Thursday, January 29, 2009

MORNINGSTAR: The Best Books on Share Investing

Morningstar | 04/03/2005 16:42

The bad news is that the number of investing books keeps growing. The good news is that the number of great ones stays the same.

You can’t become an experienced investor without time, practice and a few regrets, but you can become an informed investor pretty quickly. Here’s our short list of the best books for stock [share] investors. Enjoy.

The Intelligent Investor

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The Intelligent Investor, written by Benjamin Graham, heads our list of the best stock books even though it’s also on our list of investing classics, but it’s worth a double mention. More than any other investing book, Graham’s classic gives investors the tools needed to begin a successful investing career: a healthy sense of skepticism and an understanding of the difference between investing and speculation.

Graham advocated buying cheap stocks of companies with sound financials, using a margin of safety between a stock’s price and its intrinsic value to protect your investment. This intrinsic value, Graham believed, should be based on concrete, knowable factors, rather than expectations about the future. Graham’s emphasis on fundamentals and safety are bedrock principles for any investor.

Common Stocks and Uncommon Profits

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This 1958 book, written by Philip Fisher, was in many ways ahead of its time. Rather than emphasize cheap stock prices, Fisher focuses on finding great companies that will grow profitably over many years.

Fisher downplays the importance of dividends (which was considered heresy in the 1950s), and says it’s all right to pay up for a great company. He also advocates holding on to stocks of such companies even after they’ve risen in price, as long as the fundamentals are still good. You can see the marriage of Graham’s focus on margin of safety and Fisher’s focus on great companies in the investing style of Berkshire Hathaway Chairman Warren Buffett, who looks for great companies trading at reasonable prices.

The Essays of Warren Buffett: Lessons for Corporate America

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This collection of investing essays, compiled by Lawrence Cunningham from the writings of legendary investor Warren Buffett, offers more insight into accounting, executive behavior, and the art of capital allocation than any investing book ever written. Buffet’s remarkably clear writing style makes light going of tough topics like economic goodwill and leveraged buyouts. More importantly, Buffett isn’t just an investor, he’s the chairman of Berkshire Hathaway. So when he’s talking about the partnership that exists between a company’s management and shareholders, he isn’t just filling the air with smoke. In this, he’s created a standard of care investors should expect.

One Up on Wall Street

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I poked fun at this book’s enthusiasm in our investing classics section, but it’s a marvelous read. Author Peter Lynch, formerly one of Fidelity’s most successful fund managers, popularized investing the way Julia Child popularized gourmet cooking. Successful investing isn’t about getting a hot tip or running beta regressions. Mostly it’s about sticking to what you know, whether its farm equipment or the restaurant supplies business, and keeping your eyes open for investing opportunities.

By the way, the thread that runs through most of these books, Lynch’s too, is that they were written by investors, not bystanders, so they’re stocked with great examples of investing hits and misses, as well as the thinking that produced them. For the most part, I’d stay away from books written by consultants (Peter Drucker is the exception), such as Adrian Slywotzky’s The Profit Zone, which, like most business books, is one mediocre idea sandwiched between 300 pages of whiteboard gibberish.

Built to Last

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Authors James Collins and Jerry Porras ask, ‘What are the characteristics of the world’s most enduring businesses?’ The book works because the writers exhaustively research the question and then tell us, in plain English, how a company like Wal-Mart could become the world’s largest and most successful retailer while rival Ames fell off a cliff. In the process, he debunks a lot of harmful myths about great businesses: Every great company has a charismatic leader, right? Not so.

Collins’ book ranks as one of my favorites because he takes the focus off flashy products and puts it on the process that created the product. At root, he’s helping investors find companies with sustainable competitive advantages. The book also provides useful historical context.