Best finance books for beginners

This is going to be very much my personal take on what are the best finance books for beginners. The approach adopted here is to consider – What would be the most important call to action that a beginner in finance should take on board?

There as a number of answers to that question:

1. Start savings 20% of your income and do it consistently
2. Learn about money, investing, budgeting and finance so you can manage your finances yourself
3. Learn about investing behavior so you know how not to dupe yourself
4. Learn how to avoid scams, Ponzi schemes, and swindles
5. Learn how to spot and avoid – Bad Investment Advice!

What Works on Wall Street

by James O’Shaughnessy

A strange choice I’m sure most who are familiar with the topic would think. I bought and read the second edition in the late 1990s and there were a few things there I read which made a light or two go on.

1. The simple observation that in any one year roughly 70 percent of fund managers under-perform a Standard and Poor’s 500 indexed fund, and
2. The 70 percent who under-perform and therefore the 30 percent who out-perform is going to change year-on-year.

Put those two facts together and if you chose a professionally and actively managed fund that sort of adheres to some stated strategy but really touts the savvy intelligence and trading acumen of the managers – then the odds are stacked against you and over the long term you are likely looking at a lackluster performing fund.

The other salient takeaway I got from this book was first that mechanically, systematically, and unemotionally applied quantitative value investing could scrape you a few extra points over the return of a broad market index over the long term and secondly that I could do it myself.

Actually that last realization was a few years later when I worked out how with a basic Etrade account, a free online stock screener, and a spreadsheet I could mimic O’Shaughnessy’s approach albeit making regular monthly deposits.

Since then, according to accepted wisdom, the world has passed O’Shaughnessy’s method by with the advent of cheap computing power and now Artificial Intelligence investing software.

He subsequently revised or refined his approach and the book is now in its fourth edition. I picked up the fourth edition and tried to read it to modify my trading strategy – in my case that meant modifying my stock screener – but I found the fourth edition impenetrably ponderous, unnecessarily long, and for my tired mind just too much. I had to read summaries written by others to glean the distilled wisdom so I would know how to adjust my investing approach.

What action points does this book hit? I would say points 2 and 3. You will – learn about money, investing, budgeting and finance so you can manage your finances yourself, and you will learn about investing behavior so you know how not to dupe yourself.

What Works on Wall Street – my verdict – it was right for me as a beginner way back when I read it, but I would not recommend it to a beginner today.

What color is your parachute

by Richard N. Bolles

For those in-the-know this might sound like another strange choice for a beginner in personal finance or investing. This is another one I read many years ago. It is a great book for anyone to read at any time but especially when you are undergoing some kind of non-elective career transition.

If there is one thing that this book will help you do it is set your goals. Relying on memory here, though my edition is still on a shelf in the garage – the book walks you through a succession of personal inventory self-assessments to help you understand what you do well, what you love doing, and all the good stuff about you so you know how to direct yourself and maximize your engagement with the world of employment. And then the book gives a whole load of other advice that will help a job seeker get hired.

In truth, it doesn’t really hit any of my five target action points above so it really shouldn’t be here. Unless of course, the good advice on how to land a good job will increase your pay and thereby your disposable income which will give you the means, or more means to self-direct your financial future.

Rich Dad Poor Dad

by Robert T. Kiyosaki

It must have been the catchy title or that I was caught at a vulnerable couch potato moment in front of an annoying TV infomercial featuring the author as a guest speaker, it certainly wasn’t the gaudy color or design of the book cover. But whatever it was I bought and read this book.

Like many books, it has its own insights but it is also unsatisfying in its simplicity and uses finance terms in a creative and therefore not strictly accurate way. But I remember a take-away for me from this book was that it is important to gather things to yourself – which he terms “assets” which will give you future income and avoid things that he terms “liabilities” which will cost you money in the future.

As I say not a strictly accurate use of the two terms in the finance world but the point is worth making and exposes some common misconceptions – an example he gives is that a boat is an asset. As a friend of mine so rightly says B O A T stands for Break Out Another Thousand and the author points out that a boat should be considered a liability rather than an asset because it is just going to cost you money rather than earn you income.

Like many simple business conceptual models, he draws a picture with four boxes but instead of a chart with four equal quadrants, he uses the analogy of a simple balance sheet and a profit and loss account.

You as the person in question have an asset box which contains all the things you have or own that will earn you money, like a job, properties that pay you rent, savings accounts or stocks and bonds that pay you dividends, copyrights and other intellectual properties that give you royalties.

You also have a liabilities box which is all the things in your life which will cost you money like a mortgage, other loans, a family, and especially a teenage daughter.

Then you have an income box and an expenses box.

The general idea is to maximize your income-earning assets and minimize your money draining liabilities – without disposing of your family of course so that the flow of money into the income box exceeds the flow into the expenses box.

This book will deliver on action point number 3. You will learn about investing behavior so you know how not to dupe yourself. It will also contribute to action point number 1 by instilling good financial habits

Despite its skimpiness and shortcomings, this is a book I would recommend to beginners in personal finance. It is a quick read and gives a valuable lesson or two well worth internalizing that should instill useful financial habits and inspire you to start setting aside 20 percent of your income if you aren’t already.

Extraordinary Popular Delusions and the Madness of Crowds

by Charles Mackay

Another strange book to chose perhaps for a primer on personal finance. If you have a question for the author on the content I would not suggest looking for a Facebook profile or an email address on Linkedin or wherever the first edition was published in 1841. This is a classic and is one of the first books written which tried to describe a number of historic and infamous market bubbles and crashes. It covers the Mississippi Scheme of 1719 and 1720, the South Sea Bubble of 1720, and Tulipomania which hit the Netherlands in the 1630s.

He probably didn’t arrange them in chronological order as word processors were hard to come by in the 19th century.

The style is somewhat ponderous for a modern reader. I did read through the whole book and after the first three sections on those financial bubbles, he investigates alchemists, fortune-tellers, modern prophets, and witches. Reading it I experienced on more than one occasion that I could feel the stiffness and stuffiness of the audience he was trying to appeal to. It was easy to imagine Victorian bushy whiskered gentlemen sitting in drawing rooms sipping brandy tut-tutting and harrumphing with self-righteous disapproval over the stories about scalawag alchemists and hysterical witches.

It is rather a turgid read overall and for a beginner in personal finance, I would only recommend the first sections on financial bubbles.

As regards the five action points, this book hits points 3 and 4. You will learn about investing behavior so you know how not to dupe yourself and you will learn at least how to spot scams, Ponzi schemes, and swindles though you will need to apply the principles to the current modern setting. But it is a classic.

Warren Buffet Speaks

by Janet Lowe

This little gem gives a plethora of advice and tips in all areas of life. There are many other books that purport to teach you Warren Buffet’s investing technique. I don’t even know if it is possible or reasonable to try to summarize Warren Buffet’s wisdom. Is it just – invest in quality and value for the long-term, or to quote the man himself:

Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares for ever.¹⁾Ref. p 209, quoting Andrew Kilpatrick, Of permanent value: The story of Warren Buffet (Birmingham, AL: AKPE, 1994) p 568 quoting from Forbes, August 6, 1990

Can an average investor do that though you could ask? Well, Warren Buffet built his company on deep and painstaking research to find those nuggets of businesses and paid less than they were intrinsically worth – but – interestingly Warren Buffet’s advice to investors today is to buy into an indexed managed fund, with low fees of course.

I recommend this book for a beginner in personal finance not because it hits any of the five action points but it does instill a good and realistic attitude towards investing. And at least you can say to your friends that you’ve read and taken advice from Warren Buffet.

One up on Wall Street

by Peter Lynch

Getting lower down my list now and there are a couple of observations I could make on this book. I guess an obvious one is that I’m having a hard time remembering the key points of this very popular book. But here it is.

The main premise is that the private investor can gain an investing edge on professional traders and fund managers by researching companies in industries and niches where they – i.e. the private investor – has an inside track so will be able to spot trends and winning companies before the professionals wake up to the growth or winning potential of the companies.

But I am going to say something cynical now. I could speculate that some of the popularity of this book is that it encourages the private investor to get stuck in, research companies, find hitherto undiscovered gems, buy them and then watch them like a hawk as the enterprise goes from strength to strength and the stock value climbs into the outer stratosphere.

Couldn’t you say this is just pandering to our egos? Don’t we all want to think of ourselves as budding savvy investors using our business acumen and powers of deep perception to ferret out value missed by the herd of professional fund managers?

In financial circles, this is referred to as the qualitative approach vs quantitative approach argument. Peter Lynch is a proponent of a qualitative approach with his own twists and nuances. James O’Shaughnessy says the private investor trying to build a nest egg is better off taking a quantitative approach.

This discussion goes back decades now. Both sides have their proponents in today’s world. Now many traders and fund managers can call on powerful computer power and Artificial Intelligence to help make trading decisions but the psychology of investors and markets has not changed. Today there is more money sloshing around in markets looking for growth, gain, and income potential or a safe haven. Right now with Coronavirus sending markets on a roller coaster ride safe havens are few and far between.

Again this is another book that hits action points 2 and 3. This book will give you an education on money and investing that will help you manage your own investments and it will give you valuable insights into the psychology of investing. And the author does advocate taking a long term view, sticking with your strategy, and avoiding trying to time the market and time has tested the validity of this advice.

Would I recommend this for a beginner? There are more up-to-date books that cover similar material but this one is a classic and yes I would recommend it.

The Great Depression of 1990

by Dr. Ravi Batra

Confession: For years now I have looked back and smiled at this rather sensational mass-market book obviously intended to sow panic and encourage us all to start building survival shelters right away. This book was published in 1988. The author was clearly convinced that the world was rapidly heading for hell in a handbasket. But the great depression of 1990 didn’t happen. There was what most would call a minor correction in 1990 but after that, it was the start of one of the steadiest bull markets spanning a decade that the markets have ever seen.

The one wise piece of advice that stuck with me from this book was – buy soap! Dr. Batra was convinced that soap would replace money and a medium of exchange and store of value.

I suppose at the moment hand sanitizer and surgical masks come close.

He released another book in 1996, The Myth of Free Trade. The author is clearly in the protectionist camp.

Not recommended.

What’s missing from the above?

A few things of course. Some of the above books will explain the basics of derivatives like options and futures and if you are going to manage your own investments it is good to understand how this works. But none of them go into all the new financial derivatives that are now available.

The other glaring omission is that none of the books mentioned above address action point 5:

Learn how to spot and avoid – Bad Investment Advice! – maybe I’ll have a go at that, one of these days.

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