Value Investing Principle #1: Value Investors are Voracious Readers

"Formal education will make you a living;
self-education will make you a fortune."
- Jim Rohn

The more that you read,
the more things you will know.
The more that you learn,
the more places you'll go.
- Dr. Seuss

OK OK – I know what you're thinking – you've already read the post last month on the 'Secret to Becoming a Successful Investor' – and you get it - reading is important. I am repeating the message one last time for good reason: As you will come to discover (and I assure you I will point it out), the 'reading principle' is the essential ingredient and a pre-requisite for almost all other Value Investing principles. Choose to ignore it and one stands little chance of successfully adopting and implementing a Value Investing philosophy.

In studying the Value Investing discipline, I quickly recognized the one trait that all successful Value Investors have in common: they are all voracious readers. They are curious individuals by nature, and possess a keen desire to make sense and meaning of the world they live in. It seems that what they read is not confined to the areas of investment and financial markets, but rather spans a diverse range of subjects that include psychology, economics, and science.

Warren Buffett reads 5 newspapers a day, and devotes 75% - 80% of his day just reading. His partner, Charlie Munger observed:

"Warren is one of the best learning machines on this earth. The turtles who outrun the hares are learning machines. If you stop learning in this world, the world rushes right by you. Warren was lucky that he could still learn effectively and build his skills, even after he reached retirement age. Warren’s investing skills have markedly increased since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is."

On another occasion Munger declared:

"In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time – none. Zero. You'd be amazed at how much Warren reads – and at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out of it."

And neither Buffett nor Munger are exceptions to the rule. Legendary GEICO Co-Chairman, Lou Simpson spends 5-6 hours of his day reading. Mohnish Pabrai and Whitney Tilson, two of the most recent generation of successful value investors are also known to read extensively.

So how does adopting the habit of extensive reading benefit your Value Investing performance? The obvious benefits are:

Investment Idea generation: reading will assist you in recognizing global trends that are unfolding and which can be capitalized on.

Learning Value Investing Rationale: As Mark Twain once said:"History does not repeat itself, but it does rhyme." It is highly beneficial to examine and understand the rationale behind the successful investments made by leading Value Investors. Getting into the minds of such investors will allow you to slowly recognize similar opportunities as they arise.

The Habit of Reading is also the secret weapon that allows the Value Investor to:

• Accurately Assess & Expand one's Circle of Competence
• Add New 'Tools' to your Mental Toolbox
• Improve one's ability to perform independent and critical analysis
• Strengthen one's Investment Conviction: enhancing one's ability and to ignore the experts and the 'consensus crowd' and to develop the courage to adopt contrarian positions.
• Enhance one's ability to maintain a rational outlook when the rest of the market is losing their heads and operating on pure emotions ('fear and greed').
• Adopt a Longer-term Investment Horizon and Ignore Short-term market fluctuations.
• Recognize the Difference between Value and Price.
• Identify and Embrace Change, and Learn and Adapt

I will discuss most of these in greater detail in future posts.

On a Personal Note:

Those who know me well will tell you that books have always been an important facet of my life and have played a formative role on how I view the world. As a child and throughout high school I read avidly; whilst doing my military service I always carried a novel in my kit; and since entering the workforce I have always carried a book, journal or magazine that I could turn to whilst riding or waiting for the bus or train. I have relocated 3 times – to 3 different continents – and each time the important books ('the keepers') have come with me. I can look at any one of these books and tell you where I bought it (or who gave it to me), when I read it and who recommended it. I seem to surround myself with friends that are also readers, and I especially enjoy sharing the knowledge with them. I absolutely love and appreciate great book recommendations.

On first dates and in interviewing employees I often asked 'candidates' about the books they were currently reading or what books had influenced them. I firmly believe that you can tell much about a person's intellectual curiosity from what they are 'feeding their mind'.

I'll sign off with some advice dispensed by Emerson and highly applicable when one meets a successful Value Investor:

"If we encounter a man of rare intellect, we should ask him what books he reads." - Ralph Waldo Emerson

You can view a comprehensive list of books recommended by Warren Buffett and Charlie Munger here.

Other Quotes of Significance:

"What we become depends on what we read after all the professors have finished with us." - Thomas Carlyle

"If a man empties his purse into his head, no one can take it away from him. An investment in knowledge always pays the best interest." - Benjamin Franklin

"A home without books is a body without a soul." - Cicero

"I have often reflected upon the new vistas that reading opened to me. I knew right there in prison that reading had changed forever the course of my life. As I see it today, the ability to read awoke in me some long dormant craving to be mentally alive." - Malcolm X

"It isn't what the book costs; it's what it will cost if you don't read it." – Jim Rohn

"Learning is the beginning of wealth. Learning is the beginning of health. Learning is the beginning of spirituality. Searching and learning is where the miracle process all begins." – Jim Rohn

"Ignorance is not bliss. Ignorance is poverty. Ignorance is devastation. Ignorance is tragedy. And ignorance is illness. It all stems from ignorance." – Jim Rohn

"What you don't know will hurt you." – Jim Rohn

The Secret to Becoming a Great Investor

Greetings dear reader!

As I last promised I am about to reveal to you the Secret to Becoming a Great Investor. But before I do, allow me to address a question of no less importance:

"Why do most individuals have little chance of becoming great investors?"

To answer this, I would like to take you back 900 years (indulge me, I beg you) and introduce you to one of Judaism's foremost philosophers - Rabbi Moses Maimonides. Now this chap was not your average run-of-the-mill Rabbi. Fluent in Arabic, Spanish, Greek and Hebrew, he was learned in Jewish mysticism, the exact sciences, medicine, astronomy, Greek philosophy and served as the Royal Physician in Egypt. Like I said a pretty cool guy.

Maimoides authored a text called 'The Guide to The Perplexed' (or 'Moreh Nevuhim') - an esoteric work that deals with Kabbalah and Jewish Mysticism. Not the easiest of books to read (Trust me, I received a copy on my 19th birthday from my best friend - and I still haven't finished it!). I digress. In Chapter 34, he explains why the average individual will never be able to grasp the secrets of Jewish Mysticicm - of Kabbalah. 900 years later, his explanation also applies to the question I posed - "Why do most individuals have little chance of becoming great investors?". I provide a loose translation below:

"Preparatory studies are of long duration and Man by his nature is focused on the end result, finds these tedious and is reluctant to engage in them. Know this, if a man were able to reach a worthy goal, without any preparatory studies, such studies would be futile and a waste of time. Now suppose you awaken any person, even the most simple, and say to him 'Do you not wish to understand the nature of the heavens, their number and their form; what beings are contained in them; what the angels are; how the creation of the whole world took place; what is its purpose, and what is the relation of its various parts to each other; what is the nature of the soul; how it enters the body; whether it has an independent existence, and if so, how it can exist independently of the body; He would undoubtedly say "Yes," and show a natural desire for the true knowledge of these things. But he would wish that this desire be satisfied and to attain such knowledge by only listening to a few words. Ask him however to interrupt his usual pursuits for a week, and devote his time to obtaining such knowledge, and he would not do it. He would rather be satisfied with simple imaginary and misleading notions and would refuse to believe that there is anything that requires extensive investigative learning."

Like I said - not easy reading. Simply put what the good Rabbi is telling us is that the average person wishes to know the 'secrets of the universe' but is unwilling to pay the price – and devote the long hours of study required. And that is why 'Hidden Knowledge' is not available to the
masses – it's not that it's physically hidden, but that people are not willing to apply themselves to the learning.

Ask anyone if they want to be as successful as Warren Buffett and they will reply in an instant 'Hell – yeah!' Tell them however, that the price they must pay for such success is that they are required to expand their breadth of knowledge, begin reading books (non-fiction), that they must teach themselves how to read financial statements and read tens of annual reports a month, and most will look sideways uneasily and immediately excuse themselves, muttering something about returning late DVD's or forgetting to feed the dog.

And so it is with Value Investing. It is not difficult and not rocket-science. In fact it's really quite simple. There is enough free material available on the internet that a person who willingly sacrifices time in front of the TV, and instead devotes several hours a week to research and learning, will in no time be viewing the stock market in a similar light to Warren Buffett.

And now for the Secret to becoming a great investor:

In the 2007 Berkshire Hathaway Annual Shareholders' Meeting, a 17-year old asked Warren Buffett:

'What should I do to become a great investor?'

Buffett replied:

"Read everything you can…. When I was ten I'd already read every book in the Omaha Public Library with the word 'finance' in the title".

In my next post - "The Value Investors Library" - I will provide a list of books that have been recommended by Warren Buffett, and his partner Charlie Munger, and others which in my opinion are essential if you wish to expand your investment horizons.

Signing off for now - "May you possess the wisdom to see what the market does not, and the courage to act on it.

* It may be no coincidence that the root of Maimonides' name ('Maimon - or M-M-N) is also 'money' or 'finance'.

** Thanks to Oded for the 'Perplexed' quote.