Someone emailed me this question:
“How do you spend your time (idea generation vs. broad learning vs. in-depth research vs. discussing ideas and concepts with others)?”
Honestly, I don’t divide my time day to day along category lines. It’s more like a focus switch that I flip from 0% to 100% on a certain topic. There are some things I have to do somewhat regularly whether it’s the best use of my attention or not. The three big ones are: 1) drafting, proofreading and submitting articles; 2) recording and posting audio versions of the articles to my blog; and 3) checking and answering emails. Those have to be done regularly. And only some of those activities take 100% of my focus while I’m doing them. The most enjoyable and most productive one is drafting an article in the first place. That’s a focused task that takes a relatively short period of time where it’s the only thing I’m doing. It’s not busy work at all. It’s time well spent.
I try to be more efficient with the less useful, less focused tasks. Proofreading and submitting articles to GuruFocus, recording audio versions of the articles, etc., I prefer to do in batches, and I time how long those tasks take so I don’t waste time on busywork. I don’t learn anything from those tasks. I do learn from writing articles. Emails can be informative too, but you have to be very, very careful with checking emails.
As those who have emailed me know, they may get a very long response back from me. However, they shouldn’t count on a quick response. I was talking to someone recently who texts with me a lot rather than emails. I told him my response time to texts isn’t any faster than my response time to emails. I always read an email within two days of receiving it. I usually read it in about one day. I don’t normally respond to emails more than once a day – because, honestly, I try not to check my emails more than once a day. A lot of people have my email address. It’s a lower focus, lower intensity activity to read and even respond to emails than it is to write an article, read a 10-K, etc. The lazy part of you – and I’m very, very lazy by nature – will always prefer the unfocused, easy-to-get-done-now activity over the activity that asks more of you. You end up doing what’s “urgent” instead of doing what it’s important.
My general rule is that anything you do risks becoming a habit. Whenever you do anything, you should ask yourself: “Do I want to do this every day for the rest of my life?” Usually, the answer is “no.” That means you want to try to minimize or eliminate that task entirely. You also really, really want to avoid making a habit out of it. It would be very easy to make reading and responding to emails a habit. I intentionally limit emails.
There are a lot of things I used to do habitually that I’ve eliminated for this very reason. I used to use Twitter. I’m back on Twitter now, but only to post links to the audio versions of my articles. I won’t use it for anything else. Almost 10 years ago, I disabled comments on my blog. Reading and responding to comments wasn’t a good use of my time. I’ve mentioned before that I’ve never read a single comment to a GuruFocus article, and I don’t intend to ever start reading comments. I write a lot of articles. It would be a terrible use of my time to read and respond to comments. I’m better off reading emails from people who have an interesting question and then turning that question into an article. I get more out of that than responding to a comment. And the people who read my articles get more out of a brand-new article than they would get out of seeing me in a comment thread.
I also used to read a lot of business news. I read newspapers, magazines, online news sources, etc. Now I don’t do any of that. I found that more than 80% of what I got out of reading these things came from the value investing blogs I liked best. Now I just have a page with the RSS feeds of the 10 or so value investing blogs I like best. I avoid all other news. Lots of people – Warren Buffett (Trades, Portfolio) included – find reading news (and newspapers in particular) helpful. I don’t. I stopped doing it years ago. I haven’t had cable TV for more than five years. This doesn’t mean I don’t watch as many videos, movies, TV, etc. of some kind as a lot of people do. I probably watch less and read more than most Americans, but it’s not like I don’t see anything. I just do it more actively and selectively, and that’s the same idea I apply to news.
I do end up reading some business news. For example, I’ve linked to this excellent article from Bloomberg called “Is the Chicken Industry Rigged?” I know I’ve shared that article with a couple of people via email or in person. It’s one of the most important articles of the last year for an investor to read.
But, mostly, no I don’t read articles about business or investing. Instead, I read SEC filings, presentations by companies to analysts, etc. There are always companies going public. They file with the SEC when they do their IPO. I read their IPO filings. There are always companies that are being spun off. Those companies file with the SEC when they do the spinoff. I read the spinoff documents. Also, at some point after a merger has been announced, you will get an SEC document. I think the precise document you are looking for is the “14D-9” in this case. I read those too. I read the “background to the transaction” section or whatever it is called that describes the initial contact, the offer made to the board, the back and forth, etc. in a narrative history.
In the same document, there’s also an opinion from the investment bank that advised the seller. It often gives the multiples at which past deals in the industry were done. I read that section, too. Those aren’t short documents. I read IPO filings, spinoff filings and merger (going private, etc.) filings. At any moment in time, there is some small number of each of these events happening. There is a steady supply of IPO, spinoff and takeover documents to read. There are often investor presentations associated with each of these. I read those too. This is what I’d consider the more “passive” sort of background knowledge reading I do. Other people read The Financial Times, The Wall Street Journal, Barron’s, Bloomberg, etc., and watch CNBC and Bloomberg and those sorts of things. For me, these kinds of documents and investor presentations take the place of all that stuff.
Then there is the reading I do that is specifically focused on some sort of investment idea. This can either be reading about the company I’m actually interested in or it can be reading about competitors. Here, I am always going to read the newest and oldest 10-K from the company. I also like to read the newest and the oldest 10-K from competitors. I read the latest investor presentations too. Sometimes, if I’m actually interested in one of the companies as a stock, I will also read the latest quarterly press release. I can listen to the latest earnings call or read the transcript. I can also read the 10-Q. I don’t do much of that. If I am really considering this stock as a stock, I will do all these things to check for anything unusual, but I’m not really interested in quarterly results or the kinds of questions analysts ask. I get a lot more out of reading investor presentations and 10-Ks than I get out of reading the latest 10-Q.
But, like I said, it’s really a lot more of a focused search than I am portraying here. For example, I mentioned that article on the chicken industry. I read the article. Before I was done with the article, I had already decided I would read the newest and oldest 10-Ks for Sanderson Farms (SAFM, Financial). Sanderson is more of a pure-play chicken producer than some other companies I could pick. It was a good place to start if I wanted to learn more about the chicken industry. There was also a presentation available on the company. Right there, I had two 10-Ks and an investor presentation to read.
I generally print these things out and mark them up with a pen. I always read using a hard copy, a red pen, a pad of blank paper and a calculator. When I’m done reading about something like Sanderson Farms, you see a 10-K with questions written in the margins and sometimes these rough calculations of different “guesses” about normal levels of things and the value of the company and so on all over pages where I got the idea to start doing that kind of doodling. I just write these notes to myself so I can think out loud on the page. The notes will be (I’m making this up, it has nothing to do with Sanderson) something like “assume, conservatively 4% FCF margin and assume 2012 was a normal year for the industry then” and go on from there figuring out what the FCF per share would be in that case.
Some of these notes are a little weird. For example, I often calculate the number of employees I think are doing various things, working in various places, how much revenue there is per employee, how much profit per employee, etc., even where I’m not sure any of that is relevant. If a company says it has 120,000 customers and 2,000 employees in sales/marketing – somewhere, you can be sure I’ll have a note that says 60 customers to a sales associate. I just want to be aware of situations where there’s a surprising figure like “six customers to a salesperson or 60,000 customers to a salesperson.” This is why I always have a blank pad of paper and a calculator with me. If you don’t have those things, you just won’t bother making your best guesses about all the things a company doesn’t say directly in the 10-K but which are very simple to calculate for yourself.
In some cases, there’s information I always calculate and that I do consider important but the company doesn’t highlight. The best example of this is deposits per branch. Banks almost never tell you their deposits per branch. However, banks always tell you how many deposits they have and almost always tell you how many branches they have. It’s easy to calculate this in all cases and you should definitely do that.
You mentioned “idea generation.” The truth is that I can’t really tell you how much time I spend on “idea generation” because I can’t really trace where I get ideas. This isn’t unique to investing. The question every novelist gets and every novelist has no idea how to answer is “Where do you get your ideas?” Very often, you can answer exactly where you got a specific idea. That’s not important though. Generally, you’ve chucked 99 ideas in the trash for every one you’ve kept – so knowing where you originally got an idea isn’t helpful. I’ve gotten ideas from alphabetical lists of stocks in a country and I’ve gotten ideas from readers and I’ve gotten ideas from screens and I’ve gotten ideas from other blogs, articles, etc.
In all cases, though, I’ve gotten something like 19 ideas I hated instantly for every one idea in which I was even slightly interested. The more useful question to ask is “When did it click?” That’s true both for novelists and investors. The real question for a novelist isn’t “Where did you get this specific idea?” it’s “What clicked with this idea in such a way that you suddenly knew you had a book?” Ideas are cheap. Bad investors and great investors have the same number of ideas. Great investors just don’t invest in the bad ideas and make sure they do pounce on the good ideas.
The real question with “idea generation” is searching for the right “frame” for the investment. As an example, I’ve mentioned Howden Joinery (LSE: HWDN) before. Howden Joinery did not look cheap to me at first, but I noticed that the company didn’t make money in the first two years after it opened a depot. I also noticed the company kept opening depots. Now, mathematically, that has to mean that the company is – in any given year – reporting lower earnings now than it could report if it stopped opening depots. What matters to the future value of a business – which is all we care about when we buy the stock – is how much free cash flow the business would produce under a “steady state” condition. A company that is always losing some money opening new depots is not in a steady state. It is chronically underreporting normal earnings by some amount.
When did I get Howden Joinery as an idea? A long, long time ago. I read all of Richard Beddard’s articles so I’m sure I read about it many times on there and thought the business was a good one, but I also probably didn’t think it was cheap enough to ever buy. However, when I got to thinking about how many depots Howden could still open in the U.K. and how long that would take and then how long it would eventually take for Howden to have all of its U.K. depots be “mature” in terms of their free cash flow generation, I had a “frame” for the problem that was far in the future. We’re talking like five to 15 years into the company’s future. It’s not difficult to make some estimates within a given point five to 15 years down the road and then work back from that possible future to today and calculate the total return the stock should offer between those two points.
I would say the “idea” of Howden Joinery must have definitely come from a Richard Beddard post years back. However, the moment Howden “clicked” as something I should actually focus on as a possible investment was when I was reading the company’s own description of the early year economics of a new depot. At that moment, it clicked. And then, beyond that, there was the statement by management that it could one day have like 800 depots in the U.K. instead of more like 600. From those two numbers, you can calculate per-store future economics of a hypothetically fully mature store base and multiply it by 800 of these depots in the U.K.
It’s a very, very simple frame. I’d say that’s truly the “idea” of Howden Joinery. Knowing the business exists isn’t an idea. Knowing how you are going to think about the business as a stock you could buy and hold for five or more years is the “idea” as far as I’m concerned. How much time do I spend on pursuing ideas where I already know how I’m “framing” the problem versus the amount of time I spend flailing about just reading 10-Ks where I have no way of seeing the company?
When I have an idea worth pursuing, I drop everything and pursue that idea. Once I had the “frame” for Howden, I stopped reading 10-Ks, annual reports, etc., of other possible stocks to buy. I keep talking with people via email, and I keep reading blogs and so on. I also keep up with spinoffs and IPOs and takeovers in a general background sort of way, but I don’t study two different industries or two different companies at once. For example, I would never be reading the annual reports of Howden Joinery one day and then Cheesecake Factory (CAKE, Financial) the next day. I would already know whether – up to this point – I was a lot more interested in Howden or in Cheesecake (in my case, It’s Howden) and I focus 100% on that stock.
When I talk to a lot of value investors, they seem to think more about “learning” than I do. I’m not sure if I should feel guilty about that or not. But, I really don’t spend much time reading about investing generally, reading business news generally, etc. I’m almost always reading about a company or an industry that interests me right now. As I said, I’m taking notes and doing calculations of my own that don’t necessarily have anything to do with the kind of stuff you’d hear analysts ask about or that would be in an article discussing the company.
Something like “Is the Chicken Industry Rigged?” is a very unusual article. It relates almost directly to competition in the industry and the level of normal future profitability. Those are the two things I care most about. Business articles almost never discuss those two things. I shouldn’t be too harsh on business articles. For example, I did read an article on Chipotle (CMG, Financial) – don’t have the link right now – that discussed the changes Chipotle had made in its supply chain as a reaction to its food safety problems. The article really went into the issue that worried me most – that Chipotle would react to the food safety problem (which can happen to anyone) with changes that would make the product less fresh, less produced in store and more like competing products (which would defeat the whole point of Chipotle’s model). It was a really good article, and it discussed stuff that is knowable. Most articles focus on things like what caused Chipotle’s problems. Honestly, it’s difficult if not impossible to know the specific cause of specific food poisoning cases. It’s also the thing that matters the least to investors in the future. Whatever happened already happened. But changes to processes and to the culture of the company are what matter more long-term and that’s what investors should care about. They should be worried that Chipotle might learn the wrong lessons from their food safety problems.
That was another really great article, but really great business news articles are rare. I really don’t read business news anymore. Whatever articles I do read are either recommended by the value investing blogs I read or they are historical articles directly related to a stock or an industry I am researching.
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