A while back, I assembled two personal finance reading lists—what I called 101 and 201 level titles. But time doesn’t stand still. Below is a list of newer books, along with a few classics that didn’t fit on the earlier lists. They’re organized into three categories: retirement planning, investing and behavioral finance.
Can I Retire? by Mike Piper, CPA – There’s no shortage of retirement books on the market. But if you want a straightforward guide that covers the most critical topics in an easy-to-read format, there’s no better starting point than this. The author is a well known CPA, writer and speaker. And though the book is short—just 100 pages—it’s not at all short on valuable strategies for retirees. It includes, for example, sections on Roth conversions, Social Security and even annuities—“the good kind,” in Piper’s words.
The New Retirement Savings Time Bomb by Ed Slott, CPA – If Can I Retire? is like a field guide to retirement, this book is more like an encyclopedia. Will you read it cover to cover? It’s unlikely—but if your financial situation has even the least bit of complexity, this is a book you’ll definitely want on your shelf.
The Innovator’s Dilemma by Clayton Christensen – Why do I recommend index funds over individual stocks? There are a lot of reasons, but this book addresses the one that is maybe the most counterintuitive: It explains how companies that look unstoppable—like Kodak and Sears—can descend into bankruptcy after years of industry dominance. But this isn’t a history book. It’s a framework for understanding the lifecycle of businesses. And for investors, it’s a critical idea to understand, especially if you own stock in any of today’s seemingly unstoppable companies.
How a Second Grader Beats Wall Street by Allan Roth – As its title suggests, the premise of this book is that you don’t need an advanced degree to be a successful investor. To prove his point, investment advisor Allan Roth worked with his eight-year-old son, Kevin, to build a portfolio. It wasn’t complicated—just three funds. But lo and behold, it did admirably well. And that was precisely Roth’s point. His view, which I share, is that Wall Street tends to overcomplicate investments. And yet, if you take the opposite approach, favoring simplicity, you’ll often end up with better results.
The Automatic Millionaire by David Bach – If you’ve heard the term “the Latte Factor,” this is where it comes from. But because of it, the author has received his fair share of criticism. If you’re not familiar with it, the Latte Factor suggests that all you need to do to become a millionaire is to cut out trips to Starbucks and instead save an extra $5 a day. This idea has been criticized because it sounds too simple. The reality, though, is that Bach’s math is correct. Sure, he does assume 10% annual returns—consistent with an all-stock portfolio. Maybe that’s an aggressive assumption. But his overall point is valid: No matter what stage you’re at in your financial life—even if money is tight—you can afford to save at least a few dollars. And if you do that for enough years, you’ll make more progress than you might have guessed.
America’s Bank by Roger Lowenstein – During the Great Depression, stocks fell about 90%. In the years since, we haven’t seen a drop nearly that bad. But it’s fair to ask whether it could happen again. Some commentators argue that it’s possible. Or rather, they see no reason why it couldn’t happen. But others point to the Fed and argue that today our central bank would step in—much like it did last year. And thus, things couldn’t get as bad as they did during the Depression. No one can say for sure, but it’s a good question to consider. To better understand the Federal Reserve, and its origins, this book is an excellent starting point.
The final entry in this group is actually a group of four titles – What do they have in common? They all chronicle instances of outstanding investment success by active managers. The Greatest Trade Ever by Gregory Zuckerman tells the story of John Paulson, the hedge fund manager who successfully shorted subprime mortgage bonds in the 2000s. The Man Who Solved the Market, also by Zuckerman, traces the history of James Simons and his quantitative hedge fund firm, Renaissance Technologies. You Can Be a Stock Market Genius by Joel Greenblatt, describes the off-the-beaten-path techniques this hedge fund manager used to generate outsized returns at his firm, Gotham Capital. And in Margin of Safety, hedge fund manager Seth Klarman describes his approach to value investing. Why am I recommending these books by and about hedge funds, when they’re precisely the kinds of high-cost, actively-managed investments I advise against? These stories are important to read, in my opinion, because they illustrate just how hard it is to find extraordinary active managers. I don’t doubt that you can make a fortune in an actively-managed fund, but skill like this is exceedingly rare. That makes it exceedingly difficult for individual investors to identify—and to access—funds like this. And because it’s so difficult, that’s why I recommend the alternative, which is to avoid active management altogether.
Noise by Daniel Kahneman, Olivier Sibony and Cass Sunstein – Thanks in large part to the work of Daniel Kahneman, most investors are familiar with the idea of behavioral biases and how they can affect investment decisions. This book breaks new ground, describing another type of flaw in human judgment: The authors call it noise. The difference between a bias and noise is that biases cause us to make the same error consistently. For example, the recency bias causes investors to consistently put more weight on the events that have occurred most recently. Meanwhile, noise causes us to make errors randomly. The authors found noise among experts in a variety of professions, ranging from loan officers to insurance adjusters to cardiac surgeons. In all these cases, experts who should have reached the same conclusion on seemingly objective questions ended up frequently disagreeing with each other. And further, the authors found that people are often inconsistent with their own earlier judgments. As with other decision-making pitfalls, there’s no simple fix, though the authors do offer some suggestions. But simply being aware of this category of error in human judgment can help you avoid it.
Narrative Economics by Robert Shiller – Investing, as the saying goes, is simple but not easy. One reason: It’s highly susceptible to storytelling. This applies both when the market is riding high and when it’s doing poorly. Veteran investment manager Jeremy Grantham put it well: In March 2009, when everything looked bleak, he urged investors to avoid doomsayers, who “will start to predict the end of the world, armed with plenty of terrifying and accurate data…” That’s precisely the challenge for investors: There’s so much data out there that any informed person could construct virtually any argument—either for or against—virtually any investment. This book is somewhat academic and not an easy read, but it’s an important idea.