It has been a tricky year for investors. Between the Fed raising rates, a struggling global economy, and geopolitical risks driving the energy market in crazy directions, we don’t think anyone will be sad to see it end.
However, challenging market cycles are an excellent opportunity to look more deeply at our investment decision-making and goals. To make the most of the next bull market, we need to evaluate what we are doing well (or not so well) when things are tough.
So for you or the investor in your life, we have a few gift ideas for books that can create new opportunities or help avoid past mistakes.
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Book No. 1: Financial Shenanigans by Howard Schilit
(Source: Amazon.com)
Companies lie on their financial reports. Whether through omission, misclassification, or just outright fraud, lies that distort the fundamentals are common, and investors must know where to look to find them.
While some background knowledge of the income statement, statement of cash flows, and balance sheet is helpful, we like this book because the author uses real-life examples without the need for an accounting degree to understand how a company might try to mislead you. Some of the company names in the book might be a surprise but make it all the more enjoyable.
As you might imagine, although the tricks illustrated in the book have been revealed, other companies will try to pull them over on shareholders every year. The author put it best when he said…
Executives’ desire to put a positive spin on financial results has been around for as long as corporations and investors themselves. Dishonest companies have long used these tricks to prey on unsuspecting investors, and it is unlikely that will ever change. As King Solomon observed in the book of Ecclesiastes, “What has been will be again, what has been done will be done again.”
What we like about a book like this is that it helps traders know what not to buy, which is just as important as knowing what looks good. For investors with greater risk tolerance, identifying liars in management is also a great way to find stocks to short in a bear market.
Book No. 2: Thinking Fast and Slow by Daniel Kahneman
(Source: Amazon.com)
Thinking Fast and Slow is a book about how we think and make judgments in all aspects of our life, not just investing. Knowing why we make decisions will help investors will make their processes more thoughtful and avoid common mistakes.
Investing can be high stakes and stressful, and our choices should be deliberate and consistent… rather than emotionally driven and erratic. To improve decision-making, investors must learn a new way to talk about it and identify their faults. As Kahneman points out…
In at least some cases, an accurate diagnosis (of bad decision patterns) may suggest an intervention to limit the damage that bad judgments and choices often cause.
If you have looked back at your trading record and wondered why you didn’t sell when you knew you should or how you wound up with a terrible stock in your portfolio, this is the book for you.
Book No. 3: The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb
(Source: Amazon.com)
The Black Swan spits in the eye of conventional analysts and economists. If you don’t like your previously held beliefs about the market challenged, then we don’t recommend this book.
However… if you are like us and are always looking for the cracks in the dam to start spreading, this book is for you.
Traders have often overlooked Taleb’s book in favor of his other classic, Fooled by Randomness (which we also recommend if you haven’t read it yet). Both books show how our psychology can conspire against us to make us blind to the most significant risks and opportunities in the market.
If you hear a “prominent” economist using the word equilibrium, or normal distribution, do not argue with him; just ignore him, or try to put a rat down his shirt.
Taleb makes a strong case that traders tend to overprice small changes in the market and underprice risky-but-rare catastrophic events. In another of Taleb’s books, he proves this using option pricing theory, which is also recommended for those with a mathematical background.
Reading The Black Swan will give you insights into why market crashes happen… which may not help you predict them but will help you to identify them when they happen before it is too late. The book is not purely about trading, either; this is an excellent read for anyone who wants to understand why we tend to underestimate the probability of significant changes in all aspects of our lives.
We hope you can set aside some time to relax by a crackling fire and crack open one of these books. We’re optimistic for what lies ahead in the New Year, and we hope these picks will offer some insight into trading psychology and market behavior so that you’re better prepared to roll with the changes 2023 will bring.
Sincerely,
John and Wade
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