These two books show what it takes to be a great investor

published 11 August 2017

Today,I wanted to suggest two books to add to your summer reading list.

They're both biographies of legendary investors. In many ways, they are almost the exact opposites of each other.

And yet, anyone who reads both of these books will come away with a much better idea of just what it takes to be a truly brilliant investor.

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And that is a vital perspective to have if you're hoping to beat the market.

A dangerous book

Reminiscences of a Stock OperatorBy Edwin Lefevre; annotated edition by Jon D MarkmanPublished byJohn Wiley & Sons, £21.75Buy on Amazon

Reminiscences is,hands down, my favourite book about investing.It's also a dangerous book, as I'll explain in a moment.First published in 1923, Reminiscences is the lightly fictionalised biography of Jesse Livermore, one of the greatest speculators (short-term traders) of all time.

At its most basic level, it's a great read a boy's own adventure about a young man who leaves his modest farming background behind to make his fortune in the big city, equipped only with his wits and an almost supernatural instinct for the "tape".

He outsmarts the low-rent con men in the "bucket shops" (early 20th century spread betting, effectively). He rises to take his place among the big names of Wall Street, rubbing shoulders with the likes of JP Morgan and Bernard Baruch. He makes his fortune, loses it, picks himself back up, and makes another one.

It's an archetypal rags-to-riches, triumph-over-adversity tale.And along the way, Livermore imparts some timeless trading advice.

In fact, Paul Tudor Jones, the hugely successful hedge fund manager, insists that all of his traders read this book before they start working for him, describing it as a "textbook for speculation".

I can see why. It's not just the countless snippets of wisdom on subjects ranging from the value of "just sitting" to the futility of taking stock tips.

The truth is that no book I've ever read offers a better vicarious experience of the emotional roller coaster that having significant sums of money at risk in the markets involves.

Reminiscences is inspirational: Tudor Jones' traders would come away from this book fired up and ready to make money, and you will too.

And that's why I say that it's a dangerous book.Because if you only read Reminiscences, you've only got half the story.

The realLivermore was indeed a superb speculator, insightful, self-aware, and incredibly successful. After the events of Reminiscences, he went on to make millions during the crash of 1929.

Yet by March 1934, he had been forced to declare bankruptcy, not for the first, but for the fourth time in his life. And unlike his previous crashes, this time, he was never able to make his fortune back.

In 1940, at the age of 63, he shot himself. The note he left for his widow his thirdwife was the voice of a man defeated, a shadow of the legend he had been.

The truth is that Reminiscences is not a rags-to-riches, triumph-over-adversity tale. It's just the first half of a Greek tragedy about a man who couldn't take his own good advice.

And it's a cautionary tale for anyone who dreams of getting rich quick in the stockmarket.If a man like Livermore couldn't make a fortune as a trader without destroying himself, then what makes you think you can?

This is why I'd highly recommend that you get hold of the annotated edition of the book, published in 2010.

Unlike many of the cheap reprint editions of Reminiscences, it'll look great on your coffee table. And more importantly, it is crammed full of fascinating historical sidebars and titbits giving background and context on the life and times of both Livermore and his almost equally fascinating biographer, Edwin Lefevre.

The opposite of Jesse Livermore

A Man for All Markets By Ed ThorpPublished by Oneworld Publications, £10.99Buy on Amazon

That takes us to my next choice. In this, his autobiography, Ed Thorp comes across as almost being the opposite of Jesse Livermore.Livermore epitomises the trader as artist a man who beats the market through instinct and sheer "feel" for the market's movements.

Thorp, on the other hand, epitomises the trader as scientist rational, data-driven, with an almost superhuman intellect and maybe even a faint touch of Star Trek's Mr Spock about him.

That may seem somewhat ironic given that Thorp's career in speculation began at the poker table. But the point is that Thorp wasn't especially interested in gambling. He was interested in calculating the odds and beating the game. And he did it Thorp developed the first system to beat blackjack, and also figured out how to use a wearable computer to beat roulette.

Thorp's tale of outwitting the casinos would be more than enough to fill the average book, but that's just the tip of the iceberg. Thorp's life is fascinating from his memories of experimenting with home-made nitro-glycerine as a particularly inquisitive young teenager, to his adventures in the markets.

He established the first "quant" fund (a fund that used algorithms), Princeton Newton Partners, in 1969, and made nearly 20% a year on average, for 18 years.

Highlights include meeting Warren Buffett in the 1960s (he bought Berkshire Hathaway for under $1,000 a share) and encountering Bernie Madoff in the 1990s (and knowing even then that he was a fraud).

Thorp is clearly very intelligent. Every aspect of his success from the systems he developed to beat the odds on blackjack, to his strategies for beating the markets is based on a deep understanding of statistics and a real desire and enthusiasm for getting to the heart of how things work.

But what also really comes across from his autobiography is how hard it is to beat the markets and the gambling tables. Thorp did it, but he worked hard at it, and he had to keep adapting his systems no single strategy kept working, not at the casinos, nor on Wall Street.

Thorp, in doling out some investment advice of his own to the reader, recommends that the average investor who isn't willing to put the work in, should put their money in index funds and get on with enjoying their lives. And it's good advice.

The point of these books is not to put you off trying to beat the markets, or the idea of managing your own money actively. Indeed, they're both inspirational in their own ways.

But it's important that you approach the market with the respect it deserves. And if there's one thing that both of these writers will teach you, it's respect for the market.

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.