The best books on investing from a money manager

As head of the Yale University endowment fund, the late David Swensen was one of the foremost innovators and most successful practitioners of institutional investing. Remarkably, he also wrote one of the best books ever for individual investors. Unconventional Success shows why on average, mutual fund investors significantly underperform the funds they own: They trade excessively, buying at the highs and selling at the lows, creating tax inefficiencies in the process. Swensen also valuably details hazards to avoid in fund selection. 

This classic, now in its eighth edition, delivers a needed antidote to the broker- and media-promulgated delusion of easy and obvious paths to index-beating results. Ellis emphasizes less sexy methods that genuinely enhance performance. They include focusing on long-term wealth-building, holding down costs, and paying attention to tax consequences. He supports it all with up-to-date research findings.

Forget bromides such as buying a stock because your experience with the company’s product has been good. The hugely successful money manager Howard Marks makes the essential point that the goal is not to find good companies but to make good purchases. “It’s not what you buy,” he says, “it’s what you pay for it.”  Investors who are interested in good outcomes rather than thrills will find many more sound principles in this book.

Investment manager Michael Mauboussin illuminates mental errors that impede investment success with excellent real-life examples. The good news is that these errors are avoidable. Relying on expert opinion is useful in some cases but not in others. Mauboussin also deflates the “great company” myth, citing research that finds the stocks of companies hailed as champions by business magazines subsequently underperform the stocks of companies derided by the same periodicals.

Financial journalist Jason Zweig shows how the young field of neuroeconomics explains the biological factors underlying smart people’s irrational investment decisions. For example, brain scans show that the fear center lights up when investors consider putting money into foreign stocks, despite the demonstrated value of international diversification. Also to their detriment, investors perceive patterns of returns where none exist. It’s imperative to understand these cognitive errors to get proper control over investments.