WHEN I LOOK AT TODAY’S WORLD, I often think of Charles Dickens’s famous line, “It was the best of times, it was the worst of times.” Technology, including the web and smartphones, has made life so much more convenient.
Still, one thing I really miss from the “old days” is the experience of the traditional bookstore. Shopping online is great, but sometimes it’s easier to choose from a curated set of 10 books on a shelf than to sift through an unwieldy list of a thousand choices online. In that spirit, below is my summer personal finance reading list.
If I had to design a personal finance curriculum around just one book, it would be The Richest Man in Babylon. This classic, written in the form of a parable, is an easy read for people of all ages. While it may seem simplistic on the surface, in reality it covers a lot of ground. For example, this is how it explains the concept of intrinsic value: “Gold in a purse is gratifying to own and satisfieth a miserly soul but earns nothing.”
Index funds have been around for more than 40 years, but the “index vs. active” debate has really heated up in recent years. If this topic interests you, I recommend two books. Both authors are active managers, but they take opposite sides of the debate.
David Swensen, the longtime manager of the Yale endowment, has built the best track record in the industry by embracing active management. In Unconventional Success, however, he delivers a striking condemnation of the retail mutual fund industry, explaining why active management works for endowments like his, but not for individual investors.
Taking the other side of this argument is legendary fund manager Peter Lynch. In One Up on Wall Street, he acknowledges that his success as a stock-picker was unusual. He argues, however, that individuals can do better than professionals if they pick their own stocks and if they stick to what they know: “If you’re a surfer, a trucker, a high school dropout or an eccentric retiree, then you’ve got an edge already.”
With the market regularly hitting new all-time highs, I spend a lot of time thinking about risk. On this topic, I have three recommendations.
In The Black Swan, Nassim Nicholas Taleb makes a simple but powerful argument: Just because something hasn’t happened before doesn’t mean that it can’t happen in the future. For that reason, we should be skeptical of financial theory that assumes stock market returns follow the standard bell curve. Instead, Taleb cautions investors to protect themselves against “black swans”—highly unusual but highly consequential events with the power to wipe you out.
Writing in The Most Important Thing, Howard Marks expands on this idea: “Quantification often lends excessive authority to statements that should be taken with a grain of salt.” In other words, when it comes to investments, don’t put too much faith in numbers. Risk may seem quantifiable, but it’s not—because markets are driven by people and people are rarely logical.
If you want proof that black swan events can and do happen, I recommend When Genius Failed. This chronicles the spectacular failure of Long-Term Capital Management, a hedge fund that was built around mathematical models. Despite having more than one Nobel Prize winner on staff, “the professors had ignored the truism…that in markets, the tails are always fat.” In other words, the standard bell curve does not apply.
Excessive quantification isn’t the only reason to distrust Wall Street. In Pound Foolish, Helaine Olen examines the seedy underside of the business—from TV personal finance gurus, to complicated financial products, to the even more complicated (and opaque) relationships in what she calls the “personal financial industrial complex.” Don’t read every word—it will only depress you—but read enough to understand that you, as a consumer, are in a zero-sum game with Wall Street.
For a more lighthearted, but no less critical, look at Wall Street, read Where Are the Customers’ Yachts? Written in the 1940s by a former stockbroker, this book lampoons Wall Street as a “kindergarten.” This insider’s account seems no less true today than when it was first published.
Finally, I would pick up a copy of The Little Book of Main Street Money by Jonathan Clements, editor of this site (and, no, he didn’t insist I include one of his books). Structured as 21 financial lessons, this book’s title belies its depth. It covers everything from savings strategies, to the nuts and bolts of constructing a portfolio, to debt, insurance and taxes. This book is a highly readable field guide to navigate the financial decisions we all face.
In his Little Book, Clements writes, “we should strive to ensure that money is enhancing our lives rather than getting in the way.” I concur and hope that this summer reading list is helpful as you pursue your life’s goals.
Adam M. Grossman’s previous blogs include Go Fish and Site Seeing (Part III). Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.