Investor's Arsenal - The Top 5 Books That Will Transform Your Approach to Wealth

5. Rich Dad Poor Dad by Robert T. Kiyosaki

In this book, Robert Kiyosaki shares his journey to wealth and explores the contrasting approaches to life and money imparted by his two dads: his biological father, referred to as “Poor Dad,” and his mentor, known as “Rich Dad.” This book is a starter pack for anyone diving into the world of ‘financial independence’. It’s the kick in the pants one needs to get motivated and grasp the ‘why’ of investing – something that most folks, let’s be real, struggle with.

However, this isn’t your heavy-duty financial textbook. It won’t bore you with complex techniques, but it will throw some real gems your way. Kiyosaki introduces you to ‘options’ in real estate and spills the beans on how ‘the Rich’ play the tax game. The book does a good job of giving you a bird’s eye view of approaching personal finance intelligently. Think buying ‘good assets,’ learning to market yourself, and riding the wave of passive cash flows.

I used to have a lot of respect for this book and Kiyosaki himself – until I started noticing a strange correlation between scammy characters at networking events and this book, with their claims on it’s the one book that one needs to be financially independent by next year. Kiyosaki’s dramatic YouTube videos about how ‘they’re always out to make you poor’, didn’t help either. Personal bias aside, this book did something for me – it drove home the importance of being financially educated and kept me motivated throughout my investing journey. The book has got these visual paragraphs that stick, like this one:

“On the news was a story of another downsizing at a local company. The workers were angry and complained that the company ownership was unfair. A terminated manager of about 45 years of age had his wife and two babies at the plant and was begging the guards to let him talk to the owners to ask if they would reconsider his termination. He had just bought a house and was afraid of losing it. The camera focused in on his pleading for all the world to see. Needless to say, it held my attention.”

4. The Man Who Solved the Market by Gregory Zuckerman

“The Man Who Solved the Market” is an adventure story about Jim Simons, a brilliant mathematician, trying to change how trading works with something which would later be called quantitative finance. He went on to start a hedge fund called Renaissance Technologies, whose most profitable fund, the Medallion Fund, has been making an amazing 62% profit annually since its inception.

The book sheds light on the formidable challenge of solving the stock market by narrating the challenges faced by Simons and his team. Despite years of effort, they struggled with developing the algorithms behind the Medallion Fund, achieving remarkable returns only when they directed their focus towards predicting short-term trades.

Fast-forwarding to the present, the book talks about these modern finance experts called ‘quants.’ These guys use ‘alternative data’, which is about using super creative data sources to make stock market predictions. For example, they look at satellite images of parking lot traffic to guess how well a big store like Walmart is doing. They check all sorts of data, like the tone of voices in conference calls, records of car insurance applications, advice from social media stars, and even pictures from space showing how many crops are growing. I personally found the use of data analytics to analyze backgrounds of commissioners and other officials in the Food and Drug Administration to forecast the likelihood of drug approval as the most intriguing.

3. A Random Walk Down Wall Street by Burton G Malkiel

Once serious motivation for investing starts kicking in, the next stop is ‘A Random Walk Down Wall Street’ by Burton Malkiel. This book’s all about setting some real healthy expectations for the stock market returns. It takes you on a historical ride through different boom and bust market cycles, throwing in some wild stories like the ‘Tulip Mania’, where people were swapping houses for tulips.

The book effectively introduces two major investing styles: Fundamental Analysis and Technical Analysis. The former revolves around making buy and sell decisions based on whether the market price is lower or higher than its intrinsic value. The latter involves using purely stock price, volume charts, and their derivatives to make informed calls. The book provides a solid crash course in various financial concepts– share repurchase, price to earnings ratio, historical scams like Enron, financial instruments like Treasury inflation-protection securities (TIPS), and the near impossible task of predicting future earnings of a company.

Overall, the book offers reasonable evidence to support the importance of diversification and underscores the slim odds of succeeding through individual stock picking. It advocates for choosing index funds over attempting to beat the market. If you’re still convinced and eager to dive into investing, I would recommend reading the next book, “Beating the Street”.

2. Beating the Street by Peter Lynch

Dive into the world of stock picking with a touch of humor and a treasure trove of insights in Peter Lynch’s “Beating the Street”. In this book, Peter Lynch, renowned for managing the Magellan Fund, presents numerous case studies of stock-picking opportunities across diverse industries. The fund achieved an impressive, annualized return of 29% over a tenure of 13 years. What sets Lynch apart is his mantra of ‘Buy What you Know’, advocating for stocks with a personal touch—those he had a great experience with as a customer. His unique perspective on customer trends often came from his wife and daughters, who, as the household shoppers, brought market insights to his attention before the professionals did.

Lynch, discusses his approach of “Growth at a reasonable price”, finding opportunities to snag growth stocks at discounted rates, often through contrarian approaches. He also offers a grounded perspective on market behavior, especially during crises, where he encourages investors to keep the bigger picture in mind to prevent unhealthy pessimism and thereby make rational choices. Lynch’s advice extends to understanding personal financial risk tolerance when determining one’s stock portfolio size. For the everyday investor, he suggests a balanced approach, advocating for index funds while leaving room for more sophisticated strategies, such as sector funds, to make use of sector rotation principles.

A peek into Lynch’s bloodhound stock-picking style reveals an entirely empirical approach, akin to sniffing scents in every direction—across various industries and different products. “Beating the Street” provides a wealth of insights into the nuances of stock picking approaches and the mispricing opportunities available in diverse industries. Lynch’s warm, communicative tone makes this book not just an educational read but a journey into the fascinating world of investment through the eyes of a seasoned and successful investor.

1. How to Make Money in Stocks by William O’Neil

In this book, O’Neil introduces the CANSLIM Strategy (C = Current Quarterly Earnings Per Share, A = Annual Earnings Increases, N = New Products, New Management, New Highs, S = Supply and Demand, L = Leader or Laggard, I = Institutional Sponsorship, M = Market Direction). I am personally intrigued by this strategy because it combines the principles of both growth investing and technical analysis. The use of technical analysis to time stock purchases, is illustrated through various patterns to identify potential breakouts of a stock. O’Neil emphasizes the importance of buying stocks at the right time when they are poised for significant upward movement. Additionally, O’Neil stresses the significance of cutting losses short and letting profits run, advocating for a disciplined approach to risk management.

Personally, my bias towards this book stems from its proposal of creative indicators to identify market tops and bottoms, many of which can be easily implemented with some data analytics wizardry in Python. Examples include OTC volume as a percent of NYSE volume as a measure of speculative activity, the percentage of stocks in the daily new-high list (with a larger percentage of defensive stocks signaling a bear market), and the ratio of calls to put options as an indicator of crowd sentiment. An interesting market bottom indicator proposed in this book is the trend of cash and equivalent positions held by mutual funds, where the most cash is held by mutual funds during market bottoms. Another concept is the follow-through rallies, which is proposed as an indicator of early bull market, and the Python implementation of which is available in my GitHub project here.

The book also highlights the importance of investor psychology and the impact of emotions on decision-making. O’Neil discusses common pitfalls such as letting losses mount and succumbing to the fear of missing out (FOMO). Ultimately, O’Neil’s “How to Make Money in Stocks” serves as a valuable resource for intermediate investors, offering a strategic framework to navigate the complexities of the stock market.

Special Mentions

3. The Intelligent Investor by Benjamin Graham

“The Intelligent Investor,” authored by Warren Buffett’s mentor, Benjamin Graham, is widely recognized as the original guide to investing. However, some parts of the book may seem a bit old-school, such as its use of book value for evaluations, which may not be the best fit for today’s tech giants. Nevertheless, the book continues to offer valuable analytical insights. For instance, it suggests picking up closed-end funds that are trading lower than their Net Asset Value. In my personal experience, I observed that the Grayscale Bitcoin Trust, for example, was trading below its net asset value after the 2022 bear market, just as the book had suggested.

This book is a classic goldmine for creating a qualitive checklist to pick out good investments. The book advises looking for funds where managers have skin in the game – where they are the biggest shareholders of their own funds. When it comes to stocks, the book stresses the importance of investing in companies where the management has integrity, with the tone and substance of chairperson letters remaining consistent and not following Wall Street fads. Management accountability is crucial too, with CEOs comparing past predictions with present realities in earnings calls. Watch out for sky-high CEO pay – if it’s over $100 million, it’s a red flag. Plus, it’s all about managers focusing on running the company, not just showcasing it to the public. “The Intelligent Investor” might have an old-school vibe, but its timeless tips are a solid roadmap for navigating the ever-changing world of investments.

2. Antifragile by Nassim Nicholas Taleb

“Antifragile” by Nassim Nicholas Taleb is not an investing book per se; nevertheless, it provides valuable insights to complement an investor’s thinking. A real game-changer that flips our usual thinking about success and risk. Taleb introduces this cool concept called “antifragile,” suggesting that certain things, like ideas and careers (think writers), don’t just survive tough times – they actually get stronger. He gives examples, like how scandals can boost book sales, making careers like writing antifragile. On the flip side, robust careers, such as being a company CEO, can get totally wrecked by scandals.

Taleb points out that success can mess with our heads, making us psychologically fragile because we have more to lose – like bigger portfolios. That’s where the Stoic trick of “practicing poverty” comes in, a way to write away any wins (e.g. stock profits) and mentally brace ourselves for the ups and downs.

Following this antifragile vibe, Taleb brings in his Barbell & the Bimodal strategy. It’s about extremes – keeping 90% in super-safe stuff like cash and going wild with 10% in risky, high-reward investments. The idea is that the high-risk stuff is antifragile, potentially bringing in big rewards from unexpected events, like Bitcoin taking over should the US dollar fail. The book is a treasure trove of insights, helping us grasp the concept of antifragility and use it to our advantage.

1. Thinking, Fast and Slow by Daniel Kahneman

“Thinking, Fast and Slow” by Daniel Kahneman isn’t a finance book per se, but it’s a great book for understanding how our minds tick, why we sometimes make not-so-smart decisions, and the various biases that cloud our judgment. This insight is super handy for improving decision-making, especially when it comes to investments and personal finances. The book debunks the idea that being super smart automatically makes you immune to biases. Instead, it introduces a more relevant trait ‘rationality’, something that the reader can learn to develop by being aware of biases and decision making fallacies etc.

Kahneman shares a personal story about army candidate assessments, where observations from just a one-hour training session were continually used to predict a candidate’s future performance, despite the author being aware of the lack of correlation with actual results. It goes to show that biases can sneak into our choices, no matter what.

Shifting to the stock market, the book highlights that male traders often act on weird ideas more recklessly than their female counterparts, leading to poorer performance. There’s also a common tendency among investors to sell stocks that are doing well, despite studies showing that holding onto winners and cutting losers is a wiser long term move in the stock market.

“Thinking, Fast and Slow” suggests that it’s beneficial to blend intuition with facts, but only after examining the evidence. Particularly in unpredictable domains like the stock market, the book advises relying on statistics instead of solely relying on your instincts. For example, after conducting a thorough quantitative analysis, one can then intuitively assess the investment based on a qualitative checklist, perhaps inspired by a comprehensive reading of ‘The Intelligent Investor’. Ultimately, playing the long-term game with the stock market is about avoiding those “I should’ve done it differently” moments – either trust your gut without overthinking or thoroughly think things through to dodge regret down the road.