Through the series Bookmark, leading voices in the world of finance and business talk about the books that influenced them in their professional journey, and in some cases, also touched them at a personal level.
In this episode, Devina Mehra and Shankar Sharma, the founders of First Global Securities, talk about five categories of books, rather than five titles, which they feel would be too few to understand investing and markets.
Books On Our Own Biases, Blind Spots And Fallacies In Thinking
Before you can conquer the world, you have to conquer your own mind and more importantly, understand it! As a starting point we would recommend these few books starting with 'Thinking Fast and Slow' by the Nobel laureate Daniel Kahneman.
It is a pretty comprehensive look at how your own thinking can mislead you. How the automatic, fast, intuitive, 'natural' thinking that you rely on for most things in life - the one that feels right may be actually completely wrong in objective terms; the many biases like Endowment Bias (when you value something more highly simply because you own it), Recency Bias (when you think what is the norm now was always the case, or what is hitting the headlines is the most important thing in the world), Loss Aversion (which makes it difficult for you to book losses because it causes too much pain), Anchoring Bias and many more - all of which can derail not just your regular life all but also to your investing and trading career.
There are many other gems like how all of us need an understanding of probability to help us remove the illusion that we can do better than all those who have gone before us. Actually, this book is chock-a-block with ideas such that unlike many others, it cannot be really summarised in a para or two. This one is worth reading while making notes and highlights!
The caveat of course is that just because you understand what investing biases are, does not mean that you will be able to eliminate them from your thinking.
'The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us' by Christopher Chabris & Daniel talks of the illusions of our mind: about how our minds are finite resources and hence from our attention to our memories we perform far below what we think we do.
It deals with some of the reasons why human beings make bad witnesses to how confidence is no proxy for competence. A very useful book to make you aware of several illusions you carry as you go about the world.
Even if elimination of these illusions is not possible, the awareness that these exist, change the lens through which you see the world
'Misbehaving: The Makings of Behavioral Economics' by Richard Thaler also illustrates with many examples how we human beings are not as rational as what we think we are and how changes which should not make a difference to a rational person do make a difference in the real world.
To give an example, how making organ donation automatic while allowing an opt out results in a totally different outcome from what asking people to sign up from organ donation does. There are many such examples.
It is a fascinating story of how human beings can be easily molded to do things or make choices that objectively speaking may not totally make sense.
‘The Halo Effect’ by Phil Rosenzweig talks of a number of characteristics that we attribute to successful companies and corporate leaders (great strategy, customer focus, outstanding human resource practices etc) are all mostly due to the halo that is cast by the current performance of these companies.
The corollary to that is that once performance goes down, suddenly the same strategies and leaders start to look not so good after all.
This is the reason why many ‘how to’ books on corporate success (if you do this, this and this, you will achieve success) like 'In Search of Excellence', 'Good to Great' etc talked of outcomes and prescriptions, which did not hold out in the real world. The companies mentioned in these, more often than not, underperformed in both operations and stock market in the coming periods
The Nitty-Gritties Of Investing
This is the distinctly unsexy stuff but if you want to make a serious effort in investing or trading, you need to have the building blocks.
If you have already done a structured course in finance like CFA or MBA or MSc Finance you may be familiar with much of this, otherwise it is worthwhile to spend your time and effort on some books like ‘Damodaran on Valuation’ by Aswath Damodaran and ‘Valuation: Measuring and Managing the Value of Companies’ by Tom Copeland to give you an idea on how to go about analysing the financials of a company and making an attempt to value it.
If you are a beginner in this field, basic books on accounting and finance may also be required but you definitely need to have this tool box in order to make sense of your investments.
Stories Of Great Investors And Traders
These you have to read from the point of view of not getting a final how-to but understanding the many different approaches there are to heaven.
Ideally, you should read about many different strategies and tactics before you can evolve your own strategy. Do this widely: from reading ‘Berkshire Hathaway Letters to Shareholders’ to ‘The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution’ by Gregory Zuckerman, which is about Jim Simons and the totally different approach of taking millions of bets with a small edge and a lot of computing power.
Then there are books like ‘Market Wizards’, ‘The New Market Wizards’, ‘The New Money Masters’ etc that have interviews of (or analysis of the strategies of) many well known traders and investors.
Some of these books are old but even so they will give you pointers and if you to read about what happened to some of those people subsequently you will realise that at times success in the markets does not hold for ever. Nor does a strategy work for ever - which is an equally important lesson to learn
Autobiographies And Biographies Of Business People And Of Businesses
There is virtually an ocean of these. Since investing is mostly about investing in securities of corporations it is important to understand how businesses are built and run.
There is no formula to this but you will often find that the one line story or impression you have of a business is very different from how it was actually built up step by step
For example, when reading 'The Everything Store: Jeff Bezos and the Age of Amazon' by Brad Stone, you realise that while the whole impression is of a great leader Jeff Bezos and a linear growth rate for Amazon, the reality was very different. What actually happened was this: at every step of the way, Amazon took dozens of bets, lost a great deal of money in many of them and maybe one or two of them at every stage paid off.
Similarly Nike appears like a great success story from the word go but when you read 'Shoe Dog: A Memoir by the Creator of Nike' by Phil Knight, you realise that this was a company that was started in the sixties and took a very long time to even come to the take off stage and also contrary to the general impression, it was not a very marketing-oriented company in the beginning and for a long time thereafter.
There are some very interesting lives that business people have led and the stories can make for a fun filled ride. A couple that we can recommend are Richard Branson's 'Losing My Virginity', which proceeds at breakneck speed and Subhash Chandra's 'The Z Factor', which is as candid an account as you can get of what it means to run a business in India
Books On Technicals / Derivatives / Trading Techniques
This category may not be relevant for everyone but if you do plan to trade rather than invest or trade derivatives, please ensure that you read multiple books about your chosen methods/techniques.
Indeed, textbooks are probably what you should start with to understand the instruments properly. Else, don't venture here at all.
(As told to Ashish Rukhaiyar)
