What is money? How is it created? Why does it matter quite so much when central banks change interest rates? Someone is going to bring up something related to all this in the slightly tipsy sitting around and talking bit just after Christmas lunch. You'll want to be ready.
I've been thinking about how best to make that happen. And I reckon you can start your preparations by reading The Moneymaker: The Remarkable Story of John Law Philanderer, Gambler, Murderer and Father of Modern Finance by Janet Gleeson. Until the late 17th century, money was gold and silver. You only got more money into circulation by digging it out of the ground. You couldn't make it until "congenial charmer" Law appeared in France with a fabulous vision that had the country ditching gold for a paper currency.
It worked brilliantly at first, then badly: paper currencies are only as good as a population's confidence in them. Once that was lost, everyone scrabbled to get their gold back and the game was up. Law never really recovered from his French fiasco. But if he could visit us today, he would be thrilled. His vision has become reality.
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Today's central bankers have somehow managed to convince everyone that, while gold is worthless, paper money has a clear intrinsic value. Most people now see it as a store of value in its own right. Whether it is or not is another matter altogether. After you have read the story of Law (it is more of a ripping yarn than your average book about the nature of money) you might suddenly find you understand more than is comfortable about cash, and yearn to hold rather less of it.
With that in mind, the rest of the books on my Christmas reading list focus on how to invest well. If what you want is a DIY manual written by someone at the heart of the market, look to Mark Dampier's Effective Investing. In it, he explains why you should invest; looks at how you should choose the funds you invest in (Mr Dampier is not much into individual stock picking); and runs you through basic portfolio management.
I interviewed Mr Dampier when the book came out, and, reading through the transcript of our chat, I can tell you that his advice boils down to a few simple things: learn the basics; buy funds run by managers with good long-term records; and be patient. It's all good advice maybe enough advice for most.
However, if you are looking for more depth on investment I have three suggestions (it's a bumper year). The first is the new edition of Russell Napier's Anatomy of the Bear, which studies the four great stock market bottoms seen in the US so far (1921, 1932, 1949 and 1982). In the 2007 edition, Napier insisted that the history of tops and bottoms was forecasting a huge and imminent market crash.
He was right. The Dow Jones started falling a few months after publication: by the time it hit bottom it was down 54%. The book became an instant classic. The new edition comes with a very short (and quite gushy) introduction from me and a fantastic new preface from Napier. His conclusion is that "the current high level of equity valuation augurs very poor long term returns for investors in US equities. Even if you hang on for ten years you are unlikely to end up with much more than an annualised real return of 2%. You'll also see years when you lose serious money."
Not long now, says Napier, and China will enter the currency wars in earnest. It will massively devalue its currency in order to flood global markets with cheap goods. The consequent global deflation will "overwhelm the reflationary efforts" of Western governments and bring us "the fifth great market bottom" (these are always marked by deflation). That will be followed by increasingly bonkers efforts to create inflation think the abolition of cash and negative interest rates as a given, and a huge wave of Law-style money printing (one that won't do much for confidence). Consider yourself warned.
The next book on the list I have mentioned here before Capital Returns, a selection of essays by the analysts at Marathon Asset Management edited by Edward Chancellor. When I used Marathon's ideas about investing on the basis of the capital cycle to look at the oil sector here a few months ago, several people wrote in to say that the column was one of the most simplistic they had ever seen. I expect they are all billionaires already.
For those of us still attempting to accumulate wealth, however, the book comes with a key insight: there is, as Chancellor puts it, "an inverse relationship between investment and future returns". The more an industry invests in expanding supply, the worse the future returns to the average company operating in that sector will be.
That means that before you invest in anything, it makes sense to step back and look at how its competitors are behaving. Is everyone building new plants, or talking to investment bankers about issuing new shares to raise money? If they are, you can happily assume that prices and returns will soon collapse. Simplistic? Perhaps. But if your fund manager was still holding mining stocks this time last year you might want to send him or her a copy.
Next up is The Art of Execution by Lee Freeman-Shor. This points out the unexpected fact that even the best investors are wrong a good 50% of the time. They have as many (often more) bad investment ideas as they have good ones. But they still make money.
How? Execution. It all comes down to one thing: momentum. The best investors kill losers fast and squeeze winners to the last penny. That means they make more money on the winners than they ever waste on the losers. Job done.
Finally, I feel I must offer you a book on Brexit. No Christmas row will keep up a proper momentum this year without a discussion of this. In the last reading list I gave you (so that you could have heated arguments over your summer lunches) I suggested two books by authors who really want us out of the European Union. So for the sake of balance this time, I offer you Hugo Dixon's The In/Out Question (Dixon argues for In). I've read it. It's good. But Istill expect to vote to leave. We can argue more about that in the new year. For now, happy Christmas.
This article was first published in the Financial Times
