Great investing may be simple, but it is not easy. It requires that you master not only a number of analytical skills, but also your own emotions.
One of the mistakes that investors make is spending too much time studying investment philosophy and process, and not enough time studying businesses. Investment philosophy and methodology will never be a substitute for knowing a business inside out.
When you come across a “millionaire next door”, he or she probably made their money by mastering a small corner of the business world, not spending endless hours studying management theory or entrepreneurship.
Think Rose Blumpkin. She had an advantage over her competitors because of her relentless focus on the furniture business.
There’s a show on the History channel called American Pickers about two guys who travel around Iowa looking for antiques and collectables that they can then restore and resell. The reason they can make a business out of it is that they have an informational advantage. Through years of focus and experience, they know what will sell and what won’t and, most importantly, what things are worth.
Investing is very similar. You must be able to 1) value a business and 2) wait for the right price.
I believe you should spend at least as much time reading annual reports as you do studying books on value investing. I’m not saying you don’t need to master the great books and writings on investing. On the contrary, this is essential and part of the reason this blog exists. Nevertheless, as you master the framework and develop your own investing process, more and more of your time and energy should shift to studying businesses.
Think how much sense it would make for an aspiring golfer to spend all his time reading books and magazines on golf, but only infrequently play golf.
The foundational skill of a great investor is being able to confidently value a business. Only then will you have the confidence to make a meaningful investment when everyone else is afraid or focused on the wrong things.
What annual reports and 10-K’s are queued up for your reading this week?