Before you trade, read. There are plenty of gurus and must-read sources. Here are five best books on investing to whet your appetite. Remember: knowledge is power – in markets too. If you read nothing else, at least read these:
The importance of fundamentals
Trading in complex derivatives without possessing a thorough understanding of underlying fundamentals can be likened to trying to run before having learnt to walk.
For all the attractions of modern technology, conferring greater data, analysis and speed, there is still a clear need for investors and traders to possess at least some degree of awareness of underlying economical fundamentals and financial history.
When all other forms of analysis and interpretation of market events fail, some bright spark somewhere will urge that we focus on the fundamentals.
As the owners of fast food retailer KFC in the UK recently found out, having an improved system on paper is worthless if the tills are closed and there is no cash coming in because the new supplier has literally failed to deliver.
It is with this in mind that we would encourage capital.com customers to consider a number of key texts that have helped shape the landscape in which they operate today and enable a return to it should the world as we know it come to an end and need to be rebooted.
This will never happen? Don’t rush to be quite so sure. No one who has read the short story Nightfall by the science fiction maestro Isaac Asimov and taken its cataclysmic civilisation-destroying lesson to heart will ever commit completely to the Cloud. Fundamentals remain important.
Book 1. Passport to Profits
One of the world’s best known institutional investors is Mark Mobius, often described as the king of emerging market funds. His book Passport to Profits (subtitled a guide to global investing) was published almost two decades ago but it is still packed with sound, relevant fundamental investment advice.
Passport to Profits does what it says on the cover. It gives aspiring investors, whether private or professional, the benefit of hands-on experience to balance the risks and rewards of global investing.
Mark Mobius, occasionally referred to affectionately as The Bald Eagle, shows the reader how to view investing abroad, how to devise a global investment strategy and the pros and cons of buying directly into a company’s stocks or indirectly via a mutual fund.
As an added bonus, the book (written with the help of New York-born journalist and speaker Stephen Fenichell) is also an enjoyable read in its own right.
It is packed with mantras that communicate the lessons learnt through hands-on experience. Your best protection is diversification. Long-term planning pays.
The time of maximum pessimism is the best time to buy (it might be useful to know that this is a sanitised version of the original Templeton mantra: the best time to buy is when there is blood on the streets).
The time of maximum optimism is the best time to sell. If you can see the light at the end of the tunnel, it’s too late to buy (or sell).
The book stresses the importance of being contrary. As summarised by Sir John Templeton, founder of the investment house that still bears his name: If you buy the same securities as other people, you’ll get the same results as other people.
Or, as he says in another quotation attributed to him: To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude but pays the greatest rewards.
Mobius tells the cautionary tale of how his sister-in-law bought into one of his firm’s global emerging market funds, saying that her timing was ‘a trifle iffy, in that she bought at the height of the 1993 emerging markets boom, because everyone else did.
That boom was followed by the great 1994 emerging markets bust. He writes of how he begged her not to lose faith and to take advantage of the ‘marvellous discounts at which she could now buy more shares in my falling fund’.
She listened to him and bought low and sold high. Buy stocks whose prices are going down, not up, is his advice. Brought up to date, this could apply as easily to Bitcoin and other cryptocurrencies as it did to emerging markets in the early 1990s.
A market collapse lays the foundation for the next boom, as it says on the cover of the comic book version of the Mobius life story, published by Pan Rolling Inc.
Book 2. Real-Time Risk
The development of technology is changing the way we live and work every day, notes the blurb on the inside cover of Real-Time Risk (what investors should know about fintech, high-frequency trading and flash crashes).
Written by quantitative portfolio manager Irene Aldridge and market microstructure analyst Steve Krawciw, it was published by financial education specialist Wiley towards the end of 2017.
Development and change have created a double-edged sword in the financial markets, say the authors. Today’s investors are more informed and have more access to a broader range of investments than ever before, but they are also exposed to unprecedented risk at a moment’s notice.
Real-Time Risk sets how to show all kinds of investors how to benefit fully from the data-rich insight and opportunities that cutting-edge technology offers, while protecting assets from an always-on market.
The authors clearly see their mission as being to position investors for success in the new reality of growing wealth by enabling them to:
- Explore the blatant and not-so-blatant ways that high frequency trading impacts upon their investments
- See why market infrastructure is no longer just for execution traders and market-makers and how long-only strategies suffer by ignoring it
- Develop a balanced, data-driven perspective on global markets to make more informed investment decisions
The authors pose a number of questions to readers, including the following. Do you wonder why the markets have changed so much? Where is it all heading? How will it affect you? Do you remember Bloomberg terminals?
Do you know that allocating to stocks favoured by high-frequency traders will improve a long-term buy-and-hold strategy? Do you understand how regulation will limit or expand you options tomorrow?
Have you ever missed opportunities in the market because you felt you were disrupted?
Is your company oblivious to changes in innovation? The unfortunate truth, they state, is that many established firms are completely unprepared for the fast train of innovation currently passing them by.
Buried away towards the end of the book is a passage that could have been written for users of Capital.com, the importance to investors of minimising volatility, if not in absolute terms then in terms of volatility related to investment returns.
Minimising volatility is a challenging task, the authors concede. In a nutshell, investors need to take three steps.
- Identify the conditions that result in high volatility.
- Correctly predict when the conditions identified in step one are about to occur in the near future
- Select an action for managing this volatility. This could include trimming riskier portfolio holdings, or counterbalancing the offending instruments with offsetting or protective financial instruments, such as futures or options.
In short, Real-Time Risk is identifying simple and effective tools for well informed investors.
Book 3. A Practical Guide to Risk Management
Thomas S Coleman’s highly technical but very readable A Practical Guide to Risk Management has appeared in these columns previously, as a small part of an extended article on the broad subject of hedging risk. But it bears repeated examination and further elaboration.