Some Suggested Reading

 

I read a lot; it is one of my true passions in life. Some of that reading is for business purposes while some of it is personal, but it is all for pleasure. Listed below are collections of both types of books that might intrigue you as they have me.

 

 

Professional Reading

 

a. General Investment Overview

 

Once you have finished digesting the 1,000 pages in the 10th edition of Investment Analysis and Portfolio Management, here are some other books that provide useful insights into the investment process:

 

Bernstein, Peter L., Capital Ideas

As the subtitle (The Improbable Origins of Modern Wall Street) suggests, Bernstein has written a history of how academic theory shaped financial practice in the last half of the 20th century. It is at once an entertaining and enlightening treatment, particularly for those readers who have heard the names (like Fisher Black, Bill Sharpe, and Harry Markowitz) and want the “back fill” on their stories. Bernstein, who is an insightful researcher in his own right as well as the founding editor of Journal of Portfolio Management, serves as the finance profession’s Boswell. While he is at his best regaling the reader with the small details behind the big ideas, the real payoff here is the good and relatively painless conceptual overview the book provides. Bernstein’s Against the Gods is also worth reading, but considers a narrower topic (i.e., the evolution of risk).

 

Buffett, Warren E., and L. A. Cunningham, The Essays of Warren Buffett

The essays in this volume are actually Buffett’s “Letters to the Shareholders” of Berkshire Hathaway that have appeared in that company’s annual reports over the years. In any given letter, Buffett expounds on what must have been on his mind at the time; the list of topics ranges from ruminations on fundamental investing to discussions of the intricacies of accounting and tax policy to his take on the role of money managers in corporate governance. I imagine that, reading them separately over the years, Berkshire shareholders were highly amused and educated in a “one off” sort of way. Reading them collectively, however, you get a great insight into the mind of one of the great investors of our time. Although I enjoyed Robert Hagstrom’s The Warren Buffett Way, the advantage of this book is that you get the guy’s philosophy directly from Buffett himself without any editorial filters.

 

Lowenstein, Roger, When Genius Failed

This book traces the rise, fall, and rescue of Long-Term Capital Management, perhaps the most celebrated (and infamous) hedge fund in history. It is a remarkable account of how a lot of really smart people—from the fund’s partners to its bankers to the regulators charged with protecting the public’s interest—did some things that, with the luxury of hindsight, proved to be very foolish. It is a story with few heroes, but one with many lessons to be learned. However, beyond merely offering a cautionary tale of how greed, hubris and myopia almost brought down the entire financial system, the author also provides the reader with an excellent description of the myriad investment strategies that continue to be employed by the hedge fund industry today. At the very least, this is a book that will challenge what you think you know about leverage, liquidity and diversification.

 

Malkiel, Burton G., A Random Walk Down Wall Street

Professors teaching security analysis in business schools face an interesting dilemma: We teach people how to identify situations where a stock’s price and intrinsic value may differ, despite the fact that a substantial portion of our academic training strongly suggests that security markets are efficient to the point that such activity is unlikely to lead to abnormal profits over time. While it is certainly possible to reconcile these polemical positions—for instance, when there is a cost to acquiring and processing financial information—the more interesting question probably involves establishing which view of the world defines an individual’s core belief. My own opinion is that investors are far better off in the long run with a “null hypothesis” that markets are efficient; this creates the burden of having to convince themselves why price and value might differ in a particular situation. Within this context, Malkiel’s book is the most compelling and user-friendly statement of the nature and portfolio implications of the efficient market hypothesis that an investor could hope to find. I have used it as a supplementary text in my classes for years and it remains an insightful and highly entertaining reference.

 

b. The Security Valuation Process

There is no shortage of books describing the “right” way to value stocks and bonds. Here are few that I have found particularly influential in helping to shape my thinking on the subject:

 

Fisher, Philip A., Common Stocks and Uncommon Profits

Fisher does not have the following of Ben Graham, Warren Buffett, or Peter Lynch, but there is a lot to savor in this small volume. Like Security Analysis, the fact that it was written almost half a century ago does not diminish the value of the insights it contains. I particularly liked the chapter “The Fifteen Points to Look For in a Common Stock,” which provides a great outline for how to analyze the competitive strategy and operations of a company. Beyond that, Fisher’s discussion of “When to Sell” is quite useful; this is a topic that is often given cursory treatment but one that is arguably more important to preserving an investor’s wealth than deciding what to buy.

 

Graham, Benjamin, and David Dodd, Security Analysis

One of my former students has a great way of describing the difference between growth and value investors: The growth-oriented manager will see a company with a current cash flow level of, say, one dollar and get excited about the possibility it will increase to five dollars in the near future, while the value-oriented manager will get excited if she can buy the dollar now for only fifty cents. The latter description is a perfect example of the way Graham and Dodd espouse looking at the investment world; the difference between purchase price and intrinsic value is the investor’s “margin of safety”. The writing is occasionally ponderous and not all parts of it have aged well since its original publication in 1934—see Graham’s The Intelligent Investor for a more recent treatment of this area—but this book remains “ground zero” for any serious student of stock and bond valuation. It truly deserves to be called a classic.

 

Lynch, Peter, and John Rothschild, One Up on Wall Street

For all of the financial capital under their control, it has always amazed me how anonymous most portfolio managers are. Money management firms (Fidelity, AIM, Vanguard) are well-known, but the men and women who actually make the investment decisions typically are not, particularly to non-groupies who don’t stay glued to CNBC. Of course, Peter Lynch is an exception; his performance record while running Fidelity’s Magellan fund was so spectacular they could not keep him hidden. This is the first of two books—Beating the Street being the other—that crystallizes his “power of the little guy” investment philosophy. If Ben Graham is the quintessential value investor, Lynch embodies the GARP (Growth At a Reasonable Price) approach. The chapter on “Some Famous Numbers” is worth price of the book alone.

 

Rappaport, Alfred, and Michael J. Mauboussin, Expectations Investing

The more I use discounted cash flow (DCF) models in my personal and professional valuation work, the more I am convinced that what they do best is help an analyst understand what the market already anticipates about what the company will do. That is, by setting the DCF model equal to the stock’s current market price, you can extract a great deal of information about what expectations have already been discounted by other investors. That notion is essentially the premise of this volume, which also develops a nice intuition for how investors can spot opportunities once they understand those priced-in expectations. By the way, you know a book was written by non-academics when it comes with its own website (http://www.expectationsinvesting.com/).

 

c. The Behavioral Foundations of Investing

 

When I got out of graduate school in the early 1980s, the notion that investor psychology mattered in determining stock prices bordered on heresy. Now, however, that idea is not only accepted as plausible, but it has grown into an area of study (i.e., behavioral finance) that is quite fashionable. Here are some interesting volumes that contribute to this field:

 

Damasio, Antonio R., Decartes’ Error

Can we really “free” our reasoning minds from emotional contexts in our thought processes? Writing in the 17th century, the French philosopher Rene Decartes thought so—at least I think he thought so, based on the vague bits of Meditations I remember reading—but as the title of this book implies, Damasio believes otherwise. The product of a cognitive neurologist, Decartes’ Error offers a relatively non-technical description of how the brain works. Some of this material proved to be a lot more than I wanted to know, but the author makes an effective case for the proposition that rationality has no context without emotion; this in turn suggests that psychological factors can and must matter in our understanding economic activity. If you read this book, you’ll know why Phineas P. Gage’s pain turns out to be our gain.

 

Kahneman, Daniel, and Amos Tversky, Choices, Values, and Frames

This one may be stretching things a bit; Choices, Values, and Frames is not really a self-contained book but a compilation of articles that were originally published mostly in academic journals. The central theme for the collection is an exploration of Kahneman and Tversky’s prospect theory, which in some sense is the foundation for the behavioral approach to finance in that it offered a plausible alternative to the conventional “rational man” model of economic activity. (It was also the contribution that factored heavily into the decision to award Kahneman the Nobel prize.) You do not need to be either an economist or psychologist by training to enjoy or get the gist of the research gathered here. Incidentally, this volume was preceded by the equally compelling Judgment Under Uncertainty, which was also edited by Kahneman and Tversky along with Paul Slovic. Both works belong on the bookshelf of any serious student of this area.

 

Shefrin, Hersh, Beyond Greed and Fear

While the behavioral approach to finance has gained recent currency in academic circles, it is still not sufficiently established that many semester-long courses are devoted to the topic. (I, for instance, concentrate a couple of lectures to behavioral issues during my survey class in Investment Theory and Practice.) Further, those behavioral finance classes that do exist tend to use reading lists of original research articles or collections of those articles, such as Richard Thaler’s Advances in Behavioral Finance or Andrei Shleifer’s Inefficient Markets. However, this volume comes a lot closer to serving the role of a textbook for the field in that it provides the reader with both an integrated overview of the issues and a summary of the relevant research in the area. All the major psychological themes—e.g., overconfidence, representativeness, anchoring, frame dependence, loss aversion, mental accounting—are considered here, along with some useful applications. For someone just beginning to think about these things, this is a good place to start.

 

Kahneman, Daniel, Thinking, Fast and Slow

What does it say about the state of an academic discipline when an experimental psychologist wins the Nobel Prize for Economic Sciences? As someone whose formal training in the field was based almost exclusively on the “rational man” model, to me that event symbolized nothing short of a dramatic paradigm shift that has transformed economic theory and practice over the past two decades. Once considered pure heresy in the profession, the heuristic bias-based decision theories that underpin behavioral economics have by now become a standard part of the modern economist’s toolkit. Daniel Kahneman, along with his late colleague Amos Tversky, is widely regarded as being responsible for much of that evolution.  Thinking, Fast and Slow is a remarkable book that summarizes much of the considerable body of extant research into the way people actually make their decisions and judgments. Much of the story that emerges is that we are often susceptible to making logical errors when we assess and process information, whether due to our tendency to "anchor" on irrelevant facts, take shortcuts in the face of difficult tasks, or because of overconfidence in our ability to appraise rare events properly. What makes Kahneman’s discussion particularly insightful is his use throughout the book of the metaphorical two-system process underlying human thought: System 1, which makes fast and intuitive judgments, and System 2, the more logical and deliberate process that, among other things, tries its best to regulate the emotional responses of System 1. As the author explains, System 1 is the star of the show inasmuch as “fast thinking” is the source of so many of the cognitive biases that mark our decision making.  This volume should be required reading throughout the social sciences.

 

 

Literature (or, at least, Great Fiction)

 

I have never really known where to draw a hard-and-fast line when trying to classify a novel as “literature” or mere “fiction”. The former, it seems to me, allows the reader to learn something potentially profound about himself, while the latter can simply be a satisfying reading experience. Regardless, here are some books that have meant a lot to me:

 

Achebe, Chinua, Things Fall Apart

One of the chief functions of a good novelist is to challenge the way that the reader sees the world, a task that can be accomplished either subtly or dramatically. In Things Fall Apart, Achebe manages to confront his audience both ways. Told from the perspective of the Ibo tribesmen in Nigeria, the story revolves around the complex structures that define a society and how the imposition of an outside belief system can destroy that culture. To Achebe’s great credit, the assignment of labels such as “good” and “bad” are not nearly as black and white as the characters that populate the book. It is at once a heart-breaking and thought-provoking work, particularly for anyone who thinks that Conrad’s Heart of Darkness is the definitive statement on the personal and societal impacts of colonialism.

 

Austen, Jane, Pride and Prejudice

Given its reputation as the quintessential “chick lit” novel, I purposely avoided reading this classic for more than three decades. That was a huge mistake. Indeed, this book has everything that you can reasonably expect from a literary experience: an engaging story, memorable characters, and surprising insights into the human condition that transcend its 200-year old setting. On top of all that, there are parts of the novel that are very, very funny. Despite feeling like I already knew the story before I started reading—there have been countless adaptations of this work, such as Helen Fielding’s hysterical Bridget Jones’s Diary—I still found myself eager for the answers to the book’s main questions (e.g., Can Darcy overcome his pride and Elizabeth her prejudice (and vice versa) long enough to get out of their own way? What makes Collins such a sycophantic toady? What’s the deal with Lydia?). While it may take me another 30 years to get around to reading Sense and Sensibility, Emma, or any of Austen’s other works, next time the delay will not be because of my own prejudice.

 

Barnes, Julian, A History of the World in 10 Chapters

During a heated discussion several years ago, my wife accused me of being “way too linear” in my thinking. (I’m still not quite sure what she meant by that, but I’m reasonably certain it wasn’t a compliment.) Given that comment, however, I am sure that she would appreciate the sort of novels that Julian Barnes writes. In fact, as with Flaubert’s Parrot, some might argue that A History of the World really isn’t really a novel at all but rather a collection of tangentially connected stories that are as much documentary as they are fiction. What the book clearly is not is linear story-telling, mixing as it does a retelling of the Noah’s Ark story from the perspective of a stowaway with a detailed analysis of a painting that hangs in the Louvre and an archeological expedition to Mt. Ararat. It all does make sense ultimately—the chapters actually do progress from Genesis to Revelations—and much of what it contains is both philosophically challenging and simply hilarious.

 

Davies, Robertson, What’s Bred in the Bone

It was actually hard for me to choose which Davies’ novel to recommend; he is my favorite author and I have read all of his books, some more than once. The guy is simply a masterful story-teller and very erudite as well. This novel is the middle volume of his Cornish Trilogy, which starts with The Rebel Angels (another great book) and ends with The Lyre of Orpheus (not his best). Davies may be even better known for his Deptford Trilogy, a more evenly paced collection that “made” his international reputation as a novelist (he was already highly regarded as a playwright and a newspaperman). In fact, if you have been searching for an entertaining novel about a protagonist undergoing Jungian psychoanalysis, try The Manticore.

 

Garcia Marquez, Gabriel, Love in the Time of Cholera

I have loved everything I have ever read by Garcia Marquez, but the two novels that really stand out in my mind are this one and One Hundred Years of Solitude. While the latter is more famous—thanks most recently to Oprah—and in many ways more technically proficient, Love in the Time of Cholera affected me far more deeply. It is a memorable story of enduring, unrequited love that is extraordinarily evocative of a time and place unfamiliar, I suspect, to most readers. Many other entertaining books have explored similar themes or have tried to capture the Latin American magic realism style (see, respectively, Audrey Niffenegger’s The Time Traveler’s Wife and Laura Esquivel’s Like Water for Chocolate), but reading those will only make you appreciate how masterful Garcia Marquez really is.

 

Greene, Graham, The Heart of the Matter

Greene was a diverse and prolific writer, producing both “serious” works (such as this one) and what he called “entertainments”. While the best of the latter—which would include Travels With My Aunt and Our Man in Havana—are great fun to read, they are not particularly memorable. On the other hand, the themes in The Heart of the Matter—love, loss, loyalty—are universal and timeless. Greene is now probably better known for his work that has been adapted into movies (The End of the Affair, The Quiet American), but, to me, this is his best.

 

Hemingway, Ernest, For Whom the Bell Tolls

I grew up thinking of Hemingway as one of the literary giants. Most people of a certain age read The Old Man and the Sea in high school (or at least they were offered the chance to read it; I didn’t always take advantage of such opportunities in those days). Now, however, he seems to have fallen out of favor in many circles. I suppose his terse and sometimes overtly macho style rubs some people the wrong way, but I think the best of what he wrote is enduring. For Whom the Bell Tolls is substantially longer than most of his other novels, but it contains the same motivating themes that mark his territory. Set against the backdrop of war, Hemingway challenges the reader to consider the value of devotion and commitment and, ultimately, sacrifice. This is great stuff and one of the best books ever written.

 

Hesse, Hermann, Narcissus and Goldmund

I hesitated with this recommendation—Hesse’s The Glass Bead Game is a book that every aspiring academic really needs to read for a sense of balance—but ultimately this one has meant too much to me not to include. When asked whether he had ever read the same book twice, Robertson Davies (see above) observed that that is impossible; the words on the page might stay the same over time, but the perspective of the reader certainly does not. I have read this novel, which gives human form to the struggle between flesh and spirit that exists in us all, many times since high school and it continues to resonate each time in a different way.

 

Irving, John, A Prayer for Owen Meany

Faith and doubt, pre-destination and choice, symbols and reality, truth and deception: These could easily be the themes of an author writing in the 1800s, but this novel is quite decidedly a product of the late twentieth century (e.g., protracted musings on the Viet Nam war and the Iran-Contra affair). While The World According to Garp and The Cider House Rules appear to be Irving’s more popular works (or at least the ones that have inspired larger cult followings), this is arguably his most personal and profound book. Despite the persistent allegories—both obvious and subtle—there are no easy answers to the novel’s central religious and moral questions. Is Owen truly a miracle and an “instrument of God” or just someone elevated to messianic status by people around him who are desperate to believe in something? I am still not sure, but he is easily one of the most charismatic, hilarious, and altogether memorable fictional characters I have encountered.

 

Ishiguro, Kazuo, The Remains of the Day

Do we really appreciate the implications of the choices we make in life? Ishiguro doesn’t seem to think so; it is one of the themes that pervades his fiction. Nominally the story of an English butler reflecting back on his career, this novel is really a journey of self-realization that comes way too late to save the protagonist from himself. It is also one of the most delicately and subtly written books I have ever read. If you want an additional treat, once you have finished The Remains of the Day, read Ishiguro’s An Artist of the Floating World which, in many respects, is a comparable story told from the perspective of an elderly Japanese gentleman.

 

Nabokov, Vladimir, Lolita

Most of us have trouble writing something respectable in our native language, but Nabokov’s first language is Russian and he wrote this in English. By the way, if you have not read this book but you think you know what it is about, you will probably be surprised. By reputation, it is considered to be pornography in some circles, but it is really more about the nature of obsession than anything that is overtly lurid (not that there is anything wrong with that, of course). Nabokov is hardly a “warm, fuzzy” sort of writer, but his prose is deeply moving nonetheless.

 

O’Brien, Tim, The Things They Carried

Stories can entertain us, they can challenge the way we view the world, and they can help us remember all the things that should never be forgotten. War seems to be a particularly compelling subject for the stories that novelists need to tell—see the listings for Pynchon’s Gravity’s Rainbow or Hemingway’s For Whom the Bell Tolls—just as the machinations of lawyers and policemen seem to be fertile ground for television writers. This book is fiction, but only loosely qualifies as a novel: A character named “Tim O’Brien” recalls the poignant and sometimes harrowing events that took place before, during, and after his tour of duty in Viet Nam. It may or may not always be the story that reader wants read, but it is clearly the story that the author needed to write. It is also one that just blew me away.

 

Powers, Richard, The Goldbug Variations

Just when you start to think you are smart, a guy like Richard Powers comes along and reveals how little you know about so many things. The raw candle-power of this man is stunning, but what I like best about his books is the genuine compassion he has for his characters. The novel is basically a love story set against the backdrop of the quest to solve the mysteries of genetic coding. Music also plays a prominent theme; in fact, the blueprint of the novel itself is patterned after the structure of Bach’s Goldberg Variations for piano. Reading this one might feel more like investment than consumption, but it is well worth the effort.

 

Pynchon, Thomas, Gravity’s Rainbow

If you have not experienced Pynchon before, getting ready to have your life taken over for a while. I bought this book when I was a freshman in college at the suggestion of my Political Science professor and, after several unsuccessful initial attempts, it remained unread for more than 25 years. Awhile back, I got sick of the thing sitting on my bookshelf mocking me and so I finally started and finished it, along with the aid of Weisenburger’s A Gravity’ Rainbow Companion. (The fact that a 900-page novel requires a 300-page companion to explain all of the embedded allegories and allusions says a lot, but I’m not sure what exactly.) That this is the mother of all war novels is at once an accurate and highly misleading statement; it is a ride unlike any other that I have taken.

 

Rand, Ayn, The Fountainhead

If you have been to business school, you have probably been exposed to (and, perhaps, heavily influenced by) Rand’s view of the world at some point in your life. While most people consider Atlas Shrugged to be the definitive fictional embodiment of her Objectivist philosophy, I think this book gets the same points across in a far less heavy-handed way. (I dare anyone to look me in the eye and swear they really read John Galt’s 100-page diatribe toward the end of Atlas Shrugged as carefully as they did the rest of the book.) When I read The Fountainhead in graduate school, I was deeply moved by its ideas of the human spirit and a man’s role in society. I wonder how I would view those ideas if I read it again now.

 

Robinson, Marilynne, Gilead

Quite simply, this is a book of beautiful words formed into beautiful sentences expressing beautiful and profoundly moving thoughts. It is essentially a long letter written by a man in seventies to help his young son remember him after he passes. In his wonderful novel Mr. Sammler’s Planet, Saul Bellow summarized the main character as having lived his life the way a good man should. That would certainly be an apt description for John Ames, the protagonist in Gilead, as well. My wife and I read this book aloud over the course of a week and vocalizing the author’s words helped us find the proper cadence for the sentiments of a man whose mind remains sharp while his body is wearing out. Some books are intended to be “page turners” while others are meant to be savored; this is one of the latter kind.

 

Russo, Richard, Nobody’s Fool

I grew up in a bustling suburb of San Diego, which is about as far away from the world that Russo writes about as you can get. As in Nobody’s Fool, his other books (including The Risk Pool and the more recent Empire Falls) take place in small towns in the Northeast that, for various reasons, have become disenfranchised from the mainstream American Dream. While the contrast between the life he describes and my own was interesting enough, the real reason I love Russo is the complex and compassionate way he draws his characters. Although nothing much ever happens in these novels from a plot standpoint, I have found myself more than a little sad to see each one of them end. (Shouldn’t that be one way of defining great fiction?) This guy really is a wonderful writer.

 

Wallace, David Foster, Infinite Jest

This is an exhausting, stimulating, infuriating, and altogether remarkable book. It is a story about addiction, to both traditional substances (e.g., alcohol, drugs) as well as some unexpected ones (e.g, tennis, information). Wallace has imagined a very near-term future—one, in fact, that we’re already living in since the novel was published in 1996—that is populated with more characters and plot lines than any writer should be allowed to put into three books combined. Scattered amongst the 1,100 pages (including, by the way, about 100 pages of footnotes, which was a fictional first for me), the author does quite a bit of showing off; he was smarter than you and me and he seems to want us to know it. However, those pages also contain some of the most hilarious scenes I have ever read and that is what ultimately redeemed the experience for me. It is hard to recommend this book without reservation—how can anyone in good conscience compel you to surrender at least a month of your life, which is what it will take to absorb this magnum opus?—but I can say that it was thirty days well spent on my part.

 

Wolff, Tobias, Old School

Here is a book about people who love books written for people who love books. The plot is straightforward enough: At an East Coast prep school where writing contests generate more excitement than athletic ones, the narrator is forced to confront himself in a most unexpected way and the result changes the course of his life. The idea that fiction is a force that can both redeem and trap a person is one of the book’s compelling themes and a premise that would seem to be more than a little tricky to pull off well. However, in Wolff’s spare and direct language, this notion is given a fresh life and the result is very rewarding. By the way, after reading this novel it may be impossible for you to admit to liking both Ayn Rand and Ernest Hemingway; the author certainly makes it clear which writer he’d choose.

 

 

 

Return to Keith Brown’s Home Page