Books that changed the way I look at Investing.
Five books that changed the way I look at companies, stocks, money, the economy, and the psychology of crowds. These books helped me to keep a cool head even through the most turbulent times.
In this article, I want to share a few books that I read throughout the past few years that drastically influenced my view on investing, the economy, stocks, and the stock market.
The Intelligent Investor - Benjamin Graham
This one frequently appears in book recommendations around the finance industry. It was one of the first finance books I read. It sparked my interest in investing and understanding stocks, their purpose, and how to view them as investment vehicles in relation to the underlying business.
Not only does this book provide a general understanding of stocks and their purpose, but more importantly, it provides an excellent historical overview of how the stock market behaved over the last 50-70 years. The commentary by Jason Zweig extends the information of Graham and projects it to the present.
Source: The Intelligent Investor, Table 11-3
Graham’s arguments are as valid now as they were when he first wrote this book. In the picture above, he discussed the valuation of the chemical industry in relation to the oil industry. The market put a high multiple on the chemical industry back then, showing their optimism towards it, while they put a discount on oil companies. The market is often too optimistic or too pessimistic. The oil companies in this example outperformed the highly-valued chemical companies.
I read this book a few times over the last few years, and it helped me evaluate the legitimacy of many businesses based on their presented numbers and presentations.
Financial Statements - Thomas R. Ittelson
This book is pretty much finance 101. It is a must-read for new investors and a fantastic read for investors who want to refresh their financial statements, 101 class.
When looking through companies’ financial statements, I scan for items like the working capital, levered and unlevered free cash flow, sale cycles, and most importantly, how the cash flows through a company. For that, I look at the connections between income, balance, and cash flow statements.
This book describes these items in detail, provides easy-to-understand examples of every item on the financial statements, and describes their connection to each other in terms of cash flow.
The book provides full-fledged example companies that create a product, use resources, build and maintain a factory, and much more. This is one of the best books to understand how cash flows from the income statement through the cash flow statement to the balance sheet.
Naked Economics - Charles Wheelan
Understanding how money flows within a company is important, but it doesn’t help if a general knowledge of economics is missing. A company doesn’t work on its own. A company is part of an industry, which is part of a market, which is part of a larger economy.
Influenced by the godfather of modern economics, Adam Smith, Charles Wheelan’s writing style is straightforward yet provides a thorough overview of how the economy works.
Free economics are driven by the choices of the participants within the system. Naked economics explains how, without knowing it, many of us make economic decisions based on our skills and preferences that generate a return. The sum of all these decisions leads to a movement of resources to their most productive use.
For example, the Soviet Union failed because its centrally planned economy could not efficiently allocate resources within its markets. This central planning is highly inefficient, and companies that needed the resources couldn’t get enough, while companies that didn’t need them got too much of it.
In a free market, supply and demand dictate where the most productive use for a resource is. For example, scientists show that oranges are ten times healthier than apples. People’s demand for oranges increase tenfold, and the profit margins of orange farmers increase drastically. Apple farmers see those increasing profit margins and shift to produce oranges instead of apples. The market orients itself more towards areas with higher profit margins if their business allows them to do so. There are further consequences in our example, but this should be enough to get the point over.
The Crowd and The Psychology of Revolution - Gustave Le Bon
At first sight, this book has little to do with economics or the stock market. But the stock market has a lot to do with psychology and emotions. Understanding how an anonymous crowd of people think and act is extremely helpful.
It’s said that Gustave Le Bon’s crowd psychology influenced many thinkers, philosophers, and politicians throughout the centuries. This book allowed them to steer the mentality of crowds and put them in power. Some of the most influential figures influenced by Gustave Le Bon were Vladimir Lenin, Adolf Hitler, or Jose Ortega y Gasset.
This book helps understand how crowds think, how they behave, and how they react. This is especially useful when working with social networks that are prone to creating social bubbles.
Social networks are made to attract and retain users. Social networks show users content that is most likely to keep them active on their platform. If you invested in a stock, let’s say - Example Company (EC)- the social network will show you people and groups that also invested in EC. These groups and people will then post things to encourage each other on their positive view on EC even if there are counter views on EC.
Understanding how crowd psychology works is beneficial to maintain an objective view of things and be less susceptible to bubble-thinking.
Money - Jacob Goldstein
I recently read this book, and it quickly became one of my favorites. Jacob Goldstein describes money through a historical lens. How we look at money today is entirely different from how people looked at it a century ago.
The reason why we use money instead of barter is that using a commonly agreed transfer medium is much more efficient than exchanging goods for goods.
It took centuries and even millennia to find a clever solution on how money should look and work. The very first forms of money were IOUs that represented tangible goods like sheep. In Mesopotamia, more than 5000 years ago, people used clay to represent debt. One clay cone stood for a measure of barley. A clay disc represents a sheep. Transferring clay discs and cones was much more convenient than transporting barley or sheep.
From then on, various kinds of IOUs appeared and disappeared until Lydia, a kingdom that now is Turkey, mined gold and silver. To assess the amount of gold and silver, they broke them into standard sizes and stamped a lion on each coin.
The Greeks started using these coins in their cities, and they began to flourish. Using coins for exchange on a marketplace made transactions much faster and payment settlement efficient. You could sell shoes for a few coins and then buy apples with those coins. Before, you had to exchange shoes with apples. Try coming up with an exchange rate between apples and shoes… Yeah, it’s not that easy.
Jacob Goldstein’s book brings the whole idea of money into a completely new context. Money hasn’t been eternal, and it changed its form many times.
He even goes a step further. The whole system around money as we have today with a central bank, banks, fractional reserve banking, and shadow banking is something new, inefficient, and will eventually change. Even taxes are something that could change in the near future with newer types of money.
I’d recommend this book to any crypto-enthusiast in the blink of an eye. Cryptography and Bitcoin changed the way digital currencies work. The technologies that software engineers like David Chaum, Wei Dai, Satoshi Nakamoto, and many others created are the foundation for new CBDCs (Central Bank Digital Currencies.) These allow a complete restructuring of our financial system, make banks pretty much obsolete, and could be the beginning of the end of financial crises.
It is a great book to understand how money works and how it has changed economies over the centuries.
Conclusion
These are my top five investing books. Learning the basics is crucial for any endeavor and repeatedly refreshing those basics allows us to see how our thinking evolves.
We started with The Intelligent Investor, a book about fundamental investing. We are then moving to Financial Statement, a book that teaches the building blocks of publicly-traded companies - the financial statements. Understanding financial Statements puts you way ahead of the crowd.
Naked Economics and Money provides the reader with a general understanding of economics and how money works. To work with money and invest successfully, I cannot emphasize the importance of economics enough. Supply and demand are the roots of all businesses, and understanding how money flows through companies and industries is as important as ever.
Lastly, some basic psychology with Gustave Le Bon to not fall victim to bubble thinking. An essential part of investing is to remain self-critical and question your investment decisions from time to time. Companies change, and so can your investment preferences.
I hope you enjoyed this piece. I will add more books in the future that I find mention-worthy. Feel free to share this article with others or provide me some feedback on the books I presented here.
Disclosure: I used referral links to point you to Amazon, where you can buy the books. It doesn’t cost you anything to use these links but would provide me with a little provision. You don’t need to use these links. You can search these books directly on Amazon.