ITA Wealth Management

Based on blog entry hits, there is a great interest in investment books.  Personally, the list of good ones is rather small.  If you check Worthy Blog Sites on the right-hand edge of this page, you will find a link to Investment Book List or a rather long list of investment books.  Most on that list are not worth your time or money.  I’m bring this blog entry forward due to all the interest in this list.

Here is a revised list of my Ten Best Investment Books.  I am removing Robert Arnott’s “The Fundamental Index” and replacing it with William J. Bernstein’s latest book, “The Investor’s Manifesto:Preparing for Prosperity, Armageddon, and Everything in Between.” Not only am I adding Bernstein’s book to the Top Ten list, but I am moving it to the number one spot as I think it is a book investors should read first if they are serious about constructing a well-diversified portfolio.  Bernstein is a writer/investor who bases his viewpoints on research, a rarity in the investment business.

Where does one begin when trying to come up with the top ten investment books?  Here is my list, but be forewarned, this is not a list of books that focus on either fundamental analysis of stocks, nor is it a list of books explaining technical analysis.  In fact, the list below is the antithesis of stock picking.  Instead, my list of the top ten focus on index investing and a passive approach to portfolio management.

1. The Investor’s Manifesto – William J. Bernstein
2. Four Pillars of Investing – William J. Bernstein
3. Index Funds: The 12-Step Program for the Active Investors – Mark T. Hebner (Available on Line)
4. The Little Book of Common Sense Investing – John C. Bogle
5. All About Asset Allocation – Richard A. Ferri
6. The Intelligent Asset Allocator – William J. Bernstein
7. A Random Walk Down Wall Street – Burton G. Malkiel
8. Asset Allocation – Roger C. Gibson
9. What Wall Street Doesn’t Want You to Know – Larry E. Swedroe
10. Unconventional Success – David F. Swensen

It was not easy to pick which of Bogle’s books to recommend.  His First 50 Years is definitely one to substitute for my number 4. I was not sure I wanted to include Arnott’s book (Number 10) as it advocates actively managed index funds and that philosophy runs counter to the investment strategy laid out in the first nine recommendations.  I figure if you read the first nine, then you can handle number 10.  [Arnott's book was removed from the list and replaced with Bernstein's latest book.]

There are several ways to read these books.  1) Read them from start to finish as one reads most books.  This looks like a daunting task if one is going to commit to reading all ten.  2) An alternative approach is to have, say the first seven or eight on your book shelf and you pick themes to read.  For example, you might check the index of each and read all about asset allocation or rebalancing.  Use them as reference books.  If you take this approach, I highly recommend you read Bernstein’s second book, “Four Pillars” from start to finish so you have a sound base from which to begin developing your portfolio plan and eventually a strategy for portfolio management and tracking.  [My recommendation is to now read Bernstein's latest book as I think it is slightly easier to understand and implement.]

Make the investment in a number of these books and it will reward you over the course of your investing life.

I have a new book coming in the mail and if I think it is worthwhile, I will be writing a review of it here on the free side of the blog.

Photograph: Korean War Memorial – Washington D.C.

Below you will find the latest data table showing portfolio performance information through 12/29/2009.  Six portfolios were refreshed in this table.  I have yet to make the switch for measuring risk from the standard deviation calculation to the semivariance calculation.  I hope to have all the spreadsheets converted by sometime in mid-January.

Portfolio Performance: 12/29/2009

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William F. Sharpe, in his “The Arithmetic of Active Management” article writes, the following must be the case if “active” and “passive” are defined in sensible ways.

• before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and
• after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar

Sharpe go on to make his point. “These assertions will hold for any time period. Moreover, they depend only on the laws of addition subtraction, multiplication and division. Nothing else is required.”

“Of course, certain definitions of the key terms are necessary. First, a market must be selected — the stocks in the S&P 500, for example, or a set of “small” stocks. Then each investor who holds securities from the market must be classified as either active or passive.”

Here is how Dr. Sharpe defines the active and passive investor.

• “A passive investor always holds every security from the market, with each represented in the same manner as in the market. Thus if security X represents 3 per cent of the value of the securities in the market, a passive investor’s portfolio will have 3 per cent of its value invested in X. Equivalently, a passive manager will hold the same percentage of the total outstanding amount of each security in the market.”
• “An active investor is one who is not passive. His or her portfolio will differ from that of the passive managers at some or all times. Because active managers usually act on perceptions of mispricing, and because such misperceptions change relatively frequently, such managers tend to trade fairly frequently — hence the term ‘active’.”

If the above ideas are understood, then if follows that the passive manager will obtain precisely the market return since the manager is matching all securities in the market. Assertion number one, “before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar” must be true.

To prove assertion number 2, Sharpe argues, “we need only rely on the fact that the costs of actively managing a given number of dollars will exceed those of passive management. Active managers must pay for more research and must pay more for trading. Security analysis (e.g. the graduates of prestigious business schools) must eat, and so must brokers, traders, specialists and other market-makers.” Those “expense ” dollars work against the performance of the portfolio.

Here is another quote from Sharpe’s article. “Because active and passive returns are equal before cost, and because active managers bear greater costs, it follows that the after-cost return from active management must be lower than that from passive management. Once again, the proof is embarrassingly simple and uses only the most rudimentary notions of simple arithmetic.”

Photograph: Statue within the Forbidden City in Beijing, China

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