Ivy League or Not...

They're Not As Smart as They Think They Are

Perhaps, Warren Buffett is an exception, since he figuratively “wrote the book“ on profitable investing, but most people, no matter how successful, would probably have done many things differently in their financial life. Now, as your son or daughter gets ready to head out on their own, among the best presents for them as college grads are a few choice books on financial planning.

Here are five books considered "must reads" for both the novice and the professional investor. Each of these books is considered an investment bible by its advocates that should be followed religiously. With a little luck and some tenacity on your part, perhaps your children will not make all the same mistakes that you did.

Here they are then, in no particular order.

The Five Best Presents for College Grads:

1) The Millionaire Next Door

Thomas J. Stanley and William D. Danko

This book is simply a paean to living “below your means.” Naturally, it is packed with charts, tables and figures but its underlying message is remarkably consistent, “Give up a little today to have a lot tomorrow.” It is an exaggeration to say the authors shun all of life’s frivolities but they do make a compelling case that twenty-somethings can easily succeed and be happy with a used car and a substandard stereo.

The doctors are also ardent advocates of the “buy and hold” investing strategy. In their opinion, money accumulating interest in a low yielding CD or passbook account is simply wasted. Instead, they offer that it is significantly much better to suffer the vagaries of the stock market in a dividend yielding, blue chip stock.

2) A Random Walk Down Wall Street

Burton Malkiel

There’s an old joke about a stock broker who takes his client to a local marina. The broker, intending to impress his client, shows him larger and larger boats and details how each is owned by a progressively more prestigious person at the brokerage. At the conclusion of the tour, after seeing a particularly egregious one owned by the CEO, the client inquires, “Those are all nice but where are the ones owned by your clients?” Mr. Malkiel understands what motivates brokers and investors alike and pulls no punches in his examination of the investment industry.

On a more technical level, this book also deals with the efficient market hypothesis and the random walk theory. It makes the case that is extremely difficult and cost prohibitive to time the market. This book is a must read for any potential day traders or commodities investors in your brood.

3) One Up on Wall Street

Peter Lynch

Mr. Lynch was the wunderkind of fund managers from the late 1970s until his retirement in 1990. His Magellan fund racked up annual returns of 29.2 %. This fact bears repeating. He made an almost 30 percent return on the money entrusted to him for 13 straight years. It is no wonder that the fund grew from 18 million to over 14 billion at the end of his tenure.

Ironically, Mr. Lynch does not make the case for investing in mutual funds and rightly so. Mutual funds, despite their protestations to the contrary, are infamous for lagging the market. Less than one in a hundred has outperformed the market over any ten year period. Mr. Lynch’s book, instead, focuses on his own strategy in picking stocks and advocates that the prudent investor do his own research and invest in the stock directly.

4) Rich Dad, Poor Dad

Robert Kiyosaki

Another wonderful book that stresses the ownership of dividend producing assets rather than being a faithful employee of a the government or a corporation. Mr. Kiyoski paints a vivid picture that financial independence is earned and is not freely given by those who would profit from another’s work.

Mr. Kiyoski explains some key points that should be understood by anyone wishing financial independence, The most important is that true financial independence is when your passive income is larger than your monthly expenditures. Only when you are no longer dependent on an employer are you truly financially independent.

5) The Intelligent Investor

Benjamin Graham

For those ardent advocates of capitalism who still feel the need to “beat the market,” no book lays a more comprehensive and fundamental groundwork than this legendary tome. Be assured, this is heavy reading but will reward the reader with an in depth understanding of Graham’s stock picking methodology. No less than the aforementioned Peter Lynch and Warren Buffett credit this book with forming their basic ideas about investing.

This book comes last for a reason. It takes time to accumulate enough capital where its lessons can be put to effective use. Once the burgeoning investor has settled his loans and is living within his means, his investment life can begin. The book also comes as a strong counter argument to the first book mentioned. Mr. Graham is adamant that “Mr. Market” does not know what he is doing and can therefore be beat at his own game. This book is not for the faint of heart or for those with limited funds. It is serious investing advice for those willing to put in the hours to understand the science and art of investing.

The Final Analysis

Admittedly, these books are most appropriate for those with at least some sense of entrepreneurial spirit. They are, however, pertinent for everyone and are remarkably apt for those who would not be satisfied with fifty years of loyal service to an employer only to be rewarded with a gold watch and pension. For those satisfied with this type of long term government service or corporate loyalty, I would, instead, advise What Color Is Your Parachute? by Richard Bolles. Just in case you lose your job. It could happen. Really.

I realize that I didn’t include anything by the Sage of Omaha. His life tells the story better than any book could. I will, however, relate one anecdote that sums up the intent of this column.

Mr. Buffett is known for driving a ten or fifteen year old truck around Omaha. A correspondent once commented on this fact to Mr. Buffett’s daughter and asked why her father didn’t upgrade to a newer model. She answered that her father figured he couldn’t afford it. The correspondent was dumbstruck and indicated that her father had billions and could buy anything he wanted.

She answered that, while that might be true, her father still thought the cost too great. He wasn’t miserly she explained. It’s just that the $20,000 he would have spent on a new truck ten years ago is now worth upwards of 10 million dollars and, even for Warren Buffett, that’s just too much for a new truck.

Good luck and buy these books used.