Books and Principles

I used to read a lot of books about personal finance and investing, but I don’t anymore. Not because they aren’t valuable, but because after a while, you realize they all cover the same ten principles:

1. You are your own worst enemy – Your emotions will try to sabotage your investment plan, even if you think they won’t.
2. Stocks win in the long run – Stocks outperform cash and bonds in the long run - and by a lot. You must endure volatility.
3. Costs matter – Unnecessary fees, expenses, and trading eat into returns.
4. Always diversify – You need to own everything because you don’t know what the future holds.
5. A dollar invested today is worth more than a dollar invested tomorrow – Compound growth rewards patience. Start early.
6. Avoid taxes – Tax efficiency matters, and inflation is a silent tax that erodes the value of your cash.
7. Stay out of consumer debt – The stock market can give you 8-10% per year. Credit card debt is charged at 20%+ and making those payments eats up your cash flow.
8. No one can consistently time the market – Even the best investors don’t get it right. Time in the market beats timing the market. The more you react to headlines, the worse your results.
9. Risk and return are always linked – If you want higher returns, you must accept volatility. If you want stability, accept lower returns. Being fully invested is great until you need cash and have to sell at the wrong time.
10. The best portfolio is the one you can stick with – If you can’t sleep at night because of your investments, they’re not right for you. And if your strategy is too complicated to understand, you probably won’t stick with it.

These ten principles shape how I invest and plan. And when I think about the books that influenced me the most, they aren’t the ones you’d expect.

On Writing by Stephen King

From the second foreword: “This is a short book because most books about writing are filled with bull (you-know-what) …. I figured the shorter the book, the less the bull (you-know-what).”

This applies to everything, not just writing. In investing and financial planning there is so much garbage out there that just doesn’t matter.

Friday Night Lights by H.G. Bissinger

This is a book about a football team in West Texas, but in chapter 11 the author shares many stories about the stupidity of the West Texas Oil Boom (and bust). Every time the stock market goes crazy, and I hear about people making “genius” investments and making tons of money (for awhile, at least), I reread this chapter.

“From 1973 through 1981, when the price of oil went up more than 800 percent, he and thousands of others made the fatal error of forgetting that every ounce their success was due to the geopolitics of the Arab oil embargo and the Carter energy policy and the Iranian Revolution. They had actually thought that they themselves…were somehow in control of their own destinies…. Instead of understanding that they were the beneficiaries of history, they began to believe they were the creators of it.”

Simple Wealth, Inevitable Wealth by Nick Murray

The most concise book about why you should invest in stocks, what risk actually is, and that you are indeed your own worst enemy.

I share this book the most often and have a lot of copies of it.

The Smartest Guys in the Room by Bethany McLean

This book is about the rise and fall of Enron. I’ve read it a few times, and though, in hindsight, you can’t help but think “how the heck did these people get away with this for so long?” the truth of the matter is that it became a stock that everyone fell in love with. Then it disappeared.

The story of Enron is just another reason why I tend to avoid individual stocks and prefer indices instead.

The Psychology of Money by Morgan Housel

Of all the books I’ve read, The Psychology of Money is the only one that articulates just how easy it can be to be your own worst enemy.

There are also plenty of books to avoid. I’m not going to mention titles, that wouldn't be professional, but I’ll mention themes.

Fees are everything – No they aren’t. They are important, but they aren’t everything. Why is it that with just about everything in life, we view cheap as bad – except for our investments.

Financial advisors are evil – Many are, but most aren’t, and for some reason these books are often written by retired or out of work advisors.

You can beat the market – Maybe you can, for a little while at least. But that doesn’t really matter. If, when you’re 93 you run out of money, and your 87-year-old neighbour also runs out of money, but you both beat the market every once in a while, did either of you win?

Give me a shout if you have book you think should be added to this list.