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Another Reader’s Question: Any Suggestions on How to Learn How to Invest?

Index investing outperforms active management year after year.–Jim Rogers

Reader: How Do I learn how to invest? Suggestions?

My reply follows in three parts: What NOT to do, traditional advice, and what I suggest.

What NOT to do

Here is what you should NOT do when learning how to invest.

Ignore the difference between price and value: http://www.youtube.com/watch?v=pMz_sPs11HU

Sit all day watching CNBC so you can be “up on the economy and markets.” http://video.cnbc.com/gallery/?video=3000034368

Buy whatever Cramer recommends:http://www.youtube.com/watch?v=gUkbdjetlY8 but wait until the price pops higher so you can be sure.  You remember the adage: “Only buy what goes up, and if it don’t go up, don’t buy it.”  If you can find the most popular companies mentioned relentlessly in the news wait until the price has been rising for a several months, then buy. Price is everything. Be part of a group. Ignore any conflicting information in your investments because you won’t be successful being negative. After any purchase, ask friends what they think of the stock. Choose someone randomly and ask them why you own the stocks you have in your portfolio. If they don’t answer, yell at them for their stupidity.

After losses, blame anyone but yourself. Buy as many stock-tip newsletters as you can afford, so you don’t miss anything. If the story sounds good, then buy the stock.  Read Barron’s to supplement what you hear on CNBC and buy what the experts think–just do it quickly. Avoid becoming confused by reading the 10-K, proxy, annual reports, product and customer information and/or credit reports. Do what the charts say. Attend expensive training and trading schools like http://www.tradingacademy.com/stamford/ (Click on Video)

Or http://www.wallst-training.com/

You will make so much money that spending $10,000 for a two-day course will be a great “investment.”

Spend as much time learning about Macaulay Duration, efficient frontiers, and predicting the markets as you can. Live by the saying, “Often wrong, but never in doubt.”

Traditional advice in order of preference:

  1. http://www.aier.org/product/how-invest-wisely-2010 A non-profit research organization on economics and personal investing in Great Barrington, Ma. A good source of independent research for individual investors. Recommended that you view their store on investing materials.
  2. http://news.morningstar.com/classroom2/home.asp?colId=397&CN=COM This site has a series of classes to teach you the simple basics. Not bad for beginners.
  3. American Association of Individual Investors: http://www.aaii.com/
  4. http://www.fool.com/how-to-invest/index.aspx?source=ifltnvpnv0000001
  5. http://finance.yahoo.com/education/begin_investing/article/101181/Advice_for_a_Novice

What I suggest

Any advice I give is from my perspective so what works or worked for me may not fit your personality, goals and situation. With that caveat let me suggest:

First, read the classics: The Intelligent Investor by Ben Graham, Rev. Edition by Zweig. Get a feel for how Graham approaches investing. Next read, Margin of Safety by Seth Klarman (in Value Vault) as a further reinforcement of the value investing approach. You can then read, The Interpretation for Financial Statements by Graham in the Value Vault to give you a basic background for reading 10-Ks.

You will need to read Warren Buffett’s letters to shareholders several times to grasp all the points he is making. A good book, The Essays of Warren Buffett here:http://www.amazon.com/Essays-Warren-Buffett-Lessons-Corporate/dp/0966446119organizes his letters into subjects for easier reading. Or go to http://www.berkshirehathaway.com/letters/letters.html

Second, pick an industry with a simple product that you can understand with a few industry participants and pretend to write a story on the industry. Take the carbonated beverage or beer industry–the product is simple and there are fewer than a dozen major companies in either industry.  Read the 135-year history of Coca-Cola, read a book or two about Pepsi. Then take five years of annual reports and proxies from Cott beverages, Pepsi, and Coke and read them.

Third, figure out what their returns on capital are, sales trends, profit margins and company risks. Would you want to buy one of these businesses? At what price? Why are certain companies doing better or worse than their competitors? Have their market shares changed much over the years? Can they raise prices?

You will need to spend about two or three months reading about 30 minutes each day but you will become fairly knowledgeable about beverages. If you don’t like my idea for beverages then choose an industry/business that YOU are really interested in.

Finally, read through Security Analysis by Ben Graham (6th Edition). Note your interest in the readings. If sitting alone for hours is agony or pawing through Security Analysis is unbearable, then that will tell you volumes. Don’t worry if you haven’t the personality or interest to be a self-directed investor, just know your limitations and respect them.

If you struggle with financial statements, take a free internet course on accounting or take a course at a community college. There are plenty of programmed texts so you can learn on your own.

Learn Austrian economics–see prior post on studying financial history here: http://wp.me/p1PgpH-wN.

If you are very ambitious, get a subscription to Grants at http://www.grantspub.com. Then download all the issues since 1983, read all the books mentioned in the issues and try to understand the investment merits or lack thereof in the companies mentioned. You will learn more than going to business school.

Read the commentary in the Value Investors Club at http://www.valueinvestorsclub.com/value2

Learn how investors view various investments. Try to reverse engineer the company recommendation by looking at the original financial statements.

I hope this helps.  Let me know how your journey progresses.

More on ROIC……….

It is not whether you are right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.- Stanley Druckenmiller


First discussed here:http://wp.me/p1PgpH-v0

Greenblatt’s discussion of ROIC plus www.fool.com’s series of articles on ROIC so you can understand different approaches.


For beginners or those who need a refresher, a Khan Academy Video on return on capital:

http://www.khanacademy.org/humanities ---other/finance/core-finance/v/return-on-capital 

Competition Demystified Continued; Hedge Fund Job; Hire an Ex-hooker

Experience is something you don’t get until just after you need it.–Steven Wright

Next Reading in Competition Demystified

Let’s tackle pages 113 to 136 or Chapter 6: Niche Advantages and the Dilemma of Growth–Compaq and Apple in the Personal Computer Industry. Good work to those who did the Coors Case Study.

Finding a Job at a Hedge Fund

The reader who wants to obtain a hedge fund job has received good advice from several of the readers this post yesterday: http://wp.me/p1PgpH-lm.

Everyone gives advice that they think will help but we have our biases and what has worked for us may not fit the advisees. Please take my advice with a heap of salt.

Let’s take a step back and ask a few questions—what is your ultimate goal? I assume your reason to work at a hedge fund is to be paid while you learn to become a better investor.  You have to be sure that you have unique skills or traits that would make you suitable for the work. Would you like to be alone sitting in a room all day reading, thinking and struggling to find answers to questions?  That is what I do, and I am one weird guy. I think of the country song, “Don’t let your babies grow up to be value investors.” http://www.youtube.com/watch?v=ePgnkVAM3L8&feature=related.

What do YOU really want to do and what combination of your life situation and skills will help you attain what you are seeking. Below is an excerpt from www.fool.com on a job search board http://boards.fool.com/that-is-awesome-that-you-have-been-able-to-do-25280669.aspx.

Where is the place to be in business today?

I don’t want to sound rude or negative, but that is the wrong question if you are looking for career advice. No-one can give a general form answer to that question. Everyone can try to answer that for themselves, but how does that relate to your own situation? Rather, you should be asking yourself:

– What do I enjoy doing? – What am I good at? – What are the skills that truly differentiate me from my peers? – What type of environment do I enjoy working in? – What level of interaction with others do I need on a day-to-day basis? – How important is money to me?

Once you have thought through these questions (and I suggest you do this in writing), you’ll be on the way to finding an answer to this question:

“Where is the place to be in business today for me?”

Regards,  Alex Dumortier (TMFMarathonMan)


Ok, I am back.

Read Snowball by Alice Schroeder. You will understand how focused, obsessed and hard-working Buffett is. Do you love the work THAT much? Because you will have to work extremely hard, but if you love what you do then it isn’t really “work.” Work hard for the moneyhttp://www.youtube.com/watch?v=Lnd7Urx28f8

Traits of a Money Manager: http://www.fool.com/news/foth/2001/foth010717.htm

Career Advice

Some videos meant in fun but there is helpful advice–Steven Spielberg’s career suggestions:http://www.youtube.com/watch?v=kBN9jpooZoM&feature=related

Do you have the talent or why most people fail at screenwriting: http://www.youtube.com/watch?v=gXPYhW8Q74w&feature=related

Advice to an actor–be yourself: http://www.youtube.com/watch?v=m_Ui2IGbqhY&feature=related

Find your passion:http://www.youtube.com/watch?v=HqC7sN1DQzw

Wall Street

To those who wish to work on Wall Street I would say that you will probably witness shrinking of the financial sector for awhile as regression to the mean sets in. There was too much leverage and with the de-leveraging and greater regulation, you will see lower ROEs for banks and other financial institutions. There will come a day when MBA students will not even bother to look at Wall Street. Remember when Wall Street was a wasteland in the 1940s? On August 19, 1940, the stock exchange volume totaled just 129,650 shares. Read James Grant’s introduction the Security Analysis, 6th Edition.

Not a Clue

Another point that might sadden, anger and shock readers is that there are many brokers, money managers, and analysts even from Harvard, Morgan Stanley, or even Goldman Sachs who do not know what they are doing. Exhibit A: recent financial collapse. Also, Wall Street exists to raise and move money, so few actually analyze businesses properly.

I spoke with a young analyst who works for a fund where the partners came from a fancy investment bank and they all have CPAs, CFAs and MBAs. Their fund is down about 10% CAGR since 2008! The fund has no investment process, method or discipline. This young analyst has learned from his own reading. Go to www.lmcm.com and click on the information there and you will be impressed with the credentials. Bill Miller did very well for himself and not so well for most of his investors these past five years. Why?

Working at a Fund

If you do land a job at a good value fund, I doubt the principals have the time, temperament or inclination to train you. If you want a sense of what it is like working for Michael Price, go to my book synopsis: http://www.scribd.com/doc/80246703/5-Keys-to-Value-Investing. This analyst worked for Price. He would present ideas and then defend his thesis in order to convince Price to place the investment in the fund. Certainly the questioning by an experienced investor is a valuable learning tool. If you didn’t do your work thoroughly beforehand, you were not there long. But I doubt Mr. Price will patiently explain what deferred taxes are to the aspiring analyst. You are there to help him make money.

thinking in a little box

The ad for a hedge fund analyst position I posted yesterday required either an MBA or a CFA.  I would offer $10 to 1,000 million to the fund manager or anyone to show any statistical evidence that having those degrees improves analytical or investment ability over other attributes. It is just another screening technique for the lazy and unimaginative. One of the best investors in history, Walter Schloss never studied past twelfth grade. Seems like he did just fine. His temperament, discipline, work with Graham (he went and sat in on Graham’s lectures), and study of Security Analysis were his assets.

Let’s say I interviewed a Harvard MBA who wanted to become a value analyst. I would ask him or her, “We will have superior performance because I am so smart, hard-working and experienced. Don’t you believe that as well?” If the analyst agreed, especially just to be polite, the interview would be over. You need to be driven by curiosity while having humble skepticism and be willing to disagree; question.  I seriously would rather hire an ex-hooker http://www.youtube.com/watch?v=ZivA_f7DRdE.

Successful, but Unconventional

Below are professional investors who all have excellent records but unusual backgrounds. They made their own path; YOU can too. Also, get the book, Free Capital by Guy Thomas. The book is better than The Buffetts Next Door because you will see how several others have been successfully investing in their OWN way.  Many never aspired to having a pedigreed background nor previous investing job.

Jim Chuong: http://www.ticonline.com/

Francis Chou (former telephone lineman): http://v1.theglobeandmail.com/partners/free/globeinvestor/investment/may08/chou.html


Michael Burry: Betting on the blind side (note his personality): http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004

Kupperman as an adventure capitalist: http://adventuresincapitalism.com/page/Whos-Kuppy.aspx  While in college he would visit obscure Canadian mining companies and uncover what no other analysts bothered to look at.

I know this gentleman, Jordan Mariuma, who could barely read a balance sheet while in New York, but he had the guts to go to Romania. http://www.hedgefundsreview.com/hedge-funds-review/profile/1931806/worldwide-opportunity-fund-terra-partners

We will discuss again after others chime in or disagree with my “advice.” Don’t give up the faith. Good luck.

Of Interest

Fairholme 2011 Letter: http://www.gurufocus.com/news/159850/bruce-berkowitzs-2011-shareholder-letter

Canadian Investor in SUPER STOCKS