A Reader Asks What is the Best Way to Learn Using the Resources Here.

How Best to Learn?

An intelligent reader and I have had an exchange on how to approach using the resources on this blog to learn most efficiently. There are many resources on this blog and in the Value Valut–just email me at aldridge56@aol.com to request a key)–but the orgainization can be improved upon.

Ben Graham was right when he said a conservative investor can do better than average through using a disciplined, rational approach here: http://www.grahaminvestor.com/

Benjamin Graham always tried to buy stocks that were trading at a discount to their Net Current Asset Value. In other words he buy stocks that were undervalued and hold them until they became fully valued.

“The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor.” Ben Graham in “The Intelligent Investor”, 1949.

The problem is how difficult it is to perform much better than average. You have to expand your skills and circle of competence while keeping the costs of your learning to a minimum.

I will be traveling the next few day (until Tuesday), but I will think carefully on my answer to his question. Other readers, please feel free to offer your experiences, thoughts and suggestions. The quality of readership here is outstanding.

Dialogue

Hi John,

Just a quick question regarding your suggested learning methodology.

I am currently working through your lectures (blog and Value Vault) and there are a number of useful book recommendations. Would you suggest reading the books before moving on, to appreciate and understand the subsequent lectures? e.g. In lecture two, you quote, “The professor (Joel Greenblatt in his Special Situations Investing Class at Columbia GBS) stressed studying carefully the essays of Warren Buffett.”

I do have the book and was wondering whether to take a break from the lectures and study the book, then return to the lectures. Given you’ve been through the learning process already, what would you recommend?

I’d be very interested to hear your thoughts. Keep up the good work, it is really appreciated.

My reply: Dear Reader please tell me about your background, how you became interested in investing and how YOU think is the best way to learn.

What drives your interest in investing? Then I can better frame my answer.

THANKS.

That is a very good question and I’ll try to be as clear and honest as possible.

Background: I am from the UK, 42 years old, married, with one child.

Job: Sales & Marketing Director for a small Manufacturing Company selling custom robotics/automation machines/systems to pharmaceutical and petro/chemical industries.

Professional Background: I am a Chartered Mechanical Engineer.

Education: 2001 – First Class Honours Degree in Mechanical Engineering.

2006 – MBA from XXXXX Business School.

2010 – MSc module Valuation with Professor Glen Arnold at Salford University (10 week semester). Glen is author of “Value Investing” and other related investing/corporate finance titles (FT Pearson).

2012 – Professional Certificate in Accounting (Open University). This was a distance learning course done over two years in financial accounting (year 1) and management accounting (year 2).

Background: Hard to say how I started out, but I invested in Thatcher’s UK privatisation initiatives in the mid 80s. I made a small amount of money on this purchase of UK utility company British Gas and I was hooked. I was 16 years old.

Since then I had limited free capital due to mortgage, pension and so on. About seven years ago, I became interested again and read “The Motley Fool Investment Guide” on investing which basically advocated index/mutual funds. I did this for a couple of years, invested mainly in Fidelity funds, UK, China, India, US index funds and by sheer good fortune sold out near the top of the market to buy a house (May 2007). Shortly after I had a brief spell spread betting (futures), with limited success, actually no success! I wanted to get rich quick and attended numerous trading seminars in London. I shorted one of the worst hit UK banks (RBS) during the banking crisis and still lost money because of the volatility (and my ineptitude). Imagine losing money shorting Lehman! It was that bad.

I managed to stay out of the market for 2008 and started to reinvest in 2009, mainly FTSE100 companies that are mostly popular (by volume e.g. Vodafone, Royal Bank Scotland) but with no analysis or reason to invest other than a ‘gut feel’ that they would go up! They did, but so did everything else…I later sold once I became interested or aware of small cap value.

I’ve read (once only) many classic investment books (Graham, Dreman, Lynch, Greenwald, Glen Arnold, Montier, Shefrin, Buffett partnership letters, Greenblatt, Pabrai etc.). As you know there are many references in these books to the accounting numbers and having read them I realized I didn’t know that much about accounting despite my MBA education. As a side note, I did the part-time Executive MBA and it was way too hurried to absorb the vast amount of information, so my finance learning was minimal. I oculd calculate WACC, CAPM etc., but didn’t understand the context. And so I decided to embark on an accounting distance learning course which I recently passed a couple of months ago.

After reading these books and several biographies on Buffett, I became more and more interested in the value philosophy (low P/E, P/BV etc.). I stumbled across various value oriented blogs such as Richard Beddard in the UK, Geoff Gannon and your own blog. Since reading these blogs I started to follow the UK small cap scene. (John Chew Small-caps have the tendency to be more over-or-undervalued for liquidity and informational reasons). The reasons for this philosophy are mainly based on Buffett’s early days, Greenwald, Beddard and Glen Arnold’s teachings. I can also relate to the idea that they are under researched, too small for the institutions and are a lot easier to understand.

So far my learning process has evolved from trying to understand quantitative financial analysis through books and working my way backwards, i.e. if I don’t understand something in a book or on a blog, I know I have to educate myself rather than think I know what I’m doing. I’d like to think I recognize my behavioral failings e.g. overconfidence, which I hear a lot in investing. My current thinking is to learn financial statement analysis first, along with valuation and then I can focus on the qualitative factors such as competitive advantage etc.

I believe that to buy a company cheap, you should know its intrinsic value and so I have become more interested in valuation and the teachings of Damodaran. I have just started to look at his Spring 2012 lectures. At the same time I saw his course mentioned in your first lecture. Not long after reading your first lecture, my question occurred to me, i.e. if John is recommending these resources – does he suggest that the reader works through those recommendations first before proceeding with the lectures. I realize that if you read and did everything you posted, it would take a lifetime, so although I am definitely not looking for shortcuts, I would appreciate advice on the case study approach to learning. My intention is to work through the lectures and stop at the point a book is recommended. However there are about five or six books mentioned in lecture one alone. I’ve just started, Essays of Warren Buffett by Cunningham. I also understand there is no substitute for getting your hands dirty and reading the financial reports of the companies you’ve either screened or shortlisted for some reason. I suppose I’m at the stage where I’m not sure what ratios are important, profitability vs financial strength etc. Do I look at a company qualitatively first or do I screen based on PBV, P/E, Yield, ROIC, ROE, EV/EBITDA etc.? I’m conscious that I need to avoid value traps, so maybe look at F-Score, Z-Score, solvency.

I realize you can never stop learning, but I just need some direction from a person who’s been there already. Once I have the right approach in mind, I will study and ultimately learn from my mistakes akin to Kolb’s experiential learning theory.

What drives my interest in Investing?

I suppose this could be answered with a quote from the Guy Thomas book, Free Capital:-

“Wouldn’t life be better if you were free of the daily grind – the conventional job and boss – and instead succeeded or failed purely on the merits of your own investment choices? Free Capital is a window into this world.” Guy Thomas – Free Capital.

That quote would sum it up for me. I can cope with not being rich, but being free would be pretty good! In addition, I actually love the game of investing and the intellectual challenge interests me enormously. I read investing books for fun, much to my wife’s disapproval!

I hope the above gives you enough to answer my original question and thank you for your time and help.

23 responses to “A Reader Asks What is the Best Way to Learn Using the Resources Here.

  1. One thing that seems like an exciting opportunity is a recent post by Whopper Investment:
    http://www.whopperinvestments.com/developing-a-process-for-deliberate-investing
    “So, here’s my challenge to you, the reader. Every Sunday I’m going to post a company to value, and then the following weekend I will post my valuation and the reasoning behind it. I’m going to challenge you to take a few hours at of your week to value the company as well, and then compare your valuation to mine, and our valuations to the current market price. Let’s use our valuations to challenge the strengths and weaknesses of each other’s thesis and force each other to become better investors.”

    “Since reading these blogs I started to follow the UK small cap scene”

    Well worth reading is Paul Scott’s UK Small caps blog, which he has only just started: http://paulypilot.blogspot.co.uk/ . Paul is a former FD in retailing, and an experienced and (very!) successful private investor. Currently, he reports every day, and does a quick analysis of the relative attractiveness of the business. He is very succinct, and cuts through a lot of the endless waffle and fancy graphs. His thought processes are laid bare for all to see. John, you might want to check out his blog, too, and see what you think.

    • Mark, many thanks for offering your advice. I do like the sound of both of those ideas. It’ll be really useful to get an idea of how a practitioner values a company rather than reading the theory from a book!

  2. I’m a fellow engineer of a similar age, though I now work in investing. I’m also a level 3 candidate in the CFA program.

    My approach with John’s material so far has been to focus exclusively on the blog posts, proceeding sequentially from the very first post (I’m currently at October 14 of last year).

    I read each one, the comments, and the PDF’s very closely (often more than once), and sometimes post comments. I also subscribe to the blog so that I get emails of new posts, but mostly scan them quickly and file it away under “Can’t wait to read that more in depth once I catch up to that post.”

    The key is that I don’t pressure myself to go quickly. I only proceed to the next post once I feel there aren’t any unanswered questions from the one I’ve been working on. That helps retention & understanding enormously.

  3. Lumilog, thank you for your generous advice. I thinks it makes perfect sense to follow the blogs sequentially. Do you also read the recommended books in parallel to the blogs or do you concentrate solely on the posts/lectures? I’ll look forward to John’s response but would be interested to know how you handle the parts of the lectures that you don’t quite understand. Good luck with the rest of your learning journey!

    • No problem, V4V. The only book I’m reading in conjunction with the posts in Competition Demystified, since John has emphasized its importance before. I’ve also spent considerable time with Greenwald’s Value Investing book too. When I get stuck I usually post a comment and John (or others) will often post a reply, but I try not to bother him too much.

  4. The issue of information overload has been a recurring theme here. I wish I knew the answer. I try and blend keeping up with the posts here and on other blogs with analyzing companies and industries. I find that the analysis enables me to synthesize the general information I have read.

  5. I believe information overload is idd the key issue here. In general I believe data and facts (you can still decide whether it is information or not) overload will remain one of the key issues for investors, working people, systems, students and organisations in general.

    I believe everybody can handle it by combining following elements:

    – Just like with your investments, be patient with learning and let your knowledge compound. In the beginning you will read lots of stuff and maybe only after a couple of years you start connecting more and more dots. Also for books, there seem to be a lot of investment books let’s say there is a set of 50 really high-quality books…if you would read 1 book a month and maybe study a bit around it…it would still take you 4 years to finish. But I believe by then you read more books than most persons.

    – There are a lot of easy computer applications to organize your learning process. Take advantage of free tools such as evernote, adobe reader x, google reader, etc. Organise information on your computer/desk intelligently (really helps..imagine that you want to find a note within 10years from now)

    – Talk to other people about investing. Don’t talk only with people out of the value investing scene (although they are great for sharing ideas of course) but also talk to employees at other type of money management firms. For me one of the key reasons to do this are twofold : (1) if you are managing outside money you should think more broadly about realistically managing other peoples wishes and needs (2) sometimes you can make some kind of connection with value investing. Also you get different views on diversification, sell-discipline, managing drawdowns, etc. For me allocating capital within a ‘value investing’ framework makes sense, but also not for whole my capital base. Again, for me it is not about becoming a good ‘value’ investor. It is about finding an investment process that works for me or that could work for a certain group of people. There is nothing wrong with saying that you cannot handle a 60% drawdown that a pure concentrated equity manager can have, everybody can handle it on paper but you have to imagine that you put 100k in an account and that over the couple of some months there is only 40k left. 99,9% of people then sell everything.

    – Sometimes a roadmap can help…I have a loosely defined roadmap of learning objectives on paper.

    Just my two cents of course….always appreciate comments!

  6. I also believe having something like a blog helps since you write, get comments, think, have a motivation to write more and to think more about it…don’t have that yet but it will be there in a short period of time:)

    Last comment, since a few weeks I also started with a stock universe (let’s say European companies under EUR 1 billion and bigger than let’s say EUR 200 million). This is only a very small part of the global market available, but as an individual investor I believe it won’t harm you defining a universe for a while and study that in depth.

  7. This might be heresy, but many of the investment classics do not need to be read in full. They need to be read for the key concepts. Many contain archaic information that is no longer really relevant. I would not even waste my time trying to read “Security Analysis”. You are better off studying a good accounting text and studying recent history through the financial statements of failed and successful companies.
    Also, for example, if you read the Intelligent Investor only read closely Chapters 8 (“The Investor and Market Fluctuations”) and 20 (“‘Margin of Safety’ as the Central Concept of Investment”). 8 & 20 are the key concepts of value investing — markets are volatile and you can take advantage of the volatility and reduce risk by buying stocks that are cheap relative to their valuations. In fact virtually everything that you will read on John’s marvelous blog only reiterates those two concepts.
    From the two concepts arise two questions about whether or not an individual is fit to be a value investor. The first is behavioral. Can you mentally separate Mr. Market’s emotional state from your estimates of intrinsic value and step in to buy or sell. This is very difficult to do. People around you will be telling you you’re wrong and stupid. Often the prices of what you buy or sell will tell you that for some time after the actions too.
    The second question is whether you are able to value an asset with sufficient precision to determine whether or not it is worth owning (or should be sold). Unlike the first question, valuation is a skillset that can be learned. Here parse and focus on the various aspects of the process – What sort of valuations work best with different types of companies, What are the common valuations errors, what are the typical behavioral errors, etc.
    For example, unlike the assertions of many textbooks the valuation of an equity asset rarely, if ever, results in an exact number. I know that all the formulas (like those in Damodaran’s valuation class) seem to require a conclusion that the shares of XYZ are worth $32.47, but that is rarely the case. In my experience, I find that an issue might be worth somewhere between $30 and $50 dollars. If I can purchase it for $20 it might be a great opportunity, but chances are it will rarely trade for less than $35 unless there are serious issues that will test you per the first question.
    Also, most stocks trade around fair value. I think that is very difficult for an individual to comprehend that there are very few great values. Many opportunities arise from ideas that were researched and set aside a two or three years ago. Suddenly, you look at the new lows list or a value screen and see that it cratered. Then work it up again to determine why. Sometimes it deserves to have cratered, but sometimes there is a fundamental misperception in the market, which allows you to buy a bargain.
    It sounds like you understand the basics of valuation metrics and discounted cash flow, but are looking for more tricks or a holy grail. Unfortunately, there isn’t one. The real secret of value investing is hard work. If you have the disposition to question and differ with Mr. Market and the ability to approximate the value of an asset, then you have everything you need to invest. What you now need to do is go out and apply all that theory to the real world and figure out what works for you.
    You do this by reading and practicing. CSInvesting is a great place to collect the resources to do that. Skim through the materials with a critical eye to list and determine what you should read and learn. Create an index for yourself of what you seek to learn and find the resources on the site or elsewhere will help teach it. If it’s not on the site, use the community to get referrals as you did with your question. Once you have the index put together, prioritize the items and determine a schedule for yourself.
    During the process always turn a critical eye one what you are reading. It is probable that some things you believe will be helpful aren’t. Just because someone else says something is important doesn’t mean it is. Value investing is like academics a solitary process, and you must be able to rely on your own judgment as to the validity or importance of any information. Just because someone says it is important or valid, doesn’t make it so or doesn’t mean it will be relevant to your investment process. There is no one right or wrong way of doing things.
    Of all the books on the site there are two that I would recommend reading for the insights they give on how to analyze a company: Competition Demystified and Financial Shenanigans. Competition Demystified offers a great perspective for looking at a business’s competitive position, while Financial Shenanigans explains many of the ways companies try to mislead analysts and how a careful study of the financials often reveal their fraudulent ways. Each are also rich in cases that you can delve into deeper through Edgar filings to hone your analytical skills.
    Also, John’s case studies that he posts from time to time are great learning exercises and give insight into how valuation is conducted. Rarely is it simply the result of discounting future cash flows. More often, the valuation is an exercise in breaking down the assets of a company, determining their individual worth either by the income they produce or what they would be worth to a rational buyer in the market place, and then adding those valuations together. Sometimes the value is in separating a poorly performing asset from a strong performing asset.
    I would also read the value investor insights file. There take a critical eye to the way investors discuss their processes and analyze their examples to determine whether you agree with their thesis and valuation. All the information is publicly available through Edgar or the companies, and it is fun to reverse engineer their analysis and determine whether they were correct or made errors.
    Finally, the plethora of transcripts in the value vault is interesting and enlightening. The Greenwald lectures give a great summary of the basic process of researching and analyzing a company. The Greenblatt lectures are more advanced. I would try to focus on just getting comfortable analyzing a business and determining what it is worth. Then, later focus on different types of situations through the Greenblatt lectures and his book “You Can Be a Stock Market Genius”.
    To summarize I would recommend focusing on the basics of researching and valuing companies. Use the case studies and examples from Value Investors Insight to compare your evaluations to what professional investors conclude. A great thing about using past examples is that you can then look to see what happens to grade yourself. Later as you get more comfortable with assessing companies in general, I would branch out to the more specialized niches that Greenblatt & his guest speakers describe in the lectures.
    Being a good investor is (to paraphrase Thomas Edison) 99% perspiration and only 1% inspiration. It is really hard (and often dull) work. As Lou Simpson who used to work for Buffet has said, a good day is when you read through 10 or 15 Ks. It isn’t about being lucky, but about being ready. You get lucky by having your homework done and having confidence in your own assessment of a situation because you know the limits of what you can and cannot understand.
    A last point is that Warren Buffett’s focus on circle of competence is critical. As a small investor you have a huge advantage over huge fund managers, because you can focus on corners of the market they cannot participate in. You don’t need to know everything and can focus on anything you choose. You could opt to only invest in spin-offs from multi-billion dollar companies that will have a market cap below $500 million. Alternatively, you can invest only in micro-caps with more significant insider ownership. Or you can say I am only comfortable investing in large cap consumer staples companies, and can have the patience to wait until they go on sale to take meaningful positions. At the end of the day all you are trying to do is determine what something is worth and buy it for less.
    I wish you the best of luck, and hope that you have as much fun as I do studying businesses and what they are worth. Be warned – it is a lifelong process, and there will never be a moment when you know it all. Even the most experienced investor can be humbled by unexpected outcomes.

    • Metis,
      Many thanks for such an in-depth response. I’ve read your advice many times and it makes perfect sense to me. I have both the books you recommended (Greenwald and Schilit), so I guess I’ll move onto these after I’ve mastered the basics of researching and valuing companies as you’ve suggested. John’s case studies will be also invaluable for this as well as the VII file. As you perfectly understand, I am at the beginning and it seems a little overwhelming, but I guess I just need to get stuck in and get my hands dirty!
      Thanks again for such useful advice.

      • Drive by your town and if you see Coke, Fastenal, Fedex go get their annual reports. Can you see how they make money. Start with what interests you and then look up the question that come up.

        Step by step, three steps forward, two back. Keep on.

  8. A brief about me before the suggestion : I am currently an investor employed at a hedge fund focused on emerging markets. I started ‘speculating’ 9 years back while in graduation and then learned ‘investing’ from a very famous prof. in India (his blog is listed on this site too ( fundoo professor) and have been following Value investing since. I am also a visiting faculty for MBA courses and CFA training and enjoy teaching..
    Following this intro here are my 2 cents for your reader.. If he is not very good with accounts and he wants to get good at investing, the first step for him is definitely getting equipped with accounting (and not just basic). I always found CFA Curriculum books very well written and exhaustive in that sense. Everything else (investing books, case study etc ) should follow once a basic understanding is there. In case you don’t have the books and you are not able to find them just drop your email id.. I will mail it across

    Thanks

  9. My advice re: information overload:

    It might seem like you can keep up with a lot of blogs, etc. by better time mgmt & organizational skills. In truth, this just leads to you “scanning” a lot of material per day, but gleaning only superficial knowledge.

    Better to pick one thing that grabs your attention now and focus exclusively on that for a while to get something out of it. Accept that in the process you’re definitely missing out on other great material – but that it’s fine b/c you’re going for depth instead of breadth.

    Very much like what is described here:
    http://zenhabits.net/online-reading/

  10. PK, thank you for your kind offer and advice. Although I’ve started the process of learning accounting through an Open Uni. course, my next step should be financial statement analysis and valuation. If you think the CFA books would help me please email to aldridge56@aol.com for the value vault. Thanks again.

    (John, I assume this is OK with you. If not just ignore the comment through moderation process).

    • Fine with me.

      I will post on my advice to you in a day or so.

    • For financial statement analysis, probably the best place to start is Penman’s text. Try to get the international edition, because it refers to some of the key differences between IFRS & US GAAP.

      Much of the stuff Penman writes about … well, you probably won’t use it. But it’s good to know, anyway Suggest you knock off one chapter at a time in the order in which they appear in the book, rather than trying to just focus on the bits which look interesting. Have a go at the examples too. (Probably, it’s not worth bothering with the supplementary materials shown on the website for the book.)

      Also, it wouldn’t hurt to read Graham’s short book on financial statement analysis, perhaps as a primer. Please bear in mind that parts of that book are now showing their age and other parts are not relevant in an IFRS environment.

      Books like Financial Shenanigans (mentioned above) are also useful, once you get to a more advanced level. If you want to go down that path, suggest you start with O’Glove’s “Quality of Earnings” and go on from there. Some of the basics are covered at the end of Staley’s “The Art of Short Selling”. Mulford & Comisky have a couple of books in this area too. A word of caution – some of these books are written for auditors or for accounting academics/regulators. They focus on many things which are not very practical from an investor’s perspective. However, they will allow you to identify danger signs. (By the way, some people say that the 2nd edition of Financial Shenanigans is better than the 3rd edition.)

      I hope that this formidable list of books doesn’t give you the wrong idea. Like a number of others have already noted above, I think it’s a mistake to get too bogged down with studying. In the end, investing is like sex – at some point, you have to stop reading about it and (ahem) get on with the job.

  11. Sorry for a delayed response, Sure I will mail the CFA books at the aldridge56@aol.com and tonymmoran@sky.com. Also, being a new reader on this site, can anyone tell me what’s the concept of Value Vault and how can we access it ? I have lot of books with me which may helpful for the readers of this blog. The books are of multiple disciplines like investing, psychology, gaming ( cards etc ) and others. Do let me know how I can contribute to it.

    Thanks
    PK

    • Dear PK:

      I will email you a password to the Value Vault.

      Why don’t you see what is in there–plenty of books and videos. It will take a while.

      Then if you want to donate, email me the books or I will let you upload the books to the value Vault in a PK Folder.

      So first I will email you the PW by this evening.

      Thanks for the gracious offer.

      • Hi John

        Can you please mail me the password for the vault. Also can you please tell me how do I share big files with you. The CFA curriculum books I promised are 120 Mb+ and am having trouble sharing the books.

        Regards
        PK

  12. I haven’t started investing yet but can’t wait to do so once I get a job. I am still developing my investment strategy and plan.

    I think I am able to do basic valuations and financial modelling. BUT the one thing I can’t get my head around is: Linkages between financial statements.

    This is the most important issue that is not being discussed here. I agree with V4Value that learning financial statement analysis would be an excellent idea. Unfortunately, there doesn’t seem to be any good, free online courses such as there are for valuations. I have been able to find this course which comes close to what I am looking for:
    http://ocw.mit.edu/courses/sloan-school-of-management/15-535-business-analysis-using-financial-statements-spring-2003/lecture-notes/

    But no video lectures! 🙁

Leave a Reply

Your email address will not be published. Required fields are marked *