Recommended Reading
At RAA we’ve amassed a bookcase full of investment reading. Here are our favorites.
Index Investing
Larry Swedroe. The Successful Investor Today: 14 Simple Truths You Must Know When You Invest. 2003.
This outstanding book contains by far the most readable argument for index over active investing. Astute readers will notice this book’s many influences on the RAA website. If you need more convincing, get this book.
John Bogle. The Little Book of Common Sense Investing. 2007.
John Bogle is the Chairman of Vanguard, and the originator of the index fund. His first fund, an S&P 500 tracker, began trading on August 31, 1976. Bogle’s book is similar to Swedroe’s in that it is a full-length treatise on the advantages of index over active investment. Although they draw from similar sources, Bogle does a nice job collecting a lot of quotes, many of which are in the quote engine on my site.
Richard Ferri. All About Index Funds. 2002.
A great reference for the history of the index mutual fund, which can be summarized:
- 1924 – First mutual fund is created, called the Massachusetts Investment Trust
- 1950s – Academic work is done by Nobel Prize Winner Paul Samuelson and others into what became known as the Efficient Markets Hypothesis, which states that markets are already efficient and that it is only risk that creates returns over time. Index funds are theorized but are impractical absent computers.
- 1973 – Princeton Professor Burton Malkiel publishes the classic A Random Walk Down Wall Street. He calls for someone to create an index fund.
- 1976 – John Bogle launches the Vanguard 500, the first publicly available index mutual fund. Initially sales are poor because of extreme reluctance on the part of brokers to offer the fund, which originally paid smaller fees before ultimately switching to a no-fee model. As of 2008 the fund had $116 Billion under management.
- 1986 – Vanguard offers a bond fund that tracks the Lehman Brothers Aggregate Bond Index. The fund differentiates itself by having a 0.25% management fee, versus it’s active competitors’ 1.0% fees. The fund now has $61 Billion under management.
- 1990s – Index fund choices explode. According to Ferri there are 272 by the end of 1999. Not all are created equal though: individual investors must be wary of some so-called index funds that have high management fees and are to be avoided.
- 2000s – Despite the financial pain that index funds cause stockbrokers, the public begins to be more aware of these portfolio options that are coming to dominate institutional investing. Helping matters along, high profile investors such as Warren Buffet say things like “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.”
Burton Malkiel. A Random Walk Down Wall Street. 2007 (current edition).
This book was brilliant and prescient when it was published in 1973. Since then Malkiel has updated it many times. This is a great book that covers the same topics as the Swedroe book. I find the Swedroe to be shorter, easier to read, and more convincing, so I don’t often recommend this one. Some of the graphs and charts are terrific though, and Malkiel devotes his additional pages to some solid history lessons, much of which he lived through.
William Bernstein. The Intelligent Asset Allocator. 2001.
More technical than other books, but a bible of sorts for index investors. This book does a good job explaining the math behind the markets, including the language of risk. Your investment advisor should already have read this book.
Other Related Topics
Dan Ariely. Predictably Irrational: The Hidden Forces That Shape Our Decisions. 2008.
Brendan’s favorite of the Freakonomics genre. Ariely pins his anecdotes to a superstructure of key principles that map human irrationality. Ariely calls himself a behavioral economist, and contrasts his discoveries regarding how humans actually behave with the model of rational “economic man” as relied upon by traditional micro-economists. Readable as a memoir, a book on psychology, and a business book.
Nassim Taleb. Fooled by Randomness. 2004.
A very readable and fun book concerning the role that luck plays in most of human endeavor, and the myriad ways in which luck is mistaken for skill. Very apropos of active investing, in which every time period features a handful of active mutual fund managers that crush the markets. This number is no more than you’d expect from a random distribution. Despite this, these managers achieve enormous short-term inflow of capital, swelling their commissions. Unfortunately for the believers in skill, these managers do not repeat their success, and their Morningstar ratings come tumbling down to earth, along with their returns.
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