Best investment books for beginners

Over the years, many many friends have asked me some version of the following question:

I have never actively invested in my life, but plan to start now. What books would you suggest that I read? Remember I am not active in the market, so keep it simple. But I am smart enough to know that I should read before I start. So don't dumb it down too much either. What would you suggest I read?

Here is my personal list of the Top 5 Investment Books for Beginners:

1. The Bogleheads' Guide to Investing, by Taylor Larimore, Mel Lindauer and Michael LeBoeuf: This isn't really an invetment book per se. It is more a personal finance book. But it is one that I often recommend should be the starting point for beginner investors. Why? Because it deals with the really important questions - Should you be investing at all, given your personal financial situation? How should you think about savings vs investments? How should you set up your personal investment goals? And it does give you a good introductory walk through simple investment strategies you could start with.

2. Stocks for the Long Run, by Jeremy Siegel: If you have a single conservative bone in you, you will find yourself asking the question - should I invest in the stock market at all? Didn't the darn thing just fall 50% over one year? Who needs that? Maybe I will just stick to bonds, Money Market Mutual Funds and such. If you have ever said some versions of the above to yourself, read Jeremy Siegel. Once you read this book, you will not ever question the financial wisdom of investing a substantial part of your portfolio in the stock market. [To be fair, I must also state that Stocks for the Long Run is criticized for fueling the stock frenzy in the late '90s. And also that Siegel recommended buying stocks in Aug 2007 - we know how that turned out. But don't let those criticisms stop you from reading this book. It is a gem and for my money, one of the best investment books of all time.]

3. The Warren Buffett Way, by Robert Hagstrom: I am a big fan of Buffett. Shocker for readers of Brick and Rope, I am sure. Of the many books written about the Oracle of Omaha, this is one of my favorites. Short, simple, accessible and insightful. I wouldn't recommend that this be the first book you read, but when you are done with #1 and #2 above, pick this up. Not just does this explain the genius of the man, it does so in a way that will leave you with simple tips you could use in your investment life.

4. One Up on Wall Street, by Peter Lynch: If there is an investor who comes close to Buffett on my personal respect scale, it is Peter Lynch. And One Up is a masterpiece. Lynch makes investing look easy and common sense. Takes the mystery and mumbo-jumbo out of it. And he does so with a folksy style that is as entertaining as it is illuminating. Read here why 'gentlemen don't prefer bonds', why the only thing that matters is 'earnings, earnings, earnings'. In particular, read the chapter on 'The twelve silliest things people say about stock prices'. [#1: If it's gone down this much already, it can't go much lower.]



5. Random Walk down Wall Street, by Malkiel Burton: So you have learnt that investing is a good idea, that the stock market is the place to be. But hey, I don't have the time (or the interest) to reads tens of financial statements. If I just pick some quality stocks and hold them for the long run, wouldn't I make a killing? Or if I pick a professional financial manager and hand my money over to him, wouldn't I beat the market? Well, you might. Then again, you might win a lottery next week too. Before you hand over any of your hard earned cash to a 'professional', read Random Walk. In particular, read the last section of the book - A practical guide for random walkers and other investors.

There is my list then. Brick and Rope certified!

An aside: If you ever walked the personal finance or Investing aisles of your local bookstore, you know that there are literally thousands of books on the subject. The five above are clearly ones I have really enjoyed and personally benefited from. But then, I have also burnt my money on some really bad ones. So here is my quick list of some garbage masquerading as advice - Buy these books if you are running out of firewood:

1. Anything from the Rich Dad, Poor Dad series
2. Any book with a number in the title - 'How I made $2,000,000 in the stock market'; 'How to be a billionnaire', 'Successful investing in only 15 minutes a week' ... I could go on.
3. All of the Mad Money stuff - Empty vessels make much noise.

What do you think? Any more that come to your mind?

The amazing adventures of Kavalier and Clay

Late in The Amazing Adventures of Kavalier and Clay, one of Michael Chabon's characters is reminiscing about his years past writing comic books. He thinks about "work that would, he hoped at the time, transform people's views and understanding of the art form that in 1949 he alone saw as a means of self-expression as potent as a Cole Porter tune in the hands of a Lester Young, or a cheap melodrama about an unhappy rich man in the hands of an Orson Welles". That might as well have been a summary of the book. In this stylish, poised and confident book, Chabon has breathed life into the era of a newborn art-form - the comic book. And he clearly loves the art-form, in a way that makes you love it too. "Most of all, he loved them for the pictures and stories they contained, the inspirations and lucubrations of five hundred aging boys dreaming as hard as they could for fifteen years, transfiguring their insecurities and delusions, their wishes and their doubts, their public educations and their sexual perversions, into something that only the most purblind of societies would have denied the status of art." How can you not love that? How can you not love such writing?

Kavalier and Clay spans sixteen years in the lives of the protagonists. The story starts in Czechoslovakia, moves to New York, on to the South Pole (!) and back to suburban Long Island. And across these different geographies in different times of the narrative, Chabon has you hooked. The writing is passionate, intense, and always, always learned. In an insulting reference to Ernest Hemingway, William Faulkner once said "He has never been known to use a word that might send a reader to the dictionary." That is not a charge that can be laid on Chabon. Faulkner, in the quote above, manages to instantly get the listener riled up and on Hemingway's side, purely on the basis of how hoity-toity he sounds. Chabon, on the other hand, writes his vocabulary stretching prose in a way that glows with beauty and never once distracts the reader.

As I have said in previous posts, I am now officially a Michael Chabon fan. Kavalier and Clay was, I understand his first attempt at going past the first person narrator, and going into a multi-year storyline. It was a cracker. I can't wait to read his other books and see what mysteries await. Yiddish Policeman's Union - here I come!

Fly, you fools

The Amazing Adventures of Kavalier and Clay is, as I have mentioned before, a magically good book that has me enthralled. It is the story of Joe Kavalier and Sammy Clay, two comic book artists in New York in the early 1940's. Michael Chabon has soaring imagination; a lustrous, electric story-telling ability; and an erudite vocabulary. With Kavalier and Clay, he has written a book that has many layers and has driven me on a whole series of interesting side-journeys as I read the book.

The first part of the book is about Joe Kavalier and his attempts to become a great escape artist. The passages that talk about the gritty details of being an escape artist were so powerful that I found myself going off to find more about Houdini - what he did, how he did it and so on. Then there is the piece around Salvatore Dali that is unforgettable. Again, I found myself going off on the side to read up about Dali and his strangeness.

Most centrally, the first half of Kavalier and Clay (which is about where I am at right now) is about comics. The book is set at a time when comic books are starting to capture the public imagination, Superman is all the rage, and every publishing house is coming up with their own versions of caped men (and occasionally, women).

All the talk about comics as an art form sent me on another quest to look at comics and comic blogs (particularly Indian comic blogs). Readers of Brick and Rope might remember that the last time I went on such a search, I had come across The Comic Project, a great site with scanned copies of old Indrajal Comics issues. This time around, I found another gem.

Fly, you fools is an 'Indian web comic about life, and its irritations'. The author Saad Akhtar is wickedly funny, outrageously irreverant, horribly potty mouthed and very inventive. The comics are (self-confessedly) not fine art, but the content is hilarious. I particularly enjoyed the 'About this blog' (how often can you say that?) and the comic on 'Large Hadron Collider'. Annoyed by my continuous laughter over a half hour, my neighbour at work finally came by to ask me what I was reading. I sent him the link and a few minutes later, the guy next to him was the one getting annoyed. As Akhtar's sub-title on Fly, you fools cheekily suggests, "people are mindless cattle".

The latest author to wow me

The first author I remember who 'wow'-ed me enough to make me want to read all of his novels was Arthur Hailey. It was far enough back in time that my memory of that older me is misty and likely unreliable. In more recent times, the author who brought the most ecstasy to my reading has undoubtedly been Salman Rushdie. The first writer whom I could truly claim (for a few years) to be my 'favorite'. Since then, there have been a few more who have, in my first introduction to them, made me hunger to read all of their work. The two most recent ones were Kazuo Ishiguro and (earlier this year) J. M. Coetzee.

Last week I started reading a book that made me feel, after the first 100 pages, that not only do I absolutely love this book, I am so enraptured by the author that I can't wait to get hold of all his other books and read them too. The book I am reading is The Amazing Adventures of Kavalier and Clay by Michael Chabon.

Michael Chabon is not a prolific author by any means. Since his arrival on the literary scene in 1988, he has written all of six novels, including Kavalier and Clay in 2001. Browsing the aisles in different bookstores, it has been inevitable that I run across these books of his. However, one thing has always stopped me from plunging into one of them - their almost overwhelming verbosity.

Chabon has a busy and intricate writing style. Almost the polar opposite of the other most satisfying introduction I had this year (Coetzee), Chabon uses his words to create exquisite, elaborate, credulity stretching, yet immensely gratifying imagery with his words. To read him with any success at all, you need to surrender yourself completely. If you are the kind that loses patience if the subject of a chapter doesn't show itself in the first paragraph or two, you are not going to appreciate Chabon. Often I am a page and a half into a chapter and still don't know quite what he is talking about. And then, with some deft manouever, Chabon pulls an as-yet-unseen curtain off, and suddenly, everything I read so far falls into place. Stroke me somebody, I want to purr!

I have always been a sucker for metaphors. Can't get enough of them. Metaphors and puns, probably my favorite literary devices. (Which explains the Rushdie, among other things). Chabon is full of surprising, twisted, interesting metaphors. Sample this: Talking of Mrs. Kavalier, the mother of one of the protagonists - "She was four inches shorter than her diminutive husband, sinewy, grim-jawed, her eyes the pale gray of rainwater pooled in a dish left on the window ledge." Or this: With Joe Kavalier overhearing Rosa Saks standing with a group at a party - "Joe could not really understand what she was telling them, but it appeared to be a story that reflected poorly on her own judgment - she was blushing and grinning at the same time - and it unquestionably ended with the work 'fuck'. She tugged on the word, drawing it out to several times its usual length. She wound it all the way around her in two or three big loops and reveled in it as if it were a luxuriant shawl. 'Fuuuuuuuuck'.

Indeed!

Hyper-inflation in Zimbabwe: How many zeros in a quadrillion?

Inflation is always and everywhere a monetary phenomenon - Milton Friedman
Hyperinflation is always and everywhere a political phenomenon - Niall Ferguson, The Ascent of Money

Reading Niall Ferguson's The Ascent of Money recently, I became interested in reading up on the current state of the Zimbabwean hyperinflationary situation. Here is my conclusion: Inflation in Zimbabwe today has gone beyond 'shocking', past 'sensational', crossed 'fantastic', and is now in the range of the utterly farcical. In fact, there isn't any more a meaningful way for us to talk about inflation in Zimbabwe, because the local currency is defunct, basic good are not available to be bought with it, the central bank has stopped publishing official inflation numbers, the finance minister has accepted 'the death of the Zimbabwean dollar' and the economic planning minister has suspended the currency for at least a year. [And really? There was an economic planning ministry?]

Here are the key storylines, the best I could figure out:

• Zimbabwe has had four different currencies so far. It has now finally given up on all of them, and has opened up its economy to global currencies. Mith most economic activities take place based on South African Rand, USD, Euro, Pound sterling, and Botswana Pula.
• The first dollar was introduced in 1980 and at that time the exchange rate was ZWD 1 = 1.47 USD
• This currency fell in value dramatically and was phased out in 2006. A new devalued currency was introduced (also called ZWD) with the new currency being worth 1000 of the old ZWD. So think of this as taking off 3 zeros from the old currency.
• If the first currency had last 26 years, the second one lasted only 2. In 2008, with massive increases in money supply having eaten away at the ZWD's value, a third currency was introduced. This new Zimbabwean dollar, ZWR was worth 10 billion of the old ZWD. So think of this as the removal of a further 10 zeros from the second currency.
• You know where this is going. The third currency lasted less than a year. In early 2009, a fourth Zimbabwean Dollar, ZWL was introduced. This took out a further 12 zeros from the third currency. So by this time, 25 zeros have been taken off the first currency introduced in 1980.
• Annual inflation reached 100% in 2001. By 2006, it had reached 1,000%. By mid 2007, inflation was 10,000%. In Jan 2008, Zimbabwe's Central Statistical Office declared that inflation had crossed 100,000%. Within 4 months, in May 2008, inflation crossed 1 million percent. By Jun 2008, it had crossed 10 million percent. In July 2008, the Central Statistical Office published an inflation rate of 231 million percent. That must have broken their spirits completely, because they stopped publishing any figures after that.
• This was the point at which Zimbabwe dumped its currency and started accepting foreign currencies as legal tender.

I came across this short slideshow with some superscary (and quite funny) images of Zimbabwe's hyperinflation. Check it out if you have a couple of minutes and see if it doesn't shake you up.

Inflation in Zimbabwe

And while all this is happening in the economy, what is making news within Zimbabwe? Here are some recent headlines -

• Chaos erupts at Zimbabwe constitution conference
• Mugabe stalls government talks needed for new constitution
• Bob's the only free Zimbabwean
• Ministers in illicit rhino horn trade
• Tsvangirai claims inflation 'under control', and
• Zim Idol searches for superstar

Nero, anyone?

From Shylock to Soros - The Ascent of Money

The demand (and glamour) of economists is counter cyclical. When times are bad, economists seem to be coming out of the woodwork. Economists who were well-known only in some academic cliques suddenly become subject of water cooler conversations. The extraordinary economic environment we are living in these last two years has been like manna from heaven for the dismal science. In my continuing search for good books on the macro-economic story of the times, I have crossed paths with some pretty strong characters this year - Paul Krugman, George Soros. Love them or hate them kind of guys, though remarkably close in terms of their prescriptions for solving the economic malaise of the present. Niall Ferguson is a similarly strong personality, and his views on the solutions are markedly different from Krugman or Soros.

[Interesting aside: Are you looking for a thoughtful discussion between stalwarts on The Crisis and How to Deal with It? Read this one between Krugman, Soros and Ferguson, with the other superstar of the times Nouriel Roubini thrown in. Informed, opinionated, fun.]

Ferguson is, by all accounts, an academic of considerable stature. With The War of the World and Empire, he has created quite a reputation for himself as a thinker of note on matters of economic and financial history, and on empire states. The Ascent of Money, published earlier this year, has quickly reached must-read status amongst the financial community. I am always somewhat wary of such books, and start with a somewhat suspicious bent of mind. I am glad to say The Ascent of Money deserves its early fame.

The Ascent of Money is a history of the financial world. It is split into six chapters, one each explaining the history of banking, bond markets, stock markets, insurance, real estate markets and the globalization of capital markets. The chapters are extremely well researched, informative, and compellingly written. His story starts in earnest with Jews in sixteenth century Venice, providing commercial credit sitting on their benches, their banci. They gain their inglorious reputation with the bard's depiction of Shylock in The Merchant of Venice. And that this just the beginning. Of an oft besmirched reputation; of a powerful group of professionals working with money and trust; of a tightening link between political and economic histories; and of Ferguson's tale.

Among the most interesting parts of The Ascent of Money are the pieces where Ferguson goes behind the scenes of familiar political history and unravels the financial story that led (at least in part) to the outcomes that we read in history books today. Like the role of the bond market in the South's fall in the civil war, or the roots of Germany's hyperinflation in the days leading up to the second world war. And he has some memorable quotes to help us along on the ride - "Inflation is a monetary phenomenon, as Milton Friedman said. But hyperinflation is always and everywhere a political phenomenon." Which reminds me - How is Zimbabwe doing recently? Maybe the topic of a later post.

I am a banker who is also an active (if amateur) investor in the stock markets. So it was a bit surprising to me that the two chapters of the book I found least compelling were the ones on the history of banking, and of stock markets. The two most powerful chapters were certainly the ones on the bond market and on the real estate market ('the home owning democracy', as Ferguson calls it). Worth the price of the book just for those two chapters. And again, there are some memorable one-liners to help the story along - like this one from a Savings & Loan regulator of old - "the best way to rob a bank is to own one." Take that, Uncle Sam.

Ferguson is known for his stance that history is an inexorable march towards the present. His belief is that things could have gone many different ways, and some personalities just happened to intervene in a particular way, which led us to this today rather than something entirely different. The Ascent of Money takes a similar line. It doesn't feel like something that is moving in the one direction of time's arrow.

One little nit - The six chapters do a great job of explaining the story of the six financial institutions. But they do it in silos. It's as if the evolution of the stock markets had nothing to do with the existence of bond markets, or of insurance, or anything else. I am guessing it was a necessary simplification to show us the threads by themselves. But at some level, I guess I would have liked to see the interweaving pattern as well.

Historic sites - on an evolutionary scale

Last weekend, I took a trip with my family to Luray Caverns. The caverns, with some exquisite stalactite formations, were formed (my audio guide informed me) 145 million years ago. Driving back home from the caverns, I noticed a large brown road-sign that said - "Historic Site - Manassas National Battlefield Park". This was the site in 1861 of the first major land battle of the American Civil War. It is now a well preserved and beautiful park maintained by the National Park Service. Now, as I have probably mentioned before, I am not much of a history buff. But irony I understand. Here I was being invited to an 'historic' site about 145 years old, while on my way back from another one 145 million years old!

That got me thinking - if one were to think in terms of the history of the earth in a cosmic sense, or the history of life on earth, in an evolutionary sense, what would qualify as some of the more historic sites? So I went back to Bill Bryson's A Short History of Nearly Everything and came up with the following:

1. Shark Bay, Northwestern coast of Australia: A glimpse at the world's first ecosystem - the stromatolites. These are the first organisms to evolve after the most rudimentary bacterial life forms to emerge on earth, that starting living in a cooperative way with each other. Some stromatolite varieties live right at the surface of water, and other live just underneath, each variety being advantageous to the other. Bryson - "It is a curiously giddying moment to find yourself staring at living remnants of Earth as it was 3.5 billion years ago. As Richard Fortey has put it: 'This is truly time traveling, and if the world were attuned to its real wonders this sight would be as well-known as the pyramids of Giza.'"

2. Chicxulub Crater, Yucatan Peninsula, Mexico: A huge meteor impact crater, 180 km in diameter. One of the largest crater points in the world, though not the largest. The bragging right of Chicxulub (as opposed to Vredefort in South Africa, the largest crater site) is this: The meteor impact here occurred approximately 65 million years ago, and marks the end of the cretaceous period. Sound familiar? It should. This is often sited as the meteor hit that caused the extinction of the dinosaurs.

3. Yellowstone National Park, Wyoming: The sites of one of the largest super-volcano eruptions in the Earth's history, with expulsion of 1000 cubic kilometers of material about 640,000 years ago. Bryson ; "Most of us, when we think of volcanoes, think of the classic cone shapes of a Fuji or Kilimanjaro, which are created when erupting magma accumulates in a symmetrical mound. ... But there is a second, less celebrated type of volcano that doesn't involve mountain building. These are volcanoes so explosive that they burst open in a single mighty rupture, leaving behind a vast subsided pit, the caldera. ... Virtually the whole park [Yellowstone] - 2.2 million acres - [is] a caldera. ... Yellowstone, it turns out, is a supervolcano."

4. Burgess Shale Formation, Yoho National Park, British Columbia, Canada: One of the most celebrated fossil sites in the world. About 500 million years old, this site showcases probably the earliest view of life's history that we can really 'see' today. The fossils here show soft parts of animals unlike any other fossil site this old. And what one can see here is truly remarkable. This is a world of animals that are so different from today, scientists have trouble coming to consensus on what part of the classification tree they belong to! Bryson - "Many of the creatures employed body plans that were not simply unlike anything seen before or since, but were bizarrely different. One, Opabinia, had five eyes and a nossle-like snout with claws on the end. Another, a disc-shaped being called Peytoia, looks almost comically like a pineapple slice. A third had evidently tottered about on rows of stilt-like legs ...this had been a time of unparalleled innovation and experimentation in body designs. For about four billion years life had dawdled along without any detectable ambitions in the direction of complexity, and then suddenly, in the space of just five or ten million years, it had created all the basic body designs still in use today."

5. Olorgasailie site, Great Rift Valley, Kenya: One of the oldest and most extensive known sites of tool-making by the ancestors of humans. Between 1.2 million years and 200,000 years ago, hominids (speculated to be Homo Erectus) worked on this site to create hundreds, thousands of hand made stone weapons. Bryson - "Why the early Olorgasailie people went to such trouble we can only guess, of course. Not only did they lug hefty stones considerable distances to the lakeside, but, perhaps even more remarkably, they then organized the site. ... There were areas where axes were fashioned and others where blunt axes were brought to be re-sharpened. Olorgasailie was, in short, a kind of factory; one that stayed in business for a million years."

Now that - is a historical site!