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Wednesday 5 December 2012

A Liberal Arts Investor’s Reading List

A Little Wisdom Goes A Long Way

These days it’s hard to actually see out of the thicket of new books on the topic behavioral finance, a deluge inversely proportional to the actual impact of behavioral economics on the real world, other than through the dubious delights of default choice. And, of course, I'm adding to the bonfire with my own review of the subject in Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias.

If we think a bit wider, though, as a liberal arts investor, there are a few books people shouldn't die not having read. Following Charlie Munger’s dictum :
“Wisdom acquisition is a moral duty. It’s not something you do just to advance in life. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know.”
So here, in no particular order, are the books I go back to again and again.

The Ascent of Man; Jacob Bronowski
This book, which accompanied the 1970’s BBC series of the same name, is required reading for anyone without a degree in everything.  It’s a glorious romp through human history which packs in enough information to leave you spending a lifetime following it up. 

As we've seen here time and again the world of investing spins off into many different areas of human knowledge; the collection of which constitutes Munger’s latticework of mental models. The underpinning for much of that knowledge can be found in the Ascent of Man: everything from the growth of Islamic mathematics through religion, to the development of perspective in art through to an explanation of special relativity and the development of Game Theory through first hand experience of Johnny von Neumann (see: Games People Play).

It’s a great book, but it’s scary as well: so much to learn, and so little time left to do it in.

The Drunkard’s Walk; Leonard Mlodinow
OK, so it’s about statistics.  Sadly so is a lot of investing, and if you can’t interpret the things then you’ll end up banging your head against gut feelings.  Our observations are a poor way of managing our lives, let alone our investments because the world is beset by randomness in which we attempt to perceive patterns (see: Google Charts You Can Trust).  Understanding how chance can change our lives, and learning to recognize and understand the difference between luck and skill are critically important aspects of behavioral investing.

It’s not just about knowing ourselves, it’s about knowing the world as well.

The Drunkard's Walk  The Drunkard's Walk

The Snowball; Alice Schroeder
The thicket of myths that have grown up around Warren Buffett are virtually impossible to disentangle: you can find a row of books in any business section setting out how he goes about investing.  In fact the best way of figuring out how he does this is to read his own words (see: Warren Buffett Bias), but most people either choose not to or choose to interpret them in their own way.

The Snowball is a great book purely as biography, but to read it a second time as an investor should be a requirement for all of us.  It’s doubtful most of us could emulate Buffett’s actions, but a certainty that most of us can’t emulate his psychology. Read and weep. 

The Snowball  The Snowball 

The Art of Choosing; Sheena Iyengar
As you might expect this is a book about choice, and about how we choose.  There’s a theme here on the blog about the nature of choice and about how we exercise our rights in this area (see: Jam Today, Tyranny Tomorrow?).  Behavioral research increasingly points us towards default options in areas that are regarded as important for society – healthcare choices, retirement savings, and so on – on the grounds that not doing this leads to people simply failing to make decisions at all.

As the book shows, even failing to make a decision is a choice of sorts and many of the decisions we do make cause to us to fall victim to the illusion of control.  Learning is a gift in many ways, but to the extent that it gives us the opportunity to make informed decisions it is a critical one, and not just for investors.

The Art Of Choosing  The Art of Choosing 

Common Stocks and Uncommon Profits; Phil Fisher
By repute The Intelligent Investor is the best investing book ever written, but I find it hard to read these days.  Its messages are still as valid as ever, but its delivery is anachronistic.  I far prefer Phil Fisher’s approach which is less value oriented and more growth focussed (see: Anatomy of a Growth Investor).  But if you read carefully what you can distil is a common set of values.  Whereas Ben Graham learned from the Wall Street Crash to spend his time looking for a margin of safety Phill Fisher learned to seek out a defensive moat.

Combined in a single business a margin of safety and a moat constitute a highly investable opportunity.  As Fisher relates, these opportunities come along surprisingly often.  The key is to be ready for them when they occur.  And if that’s not value investing through the door marked “growth” I don’t know what is.

Influence; Robert Cialdini
Cialdini’s book on persuasion remains, I think, the best of its kind (see: Robert Cialdini and the Weapons of Influence).  It deals with the practical ways in which people can persuade us to do things against our better judgement; indeed it shows how that judgement can be completely overridden by clever manipulation of situations and emotions. 

There are limits to how much we can defend ourselves against these techniques, but recognizing that we’re being manipulated is the most important step.  When you can do that it’s surprising how often you find company executives, media commentators or other taking heads attempting to influence our investing decisions.

Trust; Marek Kohn
This little book is subtitled “Self-Interest and the Common Good” and it gets to the heart of the painful question of “what is trust?” (see: de Tocqueville: Trust In Self-Interest). In a world dominated by an economic system underpinned by the mantra of self-interest this is one of the big questions; and when trust fails we see both political and economic breakdowns.

In remodelling the world following the problems of the first decade of the twenty-first century creating what Munger calls a “seamless web of deserved trust” ought to be amongst our highest priorities.  In any case, understanding what trust is, when we should apply it and how we should manage the risks it creates is just about the most important question of all for investors: valuation matters, but if you don’t trust the people doing the valuation it’s meaningless.

Trust: Self-Interest and the Common Good Trust: Self-Interest and the Common Good 

Irrationality; Stuart Sutherland
The market abounds with books on psychological biases and behavioral economics.  In this vein it’s impossible to ignore Daniel Kahneman’s Thinking Fast and Slow, which is a classic of its time.  But it’s a snapshot into the mind and history of one researcher while Sutherland’s Irrationality remains the best, broadest scoped book of its type, covering off every conceivable sort of bias within its covers (see: 100 Ways To Leave Your Lucre).

It needs updating, to be sure, but that’s a project for next year …

Irrationality Irrationality  

The Birth of Plenty; William Bernstein
History is dominated by a lack of economic growth - for thousands of years nothing very much happened, and it did it very, very slowly.  Then at the back of the eighteenth century the economy sprung into life and accelerated off into the distance (see: An Age of Miracles and Wonders).

Why this happened is terribly important, because if we don't understand the causes we won't understand what we need to protect in order to maintain this level of growth, and our own economic well-being. Nowhere is this better illuminated than in Bernstein's The Birth of Plenty: there's plenty to disagree with, but you'd be hard pressed not to admire the argument, and the sheer weight of informed knowledge brought to bear on it.  An absolute delight of a book.

Other Reviews
The last year has seen a lot of good books produced, a few of which I've reviewed, and all of which are worth reading:

Screwed: Fictional Profits, False Accounting and Financialization
Double Entry: How The Merchants of Venice Created Modern Finance by Jane Gleeson-White
Double Entry  Double Entry   

Self-Organizing the Investment Blogosphere
Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere by Tadas Viskanta
Abnormal Returns Abnormal Returns   

One Price to Rule Them All
Models. Behaving. Badly: Why Confusing Illusion With Reality Can Lead to Disaster, On Wall Street, And In Life by Emanuel Derman
Models.Behaving.Badly  Models.Behaving.Badly   

When Incentives Go Bad
Strings Attached: Untangling the Ethics of Incentives by Ruth W. Grant
Strings Attached  Strings Attached   

Your Self-Inflicted 6% Trading Tax
Monkey With A Pin by Pete Comley
Monkey with a Pin  Monkey With a Pin   

Oh, and then there was this ...

The Zeitgeist Investor; Tim Richards
OK, I know … it’s pushing it to add my own tome to what is a fabulous set of books.  However, the links between historical happenstance and behavioral investing haven’t, as far as I’ve ever been able to discover, been explored elsewhere and I remain convinced that it’s a critical piece of the jigsaw for behavioral investors.  We have to be able to foresee an end to local circumstances in order to be able to manage our psychological urges. 

Experience helps us do this; the evidence clearly supports the idea that the more we invest the calmer we get and that the truly great investors are peculiarly suited to ignoring the feverish excitement of the masses.  But learning from our own mistakes is an expensive way of gaining an investing education.  Best to learn from those of others, and from those of history.

The Zeitgeist Investor  The Zeitgeist Investor  

Happy reading, one and all.


  1. Great list, just need to import it to my amazon wishlist :-)

  2. Great list-hadn't heard of a view so excited to read them!

  3. The Zeitgeist Investor... just waiting for the paperback on Amazon...