So You Want To Be An Investor

Cutting Through the Forest on an Oft-Overlooked Path

I’ve mentored a large number of people in various ways over the years. One constant is the request for how to get started or what they might do at their stage of development. I’m writing this as a simple answer to that request, as it’s so universally needed and I have yet to see someone explain it the way it ought to be.

This is how you develop investing skills, as opposed to trading. If you want to play in the stock market and consistently move money around, this advice will not be relevant. With investing, I mean that you might make a transaction to move money into one company, or out of another, perhaps 2–3 times per year. The majority of time spent is reading to help find the best transactions available and hold them for the long term.

A short background on me: I’ve spent roughly 15,000 hours on investing, which works out to about 5–6 hours/day for 8 years. This is a lot of time to spend on a singular activity, especially during the ages of 17–24. I abandoned much of my social life for, but it’s been rewarding in its own way. That being said, I don’t think this advice would change if I spent another 15,000 hours.

Getting Started: Books on Investing

Everyone should start with One Up On Wall Street by Peter Lynch. This applies if you’ve never heard of an interest rate or you work at an asset management firm. It provides wisdom that appeals to the beginner, amateur, and intermediate investor. This also happens to be the first book I read on investing, although that is more luck than me prescribing the same path that got me here.

Other books that taught me a great deal about investing — and worth it to anyone who hasn’t read them — in order, include:

1) Margin of Safety by Seth Klarman
 Very similar to Lynch’s book above, although a different take on things from one of the masters. If I had to pick three books to read this is one of them. You should look for a pdf online, it’s out of print.

2) You Can Be a Stock Market Genius by Joel Greenblatt
 Absolutely brilliant and funny look into special securities. One of the best track records in history and not many know what is taught in this easy to read book.

3) The Dhandho Investor by Mohnish Pabrai
 Case studies of how Pabrai invested in different types of stocks. Very short and very good.

And that’s it. There are infinitely more books out there, some which I might recommend given the circumstance, but you don’t need to know every corner of investing from 10 or 15 practitioners to get into investing. And each book you read after these won’t be as good as this list.

Books Related To Buffett

Warren Buffett is considered the greatest investor of all time and studying him will teach you a lot. The three listed below are the ones that I think would be the most helpful:

- Making of an American Capitalist by Roger Lowenstein
His life’s work, best described through Lowenstein.

- The Essays of Warren Buffett arranged by Lawrence Cunningham
A collection of the essays that appear throughout Buffett’s many shareholder letters over the years. Organized for efficient reading.

- Warren Buffett and the Interpretation of Financial Statements by Clark/Buffett
If you don’t know accounting, this is a practical way to start.

What’s Missing: For the Purists

Absent from my list are Benjamin Graham’s The Intelligent Investor, who founded the idea of long-term investing in cheap companies (“value investing”) back in the 1930’s. The two books above — Peter Lynch and Seth Klarman — cover the same topic in a much more accessible way. Anyone serious about investing tends to consider Graham the gold standard; Buffett still claims this book is the best one out there.

Philip Fisher’s Common Stocks and Uncommon Profits made a similar impact on Buffett, although I think it’s easier to study successful case studies of businesses. This book simply gives a list of 15 items (“points of light”) to search for in a business. If you study John D. Rockefeller, Howard Schultz, Sam Walton, etc. you’ll be in a better place than if you read this book. Study successful businesses, as opposed to how investors might think about businesses. Going to the source will teach you to think more for yourself.

A great book on short selling (betting against a company) is by David Einhorn — Fooling Some of the People All of the Time. It is intermediate/advanced and takes a hard look at the accounting games that sometimes occur. I’d recommend it, but also know that it isn’t required reading for becoming good at investing.

Prescriptions for the Well-Read

If you’ve read more than 10 books on investing, you’ve gone too far. Investing isn’t hard, as much as everyone tends to be pretty terrible at it. The reason for this is not a lack of investing or finance knowledge, but rather a lack of applying their knowledge to… well… anything. It is more than fair to say our finance industry is highly educated but this education poorly applied in any practical sense.

Reading 10-K’s on sec.gov will get you 90% of the way there. The rest is reading company presentations on their websites, transcriptions of earnings calls, and investigating what you might read in the newspaper.

To get started, I’d suggest you pick an industry and study it thoroughly. If you start with easier industries, you’ll have more simple companies to apply various ideas to. Here is the list of industries I studied- in order- when I started in 2011, and the number of companies in each industry (I still have my research):

- Tobacco (10)

- Food (24)

- Beverages (20)

- Consumer Products (29)

- Retail (9)

- Restaurants (8)

After this list of 100 companies I deliberately became a generalist. I went into various industries including oilfield services, healthcare staffing, auto retail, toys, technology, and glass. This creative discovery process was exciting and came in three stages:

- Beginner: easy companies, such as mostly consumer-related firms, to allow me to apply the book knowledge I had and start forming my own decisions. This lead to the beginnings of trying to value a business.

- Intermediate: switching types of industries away from consumer-only into more asset-intensive businesses like retail, and studying what different types of economics different types of companies had. This also allowed me to be more flexible in my thinking, as each new company or type of industry brought about a different set of problems. I was learning how to better value a tobacco company by studying a retailer, for example.

- Advanced: picking specific companies in industries I didn’t understand, as a result of all the thinking and hard work of my original 100 firms. I then would learn the industry quickly and try to determine why that business was worth investing in.

The advanced stage brought the most growth and progress in my thinking, but each stage was exciting in its own way. Deliberate learning through all of it was worth sacrificing lunchtime at my internships, or weekend time with my friends.

So, In General To Sum It Up, How Do I Succeed In Investing?

Learn financial accounting and develop your own thinking for financial statement analysis. Learn from the greats of investing and create your own style. And then study as many businesses as possible.

I also found it very helpful to study entrepreneurs/businessmen who succeeded on a large scale, as finance is only a small aspect to the picture for succeeding in investing.

And of course, through all of this process, practice thinking hard about the details. I’d encourage avoiding using models in Excel or trying to build things to “think” for you. And try hard to develop what you can for a valuation methodology. Everyone thinks about business ownership differently and you are not going to succeed by borrowing someone else’s ideas, as much as it can be helpful to learn from them.

Best of luck!

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