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Thursday, October 06, 2005

reading list

“To be Directed by the Great Schoolmistress of Reason, Experience. And not to be ruled by groundlesse fantcys & conceipts.”
from the minutes of the Royal Society in the 1600s, written by Robert Hooke, lost for the ages until discovered in a cupboard in 2006, documenting the birth of modern science

This is my recommended reading list. I figure I might as well post it on the blog. I read these books and then I try to let them go.


The Accounting Game: Basic Accounting Fresh from the Lemonade Stand
An outstanding source of learning a truly intuitive understanding of accounting. This helps create a foundation of understanding business. Despite it's comic book style, it dives into some fairly complex issues. I've read many of the books on analyzing financial statements and this one remains my favorite because I find the intuitive feel is extremely important for mapping between what you read on a balance sheet, for instance, and what that corresponds to in terms of an actual business. A lot of people I've recommended it to have also found it to be a valuable intuitive view of accounting.

The Practice of Management, by Peter Drucker (or better yet, The Essential Drucker)
Peter Drucker is to management as Ben Graham is to investing. This book is a classic from the 1950s that has never been outdone. When I read this book in the 1980s, I was amazed at how much better it was than all the management books of that time. This book is excellent for being able to differentiate good management from the bad.

Innovation and Entrepreneurship, by Peter Drucker
This is a truly profound understanding of what it means to innovate in a systematic manner. I read this in the 1980s and it has helped my understanding of business competitiveness ever since.

The Armchair Economist
A simple introduction to the principles of economics. It's not a textbook, but it helps in understanding the laws of economics and these laws are often counterintuitive. Lots of people have been tripped up by not understanding them. If you like this, you might try Hidden Order: The Economics of Everyday Life or much better, Freakonomics, which I found to be as good as the Armchair Economist.

The 22 Immutable Laws of Marketing, by Ries and Trout
I recommend this book for gaining more understanding of the various competitive factors of business. It's an outstanding explanation of why some businesses succeed while other fail.

The Tipping Point: How Little Things Can Make a Big Difference
A great book with an interesting view of marketing. Unfortunately the concept has been abused beyond all hope (when the press says "...may have reached a tipping point" it means the writer has abandoned all objectivity and is rooting for some longshot cause).

The Soul of the New Consumer, by David Lewis
Kind of a "new economy" book, but has a lot of excellent observations of major trends in consumer behavior.

Why We Buy: The Science of Shopping
This is a great book by a group of people who study the behavior of retail customers. It covers a lot of what companies do wrong. It's a great book to read if you're going to do any sort of field research looking at retail companies. Darwin would be proud of their methodologies.

I've gained a lot from reading business history books. Many of them offer incredible insight into what makes a company good or bad.

Titan: The Life of John D Rockefeller, Sr.
One of the best books on business history I've ever read.

Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-At-Any-Price
Despite the sensationalist title, this books offers an excellent view into the inner workings of a bad business and, most importantly, gives an excellent example of the interactions between senior management, the board of directors, and money managers.

Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron, by McLean and Elkind
I actually haven't gotten around to reading this one yet, but it's recommended by either Buffett or Munger.

Bull! : A History of the Boom, 1982-1999
A good book on the bull market. If you had followed the bull market while it was happening, you probably already know most of what's in this book.

Les Schwab: Pride in Performance
This guy makes Sam Walton look like an urbanite. Real hardscrabble. He created an empire of tire centers in the Pacific Northwest from incredibly humble beginnings. There's obviously no ghost writer and it reads like a letter from your semi-literate octogenarian aunt who never ventured into a town with more than 50,000 people. But this guy obviously spent a lifetime figuring out how to run his business and, like Sam Walton's book, it's a long narration of lessons learned, obstacles overcome, and a wide variety of people and situations.

What I Learned Before I Sold to Warren Buffett: An Entrepreneur's Guide to Developing a Highly Successful Company, by Barnett Helzberg
The CEO of Helzberg Jewelers explains a lot of principles of good business. Pretty much what you'd expect it to be. Don't read this if you've already read lots of other business success stories.

Damn Right: Behind the Scenes With Berkshire Hathaway Billionaire Charlie Munger, by Janet Lowe
This is a good book which explains a lot about Munger. But it's not nearly as good as the Buffett biography.

Buffett: The Making of an American Capitalist, by Roger Lowenstein
This is an outstanding book which shows in great detail how Buffett achieved such great success. I hadn't read this book for a long time because I was concerned that it would have too much personal fluff and not enough investment details. But it contains good information for someone who wants to get better at investing.

Sam Walton: Made in America: My Story
Two things make this book great. First, it shows what it takes to succeed in retail. The behavior style of Sam Walton shows up frequently in successful retailers. Second, because this book was written for the purpose of instructing future generations of Waltons in the business, it offers a lot of personal and no-nonsense insights into how Wal*Mart was built and what makes it successful. It also shows the importance of accepting and correcting mistakes.

McDonald's: Behind the Arches
Great book on business success and creating a great and enduring franchise.

The First American : The Life and Times of Benjamin Franklin
I include this along with books on business history because it's such a great story of success. Franklin was arguably the most influential and important person to live in North America.

When Genius Failed: The Rise and Fall of Long Term Capital Management
It's amazing just how far things can go wrong when extremely intelligent people lose their bearings. This is a great book on the dynamics of the investment world.

When Giants Stumble: Classic Business Blunders and How to Avoid Them, by Robert Sobel
This is a good set of business history stories.

What Were They Thinking?, by Robert McMath and Thom Forbes
The author collects product failures and has an estimated 80,000 individual duds. This book is an excellent overview of bad marketing mistakes.

The 50 Best (and Worst) Business Deals, by Michael Craig
This is a good set of interesting business deals, with a lot of focus on why things went well or badly.

Forbes Greatest Business Stories of All Time, by Daniel Gross
Excellent set of short business stories throughout history: Cyrus McCormick and the industrialization of farming, John D Rockefeller, J. P. Morgan, Henry Ford, Charles Merrill (Merrill Lynch), Sarnoff (I know a guy whose father worked with Sarnoff before RCA), Walt Disney, John Johnson, Ogilvy, Ray Kroc, Xerox, Amex, Mary Kay Ash, Intel, Sam Walton, MCI, Harley Davidson, KKR, Microsoft. There's not a lot of depth, but it's better than nothing.


Guns, Germs, and Steel, by Jared Diamond
One of the best books I've ever read about world history. This is a great analysis of cause and effect. A lot of people have raised justified issues with the book's conclusions, but it's still a great example of how to find answers to difficult questions.

The Third Chimpanzee, by Jared Diamond
This is the pre-quel to Guns, Germs, and Steel (what happened before civilization started) and is also a truly outstanding book. Again, a great analysis of cause and effect with a lot of game theory involved.

How the Scots Invented the Modern World, by Arthur Herman
The title is actually a spoof of How the Irish Saved Civilization and in my opinion, Herman was a total marketing moron for giving the book such a bad title, especially during a time of revisionism when every ethnic group in the world is making all sorts of silly claims. However, this is also one of the best books I've ever read about world history. It is an oustanding explanation of the complex interactions that occur within the various parts of modern civilization, but it focuses on the interaction between several key individuals. When you read this book, you'll feel like you were really there.

Thinking Strategically, by Dixit and Nalebuff
A great overview of applying game theory to strategic situations, including using the Nash equalibrium as a means of applying rational analysis to strategy. I found this to be extremely helpful in understanding competitive environments and being able to analyze a moat. However, there are other books that cover game theory and some of them are probably better than this one.

The Selfish Gene, by Richard Dawkins
An amazing introduction to evolutionary biology, the principles of which apply extremely well to any sort of evolutionary change, including the business world. This is an outstanding book.

Darwin's Blind Spot: Evolution Beyond Natural Selection, by Frank Ryan
This is an excellent discussion of symbiosis as a means of evolution. It also goes into some detail about how entrenched the "Darwinians" were, rejecting symbiosis in spite of clear evidence. Darwin would have rolled in his grave at the thought of scientists approaching new evidence without a rigorously open mind. I did read Darwin's Dangerous Idea, which is an excellent book that demonstrates how Darwin's explanation of evolution eats away at our cherished beliefs like an acid. It's a great book for those who liked The Selfish Gene.

Ice Age: The Theory That Came in From the Cold, by John and Mary Gribbin
Munger recommended this short book which deals with the difficulties in piecing together the various bits of unexpected evidence to understand what actually happened, and how it took a very long time and lots of people to do it. A key point is that it was such a low priority and often no one contributed to it for long periods of time. Those who did, often did so unintentionally. This is a great book, but I found it to be a bit boring at times. However, the discussions at the end of the book are very interesting about how we humans are very adaptable, general purpose creatures who seem to have emerged because of these huge fluctuations in climate that began fairly recently from a geological timeframe.

Deep Simplicity
Another book by John Gribbin, this is a good introduction to chaos theory (another horribly abused set of concepts). I'll never forget writing up an Excel script with a very simple random walk and ending up with an amazing fractal (take 3 points in a plane. Start anywhere in the plane you want. Repeat several thousand times randomly selecting one of the three points and moving halfway to that point and making a dot.) The book has a lot of more relevent stuff in it.

Voyage of the Beagle, by Charles Darwin
This is an outstanding example of science in action. Darwin learned key aspects of observation and retained a strong level of rigorous curiosity which led him to all sorts of great discoveries. Wikipedia has an great compilation of notes about Darwin's life's work.

How Buildings Learn: What Happens After They're Built, by Stewart Brand
This is an interesting book about architecture which applies to other areas. The main conclusion is that buildings consist of "layers" all of which need to change, but at different rates: appliances/furniture, utilities, nonstructural walls, etc. Bad buildings are ones which have layers mixed together so that appliances are built into the structure, or put too many limitations on future utilities, or lots of other things. Good buildings allow each layer to change independently of the other layers. Perhaps it's a stretch to add this book to the list.

Principles of Economics, by Mankiw
This is an economics textbook which is very good. I went back and read this after something else was recommended from Mankiw by Buffett or Munger. Mankiw is likely to become a key economist before too long. If you don't have a good grasp of economics and actually have the audacity to go through a textbook on your own, this is a good, but definitely buy it used. The most interesting concept I got from the book was that neutral elasticity means always buying X dollars of a good/service regardless of its price. This provides an excellent way to test intuitively whether something is on the elastic or inelastic side of neutral. I know this is probably obvious but I didn't know it.


Influence: They Psychology of Persuasion
For a while, I was focused on reading books that would help remove distortions in perception from my view. There are some good books on behavioral finance, but overall, I'd probably just recommend this book. I believe it's very important to understand and counteract your own irrationality.

The Winner's Curse
Similar to the Influence book. Very good book by the key pioneer in the field.

Devil Take the Hindmost: A History of Financial Speculation
An outstanding overview of financial bubbles going back to the tulip mania. It's amazing how similar they all are, including the most recent Internet and tech stock bubble. There's also the Extraordinary Popular Delusions & Madness of Crowds which I haven't read.

The Wisdom of Crowds
The opposite of Devil Take the Hindmost, this book shows how groups of people have very good judgement, but only when certain key criteria are met. This is a very important thing to understand when trying to compete against groups of people in making decisions.

Judgment under Uncertainty : Heuristics and Biases
This is a very academic book, but provides a great deal of detail on how people make systematic judgement errors due to their irrationalities. This is very useful as a means to counteract your own biases. Someone should take the main conclusions and distill them into a shorter and accessible book.

A great book by the guy who wrote The Tipping Point. This covers a surprising number of different facets of fast subconscious thinking.

Deep Survival
An outstanding book about human emotions, the role of adaptability in getting out of trouble, and why children 6 years old and younger tend to be more likely to survive being lost in the woods than an adult.

The Black Swan: The Impact of the Highly Improbable
An outstanding book about human bias regarding predictability. Lots and lots of useful ways of looking at things.

Race and Culture: A World View, by Thomas Sowell
This is a very interesting book which deals with groups of people, how their behavior determines their destiny, how their situation affects their behavior, and deals with cause and effect rather than right and wrong. The author (who also wrote other similar books such as Ethnic America) never flinches from reality and doesn't hide behind dogma or ideology. I bought Ethnic America in a discount book bin in Cambridge, Mass in the 1980s, presumably because it clashed with the victim culture of the indiginous liberals there.

The Millionaire Next Door, by Stanley and Danko
There is a huge difference in how people deal with money. People who try to look wealthy typically aren't. And people who are wealthy very often don't act like the stereotype. This book has two key points: 1) live below your means if you want to accumulate wealth, and 2) providing economic assistance to adult children is poisonous to them.


The Essays of Warren Buffett: Lessons for Corporate America
This is actually a fairly difficult book to really comprehend. It focuses heavily on the measurable/quantitative part of investing. I've read it three times and a huge portion of my understanding only happened on the 2nd and 3rd readings. I found this collection of Buffett's letters to shareholders to be more helpful than Graham's books.

Common Stocks and Uncommon Profits, by Philip Fisher
This is the book for the qualitative aspect of investing. You might also read some of The Motley Fool books as well, but this one really has the content. It was written in the 1950s and is still totally relevant today.

One Up on Wall Street, by Peter Lynch
This is a great book, similar to Common Stocks and Uncommon Profits. Peter Lynch ran the Magellan mutual fund for many years and had enormous success.

Beating the Street, by Peter Lynch
I actually haven't read this book, but it's supposed to be very good, with some good pointers about specific industries if I recall correctly.

The Intelligent Investor, by Ben Graham
The legendary book on value investing. In all honesty, I got a lot more out of Buffett's writings.

The Bank Director's Handbook: The Board Member's Guide to Banking & Bank Management, by Benton Gup
This is an outstanding book to read if you are interested in investing in any highly leveraged financial institution such as a bank. I would also recommend the chapter on fraud and the appendix of FDIC red flags to all investors. Reading them will give you a good sense for the patterns which occur when someone is trying to fool you as well as the conditions which are breeding grounds for fraud. Say what you will about the high cost of SOX, the single most important way to prevent fraud is to have controls and procedures in place and to follow them. Of course the real problem is that outright fraud isn't all that widespread in public companies compared to plain old waste, crappy management, and CYA behavior.
Also there's BankDirector.com

Wiley GAAP
This 1,100 page book covers the foundations of business accounting. It isn't even an exhaustive source of accounting rules. But it's a good reference to have and a good book to read cover-to-cover if you want to know accounting well.

Government Sponsored Entities: Mercantilist Companies in the Modern World, by Thomas Stanton
This is a fairly good book for anyone considering investing in one of the GSEs such as Fannie Mae, Freddie Mac, or Farmer Mac (or more likely if you're looking at shorting them).

Financial Statement Analysis, by Charles Woefel
This is a reasonably good book on understanding financial reports.

How to Read A Financial Report, by John Tracy
I didn't like this book as much as Financial Statement Analysis, but other people have liked it.

The Warren Buffett Portfolio, by Robert Hagstron
I really don't like books about how to invest like Warren Buffett, but this is one of them. I read it and got some good out of it. I've read others and wasn't impressed. If you really don't feel like reading Buffett's shareholder letters (either individually or the compilation The Essays of Warren Buffett), then this is a fairly good book.


Aesop's Fables
Always worth reading.

Spotting the Losers: Seven Signs of Non-Competitive States
This is a great article about what makes some societies failures and others successes. A lot of leaders in the Middle East should memorize it.
Also, "unearned, "found" wealth is socially and economically cancerous..." such as oil. It's funny how this is also covered by The Millionaire Next Door on a microeconomic level (the disaster of economic outpatient assistance).

This is a great list and it makes it easier for us to choose books from here and feel great of having done that
Availability Bias
Social Proof
are the results
I saw from your blog that you're familiar with behavioral finance (which is clear from the mention of availability bias and social proof). Judgment Under Uncertainty is an excellent collection of academic articles on the subject, grouped into categories like availability bias (you may have already read the book, I don't know).

If I had to recommend just a few of these books, they would be: The 22 Immutable Laws of Marketing, The Essential Drucker (which is a collection of Peter Drucker's writings), and Thinking Strategically (or any other good book on game theory).
I am greatly enjoying your site. If you would care to receive a copy of Poor Charlie's Almanack for review purposes please contact me at: pkaufman@glenair.com

I will have Charlie personalize it for you if you like. Please supply me with how you would like it to read.

Peter Kaufman

P.S. I truly think there is more to Pink Floyd than meets the eye. I have had two totally separate Yoga classes within the past year in which the instructors chose to play complete Pink Floyd albums as an accompanyment to the class. ???

Thanks for the offer, but I'm focusing more on investing right now than reading. And Charlie's pretty old right now, I'd hate to bother him about signing yet another book. :-) And regarding personalized stuff from famous people, I had the chance to buy a stock certificate of Standard Oil signed by John D Rockefeller Sr. It was $1,000 but I thought it was just too extravagent.

I always thought Pink Floyd met the ear more than they eye. I remember when Dark Side of the Moon came out.
Thank you all - I do think that the effort you have put in will really help people like me who are trying to understand.

> Margin of Safety by Seth A Klarman - sorry but I've only been able to get some chapters from the WEB which were very good - check out the price on Amazon - $1300! Why can't they re-print it, unless someone knows an alternative source??
This is an impressive list. It really underscores the value of understanding the business behind a stock and not just looking at it as a piece of paper that's traded amongst parties.
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