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Fund managers' favourite investment books

We ask three fund managers to recommend the investment books that they can’t do without.
March 13, 2013

The surest way of getting your hands on an insightful read is knowing what other people are reading and recommending. So we asked fund managers for the one book they couldn’t do without, that most inspired and influenced them and why they would recommend it.

Simon Gergel, manager of the Merchants Trust (MRCH)

The Innovator’s Dilemma - When technologies cause great firms to fail by Clayton M. Christensen [Harvard Business School Press, 1997].

"I have read many books on how to value businesses and how to look for bargains in out of favour situations. But when is this the wrong approach? When can an apparent bargain become a value trap? ie a stock that is cheap for a good reason.

The Innovator's Dilemma highlights how large, strong, market leading businesses can, in certain conditions, be overtaken by new, often start-up competitors, due to a disruptive technological change.There are two central points that I take away from the book, illustrated with a number of real life examples, notably in the rapidly evolving disk drive industry.

Firstly, and most obviously, companies and investors must always be alert to the risk of technological change that can weaken or destroy a business’s competitive advantage.

Secondly, and more disturbing, even if a company recognises a potential risk, it can be exceptionally difficult for large successful companies to adapt to a genuinely disruptive technology change.

Avoiding value traps is an essential skill of a value investor. This book has helped me to avoid a number of problem situations."

Ian Lance, co-head of the Income team at RWC

Margin of Safety: Risk Averse Value Investing Strategies for the Thoughtful Investor by Seth Klarman [HarperCollins, 1991].

"Margin of Safety is a book authored by an American hedge fund manager that many UK investors will never have heard of (unless you read our feature on Seth Klarman - The New Warren Buffett - IC 14 December 2012). But Seth Klarman’s investment record is arguably better than that of Warren Buffett. Mr Klarman tends to shun the limelight, however, which is why he is much less well known.

One of the things he is known for, however, is his book Margin of Safety which was published in 1991, is now out of print, and sells on Amazon and Ebay for over $1,000 (£672.61). It is one of the most stolen library books, making it very difficult to find a copy to read.

This is one of those timeless investment classics; the mistakes that professional fund managers were making back in the early 90s are exactly the same ones they make today and help explain why, as an industry, fund managers fail to beat the market after fees. The key issue is that most investment managers are incentivised to chase short-term performance and it is this that almost guarantees that they will fail in the long term. Mr Klarman advocates taking a long-term view, focusing on absolute not relative returns and being willing to hold cash when valuations are full. These are some of the reasons Baupost has been so successful and yet are anathema to most investors today. What a strange world we live in."

William Barker, fund manager of the PFS Downing Active Management Fund has several recommendations.

The Intelligent Investor by Benjamin Graham [HarperCollins, 2003].

"I first read this book aged 13 and still think it is the one book all investors should read. I particularly recommend Chapter 20 on the Margin of Safety. If you want more numbers and detail then read Security Analysis by Benjamin Graham [and David L. Dodd] [McGraw-Hill Professional, 2008].”

Other books that he recommends include:

Common Stocks and Uncommon Profits by Philip Fisher [John Wiley & Sons, 1996].The Most Important Thing: Uncommon sense for the thoughtful investor by Howard Marks [Columbia University Press, 2011].

There's Always Something to Do: The Peter Cundill Investment Approach by Peter Cundill [McGill-Queen’s University Press, 2011] ("a fantastic read").

Mr Barker also recommends that you download all the letters by Warren Buffett. "I did this aged 14 and it taught me more than anything else," he says.

If that grabs your interest and you want to understand more of Warren Buffett's thinking, he says you should read The Snowball: Warren Buffett and the Business of Life by Alice Schroeder [Bloomsbury, 2009].

However, Mr Barker also thinks that investors should read more widely around business issues. In this category he says the books he has got the most from include:

How to Win Friends and Influence People by Dale Carnegie [Vermilion, 2006] and Why We Buy: The Science of Shopping by Paco Underhill [Simon & Schuster, 2008].

A WEALTH OF WORDS

While everyone knows that there are plenty of books about investing, not so many are aware that these books might themselves be an investment - or at least an expensive collectable.Reminiscences of a Stock Operator by Edwin Lefevre from 1923, is not only a racy and entertaining book, full of investment wisdom, but good condition first editions might be sold for more than £5,000.

Security Analysis by Benjamin Graham and David L. Dodd was first published in 1934. It is the precursor to one of the Bibles of modern investing, The Intelligent Investor, and first editions might be bought for a little less than £15,000.

But for real jaw-dropping values we have to look back to the grand-daddy of economics and finance, Adam Smith himself. An early edition of the 1776 An Inquiry into the Nature and Causes of the Wealth of Nations could set you back a massive £120,000. No reading that one in the bath!

HAVE YOUR SAY

Do you agree with the fund managers' choices? Or do you have another investment book to add to the list?