Behavioural economist Daniel Kahneman – who teaches us to control our damaging behavioural traits to become better, more-disciplined investors – continues as a powerful force on the best-seller lists as 2017 draws to a close.
Kahneman's Thinking, fast and slow has been on The New York Times bestselling non-fiction paperback list for 147 successive weeks or almost three years. It is currently ranked seventh on the weekly list ending November 18 – even outselling the acclaimed American biography Alexander Hamilton by Ron Chernow, the subject of a hit Broadway show.
Meanwhile, The undoing project by Michael Lewis – number two on this best-selling list – tells the intriguing story behind the pioneering studies of Kahneman and fellow psychologist Amos Tversky into the psychology of economic or financial decision-making.
If you are going to spend time over any summer break reading about how to improve your chances of investment success, your reading list is likely to include books on how to keep wealth-destroying behavioural biases under control.
Some titles appear on Smart Investing's holiday reading list year after year. Some of the best investment books seem to improve with age – just like a good red. And as we develop as investors, the points made in these books tend to make more sense.
If you read a few of the suggested books last year, think about rereading them.
The best investment/personal finance titles tend to give pointers about how to accumulate wealth slowly and progressively through an understanding of the fundamental principles of sound saving and investment practices. Avoid sensational books that claim to offer ways to get-rich-quick; these can act as guides to quickly losing money.
Here are a few titles to consider adding to your reading list for summer 2017:
- Thinking, fast and slow by Daniel Kahneman: A winner of the Nobel Prize for economics, Kahneman points to the many flaws in financial decision-making – including overconfidence and excessive loss aversion (inhibiting appropriate risk-taking and encouraging a short-term focus) – that can have costly consequences for an investor. His views underline the benefits of having an appropriately-diversified portfolio while avoiding the traps of market-timing, stock-picking and making emotionally-charged investment decisions. “Much of the discussion in this book is about the biases of intuition,” he writes.
- The only investment guide you'll ever need by Andrew Tobias: His overall message is to take a common-sense approach to looking after your investments and other personal finances. For example, only buy investments you can understand, avoid investments that seem too good to be true, and don't have credit card debt. This book was first published 39 years ago.
- The behaviour gap – Simple ways to stop doing dumb things with money by Carl Richards: This is an entertaining, easy-to-read guide by a financial planner turned personal finance columnist to keeping our negative behavioural traits under control when saving, investing and spending. His tips include: adopt strategies to avoid buying shares at high prices and selling low, don't spend money on things that don't really matter, identify your real financial goals and simplify your financial life.
- The millionaire next door by Thomas Stanley and William Danko: Long-term research by late academics Stanley and Danko suggests that “prodigious accumulators of wealth” are typically content to progressively build their wealth while being inconspicuous in their spending. In other words, these wealth accumulators are not in a hurry to make their money by taking excessive risks or in a hurry to spend their money. Conspicuous consumption should not be taken as a sign of wealth – it often means the opposite.
- A random walk down Wall Street: The time-tested strategy for successful investing by Burton Malkiel: The basic theme behind this classic is Malkiel's argument that investors – individuals and professionals – cannot not expect to consistently outperform the market. Given that belief, Malkiel, a Princeton University economics professor, is a firm believer in investing in market-tracking index funds (including ETFs), dollar-cost averaging (regularly investing set amounts), appropriate portfolio diversification, periodic portfolio rebalancing and low-cost investing. And he emphasises the need for investors to understand the risks of irrational behaviour.
- The little book of common sense investing by Jack Bogle: As Bogle writes, “successful investing is all about common-sense”. Don't try to pick the best time to buy and sell stocks – consistent success with market-timing is rarely achieved; diversify to minimise risks (and spread opportunities); recognise the rewards of compounding, long-term returns; and keep investment costs low. “The more the managers and brokers take, the less investors make,” Vanguard's founder writes.
- If you have trouble putting down such fictional thrillers as The Midnight Line by Lee Child, the latest adventure of retired colonel Jack Reacher, perhaps try something different – a novel with a personal finance theme.
- As personal finance author Paul Brown comments in The New York Times: “If we're lucky enough to get away for a few days, do we actually want to take a book about investing to the beach?”
- Brown's favourite new novel with a personal finance twist is The Windfall by Diksha Basu. This is the story of a middle-aged Indian business owner who suddenly becomes rich after selling his website for many millions.
His once satisfying lifestyle is lost as he turns into a conspicuous consumer, moving to an upmarket suburb and imitating his new big-spending neighbours. As Brown writes, this book may prompt you to think about why you are trying to accumulate wealth in the first place.
Written by Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
01 December 2017