Sunday, April 28, 2013

Top 10 investment books for Superinvestors

There are many recommended reading list on the best investment books to read to gain a better knowledge on investing. Many of these reading lists purely just state the book title and author without telling the reader why and how these books will benefit them.  Moreover, most of these reading lists are catered for the beginner investor. To address the gap, I decided to come up with my own top 10 investment books that cater to all types of investors as well as those that are recommended by famed superinvestors such as Warren Buffett, Howard Marks, Seth Klarman and etc. I believe in Mohnish Pabrai’s idea of cloning where he said that an investor would dramatically improve their results if they simply copied what Buffett and other value investor does. We not only can copy the stock ideas of these superinvestors, we can also read the books that they read or recommended.

The selection of the books is based on the depth of investment concepts covered and recommendations of these superinvestors. The reading list has been sorted in order of difficulty. Here are my top 10 investment books.

As Warren Buffett says "In business, I look for economic castles protected by unbreachable moats". The wider the economic moat of a business, the more likely it is to stand the test of time. When Buffett purchases a business, he pay careful attention to economics of the industry and if the business has an enduring competitive advantage

This little book by Pat Dorsey explains the company’s economic moat as the measure of its ability to withstand competitive threats and tough economic times. It is a quick read and provides detailed analysis about the different types of durable competitive advantages a.k.a. moats, that a company achieves. It teaches the beginner investors how to identify business with wide moat when you see one. Some attributes to identify an economic moat include customer stickiness, intangible assets, the durability of earnings power etc. If investors can identify companies with moats and purchase their shares at reasonable prices, investors will be able to do well in their investments

  1. Moneyball: The Art of Winning an Unfair Game by Michael Lewis [Easy]
Money ball tells the fascinating tale of Billy Beane's ingenious use of statistical analysis in order to assemble a winning team without the luxury of a large payroll. The book talks about how the Oakland Athletics selected undervalued players and won its division. The book is just as much about value investing as it is about baseball. Just as Billy Beane analyze baseball players objectively based on the relationship of a player’s salary to quantitative measurements like on-base percentage, value investors analyze stocks objectively based on the relationship of a stock’s market price to quantitative measurements like its discounted cash flow.

3.       Fiasco:The Inside Story of a Wall Street Trader by Frank Parindy [Easy]

Recommended by Charlie Munger, the vice chairman at Berkshire Hathaway is known to be an intellectual man and this book is highly recommended by Charlie Munger as an essential investment book for investors. FIASCO is the shocking story of one man's education in the jungles of Wall Street. As a young derivatives salesman at Morgan Stanley, Frank Partnoy learned to buy and sell billions of dollars worth of securities that were so complex many traders themselves didn't understand them. In his behind-the-scenes look at the trading floor and the offices of one of the world's top investment firms, Partnoy recounts the macho attitudes and fiercely competitive ploys of his office mates. This book is considered to be the first on the derivatives trading industry

This is a book written by one of the superinvestors, Joel Greenblatt. He is founder and managing partner of Gotham Capital and is well known for the invention of Magic Formula Investing. This book is his first book before the now famous "The Little Book That Beat the Market". This book covers a wide range of topics, some of which might be a tad complex for the beginner investor. It focuses on special situations such as spin off, bankruptcy, restructuring and merger securities. The book is filled with case studies and examples.

Fund manager Joel Greenblatt has been beating the Dow (with returns of 50 percent a year) for more than a decade and this book is filled with his insight in areas where the individual investor has a huge advantage over the Wall Street wizards. This book is on Seth Klarman's and Dan Leob's must read list. If this book finds its place in one of the superinvestor's reading list, it should definitely be on your reading list as well.

5.       Margin of Safety by Seth Klarman [Intermediate]
This book is one of the most highly sought after investment books of all time. The title of the book suggests that it is all about value investing and how seeking a margin of safety helps to ensure positive stock market return. This hard-to-find and out-of-print book is a must for aspiring investment aficionados. It is written by one of the most successful hedge fund managers of our time, Seth Klarman. Klarman explains the value investing philosophy, the logic of the value investing strategy, and why value investing succeeds over the long term. The book is organized into three parts, namely (1) Where Most Investors stumble (2) A Value-Investment Philosophy (3) The Value-Investment Process. "Margin of Safety" is recommended by David Einhorn and is a must-read for investors.

6.       The Intelligent Investor by Benjamin Graham [Intermediate]

This book is considered as the bible of value investing and almost all superinvestors had read and benefitted from this book. Warren Buffett read the first edition of "The Intelligent Investor" early in 1950, when he was 19. To him, it was like seeing the light. He said: “I thought then that it was by far the best book about investing ever written. I still think it is.” This book is written by the "Father of Value Investing" and recommended by Warren Buffett, the greatest investor of all time. There should be no further explanation on why this is one of the top 10 books that must be found on any serious investor's bookshelf.

7.      Winning the Loser's Game: Timeless Strategies for Successful Investing by Charles Ellis [Intermediate]
Recommended by Howard Marks, this is one of the most useful investment strategy book and it provides solid and clear concepts.  Ellis explains how to avoid common traps and get on the road to investment success. After reading the book, readers will be able to create an investment program based on the realities of market. The book has since sold half a million copies and is highly recommended by late management guru Peter Drucker as one of the best book on investment policy and management.

8.       Value Investing: Graham to Buffett and Beyond [Difficult]

This is one of the best books on value investing. Bruce Greenwald is also a professor at Columbia’s Business School, and director of research at First Eagle Funds. The book is divided into three parts: an overview of what value investing is; an examination of three specific approaches to value investing; and case studies of several well-known value investors and the ways they put the tenets of value investing into practice. It explores the way value investing evolved over the years and how the basic concepts were used and modified by Graham disciples to support the present environment without letting past concepts be forgotten. Though the book provides a deep insight into value investing, it can sometimes be a bit technical and therefore reads like a college text.

9.       Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud by Howard Schilit [Difficult]
This book is highly recommend by Dan Leob, the fund manager of Third Point. This book takes an in-depth look at accounting fraud and how to identify warning signs of a company's impending problems. Obviously this book makes sense for anyone looking at balance sheets, 10-Q's and 10K's on a regular basis.  A must-read for people who like detailed analyses of companies and financials

10.   Quality of Earnings by Thornton O' Glove [Difficult]

This is a lesser known book among investors but is a great book if you want to deepen your understanding of analyzing companies and valuation. It teaches you how to understand the various financial information companies provide. Readers will learn how to interpret the financial statements from an investor point of view.  This book found its place in the top 10 list via a recommended by Bill Ackmann, who is famous for shorting Herballife

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