Smart reads for the smart investor

May 5, 2006

Whether you're in the know or want to know, our best-of-the-bestpicks will help you maximize your money.

They're everywhere. Pundits claiming to know the way to invest are ubiquitous-shouting at you from the television or the radio, hawking the latest tome with all the answers to guide you to riches. So how do you know which books are truly worth your precious time and which will best serve as doorstops?

We asked some of the smartest financial planners and personal-finance columnists: "If you could recommend only one book on investing, which would it be?" To be sure, there were lots of different replies-everyone has his favorites-but the one that popped up repeatedly as the most valuable yet readable was . . .

Winning the Loser's Game Timeless Strategies for Successful Investingby Charles D. Ellis (McGraw-Hill, 2002)

So exactly what is the loser's game? Essentially, one loses by trying to outdo the market, i.e., the indexes that track it, with the S&P 500 being the most frequently cited benchmark. Trade on hot stock tips or buy speculative investments that promise quick rewards, and you lose. Allow your emotions to lead the way, you lose. Try to time the market, you lose. Make investment choices for the purpose of reaping tax benefits, you lose.

Ellis emphasizes that beating the market shouldn't be your goal, especially since it's well established that active stock trading consistently underperforms the market indexes. If pros who spend each workday poring over research reports can't regularly pick winners that top the market, what shot does an amateur have? Ellis explains how the markets work and how the odds of beating it are stacked against you. Information that you think is important when trading has already been factored into the market price by pros who actively trade all the time. You may be able to have a winner now and then, but consistently? No way.

So, Ellis says, if you can't beat the market, buy it! That means index, or passive, investing, is the way to win in the long run. Yet it doesn't necessarily dispense with the need for an investment adviser, he notes; in fact, an adviser serves two important functions. First, he helps you allocate your assets among different types and categories of stocks-large- and small-caps, growth and value, international, etc. Second, he then helps you implement your plan or, as Ellis terms it, your policy. Although you win by capitalizing on the market's long-term trends, staying committed to that principle isn't always simple, because investors are constantly bombarded with news of investments to buy and sell.

"In the short run," says Ellis, "the stock market is fascinating and deceptive. In the long run, it's almost boringly predictable." So while your portfolio and its returns are plodding along, the temptation to juice it up is sometimes almost un-bearable. Adhering to your investment objectives is, Ellis says, the antidote to panic when the market is taking a dip, or a dive, and your adviser can help you stay on track. That said, he stresses that you must never relinquish responsibility or forget that you're your own best manager.

Ellis also explains how to leverage the power of compounding and protect against down cycles as well as an investor's greatest adversary: inflation, and its corrosive influence on purchasing power. He notes that the key to investment success isn't necessarily to do more things right; it's all about doing fewer things wrong. He expands on these and other simple-yet-provocative strategies for investing, gifting, and estate planning.