Wondering what you can read to become a better investor? Author Michael Lewis — who has chronicled the financial crisis and many traders’ undoing in “Flash Boys,” “The Big Short” and other books — has two suggestions. But, first, a warning.
Lewis, who joined us for a live interview on Facebook on Tuesday, said he thinks far too many of us make far too many financial decisions.
“They think they are supposed to be more active in the markets than they should be,” he said. “I would not encourage people to waste a lot of their time thinking about their financial lives. Less is more. Set [your investments] up in a basically simple way and then go about your business of making a living.”
That warning is perhaps no surprise given the subject of his newest book, “The Undoing Project”: Two psychologists who took sledgehammers to a pillar of economic theory, demonstrating that humans — and thus investors — do not weigh risks and rewards with anything resembling rationality. (Though Lewis does have two suggestions for how to invest your money.)
If you’re absolutely keen to speculate and pick stocks, he has two reading recommendations.
His No. 1 choice is “Reminiscences of a Stock Operator,” a thinly disguised biography of American stock trader Jesse Livermore that, using an assumed name, he published with journalist Edwin Lefèvre in 1923. Livermore, known as the “Boy Plunger,” famously went from being $1 million in debt to spending $2 million each year on his personal expenses.
The book contains dozens of lessons that may be well known to experienced traders, some of which MarketWatch has chronicled before: The market is always right; don’t over-trade; never argue with the tape; use stop losses; and always trade with the primary trend of the market.
“It’s an old book, but I think it’s the best book that’s ever been written about stock market speculation,” Lewis said. “It’s really funny, interesting, readable. The book is alive.”
Second on Lewis’s reading list would be Berkshire Hathaway CEO Warren Buffett’s annual shareholder letters. “They’re really readable,” Lewis said. “It’s a different spirit with which [Buffett] approaches the market. It’s not a bad one to emulate; it’s the best one to emulate.”
Buffett has never been shy in passing on his own reading recommendations, often within those very shareholder letters. In his 2003 letter, he called value investor Benjamin Graham’s “The Intelligent Investor” his favorite book on investing.