Personal Finance Education Series: (2) Recommended Books

I’ve read quite a few books on the topics of economics, finance & investing, but I thought it might be good to capture here my recommended books for someone who wants to get started learning more about personal finance & investing.

There are, of course, a lot of great books out there, but there is an endless supply of terrible ones. In general, you want to avoid the trendy, get-rich-quick, fashionable finance books, and instead focus on the ones that can give you the basic foundations to make your own judgements about personal finance & investing decisions. Once you have the basics down, then you can start absorbing the constant barrage of “flavor of the month” financial advice and investing books.

I’m going to run through these in roughly the order that I would recommend. I have a lot more on my shelf, but these are the books that in reflection really changed they way that I look at investing.

1. The Wall Street Journal Guide to Understanding Money & Investing
This book looks quite plain, and it’s only about 100 pages or so. But this book has a clear, visual and concise explanation of almost every important personal finance topic, everything from the basics of money and currency all the way to understanding stock options and derivatives. The great thing about this book is that it also can serve as a simple reference – a mini-encyclopedia of money & investing. The book is structured into easy to digest 2-page sections, and I highly recommend it as a basic entry into money & investing. Yes, I guarantee you that you already know some of the material covered in this book. But I also guarantee that you will learn something from it as well.

2. The Millionaire Next Door
Normally, this book would fall into my “trendy” disclaimer, but I do recommend that people read this book. True, it has chapters that are needlessly dry, reciting endless statistics about the habits and averages among the population of millionaires that were studied to make this book. But the most important thing is that this book emphasizes that a high income does not guarantee wealth, and that being wealthy is living below your means and the long term accumulation of assets. This book shatters a lot of myths that people have about the average millionaire in the United States, and it really highlights the basics of a healthy financial life.

3. A Random Walk Down Wall Street
Our first entry into the world of investing. This book is the absolute must-read to understand the predominant financial theory of the past thirty years: the stock market is efficient, and that efforts to beat the market, either through fundamental or technical analysis are futile. Personally, I believe that markets are not completely efficient due to the lack of rationality of either individuals or crowds. However, understanding efficient market theory is the cornerstone to understanding modern markets, so this book is basically a must-read. If it doesn’t convince you, at minimum, it will leave you with a strong bias against any “easy” way to make money off the stock market.

4. The Essays of Warren Buffett
Now that you’ve internalized efficient market theory, it’s time to listen to the words of probably the single greatest investor of the past fifty years, Warren Buffett. This book is a collection of his annual letters to shareholders. (In fact, you can now get all of his letters from 1977+ online!) Warren Buffett epitomizes why value investing works – his deep understanding of the finances of operating businesses allows him to selectively invest when he sees people selling dollar bills for fifty cents, to borrow a phrase. As a businessman myself, I also deeply appreciate the clarity of Buffett’s insights into what a financially outstanding business looks like, from a capital perspective, and his perspective on what makes a great manager and allocator of capital. I’ve read this collection at least three times.

5. Common Stocks & Uncommon Profits
Warren Buffett comes from the school of value investing, but his methodology and thinking has changed over the years to incorporate more flexible concepts of value than just book value or dividends. In this book, Philip Fisher explains the real fundamental basis for “growth stock” investing – recognizing that in some cases, the dominant factor for successful investing can be finding companies with outstanding growth potential. This may seem obvious to those of you out there who follow the technology industry, but I found this book crucial for my internal rationalization of the logic of both value and growth investing.

6. The Intelligent Investor
Warren Buffett stands on the shoulders of giants, and Ben Graham is the historical giant of value investing. This is the book that Buffett recommends to every investor, and it is fascinating from both a historical as well as financial perspective. When you read this book, you are stepping back in time, to a world before the Great Depression, when common stocks were still relatively new, and people bought them purely based on popularity, growth, or immediate payout. Graham was the one who first evangelized the idea that by looking at the core financials of a company – the assets and the dividends, you can make an informed judgement of the company’s value and the value of the stock.

7. Devil Take the Hindmost
This is not a personal finance book – it’s a history book. This book walks through almost all of the great financial bubbles since the 17th century. Fantastic for perspective on how markets get carried away. For me, the insight from this book was that there is a repeated theme in the history of bubbles. The combination of a new technology with a new innovation in finance leads to a combination of new capital and optimism that leads to an incredible rush and explosion of investment. This book will change your mind about how rational markets really are when crowds get a bit too excited.

8. When Genius Failed
Another history book, and a modern one at that. This is the story of the blow-up of Long Term Capital Management, the single most lauded hedge fund of the late 1990s. For those who have gotten deeply into the math and statistics behind the market, this book should be a wake up call. Any investment strategy can be broken, and any model based on the past will not predict the future once people in the market adapt to that new knowledge. There is a huge insight in this book that may seem esoteric, but it’s likely the biggest new insight into markets of the last decade: When you are a big enough investor, your own investment in the market creates a new correlation between investments that didn’t previously exist – the fact that you own all of them. Similar to quantum mechanics, the investor affects the markets they invest in. This simple truth explains why LTCM fell, and why there is a limit to strategies based on historical analysis of assets.

9. Against The Gods
This is one of my favorite books, bar none. It’s a stretch to say it’s about personal finance, but for me, it was a game changer. This is a history book, specifically about the history of the mathematics of statistics. It’s very interesting to note that just a few hundred years ago, no one understand the math of probability, and yet this is the branch of mathematics that dominates all modern science. Statistics is extremely counter-intuitive. Our brains are hard-wired to get it wrong. By walking through the history of how this branch of mathematics developed, I found I developed a new understanding of statistics, and a better sense of intuition around it.

American Idol, Season 6, Top 24 Spoilers

Don’t read if you don’t want to know…

Wakkaballs has it all on his blog, in this post.

In plain text:

TOP 24
1. Alaina Alexander
2. Antonella Barba
3. Antonio Javier “A.J.” Tabaldo
4. Blake Lewis
5. Brandon Rogers
6. Christopher “Chris” Richardson
7. Chris Sligh
8. Gina “Gigi” Glocksen
9. Haley Scarnato
10. Jared “J.L.” Cotter
11. Jason “Sundance” Head
12. Jordin Sparks
13. Lakeesha Jones
14. Leslie Hunt
15. Melinda Doolittle
16. Nicholas “Nick” Pedro
17. Paul “P.K.” Kim
18. Philip Joel “Phil” Stacey
19. Rudolpho “Rudy” Cardenas
20. Sabrina Sloan
21. Sanjaya Malakar
22. Stephanie Edwards
23. Amy (female)
24. Nicole (female)


How Rational Are We? The Dollar Coin vs. Dollar Bill Debate

A lot of big news coming out now about thew new Presidential $1 Dollar Coins, set to launch Thursday with the first coin in the series, George Washington. I’ve written this post about the program here. It’s one of the top posts for the entire blog.

I saw this article today on Yahoo News, and I thought it fit right in with the topic of this blog – namely how people can be predictably irrational.

Yahoo News/AP: No Plans to Replace Bill with Dollar Coin

The failure of previous iterations of the dollar coin are common knowledge. Every time it’s the same. Big fanfare, big launch, and then the US Mint produces a huge number of coins that sit in vaults forever because there is no demand for the coins.

An AP-Ipsos poll found that three-fourths of people surveyed oppose replacing the dollar bill, featuring George Washington, with a dollar coin. People are split evenly on the idea of having both a dollar bill and a dollar coin.

Fantastic. This would be a really interesting data point… if the costs of the dollar bill and the dollar coin were the same. It’s nice to know that if everything were equal, people prefer the bill to the coin. This isn’t surprising – I personally also prefer the bill to the coin, assuming both are freely accessible.

Here’s the problem, though.  Dollar bills wear out in 18 months.  Coins last approximately 30 years.  If you do the math on $1 units in circulation, you realize that we spend hundreds of millions of dollars, per year, extra, just to support the dollar bill.

Now granted, in a US budget of over $2 Trillion dollars, maybe the idea of worrying about a few hundred million is quaint.  But I guarantee you, the question would have come out differently if you had asked:

“Do you support a federal tax increase of several hundred million dollars to have a dollar bill instead of a dollar coin?”

Rephrase it how you’d like.  I know the “tax increase” word is dirty (it’s certainly a way to lose my vote).  Try, “how much would you pay extra to have a dollar bill instead of a dollar coin?”

That’s the real issue – we all know people prefer the bill.  That is obvious given the failures to launch a coin historically.  The question really is, how much is that preference worth?   In a world where both “cost the same” to the user, that preference will dominate.  But would people really pay extra for the convenience of the dollar, if that cost were visible?

I used to be a big dollar bill fan, but I’ve flipped around now that I’ve seen how successful the coin has been in Europe and Canada.  The path is easy:

  • Retire the $1 Bill
  • Create a $1 Coin
  • Create a $2 Coin

The third step is key, since it helps solve the issue of having too many coins as change for a $5 bill.

My only question now is whether or not we’ll ever really complete the conversion to a coin.  Right now, the race is between the coin and electronic payment.  At some point, cash just won’t matter enough to care.