Much of the heavy lifting has already been done for us, at least as far as sketching out the investing terrain. And you don’t have to spend all day in the library to cover the basics. Most of what you need to find solid investing
ground would fit on the nightstand. Here's a list of our favorite investing classics.
Burton Malkiel carried the efficient-market theory down from the ivory tower to ground level where air-breathing humans could actually make use of it. In its simplest form, the efficient-market, or random-walk, theory says that future stock prices don't depend on past prices--prices are arrived at by chance. Some efficient-market purists even argue that publicly available, and even insider, knowledge about a company cannot be used to pick stocks that beat the market because a stock's price already reflects everything known about that company.
Malkiel doesn't swallow efficient-market theories whole hog, and readers don't have to, either. What comes through clearly is the difficulty of picking winning stocks, and the role of luck and randomness in investing. This may seem like dead weight for investors thrilled by the giddiness of Peter Lynch's “One Up on Wall Street” (another great investing book), but it's critical ballast. If you're new to investing, and you've read a couple can-do books that make your heart race, A Random Walk is the next book for you. If you've been around the block a few times, Malkiel's disciplined treatment of technical topics such as beta keeps the book fresh.
“The Intelligent Investor”
I feel a little bad including this book, written by Benjamin Graham, and not “Security Analysis”, Graham and David Dodd's epic that launched the field of fundamental analysis, but it's a much better place to start. It's an easier read, and covers all the basics of Graham's value-investing philosophy: margin of safety, the defensive investor, market fluctuations, the difference between investment and speculation, plus he quotes the Aeneid "Through chances various, through all vicissitudes, we make our way." More than 50 years after its publication, the edge on this tool is still sharp.
“Stocks for the Long Run”
This book, written by Jeremy Siegel, doesn't break a lot of new ground. But it does make complex issues less complex. If you just want to understand the long-term power of equity investing—at least as we understand it so far--this is the book you should buy. It helps readers understand how economic factors and investor behavior cause short-term market fluctuations. Siegel also shows readers how to use their knowledge to build an investment portfolio with stocks and funds. It's useful, historical, and easy to reference.
“The Only Investment Guide You'll Ever Need”
If you're looking for the bare essentials, this may indeed be the only investment guide you'll ever need. And this witty book, written by Andrew Tobias, is so much fun to read, you may not even realize you've buried your head in an investment book.
Tobias covers all the bases--stocks, bonds, funds, IRAs, insurance, and real estate. This is the book I always give friends who are just getting started. Be careful, though: Reading it may make you hungry for more.
“The Wall Street Journal Guide to Understanding Money and Investing”
Like Tobias' book, this guide by Kenneth M. Morris and Alan M. Siegel starts on the ground floor. A little more basic than “The Only Investment Guide You'll Ever Need”, this book runs through the history of money, then graduates to stocks, bonds, and funds, and closes with a chapter on futures and options.
If you learn best with visual guides, this is the book for you. It's amply and colorfully illustrated with simple-to-understand graphs and charts, key-word glossaries, and real-life examples. (This is especially helpful when the book discusses the often-challenging subject of bonds.) This book is a favorite among new Morningstar employees, who receive a copy of it when they join this firm.
This article originally appeared on www.morningstar.com.
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