In these crazy times, all one could ask for is sanity. Yes, sanity – a clear mind, free of noise, to with which to face the insanity that the volatile, noisy stock market thrusts upon us. We find ourselves glued to our computer screens or CNBC, waiting to find out what the Dow’s next tick is going to be. What do we get out of it? Only a headache and wasted time.
Here is my advice: read. Read books that will bring you sanity, the ones that will snap you back into the mindset of investor and out of being a nervous observer of the daily stock market melodrama. The following books are excellent choices and offer plenty of sanity and sage advice.
Economics
Politicians, God rest their souls, always try to appeal to the lowest common denominator. They try to “protect” us from evildoers by insisting on minimum-wage laws or rent controls, or by threatening windfall taxes on oil companies. They paint themselves as heroes fighting for the little guy against the evil-doers. All they are doing, however, is feeding on the economic illiteracy of the average Joe. Given this reality, the following books should be required reading in high schools and colleges: Basic Economics
Atlas Shrugged
Ayn Rand immigrated to the US from Russia in 1925 when she was 20, when her father’s business was seized by the Russian government, ostensibly for the greater good. I left Russia 66 years later, a decade after Rand died, and my family suffered a lot less than hers. However, we (as well as millions of thinking Russians) both saw the ugly consequences of socialism.
In Atlas Shrugged,
According to Jennifer Burns, who published Ayn Rand’s biography, Rand’s popularity surges during every political cycle when the merits of our political system are being debated. Winston Churchill said it well: “Capitalism is the worst of all possible economic systems, with the exception of all the others.” I hope we only see the alternative system to capitalism – a compassionate socialism that is often offered to us as an alternative to our dispassionate system – only in the pages of Atlas Shrugged.
You may think Alan Greenspan had a hand in today’s crisis. I know I do. He took interest rates down to incredibly low levels and kept them there for too long, causing the real estate bubble. He also did not think Wall Street needed regulation. But that doesn’t make his book, The Age of Turbulence
Stock Market History
I’ve really enjoyed reading Stocks for the Long Run
It is well written and provides a good overview of the performance of different asset classes over last two centuries. But the book needs a different title, maybe something like “Stocks for the Really, Really… Really Long Run.” That way, it would not lure investors into a false sense of security when it comes to stocks. Probably unintentionally, Siegel’s book preaches that the stock market is always a buy, no matter what valuations are, and that a 7% real rate of return is a birthright for stock investors, no matter if the stock market is extremely cheap or ridiculously expensive. This is very true if your time horizon is 30 years or you plan to live forever. It is also true if you can tolerate seeing your portfolio go nowhere for a decade or longer. Unfortunately, most of us don’t have that idealized time horizon. We need to pay for our children’s educations, weddings, boats, etc. I don’t know anyone who has the patience to see their portfolio of stocks do nothing for decades.
That is why Siegel’s book should only be read alongside the following antidote: Unexpected Returns
Risk
What is the appropriate way to look at risk?
The following two books, Fooled by Randomness
Fooled by Randomness
Any model that solely focuses on past observations and dismisses outcomes that lie outside of what happened in the past is worthless and dangerous. One way of understanding how randomness works is by studying alternative historical paths. This means more than just focusing on what took place in the past. Observed history was actually just one of many possible outcomes. One should focus on what could have taken place, what alternative paths might have existed. With that added insight, we can then predict and prepare for what might happen in the future.
Let’s take the current crisis: Wall Street and the rating agencies dismissed the possibility that housing prices might decline nationwide. That hadn’t happened since World War II, and everyone assumed that meant it wouldn’t happen in the future. On that leap of faith, Wall Street took subprime (risky) mortgages originated in different parts of the country, lumped them together in mortgaged-backed securities, and – voila! – declared the risk to be diversified away. Junk was turned to gold. Since rating agencies used the same underlying assumption – housing never declines nationwide – they announced to the world that the junk was AAA and should be bought in truckloads – and it was. We know how this story ended.
The Black Swan
In the second edition of The Black Swan
“An economist would find it inefficient to maintain two lungs and two kidneys: Consider the costs involved in transporting these heavy items across the savannah. … Also, consider if we gave Mother Nature to the economists, it would dispense with individual kidneys: since we don’t need them all the time, it would be more “efficient” if we sold ours and used a central kidney on a time-sharing basis.”
This reconfirms of why I’d like to own stocks with “sub-optimized”, debt-light (cash rich) balance sheets, as Taleb eloquently puts it “Debt implies a strong statement about the future, and a high degree of reliance on forecasts”.
Books for the Soul
What would you do and what would you share with others if you only had months to live? This is the theme of the following two books: Tuesdays with Morrie
Another book I’ll add to this category is The Snowball: Warren Buffett and the Business of Life
I find myself wanting to work 24/7. I bring my laptop home, or start reading The Wall Street Journal on iPad at the dinner table – my work life starts pushing out my personal life. This book made me realize that no professional success is worth regretting 20 years down the road that you didn’t spend enough time with your kids. Unfortunately, Buffett has that regret.