Summer reading: Don't forget these 7 investing books, from Buffett to Shiller

It's good to be reminded of randomness and risk in pursuit of returns.

  • By Howard Gold,
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There are about seven more weeks left to the summer, including Labor Day, and many people are just starting their vacations. For those of you heading to the beach, mountains or lake, you'll have plenty of down time to catch up on your reading. That includes books that will help make you a better investor, especially in this year's seesawing markets.

So I've ransacked my bookshelf for the books I think every informed investor should read. They heavily reflect my own biases (you won't see recommendations on individual stock investing), and comprise several topics and styles. Here they are, from number one down:

1. "A Random Walk Down Wall Street," by Burton Malkiel. This is one of the most popular investing books ever, with more than 1.5 million copies sold. Malkiel, professor emeritus at Princeton, wrote the first edition in 1973 to introduce then-new modern finance theory and the even newer idea of passive investing to a mass audience. (He also served on the board of Vanguard for 27 years.) He's never wavered from his core belief that individual stock pickers can't beat the market over time. Only recently has the rest of the world caught up with him.

Malkiel theorizes that stock prices follow a "random walk" (i.e., they follow no discernible pattern or trend), so no one of either a fundamental or technical bent can consistently predict how stocks will move. "To be perfectly blunt," he wrote in an earlier edition, "many security analysts are not particularly perceptive, critical, or competent." Please don't hold back, Burt. The 11th edition explores more recent trends, including behavioral finance and smart beta. Malkiel also includes some practical age-based recommended portfolios at the end.

2. "The Little Book of Common Sense Investing," by John C. Bogle. A good companion piece to Malkiel, and a concise summary of the thinking of the man who as founder of Vanguard helped more average people invest wisely than anyone else. This little book gets right to the point — you can easily devour it in a sunny afternoon by the shore. But don't be fooled by its brevity; it offers one of the most rigorous arguments for why low costs drive investing returns. Never has a simpler idea (except that of compound interest) been more powerful.

3. "Against the Gods: The Remarkable Story of Risk," by Peter L. Bernstein. This superb, ambitious book covers some of the same ground as Malkiel does, but drills deeper. It tracks how some of the world's greatest thinkers, from Pascal and Bernoulli through Markowitz, Kahneman and Twersky (founders of behavioral economics) came to understand risk, chance and probability. Yet the late Bernstein wore his erudition lightly; he was a master of boiling complex ideas down to crystal-clear prose. "We are never certain. We are always ignorant to some degree," he wrote. "Volatility is a proxy for uncertainty." This book has lots of real wisdom.

4. "Irrational Exuberance," by Robert Shiller. I could have chosen one of several excellent books on behavioral finance, but this was the most relevant to markets. Its first edition was published in 2000, on the eve of the dot-com crash; the second edition, in 2005, just as real estate was peaking. Shiller presciently warned of both. The third edition appeared in 2015, and Shiller updated it to provide analysis of the financial crisis and its aftermath. It also includes his very incisive 2013 Nobel Prize lecture on speculative asset prices.

5. "The Snowball: Warren Buffett and the Business of Life," by Alice Schroeder. There are whole shelves full of books about Warren Buffett and his mentor, Benjamin Graham, but I think this one best explains what formed Buffett's investment philosophy and how it works in the real world. Schroeder, a former top Wall Street insurance analyst, got full access to Buffett. Her keen intellect helped her grasp and explain how he became the greatest investment genius of all time. (Hint: Think of a snow ball rolling down a hill, but it gathers money rather than snow.) It's more than 800 pages long, but well worth your time.

6. and 7. "Liar's Poker" and "The Big Short," by Michael Lewis. Lewis is a great storyteller who always finds the right characters to embody his themes. "Liar's Poker" is the quintessential coming-of-age story of Wall Street in the wild 1980s, and no nonfiction book of that time sums it up better. "The Big Short" tells the story of the financial crisis from the points of view of the misfits and contrarians who saw the truth long before anyone else did — and were almost destroyed by it. Lewis pulls off the neat trick of actually dramatizing the most complex, abstruse financial instruments ever created. (Oh, and stream the movie, directed by Alan McKay; it was great, too.)

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