Change Your Mind: The Five Best Finance Books That You Haven’t Read (Yet)
JP Osseward | April 20, 2021
These books helped to shape my worldview and are an excellent complement to “conventional” textbook learning. There are numerous other books that might have made this list; I’m sure other people will argue that I missed this book or that book (Great! I’ll put them on my reading list). Each of these books offer unique perspectives from people who don’t shy away from their opinion, and in many ways have transformed how we think about decision making and finance. All five of my selections excel at tackling a subject that can so often seem impenetrably esoteric and translating it into accessible nuggets of wisdom.
I Will Teach You To Be Rich (Ramit Sethi): Of these five, the first that I read and definitely the winner of the “Most Sensational Title”. Sethi takes the world of financial automation and makes it interesting. Broadly, this book addresses investing as a lifelong process that requires discipline and diligence. Yet human beings are notoriously fickle about sticking to long-term discipline, and financial diligence is hard. Therefore, Sethi argues, you should reduce human involvement in the process to the extent possible. This may sound bleak but really, it’s the opposite. Sethi suggests that humans shouldn’t waste their time moving money between bank accounts, investment accounts, finding the highest interest rate on savings accounts and other minutiae. Humans should enjoy their lives, explore nature, create new friends, maintain bonds, and build families. Financial automation succeeds far better than even the most disciplined person, so get out of the way and let the computer do the work.
Unconventional Success (David Swensen): If I could only read one book about investing, beyond a guide for how to read a balance sheet and income statement, it would be Unconventional Success. For those of you who aren’t familiar with David Swensen, he is the Chief Investment Officer of the Yale Endowment. His investment management model (the Endowment Model) has been copied by thousands of institutions around the world (many of them led by former students of Swensen and the Yale program). But this book is written for the common investor and not for multi-millionaire/billionaire institutions. Swensen’s ideas are crystal clear, and immediately recognizable for the truths they are. Swenson’s overarching principle in both books is simple: align interests between investors and the vehicles that hold their investments. He spells out the pros and cons of each asset class (at least those widely available as of publication in 2005) and parses out the issues and conflicts of interests present in the investment vehicles available to most investors. In the first half of the book, he lays out a simple thesis for how to manage portfolios grounded in fundamentals and how best to align interests. He dedicates the last half of the book to eviscerating Wall Street and expounding on how it has provided little if any benefit to the common investor (and in most cases has actively hindered performance). In many ways, this book can become First Principles thinking about the rest of investing.
Antifragile (Nassim Talib): Talib’s book is a philosophical treatise in as many ways as it is a work about risk and investing. Talib peppers the book with numerous examples from history concerning how philosophers thought about the structure of society and how it makes investments. The book’s title, Antifragile, is not a real word per se, but the answer to a question that Nassim poses throughout the book: how do we build systems that get better during times of stress and chaos? As society has grown, it has tried to make things more efficient. As a result, finance builds models focusing on how to optimize for growth, rather than optimizing for difficult times. As such, Talib argues, we are constantly making ourselves more fragile because we are building societal structures, companies and organizations that are designed to only do well when it is easy to do well. He combines this concept with the Pareto principle (also known as the 80/20 rule) to spell out that one unit of input does not equal one unit of output; or more precisely, that life is full of nonlinearity (only in spreadsheets and with economics do you get nice lines that create tidy graphs). Combine nonlinearity with the human tendency to optimize away from resilient companies, and you’ve created a system which devolves quickly when things get out of hand, compounding one issue on another in a downward spiral. In totality, Talib believes it is better to miss out on a little bit of return during the good times, allocating those resources to making the rough periods more manageable and ideally, an opportunity for burgeoning growth.
Thinking, Fast and Slow (Daniel Kahneman): This book examines the neurological process of decision making. We don’t have just one system for decision making, but many, each activating under specific circumstances. Kahneman tears apart the concept of Homo Economicus (the theory that Human beings are highly functional and rational decision makers) with a deluge of examples demonstrating how human beings don’t, in fact, follow what a nice tidy graph says that they should do. We make decisions one way in a certain circumstance, but when presented with additional variable(s), choose a totally different outcome entirely. While Thinking, Fast and Slow doesn’t provide a solution or a set of rules about what to do, it offers readers something more important: a reality check that you do not make decisions as consistently and predictably as you think you do. It helps alleviate the slight hubris we all demonstrate regarding how well we pick and choose, asking us to consider other options and to take our time. Oh, by the way, he won a Nobel Prize for these ideas.
Principles (Ray Dalio): I saved the review of this book for last, not because it is least important, but because thinking about the concepts Dalio presents can cause you to spiral off into a pensive coma. In essence, Ray Dalio tries to build a decision-making system for how individuals and companies can make the best choices in any endeavor. Woah! Fundamentally, the book attempts to spell out a life philosophy on decision making with the consideration that each person has their own skills and limitations, and that each person is unlikely to be capable of solving all their problems themselves. In many ways, the book explores the concept that when you are trying to solve a problem, you most likely don’t have the right solution, and that you need to gather resources and weigh more diverse input regarding how to move forward. Principles attempts to marry the process of everyday decision making with the scientific method, slowly building principles and rules off previous rules and principles, through a personal and professional operating system, perpetually striving to improve itself.
Did I miss one of your favorites? Send me an email to let me know — I will add it to my list. If you want to add one of the books referenced above to your library, I have included links to help you find them: