Books that Changed How I Invest

As a soon to be ex-academic reading has been my life. As I head towards early retirement I’ve radically altered my book-buying habits to provide a rapid self-taught course in investing. Here are five works that have changed not just how I think but how I’ve invested.

1. Benjamin Graham The Intelligent Investor

There’s a reason why most investing reading lists include Benjamin Graham’s classic text. Chapter 8’s famous personification of ‘Mr Market’ has once again proved prescient in the wake of the EU referendum result: “Often […] Mr Market lets his enthusiasm or his fears run away with him and the value he proposes seems to you a little short of silly”.

The 2003 edition with Jason Zweig’s helpful chapter summaries could do with an update. There is no shortage of recent material to work into the commentaries.

2. Lee Freeman-Shor (2015) The Art of Execution

Manager of the Old Mutual European Best Ideas fund, Lee Freeman-Shor draws on analysis of nearly 2000 investments made for his fund by some leading fund managers. Most of their decisions lost money, but the best managers made up for this with big winners. The key to success is knowing what to do with an initial winning or losing position to maximize gains and minimize losses.

Freeman-Shor provides a helpful typology of investor decision styles:

Rabbits: frozen into inaction, they hold onto losing investments for too long.

Assassins: ruthless with losing investments, they follow stop-loss rules and materially adapt when they are losing.

Hunters: buy more of an investment after an initial entry starts to lose in the conviction of its long-term recovery. Following this strategy emboldened me to add to a losing position in Aberdeen Latin American Income. The incremental addition is up over 20% in three months, bringing the total of three investments to near break-even.

Raiders: grab a small profit, but can sell out completely of winning positions too soon.

Connoisseurs:  sell a small portion of stakes in winning investments, but hold on to the bulk of their successful holdings.

3. Ben Carlson (2015) A Wealth of Common Sense

Ben Carlson’s book takes its title from his invaluable blog.

The text distills several years of wisdom:

- The necessity of articulating a clear investment policy statement: Why are you investing? What is your risk appetite? What is your time horizon?

- Making money in the long-term requires a willingness to endure losses over several short-terms in an investing life-time: “Plan on experiencing uneven results, frustrating periods, volatility, and the occasional crash”.

4. Tobias Carlisle (2014) Deep Value 

A challenging read in the best sense that mixes business biography and back-testing of deep value valuation metrics, ultimately to highlight the power of mean reversion: “investors aren’t rewarded for picking winners; they’re rewarded for uncovering mispricings – divergences between the price of a security and its intrinsic value […] And the place to look for mispricings is in disaster, among the unloved, the ignored, the neglected…”

5. S. Horan, R. Johnson, T. Robinson (2014) Strategic Value Investing

Another data-laden text, with chapters on different methods of estimating the intrinsic value of potential investments and thereby what both Benjamin Graham and latterly Seth Klarman term “the margin of safety”: the potential difference between current stock market price and the underlying value of the business.

As with Carlisle’s book this volume’s historic data illustrate the long-term advantages of small-cap value, together with the attendant short-term volatility -  an important lesson given what’s happened to my overweight in UK small and mid-caps since late June.