Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) are both avid readers. They believe the only way to improve your intelligence and stay ahead of the competition is to be continually reading and improving your investment process. In fact, Munger once went so far as to say, "I don't know anyone who is wise who doesn't read a lot."
But in the same reply, Munger also issued a warning. He said that it is not enough to be an avid reader. To be really successful in any field, you have to be both an avid reader and have the right intellect to take the lessons learned and apply them to real life.
Munger on reading
Buffett's right-hand man made these comments at the 2004 Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting of shareholders.
Buffett asked Munger to add his two cents following Buffett's response to a shareholder who asked The Oracle of Omaha if he could share his thoughts on the best reading material for those investors seeking to improve their process.
Buffett responded by saying that when he started out investing, he spent much more time looking at companies. "We would look at everything in sight that we thought we could understand," he explained. "The world hasn't changed in that respect. There may be some more people doing it, but there are a lot more companies to look at now," Buffett added.
When you've found interesting companies, the best approach is to "read everything in sight," about the companies, their industry and their competitors. That's the only way to make sure you know as much as possible about its firm and outlook. Only then can you make an informed decision.
Buffett then handed over to Munger, who said:
"You have to have a temperament, really, which grabs the correct ideas and does something with those ideas. And I think most people who read a lot don't have the necessary temperament, and they grab the ideas or they're simply confused by the mass of material. And, of course, that won't work."
Buffett agreed, adding:
"I mean, if you can't control yourself, no matter what the intellect you bring to the process, you know, you're going to have disasters. And Charlie and have seen one after another that — It's not a business that requires extraordinary intellect. It does require extraordinary discipline. That shouldn't be so difficult. But as I look around the world sometimes, apparently it is quite difficult. I mean, the whole world went a little mad a few years back in terms of investments. And you say to yourself, "How could that happen? Don't they learn anything for the earlier ones?" But, you know, what we learn from history is that people don't learn from history. And you certainly see that in financial markets all the time."
The bottom line
Buffett has said on many occasions that he believes investing is all about temperament and not intelligence. This is the same point.
Investing is just as much about getting comfortable with yourself and your limits as an investor than anything else. If you don't know what you are comfortable owning, and the limits of your circle of competence, then the chances of you making a severe mistake are much higher.
Reading is a great way to improve your knowledge and understanding of any topic, but it is never going to be a shortcut. Just because you have read a book on investing, does not guarantee that you will be able to outperform the market for the next 10 years.
Understanding that is the difference between an average investor and a great investor. And as Munger and Buffett explained in 2004, some people have it, but many people don't.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- Warren Buffett Explains Why Berkshire Does Not Give Analysts Special Treatment
- Warren Buffett's Thoughts on Intrinsic Value and Berkshire's Stock Price
- What Makes a Good Retail Business According to Buffett
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