Investment: Read on and make a profit

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The Independent Online
This has been another fascinating year for investors, which is ending on an exuberant and appropriately millennial note. Just as there were many irrational and pagan rituals in the months leading up to the year 1000 - it was a time of wild hopes and exaggerated fears - so we are ending the second millennium as witnesses to an almighty speculative boom in technology stocks which shares many of the characteristics of past episodes of demotic mania.

The Net shares phenomenon, thrilling and disturbing in equal measure, has many uncanny parallels with history's great speculative manias. Great fortunes are being made and lost. It would be idiotic party-pooping of the worst kind to go into denial about the fabulous opportunities for getting rich quick the Net boom is making possible.

Equally, it would be dangerous and irresponsible to avoid pointing out the undeniable fact that all such speculative manias end in tears for many. It seems a good moment to recall this definition of the difference between speculation and investment: "Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money becoming a little."

The comment comes from Fred Schwed, the author and humourist, who wrote a classic book on the stock market in the 1930s called Where are the Customers' Yachts? The title encapsulates the time-honoured truth that those who invariably do best out of speculative booms are the brokers and investment bankers paid for issuing and trading the flood of new shares.

I found it along with many other apt quotations in the book I have no hesitation in naming as my investment book of the year. Devil Take The Hindmost is a splendid, authoritative and thought-provoking history of the great speculative booms and busts, from Dutch tulips and the South Sea Bubble through 19th-century railways stocks and 1929 to the Japanese stock market in the 1980s (a particularly sordid yet fascinating episode).

Like all the best history books, this one is redolent with pointers and parallels to the present. The author, Edward Chancellor, makes no secret of his view that today's stock market bubble has all the makings of the next great speculative bust. He points out that most booms tend to occur during a period of great technological change and when laissez-faire is the dominant political ethos of the day. Booms are accompanied by elegant but fanciful justifications of asset values (in this case, share prices) which cannot be justified in any conventional way.

In some places, Mr Chancellor overstates his case, but I would unequivocally describe this book as the best and most necessary antidote for anyone who plans to spend this Christmas contemplating how best to play the information technology boom. Note his comment that: "There is little historical evidence to suggest that improvements in communications create docile financial markets or better-informed investment behaviour. If anything, the opposite appears to be the case."

For those with a deeper interest in the history of financial markets, and the characters who people them, the third volume in David Kynaston's history of the City of London is as readable and illuminating as the first two. This volume covers the period 1914 to 1945, an era dominated by two world wars and two quite remarkable individuals, Montagu Norman, governor of the Bank of England, and John Maynard Keynes. Mr Kynaston has a remarkable ability to breathe life into character and to observe the City from more than one perspective. He is anything but uncritical of the City and its ways.

City Cinderella is another well-written and highly readable memoir of the City's more recent past. Peter Stormonth Darling, as the first chairman of Mercury Asset Management, witnessed the remarkable transformation which saw the unloved fund management arm of Sigmund Warburg's once-mighty investment bank become one of the UK's leading fund management companies. The book is a mix of anecdote and shrewd observation on the way the investment world works.

Two prominent figures in the American fund management business have also written books which merit attention by the serious student of investment. John Neff on Investing is an account of how one of America's most successful fund managers stuck to his tried and tested value-investing methods through thick and thin. Mr Neff sums up his approach to investment as "now and then a windfall, but mostly a four-yard gain and a cloud of dust".

Common Sense on Mutual Funds, by Jack Bogle, the founder of Vanguard, America's leading exponent of tracker funds, is a straightforward and compelling explanation of why minimising costs is such an important discipline for anyone who invests through collective investment funds.

Inventing Money, by Nicholas Dunbar, is another cautionary tale, this time about the rise and fall of Long Term Capital Management, the hedge fund that crashed last year, with a host of financial luminaries aboard, including two Nobel laureates. The story reminds us how most great advances in theory are taken up and frequently abused by the ambitious corporate titans of the day. (Despite LTCM's fall, I have no doubt the theory of options pricing and the understanding of derivative securities will eventually come to be seen as a powerful long-term benefit to humankind.)

My list of recommended investment books this Christmas also includes three compendiums. The first, The Book Of Investing Wisdom, contains writings by leading practitioners in the investment world. The second, The Ultimate Investor, is a collection of thoughtful essays on aspects of the investment process. Finally, Trading Online, although primarily directed at the new generation of electronic day traders, is one of the best single-volume guides to the online data and dealing services on the Internet I have come across. Some of the bookis out of date, but it will give you at least a flavour of the rich variety of information available on day trading or more serious investing.

Finally, I can also recommend Market Speculating by Andrew Burke, an introductory guide to spread betting. Although it is sponsored by IG Index, one of the leading spread-betting firms, the book does not underplay the risks in this new and fast-growing medium for those who want to take leveraged bets on sporting events and financial markets.

All these books are available at exclusive discount prices from The Independent Financial Bookshop at or by phone on 01730 233870