Investment Consult: Four books every investor should read

October 22, 2001

The wisdom of these experts can help you make smart moves and avoid mistakes.

 

Investment Consult

Four books every investor should read

The wisdom of these experts can help you make smart moves and avoid mistakes.

Lewis J. Altfest, PhD, CFA, CFP

When clients ask me to recommend books about investing, I usually name four titles. Two cover the basics with solid, practical advice, while the other two give you the winning techniques and mindsets of a pair of investing legends.

Let's look at the "tutorials" first. Making the Most of Your Money, by Newsweek contributor Jane Bryant Quinn (Simon & Schuster, 1997), is a highly readable, 1,066-page tome that tells you virtually everything you need to know about investing and personal finance, from creating a spending plan to buying a second home. Her chapter on mutual funds defines the types available and simplifies the selection process; her "12-Step Program for Picking Mutual Funds" is a must-read.

Besides the in-depth discussion of funds, you'll find a chapter on bonds followed by one called "Some Absolutely Awful Investments," which include limited partnerships, unit investment trusts, penny stocks, commodities, and gold. Here, Quinn both teaches and entertains—often simultaneously, as in this statement: "A limited partner is best defined as someone who gets a limited amount of his or her money back (if that)."

The second bestseller I recommend is Get A Financial Life: Personal Finance in Your Twenties and Thirties (Fireside, 2000). Author Beth Kobliner is a former staff writer for Money magazine. Although the book's subtitle makes no secret of the author's target audience, there's plenty here for older, savvier investors, too. For instance, anyone can take advantage of Kobliner's tips for using the Internet to find the best deals on auto loans, mortgages, and credit cards.

Using a slightly breezier style and far fewer pages than Quinn, Kobliner, a great believer in index funds, makes a convincing case for them. The chapters that cover financial planning (paying down debt, the importance of saving, etc.) should prove particularly valuable if you're just starting out in investing.

The second pair of books I'd suggest you read are treatises on the two most solid styles of investing, value and growth. The first, Robert G. Hagstrom Jr.'s The Warren Buffett Way (John Wiley & Sons, 1994), allows you to walk a mile in the famous billionaire's shoes and explains the principles and practices of value investing, which has made Buffett so successful.

Hagstrom's analysis of how Buffett picks stocks is illuminating. In short, Buffett buys solid companies at reasonable prices (he eschews stocks that have high price-to-earnings ratios) and holds these stocks as long as their outlook remains favorable. This strategy usually produces a portfolio full of what many investors would consider boring stocks: companies in recession-resistant industries, such as consumer staples. Buffett avoids companies whose products and business plans he doesn't understand, or that lack an established track record and position in their industries. This explains why he didn't—wisely, as it turned out—hop on the Internet bandwagon during the 1990s.

Buffett, moreover, pays little attention to diversification and concentrates on the individual stocks he believes in.

If Buffett is the Tiger Woods of value investing, Peter Lynch is growth investing's Michael Jordan. Lynch was the third manager of Fidelity Magellan, currently the largest mutual fund in the country, with $79 billion in assets and now closed to new investors. His record over 13 years, from 1977 to 1990, was spectacular. Perhaps most impressive was that he continued to succeed as fund assets exploded—Magellan grew from $22 million to $1.6 billion in Lynch's first six years—and he had to find more and more winning stocks, to avoid creating too big a position in any one company.

His book, One Up on Wall Street (Fireside, 2000), indicates that his investment style is in some ways similar to Buffett's. For example, both men prefer to buy and hold companies with strong franchises and above-average growth rates. Each is a big believer in avoiding groupthink and fad investments or industries. They differ in that Lynch, unlike Buffett, won't wait for a stock to fall out of favor before he buys it. And he won't necessarily rule out a technology company if he understands what the firm does and how it makes money.

Lynch's strength, therefore, has always been in identifying tomorrow's winners. Many times, as his book explains, he has been able to do this by buying companies whose products he admired. He suggests you can be successful by adopting the same approach. In other words, if you like a certain brand of shoes or automobile, an airline, or a new drug that your patients are doing well on, read the company's annual report.

Check, too, he says, to see whether management is buying its own stock, or the company is buying back its own shares. Those are strong signs that its future is bright.

Don't expect these books to turn you into the next Warren Buffett or Peter Lynch. Read them to get a broad-based knowledge of personal finance, and to get yourself into the habit of asking the right questions about potential investments. When it comes to making money, education and discipline help stack the deck in your favor.

The author, a fee-only financial planner, is president of L.J. Altfest & Co. (www.altfest.com ), a financial and investment advisory firm in New York City. This column appears every other issue. If you have a comment, or a topic you'd like to see covered here, please submit it to Investment Consult, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742. You may also send a fax to 201-722-2688 or e-mail to meinvestment@medec.com.

 

Lewis Altfest. Investment Consult: Four books every investor should read. Medical Economics 2001;20:15.

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