Advanced Investing

What I plan to do here is to present a detailed list of the best books and letters I have read on investing and which in my opinion all investors should read. If you are looking for one book to cover it all then you’re going to be disappointed, you might find one but it will not give you enough detail or information for you to know all you need to know to start investing wisely.

Learn to invest

If you read all the books listed on this page it will take quite a while, but in my eyes, you are ready to get stuck into the world of investing and aren’t at too much risk of losing the shirt on your back.

You’ll notice there are a lot of books, and if you buy them all then you’ll have to spend quite a bit of money. My first recommendation is: find a good library! If they don’t have all these books, then you need to either find another free source of them, or think of this as your first investment – in yourself. I don’t list a book here unless it teaches something which I view as essential to investing, so every book is worth the money as it can prevent you from making a mistake that could lose you thousands. Or it could help you find that one gem that could make you thousands! This is an investment in your education and you will more likely than not make back whatever you spend on these books.

I have learnt a great deal about investing from simply reading books and doing research online. It has been a lot of reading but every time I read something new I expand my knowledge and become a better investor. The reading list below is set out in a specific order to ensure you will have the necessary understanding as you progress to more advanced topics. There is nothing worse than reading a book you don’t understand, even if it’s a great book you are just wasting your time.

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1. Investment Philosophy

The best place to start is to get into the right mindset and learn a proper investment philosophy. To do this I am going to recommend a book anyone familiar with value investing has heard of – The Intelligent Investor by Ben Graham. The links below are to both the US and UK Amazon pages.

Now despite being heavily recommended, I don’t consider this book a thrilling read. In fact some of the chapters you can just skim over. Chapters 1, 8 and 20 are the most important, make sure to read them and understand them. The other chapters are useful and you should read them if your new to investing. If you already have some background knowledge then I suggest skimming over them to pick out the useful parts. This book isn’t going to teach you how to invest, but it will teach you the right mindset.

Rule number 1 in investing: Don’t lose money
Rule number 2 in investing: Don’t forget the first rule

The right philosophy is one of capital preservation and being conservative. Always think of the downside and don’t gamble on ‘what if’. If you take care of the downside then the upside will take care of itself.

2. Financial Statements

Investing is all about financial statements, and books on investing will be constantly referring to things like ‘gross profits’, ‘EBITDA’ and ‘revenue’ so it’s important to learn about these before diving into other books. You may be familiar with some of these terms but you need to know your way around financial statements like the back of your hand. Before you start reading the books below I suggest you take a look through the financial statements of a random company, here is one, page 79 (as numbered on the pages) is where they start.

One of the best books for a beginner that I read was Warren Buffett and the Interpretation of Financial Statements by Mary Buffett.

I don’t regard her as an authority on investing by any means but the book is very good at giving a simple overview and also how to interpret things like Gross Margin differently from Operating Margin.

Once this has given you a good summary knowledge it is time to get stuck into something more meaty. The Interpretation of Financial Statements by Ben Graham goes into a lot more detail.

For anyone outside the U.S. most of the entries in the financial reporting are the same in other countries with only a couple of differences so it is still a good read. I am not a US based investor but learnt most of what I know from US books.

There is one other book to read on financial statements but after the above book you will want something a lot more interesting first! So let’s move onto the topic of actually investing.

3. Valuing Businesses in Theory

One book which I read, but I do not recommend you read, is The Theory of Investment Value. In it John Williams states that the value of an investment is the sum of future cash flows, discounted by an appropriate discount rate. Go and read the Wikipedia page on DCF.

The premise behind this is that receiving $100 today is not the same as receiving $100 next year (even ignoring inflation). That’s because if I get $100 today I can put it in a government bond and have slightly more in a years time.

The DCF is one of the primary methods of valuing businesses and the best book I have read that gives a good explanation and example of using it in a value investment context is Seth Klarman’s Margin of Safety.

Although I’m recommending this book, it is out of print and very expensive. There is a pdf version floating around the web and not too hard to find, I won’t link to it however as I am not sure how legal it is.

This next book is one of my favourites and is packed full of examples of how a lot of money can be earned from special situations. It is You Can Be a Stock Market Genius by Joel Greenblatt.

If you only pick one book off this page, it should be this one. Greenblatt gives so many examples of the kind of deeply undervalued situations he invested in during his career that you should come away itching to get started yourself.

4. Valuing businesses in practice

With all the theory out of the way, it is a good time to see how some of it is done in practice. The best place to start here is with none other than Warren Buffett himself. In his early days he ran an investment partnership which delivered stellar returns. You can read his regular letters to investors here, which gives you a good idea of the kind of investments he was making and the rationale behind them.

I would then recommend reading his reports to shareholders of Berkshire Hathaway, but the nuggets of gold are buried within a lot of operating information about Berkshire itself. Luckily someone had the great idea of extracting his wisdom and publishing it.

5. Qualitative features

Up to now, you’ll have read a lot about number crunching and earnings, but little about the qualitative features of investing. Buffett in his Berkshire letters talks a little of it, things like Coca Cola trade for far above book value for a good reason, they consistently earn great returns with little chance it will substantially fall. Compare that to a random company earning a 50% return on equity with little competition in the market. That may be valued far above book value, but if barriers to entry in the market are low, competition will soon enter and shrink that 50% return on equity closer to something like 10%. All of a sudden the investment lost money.

That is why durable competitive advantage is important when we are valuing businesses based on cash flows. This next book is very old, but has stood the test of time well. It is far more focussed on finding strong businesses and should help you identify a sustainable competitive position. It is Common Stocks and Uncommon Profits.

Chapter 3 is perhaps the most important in here. Instead of focusing on the financials it focuses on the business side which is still important in value investing.

6. Avoiding Disaster

I said I would come back to financial statements and I have saved the most important to last. All too often in the investing world, companies manipulate their financial statements to report better results than are actually occurring. The trick to being a good investor is knowing how to spot these. There are two books I strongly recommend reading before trying to pick stocks on your own. These both show how companies can manipulate financial statements, and more importantly, how you as an investor can spot it!


7. Practice, practice, practice

Finally, and probably the most important of all, you need to use these skills and actually invest your own money, follow companies and learn about different industries. I have written lots of series on ‘How to value ______ companies‘, read them and then learn about the companies in those industries.  But no amount of reading is going to compensate for actually doing the work and gaining experience. The longer you invest the more experience and knowledge you gain, all I have done here is to give you as good a starting point as any in which to start your investing career.

You will make mistakes but following the principles in these books these should hopefully not be too costly. Remember the number 1 rule: Don’t lose money.


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