Resources For Budding Value Investors
Lots of budding investors ask Dan and I for book recommendations and advice about where to start learning. Usually, they get whatever's at the tip of our tongue that day (a good example of the availability bias at work!). So, I thought I'd take some time to link to my favorite investing resources. Rather than provide a comprehensive -- and overwhelming list -- I'll just share the best. Quality over quantity.
The first question any investor should ask is, why value investing? There are lots of ways people make money in the markets. Jack Schwager’s Market Wizards books chronicle them. I, however, am biased towards value investing. Warren Buffett’s essay The Superinvestors Of Graham and Doddsville makes a compelling case for the strategy.
Once you’ve bought into the concept, Warren Buffett says you only need to understand two things:
How to value a business; and
How to think about market prices.
While these are broad skills that take a lifetime to master, their essence has been distilled into just three chapters. Those are:
"The Investor and Market Fluctuations" is chapter 8 of Ben Graham's The Intelligent Investor. You can read it here (page 202 of the PDF).
"Margin of Safety as the Central Concept of Investment" is chapter 20 of Ben Graham's The Intelligent Investor. You can read it here (page 526 of the PDF).
"The State of Long‐Term Expectation" is chapter 12 of John Meynard Keynes' The General Theory of Employment, Interest and Money. You can read it here.
While these chapters may be all you technically need, most will want more. Berkshire Hathaway's annual letters to shareholders and the Q&A at Berkshire's annual meeting are the next best resources.
Berkshire's letters are available for free on Berkshire's website. There’s also hardcover and kindle editions on Amazon. If you’re looking for a shorter read, Lawrence Cunningham organized Buffett’s best quotes by topic into a book.
Audio and video of the annual meeting's Q&A are free on CNBC's website. They've also been turned into a podcast. Listening to the Q&A is like painting the golden gate bridge: by the time you're done, it's time to start all over again. Each time through, I pick up something new.
If you're not sick of Berkshire Hathaway at this point, you'll thoroughly enjoy Poor Charlie's Almanac, a compendium of Charlie Munger's (Buffett's right-hand man) speeches. The Psychology of Human Misjudgement is the best of the bunch and is on YouTube. Thinking Fast and Slow is a great follow-up book on human psychology.
Beyond Berkshire, there are lots of other greater investors to read. Chief among them is Howard Marks whose been publishing free memos since 1990. Joel Greenblatt's books are also must-reads. You Can Be a Stock Market Genius is particularly good -- don't let the cheesy title fool you. William Thorndike’s The Outsiders is a personal favorite. It provides chapter-length case studies of great capital allocators. When you hear us talk about “Outsider” capital allocation, it is in reference to this book. Last but not least I’d also recommend anything by Nassim Taleb and Peter Bevlin.
Of course, at some point, prospective investors need to actually get their hands dirty. The best way is to read annual reports. Public companies file annual reports on Form 10-K with the SEC, which you can search for here.
It's never too soon to begin reading 10-Ks. But, newer investors should start with simple businesses they already know something about. For example, prefer Wendy's to Goldman Sachs. As a rule of thumb, don't bother with 10-K's longer than about 100 pages. Those are too complex for new investors. Many micro cap companies have 30-50 page annual reports, but even Apple’s is only 63 pages.
You won't understand much in your first 10-K, and that's okay. Look things up and be curious. If something doesn't sense, chase it down. Being an investor is a lot like being an investigative journalist. One tip I wish I’d figured out earlier is to batch industries together. If you start with Wendy's, read McDonald's next, and Burger King (aka Restaurant Brands International) after that. You'll learn exponentially more by comparing and contrasting competitors.
Since there are no called strikes in investing, investors should try to see as many pitches as possible. Beyond reading 10-Ks, read Value Investor's Club, Value Line (free through many libraries), Barron's (free through many libraries), and hedge fund letters. My favorite letters are from Sequoia and Pershing Square because their style overlaps the most with mine.
Last but not least, there are a zillion great blogs and podcasts out now. Below are some of my favorites:
Shane Parish's blog Farnam Street and podcast,
Value After Hours podcast, and
This Week In Intelligent Investing podcast.
At the end of the day, investing is all about understanding how the world works. To that end, anything you read can be relevant. So, just follow your curiosity. Here’s a couple of other pieces of general advice I’d wish someone had pounded into me 10 years ago:
Don't get hung up on how you think the world should work. Try to see it as it actually does. There are a lot less logic and reason behind things than economists are willing to admit.
Just as you don't need to know a man's weight to know he's fat, you don't need to know a company's precise value to know if it is cheap. Don't get distracted with elaborate valuation models. If there's a big enough mispricing to warrant an investment, you won’t need a calculator to see it.
Invert. Instead of asking “what’s this company worth?” ask “what is this not worth?” This forces you to create upper and lower confidence bounds of value and think probabilistically. You don’t need to know precisely what a company is worth, so long as you know you’re buying it for a price that is clearly too cheap.
Look everywhere for a margin of safety, not just price. Sometimes the margin of safety is in the qualitative aspects of a company’s culture or business model. If you only buy statistically cheap businesses (low P/E, low P/B) you’ll end up with a bunch of coal miners and steel stocks.
Focus on avoiding stupidity rather than seeking brilliance. Charlie Ellis says investing is like amateur tennis, not pro tennis. Amateur win by simply getting the ball over the net consistently. Pro need to hit a few aces. Investors should focus all their energy on avoiding mistakes. If you can avoid losing money, every other outcome is positive!
Disclosure: The author, Eagle Point Capital, or their affiliates may own the securities discussed. This blog is for informational purposes only. Nothing should be construed as investment advice. Please read our Terms and Conditions for further details.