10 Top Investment Books For Developing An Investing Philosophy

by: Lowell Herr

Summary

Build an educational foundation for portfolio construction.

Begin on the right foot by learning the soundness of index investing.

Avoid investment mistakes by reading critical material.

Learn how to manage and monitor your portfolio.

Education ranks a close second to "The Golden Rule of Investing" when it comes to preparing for a lifetime of investing. What better way to begin than reading investment books that contain investing concepts based on experience and sound logic. The following ten books are ones I've found to be extremely valuable in helping form an investment philosophy. Be forewarned, these books contain the central theme of index investing, an approach to portfolio construction that is followed by a minority of investors.

For those pondering "The Golden Rule of Investing," simply stated, it is to 'save as much as you can as early as you can' and the operative word is early.

Books

The following order is loosely based on ease of reading and the importance of investing concepts.

  1. The Elements of Investing - Burton G. Malkiel and Charles D. Ellis
  2. The Investment Answer - Daniel C. Goldie and Gordon S. Murray
  3. The Investor's Manifesto - William J. Bernstein
  4. The Power of Passive Investing - Richard A. Ferri
  5. Four Pillars of Investing - William J. Bernstein
  6. The 3 Simple Rules of Investing - Michael Edesess, Kwok L. Tsui, Carol Fabbri, and George Peacock.
  7. The Ivy Portfolio - Mebane T. Faber and Eric W. Richardson
  8. The Little Book of Common Sense Investing - John C. Bogle
  9. Unconventional Success - David F. Swensen
  10. The Bogleheads' Guide to Investing - Taylor Larimore, Mel Lindauer, and Michael LeBoeuff

Here are a few words about each of the above ten volumes, and I recommend interested readers check out the reviews on Amazon.

The Elements of Investing contains all the essential information one needs to begin a lifetime of portfolio building. Here are the key ideas.

  • Save early in life.
  • Use index instruments such as index funds or non-managed index ETFs.
  • Diversify all over the world.
  • Avoid making stupid mistakes.
  • Keep your investing processes simple.

The Investment Answer could easily rank number one as it is a two hour read. This book is set up to help the reader make five decisions.

  • To manage the portfolio yourself or seek professional help. The authors recommend professional help, the one decision where I disagree with their advice.
  • How to set up an asset allocation plan.
  • How to best diversify the portfolio.
  • Should one take a passive or active approach to investing.
  • How to go about rebalancing the portfolio.

The Investor's Manifesto is one of three basic investing books by William Bernstein. I recommend reading everything he has written. The Manifesto barely edges out The Four Pillars of Investing. Bernstein is a strong advocate of index investing. He writes with humor and his ideas emerge from a lot of research. Until the Manifesto came out, Four Pillars and his first book, The Intelligent Asset Allocator were my top choices.

Rick Ferri's The Power of Passive Investing is slotted in between the two Bernstein books as it provides much detail as to why one is better off using index funds rather than actively managed mutual funds. This quote from David F. Swensen, author of my number nine suggestion, is the central theme of Ferri's book. "The costly game of active management guarantees failure for the casual participant."

After reading these five books, one is only going to begin to fill in a few holes here and there. Many holes are filled by Michael Edesess et. al. book. The 3 Simple Rules of Investing: Why Everything You've Heard About Investing Is Wrong - And What To Do Instead is included for reasons of the subtitle. The three rules are:

  1. Simplify your options
  2. Look only forward
  3. Tune out the noise

These authors challenge everything most of us were taught from rebalancing, asset allocation, to dollar cost averaging. Research articles are cited so the reader can dig into the original sources for additional information. If you are looking for a simple approach to investing, this is the book for you. A very few ETFs are all you need to construct a portfolio.

The Ivy Portfolio by Faber and Richardson contribute several simple example portfolios and make a case for reducing risk by using the simple 200-Day moving average as a "circuit breaker." This critical material is found in the chapter, 'Winning by Not Losing.'

Number eight (8) on my list is John Bogle's The Little Book of Common Sense Investing. As the leading proponent of index investing, at least one of Bogle's books deserved a place among the top ten. It was not easy to pick which of Bogle's books to recommend. His First 50 Years is definitely one to substitute for my number 8.

Unconventional Success: A Fundamental Approach to Personal Investment is written by David F. Swensen, an active manager who gives oversight to the Yale Endowment Fund. Despite his professional position, he is a strong advocate of passive management. In chapter 3, Portfolio Construction, Swensen makes a logical case for his six asset portfolio. I've written several articles here on Seeking Alpha that relate to the Swensen Six portfolio.

Rounding out my top ten investment books is Larimore et. al. The Bogleheads' Guide to Investing. While this book also promotes index investing it contains many other topics related to investing.

There are several ways to read these books. 1) Read them from start to finish as one reads most books. This looks like a daunting task if one is going to commit to reading all ten. 2) An alternative approach is to have, say the first seven or eight on your book shelf and you pick themes to read. For example, you might check the index of each and read all about asset allocation or rebalancing. Use them as reference books. If you take this approach, I highly recommend you read The Elements of Investing and one of Bernstein's books from start to finish so you have a sound base from which to begin developing your portfolio plan. Carve out time to educate yourself by reading the above material and it will reward you many times over during your investing career.

None of the above books go into sufficient detail about maintenance and monitoring portfolio and benchmark performance. To fill in that gap you will need to seek advice elsewhere.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.