In these crazy times, all one could ask for is sanity. Yes, sanity – a clear mind, free of noise, to with which to face the insanity that the volatile, noisy stock market thrusts upon us. We find ourselves glued to our computer screens or CNBC, waiting to find out what the Dow’s next tick is going to be. What do we get out of it? Only a headache and wasted time.

Here is my advice: read. Read books that will bring you sanity, the ones that will snap you back into the mindset of investor and out of being a nervous observer of the daily stock market melodrama. The following books are excellent choices and offer plenty of sanity and sage advice.

Selling

I’ll start with Its When You Sell That Counts, by Donald Cassidy, which aims to help readers recalibrate their decisions about when to sell stocks. During secular bull markets, selling is frowned upon, as buy-and-hold turns into investing religion. The investor who buys and sells is labeled as a heretic, or even worse, a trader (if you say “trader” fast enough, it sounds like “traitor”).

In secular bull markets, on average, sell decisions are not as rewarding as hold decisions, as market valuations are expanding and even the second-rate dogs of the equity markets start looking like pedigreed cocker spaniels. Every investor is now a “long-term” investor and sell becomes a four-letter word. But being a long-term investor is not about the longevity of your hold decisions; it’s an attitude. Holding a stock because you bought it is a fallacy; you should only hold a stock if its future risk-adjusted return warrants it.

Warren Buffett has been mistakenly promoted into deity status in this buy-and-hold temple.  Let’s correct this mistake. Warren Buffett became a buy-and-hold investor when his portfolio and positions got big enough, pushing $60 billion, that selling became a difficult undertaking. In his early career, before the “Oracle of Omaha” was his moniker, he was a buy-and-sell investor. Being on the boards of some of his biggest holdings (like Coke and the Washington Post) made selling even more difficult for Buffett.

One doesn’t need the benefit of hindsight to know that at 55 times earnings Coke was tremendously overvalued in 1999. Coke, like the majority of Buffett’s top public holdings (the Post, Procter & Gamble, Johnson & Johnson, and many others), did not go anywhere for a decade. Take a look at his top public holdings and tell me whether he would have done a lot better if he had sold them when they became fully valued. In most cases, that would have been a decade ago.

Emotions assault us from different directions when we face a sell decision: If it is a losing investment, we want to wait to break even. This is the wrong attitude. Our purchase price and our sell decision should not be related .  When it comes to selling a winner, on the other hand, we want to sell only at the top. Again, this is the wrong attitude: The top is only apparent in hindsight, when it is usually too late.

We should sell the stock when it reaches our price or valuation target, determined at the time of purchase. We are our biggest enemy when it comes to investing, and especially selling. Cassidy’s wonderful book has been written to fix this. Its objective is to recalibrate your mind and free you from the imprisonment of your past decisions, to break you free from the buy-and-hold state of mind and turn you into a buy-and-sell investor.

It’s a terrific and a very important work. Proper sell discipline makes the difference between great and mediocre returns for even the best-crafted buy decisions. Pros may want to skip a few chapters, but it is an important read for everyone, especially in today’s environment.

Think and behave like an investor

The following books should help you to think like an investor, forcing you to think beyond stock tickers and focus on what is under the hood: the businesses and the people who run them. The first book is The Essays of Warren Buffett, a compilation of Warren Buffett’s annual letters to shareholders dating back to the 1970s. As you might expect, Buffet’s annual reports themselves, are fairly repetitious. His wisdom doesn’t vary that much from year to year. This book organizes main concepts and removes annoying redundancy.

You Can Be a Stock Market Genius by Joel Greenblatt is one of those books that should be read more than once. Greenblatt shares unique approaches to finding undervalued stocks. On top of being a very good investor, Joel has a healthy sense of humor.  Joel also has written The Little Book That Beats the Market.  At the end of the book, Joel offers a “magic formula,” a screen that has beaten the market over a long period of time.  The magic screen is very simple: buy low price-to-earnings stocks that have a high return on capital. Low P/E is an indication of cheapness, while high return on capital is an indication of competitive advantage and the possibility to grow earnings quickly. Here is the book’s Web site, which provides a weekly list of stocks that score high on both measures.

Margin of Safety by Seth Klarman is another gem. Unfortunately, you won’t find this book in book stores. It is out of print, and it occasionally sells on eBay for thousands of dollars. This book lacks Greenblatt’s humor, but it is full of Buffett-like lucidity, and it is a must-read for anyone who is serious about value investing.  In fact, even though Joel Greenblatt receives the credit for identifying and popularizing spinoffs as an often-mispriced subset of stocks, Klarman dedicated a good portion of a chapter to spinoffs in his book, which was published eight years earlier than Greenblatt’s.

Klarman talks about how investors’ time horizon has shrunk over the years:

Since Klarman wrote his book in 1991, the investment industry has gotten even worse.  The precipitous cost decline of micro processing and color printers’ ink has elevated the influence of consultants over the investment industry to absurd levels. Armed with Modern Portfolio Theory – a Nobel Prize-winning framework, consultants now port alphas and deport betas.  Unfortunately, in the process of quantifying the unquantifiable to the precision of a basis point, common sense was lost. Though they hide behind Greek symbols and fancy, colorful presentations, these are the same folks that persuaded their gullible pension fund clients to allocate a greater portion of their assets to “growth” stocks in late 90s, real estate and alphabet soup investments in mid 2000s, and long-term treasuries today. These people are always chasing the latest fad.

In this consultant-infested environment, a long time horizon is a competitive advantage.

The Super Analysts by Andrew Leeming is a book few people may have heard of. The
author interviews successful investors (not academics), and they discuss their approach to investing and their analyses of common stocks and of some specific industries.

Pilgrimage to Warren Buffett’s Omaha by Jeff Matthews is not another biography of Warren Buffett, but rather the most insightful, critical, and balanced analysis of Buffett and Berkshire I’ve ever read.  I also encourage you to read Jeff’s musings on his blog; I’ve been reading it for years.

Finally, I also recommend The Little Book That Builds Wealth by Pat Dorsey.  Michael Porter wrote Competitive Strategy a few decades ago, and it quite deservingly it turned into a bible of industry analysis that is taught in all business schools and management programs.  Pat Dorsey adopted Michael Porter’s concepts into this little book and applied them directly to investing.  To be honest, if this book had been out when I was teaching my investment class, I’d be using it instead Porter’s – sorry, Michael!

Behavioral Investing

The right temperament is crucial in investing. Being a critical thinker and knowing how to value stocks is important, but it is all a waste if your emotions get the better of you. The following books will help you to recognize the shortcomings of your hard-wiring and help you to devise strategies to deal with it.

Psychology of Investing, by John R. Nofsinger, is short and to the point. You’ll become an expert on behavioral investing in about an hour. Well, not quite, but close.

Why Smart People Make Big Money Mistakes And How To Correct Them, by Gary Belsky and Thomas Gilovich is a fun and easy read. It also addresses how shortcomings in our wiring affect money decisions, like buying cars and stereos.

The Little Book of Behavioral Investing by James Montier is another good read.  James used to be a global equity strategist at SocGen – a large European financial institution.  I read his research religiously, the only sell-side research (with the exception of Albert Edwards, who was James’ partner, and Dylan Grice, who took James’ place) that’s worth reading.  This book is written for value investors by a value investor who happens to be the leading thinker in behavioral finance.  This is the only behavioral investing book that I am aware of that that quotes Ben Graham, Seth Klarman, John Templeton and Warren Buffett throughout the book and synthesizes their lessons with those of behavioral investing.

While the three books above cover many topics in Your Money and Your Brain, by Jason Zweig, Chapter 10 is what makes this book a must-read: it addresses happiness – yes, happiness. Although, as most of us know, money doesn’t buy happiness(unless you are starving or living in a cardboard box), money spent on buying things brings a burst of happiness that quickly fades away. Think of how happy you were on the day you bought your first car. Now fast-forward a few weeks later.  The rush almost certainly faded. Money spent on experiences, on the other hand, brings a higher utility of happiness. Recollecting experience brings happiness. ( take a lot of pictures and videos to remember things better.)  Zweig also provides a list of things you can do that will make you happy, and none of them require you to spend a penny, which is a big positive in today’s economy.

Though traders and value investors fish in the same pond – the stock market – and may even catch the same fish at times, their approaches and analytical timeframes are diametrically different. Value investing and trading, however, share a common element: Both are done by humans, and thus are affected by emotions. That’s why I also recommend a fictionalized novel that provides a great introspective look inside a trader’s mind and teaches many behavioral and common-sense lessons. Reminiscences of a Stock Operator, written in 1923 by Edwin Lefevre, depicts from a first-person perspective the early years of the great trader Jesse Livermore. It is rumored that this book was actually written by Jesse Livermore and edited by Lefevre. Here is a sampling of the book’s insights:

I’ve read this book a few times, but couple of months ago I was fortunate to read a brand new edition annotated by Jon Markman.  Jon’s skillful annotation takes you behind the scenes of the Lefevre’s story and provides important insights into characters and the backdrop of that very interesting time period.  Jon’s annotations are almost like a book within a book.

Another good book about Livermore is called Jesse Livermore, by Richard Smitten. Here’s one of its best passages:

The Big Short by Michael Lewis.  Michael Lewis is one of the best story-tellers Wall Street ever produced.  So you would expect from the author of “Liar’s Poker” a fun, well written book that tells you how Wall Street machine does what it does best: taking an average-size bubble and making it enormous. No surprise there. But this is not just another “how Wall Street screwed everyone” book.

Lewis tells a story of a few brave investors who shorted subprime mortgages at the height of the real estate bubble.  From today’s perch, it seems like a no-brainer trade after all, we are blessed with the wonderful benefit of hindsight.  But Lewis sets aside this hindsight, delves into guts of Wall Street in the midst of the housing bubble, and shows the emotional rollercoaster his heroes went through before they were proven right.  This book teaches a valuable lesson about the difficulty, frustrations and rewards of being a contrarian, a tiny minority daring to contradict 99% of investors. This book reinforces that when you make a contrarian bet, you better do your own research, otherwise the pressure of the crowd will overwhelm you. Be prepared to be “wrong” for longer than you rationally expect; make sure your investors will stick around long enough to allow you be proven right; and finally, have a support system – a few friends and colleagues who will provide vital emotional support.   

Economics

Politicians, God rest their souls, always try to appeal to the lowest common denominator. They try to “protect” us from evildoers by insisting on minimum-wage laws or rent controls, or by threatening windfall taxes on oil companies. They paint themselves as heroes fighting for the little guy against the evil-doers. All they are doing, however, is feeding on the economic illiteracy of the average Joe. Given this reality, the following books should be required reading in high schools and colleges: Basic Economics by Thomas Sowell and A World of Wealth by Thomas G. Donlan.  Another excellent book is economic romance – Invisible Heart by Russell Roberts.  No I did not go soft on you here, in fact I have to admit, the “romance” part of this novel did not appeal to my sentimental senses, but the discussion about capitalism and free markets is Milton Friedman worthy.

Atlas Shrugged by Ayn Rand is a novel, not an economic tome, but it accomplishes a lot more than most economics books ever do. It vividly illustrates what happens to the economy when the invisible hand of capitalism is replaced by the “fair” and “compassionate” hand of socialism: The economy collapses.

Ayn Rand immigrated to the US from Russia in 1925 when she was 20, when her father’s business was seized by the Russian government, ostensibly for the greater good. I left Russia 66 years later, a decade after Rand died, and my family suffered a lot less than hers. However, we (as well as millions of thinking Russians) both saw the ugly consequences of socialism.

In Atlas Shrugged, Ayn Rand defines her individualist philosophy. Individualism is not a politically correct term in our society. One doesn’t make a lot of friends by advertising his selfishness and greed. So call it anti-collectivism, where independence, self-reliance, and individual pursuit of happiness are superior goals, as opposed to collectivism, where the pursuit of communal and national goals is often undertaken at the expense of individual liberty.

According to Jennifer Burns, who published Ayn Rand’s biography, Rand’s popularity surges during every political cycle when the merits of our political system are being debated. To paraphrase Winston Churchill : “Capitalism is the worst of all possible economic systems, with the exception of all the others.” I hope we only see the alternative system to capitalism – a compassionate socialism that is often offered to us as an alternative to our dispassionate system – only in the pages of Atlas Shrugged.

You may think Alan Greenspan had a hand in today’s crisis. I know I do. He took interest rates down to incredibly low levels and kept them there for too long, causing the real estate bubble. He also did not think Wall Street needed regulation. But that doesn’t make his book, The Age of Turbulence, any less of an excellent read. It is not written in Fed-speak. It seems that Sir Alan, after he left the Fed, learned how to use English in a very clear and engaging way. This is not just another autobiography, either. The book goes far beyond that. It covers the workings of the Fed, lessons on macroeconomics and history, and relays Greenspan’s unique perspective on American politics as an insider who served under or worked with the last eight presidents.

Stock Market History

I’ve really enjoyed reading Stocks for the Long Run by Jeremy Siegel, but it took me a while to recognize how dangerous this book is.

It is well written and provides a good overview of the performance of different asset classes over last two centuries. But the book needs a different title, maybe something like “Stocks for the Really, Really… Really Long Run.” That way, it would not lure investors into a false sense of security when it comes to stocks. Probably unintentionally, Siegel’s book preaches that the stock market is always a buy, no matter what valuations are, and that a 7% real rate of return is a birthright for stock investors, no matter if the stock market is extremely cheap or ridiculously expensive. This is very true if your time horizon is 30 years or you plan to live forever. It is also true if you can tolerate seeing your portfolio go nowhere for a decade or longer. Unfortunately, most of us don’t have that idealized time horizon. We need to pay for our children’s educations, weddings, boats, etc. I don’t know anyone who has the patience to see their portfolio of stocks do nothing for decades.

That is why Siegel’s book should only be read alongside the following antidote: Unexpected Returns, which is a truly terrific book by Ed Easterling. Unlike Siegel, Easterling shows that even though stocks are a great investment for the (really, really) long run, they have periods when their returns are unspectacular. Ed calls these periods bear markets. I call them range-bound or sideways markets, which is just a difference in semantics. Those bear (sideways) markets take place after secular bull markets.

Risk

What is the appropriate way to look at risk?

The following two books, Fooled by Randomness and The Black Swan, are by Nassim Taleb. These books address the risk associated with rare events.

Fooled by Randomness is my favorite nonfiction book, period. I’ve read it at least five times. This book turns upside down the way we are taught to look at risk. Nassim rebels against the current establishment of finance that measures risk with elegant formulas that receive Nobel Prizes but lack common sense.

Any model that solely focuses on past observations and dismisses outcomes that lie outside of what happened in the past is worthless and dangerous. One way of understanding how randomness works is by studying alternative historical paths. This means more than just focusing on what took place in the past. Observed history was actually just one of many possible outcomes. One should focus on what could have taken place, what alternative paths might have existed. With that added insight, we can then predict and prepare for what might happen in the future.

Let’s take the current crisis: Wall Street and the rating agencies dismissed the possibility that housing prices might decline nationwide. That hadn’t happened since World War II, and everyone assumed that meant it wouldn’t happen in the future. On that leap of faith, Wall Street took subprime (risky) mortgages originated in different parts of the country, lumped them together in mortgaged-backed securities, and – voila! – declared the risk to be diversified away. Junk was turned to gold. Since rating agencies used the same underlying assumption – housing never declines nationwide – they announced to the world that the junk was AAA and should be bought in truckloads – and it was. We know how this story ended.

The Black Swan is a follow-up to Fooled by Randomness. Nassim takes a lot of the concepts discussed in Fooled by Randomness and explains them in greater detail, providing new and unexpected insights. I have to warn you that The Black Swan is not an easy read. This book, which has more insights per page than most, is not a beach read. If you’re looking for a Cliff’s Notes version, in this lecture Nassim covers major concepts described in both books in great detail.

In the second edition of The Black Swan, Nassim added a section that talks about how Mother Nature deals with black swans through redundancies. One way to avoid catastrophic failure is spare parts – we get two lungs, two eyes, and two kidneys, and each has more capacity than we ordinarily need. Taleb writes:

This reconfirms of why I’d like to own stocks with “sub-optimized”, debt-light (cash rich) balance sheets, as Taleb eloquently puts it “Debt implies a strong statement about the future, and a high degree of reliance on forecasts”.

Books for the Soul

What would you do and what would you share with others if you only had months to live? This is the theme of the following two books: Tuesdays with Morrie by Mitch Albom and The Last Lecture by Randy Pausch and Jeffrey Zaslow. In both books, terminally ill teachers share their life lessons with readers. Pausch, who sadly passed away last year, also gave this great lecture on time management; and here is his last lecture.

Another book I’ll add to this category is The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder. This is an authorized biography of Warren Buffett. I am not sure this is the best book to read if you want to learn to invest like Mr. Buffett, but it gives a fascinating view of his life. There are many great lessons we can learn from Mr. Buffett that go far beyond investing, for example about honesty and treasuring one’s reputation. But I thought this book was important for a very different reason: It shows that Warren Buffett is not a perfect human being and that we can also learn from the maestro by not repeating his mistakes. He achieved his unparalleled success in his business life at the expense of his personal life.

I find myself wanting to work 24/7. I bring my laptop home, or start reading The Wall Street Journal on iPad at the dinner table – my work life starts pushing out my personal life. This book made me realize that no professional success is worth regretting 20 years down the road that you didn’t spend enough time with your kids. Unfortunately, Buffett has that regret.

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo.  He is the author of Active Value Investing (Wiley, 2007) and the upcoming The Little Book of Sideways Markets (Wiley, December 2010).  To receive Vitaliy’s future articles by email, click here or you can read them on ContrarianEdge.com.

Copyright Vitaliy N. Katsenelson 2010.  This article may  be republished only in its entirety and without modifications.  

In crazy times like today, all one could and actually should ask for is sanity. Yes, sanity – a clear mind free of noise to deal with the insanity that is thrust upon us by a volatile and noise-making machine also known as the stock market. We find ourselves glued to the computer screens or CNBC waiting to find out what the Dow’s next tick is going to be. Unfortunately, we are left with only a headache and wasted time. OK, what’s next? Here is my advice: read. Read books that will bring you sanity, the ones that will snap you back into the shell of investor and out of the sorry shell of nervous observer of the daily stock market melodrama. The following books are excellent choices and come with plenty of sanity and sage advice.

Selling

I’ll start with Its When You Sell That Counts, by Donald Cassidy. Selling is usually as popular as candy the day after Halloween. During secular bull markets selling is frowned upon as buy and hold turns into investing religion. And since sell violates the “hold” covenant of that religion, the investor who buys and sells is labeled as a nonbeliever, or even worse, a trader (if you say “trader” fast enough it sounds like “traitor”).

In secular bull markets, on average, sell decisions are not as rewarding as hold decisions, as market valuations are expanding and even second-rate dogs (stocks) start looking like pedigreed cocker spaniels. Every investor is now a “long-term” investor and sell becomes a four-letter word. But being a long-term investor is not about the longevity of your hold decisions, but rather is an attitude. Holding a stock because you bought it is a fallacy; you should only hold a stock if future risk-adjusted return warrants it.

Warren Buffett has been mistakenly promoted (though, I’d argue, demoted) into deity status in this buy-and-hold temple.  Let’s correct this mistake. Warren Buffett became a buy-and-hold investor when his portfolio and positions got big enough, pushing $60 billion, so that selling became a difficult undertaking. In his early career, before “Oracle of Omaha” was his moniker, he was a buy-and-sell investor. Being on the boards of some of his biggest holdings (like Coke and Washington Post) made selling even more difficult.

One doesn’t need the benefit of hindsight to know that at 55 times earnings Coke was tremendously overvalued in 1999. Coke, like the majority of Buffett’s top public holdings (Washington Post, Procter & Gamble, Johnson & Johnson, and many others), did not go anywhere for a decade. I dare you to take a look at his top public holdings and tell me whether he would have done a lot better if he had sold them when they became fully valued (or slightly overvalued). In most cases, that would have been a decade ago.

Emotions assault us from different directions when we face a sell decision: If it is a losing investment, we want to wait to break even. This is the wrong attitude. Our purchase price and sell decision should not be related (the only exception I can think of is tax selling). Or when it comes to selling a winner, we want to sell only at the top. Again this is the wrong attitude: the top is only apparent in hindsight, when it is usually too late.

We should sell the stock when it reaches our price or valuation target, determined at the time of purchase. We (our emotions and false goals to be exact) are our biggest enemy when it comes to investing, and especially selling. Cassidy’s wonderful book has been written to fix this. Its objective is to recalibrate your mind and free you from the imprisonment of past decisions, to break you free from the buy-and-hold state of mind and turn you into a buy-and-sell investor.

OK, this is a bit of a long introduction to this book, but it’s a terrific and a very important work. A proper sell discipline will decide between great or mediocre returns for even the best-crafted buy decisions. Pros may want to skip a few chapters, but it is an important read for everyone, especially in today’s environment.

Think and behave like an investor

The following books should help you to think like an investor, forcing you to think beyond stock tickers and focus on what is under the hood: the businesses and the people who run them. The first one is The Essays of Warren Buffett. It’s a compilation of Warren Buffett’s letters to shareholders from annual reports dating back to the 1970s. Before this book came out (or at least before I was aware of its existence) I had my graduate students at University of Colorado read Buffett’s annual reports, which as you may expect were very repetitious. His wisdom doesn’t vary that much from year to year. This book organizes main concepts and removes annoying redundancy.

Another good book is The Entrepreneurial Investor, written by my friends at West Coast Asset Management. It accomplishes many objectives of Buffett’s essays, plus has plenty of cultural references, humor, and common sense. All of these things make it a fun and enjoyable read. I made this book suggested reading in my graduate investment class.

The Super Analysts by Andrew Leeming is a book I think few people have heard of. The author interviews successful investors (not academics), and they discuss their approach to investing and analysis of common stocks and some specific industries.

You Can Be a Stock Market Genius by Joel Greenblatt is one of those books that should be read more than once. Joel shares very unique approaches about how to find undervalued stocks. On top of being a very good investor, he has a healthy sense of humor. Joel also has written The Little Book That Beats the Market. I plan to read this book with my son when he gets older, as it is a great introduction to investing. At the end of the book Joel offers a “magic formula,” a screen that has beaten the market over a long period of time.

The magic screen is very simple: buy low price-to-earnings stocks that have a high return on capital. Low P/E is an indication of cheapness, while high return on capital is an indication of competitive advantage (at least in the past) and the possibility to grow earnings at high rates. Here is the book’s Web site, which provides a weekly list of stocks that score high on both measures.

The Business of Value Investing by Sham Gad.  Wiley sent me the manuscript to review, and it happened to arrive on my birthday in June.  I opened the manuscript when guests showed up at the door; I set it on the kitchen table.  My niece, a recent graduate from business school, who has little interest in investing, picked it up, and I did not see her for the whole evening.  She loved it! It is hard to make value investing interesting, but Sham did.  I’ve read it too, and thought it was an excellent introductory book to value investing.

Pilgrimage to Warren Buffett’s Omaha by Jeff Matthews.  This is not another biography of Warren Buffett, but rather the most insightful and critical (fair and balanced) analysis of Buffett and Berkshire I’ve ever read.  I also encourage you to read Jeff’s musings on his blog; I’ve been reading it for years.

The Little Book That Builds Wealth by Pat Dorsey.  Michael Porter wrote Competitive Strategy a few decades ago; quite deservingly it turned into a bible of industry analysis at all business schools and taught in all management programs.  Pat Dorsey took Michael Porter’s concepts and in this very little book applied them directly to investing.  To be honest, if this book had been out when I was teaching my investment class, I’d be using it instead Michael Porter’s (sorry Michael), as it is written for investors.

More Mortgage Meltdown: 6 Ways to Profit in These Bad Times.  This book was written by Whitney Tilson and Glen Tongue, who are excellent investors.  I’ve seen the presentation that is the core of this book, presented by Whitney and Glen, several times; in fact you can download the latest version here.  Investment ideas of how to profit from today’s crisis have already played out for the most part; so this book will not give you fish, but understanding their analytical process will teach you how to fish.

Behavioral Investing

The right temperament is crucial in investing. Being a critical thinker and knowing how to value stocks is important, but it is all a waste if your emotions get the better of you. The following books will help you to recognize the shortcomings of your hard-wiring and help you to devise strategies to deal with it.

Psychology of Investing, by John R. Nofsinger, is short and to the point. You’ll become an expert on behavioral investing in about an hour. Well, not quite, but close.

Why Smart People Make Big Money Mistakes And How To Correct Them, by Gary Belsky and Thomas Gilovich. This is a fun and easy read. It also addresses how shortcomings in our wiring impact money decisions, like buying cars and stereos.

Your Money and Your Brain, by Jason Zweig, is another selection. I have to admit that the two books above cover many topics in this book (though this one offers new angles and insights) and are likely to be more exciting reads, but Chapter 10 is what makes this book a must-read: it addresses happiness – yes, happiness. Although, as most of us know, money doesn’t buy happiness (unless you are starving or living on the street), money spent on acquisitions – things – brings a burst of happiness that quickly fades away. Think of your level of happiness when you bought the car of your dreams. Money spent on experiences – being – brings a higher utility of happiness. Recollecting experience brings happiness. I plan to reread this chapter at least a couple of times a year. Zweig also provides a list of things you can do that will make you happy, and none of them require you to spend a penny, which is a big positive in today’s economy.

Reminiscences of a Stock Operator, written in 1923 by Edwin Lefevre, tells from a first-person perspective the fictionalized tale of the early years of the great trader Jesse Livermore. It is rumored that this book was actually written by Jesse Livermore and edited by Lefevre.

Though traders and value investors fish in the same pond – the stock market – and they may even catch the same fish at times, their approaches and analytical timeframes are diametrically different. However, they do share a common element: both are done by humans and thus are impacted by emotions. This book provides a great introspective look inside a trader’s mind and teaches many behavioral and common-sense lessons. Here are some quotes:

Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market to-day has happened before and will happen again.

and

A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s tip I must sell those same stocks on Smith’s tip.

and

The recognition of our own mistakes should not benefit us any more than the study of our successes. But there is a natural tendency in all men to avoid punishment. When you associate certain mistakes with a licking, you do not hanker for a second dose, and, of course, all stock-market mistakes wound you in two tender spots—your pocketbook and your vanity.

and

One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.

Another good book about Livermore is called Jesse Livermore, by Richard Smitten. I quoted this book in my book – here is the quote:

After several months of despair, Livermore finally summoned up the courage to analyze his behavior and to isolate what he’d done wrong. He finally had to confront the human side of his personality, his emotions and his feelings. . . . Why had he thrown all his market principles, his trading theories, his hard-earned laws to the wind? His wild behavior had crashed him financially and spiritually. Why had he done it? He finally realized it was his vanity, his ego. . . . The outstanding success of making more than $1 million in one day had shaken him to his foundations. It was not that he could not deal with failure—he had been dealing with failure all his life—what he could not deal with was success.

Economics

Politicians, God rest their souls, always try to appeal to the lowest common denominator. They try to “protect” us from evil doers by insisting on minimum-wage laws or rent controls, or threatening windfall taxes on oil companies. They sound like heroes fighting for the little guy against the evil doers. However, all they are doing is feeding on the economic illiteracy of the Average Joe. This is why the following two books should be required reading in high schools and colleges: Basic Economics by Thomas Sowell and A World of Wealth by Thomas G. Donlan.

You may think Alan Greenspan had a hand in today’s crisis. I know I do. He took interest rates down to incredibly low levels and kept them there for too long, causing the real estate bubble. He also did not think Wall Street needed regulation. But that doesn’t make his book, The Age of Turbulence, any less of an excellent read. It is not written in Fed-speak. It seems that Sir Alan, after he left the Fed, learned how to use English in a very clear and engaging way. This is not just another autobiography, either. The book goes far beyond that. It covers the workings of the Fed, lessons on macroeconomics and history, and perspective on American politics from an insider who served under or worked with the last eight presidents.

Atlas Shrugged by Ayn Rand. This is a novel, not an economics book; however, it accomplishes a lot more than most economics books could ever accomplish. It vividly illustrates what happens to the economy when the invisible hand of capitalism is replaced by the “fair” and “compassionate” hand of socialism: the economy collapses.

Ayn Rand immigrated to the US from Russia in 1927 when she was 22, when her father’s business was seized by the Russian government, ostensibly for the greater good. I left Russia 64 years later, a decade after Rand died, and my family suffered a lot less than hers. However, we (as well as millions of thinking Russians) both saw the ugly consequences of socialism.

In Atlas Shrugged Ayn Rand defines her philosophy: individualism. Individualism is not a politically correct term today (if ever) in our society. One doesn’t make a lot of friends by advertising his selfishness and greed. So call it anti-collectivism, where independence, self-reliance, and individual pursuit of happiness are superior goals, as opposed to collectivism, where pursuit of communal and national goals is often undertaken at the expense of individual liberty.

According to Jennifer Burns, who recently published Ayn Rand’s biography, Rand’s popularity surges during every political cycle, when the merits of our political system are being debated. Winston Churchill said it well: “Capitalism is the worst of all possible economic systems, with the exception of all the others.” I hope we only see the alternative system to capitalism – a compassionate socialism that is often offered to us as an alternative to our dispassionate system – only on the pages of Atlas Shrugged.

Stock Market History

I’ve really enjoyed reading Stocks for the Long Run by Jeremy Siegel, but it took me a while to recognize how dangerous this book is.

It is well-written and provides a very good overview of the performance of different asset classes over last two centuries. But the book needs a different title, maybe something like “Stocks for the Really, Really… Really Long Run.” This way, it would not lure investors into a false sense of security when it comes to stocks. Probably unintentionally, it preaches that stocks (and the stock market as a whole) are always a buy, no matter what valuations are, as they do better than other asset classes in the long –run; and that a 7% real rate of return is a birthright for stock investors, no matter if the stock market is extremely cheap or ridiculously expensive. This is very true if your time horizon is 30 years or you plan to live forever. It is also true if you can tolerate seeing your portfolio go nowhere for a decade or longer. Unfortunately, most of us don’t have this time horizon. We need to send kids to school, pay for weddings, boats, etc. I don’t know anyone who has the patience to see their portfolio of stocks do nothing for decades.

That is why Siegel’s book should only be read with the following antidote: Unexpected Returns, which is a truly terrific book by Ed Easterling. Unlike Siegel, Easterling shows that despite stocks being a great investment for the (really, really) long run, they have periods when their returns are unspectacular. Ed calls these periods bear markets. I call them range-bound markets, which is just a difference in semantics. Those bear (range-bound) markets take place after secular bull markets.

What is the appropriate way to look at risk?

The following two books, Fooled by Randomness and The Black Swan, are by Nassim Taleb. These books address risk and rare events (the Black Swans).

Fooled by Randomness is my favorite nonfiction book, period. I’ve read it at least five times. This book turns the way we are taught to look at risk upside down. Nassim rebels against the current establishment of finance that measures risk with elegant formulas that receive Nobel Prizes but lack common sense.

Any model that solely focuses on past observations and dismisses outcomes that lie outside of what happened in the past is worthless and, more importantly, dangerous. One way of understanding how randomness works is by studying alternative historical paths. This means more than just focusing on what took place in the past – the definite (since it already happened), observed history, but one that beforehand was actually still just one of many possible random outcomes. One should focus on what could have taken place, what alternative paths might have existed. This allows us to think creatively about what could have happened, and with that added insight to then predict and prepare for what might happen in the future.

Let’s take the current crisis: Wall Street and rating agencies dismissed the possibility that housing prices might decline nationwide. This hadn’t happened since World War II – well, then, it wouldn’t happen in the future. Therefore, Wall Street took subprime (risky) mortgages originated in different parts of the country, lumped them together in mortgaged-backed securities, and – voila! – the risk had been diversified away. Junk was turned to gold. Since rating agencies used the same underlying assumption – housing never declines nationwide – they announced to the world that the junk was AAA and should be bought in truckloads – and it was. We know how this story ended.

The Black Swan is a follow-up to Fooled by Randomness. Nassim takes a lot of the concepts discussed in Fooled by Randomness and explains them in greater detail, providing new and unexpected insights. I have to warn you that The Black Swan is not easy. This book has more insights per page than most, but is not a beach read.

In this lecture Nassim covers major concepts described in both books in great detail.

Books for the Soul

What would you do and what would you share with others if you only had months to live? This is the theme of the following two books: Tuesdays with Morrie by Mitch Albom and The Last Lecture by Randy Pausch and Jeffrey Zaslow. In both books terminally ill teachers share their life lessons with readers. Also, Randy Pausch, who sadly passed away last year, gave this great lecture on time management; and here is his last lecture.

Another book I’ll add to this category is The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder. This is an authorized biography of Warren Buffett. I am not sure this is the best book to read if you want to learn to invest like Mr. Buffett, but it gives a very different and interesting view of his life. There are many great lessons we can learn from Mr. Buffett that go far beyond investing, such as about honesty and treasuring one’s reputation. But I thought this book was important for a very different reason, in that it shows that Warren Buffett is not a perfect human being and that we can learn from the maestro, but in a different way: by not repeating his mistakes. He achieved his unparalleled success in his business life at the expense of his personal life, unfortunately.

Especially in today’s environment I find myself wanting to work 24/7 (and I probably do). This is truly a stock picker’s market. I bring my laptop home, read The Wall Street Journal at the dinner table, and my work life starts pushing out my personal life. This book made me realize that no professional success is worth regretting 20 years down the road that you didn’t spend enough time with your kids. Unfortunately, Buffett has that regret.

Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007). To receive Vitaliy’s future articles my email, click here.

• Slide 17 – new slide on Japanese secular bear market
• Slide 18,19,20,21 – updated valuation data for recent stock market rise, added a new 10 year trailing P/E chart, and new reported and operating earnings expectations
• Slide 20 – brand new discussion on the role interest rates play in stock market cycles
• Slide 24 – new slide, are we still in range-bound market?

This made me think that I should either update the book (write a second edition) or write a series of articles to address the following two questions: Are we still in the range-bound market I described in the book? How should investors change/readjust strategy investing in this environment?

In the mean time I wanted to ask you this: what would you like to see in the second edition of my book. Tell me what you think. Don’t hold anything back. If you think I should shut up and stop writing, tell me this too.

I’ll be attending Berkshire Hathaway’s annual meeting at the beginning of May.  After attending it last year, I had serious doubts about returning.  The Q&A session, which is really the reason to attend and consumes three quarters of the meeting, was not very fruitful.  Questions asked by attendees were “dumb” – Charlie Munger’s words, not mine.  The majority of questions had nothing to do with Berkshire and addressed important investment topics like Buffett’s “relationship with Jesus” (no kidding) and tips on how to look for a job.  Buffett is great, brilliant, we love him but he is not God.  I was surprised last year’s questions did not ask him for advice of how he would do brain surgery.  I’ll stop here….   However, Buffett, being a smart fellow and all, changed the format of Q&A this year.  This year questions will be submitted ahead of time to three reporters and thus will go through the process of un-natural selection, which in this case is a good thing.   

The BRK annual meeting turned into a value investing social gathering.  It does provide a great opportunity to meet, debate, learn from, and, this year, sympathize with other value investors.  I’ll have a couple of free hours on Friday.  You are invited to join me and couple of friends for cheap talk (we are value investors after all) and drinks (mostly water with no ice – value investors cannot afford anything else in this market).  We’ll be at the Double Tree hotel bar area on Friday, May 1st, from 1:30 to 4pm.  Nothing formal, just like-minded folks getting together for a chat.

In addition I’ll attend the following events:

·    I’ll stop by Dairy Queen on Friday night to sign books.  But more importantly I am looking forward to meeting other authors who will be there.  I am especially looking forward to meeting Jeff Matthews in person (we exchanged emails over last five years, but never met).  Jeff wrote a must read book on Berkshire and Buffett.  It was not another biography, but the most insightful, and very critical (fair and balanced) analysis of Buffett and Berkshire I’ve ever read.  I recommend this book strongly to everyone. 

The authors of two other books that I believed were excellent will be at the signing.  Robert Cialdini’s Yes! I’ve read many books on behavioral finance, this one is top notch.  Pat Dorsey’s The Little Book that Builds Wealth is a must read as well, he took well known concepts from Michael Porter’s competitive strategy and added a lot of value and great examples of how to apply them to company analysis. 

·    Yellow BRK’s Group, here is more information, Friday 4pm

·    Graham and Dodd Investing reception, here is more information on Saturday 4-6:30pm.

·    Tom Gayner’s of Markel Sunday brunch presentation (804-747-0136 for more info)
 

Here is more information about DQ event:
OMAHA–Start your “Woodstock of Capitalism” experience with an exercise in good taste: Enjoy a free ice cream cone at the West Dodge Dairy Queen, 404 N. 114th St. (at Dodge) from 8:30 pm until 10 pm on Friday, May 1.

The reception, now in its 11th year, will also give you a chance to visit with a Warren Buffett CEO and several authors:
·    Glen Arnold, The Financial Times Guide to Value Investing, (FT Press)
·    Bill Buffett, Foods You Will Enjoy – The Story of Buffett’s Store
·    Randy Cepuch, A Weekend With Warren Buffett (Perseus)
·    Bill Child, How to Build a Business Warren Buffett Would Buy: The R. C. Willey Story (Shadow Mountain)
·    Robert Cialdini, Influence (Collins); Yes! 50 Scientifically Proven Ways To Be Persuasive (Free Press)
·    Patrick Dorsey, The Little Book That Builds Wealth (Wiley)
·    Vitaliy Katsenelson, Active Value Investing (Wiley)
·    Janet Lowe, Warren Buffett Speaks, Damn Right: Behind the Scenes With Berkshire Hathaway Billionaire Charlie Munger, Google Speaks (Wiley)
·    Jeff Matthews, Pilgrimage to Warren Buffett’s Omaha (McGraw-Hill) 
·    Robert P. Miles, 101 Reasons to Own the World’s Greatest Investment; Warren Buffett CEO; and Warren Buffett Wealth (Wiley)
·    Janet Tavakoli, Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street
·    Timothy Vick, How To Pick Stocks Like Warren Buffett (McGraw-Hill)

No reservations are necessary, but you’ll need to show your annual meeting credentials for an ice cream cone, compliments of John Wiley and Sons Publishers. Other DQ products will be available for purchase. This event is also sponsored by The Reader, The University of Nebraska at Omaha College of Business Administration and the Omaha Airport Hudson Booksellers. Hope to see you there. More info and directions

Selling

I’ll start with Its When You Sell That Counts 3rd Edition by Donald Cassidy. Selling is usually as popular as candy the day after Halloween. During secular bull markets selling is frowned upon as buy and hold turns into investing religion. And since sell violates the “hold” covenant of that religion, the investor who buys and sells is labeled as a nonbeliever, or even worse, trader (if you say ‘trader’ fast enough it sounds like ‘traitor’).

Selling is usually as popular as candy the day after Halloween. During secular bull markets selling is frowned upon as buy and hold turns into investing religion. And since sell violates the “hold” covenant of that religion, the investor who buys and sells is labeled as a nonbeliever, or even worse, trader (if you say ‘trader’ fast enough it sounds like ‘traitor’). In secular bull markets, on average, sell decisions are not as rewarding as hold decisions, as market valuations are expanding and even second caliber dogs (stocks) start looking like pedigreed cocker spaniels. Every investor is now a “long-term” investor and sell becomes a four letter word. But being a long-term investor is not about longevity of your hold decisions but it is an attitude. Holding a stock because you bought it is a fallacy; you should only hold a stock if future risk adjusted return warrants it. Warren Buffett has been mistakenly promoted (though, I’d argue demoted) into the god status of this buy and hold temple. Let’s correct this mistake. Warren Buffett became a buy and hold investor when his portfolio and positions became big enough, pushing $60 billion, when selling became a difficult undertaking. In his early career, before “Oracle of Omaha” became his middle name, he was a buy and sell investor. Being on the board of some of his biggest holdings (like Coke and Washington Post) made selling even more difficult.

One doesn’t need the benefit of hindsight to know that at 55 times earnings Coke was tremendously overvalued in 1999. Coke, like the majority of his top public holdings (Washington Post, Procter & Gamble, Johnson and Jonson and many others), did not go anywhere in a decade. I dare you to take a look at his top public holdings and tell me if he would have done a lot better if he sold them when they became fully valued (or slightly overvalued). In most cases it would have been a decade ago.

Emotions pour from different directions when we face a sell decision: If it is a losing investment we want to wait to break even. This is the wrong attitude. Our purchase prices and sell decision should not be related (the only exception I can think of is tax selling). Or when it comes to selling a winner–we want to sell only at the top. Again this is the wrong attitude: the top is only apparent in hindsight, when it is usually too late. We should sell the stock when it reaches our price or valuation target, determined at the time of purchase. We (our emotions and false goals to be exact) are our biggest enemy when it comes to investing and especially selling. This wonderful book has been written to fix this. Its objective is to recalibrate your mind and free you from imprisonment of past decisions, break you free from the buy and hold state of mind and turn you into a buy and sell investor.

OK, this is a bit of a long introduction to this book, but this is a terrific and a very important book. A proper sell discipline will decide between great or mediocre returns for even the best-crafted buy decisions. Pros may want to skip a few chapters, but it is an important read for everyone, especially in today’s environment.

Behave and think like an investor

These books should help you to think like an investor, forcing you to think beyond stock tickers and focus on what is under the hood–the businesses and the people who run them. The first one is The Essays of Warren Buffett: Lessons for Corporate America, Second Edition. It’s a compilation of Warren Buffett’s letters to shareholders from annual reports dating back to the 1970s. Before this book came out (or at least before I was aware of its existence) I had my students read Buffett’s annual reports, which as you may expect were very repetitious. His wisdom doesn’t vary that much from year to year. This book organizes main concepts and removes annoying redundancy.

Another book is The Entrepreneurial Investor: The Art, Science, and Business of Value Investing, written by my friends at West Coast Asset Management. It accomplishes many objectives of Buffett’s essays plus has plenty of cultural references, humor and common sense. All of these things make it a fun and enjoyable read. I made this book suggested reading in my graduate investment class. The Super Analysts by Andrew Leeming is a book I think few people have heard of. The author interviews successful investors (not academics), and they discuss their approach to investing and analysis of common stocks and some specific industries.

You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits by Joel Greenblatt is one of those books that should be read more than once. Joel shares very unique approaches of how to find undervalued stocks. On top of being a very good investor, he has a healthy sense of humor. Joel also has written The Little Book That Beats the Market (Little Books. Big Profits). I plan to read this book with my son when he gets older as it is a great introduction to investing. At the end of the book Joel offers a “magic formula,” a screen that has beaten the market over a long period of time.

The magic screen is very simple: buy low price to earnings stocks that have high return on capital. Low P/E is an indication of cheapness, high return on capital is an indication of competitive advantage (at least in the past) and possibility to grow earnings at high rates. Here is the book’s Web site, which provides a weekly list of stocks that score high on both measures.

Behavioral Investing

The right temperament is crucial in investing. Being a critical thinker and knowing how to value stocks is important, but it is all a waste if your emotions get the better of you. The following books will help you to recognize the shortcomings of your hard-wiring and help you to devise strategies to deal with it. Psychology of Investing (3rd Edition) by John R. Nofsinger is short and to the point. You’ll become an expert on behavioral investing in about an hour. Well, not quite, but close.

Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics by Gary Belsky and Thomas Gilovich is a fun and easy read. It also addresses how shortcomings in our wiring impact other parts of money decisions, like buying cars and stereos. Gary Belsky and Thomas Gilovich is a fun and easy read. It also addresses how shortcomings in our wiring impact other parts of money decisions, like buying cars and stereos.

Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich by Jason Zweig is another selection. I have to admit that the first two books cover many topics in this book (though offers new angles and insights) and are likely to be a more exciting reads, but Chapter 10 is what makes this book a must read–it addresses happiness–yes happiness. Though as most of us know money doesn’t buy happiness (unless you are starving or living on the street), money spent on acquisitions–things–brings a bust of happiness that quickly fades away. Think of your level of happiness when you bought the car of your dreams. Money spent on experiences–being–brings a higher utility of happiness. Recollecting experience brings happiness. I plan to re-read this chapter at least a couple of times a year. Zweig also provides a list of things you can do that will make you happy, and none of them require you to spend a penny, which is a big positive in today’s economy.

Economics

Politicians, God rest their souls, always try to appeal to the lowest common denominator. They try to “protect” us from evil doers by insisting on minimum wage laws or rent controls, or threatening windfall taxes on oil companies. They sound like heroes fighting for the little guy against the evil doers. However, all they are doing is feeding on the economic illiteracy of the Average Joe. This is why the following two books should be a required reading in high schools and colleges: Basic Economics 3rd Ed: A Common Sense Guide to the Economy by Thomas Sowell and A World of Wealth: How Capitalism Turns Profits into Progress by Thomas G. Donlan.

You may think Alan Greenspan has had a hand in today’s crisis. I know I do. He took interest rates down to incredibly low levels and kept them there for too long, causing the real estate bubble. He also did not think Wall Street needed regulation. But this doesn’t make his book, The Age of Turbulence: Adventures in a New World, any less of an excellent read. It is not written in Fed-speak. It seems that Sir Alan, after he left the Fed, learned how to use English in a very clear and engaging way. This is not just another biography, either. The book goes far beyond that. It covers the workings of the Fed, lessons on macro economy and history and perspective on American politics from an insider who served under or worked with the last eight presidents.

Stock Market History

I’ve really enjoyed reading Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns And Long Term Investment Strategies by Jeremy Siegel, but it took me a while to recognize how dangerous this book is.

It is well written and provides a very good overview of the performance of different asset classes over last two centuries. But the book needs a different title, maybe something like Stocks for the Really, Really… Really, Long Run. This way, it would not lure investors into false sense of security when it comes to stocks. It preaches that stocks (stock market as a whole) are always a buy, no matter what valuations as they do better than other asset classes in the long-run, and that a 7% real rate of return is a birthright for stock investors no matter if the stock market is extremely cheap or ridiculously expensive. This is very true if your time horizon is 30 years or you plan to live forever. It is also true if you can tolerate seeing your portfolio go nowhere for a decade or longer. Unfortunately, most of us don’t have this time horizon. We need to send kids to school, pay for weddings, boats, etc. I don’t know anyone who has the patience to see their portfolio of stocks do nothing for decades.

This is why this book should only be read with the following antidote: Unexpected Returns: Understanding Secular Stock Market Cycles, which is a truly terrific book by Ed Easterling. Unlike Siegel, Easterling shows that despite stocks being a great investment for the (really, really) long-run, they have periods when their returns are unspectacular. Ed calls these periods bear markets. I call them range-bound markets, which is a difference in just semantics. Those bear (range-bound) markets take place after secular bull markets.

The appropriate way to look at risk

The following two books, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets and The Black Swan: The Impact of the Highly Improbable are written by Nassim Taleb. These books address risk and rare events (the Black Swans).

Fooled by Randomness is my favorite nonfiction book, period. I’ve read it at least five times. This book turns the way we are taught to look at risk upside down. Nassim rebels against the current establishment of finance that measures risk with elegant formulas that receive Nobel Prizes but lack common sense. Any model that solely focuses on past observations and dismisses outcomes that lie outside of what happened in the past is worthless and more importantly dangerous. One way of understanding how randomness works is by studying alternative historical paths. This means more than just focusing on what took place in the past–the definite (since it already happened), observed history, but one that beforehand was actually still just one of many possible random outcomes. One should focus on what could have taken place, what alternative paths may have existed. This allows us to think creatively about what could have happened and with that added insight then to predict and prepare for what may happen in the future.

Let’s take the current crisis: Wall Street and rating agencies dismissed a possibility that housing prices may decline nationwide–this hadn’t happened since World War II–well, then it will not happen in the future. Therefore, Wall Street took sub-prime (risky) mortgages originated in different parts of the country, put them together in mortgaged backed securities and–voila!–the risk had been diversified away. Junk was turned to gold. Since rating agencies used the same underlying assumption–housing never declines nationwide–they announced to the world that the junk is AAA and should be bought in truck loads and they were. We know how this story played out. The Black Swan is a follow up to Fooled by Randomness. Nassim takes a lot of the concepts discussed in Fooled by Randomness and explains them in greater detail, providing new unexpected insights. I have to warn you that The Black Swan is not easy. This book has more insight per page than most, but it is not a beach read.

Books for the soul

What would you do and what would you share with others if you only had months to live? This is the theme of the following two books: Tuesdays with Morrie: An Old Man, a Young Man and Life’s Greatest Lesson by Mitch Albom and The Last Lecture by Randy Pausch and Jeffrey Zaslow. In both cases terminally ill teachers share their life lessons with readers.

Another book I’ll add to this category is The Snowball: Warren Buffett and the Business of Life by Alice Schroeder. This is an authorized biography of Warren Buffett. I am not sure this is the best book to read if you want to learn to invest like Mr. Buffett, but it gives a very different and interesting view into his life. There are many great lessons we can learn from Mr. Buffett that go far beyond investing, like about honesty and treasuring one’s reputation. But I thought this book was important for a very different reason in that it shows that Warren Buffett is not a perfect human being and we can learn from the maestro but in a different way: by not repeating his mistakes. He achieved his unparalleled success in his business life at the expense of his personal life, unfortunately.

Especially in today’s environment I find myself wanting to work 24/7 (and I probably do). This is truly a stock picker’s market. There are a lot of cheap stocks, but a lot of them are deceptively cheap and there are so many risks lurking from so many directions that semi normal working hours are not enough. I bring my laptop home, read The Wall Street Journal at the dinner table, and my work life starts pushing out my personal life. This book made me realize that no professional success is worth regretting 20 years down the road that you didn’t spend enough time with your kids. Unfortunately, Buffett has that regret.

By Vitaliy Katsenelson, CFA

After reading Jeremy Siegel’s book Stocks for the Long Run, one gets a strong sense of security about investing in the stock market. Over long periods, the market overcame catastrophes like a global influenza pandemic, the Great Depression, the Cold War, two Gulf wars, two world wars, terrorist attacks, natural disasters, and much more. All of those events look like small potholes on the long road to prosperity when you put it into historical perspective.

I use Siegel’s excellent book in my graduate investment class because it provides a very good historical overview of financial markets. However, students often ask me after looking at the well-defined upward slope of the stock market line on a 200-year chart, “Why bother tinkering with stock picking? Just buy an index fund and forget about all your worries.”