The One Finance Book You Must Read

I’ve finally read a book I’ve been planning to read for some time, and I cannot recommend it highly enough. The Essays of Warren Buffet, by Warren Buffet and Lawrence A. Cunningham. If you’re at all interested in your own personal finances, and that should be all of you, read this book. Borrow it from a library if you can’t afford to buy it. Do it this week.

I’ve Learned a Lot

I sold my house about 6 months ago. This has left me with a bunch of cash (a scary amount for someone who thought the mortgage on the house was a ridiculous amount of money at the time), which is just sitting in a high interest savings account. We’re planning to buy another house better suited to the two of us than this one, but we’ve been looking seriously at what we’re going to do with our combined finances. Over the summer break, I’ve been reading up on investing. I’ve been learning a lot.

I’m not completely ignorant of financial concepts; I understand compound interest, inflation, I’ve owned shares (some of which even made me money!), and I’ve lost money on stupid speculative purchases. I’ve not made any spectacular moves that would have the business press hail me as a guru. I’ve certainly done a lot of dumb things with money in the past. However, I have managed to buy a house and have no debt at 32. Not too shabby. I also graduated from the AICD company directors course, which means other people believe I know enough about reading company financial statements to be able to make assessments of whether they’re insolvent or not, among other things.

Why This Book Is Awesome

The recent shenanigans in world financial markets tells me that the so-called ‘experts’ are often wrong. The more I learn about what some of them have been up to leaves me flabbergasted that they were allowed to get away with it. There are a lot of managers not paying adequate attention to what their underlings are doing, or, what I suspect is more likely, there are a lot of managers who plainly don’t know what they’re doing. ABC Learning’s practice of reporting multiple income streams as a single line item on company accounts is astounding, not to mention that some of what they called ‘income’ plainly wasn’t. To quote from Essays, attributed to Abraham Lincoln:

“How many legs does a dog have if you call his tail a leg? Four, because calling a tail a leg does not make it a leg.”

I”ve read quite a few books on investing and finance, and this should be the next book you read on finance. Seriously. It’s that awesome. Mr. Buffet’s financial record speaks for itself, and this book is a collection of his essays that he has sent to the shareholders of his company, Berkshire Hathaway, over the years. It’s pure condensed financial wisdom from one of the smartest financial guys in the world.

But Wait, There’s More

Having finished that one (which I will continually refer back to), I’m now reading the book that Mr. Buffet thinks is awesome: The Intelligent Investor, by his mentor Benjamin Graham. In Essays, Mr. Buffet refers to this book, and Mr. Grahams approach, on many occasions. Their philosphy is about making solid, safe returns on investments they understand. They’re not chasing theoretically optimal, or amazing, market-beating returns. And yet, following this approach, Berkshire Hathaway is one of the best investments you could have made at almost any point in the past 50 years. There are precious few stocks you could buy with their sort of record. One assumes that maybe they’re on to something.

Much of the problem is that there is an awful lot of jargon in finance. I work in IT, so I’m used to more than my fair share of jargon, and I’m now getting a new appreciation for why senior management, with no background in IT, would find discussions of technology mystifying. I find myself in a similar position when I read about bond coupons, convertible offers, percentage yields, and so on. These terms have very specific meanings, and some exist more for historical reasons than any other.

For example: bond coupons. Back in the days before computers, bond certificates would have little ‘coupons’ on them, just like the ones you get in your supermarket jumk mail. They had dates on them, and you would clip them out at or after that date, and hand them over to a bank, who would give you money in return, based on the amount of the bond, and it’s percentage interest. A $100 government bond with a rate of 10% (its yield) might have yearly coupons, each worth $10. So now, when referring to this payment today, people often call it a ‘coupon’, even though no physical coupon is required.

And that’s why finance is confusing. All these special terms for things obscure what people are really talking about for those not familiar with them. Just like me talking about the SAN having hot spindles and needing to have the I/O load re-balanced. WTF?

Knowledge Is Power

But, if you learn the special code, the jargon, suddenly a lot of things start to make sense. The trap, as always, is to get too wrapped up in the jargon, and the abstractions, and to forget about what’s actually going on underneath. Hence the current debacle caused by people who should have known better playing with Mortgage Backed Securities and Credit Default Swaps. This is where Warren Buffet and Benjamin Graham come in.

In Essays, Mr. Buffet is able to explain some somewhat complex ideas in simple, concrete terms. He is an excellent writer, and while he has a formidable knowledge of arcane finance and accounting, he is able to explain ideas in a way that the relative novice can easily understand. He’s also not shy about explaining what some of Wall Street gets up to, and decrying it for the borderline fraud that it is, and with a wry humour to boot.

Essays sets the standard for good financial books. I now expect a book on finance to simply and clearly explain what on earth it all means, and why I should care. I expect the jargon to be clearly defined, and used consistently. I expect that I will gain new insights into the way things really work, not the way the economic theorists think it should work if the world was filled with purely rational people. If it can’t get close to the standard set my Mr. Buffet, why on earth should I waste my money, or more importantly time, on it?