We get a lot of email at The Motley Fool from people asking us where to start: high-tech stocks, value stocks, bonds, mutual funds, index funds? Also, what are the right formulas to use? Should investors focus on price-to-earnings ratios, return on equity, or return on invested capital? There's a lot to chose from, so what's the right investment vehicle and which tools should you use?
Forget all of it.
If you're new to investing and want to learn more, ignore the strategies and tools mentioned above, just for a while, and get centered. What this means is that before you open an accounting text, learn the Rule Maker strategy, or start studying an industry, you have to find out what kind of investing appeals to you. Where's your center of gravity? Is it with a guy like Peter Lynch, who loved studying businesses and worked like a sled-dog; or is it with a guy like speculator George Soros, whose hedging, trading, and currency strategies earned him a fortune?
I learned things in reverse. Once I saw how far a little accounting knowledge could take me, I made it my focus and started reading 10-K reports and accounting texts by the dozen. This isn't a bad thing to do. Accounting is the language of business and the 10-K is one of the best sources of information an investor has access to. Without a basic understanding of the financial statements, you can't get too far unless technical analysis interests you.
Problem is, without an investing framework in which to fit this accounting knowledge and all these business specifics, as well as a dose of stock market context, much of this information loses meaning. Think of the martial arts pupil who walks into the dojo. He doesn't get taught how to sword fight on day one. No, he spends the first few days convincing the teacher he's worth training. Then the teacher explains what martial arts is all about. Then, once he's got his center, at least in terms of a way of thinking, comes breathing exercises, painting fences, and waxing cars. You don't get to smash bricks until the big tournament.
A number of the businesses whose stock prices collapsed over the last year, such as Cisco (Nasdaq: CSCO), had strong balance sheets, great sales, and a bright future. For the average investor, a working knowledge of accounting and business wouldn't have flagged Cisco as a risky stock. You need a little market and investing experience to recognize this. If you're new to investing, the best place to get this experience in a hurry is by hearing the stories of those who have already walked that road.
So here's a list of the best investment books I've read in the last two years, all of which helped me find an investing center. I've omitted books that taught specific analysis techniques, some of which were excellent, but inappropriate to the topic of this article. Most of these books we talk about frequently on the site. Obviously, my list won't do much for the day trader. That's just not our focus at The Motley Fool. If time is short, an abridged list of the first six will get you off on the right foot.
One Up on Wall Street, Peter Lynch
The Warren Buffett Portfolio, Robert Hagstrom
A Random Walk Down Wall Street, Burton Malkiel
Stocks for the Long Run, Jeremy Siegel
Common Stocks, Uncommon Profits, Philip Fisher
Common Sense on Mutual Funds, John Bogle
The Intelligent Investor, Ben Graham
The Truth About Money, Ric Edelman
The Money Masters, John Train
The Warren Buffett Way, Robert Hagstrom
John Neff on Investing, Steven Mintz and John Neff
Buffett: The Making of an American Capitalist, Roger Lowenstein
The Essays of Warren Buffett, selected by Lawrence Cunningham
Built to Last, James Collins and Jerry Porras
Influence: The Psychology of Persuasion, Robert Cialdini
Why Smart People Make Big Money Mistakes, Gary Belsky and Thomas Gilovich
The New Money Masters, John Train
Innumeracy, John Allen Paulos
Have a great day.