INVESTMENT OUTLOOK : PERSONAL FINANCE : PROFITABLE READING : Books That Investment Experts Have Found Helpful
In 1934, two Columbia University business professors, Benjamin Graham and David L. Dodd, published a textbook called “Security Analysis”--a deceptively simple title for a book that many still regard as the bible of the investment community.
Since then, the book, a guide to scrutinizing corporate finances, has sold more than 750,000 copies. Soon after the Oct. 19 market plunge, publisher McGraw-Hill came out with its fifth edition, updated by three other authors.
Graham died in 1976, but Dodd, now 92 and living in Falmouth, Me., proclaims that the “valuation approach is still valid, and I’m sailing happily on it.” If he has one bit of advice for veterans of the 1987 market crash, it is that the situation is strikingly similar to 1929, which “created a veritable wealth of investment opportunities.”
Many money managers and investors still cite Graham and Dodd as the classic guidebook for serious investors. Also winning high praise is a book that predates Graham and Dodd. “Reminiscences of a Stock Operator,” published in 1923, follows the exploits of speculator Jesse L. Livermore, who made and lost several fortunes over a career spanning more than three decades. (Some say Livermore penned the book, using the pseudonym Edwin Lefevre.)
Livermore made his first fortune while in his 20s, selling short during a “rich man’s” panic in 1907 and earning himself an enduring nickname as “the boy plunger.” In 1940, heavily in debt, Livermore put a bullet through his head in a New York hotel, leaving a suicide note that read: “I’m a failure.”
Insomniac investors sobered by the recent goring of the bull market just might find some lessons in “Reminiscences” and in other books mentioned by some the nation’s best-known investors.
Asher B. Edelman, corporate raider:
“When we are near, we must make the enemy believe that we are far away,” the Chinese philosopher Sun Tzu wrote in the 4th Century BC. “When far away, we must make him believe we are near.”
In his classic “The Art of War,” Sun Tzu taught that “all warfare is based on deception.” Destroy the enemy’s will, and the battle is won. Little did he know how many corporate takeover artists would, centuries later, adhere to his teachings.
Edelman, 48, sings Sun Tzu’s praises. The advice, he says, ranks right up there with the classic treatise on value investing, Graham and Dodd’s “Security Analysis.”
“I’ve only used two books,” Edelman says brusquely. Why these? “Sun Tzu, because no one has ever better understood the tactics of investing. And Graham and Dodd, because no one has ever better understood values.”
With varying success, Edelman has waged nearly a dozen takeover battles in the last few years from his New York office. Ever on the prowl, Edelman also absorbs himself in literature of another sort. “I tend to read annual reports, balance sheets, 10-Ks, 10-Qs,” he says.
In October, the part-time Columbia University instructor even offered a $100,000 prize to any student who could find him a good company to buy. Edelman’s class was titled “Corporate Raiding: the Art of War.” Columbia shot down the idea.
Michael Metz, market strategist:
A Harvard-trained lawyer who gravitated to Wall Street, Metz is considered within the securities industry as a follower of Graham and Dodd’s value approach to investing. But, says the senior vice president of Oppenheimer & Co. in New York, the first rule of investing is: Know thyself.
“I would start with Freud’s ‘Introductory Lectures on Psychoanalysis,’ ” he says. In the same psychological vein, he suggests Edwin Lefevre’s “Reminiscences of a Stock Operator” and “Street Fighting at Wall and Broad,” a 1980 tome by Marchand Sage. Those books “show how stocks are manipulated mechanically and how a professional investor capitalizes on the psychological quirks and eccentricities of the amateur speculator and investor.”
From there it’s a logical step to another classic, Charles Mackay’s 1841 treatment of crowd mania, “Extraordinary Popular Delusions and the Madness of Crowds.” In the book, Mackay chronicles crazes that have hit masses of people, such as the 17th-Century tulip bulb mania in Holland.
“The problem is that most investors fall victim to their own psychological quirks (and make) mistakes in buying and selling,” says Metz, who has childhood memories of the Depression. “A reasonably intelligent person who’s not a slave to his own lunacy should be able to make money in the market.”
Paul A. Bilzerian, corporate raider:
In five failed takeover efforts, Bilzerian has pocketed more than $50 million. He was also recently rebuffed by Singer Co.
The 37-year-old Florida investor views it as a wonderful irony that one of his literary idols, T. Boone Pickens Jr., also recently bought a stake in the defense electronics firm. Bilzerian names the oilman’s autobiography, “Boone,” as one of two books that have most influenced him.
When Boone disclosed ownership of a stake in Singer two days after Bilzerian had finished reading “Boone,” Bilzerian says, “I thought maybe karma was at work.” Of Boone’s book, he adds: “For somebody in my position, it was rather comforting to learn that someone else shared so many experiences, values and thoughts.”
But for sheer market wisdom and fascination, Bilzerian says, the compelling “Reminiscences of a Stock Operator” is at the top of his list. “It says so much about how we think about things, our attitudes and thoughts, and how we respond to different events,” he says. “Everyone would walk away from that book having learned something.”
To Bilzerian, the great thing about Edwin Lefevre’s 1923 book about investor Jesse Livermore is its sense of joie de vivre. No one would ever guess that its subject 17 years later would shoot himself dead in a New York hotel.
“He lived a full life; he made a fortune and lost a fortune, he made it again and lost it again. He shorted the market, he went long the market; he was short commodities, he was long commodities; he lived as a king and he lived as a pauper.”
David N. Dreman, money manager:
Dreman, author of “The New Contrarian Investment Strategy” and founder of Dreman Value Management in New York, also leans toward the writings that probe the psychology of the markets and the panics that have plagued investors through the years.
“Extraordinary Popular Delusions” is high on his list, along with “The Crowd,” written at the turn of the century by Gustave LeBon. Another favorite is John Kenneth Galbraith’s “The Great Crash of 1929,” which he calls a “wonderful description of 1929.”
Dreman, 51, who shuns analysts’ earnings projections when picking investments, has been in the business for more than 25 years and feels that there have been “a lot of gloom-and-doom books over the years” that haven’t been very good. His reading choices, he says, “give a familiarity with how to defend yourself when the market is overheated.”
Robert R. Prechter Jr., market theorist:
The young (38) Mr. Prechter--who helped drive the bull market and came close to missing the Crash of ‘87--wears his investment philosophy on his nameplate as editor of the Elliott Wave Theorist newsletter in Gainesville, Ga.
“The two books that influenced me most were ‘The Wave Principle’ (1938) and ‘Nature’s Law’ (1946) by R. N. Elliott,” he says. Also of value: “Cycles, The Science of Prediction” (1947) by Edward R. Dewey, “Technical Analysis of Stock Trends” (1948) by Robert Edwards and John Magee, “The Kondratieff Wave” (1972) by James B. Shuman and David Rosenau, and “The Dow Theory” (1932) by Robert Rhea.
“All of those books recognized that the stock market has form, that it is not a random movement. . . . (‘The Wave Principle’) is a detailed description of the repeating price patterns formed in markets. These patterns reflect natural changes in mass psychology from pessimism to optimism and back again.”
He keeps all these books within arm’s reach of his desk, even though he does not refer to them. “I read each one of them once,” he says. “And I have a good memory.”
Elaine Garzarelli, securities analyst:
“I’m an economist,” the 36-year-old Garzarelli says matter-of-factly. “So I read economics books.”
Sensing that the country was “going into a 1929 type of situation,” the Shearson Lehman Bros. research analyst and money manager called the October crash a week in advance and has acquired the aura of an investment sage.
She had read Paul A. Samuelson’s classic economics textbooks, along with Galbraith’s “The Great Crash of 1929” and George Soros’ “The Alchemy of Finance: Reading the Mind of the Market,” just out this year.
And, about nine months ago, she started doing some original reporting, taking to lunch “some men who had lived through the crash of 1929.”
They included Roy R. Neuberger, founder of the New York investment firm of Neuberger & Berman, and Arnold Bernhard, founder of the Value Line investment service.
“I wanted to see if anybody who lived through it saw it (coming),” she says. “Neuberger said absolutely he saw it (and) shorted it all the way down. So if you were watching everything, you saw what was going to happen.”
Robert Haft, corporate raider:
But enough of these books about psychology and market cycles and investment strategies.
Haft, 34, founded the Crown Books discount book chain and, with his father, Herbert, has launched a slew of high-powered but unsuccessful takeover attempts. The market upheaval helped torpedo their most recent run, at Minneapolis retailer Dayton Hudson.
Haft turns to books for inspiration. Here’s his list: “Profiles in Courage” by John F. Kennedy; “History of the English-Speaking Peoples” by Winston Churchill; “The Fountainhead” by Ayn Rand; Aristotle’s “Ethics,” and “Man’s Search for Meaning,” by Viktor E. Frankl, a concentration camp survivor.
Frankl’s book is of particular interest. “It was very much his story of . . . how he found meaning in life,” says Haft, who is based in Landover, Md. “He had lost his family, his health, but he still had his ideas and his mind and his future. That was his ability to go on, in spite of the worst physical and mental situation that anyone could possibly be in.”
Of the usual investment books, Haft says: “I’ve read some of these books. I wouldn’t say reading ‘Elliott Wave Principle’ changed my life, but reading the philosophy of Aristotle--that is the kind of thing that can be changing.”
