Getting started

The Millionaire Next Door – Thomas J. Stanley and William D. Danko
The Millionaire Next Door is one of those rare investment books which happens to be both very good and a best seller to the general public. This is uncommon because investment books that sell well are usually get-rich-quick rubbish. The Millionaire Next Door talks about good old fashioned frugal spending, hard work and long term investment. If you are looking for a book on wealth to give you a kick off, this is a good start.

Why Smart People Make Big Money Mistakes – and how to correct them – G. Belsky & T. Gilovich
Exceptional book on investor’s psychology. If you want to start investing, first you will need to understand that the biggest obstacle you will face is yourself, and not dodgy auditors, greedy company directors, or market manipulators. The book picks on the investor’s psyche in a way that will have you squirming with embarrassment when you realize just how much that sounds like you. After you have read The Millionaire Next Door and Why Smart People Make Big Money Mistakes you will be set to start reading books on actual investing.

Books on asset allocation, returns, market efficiency (or lack thereof), index funds and actively managed funds

The Bogleheads’ Guide to Investing – Taylor Larimore, Mel Lindauer, John C. Bogle (foreword)
Mainly aimed at novice investors, it puts up a good case for investors to use a simple, low cost indexed strategy with their portfolios.

Common Sense on Mutual Funds – Jack Bogle
One of the best, and most sensible books ever written on investment. The book recommends investors use index funds as much as possible, minimise turnover and general commissions, and take a long term view.  Armed with a huge volume of statistics to back up his points, Jack argues that index funds are a superior choice, but if you prefer to buy an actively managed fund, you should avoid conservative index hugging ones and go for very active managers with unusual portfolios and low fees.

The Intelligent Asset Allocator – William Bernstein
This is a very neat book that will change your perspective on portfolio construction. It takes modern portfolio theory and strips it down to a simple and very useful form. It doesn’t refer to beta and the capital asset pricing model isn’t used, thankfully, but instead shows a very practical way of putting together portfolios to minimise risk. It answers the age old question – should you invest in property, shares, bonds, cash or hedge funds? The answer is all of them, but rebalance the portfolio regularly. This is a surprisingly sensible book and it has none of the silly assumptions or overcomplicated mathematics that are so annoying about most Modern Portfolio Theory books. Definitely on the required reading list, it presents only a mild technical challenge because the author seems to be one of those guys that believes an ounce of common sense is worth more than a tonne of computer power. Some have complained that this book has too much math in it, but it is written in a format where the mathematical details are locked up in tiny boxes that can be bypassed by the uninterested reader without harming the narrative.

The Four Pillars of Investing – William Bernstein
Four pillars is the least technical of William Bernstein’s books. It covers a number of subjects from portfolio construction to behavioural finance and is pitched at investors who don’t like maths very much. It is something like a version of The Intelligent Asset Allocator which you can read on the bus on the way to work, whereas The Intelligent Asset Allocator is more technical and the best value can be had from it with a pen and notebook in one hand.

Value Averaging: The Safe and Easy Strategy for Higher Investment Returns – Michael Edleson
Value averaging is a modified form of dollar cost averaging where you calculate a “value path”, i.e. a theoretical target for your portfolio based on an assumed long term return, and compare your portfolio’s value to the projected value to see how much you need to invest (or withdraw from the portfolio).  Unlike dollar cost averaging, value averaging makes you invest more money when markets are down and less money when they are up.  According to Edleson this has resulted in higher long term returns than ordinary dollar cost averaging.

A Random Walk Down Wall Street – Burton G. Malkiel
A 500 page doorstop, but hard to put down since it is so fun. Malkiel slays a variety of Wall Street sacred cows from head-and-shoulders topping patterns through to the hallowed Capital Asset Pricing Model. He gives lurid accounts of manias from the South Seas Bubble to the biotech boom and how even well known fund managers and brokers always seem to get it just as wrong as the most incorrigible punters. He is generally critical of almost all Wall Street lore, systematically bashing practically everything and everyone, so no wonder it is a fun book. Giving even fundamental analysis a thumping (though O’Shaughnessy has a few words to say about this in What Works on Wall Street), he does come out on the side of the blindfolded-baboon-throwing-darts-at-the-quotes-section-of-the-paper method for stock selection and seems to regard Buffett’s success with some scepticism, but this is a must-read book anyway. His criticism of fundamental analysis only really deals with growth stocks, pointing out how unreliable earnings forecasts can be, especially when they optimistically run into the future. He is less critical of value investment, since although he spends the bulk of the book advocating random stock picks, he suddenly changes his tune at the end with a moderate endorsement of value investing. On the other hand he gives technical analysis in all its forms a hiding. You’ll get a lot out of this book, even if it is just to put you off growth/momentum or technical investing.

Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life – Nassim Taleb
This is a very interesting book that explores randomness and in particular discusses how traders often mistake dumb luck for skill. He’s a bit pompous, but occasionally amusing. He has some interesting ideas on risk and return, and his views on option trading are a little different to most.

Global Bargain Hunting – Burton Malkiel, J.P. Mei
From the author of A Random Walk Down Wall Street, this book talks about the opportunities available in Emerging Markets. Focusing on both the risks and returns, with as much backup data and research as you might expect from a Malkiel book, this lays out a compelling case for considering allocating a portion of your portfolio into investments in the Pacific Rim, Eastern Europe, South America and Africa. It documents the fundamental shift in the world over the last 20 years, the cold war ended and democracy is blooming, globalisation is opening up new opportunities socialism is wilting. As a result, economic growth in many economies is significantly higher than that in more developed markets. At the same time, they argue that valuations tend to be much lower and as a result returns of stocks in emerging markets can be much higher. The book not only discusses high profits, it also discusses risks, including lawlessness, nationalisation, bubbles and busts and bad debts. It also goes into some detail talking about active vs passive investing, market timing, buying closed end funds at discounts to net asset backing or selling at a premium and a fair bit of information about value investing.

Unconventional Success: A Fundamental Approach to Personal Investment – David Swensen
David Swensen has been the Chief Investment Officer at Yale University since 1985. He is responsible for managing and investing the University’s endowment assets and investment funds, which total about $22 billion, realizing an average annual return of 17.8 percent on his investments over the last ten years. He’s scathing of Wall Street and the conflicts of interest it suffers from. His book focuses on alternative asset classes, and discusses their good and (mostly) bad side, concluding that most people are better off with a core portfolio of index funds from the major asset classes. He also spends quite a lot of time talking about rebalancing portfolios, and why this step is one of the most important parts of asset allocation and portfolio management.

Market history

Against the Gods: The Remarkable Story of Risk – Peter Bernstein
This is a fascinating historical exploration of the development of the mathematics of economics and risk management, discussing the origins of statistics and probability theory, game theory, regression to the mean and modern economics. It won’t teach you how to value a company or recognise an “oversold” stock, but if you read it from cover to cover you will become a more sophisticated investor with a deeper understanding of the way markets and risk function. The mathematics discussed are sophisticated, but the book doesn’t go into these concepts in any great depth, it is more a narrative on how we arrived at modern theories and thus you can read it without needing a background in economics or maths (instead, this book is supposed to give you that background).

The Birth of Plenty – How the Prosperity of the Modern World Was Created – William Bernstein
William Bernstein, author of The Intelligent Asset Allocator and The Four Pillars of Investing turned his eye to the subject of why it is that some countries are wealthy but others poor, and why for most of the world’s history economic growth has been almost negligible but yet, about 200 years ago, it suddenly picked up pace enormously.  He came up with a 4 factor model explaining that protection of property rights (so people have an incentive to look after and improve their property, build businesses and make money), scientific rationalism (so scientists, engineers and inventors are not persecuted), a good transport and communications network (so goods can be efficiently transported and ideas shared) and good financial markets (so capital can be raised to commercialise inventions, like building an electrical grid from scratch so Thomas Edison’s company could sell its new wonder invention, the light bulb) are all essential.  With a long view of history going back to ancient times, he applies his four factor model to explain the very different paths taken by the western world and other nations, why some countries have everything (including natural resources) yet are poor, whereas others with seemingly nothing can grow rich through commerce.

The Crowd/Extraordinary Popular Delusions – Gustave le Bon and Charles Mackay
A classic double volume, originally written more than a century ago.  This is not an investment how-to book as such, but is one of the classic books about manias and booms. From the South Seas Bubble to the French equivalent, Dutch Tulipomania and more recent busts. It talks about how crowd psychology works on prices and feeds an extraordinary lust for ever higher gains, forcing up prices to levels far higher than could ever be sustained. Original editions appeared in the 19th century, but updates have been made in recent editions.  Part of the reason why this book still sells after all this time is that the authors just got it right.  If the language was a little more modern you’d think it was written just recently with lessons supposedly learnt the hard way from the .com boom and bust.

Global Investing: The Professional’s Guide to the World Capital Markets – R. Ibbotson, G. Brinson
This is a book for data junkies. If you are looking for the definitive book on market returns, covering many countries going back many years, with data on taxes, returns, risk, correlations etc, then this is for you.

Books on stock picking

Sensible Share Investing – Austin Donnelly
How the Stock Market Really Works – Martin Roth
Understanding a Prospectus – Des Luplau
Basic information on the stock market. Easy to read but detailed enough not to offend advanced readers. Read these BEFORE you open a brokerage account.

The Intelligent Investor – a book of practical counsel – Benjamin Graham.
An advanced book, definitely not the sort of thing you would plough into straight away, but rightly called “the best investment book ever written”. It isn’t so much that the material is difficult, on the contrary his approaches are fairly intuitive if you “get” value analysis, but it is dry and pretty foreboding, the sort of book you may have to force yourself to keep reading. Every couple of pages he makes a statement that is so profound and quote worthy that you’ll want to take notes. Warren Buffett learned investment from this man, and in the later editions an appendix and introduction by Buffett make interesting reading.

Security Analysis – Benjamin Graham and David Dodd
Graham’s other book, another milestone in investment writing. This one leans more toward being a textbook than a book. The Intelligent Investor should be read cover to cover, but this one will remind you of your old economics textbooks from school. There is also a new version out called Graham and Dodd’s Security Analysis by Sidney Cottle, Roger Murray and Frank Block. It is supposedly just a new edition but is in fact a radical rewrite. If you feel up to it you can read both, they are similar books, but they aren’t quite the same book. Like the bible, not many people attempt to read Security Analysis from cover to cover, as even professional financial analysts prefer to take this book in small doses. It is a heavy technical book on how to appraise equities and bonds, though if you take the time necessary to get through it, you will be as qualified a securities analyst as you’ll find anywhere. If you liked Securities Analysis, you’ll probably also like The Interpretation of Financial Statements, which is similar.

The Zulu Principle and Beyond the Zulu Principle – Jim Slater
Two excellent and thorough book on fundamental analysis and how small investors can do very well investing in small growth companies. Beyond- is the newer book, and is essentially a rewrite of the first. You will benefit from both books because they don’t completely overlap but the newer one is the better book if you only want to buy one. There are chapters in the first book that aren’t repeated in the second, maybe you should buy Beyond- and look for the other one in the library. Another book by the same author, Investment Made Easy is more of a beginner’s primer, covering a variety of investment topics but not in such fine detail. The Zulu books are only an intermediate challenge and will not be too difficult for anyone that knows what a price earnings ratio is.

One up on Wall Street and Beating the Street – Peter Lynch
Peter Lynch ran the Fidelity Magellan Fund for many years, and though now retired will be remembered as one of the greats. Some very good general stock investment advice on a number of different types of stocks and the strategies that work with them. His approach to investing is surprisingly simple, and basically revolves around the idea that “if you like the product, you’ll probably love the stock, so it is best to buy shares in a company you know is doing well rather than take a flier on some biotech startup”. He himself was a fund manager, but generally doesn’t have very complementary things to say about the analysis skills of most of his colleagues, in fact he urges investors to think like an “amateur”.

How to Pick Stocks Like Warren Buffett – Timothy Vick
The Midas Touch – John Train
Buffett Step-By-Step: an Investor’s Workbook – Richard Simmons
The Warren Buffett Way, The Warren Buffett Portfolio and The Essential Buffett- R. Hagstrom
The Essays of Warren Buffett – Lawrence A. Cunningham
Buffettology – Mary Buffett (his former daughter-in-law)
Buffett – The Making of an American Capitalist – John Lowenstein
How to Think Like Benjamin Graham and Invest Like Warren Buffett – Lawrence A. Cunningham
Of Permanent Value : The Story of Warren Buffett – Andrew Kilpatrick
Wall Street on Sale – Timothy P. Vick
A Wonderful Company at a Fair Price – Brian McNiven
Some very good books about Warren Buffett and his methods. You can’t call yourself an investor until you can write an off-the-cuff two page essay on Warren Buffett and his methods! How to Pick Stocks Like Warren Buffett and The Essential Buffett are probably the best of the bunch.

Common Stocks and Uncommon Profits – Philip A. Fisher
You can save yourself a lot of reading on Warren Buffett simply by going through this volume. The “other writings” alluded to in the title are several short works that are bundled into the one cover with Common Stocks and Uncommon Profits. These other works are “Conservative Investors Sleep Well”, which deals with the subject of how to identify a safe company with powerful competitive advantages, as opposed to a speculative company, and “Developing an Investment Philosophy”, which goes at length into such things as being a contrarian, focusing on businesses instead of stock markets, market timing (and why you shouldn’t do it) and an argument against the Efficient Markets Hypothesis. All of Buffett’s talk of “margin of safety” and “value” comes from Graham, but Fisher is the one that promotes the idea of the super business franchise, the buy and hold forever doctrine for quality companies and all of that stuff about competitive advantages. If you study your Ben Graham and Phil Fisher you’ll have virtually the entire foundation that Buffett drew on, in fact after a good read of Fisher I came to the conclusion that most books on Buffett are simply Fisher ripoffs with a bit of value investing thrown in.

Dean LeBaron’s Treasury of Investment Wisdom: 30 Great Investing Minds – Bean LeBaron
Another book in the “Money Masters” genre, this is an excellent book reviewing a wide range of successful approaches to investment and the investors who use them with a bit of discussion about the pros and cons of each method. This is definitely one of the books you ought to read if you are still trying to find your “niche” as an investor, as it will give you exposure to some of the possibilities that are out there.

What Works on Wall Street – James P. O’Shaughnessy
O’Shaughnessy was the first outsider ever to gain access to the Standard and Poors Compustat database, the ultimate resource for investment researchers containing an overwhelming amount of price and fundamental data for many thousands of securities over many decades. Using computer simulations he backtested a variety of trading and investment strategies and made some interesting discoveries on which strategies work the best. This book contains the results of his findings and though many people have criticised the book as just another exercise in mindless data mining, mutual funds based on his strategies have emerged, and although they underperformed at first, they’ve done very well since inception.

Contrarian Investment Strategies: The Next Generation – David Dreman
A cross between What Works on Wall Street and A Random Walk Down Wall Street. He attacks conventional wisdom just like Malkiel does and gives detailed arguments to show Wall Street analysts in a rather ridiculous light but also runs an equity fund and shows a variety of strategies that have worked in the past. His backtesting, based on Compustat just like O’Shaughnessey comes to similar conclusions but does not reveal anything you didn’t know after reading O’Shaughnessey’s book. He argues just like Malkiel does that a blindfolded monkey, lubricated with sufficient alcoholic beverages could pick stocks as well as any analyst, but takes an interesting approach in that he actually regards this as an exploitable phenomenon to make money! Dreman’s systems, which are basically just value investing techniques work on the idea that analysts are far too bullish on growth stocks and far too pessimistic on “dogs”, therefore you can do very well by buying stocks that analysts are exceedingly bearish about and have sold down to the point that they trade very cheaply. When earnings recover, as they usually do, the stock will “surprise” Wall Street and rally nicely. Dreman’s own investment record is excellent, which indicates that he may be onto something. He advises people to buy very oversold stocks, provided that the company is still in one piece and not likely to die completely, so unlike both Malkiel and O’Shaughnessey he does value qualitative factors like management and business prospects.

John Neff on Investing – John Neff
This guy is considered to be one of the greatest fund managers of all time, right up there with Buffett, Templeton and Lynch. His Windsor fund beat the market in most of the 30 years of his tenure and his final score was more than 3% higher than the market. This book has three sections. The first is autobiographical, talking about Neff’s early life and how he came to be running a fund. The second section, which I more-or-less summarise in the “Great Investors” FAQ (“Neff’s Methods”) deals with Neff’s value approach and “Measured Participation” portfolio construction strategy. The third section is something of a historical account of what it was like to run Windsor.

Global Investing the Templeton Way – Norman Berryessa and Eric Kirzner
This book is based around a series of interviews with Sir John Marks Templeton. The two authors, a financial writer and a finance academic wrote this book obviously with a profound reverence for the efficient markets hypothesis and modern portfolio theory, and as a result many pages are expended extolling the virtues of these techniques. Interestingly though, in their interviews with Templeton they keep putting forward MPT ideas and Templeton rejects them. Repeatedly Templeton says he doesn’t have much use for MPT, ranking it along side technical analysis as something they take a look at from time to time but otherwise have found little use for. This book, which contains plenty of sage advice relating to value investment by Templeton would mainly suit investors wanting to learn more about global investing, as it devotes much space to the peculiarities of having to invest across borders and live with foreign investment restrictions, exotic tax systems and the challenges of digging up good financial information in poorly regulated and informed foreign markets.

Books on speculative trading

How to Make Money in Stocks – William J. O’Neil.
A highly regarded book on growth stock trading, the CANSLIM approach explained. This book will be more suited to medium term traders/investors that like to combine technical analysis with fundamental analysis. He advocates stop-loss techniques such as “always sell a stock if it falls 10%” and has chapter after chapter devoted to charting. His methods are typical of the high-turnover approach used by stock brokers, and he is more concerned with trying to find the next big thing and make 100 times your money than long term steady accumulation of profits. If you like Warren Buffett you’ll probably hate William O’Neil.

Trading For A Living – Dr. Alexander Elder
This is one of the best trading books, Elder is a trained psychiatrist and professional futures trader. The book stresses that the answer to trading success is not in finding a technical buy or sell signal as such, but in recognising your own psychological pitfalls and mastering money management. He gives black box software a thrashing, and compares Gann, Elliott Wave, various other gurus and systems with astrology.

Technical Analysis Explained – Martin Pring
Technical Analysis of the Financial Markets – John J Murphy
Technical Analysis of Stock Trends – Robert Edwards
The Complete Day Trader: trading systems, strategies, timing indicators, and analytical methods – Jake Bernstein
A Complete Guide to the Futures Markets – Jack D. Schwager
Some of the most interesting books about trading with technical analysis.

Futures: Fundamental Analysis – Jack D. Schwager
A really dry book on fundamental analysis of the futures market. Kind of like Securities Analysis except this one talks about commodities.

Market Wizards and The New Market Wizards – Jack D. Schwage
These books are from the transcripts of a series of interviews with some of the world’s top traders. These guys aren’t amateurs doing a bit of trading from home, but mostly guys that run huge trading accounts for institutional clients. They don’t tell you a whole lot about the actual techniques used because of commercial secrecy, but if nothing else they will bang into you the importance of money management, discipline, intelligence and an enormous amount of hard work. Shattering the “easy money” illusion that people get about trading, these books will either put you off trading for good or prompt you to assess your own professionalism in trading.

How I Trade for a Living – Gary Smith
Smith is one of those very rare trading book writers who is able to back up what he says with genuine, authenticated trading statements signed by his broker that show he is in fact a highly profitable trader. He talks about how he trades for a living, using divergence, momentum and contrarian sentiment studies. He seems to be on some kind of crusade against trading system vendors, and he openly challenges vendors who announce their systems over the Internet and through trading magazines to actually put forth some trading statements to show profitability. He is sceptical of firm mathematical indicators and he advises against leveraged trading (like futures and options) and short selling. He mainly trades stock funds, and almost always takes long positions. If you do want to start trading you could certainly do a lot worse than reading this book first, he gives a quite good insight into the sort of lifestyle and the amount of work you have to do in order to become a professional trader. His method is geared more for the continuous, reliable, unspectacular profits style of trading, as opposed to the crash test dummy method (going for broke trying to triple your money every two weeks).

Reminiscences of a Stock Operator – Edwin Lefèvre
This book is the thinly disguised biography of Jesse Livermore, one of the greatest traders of all time. Although he eventually shot himself dead following his umpteenth bankruptcy, his book is still regarded as a trader’s classic. This book is probably the “The Intelligent Investor” of trading books.

Trade Your Way to Financial Freedom – Van Tharp
The Mathematics of Money Management: risk analysis techniques for traders – Ralph Vince
Portfolio Management Formulas: mathematical trading methods for the futures, options and stock markets – Ralph Vince
The Irwin Guide To Trading Systems – Bruce Babcock, Jr.
Money Management Strategies for Futures Traders – Nauzer J. Balsara
The Definitive Guide to Futures Trading – Larry Williams
For the serious trader wanting a better understanding of the sort of money management techniques mentioned in the trading FAQ, these are very good reference books. They may on occasion mention technical analysis but they are significantly more advanced than that, going well beyond just being another book on drawing trend lines and watching support and resistance levels. These are hard going, advanced texts that employ a lot of mathematics, but far from being ivory tower academic stuff they are written by professional futures traders (except Tharp, who as far as I know is a psychologist or something). You can scratch around for years and never see the need to do much more than standard charting, but if you want to take your trading to the next level and get really serious these books are well worth looking up. If you trade stocks without leverage you might be able to get away with ignoring this field, but if you intend to use margin, to trade futures or options then you had really better get acquainted with this material as quickly as possible.

General

When Genius Failed: The Rise and Fall of Long-Term Capital Management – Roger Lowenstein
The story of the rise and fall of one of the most famous hedge funds in history.

Asian Eclipse – Michael Backman
Considering buying Asian stocks? This book deals with corruption and financial scandals in Asia. If you have heard all this stuff about the need for banking reform in Asia, yet don’t know what it all means, read this and be shocked at the manipulation, fraud, cronyism and contempt for minority shareholders that characterise most Asian stock markets. Find out what happens when incompetent real estate speculators are allowed to buy their own banks and judges earn such low salaries that only by accepting money from the accused can they pay their bills.

Suggested books for a self-study course in investments

Level one, getting off to the best possible start:

1. The Millionaire Next Door by Thomas Stanley and William Danko
2. Why Smart People Make Big Money Mistakes – and how to correct them by Gary Belsky and Thomas Gilovich
3. Common Sense on Mutual Funds by Jack Bogle
4. The Intelligent Asset Allocator by William Bernstein

Level two, learning the truth about the way markets work:

1. A Random Walk Down Wall Street by Burton Malkiel
2. What Works on Wall Street by James O’Shaughnessey
3. One Up on Wall Street and Beating the Street by Peter Lynch
4. Contrarian Investment Strategies: The Next Generation by David Dreman

Level three, the stock picker:

1. How to Pick Stocks Like Warren Buffett by Timothy Vick
2. The Warren Buffett Way and The Essential Warren Buffett by Robert Hagstrom
3. John Neff on Investment by John Neff
4. The Zulu Principle and Beyond the Zulu Principle by Jim Slater
5. - and anything else you can find on Warren Buffett

Level four, the hardcore guru type:

1. The Intelligent Investor by Benjamin Graham
2. Common Stock and Uncommon Profits by Phillip Fisher
3. Security Analysis by Benjamin Graham and David Dodd and the newer version Graham and Dodd’s Security Analysis by Sidney Cottle, Roger Murray and Frank Block, I count these as two different books.
4. Against the Gods: The Remarkable Story of Risk by Peter Bernstein

Something similar for a study course in trading could go along the lines of:

1. Anything by Daryl Guppy
2. Trading for a Living by Alexander Elder
3. How I Trade For a Living by Gary Smith
4. Market Wizards and the sequels by Jack Schwager
5. Trade Your Way To Financial Freedom by Dr Van Tharp
6. Reminiscences of a Stock Operator by Edwin Lefèvre

Have a good read.

A different industry

Investment banking is really concentrated in a handful of major firms, with boutiques and regionals often scrambling for footholds. The sellside requires a great deal of capital to establish a complete product line. Therefore, it’s unlikely that you are going to be able to start your own firm — you’re going to be working for one behemoth or another until you retire or move over to the buyside anyway. Just like commercial banks, investment banking is quickly becoming an industry with just a few real players.

Look at the investment management industry and you’ll see a totally different picture. While there is certainly an impetus towards industry consolidation on the buyside, the impetus is a great deal weaker than that on the sellside. The buyside has far lower capital requirements to start new firms. In addition, plan sponsors (the foundations, universities and pension plans who control vast pools of money) are always on the lookout for new investment managers with different strategies or expertises. Therefore, once you’ve established yourself in the industry as being particularly good at managing a particular kind of fund, you will have the opportunity to open your own firm. This is why we see the landscape of thousands of buyside firms.

Flexibility in location

Most investment bankers work out of three cities: New York, London or Tokyo. Part of the investment banking trade is being close (physically close) to the markets themselves. Customers pay investment bankers for that experience with the markets on a moment-by-moment basis.

The buyside, however, draws its profits not from trading or offering securities, but by gaining assets from plan sponsors and individuals. Plan sponsors are located all over the United States — corporations and unions in Detroit need investment managers just as much as a foundation in Los Angeles or a university in New Hampshire or a government pension plan in Tallahassee. Therefore, one can find good buyside shops all over the United States — from Anchorage to Miami. While the large concentration of firms is in New York and Boston, with lesser concentrations in Chicago, San Francisco, Minneapolis and Los Angeles, there are numerous firms in all major cities (and many smaller ones). Examples include McKinley in Anchorage, USAA in San Antonio, Federated in Pittsburgh, Smith Breeden in Chapel Hill, N.C., Munder in Birmingham, Mich., Invista in Des Moines, T. Rowe Price in Baltimore, or Columbia in Portland — I could go on for hours.

Invest the way you want

Investment banks generally perform analysis in very similar ways. How a potential IPO candidate firm is valued at Goldman will not be very different from how Morgan Stanley will value it.

The buyside varies wildly in terms of styles, strategies and investment philosophies. A quant firm will not even have the same kinds of personnel as a fundamentalist firm. An analyst at a large-cap growth firm will do very different types of analysis (or at least, on very different sorts of companies) as a small-cap value firm. It’s up to you to choose.

Investment banking firms (generally) receive their money from advising corporations in large transactions (offerings, mergers, divestitures, etc). These events occur over a relatively short time-frame. The job of the banker is to get the transaction done as quickly as possible and collect your fee. Generally, these transactions take from weeks to months. You as a banker have relatively little control in how slow or fast the transaction occurs — generally, at a frenetic pace.

As an investment manager, I have the luxury (and necessity, in my case) of taking a long-term view. While admittedly, some mutual funds have their values posted on a daily basis, most investors evaluate their managers on a quarterly or yearly basis (though monthly performance is sometimes used). The time-frame of investment management shops varies considerably from the seconds of some quant shops to multiple years at some value shops. Therefore, again, you can pick the type of investing you prefer.

Differing firm cultures

Most investment bankers have very similar backgrounds. Generally, they are under 45, have an MBA from a prestigious business school and entered the business at a relatively early age (usually right upon finishing their degrees).

Buysiders vary considerably. Some of my best friends in the business are over 60 — one is over 80 and still relatively active in his firm. Many have widely varying academic and work backgrounds, including extensive experience in industry. Though most have MBAs, they often have other graduate degrees and interesting undergraduate degrees as well. Basically, I find the buyside community a great deal more interesting and fun to interact with.

This diversity is reflected in the firms you will encounter in your career. A quant firm may be full of science PhDs and ex-computer programmers. A high-tech sector firm may have young MBAs with experience at major high-tech firms. A value firm may be full of ex-accountants. An aggressive hedge fund may be composed of gung-ho traders. Some firms will have an explicit commitment to their community and sponsor numerous charities in their area, while others will not. I have found that the buyside is a much more human place to work than the sellside. Again, it’s up to you to choose.

A career for a life-time

There are few investment bankers in their 50s. The pressure, time commitment, office politics, intense travel schedules, etc. will drive all but a few out of the industry. More importantly, most come to question whether the sellside provides enough benefits for its immense drawbacks. The money is good, but many come to conclude that peddling securities for large corporations is not a worthwhile activity to spend the remainder of their lives on.

On the other hand, there are numerous buysiders working well into their 60s, 70s and even beyond. Not only is the pace such that you can be on the buyside past the age of 45, most buysiders love the business. Our work enables people to retire comfortably, foundations and charities to continue to benefit the community, and universities to expand educational opportunity. Meanwhile, we get to do that using the investment methods we enjoy most at the paces that we’re comfortable with.

The career for the curious

The buyside has a certain intellectual freedom that the sellside does not. As a buysider, I am allowed to hold any opinion about a particular firm that I want. I could say that [some Fortune 100 company]’s strategy is entirely wrong-headed, their management foolish, their industry going downhill on an iced slope and their finances disorganized. Not only would I not be reprimanded but even analysts who like the company would want to find out why I thought the company was a poor investment (they may not agree, but they would want to test out my ideas).

Sellsiders do not think in that kind of broad terms. Their job is to get the deal done and collect the fees. While you will learn a great deal in corporate finance, your time is not your own but the client’s. In a merger, you will spend your time trying to make the deal look as good as possible — it’s not your place to say that the whole idea was wrong, or what effect the merger would have on the industry, and so on. In a public offering, your job is to make the company look as good as possible. It is true that investment banks turn down numerous assignments that the senior management feel are bad deals. At a junior level, however, you will have no say whatsoever over what deals you will do.

On the buyside, you will not be told what ideas (in your industry) to cover. In fact, it is your job to tell your portfolio managers what ideas you like. They may request that you look at a particular firm or idea (it may be in the portfolio already or just an idea they themselves got elsewhere). However, this is a request for your actual opinion. If you feel the idea is a poor one, you are expected to say so (and, of course, be able to defend that opinion well). You are not expected to agree with your PMs on all occasions. In fact, you are to bring greater understanding than they have on your area of expertise.

Summing up

There are a lot of good reasons to get a job on the sellside. However, a lot of students enter the sellside with hyped and unrealistic expectations (some of which they get from the firms, some from their unknowledgeable and ignorant fellow students). Most buysiders aren’t yelling about how great our profession is from the rooftops. Buysiders are often a low-key bunch. So, when your class hot-dog is running his mouth about how great his job in investment banking is going to be, take the cue — let him run his mouth while you take the job on the buyside. And don’t let him know what he’s missing — you don’t need the competition from him anyway.

 Keep in mind that, as it occurs with any rankings out there, the criteria is  subjective and open to debate.

Ultra Elites
London Business School (LBS)
INSEAD

Elites
Oxford (Said)
Cambridge (Judge)
IMD
Warwick
IESE
IE

Regional Elites

Europe:
HEC Paris (France)
ESADE (Spain)
St. Gallen (Switzerland)
SDA Bocconi (Italy)
RSM Erasmus (Netherlands)
Mannheim (Germany)
WHU (Germany)
Vlerick Leuven Gent (Belgium)

India:
ISB

China:
Tsinghua
CEIBS

Other Asia:
HKUST (Hong Kong)
Nanyang (Singapore)
NUS (Singapore)
SMU (Singapore)

Australia:
Australian School of Business
Melbourne Business School

Canada:
Queens
Ivey
Rotman

Africa:
University of Cape Town GSB

Preliminary research:

1. Look at the investment record of the fund and think of smart questions to ask. Notice wether they are overweighting any particular position or sector. If the fund has any positions publicly disclosed, try to reverse-engineer them in order to understand their logic. Focus on the general picture and don’t spend too much time trying to figure out every single detail. The point is to be able to use their investment thesis as a comfortable and professional talking point.

2. Prepare a couple of stocks that you think are an interesting investment that fits with the investment style of the particular hedge fund fund. This is both an opportunity to get feedback on your thesis and for them to see your pitching capabilities. Look at value investors club and conferences to get guidance on how to present your ideas. More on this aspect later.

3. Prepare a few good questions to ask on their holding period, why and when they sell, what exactly they look at when they go long/short, do they look at longs and shorts autonomously or in pairs, how do they determine investments sizes, etc.

During the interview:

Start thanking the manager for their time and briefly explaining your background and what you are hoping to learn during your meeting (for example, how do they approach investments, walk through a current investment, critique your investment pitch, career advice, etc.). It is important to have a general draft regarding what you want to talk about in advance, so that you have time to cover all the main stuff. As a rule of thumb, you could spend around 10 minutes in each topic and then add leave another 10 minutes for open topics in the end. The usual 30-45 minute informational interview goes flying, so pick your topics carefully and cut out anything which is not important to you.

Note that the manager who granted you an informational interview probably assumes that you are looking for work, so do not be afraid of asking what they are looking for when hiring people and whether there are any current opportunities at the fund. If you are leaving a good impression and there’s an opening, you may be quickly fast-tracked to a formal interview.

As noted above, to really maximize your chances, you should hace a decent investment pitch ready. This includes:

a) Spreading comparisons. Bring a printout that compares the company you’re pitching with a few peers (4-5 is usually enough) on various metrics: valuation (forward p/e, ev/ebitda, etc.), balance sheet (cash, investments, debt), and spending/profitability (ROE, ROIC, capex, gross, sg&a, and r&d margin). For margins, be sure to explain how you adjusted COGS, SG&A, and R&D for one-time charges to determine normalized spending. Do not choose a  company/industry that is too complex or you will spend too much time making adjustments. It does not have to be perfect and it will be a good chance to get professional feedback, since you will sure be asked why you used certain metrics, what you focus on when comparing companies, etc.

b) ”Proprietary” research – talk to people. Show the manager that you took the effort of talking to experts/suppliers/customers, visited stores, etc. You should have enough resources at the university: talk to professors if they are experts in certain industries, network with all sorts of people at your school, set up brief phone calls with alums that work in the industry you are researching… Just make sure you show proactiveness.

c) Make sure that you identify the catalysts that may cause the company you’re pitching to change in value. Otherwise, it is not an investment opportunity.

The key of both the interview and the investment pitch is to show you’re enthusiastic, are capable to perform the job, and will not be a complete liability for the first few weeks. Spreading comparisons, adjusting financials for one-time charges and doing channel checks are very common intern activities in equity research. so show the manager that you are confortable doing those things and you may get the chance to do it for his fund.

7:00 a.m.: Arrive at the office.

7:01: Read The Wall Street Journal and Financial Times, paying particular attention to articles about the industry you follow.

7:30: Listen to morning call voice mails from sell-side analysts. (“Each sell-side firm has a morning meeting, and the highlights are sent via the institutional salesperson to their asset management clients.”)

8:00: Attend the morning investment meeting. (“Most firms have a daily meeting where all analyst and portfolio managers gather to relay new information, initiate stock recommendations and discuss current market changes.”)

9:00: Listen to a company’s investment conference call (“particularly during earnings reposting season. These calls usually include updates from the CEO and CFO on operating performance, strategic initiatives and future company expectations.”)

9:45: Open the stack of reports in your inbox. Study the latest industry press and investment literature to identify new trends that may impact the companies you follow.

10:30: Phone industry analysts and company management with follow-up questions.

11:00: Meet with your research associate to discuss potential changes that need to be made to financial models and investment recommendations based on new information gathered during the morning’s activities

12:00 p.m.: Eat lunch while attending an industry conference or a meeting with sell-side analysts. (“These are great ways to gather new insights and meet with industry players in a less formal setting.”)

1:30: Continue working on the written investment analysis of the company you are going to initiate coverage on the next day. (“This is the culmination of a two-week process in which you met with management of the company, visited the two largest manufacturing facilities, spoke with large customers of the company and conducted surveys on the demand expectations of their new product line.”)

2:45: Take a phone call from a senior portfolio manager who wants to discuss in more detail the investment report you issued last week on XYZ Company. (“Specifically, he wants additional support for why you believe earnings will fall 12 percent when the company has stated they expect only a 6-8 percent decline.”)

3:15: Sit down to write the final recommendation summary for the company you will initiate coverage on the next morning.

4:00: Review the day’s trading activity to see how your industry performed, again paying particular attention to the company you are initiating coverage on. (“If the investment team likes the idea, they will be paying close attention to the recent trading performance of the stock.”)

4:30: Meet with your research associate to put the finishing touches on the PowerPoint presentation that you will use to pitch the new stock the following morning. (“You identify a few changes to the slides and decide to cut out a few pages, remember that portfolio managers do not want to be inundated with information; they only want the necessary facts and the pertinent details that support your recommendation.”)

5:30: Check the newswires and first-call notes for any after-hours company news.

6:00: Head to the gym (“for a quick workout to clear your head. Hopefully there is a workout facility in the building.”)

7:00: Return to the office to run through the final PowerPoint slides and to make sure the initiation report is on the top of each portfolio manager’s inbox.

7:45: Leave for home.