The 5 Greatest Investment Books You've Never Heard Of
Some time ago, a reader asked me for a list of favorite investing books. I emailed him back that on a slow day I’d write one up. Well, today is that slow day.
Below are some notes on a handful of my favorite investing books. To make things more interesting, I’m leaving off those books widely considered as part of the canon. So you won’t find anything by Benjamin Graham, Warren Buffett, Seth Klarman or Joel Greenblatt, for example.
“A great speculation always entails more tension than all but a few can withstand.”
All of the below are lesser known titles, but they are truly my five favorite books on finance. These are books I’ve read more than once and that I find myself dipping into again and again.
With that, here we go…
1. Humble on Wall Street by Martin Sosnoff
This came out in 1975. It’s a Wall Street memoir of Sosnoff’s adventures managing money in the 1960s and ’70s. The main gist is that intellectual effort does not solve stock market problems. The market humbles all.
Sosnoff is a conceptual stock picker who does the work on earnings and the like but knows the limits of analysis. A running theme is the futility of relying too heavily on facts and figures. His first law is “the price of a stock varies inversely with the thickness of the research file.” The point being that the really good ideas are often the simplest and cleanest.
The chief appeal here is Sosnoff’s style. He has a gift for metaphor.
He writes about stocks sinking gradually over time. “This is like Venice slipping gently but proudly into the mud over 400 years. In the end, the mud wins, but there have been some memorable masked balls in between.” Or when he writes that the speculator’s credo is “he will trade in any kind of sardines, as long as the ice lasts.” Or when describes how the slow reaction times of large pools of money are “comparable to the time it took a species of grass-eating dinosaur to transmit a brain impulse to its tail asking it to thrash out a Tyrannosaurus rex who was busy crushing its backbone. When the message arrived, the herbivore lay dying.”
There is a lot of that kind of writing, and it is great. There are also many other quotable lines. “A great speculation always entails more tension than all but a few can withstand.” “Stocks are pieces of paper with stories attached to them.” “A meaningful insight can be attained at the cost of burnt fingers.”
Funny, cynical and wise…
2. Silent Investor, Silent Loser by Martin Sosnoff
Sosnoff followed Humble on Wall Street with this book in 1986. It is just as good if not better. He extends his usual themes here, but the main theme is this:
“The disenfranchisement of all shareholders by rapacious managements with kept boards… has cost shareholders billions upon billions…”
Sosnoff fingers the lack of real owners as the main culprit and also as a cause of weak results:
“The sociology of token ownership of equity by both officers and directors of almost all big businesses reinforces an anti-entrepreneurial style that is considered normal behavior, even by the professional investor.”
What to do? Sosnoff comes out forcefully for investing in owner-operators:
“My experience as a money manager suggests that the entrepreneurial instinct equates with sizable equity ownership… If management and the board have no meaningful stake in the company — at least 10-20% of the stock — throw away the proxy and look elsewhere.”
Silent Investor, Silent Loser is another terrific book filled with colorful writing. I find myself often dipping into these books and rereading them in their entirety every few years — just for inspiration and a good dose of humility. I don’t know anything about Sosnoff’s track record, but I love his books.
There are some principles and rules, but otherwise, humility is what’s called for in finance.
3. Sense & Nonsense in Corporate Finance by Louis Lowenstein
Louis is the father of Roger Lowenstein, who wrote such best-sellers as Buffett: The Making of an American Capitalist and When Genius Failed: The Rise and Fall of Long-Term Capital Management. The elder Lowenstein died in 2009. He had a varied career. He was president of Supermarkets General. He was a corporate lawyer for 20 years. And he was a professor at Columbia.
He wrote three books — all good. This one, which came out in 1991, is my favorite. If you ever wanted to understand corporate finance — buybacks, dividends, buyouts, stock splits and more — then this is the book you should get. Lowenstein writes well about finance and its limitations. He skewers the nonsense. His basic principles of finance — there are 12 of them — are worth the price of the book.
Here’s an excerpt from No. 4, which is another reason to invest in financially strong companies:
“Opportunity knocks primarily on the door of the rich… All over the industrial landscape, there are once-strong companies that now must sit on their hands while better-financed competitors use the current recession to seize additional market share. But then, the rich have always had their pick of opportunities.”
Lowenstein’s book is an old-school corporate finance book, the kind more common before the Second World War. It is rich in anecdote and logic, but bereft of mathematical modeling. Lowenstein criticizes efforts to make finance a hard science: “The price of this mathematical elegance is that it obscures hard, practical questions.”
For Lowenstein, finance is a “modestly useful discipline.” There are some principles and rules, but otherwise, humility is what’s called for in finance. There are too many unknowable things to aim for precision.
4. Modern Security Analysis by Martin Whitman and Fernando Diz
This is the newest book on this list and the only one in print. It came out in 2013. Whitman is the founder of Third Avenue Management and has been investing for more than 50 years. This book is a culmination of everything he’s written. It’s his magnum opus.
This book is not an easy read. It is almost 500 pages of closely cropped text. But I have learned more from Whitman than perhaps any other investor. I think he’s advanced the ideas of Benjamin Graham and David Dodd — who wrote the classic Security Analysis in 1934 — more than any other thinker.
Whitman advocates investing in companies with strong financial conditions acquired at prices “that represent meaningful discounts from readily ascertainable net asset values (NAVs).” His focus is on thinking of managers as “investors (dealmakers) and financiers.”
As he says, “These activities can be orders of magnitude more important than operations in the generations of wealth, and are summarized in the saying, ‘One good deal may create more wealth than 10 years of brilliant operations.’”
This has become a cornerstone of my own approach as I look for companies that can “do deals” and make things happen through their investing activities (buying and selling assets).
A focus on creditworthiness is another hallmark of Whitman’s approach. “Call it overkill,” he writes, “but it is also quite comfortable to be invested in common stocks of companies whose solvency is not close to ever being in question.” I certainly agree.
There is a lot to this book. If I had to cite a bible of investing, this would be my pick.
5. 100 to 1 in the Stock Market by Thomas W. Phelps
Another out-of-print book, this one from 1972. Phelps was a security analyst, former partner at Scudder, Stevens & Clark and was once The Wall Street Journal’s Washington bureau chief. Phelps’ book has a great premise. He draws lessons from studying all the stocks that went up 100-fold. He distills some of the traits you’ll want to look for in finding these monster winners.
His main advice, though, is to “Buy right and hold on.” Phelps advocates an extreme buy-and-hold mentality. Humongous returns come only with time. And the book is great in hammering home the power of compounding.
He walks you through simple examples about how return on equity works and how book value compounds over time and how these (and other factors) manifest themselves in the return you get. I think these lessons are very important. I’m always a little amazed to see how even professionals — even my peers — don’t do the simple math to get a sense for the returns they’ll likely earn.
Besides the wisdom, the charm of the book is in Phelps’ prose style.
On relying too much on numbers and computers:
“Some of us are here today because one of our ancestors started running when the birds stopped singing, instead of waiting until he could count the Indians.”
On investors buying and selling too much:
“When I was a boy, a carpenter working for my father made this sage observation: ‘A lot of shavings don’t make a good workman.’”
On stock manipulation:
“But for the gullible, there would be no more manipulations. In Africa, where there are no antelope, there are no lions.”
On solving problems:
“Every human problem is an investment opportunity if you can anticipate the solution. Except for thieves, who would buy locks?”
On investing abroad:
“For most people, investing abroad amounts to fleeing from hazards they can see to hazards they can’t see.”
As I say, it’s one of my favorites.
So there you have it, my top five. My copies of these books are well marked and used. If I could take only five investment books on a desert island, these would be my choices.
I recommend them all to you.
Ed. Note: Chris reads and travels extensively, always on the lookout for the best investment opportunities the world has to offer. And he frequently shares these opportunities with readers of The Daily Reckoning email edition. In fact, right now, you could gain access to an exclusive FREE report he recently typed up that details one hidden investment that quietly pays you 5 times your money. Sign up for The Daily Reckoning, for FREE, to make sure you can access it.