TAKING STOCK: Books on the stock market

Dear Mr. Berko:

I’m a 42-year-old single man.

I sell commercial printing and make over $160,000 a year.

I have a self-directed 401(k), and I’m disgusted with its poor performance.

I’m down 6.7 percent year over year and I just can’t seem to buy the right stocks or I sell them too soon or pay too much or watch as they reduce the dividends or find that their revenues don’t meet projections.

Is there one good book of rules you could recommend to improve my skills at managing my $214,000 401(k)?

DL, Joliet, Ill.


Dear DL:

Unfortunately, there isn’t.

However, I can give you the first and second rules of 401(k) investing: Always be a long-term investor. The third rule of 401(k) investing is: Always buy dividend stocks and reinvest the dividends.

As I said, there’s no single book that will give you the necessary answers.

But there are some useful books, and there are four learning steps I recommend you take to improve your success in the stock market.

I can’t guarantee success, but if you follow my advice, you’ll be light-years ahead of 96.3 percent of those who’ve left the starting line to build a retirement portfolio.

Most books on stock market success are just as meaningful as books on how to be an Olympic swimmer, how to play championship golf or how to become a star quarterback.

To do those things, first you must have talent in your blood. (Without talent, your chances of success will be poor.) Then you must practice taking your bumps and falls and getting sprains and bruises until you find your balance and comfort level in the pool, on the golf course or on the gridiron.

Learning to invest is no different.

You must have talent in your blood and grit in your gut.

But you’ll still make mistakes because you lack experience.

The following recommendations will shorten your learning curve so that when you make mistakes, they’ll be small and you’ll know why you made them.

1) Carefully read “The Prince,” written by Niccolo Machiavelli in 1513. Machiavelli, a prodigious writer, was an Italian Renaissance historian, diplomat, politician, humanist and philosopher. “The Prince” is a short treatise that candidly explains the essential and odious relationship between governments and money. It’s a must-read.

2) Ask your accountant for a book on corporate accounting. Read it—slowly. Then combine this book with “Financial Statement Analysis,” by Martin Fridson and Fernando Alvarez, which will acquaint you with the evil details and the process. This is a well-written book on how cleverly composed financial statements are used to inform, mislead or obscure the financial health of a company. This should be required reading by investors who make their own portfolio decisions or want to knowledgeably question a portfolio manager’s recommendations.

3) Buy or rent “The Big Short,” starring Ryan Gosling, Brad Pitt, Christian Bale and Steve Carell. It’s based on a Michael Lewis book about four normal guys who managed to predict the Great Recession. It’s also an enjoyable and funny drama. These self-anointed Wall Street geniuses predict the bursting of the credit and housing bubble and decide to take on the big banks for their greed and lack of oversight. Watch this initially for its content value and later for its entertainment value.

4) To put all this analysis in perspective and increase your probability of success, devour Benjamin Graham and David L. Dodd’s “Security Analysis.” This is inarguably the most definitive book in the industry focusing on the concept of intrinsic value, measuring a firm’s assets, earnings, dividends and financial strength. Next to reading Shakespeare’s plays, this book on investing can be among the driest, most boring and most tedious books. It was such tiresome reading (what would you expect from two Columbia professors?) that I couldn’t wait to put it down.

Finally, be mindful that good judgment comes from experience and most experience comes from bad judgment. Now you’re ready to invest—smartly.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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