One of the most common emails I get from new readers is “What books should I look at to learn about markets, economy, and investing?”

Some years ago, I put together that exact list for The Street.com in a two part series. Here is the part II:

~~~

In part 1, we looked at books that are helpful to the “Apprenticed Investor,” from the history of markets to investor psychology. Today, we get into the details: economics, technical analysis, short selling, the fundamental approach, life on Wall Street and everything else.

Wall Street

If you can understand how the crazier things happen on Wall Street, you may avoid some investing pitfalls. These two books offer insight into that arena — and they could just as easily be filed under how to raise problem children.

Fred Schwed’s Where Are the Customers’ Yachts? or A Good Hard Look at Wall Street. Schwed worked on Wall Street for a few years, and his book — written 60 years ago — is a delightful read, full of insight into both the Street and investors’ psyches.

For those of you thinking about working in the industry, then Liar’s Poker by Michael Lewis is for you. It provides a snapshot into a major firm circa the 1980s. As much as things have changed since then, they are still very much the same.

Economics

Understanding where we are in the business cycle — expansion, plateau, contracting, bottoming — is crucial to understanding where the markets will be in 6-18 months.

My favorite introductory econ book is Todd G. Buchholz’ New Ideas from Dead Economists. Buchholz’s survey of the history of economic thought is lively and informative. He avoids politics and academic squabbling, resulting in an extremely enjoyable, informative book. That’s saying a lot for a subject that in the hands of a lesser writer would be dry and boring. Were I to recommend but one economics book for the layperson, this would be it.

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt and Stephen J. Dubner. This is less a book about economics, and more a book about how to approach challenging problems from a logical perspective. Outside-the-box thinking combined with intelligence, creativity and mathematics makes for a potent combination. But don’t let the math intimidate you — it’s a delight to read, and is very accessible to the nonmathematician/noneconomist.

The most serious of the econ books is Beating the Business Cycle by Lakshman Achuthan and Anirvan Banerji. Anticipating when the business cycle is about to turn is a trick most economists are exceedingly poor at; Achuthan and Banerji show you how to do it. If you find that the previous two econ books whet your appetite, then consider this your graduate-level reading.

Technicals

You learn technical analysis not by reading about it, but by looking at thousands of charts over the course of many years. That makes recommending any books on TA challenging. I picked the following because they either illuminated a particular segment of TA or were extremely accessible to the nontechnician.

Getting Started in Technical Analysis by Market Wizards author Jack Schwager covers all the basics: moving averages, trend lines, patterns, support and resistance. Another good book to get started with TA is The Visual Investor by John J. Murphy. Either of these will give you a broad overview of technical analysis.

My favorite of the new [2005] TA books is Trend Following by Michael Covel. Straightforward, easy to read, this book is rich in details about why trend following is such a successful strategy amongst some of the world’s best-performing hedge funds.

How to Make Money in Stocks by William J. O’Neil. O’Neil, founder of Investor’s Business Daily, created a quantitative and technical-based trading system called CANSLIM. Although I am not a follower of this methodology, it has much to offer to the novice. If you are an IBD reader or are curious about his philosophy, this book is a good place to start.

I’ve read several books that RealMoney’s Gary B. Smith has recommended, including How Charts Can Help You in the Stock Market by William L. Jiler, and How I Made 2,000,000 in the Stock Market by Nicolas Darvas. I would suggest both of them to readers who want more details and background to how several successful technicians have made their fortunes in the past.

I occasionally find myself looking at a chart and wondering what the heck it means. That’s why I have a small reference library on my desk. It includes:

Technical Analysis from A to Z by Steven B. Achelis;
Encyclopedia of Chart Patterns by Thomas N. Bulkowski;
Japanese Candlestick Charting Techniques by Steve Nison;
Technical Analysis of the Financial Markets by John J. Murphy.

Don’t think you need a full reference library; all you need is one reference book to help you occasionally.

Short Selling

Surprisingly, there haven’t been too many books on shorting — or even on the art of selling. One I like is Sy Harding’s Riding the Bear: How to Prosper in the Coming Bear Market. It came out in late 1999 — how’s that for auspicious timing! If the “buy & hold” investors had read this back then, they would have saved a lot of money. It’s just as sensible today.

Another well-timed book is When to Sell by Justin Mamis. This was published in 1970s. It’s a bit slow going, but is filled with good observations about developing a sell strategy.

A basic approach to shorting is William J. O’Neil’s How to Make Money Selling Stocks Short. Pure fundamentalists should be forewarned: it is very technically driven, and may be hard going for those with an aversion to charts. That’s just as well; fundamentals can tell you what to buy, sell or short — but not when. And timing is especially crucial when it comes to shorting.

Fundamentals

Given my inclination towards quantitative, trend, sentiment and macro economics, I am admittedly an outsider on pure fundamentals. But I have found these books to be valuable additions to my knowledge base.

Stocks for the Long Run by Jeremy Siegel is a terrific overview of all things equity. It’s a great place to start, although many fundamentalists would advise you to begin with The Intelligent Investor by Ben Graham, which is considered the bible of value investing. [UPDATE: There are data problems with Siegel’s book that challenge its basic premises. Irrational Exuberance by Robert Shiller argued Jeremy Siegel was wrong: markets are risky, stocks are over-priced. I’m in Shiller’s camp. See also Fooled by Randomness by Nassim Nicholas Taleb, who writes that Markets are very random; watch out for black swan events.]

I find Warren Buffett intriguing. His annual reports are legendary; reading them is an education in itself. Start with Warren Buffett Speaks: Wit and Wisdom from the World’s Greatest Investor by Janet Lowe. If you want the unvarnished words from the man himself, then choose The Essays of Warren Buffett: Lessons for Corporate America by Warren E. Buffett.

I would be remiss if I left out Peter Lynch. You can read any of his books, but I like One Up On Wall Street: How To Use What You Already Know To Make Money In The Market. Lynch shows how people can use their own experience to gain an edge on Wall Street. (We discussed this last year.)

One of the reasons I am not a fundie is that I don’t do forensic accounting (bor-ing!). However, a readable approach to getting at those footnotes is Financial Fine Print by Michelle Leder. Those of you who are technically oriented may find this is a tough slog.

Supplemental

There were lots of worthwhile books that didn’t make the cut for one reason or another. Some of them — like Bull’s Eye Investing by John Mauldin were a bit too advanced for the apprentice. Others cover a single topic. If the entire book can be adequately summed up in one line, then I can save you eight hours.

The Tipping Point: How Little Things Can Make a Big Difference by Malcolm Gladwell. I thoroughly enjoyed this book, but if you want to save time, the punch line is that complex systems are nonlinear.

The Wisdom of Crowds by James Surowiecki. The book is thought-provoking and interesting but, unfortunately, I found too many logical flaws in it; further, it seems to be too tied to the efficient market hypothesis. (Bottom line: The crowd is right until they become an unthinking mob.)

Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle. (Wall Street charges too much, you are a lousy investor anyway, buy index funds.)

Chaos by James Gleick. Want to understand the mathematical science — physics, actually — of what really drives the market’s behavior? Then this book is for you. (Bottom line: Markets are not truly random, but have qualities which include persistence, sensitivity to initial conditions and nonlinear dynamics.)

The (Mis)Behavior of Markets by Benoit Mandelbrot. Chaos theory as applied to markets by fractal geometry’s creator. Warning: this book may make your head explode.

~~~~

Originally published:

Apprenticed Investor: More Reading Ideas
Barry Ritholtz
12/07/05 – 11:14 AM EST

http://www.thestreet.com/print/story/10256101.html

Category: Books, Economy, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to “Apprenticed Investor: More Reading Ideas”

  1. Guillermo says:

    “this book may make your head explode.” Is not really a fair way to describe The (Mis)Behavior of Markets. It’s an amazing book and while some of it is definitely hard to get through, the section where he makes those three-dimensional charts that take into account market speed are AMAZING for someone that needs to be introduced to that concept.

    As anyone that has (accidentally, obviously) ingested hallucinogenic substances will tell you, time is totally relative! What is a few hours in the park in wall-clock time is like seventy-two years in mental time. It’s the same in markets, one minute in a busy market is like one hour in a normal market. This applies to options trading too, time accelerates on friday afternoons nearing the close.

    One of the most important things I learned about trading, especially options trading, was that. You need to account for markets working at a speed that is on average equal to wall-clock speed, but has some really really fat tails.

    ~~~

    BR: Its a terrific book, but for the average reader, it might be over their heads. Chaos is probably more accessible

  2. Thanks for list.

    I would have appreciated an options book or two. May I suggest my book: The Rookie’s Guide to Options.

    Very well reviewed and readers love it.

    Regards

  3. Guillermo says:

    Here’s some of my favorite boil-it-downs for finance/econ books:

    Black Swan – You can’t tell the future
    Fooled By Randomness – Somethings are just random or irrational, stop trying to find rational causes ex-post
    The Alchemy of Finance – Markets are subject to self-feedback loops, and they work both ways
    The Tipping Point – systems where growth has a positively sloped derivative
    The Holy Grail of Macroeconomics – People are scared of credit after big leverage-induced blow-ups. If people stop borrowing, the government can just borrow in their behalf.
    Extraordinary Popular Delusions and the Madness of Crowds – Sometimes you just get caught-up in the moment
    Animal Spirits – Attitudes are contagious

  4. machinehead says:

    I gather that Part II completes this series. One detailed investment discipline that seems missing is asset allocation, which I regard as being of paramount importance.

    Two texts I would nominate:

    1. Asset Allocation, 4th edition by Roger Gibson.
    http://www.ebook3000.com/Asset-Allocation–4th-Ed-By-Roger-Gibson_91179.html

    2. The Ivy Portfolio by Mebane T. Faber and Eric W. Richardson. One surprise in this book is the startlingly high returns achieved by the top, best-connected investors in private equity. The ‘Links’ tab in the website brings up some excellent papers, whether you buy the book or not.
    http://www.theivyportfolio.com/

    ~~~

    BR: Completes it up to 2005 — I will update the list, once I have enough books for part III

  5. wunsacon says:

    Barry,

    In light of how quickly Amazon rolled over on the Wikileaks issue, might you instead steer your readers through to other booksellers by changing your hyperlinks? Please consider it.

  6. eren says:

    i don’t use amazon/ebay/paypal anymore.

  7. I use Amazon for a few reasons: Their tracking allows me to generate detailed info on Big Picture related purchases (as well as clicks). I am working on a post that compares the monthly purchases over 2009-10. Its quite a fascinating tool, and no one else has it.

    Secondly, Amazon has been utterly reliable when it comes to making payments. Its not a lot of money, but I hate suspecting I am being ripped off.

    Last, I set up links to Bailout Nation at BailoutNation.net. I sold almost 1000 books from Amazon reported selling referrals. B&N ? Not one single book . . .

  8. Randi says:

    Great list ! Thanks for putting it together.

    (I found some gems on the first one)

  9. bergsten says:

    @BR: Your Gladwell summary was precious.

    Here’s one for Outliers — “I got the opportunity to write best selling books, with all of the attendant financial benefits, because I had connections thanks to having a job writing for the New Yorker.” The rest of you don’t, so you are just screwed and you might as well give up now.

  10. JimRino says:

    With all due respect Barry, Mr. Ritholtz, you’re missing the big picture:
    http://peakoil.com/consumption/peak-oil-the-coming-famine/

    Peak Population: Peak Oil, Peak Fish, Peak Water, Peak Food, and Global Warming.
    Russia’s burned out wheat crop, glacier melt, Chinese mud slides, Pakistan floods…

    We are at Peak Population Now.
    With a projected growth of two more billion people in 25 years, nothing is going to get better.
    Taleb’s “Black Swan” may be the most important book for protection from Capitalism’s Sociopathic Failure in Risk Management.

  11. JimRino says:

    What will oil be priced at in 10 years?
    US Farms depend on Synthetic Nitrogen.

  12. JimRino says:

    Have any of you seen Food, Inc?

    Having cows stand in one foot of feces in a “food” lot, is a sociopathic Risk Management Failure.

  13. Guillermo says:

    UGH! I’ll bite JimRino.

    US Farms DO NOT depend on Synthetic Nitrogen (why did you capitalize this?). Fertilizers from petroleum-based sources are currently cheaper than the alternatives (although not by much).

    Look, go get yourself a plane ticket to LA or Boston and visit George Tillman reclamation plant, and Hyperion Bay or Deer Island sewage treatment plants. You know what they do there? They charge you money to take your sh*tty water away, then they clean the water to drinkable purities and they use the remaining organic matter to generate energy through methane-producing anaerobic digestion. The remaining organic matter has been thoroughly decomposed by microorganisms and pathogens have been killed by the heat produced in digestion.

    In MA, they turn your feces into fertilizer (Bay State Fertilizer) and then sell it back to people. At the moment it doesn’t meet some very stringent standards because of the combined sewers, but heavy metal and other harmful substances are way, way below EPA thresholds for the highest quality fertilizers.

    Of course, this is all limited to few places right now because it is capital-intensive and not always immediately attractive from a return-on-capital standpoint, but, eventually, it will be. If oil doubles in price, you can bet your ass that companies like GDF Suez and Veolia are going to be scrambling to sell your doody back to you or to farmers who find it more cost-effective than petroleum based fertilizers.

    The technologies exist, are proven, are sustainable, are effective and have been profitable. This is going to happen. It might take a long time if oil continues to be cheaper or it might happen sooner if oil prices rise or a little help is provided (AHEM pigovian tax or EPA).

    You can keep living in panic, but please, don’t try to drag everyone else into your doom-and-gloom view of the future.

  14. JimR,

    then, would be happen to be a proponent of: “…Researchers at University of Connecticut have found that industrial hemp has properties that make it viable and even attractive as a raw material, or feedstock, for producing biodiesel. Hemp biodiesel has shown a high efficiency of conversion (97 percent) and has passed laboratory’s tests, even showing properties that suggest it could be used at lower temperatures than any biodiesel currently on the market.

    The plant’s ability to grow in infertile soils also reduces the need to grow it on primary croplands, which can then be reserved for growing food according to Richard Parnas, a professor of chemical, materials, and biomolecular engineering at UConn.

    “For sustainable fuels, often it comes down to a question of food versus fuel,” said Parnas, noting that major current biodiesel plants include food crops such as soybeans, olives, peanuts, and rapeseed. “It’s equally important to make fuel from plants that are not food, but also won’t need the high-quality land.”

    Cannabis sativa is known for it’s ability to grow like a “weed” in many parts of the world, needing little fertilizers, or high-grade inputs to flourish. But the seeds, which house the plant’s natural oils, are often discarded. Parnas points out that this apparent waste product could be put to good use by turning it into fuel.

    “If someone is already growing hemp they might be able to produce enough fuel to power their whole farm with the oil from the seeds they produce. The fact that a hemp industry already exists means that a hemp biodiesel industry would need little additional investment,” he said…”
    http://www.gizmag.com/hemp-biodiesel-dope-biofuel/16852/

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Industrial+Hemp+Free+the+Weed

    if not, why not?
    ~~

    and, w/this: “We are at Peak Population Now.
    With a projected growth of two more billion people in 25 years, nothing is going to get better.”

    are you suggesting ‘Population Reduction’? If so, are you going to ‘lead, by example’?

  15. “would be happen”, above

    “would you happen”

  16. bankwatch says:

    Suggestion: The Fearful Rise of Markets: Global Bubbles, Synchronized Meltdowns, and How to Prevent Them in the Future – John Authers – FT Markets Senior Editor. A nicely done book in short chapters that concisely interpret the forces that shape markets today. In particular is the demonstration of the herd approach amongst markets with synchronization between currency, bond, stock and other markets that never existed before.

  17. lulsh says:

    I would add “Margin Of Safety” by Klarman and “How to Trade in Stocks” by Jesse Livermore

  18. be the ball says:

    Thanks for the list. Funny that I was just about to send you a note asking this very question.

    One thing I am not sure I see on your list:

    I am particularly interested in understanding better the interplay between currencies, bonds and equities and how and why funds tend to flow between them.

    Both the macro and the micro: As a random example of a question I would be looking to answer:
    Macro: What are common telltale signs that interest rates might be set (or need) to rise or fall in the near future?
    Micro: If you believe that interest rates are going to rise or fall in the near future, what are logical investment strategies to trade upon that belief?

    Any book or site suggestions would be most welcome.

    Thanks so much.

    Brian

  19. mathman says:

    Yves Smith on LeShow (Harry Shearer) yesterday (Dec. 5):

    http://www.kcrw.com/etc/programs/ls

  20. derekce says:

    Barry, I have a good handle on the other stuff-Wall Street, sentiment, business cycle,etc. Even how the politics works. However I don’t understand the TA, am skeptical and largely ignore it. How important do you think it is out of this list? Help me see the light.

  21. louiswi says:

    For books that are a must, the most “mustess” for a newbie is “Against the Gods” by Peter Bernstein.

  22. IS_LM says:

    The financial crisis that spawned the Great Recession has also spawned a deluge of books on the financial crisis and the Great Recession. It has also spawned a film, The Inside Job. Generally, the books and the film focus on the authors’ opinions about what happened to and in financial markets, in particular the role of financial deregulation that started in the early 1980s and that culminated under Clinton. I’ve read most of them, and while each has something unique to say, almost all of them lack sufficient historical context.

    There are two books, however, that I think give superb treatment to the intellectual edifice of modern macroeconomics and finance. On macro, it’s economist Roger Farmer’s How the Economy Works. On finance, it’s journalist Justin Fox’s The Myth of the Rational Market. Historical context matters because deregulation did not occur in a vacuum; there were strong, albeit incomplete, arguments to support the opinion that financial deregulation would improve welfare. While many of those arguments have now probably been falsified by the last three years, it is important to recognize their genesis.

  23. Livermore Shimervore says:

    When Genius Failed by Lowenstein. I fogot who said this but in discussing the wealth of decision makers on Wall Street one smarty guy critiqued “unlike all of you I understand the meaning of the word ‘enough’” .
    Whether it is Gold, China, green tech, financial stocks, oil, ag or industrial metals these guys who decide which gets how much investor money, they simply can not help themselves. What seems fundamentally sound from a err fundamental perspective, become a barry bonds steroid monster that no longer resembles the original good bet. I really can’t think how any new investor can dive into the shark tank with their life saving’s without knowing the track record of this ruling class of smarty guys and their bullet-proof inability to judge risk or who this risk is being entrusted to. But more crucially, the certainty that whatever ballons has a ready made crowd just waiting to profit from the certain collapse. These last two things seem foreign to most investors. That’s criminal.

  24. moric says:

    For your fundamental section you might want to consider adding Margin of Safety by Seth Klarman

    ~~~

    BR: I have the PDF, but the book is unavailable

  25. be the ball says:

    I think my request/question above made it sound like I was looking for a book that would tell me how to make money in the bond market :-) and that’s why everyone ignored it.

    So, I’ll rephrase the question.

    Looking for a book that talks about the interplay between interest rates, currencies and equities. For example, if US interest rates go up, what does that tend to do to the dollar and by turn, equities? What if it’s 2yr rates that rise vs. 30 yr rates, how do they effect things differently? Etc….

    A historical tome is fine, anything that can frame these concepts for me :-)

    Anyone with any reading suggestions, please chime in.

    I’m a short-term daytrader by nature (30 minutes is an eternity for me) but most of my cash is just sitting in cash because I don’t have enough of an understanding of this stuff.

    Thx

  26. [...] an excellent listing of reading on a wide range of investment topics suitable for new investors at http://www.ritholtz.com/blog/201…I had read one of the books recently, Fred Schwed's very funny, very charming and very [...]