I don’t know about the smartest, but at less than 180 pages this is certainly the smallest investing book I have ever read. The bargain price of $4.97 was worth it though. (The size falls below the minimum 200-page limit I follow when paying $5 for any book on investing, but that is okay, as long as quality compensates for the lack of quantity.)

What about the content? Is it any good for the $4.97 I paid, or, (if you are not lucky to get the bargain) the $19.95 jacket price? According to the author Daniel Solin, this is the smartest book you’ll ever read because “it is simple. It is understandable”. And simple is good.

Between Chapter 1 and 35, the author talks about the follies of active (or what he calls “hyperactive”) investing as opposed to passive investing, where you buy and hold a diversified mix of index funds that track the entire financial market. There are interesting nuggets of facts and wisdom here and there. For example, between 1985 and 2004, the average annual return of all actively managed funds was a mere 3.7%, whereas the S&P 500 Index returned a whopping 13.2%.

None of this is new to an experienced investor, who is already well versed in the differences between index investing and stock picking. But this is where the story-telling skill of the author becomes important, because no matter how obvious the bottom line is, sometimes we all need hammering the point home (particularly when violent market swings cause even the most seasoned investor to make stupid mistakes).

The book gets interesting from Chapter 36, where the author starts talking specifics, beginning with his 4-step advice: 1) decide on asset allocation (proportion of stock and bond funds in your portfolio) based on your risk tolerance, 2) open account with one or more prominent fund families (Vanguard, Fidelity, T. Rowe Price) to set the ball rolling, 3) choose specific stock and bond funds offered by these fund families to build your portfolio, and 4) rebalance twice a year to reset the proportion back to the original asset allocation.

In short, the author does the following:

1. First, he presents four different asset allocation types, with increasing degrees of risk (and return): low risk, medium-low risk, medium-high risk, and high risk. Your choice of asset allocation depends on your risk tolerance (that in turn depends on your age and other circumstances).
2. Next, he builds the portfolio for each asset type using three kinds of index funds - total US stock index fund (that tracks the broad US stock market), international stock index fund (tracks major international market indexes), and total US bond index fund (tracks broad US bond market) - drawn from each of the three fund families.
3. He wraps up by suggesting you rebalance your portfolio twice a year (opinions vary on this - I rebalance once a year), to reset your portfolio composition back to the original asset mix.

These specific advices will hand-hold a first-time investor through the process of setting up a well diversified portfolio that is guaranteed to achieve at least the market return. And, “over the long term, simply achieving market returns will beat 95% of all professionally managed investment portfolios”. To a newbie investor, this alone should be worth paying $19.95 for this book. If you are a pro, search the bargain shelves of your favorite book store - you may get lucky too.

I always enjoy reading a well-written book on investing, and not because I am learning something new each time. In fact, after you are done with a half-dozen or so really good books, you pretty much know all there is to know about investing, and rest is mere detail.

Rather, what I really like is the style of writing, which separates the winner from the also-ran. Investing is as complex a subject as any branch of modern science (probably more so, because investing also involves human psychology and behavior, a topic not well understood yet). But the author must still get the message across to the layperson as well as the intellectual, because money management knows no social hierarchy.

Striking this delicate balance between presenting hard concepts and facts, and explaining them in a way ordinary people can understand and follow, is what makes a good, even great, investing book. There are many ways to tell a story, but the one who does it best gets my vote (or in this case, my money).

The problem is, when you visit the “investing and personal finance” aisle in a book store, you are immediately swamped with books of all sizes and colors (a search for “investing” on Amazon throws up over 163,000 entries). It is hard to figure out if the book you just forked $29.95 for is really worth it.

What I do is reverse the order - I figure it out first, and then buy. I go visit the local public library (my favorite spot in town, next to my home and the chinese buffet nearby), which has pretty much every book on investing under the sun. If I like a book that I read from here, I buy a copy for myself.

The only time I break this read-first-buy-next rule is when I come across an investing book that sells for under $5 in the “bargain price” section of the book store. As long as it has all pages intact (and there are at least 200 of them, so I can be sure I am not paying $5 for a newsletter!) and does not look overused, the book is a good bet for me, even if I never heard of it before. I still flip through a few pages to make sure this is not a total dummy. So far, I haven’t regretted a single purchase I made this way.

I just finished reading A Mathematician Plays the Stock Market by John Allen Paulos, professor of mathematics at Temple University. Being a scientist with a theoretical bend, I was readily drawn towards the title of the book.

I expected some sprinkling of mathematical expressions here and there, but to my surprise, there is none! In Paulos’ own words, he wanted to use “vignettes and stories rather than formulas and equations” to “explore the basic conceptual mathematics of the market”.

I enjoyed his engaging style of writing, and the “cloyingly personal account of how I lost my shirt” with WorldCom stocks was a first. (I mean, most investing books come across as an impersonal collection of dos and don’ts, as though the author is too smart to do such dumb thing as buying telecom stocks in the middle of dotcom bust.)

Most of the material presented here is already covered in many other (more famous) books, so there is little here for a knowledgeable investor, at least on the practical side of investing. (For those of you looking for hands-on advice, I would suggest Burton Malkiel’s classic A Random Walk down Wall Street. If you are a total novice, Andrew Tobias’ The Only Investment Guide You’ll Ever Need is a great first read.) This book does not offer any financial advice, such as how to construct a high-yield portfolio or pick the hottest stocks (what Paulos calls “financial pornography”; the term, though, is originally attributed to Jane Byrant Quinn who wrote investment pornography).

Like most academicians talking about investing, the bias is strongly in favor of efficient market hypothesis, rather than fundamental analysis (the first one gave us Nobel Laureates, the second one gave us Warren Buffett). But Paulos, like Malkiel in later editions of his book, acknowledges the merit of the latter, at least over short time scales. (If the market is really that efficient, how does one explain bubbles and bursts?)

The problem is though, after adding up the time and effort spent researching the fundamental attributes of a company, and the transaction costs (and other fees), you do not gain much over the set-it-and-forget-it armchair investors who rely on market efficiency and put their faith in index funds.

The book gets really interesting in the last two chapters, where Paulos discusses such technicalities as complexity, chaos, power laws, fractality and paradox, all using simple language. I particularly liked his arguments proving “if efficient market hypothesis is true, most investors will not believe it, and if it is false, most will believe it”.

This does make sense: if most investors believe market efficiency to be true and do not react to new developments (an efficient market will already have incorporated them into prevailing stock prices), the few non-believers will exploit these developments and to them the market will respond slowly, thus falsifying the hypothesis. You can turn the argument around to prove the other half of the paradox too. Paulos thinks the efficient market hypothesis is “neither necessarily true nor necessarily false”.

To wrap up, I recommend this book as a general reading to savvy and novice investors alike - the former ones will enjoy the honesty of personal narratives (besides the easy intellectuality that permeates through the book), and there is enough stuff in here to teach smart investing to the latter ones.