Just in case you missed it in the Weekend FT, John Authers looks at some books that he feels ought to be on investors’ wish lists this holiday season.
The most popular book of 2007 also proved to be a good allegory for the problems the markets faced all year, he says. In JK Rowling’s Harry Potter and the Deathly Hallows, our teenage hero has to contend with the evil Lord Voldemort, who has split his soul into many different parts, and hidden them across the world.
Voldemort can only be killed once Harry finds each of these objects, known as horcruxes, and destroys them - and the act of destroying them is itself fiendishly difficult.
After nearly a year of the subprime crisis, that sounds dreadfully familiar. Subprime loans, which should never even have been offered to the borrowers, were split into many complicated financial instruments, and distributed, or hidden, worldwide. The battle for investors and regulators has been to identify where these subprime “horcruxes” are hidden, and to neutralise them. Until they are all found, Lord Voldemortgage rules the earth.
It may sound fanciful to read Harry Potter as a financial text. But The Wizard of Oz is frequently cited as a tract about the debate over leaving the gold standard (or “following the yellow-brick road”) so the notion of reading children’s classics as financial allegories has some precedent.
The book is great, and genuinely scary because it is not at all clear whether our hero will be all right in the end. I cannot spoil the ending for those who have not yet read it: suffice it to say the same suspense hangs over the credit crisis.
If you are looking for more immediately practical books, then the best basic guide probably continues to be The Money Machine - How The City Works, by the former writer of this column, Philip Coggan. Amazingly, the first edition came out more than two decades ago - yet the lessons in the book remain fresh.
As for this year’s new books, an accidental marketing success has been the Little Book series: introductions to important investment subjects, in barely 100 pages. This year’s offerings were The Little Book of Commonsense Investing, on indexing, by Jack Bogle, and The Little Book That Makes You Rich, about growth investing, by Louis Navellier. Both are written by giants in their field, and both make their case very well if - at times - too strongly.
For a persuasive take on the most successful investment theme of the year, the emerging markets, try Antoine van Agtmael’s Emerging Market Century. The writer coined the term “emerging markets” decades ago. His thesis is that the developing world has spawned multinational companies that can take over the world.
The rally in emerging markets appears a little overdone, but van Agtmael’s view, built from the bottom up, does give cause for reassurance.
As for the greatest debate of the year, it concerned the uses of modern portfolio theory, and the complicated quantitative investment and risk-management systems it has engendered. That theory is increasingly under attack.
One core principled objection to it is that risk managers use models based on past experience, and therefore lay themselves open to the unexpected. That point of view was argued forcibly by Nassim Nicholas Taleb in Black Swans, the year’s most talked-about financial polemic, and also by Richard Bookstaber in A Demon Of Our Own Design. Both are readable, and both were written before this year’s volatility, and yet they read like commentaries on it.
Another objection comes from the field of behavioural finance, which substitutes the findings of experimental psychology for the traditional economic assumption that people make decisions rationally. If we can understand systematic ways in which people behave irrationally, perhaps we can better understand investment bubbles. Peter Bernstein’s Capital Ideas Evolving is a clear and elegant introduction to the debate, including vignettes of all the main intellectual figures.
The year’s most exhaustive, and often entertaining, coverage of the behavioural literature is James Montier’s Behavioural Investing. It comes down on the side of the behaviouralists, and in impressively erudite fashion.
For those who want to take behaviouralism a step further, and to study the science of the brain - a subject that tells us a lot about ourselves, as well as about how we might just make some more money - two good books came out this year: Your Money & Your Brain by Jason Zweig, and Richard Peterson’s Inside the Investor’s Brain.
Most books on this list will be enjoyed even by those of your loved ones with no interest in investment. For those who find the subject incurably boring, try the Harry Potter, and tell them it’s really about subprime.
