Hulrum recently became more and more engaged in investing topics. Thus, the worldly author asked Hulrum about his most beloved readings on investing in a world of dwarves. Here’s what Hulrum said.
Disclaimer: the following content is for informational purposes only and does not constitute financial advice. Do not take any decisions based solely on my writing.
My dear human friend,
We haven’t spoken for a long time. I guess that might be due to your shorties series on stop-loss, position sizing, and technical analysis. But as you so kindly helped me with my gnomish finance issues before, I certainly do not hesitate to introduce some of my favorite books to you.
I am certain that these are available in your world by some mystic coincidence, too. There is no particular order, except for Graham’s “Intelligent Investor”. This is clearly my number one book and therefore mentioned first.
Benjamin Graham (1894–1976): The Intelligent Investor (1949)
Clarity, just clarity. This masterpiece is full of knowledge, practical examples, strategic overviews and deep-dive case studies. All in one book. Sure, it is old. But many topics like the defensive investor (“safety and freedom from bother”) and aggressive investor (“enterprising”), or inflation influences, are as up-to-date as they can be. This book, dear worldly author, enabled me to build a comprehensive understanding of investing for the first time. It is a very long read, indeed — around 600 pages. But it is well worth the effort!
If you asked me about a few cherries picked, I’d recommend to you:
- “Main Points” on page xiii, as it sums up the book in a short but comprehensive way.
- Chapter 12 (“Things to consider about per-share earnings”) gives a great overview over the challenges of accounting. And with challenges, of course, I mean disadvantageous accounting practices for us stockholders.
- For detail lovers, read p. 416 (“Convertible issues and warrants”) on “Special Items” and the adjusted P/E-ratio.
- And of course chapter 20 “Margin of Safety” is a must-read!
My most gnomish quotes:
“Confronted with a (…) challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.” — “Observation over many years has taught us that the chief losses of investors come from the purchase of low-quality securities at times of favorable business conditions.”
Benjamin Graham “The Intelligent Investor”, Revised Edition 2003, p. 516
Daniel Pecaut & Corey Wrenn: University of Berkshire Hathaway (2017)
“This book isn’t for the first-time investor.” This is a curated collection of the notes from the authors (who are investment managers themselves) on Berkshire Hathaway’s Annual Meetings 1986–2017. There is one huge advantage to it: Instead of reading all the Berkshire Hathaway Shareholder Letters you can pick up hugely important lessons efficiently. These lessons are incredibly broad and, as I think, also extremely valuable. They are about Berkshire earnings, their insurance business and its merits if done right (think “float”). But they also cover inflation, technology, errors made, moats (competitive advantages and their durability), and the intrinsic value concept. The notes further encompass discussionss on various stocks from airlines and railroads to homebuilders and do not even stop at dividends, derivatives, convertibles — and why the efficient market theory is probably gnome-sh*t, of course.
In short: Read this book if you are a bit advanced, look up concepts you don’t know along the way. This is one of the most efficient reads in my round golden eyes.
My most beloved quotes:
“Always remember that when you are buying a stock, you are really buying part ownership of a business.” — “You would not be trading farms based on short-term swings in agricultural prices.” (Note: from 2008 annual meeting)
D. Pecault and C. Wrenn, “University of Berkshire Hathaway”, 2017, p. 168
Peter Lynch with John Rothchild: One Up On Wall Street (1989)
A whole bunch of important (basic and advanced) concepts are presented in this book: The investor’s attitude, the “tenbagger”, “di-worse-ification”, and very helpfully the six categories of stocks. This is a great book if you want to structure your portfolio with sensible investment choices for your goals — or find stocks which have a great potential to make you rich(er).
To find some orientation as a beginner, let me give you a brief summary on the six types of stocks according to Peter Lynch, dear human friend. These obviously can change over time and become another of the six types:
- Slow Growers: These are large and aging companies and former → Fast Growers, like utilities, chemicals, steel, and computers. Our teacher Peter Lynch says: Don’t buy! Why should you, as these are growing so slowly…
- Stalwarts: … such as Coca Cola, Procter & Gamble. These are huge companies, but growing faster than slow growers, with 10–12 % annual growth in earnings. Mind this book is from 1989 and these examples are as well! Strategy for dealing with stalwarts: Sell after 30–50 % gain. Always keep some of them in the portfolio for recession protection.
- Fast Growers: These are Lynch’s favorite with 20–25 % growth p.a. They can also be seeked and found in slow-growing industries, not only in fast-growing industries. A good balance sheet is a prerequisite. They involve huge risk, are tricky to get in and out correctly, but offer huge upside.
- Cyclicals: They are characterized by sales & profits rising and falling regularly or even predictably. Examples involve companies selling/trading cars, tires, steel, aluminum, and as a dwarf I also think mining…). Peter warns us to be careful not to confuse these with stalwarts! Obviously, for maximum profit, it is important to buy at the right time in the cycle.
- Turnarounds: No growth. They are “battered” and “depressed”, thus could maybe be cheap. Potentially these stocks are indeed going down, e. g., like poorly managed cyclicals. A famous example for a turnaround was Chrysler (again: this book is from 1989!). This type of securities is very risky, but offers huge potential upside if you can find turnarounds which can actually rescue themselves. Further detailed scrutiny and classification into different subtypes of turnarounds is of course very necessary, Master Lynch says. So be careful…
- Asset Plays: These are stocks with lots of assets behind the share price, such as cash or land, which have been overlooked by analysts. Thus, their share price is actually below their (net) assets. To find them one needs “working knowledge of the company that owns the assets” to be able to find the hidden value. This strongly reminds of Graham’s net current assets approach.
My most cave-ish quote:
“Instead of buying back shares or raising dividends, profitable companies often prefer to blow the money on foolish acquisitions. The dedicated diworseifier seeks out merchandise that is (1) overpriced, and (2) completely beyond his or her realm of understanding. This ensures losses will be maximized.”
Peter Lynch, “One Up On Wall Street”, 1989, p. 153
Chip & Dan Heath: Decisive (2014)
This actually is not a native investing book. But it is about decision making — one of the investor’s most important skills! The authors introduce the issue that suboptimal decision making is shown in numerous scientific studies. For example, in many business environments, only a single alternative is considered: Yes or No. They identify reasons why decision making goes wrong and offer a simple and systematic approach that really everyone can learn to make better decisions: The WRAP process.
For lazy humans, this book also offers a really great one-page summary at the end of each chapter. Plus: They offer their insights as useful resources on https://heathbrothers.com/resources/overview/.
(This is no advertisement, the resources are free. I do not receive any money and I am not affiliated with them in any way.)
My most pixiestoutish quote:
“The future is not a ‘point’ — a single scenario that we must predict. It is a range. We should bookend the future, considering a range of outcomes from very bad to very good.”
Chip & Dan Heath, “Decisive”, 2014, p. 217
By the way: I consider this book worth buying for the “final checklist” on page 227 alone!
Joel Greenblatt: The little book that still beats the market (2005/6, my edition 2010)
Oh, I love the cover design of this book.
Apart from that, this incredibly successful investor offers a book which describes the “magic formula”. This formula is to buy “good” companies (that is, with high returns on capital) at “bargain prices” (high earnings yield). This is a further development of “Graham’s formula” that centered on so-called net-current-asset stocks, i.e., stocks selling below their net liquidation value. Greenblatt notes that this kind of stocks does not practically exist anymore and therefore presents his formula described above.
Backtesting and application of the formula led to great investing results in the past. This is outstanding, as it is a fully deterministic and reproduceable formula and thus can be implemented by everyone who cares to do so. There is no subjective influence. I love this book for its teachings on methodical investing, far from the noise of some analysts, reports and media.
If you want to know whether this formula might still work today, you can find a great, more current evaluation here.
My dearest quote:
“When it comes to Wall Street: There ain’t no tooth fairy!”
Joel Greenblatt, “The little book that still beats the market”, 2010 edition, p. 116
André Kostolany (1906–1999): “Geld und Börse” (1999)
I love Kostolany’s books just for their entertainment value alone!
This is his last book before he passed away. It is incredibly holistic, funny, exciting, inspiring, and motivating to do something better with your life.
If it is not available in English, pick one of his other books (except if you are interested in learning German :)). The title means something to the likes of “Money and Stock Exchange”.
In this book, you can dive into old times and learn very up-to-date techniques and tricks. The big question “How to get rich?” is answered in a pragmatic way: By speculation, the right kind of marriage, or a lucky idea in trade or industry. Pick yours.
The masterpiece discusses a large variety of topics: Market cycles, characteristics of traders at the stock exchange (hard-boiled vs. shaky), and even a stock exchange history from Amsterdam to Wall Street! It depicts the interests of brokers (Buy? OK. Sell? Also not bad!). And then there is the long-term role of war and economic development — and the short-term role of money and psychology. With this great framework, the reader can feel well-equipped for speculative adventures.
My most Kostolanish quote:
“Wer viel Geld hat, kann spekulieren (Those who have a lot of money may speculate)
Wer wenig Geld hat, darf nicht spekulieren (Who has little money may not speculate)
Wer kein Geld hat, muss spekulieren (He who has no money must speculate)“
(André Kostolany, “Geld und Börse — Die Kunst, ein Vermögen zu machen”, 1999, S. 323, Translation by DeepL)
A really well-written, reliable & hands-on book on taxes (for German humans: Roland Elias & Kevin Mack: Steuerhandbuch für Privatanleger, 2021+)
Finally, pick up a truly comprehensive and clearly-written book on taxes. For German humans, I strongly recommend the book mentioned above. I won’t quote from it as this is a very specific topic. But this kind of book is so greatly important. Why? Just by simple measures like (all legal!) loss offsetting, using tax allowances, and tax deferrals, you can have a simple, guaranteed, and considerable impact on total gains. Of course this is not financial or tax advice.
Thanks a lot, Hulrum, for helping me out with your newly acquired knowledge. I will now disappear for a few weeks, read all these grandmasters, and hopefully return as wise as you seem to have become. Or did you ask your friend, the experienced investor dwarf, again? Anyways, have a great time digging for riches…
