Finance

3 books that will help you better understand the stock market and how to invest your money

Published

12 months ago

April 1, 2024

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The stock market can be a very difficult place for beginners to navigate. Before you start investing your money, you should have a fairly good understanding of how the stock market works.

Investing can be a way for your money to make money for you. That said, you work hard for the money you earn, and investing in the stock market without proper knowledge can cost you.

There are many resources out there to give you the knowledge you need to be confident in the investments you make. Books are one of many resources to explore.

The stock market can be a confusing place when you don’t have the knowledge you need. (iStock / iStock)

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Over the years, there have been numerous books written about the ins and outs of the stock market, and they all take different approaches. Some take a very data-driven approach, while others are more psychology and behavior-based. Certain books cover short-term investing, while others are more focused on the long-term growth of your money.

If you have never invested a dime before, or have just begun investing and want to know more, these are three books that will help you get a better understanding of how the stock market works.

“A Beginner’s Guide to the Stock Market: Everything You Need to Start Making Money Today”
“The Intelligent Investor”
“The Psychology of Money”

1. “A Beginner’s Guide to the Stock Market: Everything You Need to Start Making Money Today”

If you have no idea how the stock market works or what the first steps you should take are, this book is for you.

Think of “A Beginner’s Guide to the Stock Market” by Matthew R. Kratter as a “how-to” guide to investing. This book will answer all the questions you have and provide you with clear instructions on how to get started in the stock market.

Throughout this book, you’ll learn how to open a brokerage account, how to purchase your first stock, how to earn a passive income in the stock market, how to choose stocks and more.

2. “The Intelligent Investor”

“The Intelligent Investor” was written by Benjamin Graham in 1949 but remains one of the most popular stock market books to date.

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This book covers value investing, which is an approach that targets undervalued stocks that could perform well in the long term. This is not a short-term strategy, but instead teaches investors how their money can grow over a long period of time.

Close-up view a person's hands going over stocks on a smartphone.

Before you get into investing, pick up a few books that will teach you the basics of the stock market. (iStock / iStock)

Even though this book was written in 1949, a lot of the concepts put forth by Graham can still be applied today. That said, there was a revision published in 2006 so the book better reflects a modern market.

The revised edition of the classic business book offers commentary by financial journalist Jason Zweig.

3. “The Psychology of Money”

“The Psychology of Money” is slightly different from the others on this list. This book was published in 2020 by Morgan Housel.

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This book is more of a lighter read than many other money-based books. It focuses more on individuals’ behaviors and financial decisions, rather than math and data.

Knowing the basics of investing can help you accumulate wealth over time. (iStock / iStock)

As a stock market novice, it’s easy to get tangled up in the math and data. The style of this book is easy to digest, while still teaching about investing and money management in general.

Through the 19 different stories presented in the 19 chapters of this book, Housel is able to teach readers how to have a better relationship with money and finances.

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Investors will be ‘miles ahead’ if they avoid these 3 things: expert

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Barry Ritholtz

Barry Ritholtz had a hard time writing his first book, “Bailout Nation.”

Drafted in the midst of the 2008 financial crisis, the biggest challenge, he said, was that a different company “would blow up” every week.

It felt as if the writing “was never over,” said Ritholtz, the chairman and chief investment officer of Ritholtz Wealth Management, an investment advisory firm that manages more than $5 billion of assets.

By comparison, the new book was a “joy” to write, largely due to the benefit hindsight, said Ritholtz, who is also a prolific blogger and creator of the long-running finance podcast “Masters in Business.”

The book, “How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth — And How to Avoid Them,” published March 18, is a history lesson of sorts.

Ritholtz looks back at anecdotes across pop culture and finance — touching on Hollywood titans like Steven Spielberg, music sensations like The Beatles, and corporate pariahs like Elizabeth Holmes of Theranos — to illustrate the disconnect between how much people think they know and what they actually know. (Ritholtz’ point being, The Beatles and films like “Raiders of the Lost Ark” were initially panned; Holmes, initially lauded, is now serving jail time.)

“It’s a huge advantage to say, ‘I know how the game ended,'” Ritholtz said. “What the analysts were saying in the second, third, fourth inning, they didn’t know what they’re talking about.”

CNBC spoke to Ritholtz about why people are often bad investors, why famous investors like Warren Buffett are “mutants,” and why financial advice about buying $5 lattes is the cliché that just won’t die.

This interview has been edited and condensed for clarity.

How to be ‘miles ahead of your peer investors’

Greg Iacurci: Your No. 1 tip to being a better investor is to avoid mistakes — or, as you write, “make fewer unforced errors.” What are some of the most damaging unforced errors you often see?

Barry Ritholtz: Let’s take one from three broad categories: Bad ideas, bad numbers and bad behaviors.

Bad ideas are simply, wherever you look, people want to tell you what to do with your money. It’s a fire hose of stuff. Everybody is selling you some bulls*** or another. And we really need to be a little more skeptical.

On the numbers side, the biggest [mistake] is simply: We fail to understand how powerful compounding is. A lot of the dumb things we do get in the way of that compounding. Cash is not a store of value. It’s a medium of exchange, and you shouldn’t hold on to cash for very long. It should always be in motion, meaning you should be paying for your rent or mortgage with it, paying your bills and your taxes, whatever recreational stuff you want to do, whatever philanthropy you want to do and whatever investing you want to do. But money shouldn’t just sit around.

Barry Ritholtz shares the biggest mistakes he sees investors make

Compounding is exponential. When I ask people, “If I’d invested $1,000 in 1917 in the stock market, what’s it worth today?” You look at what the market’s returned — 8% to 10%, with dividends reinvested — $1,000 a century later is worth $32 million. And people simply can’t believe it. Ten percent [reinvested dividends] means the money doubles every 7.2 years.

The biggest [behavioral error] is simply, we make emotional decisions. That immediate emotional response never has a good outcome in the financial markets. It is exactly why people chase stocks and funds up and buy high, and why they get scared and panic out and sell low.

If you just avoid those three things, you’re miles ahead of your peer investors.

Not all plays are ‘Hamilton’

GI: Going back to something you mentioned about how relentless bad financial advice is, what are some memorably bad pieces of financial advice or investment opportunities you’ve come across?

BR: I get a lot of weird things — plays, restaurants. You should know, most plays are not “Hamilton” and most restaurants are not Nobu. These are really, really difficult investments. Those are all the winners. You’re not seeing the other million products in the same space that didn’t make it.

I think we have this really distorted viewpoint of the world that allows us to believe that finding a giant winner is much easier than it really is. And that is because you don’t see the endless fails, the restaurants that implode, the plays that close after opening night. All these little investment opportunities that come along, and the people selling [them], the advice they’re giving, they’re always weird and quirky. A great restaurant is a really good business, but most restaurants are terrible businesses, and that’s a hard thing for people to recognize.

The financial ‘cliché that refuses to die’

GI: There’s this great part in the book where you talk about the $5 coffee: The thought being, if you invest that money instead of buying coffee, you’ll basically be a millionaire. You write that it’s the “cliché that refuses to die.” Why do you think it’s detrimental for people to think this way?

BR: $5, really? I don’t want to come across as a completely detached one percenter, but if a $5 latte is the difference between you having a comfortable retirement or not, you’ve done something very, very wrong.

Let’s say you do put $5 away. If you saved $5 every day and invested it, it adds up to something. But when you look out 20, 30, 40, years, the other side of the spending equation is, what’s my income going to be? How much am I going to earn? If you’re going to show me $5 compounding over 30 years, you also have to show me where my income is going to be. If I’m looking at this as a 30-year-old, what’s my income going to be at 60? How will my portfolio, my 401(k) — and if I have kids, my 529 [college savings] plan — how will that have compounded over the same time? If you’re only looking at the $5 latte but ignoring everything else — and that’s before we even get to inflation — it looks like a chunk of money but it really isn’t.

The big philosophical problem that I’ve found is most of the spending scolds don’t understand what the purpose of money is.

GI: What is the purpose of money?

BR: Money is a tool. First, lack of money certainly creates stress. You can worry about paying the bills, and if you have a kid, how am I going to pay for their health care? Not having sufficient money to pay the rent, buy food, pay for health care, is certainly stressful. The first thing money does is it chases away the lack-of-money blues.

Everybody is selling you some bulls*** or another. And we really need to be a little more skeptical.

Money [also] creates optionality. It gives you choices. It gives you freedom. It allows you to not do many of the things you don’t want to do. And it allows you to buy time with friends and family experiences and to create memories.

It’s the ability to spend your time how you want, with who you want, doing whatever work you want, or no work at all, if you eventually get to that point.

GI: What should people do to make investing as simple as possible and have good outcomes?

BR: [Vanguard Group founder] Jack Bogle figured this out 50 years ago. If you want to find the needle in the haystack — if you want to find the Apples, Amazons, Microsofts, Nvidias, J.P. Morgans, United Healthcares and Berkshires [of the world] — don’t look for the needle in the haystack. Just buy the whole haystack. (Editor’s note: The “haystack” here refers to buying an index fund that tracks the broad stock market rather than trying to pick winners.)

You make the core part of your portfolio a broad index, and then you put whatever you want around it.

So, start out with a basic index, be very tax-aware of what you do, and then back to the behavioral stuff: Don’t interfere with the market’s ability to compound.

The crazy thing about Warren Buffett: His wealth has doubled over the past seven years. Think about how insane that is. He’s 94, like half of his wealth came about from zero to [his late eighties], and the other half came about in the last seven years. That’s the miracle of compounding.