Investment books to read

Last week, I reviewed The Smartest Investment Book You'll Ever Read by Daniel R. Solin.

Not so smart, I said then, because the author provided little help for do-it-yourself investors.

If you're ready to fire your financial adviser and go it alone, I'd start with an investment classic, A Random Walk Down Wall Street by Burton G. Malkiel. First published in 1973, this book has sold more than one million copies. Malkiel, an economics professor at Princeton University, has a simple message many others have repeated.

"Investors would be far better off buying and holding an index fund than attempting to buy and sell individual securities or actively managed mutual funds," he says in the preface to the ninth edition (Norton, $37.50), which came out this year.

Random Walk still raises eyebrows with its main argument: the market prices stocks so efficiently that a blindfolded chimpanzee throwing darts at The Wall Street Journal can pick a portfolio that does as well as those managed by the experts.

I had the pleasure of meeting Malkiel in 2001, when he spoke at the University of Toronto's Rotman School of Management, and found him thoughtful, wide-ranging and eclectic.

While he believes in indexing — a strategy of holding passively managed funds that give you the same return as a broad basket of stocks or bonds — he is far from a zealot.

He recognizes that some people have the gambling urge, so he provides rules for successful stock picking.

Choose companies that appear able to sustain above-average earnings growth for at least five years, and trade as little as possible.

"For all its hazards, picking individual stocks is a fascinating game," he says, adding that stock pickers use a mixed strategy. You should index the core of your portfolio (your retirement funds) and take a flyer on individual stocks with money you can afford to lose.

He also advises readers not to follow some of his earlier advice. For example, the S&P 500 index leaves out many small, dynamic companies. He now prefers to use a more inclusive United States index (such as the Russell 3,000, the Dow-Wilshire 5,000-stock index or the MSCI broad U.S. index).

I like Malkiel's insistence on using real estate to diversify a portfolio. This investment doesn't move in tandem with other assets and is a more dependable hedge against inflation than common stocks. He believes in owning commercial real estate through real estate investment trusts.

I'd also recommend John Bogle, the founder of a fund firm, Vanguard Group Inc., that was a pioneer in bringing out low-cost index funds in the 1970s. Vanguard never set up shop in Canada, alas, so it's almost impossible for Canadian investors to buy Vanguard funds.

Bogle is retired now, but still blowing the horn — too shrilly, some critics say — for index funds. You can read his latest comments in The Little Book of Common-Sense Investing (Wiley, $23.99), published last month.

Investors pay too little attention to the costs of investing, in his view. That's because so many costs are hidden from view and investors focus on short-term returns.

He points out that the average mutual fund deducts 2.5 percentage points a year for management costs.

"Where returns are concerned, time is your friend. But where costs are concerned, time is your enemy," he says. "Over the long term, the miracle of compounding returns is overwhelmed by the tyranny of compounding costs."

This elder statesman of indexing ends each chapter with a section, "Don't take my word for it," in which he quotes others who support his views.

For example, economist Paul Samuelson of the Massachusetts Institute of Technology told a group of financial analysts in 2005 that "the creation of the first index fund by John Bogle was the equivalent of the invention of the wheel and the alphabet."

Even Bogle, however, admits he wouldn't have had the temerity to say that.

Finally, you can explore index investing in a vast library of free articles on the Internet.

Mark Hebner of Index Funds Advisors Inc., a U.S. advisory firm, has two websites brimming with information: indexfunds.com and ifa.com.

If you want Canadian advice, check out a set of linked websites, at www.financialwebring.com, aimed at helping do-it-yourself investors.

In particular, look at these sites: