Best books for investors

A couple of years ago the great investment writer, Jason Zweig, wrote an article listing his best books for investors. Zweig recommended 15 books (which can be seen in the original article). The 15 books are listed in the following table (ordered by the year of first publication).

Author Title Year
Bertrand Russell Sceptical Essays or The Scientific Outlook 1928
Fred Schwed Where Are the Customers’ Yachts? 1940
Benjamin Graham The Intelligent Investor 1949
Darrell Huff How to Lie with Statistics 1954
Adam Smith The Money Game 1968
Burton G. Malkiel A Random Walk Down Wall Street 1973
Charles P. Kindleberger Manias, Panics, and Crashes 1978
Roger Lowenstein Buffett: The Making of an American Capitalist 1995
Richard Feynman Surely You’re Joking, Mr. Feynman! 1997
Peter L. Bernstein Against the Gods: The Remarkable Story of Risk 1998
John C. Bogle Common Sense on Mutual Funds 1999
Gary Belsky and Thomas Gilovich Why Smart People Make Big Money Mistakes and How to Correct Them 1999
E. Dimson, P. Marsh, M. Staunton Triumph of the Optimists 2002
Alice Schroeder The Snowball: Warren Buffett and the Business of Life 2009
Daniel Kahneman Thinking, Fast and Slow 2013

One might quibble over the inclusion of one or two books here (that is the joy, and purpose, of lists), and it is important to remember that this is a list for investors (a list for traders would inevitably look rather different), but overall most would probably agree that this is a fine list.

It is interesting to see the distribution of publication dates of the recommended books.  Only three were first published in this century. And, of those, the most recently published book is not focused on investing, while the one before that is about a chap who started investing in the 1940s.

The median year for the 15 books is 1995, but the mean year of publication (OK, a rather silly calculation in this context but why not?) is 1980.

The following chart shows the year of first publication of the 15 books mapped onto the Dow Jones Industrial Average (log scale).

Recommended books for investors

On this chart it can be seen that the publication dates of six of the books are clustered around the end of the twenty-year bull market that started in 1980. Perhaps bull markets give authors the confidence to write books, or investors the appetite to read them. Certainly few classic books would appear to have been written in recent years.

But also, as it is often said, the essential lessons of investing change little over time.

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30 years since Big Bang

In the early 1980s the Office of Fair Trading brought a case against the London Stock Exchange, citing a range of restrictive practices which included:

  • fixed minimum commissions for stock trades
  • separation of brokers (who acted as agents for customers) and jobbers (market makers)
  • foreign membership of the stock exchange was not allowed

As a result the Exchange changed its rules which came into effect on 27 October 1986 (30 years ago today).

The effect on the financial industry in the UK – especially the City in London - was dramatic, such that this process of de-regulation is also referred to as Big Bang.

One of the greatest changes was the acquisition of many established City firms by foreign (mainly American) banks. This led to great debate of something called the Wimbledon Effect – i.e. whether an economy needs strong domestic competitors or if it can thrive by merely providing the forum for foreign-owned institutions.

Overall, London has thrived as a financial center since Big Bang and the deregulation has been seen as beneficial for financial markets. Although in 2010 Nigel Lawson, the Chancellor in 1986, admitted that the global financial crisis starting in 2007 was an unintended consequence of Big Bang. The problem being that previously investment banks had been careful with their own money, but merger with high street banks gave them access to depositors’ funds. and incorporation as limited liability companies removed the personal risk for managers (the principal–agent problem).

Below is an extract taken from George G. Blakey’s magisterial A History of the London Stock Market 1945-2007 to give a flavour of the market in 1986, the year of Big Bang.

Markets opened the New Year with a broad advance, but after hesitating on the political upset created by the Westland affair, which led to the resignation of two Cabinet ministers, Michael Heseltine and Leon Brittan, and a 1% increase in base rates to steady the pound after a sharp drop in the oil price, they recovered to close the month at record levels. There was no doubt that sentiment was aided by the sight of predators being willing to compete with each other and pay ever higher prices for what had once been thought of as rather dull companies. Thus Imperial Group and Distillers went for £2.5 billion each, some 25% above the opening bids, in hard-fought and no holds barred contests between determined bidders.

Markets were under something of a cloud in November and December as one scandal after another came to light. First of all Geoffrey Collier, a senior executive at Morgan Grenfell, resigned after insider dealing allegations. Then US arbitrageur, Ivan Boesky, who had been an active participant in many of the year’s big bids in the UK, was fined $100 million by the SEC. After weeks of rumours, December saw a DTI investigation ordered into the Guinness takeover of Distillers, closely followed by the revelation that Guinness had “invested” $100 million in Boesky’s arbitrage pool of funds. On the last day of the year, Roger Seelig, the Morgan Grenfell executive who had looked after the Guinness bid, resigned from his post at the bank.

Although these events were truly exceptional in the light of the high standing of the persons and the companies involved, they did not prevent a good Christmas rally developing in a market which also had to absorb the £5.6 billion offering from British Gas. The advent of dual capacity and automated quotations with Big Bang in October seemed to have no particular influence on the course of markets at the time. The FT 30 closed the year at 1313.9, well below its peak, but still a gain of 15.5%, while the broader- based All Share and FTSE were up 20% and 23.5% at 835 and 1679 respectively. Government Securities were up a modest 1.25% at 83.62. The Dow recorded a gain of 22.5% closing at 1896.

 

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CAPS Portfolio

A fun Quartz article found that a portfolio comprised of U.S. companies whose names were all upper case (e.g. NVIDIA) had out-performed the S&P 500 Index in 2016. The article’s explanation: confident companies have confident names!

How would such a portfolio fare in the UK?

The following table lists the 14 FTSE 100 companies with (almost) all upper case names. Included in the table are the returns from the beginning of 2015.

Company TIDM Rtn (from 2015)
BP BP. 39.9
CRH CRH 36.8
RSA RSA 31.2
RELX REL 21.9
DCC DCC 18.5
HSBC HSBA 16.8
FTSE 100 UKX 12.4
WPP WPP 9.0
BAE Systems BA. 8.2
SSE SSE 3.3
GKN GKN 1.8
TUI AG TUI -15.0
BT BT.A -17.8
ITV ITV -38.4

And the following chart plots the performance of an equally-weighted portfolio of the 14 upper case companies benchmarked against the FTSE 100 Index.

CAPS portfolio

As in the US case – it works!

Why do investors bother with anything more complicated?

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FTSE 100 for US dollar investors in 2016

The following chart plots the FTSE 100 Index for the period 1 January 2016 to 11 July 2016. It also plots the Index priced in US dollars (i.e. it shows the returns a US dollar investor would see over this period).

FTSE 100 v FTSE (USD) [Jan-Jul 2016]

Today, the FTSE 100 Index closed at 6682, an increase of +9.7% from 1 January 2016.

Adjusted for the GBPUSD rate, the FTSE 100 closed today at 5886 (in dollar terms),  a decrease of -5.7% on the start of the year.

 

 

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The UK Almanac Calendar

The UK Almanac maintains a calendar of important market dates. The calendar can be viewed on the UK Almanac web site here, or synced with your own online calendar (see below).

Add the above calendar to your own Android, iPhone or online calendar:

html button

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Top Ten EconTalk Podcasts of 2015

EconTalk is an excellent series of interviews hosted by Russ Roberts. Our favourite EconTalk podcasts of 2015 are listed below.

1 Podcast icon_Planet Money Campbell Harvey on Randomness, Skill, and Investment Strategies [23 Mar 15]
2 Podcast icon_Planet Money Michael Matheson Miller on Poverty, Inc [02 Nov 15]
3 Podcast icon_Planet Money Noah Smith on Whether Economics is a Science [28 Dec 15]
4 Podcast icon_Planet Money Nathaniel Popper on Bitcoin and Digital Gold [08 Jun 15]
5 Podcast icon_Planet Money Luigi Zingales on the Costs and Benefits of the Financial Sector [02 Feb 15]
6 Podcast icon_Planet Money George Selgin on Monetary Policy and the Great Recession [14 Dec 15]
7 Podcast icon_Planet Money Mike Munger on the 500th episode [24 Dec 15]
8 Podcast icon_Planet Money Matt Ridley on Climate Change [29 Jun 15]
9 Podcast icon_Planet Money Nassim Nicholas Taleb on the Precautionary Principle and Genetically Modified Organisms [19 Jan 15]
10 Podcast icon_Planet Money Vernon Smith and James Otteson on Adam Smith [06 Apr 15]

 

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Top Ten Planet Money Podcasts of 2015

We’re great fans of the Planet Money podcasts. In our humble opinion the following were the best episodes in 2015.

1 Podcast icon_Planet Money Episode 416: Why The Price Of Coke Didn’t Change For 70 Years
2 Podcast icon_Planet Money Episode 621: When Luddites Attack
3 Podcast icon_Planet Money Episode 608: Shorters Gonna Short
4 Podcast icon_Planet Money Episode 606: Spreadsheets!
5 Podcast icon_Planet Money Episode 502: The Afterlife Of A T-Shirt
6 Podcast icon_Planet Money Episode 671: An Insider Trader Tells All
7 Podcast icon_Planet Money Episode 657: The Tale Of The Onion King
8 Podcast icon_Planet Money Episode 632: The Chicken Tax
9 Podcast icon_Planet Money Episode 500: The Humble Innovation At The Heart Of The Global Economy
10 Podcast icon_Planet Money Episode 644: How Much Does This Cow Weigh?

 

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Be a John, but buy Michael

An article in yesterday’s New York Times observed that,

Among chief executives of S.&P. 1500 firms, for each woman, there are four men named John, Robert, William or James.

What is the situation like in the UK? We don’t have up to date analysis, but below we quote some analysis that appeared in the 2007 edition of the The UK Stock Market Almanac.


What are the predominant christian names of the Chairmen, CEOs, and CFOs of FTSE 100 companies?

The following table shows the frequency of first names of the three major officers in all the FTSE 100 companies.

FistName Chairman CEO CFO Total
John 17 7 6 30
David 3 3 8 14
Philip 2 5 4 11
Michael 4 4 3 11
Andrew 0 3 7 10
Paul 1 4 3 8
Richard 2 3 3 8
Robert 6 0 2 8
Richard 2 3 3 8
Peter 5 0 2 7
Martin 2 2 3 7
Mark 0 1 4 5
Simon 1 1 3 5
Stephen 0 2 3 5

The lesson seems to be: if you want to run a FTSE 100 company, be called John or think of changing your name to John. 17 Chairmen and 7 CEOs of FTSE 100 companies have the first name John. The second most popular name is David.

It’s interesting to note how first names differ between the three roles. Apart from John, Robert and Peter are popular names for Chairmen, Philip is popular with CEOs, and David and Andrew are common for Chief Financial Officers.

What does this tell us?

Probably not very much.

The charts below, however, may give some guidance for investors.

Portfolio of FTSE 100 CEOs named John

 

Portfolio of FTSE 100 CEOs named Philip

The first chart plots the performance of a portfolio comprised of those FTSE 100 companies whose CEO’s first name is Michael. The second chart is similar, except the CEO’s name is Philip.

The result: Michael out-performs Philip by a wide margin.

Recommendation: buy Michael, sell Philip.

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Chinese New Year – year of the goat

Today is the start of the Chinese new year.

The following chart plots the average performance of the stock market for each animal year since 1950. For example, Ox years started in 1961, 1973, 1985, 1997, 2009; and the average performance of the market in those (Chinese) years was +14.0%.

NB. The Chinese calendar is based on the lunar year cycle and so performance has been calculated for each lunar year – not the corresponding calendar year.
Chinese calendar and S&P 500 average annual returns (1950-2015)
The Chinese New Year starting this week is…the Year of the Goat – which has been the best Chinese lunar year animal for the stock market.

The Chinese calendar is therefore forecasting (if history is a guide) the market will increase 17.9% from 19 February 2015 to 7 February 2016.

Note: There is some confusion in the Chinese astrological calendar over whether this is the year of the goat, the sheep, or the ram. If it turns out that this is the year of the ram, then the above figures may not provide an accurate forecast for the market in the coming year.

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The UK Stock Market in General Election Years

In July 1945, two months after Germany surrendered, Winston Churchill was in Potsdam at the first meeting of the heads of government of the UK, US and Russia to decide Europe’s future. On the 25th of July Churchill flew back to London to await the results of the general election that had been held that month – the first election for ten years. With the war-hero Churchill at their head, the Conservatives were confident of victory, although some of the more pessimistic forecasters thought their majority might be as low as 30. The following afternoon the results started coming in and it was soon obvious that Labour had won by a landslide. The final result was a Labour majority of 146 seats – the first time Labour had won a majority. The following day the FT Industrials Index promptly fell 3 points to 115.

Over the following few days the gloom continued and the index slumped to 105.9, although gold shares and dollar securities saw buying as a hedge against the coming socialist apocalypse. The Financial Times joined in the misery with an editorial describing the election as,

the most serious reverse since the dark days of 1940.

Nationalisation was the bogey word spooking the market – the phrase “public ownership” had appeared many times in the Labour party manifesto.

However, after the shock of a socialist government had sunk in, investors quite liked the idea of receiving compensation for their investments in some really rather dull industries, and which allowed them to re-invest in some new and more dynamic ventures. The Labour party manifesto itself had signalled the new opportunities,

The genius of British scientists and technicians who have produced radio-location, jet propulsion, penicillin. and the Mulberry Harbours in wartime, must be given full rein in peacetime too.

Well, perhaps not Mulberry Harbours but, yes, the future looked bright for British industry to exploit the new advances in electronics, radio and television, textiles, chemicals, plastics and pharmaceuticals.

A few months later, by the time of Chancellor Dalton’s first budget, the FT Industrials Index had recovered nearly all the ground lost since the election. The FT described the budget as a “tonic for both industry and labour”, and when in December the government announced the nationalisation of 850 coal industry entities, the market shrugged and share prices rose.

The 1945 election obviously took place at an exceptional time, but the reaction stages of the stock market are similar to those in other general election years. An example can be seen in the following chart of the market in the year 1983: the market rose before the election, sold off on the result, but ended the year higher.

The UK Stock Market in General Election Years_1

There have been 18 elections since WWII, and the market has ended the year higher than it started for 12 of those elections. The following chart shows the annual return for the FTSE All-Share index in each election year since WWII.

The UK Stock Market in General Election Years_2

The average return in those 17 election years (in 1974 there were two elections) was 3.0%. Hence, historical precedent would suggest that the UK market will see a positive return in 2015.

Another election to consider here might be the US presidential election in 2016: the last time the US market fell in a pre-presidential election year was in 1939, and the average return in these years has been 17%. Given the strong correlation between the US and UK markets, this could be another factor suggesting a positive return for 2015.

The above chart indicates which party won the most seats in each election year: both the Conservatives (blue) and Labour (red) have won the most seats in nine general elections since 1945. But in the nine years that the Conservatives won the most seats, the market has risen eight times with an average annual return of 10.8%; while for Labour the market only rose in three years and the average annual return was -5.8%

The following chart shows the average performance of the stock market in the months around the election itself.

The UK Stock Market in General Election Years_3

On average the market has risen two months before an election, with an average return of 0.32%. But after that the returns in the following three months are all negative, with the second month after the election seeing an average return of -1.3%.

In 2015 the general election will take place on 7 May, in which case history would suggest that the following two-month period up to 7 July will see a weak market. Of course, this period will overlap with the Sell in May effect which often sees a weaker market at this time of the year anyway.

In summary, the historical precedent suggests that the market will end higher in the election year 2015 than it starts. Although such forecasts would most likely not have been supported by Winston Churchill, who said,

I always avoid prophesying beforehand, because it is much better policy to prophesy after the event has taken place.


 

Notes:

  1. Reference source for the 1945 general election: George Blakey’s A History of the London Stock Market
  2. Article first appeared in Investment Advisor.

 

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