Recommended Books on Finance for Finance 321 Students 1. Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein This fascinating book describes man’s efforts to understand, measure and cope with risk. The author notes that the mastery of risk is “the revolutionary idea that defines the boundary between modern times and the past.” Within our era, it also separates the cultures where economic development and political progress have occurred, and those where they have yet to advance. I was fortunate to meet Peter Bernstein at the American Risk and Insurance Association meeting where this work won the award for the best book on risk published that year, and now have a signed copy of his work. This book is destined to become a classic as it combines a remarkable story with outstanding writing. If you can only read one book on my list, I would encourage you to enjoy this one. 2. The New Financial Order: Risk in the 21st Century by Robert J. Shiller This book proposes a major transformation in risk sharing in society, with many innovative ideas about how to handle risk. One interesting concept is basing financial transactions on an inflation indexed unit so that rents, salaries, loan repayments and investment income are all paid in inflation adjusted units, removing inflation risk. Many of the innovations are based on global risk information databases (GRIDs) that would provide the underlying indices for all manner of risk trading, from income in a particular occupation to the GNP of a nation. Shiller proposes several ideas for a new financial order, including insurance for livelihoods and home values, inequality insurance and responsible intergenerational social security. He reviews several significant historical financial innovations: money, modern stock markets, futures markets and life insurance and draws conclusions from the strategies that made these innovations successful. This book is a good explanation of the role risk plays in society and potential methods for reducing risk even further by adopting new risk sharing instruments. 3. When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein Any well-rounded list of business books will include some success stories and some failures, to help us learn both what works and what doesn’t. This book describes one of the most remarkable financial failures of recent times. The cause of this failure was an over-reliance on financial models. Success often breeds hubris, and the more remarkable that success is, the more overconfident the decision-makers tend to become. If you remember this story, and the dangers of over leveraging and overconfidence, then you will be less likely to suffer a similar debacle. 4. Buffet: The Making of an American Capitalist by Roger Lowenstein Now for a success story, again authored by Roger Lowenstein. This is an excellent book describing how Warren Buffet became the richest person in America simply by investing in value stocks (or other securities) and using market timing. His life contradicts the Efficient Market Hypothesis, so widely accepted in finance. He became a follower of Benjamin Grahamin graduate school and started by studying financial reports to find stocks that were undervalued by the market, generally by having cash or other valuable resources that was worth more than the stock was selling for. He bought and held until the market value increased, and often continued to hold. He did not use leverage and was very patient with his investments. At first he ran a partnership for some friends and family. He dissolved the partnership in 1969, when he felt the market was overvalued and he could not find many attractive stocks. At this point he bought Berkshire Hathaway and used the cash this firm generated to buy National Indemnity, primarily to get hold of its cash flow. He then used these funds for other significant investments in undervalued securities. He later continued to make successful investments in other insurers, including GEICO and General Reinsurance. He kept to his strategy, invested only in companies whose business he understood (thus avoiding the technology bubble of the 1990s) and kept close control over expenses. His ability to beat the market without relying on a large staff of analysts or massive computer databases demonstrates the opportunity that the financial market creates for any dedicated investor. 5. Good to Great: Why Some Companies Make the Leap … and Others Don’t by Jimmy Collins This book provides dozens of examples of success stories, and a list of characteristics that separates companies that have become great from the rest of the pack. His findings of the most important characteristics are somewhat surprising: 1. Having a leader who is humble, but professional, and not high profile 2. Putting the right team together, and getting rid of the people who don’t fit 3. Maintaining unwavering faith in the selected strategy, along with a willingness to confront the facts 4. Selecting a simple concept and focusing on what you can be the best in the world at 5. Developing a culture of discipline 6. Being willing to apply carefully selected technologies 7. Staying focused on the strategy until it becomes successful These factors can help you to identify companies that have the potential to become great, or to develop strategies to make your own organization great. 6. Pipe Dreams: Greed, Ego, and the Death of Enron by Robert Bryce As long as we are going to learn from the failures of others, we might as well study one of the most gigantic failures of recent years, Enron. This book provides some helpful insights into the failure that rocked the financial world, destroyed the reputation of a previously respected accounting firm, and derailed trading in energy derivatives. The lesson is simple. If a new division in a company appears to be extremely profitable, the leaders of the company can either make the effort to learn exactly how that aspect of the company works or it can decide to pass along that segment of the business to some other entity that has a better understanding of those operations. The management of a company cannot simply accept that business and allow it tobecome the dominant force within the organization, without understanding it enough to establish reasonable controls. This is an important lesson, and one that all industries need to take