A Random Walk Down a Stock Market Recommended Reading List

by Steven M. Cohen  •  Mar 18, 2009 at 12:46 pm

http://www.buyselljump.com/2009/03/a-random-walk-down-a-market-reading-list

Everybody needs a break. In an effort to keep readers from becoming more depressed during this recession/depression, let's step away from the putative subject matter of this space—the impact of (usually misguided) politics on the markets, and momentarily revisit the days when markets acted somewhat more rationally. In preparation for a return to relative normalcy, I've put together a reading list—some would probably call it nostalgic, parts of it even quaint—of books that I've found valuable when thinking about how markets work. If someone characterized it as more stream-of-consciousness than organized exercise, I would have no argument.

This eclectic collection is decidedly un-academic, meaning that a list put together by a business school professor would look very different. Some of these books I have read recently, others over the past few years, and still others a long time ago. All of them, I think, have application today, even though some of them are very conventional in their approach, and many investment professionals think that "this time it's different." I don't subscribe to that notion, and while I recognize that the present environment is particularly difficult and challenging, I still believe that certain principles--for example looking for good valuations, diversification, etc.--apply regardless of short-term economic, political and market disorder. So here are some suggestions, in no particular order:

A Random Walk Down Wall Street, by Burton G. Malkiel--a sort of comprehensive primer on investing. There's a good reason why it's in its umpteenth printing and has been a bestseller for years. Even in these stomach-churning conditions, it's still relevant.

Unconventional Success: A Fundamental Approach to Personal Investment, by David F. Swensen. The author directs the investment of the Yale endowment and has had a fantastic record (although he has by no means been immune from the typical endowment losses during the present crisis). Swensen debunks a lot of conventional investment notions, among them that it makes sense to pay advisory fees to "professionals." His illustrations of how these fees negatively impact performance over the long-term are positively scary. Swensen earlier wrote a book aimed at institutional investors, but this one is specifically for individuals.

The Little Book of Common Sense Investing, by Jack Bogle. This is somewhat along the same lines as the Swensen book. Bogle is the founder of Vanguard, the mutual fund giant. He has always been, and remains, one of the most vocal proponents of passive index investing. He also has always argued for low fees, and does a particularly persuasive job here. After reading Swensen and Bogle, you will never want to pay a broker commission or a high mutual fund load fee again.

(Two more in the Wiley "Little Book" series--Value Investing, by Christopher Browne, and The Little Book That Beats the Market, by Joel Greenblatt. These are two short, entertaining, and valuable investment guides with very refreshing points of view.)

For a change of pace, two books that are more philosophical than investment-oriented, but they have tremendous application to markets and investing: Fooled by Randomness and The Black Swan, both by Nassim Nicholas Taleb. These are two challenging books that require some commitment to read, but they have profound things to say about risk and the intervention of extraordinary events. Few could argue that we are not in the midst of extraordinary events today, making Taleb's thesis more relevant than ever.

Want to be entertained with a potboiler while staying in the investment mode? Read When Genius Failed, by Roger Lowenstein. I finally got around to reading this recently, even though it has been out for years. It's the story of the collapse of Long Term Capital Management in 1998, a morality tale of how abject arrogance can lead to the loss of enormous amounts of money. And just like LTCM, Bernie Madoff lured investors by playing up the "exclusivity factor" and cachet of investing with him. Unlike Madoff, however, LTCM was not a fraud, but instead was undone by a set of fatally faulty assumptions by its managers, among them several Nobel Prize winners.

I know I promised a brief respite from present-day reality, but you ought to read Robert Shiller's rather depressing Irrational Exuberance. What is most striking, even eerie, is the uncanny accuracy with which he foretold the bursting of the housing bubble. It's almost creepy. This is a sobering book that has been a bestseller for years now, with good reason.

I should add to the list something by Peter Lynch, the long-retired manager of the Fidelity Magellan fund. The only one I still have lying around is One Up on Wall Street, but that was published in 1989 and he probably has written something more recently. Some of the recent biographies of Warren Buffet, contain some pretty good common sense but too many war stories about his brilliant investing. I would characterize them as obnoxious but insightful.

Here's an absolutely great book that is more timely now than when it came out a couple of years ago and you can probably guess why. Pick up a copy of Ponzi's Scheme: The True Story of a Financial Legend, by Mitchell Zuckoff. The connection with present-day events is obvious, but this is a tremendously enjoyable book that is a real period piece about the 1920s, before there was much regulation of the financial industry. (Believe it or not, Ponzi comes off in a reasonably sympathetic manner, unlike his present-day counterpart.) I have another old favorite in that category, Reminiscences of a Stock Operator, by Edwin Lefevre, thought to be in reality the biography of investing legend Jesse Livermore.

My last recommendation is a book actually written in 1841, the investing classic Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay. My copy has a wonderful foreword written by Bernard Baruch in 1932. You can read about all sorts of bubbles, the South Seas as well as tulip mania. It's amazing how some books are timeless.

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