How to Be a Great Investor, Part Ten: Read (and Keep an Open Mind)

This article is the last of a ten-part series loosely based on Michael J. Mauboussin’s white paper “Thirty Years: Reflections on the Ten Attributes of Great Investors.” See “Part One: Be Numerate,” “Part Two: Understand Value,” “Part Three: Properly Assess Strategy,” “Part Four: Compare Effectively,” “Part Five: Think Probabilistically,” “Part Six: Update Your Views Effectively,” “Part Seven: Beware of Behavioral Biases,” “Part Eight: Know the Difference Between Information and Influence,” and “Part Nine: Position Sizing” for previous installments. And please keep in mind that although I’m basing my work on Mauboussin’s, I am departing from his ideas on occasion.

As Michael Mauboussin relates, not too long ago the Columbia Business School sent a group of students to meet with Todd Combs, the investment manager at Berkshire Hathaway and (currently) CEO of Geico. He recommended that they read 500 pages a day. The students were dumbfounded. Combs’s colleague at Berkshire, Vice Chairman Charlie Munger, has said, “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.” And Warren Buffett himself has suggested that he devotes 80% of his working day to reading.

All this might seem extreme. But, as Munger says, Einstein pointed out that “success comes from curiosity, concentration, perseverance and self-criticism. And by self-criticism, he meant the ability to change his mind so that he destroyed his own best-loved ideas.”

(All of the above quotes are taken from Mauboussin’s “Thirty Years” paper.)

The question, then, is: what should we, as investors, read?

I’ve broken the answer down to nine basic categories.

1. Books on investing in general. These can range from classics like Graham and Dodd’s Security Analysis to contemporary overviews like Frederik Vanhaverbeke’s Excess Returns. It’s best if they were written by actual investors.
2. Financial, accounting, and statistics textbooks and courses. Good investors must understand generally accepted accounting principles, be able to read financial statements, understand how to get the most out of those statements, and be familiar with basic statistical analysis. Textbooks and courses (in-person or online) may be the best way to get a good grasp of this material.
3. Analyses of individual stocks and companies. Even if, as I do, you use a quantitative approach, you should be familiar with how analysts—whether certified ones who work for an investment bank or amateur ones who write for sites like Seeking Alpha—approach evaluating companies to invest in.
4. White papers and academic articles. One needs to be discriminating here, but many valuable insights can be gleaned from the research done by investment firms and university professors.
5. SEC filings and earnings call transcripts. Being able to read balance sheets, income statements, and cash flow statements—along with all the footnotes—is invaluable; transcripts of earnings calls can be very informative as well.
6. Memoirs by and interviews with great investors. Putting investing success into a personal narrative can be inspiring; but often the most helpful bits in such reading are the accounts of investing mistakes.
7. Investment/trading blogs and forums. Some of these are wise, some are foolish, and I doubt any are indispensable. But perusing them is a good way to keep abreast of current thinking, and their interactive components can help you get answers to your investing questions.
8. History. Understanding how economics, markets, and politics worked in the past is key to having a grasp on the future.
9. Philosophy, poetry, and advice. Sometimes stepping away from the markets and reading about life in general can produce unexpected insights.

The next question is, of course, what not to read:

1. Computer-generated stock news. If you Google a small, obscure stock looking for news about it, the large majority of what you’ll come up with are “stories” written by an algorithm. These are garbage at best.
2. Technical analysis literature. Most of this will cause you to lose money faster than any other financial advice you’ll come across. Remember: the price you paid for a stock has nothing to do with its prospects, and its recent price history matters very little. A few technical metrics are valuable, but most of the literature out there is stock-market astrology.
3. Econometrics, EMH theory, and CAPM theory. If you don’t know what these are, that’s OK. And while these theories have produced some amazing insights, they ended up flouting empirical observations and using seriously flawed assumptions about market behavior. Before approaching this material, I suggest reading Alphanomics by Charles Lee and Eric So, which I wrote about here. On the other hand, though, Mauboussin counsels, “make a point of reading material you do not necessarily agree with. Find a thoughtful person who holds a view different than yours, and then read his or her case carefully. This contributes to being actively open-minded.”
4. Market speculation. Spending more than a few minutes a day reading what pundits think is going to happen next in the markets can poison your mind. Remember that more than 50% of their predictions will be wrong.
5. Get-rich-quick pitches. These come in a variety of forms, ranging from printed newsletters to high-tech websites. If anyone promises you excess returns of over twenty percent, either steer clear or contact the SEC.
6. Stocktwits. This website showcases content-free time-sucking garbage. There may be a few diamonds among the trash, but going through it all is exhausting. When researching a stock, steer clear of robo-advice and uninformed opinion and stick to actual financial analysis.

What does all this reading (and not reading) do for us as investors? It keeps us sharp and inquisitive; it makes it more likely we’ll find an edge; it increases the chance that we’ll stumble upon an investing idea that will not only be profitable but will set us apart from other investors; it increases our ability to question our own beliefs and to modify them as necessary. And reading has one additional benefit: it keeps us from obsessing about the performance of our portfolio. Psychologically, especially in bear markets such as these, nothing could be better.