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The Value of Information, Part 2

Knowledge is power, but what should investors pay for?

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Jan 20, 2022
Summary
  • Transaction costs kill our investment returns.
  • How to effectively consider analysis and investment community expenses.
  • Value investors will be pleased that we can surprisingly keep costs quite low, compared to what some service providers would suggest.
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In the first installment of this series, I shared my thoughts on the cost and value of data and news. In this section, I will focus on analysis and community.

Analysis

This is an interesting section and is made up of $140 on books, $680 on newsletters and $680 on courses.

I probably spend closer to $300 per year on books, which are a combination of investment related and other non-fiction. But reading is my hobby, so I’m not sure if I would allocate it as a portfolio cost. Also, books can be kept for reference. I studied finance at university and my Frank Fabozzi textbooks on equities, fixed income and portfolio management have been great investments over time. So, we can treat books as a capital expenditure rather than an expense.

But we probably don’t need to read so many books when we can get the key points from book reviews. For example, I was thinking to purchase "King of Capital," but then I saw a review on GuruFocus, so I didn’t need to read the book as it shared the key points.

Does every sophisticated investor read so many books? Not always. When I asked a friend of mine who manages a multibillion-dollar fund in London what books he had read, all he could think of was "Barbarians at the Gate" while at university. His knowledge of financial theory is very strong, though. He graduated top of the class in undergraduate finance and quickly obtained the chartered financial analyst designation. My friend’s analysis mostly comes from reading regulatory filings and talking to company management. We can’t all talk to company management, but we can read their transcripts from earnings calls with analysts, again a valuable but free resource.

When it comes to newsletters, I’m very dubious. Along with Grant’s Interest Rate Observer, I used to have access to The Bank Credit Analyst, a monthly macro report from BCA Research, which is part of Euromoney Institutional Investor (

LSE:ERM, Financial), but this costs around $12,000 per year, so it’s out of reach now. The articles on GuruFocus are free and do a very good job of stimulating ideas and analyzing plenty of stocks and economies and educating about investing strategies.

So I don’t subscribe to any newsletters.

Where I see value, however, is reading the management discussion and analysis sections of 10Ks from a range of companies, including JPMorgan (

JPM, Financial), Amazon (AMZN, Financial), Caterpillar (CAT, Financial), FedEx (FDX, Financial) and Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) shareholder letters. Again, these are all freely available and offer better insight than surely most newsletters. The CEOs of these big companies have great business knowledge and insight.

Many companies publish detailed insight into their industries. For example, the annual Shell Scenarios published by Royal Dutch Shell (

LSE:RDSA, Financial). Many companies host capital market days, where management teams offer deep dives into certain businesses. Next month, Royal Dutch Shell will be having a webinar focused just on its liquefied natural gas division. Additionally, ExxonMobil (XOM, Financial) just released details of its climate change strategy.

Merger and acquisitions documentation can be very insightful, as can prospectuses for bonds and equity issues that detail business plans and all manner of risks. Most big companies also publish sustainability reports, which are increasingly important for environmental, social and governance considerations. The Principles for Responsible Investment is a leading organization with a great amount of freely available analysis and research on ESG and is worth following.

If we remember companies put a positive spin on things, then we already start to have an information overload. Managements are legally obliged to be truthful too, so freely available company information is highly useful.

A top portfolio manager I once worked with always told me “the central bank is God.” He would religiously read everything the major central banks would publish as well as other institutions, such as the International Monetary Fund, the World Bank and the Bank for International Settlements. There’s really a lot to get through. I like to read the Bank of England’s monetary policy report and its financial stability report. Also, the IMF’s world economic outlook that comes out twice a year, as well as OPEC’s monthly oil market report. The U.S. Federal Reserve’s press conference is a must watch, six times a year.

Many other trade associations and companies have freely available reports on specific sectors and markets. Then there are think tanks such as the McKinsey Global Institute that publish a lot of thoughtful and useful research, again for free.

So with this (high quality) information overload, I don’t even have time for newsletters requiring paid subscription.

Since I studied finance and have a core set of textbooks, I don’t tend to go on courses. I’m happy to delve into my textbooks, read Wikipedia (which I think is excellent) or try to talk to friends and acquaintances who have expertise. Courses are useful for professionals who need to pass regulatory exams quickly, but retail investors can learn enough from books and freely available online resources. GuruFocus has defined many metrics and explains many concepts through its tutorials, so it’s a good starting point too.

Community

Without wanting to promote GuruFocus too much, I find that it’s a great community. Some may find it useful to join shareholder associations, but I believe minority investors won’t have much power compared to institutional ones, so I don’t see the point personally. Perhaps for some joining a club is more of a social expense, and that’s fine, but I wouldn’t classify it as an investment expense then.

Yes, talking to others is a good way to get idea generation, but with forums like GuruFocus, Twitter and just reading the information and understanding the concept of value investing, I find that I can come up with my own ideas.

Regarding investment shows, I used to attend a few, but found they tend to be dominated by service providers trying to sell their products rather than focusing on investment research. Perhaps there are better investment shows out there, and I would like to attend GuruFocus’s Value Conference one day. I now only attend investment conferences very selectively and only if I can make a holiday out of the trip at the same time.

Conclusion

The hedge fund analyst with the $4,450 figure, in my mind, is way off. So what would I recommend paying for? GuruFocus, the Wall Street Journal and some quality finance textbooks for self-education. As I hope I’ve demonstrated, there is plenty of freely available and high-quality information out there. Everything else, like opinions, are really for entertainment or social need.

The most valuable commodity is, in fact, our time. As such, we really need to be thinking about what resources we use to read, to learn, to research and to think deeply about investing. We need to focus on quality primary (not secondary) information and data, a lot of which is freely available online or cheaply available and well organized through GuruFocus. Opinions are a dime a dozen, some are worth considering for sure, but the one that ultimately counts is your own.

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