Books Every Retail Stock Investor Must Read

Before you invest, you have to have a plan. These books can help.

You can't control the market. You can, however, control how you respond to the market's ups and downs. By knowing why you bought the stocks in your portfolio, and what to expect out of them, you can control your temperament. That's why educating oneself is the single most important step any new investor can take. The following is a list of books I consider to be mandatory reading for any new stock investor. Some are good books for retail stock investors; some are just good investment books. 

One Up on Wall Street (Peter Lynch)

Investor checking performance of financial portfolio online
Rafe Swan/Cultura/Getty Images

 This, to me, is the retail stock investors bible. Lynch's strategy of buy what you know investing is a useful tool in identifying retail winner's, but there's so much more. 

This book will teach you the following:

  1. How your shopping and day to day activities can tip you off to winning retail and consumer goods stocks. Lynch also explains the limitations to "buying what you know," and how to conduct the necessary analysis that goes along with it. 
  2. What to expect from different categories of stocks
  3. Stock valuation basics (P/E vs. PEG ratio, etc.)
  4. A wide overview of fundamental analysis
  5. How to have the proper temperament to invest in stocks over the long-run, and when to tune out "noise" from financial pundits and analysts. 

Quality of Earnings (Thornton O'glove)

This book will help you pull back the curtain to see how a business is performing. You'll learn which red flags to watch out for (like rising inventories for retailers), how a company can make its earnings look artificially good, and when dividend payments can sabotage a business. 

More than anything it will help you identify management teams that are focused on "looking good," rather than performing good. After reading this book, you may be able to sell a bad stock that "looks good," before it's too late. 

The Little Book of Valuation (Aswath Damodaran)

 I'm a big fan of "the Little Book" series of investment books. They're easy to read, yet they're chock full of valuable investment lessons. The author, Aswath Damodaran, is one of the most renowned valuation experts in the world; this book is by far his most approachable work for newer investors. It explains a wide range of valuation tools (including dividend discount models and discounted cash flow analysis), valuation multiples (P/E, etc.), and relative valuation. In the end, the reader is left with a clear idea of which valuation tools will work best for their specific investments. 

The Little Book That Beats The Market (Joel Greenblatt)

Joel Greenblatt is a successful money manager, famous value investor, and business professor. Through his "magic formula," he explains how investors can find cheap stocks that have fallen out of the markets favor. The "formula" picks the stocks with the best combination of high returns on capital and high earnings yield. The track record of stocks that meet Greenblatt's criteria, as a group, is very impressive.

While I've outlined the "magic formula" criteria above, you should still read the entire book. Much of the book is about having the right temperament and behavior for long-term value investing, Greenblatt explains it in a manner that is very easy to understand. 

Your Money and Your Brain (Jason Zweig)

Speaking of behaviors, if you believe (as I do) that half of investing comes down to temperament, then Your Money and Your Brain is a must-read. Zweig explains why we make dumb and irrational decisions with our money and the science behind it. By understanding our self-destructive patterns and biases, we can take steps to improve them.

In other words: if you find that you are always "buying high and selling low," or holding your losers and selling your winners, then read this book immediately!

While there are plenty of good investment books not mentioned here, these five will give you a good foundation for the core principles of investing (valuation, fundamental analysis, and your own behavior).