Want to know the secret to wealth and success? So do I -- and I'm still looking.
A good first step for all of us may be to heed the advice of Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) co-chairman Charlie Munger. He once said:
You've got to have multiple models [of knowledge]. And the models have to come from multiple disciplines -- because all the wisdom of the world is not to be found in one little academic department. That's why poetry professors, by and large, are so unwise in a worldly sense.
It's pretty simple: You can know everything about medicine, but still be a terrible doctor if you can't communicate with your patients. You can be the best plumber in town, but still go bankrupt because you have no business sense. And you can know everything about investments, but commit financial suicide because you view the world in a vacuum. Citigroup (NYSE: C ) and AIG (NYSE: AIG ) proved this the world over.
Same thing applies to individual investors -- you have to be well-rounded. And in some respects, you can glean more investing knowledge from non-finance learning than you can from trolling through balance sheets and economic formulas. Here are five books that I think will help investors build a well-rounded body of knowledge.
The Checklist Manifesto, by Atul Gawande
One century ago, medicine's biggest problem was that we didn't know enough. Today, one of the biggest problems is that we know so much that doctors are bound to become confused and forgetful. Information overload, in other words. Gawande, a surgeon and columnist for The New Yorker, shows how a simple checklist substantially reduced surgical errors like infection. He then convincingly shows how checklists can take just about anything complicated and reduce the odds of screwing up. Does that apply to investing, too? Absolutely, and Gawande actually touches on that in the book.
The Drunkard's Walk, by Leonard Mlodinow
This book details how much of life's success is due to random chance. A great read for someone who just made a killing on an investment and thinks it was attributable solely to his or her intelligence. (It probably wasn't.)
We love to think the world fits into neatly defined processes that can be predicted and followed. Problem is, it's quite the opposite. Mlodinow -- who co-wrote A Briefer History of Time with Stephen Hawking -- shows how the laws of probability are anything but intuitive, and prone to distort how we judge outcomes. He provides as much depth as most statistics classes without writing one formula in the entire book -- a rare, but treasured, skill. One of the most informative-yet-readable books you can find.
Why Zebras Don't Get Ulcers, by Robert Sapolsky
The subtitle of this book is "The acclaimed guide to stress, stress-related disease, and coping." Sounds like a self-help guide, but it's really not. Imagine a Stanford neurology researcher with the skills of a writer from The Daily Show who wants to share his work -- that's basically what this book is. It shows how freaking out leads to more freaking out, which leads to severe freaking out, which starts to eat your body away until a psychological issue becomes a physical issue, at which time you're pretty much a lost cause. If this book doesn't teach you something about investor psychology, nothing will.
Empire: The Rise and Demise of the British World Order, by Niall Ferguson
This book shows how Britain came to dominate the world culturally and economically in the nineteenth century -- in good ways and bad -- and then slowly faded in the twentieth. One interesting note on decline: "Throughout the twentieth century, the principal threats -- and the most plausible alternatives -- to the British rule were not national independence movements, but other empires." The British were overtaken by those who could run the ship more efficiently (or ruthlessly), in other words.
One apt comparison is how individual companies get so widespread that operating the business becomes grossly cumbersome and costly, letting smaller competitors gobble up once-bulletproof market share. I'm looking straight at you, General Motors.
Simplexity, by Jeffrey Kluger
Banking should be very simple, but Goldman Sachs (NYSE: GS ) made it horrendously complicated. Apple (Nasdaq: AAPL ) and Microsoft (Nasdaq: MSFT ) make extremely complex products, but their business is simple -- they sell stuff we want. That's the theory behind Simplexity: Simple things can become unworkably intricate, and complicated things can boil down into simple parts. This seems obvious until you read some of the book's examples, which get you thinking about other parts of your life, and why you may or may not understand them in the slightest. Not a deep read, but a thought-provoking one, this book will inspire you to think about companies in new ways.
Let's keep this going
Got any of your own recommendations? Please, share 'em with the class and post away in the comment section below.