By: Tim Melvin
Warren Buffett and Charlie Munger have commented many times in the past about the need to read widely and often to achieve investment success. "I have said that in my whole life, I have known no wise person over a broad subject matter area who didn't read all the time -- none, zero," Munger commented at the 2003 Berkshire Hathaway (NYSE: BRK-B) annual meeting.
"Now I know all kinds of shrewd people who by staying within a narrow area can do very well without reading," he added, "but investment is a broad area. So if you think you're going to be good at it and not read all the time, you have a different idea than I do. . . . You'd be amazed at how much Warren reads. You'd be amazed at how much I read."
When Warren was asked by an interviewer how he achieved success he held up a sheaf of papers and commented, "Read 500 pages like this every day. That's how knowledge builds up, like compound interest." This is an underappreciated talent in today's investing world. We flock to seminars and meetings to learn how to pick stocks and analyze markets using charts and pictures, without developing the knowledge of what is driving the price moves.
Get Your Nose In A Book
We have become a short term-oriented society, where video games and sound bites have taken the place of study and learning to a shockingly large degree. Investors should be big readers. "By the age of 10," Buffett once said, "I'd read every book in the Omaha Public Library with the word finance in the title -- some twice." We may not be able to replicate the young prodigy but we can take a lesson from him. Investors need to read the classics of investing literature from all the leading schools of thought, when it comes to profiting in the stock market.
Value investors who read Graham but not books on growth investing from Phil Fischer and William O'Neill have a limited understanding of what is going on the markets at any given moment in time. Growth investors who haven't read value classic from Graham and others have likewise limited their knowledge base, and this could hurt them badly over their investing life span. Being familiar with the mindset and driving forces behind other approaches can make you a better investor, regardless of your favored approach to the stock market.
Don't Be Narrow-Minded
If you favor Austrian economics, you need to have read Keynes to understand your own position more fully. Likewise devout Keynesians who have never read Von Mises have a limited and incomplete understanding of markets and the world.
Investors should also be reading as many of the industry reviews and reports that are generated all the time as well. In recent months we have seen articles and studies about the bank merger and acquisition wave from firms like Deloitte, as well as smaller firms like BKD and Crow Horwath, that shore up the case for small banks as the trade of the decade for patient investors.
Bain Capital and PitchBook have released studies of current Private Equity activity that contain incredibly valuable information about where the smart patient money is investing. The world is awash with valuable information easily accessible via the web -- but most investors are too busy looking at pictures and playing the stock market equivalent of video games to capitalize on it.
In The Words Of Dr. Seuss...
Getting your news from the papers, rather than just the opinionated talking heads on the financial and news networks, can allow you to reduce the volume of noise every day -- and gain perspective for yourself on what is important and what is not. Just about every newspaper in the world has an online presence, and most of them have English online translations, so you can expand your view of the global economy and markets beyond just what is available locally. Being aware of differing points of view can make you a much better investors than one who relies on two-minute sound bites to form their investment opinions and make decisions.
Successful investors should read across a wide range of subjects besides markets. Success in the stock market has as much to do with understanding psychology and probability theory as it does accounting and economics. You can even lighten it up a bit -- as there are life and market lessons to be found in the fiction of authors like Robert Parker and John D. MacDonald as well. Most successful investors are big readers. Investors looking for long term success would be wise to emulate them.
As the great philosopher Dr. Seuss once told us, "The more that you read, the more things you will know. The more that you learn the more places you'll go." That is just as true about the financial markets as it is about life. As the industry continues to present opportunities for value-investors, they will need to weed through the daily noise of the market. A perfect example is the 3 Low Risk, High Yield Stocks that Tim Melvin identifies as the trades of the decade.
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