I'm about to hit you all with some knowledge, so get your big kid pants on! You should read these books in the order they are listed, because they stack up on top of each other and the lessons learned in one are needed to understand the lessons in the next.
Disclaimer: I am not a financial advisor or registered securities analyst.
Another disclaimer: If you do not know what exactly a stock is, how to buy or sell a stock or what dividends and earnings are, please look up some crash courses on YouTube or something before starting this list.
Let's begin:
- The Little Book of Common Sense Investing by John Bogle – For those of you who don't know, John Bogle is one of the most important people to ever walk this planet when it comes to stocks and investing for the average person. He founded a little company called Vanguard (ever heard of it?) and he also invented the first index fund. In this book, Bogle gives us a primer on the classical approach to passive, conservative and long-haul investing. He goes into the statistics on how around 90% of mutual funds and most people can not beat the market. He makes it clear and simple that if you want to benefit from stock yields over time, you should deploy your money into index funds and sit back while earnings and dividends carry you to wealth. Many people (probably most people to be honest) can stop here and honestly do perfectly fine. The info in this book is all you need to build serious wealth. You will also understand the theory that picking individual stocks is usually a losers game. One of the reasons I believe you should read this book first is because the lessons you learn inside of it may show you that the rest of the books on this list may not even be worth reading! If you aren't content with boring old index fund investing though, you can read on..
- One Up On Wall Street by Peter Lynch – This book is dated but the principles written in its pages ring true to this day. Peter Lynch is considered one of the most successful mutual fund managers of all time. He achieved returns that beat the S&P 500 for over a decade straight for his investors in the Fidelity Magellan Fund in the 70's and 80's. Yes I know I said most people can't beat the market by picking stocks, which is why those who can do it consistently are very special. In this book he teaches you about the tools and strategies he used to achieve those results. It's a great book because it doesn't get too crazy in terms of math and logic, and it's easy to understand.
- Thinking, Fast and Slow by Daniel Kahneman – Now it's time to take a break and get into the psychology behind stock investing. Let's be honest, we're all pretty stupid and we all have internal biases. These two facts can be serious roadblocks to investing success. The sooner you admit that the better off you'll be. This book will help you understand how to separate your irrational mind from your rational mind when investing and it will make you better at objective decision making.
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Ok, now at this point you have two paths you can take. After these three books you'll have a good grasp on the theory and mindset to making money in stocks, but you will be lacking the knowledge to actually pick individual stocks. I mean how are you supposed to do that? Just buy whatever is trending on Reddit or what that idiot Jim Cramer on CNBC is talking about? Well as long as you still understand (from book #1) that the odds are against you when picking stocks, you can continue on one of two paths:
– The Value Investing Path (Finding, analyzing and buying stocks that are “undervalued” and waiting for them to rise back to their fair market value, thus making a ton of money. This is what Warren Buffett does. It's also extremely difficult, boring and requires rock-solid emotional stability to ignore the ups and downs of the market.)
-OR-
– The Traders Path (Following market trends and sentiment to find opportunities that can make you money. I personally would not consider this path to be an “investors” path. This is a “speculators” path, and they are very different. However, you can make money speculating. This could involve shorting stocks or doing a bit of technical analysis, or maybe even playing with some derivatives like options. This path is also extremely difficult and will cause most people to lose hours of sleep each night sweating as they panic about their positions)
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If you chose The Value Investing Path, continue here:
- All of the accounting books you can find – You NEED to understand the fundamentals of accounting in order to value businesses. There is no getting around it. Yes, it's boring but if you find yourself enjoying it, you may have an inclination for this. Read everything you can on accounting. Learn to read balance sheets, income statements and cash flow statements. Learn about assets and liabilities. Do the practice assignments in the books and all of that!
- The Intelligent Investor by Benjamin Graham – This is probably the most famous book on this list, and guess what, you're not going to understand ANY of it. This is the book that Warren Buffett swears by. In fact, Buffett studied with the author of this book when he was a lad. This book is the bible of value investing. Every successful investor knows this book. Within its pages you will learn about what to look for in the stock market, how to understand market behavior, what a good business looks like, how to find the intrinsic value of a company, and much much more. I recommend reading this book at least twice and researching everything inside it that you don't understand.
- Margin of Safety by Seth Klarman – Physical copies of this book are extremely expensive, so you're better off finding an online copy (shh don't tell). It's a bit more modern than the title above and it was written by a very successful value investor!
- The Dhando Investor by Mohnish Pabrai – Fantastic value investing book that offers some fresh ideas and new things to think about that are built on top of the previous books. Also written by a very successful investor.
If you chose The Traders Path, continue here:
- Reminiscences of a Stock Operator by Edwin Lefèvre – A classic that most traders are told to read at some point in their lives. It teaches so many valuable lessons of reflecting on your wins/losses, psychology of trading, knowing yourself and your weaknesses and more fun stuff. It's an old book but definitely worth reading.
- Getting Started in Technical Analysis by Jack Schwager – If you don't know, technical analysis (TA) is the process of finding opportunity by analyzing the market indicators such as price, volume and trends. It ignores company fundamentals and is often seen as a type of voodoo that you either believe in or you don't. I personally am not a fan, however I do recognize the importance TA plays in understanding some stocks at certain times. I do believe that in combination with other metrics, TA can provide valuable insight. This book will teach you the basics.
- Fooled by Randomness by Nassim Nicholas Taleb – It is not possible to predict the stock market. This book will help you reconcile with that. It will help with understanding how randomness and a bit of luck ties into not only your trading, but your whole life. You will learn about risks and the consequences of taking them.
- Market Wizards by Jack Schwager – Another great book by the same author as #2 above. This is written in a sort of conversation-like format where the author interviews some of the most successfully traders of the time. There is tons of information in this book on all of the topics we've discussed since it's like you're reading a conversation between two people.
I hope this post will help some of you.
Honorable mentions:
– The Snowball – Alice Schroeder
– Security Analysis – Benjamin Graham and David Dodd
– A Random Walk Down Wall Street – Burton Malkiel
– The Alchemy of Finance – George Soros
– The Big Short – Michael Lewis
– Common Stocks and Uncommon Profits – Philip Fisher
– Value Investing: From Graham to Buffett and Beyond – Bruce Greenwald
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