Investing is exciting but not half as exciting as the rigmarole and paraphernalia surrounding it. Oh, how empowering it is to get your mind around price earnings ratios, normal market size, new issues, stop-losses and all the other stuff in Robbie Burns' book, The Naked Trader - which I recommended a couple of weeks ago as a gift for laddish investors.
But, ideally, make it only half of a duo gift, wrapping it up with The Little Book of Common Sense Investing by John Bogle. Regular readers will be familiar with John Bogle, who created one of the world's finest investment management groups and is a brilliant investment commentator. He's not bothered about price-earnings ratios or all that Robbie Burns stuff. Instead, John Bogle is an outspoken champion of index funds. He has written many weighty books on the subject, but here he compresses his whole message into 200 pocket-sized pages that could be read in a couple of hours. For anyone new to investment and inclined to get at all excited about its complexities, this is the Sermon on the Mount. However fulfilling you find the investment pursuit, you are very unlikely to perform better than an index fund, and you should know that from the beginning.
Luke Johnson knows a lot of detail about an amazing range of business subjects and has thoughtful views about all the controversial ones. Well-known to investors as the impresario behind many unlikely stock market and private equity successes, he is also, like you and me, a regular investor in many companies - especially small ones. Few such practitioners reveal their thoughts in print on a weekly basis, but Mr Johnson does, currently in the FT and previously in the Sunday Telegraph. Eighty of his best Telegraph columns are collected together in The Maverick. He touches on everything from Machiavelli to the changing fortunes of the Chiquita banana company. Magpies who like their wisdom in 900 word gobbets will enjoy every page.
My reading list always includes a management book. This year, it's The Modern Firm, by Professor John Roberts. It was first published in 2004, but this year it came out in paperback. I'll bet the publishers rue their decision to feature Lord Browne of BP as the top endorser on the book's back cover. The BP he ran - now being re-engineered following his inglorious departure - also looms large inside as a model enterprise. Nevertheless, this is a valuable exposition of organisational design. Like many academic books about business, it often seems to be stating the obvious. But a lot of companies would be run a lot better if their top managements adopted a few of the precepts laid out here in straightforward language.
Despite lavishing an entire page last week on a book about the Lazard investment bank, I cannot bring myself to leave out The Accidental Investment Banker by Jonathan Knee. After a brief and hilarious internship at a would-be investment bank in London in 1983, Mr Knee recognised that investment banking was not for him… a few years later he joined Goldman Sachs, moving on to Morgan Stanley after several successful but frustrating years. Goldman's development into the world's pre-eminent investment bank has been a triumph of organisational design, however cumbersome it seemed when Mr Knee quit. He dispassionately and colourfully analyses the forces that shaped investment banks and investment bankers during recent tumultuous years.
Finally, derivatives are the subject of A Demon of Our Own Design by Richard Bookstaber, another graduate of Morgan Stanley, and also of Salomon - where he was the global head of risk-management for an impressively long stint straddling its disappearance into what is now Citigroup. Mr Bookstaber started his career selling the early derivatives known as "portfolio insurance" in the run-up to the 1987 crash, in which he has no difficulty in designating them as the starring villain. He intersperses some challenging (although formula-free) analysis of how derivatives work - and how they come unstuck - with commentary on the strengths and foibles of the banks and people who design and sell them. These 150 pages are rewarding material, but are just the preamble for Mr Bookstaber’s main course, which is argued in the book's highly philosophical last 80 pages. Drawing a parallel with nuclear power stations and their rare, yet "normal" (that's a technical term denoting "expected") accidents, he says that in seeking to address ever more precise categories of risk via new derivatives, financial markets create complexity, which is more dangerous than the risks addressed.
Happy new year.
