June 27, 2012

5 must read books about stocks

It's always a good idea to read books to learn more about a subject. The problem is that if you enjoy a broad subject, you will also find an endless amount of books you want to read. Sometimes you wish you had one of those machines from the Matrix movie so you can inject the information into your brain in a matter of seconds. But until someone invents one of those machines, I thought it was a good idea to recommend 5 books out of all the books I have read about the financial markets. This is the list I would have wanted to read many years ago, and it would have saved me a lot of time since I wouldn't have read all the other not so good books. This list covers both trading and investing - you should read about both disciplines.

Money Masters Of Our Time by John Train. This book covers 18 different famous and not so famous profiles from the financial markets. These profiles include Warren Buffett, Peter Lynch, Julian Robertson, and Michael Steinhardt. It explains the background each profile has and the different strategies they use, such has how to find growth stocks, and how to value companies from the emerging markets. When you have read the book, you will have a broad introduction to the different strategies you can use. Here's a quote from the book about the similarities between Zebras and portfolio managers:
"Zebras have the same problem as institutional portfolio managers. First, both seek profits. For portfolio managers, above average performance; for zebras, fresh grass. Secondly, both dislike risk. Portfolio managers can get fired; zebras can be eaten by lions. The outside zebras end up as lion lunch, and the skinny zebras in the middle of the pack may eat less well but they are still alive. Third, both move in herds. They look alike, think alike and stock close together.

Market Wizards. This book is considered to be a classic. Jack Schwager has written several books with the same theme, and you should read them all if you enjoyed the first book. It is similar to Money Masters Of Our Time since it covers 17 famous and not so famous profiles, including one who has specialized in psychology. These profiles are generally traders compared with the profiles in Money Masters Of Our Time who are generally investors. You will find out why Paul Tudor Jones thinks "Losers Average Losers," an interview with Ed Seykota who realized an 250,000 percent return on his account over 16 years, and why Michael Steinhardt doesn't like charts. A quote from the book's interview with Paul Tudor Jones when he as an inexperienced trader lost money:
"The guy standing next to me said, 'If you want to go to the bathroom, do it right here.' He said I looked three shades of white. I remember turning around, walking out, getting a drink of water, and then telling my broker to sell as much as he could."

The Complete Turtle Trader. This book has been written by Michael Covel who is interested in Trend Following which is a trading method where you buy an asset, such as a stock, when you think the trend is up. You hold the stock no matter what happens until you think the trend is down, yhen you sell it, and try to make money when the stock is falling. The book itself covers an experiment by Richard Dennis and William Eckhardt. The point of the experiment was to investigate if you could teach amateurs how to trade - or if trading was a skill you were born with. You will also learn about the trader Salem Abraham who is trading from a little town in Texas - far away from Wall Street:
"Just because you have a Lamborghini, you don't have to go 160 miles an hour. I'm never going past 30 and I'm going to control risk."

One Up On Wall Street. This book covers one profile only and that profile is Peter Lynch who is also the author of the book. I believe the methods Peter Lynch is using are the methods that should be used by the average investor. The secret is "common sense." If you are working at Google, you probably know more about Google than the average analyst at Wall Street. You can clearly see if Google is expanding, and you can also see if Google has problems. Buy the stock (if it has the correct value) if Google is expanding. If you like eating at Burger King, buy the stock. If you like Apple products, buy the Apple stock.
"Average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research."

The Black Swan by Nassim Nicholas Taleb. This book has nothing to do with the movie - it is a book about predictions. The basic idea is that it is impossible to predict the future since we can't predict Black Swan events. Once upon a time, everyone thought that if you looked at a swan, it had to be white. Then we discovered Australia and the black swans living there. There was no way someone could have predicted that swans also could be black by only looking at white swans in Europe.
"One single observation can invalidate a general statement derived from millennia of confirmatory sighting of millions of white swans. All you need is one single black bird."