Investing

Top 10 Most Important Investing Books of All Time

Investing

 

I’ve read 100+ books on investing; countless hours of reading and educating myself on key investing principles. But I came to realize that while there are hordes of books that will endeavor to teach you how to invest in stocks, only a handful of classics matter; the books that will transform you. The list I’m sharing with you is what I believe to be the only books you need to read to establish a foundation for “Do-it-yourself” (DIY) investing. And even if you consider yourself an advanced investor; it never hurts to revisit the sound investing principles found in these tomes.

These are the Top 10 Most Important Investing Books:

1. The Intelligent Investor, Benjamin Graham

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It was through The Intelligent Investor that I was introduced to value investing, and the important concepts of Margin of Safety, Mr. Market, and Intrinsic Value. Warren Buffett called it “the best book on investing ever written”.

2. Common Stocks and Uncommon Profits, Philip Fisher

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Philip Fisher opened up my world to growth stocks. It was after I read Common Stocks and Uncommon Profits that I started paying more for stakes in higher quality, and faster growing businesses.

3. One Up On Wall Street, Peter Lynch

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 There are so many easy-to-implement lessons shared in One Up On Wall Street. But what really stuck with me was Peter Lynch’s focus on ‘buying what you know’. That has saved me from many disasters in the market.

4. Market Wizards, Jack D. Schwager

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Jack D. Schwager introduced me to some of America’s top traders in Market Wizards. But instead of telling us their favourite stock picks (what they buy) he explained their investment frameworks (why/how they buy).

5. Buffettology, Mary Buffett and David Clark

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There are many books that endeavor to explain how Warren Buffett invests in stocks but most come up short. Buffettology is the book that gets it right.

6. The Money Masters, John Train

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A classic that is fun to read. The Money Masters shares winning strategies from some of the world’s best investors who ever lived. It’s a book that I’ll read every couple of years to brush up on investing essentials.

7. The Essays of Warren Buffett, Lawrence A. Cunningham

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Lawrence A. Cunningham saves us the time of sifting through Warren Buffett’s priceless teachings from his annual reports in this comprehensive compilation; The Essays of Warren Buffett.

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

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 If you’re a DIY Investor you likely believe that the market is not efficient. But Burton Malkiel argues otherwise in A Random Walk Down Wall Street. Even if you don’t agree with the Efficient Market Theory it’s important to understand both sides.

9. Poor Charlie’s Almanack, Peter D Kaufman

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Warren Buffett’s partner, Charlie Munger, influenced him to invest in companies with strong competitive advantages, albeit at higher prices. Although somewhat scattered and non-linear, Poor Charlies Almanack is chock full of good advice on investing, and life in general.

10. The Snowball, Alice Shroeder

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Alice Shroeder chronicles the most important capitalist of our time in ‘The Snowball’. It goes without saying that Warren Buffett is the reason many people, including myself, are inspired to invest in stocks. He’s a role model. What’s also great about the book are the never-before-seen photos that add to Buffett’s story.

 

 

MarketMasters

Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.

The Education of a DIY Investor

Investing

 

When I was 12 years old I made a decision. I was going to be rich. I looked up to successful people and wanted what they had: financial freedom. They seemed to be happier than everyone else. But who was I kidding? Becoming rich would be an uphill battle. I was from a middle-class family of humble means. There was no trust fund. And my parents didn’t have work connections to land me my first job. The odds were stacked against me. But I still made the decision to be rich and started on my wealth-building journey. And the path I chose to get me there: do-it-yourself investing “DIY Investing”.

How I became a DIY Investor:

1. Emulating Successful Investors

I realized that if I wanted to make money by investing in stocks I had to study successful stock investors. Common sense, right? Isaac Newton said it best:

“If I have seen further than others, it is by standing upon the shoulders of giants.”

So, from age 12 to 18, I read around 50 books on the topic.

These were the six most formative investing books for me:

  • The Intelligent Investor
  • Common Stocks and Uncommon Profits
  • One Up On Wall Street
  • Market Wizards
  • Buffettology
  • The Money Masters

I would also study Forbes’ list of the 500 Richest People in the World and Canadian Business’ Richest Canadians. It then all became very clear to me. I could become rich by earning money, saving the proceeds, and investing in stocks as other rich people, such as Warren Buffett had done before me.

2. Earning and Saving

I had opened my first bank account when I was about 8 years old. As you can imagine there wasn’t much there; cash from birthdays, Christmas, and some chores. Maybe $500 in total from what I can remember. I had to earn/save more money fast! So I did what Warren Buffett had done at my age – delivered newspapers. At 12, I joined PennySaver and became a paperboy for three neighborhoods in my hometown of Mississauga. I deposited each paycheque, along with any other money, straight into my savings account.

3. Compounding Money

Once I turned 14, and just started high school, my savings account had grown to about $5,000. At that point, I wanted to invest in stocks. But because of my age I wasn’t eligible to open a brokerage account. So I started with bonds. After returning home from the bank, I placed those newly purchased Canadian Savings Bonds into a small but sturdy wooden box, hiding it safely under my bed. I was so proud. I knew that my bonds would generate interest for me on the principal amount ($5,000). “Compound interest is like magic”, I thought. “And the earlier I started the longer my money would compound (‘work’) for me”. Throughout high school, I would work several odd-jobs (mechanic shop janitor, meat department clerk, and Best Buy associate), all the while saving money from each paycheque, and then buying more bonds.

4. Investing in Stocks (the inflection point)

I turned 18, and was ready to enter University (party time!). In September, 2005, I moved into my “cozy” on-campus dorm room at the University of Waterloo. But even more exciting was that I finally opened my first brokerage account. By investing in stocks I could compound returns through both capital appreciation (i.e., stock price goes up) and dividend income (i.e., quarterly dividends from companies). I had already cashed out of my bonds; $10,000. So I invested that money evenly into 5 stocks, owning a $2,000 stake in each company. I felt like a true capitalist. This is how my idols, Benjamin Graham, Philip Fisher, Peter Lynch, and Warren Buffett, got rich; by investing in stocks. As I earned money though co-op job placements (which I recommend to every young person!), and bought more stocks, my portfolio grew, and grew, and grew. I was on top of the world. And then the financial crisis happened.

5. Capitalizing on Crises

I was 21 years old when the entire world ended in 2008 (or so most people thought at the time). The financial crisis thrust economies around the world into recession. Stock markets collapsed. And my stock portfolio imploded. I suffered around a 50% decline from peak to trough. The financial press was all doom and gloom. “Sell! Sell! Sell!” Most people were scared and converted their stocks to cash. So I invested all of my savings into my existing stock holdings. When I pulled the trigger I was scared stiff. But I’m glad I made that move as my stocks would soon rebound, pushing above pre-financial crisis highs into the years to come. I bought quality stocks on sale. 50% off! Was I a young genius; able to time the market? Nope. I simply learned from Benjamin Graham, the father of value investing, that economies and markets operate in cycles. Therefore, an investor could capitalize on manic markets, rather than become fearful and flee. Indeed, 2009 was a great year to be a value investor. I would make a similar move in February, 2016 to capitalize on a bear market in Canadian stocks where the TSX declined close to -25% from its high in September, 2014. Now I know that the average bear market (on the TSX) has declined -28%, lasting 9 months, while the average bull market has advanced +124%, lasting 50 months. Based on this historical evidence then since 1956, I should eventually be rewarded when I take on “risk” (i.e., investing in cheaper stocks) during bear markets. As Warren Buffett said:

“Be fearful when others are greedy and greedy when others are fearful.”

6. Refining My Portfolio

In 2010, upon graduating from the University of Waterloo, I had about $50,000 in my stock portfolio. More money than any of my friends. This was certainly an inflection point for me as the magic of compounding started to take real effect and I was just about to enter a full time career and earn a much bigger paycheque (plus bonus), which meant more money for stocks. By 2013, three years into my first full time job, my portfolio had grown to about $125,000. However, I realized that I could build wealth faster if I compounded returns at a greater rate. So, at 25, I made it my mission to build a portfolio that actually beat the market. I started watching BNN Market Call, re-reading the best investing books, and magazines (Money Sense, Canadian MoneySaver, and Canadian Business) and following the top investors around the world. From that I re-structured my portfolio into one that I’ve comfortably maintained since.

7. Sticking to My Investment Strategy

From my ‘quarter life crisis’ (age 25) and onwards, I continue to earn, save, and invest in stocks using the same strategy. Now, at age 28, I have built a quarter of a million dollar stock portfolio ($250,000). With a bigger capital base, it’s amazing how much more rapidly my portfolio can compound. For example, a 10% return will thrust my portfolio to $275,000. I say “10%” because over the long run (since 1934), the TSX has delivered a 9.8% annual compound return, despite recessions, bear markets, and world crises. But there’s no guarantee. Nevertheless, $1,000 invested in the Canadian index in 1934 would have grown to $1,595,965 by 2014 with 9.8% compound returns. That’s “magic”.

8. Always Learning and Growing

My DIY investing journey has been fulfilling so far. But I also know that I can further improve my odds of success by continuously learning, and improving my investing craft. This is why I recently met with some of Canada’s top investors. 28 in total. They told me how they invest in stocks, bonds, and options; sharing their proven investing strategies. It was enlightening. So I decided to put all of their investment advice into a book – Market Masters. You can now purchase Market Masters in Chapters, Indigo, and Coles stores across Canada as well as on Amazon.ca.


MarketMasters

Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.

Competitive Advantage: How to Find Stocks With Competitive Advantage

Investing

Competitively Advantaged
The successful investor only invests in a business with clear competitive advantage. Warren Buffett depicted competitive advantage as a moat, whereby competitors could not breach it to penetrate a business’s fortress. A business enjoys competitive advantage by creating a strong brand, possessing pricing power, offering niche customer service, or operating in an oligopoly, among others. In effect, a competitively advantaged business attracts and retains loyal customers. For example, Coca Cola is widely consumed as a result of its strong brand recognition. If one were to receive $1 billon from a venture capitalist, would he be able destroy Coca Cola’s market share in the soft drink industry? Absolutely not. Similarly, Wal-Mart is widely known to have the lowest prices in the industry. Consumers flock loyally to Wal-Mart, not Zellers. To stress then is that the successful investor invests in competitively advantaged businesses because he knows consumer loyalty to those businesses is like an addicts addiction; predictable and virtually impossible to break. Moreover, most favourable, however difficult to find, is a business that enjoys several competitive advantages.

Case Study: Competitive Advantage of a Strong Brand
Establishing competitive advantage in the clothing retail industry is incredibly difficult, which is why malls are so popular. Consumers likely visit multiple stores in order to find a top or pair of jeans, demonstrating no loyalty to one store. These clothing retailers then operate much like commodity businesses. However, there are juggernauts in the clothing retail industry. These juggernauts strategically established luxury brand appeal, a clear competitive advantage, to ensure consumer loyalty. For example, some consumers consistently seek Gucci, Coach or Louis Vitton products. Price is no barrier. One will never find a 60% off sale for a Gucci purse because there are people that will pay $500 for a Gucci purse, time and time again.

Case Study: Competitive Advantage of Pricing Power
The successful investor does not invest in a business with little or no pricing power, for he knows one of the most detrimental forces to a business is inflation, which can average 3% annually. A business that can raise its prices annually by more than inflation, such as Starbucks, is then competitively advantaged. Could McDonald’s harness the same pricing power for its coffee that Starbucks enjoys? Absolutely not. And yet, in 2008, common investor sentiment was McDonald’s new McCafe would rapidly entrench on Starbucks core business model. The successful investor shrugged off this negative sentiment, however, for he knew Starbucks customers well, reasoning they would not migrate to McDonald’s coffee based solely on lower prices. The common investor also discounted Starbucks during the financial crisis, forecasting consumers would tighten their belts and forever spend less, in turn declaring Starbucks doomed with its $5 Frappuccino. However, the successful investor simply visited several Starbucks locations to discover business was booming.

Case Study: Competitive Advantage in Niche Customer Service
North West Company Fund manages a portfolio of general department stores that, with the exception of one, most have likely never heard of: Northern, North Mart, AC Value Centre, and Giant Tiger. Aside from Giant Tiger, these department stores operate in the remote, northern regions of Canada. Indeed, North West Company Fund possesses clear competitive advantage in that no other business wants to operate in those remote regions of Canada. From this, North West Company was able to develop a strong relationship with its primarily Native Canadian customers. Further, selling to Native Canadians ensures North West Company almost guaranteed growth since the Canadian government subsidizes the income of Native Canadians. In essence then, North West Company consistently collects that government subsidized income when Native Canadians shop at its stores.

Case Study: Competitive Advantage of the Oligopoly
Canadian banks are undoubtedly the world’s most secure banks. The big five – TD, RBC, CIBC, ScotiaBank and BMO – weathered the storm that was the financial crisis from 2007 to 2009. Canadian banks are secure because its management is disciplined. For instance, investments are cautiously pursued, complex derivatives are largely avoided, mortgage policies are stringent, and most importantly, Canadian banks do not employ cowboys with itchy trigger fingers, unlike U.S. banks. However, Canadian banks charge high fees on accounts, chequing, withdrawals, over draft, trades, and the list goes on. And yet, in Canada, the majority of residents hold their money in either one of the “big five” banks, which is clearly the banks’ competitive advantage. Indeed, the Canadian banking system is essentially an oligopoly, an excellent reality for shareholders of a Canadian bank, not so excellent a reality for customers. Intelligently, the successful investor hedges the impact of high Canadian bank fees by becoming a shareholder in one of the “big five”.

Stock Valuation: Top 22 Metrics to Find Value Stocks

Investing

1. Brand. The business must possess a readily identifiable brand with favourable consumer perception.
2. Growth. The business must be able to grow its market share domestically and/or globally.
3. Track Record. The business must have a track record; else one cannot project its future.
4. Relevancy. The business must be relevant in multiple markets in that the business can expand its products into varying countries with ease.
5. Management. The business must possess able managers that focus on building shareholder value by; maintaining high return on equity, buying back shares, and owning personal stake in the business.
6. Competitive Advantage. The business must possess such a strong competitive advantage that other businesses fail to entrench on its market.
7. Earnings. The business must be growing its earnings over time.
8. Pricing Power. The business must be able to increase prices over time in line with inflation or greater.
9. Return on Equity. The business must enjoy high return on equity. Otherwise, it is not building shareholder value.
10. Consistency. The business must be consistent. The inconsistent business changes with the wind.
11. Profit Margin. The business must generate consistently high profit margins.
12. Personal Appeal. The business must appeal to you. You must love to such an extent its products or services that you can endorse the business without hesitation.
13. Book Value. The business must be growing its book value and, in turn, its underlying value.
14. Simplicity. The business must be selling a product or service that anyone can understand.
15. Repeat Use. The business must sell a product or service that is purchased consistently and continuously by the consumer.
16. Utility. The business must possess lasting utility such that underlying its brand, its products or services satisfy a consumer need or want.
17. Market Leader. The business must be a market leader. The market leader enjoys little competition.
18. Consumer Base. The business must enjoy a large consumer base, preferably both domestically and globally, so that it is not plagued by volatile revenues.
19. Employee Morale. The business’s employees must be happy to work there. A happy top line creates a better bottom line.
20. Adaptability. A quality business must be relevant forever by understanding how to sell in future markets.
21. Self Growth. The business must not grow by financing credit but instead grow by effectively allocating its retained earnings.
22. Debt. The business must not be burdened by significant long term debt, otherwise risk staggered growth.

Manulife Financial: Stock Valuation

Investing

>Originally written July, 2010

Manulife Financial is North America’s largest and the world’s fourth largest insurance business. Although Manulife Financial’s main operations are located in North America, it controls significant operations in Asia, spanning ten countries there. And while the successful investor values highly Manulife Financial, the common investor currently does not. Manulife Financial, as of July 2010, traded with a historically low P/E of 7.49. The common investor feels that because Manulife Financial did not hedge its segregated funds before the financial crisis, that each stock market correction will effectively hammer it. However, Manulife Financial’s portfolio consists of quality holdings; real estate in Canada, USA and Asia totalling $6 billion, stock’s totalling $5.3 billion, and money market funds and bonds totalling billions. Finally, even as Manulife Financial increasingly hedges its segregated funds, targeting a 70% hedge by 2012, common investor sentiment is “too little too late”. However, by comparing Manulife Financial’s underlying business to that of Great-West Life Co, another Canadian insurance business, one should conclude Manulife Financial’s stock is grossly undervalued.

First, Manulife Financial’s $29 billion book value is higher than its $28 billion market capitalization. Evidently, the successful investor can buy a piece of Manulife Financial for no premium. Second, Manulife Financial’s cash holdings and investments are substantial. Manulife Financial’s management is clearly maximizing its float – the money it receives from policy holders that is then invested or held in cash holdings. And overall, Great-West Lifeco’s fundamentals pale in comparison to those of Manulife Financial. However, Great-West Lifeco’s market capitalization falls only $4 billion short of that of Manulife’s. Further, because Manulife Financial is not trading with a premium, the successful investor would unlock its cash value. As of 2010, Manulife Financial held $19 billion in cash holdings, which comprised 68% of its market capitalization and 66% of its book value. However, before unlocking Manulife Financials cash value, the successful investor would take into account its $6 billion in long term debt. The equation to unlock Manulife’s cash value helps valuate Manulife Financial’s real stock price:

Manulife Financial’s real stock price = actual stock price [$15] + (cash per share [$10.8] – long term debt per share [$3.52])

Finally, the equation delivers Manulife’s real stock price, $22.28, an increase of 49% over its actual $15 stock price.

Why a Stock Increases

Investing

The successful investor invests in a stock not based on its momentum, but on its underlying value, earnings, and future earnings potential. To emphasize, a stock’s price is driven by its growth over the long term. Logically, if earnings increase, a business will grow. For example, the successful investor would invest currently in Wal-Mart’s stock because he believes Wal-Mart’s market capitalization will be higher in 2040. While the successful investor cannot predict Wal-Mart’s future growth with utmost accuracy, he can with some certainty project its future growth based on its past growth. Thus, if by 2040, Wal-Mart triples its net income to $42 billion, Wal-Mart’s stock price, and in effect its market capitalization, should also triple to about $150 and $540 billion respectively, returning 10% compounded annually from 2010 to 2040. However, understand that a stock’s price increases in line with its underlying growth only in the long term. In the short term, a stock’s price increases in line with investor sentiment. As Ben Graham, the father of value investing, once said, “in the short run, the market is a voting machine, but in the long run it is a weighing machine.”

Top 10 Best Investing Books

Investing

After reading 100+ books on investing, I share the top 10 best investing books below. These 10 investing books are essential reading and will formulate the core principles of your investing strategies. I added my book, Lessons From The Successful Investor, to the list as I am confident it will be an investing classic in due time.

1. The Essays of Warren Buffet, Lawrence Cunningham
2. Poor Charlie’s Almanack, Charlie Munger
3. The Intelligent Investor, Ben Graham
4. Common Stocks and Uncommon Profits, Philip Fisher
5. One Up On Wall Street, Peter Lynch
6. The Snowball, Alice Shroeder
7. The Investment Zoo, Stephen Jarislowsky
8. Super Stocks, Ken Fisher
9. The Richest Man in Babylon, George S. Clason
10. Lessons From The Successful Investor, Robin R. Speziale

The Antiquity Theory

Investing

My uncle has worked in the antique market for over 15 years. Over that extensive period, he has indulged our family with the countless successes he has had. However, he explains that like the stock market, the antique business has its ups and downs. But like the successful investor, my uncle has persisted with the antique business and has in turn earned significant returns.

Firstly, my uncle sticks to a disciplined buying plan. He does not over pay for an antique at auction. For if he were to overpay, his returns on that antique would suffer. However, if he comes upon a rare opportunity, essentially finding a quality, high demand antique, in which knows has eager collectors, he will pay a small premium.

Secondly, he buys antiques that he understands. He has studied a significant amount about antiques, and has effectively acquired a niche in certain antiques. Thus, when my uncle attends antique auctions, he can efficiently appraise the fair value of those antiques he understands. My uncle explains that the best buying opportunity at an auction is when he knows more about an antique than other buyers present. With that advantage, he can effectively bid lower or at fair value to acquire an antique, while others remain perplexed by its value.

Thirdly, he likes to buy old and rare antiques. He explains that some in the antique market purchase relatively new items, hoping in the future those items become valuable antiques. However, he considers that approach to be a guessing game and thus sticks to buying antiques that he knows bear value now.

Fourthly, he explains that he buys antiques that possess a market of loyal collectors. Thus, he focuses his purchases on quality, brand name antiques. If he were to buy an obscure antique that antique would likely possess a small group of collectors. However, Coca Cola memorabilia, for instance, possesses a vast group of collectors that create constant demand. Conversely, my uncle explains that buying an antique that is in high supply in the market is not an intelligent decision. For instance, because those antiques such as Royal Doulton were mass produced in the past, their current antiquity is not rare and hence not valued highly by most collectors.

Finally, he stresses again that like the stock market, the antique market is full with amateur antique buyers. However, he likes this since he can buy valuable antiques without those amateurs knowing their true value.

My uncle represents, like the successful investor, an individual who can beat the market. He beats the antique market in that he is able to achieve higher returns on his antique purchases because he knows how to valuate an antique; measuring its auction price against its true value and formulating a return on investment on the spot. In all, his example is another reason, besides the psychological deficiency theory, to discount the market efficiency theory. For instance, the efficient market theory would assert that buyers at an antique auction contained all available information on present antiques and hence the true value of those antiques would be known and effectively priced in. A bargain antique, then, would not exist. However, my uncle purchases antiques at bargain prices consistently, because he knows more than the average buyer. And in turn, he can sell those mispriced antiques and gain 500% return at times.

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