The Internet has provided us an easy way to learn about finance and investments. But if you want to get an in-depth analysis, then you will have to Read a Book.
The advice from well-experienced financiers will go a long way in defining your financial plans. So, learn about their core principles before you put your own money on the battlefield.
- Rich Dad Poor Dad (Best Book for Beginner)
- Essays of Warren Buffet
- The Richest Man in Babylon
- The Millionaire Next Door
- Intelligent Investor (Best Book on Investments)
1. Rich Dad Poor Dad (Best Book for Beginner)
– Robert Kiyosaki
Rich Dad Poor Dad is my first book on Finance, and I have already read it 4 times. Every time I read it, I grasp something new that I had missed the previous time. No wonder it’s my favorite book. The book is simple but has powerful implications.
In the book, Robert Kiyosaki has shared his personal life story. He claims to have two dads – one rich and the other one poor.
The rich dad never finished schooling but was very wealthy. The poor dad (his real dad) had a well-educated degree and held a government job. Despite this, he has always struggled to manage his wealth.
Money worked for the rich dad while the poor dad worked for money.
The Fundamental Lesson you will learn from this book is the practical difference between an asset and a liability. Kiyosaki states that we have been taught about these terms incorrectly in our school.
Is your home an asset or a liability?
Many of us would go with the asset as we have taught in our schools. But in truth, most of our homes are a liability. It’s because our money is going out of it – paying for electricity, maintenance, taxes, and so on.
Assets put cash in our pocket while liabilities take cash out of our pocket. Rich people accumulate assets whereas poor people buy liabilities, thinking they are assets.
When you keep on adding assets in your portfolio, your income will increase. But when you buy liabilities, your expenses will rise.
Kiyosaki also advocates the importance of money in our lives. Despite its necessity, schools have neglected to teach them to children. Our school shows us the way to get a job after graduation – only if it was so easy.
In this competitive world, getting a job has been harder than ever. Keeping a job has been equally harder. The Coronavirus Pandemic has already knocked down millions of jobs worldwide, which is expected to rise in the upcoming days.
So why study so hard in our school if we cannot even have a secured source of income later on?
“Workers work hard enough to not be fired, and owners pay just enough so that workers won’t quit.”
2. Essays of Warren Buffet
– Warren Buffet
What better to learn from the Richest Investor than from his book?
The Essay of Warren Buffet consists of the collection of the shareholder letters that Warren Buffet provides in the Berkshire Hathaway meetings.
Buffet urges us to buy a great business at a sensible price, rather than a mediocre business at a bargain price. The mediocre companies might be a lot cheaper, but you will have to buy many such companies before one of them brings you a good profit.
Moreover, don’t diversify too much! It takes way too much time. Diversifying comes from not knowing what’s going to happen.
If you don’t understand the business, then don’t buy its stocks at all. Only stick with the businesses that you understand.
It’s also not enough to buy businesses based on just their financial numbers. You have to make sure these companies have great management as well.
Likewise, while most of us fear stock market fluctuations, Buffet thinks otherwise. When the market goes down, it provides greater buying opportunities than it was possible earlier.
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
3. The Richest Man in Babylon
– George Samuel Clason
The Richest Man in Babylon is the oldest book in this list, which was first published in 1926. In the book, George Samuel Clason provides some wonderful personal financial tips from ancient Babylon. The book might be almost a century old, but its core concepts are still relevant.
If you are to get one lesson from this book, then it is that you learn where you are spending your money. You can’t become rich by only earning a lot. You will also have to divide your funds properly.
Our major problem is that when our income increases, our expenses also tend to increase alongside. We desire a new car, a new mobile, and so on. Being able to control our expenses is what differentiates the rich and the other classes.
Like Warren Buffet, Clason also advocates that you should invest in areas only where you have knowledge about. Most people investing in bitcoin don’t know how it operates. For them, it will be difficult to understand why its price has moved in a certain direction.
Why won’t most of us gamble in a casino?
It’s because we know that the odds are always against us. Similarly, investing in a stock that we don’t know is gambling. We can only hope its prices will increase later on, like hoping to win in the casino.
Despite the book being very old, it discusses a popular modern concept – Passive Income. Clason states that you will have to work regularly now to earn passive income. But once your income starts coming in, you won’t have to give much effort. Your money will start working for you.
While we earn for ourselves, do we pay ourselves enough? Where do most of your salary go? Taxes? Rent? Netflix? Fast food?
People pay to others as soon as possible, leaving little for themselves. Clason suggests saving at least 10% out of your income. It might be hard at first, but he claims that it’s necessary if you want to become rich.
“Advice is one thing that is freely given away, but watch that you only take what is worth having.”
George Samuel Clason
4. The Millionaire Next Door
– Thomas J. Stanley
As the name suggests, this book focuses on the millionaires – finding out what differentiates them with ordinary people.
The basic premise of this book is that you can enjoy your profits, but you should never spend the principal. Even better, you should reinvest your profits to earn Compounding Returns in the year to come.
After a lot of research, Thomas J. Stanley came to the conclusion that millionaires have a lot in common. As contrary to what many people might think, around 80% of millionaires are college graduates. Most of them come from poor families. Also, they all have great control over their money: they plan their budget and know where they are spending their money.
In economics, the Opportunity Cost is the value lost by giving up the next best alternative. For example, if you buy a new phone, then you may not be able to buy a laptop. So, the laptop becomes your opportunity cost.
While we tend to calculate opportunity cost in terms of money, Stanley argues that we should also consider our opportunity cost of time. Many of us would prefer to watch a movie instead of learning about financial independence.
If you have a child or are planning to have it soon, then Stanley urges you to not give cash gifts to your child. Research showed those children went on to become poorer than the ones who didn’t receive cash gifts as a child. Likewise, that money will be used less productively.
Stanley has also formed a Wealth Formula so that we can understand about our net worth easily.
Net worth = Age * yearly income /10
* This formula doesn’t apply to students as their earnings are limited.
“Money should never change one’s values…. Making money is only a report card. It’s a way to tell how you’re doing.”
Thomas J. Stanley
5. Intelligent Investor (Best Book on Investments)
– Benjamin Graham
Benjamin Graham is known as the Father of Value Investing. Warren Buffet considers Intelligent Investor as the most valuable book on ‘Investments’.
Graham advocates that a stock is an ownership interest in a business. Most people buy stocks just to get stocks. What they don’t realize is that they are also a part-owner in the company. This gives them some rights and powers of the companies’ workings. It can be used to make some crucial decisions.
A lot of times, the market doesn’t reflect the value of the firm. It reacts more than it needs to, which presents us with many opportunities. Graham suggests to be patient and search for the times when the stocks will be available cheaply.
Similarly, Graham urges us to own those companies whose Price < Net Working Capital.
Net Working Capital = Current Assets – Current Liabilities.
If you can buy a business at that price, then you are not paying for its buildings, lands, goodwill, and so on. But this type of company is rare in the modern era, except when the prices fall dramatically.
The Margin of Safety is also a term that has been widely used in the book.
Margin of Safety = Intrinsic value of a stock – Price.
Intrinsic value is the investor’s perception of the internal value of the company.
For example, you believe the value of Microsoft stock is $200. Its current market price is $170. This gives you a margin of safety of $30.
Higher the margin of safety, lower will be your risk.
“But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”