Have you procrastinated on gifts this year? Not sure where to start? Books. And if your loved ones have any interest in finance, or any potential to be interested in finance, you've come to the right place to find out what books to give this holiday season.
In this episode of Industry Focus: Finance, Gaby Lapera, Michael Douglass, Robert Brokamp, and John Maxfield each recommend their favorite finance and books, the ones that made them change how they look at investing or economics as a whole, and describe what makes them so good that you won't want to miss out on these recommendations.
A full transcript follows the video.
This podcast was recorded on Dec. 14, 2015.
Gaby Lapera: Hello everyone, welcome to Industry Focus, financials edition! Happy Hanukkah, joyous Kwanzaa, merry Christmas, happy Festivus, season's greetings for anyone I might have missed.
We've got John Maxfield on the phone, we've also got Robert Brokamp, CFP -- I was told to really emphasize that part. He is the lead advisor of The Motley Fool's Rule Your Retirement Newsletter, and is a regular contributor to Motley Fool Answers, which is one of our sister podcasts. And we also have Michael Douglass, who used to be on the show but abandoned it, but we're really happy to have him back.
Michael Douglass: Thanks, Gaby. Great intro there.
Robert Brokamp: That means either you were too good to be on it, or ...
Douglass: Way too bad. I'll let our listeners decide whether they've missed the umms.
Lapera: Soothing sounds of Michael Douglass. So, today we've got a special holiday episode. We thought we'd help any procrastinating gift-givers out there by sharing our favorite investing and/or business books. In my family, everyone gets three Christmas presents every year. You get a book, some form of outerwear because everyone's really worried that I'm cold all the time, I guess, and a chocolate orange. So, that is three free gift ideas for everyone for the price of one free podcast.
Brokamp: I'll just add that my family does the same thing in terms of the book and outerwear. P.J.s every Christmas Eve. So we're in line on that one.
Lapera: There you go.
Douglass: My family actually does chocolate oranges.
Lapera: There you go!
Brokamp: We just need to combine our families and we'll be as good as hers, Michael.
Douglass: If only.
Lapera: Wow. I guess you guys are invited over for Christmas now because I feel bad. Actually, last year, I got a romance novel, and in the interest of not getting another one, I'm hoping you all will sway my mother into buying one of your favorite books for me for Christmas. So, you have to be as charming and convincing as possible.
John Maxfield: And we know Gaby's mother is listening. She's our most dedicated listener, besides my mother.
Lapera: She is, she listens to all of them, and she'll tell me whether or not she thinks they're good every week.
Brokamp: Gaby's mom, you should be very proud, by the way.
Maxfield: I agree.
Lapera: This is so nice!
Douglass: For what it's worth, my mother called me and I didn't pick up the other day, so she promptly called the Fool HQ front desk. And I got an email saying, "Your mother just called." So, Mom, if you're listening, I love you too!
Lapera: This is a very nice episode already, guys! Maxfield, do you want to start?
Maxfield: Yeah! Absolutely. So, first of all, I love this episode. Readers probably know I'm obsessed with reading, and that probably goes to explain, if my wife is listening -- I love my wife. Just want to throw in some nice words of my own, so I don't sound like the Grinch this year. So, the question is, when you're picking a book for investing, what are you looking for? What I'm looking for is something that will change how I think about companies, or the economy, or something in that regard that will make me an actually tangibly better investor.
The most recent book that has done this for me, when I think about big changes, it has really tangibly changed how I think about business, it is called The Outsiders by a man named William Thorndike Jr. Basically, this book traces eight different CEOs who, over the years, have achieved these absurdly ridiculous returns.
Henry Singleton, who's the main person he talks about, it's the story he wraps around and brings seven other unconventional CEOs into the equation, if you had invested a single dollar with Henry Singleton, when he started the company Teledyne in 1961, when he retired in 1990, which was, mind you, in the midst of a very severe recession, that single dollar would be worth $180.And over that 30 year stretch, he returned 20.4% on a compound annual basis. To put that into context, Warren Buffett, who is the best investor of all time, has returned 22.3% on a compound annual basis over his 36 years. So, he's basically right up there with Buffett.
And the question is, how did somebody like Henry Singleton achieve this? The title of the book, "The Outsiders," kind of gives it away. These guys are not your Jack Welches, who are your famous CEOs, who are your particularly good operators. These CEOs were exceptional at capital allocation. You have Jack Welch and these other fantastic CEOs who are able to earn their companies a lot of money. But then the question is, what do you do with that money, and determining what you do with that money, how big of an impact can that have on your returns?
And what they found is, Henry Singleton, over the years -- and Teledyne was a conglomerate, so he'd buy other companies with his high-priced stock, and they'd have low-priced stocks, so they'd arbitrage in that way. But over the years, he bought back -- in the 1960s, after he had finished building a bunch of companies and building Teledyne, he repurchased 90% of Teledyne's outstanding common stock, and he did it at cheap prices.
And that was the way that he achieved those phenomenal returns. And you go back through all those other CEOs that Thorndike talks about, and it's the same exact story. So, the takeaway from Thorndike's book is this: there are two types of great CEOs, talking very generally. The first of those operating CEOs who are phenomenal at running their businesses. The second are those CEOs who are phenomenal capital allocators like Henry Singleton, like Warren Buffett. And it is generally the latter category that produces the largest compound annual growth over an extended period relative to the former.
Lapera: Alright, thank you very much. I think it's my turn. I think I might have one of the oldest books out of the four of us. I am doing Benjamin Graham's The Intelligent Investor, which was originally published in 1941, but I actually prefer the version with Jason Zweig's notes, they provide a lot of extra insight. Benjamin Graham, if you haven't heard of him, was the granddaddy of investing. He greatly influenced Warren Buffett. If that's not a compliment, I don't know what is.
And the things you read in his book are things that you hear from The Motley Fool all the time: invest in companies in the long term because you believe in them, buy companies you've done your homework on because the market's going to take wild swings and the companies that are really going to last are the ones that will really last. I know that sounds circular, but it's true. I read this book really quickly, and then I went back and read it again very slowly.
It's a very long book, but it's definitely worth your time. I think I'm going to turn it over to Robert Brokamp now, because he looks so ready to talk.
Brokamp: Thank you very much!
Lapera: You're welcome.
Brokamp: My recommendation is Stocks for the Long Run by Jeremy Siegel. Jeremy Siegel is a professor at Wharton Business School at the University of Pennsylvania. And when you look at it, it does have a certain textbook look to it.
Douglass: It says "fourth edition" on the front cover.
Brokamp: Right. And there's a fifth edition that just came out a year ago. But, what's great about this book is that it's not just an investing book. It's a history book, it's an economics book. There is sort of a textbook-y feel to it, but Jeremy Siegel writes in a way that the average person can understand some of these contexts. He goes back to the returns of various asset classes, all the way to 1802, and then comes all the way through the big events: the Great Depressions, the wars. And the recent edition even includes the Great Recession.
And the main point of all of this is that over the long run, stocks are actually the least risky asset class, because one of the big risks we all have when we're trying to accomplish our financial goals is, are we going to have enough money, and is the money we have going to keep up with inflation? In the short term, year to year, you don't know what's going to happen. But over the long run, historically, stocks have beaten cash, bonds, real estate, and inflation.
So, I think part of this book is just inspiration, especially during times when the market is down, to look at this and say, "Over the last 200 years, if you can just hold on through parts like the Great Depression, where stocks went down 90%, even those who held on and still added a little bit to their portfolios, over the coming years, made out much better than any other asset class."
And actually, I first learned this as an audiobook. So, I highly recommend, especially to those busy parents out there who are spending a lot of time in the car driving your kids around, get it as an audio book. It's a great way to get it in snippets, so you're not getting overwhelmed by all the information. But I think it'll convince you to be a longtime stock investor.
Lapera: Excellent. M.D., you're up, slugger. You've got big shoes to fill.
Douglass: With only so many vocalized pauses. Okay, let's see how I do. For me, it's a book by Howard Marks called The Most Important Thing. Marks is a big value investor, despite the fact that his name kind of sounds like Karl Marx. And as a growth investor--
Brokamp: Spelled differently, by the way. And not with a Russian or German accent.
Douglass: Right. Even as a growth investor, personally, I found that influenced me a great deal. There are two particular points that I'd like to draw from the book. One is that he talks about the inherent cyclicality of the market. So, you will have bull markets where people become convinced that things are always going to go up, and you will have bear markets, where people become convinced things are always going to go down.
And they inevitably feed into each other, because a handful of people then realize, "Well, it's not always going to go down." And a few people on the flip side say, "Well, it's not always going to go up." So, whenever you hear, "This is the new reality," be skeptical, because often, that is actually what Marks refers to as "the third phase" of the market, whichever it is, bull or bear. So, that's something to consider. When people say, "Oh, oil prices will always be $5 a barrel," or, "Tech stocks are always going to be amazing," that's maybe a time to get a little bit skeptical about that long-term thesis.
The second piece is, he talks about three words that are the most beautiful words in the world if you're on the other side of the transaction. I'm quoting directly from page 114. And those words are, "regardless of price." And this is one of the reasons that so many mutual funds underperform the market, is because their investors will pull out when they begin to underperform their benchmark or index or the S&P 500, or when they just go down. And that, then, forces them to sell assets at any price. They must sell those assets right then.
And if you're on the other side of that trade, that's a nice opportunity for you. And that also explains why you've got these brilliant minds who, consistently, none the less, underperform their benchmarks. And that's often because the fear of the market is magnified by all the people been pulling their money out of that mutual fund. So, two thoughts for you from "The Most Important Thing."
Brokamp: I actually did a survey of the investors at The Motley Fool, the analysts and advisors, and I said "Send me your favorite investing books." And this book was among the top five. So, you're in good company.
Douglass: Good to know!
Lapera: I guess, if anyone is curious, the top ones for that were The Little Book That Builds Wealth by Pat Dorsey, One Up On Wall Street by Peter Lynch, The Warren Buffett Way by Robert Hagstrom, The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks, and The Essays of Warren Buffett: Lessons for Corporate America by Warren Buffett, compiled by Lawrence Cunningham. There's a whole bunch more, and if you're really interested, if you email me at the show, because I would love to get an email, no one has emailed me yet, firstname.lastname@example.org, I will send you the the Fool...uh, full Fool list.
Douglass: The Fool list, I see what you did there.
Maxfield: Even the secret ones you haven't disclosed yet?
Lapera: Even them. Also, I want to plug a highly accessible book, Personal Finance for Dummies. I know that this sounds like a joke, but it's not. I've read it, Mr. Brokamp has read it, and as we discussed a couple of weeks ago, a majority of Americans apparently need to read it. John Maxfield, again, shout-out for being able to successfully complete that financial literacy quiz that I sprung on you a couple weeks ago.
Anyways, I hope we made your gift-giving a little easier this year. Books are always a great present, especially if you get to learn from them. After all, is my very imposing immigrant father would say, "Education is the gift that lasts forever, and that no one can take away from you."
Brokamp: I don't know your father, but I think that was a good impression.
Douglass: I do, and it was.
Lapera: He's a very serious man, my father. But very kind. But he might be serious because people are taking his gifts away, I don't know.
I don't think we mentioned any stocks, but if we did, people may or may not have an interest in them, so don't buy or sell based solely on what you hear. Like I said, please email us at the show. If you have any questions, thoughts, or want the full list. Thank you guys very much for joining us today. I hope everyone has a great week!