The best books on Investment

Your first book is Booms and Depressions by Irving Fisher.

This is a very good account of how the Boom occurred and how the Great Depression followed. I think it’s a historical document, so I list it as one of my favourite books. It was written after the Depression, in 1932, and the author, Irving Fisher himself, essentially went bust. At that time I think he was a Professor at Princeton. He was very optimistic about America and about the economy, and so he had long positions in equities. But during the crash he suffered badly: he had mortgages on his house and so he had a financial problem. But because he was such a well-known economist, I think, Princeton bailed him out.

Fisher developed this debt-deflation theory. He wasn’t a stock market timer, but more among the best economists of the 20th century. I would rank him along with Schumpeter as one of the great economists. He was to a large extent a monetarist, but he realised that expected money supply growth and debt growth would lead to problems. He didn’t realise this while it was happening, but at least afterwards he realised it.

“I would rank Irving Fisher along with Schumpeter as one of the great economists.”

In 1930, before the Depression —but just after the crash of 1929 had happened— he wrote The Stock Market Crash And Afterwards. At that stage he hadn’t realised it fully. When he wrote that book, the stock market was recovering and he explained that basically the valuations were very low and that the outlook was still favourable. It’s only in 1932 that he realised that there had been a debt overhang. But he describes very well in both books the excesses that had happened before the crash.

Are you choosing these books partly because they mirror the excesses involved in the 2008 financial crisis?

Yes, exactly. Fisher describes how investment banks began to sell securities just to make a profit out of selling them, and so forth, and how the public was borrowing money on instalment credit. The whole debt bubble was very well explained in Booms and Depressions.

And how did the boom before the 1929 crash mirror the bubble we’ve just seen exploding?

Well, excessive speculation, excessive money creation as a result of artificially low interest rates, and also the globalisation that took place at that time, which essentially then led to one country after another falling down during the Depression. Fisher shows how trade contracted at the time. Booms and Depressions is a historical document that mirrors very well what happens during financial bubbles.

Your next choice is The Economics of Inflation by Constantino Bresciano-Turroni. This was written about the Weimar Republic hyperinflation, wasn’t it?

Correct. Bresciano-Turroni was an employee at the time, I think, in Germany, and he followed this hyperinflation development very closely. He describes the impact of inflation on equities, on real estate, on wages and on the exchange rate.

These first two books you’ve chosen deal with quite severe economic problems. Do you think it’s necessary to look into severe economic problems to understand investing on the whole or is it only important to look into them today?

I think it’s very important for investors to have a historical background about how booms occur and how depressions then ensue. You can have a depression that is deflationary and you can have a depression that is inflationary. In other words, real incomes go down and standards of living go down, but prices go up. And by printing money, the central banks think they can control the destiny of an economy — when, in fact, an economy moves quite differently from the will of central bankers.

“I think it’s very important for investors to have a historical background about how booms occur and how depressions then ensue.”

It is a fact of life that we have cycles: we have excursions into prosperity and excursions into depression. The excursions into prosperity can be inflationary or can be disinflationary or deflationary and the excursions into depression can be deflationary or inflationary.

You have said that this is the best book ever written about the mechanics of inflation. Why is that?

Many people think that in inflationary times stocks go up. But, in reality, in nominal terms, equities do go up but — in real terms, or in gold terms, or in a strong currency term — they go down. And this book analyses precisely the social consequences of high inflation. Obviously, they’re not very encouraging. I would say for an investor today, if he reads this and doesn’t understand the implications he shouldn’t read at all.

Can you tell me about Sidney Homer’s A History of Interest Rates?

Investors should realise that interest rates move in long cycles and this is fairly well documented in Homer’s history of interest rates. I think that in general — because I go to lots of seminars and so forth — investors and professional fund managers may have a CFA, but they have no clue about history.

I think it’s a very good book, a historical document about how interest rates have moved over thousands of years. It has some interesting observations. Sidney Homer was an academic and a very intelligent and knowledgeable man. I think that everybody who is in investment should read this book.

Your next book is Manias, Panics and Crashes by Charles Kindleberger. Tell me why you’ve picked this one.

I think people should just study economic history more carefully. What we’re seeing today has happened before — probably in a less extreme way or on a smaller scale in terms of the excesses, but it’s all happened before.

Kindleberger looks at various manias that occurred in different asset classes: commodities, equities, and homes – I mean building booms – as well as John Law and the South Sea Bubble. He describes very well how these manias occur and what the symptoms are of manias in terms of excessive speculation, overleverage, borrowing, fraud, embezzlement, high trading volumes, and so forth — and then how they then end. I mean, usually you have a slump after a crisis occurs. The crisis is a symptom of the excesses of the previous boom, and then economically a slump occurs.

You also recommend Collected Works of Jules Verne. You said his predictions were considered the “fantasies of a lunatic”.

Well most of it was realised subsequently: such as travel to the moon, travel to the bottom of the ocean, and so forth.

But are the works of Jules Verne really a primer for an investor? I mean, he was obviously a visionary, but could you become a visionary just by studying him?

I came to Asia in 1973 — the Vietnam War was still on and Mao Tse-tung was in power — and, until 1990, China was nothing because the opening had begun in 1978 but was concentrated in the south until 1990. But in the last 20 years China has become an economic power. I think investors, especially long-term investors, really have to think, as one would say, “outside the box”. They have to consider that the world changes dramatically and that the changes in the world have actually accelerated as a result of instant communication.

I mean, it took someone, I don’t know, more than three months to send a letter in 1850 from London to Shanghai because it went by sea lines and today it’s instant. Economic and political developments can happen overnight. Just to think that because something has been such and such a way before doesn’t mean it will necessarily apply to the future. What I’m saying is that nobody has a clue how the world will look in 20 years’ time because huge changes can occur. Maybe in 20 years’ time we’ll live on another planet, who knows? I don’t think so, but it could be. And so investors have to take into consideration a lot of events that could happen but that nobody has thought of.

Like William Goldman’s maxim – he was talking about Hollywood – that “nobody knows anything”.

I don’t know Goldman, but I would think that there are statistics about the forecasting records of people which are really very poor. I know that analysts and strategists tend to extrapolate existing trends into the future, when trends can be changed very dramatically by new inventions and huge geopolitical developments, and so on. But Verne’s predictions were realised and, therefore, I consider him to be the greatest forecaster of all time.