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Good Reading

The Wall Street Journal recently introduced a weekend edition, and with it, a new feature. In this feature, a guest reveals his/her five favorite books. A thumbnail review of each book is given. Our own Jeff Fraser suggested the Rochester Chapter AAII members do something along similar lines, giving their five favorite books on investing. Paul Gorman offers five of his favorites here. We encourage you to add your favorites to our list.

Paul developed criteria for inclusion to the list. First, the book must be well written, straightforward, clear and understandable; it must be a “quick read”, interesting and topical, and grasped by the interested layman without undue effort. In other words, read it once and you’ve got it. A number of books fit the criteria, so another was added. The book must have been read more than once. In other words, something of value must have been found in the book, something so interesting and useful that the reader had to go back and get some more.

Paul Gorman's picks

At the top of my list is Jeremey Siegel’s Stocks for the Long Run. This book is a treasure trove of knowledge and experience on investing. Although a “longish” book, over 40 chapters, each chapter is relatively short. A disciplined reader could complete a chapter a day, and profit considerably for the effort. I found that once I got into this book, I didn’t want to stop until I was done. The book opens with a “grabber”, a compelling fact that is meant to get your attention and keep it. Here it is: one dollar (yes, $1.00) invested in the stocks available in the USA in 1802, with dividends and gains re-invested, would grow to $8.8 MILLION by the year 2001. Other investments (bonds, bills, gold) come nowhere close, the best of them giving back $13,980 by 2001, and that is bonds. The book covers just about any topic or question the individual investor might have, and does so with a simple and direct style. At times the reading might seem dry, but Professor Siegel’s goal is to insure the message is understood. This is a great book. The third edition came out in 2005, and I’m sure future editions will be introduced addressing the “latest and greatest” investment topics/fads, which will be dissected, explained, and debunked where necessary. Professor Siegel can often be seen on CNBC. He currently teaches at the Wharton School of the University of Pennsylvania. Siegel is also an adviser for Wisdom Tree Funds. McGraw Hill is the book publisher.

A virtual toss-up to Stocks for the Long Run is Burton Malkiel’s A Random Walk Down Wall Street. This is another excellent introduction to all topics related to investing. Malkiel espouses the efficient market hypothesis. In sparest terms, the efficient market hypothesis argues that past market pricing cannot be used to predict future price movements. Malkiel plays the Devil’s Advocate against his own position, and he does a fair and excellent job in describing each approach that has come up to challenge “efficient markets”. He discusses streaks, bubbles, crazes and crashes; he examines calendar effects, technical and fundamental analysis. And he presents an excellent chapter on behavioral finance. But in the end (in his own words), “…as long as there are stock markets, mistakes will be made by the collective judgment of investors. And undoubtedly some market participants are demonstrably less than rational. As a result, pricing irregularities and predictable patterns in stock returns can appear over time and even persist for short periods. Undoubtedly, with the passage of time… we will document further apparent departures from efficiency and further patterns in stock market returns. But I suspect that the end result will not be an abandonment of the belief of many that the stock market is remarkably efficient in its utilization of information, and that whatever patterns that have existed are unlikely to persist and will not provide investors with a method to obtain extraordinary returns.” This book was first published in 1973. As an indication of its remarkable success, it has gone through nine editions, the latest being 2007. Malkiel is Chairman of the Economics Department at Princeton University, a former member of the Council of Economic Advisers, and adviser to the Vanguard Group.

For our third book, we offer Peter Lynch’s One Up on Wall Street. This book was a delight to read, and I am not alone in this assessment. This book has sold over one million copies. In the Forward to later editions, Lynch relates a family anecdote, which occurred shortly after the book first hit the bookstores. His daughter came up to him as he returned home from work one day and mentions that Daddy had gotten a phone call from Omaha, Nebraska, from a man named Mr. Buffett, who wanted to call and say how much he enjoyed the book. I found this book to have value because it is written by one who has been there, who actually performed on the firing line and performed at the highest level, and who did so for a number of years. Lynch’s Magellan Fund made many people rich. When it comes to investing, Lynch claims the individual investor has a distinct advantage over the professionals – the individual investor is not subject to the pernicious effects of short term quarterly goals and the results planning that fund managers must commit to, or lose their jobs. In fact, the longer perspective the individual investor can take, the more successful he/she is likely to be. Lynch relates how he characterized stocks for inclusion to his fund: the stalwarts (10-12% annual growth in earnings), the fast growers (even more growth, 15% and up, but over 25% and he’s suspicious), cyclicals (be careful when you buy), asset plays (patents, intellectual property, prized holdings, contracts, etc.), turnarounds, and slow growers (2-4% growth, included for the healthy dividend). Lynch believes knowledge is key, “…invest in things you know about …” Because the more you know about an investment proposition, the less troublesome will be the risk you will face. The book is laced with quotable one-liners. “Just because a company is doing poorly doesn’t mean it can’t do worse.” In your portfolio, “…you won’t improve results by pulling out the flowers and watering the weeds.” Buy when the price is right: “…it’s a real tragedy when you buy a stock that’s overpriced, the company is a big success, and still you don’t make any money.” And on a timely topic, “…market declines are great opportunities to buy stock in companies you like. Corrections – Wall Street’s definition of going down a lot – push outstanding companies to bargain prices.” When you read this book, you will understand why Warren Buffett liked it so much. There is a Penguin paperback edition available at the bookstores.

The fourth book is a title recommended by a blogger (Barry Ritholtz) who also runs an investment advisory. The fourth book, More Than You Know (with sub-title “Finding Financial Wisdom in Unconventional Places”) is written by Michael Mauboussin, chief investment strategist at Legg Mason Capital Management. I found this book interesting in its organization, each short chapter is virtually a lecture, and these “chapters as lectures” give concise updates on the latest thinking on investing. Some chapters are cautionary. Advances in our understanding of business and markets emphasize the impact of technology – businesses die off faster today than they did in the 1950’s. For companies of the S&P 500, the average life span in the 1950’s was in the range of 25-35 years. By year 2000, the span had compressed to 10-15 years. As investors, we should realize that most businesses fail, some are bought out or merged, but long lasting success with superior returns is rare. It seems that higher portfolio turnover (higher than in the 1950’s) may be necessary to achieve good investment results. An especially interesting section of the book is the treatment of markets as “complex adaptive systems”, or alternatively, as “self-organizing emergent systems” whose properties are not well understood. This must be why it is so difficult (impossible?) to predict market moves. Investors should also find value in the chapter titled “Linking Stress to Suboptomal Portfolio Performance.” A psychological perspective is taken here. In the successful evolution of the human species, the response to stress (as in fight or flight) enabled our ancient ancestors to survive. But on Wall Street today, the pervasive stress of “performance” elicits the same bodily response in portfolio managers. The response to stress is to “…take care of business in the here and now … our blood pressure rises, the body mobilizes energy to the tissues that need it most, our short term memory improves, and we set aside long term projects … This stress response is effective in a crisis but can be very costly if you experience every day as an emergency.” The stress is costly to both health and judgement – a short term focus is very dangerous to your portfolio performance. Data is provided to buttress this point. The book is published by Columnia University Press.

Another selection is somewhat different, a biography. It is Roger Lowenstein’s Buffett, The Making of an American Capitalist (1995). I’m aware of a new Buffett bio, Snowball, released this year, but Lowenstein’s was there first. Lowenstein for many years wrote the Wall Street Journal’s column “Heard on the Street”. He too is an investor, and he writes well. In this book, you can discover for yourself what lay behind Buffett’s phenomenal success. Some facts: his father (Howard) was an investor, who ran a brokerage in Omaha, and Warren would post prices as a youngster; a conservative Republican, Howard was unexpectedly elected to the US House of Representatives (he was expected to lose); a man of highest integrity, Howard returned a pay raise awarded to representatives, he thought it unnecessary; Warren began college studies at Penn, returned to Nebraska to complete his degree; rejected by Harvard Business School, he studied instead at Columbia where he began a famous association with Ben Graham; awarded the only A+ that Graham ever gave in his famous class “Security Analysis”; worked for several years on Wall Street at Graham’s firm; returned to Omaha to raise $100,000 and manage his own investment business, Buffett Partnership, Ltd.. The rest is history. We must remember that Warren Buffett was not known at all when he started his investment partnership, in fact most partners were relatives or friends and neighbors. He had been referred to as a “hick” and a “hayseed”. He ran his business out of his home. In the long-hair hippie 60’s, Buffett sported a crew cut. Yet, in the years of his partnership, from 1957 to 1969, Buffett never had a down year; in the same period, the Dow Jones Industrial Average (DJIA) had five down years. Over this period, the DJIA returned 8.6% per year, with standard deviation (risk or volatility) of 16.7%. Buffett gave his partners a return of 30.4% per year with lower risk, a standard deviation of 15.7%. In the years ahead came notoriety, American Express, Coca Cola , The Washington Post, Charlie Munger and Bill Gates, not to mention Berkshire Hathaway. There also came a migration away from the Value Investing of Ben Graham to the Growth Investing of Philip Fisher, although Buffett refuses to recognize the distinction between value and growth. He believes every good investment has both value and growth, as he says, they are two sides of the same coin. The book ends in the 1990’s, shortly after Buffett cleaned up the crisis ridden and scandal racked Salomon Brothers. As its largest shareholder, Buffett was called in to set the business straight. Emulating the integrity of his father, as CEO Buffett dismissed virtually all senior management, including the “King of Wall Street” former CEO John Guttfreund. It was a tough experience, but in the end Salomon was saved. There are many great take aways in this book, now famous as Buffett aphorisms. “If you buy at a good price, it doesn’t matter when you sell.” And my personal favorite, a guiding light, “…the future is never clear, you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long term values.” It seems Warren Buffett has a feel for “sell organizing emergent systems”.

Damn Right!, by Janet Lowe, published by John Wiley & Sons, Inc, copywright 2000. Forward by Warren Buffett. Janet Lowe has made a name for herself as an author of popular books on investing. One which might be familiar to AAII members is her book Dividends Don’t Lie, co-authored with Geraldine Weiss. In this book, Weiss’s approach to investing is presented, wherein financial quality and dividend yield are employed in selecting stocks to buy and sell. (AAII provides a stock selection screen based on Weiss’s approach.) Another of Lowe’s books which I found especially interesting was her biography of Benjamin Graham. Graham is famous as Warren Buffett’s professor, the man who ingrained in Buffett the tenets which enabled his phenomenal success. Perhaps after studying Buffett’s success, Lowe saw Charlie Munger as a worthy subject for an in depth profile. Charlie Munger , as most investors now know, is Vice-Chairman of Berkshire Hathaway and Warren Buffett’s most trusted investment advisor. You can get a hint of what Charlie is like from the book’s title, Damn Right.

Without giving away too much of the book, here are some facts to familiarize Charlie Munger. Although he now lives in Los Angeles, Charlie also grew up in Omaha, Nebraska, and worked as a teen in the Buffett family’s grocery store. He left Omaha for college in California, and fell in love with the place. WWII interrupted his studies, and Charlie served with the Navy in the Pacific Theater. As a meteorologist. After the war, but without completing his undergraduate degree, Charlie convinced the Admissions Committee at Harvard Law that he should be admitted to the next entering class. Charlie graduated as a top member of his class, returned to Los Angeles, practiced law, and in time founded his own firm. On a family visit back to Omaha, Munger met Warren Buffett, and each recognized the “something special” in the other. Buffett is reported to have said, “Charlie, law is fine as a hobby, but you can do better.” Thereafter, almost daily conversations ensued, on all sorts of topics, and in the process investment decisions would be made. The success of Berkshire Hathaway is well documented, and as Bill Gates (another of Buffett’s close associates) has said, “Warren could not have done it without Charlie.”

From a human interest perspective, Charlie Munger is definitely not the warm and fuzzy type. He can be direct and frank, and often is. He is driven by a boundless curiosity. He is a voracious reader. His hero is Benjamin Franklin, whose writings Charlie claims are worth more than any MBA. He loves “multi-factor analysis” (his term). He is competent and confident, he was wealthy before connecting with Buffett and Berkshire Hathaway. On confidence, Charlie was once asked if he played the piano. His answer, “I don’t know, I’ve never tried.” More importantly, Charlie is highly principled and ethical. After a failed operation left him blind in one eye, Munger refused to litigate against the doctor or hospital, noting that in all such procedures, a certain small percent will fail.

As a book review, I will say I was less pleased with this book than Lowe’s earlier efforts. Charlie is certainly an interesting guy and a formidable topic to explore, but Lowe doesn’t quite do him justice. A note on style, Lowe prefaces virtually every paragraph with a short title. It’s certainly different from other biographies. It can be distracting, interrupting continuity in the reading; or, it can be very helpful if your reading tends to get interrupted anyway (by the phone, the children, the pets, etc.).

This is not to say there are no worthwhile take aways from the book because there are many. Here are two that had meaning for me.

At a party where Charlie was dominating the conversation with an analysis of a proposed investment, one of the guests remarked that Charlie had certainly gotten “full of himself” with success, and that he pontificated as though he were the Pope. His daughter came to his defense immediately, observing, “No, Charlie has always been that way, he’s always been confident and willing to express his views. It’s just that with success behind him, people listen to him now.” Here’s the take away. As you build your own wealth through due diligence and a disciplined investment approach, people will pay you no heed. After a time, when your success is apparent, then your friends, neighbors and relatives will seek you out, to ask what you think about this and that investment. And perhaps mixed with the deference will be a touch of envy, we’re all too human after all.

The second take away is wisdom to be considered. Munger and Buffett both claim that just a few investment successes are all a person needs. In remarks to an assembly of financial advisors, Charlie described his own path to wealth. “… our experience … confirm(s) a long held notion that being prepared on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical things, will often dramatically improve the financial results of that lifetime. A few major opportunities clearly recognizable as such will usually come to one who continuously searches and waits, with a curious mind, loving diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past …”

Amen. Like the parables of the gospel, simple.