To remove all doubts, let me first come out and say this clearly:
Yes, I am a ‘Value’ Investor.
No, I don’t invest only in low PE, low PB stocks and Growth is an essential component of ‘Value’ for me and most importantly, I absolutely cherish Warren Buffett Letters (and many other Investor letters which I intend to share on my website with my readers)
Now, having said that, I intend to give the reason for the blasphemous statement that I started with.
A lot of people ask me (and other investors) on how to start learning about markets and ways to make money in financial markets and inevitably they are guided by us but unfortunately, the guidance depends not on the individual’s temperament and skillset but OUR ‘style’ of investing. How about that??
This not only leads to confusion but also a very dangerous propensity which can be explained by an effective mental model called ‘Availability’. I have written a lot about mental models and this bias earlier which you can read hereand here.
The sequence of an event goes something like this.
Because of curiosity and new found interest, the newbie starts looking for people who have been successful in financial markets. Let’s say he meets someone who is a ‘Value’ Investor. This ‘Investor’ generally gives advice the newbie to start with the following books:
1. Intelligent Investor by Benjamin Graham
2. Security Analysis by Benjamin Graham
3. Warren Buffett Letters
The newbie, all excited, will go and start reading and in all probability will ‘Google’ about the stuff he has read in the books and finds a plethora of websites talking about how this is the ‘ONLY’ sensible way of being in markets and since Warren has done it and many others have done it and that’s it. Before he knows it, he has become the ‘Value’ guy. A smarter newbie will be able to get the key salient features and understand the nuances and will appreciate the similarity as well as the differences in Buffett’s approach v/s Graham’s approach and start approaching financial markets from a vantage point of a ‘Fundamental Investor’ with a so called ‘Value-driven philosophy’. All hunky dory… Isn’t it? After all, Buffett says, if you are cut out for this, either it makes immediate sense or it never does. And if it makes sense to you, you are a ‘Value’ Investor.
Now, imagine a different scenario,
Let’s say the first successful investor the newbie interacted with was ‘NOT’ a Value investor. Let’s assume he was a ‘Trend Follower’. This ‘investor’ (and I am using the term here knowing fully well the difference between Investing and Speculating. But bear with me) talks about the arrogance and fallacy of ‘Fundamental’ investors and will talk about how ‘Price’ is everything or as they say in Gujarati,
“Bhaav Bhagwan Che” (Price is god)
He will inevitably ‘guide’ this newbie to go and read about the following:
1. Ed Seykota trading tribe
2. Michael Covel’s Trend Following
3. Richard Dennis and his famous ‘Turtle’ experiment
Repeating the process mentioned above, after a lot of reading he inevitably believes that the only way to make money is not ‘Intelligent Investing’ or ‘Intelligent Trading’ or ‘Intelligent Speculating’.
“Nothing is more dangerous than an idea, when it’s the only one we have”
The simple act of his initial exposure to success by two different philosophies can lead to an entirely different choice of viewpoint to financial markets. In the whole process, the newbie gets lost and forget the MOST IMPORTANT ingredient of success in Financial Markets and that is ‘His OWN Personality’.
But wait, that is not where the whole problem ends. It gets further accentuated. The mental model that now comes into picture is called ‘Confirmation Bias’ and ‘Commitment and Consistency Bias’. Let me explain how.
Nothing else matters
Once the newbie is exposed to a particular philosophy, he keeps on spending a lot of time finding success stories of that investment philosophy and subconsciously keeps on confirming his initial hypothesis
“This investment philosophy is the ONLY way to be successful in the financial markets”
And later due to committing so much time on one particular investment philosophy and by now telling so many people that he is a ‘Value investor’ or a ‘Trend follower’, the commitment bias will make sure that his mind gets closed to other point of views. Either you will hear this newbie quoting Warren Buffett and ridicule other investment styles. You can often hear stuff like
Warren Buffett said: “I knew technical analysis doesn’t work when I turned a chart upside down and I didn’t get a different answer” or “Read ‘Superinvestors of Graham and Doddsville’, and you will know”
Or he will quote Ed Seykota and say
“Fundamental are funny-mentals”
Or he will quote ‘Jesse Livermore’ or ‘Nasim Taleb’ or ‘George Soros’ or any other ‘Hero’; he has been exposed to initially.
Show him the investing record of anybody else who doesn’t belong to ‘his’ philosophy and few standard replies are
“He (the Superinvestor) is an exception”
“He is lucky and it’s not the consistent way of making money”
“He won an ovarian lottery or his cost of capital is too low.” (Reply by Critics for Buffett, Not entirely wrong though)
“It’s a very difficult thing to do and just not worth the effort.”
I am not sure if 30 year plus record of 20+ CAGR (Warren Buffet’s record) or 14 years of 64% CAGR (Seykota’s record) is not ‘Worth’ the effort but I think I made my point.
Affairs (may be even ‘flings’) before marriage
Well, my advice to all such individuals is very simple. Don’t out-rightly commit.
Fight this Availability bias in the initial phases of your career and you will not be following a strategy that worked for your ‘Guide’ or your ‘Hero’.
Read various investment philosophies and find what ‘hits’ ‘YOU’ and ‘rhymes’ with ‘YOU’ because finding YOURSELF is more important than sticking to what you got exposed to.
Read a brief of various successful people and after sometime, some ideas and concepts will make more sense to you. Evaluate the possibility of replicating those ideas in the markets you operate in and jump in. There is no better way of learning things.
What are the various options to start?
Well, I have actually charted out various books to tackle with this very dilemma in the resource section here but this is my basic guideline for that.
Start with the books that feature basic investment philosophies of different type of successful investors. I will make your job easy by profiling many such investors on the blog via the Octavo Pansophy series. Few of my favorites are:
1. Money Master of our time
2. New Money Masters of our time
3. Market Wizards
4. New Market Wizards
5. Hedge Fund Market Wizards
6. More money than god
These books will give you an exposure to a lot of philosophies and Ideas and then on the basis of where your interest aligns, move forward. A lot of investment philosophy specific resources can be found here.
Not a novice?
What if you already have an investment philosophy?
It doesn’t matter. I would still suggest that you go through the above mentioned books. You will gain insights which you can fuse with your own investment philosophy. I have successfully implemented many ingredients of successful trader’s and speculator’s philosophies (especially in areas of ‘Risk Management’) in my ‘Value investing’ Paradigm. It suits ‘ME’. It generates better returns for ‘ME’. The same may not work for you but you might find the nuggets you have been struggling to find because you were not really ‘Looking’. Rewriting the quote from by Emile Chartier here because it’s very important
“Nothing is more dangerous than an idea, when it’s the only one we have”
Most Important Point
Oh Yes, THE MOST IMPORTANT point I HAVE to mention before I end this article.
When you are done reading the above mentioned books and no matter what investment philosophy you prefer, you ‘MUST’ read Warren Buffett letters too. It still is the best course in Business and Finance you will take.
15 thoughts on “Wait: Don’t Read Warren Buffett Letters!!!”
Fantastic post Puneet.
I did struggle with similar things for sometime in my initial years and it used to appear very confusing. For example one question newbie’s struggle with in initial years is about portfolio concentration. I kind of assumed, i have to find the guy with best returns and then carbon copy his style be it concentrated or diversified. The variable of knowing yourself in the portfolio building was missing in that quest.
Similarly, in initial years, my first indoctrination was from the school of “quality business even, if at expensive valuation”, took some time to understand it pro’s and con’s and start appreciating ideas of other kind.
One thing i could suggest for newbie readers is, in addition to reading different things, try to interact with lot of different kind of investors with an open mind and listen to their stories and processes. Real life stories often tend to open up our mind and heart well as we can relate to some of the stories much better.
Thanks for the appreciation, Raja.
Yes, you are absolutely correct. It is very essential for the newbie investors to get in touch with other investors. This is one thing I didn’t do much in the initial phase of my career and paid a price for that. Had to learn a lot of things by hit and trial which costed time and money and in hindsight I could have saved on both if only I was open to discuss with various sensible investors.
But there is a caveat too : Don’t be over or under-impressed by some investor and try to over or under-weigh his experience over others. This generally happens if that particular investor’s personality is more impressive. Well, personality has nothing to do with making money in stock markets.
You are damn right.
My reading list just keeps expanding!
Even mine is consistently expanding. 🙂
As long as there is an outflow and inflow from the library, its fine. !!!
Fantastic stuff Puneet !! Liked it especially the way you have summed it up. Especially the idea point. Money masters of time is a superb book. Many people start with heavy stuff like big books and lose interest in so called “Value Investing” theme. We all have to see what suits our personality !!
Who is the author of More Money Than God ?
Thanks for your help in advance
Its a book written by Sebastian Mallaby.
You can find the link on the library page.
Here is the link : https://www.stoicinvesting.com/library.php
Awesome post Puneet!! You have infact very nicely captured the dilemma of every investor who is not a newbie but hasnt seen many cycles of the market yet.
Thanks Vinay 🙂
Link for more money than god – http://www.amazon.in/gp/product/B003ZSHUD4/ref=dp-kindle-redirect?ie=UTF8&btkr=1
Thanks for the link, Varenya.
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Warren Buffett, himself, was strictly a Graham disciple, until his mind was opened to a blend of value and growth. This was due to Charlie Munger’s influence, who taught Buffett that it is better to buy a good company at a fair price than a fair company at a good price. Buffett kept his mind open to new ways of thinking.
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