A month ago, I wrote an article entitled "Warren Buffett: Reading Will Make You A Better Investor’. In it, I talked about the Oracle of Omaha’s voracious reading habits, and how ordinary investors would be well-served by following his example. Today, I want to discuss the utility of writing for investors. I believe that writing can also help you become a better investor. Here’s why.
What is it for?
At first glance, there seems to be little in common between good investing and good writing. After all, why should there be? Theoretically, an investor’s process can take place entirely in their mind, with no reason for it to materialise on a page. However, there are a number of reasons why I think that the process of writing is crucial to being a good investor.
Firstly, writing helps to develop your thinking. As humans, we are prone to jumping to conclusions - that is, we take things to be true without considering why we think them. Writing down your reasoning can help expose flaws in it and force you to develop it further. For example: I believe that copper mining Company A is currently undervalued because I believe that the price for copper will rise in the future. Why do I believe this? Because I think that there will be a shortage of copper in the near future. What is my basis for believing this? If I cannot answer this question, then the entire chain of reasoning become flawed.
Now, you may say that in this example, any investor worth their salt would have a good reason for why they believe that copper will be in scarce supply. This may be true for this hypothetical example (although there are some very shoddy investment theses out there also!), but I think it should be clear how these defects in reasoning can come about. I find that this happens most often with stocks that have compelling stories.
For example: tech company B posts impressive growth numbers quarter after quarter, but also demonstrates losses every quarter. Financial media labels it the ‘new Amazon’, leading investors to internalise that label and uncritically accept this conclusion. If you develop a habit of writing out your investment theses and ask yourself ‘why?’ at every step, you can avoid falling into such traps. This is true even if you never publish your writing, although being published makes it more likely that your thoughts will be critiqued by other investors - which is a good thing!
The second reason why writing can make you a better investor is that it helps you consider new perspectives. I often find that the best ideas come when you’re not looking for them. For instance, you may write a piece about the energy sector, and in the process of researching it stumble across an asset class that you had never considered before. Alternatively, maybe you are writing down your investment philosophy and realise that someone else has already provided a better framework for what you are trying to do.
Don’t take my word for it though. Here’s Warren Buffett (Trades, Portfolio) again, talking about the importance of writing out investment theses:
“If it can’t stand applying pencil to paper, you’d better think it through some more. And if you can’t write an intelligent answer to those questions, don’t do it”.
Buffett, of course, is well-known for his annual letters to shareholders of Berkshire Hathaway (BRK.A, BRK.B), which we frequently cite here at Gurufocus. If you want to improve your financial writing, you could learn from the master.
Disclosure: The author owns no stocks mentioned.
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