Quarterly Reports: The Best Investment Books ever Written

a timely accounting of timeless principles of personal finance

Only Four great investment books have ever been written, and I will tell you which they are.

Well, five, maybe, or six, but wait a moment while we get this in perspective. It's tough to get rich reading books. Tougher still, ironically, if you choose current ones. Current books are conceived with great insight. Written at a feverish pace to share that insight, they are still of some interest when submitted for publication. Nine months later, when current books appear, they are embarrassingly out of date. The book on buying strategic metals appears at the height of the strategic-metals boom (so you should be selling metals, not buying them); the book on buying high-tech stocks appears just as Apple is cresting at 63 (so you should be selling high-tech stocks, not buying them). It's an old story, retold every season. Just now, there's William Grace's The Phoenix Approach, a fine new book--but published when Chrysler, far from in ashes, has risen tenfold.

People may someday look back on Douglas Casey's Crisis Investing, the enormous 1980 best seller that fore-told complete economic collapse by 1983, or on Robert Allen's Creating Wealth, the enormous 1983 best seller that advised everyone to think positively and buy two rental properties a year, as classics. But for honing one's investment savvy, it may be best to seek out books of statelier vintage.

The greatest investment book ever written I was introduced to years ago at business school. I was researching a term paper on chain letters (no less) and my faculty advisor--right off the top of his head--suggested I seek out a volume called Extraordinary Popular Delusions and the Madness of Krauts, by Charles Mackay, published, he said, in 1841. My God, I was impressed. What esoterica! (I was also astonished by the title and surprised to learn that Germans, even back in 1841, were called Krauts--or that anyone would have called them that on a book jacket.) I subsequently learned that any business professor worth his salt would have had this book at tongue's tip. And that it had to do with the madness of crowds.

Should you run off to the library to read it--it is, after all, the greatest money book ever written, never mind that it is 143 years old and not the sort of tome you'd want to underline with a yellow Magic Marker--you will read of alchemists and crusaders, of witches and geomancers, of animal magnetizers and fortunetellers: forerunners, all, of the modern investment analyst. And you will read about tulips. As you probably know, tulips became the object of such insane and unreasoning desire in 17th Century Holland that a single bulb about the size and shape of an onion could fetch a small fortune on any of the several exchanges that had sprung up to trade them. (The author describes one unfortunate Dutch sailor who, having a taste for onions and having been sent down to a rich man's kitchen for breakfast, actually consumed one of the priceless bulbs in error.)

As with any true classic, once Extraordinary Popular Delusions is read, it is hard to imagine not having known of it--and there is the compulsion to recommend it to others. Thus did financier Bernard Baruch, who claimed it saved him millions, recommend the book in his charming foreword of 1932. (I was asked to write a foreword to a more recent edition--both are readily available in paperback--which is why, to a few readers, these words may sound more than a little familiar.)

"Have you ever seen," Baruch quoted an unnamed contemporary, "in some wood, on a sunny quiet day, a cloud of flying midges--thousands of them--hovering, apparently motionless, in a sunbeam? ... Yes? ... Well, did you ever see the whole flight--each mite apparently preserving its distance from all others--suddenly move, say three feet, to one side or the other? Well, what made them do that? A breeze? I said a quiet day. But try to recall--did you ever see them move directly back again in the same unison? Well, what made them do that? Great human mass movements are slower of inception but much more effective."

Suddenly, a few years back, everyone in New York and California was on roller (continued on page 206)Best Investment Books(continued from page 123) skates. I certainly did not view this as a form of madness, having at the time purchased two pairs myself--nor, at least as of this writing, as a "great human mass movement." But all of a sudden, there they were--on roller skates.

Baruch quotes Schiller: " 'Anyone taken as an individual is tolerably sensible and reasonable--as a member of the crowd, he at once becomes a blockhead.' " There are lynch mobs and crusades, runs on banks and fires; in each case, if only people hadn't panicked, they would have escaped with their lives. There are mass suicides. Eight or ten years ago, there was "the hustle," the object of which was for throngs of people to shift gears on the dance floor in lemminglike unison.

(I have never actually seen a lemming, but I suspect that when I do, I will see more than one.)

The month Baruch wrote his foreword, October 1932, marked the absolute bottom of the stock-market crash that had begun three years earlier. Wild speculation had driven the Dow Jones industrial average to 381 in October 1929; three years later, it had fallen to 41. The pendulum invariably swings too far.

"I have always thought," Baruch reflected, "that if ... even in the very presence of dizzily spiraling [stock] prices, we had all continuously repeated, 'Two and two still make four,' much of the evil might have been averted. Similarly, even in the general moment of gloom in which this foreword is written, when many begin to wonder if declines will ever halt, the appropriate abracadabra may be, 'They always did.' "

In the late Sixties, stock prices again began to spiral dizzily. Synergy was the new magic word, and what it meant was that two and two could, under astute management, equal five. It was alchemy of a sort and enough to drive at least one stock, in two years, from $6 a share to $140. Not much later, it sold for $1.

By late 1974, stocks generally had been eroded to Depression levels. Yet if you'd had the courage in December 1974 to buck the crowd, gains of 500 and 1000 percent over the ensuing three to four years would have been common in your portfolio.

Not that you must be a stock trader to benefit from the perspective Extraordinary Popular Delusions provides. Should the Government balance its budget? Should the Fed loosen or tighten credit? Read a tale of money printing and speculation in early 18th Century France that should give any easy-money advocate pause.(Read, too, of the hunchback who is supposed to have profited handily by renting out his hump as a writing table, so frenzied had the speculation become.) Mackay describes Frenchmen "ruining themselves with frantic eagerness." Then the lunacy spread to England, where, Mackay says, "every fool aspired to be a knave."

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There have been other good books written about money since 1841, but only a few hold up. Best known and most important, and most likely to make you money, is Benjamin Graham's The Intelligent Investor (Harper & Row), first published in 1949 and most recently revised in 1973. It is based on Graham's 1934 textbook Security Analysis, written with David L. Dodd. Relatively few read the latter, or even the former, because the authors' conservative precepts require of the reader a willingness to spend long hours of close analysis over a period of years. "Medical men have been notoriously unsuccessful in their security dealings," Graham notes, because "they usually have an ample confidence in their own intelligence and a strong desire to make a good return on their money, without the realization that to do so successfully requires both considerable attention to the matter and something of a professional approach to security values."

Unfortunately, moreover, at least as of this writing, with the Dow comfortably above 1100, it's not easy to find securities that meet Graham's strict tests of value.

There is no magic or hocus-pocus in Graham's approach. It is to buy securities so cheaply relative to their assets that, over the long run, they must almost surely appreciate. It's really not much different from Allen's approach in Creating Wealth, but there the field is real estate. Allen would have you sift through scores of properties until you find a seller so "motivated" that he is willing to let his property go for much less than it's worth--or else on extraordinarily favorable terms (which amounts to much the same thing). Neither approach is fool-proof; both take a lot of expertise and time.

For most of us, the market is unbeatable. When it is going up, we may look smart; when it is going down, we may feel dumb. But our ability to predict which way it will go, or which stocks within it will outperform the rest, matches the local forecaster's ability to predict the weather more than a few days in advance. Burton Malkiel's A Random Walk Down Wall Street (W. W. Norton), now 11 years old, is at least a near classic. It explains why you--and the overwhelming majority of professionals--would be better served by throwing darts at the stock pages and then standing pat than by trying to "beat" the market through the application of any active intelligence or strategy.

And that is largely true. The more actively you flail, the more you lose between the cracks to brokerage commissions and taxes.

Malkiel readily agrees that there are exceptions. A handful of people can beat the market with reasonable consistency and by a wide margin. But they're as rare as albinos.

For most, it's best to see the game for what it largely is--a game--and to approach it with at least a modicum of humor. Toward that end, we have "Adam Smith's" The Money Game (Random House), 15 years old and one of the greatest investment books ever written. Like Graham's book, it is well known, so I'll be brief. It is about a time long gone--except for the fact that it's back--when everyone buzzed about the market and the corps of eager brokers was swelling like a hernia.

Smith was appropriately caustic. Among his more lasting bits of advice: "If you don't know who you are, the stock market is an expensive place to find out."

And: Never fall in love with your stock. "The stock doesn't know you own it." Maybe not, but I can name at least three it would break my heart to sell.

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Far less well known and even more delightful is Fred Schwed's Where Are the Customers' Yachts?, now 44 years old (available, along with a catalog of lesser curiosities, from Fraser Publishing, Box 494, Burlington, Vermont 05402). The title comes from the story you doubtless know about the out-of-towner on a tour of Manhattan's financial district. "Over there are the bankers' yachts," his tour-master gestured, "and over there are the brokers' yachts."

"Where are the customers' yachts?" the neophyte is alleged to have asked, with unwitting perception.

Schwed quotes "the sinister old gag" that Wall Street is a street with a river at one end and a graveyard at the other. "This is striking but incomplete. It omits the kindergarten in the middle, and that's what this book is about."

He recalls, too, the old saying about the bulls, the bears and the pigs. The bulls make money and the bears make money--but not the pigs. "It took me some time," says Schwed, "to discover it to be particularly untrue."

Although the game grows ever swifter and more sophisticated, nothing changes much. "Experience has shown that usually the bulls are victorious and the bears lose out," wrote Joseph de la Vega in 1688. There were bright young hustlers then; there are bright young hustlers now. There were brokers pretending to know where the market was going then; there are such brokers now. ("The notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter's consciousness," writes Schwed.) Accounting is as much an art to be made fun of as it ever was. (He tells the story of the old gentleman whose sons and auditors were trying to show him that while business seemed to be good, the store was actually losing money. "They were awash in ledgers and statements as they strove to prove their point. Finally, the old man spoke. 'Listen,' he said. 'The pushcart that I pushed into this town 40 years ago we still have. It is in the storeroom on the sixth floor. Go up and look at it. Check it off. Then everything else you see is profit.' ")

There were margin calls then, there are margin calls now--though fewer of them, since much of the leverage has been regulated out of the game. "If you are a customer receiving margin calls, there are a number of things you can do," Schwed writes, "but none of them is good." He recounts the finger-in-the-dike method (sending in more and more money to meet the calls) and the head-in-the-sand method (going off to the Maine woods) but seems to favor the old advice: Never meet a margin call. Let your broker sell out your position and be done with it.

He observes investors as if they were ants running in a variety of directions to accumulate crumbs, unaware of the larger forces at work (an approaching human foot, for example). "Your average Wall Streeter," he says, "faced with nothing profitable to do, does nothing for only a brief time. Then, suddenly and hysterically, he does something which turns out to be extremely unprofitable. He is not a lazy man."

People afraid of ever having any cash Schwed labels rhinophobes. The term would seem more properly to describe people afraid of their noses; but I do know exactly the sort of people he means: The minute they sell a stock, no matter how overpriced the market, they feel compelled to dump the proceeds back into some other stock. God forbid they should ever actually sit with cash.

And he describes another timeless type, "customers of a certain mentality who cannot rid themselves of the idea that the whole business is a contest between broker and customer to see which one gets the other's money." In which regard, perhaps you saw the item last winter about a Pennsylvania doctor who, apparently a sore loser in this contest, dressed up as Santa Claus and abducted his broker from a Christmas party, torturing him for 12 days.

What's marvelous about Schwed is the devastating simplicity and good humor with which he makes his points. Playing the market is like playing poker: " 'Now, boys,' " said the hopeful soul, " 'if we all play carefully, we can all win a little.' "

With patience and gradual economic progress, that can actually be true of the stock market. We can all win a little. It is not a zero-sum game. But those two seemingly modest ingredients, patience and economic progress, are anything but assured. Especially the first.

"What synergy meant was that two and two could, under astute management, equal five."