Warren Buffett (Trades, Portfolio) is known for being a voracious reader, reportedly consuming as many as 500 pages a day. He has credited his success to his limitless appetite for knowledge, and has said that reading is the key to success in all walks of life. At the end of the day, good investing requires the collation of large amounts of information, which can only be gleaned from financial reports. There are no shortcuts.
What to read, and what not to read
So what does the Oracle of Omaha advise budding value investors read? He believes there is no substitute to reading financial statements published by companies. This requires at least a rudimentary knowledge of the language of accounting, which is why Buffett also thinks investors should be fluent in it.
Do not despair - while it can seem complex and alien at first, accountancy is really not that difficult. Indeed, as Buffett has pointed out in the past, if a report is written in a confusing way, with lots of footnotes, management probably wants to obscure something important. The more reports you read, the better you will become at uncovering such irregularities.
Apart from reading material directly relating to companies, Buffett suggests that investors read books about value investing itself. Being a former student of Benjamin Graham, it should perhaps come as no surprise that Buffett recommends both "Security Analysis" and "The Intelligent Investor." The latter is more conversational, whereas the former is slightly more technical, which might deter some novice readers. Personally, I would recommend reading "The Intelligent Investor" as an introduction to the value investing mindset, and then supplementing the lessons learned with "Security Analysis."
Apart from Graham’s works, Buffett has also recommended books like "Poor Charlie’s Almanack" - a collection of advice by and biographical information about his partner, Charlie Munger (Trades, Portfolio) - "The Little Book of Common Sense Investing" by Jack Bogle - the father of passive investing - and "The Most Important Thing Illuminated" by Howard Marks (Trades, Portfolio). He holds economist John Maynard Keynes in high regard as well.
Buffett also spends a lot of time reading biographies, such as those of President Theodore Roosevelt. Now, while it might not be obvious how these relate to investing, I believe that all of us can stand to learn from history. Although the world has changed tremendously over the last few centuries, one of the things that has remained constant is how people act under pressure - both political and financial. Learning from the mistakes of the past can make us better investors in the future.
Knowing what to read is half the battle. The other half is knowing what not to read. There is only so much time in the day, and most of us have pretty busy lives. Buffett has said that he does not read analyst coverage of stocks he owns or is considering buying, preferring to focus on the facts contained within financial statements. He recognizes that sell-side analysts often have a vested interest in promoting a particular narrative about a company, and takes their recommendations with a large pinch of salt.
As far as I know, Buffett does not read much fiction. While this is understandable - he wants to concentrate his limited time on the things that are the most relevant to him and Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) - I believe reading works of fiction can also improve your investment process. Value investing requires a degree of creativity - putting together the pieces in a way that no one else has, and seeing something that no one else does. Fiction has the power to greatly expand your creative mind, which may help you in unforeseen ways down the line.
Reading can be a time-consuming activity, but one that can yield great dividends in the future, and one that is rewarding in and of itself. Think of it as investing in yourself.
Disclosure: The author owns no stocks mentioned.
Read more here:
- ”‹Warren Buffett: Areas Don’t Make Opportunities, Brains Do
- The Value Investor's Handbook: Value Traps
- The Value Investor’s Handbook: Popularity Is Your Enemy
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