10 books to read before you start trading
By Claire Hunte
08:00, 11 October 2017
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
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.
His book takes you back to essential questions that shift from immediate gratification to results from ancient fundamentals. He has crucial lessons for anyone wanting to start trading.
His winners will take three to 10 years to play out. Despite his warnings against the dot.coms, he doesn’t want you to avoid technology companies and hot stocks, but he urges readers to stock pick on more than simply liking a product. Lynch encourages doing your research about a company’s earnings prospects, financial conditions and so on.
6. Market Wizards
Market Wizards by Jack Schwager. Successful market participants tell you their own tales through interviews conducted by Schwager. Some people prefer to read the accounts of those at the coalface and this compilation of interviews is a good place to start.
Schwager speaks with a range of star traders, from those in future and currencies, such as Ben Kovner and Richard Dennis, to William O’Neill in stocks and even pit traders such as Tom Baldwin. He gives readers an inside look at trading success across the board.
However, Schwager presents a caveat to the average individual at the very beginning: “The level of trading success attained by many of the Market Wizards is possible only because they have some innate skill, or some inner radar, that gives them a better-than-even probability of sensing what markets will do. I don’t care how devoted someone is to trading or how many hours they are willing to watch trading screens; the reality is that this type of skill will be out of reach for most people.”
This isn’t a how-to book for newcomers about to start trading, but the common trend, Schwager points out, is the attitude among his interviewees. Attitude may lead you to finding more opportunities when trading.
Schwager has written a number of books including a Market Wizards series and a guide to futures markets.
7. Switch
Switch by Chip Heath & Dan Heath: Practically every guide for those about to start trading will tell you about the necessary characteristics required to be a successful trader. Positive mental attributes carry a lot of weight to turn profit consistently.
In Switch, the Heath brothers want to help you change things. They supply case studies about individuals, organisations and society to show the power of changing yourself or other people through changing your behaviour, your situation and your habits.
This can happen when environments shift. For example, why smokers find it easier to quit when they’re on holiday as opposed to their smoke-permeated homes.
However, thankfully shifting habits doesn’t require a wholesale change of environment. Small environmental tweaks can create or force new habits. One of the surprising reveals in the book is that self-control is an exhaustible resource. Making tough decisions wears you down.
In exhausting control, you are exhausting the mental muscles needed to think creatively. Inability to effect self-control is not laziness. The book offers fascinating evidence of why we do things and examples of how people managed to change.
8. Nudge: Improving Decisions about Wealth, Health and Happiness
Nudge: Improving Decisions about Wealth, Health and Happiness by Richard Thaler and Cass Sunstein. This great book for those about to start trading explores trading psychology and the biases that impede our decision-making processes.
We know that ‘to err is human’ but Thaler and Sunstein want you to accept that this is your humanness and to provide you with an alternative universe, or what they call “choice architecture”.
A choice architect, according to the authors, is someone who has the responsibility for organising the context in which people make decisions and by that definition many of us are choice architects whether we realise it or not. You can choose to arrange things in a way to influence and bring about change by nudging.
Thaler and Sunstein know that, as human beings, our current choices aren’t always self-promoting. They use more than four decades of research and the emerging science of choice to underline that, when it comes to rationality and decision making, we’re not precise machines. Human decision making is ultimately, like weather forecasters, flawed and biased.
It’s not hopeless to understand how we go wrong and that despite our biases there are workarounds – ways to nudge our behaviour. The book wants you to make better choices, independently, and to preserve your freedom of choice.
The book’s scientific approach may be wearying for some and it recommends a number of social policies that you may or may not agree with. But by understanding how we think, we can make better and more effective choices in how we design our environments. That, at least, is worth a shot.
9. Fool’s Gold
Fool’s Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe by Gillian Tett. This is recommended reading for anyone who wants to start trading because it gives a panoramic view of the most recent financial crisis of 2008.
Tett begins her cautionary tale in the 1990s when a group linked to JP Morgan, the banking and financial giant, developed innovative products under the ‘credit derivatives rubric’. She takes us into a world occupied by these bankers, trying to unravel the catastrophic events that began to unfold in 2008.
Tett’s narrative doesn’t do simple finger pointing; blaming a few bankers or individuals. Given the scope of her book that is too pat an answer. Instead she attempts to answer the question she lays out in her book of “Why? Why did bankers, regulators and ratings agencies collaborate to build and run a system that was doomed to self-destruct?” Why, indeed?
Tett analyses, connects the dots and puts the blame firmly on the shoulders of a financial system that utterly failed.
This book is must read because, as Tett writes: “The strange journey that the Morgan group have travelled over the last two decades does provide insights into why the financial system spun out of control, and why a set of ideas which once seemed ‘good’ turned so terribly ‘bad’. It is a tragic, salutary tale, not just for bankers but for all of us.”
10. The Big Short
The Big Short: Inside the Doomsday Machine, by Michael Lewis. The Big Short is best viewed as a film. The cinematic version serves up the credit crisis, covered by Tett in her book, as entertainment. Watching this is the most fun you can have before you start trading.
This film opened to mixed reviews, but it delivers what the financial crisis was about in under two hours. Underneath the humour is the grim reality. While Tett doesn’t lay blame as pointedly, one comes away from this film clear about the ‘protagonists’ and ‘antagonists’ and who they are.
The Big Short even takes you back to the 70s when mortgage securities were first invented. Consider it Financial Crisis 101. Given some of the asides to explain technical terms, it can seem like a ramped up PowerPoint presentation.
By the end of the film, viewers can be confident of understanding what subprime mortgages are, given that an actress explains it to you from a bubble bath while drinking champagne. Even though it’s fictionalised, the complicity and downright fraud portrayed will make you angry.
Based on Michael Lewis’ nonfiction book, the film version takes liberties (was everyone depicted in the film that entertaining in real life?). But this black comedy paints a universe that did exist: one of greed, corruption and venal behaviour.
The regulators, ratings agencies, right through to banks, chose to ignore the housing market bubble right under their noses, because it suited them, and because money flowed.
The consequences hurt ordinary people, as Michael Lewis writes: “The creation of the mortgage bond market, a decade earlier, had extended Wall Street into a place it had never before been: the debts of ordinary Americans." This film serves as an allegory for what can happen when greed is the only driving force on Wall Street.