The list of books runs a gamut from cognitive issues to the irrationality of crowds to how and why a quantitative approach to investing has risen to dominance.
Here's a starter library for investors:
1. "Market Wizards: Interviews with Top Traders" by Jack D. Schwager.
Twenty-five years ago, Jack Schwager interviewed many of Wall Street's trading legends at the height of their success.
What makes these interviews so compelling is how consistent the themes are, regardless of which markets the traders were working in (stocks, bonds commodities, currencies, etc.) or the style they employed (technical, macro, fundamental, quantitative).
The importance of discipline, capital preservation, risk management, individual responsibility, flexibility, consistency and intellectual honesty runs across all disciplines. The result is not a "How to invest" book; instead, it is a book about "How to think about investing." (If you enjoy this, there are several more in the series).
2. "Bull! A History of the Boom, 1982-1999," by Maggie Mahar.
In the best book about the great bull market of the 1980s and '90s, Mahar does a terrific job of explaining how things reached a ruinous climax in 2000. No one is spared. The government, the Fed, Wall Street and Mahar's colleagues in the financial press are all subject to a scathing critique for their complicity in the inflation of the tech bubble.
It reads like a historical novel. The many lessons to be found in its pages will reward the careful reader.
3. "Black Monday," by Tim Metz.
If you enjoy Bull! Then check out a terrific tale about the 1987 crash. You will learn much about the market structure (its "plumbing"), colourful characters, political connections and regulation.
4. "A Random Walk Down Wall Street: Time-Tested Strategy for Successful Investing," by Burton G. Malkiel.
Princeton professor Malkiel is best known for several big ideas, including that stock markets are generally more efficient at incorporating information into equity prices - as well as less predictable in their movements - than recognised by some academic theorists.
Trying to beat the market, therefore, by predicting its movements or the movements of particular stocks is likely to be a fool's errand. No fund manager or investor is going to consistently outperform the market. Individuals simply have less insight than the market - reflecting the buying and selling done by millions of individuals - has as a whole. He makes a compelling case that owning a broad index is better on average than trying to pick stocks or time the market.
Malkiel writes in simple, easy-to-understand prose. In 2016, the book's 11th edition was published, and it has sold more than a million and a half copies, a testament to its appeal.
5. "Thinking, Fast and Slow," by Daniel Kahneman.
The winner of the 2002 Nobel Prize in Economic Sciences was not an economist but a psychologist. Kahneman won for his seminal work (his research partner Amos Tversky died in 1996) in behavioural finance. The two cognitive psychologists challenged the idea of Homo Economicus - that people behave as rational, self-interested, profit-maximising actors in the economic sphere.
The book presents two systems of human cognition: The first governs our faster, instinctual reactions to events; the second engages in slower, deliberative and logical thought.
We learn from Kahneman that the human brain, a marvellous device for keeping us alive in the fast-changing environment of the savannah, tends not to work so well in financial markets. We see patterns where none exist and can be easily fooled by a variety of cognitive foibles. Our wetware is deeply flawed, and the sooner we understand that the better off our portfolios will be. This book will transform the way you think about thinking.
6. "Extraordinary Popular Delusions and the Madness of Crowds," by Charles Mackay.
As it turns out, history is replete with booms and busts. This book details how they came about and their impact over time. It is fascinating and instructive, and should help you understand what occurs when a crowd of soccer fans turns into a rowdy mob of hooligans. First published in 1841, this book remains a classic. (If you like this, see "Manias, Panics and Crashes: A History of Financial Crises," by Robert Z. Aliber and Charles P. Kindleberger).
7. "The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street," by Justin Fox.
If "A Random Walk Down Wall Street" begins a conversation about efficient markets, this book explains why markets are less efficient than many people believe. Fox tells of the various academic and Wall Street theorists who developed the efficient market hypothesis and then pushed it much further than it should have gone - careening headlong down an ideological path that ended in market destruction.
This book is not dry or academic. It is good wonky fun.
8. "The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It," by Scott Patterson.
Who are the quants? They're mathematicians and (literally) rocket scientists who came up with mathematical theories to game the market. The book tells a rousing good tale of these outsiders and the mathematical models that eventually took over equity trading.
Combining those models with excessive amounts of leverage and hubris eventually leads to catastrophe. Quants figure large in recent financial crises, and it is important to understand their role in the markets.
9. "The Big Short: Inside the Doomsday Machine" by Michael Lewis.
The best told tale of the credit crisis, from the poet laureate of Wall Street. Lewis' narrative, told from the unique vantage point of a group of quirky Wall Street outsiders is simply the most compelling version of what happened. It's also a delightful read.
10. "Winning the Loser's Game," by Charles D. Ellis.
What is the loser's game? In professional tennis, good players win by scoring points against their opponents - a winner's game. But amateurs tend to lose by making unforced errors - avoidable mistakes that cost them points - a loser's game. Avoid unforced errors, Ellis says, and even amateurs can win.
The parallels to investing are manifest. Ellis was the first person to point out that most active portfolio managers tend not to do as well as their benchmarks. That low performance, plus fees, is why he recommended index funds.
11. "When Genius Failed: The Rise and Fall of Long-Term Capital Management," by Roger Lowenstein.
A gripping narrative about the hedge fund Long-Term Capital Management. LTCM had more than $100 billion in assets, but it was highly leveraged, with a debt-to-equity ratio of 100-to-1. The hubris of LTCM's founders, who steadfastly refused to accept the possibility of error, and a Russian debt default led to the firm's collapse.
Lowenstein's tale also provided an early warning about the 2008-2009 financial crisis, when all of the elements of LTCM's collapse - derivative contracts, high leverage, interrelated players and a bailout organised by the Federal Reserve Bank of New York- would reappear.
12. "Against the Gods: The Remarkable Story of Risk," by Peter L. Bernstein.
Two years before LTCM blew up, Bernstein published a brilliant history of modern finance, looking at rationality and its limits in explaining our financial choices. It serves as a paired bookend to "When Genius Failed."
The Boston Federal Reserve reviewed the book, remarking, "Modern thinking began when man abandoned the belief that events are due to the whim of the gods and embraced the notion that we are active, independent agents who can manage risks."
This is a typically brilliant work by Bernstein, every page filled with insightful observations and analyses.
Those are your 10, plus bonuses. Get reading!
Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of "Bailout Nation" and runs a finance blog, the Big Picture.
