Assuming someone had the temperament, interest and work ethic to be a good investor. What would you prescribe as a curriculum?
Which books, articles, shareholder letters, blogs, websites, etc. If you were going to have an extensive class on value investing, what would the materials list look like?
Here is what I would make required reading:
Part of the class would require reading some material about extreme stock market conditions like:
This part of the class would revolve around contemporary sources. Students would read newspaper articles from the various crashes. They’d also read newspapers around the time of the various market bottoms. Historical case studies should be based on sources that were present and available to investors, CEOs, etc., at the time. So, if you’re studying an investment Ben Graham made in 1942 – you should be using The New York Times archives to find articles printed in 1942 and you should be getting your data from a Moody’s Manual from 1942.
This is critical.
And many people have never done it. Many investors have never gone back through old Moody’s Manuals, newspaper articles, etc. If you think you know enough about 1929 and yet you’ve never read something written in 1929 – you’re idea of knowing is too intellectual and external. Knowing is understanding what the paper looked like every morning to folks who were as blind to the future as you are now. You have to internalize what it feels like to be in the middle of all that.
Reading Kuhn’s books – The Structure of Scientific Revolutions and The Essential Tension – will help you understand why this is important. Why modern accounts of past investment beliefs are almost always wildly inaccurate attempts to act like people in the past shared the beliefs we have today. They didn’t. Beliefs change. In fact, the two cornerstone concepts of equity investing — that stocks are investments and that stocks tend to outperform other assets — were heretical beliefs when Ben Graham started his career. They are orthodoxy today.
The rest of the class would be limited to two other activities:
1. Historical examples of investments made by investors whose books, letters, etc., the class has read
2. Side-by-side comparisons of stocks with the names of the companies redacted
So, for example we would study:
· Warren Buffett’s investment in:
o Wells Fargo
o Washington Post
o American Express
o Sanborn Map
o Dempster Mills
o Commonwealth Trust
o Berkshire Hathaway
o Union Street Railway
· Ben Graham’s investment in:
o Northern Pipeline
o DuPont/GM (long/short)
o Missouri, Kansas, & Texas Railroad (old common stock while company was in bankruptcy)
· Phil Fisher’s examples given in: “Common Stocks and Uncommon Profits”
· Peter Cundill’s investments presented in: “There’s Always Something to Do”
At least half the class time would be devoted to side-by-side comparisons of stocks with the company names redacted. Ben Graham did this all the time. Students wouldn’t be told ahead of time which kind of comparison they were seeing. Comparisons of Company A, Company B, etc., would include comparisons like:
· Microsoft at several different points in its history
· Present day comparison of Wal-Mart and Costco
· Present day comparison of all the major North American railroads
· Present day comparison of a high-quality huge company (like Procter & Gamble) and a high-quality tiny company (like United-Guardian)
· Comparison of present-day hated company (like Bank of America) and a historical Warren Buffett investment (like GEICO)
And so on…
Every single class would feature comparisons between unnamed stocks. Sometimes they would be “actionable ideas” like Wal-Mart vs. Costco. Sometimes they would be meant as eye-openers (for example, there are micro caps with the same ROEs, margins, consistency, etc., as blue chips). Other times they might be trickier – for example, comparing two stocks Warren Buffett could have bought back in the 1970s, 1980s, etc., only one of which he actually did buy.
When teaching historical examples, I would always include a present-day example. So, for instance, you would never just teach the fact that Warren Buffett bought net-nets for his partnership. You’d bring some modern day net-nets with you to class that day.
Finally, it would be too difficult to assign books and other research materials about specific companies to the whole class. But this is critical work. So, each student would be required to research one long-lived company (like Disney, Gillette, etc.) and present its entire history to the class explaining how the company was founded, where it faltered, what were the key economic drivers for the company early on, how it changed as it grew, who the different CEOs were and how they each ran the company, etc.
Disney is a good example. Most of the information you need is in Neal Gabler’s biography of Walt. But there are actually plenty of companies where it’s quite easy to do this work just using widely available sources. Examples include: Wal-Mart, Microsoft, Apple, Coca-Cola, etc.
I’d also let students choose a “tycoon” rather than a business. For example, a presentation on how Cornelius Vanderbilt made his fortune would be as interesting as any discussion of a company. By the way, there’s a great biography of Cornelius Vanderbilt by T.J. Stiles. Other good research candidates include John D. Rockefeller, Andrew Carnegie, etc.
Everyone would have to do a long-term solo research project. Value investing is mostly about doing original research alone.
And, of course, everyone would take a turn picking the present-day stock they like best and putting it up on the board as a blind stock valuation. The idea with a blind stock valuation is that you only answer questions you are asked. So, the students learn which questions are important to ask – and in what order – about a stock even when they don’t know the name. They learn to recognize unusual returns on equity, margins, asset turnover ratios, growth histories, etc., and get away from just accepting the conventional wisdom about a stock based on its name, industry, etc.
This is pattern recognition. And it’s the most important part of value investing aside from controlling your emotions.
So every class would start with someone putting their favorite actionable stock idea on the board along with its key characteristics. But no name. And then that student would have to answer any questions the class asked. (Except for questions where an honest answer would risk identifying the company). If for some reason the class wanted to know if the founder still controlled the company – they’d tell them. If the class wanted to know what year the company was founded – they’d tell them. If the class wanted to know the exact gross margin last quarter – and that wasn’t already on the board – they’d put it up there. And so on.
This way, everyone would get a chance of seeing what it takes to be totally knowledgeable and prepared about a single stock you picked yourself. And everyone would get many chances to experience what it’s like to investigate a potentially interesting investment starting from a point of total ignorance and moving towards understanding based on what questions you choose to ask.
I would focus on practical examples. I wouldn’t teach specific valuation techniques, ratios, accounting, etc. except insofar as they appear in the reading material and someone was confused by it. Once something technical like that became relevant to a specific stock example, we’d discuss it. But not before then.
It’s important not to detach theory from practice. That’s why I’d focus on reading books by investors who talk about their actual investments. And that’s why all the reading would be done at home and the class time would be focused on putting specific stocks up on the board.
The majority of class time would be spent on concrete examples.
I can’t stress that enough. New value investors love reading books on theory and technique. They spend too little time studying specific stocks. Out in the wild, you never encounter a P/E ratio in isolation. It’s always attached to a living, breathing stock.
The focus needs to be on actual examples that put things like P/E ratios in their place – as just one aspect of the whole.