Tuesday , 5 March 2024

Become An Expert In Financial Market Math & History – Here’s How (2K Views)

Following Charlie Munger’s advice to “develop into a lifelong self-learner through voracious reading; cultivateinvesting-4 curiosity and strive to become a little wiser every day” this article presents my recommendation as to what books to read to learn more about financial market history and the basic math skills you need to be a good investor.

So says Ben Carlson (awealthofcommonsense.com) in edited excerpts from his original article* entitled An Investing Master’s Degree in History & Math.

[The following article is presented by  Lorimer Wilson, editor of  www.munKNEE.com and the FREE Market Intelligence Report newsletter and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Carlson goes on to say in further edited excerpts:

[While] there are no surefire ways to use quantitative and historical market patterns to create an investment strategy that works in all environments, the point of learning about these aspects of the financial markets is to gain a greater understanding of the different risks involved when investing and how you can use this information to increase your chances for positive results.

Here’s my list to help get you your master’s degree in market math and financial history:

1. Stocks for the Long Run andfbig_nest_egg_study_istock1
2. The Future for Investors
By Jeremy Siegel

Siegel shares reams of historical information in his books and even goes back to the 1800s with his stock data. These are great books for a long-term perspective on what’s worked in the past and why. Siegel also does a nice job showing why it’s important to understand the dynamics of inflation and compounding through his data.  Many mistake Siegel’s message by assuming he these books mean stocks always and forever make sense as investments.  Actually what he shows in these books is that stocks have always been your best best over multi-decade periods, but they can be cyclical over shorter time frames.

3. The Warren Buffett PortfolioWays-to-make-money-1
4. The Essential Buffett
By Robert Hagstrom

These are two of my favorite books on Buffett. You get a nice sense of market history with a look back at some of Buffett’s most successful investments (and biggest mistakes), but it’s not that you’ll learn how to buy stocks like Buffett that makes this history informative.  The most important lessons are learned through a greater understanding of the temperament it takes to be a great investor. Both of these books also devote an entire chapter to probability theory which is at the heart of Buffett’s investing style. He always says he would rather be roughly right than precisely wrong, which is all we can do in the absence of being able to predict the future.

5. Investing: The Last Liberal Artinvesting4
By Robert Hagstrom

Hagstrom covers Charlie Munger’s lattice of mental models approach to worldly wisdom in this book. Munger likes to combine history, math, physics, biology and economics to be able make wiser decisions. There’s a chapter on each of these subjects to provide a broader perspective on how to view complex systems. Having a varied skillset is not only important in when investing, but in many other aspects of life as well. If you’re a fan of Munger, also check out Poor Charlie’s Almanack, one of my all-time favorites in an homage to Benjamin Franklin.

6. The Intelligent Investortechnical-analysis-debunked-5-reasons-why-we-dont-believe-in-charting
By Benjamin Graham

You can probably get away with reading just two chapters of this classic. Chapter 8 is Graham’s thoughts “Mr. Market” analogy.  It’s the most simple yet effective description I’ve ever read about the differences between the short-term and long-term moves in the market. Chapter 20 covers the concept of having a margin of safety. You could take this to mean simply buying value stocks, but a margin of safety in your investment process allows for the inevitable mistakes and uncertainty we get when investing.

7. The Big Shorthigh frequency trading
By Michael Lewis

There are so many lessons we can learn from the most recent financial crisis (many of which have already been completely forgotten). Lewis wrote the definitive book on the subject. It’s one of the best finance books ever written.

8. Success Equation: Untangling Skill and Luck in Business, Sports and Investinga5321_market-analysis
By Michael Mauboussin

Although a basic quantitative skills are vital for investors, it’s important to remember that you must balance your numbers with a heavy dose of humility. It’s impossible to perfectly predict future risk factors, but even those people that do occasionally make precise forecasts have a huge amount of luck involved. Mauboussin does a great job laying out the differences between skill and luck in a number of endeavors.

9. The Intelligent Asset Allocator andpersonal-finance6
10. The Investor’s Manifesto
By William Bernstein

The Intelligent Asset Allocator goes over the important math behind portfolio theory (diversification, correlation, asset allocation, risk controls, etc.). That one is a little dry, so The Investor’s Manifesto is a good follow-up that goes over the entire portfolio investment process in much simpler language.

11. A Short History of Financial Euphoriatimeless-keepers3
By John Kenneth Galbraith

Galbraith covers all of the classic bubbles in going back hundreds of years including the Tulip Craze, the South Sea Bubble and the Crash of 1929. Understanding the history of herd mentality and investor emotions is one of the most important aspects of learning about financial history. This short book does a great job detailing the fact that every cycle is different yet human nature is not.

12. The Little Book of Common Sense Investinginvesting2
By John Bogle

No market math lesson is complete without an understanding of effects of compound interest from long-term returns and expenses. Bogle is by far the best in the business at explaining these concepts.

13. The Little Book of Market Mythseconomic-decline-90x65
By Ken Fisher

An underrated book that’s packed full of data and historical examples to explain why many investors general assumptions about the markets are wrong. The myth-busting on market timing, economic growth, stocks vs. bonds and volatility are all helpful. Another short read, but packed full of useful information.

14. Against the Gods: The Remarkable Story of Riskrisk
By Peter Bernstein

This one is a nice combination of market history and probabilities in relation to risk. Bernstein goes way back to show how risk has evolved over the centuries into the current risk management construct that many use in the investment industry to try to understand and quantify risk. It shows how uncertainty can lead to mistakes, errors in forecasting and irrational decisions as we try to predict the future.

I’m sure I’ve missed a few books here, but these ones should get you well on your way.



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One comment

  1. Great listing, which I look forward to reading.
    Anyone else have any personal favorites you would add to the above list?