First I think it’s important to know where we came from. In order to think outside the box, you have to know what’s in the box in the first place. Part of knowing what’s in the box, means having an appreciation and understanding of history. Americana by Bhu Srinivasan takes us on the 400-year journey of capitalism in America. From the Mayflower and whaling to Nike and the internet, this is a great book to help lay the foundation and provide context for the world we live in today.
Next, so much of investing comes down to basic human behavior. The Psychology of Money by Morgan Housel contains lessons on wealth, greed, and happiness. Doing well with money isn’t necessarily about what you know, it’s about how you behave. And behavior is hard to teach, even to really smart people. How to manage money, invest it, and make business decisions are typically considered to involve a lot of mathematical calculations, where data and formulae tell us exactly what to do. But in the real world, people don’t make financial decisions on a spreadsheet. They make them at the dinner table, or in a meeting room, where personal history, your unique view of the world, ego, pride, marketing, and odd incentives are scrambled together.
If you have an understanding of history and firm grasp of your behavior, understanding the mechanics of businesses, i.e. accounting, is crucial to identifying great companies. Using the world of a child’s lemonade stand to teach the basics of accounting, The Accounting Game makes a dry subject enjoyable and understandable. This book does a wonderful job walking you through the income statement, balance sheet, and statement of cashflows all set against an easily understood framework…owning a lemonade stand.
Putting it all together and we have The Four Pillars of Investing by William Bernstein. This book contains, well, 4 pillars: The Theory of Investing. The History of Investing, the Psychology of Investing, and the Business of Investing: This is one of the best books about investing I’ve read. By no means the first one you should read, but once you’ve got some of the basics under control, this helps takes it to a very sensible level. Asset allocation and the history of booms and busts are key here.
Lastly, I’d be remiss if I left out the role that chance and luck play in investing. Fooled by Randomness by Nassim Nicholas Talib is about luck, or more precisely, how we perceive and deal with luck in life and business. Set against the backdrop of the most conspicuous forum in which luck is mistaken for skill, the world of investing and trading, this book is a captivating insight into one of the least understood factors of all our lives…luck or randomness.