Publishers release a crushing number of personal-finance books every year, most of which fall into the Taco Bell category. That is, Taco Bell uses the same few ingredients -- meat, cheese, sauce, lettuce, tomatoes and shells -- to make variations of its basic dishes. The ingredients in your basic personal-finance book boil down to: Pay down your credit cards, pay yourself first, diversify your portfolio and buy low-cost funds. Only the titles change.
Even an interesting investing shtick gets old quick. For example, Jim CramerUs franchise has grown to three cheesy books in three years: Jim Cramer's Mad Money, Jim Cramer's Real Money and this year's Jim Cramer's Stay Mad for Life. Jim, you're a crazy guy -- we get it.
So to make our list of best investing books, an author had to write something that's not just useful but original. If there's a theme this year, it's helping you cut through the noise that prevents you from being a better investor.
Don't be cocky -- or greedy or scared or surprised or ...
By Jason Zweig (Simon & Schuster, $26)
The most remarkable breakthrough in personal finance this century is identifying the reasons we are so poorly programmed for investing. Brain scans reveal why in matters of money we often possess the discipline of a dog in a butcher shop and the judgment of a drunken teenager on spring break.
The primitive parts of our brain, fired by pleasure and fear hormones, sometimes override our more evolved and logical lobes. So we prefer a gamble to a sure thing. Gains make us euphoric and willing to make long-shot bets. Losses make us fearful and so cautious we miss opportunities.
Of the recent books about investor psychology and neuroeconomics, journalist Jason Zweig's is the first comprehensive treatment for the lay investor. He has spoken to or had his brain scanned by everyone who counts in the field, and he puts all of it in the book (which goes on a few dozen pages too long).
Also highly recommended is Inside the Investor's Brain (Wiley, $60). This is a more scientific and less anecdotal treatment of the same subject -- but still clear and accessible. The author is Richard Peterson, a psychiatrist and former trader who trains professional investors to overcome their bad habits.
Why the markets are even risker than we suppose
By Richard Bookstaber (Wiley, $28)
Hedge funds are private investment accounts that often use exotic financial instruments and strategies to make money and reduce risk for their wealthy clients. They're so exotic, in fact, that the fund managers themselves sometimes can't predict the consequences.
Case in point: The 1987 market crash was triggered by the use of a hedging strategy known as "portfolio insurance." Back then, so many money managers used the same portfolio-insurance strategy that on Monday, October 19, 1987, "they poured sell orders into the S&P futures market pit by the truckload," says author Bookstaber. By the end of the day, the market had suffered a 22.6% drop -- its worst one-day drop in history. Bookstaber is in a unique position to point the finger, having helped create the technique while at Morgan Stanley.
Hedge-fund clients can suffer from such strategies, sure, but they know about the risks. The pity is that hedge funds whipsaw small investors who aren't their clients when they roil entire markets. This book brings the big, shadowy hedge-fund demon into the light, although Bookstaber doesn't have any strong recommendations on how to rein it in. Still, this primer from a savvy insider makes hedge funds the devil you know, which is better than the other kind.