The Buy-and-Read Approach to Stock Gyrations

What to do when the stock market gets wild? Don’t sell. Read.

A grounding in the history, psychology, strategy and plain old how-to techniques of investing can help you prosper in these volatile times. And a nice bonus of our national obsession with the market is that investment classics, unavailable for many years, have lately been reprinted and updated.

With the gift-giving season approaching, the 10 favorite books I list below (roughly in order of how valuable I’ve found them) are timely in another way:

* “The Intelligent Investor” by Benjamin Graham.

This may be the best book ever written about investing. The author, a former Wall Street money manager and professor of finance at Columbia University, was mentor to Warren E. Buffett, among other stars. Graham shows us how to think about investing, not how to analyze stocks. (The latter was the purpose of Graham’s more technical masterpiece, “Security Analysis,” written in 1934 with David Dodd and still in print.)

Among Graham’s important insights: that investors are their own worst enemies, that a metaphorical manic-depressive he named Mr. Market sets the prices daily (and you should take advantage of his emotional extremes), that every stock should be bought at a bargain price and that the best mind-set for an investor is to imagine that buying a stock constitutes becoming a partner in a business.

This book was first published in 1949. The version I own came out in 1973, and a new version appeared this year from HarperCollins. Be warned that the book has an anachronistic quality, which I like--including the epigram from Virgil’s “Aeneid”: “Through chances various, through all vicissitudes, we make our way.” That’s a good creed for investors.

* “A Random Walk Down Wall Street,” by Burton G. Malkiel.

Malkiel is a rarity: a real economist, now at Princeton, who can write with lucidity and wit about the market. The theme of this book is the unpredictability of short-term price movements in stocks--a notion that all investors should drum into their heads.

“Taken to its logical extreme,” writes Malkiel, this theory “means that a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the experts.” And that has been shown many times: Consider that far fewer than half of all mutual funds beat the market averages.

Malkiel’s book, first published in 1973 and available in paperback, focuses on investor psychology, history, the pricing of stocks, the futility of timing and the importance of the long term. There’s also a practical investment guide tacked on in later editions.

* “One Up on Wall Street,” by Peter Lynch.

Lynch, the former manager of the Fidelity Magellan Fund and probably the best mutual fund manager of all time, did this book with John Rothchild, a talented ghost writer. It’s wonderfully breezy and informative, full of real-life anecdotes.

Its theme is that anyone can invest as well as the pros do--in fact, amateurs have some advantages over money managers. Lynch teaches that you run across good stock-buying ideas all the time. He tells the story of his spectacular bet on Hanes hosiery (now part of Sara Lee Corp.) after his wife became enamored of the new egg-shaped pantyhose containers at grocery stores.

This was Lynch’s first book; it was first published in 1989 and is easy to find in paperback. His second, “Beating the Street,” (1993) is very similar and can serve as a substitute. His latest, “Earn to Learn,” is a guide to the basics of investing and business for beginners.

* “Common Stocks and Uncommon Profits,” by Philip A. Fisher.

Yet another classic, this one was first published in 1958 and reissued in paperback last year. Fisher, a California version of Ben Graham, is a brilliant and reclusive money manager who began his career in 1928, on the brink of the crash.

In his most famous chapter, “When to Sell,” he writes, “I believe there are three reasons, and three reasons only, for the sale of any common stock.” You’ll have to buy the book (or leaf through it at the bookstore) to find out what they are, but here’s a hint: One of the reasons is not a decline in a stock’s price. Or an increase.

“Perhaps,” Fisher writes, “the thoughts behind this chapter might be put into a single sentence: If the job has been correctly done when a common stock is purchased, the time to sell it is--almost never.”

* “The Only Investment Guide You’ll Ever Need,” by Andrew Tobias.

Tobias, who is the breeziest and funniest personal finance writer around, first published this little book in 1978. It’s out in a new paperback edition--just 221 pages with only one graph and just one table in the appendix (showing the effect of compound interest, which is pretty spectacular: $1, growing at 12%, becomes $93 in 40 years and $7 billion in 200 years).

The first half of the book establishes general principles, including “trust no one” and “the case for cowardice.” The second half examines specific stock market strategies, including what to do if you inherit a million dollars. Among Tobias’ suggestions: Put a year’s worth of cash in a money market fund, “put roughly equal sums into U.S. Treasury securities maturing in one, two, three and four years,” put the bulk of the remaining money into stock index funds split between domestic and foreign investments, and “do not buy a boat.”

* “What Works on Wall Street,” by James P. O’Shaughnessy.

O’Shaughnessy, a money manager who is also a serious financial technician, took a database of stock market history and then ran a bunch of computer programs to find out which specific investing strategies (high dividend, low price-to-earnings ratio, relative strength, etc.) had produced the best results over time. Believe it or not, no one had ever done this before.

Some of the results were surprising--for instance, that stocks with a low ratio of their prices to their company’s sales (which seems a crude measure) consistently performed well. O’Shaughnessy has started a successful mutual fund based on what he discovered.

* “Stocks for the Long Run,” by Jeremy J. Siegel.

Published in 1994 and still widely available, this book created quite a stir. It looks at stock, bond and Treasury bill performance over the period 1802 to 1992 and concludes that 1) stocks return far more than other investments and 2) while stocks are extremely risky in the short run, they are actually less risky than bonds and T-bills in the long run.

This is the buy-and-hold bible. Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, is a respected scholar. Despite that, his book is exceptionally readable--and far broader in scope than O’Shaughnessy’s. It also deals with inflation, gold, foreign stocks, taxes, index futures and options.

* “The Warren Buffett Way,” by Robert G. Hagstrom Jr.

Books about Buffett abound. I like this one, available in paperback, the best because it concentrates solely on the stock-picking strategies of the chairman of Berkshire Hathaway Inc.--and how you can emulate them. What it lacks in literary polish it makes up for in hagiographic detail and abundant sayings from the master.

For example, Hagstrom writes, “Buffett gives zero credence to market predictions.” Buffett cannot predict short-term market movements and does not believe that anyone else can. He has “long felt that the only value of stock forecasters is to make fortunetellers look good.”

* “The Motley Fool Investment Guide,” by David and Tom Gardner.

The Gardners launched their Web site in 1994, and they’ve built up a large and much-deserved following. This book, published this year in paperback by Fireside, is full of good advice, most of it presented cheekily, about selecting stocks and building a portfolio.

The Gardners are advocates of Dow-dividend investing. They’ve even devised their own system, the Foolish Four. Take the five Dow stocks with the highest dividend yields, throw out the one with the highest yield and double up on the one with the second-highest.

The Gardners’ premise, like Lynch’s, is that nonexperts (i.e., the “fools”) can beat the Wall Street hotshots (i.e., the “wise”). This is not merely a lovely idea; it tends to be true.

* “Against the Gods,” by Peter L. Bernstein.

Bernstein, founder of the Journal of Portfolio Management, the investment world’s answer to the New England Journal of Medicine, is a cerebral economic consultant with a strong contrarian streak. This wonderful book recounts the history of risk--and how it has been tamed--from the ancient Greeks to Wall Street derivatives. Most investors ignore risk and concentrate solely on return, and Bernstein shows why this is a dangerous pursuit.

Understand that this is not a how-to book, but it provides background that investors need. Bernstein’s earlier book, “Capital Ideas,” available in paperback, is a valuable history of the stock market.