A common answer for a typical investor would probably be to run a screen: take a big list of stocks and their financial figures and sort/filter by standard metrics like Price-to-Earnings or ROI. There’s nothing wrong with that approach. Plenty of great investors, including one of my personal heroes, Joel Greenblatt, make heavy usage of creative screens to build portfolios.
But, instead, Mr. Price picked up a copy of the day’s Wall Street Journal lying on the table and said, I’ll show you. He went down the list of stories on the front page, distilling the essence of each article with impressive speed. A piece on rebounding natural gas prices had him musing about the value of drilling rig operators. Another one on new financial regulations triggered a thought about its effects on a specialty lender that he follows. The announcement of a merger prompted him to make a mental note to go over other companies in that sector to gauge the possibility of further consolidations.
 |
| Mr. Price, unimpressed by my bright-eyed-bushy-tailed demeanor |
Occasionally it is possible to exploit short-term inefficiencies like our aforementioned AAPL trade. But in general, ideas aren’t so much “found” – like pigs hunting for truffles – as they are “formed” – like laying down nutrients in the soil and waiting for rain and photosynthesis. Buffett was once asked how to get smarter, and he held up a stack of paper and said, “Read 500 pages like this every day. That's how knowledge builds up, like compound interest.” He has also bluntly stated, “My job is essentially just corralling more and more facts and information, and occasionally seeing whether that leads to some action.”
And so, I read. On a typical weekday, I skim at least three newspapers: The Wall Street Journal, New York Times, and Financial Times, and try to read them a la Michael Price. A continuous stream of Google Alerts pours in all day, keeping me up to date on breaking news. I subscribe to industry-specific journals, like American Banker or CIO Magazine. And then there is hedge fund gossip, e.g. who’s buying what, who is in trouble, who might be forced sellers, who is playing activist in corporate boardrooms, etc. Twitter’s become an unusually good source although it takes some effort to sort through the hearsay of citizen journalism.
When doing serious due diligence on a security, I spend hours going through SEC filings, reading Management Discussion & Analysis and Financial Statements and press clippings and investor presentations and conference call transcripts. Most of the time, the resulting action item is… nothing. Data and facts get digested and sorted to build a narrative of the company from which I try to analyze and understand and predict its future performance. More often than not, it gets filed away in the “Too Hard” drawer. It is a bulging drawer, but one I dip back into often when new data and facts arrive, hoping for an insight to form an investible thesis around.
Alas, that laundry list only scratches the surface. In this hyper-competitive market, the only way to maintain a consistent edge is to continuously compound our understanding of the world. We have to stay curious. We must build and polish a latticework of mental models1 against which we test ideas. Every now and then some of them click, and we invest. Otherwise, we simply wait. Value investing is a game won by temperament, not speed or IQ or raw computing power. It requires, above all, a willingness, nay, desire, to basically sit around and read all day. It doesn’t sound glamorous because it isn’t. But I wouldn’t trade it for any other job in the world.
__________________________
1A term popularized by Charlie Munger, who believes in stock picking as a subdivision of the art of worldly wisdom.
