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FIVE BEST
Books a Million
The best advice on personal investment.

BY JONATHAN CLEMENTS
Saturday, April 15, 2006 12:01 a.m.

1. "Money Masters of Our Time" by John Train (HarperCollins, 2000).

I am an advocate of market-tracking index funds, so this might seem like an odd book for me to recommend. John Train profiles 17 renowned money managers, combining entertaining biographical sketches with breezy descriptions of their investment strategies. The folks profiled, including Warren Buffett, T. Rowe Price, George Soros and John Templeton, all made their names by generating outsized investment returns. Meanwhile, I am convinced that the financial markets are reasonably efficient and that investors are better off avoiding costly efforts to beat the market averages. Still, early in my career, I read a slightly different version of this book--and it was maybe the first book that got me truly excited about investing. And besides, even if you're going to index, it is important to know how the enemy thinks.

2. "Capital Ideas" by Peter Bernstein (Free Press, 1991).

If John Train gives you a great introduction to traditional active investing, then Mr. Bernstein's book is the antidote, telling the story of how finance professors turned Wall Street upside down by bringing academic rigor to the investment process. Sure, a book devoted to the capital-asset pricing model and the Black-Scholes formula might sound like heavy going. Yet it's a gripping tale. Before the 1970s, professional money managers were assumed to beat the market and controlling investment risk was a rough-and-ready business. But as the insights of Harry Markowitz, William Sharpe, Eugene Fama and other academics took hold, the business of managing money was forever changed.

3. "Winning the Loser's Game" by Charles Ellis (McGraw-Hill, 2002).

When novice investors ask what to read, this is the book I usually suggest. Charles Ellis provides an easily digestible introduction to sensible investing--in other words, he is a fan of indexing--and he does it in a brisk 182 pages. The book's title reflects Mr. Ellis's contention that investment management has become a loser's game, where trying to win is the surest way to lose, because you are competing against so many other talented investors and because of all the investment costs you incur. My only complaint: Earlier versions of "Winning the Loser's Game" were even shorter and hence more digestible. In fact, on my desk, I have the 1985 version of the book, which I borrowed from the Dow Jones company library in 1990 and somehow neglected to return. That one is a wonderfully brief 81 pages.

4. "The Four Pillars of Investing" by William Bernstein (McGraw-Hill, 2002).

Mr. Bernstein (no relation to Peter) is a semiretired neurologist in North Bend, Ore., who didn't get around to applying his considerable intellect to finance until he was in his 40s. Yet over the past decade I have probably learned more from chatting and emailing with him than from anybody else. This book will give you a taste of his thinking, including what to expect from different asset classes and how to build a winning portfolio. Think of Charley Ellis's book as your introduction to investing and Bill Bernstein's tome as the second semester. Full disclosure: Before publication, I read and commented on the manuscript of both this book and the fourth edition of "Winning the Loser's Game."

5. "Fooled by Randomness" by Nassim Nicholas Taleb (Thomson Texere, 2004).

If you're going to survive on Wall Street, you don't just need to be wary of brokers, insurance agents, financial journalists and overhyped mutual funds. You also need to guard against your own self-confidence. That is where Mr. Taleb's quirky book comes in. "Fooled by Randomness" is a delightful mix of mathematical insights, philosophical ruminations and intriguing anecdotes. Think you've found the next superstar mutual fund? Convinced you've detected some stock-market pattern that foretells fabulous returns in the months ahead? Spend a few minutes with Mr. Taleb's book, and he should be able to talk you down.

Mr. Clements's latest book is "You've Lost It, Now What?" (Portfolio, 2003).

Copyright © 2006 Dow Jones & Company, Inc. All Rights Reserved.

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