How do you become a better investor?
One way is to make a smart person spend years researching and analyzing a topic and then cheat off their results.
With that as prelude, I asked some of our top analysts this question:
Name one little-known (or at least underappreciated) investing book that's a must-read.
Here are their recommendations.
Morgan Housel, Fool contributor
Michael Mauboussin, chief investment strategist at Legg Mason
The book covers topics from risk management, to common biases, to interpreting statistics. Yet it all boils back to investor psychology, which is probably the most important yet overlooked aspect of investing. One chapter is called "Good Morning, Let the Stress Begin," which you can probably relate to these days.
Alex Dumortier, CFA, Fool contributor
Technically, The Logic of Failure: Recognizing and Avoiding Error in Complex Situations isn't an investing book, but it has plenty to teach investors in the current environment. The author, Dietrich Dorner, a professor of theoretical psychology, draws on experimental research to examine the ways in which people manage or fail to manage -- complex systems. Sound boring? In fact, the book is a quick read and Dorner's case studies are very compelling (he describes the human factors that caused the Chernobyl nuclear reactor to melt down, for example).
The Chernobyl example should be a tip-off that Dorner's line of inquiry is not merely ivory tower daydreaming. I can think of two cases of complex systems that are at the heart of two of the biggest stories in business today: The Gulf of Mexico oil spill is one, the balance sheets of large banks such as JPMorgan Chase
Finally, I would strongly recommend the book to our financial overlord, Ben Bernanke. It seems to me that a zero interest rate policy that now looks set to last well into next year could have potentially severe destabilizing effects on financial markets and the economy (complex systems par excellence). There are limits to what you can achieve in terms of preventing deflation by keeping the interest rate lever at zero over an "extended period;" meanwhile, hidden risks are building up anew in the financial system.
Tim Beyers, Fool contributor and Rule Breakers analyst
Successful growth investing is equal parts science and art. Warren Buffett's mentor, Benjamin Graham, defined the science side of the investing equation with David Dodd in the 1934 tome, Security Analysis. Philip Fisher would define the art part 24 years later with 1958's Common Stocks and Uncommon Profits. Much of what I learned about successfully investing in stocks that are difficult to price -- numerically expensive franchises such as salesforce.com
He helped pioneer the notion of buying business momentum as an alternative to buying cheap assets, as Graham advocated. And he followed his own advice, purchasing shares of Motorola early in its development. To this day, Fisher's 15 points clarify what makes for a great investable business, one led by management that understands and aligns itself with shareholder interests.
So yes, read the numbers. Read Graham and Dodd. Become a spreadsheet ninja. And then, when you've mastered all that, grab a copy of Common Stocks and Uncommon Profits. You'll be a better investor for it.
Rick Munarriz, Fool contributor and Rule Breakers analyst
A few years ago, I got to meet Kaihan Krippendorff in a Miami radio studio when we were both taping segments for The Motley Fool's radio show. His book -- The Art of Advantage -- takes a look at 36 Eastern military stratagems and applies them to stateside companies.
For example, he takes "exchange a brick for a jade" and applies it to the razor and blades model where subsidized bait in the form of cheap razors or video game consoles that are sold at a loss aim to move the more lucrative blades and software titles later.
Under the "invite your enemy onto the roof, then remove the ladder" stratagem, he looks at Jack Welch's arrival at General Electric
The book came out in 2003, so some of the corporate examples are now dated, but it's a great way to make investing concepts relatable to the masses.
Matt Koppenheffer, Fool contributor
What do you need in your toolbox to be a great investor? An understanding of what makes a great business is huge. A firm grasp on valuation is a must as well. Some might even argue that knowledge of technical analysis is important (though I'd strongly disagree).
But if understanding a business is your investing hammer and valuation is your measuring tape, a handle on your emotions is the investing equivalent of a screwdriver. What happens when you're building something without a screwdriver? Things tend to fall apart. Yet I believe too many investors invest without this essential tool in their kit. That's why I think Jason Zweig's "Your Money and Your Brain" is essential reading to get a basic understanding of how your brain can screw up your investing.
The recent downturn is a great example of why it's so important to have a handle on your emotions. From late 2007 to the March 9, 2009 bottom, Microsoft's
The answer, of course, was that investors were panicking and selling anything and everything. Those who managed to keep a clear head, though, could have picked up Microsoft shares at a downright bargain valuation of eight times trailing earnings.
For more investing classics, check out Motley Fool co-founder Tom Gardner's favorites here. Or share yours in the comments section below.
Microsoft is a Motley Fool Inside Value recommendation. salesforce.com is a Motley Fool Rule Breakers pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Legg Mason. Try any of our Foolish newsletter services free for 30 days.