Many readers have expressed interest in learning more about equity (or stock) investing over the last few months and have asked for book recommendations that will allow them to build a strong foundation in the subject. Initially, one would believe such a request to be simple to fulfill. Yet, upon further reflection, there are a few important factors that need to be considered before making these book recommendations.
Understanding Current Level of Investing Acumen and Maintaining an Open Mind
First, everyone begins the journey into investing with different backgrounds and various levels of investing/financial acumen. Understanding what an individual already knows and what she does not know is critical. For instance, we cannot recommend a book that discusses balance sheet analysis in-depth if a person is unfamiliar with accounting. In fact, every level of investor needs to understand their competencies and their voids of knowledge. Unfortunately, knowing what you do not know usually comes once one has established a good foundation of investing knowledge.
When embarking upon the study of investing, regardless of background, an open mind is critical and one should remember that most of what she will learn is theory and not necessarily fact to be blindly followed. Although Warren Buffett is a great investor, it is difficult to recommend his works to newer investors due to their and the media’s tendency to generally assume everything he does is correct. We believe that anyone can learn how to become a better investor, yet everyone starts at different places. As we mention these books, we will try to highlight who these books address.
The Importance of Learning about Different Strategies
Second, as many may know, there are various investment strategies that have been successfully and unsuccessfully implemented throughout the years. Basically, a strategy that is successful for one may be devastating to another. It is not our place to say that one strategy is better than another. Ultimately, the strategies that tend to work for investors are those that best fit their personalities.
Some investors mix and match various strategies to form a personal strategy that best agrees with them. For instance, Chain Bridge Investing’s strategy is rooted in fundamental analysis (explained below), but also consists of aspects of technical analysis (explained below) and other strategies. With this factor in mind, in order to maximize the usefulness of our book recommendations we would have to know the type of investment strategy one is pursuing.
A new investor should be aware of the various investment strategies and seek to, at least, establish a basic understanding of the principals of these strategies. Such knowledge will help the investor find the strategy that works best for her and recognize which strategy a market writer or other market participant is using when expressing a view on a stock or the market. With that knowledge, the investor can begin the process of critically evaluating the views and advice of others.
Check back, part two will be released on August 13, 2010.