To some of us, value investing sounds so simple. As Warren Buffett has pointed out, this doesn’t happen to everyone, but for some of us, as soon as we first hear about value investing, something clicks, we get it, and value investing instantly becomes the only rational way to invest. But then reality sets in.
And the reality is that the vast majority, 99%, of self-identified “value investors” still are awful at investing, can’t beat the market, and despite knowing how to talk the talk, they don’t know how to walk the walk.
100% of us are in this boat when we first learn about value investing. Just because you know about value investing doesn’t mean you know how to be a value investor. But there’s hope. For some of us, 1%, we’re able to absorb the lessons of the great value investors, we have the natural talent (i.e., slightly above-average intelligence combined with perfect temperament), and we’re actually able to implement the value investing principles and get results that beat the market over the long run.
How do you find out if you’re in the 1%? How do you improve as a value investor and actually give yourself a chance to see if you can beat the market?
Here are 10 ways to get better at investing, make the most of your value investing knowledge, and see if you’re actually in the 1% of investors who can beat the market.
1. Know Yourself
It doesn’t take much intelligence to be a great investor. You’ve just got to have slightly above-average intelligence. Probably 60% of people walking the Earth have the brain it takes to be a great investor. But it’s not just about having the right brain, it’s also about the gut. You’ve got to have the right stomach in order to use your slightly above-average intelligence and get great investing results. And having the right stomach is much more rare. I estimate that about 2% to 4% of people have the right stomach for investing.
A more refined way to speak about the gut is to call it temperament or personality. You’ve got to have the right personality for value investing if you want to be successful at it. And you don’t know what your temperament or personality is if you don’ know yourself.
The first job of an aspiring value investor is to get to know yourself. Do you have what it takes? Do you think independently? Do you care what others think? Are you humble enough to know what you don’t know? Are you disciplined enough to stay away from what you don’t know? Are you a curious person and willing to be a lifelong learner? Are you brave enough to make real bets when the odds are right? Are you strategic in the way you structure your life and work? Do you know your strengths and weaknesses? Knowing these things about yourself helps you understand if you’ve got what it takes to be a value investor.
One time I heard Mohnish Pabrai talk about personality tests and personality types. That took me down the path of learning about personality types and led me to the website 16personalities.com. Knowing my personality type changed my life. It’s the most important thing.
2. Read Value Line Every Week
Serious value investors read Value Line. Buffett does it, Munger does it, and Li Lu does it. Seriously, what else do you need to know? As Li Lu said in a lecture once, you’ve just got to go page after page and read the whole thing from front to back. You have to be curious! And Value Line is a great way for value investors to exercise their curiosity and learn about many different businesses.
I read every issue of Value Line. I use both the medium and large cap product they have and also the small cap product. That’s around 3,500 businesses!
“Starting with the A’s” like Warren Buffett and looking at business after business, every single one of them, was how I found my best investment to date, Ring Energy, and I can tell you, that thing changed my life. I would have never found that business and would have never had that wonderful result if I hadn’t treasure hunted like Warren Buffett in the 1950s, and Value Line is a great place to treasure hunt.
3. Use The Wall Street Journal’s 52 Week Highs And Lows
The Wall Street Journal publishes it’s 52 week highs and lows after every trading session. It’s in the print edition of the paper as well as online. They publish the new highs and lows for the New York Stock Exchange and the Nasdaq. It’s a great way to find some unloved stocks, as well as to learn about new businesses.
I like to look at the lows for investing ideas. And every day I try and pick out two stocks from the highs and two stocks from the lows to just briefly look at and learn about what they do. I do this to add them to my encyclopedia of companies, so when I do come across them in a 13F or something like that, I at least have a base level of familiarity with them and can quickly get to thinking about why one of my Superinvestors bought them.
4. Do Math In Your Head
Mohnish Pabrai says thou shall never use Excel.
Li Lu says “don’t use those calculators.”
When Mohnish and Li Lu speak, I listen. I don’t use calculators and I don’t use Excel.
I learned to never use Excel from Mohnish. His point was that investing needs to be simple. If you use Excel, you run the risk of making things too complicated, which can lead to justifying bad investment ideas with faulty long-term projections. So you keep things simple and keep things off Excel. For example, with Reysas Logistics, what’s the debt, what are the assets worth, what’s the net asset value, and what’s the market cap? It’s all simple math that you don’t need Excel for.
And in that Columbia lecture, Li Lu tells the class to not use calculators and to train yourself to do math in your head so you can move quickly from company to company. What Li Lu said clicked with me, and even as a former “I don’t do math in my head guy” I was converted and have been doing math in my head ever since I saw that lecture. And I can report to you that it works. Is my math perfect? No. But I ball park things, and I’m able to move quickly. Doing math in my head also forces me to think in simple terms about companies’ financials, and it helps me focus in on the things that actually matters for a company’s prospects.
Staying away from Excel has helped me avoid bad investment ideas. And doing math in my head has helped me focus on the things that matter for a business. Both of these habits have made me a much better investor.
5. Read 10-K’s
There’s one thing that Warren Buffett does constantly that 99% of his fans don’t do, he reads 10-K’s. This is the most glaring mistake that I see other self-described investors make, they don’t read 10-K’s! They don’t read annual reports and quarterly reports! Buffett reads these things every day. He reads the companies he owns, he reads the companies he might own, and he reads the companies he’ll never own. There is so much to be learned about businesses that you’re interested in, their competitors, and their industries in the 10-K’s.
10-K’s and 10-Q’s are where the magic is. Every investor sees the day to day news in the newspapers and on CNBC. But few investors venture into the world of annual and quarterly reports. You can learn about entire industries and increase your knowledge edge by reading annual reports and quartlery reports.
Charlie Munger said he knows no smart people who don’t read constantly. And I don’t know any successful investors who don’t constantly read 10-K’s and 10-Q’s. When Buffett said read 500 pages a day, to a large extent he was talking about 10-K’s.
Use the SEC’s wonderful EDGAR search tool, look up companies that you’re interested in, and read their 10-K’s and 10-Q’s.
6. Start With The Presentations
10-K’s and 10-Q’s are where the details are, and they’re where you must go, but I do like to start with the presentations. Presentations are digestible PDF’s that can be found on many public companies’ investor relations page. Companies put these out so investors and analysts can follow along on their earnings calls and they also use them to present at conferences.
I like these presentations because within ten minutes you can quickly get an idea about what a company does, the basics about their financials, and what their current strategies are to grow their business or unlock value. They’re kind of a cheat sheet to the annual and quarterly reports.
These presentations are a great way to start your look at a company, but they are just a starting place. I look at these presentations almost as sales material. I’ve never seen a company put something negative like “we’ve got too much debt and we’d be a risky investment” in their presentation. Rather, it’s always stuff like “we’re reducing our debt” or look how we’ve grown this metric or that metric. But then you have to ask yourself, “wait, does that metric actually matter?” So they’re to be reviewed skeptically, and they’re just a place to start. But I do find that these presentations are very helpful because they allow me to quickly understand what a company does and the story they are trying to tell.
7. Read Warren Buffett’s Letters To Shareholders
Warren Buffett has published over 50 years worth of letters to his shareholders. These are a gold mine for a value investor to improve their knowledge and skills. Value investors should read every single one of his letters.
People used to ask Buffett if he was going to write a book, and of course the answer is that he doesn’t need to write a book. The letters are his book!
If you want to learn about business and investing, there’s nothing better you can do than read Warren Buffett’s letters to shareholders.
8. Read Business Books By Reporters
One of my favorite hobbies is reading business books, specifically by reporters. Reporters have to write constantly. They’re always working on the next story and they have to publish articles all the time. They’re constantly exercising their writing muscle, and that makes for wonderful books when they decide to do a deep dive on a business or entrepreneur and write a book.
I’m currently reading Power Play by another Wall Street Journal reporter, Tim Higgins. These reporters are so gifted at being talented writers as well as having that investigative journalist mindset to figure out what the right questions to ask are and to keep digging until they get their answers.
Reading these business books by reporters is relaxing and enjoyable, but they also give me deep insights into entrepreneurs, managers, companies, and industries that I wouldn’t get just from the financial reports. This knowledge builds and compounds and makes me a better investor.
I call this “light reading” and I do it on the weekends and at the end of each day before bed.
9. Watch YouTube Lectures
The amount of free knowledge directly from the minds of the great value investors that is available on YouTube is just, in a word, miraculous! It is a complete miracle how much free investing knowledge there is on YouTube, and the stuff I’m talking about is just as high quality as it gets.
I’m talking about the Buffett and Munger interviews and lectures, the Mohnish Pabrai Q&A’s, the Li Lu lectures and interviews, the Joel Greenblatt lectures, the Guy Spier interviews, the Robert Vinall investor meetings. And the list goes on and on. You can also learn about companies and industries when you’re doing a deep dive on a business.
YouTube was where I first really connected on a deep level with Warren Buffett and value investing and it’s where I still am today. It’s a tremendous place to learn from the greats and also to connect with peers like on the Punch Card Investing show. Serious value investors use YouTube seriously.
10. Trade Journals
Of course value investors should read the major newspapers and keep up with the day to day news, but trade journals like the Oil & Gas Investor are a great way to go deeper and expand your knowledge of various industries that you want to be more involved with. If you’re going to be investing in certain industries over and over and for the long run, I recommend trying to find trade journals and news websites dedicated to those industries, and those resources will help you attain an insider’s knowledge of those industries and help you get an edge on Mr. Market.