“How do I educate myself as an investor?”
This is one of the most common questions I get from readers, and it’s easily the most important.
There is no substitute for experience. As in absolutely none. Having your own money at risk has a way of making you focus in a way that reading a book never can.
But the problem with learning purely by experience is that it can be an expensive education when real money is involved. The market is a stern schoolmistress, and one that is not averse to proverbially rapping you on the knuckles with a yardstick when you err.
Investing for beginners means making beginner’s mistakes. But by educating yourself beforehand, you can hopefully keep the financial pain to a minimum. That’s why I’d like to suggest some of my favorite financial reads:
Investing for Beginners – In the News
As a start, I strongly recommend you read the Financial Times (“FT”) daily and Barron’s weekly. I consider these the absolute bare minimum of reading material for any aspiring investor.
The FT gives coverage of the global financial markets that no other newspaper — not even the Wall Street Journal — can come close to matching. If you want to know what is driving the any stock, bond, currency or commodity market anywhere in the world, the FT is your source. I’m a little old-school and still receive a paper copy at the office every morning, but the FT has a great website and excellent phone and iPad apps as well.
Barron’s is more centered on the American markets, but I consider the two hours I spend every Saturday morning reading it cover-to-cover to be some of the most productive hours of my week. In an age in which it is easy to get paralyzed with too much information, Barron’s condenses a week’s worth of data into a tidy, digestible package. There might be days when I have to skip my morning FT reading due to time constraints, but I never fail to read my weekly Barron’s.
Investing for Beginners – Books
The news is good for information, but books are where the real education begins. I would recommend the following list of books to any newbie investor, as well as any grizzled market veteran:
The Art of Asset Allocation, David Darst: This is distinctly not a “how to trade stocks” book. As its name implies, it is a guide to building a comprehensive portfolio from the top down.
It is important to remember that, while a savvy stock pick can make you wealthy, studies have shown that more than 90% of your portfolio returns are explained by asset allocation.
I recommend that most families hire a good financial planner to help them make sense of their financial lives and to build portfolios that are appropriate given their ages, risk tolerances and special situations. But if you are the “do it yourself” sort, Darst’s book can effectively replace your financial planner if you use it correctly.
And by the way, if you do employ a financial planner, and they have not read The Art of Asset Allocation, you should fire them. Immediately.
Frankly, I don’t know how O’Shaughnessy finds the time to do this kind of number crunching. What Works is hundreds of pages of well-researched quantitative strategies. There is no filler here; it’s all meat. He has sliced and diced the market in every conceivable way it can be sliced and diced: value, growth, return on equity, dividend yield, buyback yield — and the list goes on.
What I like most about O’Shaughnessy is his absolute lack of bias or dogmatism. He does not approach the investing process with any preconceived notions, but rather lets the data do the talking.
And talk it most certainly does.
If you’re a beginner investor, how do you use this book? As you gradually develop your own style, whether it be value, growth, or something more exotic, I recommend you use some of O’Shaughnessy’s screens as “fishing ponds.” You don’t necessarily need to buy every stock in the screen, but you can use the screen as a great starting point for further research.
The Intelligent Investor, Benjamin Graham: I am a value investor by temperament, so no list if books about investing for beginners would be complete without Benjamin Graham’s classic. Think of this as a less dense, more digestible version of Graham and Dodd’s Security Analysis. (Security Analysis is considered the “bible of value investing,” but it can be a little dense for a beginning investor.)
Benjamin Graham is considered the father of value investing and was Warren Buffett’s mentor. Without Graham, there would have never been a Buffett, or at least not the investing legend we know and love.