Books have survived thousands of years, including the onslaught of radio, TV and internet. Books are still a key custodian of knowledge today.
There are more books written than we can ever read in our lifetime. Hence we need to be selective about what we read since our time is scarce and books are near abundance.
I hope to share with you 7 books that shaped my financial life. You may use it as a reference and see if they have the same impact to you.
I have to caution you that each of us is inspired by different books. What created an impact on me may not do the same for you. Also, many similar ideas are discussed in different books. So you may share the same learnings from other sources than those listed here.
Those who are interested in money should have read this. Over the years I found that I wasn’t the only few who had found the book impactful. Many others often cited this book being influential in their lives. The funny thing is that the book doesn’t offer any concrete ways to build wealth. In terms of utility it was near zero.
I guess the magic was where Kiyosaki used a story to illustrate the differences between how a rich person and a poor person view money. It was also this book that helped me decide that I want to be rich rather than poor or average because running the rat race for my entire life is miserable.
That was the biggest value.
The most memorable concept was his definition of an asset – it is one that puts money in your pocket. And you might thought that a property you bought is an asset. But it is a liability because it doesn’t put money in your pocket and in fact, it takes money out to pay for mortgage, property taxes and fixes.
“Rich people acquire assets. The poor and middle class acquire liabilities, but they think they are assets…
Once in their house, they have a new tax, called property tax. Then, they buy a new car, new furniture and new appliances to match their new house. All of a sudden, they wake up and their liabilities column is full of mortgage debt and credit-card debt.
They’re now trapped in the rat race. A child comes along. They work harder. The process repeats itself. More money and higher taxes, also called bracket creep, A credit card comes in the mail. They use it. It maxes out. A loan company calls and says their greatest “asset,” their home, has appreciated in value. The company offers a “bill consolidation” loan, because their credit is so good, and tells them the intelligent thing to do is clear off the high interest consumer debt by paying off their credit card. And besides, interest on their home is a tax deduction. They go for it, and pay off those high-interest credit cards. They breathe a sigh of relief. Their credit cards are paid off. They’ve now folded their consumer debt into their home mortgage. Their payments go down because they extend their debt over 30 years.”
Another popular book of all times. Using a parable to explain the concept of money in a Babylonian setting. Mystical and alluring. It also makes the reader feel the advice is timeless. The most memorable part was the seven cures for a lean purse:
The first cure: Start thy purse to fattening
For every ten coins thou placest within thy purse take out far use but nine. Thy purse will start to fatten at once and its increasing weight will feel good in thy hand and bring satisfaction to thy soul.
The second cure: Control thy expenditures
Budget thy expenses that thou mayest have coins to pay
for thy necessities, to pay for thy enjoyments and to gratify thy worthwhile desires without spending more than ninetenths of thy earnings.
The third cure: Make thy gold multiply
To put each coin to labouring that it may reproduce its kind
even as the flocks of the field and help bring to thee income, a stream of wealth that shall flow constantly into thy purse.
The fourth cure: Guard thy treasures from loss
Guard your treasure from loss by investing only where thy principal is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental. Consult with wise men. Secure the advice of those experienced in the profitable handling of gold. Let their wisdom protect thy treasure from unsafe investments.”
The fifth cure: Make of thy dwelling a profitable investment
Own thy own home.
The sixth cure: Insure a future income
Provide in advance for the needs of thy growing age and the protection of thy family.
The seventh cure: Increase thy ability to earn
To cultivate thy own powers, to study and become wiser, to become more skilful, to so act as to respect thyself.
There might be some readers who do not know that BigFatPurse was the name of the blog before we renamed it to Dr Wealth. The name was inspired by the core idea of offering cures to a lean purse. And the goal was to have a big fat purse.
Robert Allen may sound gimmicky at first because of his writing style but the book has its gems. The most impactful part of the book was when he shared the first stream of income, “Your First Stream: Success in the Stock Market— Investing for Total Idiots”. It was the first time that I was introduced to an index fund and the idea that majority of the fund managers couldn’t do better than the indices.
“Take 50 percent of your monthly savings and sock it away into your chosen index fund(s). Do this every month without fail for the rest of your life. If you’ll do this—even if you do nothing else I describe in this book—then in due time the floodgates of prosperity will pour into your life. The goal of
the following chapters is to open those floodgates much sooner. But if all of your short-term “hare-brained” schemes come to naught, this “tortoise” strategy will have you slowly giggling yourself toward a prosperous future.”
The most important reason why this book is impactful was because it made me took action after reading this part:
“Index funds, dollar cost averaging, long-term investing. . . . You’ve probably heard all of this before. But have you done anything about it?
Stop reading right now. Pick up the phone and call one of the index funds listed on page 55. If you prefer to do your own research, go to one of the mutual fund tracking services (e.g., www.morningstar.com) and look up all of the index funds that are available through various fund families.
This shouldn’t take you more than 30 minutes. Throw a dart and pick one.
Call the toll-free number of the fund you selected and have X dollars automatically deducted from your bank account every single month for the rest of your life. (Relax, you can always change your mind.)
Most likely, the company has account representatives available 24 hours a day . . . which means that you have no more excuses. You can do it right now. Operators are standing by. Don’t even wait to finish reading this sentence. Stop and do it now.”
The problem was that the book was meant for Americans and I need to find an equivalent in Singapore. It was 2007 when I read this book whereby index fund was pretty much unheard of locally. I couldn’t find a monthly investment plan for S&P 500 Index Fund. But I manage to stumble upon POEMS offering one for STI ETF. That works too and I went to the nearest branch and started an account right away.
I was still in university when I came across the book. It was pretty thick but nonetheless easy to read with many stories and quotes of great traders adopting the trend following approach. Even though the nuances of each strategy were different, the main principle of not guessing the direction of the market but simply following the trend to make money was ingrained in all these traders. I was intrigued by the simplicity and soundness of it.
“That strategy is known as trend following. Author Van Tharp has described it succinctly: “Let’s break down the term ‘trend following’ into its components. The first part is ‘trend.’ Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices … ‘following’ is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then ‘follow’ it.”
The most alluring story of all was about the turtles – a group of strangers with no finance background turned out to be super traders making millions from the markets.
“In 1983, he made a bet with his partner William Eckhardt.
Dennis believed that trading could be taught. Eckhardt belonged to the “you’re born with it or you’re not” camp. They decided to experiment by seeing whether they could teach novices successful trading. Twenty-plus students were accepted into two separate training programs. Dennis called his students “Turtles,” after visiting a turtle-breeding farm in Singapore.
How did it start? Dennis ran classified ads saying “Trader Wanted’’ and was immediately overwhelmed by some 1,000 queries from would-be traders. He picked 20+ novices, trained them for two weeks, and then gave them money to trade for his firm. His turtle traders included two professional gamblers, a fantasy-game designer, an accountant, and a juggler. Jerry Parker, the former accountant who now manages more than $1 billion, was one of several who went on to become top money managers.”
It was the book that led me to really learn about the markets and made me attend my first ever paid investment course on trend following.
I was so into trading in my initial years that I did an interview project with other Singapore traders and published a book at the end of it.
Harry Browne was not any financial advisor because he eventually ran for the U.S. presidential election. He devised the Permanent Portfolio strategy that is still in use today. It was a simpler version of a risk parity portfolio. A retail investor would have no problem implementing the former. Here are the essence:
“Your portfolio needs to respond well only to those broad movements. And they fit into four general categories:
Prosperity: A period during which living standards are rising, the economy is growing, business is thriving, interest rates usually are falling, and unemployment is declining.
Inflation: A period when consumer prices generally are rising. They might be rising moderately (an inflation rate of 6% or so), rapidly (10% to 20% or so, as in the late 1970s), or at a runaway rate (25% or more).
Tight money or recession: A period during which the growth of the supply of money in circulation slows down. This leaves people with less cash than they expected to have, which usually causes a recession — a period of poor economic conditions.
Deflation: The opposite of inflation. Consumer prices decline and the purchasing power of money grows. In the past, deflation has usually triggered a depression — a prolonged period of very bad economic conditions, as in the 1930s.
Stocks take advantage of prosperity. They tend to do poorly during periods of inflation, deflation, and tight money, but over time those periods don’t undo the gains that stocks achieve during periods of prosperity.
Bonds also take advantage of prosperity. In addition, they profit when interest rates collapse during a deflation. You should expect bonds to do poorly during times of inflation and tight money.
Gold not only does well during times of intense inflation, it does very well. In the 1970s, gold rose 20 times over as the inflation rate soared to its peak of 15% in 1980. Gold generally does poorly during times of prosperity, tight money, and deflation.
Cash is most important during a period of tight money. Not only is it a liquid asset that can give you purchasing power when your income and investments might be ailing, but the rise in interest rates increases the return on your dollars. Cash also becomes more valuable during a deflation as prices fall. Cash is essentially neutral during a time of prosperity, and it is a loser during times of inflation.”
It was so influential that I didn’t just implement it with real money, I went on to write a Singapore version of Permanent Portfolio.
This book is as short and sweet as Harry Browne’s Fail-Safe Investing. You can probably finish it in one sitting. Simple doesn’t mean shallow. Greenblatt is a famous hedge fund manager grounded in value investing principles.
Many investors adore Warren Buffett but found it hard to really invest like him. This is because he doesn’t give specifics about his investment approach. Joel Greenblatt created the Magic Formula, to mimic the principles of Buffett’s investment approach but with clear rules.
There were only two selection criteria:
“Buying a share of a good business is better than buying a share of a bad business. One way to do this is to purchase a business that can invest its own money at high rates of return rather than purchasing a business that can only invest at lower ones. In other words, businesses that earn a high return on capital are better than businesses that earn a low return on capital.
Paying a bargain price when you purchase a share in a business is a good thing. One way to do this is to purchase a business that earns more relative to the price you are paying rather than less. In other words, a higher earnings yield is better than a lower one.”
He called this method The Magic Formula.
“The magic formula chooses companies through a ranking system. Those companies that have both a high return on capital and a high earnings yield are the ones that the formula ranks as best. Put more simply, the formula is systematically helping us find above-average companies that we can buy at below-average prices.”
In short, buy the top 30 stocks by their return on capital and earnings yields ranking.
The main lesson from this book was that a quantitative and mechanical strategy can have superior returns. But few were able to subject themselves to a set of rules. It just felt demeaning and boring. We are our worst enemies in the markets.
Greenblatt subsequently wrote a piece (Adding Your Two Cents May Cost You A Lot Over The Long-Term) precisely elaborating on this issue.
“Formula Investing provides two choices for retail clients to invest in U.S. stocks, either through what we call a “self-managed” account or through a “professionally managed” account. A self-managed account allows clients to make a number of their own choices about which top ranked stocks to buy or sell and when to make these trades. Professionally managed accounts follow a systematic process that buys and sells top ranked stocks with trades scheduled at predetermined intervals. During the two year period under study, both account types chose from the same list of top ranked stocks based on the formulas described in The Little Book that Beats the Market.
[The] self-managed accounts, where clients could choose their own stocks from the pre-approved list and then follow (or not) our guidelines for trading the stocks at fixed intervals didn’t do too badly. A compilation of all self-managed accounts for the two year period showed a cumulative return of 59.4% after all expenses. Pretty darn good, right? Unfortunately, the S&P 500 during the same period was actually up 62.7%.
“Hmmm….that’s interesting”, you say (or I’ll say it for you, it works either way), “so how did the ‘professionally managed’ accounts do during the same period?” Well, a compilation of all the “professionally managed” accounts earned 84.1% after all expenses over the same two years, beating the “self managed” by almost 25% (and the S&P by well over 20%). For just a two year period, that’s a huge difference! It’s especially huge since both “self-managed” and “professionally managed” chose investments from the same list of stocks and supposedly followed the same basic game plan.
Let’s put it another way: on average the people who “self-managed” their accounts took a winning system and used their judgment to unintentionally eliminate all the outperformance and then some!
Hence, I became more quant when it comes to stock picking and having rules to guide my investing decisions rather than leave it to pure free play. I learned not to trust myself too much.
Little do people know that Dr Michael is the founder of shareinvestor.com. Probably even fewer people know about a great investing book he wrote, Your First Million: Making it in Stocks.
Most books are written by Americans and this is a rare gem written for a Singapore context.
This book imprinted a significant idea in me:
“This means that for every dollar that I invest in these stocks, the company must have at least a dollar in the bank and ideally, the company does not have any borrowings. This also means that the business of the company comes to me as the investor for free. My next assessment is whether this ‘free’ business is sound and is not bleeding too much cash. To do that, I look at the company’s cashflow statement. I am fine if the company declares large losses, so long as these losses are non-cash related. The key is to find ‘free’ businesses that will survive the downturn, so that when the economy turns around, these businesses can regain their former enviable positions during good times.”
Wall Street tells us it is ok to pay for future earnings. But Dr Michael Leong, echoing Benjamin Graham, suggested to buy companies below the value of the good assets. By doing so, the future earnings are technically free to the investor.
This was my first introduction to deep value investing and became a core investment approach till today.
Unfortunately he lost his battle against cancer and passed on years ago. I wrote an unofficial eulogy previously.
Forge your own path
My investment journey might have some overlaps with others’ but it is unique by itself.
How I have figured my way does not mean the same path would work for you. You have to forge your own path. Sometimes our paths may cross and we may help each other or walk in the same direction together. We all learn from one another and no man is an island.