52 Books To Read Before Buying Your Next Stock

Funds management involves a lot of synthesis of information and a lot of reading. Over the years we all end up reading many investment books and refer to them from time to time.

We thought it would be a good idea to compile a list of books that have influenced our investment style or helped provide insight into the investment process.

Whilst not an exhaustive list, we will recommend one book a week to read, for a year. This list should provide a good starting point for any interested investor.

47 — Betting on Zero directed by Ted Braun

This documentary was produced in 2016 by Ted Braun so strictly speaking is not a book….but it should be. As a reward for having read nearly 50 books on the Cadence list of 52 Books To Read Before Buying Your Next Stock you can have a week off by watching this nearly 2-hour long documentary.

This documentary follows the hedge fund manager Bill Ackman who has a one-billion-dollar short position on the US listed company Herbalife. Bill Ackman is convinced that Herbalife, an international nutritional products company is a pyramid scheme. In the opposite corner we have Carl Icahn, a famous activist investor who has taken the opposite side of this ‘bet’ and believed that when the Herbalife share price fell significantly it presented a buying opportunity.

So here we have two very well-known investors with large sums of capital at their disposal with equal and opposite views on a company that has come to notoriety, particularly over the last few years. And as they say, ‘This is what makes a market, people with equal and opposite views.’ There are not ‘more buyers than sellers or more sellers than buyers’ for Herbalife stock, the same amount of stock is bought and sold daily in Herbalife but the buyers and sellers have equal and opposite views on the future of the company.

Betting on Zero is compelling viewing and since the trade is currently ‘live’ we still don’t know the outcome. From an investor’s perspective it doesn’t get much better than this.

GET THE BOOK

46 — Black Swan by Nassim Nicholas Taleb

Nassim Nicholas Taleb’s first book, Fooled by Randomness, is a well deserved number 2 on our list of books to read before buying your next stock.  Black Swan, his second book, covers similar concepts to Fooled by Randomness. It is an excellent book that often made me question my own long held beliefs.

 The book has helped me understand that:

 1. When making investment decisions we spend a significant amount of time trying to take account of all possible outcomes to arrive at the best decision.  A “Black Swan”, or unanticipated left field event, can have a huge impact on the performance of the investment. This does not mean that all of our analysis is a waste of time, but that we need to open our minds to the possibility that things will happen that are totally unexpected. Good investment performance is a combination of good analysis, good decisions and luck.

2. One of the reasons we don’t properly account for Black Swans is that it makes “Experts” seem less of an expert.  If you spend an hour discussing the pros and cons of an investment with your advisor, who then ends the conversation by saying “Also, the investment could halve or double in value due to an event that I have not thought of” you would probably get a new advisor!

This book took me a long time to read but it is well worth it.

GET THE BOOK

45 — Beating the Street by Peter Lynch

This book is written for ‘Mum and Dad’ investors by one of the world’s most successful Fund Managers who made his name managing the multi-billion dollar Fidelity Magellan Fund. He holds nothing back in his detailed advice on how Mum and Dad investors can ‘Beat the Street’ and outperform Institutional Fund Managers.

He openly discusses his rigorous investment process and what he looks for in a successful investment. He discusses in detail, with past examples: how to go about finding your investment ideas; what research you should do on companies that you are looking to invest in; how to read company financial statements and what you should look at; what questions you should be asking yourself; when best to buy an investment; when to add to your investment and when to sell your investment. He discusses over fifty of his past investments detailing step by step how he discovered the investment, how he conducted research on the company and how he entered and exited the investment. He is also very open about the mistakes he made along the way and how he went about trying to avoid making the same mistakes again.

I think the one thing that stuck out for me in this book was Peter Lynch’s view that investing is really quite simple and logical. He believes that any person using their own experiences and insights with the right amount of dedication and hard work can become a successful investor. This book is a well worth reading as Peter Lynch gives an investor a lot of valuable insight into what a successful and complete investment process looks like.

GET THE BOOK

44 — Trade Like an O’Neill Disciple by Gil Morales & Dr. Chris Kacher

This book was written by two portfolio managers who worked for William O’Neill and as such are practitioners of the William O’Neill investment philosophy which we as an organisation have written extensively about. Our own investment philosophy is an adaptation of the William O’Neill investment process.

As the authors observe, ‘while most investors do not hesitate to dabble in the markets, they would rarely dabble in medical or legal practice, or even in playing professional baseball.’ Jesse Livermore famously responded to a question, ‘how can I make some quick money in the markets’, by asking the question, ‘How can I make some quick money in law or surgery!’ The introductory chapter of this book essentially makes the salient point that investing is a full time and time consuming pursuit and should be viewed as such.

The basic investment philosophy which you would have heard us talk about at our investor presentations is that is it better to average up than to average down. Put another way by the authors, ‘it is foolhardy to make a second trade, if your first trade shows a loss…..never average losses’.

The second basic investment philosophy is that a stop loss policy on all stocks needs to be implemented as huge losses in the stock market can be debilitating. Stop losses prevent this situation arising. Cadence Capital has a similar investment philosophy in relation to losses.

William O’Neill comments on this as follows; ‘The whole secret to winning big in the stock market is not to be right all the time, but to lose the least possible when you are wrong.’ In addition, the system of pyramiding into strongly acting positions while weeding out weaker ones generally gets an investor concentrated in the right stocks during a bull market cycle’.

One chapter of this book is devoted to ‘patterns and humans’ and a quote that resonates from this chapter is; ‘I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans – and human nature never changes’.

Chapter 2 focusses on the interplay between technical and fundamental research which is something our investors ask us about regularly. The authors go into this in some detail with one of the most interesting quotes being; ‘Buy based on both fundamental and technical analysis, but sell purely on technical analysis’. Whilst this is hard for many fundamental analysts to accept, we would argue that the share price is already starting to adjust for some poor piece of fundamental information that the market is only just starting to process.

Another great matter of fact quote form this book is that, ‘One enjoys intellectualizing about the market but crosses the line and starts trying to predict where the market is going.’ I think this is true of all of us at different times in the market and is worth reminding ourselves of from time to time.

This brief review and a smattering of quotes cannot do this book justice and I think this book is compulsory reading. The other great thing about this book is that is has a list of Dr. K’s Top 50 Wall Street Books. Many of the books on this list also appear in our list of 52 Books you should read before buying your next stock. There is no doubt that reading these books is a great help in becoming a better investor.

GET THE BOOK

43 — Chindia: How China and India are Revolutionizing Global Business by Pete Engardio

Karl Siegling recently wrote a resources article for the ASX where he noted “Readers may remember the resources mantra of ‘stronger for longer’ from around 2002 until 2007, initially the story was one of China growth. As the resource boom continued the mantra evolved to ‘stronger forever’ and included India so that the combined mantra became ‘Chindia, stronger forever”.  No sooner had the ink dried on this book that the Global Financial Crisis came along.   This book is a very good introduction to both China and India and how they have and continue to redefine world business and influence international trade all over the world. This book is factually based with Pete Engardio, a senior writer for BusinessWeek, drawing a lot on BusinessWeek’s analysis and reports. Definitely well worth reading.

GET THE BOOK

42 — Signals by Dr Pippa Malmgren

In this book first released in 2015 and updated in 2016 to reflect the Brexit vote, the author discusses how everyday signs and events can help us to navigate the World’s turbulent economy. Dr Malmgren argues that being alert to the many smaller signals around us, we can take advantage of larger scale situations. Inflation and deflation are also discussed, and how the fallout of this battle is evident in standards of living and the rise of anti-establishment voting.  An interesting read which is particularly relevant in today’s uncertain times.

 

GET THE BOOK

41 — The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks

What caught my eye about this book was what Warren Buffet had to say. “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book.” This successful American investor is renowned for his “Oaktree memos” which he has been sending to his investors for the past 20 years. These memos discuss his investment philosophy and give his insights into the market environment/ recent events at that point in time. These memos are the core of this book in which he has listed 19 “Most Important Things” for successful investing.  These include topics such as second-level thinking, fundamental research, risk management, market psychology, market cycles, contrarian investing, patience, overall market environment and some pitfalls. Even though at Cadence we don’t agree with everything he says in this book, it is a very thought provoking investment book that should definitely be read.

GET THE BOOK

40 — Masters of the Market : Secrets of Australia’s leading sharemarket investors (1st Edition)

I first read this book not long after it was published in 2003 and really enjoyed it.  At the time there were many books written on successful American fund managers, but Masters of the Market was the first book to focus on Australian fund managers.  

Each chapter in the book is an interview with a successful Australian fund manager.  The fund managers are: Robert Maple-Brown, Greg Perry, Peter Morgan, Brian Price, Alex Waislitz, Jim and Robert Millner, Sir Ron Brierley and Gary Weiss, Tim Hughes, Anton Tagliaferro, Peter Hall, David Paradice, Erik Metanomski, and Geoff Wilson.  

I read the book again this year (2016) and again found it well worth reading.  I also looked up each fund manager to find out what they are doing now, and found that the majority were still involved in funds management and had continued to perform well.

 

GET THE BOOK

39 — Buffett – The making of an American Capitalist by Roger Lowenstein

This is a very well written biography on one of the world’s most successful stock pickers. This book gives the reader in-depth insights into the investment mind of Buffet during the first 40 years of his investing career. It covers in detail ten or so of his earlier investments and shows over time how his Investment Philosophy evolved. As an investor there are numerous things to be learned in this book. One of the things that struck me was how extremely patient Buffet was. He would be happy to sit in cash for long periods at a time until it was the right time to start investing into an investment. He also felt very strongly that one should only invest into things that you completely understood. This book was also very interesting in that it did a great job in giving some insights into the personal and family life of this great investor.

GET THE BOOK

38 — Liar’s Poker by Michael Lewis

Liar’s Poker was one of the first books I read that was a first hand account of what goes on inside an Investment Bank.  In the late 1980’s Michael Lewis was employed by Solomon Brothers in the bond trading department.  The bond traders were expected to make money any way they could and Michael suggests that “the Law of the Jungle” applied and that nothing that any of the traders learnt at university was used on the job.  Some of the bond traders did not finish high school. The culture in the department was unprofessional – the traders often played practical jokes on each other, such as pretending the SEC was investigating one of the traders for stealing food from the canteen.  The team was very successful during the period Michael was there but he attributes this mostly to luck, as the traders did not perform as well later on in their careers.  The book is eye opening and entertaining.

 

GET THE BOOK

37 — Jesse Livermore: World’s Greatest Stock Trader by Richard Smitten

We reviewed Reminiscences of a Stock Operator earlier in our recommended books list, which offers an overview of Jesse Livermore’s success as a trader – the story of the Boy Plunger. This biography is excellent further reading on Livermore, as it goes into great detail about his life (both personal and as a trader), as well as the context in which he amassed his fortune. Livermore’s personal story is just as interesting as his trading success.

To this day, Livermore is widely considered the greatest trader who ever lived. His approach to trading stocks was ground breaking at the time. Even though the techniques he employed have evolved, and become somewhat commonplace, this biography still offers a great insight into how his mind worked, why he stood out, what made him different as well as his greatest mistakes.

GET THE BOOK

36 — The Question Behind The Question by John G. Miller

In this best selling book by John G Miller, the importance of staying away from fads and sticking to practising key fundamentals, such as personal accountability, is discussed. Another important theme that is discussed is the importance of team work and removing silos and the ‘us and them’ mentality. By working as a team and practising personal accountability in a changing world, companies and groups can thrive and become better places to work in and invest in.

GET THE BOOK

35 — The World Is Flat by Thomas Friedman

In his book Friedman documents the IT revolution and the globalisation of the world during the 21st Century. The world is continually changing and moving forward which means Individuals, Companies and Governments continually need to change the way they do things just to stay ahead. His message is quite straight forward, be prepared because changes waits for no-one.

This book is 10 years old and some of his observations made 10 years ago are a little “old hat”, however it is an important read as a lot of what he says can be extrapolated into the world of 10 years’ time. His two chapters, The Ten forces that flattened the world and the Triple Convergence, were the crux of the book.

GET THE BOOK

34 — Elliott Wave Principle: Key To Market Behaviour

Robert Prechter Jr. is widely regarded as the modern day king of Elliot Wave theory, and this books contains his thorough explanation of it. We think this book is a must-read for anyone considering using technical analysis as an investment tool.

Elliot Wave theory is a subjective forecasting method for stock chart patterns. The book is easy to read and written in a style that both the professional trader and beginners will be able to utilise.

We believe this book is one of the classics when it comes to Investing literature, and we highly recommend you read it before buying your next stock.

GET THE BOOK

33 — The Warren Buffett Way by Robert Hagstrom

Buffet doesn’t require any introductions. In this book, Hargstrom gives us an insight into Warren Buffet’s career as well as some of the people he worked with while developing his investment strategy.

The book points out examples of successful investments by Buffet, which have contributed to his outstanding returns. Hagstrom not only covers how Buffet thinks about investing, he overlays examples of those ideas in action.

It feels like Hagstrom had the retail investor in mind when he was writing this book. Seasoned investors might find the anecdotal aspects of the book the most interesting.

In short, if you’re interested in learning more about how Warren Buffet thinks (and why), as well as what does ideas look like in practice then we highly recommend this book.

GET THE BOOK

32 — Reframing by Richard Bandler

Even though this book doesn’t focus on specific stock picking techniques or financial theory, its introduction to the concept of ‘reframing’ can be highly beneficial for anyone interested in participating in the market.

The techniques discussed are universal and they could be applied to a broad range of situations – including investing.

Reframing refers to the process of consciously changing how you perceive an event, and to alter what it means to you. This reframing, it is argued, trains a person to see a different side of a situation, and empowers them to shape the impact and meaning of the events in their lives.

The ability to have control over how situations affect you, in terms of investing, is definitely something worth taking the time to research and learn about.

The book explains Richard Bandler’s reframing techniques, and encourages the reader to use these to take control of how situations affect them. Bandler is a linguist, speaker and a leader in his field. We encourage you to read this book.

GET THE BOOK

31 — Master CEOs: Insights From Australia’s Leading CEOs by Matthew Kidman & Alex Feher

Master CEOs is a series of interviews with CEOs of Australian listed companies. The CEOs were chosen based on excellent long term shareholder returns of the companies that they were in charge of. Australian investors often end up reading books that are US focused, and it is refreshing to read a book with an Australian focus. We had previously invested in both Zinifex and Oxiana and were very interested to read the chapter on Owen Hegarty and OZ Minerals (formed by the merger of Oxiana and Zinifex).  Owen was a very enthusiastic promoter of the company and I was surprised to read that the majority of his “typical day” was taken up with presenting to investors. The book also has a chapter on Ron Hancock, who is currently a director of Cadence Capital Limited. Ron founded and built up Wide Bay Australia over almost 50 years before his retirement in 2013.

GET THE BOOK

30 — Outliers: The Story Of Success by Malcolm Gladwell

In Malcolm Gladwell’s Number 1 best seller, Outliers: The Story of Success, Gladwell examines the factors that contribute to high levels of success. Whilst many factors, including birth date, can play a part in success, it is the 10,000 hours theory that is perhaps the key to achieving success either personally or within business.

By delving into the backgrounds of Bill Gates and Paul Allen from Microsoft and The Beatles, Gladwell uses statistical analysis and interviews to put forward the point that in many cases it is not natural talent that is important, rather the opportunity to practice your craft repeatedly over many years for the equivalent of 10,000 hours. The constant practice, be it computer programming in the case of the Microsoft founders or the early days of The Beatles playing gigs to small groups of people in Hamburg, plays a major role in success.

A fascinating book that you will want to read again.

GET THE BOOK

29 — When Genius Failed by Roger Lowenstein

In this book, Roger Lowenstein gives the reader a peek behind the curtain in the spectacular collapse of LTCM (a large U.S. hedge fund). The absolute return fund achieved a post-fee 20%+ annualised return for 3 consecutive years. In its fourth year, however, the fund came crashing down. The book explains the intricacies behind the collapse, and we believe it is a fantastic read for anyone interested in financial markets.

The title of the book alludes to LTCM’s origins. Founded by a John Meriwether, a highly respected bond trader, LTCM’s board members included nobel-prize winning economists Myron Scholes and Robert Merton – two of the minds behind the Black-Scholes options pricing model, which is still taught to Finance students at universities all over the world.

The book touches on many aspects that ultimately contributed to the collapse, including over-confidence in predictive computer models, employing extremely high levels of leverage and a lagging regulatory environment.

The book serves as a cautionary tale – even a team of geniuses at the top of their game failed to grasp the complexities of the financial markets and human behaviour.

GET THE BOOK

28 — The Next Great Bubble Boom by Harry S. Dent Jr.

Harry Dent made a name for himself in his earlier years predicting major market moves such as the Japanese slow down and the Tech wreck .

We first read this book of his in 2005, and at the time found it a very interesting and insightful read. In this book he explains amongst other things how demographics, and his ‘spending wave theory’, has an effect on markets. Unfortunately, he was quite wrong in his market predictions on where the Dow and Nasdaq would be by the end of his predicted cyclical bull market period of 2005 to 2009.

Even though this book is a little dated, we think it is worth the read for Dent’s insights into market cycles and the market psychology behind these. His discussions on the ‘Human model of forecasting’ and the ‘Seven human realities of investing’ , we think, are most probably the most important parts of the book.

GET THE BOOK

27 — The Rise And Rise Of Kerry Packer by Paul Barry

Whilst we haven’t recommended too many biographies on our recommended books list, this one most certainly deserves its place. As far as reputations go, there aren’t many Australian businessmen on the same league as the late Kerry Packer.

As far as biographies go, Paul Barry does an excellent job at delivering a balanced, detailed and interesting read. The author’s introduction to Kerry Packer’s story starts from the very beginning with the – also remarkable in its own right – story of his father Frank Packer.

The book showcases Packer’s tenacity, wit and business-like nature whilst adding a human layer to his personality by talking about his unpredictable mood and acts of generosity, amongst many other things.

We recommend this book as a reminder of how a business’ success can often be due to a specific, remarkable personality. Kerry Packer accumulated wealth and influence like no other Australian before him, and his story can certainly offer lessons for anyone interested in business and investing in Australia.

GET THE BOOK

26 — Confessions Of A Street Addict by James J. Cramer

An entertaining read by one of Wall Street’s most successful hedge fund investors and recognisable media commentators. Cramer takes us through the life of a hedge fund manager and strategies he used to consistently beat the market over more than a decade. The reader uncovers some of the inner workings of Wall Street including the pressure to outperform and dedication to the craft of stock analysis required in order to be successful. Cramer morphed from journalist to Goldman Sachs stockbroker to hedge fund manager to media commentator. The key ingredient along the way was his passion for investing and stock picking. Cramer currently anchors several media segments on CNBC and remains one of the industry’s most insightful and opinionated characters.

GET THE BOOK

25 — The Wolf Of Wall Street by Jordan Belfort

The Wolf of Wall Street is an autobiography by Jordan Belfort. As investors it is important to understand the range of people that we may come across from time to time, and the way they do business.  Jordan Belfort is at one extreme of the spectrum – constantly crossing ethical and moral boundaries (and the law) to make a dollar.

Belfort was a stock broker who made his money by buying shares in a company, and then using aggressive sales tactics to get his clients to buy the shares off him at inflated values (this is most easily done using penny stocks which are often illiquid and have large bid-ask spreads).  The book (and subsequent movie) are entertaining and disturbing at the same time, and reinforce the ‘buyer beware’ attitude that we all should take when making investment decisions.

This is an entertaining and highly recommended read.

GET THE BOOK

24 — The Education Of A Speculator by Victor Niederhoffer

This is an interesting read primarily because Victor Niederhoffer, the author, blazes his own trail. The tone is awkward at times – overly modest occasionally, pompous frequently – but this is a man who has made many millions, lost many millions, and then made it all back and more. He has traded in many markets for himself and others, George Soros included, and probably in a manner unlike anyone else.

The author delights in drawing unusual (and tenuous) analogies between the financial markets and anything and everything else that can be studied and measured – music, ecology, competitive sports, weather, etc. While the non-trading subject matter is of passing interest – the mating habits of certain insects, for example! – the statistical conclusions and trading inferences can come across as dubious.

Nevertheless, behind these varied and surprising musings is a highly intelligent and accomplished mind. What is also abundantly clear is how Niederhoffer’s amazing will-power has featured in each of his successful pursuits. It is his character more so than his reflections that held our attention, so even though this isn’t a book filled with practical trading tips, it’s still a must read auto-biography for those interested in investing.

GET THE BOOK

23 — Hot Commodities by Jim Rogers

Roughly 20 to 25 percent of the Australian Stock Market by market Capitalisation is made up of resource or resource related stocks. As Ed Seykoya said  “Commodity trading is the purest form of trading in the world and resources companies are simply a leveraged version of this.” If you are looking to invest in resource or resource related stocks, this book is must read. Authored by Jim Rogers, co-founder of the Quantum fund, it covers off all the essentials of investing in commodities. The book discusses supply and demand fundamentals, the bull and bear cycles that commodities typically follow, and the reasons that cause them to happen. It also discusses physical and derivative trading in commodities, and looks in detail at the current fundamentals of all the major commodities.

“Commodity trading is the purest form of trading in the world and resources companies are simply a leveraged version of this.” – Ed Seykoya

GET THE BOOK

22 — Masters Of The Market by Geoff Wilson, Anthony Hughes and Matthew Kidman (2nd edition)

Master of the Market is a series of interviews with top performing Australian fund managers.

We first read this book not long after it was published in 2005. Having read the first edition a few years earlier, we were surprised that a number of the “masters” had underperformed in the 3 years between editions. The conclusion I drew from this was that even the best investors can have a bad year (or three), and that long term performance is a better indicator of investment ability than short term performance.

We were most impressed with the chapter on Phil Matthews, who had fantastic investment performance over a long period of time. His view that the oil price was headed much higher than its current price (about USD 55 per barrel) was the catalyst for me to find out a lot more about the oil market including peak oil theory. Due to the widespread belief that oil production would soon peak the oil price rose well above USD 100 (as suggested by Phil). It has since fallen back to USD 35 in 2016 due to large increases in supply from unconventional sources. There are two main lessons from this:

  1. We need to continually allow for the possibility that we are wrong, no matter how convinced we are that we are right, and
  2. If enough people believe something is true it will create a trend which investors can make money from.
GET THE BOOK

21 — Valuation: Measuring And Managing The Value Of Companies by McKinsey & Company Inc.

Perhaps the most academic title we have reviewed so far in our 52 Books To Read series, McKinsey’s Valuation is a must-have resource to learn about fundamental analysis. The book has been updated regularly since it was first published, with expanded material being added to cover more contemporary themes (like the Internet bubble). As a result, the book still holds its own 26 years after it was originally published. The length of the book is inevitable given how much it covers, but it is surprisingly clear and easy to read given the topic.

We believe fundamental analysis is a crucial part of investing, as described in an eBook we have written previously; you can also learn more about how Cadence combines fundamental and technical analysis here.

Valuation covers topics that every investor should understand, such as how to value cashflows and , how to measure the performance of a company. The lessons in assessing historical performance and forecasting of financial results are extremely valuable.

If you’re interested in learning about different valuation techniques, as well as understanding the framework in which value is measured, then we highly recommend this book.

GET THE BOOK

20 — Thinking, Fast And Slow by Daniel Kahneman

Whilst a heavy going book, written by the winner of a Nobel Prize, this is invaluable reading for potential investors in the stock market. Readers will get an interesting take on how we all make decisions and the dangers associated with the way we make decisions. This book is particularly interesting in relation to impulsive thinking which the author describes as System 1 thinking. The author gives us example after example of System 1, ‘impulsive thinking’ and why as human beings we do it.

The entire book is fascinating but investors should pay particular attention to the sections on the Illusion of Stock Picking Skills, The Optimism Bias (also see the excellent TED TV talk on the optimism bias) as well as the ‘Endowment Effect’ which illustrates that most investor fear a similar size loss much more than the positive psychological effect of a gain. Also of particular interest if the chapter on the Illusion of Understanding. All of these observed and well documented psychological traits have significant consequences when it comes to investing.

Thinking, Fast and Slow will take a long time to read. Below is a sample group of chapters to steer you towards the relevant sections for an investor:

  • Chapter 19 (Page 199) – the Illusion of Understanding
  • Chapter 19 (Page 212) – the illusion of Stock Picking Skill
  • Chapter 24 (Page 255) – The Engine of Capitalism, Optimists, Entrepreneurial Delusion, Competitive Neglect, Overconfidence
  • Chapter 27 (Page 289) – The Endowment Effect

There is so much good material in this book that I would encourage everyone to read it and not just from an investment
perspective but from a different perspective on life and human beings.

GET THE BOOK

19 — The Tipping Point by Malcolm Gladwell

This is a fascinating book about exceptional people, surprising changes that are all around us, and just how poorly we understand ourselves and society. You should definitely read this book if at all interested in marketing or public awareness, and in understanding how ideas and behaviour can spread.

The lessons for investing are less obvious. It would be wonderful to stumble across a company on the cusp of exponential growth, but the drivers would be difficult to spot unless you know the key people, and the product and market in fine detail. Our biggest takeaway was just how susceptible we are to our environment and those around us; it is no wonder that the stock markets can fluctuate wildly without apparent reason or cause. Prices affect prices and that, to me, shows how important it is to combine technical analysis with fundamentals when investing, as we do at Cadence.

GET THE BOOK

18 — The Alchemy Of Finance by George Soros

George Soros is often cited as one of the most successful investors in history. At its core, The Alchemy of Finance is based around Soros’ Theory of Reflexivity. Soros believes that human understanding is incomplete and incoherent and, as such, prices aren’t objective. Instead, prices are based on people’s biased perceptions of the fundamentals underlying a company. Since investors are human, and they trade on biased perceptions, it follows that these perceptions and biases greatly influence the market. Soros goes on to explain how, in some cases, these perceptions can even affect the underlying fundamentals of the market itself.

Even though the writing style could be more engaging, this book is Soros’ way to enlighten the reader about the subtle psychology and emotion underlying the market. In this light, the use of the word ‘alchemy’ in the title is highly appropriate since Soros appears to see investing as an art more than a science. This book was written over 25 years ago, however Soros’ ideas are still highly valuable today. We have written about market psychology and emotions in the past. We recommend this book to anyone interested in high-level theory about financial markets, given that Soros’ theory also has practical applications.

GET THE BOOK

17 — Winning On Wall Street by Martin Zweig

Zweig begins his book by sharing some of his life stories with the reader – about investing, and some examples of ‘life lessons’ along the way – giving us an insight into how he learned his craft. Zweig points out that Edwin Lefevre’s Reminiscences of a Stock Operator inspired him – a book that we reviewed and recommended earlier in this series. He then goes on to explain his methodology. In a nutshell, he uses a combination of fundamental analysis and technical analysis, as we do at Cadence. Zweig’s model relies on macroeconomic indicators (such as interest rates and prime rates) as well as using ‘momentum’ indicators.

The author explains his model with a high level of clarity; it is easy to understand. He does a good job supporting his model with data, although as a result the book is written in a somewhat academic style. Zweig also writes about market sentiment and its cyclical nature. He explains in detail how to time the market (using a series of sentiment and seasonal indicators), how to pick which stocks to invest in and, once invested, how to benefit from using stop-loss orders.

The book was written in the late 80’s so some of the information might be out of date. However, the key message of the book remains relevant: a model that combines technical and fundamental analysis can outperform the market.

Zweig writes in an objective, unbiased style that is effective. Winning on Wall Street is also an insight into how successful investors think about, and build, their investment models. We recommend this book for anyone interested in investing – particularly those keen to learn more about macroeconomic indicators and timing the market.

GET THE BOOK

16 — The Art Of Speculation by Phillip L Carret

I would title this book “A Review of the Markets” – it is a useful read about the different investment instruments available, with Carret’s valuable opinion on the risks and opportunities they can offer, and some insights into the stock markets during the 1920s. There was little depth, though, on how Carret became one of the 20th century’s most successful and enduring investors. I had high hopes, but neither his artistry as a speculator or as an author were on much display; rather than describing his techniques and successes, Carret discusses without humour a more general approach to capital growth.

Despite the tedium, or perhaps because of it, this is a true account of Carret’s success. There is no secret other than common sense, hard work, self-reliance and an enquiring mind. While each opinion offered is dry and bland, it comes from experience and understanding – the art is perhaps in seeing through the market instrument to the ownership it represents. At the very end of the book Carret offers twelve tenets, being the clearest description of his own approach. Note that several speak directly to Cadence’s process, such as the direction to, “Be quick to take losses, reluctant to take profits.” Again, disappointingly it is all common sense, but it is common sense accrued from long study and practice.

GET THE BOOK

15 — Flow: The Psychology Of Optimal Experience by Mihaly Csikszentmihalyi

As an investor and as a father, I like the idea that happiness is a skill – the theme of this book. The author explains the enjoyment we feel from “flow experiences”, those activities that require all of our skill and focus. It is a reminder that the effort put into something often brings its own reward; we enjoy learning and taking on new challenges when we can see ourselves progress and become more capable. As an investor, with the scoreboard plain to see, there are always lessons to be learnt. And as a father, I want to encourage my son to develop his own interests and take a playful approach to the challenges that lie ahead.

The first few chapters are thought-provoking – such a simple change in mindset can enrich and bring meaning to our lives – and I would recommend the read. The rest of the book, however, is an exhaustive list of examples that I found rather tedious, although there might be parts that others can better relate to.

GET THE BOOK

14 — Common Stocks And Uncommon Profits by Philip A. Fisher

In terms of finance and investing Philip Fisher’s reputation precedes him. This book was originally published in the late 50’s but remains a must-read for every investor – it’s worth noting the book has been brought up to date since it was first published.

You could say the author is biased towards growth investing. However, the ideas he puts forward in terms of what to look for in a company are worth reading – Fisher aims to provide the necessary tools for investors to succeed, going as far as providing bullet point lists of desirable company attributes.

It’s fair to say that Fisher focuses more on qualitative than quantitative analysis – at Cadence we believe a combination of the two is necessary – however, his suggestions in terms of qualitative data to look at when evaluating companies is something we’ve talked about before.

Fisher encourages investors to evaluate the strength of a company’s management, its sales team, HR reputation and process, their R&D track record… At Cadence we value both qualitative and quantitative analysis, and this book is definitely worth reading for investors interested in exploring the principles of using qualitative analysis to value companies.

GET THE BOOK

13 — The Age Of Fallibility by George Soros

George Soros doesn’t need an introduction. This book offers a unique insight into how someone like Soros sees the world and, perhaps more interestingly, how he wants the world to be. The high-level concepts conveyed are very valuable for anyone interested in capital markets and how they impact the world. Soros breaks down his way of thinking into three core principles and, from there, he conveys concepts like Open Society and the Feel-Good Society, points out problems with what he refers to as The World Order and finally leads the reader to his views on the Global Energy Crisis. The core principles Soros’ puts forwards as a premise to his essay can be summed up as follows:

  • Understanding social events is not the same as understanding natural events because, in social events, the subjects (i.e. humans) are self-reflective
  • Nobody knows the absolute and definite truth – anyone can be wrong
  • We should continue to pursue knowledge and ‘truth’, but only under the premise that we can, and often will be, wrong.

For Soros, accepting the three postulations above takes us from the Age of Reason into the Age of Fallibility – hence the title of the book. Soros’ idea of reflexivity is perhaps the most relevant – financial markets are not perfect, we have to be ready to accept that some times we’ll be wrong, nobody knows the ‘truth’, and that’s ok.

GET THE BOOK

12 — Hedgehogging by Barton Biggs

Barton Biggs is credited with predicting the .com bubble. In this book, he offers a glimpse at what happens behind closed doors in a funds management business – in particular hedge funds. Biggs is, without a doubt, a talented and engaging writer.

Whilst not a ‘How to invest in X’ type of read, the author does offer some insights into his strategies. More importantly, Biggs describes in detail some of the characters, back-stories and motivations that drove his success for 30+ years in Funds Management. This book is a mixture of high-level advice in both investment management and entrepreneurship.

Some of the key take-aways from the book are echoed in Cadence’s investment philosophy.

Biggs talks about ‘activist investing’ and actually visiting companies in person or reaching out to them to learn more about their business. Cadence visits 300-400 companies a year. Biggs also talks about being impartial to growth and value investment strategies. At Cadence we use a combination of fundamental and technical analysis.

The author points out that investing is not only about entering positions and exiting is just as important. Cadence has a disciplined approach to entering and exiting positions. Biggs also agrees with our view that you should be backing managers who are also investors in the company – not simply businessmen drawing a wage. At Cadence, the Management team invest their own money in the fund.

Some of the author’s experiences in setting up a fund, managing it, pitching it and raising money are must-read insights for any professional investor – particularly those with an entrepreneurial flare. This book is filled with entertaining stories about the industry, the people in it and the sometimes surreal decision-making situations they face. There are many lessons to be learned from this book (too many to go over all of them). Borrowing from the book, investing is as much of an art as it is a science. As such, you need a very broad skill set (and an eager disposition) to be successful. This is a highly recommended read for anyone interested in funds management.

GET THE BOOK

11 — Technical Analysis Of The Finanical Markets by John J. Murphy

This book, although over 500 pages long should be compulsory reading for anyone interested in trading or investing money professionally or for themselves personally. It was first published in 1986 and is considered by many in the market to be the “Bible” of technical analysis.

The book covers many different trading techniques and technical indicators or approaches.

For example, topics covered include: Chart Construction, Trend Concepts, Reversal Patterns, Continuation Patterns, Stock Market Indicators, Time Cycles, Point & Figure Charting and Elliot Wave Theory.

The author has done an excellent job of bringing many technical analysis concepts together in one summation in an easy to understand format. This book is a must read for any person wanting to incorporate technical analysis into their investing or trading. The book emphasises the importance of having a trading plan in addition to understanding the various technical analysis methods available.

At Cadence we believe the concept of identifying a chart trend pattern (up or down) is paramount to successful investing.

This book offers techniques to help identify the trend forming process, which in turn enables the investor to focus on successful capital management strategies.

GET THE BOOK

10 — Beyond Greed And Fear: Understanding Behavioral Finance And The Psychology Of Investing by Hersh Shefrin

People who study finance at university learn about the efficient market hypothesis, which concludes that all stocks are correctly priced, and therefore investors cannot consistently outperform the market. This hypothesis is based on the assumption that all investors are rational, and that rational investors take all publicly available information and correctly use that information to determine the value of a stock.

Beyond Greed and Fear was the first book that helped Chris understand how psychology affects his own (and everyone else’s) investment decisions. After reading the book you will be much more aware of the biases that influence your investment decisions, and how biases can influence other people too. Hopefully this will assist you to outperform the market, and prove that the efficient market hypothesis is not right! In addition to Beyond Greed and Fear, we encourage you to download our free ebook, A Guide To Analysing Company Fundamentals, which talks about some common biases such as “always look to buy stocks with a low PE ratio”.

GET THE BOOK

9 — Taming The Lion: 100 Secret Strategies For Investing by Richard Farleigh

Starting out his investment career as a chess playing economist, Richard Farleigh initially believed that investment and trading seemed to be just gambling. Overtime he came to believe that market prices are in fact predictable and developed a repeatable investment methodology to make money investing and trading in the markets. In this book Richard Fairleigh reveals a 100 secrets that he believes will give readers the ability to “tame the lion” and in so doing become better investors.

Richard believes strongly that to invest you need to have both an edge and that you need a disciplined investment approach. Even with both of these he also mentions that investing is more like playing a game of Backgammon than a game of Chess in that markets are unpredictable, like the roll of a dice, so you also need a little luck. This book would be worth reading if you were only to read chapter 9. What is described in this chapter is very much aligned with the Cadence approach to investing in that he describes combining both fundamental analysis with market price action as a “very powerful trading technique”.

This is a must read for all Investors wanting to know more about the behaviours of markets and how to improve their investing skills from an experienced “money maker”.

GET THE BOOK

8 — One Up On Wall Street by Peter Lynch

Peter Lynch ran the Magellan mutual fund for 13 years in the late 70s and through the 80s. The fund’s performance during this time was astounding, earning him a stellar reputation in the industry. Lynch encourages the reader to seek out ‘ten baggers’ and offers insights into ways the average investors has, or can have, one up on professional investors.

His first point is that investors should leverage their day-to-day observations of industries, companies, brands and their products or services in order to generate investment ideas. If, as a customer, you feel a company’s business picking up there might be an opportunity to make money as an investor – you may see a surging opportunity before analysts report on it.

Investors should do their own research and explore the ideas they strongly believe in based on what they know. Lynch urges readers not to trust the experts, to avoid trying to time the market (or predict the economy) and to develop the personal qualities required to be a successful investor such as discipline, independent thinking, self-reliance and being able to remain calm under stress.

In terms of risk, the author suggests you shouldn’t invest unless you can afford to lose (and already own a home).

Lynch dedicates about one third of the book to explaining what you should be looking at when you do fundamental research on a specific company and, more importantly, how to interpret the numbers so you can form a view on ‘why’ things are happening. He offers several great examples, and it all boils down to learning as much about the company as you possibly can – qualitative and quantitative analyses are equally important.

Lynch finishes the book off by offering suggestions on how to put together and maintain a portfolio, including how long to hold a position for and how to identify when it might be time to sell. He shines a light on the importance of being patient and also having the confidence to take the path no one is taking – in other words, if everyone is selling there might be an opportunity to buy. Don’t just follow a trend. You need to think independently.

At Cadence, we also believe fundamental analysis is one of the cornerstones of stock picking. However, we believe combining technical analysis (timing the market) with our own fundamental research can help us achieve superior risk adjusted returns – learn more about the Cadence Investment Philosophy here.

This book is an excellent read for anyone with an interest in the stock market and investing. We consider it a must-read.

GET THE BOOK

7 — Trade Your Way To Financial Freedom by Van K. Tharp

Van K. Tharp is a consultant who specializes in coaching traders and investors (this author also has a few Finance best-sellers under his belt).

The author covers several seemingly simple trading concepts and ideas. The depth of these concepts is made clear as you read through the chapters.

Looking beyond the self-promotion, which the author isn’t shy about, Tharp boils down the importance of your own personal situation when trading.

Tharp explains the attributes of some existing systems but, ultimately, directs the reader to think beyond simply entering positions and following an established system. The author urges the reader to think about risk reduction, exits and position sizes that ‘work for them’.

In short, Tharp points out the need for compatibility between your trading method, personality and circumstances.

Tharp believes the ‘psychology of the market’ and its participants are utterly important when making investment decisions and, as such, discipline and self-awareness are crucial – we certainly agree.

Traders with different levels of experience may have differing ‘take-aways’ from this book, and we believe anyone with an interest in trading should read it.

GET THE BOOK

6 — How I Made $2,000,000 In The Stock Market by Nicolas Darvas

Nicolas Darvas fled Hungary at the age of 23 with nothing but a few pounds to his name. He would go on to turn an investment of $10,000 into $2,000,000. It only took him 18 months. Not the story you’d expect from a professional ballroom dancer.

Years later, aged 39, Darvas wrote this book. It outlines the steps in his journey, and explains the investment strategy that made him successful. The strategy is referred to as The Box.

The book begins by explaining Darvas’ first exposure to the market. Darvas came to own his first stock after being paid in scrip for his services as a dancer. The stock went up. He was hooked.

After that, Darvas begins experimenting more with the stock market. He goes through several ‘stages’ as an investor and each stage is a section in the book: The Gambler, The Fundamentalist, The Technician and finally The Techno-Fundamentalist.

It’s tempting to criticise The Box method – perhaps it would not work so well in a bear market. However, when you boil down Darvas’ idea to its essential attributes you find a strategy based on discipline, simplicity, real-life practicality and common sense.

Times may have changed, but every investor can benefit from reading about Darvas’ achievements. This book is as inspiring as it is entertaining and we highly recommend it.

“Just to add a line to this review…… this book was my first insight into the use of Fundamental and Technical Research when investing. Nicolas Darvas discovered that Fundamentals alone did not work, I would argue he also discovered Technical Research alone did not work but the two combined did. – Karl”

GET THE BOOK

5 — The New Market Wizards: Conversations With America’s Top Traders by Jack D. Schwager

Following up on the Market Wizards Book review is a review on the New Market Wizards book by Jack Schwager.

Of particular interest for our funds are the interviews in Part IV of the book covering Stanley Druckenmiller, Richard Driehaus, Gil Blake and Victor Sperandeo.

Interestingly when I first read these interviews I dismissed Part VII on the Psychology of Trading. Over time when I have revisited this book I actually find the three chapters on Psychology of Trading the most interesting and there are also references in these chapters to additional material that is very useful for potential investors.

Part VIII Closing Bell is also very interesting.

You could almost read this book from the back first and make your way forward to the interviews. Compulsory reading….!

GET THE BOOK

4 — How To Make Money In Stocks by William O’Neil

This book is about finding “multibaggers” – the stocks that double in price and then keep climbing higher. Having studied the best-performing US stocks throughout history, William O’Neil distills the attributes they share and prescribes a system to identify and trade the future winners. It is a no nonsense guide to making money, a reference for adherents, and a refreshing challenge to orthodox investing.

You can forget the “buy and hold” strategy: limiting your losses and timing the market are far more important if you are to preserve your wealth. And you can disregard the traditional valuation metrics because they were of little help “post-GFC”, in the 2000 tech bubble, or in any of the previous periods in which enormous gains were made. Focus instead on new growth areas, recognise patterns in market trading – one hundred examples of price chart are provided! – and buy more of the stock as its price trends upwards.

Admittedly, this is not a light or entertaining read. It blatantly plugs O’Neil’s stock data services, and more frustratingly it fails to address the “false positives”: O’Neil gives no examples of stocks that meet his criteria and yet fail to deliver. Nevertheless, it contains concepts that are critical to your wealth. For example, at Cadence Capital we seek to benefit from trends, and we actively scale into and out of stocks to maximise returns and to prevent large losses. There is some drudgery to investing after all, namely the discipline required; you can consider this book a modest test!

GET THE BOOK

3 — Market Wizards: Interviews With Top Traders by Jack D. Schwager

From Amazon: How do the world’s most successful traders amass tens, hundreds of millions of dollars a year? Are they masters of an occult knowledge, lucky winners in a random market lottery, natural-born virtuosi—Mozarts of the markets?

In search of an answer, bestselling author Jack D. Schwager interviewed dozens of top traders across most financial markets. While their responses differed in the details, all of them could be boiled down to the same essential formula: solid methodology + proper mental attitude = trading success. In Market Wizards Schwager lets you hear, in their own words, what those super-traders had to say about their unprecedented successes, and he distils their responses down into a set of guiding principles you can use to become a trading star in your own right.

GET THE BOOK

2 — Fooled By Randomness: The Hidden Role Of Chance In Life And In the Markets by Nassim Nicholas Taleb

Human beings are exceptional at pattern recognition and, for the most part, this skill serves us well.

Taleb does a brilliant job of explaining the other side of that coin: Mistaking correlation for causation, overestimating causation, a belief that everything can actually be explained and the apparent inability to get our heads around ‘randomness’.

Taleb goes beyond the numbers and uses real-world examples to explore topics such as survivorship bias, a systematic neglect of outliers and the scarcity of truly symmetrical distributions in the real world.

This book will make you think differently about the roles luck and chance play in your life. With the business world as a back-drop, real life situations as examples and a ‘tell it as I see it’ delivery, this read is as entertaining as it is thought provoking. We consider it a must read for every investor.

GET THE BOOK

1 — Reminiscences Of A Stock Operator by Edwin Lefevre

This book is almost compulsory reading for anyone who wants to invest in the market.

The ‘boy plungers’ views on ‘hope, fear and greed’ make interesting reading.

This book is good the first time but makes more and more sense on the second and third reading. We will more than likely revisit this book a year from now after having recommended 52 other books to read.

GET THE BOOK

Subscribe to our Monthly Newsletter

 

A Guide to Analysing Company Fundamentals

Learn how to use the PEG Ratio and avoid common pitfalls using P/E and dividend yield ratios.

Download Free EBook

Featured Video

Quarterly Webcast March 2017

Quarterly Webcast March 2017

In this Webcast, Karl Siegling gives an update on the fund’s performance and a brief outlook for the Company. He also discusses the portfolio’s holdings, and gives a detailed update of the Company’s largest holding Melbourne IT (ASX:MLB).

More Videos