Archives for September 2010

5 Books That Have Shaped My Investment Philosophy


This morning Adam Joyce asked this question on LinkedIn:

I responded with the following answer:

This got me thinking about how I’ve educated myself about investing.  The internet has, by far, been my number one source of information.  However, if I really want to dig in to a topic or learn about something in detail I will buy a book on the subject.  So, this got me thinking about the books that have shaped my investment philosophy.  Here are 5 of the most important books on investing that I have read:

The Intelligent Investor by Benjamin Graham – Originally published in 1949, this book has often been called the bible of investing.  Read it once and you’ll see why.  Ben Graham is the father of value investing.  He is a very smart investor and lays out a simple portfolio policy including principles for selecting stocks.  Warren Buffett‘s own investment philosophy has been influenced by Mr. Graham.  Buffett claims that this book is, “By far the best book on investing ever written.”  This is a book that you will want to read several times to maximize its impact on your investing.  You will also want to be sure to get the revised version which adds helpful commentary from Jason Zweig.

The Dhando Investor by Mohnish Pabrai – Mr. Pabrai is another great value investor.  $100k invested with Pabrai in 1999 was worth over $659k by 2006…an annualized return of over 28% after fees.  In this book Pabrai shows how he has combined the methods of Warren Buffett, Benjamin Graham, and Charlie Munger to create a simple framework for investing.

The Davis Discipline by John Rothchild – The author shares the story of the Davis family beginning with the elder Shelby Davis, followed by his son (also Shelby), and now the third generation (Chris and Andrew).  The book provides a fascinating account of how an initial portfolio of $50,000 started by Shelby in 1947  turned into $900 million by 1994.  The story is an excellent example of the power of compounding, patience, and discipline.

Buffettology by Mary Buffett and David Clark – A good book to gain insight into Warren Buffett’s style of investing.  In this book you will find methods used by Buffett to value companies and select stocks.  It is a great book for investors who want to learn more about the approach of one of the best investors ever.

The Warren Buffett Way by Robert Hagstrom – Another great resource on Buffett’s investment strategy.  Chapter 4, titled “Buying a Business” is my favorite part of this book.  It will help you see that there is no fundamental difference between buying an entire business outright and buying shares in a business by investing in stocks.  Being an “owner” of businesses should drive your investment strategy and help you think through some very important criteria when it comes to picking stocks.

How about you?  What books have shaped your investment philosophy?  Leave your favorites in the comments…I would love to see what’s on your list.

Cheap Stocks

One way to evaluate stocks and bonds is to compare the earnings yield of the S&P 500 with the yield on the 10-year US Treasury bond.

In total, S&P 500 companies reported after-tax annualized earnings of $716 billion in the second quarter and had a market capitalization of $9.3 trillion. In other words, for every $100 in market value, the companies in the S&P 500 were generating $7.70 in after-tax profits – an “earnings yield” of 7.7%.

Comparing that earnings yield to the 10-year Treasury yield (currently 2.8%) reveals a gap of nearly five percentage points, the largest such gap since the late 1970s.

Today stocks offer an earnings yield that is 2.75X the yield on bonds.  So, by this measure, stocks are considerably more attractive than bonds for long-term investors.

Source: “Unfunded Liabilities and Cheap Stocks” [First Trust Advisors]