Top 5 Books in Passive Investing

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Source: simplepassiveinvesting.com

Passive investing is one of the easy method to generate passive income. With the right stock or index fund, the average person like you and me can sit back and collect an easy paycheck each month. Here are the top 5 books on I have read on passive investing.

  1. The Little Book of Common Sense Investing by John Bogle

This book is the bible for passive investor looking to produce passive income. John Bogle provides tremendous information on why you should invest passively in U.S stock index fund rather than chasing the glorious returns of individual stocks. He backs his thesis on choosing index fund over individual stocks with historical investment returns from the two investments. The book is very short as it is only 216 pages and it is very easy to understand what John Bogle is writing about. He does not use strange terminology that you would find in technical analysis books. But, don’t take my word for it,  here is the review of the book from Warren Buffett. “There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read John Bogle’s The Little Book of Common Sense Investing.” – Warren Buffett, Chairman of Berkshire Hathaway, 2014 Annual Shareholder Letter.

You can read more about the book here:

 

  1. A Random Walk Down Wall Street by Burton Malkiel

If you need another reason why index funds are the way to go read this book. Burton Malkiel is cut from the same cloth as John Bogle in terms of thinking about the passive investing in the stock market. The main difference between this book and John Bogle’s book is that Burton Malkiel believes in investing in foreign emerging market as a way to further diversify one’s portfolio. John Bogle’s research primary focus on the S&P 500 index fund. The Wall Street Journal provide the following review of Burton Malkiel book’s. “Talk to 10 money experts and you’re likely to hear 10 recommendations for Burton Malkiel’s classic investing book.” (The Wall Street Journal). If you are looking for chapters summaries of the book, read more here.

You can read more about the book here:

 

  1. Winning the Loser’s Game by Charles Ellis

Charles Ellis’ book is another book that provides insight to not play the stock market game. Charles observed that “accurate investing is a seriously negative sum game. To achieve better than average results through active management, you depend directly on exploiting the mistakes and blunders of others”. With active investing, you have to be right twice in when you buy and when you sell. Also, when pursuing individual stocks, one must think about the price the asset is selling for. There is a reason for it to be selling low and there is for the asset to be selling high. By investing in a passive index fund, an investor would not have to worry about whether or not the company will be in business but rather sit back and enjoy the ride of the stock market and collect dividends along the way. Here is a review from Bill McNabb, vanguard CEO. “The best book about investing? The answer is simple: Winning the Loser’s Game. Using compelling data and pithy stories, Charley Ellis has captured beautifully in this new and expanded edition of his classic work the most important lessons regarding investing. In today’s unforgiving environment, it’s a must-read!”

You can read more about the book here:

  1. Intelligent Investor by Benjamin Graham

Another classic to read regarding passive investing would be the Intelligient Investor by Benjamin Graham. While this book is quite famous for producing the likes of Warren Buffett, it also teaches key lesson regarding passive investing. As Warren Buffett mentioned, ” When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever”. This means that if you invest in a business and own it for a long period of time, your cost to own it becomes minuet and your returns should be exponential. While owning invidual stocks can lead to big risks, however, if you own stalwart such as Walmart, Cola Cola, your risk diminishes as big business are big business for a reason. They are able to compete in a market dominated with competition and brand followers. The two chapters that Warren Buffett said investor should focus on when reading this book are Chapters 8 and 12. Chapters 8 talks about Mr. Market and how Mr. Market will try to sell you a stock each day whether that is high or low.  Here is an excerpt from Chapter 8, ‘Every day he [Mr Market] tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.’ Warren Buffett interpret this as stock investing is a no strike game. You can wait all day at the plate for a good pitch to hit rather than swinging at multiple different pitches that you might not like. In Chapters 20, Benjamin Graham talks about margin of safety which means that whenever you buy a stock, you must have a margin of safety in the share price. This allows for an investor to have a level of safety if the investment goes lower and reap the benefits when it goes higher than the intrinsic value.

You can read more about the book here:

  1. The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks.

While this book does not promote investing passively in an index fund, it still teaches a lot of good lesson for investor looking to earn extra income or investment gains. One key lesson Howard Marks pass along to investor is called second level thinking. Second level thinking is a method that test an investor thesis toward looking at any investment. Here is an excerpt from this book regarding first and second level thinking. ‘First-level thinking says, “It’s a good company; let’s buy the stocks.” Second-Level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell”.’ This method help investor to think about their investment differently from the crowd but as an contrarian. If everyone is buying a stock and the price skyrocket, the investor must resist jumping in to collect the capital gains but rather to see it as a trap of getting rich quickly type of scheme. “Few books on investing match the high standards set by Howard Marks in The Most Important Thing. It is wise, witty, and laced with historical perspective. If you seek to avoid the pitfalls of investing, you must read this book!”. (John C. Bogle, Founder and former CEO, The Vanguard Group)

You can read more about the book here:

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