Swindles, bears and brains ? summer reading for investors
One I’m already halfway through, but at 870 pages in total the story is just getting going; the second I read a while ago but it seems more relevant than ever and I’m looking forward to revisiting it; the third I’ve dipped into and been meaning to get properly stuck into for a long time.
The book I’m planning to finish off on our Lake District “staycation” is one that crops up in articles whenever a new financial scandal hits the headlines and so has been on my “must get round to reading one day” list for many years. The Way We Live Now is regarded as Anthony Trollope’s masterpiece and halfway in I’m not about to disagree. It is a timeless picture of greed, ambition and corruption, set in the London of the 1870s but completely recognisable today, full of interesting subplots and beautifully written.
The central character, Augustus Melmotte, is a shadowy financier who arrives in London with apparently limitless wealth and a long list of questions about where it all came from. An outsider in snobbish and xenophobic London society, Melmotte’s money, lavish parties and get-rich-quick investment schemes are nevertheless more than welcome.
Welcome, that is, until the rumours grow that his wealth is nothing more than a massive swindle and the house of cards begins to collapse. Which is where I’ve got to, so please don’t tell me how it all unfolds.
I first read the second book on my list when it was published six or seven years ago and it is one of my favourites on investment. Russell Napier’s Anatomy of the Bear is a must-read for anyone who wants to understand the great sweep of investment history and, in particular, why markets suddenly decide to stop falling and start rising again.
When I read Napier’s book on its publication in 2005 it depressed me. The former Asian equity strategist at CLSA in Hong Kong had conducted a wonderfully detailed study of the four best buying opportunities in the 20th century, attempting to identify the shared features of the moments when the four greatest bear markets of the previous hundred years ran out of steam and investors started making money again.
The reason the book was so depressing was Napier’s conclusion that bear markets usually take between nine and 14 years to run their course. In late 2005, he suggested that we were barely halfway through the current downturn if history were any guide. Having peaked in 2000, he said, the market might provide a decent buying opportunity some time between four and nine years hence. A few years into the recovery from the 2000-03 crash, that was not a reassuring message, although it looks remarkably prescient today.
Now, however, even the end of his range, 2014, does not seem so very far away and I’m intrigued to see how many of Napier’s characteristic signs of a significant market bottom are in evidence. More than a decade into the bear market that began with the implosion of the dotcom bubble in 2000, and with valuations in many cases at generational lows, is the tide finally starting to turn for stock markets?
The third of my planned holiday reads has been described as the definitive guide to behavioural finance. Daniel Kahneman received a Nobel Prize for his ground-breaking challenge to the conventional wisdom that human beings are essentially rational beings. His Thinking, Fast and Slow is the culmination of a lifetime dedicated to exploring the competing systems that determine how we make decisions and choices.
Kahneman’s premise is simple ? that our brains are governed by two often-contradictory ways of thinking: one fast, intuitive and emotional, the other slower and more logical. Until relatively recently, investment theory was based on the idea that our thinking about money is determined by the deliberate, slow-thinking system, but Kahneman’s great insight, which is transforming how investors and policy-makers alike think about saving and investing, is that it is fast, rule-of-thumb thinking that actually drives our financial behaviour.
Thinking, Fast and Slow is not exclusively a book about investment, but the influence of the psychological biases that Kahneman explores on our investing behaviour is profound and in most cases is the difference between us meeting our financial goals and failing to do so. Learning to control our instinctive thinking, to understand how it drives us to make the wrong decisions, seems like the key to investment success. In its own way, I’m expecting it to be as gripping as what happens to the odious Augustus Melmotte.
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