This week I wanted to share with you some of the best books I know about investment. The shelves of bookshops groan with investment self-help books, and the Kindle store does a roaring trade, but here is a mix of books specific to the Australian stock market, plus a couple of the all-time classics that still hold their relevance. I’ve also added several economic history examples, which I think make fascinating reading. So, here’s your summer reading fare taken care of.
Value-Able by Roger Montgomery
Roger Montgomery will be a familiar name to many, if not most, readers: he is a regular contributor to Switzer Super Report and Switzer Daily. Roger is the founder of Montgomery Investment Management, and is one of the best Australian value investors. Since inception in August 2012 The Montgomery Fund ($25,000 minimum investment) has earned a total return (capital gains plus dividend income) of 77.5%, compared to the S&P/ASX 300 Accumulation Index’s return of 63.5% over the same period. The global strategy, the Montgomery Global Fund (also $25,000 minimum investment) has earned since inception in July 2015 total return of 21.5%, versus 13.1% for its benchmark index, the MSCI World Net Total Return Index A$.
Value investors look for stocks with prices that are unjustifiably low based on their “intrinsic value.” It’s a concept that is also used by Warren Buffett and Charlie Munger of Berkshire Hathaway fame, but they didn’t invent it. The intrinsic value is very different to the price/earnings (P/E) ratios, dividend yields, sales and profit forecasts that are often used by investors trying to buy stocks that are likely to rise in price: the problem is that the intrinsic value is not quoted in the newspaper or in any of the data feeds that you can have on your computer screen. You have to work out the intrinsic value of a stock yourself.
In Value-Able, Montgomery takes the reader through two methods of valuing stocks, one that arrives at an estimate of intrinsic value, and one that works out the internal rate of return (IRR) that holding a share for a certain period of time will generate. The book does not give the reader the perfect formula into which they can instantly plug any stock’s fundamental data and conclude that it is undervalued or overvalued – the approach requires a bit more effort than that – but it certainly gives you a rational approach to value-oriented investing in the stock market, with good real-life examples.
Where Are the Customer’s Yachts? by Fred Schwed, Jr.
There is a very good story behind the strange-sounding title of this book. It comes from a remark attributed to a Mr. Travers, who, one day in the early 1900s, was being shown around the financial district of New York. Mr. Travers’ guide pointed out the magnificent yachts riding at anchor at the New York Yacht Club, saying, “Look, there are all the bankers’ and brokers’ yachts.” Mr. Travers’ reply was, “Where are the customers’ yachts?”
First published in 1940, the full title of this book is Where Are the Customer’s Yachts? A Good Hard Look at Wall Street, by Fred Schwed, Jr. Schwed was a stockbroker with a fairly cynical view of Wall Street, viewing it as a place where a customer could be anyone willing to put up some money. Having lost a bundle in the 1929 Crash, Schwed retired from stockbroking to ‘drink, play golf and write a little.’ His only other published work was a children’s book called Wacky, the Small Boy. Schwed had a unique style, and the major bonus of his Wall Street book is that it entertains while it educates you about the mechanics of investment. You might think that it’s out of date, but it’s very up-to-the-minute, because certain things about the stock market are timeless. It’s fun to read, but there are a lot of serious messages that still ring true.
Common Stocks and Uncommon Profits by Phillip A Fisher
This book from the 1950s is one of the most influential texts of the “growth” investment school, which is an investment strategy focused on capital growth – growth investors look for companies showing signs of above-average growth, even if the share price appears expensive in terms of valuation tools such as price-to-earnings (P/E) or price-to-NTA (price to net tangible asset value) ratios, what the Americans call “price-to-book.”
Fisher is the counterpoint to the “value” school that came out of the writings of Benjamin Graham, whose tomes Security Analysis (1934) and The Intelligent Investor (1949) are the sacred texts of value investing (they are also pretty hard going for the typical reader.) Fisher didn’t see the point of value investment: he felt that companies trading at a discount to the valuation of their assets really only offered the upside of a return to fair value. Neither did he see the point of making a value investment in a company that happened to be poorly run.
In seeking stand-out growth opportunities, Fisher placed a huge emphasis on a company’s people – what today would be called its “intellectual capital.” He was always peering into the future to see what products were on the drawing board, to see what might drive the company’s revenue and earnings growth down the track, and potentially generate a huge return. He might even have been called the first “tech” investor.
The Little Green Book – A Gardener’s Guide to Investing by Peter Harper
Peter Harper is co-founder and executive chairman of independent Sydney-based financial management firm Harper Bernays. I’ve talked investment with Peter many times, and I admire his investment philosophy – which is expressed in The Little Green Book, using the analogy of a garden to describe the process of establishing and nurturing an investment portfolio. It’s a short book and it isn’t for everyone: for example, Peter does not have much truck with charting or technical analysis. But its apparent simplicity is quite deceptive: Peter’s message about the importance of time, patience and discipline to an investment portfolio is very powerful.
Stockmarket Secrets by Marcus Padley
Melbourne-based stockbroker Marcus Padley is another name that will be familiar to Switzer Super Report readers. I’ve known Marcus for a long time: he is the man behind the ‘Marcus Today’ newsletter, which has for many years delivered a pithy, slightly cynical take on the stock market from a veteran insider, who knows the market about as well as anyone could, and who is one of the best people an investor can have on their side as they try to negotiate a market in which they need to know what they are doing, while being bombarded with advice and marketing – which, Marcus points out, is not always (in fact, hardly ever) in their best interests. Marcus’ book Stockmarket Secrets is very much in this vein: while it is a great guide to the mechanics of how the stock market works, it is also very much attuned to the cynical investor who wants to ask, ‘why am I being sold this?’ or ‘why am I being told that?’
Last year Marcus put his money where his mouth is and established two separately managed accounts (SMAs) that invest following his philosophies, one a strategy that attempts to maximise regular, tax-effective income from Australian shares with competitive capital growth over the medium to long term, the other a more aggressive strategy in Australian shares that emphasises medium to long-term growth, with some income. The book explains how the investment strategies behind the SMAs came about.
Economic history
I also wanted to mention some of my favourite books on economic history, which are not necessarily guides to how the stock market works and sources of advice on investment strategies you can start to follow, but in my view essential (and fascinating) reading on how the system we use developed. I love this sort of book.
First is The Ascent of Money: A Financial History of the World, by British historian Niall Ferguson, which is a cracking read, showing how financial history and political history are totally entwined – and that every financial bubble bursts.
The second is The Power of Gold: the History of an Obsession, by Peter Bernstein. This covers some of the same ground as Ferguson’s book, but there is no better testament to the relevance of Bernstein’s book than the fact that some of the people buying gold at the moment because of the worrying prospect of North Korea doing something crazy are thinking in the same way as the Babylonians did.
The third is The Big Short, by Michael Lewis. Forget the movie, this book by Lewis is the best I’ve read that tells the reader why the big events of the 2000s – the US credit and housing bubbles, and the consequent GFC – happened. I think Lewis is the best financial writer of his time: his book about the European debt crisis, Boomerang, is also an excellent read. Lewis has a real knack for making the financially complicated an interesting and riveting yarn.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
