“I owe everything I am and everything I will ever be to books.”
“Reading is an act of civilization; it’s one of the greatest acts of civilization because it takes the free raw material of the mind and builds castles of possibilities.”
This article is dedicated to my grandmother Jana, who loved books and passed this passion onto my mother and me as well. May you always have a good piece to read.
Why books
The quotes above express the nature of books and reading perfectly – they contain countless information to be harvested and they can form you into a person you want to become. Value investing is a life-long journey of learning and I view books as the ship you sail on. I’ve tried numerous other ways of learning value investing- YouTube, online seminars, courses etc., but I find that books are still the best, the cheapest and the most efficient way to do so. Of course, you can combine all of the methods, but books are still the clear winner.
It sounds like a cliché: “read books so you’re smarter”, but it’s still valid advice. Anytime somebody asks me how to either get started or improve oneself in the art of investing, I tell them the same thing: “read books”. Therefore, I decided I will provide a list of my favorite books to become a better (value) investor, but also some other, not directly linked to that topic, which I still believe provide utility to improve oneself. I will also be updating this article from time to time when I read a new book, thus be sure to be subscribed to the newsletter to get notified. Without further ado, here’s my list:
The list
Value investing
1.
Name: Warren Buffett Accounting Book: Reading Financial Statements for Value Investing
Author: Stig Brodersen, Preston Pysh
ISBN: 9781939370150
Relevance for value investing: 5/5
Difficulty (5 is highest) : 2/5
Overall rating: 4.9/5
Short description and why I liked the book: This book provides a great starter for anybody interested in value investing. It guides you through the principles and concepts of value investing, what to look for in a company or what a good business is.
In the second part, it provides an overview of the most basic and absolutely fundamental knowledge of financial statements, how they are constructed and how to read them. It provides formulae to calculate relevant ratios and recommended values. Lastly, it shows you how to calculate the intrinsic value of a company using the DCF model, which is ultimately what we do as value investors. Overall, the perfect book for a complete beginner or intermediate value investor.
2.
Name: The Great Investors: Lessons on Investing from Master Traders
Author: Glen Arnold
ISBN: 0273743252
Relevance for value investing: 5/5
Difficulty (5 is highest) : 4/5
Overall rating: 4.7/5
Short description and why I liked the book: This book is almost purely conceptual, i.e. it examines approaches and strategies of the best (value) investors of all time: Warren Buffett, Charlie Munger, Peter Lynch or Philip Fisher. This book is thorough, extensive and develops the conceptual understanding of any value investor by replicating the successful ones. It might be a little difficult at first, but I highly recommend it to build a strong base, upon which any business or investment analysis lies.
3.
Name: The Essays of Warren Buffett: Lessons for Corporate America
Author: Lawrence A. Cunningham
ISBN:1531017509
Relevance for value investing: 5/5
Difficulty (5 is highest) : 5/5
Overall rating: 4.3/5
Short description and why I liked the book: Warren Buffet, to our misfortune, never wrote a book himself about his investing approach. Thankfully, he sends a letter to his shareholders at Berkshire each year, where he explains how the year went, plus he drops a nugget of knowledge here and there, how he views investing, the markets and his approach. He’s been sending these letters for around 50 years, so if you accumulate it, there is lots of knowledge in there. Thankfully, you do not have to distill it yourself – Prof. Cunningham did it for us, i.e. he went over all the letters and extracted some principles, guides and tactics of Mr. Buffett himself.
The book provides an amazing insight to the mind of Warren Buffet and his thinking. On the other hand, since it’s basically a collection of principles based on thoughts and quotes by Mr. Buffett across years and many unlinked letters, is rather difficult to read, as the flow is not as natural. Prof. Cunningham did an excellent job, but you should be already familiar with value investing, corporate finance and Buffett himself if you plan to read this book.
4.
Name: The Intelligent Investor
Author: Benjamin Graham
ISBN: 9780060555665
Relevance for value investing: 5/5
Difficulty (5 is highest) : 4/5
Overall rating: 4/5
Short description and why I liked the book: What kind of a list would this be if I did not include the book by the father of value investing himself, The Intelligent Investor by Benjamin Graham. Again, quite conceptual, this book lays the foundations of value investing, which has evolved quite substantially across the years. Mr. Graham introduces the fictional character “Mr. Market” and thus an essential concept of behaving in the market (you could argue this was one of the first notions of behavioral finance).
I think it is very useful to read to book, since it is the groundwork. On the other hand, the book is rather lengthy and sometimes misses a natural flow. It wasn’t meant as a guide per se, but rather an essay about investing, which was the way books were written at that time. Also a lot of principles and approaches have changed since almost 100 years ago, thus you have to take it with a grain of salt. Still, it is definitely recommended.
5.
Name: Akciové investice
Author: Daniel Gladiš
ISBN:9788024753751
Relevance for value investing: 5/5
Difficulty (5 is highest) : 2/5
Overall rating: 5/5
Short description and why I liked the book: Unfortunately, this book is available only in Slovak and Czech, thus if you do not speak those languages, it will not be very relevant to you. This book by Daniel Gladiš, who is together with his colleague Jan Žák of Vltava Fund probably the only relevant value investors in Czechia and Slovakia, is excellent for beginners as well as for intermediate or advanced investors. It explains basic concepts of value investing and introduces an extremely relevant idea, the so-called “circle of competence”. The circle is defined by your area of expertise, i.e. business models and industries you understand well. Then it says you should invest only in companies that lie in this circle. Put simply, if your background is in finance or retail, you should not be investing in bio-tech companies, despite they might seem attractive financially; you just cannot understand how the company makes money, what the competitive advantage is and you cannot predict it at all.
Moreover, the book introduces a very elegant, easy, yet useful financial model as a substitute/complement to the DCF, which estimates the upside based on book value growth and reinvestment rate. Overall, this book is amazing and I recommend it to everybody.
Value-growth investing
These books and their authors could be described as growth investing/investors, but since they incorporate a lot of principles of value investing, such as stable growth, sustainable business model, competitive advantage and strict financial management, I label them as “value-growth”. The difference is that these companies are usually quite small, often unknown and most of their growth lies ahead. Despite the fact I am not looking for such companies myself, the concepts in these books enhanced my value investing practice by paying more attention to understanding the qualitative side, which is the most important thing in growth investing.
1.
Name: One Up On Wall Street: How To Use What You Already Know To Make Money In The Market
Author: Peter Lynch
ISBN:0743200403
Relevance for value investing: 4/5
Difficulty (5 is highest) : 2.5/5
Overall rating: 4.5/5
Short description and why I liked the book: Peter Lynch is a legend and of the most successful investors of all time judging by his track record. Among others, he discovered the company Dunkin’ Donuts which made him a lot of money. One of the main thesis of the book is that you can use a lot of common knowledge you already have to make successful investment, by observing what products are currently highly sought after as a consumer. All you need is a little business acumen and his so-called “10 or 100-baggers”, i.e. investments that make you 10+ times your money, are underway. He also explains different types or categories of stocks, so you can filter them out quickly to understand the potential behavior of the stock and the development of the company.
2.
Name: Common Stocks and Uncommon Profits and Other Writings
Author: Philip A. Fisher
ISBN: 0471445509
Relevance for value investing: 4.5/5
Difficulty (5 is highest) : 3/5
Overall rating: 4.5/5
Short description and why I liked the book: Philip Fisher is another gentleman, who classified himself as a growth investor, but his principles are very easily applied to value investing as well. The book isn’t so “juicy” as the one by Peter Lynch, but still has a lot of priceless insights. One of them is his method of obtaining information by “scuttlebutt”, or gossip among either employees of the company you are analyzing or the employees of the competition. By asking them for “scuttlebutt”, you get information which is otherwise not publicly available and gives you an edge. Moreover, he explains core principles of his investment approach, what he finds essential in a business, which he then comprises into the “Fisher’s Checklist” of 15 questions one has to answer about a company before investing in it.
3.
Name: 100 Baggers: Stocks that Return 100-to-1 and How to Find Them
Author: Christopher W. Mayer
ASIN : B08NQ4YJC4
Relevance for value investing: 4/5
Difficulty (5 is highest) : 2/5
Overall rating: 4.5/5
Short description and why I liked the book: Basically a modern extension of Lynch’s approach, Christopher Mayer goes further and focuses specifically on not mere 10-baggers, but rather 100-baggers straight away. Of course he is smart about it; the stock he looks for, i.e. those which return 100+ times the initial investment, do so after 10, 15 or 20 years.
Still, the idea is to find stocks with great future potential, which are thought to grow indefinitely. He introduces the “bean-can approach”, which is an analogy to when cowboys hid money in empty bean cans, then forgot about it, and then found it many years later. In investing, this approach means you find an excellent company, buy it and don’t touch it: simply because by tinkering and trying to time the market, you will most likely lose. Thus, for this investment to work (i.e. Buy & Hold), the company you buy must be truly an excellent one. Thus, with this in mind, you can enhance your value investing practice by combining these principles with the ones you already know and find the winners in the long run.
Books about business
I always stress how important qualitative analysis in value investing is. Anybody can plug numbers into a financial model, but deciding on what the numbers should be, that’s the real art of value investing. You decide on those numbers precisely by understanding the business model, the competitive advantage (e.g. the brand), the industry etc. These book should help you do exactly that; develop a business acumen.
1.
Name: The 22 Immutable Laws of Marketing: Violate Them at Your Own Risk
Author: Al Ries, Jack Trout
ISBN: 088730592X
Relevance for value investing: 4.5/5
Difficulty (5 is highest) : 1/5
Overall rating: 4.8/5
Short description and why I liked the book: Ever wondered why Apple is so successful as a company (and a stock)? Yes, their products are great, but I would argue biggest part of their success is their marketing (no, I don’t mean commercials!).
This miniature, 128-page book is so loaded with knowledge that it’s even unbelievable. Given it’s quite old (1993), it’s flabbergasting how timeless the book is and how the “laws” are relevant till this day. I love this book because of its simplicity, no holds barred (no BS), straight-to-the-point style and also because despite somewhat unexpected, its relevancy for value investing. As I said, if you want be a successful value investor, you have to understand the business model, the edge of a company and most importantly, WHY it sells, i.e. why the customers pick that given company. Marketing is exactly that and this book provides the “laws”, i.e. successful practices with examples of companies who adhered to them and became successful, and also their competition which didn’t and failed. Definitely read this one.
2.
Name: Blue Ocean Shift: Beyond Competing – Proven Steps to Inspire Confidence and Seize New Growth
Author: W. Chan Kim, Renée Mauborgne
ISBN:1509832165
Relevance for value investing: 4/5
Difficulty (5 is highest) : 3/5
Overall rating: 4.3/5
Short description and why I liked the book: This book provides a unique concept and it proposes that companies should forget trying to compete in the traditional sense of the word, i.e. by spending more on advertising, cutting the price and just marginally improving their product, but rather should focus on creating whole new segments, in which they will be alone and have no competition. They draw the analogy and define the term “Blue Ocean” as a competitive space, which is free from sharks killing each other, competing for any fish they can find in the blood-stained red ocean.
The book provides great examples of such companies and how they were able to win over the competition by not competing at all and also provides detailed description how to go about such a process. In my value investing practice, I established the term as well and try to look for companies who either have a blue ocean, or have the potential of creating one. Of course, you are not going to find that every time, but it’s very useful to know about this concept.
General finance, investing or capital markets books
1.
Name: Investment Valuation: Tools and Techniques for Determining the Value of any Asset
Author: Aswath Damodaran
ISBN: 9781118130735
Relevance for value investing: 4.7/5
Difficulty (5 is highest) : 5/5
Overall rating: 4.7/5
Short description and why I liked the book: This book could be very well considered the “Bible of Valuation”, since it is a 900-page behemoth. As the name suggests, it deals primarily with valuation of assets, be it stocks, bonds, derivatives, real-estate etc. Great deal is dedicated to equites and different types: old and mature companies, financial services companies, young start-ups, loss-producing companies etc. and equips you with models and ways to value basically any more or less peculiar company, where a simple DCF might be skewed or insufficient. The main value of the book is in the myriad of models in provides to the reader for any specific type of company.
Moreover, it spends a considerable amount of pages by explaining the market mechanics, efficient portfolio and market theory, corporate finance and accounting etc. It is not exactly cheap, but for the knowledge it entails it’s definitely worth it. Lastly, it’s really cool to boast that you own a 900-page book about finance.
2.
Name: The Behavioral Investor
Author: Daniel Crosby
ISBN: 0857196863
Relevance for value investing: 4/5
Difficulty (5 is highest) : 3/5
Overall rating: 4.3/5
Short description and why I liked the book: Investing is not only about numbers and finance; psychology plays a big role, either your own as the manager of your portfolio, but also of the general market and its sentiment. The field which studies this is called “behavioral finance” and it tries to explain market inefficiencies, bubbles and basically any deviations from the “homo economicus” with psychology.
This book is a brief introduction to that field and it helps you learn and understand two key concepts:
- why the market sometimes behaves in a weird manner
- recognize possible biases in your own practice and avoid them
I believe acquiring knowledge in those two fields can make you a much better investor and a market participant, who is able to stand their ground when things are going sideways, immune to various psychological culprits of investing.
