Interested in trading and having typed in ‘how to start trading?’ into Google and Quora you feel like you’ve entered the third dimension?
While there is plenty to be said for Google and Quora’s research capabilities, sometimes a good alternative to start trading is to pick up a book to ensure a well-rounded approach.
An oft-quoted line is that Warren Buffett read to up to 1,000 pages a day when he started out as a beginner investor. In fact, a number of professional investors read all the time.
Why? Because it makes them smarter. If you want to start trading, take it from Buffett, who was quoted in the book Working Together: Why Great Partnerships Succeed, by Michael Eisner and Aaron Cohen, saying: “My job is essentially just corralling more and more and more facts and information, and occasionally seeing whether that leads to some action.”
Successful trading will come with sufficient skill and experience, but a good book on trading and the markets provides a knowledge base to make decisions and, as Buffett advises, turn insight into action. Here is a list of the best books to set you on your trading journey.
1. Day Trading for Dummies
Day Trading for Dummies by Ann Logue. The book is US-oriented but it feels like you can consume it at your leisure with its folksy tone. It dispenses advice on how to start trading as if by a friend who also happens to be an expert.
The layout of the book helps as it outlines what each chapter will deliver at the start. Chapters build on foundations. The first chapter for example, gives you an overview of what a day trader does, how to set up a trading business and disposes a few myths around trading as well, such as the view that it is a means to easy money.
Logue writes: “Because of the excitement of day trading and the supposed ease of doing it, you may think that day trading makes a great hobby. On a boring Saturday afternoon, you could just spend a few hours trading in the forex market (foreign exchange) to make more money than if you spent those few hours playing video games! Right? Uh, no.”
2. The Little Book that Beats the Market
The Little Book that Beats the Market by Joel Greenblatt. Greenblatt is a hedge fund manager and founder of Gotham Capital. In 2005 he published what is now called a classic and is often included in lists of books for beginners in investing and trading.
This is another guide that details a straightforward “magic formula”, as Greenblatt calls it, to find good businesses when they are at bargain prices and then to hold them for a year.
He outlines his formula and couches it in the current stock market environment, to explain why this formula works for both individual and professional investors. He does this using simple language and has said that he wanted it to be understood by his own children, then aged six to 15 – not even old enough to start trading.
The topic is treated with a touch of humour that many may find refreshing for the ease in which it presents concepts.
A well-known Greenblatt quote from his book reads: “Choosing individual stocks without any idea of what you're looking for is like running through a dynamite factory with a burning match. You may live, but you're still an idiot.”
Greenblatt also updated the book after the 2008 financial crisis and published the Little Book That Still Beats the Market in 2010.
3. Trading Your Way to Financial Freedom
Trading Your Way to Financial Freedom by Van Tharp. This is another bible of sorts for traders who claim Tharp has changed their way of thinking. That is an important distinction because, as Tharp writes in the most recent edition of his book, “you cannot trade the markets. Instead you trade your beliefs about the market.”
Tharp has a PhD in psychology and is a Master Practitioner of Neuro Linguistic Programming. He coaches both traders and investors through workshops and seminars on unique learning strategies.
Tharp argues that most people are not successful traders because, “at the most basic level, people must trade by processing information.”
As it turns out most of us are not very efficient information processors and we have a lot of biases that enter into trading decisions. That adds a layer of complexity to trading and investing, which Tharp see as a simple process.
Tharp urges readers to look beyond the questions on what to buy and how to focus on position sizing – a key factor in determining profits – and your own personal psychology. Essentially this book puts you, the individual about to start trading, centre stage.
4. The Intelligent Investor
The Intelligent Investor by Benjamin Graham. This is a classic in the true sense but it’s an impervious read. Considering that this book was first published more than 60 years ago and is still relevant today, it is a seminal text on investing.
The book is regularly updated to reflect “significant changes in financial mechanisms and climate.”
Graham was famously mentor to investment guru Warren Buffett. Buffett writes the introduction in the fourth edition of the book and says he read the first edition in 1950 when he was 19. Buffett said he thought in 1950 that it was the best book on investing ever written and he still held that to be true.
Many people may read it because Buffett recommends it, but even so the book is revelatory in its approach to laying open the possibility of investment to the average individual.
If you are interested in investing and want to start trading, this book makes no claim to providing market-beating strategies, instead, as it outlines at the beginning, it provides only three powerful lessons:
- Minimising the odds of suffering irreversible losses
- Maximising the chances of achieving sustainable gains
- How to control self-defeating behaviour that prevents many investors from reaching their full potential
That’s a tall order but the Intelligent Investor fulfils it. As Buffett advises: “Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock-market folly that prevail during your investing career. The sillier the market’s behaviour, the greater the opportunity for the business-like investor. Follow Graham and you will profit from folly rather than participate in it.
5. One Up on Wall Street
One Up on Wall Street by Peter Lynch. In this book, Lynch takes his experience as a former mutual fund manager at Fidelity Magellan Fund, and as an individual investor, to dispense wisdom about stock picking – the old-fashioned way.
He’s a fundamental investor. It brings a certain comfort that Lynch can describe missing technology stocks because he didn’t use fundamental investing techniques at the time. Like other great investors, he didn’t own what he didn’t understand. His discoveries, he says, are often made eating and shopping.
He admits to not recognising Amazon’s potential back in 1997, even though he felt the business was easily understandable, reasonably priced relative to its prospects and well-financed back then.
At the time, he “wasn’t flexible enough to see its opportunity.” He missed it and Amazon’s “miraculous levitations”, but you get the feeling he’s not bemoaning the loss.
He argues that, before Internet businesses came along, companies had to grow their way into the billion dollar ranks. Now they can reach that status via valuations without turning a profit or sometimes even collecting any revenue.
He warns those who buy after shares have levitated. “Does it make sense to invest in a dot.com at prices that already reflect years of rapid earnings growth that may or may not occur?” Lynch is posing a rhetorical question – the answer is clearly no.