11th Commandment of Investment Study

“Nobody goes to church expecting to learn about the 11th commandment.”

Regardless of one’s religious views, it’s pretty clear that most religious people do not expect to receive the 11th commandment this Sunday (or Friday).  Many religions study the same passages in the same books over and over.  The point isn’t to someday uncover some new wisdom, but as a reminder to practice what you already know.

“To make a deep mental path, we must think over and over the kind of thoughts we wish to dominate our lives.” – Henry David Thoreau

I take a similar approach to my study of value investing.  Although I still find that the most valuable information I get each day is from 10Ks, I believe that information is worthwhile because of a foundation established through the study of a few books.  I try re-read each of these books at the beginning of each year, not because I expect to learn something new, but because I want to be reminded of the foundational principles that I think benefit me on a daily basis when I dig into a company’s financials.  These principles provide a framework to read everything else.

Currently, I have 3 books that I consider foundational.  I am open to adding a fourth.  Suggestions?

My current 3 are as follows:

1. Security Analysis: This is an “old book.”  If you get the 1940 edition, the writing style clearly forces you to focus on the message.  I consider this the Old Testament of Investing–people refer to it a lot, few have actually read it.

2. Annual Letters from Buffett: (1959-Present–includes Buffett Partnership period).  I was lucky to be at Columbia when I become interested in investing and these letters were one of the first things on investing that I read.  There’s nothing like your first time and I still find that these letters (especially the older ones) provide me with daily lessons to apply to my investment approach.

3. Thinking Fast and Slow: Although this is a recent book, it is essentially the Bible of Behavioral Finance.  A lot of different authors wrote derivates of Daniel Kahneman’s ideas over the years, but he finally published his own book in 2011.

I read a lot of other books throughout the year, but after I finish each one, I wonder if I should have instead re-read one of the above 3.  I have listed a few honorable mentions below and like I mentioned before, I am open to any suggestions.

Honorable Mentions:

Classics: An Investor’s Anthology: This is a collection of essays from various investors from days gone by.  I enjoy the old stuff and this book provides a great collection.

The Most Important Thing, Howard Marks: A collection of Marks’ letters over the past 15 years.  Close call on making it a foundational book.

Margin of Safety: Seth Klarman: Good foundational book.

Poor Charlie’s Almanack: A great collection of Munger’s writing.  Although I think Buffett’s writings are great, Munger’s may have him beat with his mental models approach to investing.

Of Permanent Value: : A great in-depth (very in-depth) look at all things Buffett.  Can’t make it a foundational book, just too long to read each year.

Rich Dad, Poor Dad (gotcha…)

 

 

 

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The Abominable No-Man and Bad Management

Some investors think a business is good, but know that management is bad.  These investors justify the investment based on the idea that the great price of the business is worth the bad management. This is akin to marrying a supermodel who is going to yell at you all day.  Whatever pleasure your eyes may derive from the marriage, your ears will endure a greater amount of pain in the long run. The pocketbooks of those partnering with bad management are likely to see a similar 50%+ decline in their net worth.

This Post Has One Comment

  1. Great list Matt. The first two on your “top 3” are in my top 3 also (I’ve never read the Kahneman book). If I rounded out my top 5, it would have to be Klarman’s book, Greenblatt’s Genius book (I highly recommend this if you haven’t read it-I love the case studies and being able to read Greenblatt’s simple thought processes), and in number 5 would be Snowball (although it would be a task to reread it each year, it’s a great book that really gets into details of some of Buffett’s thoughts).

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