When you start getting interested in investing, sometimes it can be difficult to figure out what to do first. You don’t really know what you need to know or where to find what you need to know. If you have a short attention span, then SprinkleBit’s investing education portal can provide a pretty comprehensive starting point. It will give you the basics that you need to understand what investing is all about.
But inevitably, not every investing nuance can be fully explained without a little extra reading. So if you are not afraid to sit down with a good book, here are five essential books for the beginning investor, in the order that you should read them.
You will probably note right away the heavy bias towards company-level analysis and long-term investing that is the general theme behind this reading list. The content is a very basic summary of the tools and processes that I use to evaluate investments. These five books will have everything that you need to know to start doing basic fundamental analysis all on your own.
Why These Five Books?
Reducing my investment library down to five books was not easy. After sorting through the content, I eliminated the overlapping topics by selecting books that were relatively short (less than 250 pages), interesting, and easy to read. In most cases, they could also be “read” simply by skipping to the end of each chapter and scanning a bulleted summary.
It doesn’t get much easier than that.
Why this particular order?
The short explanation for why I chose this order is because it starts with the big ideas and then fills in the details. You might have also noticed that most of these books are somehow related to Warren Buffett’s investment philosophy. This is somewhat misleading because he didn’t come up with any of these ideas on his own. His investment model is really just a combination of great ideas that were stolen from other people. It is much easier to use what already works than try to come up with a new system.
1. The Warren Buffett Way
The Warren Buffett Way, Second Editionis where you should start. It is especially important for fundamental analysis. It gives you the perspective of how to see a stock as a business. And when you analyze a stock, you must look at it in the same way that a business owner would look at a business. This includes the company’s competitive position, its financial position, its management, and ultimately its "business" value. According to this book, you should make your investment when the current price is less than the value. Simple to understand, but difficult to execute.
2. The Warren Buffett Portfolio
When you understand the basic ideas that lead to a successful company and a profitable investment, the next step is placing your bets. The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy provides a wonderful explanation about how to do this, and advocates putting most of your money into your best ideas. It also compares this betting strategy to other strategies you might already be familiar with.
Having a general idea of what to look for and knowing how to bet is nice, but those are big-picture ideas.
The next three books give you a more refined way of making your investment decisions.
3. The Little Book That Builds Wealth
The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments (Little Books. Big Profits) focuses on a company’s competitive position. It outlines a number of different ways that firms can build a competitive advantage, and describes which industries are more likely to have competitively stable companies. It also offers a way to put a value on this qualitative measure. A company with a good competitive position is almost always going to be more valuable in the long run.
It should be noted, However, that the book also mentions Lehmen Brothers and other failed investment banks as examples of a good competitive advantage, so it should be obvious that a competitive advantage is not very useful if the company doesn't also have financial stability.
5. Why Smart People Make Big Money Mistakes and How to Correct Them
The last book you should read is probably the most important. Knowing what you should look for and knowing how to invest is important for investment success, but sometimes there are hidden psychological factors. Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the Life-Changing Science of Behavioral Economics is a guide on how to overcome these hidden factors. It will give you a way to see if your investment decisions are based on a hidden bias or based on facts. This is an important difference because sometimes your entire investment analysis can be completely thrown away if you start with the wrong assumptions.
Beyond these five books, there are a number of other excellent investing primers that you can use, such as the SprinkleBit University and investing social network. SprinkleBit University has a series of easy-to-read chapters to help you learn investing terminology so that you can start speaking the "language" of investing in no time. You can go at your own pace, and track your progress. It's highly interactive, and is a great place to start your investing education.
But if you're looking for starters to begin your Investing library, these 5 industry primers are where you can get the most value from the smallest number of pages. It is the best place to start. Good luck!
Andrew holds a Master's in Economics from Kansas State University with a focus on the Technology Sector. He enjoys writing about value investing and thinks learning new investment strategies is more useful than hot stock tips. He considers fundamental analysis to be the key to making great long-term investment decisions. You can follow his SprinkleBit portfolio here.