When you are ready to take the next step beyond buy & hold then this fun selection of advanced investing books will introduce you to the world of scientific, actuarial investment strategy - quantitative investing. This is how you produce more consistent and reliable investment returns regardless of market conditions. Each of these books offers a slightly different perspective so you can see which one is most compelling for you...
What Works on Wall Street, Fourth Edition: The Classic Guide to the Best-Performing Investment Strategies of All TimeJames O'Shaughnessy provides mountains of research on effective stock screening strategies. Otherwise known as factor modeling, his methodical research examines how market capitalization, P/E ratios, price to sales ratios, and price to book ratios (among other factors) influence expected investment returns. He then develops multi-factor models where he combines several factors to develop improved return versus risk. This is the place to start if you are new to stock screening. Another excellent choice in this area is Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (Wiley Finance)
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The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear MarketsI'm not a huge fan of the "Ivy Portfolio" portion of the book. Instead, the reason this book is featured is the golden gems hidden in the 3rd section explaining quantitative systems. That is Meb's strength. Both approaches revealed in the book have held up beautifully in out-of-sample results and are fully explained in easy-to-understand terminology.
Unexpected Returns: Understanding Secular Stock Market CyclesInvesting without knowing what's in this book is like driving with your eyes closed. Ed has done the research and presents data-proven insights in beautifully organized charts that will intrigue the analytical mind and frustrate romance novel readers. Admittedly, it's not a page turner, but if you have a portfolio you gotta know this stuff. Pay particular attention to the forecast conclusions made when the book was originally published years ago.
The Misbehavior of Markets: A Fractal View of Financial TurbulenceThe next time a buy & hold apologist tells you volatility doesn't matter, hand them this book. Mandlebrot is the math genius behind Fractal Geometry so this analysis comes with a serious pedigree. He analyzes security market price change distributions and proves that the frequency and severity of extreme moves defies normal statistical probability. The important conclusion is that fat-tailed distributions are so prominent that they literally define the distribution with important mathematical conclusions.
The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility"Our minds are wired to deceive us, and nowhere is this more expensive than investing. This books provides part of the foundation for quantitative investment discipline, puts the nail in the coffin of forecasting, and eliminates 99% of what passes for "financial advice". The crux of the issue is decision making under uncertainty. The future is 100% unpredictable so the only viable alternative is probabilistic outcomes. Pay particular attention to chapters 15-17.
More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded) (Columbia Business School Publishing)If you enjoy an intellectual adventure into investing then this book is fun and a worthwhile read. If you are looking for data driven insights then this book will disappoint you. Of particular note is how the author holds up Bill Miller's value investing track record as evidence right before Miller "blows up" in the years following publication. Oops! Nonetheless, this book provides valuable food for thought.
Valuing Wall Street: Protecting Wealth in Turbulent MarketsPublished in 2000, this book applied Tobin's Q-ratio to call the subsequent poor stock market returns perfectly. There's tons of other research on valuation as a risk management tool (see Shiller's Irrational Exuberance
as another example), but these books are rare in providing you a well researched, fully-disclosed methodology. Use these books to better understand the roots of valuation based investment risk management.
Being Right or Making MoneyThis book isn't cheap, but hey, it's Ned Davis Research. What you get is a top-quality presentation of technical indicators. Of particular note is his explanation connecting quantitative investment discipline with the greatest investors of all time.
The Handbook of Portfolio Mathematics: Formulas for Optimal Allocation & LeverageYou can't declare yourself a "quant" if you haven't read Ralph Vince's writings, and this book provides as good an overview as any of Ralph's analysis. Not exactly a page turner, but this is mathematics we are dealing with.
Quantitative Investment Analysis (CFA Institute Investment Series)Let's finish this list with the textbook on quantitative analysis - literally. It is used for studying to prepare for the CFA designation.
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