The S&A Digest: Porter's Top 10 Books About Investing

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(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/28/2013

My top 10 books on investing… How the rich got richer… Bye bye GM, hello Toyota… Corporate dirty diapers… Who makes a billion a year?… More on the cost of global warming… A real letter from Doc Shea…

"I got rich by making rich people richer," said our friend and world-class money manager Rick Rule at our Spring Editors' Conference last week. That's a valuable insight and something to remember if you run your own business or if you're considering starting your own business. As you'll see below, hedge fund managers have become masters at that business model...

Toyota sold more cars, 2.35 million, than GM in the first quarter of 2007, overtaking the American auto giant as the world's largest car manufacturer for the first time. At Columbia Business School's annual value-investor conference last March, renowned value investor Martin J. Whitman was asked which company would he keep if he had to sell all of his long-term investments except one. His answer? Toyota.

Investors in subprime-mortgage bonds will lose an estimated $75 billion as home prices continue to slump and mortgage defaults reach record highs. Investors won't know for years, though, which companies, banks, and hedge funds have taken a hit, thanks to the accounting rules that dictate mortgage investments must be kept on the books at their purchase cost... until they're sold. Thus, there's likely to be a huge opportunity for research analysts to ferret out which balance sheets are materially weaker than they appear – corporate dirty diapers.

Alpha Magazine released its list of hedge fund manager compensation for 2007, and the numbers are getting higher. James Simons of Renaissance Technologies takes home the crown with an annual salary of $1.7 billion. His $6 billion fund uses complex mathematical equations and charges 4% of holdings and 44% of profits. Even with his excessive fees, investors gained 44% last year. Three managers took home more than $1 billion, including famed value investor Eddie Lampert and Citadel's Kenneth Griffin. According to The New York Times, the top 25 managers took home $14 billion – enough to pay the 80,000 New York City public school teachers' salaries for three years. At least investors are getting something for their money.

China, the world's largest consumer of coal, has become a net importer of the resource for the first time. High local prices and transportation bottlenecks have led to the shift. After bottoming at around $6, James River Coal (JRCC) – which dropped from around $39 over the past year – has quietly gone up 50% in the last three months...

UBS will launch the first Global Warming Index this week, allowing companies with a high exposure to the phenomenon to hedge. Now why would they want to do that? Global warming has already caused a surge in weather derivatives trading, which increased 363% to $45 billion last year. The cost of doing business is going to rise as companies jump into the climate change casino... There's a lot of money in global warming, and it's all coming out of our pockets.

New highs: Allegheny Tech (ATI), AutoZone (AZO), Banco Latinoamericano de Exportaciones (BLX), Exelon (EXC), Janus (JNS), Annaly Capital (NLY), Oneok (OKE), Southern Copper (PCU).

In the mailbag... a real letter!

Dr. John Shea (of the Shea Ear Clinic in Memphis) put pen to paper, used a real envelope, and applied a U.S. government stamp to send us his take on the dubious value of formal education:

"I had 13 months of college, two years six months of med school, and eight months of residency [a tiny fraction of the education most doctors receive today]. I went into practice and have become a great success. Most education... is for an energetic self-starter, a waste of time. I have put five children through graduate school (two doctors, two lawyers, and one business-school graduate). They are all working, waiting for me to die and pass on my considerable estate to them."

I've known Dr. Shea for 10 years – he's a longtime subscriber. And it was great to get a real letter from him. Thanks, Doc Shea. If you'd like to send a real letter, address it to me personally and send it to: 1217 St. Paul Street, Baltimore, MD 21202. Writing letters is a lost art – but it's deeply appreciated here. Now on to the quicker, easier, and angrier e-mails... (You're welcome to send those too: feedback@stansberryresearch.com.)

"Regarding the Murmansk Shipping recommendation, I think it's really, really sad that you regard something as 'ultracontrarian' and 'totally off-the-map' simply because you disagree with the premise (i.e., global warming). Solipsism, thy name is Stansberry." – Paid-up subscriber Alan Grayson

Porter comment: Into which basket would you place an investment in a Russian company with no audited financial statements, no public record of ownership, and no reliable historic financial results that's operating a group of nuclear-powered boats with questionable engineering standards in a business that will only grow substantially if the weather changes in a radical way?

"I've been reading your material for a while now and most recently I started reading all of the back issues of the Blast, starting as far back as they go on the website to December of 2004. (Your mention of reading the annual reports from Buffett around Christmas inspired me.) It seems like you all have a tendency toward safe investments, and by safe, I mean you know your downside. So I'm curious to know if there were downside stats on the Max Yield Strategy mentioned a few days ago? The annual return sounds great, but what kind of drawdowns do you have to sit through to get there? What was the max drawdown? How long did it last?" – Paid-up subscriber AK

Porter comment: Great question... the strategy is volatile. For Ian's top recommended Max Value strategy, the largest drawdown was 50%. It took a year and half for Max Value to rebound to a new high. While this might be too volatile for most investors to handle, you should know that the drawdown was identical to the largest drawdown in the world stock index – but the world index took five years to recover. Thus, relatively speaking, Max Value is less volatile.

Porter's Top 10 Books About Investing

Last week, I said Mohnish Pabrai's new book (The Dhandho Investor: The Low-Risk Value Method to High Returns) was one of the 10 best books I'd ever read about common stock investing.

Logically, many subscribers have asked about the other nine books in my top 10 list.

I thought about the question over the weekend... and all day Monday. It's easier to think "wow, that's a great book" than to accurately quantify where it falls, precisely, in terms of all the books you've read before. (I read at least one new book per week, so it's hard for me to even remember all the books I've read in the last year.) So, before you skip down to see my list, please understand: I reserve the right to add, subtract, and rearrange.

Also, you should know this list only includes books that deal, nearly exclusively, with common stock long-term investing.

There are many other great books on trading, economics, the psychology of investing, the history of finance, etc. that I haven't included in this list, but that contain valuable insights for investors. This list strictly deals with how-to books for successful long-term investing.

If you read these 10 books (one isn't even a book, it's an essay) and you follow the basic precepts (buy value, buy safety, buy businesses with a durable competitive advantage, allow your investments to compound over many years), I have no doubt you can easily earn 15%-30% per year, after tax. My only other assumptions are that you're capable of reading English on a 10th-grade level and that you can handle basic math with the help of a calculator.

Your investing shouldn't require more than 10 hours per week. If you make more than two to three investments per year, you're working way too hard. (One more thing... you don't need to read investment newsletters to do well as an investor, though we hope you'll keep reading ours out of fondness.)

You can buy all of the books on this list easily and cheaply (except for Seth Klarman's book, which is out of print). If you study them all carefully, it might take you six months. Your total tuition wouldn't equal $1,000 – and you'd know far more about how to be a successful investor than 99% of the world's top MBA graduates.

Being a successful investor takes a little bit more than just knowledge. You've also got to master the traits listed in the very first "book" on my list. It's an essay written by Richard Russell. It contains the only real secret to becoming wealthy: the power of compound interest. It also demonstrates the key emotional distinction between wealthy people and everyone else:

"...The wealthy investor tends to be an expert on values. And if no outstanding values are available, the wealthy investor waits... But what about the little guy? This fellow always feels pressured to 'make money.' And in return he's always pressuring the market to 'do something' for him. But sadly, the market isn't interested... And because the little guy is trying to force the market to do something for him, he's a guaranteed loser. The little guy doesn't understand values so he constantly overpays. He doesn't comprehend the power of compounding, and he doesn't understand money. He's never heard the adage, 'He who understands interest ­– earns it. He who doesn't understand interest – pays it.'"

With this emphasis and my earlier caveats, here are my personal top 10 books on common stock investing.

Best,

Porter Stansberry

Baltimore, Maryland

April 24, 2007

P.S. I'm eagerly awaiting Dan Ferris' outraged e-mail letting me know how badly I've bungled this list...

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