Five books to change the way you think about money
There is a huge number of books out there aimed at making personal finance and economics more relatable and engaging. In this article we share some of our favourites.
1. ‘The Richest Man in Babylon’ by George S. Clason
'A part of all I earn is mine to keep.'
In the 1920s, American writer George S. Clason wrote a series of financial parables set in the ancient city of Babylon. They became so popular that they were eventually published as a single volume in 1926 entitled “The Richest Man in Babylon”.
The book’s setting might seem unusual but its lessons are timeless. Each parable focuses on a particular theme, such as saving a regular amount of your wage and investing for the long-term. Besides presenting these ideas in a novel way, the central value of the book is in showing that these principles are as applicable today as they were 4,000 years ago.
This book is also quite short, perfect for a winter’s day!
2. ‘Freakonomics: A Rogue Economist Explores the Hidden Side of Everything’ by Steven Dubner & Stephen J. Levitt
'The conventional wisdom is often wrong.'
‘Freakonomics’ is easily one of the most popular books on economics in recent years and for good reason. Levitt and Dubner apply economic theory to a collection of seemingly random topics, ranging from drug dealing to cheating in sports, to reveal how economics explains much of what we witness around us.
Ever wondered how much drug dealers actually earn or just how much “good” parenting impacts a child’s education? These are just some of the subjects that Levitt and Dubner explore in order to illustrate how we humans are ultimately driven by economic incentives. The diverse - and occasionally controversial - subjects explored in the book have drawn criticism from some academics, who argue that the authors have strayed too far from economics and into sociology.
Nevertheless, this is one book that will certainly expand how you think about economics and, in particular, incentives. Plus, controversy is usually a sign of a good read!
3. ‘The Little Common Sense Book of Investing’ by John C. Bogle
'Don't look for the needle in the haystack. Just buy the haystack!'
John “Jack” Bogle was the founder of Vanguard, the investment company that launched the world’s first index fund. But first, what is an index fund? Unlike an “active” fund, where fund managers pick and choose particular stocks, index funds are “passive” and simply hold stock in every company in a particular index such as the FTSE 100.
In ‘The Little Common Sense Book of Investing’, Bogle argues that since stock markets tend to go up over time, there is no need for investors to pay high fees to active fund managers. He presents data that shows that active fund managers frequently under-perform the stock market, despite charging rather high fees (typically 2% of invested funds a year), which ultimately eat into an investor’s returns. Instead, he argues that index funds, which can charge as little as 0.2% per year and simply track the market’s movement offer investors better value.
This is a short book but the ideas within it will impact how you think about your personal investments. After all, Warren Buffett, the world’s most famous investor, advises people to invest 90% of their savings in low-cost index funds, such as those pioneered by Bogle.
4. ‘The Intelligent Investor’ by Benjamin Graham
'People who invest make money for themselves; people who speculate make money for their brokers.'
‘The Intelligent Investor’ is not an easy book to read; it is, however, an informative one - so much so that Warren Buffett lists it as one his favourite books. In it, Benjamin Graham, the founder of value investing, sets out his approach to picking stocks.
At the core of Graham’s investing ethos is that the market doesn’t price stocks perfectly, which means there can be a difference between a stock’s intrinsic value and its price. Graham explains (at length) how investors can use financial metrics to spot stocks that are actually undervalued, which may, as a result, generate excess returns as the market eventually corrects itself.
Even if you have no intention of actively picking stocks, Graham’s book is a treasure trove for anyone with an interest in financial markets. Perhaps one of its most enduring lessons is that stock-picking is both risky and time-consuming - so perhaps most of us are better off putting our savings in index funds as Bogle recommends.
5. ‘Psychology of Money’ by Morgan Housel
'Money’s greatest intrinsic value - and this can’t be overstated - is its ability to give you control over your time.'
Published in 2020, Morgan Housel’s ‘Psychology of Money’ is the newest book on this list. Although it is undoubtedly about personal finance, it explores financial decision-making from a very different angle to most books on the topic, namely our own psychology.
Housel argues that society views finance as being akin to physics: both are governed by defined rules and principles. Although this is true, unlike physicists, investors must contend with their own psychology when following these principles - something that is often overlooked. This, he argues, is why people often do “silly” things with money that go against their better judgement (hint: it’s not just greed); one example he offers is a CEO with a net worth of $100m who risks it all (and his reputation) in order to make illegal trades.
This book won’t teach you how to develop a savings plan or draw up a budget. What it will help you to do is understand your own strengths and weaknesses when making financial decisions so that you can meet your goals.
Ultimately, these books show that the principles of personal finance are fairly straightforward. The challenge for us now is to make sure we apply them consistently.