Over the years, I have read enough books on the topic of personal finance to make both Amazon and my local library very happy. Here are a few of my favorites:
The Only Investment Guide You'll Ever Need by Andrew Tobias
I owe so much of what I know today about personal finance to the 1978 first edition of Andy's classic, which I read right after graduating from college, that every time I write something for public viewing I'm afraid he'll sue me for plagiarism. He has kindly allowed me to read the text and make recommendations, some of which he has even taken, for the last 4 editions, earning me a very nice acknowledgment in his book that makes my mother kvell (it's a Jewish mother thing). Be sure to get the 2005 edition.
Winning The Loser's Game by Charles D. Ellis
No book comes closer than this one to describing the investment policy I consider optimal, laying the foundation for a proper understanding of risk and return, the role of time in investing, and the importance of maintaining maximum levels of equity holdings while minimizing unnecessary investment expenses.
Asset Allocation by Roger C. Gibson
With reservations, I recommend this book as a way of understanding the most valuable insight of Modern Portfolio Theory: that the best way to reduce the risk of investing is not to choose less risky investments with lower returns but to combine different types of risky assets that go up and down at different times (not only does this reduce the overall volatility of the portfolio but, as impossible as it sounds, it actually causes the expected return of the portfolio to rise above the average expected return of the individual assets that make up that portfolio!). I use many of Gibson's insights in the development of portfolios for my clients (and plan to discuss them here at some later date). My reservations are that the book is written for investment advisors, can be tough sledding in parts, and spends a great deal of time discussing practice management and the advisor's handling of client expectations and fears (and I disagree strongly with his views on this last subject).
A Random Walk Down Wall Street by Burton G. Malkiel
Virtually every person I respect in the investment field puts this on their list of the books that most influenced their thinking. Although my departures are slightly different from his, I identify with Malkiel's description of himself as a "random walker with a crutch." Unlike many people who become famous for a particular viewpoint, Malkiel has proven to be unafraid of reexamining his assumptions periodically, and his 9th edition, which came out in early 2007, is worth a read, even by people who have read each of the first 8 editions. One of my favorite concessions was his acceptance of mean reversion, the tendency of markets after a few (3 to 5) years of above-average or below-average performance to pull back toward the average. One thing this does is make stock investing much safer in the long run than is implied by its volatility over the short run. Alas, people who think it is possible to beat the market with market timing or superior stock picking will find some of the best arguments against that belief in this book. My favorite quote ever on that topic is in this book, toward the end of the chapter entitled "Potshots at the Efficient-Market Theory," by Richard Roll, a well respected professor and money manager. It's a long quote, but two sentences will communicate the basic point. In a debate with Robert Shiller (author of Irrational Exuberance and a skeptic on market efficiency), Roll noted, "I have personally tried to invest money, my client's money and my own, in every single anomaly and predictive device that academics have dreamed up ... I have yet to make a nickel on any of these supposed market inefficiencies." Nor have I.
Stocks For The Long Run by Jeremy J. Siegel
This book contains a wealth of historical information about stocks, bonds, cash, and inflation, making the case for the book's title extremely well. Siegel is open-minded, and does his best to fairly review the literature supporting fundamental, technical, and behavioral attempts to beat the market averages. His chapter on taxes hammers home a point I've made with many of my clients: taxable accounts should be dominated by long-term holdings of stocks and/or stock mutual funds, while alternative investments (commodity futures, REITs, and bonds) generally ought to be placed in sheltered accounts whenever possible. He also explains how active trading of stocks and timing strategies is severely punished by transaction costs and (in taxable accounts) taxes, although I believe he has massively underestimated the transaction costs of moving average strategies in his semi-sympathetic discussion of them, a topic I address in my own coverage of moving averages (forthcoming).
