Recommended Financial Books

[gary]

To all you 'expert' ERs, any great financial books that you highly recommend? For Christmas, we're thinking of buying some books for some friends that are close to ER. A list would be greatly appreciated....

 

[Cut-Throat]

'The four pillars of Investing" by William Bernstein.

'What Wall Street does not want you to know' by Larry Swedroe.

 

[unclemick]

Benjamin Graham's "The Intelligent Investor" - the 1949 classic reissued and updated/edited by Jason Zweig.

 

[ESRBob]

One that isn't often mentioned is Retire Early, Sleep Well by Steven Davis. It is purely financial -- nothing about the psychological side -- but I like it a lot for its hard-nosed "Slicer" analysis and explanations. He draws all his example portfolios from Vanguard and DFA funds.

Sort of takes Bernstein's Intelligent Asset Allocator/4 Pillars a little deeper into just the Modern Portfolio Theory aspects.

ESRBob

 

[Hyperborea]

Benjamin Graham's "The Intelligent Investor" - the 1949 classic reissued and updated/edited by Jason Zweig.

Well, I'm not sure if Benjamin Graham would recommend his book anymore.  He might just recommend "The Four Pillars of Investing" by William Bernstein.

Ben Graham quoted from an interview shortly before his death:
"I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when Graham and Dodd was first  published; but the situation has changed.... [Today] I doubt whether  such extensive efforts will generate sufficiently superior selections  to justify their cost.... I'm on the side of the'efficient market'  school of thought."

 

[wabmester]

Bernstein is a proponent of the "efficient frontier." This is not the same as those who believe in an efficient market. Those in Bernstein's camp basically believe that you can get a free lunch by reducing volatility through asset allocation. That's fairly safe advice, but some take it a step further by suggesting that you can beat market returns via "smart" asset allocation. That conflicts with the efficient market hypothesis, which Graham refers to.

In any case, I think "Four Pillars" is a good book for the clueless. I wouldn't recommend treating it as an investment bible as some do, though.

 

[Hyperborea]

Bernstein is a proponent of the "efficient frontier."   This is not the same as those who believe in an efficient market.

Yup, he believes in the 3 factor model of Fama & French (market, small, and value) which is one of a number of different factor models. However, Bernstein is a lot closer to efficient market than the old Graham analysis stuff. Now even in an efficient market there is an efficient frontier which is probably the Sharpe total world market portfolio.

 

[Nords]

"Millionaire Women Next Door"

I've complained before that it didn't include addresses or phone numbers, but it's a great read on gender differences in running a business. It's also an eye-opener on the importance of developing job skills whether you're an entrepreneur, a diehard careerist, or an ER wannabe on the parent track.

It's a great gift to women-- especially in their teens/20s-- but it's an even better gift to men who view business in warfare terms. There's a better way!

But I guess MWND doesn't strike a chord when you're ready to ER. A more suitable ER recommendation would be Po Bronson's "What Should I DO With My Life?" (paperback has more than the hardcover), Zelinski's "Retire Wild & Free" book discussed in another post, a copy of Terhorst's out-of-print "Cashing in on the American Dream" book, or Bud Hebeler's "J.K. Lasser's Your Winning Retirement Plan".

 

[wabmester]

he believes in the 3 factor model of Fama & French

Well, I can't tell if he believes in it, but he's certainly selling it.   Fama works for DFA these days.   Both Swedroe and Bernstein are DFA brokers.   I view them both as pitchmen,  although I think their pitch is less evil than most.

Interestingly, I'm pretty sure Fama came up with the idea of the Efficient Market Hypothesis in his younger days -- or at least coined the phrase.   So, I suppose one could consider the three-factor model to be an evolution of EMH.

 

[brewer12345]

"Principles of Corporate Finance" by Brealey & Myers

This is a grad school text, but it is extremely readable and does an excellent job of explaining corporate finance and capital markets in an intuitive, understandable way. For me, this is one of the Rosetta Stones needed for equity and credit analysis.

 

[Hyperborea]

Interestingly, I'm pretty sure Fama came up with the idea of the Efficient Market Hypothesis in his younger days -- or at least coined the phrase.   So, I suppose one could consider the three-factor model to be an evolution of EMH.

The efficient market hypothesis doesn't say that there can't be any inefficiencies in a market but that once they are generally found that they will be arbitraged away to the point that it would cost too more than they are worth to make them any smaller. If you haven't read the Sharpe lectures that Bob Smith posted the link to then you might want to consider it. Sharpe takes a look at the factor models in his discussions including the 3 factor model of Fama & French. Two interesting points were that the magnitude of the effect of small and value was entirely within the realm of randomness and that if any such effect existed it seems to have disappeared about the time that DFA started to offer a fund that really targeted that factor (arbitraged away?).

As for financial books, I think a lot depends on how financially astute these friends are. Are they coasting into retirement without a real understanding of investments (i.e. ER at 55 with a big pension)? Then how about Malkiel's perennial classic, "A Random Walk Down Wall Street"? If they're somebody who doesn't know what to do with their time rather than their money then Nords' suggestion of Po Bronson's book is good.

 

[grumpy]

As for financial books, I think a lot depends on how financially astute these friends are. Are they coasting into retirement without a real understanding of investments (i.e. ER at 55 with a big pension)?

Hyperborea,

As one who was "(i.e ER at 55 with a big pension)" I wonder why you would assume that such an indivdiual would lack "a real understanding of investments'". While my ER plans always included having a big pension, that has not prevented me from accumulating a 7 figure investment portfolio that I manage very well, thank you very much. Is this sour grapes?

Grumpy

 

[Hyperborea]

As one who was "(i.e ER at 55 with a big pension)"  I wonder why you would assume that such an indivdiual would lack "a real understanding of investments'".

No assumption was made that a person who ERs at 55 with a big pension would lack a real understanding of investments.  It was actually meant to be an example in the other direction.  It wasn't a statement that those with big pensions retiring at 55 are neccessarily financially illiterate.  However, there are a few types of people who can and do retire early with little understanding of investments because the method that lets them retire early doesn't require them to have any.  Folks with big pensions are probably the largest group of these.  Though there are also those who win at the stock option lottery - I've known some of them and they don't often know what to do with the money either.

This is kind of like the logical statement "all humans are mortal" not being able to be inverted to "all mortals are human" - at least sort of.  In this case there are "many" or "most" rather than "all".

While my ER plans always included having a big pension, that has not prevented me from accumulating a 7 figure investment portfolio that I manage very well, thank you very much.

Right, nothing prevents you from learning about investments but then nothing requires you to either.  Those with a big pension can retire early (at least with some pension plans) without needing to know anything about investments.

Is this sour grapes?

I don't see how this can be logically concluded from what I stated.

Now, to the topic at hand, what kind of financial book to buy for the near-ER friends will depend on their financial literacy though.  Brewer's suggestion of "Principles of Corporate Finance" will do little to help somebody without more rudimentary information first.  Just as my suggestion for Malkiel's "Random Walk" will not be that useful to most MBA grads.

 

[ESRBob]

Sharpe takes a look at the factor models in his discussions including the 3 factor model of Fama & French.  Two interesting points were that the magnitude of the effect of small and value was entirely within the realm of randomness and that if any such effect existed it seems to have disappeared about the time that DFA started to offer a fund that really targeted that factor (arbitraged away?).
.

Hyper,
I took the time to wade through two of Sharpe's papers looking for this reference, (It is on pages 46-51 of the second lecture) and would not want the average reader to walk away thinking that Fama French has been made irrelevant.

What my (highly opinionated) read of Sharpe on this point leaves me with is that:
a) He wishes it were easier to dismiss the 3-factor model because it doesn't fit into his neat world of hypothetical fish famers
b) he eyeballs "Ocular Analysis" some graphs and decides that something in recent years isn't going up as fast as it used to, thus wishing to dismiss it.
c) He does find significant results in the small and small value categories, but dismisses these as 'only a few percent of the total market cap".  That may be a problem if you only global-market-cap-weight as he recommends, but it is no problem at all if you slice with small and value tilts -- overweighting these small outperforming sectors has done nice things to my portfolio actual and expected returns.
d) he definitely doesn't say there are no longer value or small effects.  After admitting that there are definite small and value effects, he simply asks, in that peevish academic way, whether they can possibly persist, since they are irrational, and that now that we all know about them, they are all but sure to disappear.

It reminds me of the joke about the two economists who find $100 lying on the ground in the park, and can't decide whether to split it, pick it up or whatnot, until one comes to the conculsion that, since $100 bills are valuable, if it really were one it wouldn't still be lying on the ground in a public place , so they happily leave it and walk off having assured themselves that what they saw couldn't possibly have been a $100 bill.  (I was always lousy at telling jokes, sorry.)

While giving a nod to psychological "Market Behavior' issues, Sharpe doesn't touch what I view as the real reason a value premium persists (Fama and French admit the small premium may be declining, although if you rope in microcap and private equity, small cap premia may in fact be alive and well).  The reason a value premium persists, imho is purely psychological:  value companies generally have problems.  They are in the news for negative surprises.  (or they are boring un-noticed companies).   When bad news hits, active investors, except those curmudgeonly value investors, are afraid their reputations will suffer if they own these things.  Who wants to risk looking like a fool?  So investors dump them and make them into bargains.  Meanwhile management of these companies works hard to fix the problems (we are talking big companies here -- NYSE listed securities for most US value funds) and when they do, everyone acts surprised and gives them back their keys to the executive washroom (invites them back into the club of market-PE stocks).  The value investor then has a fully priced security, which she sells and moves on.  This works across the asset class, not on anecdotal stock-by-stock basis:  I wouldn't want to hang all my chips on Delta or Enron, but a fund will balance  these out with the Tycos and can come out ahead.

One point:  value index funds may not capture this cycle that efficiently as their indexes only get re-set annually (usually) and as should be clear from the above, companies move in and out of the value camp possibly more rapidly than that.  For this reason, I am comfortable paying for an active manager on the value side -- the only place this old BogleHead can really say that with any conviction.

I've posted on this topic before, so sorry if it is boring to some, but I feel value investing deserves an advocate and a fair hearing, especially when Nobel Prize Winners like Sharpe are lined up to diss it.  

ESRBob

Additional note: I sent a polite version of this to Professor Sharpe, basically saying if he has real data showing that the value premium is gone, that this Board would very much like to see it. Will post any reply.

 

[Brat]

How Not To Go Broke at 102, Adriane G. Berg

This book isn't very analytical, which is why I wouldn't make it a favorite read, but it does touch on longevity issues that others don't.

This book is a good platform for discussion with a person who isn't into finance or longevity planning.

 

[Shredder]

Suprised no one mentioned the "The Coffee House Invester" certainly not the everything to all book but I found to be helpfull and a very simple read.......Shredder

 

[unclemick]

Wm. Bernstein, Bogle. and Coffeehouse all have websites - good ones - so I have a tendency not to recommend their books - which I probably should since I like their stuff.