Investment Reading: A Holistic Approach

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Mar 27, 2015
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Over the past several months we have been asked what we might recommend for reading material in the field of investments. While we believe reading is an essential part of being a successful value investor, we think it’s only part of the total equation. We believe the old elementary school 3R’s (Reading, Writing, and Arithmetic) is the platform for constant study and self-improvement.

Critical Thinking Is the Foundation

Before we get into the need for each of these, we think it’s essential to address the idea of education. We don’t believe those who educate themselves with raw data – no matter how much volume there is – will generally be successful as investors. Rather we believe education is less about learning and really about thinking. The ability to think – composing ideas, testing hypotheses, seeing relationships and connections – is absolutely critical to understanding the dynamics of market forces, trends, and returns. If you can create models in which you think then raw data will become all that more valuable.

The major components to critical thinking are a) perception, b) logic, c) assumptions, d) argument, e) fallacy, and f) problem solving. Investors should spend an inordinate amount of time digesting these concepts and creating mental models incorporating them into their education. Added to these is the emotional balance I discussed in last week’s article entitled “Patience Is A Virtue” that can be found here. We believe a platform based on these two concepts can provide you with an extraordinary advantage in the field of value investing.

With that in mind we recommend investors spend time each day working on the three Rs. By doing this you will accumulate a great deal of data, be able to identify and describe opportunities, and measure possible outcomes.

Reading

We spend roughly 4-5 hours each day reading. This includes 10-Qs, 10-Ks, online writings, investment classics, and assorted subjects across the spectrum. We specifically read every filing of our investment holdings as well as market research about competition, trends, and innovation. As an example in the past year we have read Manhattan Research’s (MANH, Financial) annual report, 10-Qs, management summaries and transcripts from earnings calls, Gartner market research, and roughly 15 research reports from academia, trade groups, and competitors. In addition we have been reading reports on innovations in the supply chain space including technology, informatics, and data platforms. Finally, we read several annual reports of MNH’s customers to get a feel about how they see their issues in logistics and supply chains.

Writing

Each quarter we write a document about each holding that includes an investment thesis, anti-investment thesis, competitive summary, key assumptions, etc. We also review previous summaries to see how our predictions and assumptions held up over time. We believe writing provides us with the need to clearly articulate our investment case. If we can’t make the argument concisely and cogently it’s highly likely we don't understand the opportunity well enough. In addition we write both quarterly and annual portfolio reviews for our clients. This process forces us to describe our processes and results in a manner stripped of jargon and acronyms. It’s difficult but well worth the effort. Early next month we will release our Q1 review.

Arithmetic

Each quarter we run a financial review of each holding. This includes financials, ratios, performance, growth rates, etc. We are constantly on the lookout for new ways to use data and math to better understand and predict investment opportunities. We strongly believe this area can utilize so many aspects of critical thinking. Data alone can tell us little, but seeing connections in the numbers can provide extraordinary value.

In Summary

For each holding we spend roughly 15-20 hours per quarter reviewing our business case and assessing the future. Roughly half of our workday is spent on this task. Because we maintain a relatively focused portfolio (roughly 20 stocks) we can get to know each holding in considerable detail.

So what do we do with the rest of our time? The answer to this really addresses the questions we have received about what we read. Roughly half our time is spent reading material across the spectrum – biology, psychology, organization theory, fellow value investor writings, and many others. We generally divide these into several buckets. As a start we would recommend what we call “Old Classics” and “New Classics”. The following list is a very small portion of reading we highly recommend. These include:

Classic Investment Literature

You can never go wrong reading from the masters. This keeps us grounded in the basics of value investing. We highly recommend the following:

“Security Analysis”, Benjamin Graham and David Dodd: We prefer the 6th edition with commentaries by eminent modern value investors.

“The Intelligent Investor”, Benjamin Graham: We prefer the updated version with Jason Zweig’s astute commentary.

“Margin of Safety”, Seth Klarman (Trades, Portfolio): While actual copies are extraordinarily hard to come by there are several PDF versions available. (Sorry Seth!)

“The Essays of Warren Buffett (Trades, Portfolio)”, Lawrence Cunningham: We greatly enjoy reading this on a regular basis. Who can write better than Buffett? Get the 3rd edition.

New Classics (in our eyes)

“The Manual of Ideas”, John Mihaljevic: A fantastic summary of the major value investment methodologies. For those who cannot afford membership this is a reasonable stand in. The website free interviews are also fantastic.

“Excess Returns”, Frederik Vanhaverbeke: Another great book that really goes into detail about value methods. Consider this your arithmetic work for the day.

“The Battle for the Soul of Capitalism”, John Bogle: A drawback to Bogle’s later books is that they frequently repeat themselves. This is one of the better ones along with the 10th Anniversary edition of “Bogle on Mutual Funds”.

“Why Moats Matter”, Heather Brilliant and Elizabeth Collins: Everything you wanted to know about what makes up a competitive moat.

“Latticework: The New Investing”, Robert Hagstrom: A great summary of Charlie Munger (Trades, Portfolio)’s mental models approach.

“More Than You Know”, Michael Mauboussin: A great book discussing the role of consilience and multi-disciplinary studies in investing.

Conclusions

Great value investors are always learning. Whether through the creation of new mental models or reading 10-Qs, the ability to acquire, collate, correlate, and process information is a vital part of an investor’s day. Reading isn’t enough. The ability to think – to truly understand what one has read or written about – requires a multi-faceted approach. You will never regret creating and participating in this process. While it doesn't guarantee investment success it will definitely improve your chances. And that’s about all we – and our investors - can ask of ourselves.

As always we look forward to your thoughts and comments.