Reading, resolutions and "research"

"Please don't bother me right now, I'm reading about railcar loading trends for 1842, the year of the great hog debacle.  I think I can see parallels between that and the current coal environment."  Ever run into a value investor like that?  Head so deep in a history book that everything current is just a repeat of the past?  Reading is to value investing as ice skates are to hockey.

Reading is so embedded in the value investing mantra that I've seen debates break out over who reads the more.  One of Warren Buffett's protege investors was mis-quoted in an interview saying he read 500 pages a day.  Soon message boards were full of posts positing that if Buffett deputies read 500 pages a day then that must be the path to success.  It wasn't long before legions of investors were burned out trying to plow through the equivalent of a Stephen King novel a day, seven days a week barely giving themselves time to eat or use the restroom, let alone think about what they were reading!  Eventually said deputy clarified that they only read 500 pages a week, but the damage had been done.

This is the time of the year when investors are making resolutions "I'll research more before making the next investment." "I won't sell as quickly" "I'll be more patient" "I won't chase story stock" etc.  One resolution many will make is they want to read more and deepen the research before investing.

By nature I'm a goal type of person, I'm first born, and driven (often go together), and like to accomplish things, even fabricated goals.  For years I'd set new year gold.  I'd build little systems to hit my goals and once I accomplished them I'd fall off my system for the rest of the year leaving the goal just a memory.  The goals were nice milestones, but at each goal I either realized it wasn't worth pursing the activity further, or I was discontent and set another goal further afield.

As I've knocked down goal after goal and grown older I've realized there's a better way.  Instead of setting fixed goals each year I now strive to build sustainable systems.  For example, a few years ago I set a weekly goal of running a certain number of miles.  I found myself in two situations, I'd run 80% of the miles the first three days of the week and then I'd slack off and do an easy run on Friday to make my goal.  Or I'd be busy Mon-Wed and Thursday and Friday would run too much putting myself at risk for injury trying to reach the weekly goal.  The better way is to say that I plan on exercising three to four days a week.  Since I'm not holding myself to an arbitrary number I can be satisfied if I get outside a consistent number of days.  The beauty of this system is that it's sustainable, run (or exercise) three days a week.  If I'm tired maybe I'll walk, or in the summer I might swap a run with a bike ride, but regardless I am out exercising, not maintaining a spreadsheet.

I've spoken in the past about building an investing system.  You need to invest in a way that fits your personality.  This is where reading comes into play.  There are many different ways to be a value investor.  Value investing is simply buying something of a measurable value for a substantial discount to that measurable value.  The thing is that to do this you don't need to keep your nose in a book constantly, even if Buffett does.

Have you ever seen someone say the following: "I'm interested in value investing, what should I do?" and the response is to throw a library of value investing books at the person asking a question. "Oh you need to read all of Buffett's letters, plus Security Analysis, plus thirty other books and 10-Ks and 10-Qs and the Farmers Almanac back to 1910 and then you'll be ready to begin.."

The approach we use to teach value investing is strange, almost foreign compared to most other things we learned in life.  Consider a sport.  The student is taught a number of basic rules and techniques and then told to practice.  As they practice and improve they are then taught more difficult techniques.  Or what about a pilot?  Piloting a plane is complicated, but a pilot learns the basics first then gets in a plane and practices with a teacher.  Once they know the basics they learn by doing.  Almost any type of learning I can think of follows this same pattern.  Discover the basics, practice, improve, learn more, practice more, improve etc.

Yet in the world of investing we have it backwards.  We tell a beginning student to read expert level books and never dip their toe in the pool until they've mastered the material.  Value investing is no more complicated compared to flying a plane, yet we're treating it like rocket science.

Maybe we do this because investing is a serious business where we're putting our money into something with the potential for a loss.  It's ironic that we hesitate to invest money where a potential for loss exists but where there's also a potential for gain, because most of our money is spent on things that are a 100% loss.  If I spend money on a burger and a beer, I enjoy it for a few minutes and after that the money's gone for good.  Sure, it converts into energy for a bit, but a few hours later I'm hungry again and need to consume more food (money turned into energy).  Same with almost anything else, food, electric for the house, gas for the car and on and on.  Consumers regularly part with the majority of their paycheck, or in some cases more than their paycheck for 'spent' things.  Items that have no potential for gain.  Yet when it comes to investing, where a potential for gain exists people are like deer in the headlights because they might lose money.  It's nothing to walk into a dealer and spend $25k on a car, but save $200 a month..yikes!

One does not need to be a rocket scientist to be a successful investor.  A simple index fund will result in a gain given enough time.  If an investor wishes to explore the value side of the world basic screens are a great start.  Buy 50 stocks trading for 75% of book value and sell when they hit 1.25x, rinse, repeat.  Will this investor buy bad companies, yup, will they own duds, yup, will it work out over time, yup.

In the new year I'd advise you to ditch resolutions to read more (unless you don't read at all, which is unlikely if you're reading this) and instead treat investing like any other activity.  Learn the basics, then practice and improve.  Once the basics have been mastered move into the next level, add more complicated techniques and work on mastering those.  Continue to improve and master each technique before moving to the next.  It's possible you might never advance beyond the basics, but that's alright, master those basics and stay at a level that you're comfortable with.  Investors get into trouble when they venture far from their abilities.  Sometimes you'll need a book or two to cross the chasm between what you know and what you want to do, that's when it's appropriate to shove your nose in a book.  But not before you're at that chasm.

Let me make a few concrete recommendations.  If you're new to investing I'd make sure you understand how financial statements work before committing any money.  You don't need a Masters level education to understand financial statements, just the ability to read and understand the mechanics.  The heuristic I learned was this: The income statement shows if a company can price their products for more than it costs to make them.  The cash flow statement shows if they're lying, and the balance sheet is a snapshot in time of this process.

If you have been at this for a while look to add a new technique this year.  Maybe it'll be spin-offs, or options, or liquidations.  Make it specific, not broad.  Don't say "I'll invest in special situations", be specific "I'll invest in a liquidation".  Then do what's necessary to learn the basics and practice.

Practice is what internalizes the book knowledge we've read.  Reading without practicing holds little value.  Yet we can learn a lot that's not in a book through practice and experience.  Don't get lost in the weeds reading about the details, get out there and experience it!

So how does research fit into my investing system? I outline my full process here.


  1. Nate- I enjoy your work, but I have to respectfully disagree with much of your piece.

    As a group "value investors" probably read more than the average person, but is it because they feel they have to in order to hit a certain target? Because Buffett said so? Im sure some do this, but most value investors (a vague generalization) tend to be curious individuals who enjoy continual learning. Investing, unlike almost anything else allows one to learn about an endless amount of subjects. Books on history, psychology, biographies, investing, science, business, etc all can help bring perspective to investing and ones general education. Of course none of this is required, it's voluntary, it's wanted... At least in my opinion.

    And I find most value investors advise new investors to simply start investing with real money. That there is no better way to learn than when you have real money at stake. Much more so than I hear people saying "only after all of Buffett's letter and 30 books should you start". If the question is how can I become a better investor? Well than yes, it can do nothing but good to read Buffett's letters, intelligent investor, margin of safety, 10ks, 10qs, etc.

    How many times do u read about some famous investor who discovered The Intelligent Investor and bam they were hooked. I feel like it's almost a cliche how many guys say it, but it's true. They didn't take a class or wait.

    I just don't get who this post is aimed at. Who truly thinks, besides a finite few that they must read more before they invest? I mean just check out seeking alpha and COBF. A ton of investors who obviously aren't nose deep in a book before they invest.

    I mean I agree with you, that a newbie should just start investing, learn some basics, keep growing, but that's my point who doesn't believe this? I could be wrong, but IMO the majority agree with you.

    With that said, I do like the idea of making a resolution for learning a new type of investing and will probably implement that. Thanks for posting, keep up the good work.

  2. Great post! Gives a thoughtful frame of mind.

  3. Great post!!! I don't agree with about this point " It's ironic that we hesitate to invest money where a potential for loss exists..." . We also live now , not only in 30 + years so it's wrong called it " loss".

  4. I think this is an excellent post Nate. Its the balanced wake up call that I needed. I am the perfect audience for this piece.

    It makes perfect sense to me. I have spent the last 6years or so reading seminal texts, letters, blogs and then secondary books. I have dabbled in a couple of investments, and tracked others, with the occasional attempt at a deep dive. When I dive deep, I get overwhelmed by the uncertainties of various things, including pension liabilities or anything else I find in the financial statements. I am intellectually committed to the idea of value investing, and motivated to think about such related issues, but I feel scared off or too lazy to really get in arms deep. I tell myself that I need to improve my expertise on financial statements, memorise and deepen my understating of valuation techniques. There is always something else that prevents me from getting to where I want to be. This post is an antidote. It says: Know something, stick to it, take basic risk in order to learn more, don't act for the sake or it but doing nothing and reading more will run you out of time pretty quickly. Its true that Buffett and Munger say the less you do the better, but its all about understanding the context of what they are saying and getting the balance right. My resolution will be to call a break to reading more and accumulating more knowledge, but instead to consolidate and apply what I know- even if it means taking more risk than I otherwise would according to the very purpose of value investing. This year, thinks will be different. If not, I will leave the pursuit all together and get a new hobby.

  5. That whole "read 500 pages a day (week)" is so absurd. I often wonder how many "value investors" would swim 3 miles a day if Buffett happened to mention that he swims that much.

    Buffett reads so much because he apparently enjoys it. If you have to force yourself to read a certain number of pages, then you are just wasting your time. It'd be like Tiger Woods saying he hits 500 golf balls a day. You could go out and mindlessly hit that many golf balls and still shoot in the 90s. It's not how many pages you read or balls you hit, it's how much you learn from each page/ball.

    People should quit trying to mindlessly ape Buffett and instead find their own method that they enjoy and that works for them.

  6. Charlie Munger keeps saying over and over, read, read!

    See -

    It's true that anyone who wants to gain an edge has to be more informed than the rest. The stock market is effectively a wealth transferring mechanism. Those who are ignorant and weak willed will lose their money to those who are better informed and courageous. And there aren't many ways to be informed and courageous in stock market than to read. Knowing more about a certain company is half of it (the economics) and knowing about the past madness of the crowds (the psychology) is the other half of it. How would you know about either of those without reading?

    Now that's not to say that a newbie will have to go through reading hundreds of books before he's ready to invest. Mike Burry listed about 4-5 books and he said if someone read those books, he'd know all that was needed to invest.

    So my belief is that once you have the right approach (to underpay rather than overpay and to maintain patience and wait for the right deal at the right price), you can simply spend more time sifting through actual opportunities rather than keep learning more and more about the theory of value investing.

  7. Right on the target! Great as always! Thanks and Happy New Year Tobik!

  8. Hi Nate, Thank you so much for this piece. As a new value investor learning the ropes I was feeling a bit overwhelmed by all the information I had to read before I could start.