The Learning Path Towards Intelligent Investing

The 8 reads that will get you from 'somewhat familiar' to 'acutely aware'.

I did my bachelor’s in finance and a master’s in economics and finance. Yet, when it came to investing, I wasn’t equipped to properly think about it. Traditional academia, in general, poses no good solution for investors. Investing in equity is, ultimately, only a part of finance, which is, to some extent, only a part of economics. It is therefore not striking that one comes out lacking depth for investing practices.

When I started specifically reading about these topics 3 years ago, everything was mixed up and I was dangerously ignorant. Although my background is in finance, I deeply felt as an outsider in the investment field. I knew of no one who practiced it profitably, or even intelligently. There was no one I could turn to in order to know where to look, which books to read. I’m not sure I was even aware of Warren Buffett’s existence, not to mention other, less-known, people.

The only way forward, I thought, was brute force. I simply read everything I found related to investing, invariably going through disastrous content. The material out of which I could extract valuable insights was almost negligible. The average value per page is shockingly low and most content is repetition. In many cases, worse than that.

My intention here is to provide you with the depth I suspect is required for soundly approaching the discipline. Portfolio management as a craft remains obscure and, even though these reads will help you, none addresses its core essence. Lastly, of business analysis I suspect the ground rules can be taught, but no more than that. I suspect you’ll get those from the reads below.

I think everyone, at whichever stage of the journey, will find one of these pieces valuable. Some are books, whereas others are letters or essays. This path is mostly designed for people that don’t know where to start but know something about the matter. These recommendations should help you efficiently go from a bit familiarized to greatly aware of the dynamics behind investing.

An Inquiry into the Nature and Causes of the Wealth of Nations

Economics is the big picture. I suspect that a lack of understanding thereof impedes performing deep business analyses. How variables relate to one another and how money flows within economies is unbelievably important. These compose the fundamental societal pieces upon which the more sophisticated financial system and instruments are built. Adam Smith helps you become aware of the underlying reality below this whole world of financial assets.

Note: This does not imply one can become capable of predicting variables’ behavior and acting thereupon.

Financial Intelligence

Accounting is the language in which companies’ performance is written. It’s the very best first place to seek understanding of the true value of a business, which by no means is sufficient. Approaching accounting is very confusing because of all the field-specific jargon and a very peculiar aspect: most books and teachers forget to underpin the fact that most accounting is subjective. Financial Intelligence patches this and several more holes which are often missed by other books. It provides uncompared comprehensiveness with incredibly accessible explanations. Lastly and very importantly, the authors frequently remind of the limitations of this discipline.

The Intelligent Investor

This book contains the most complete overview of the investing profession. It walks you through most important concepts and strategies one can follow, alongside relevant historical and statistical data. But its most important aspect is that it teaches the attitude an intelligent investor must adopt. Psychology and very powerful concepts are explained in great detail. One begins to understand how crucial of a role psychology plays in the financial markets and how to exploit the flaws this carries.

The Innovator’s Dilemma

Getting acquainted with the destructive nature of capitalism is crucial if we are making bets on how things may evolve. Clayton Christensen lays down a great analysis of why it’s hard to sustain success as a corporation. This book will provide you with deep insights as to how industries evolve, how companies displace their competition and why winners keep winning, until they don’t. Considering these factors when investing is crucial, for businesses’ future depends on many of the things Clayton speaks about.

The Trouble with Earnings and P/E Multiples

Once you start getting into investing, you’ll repeatedly see people utilizing price multiples. The problem is that people rarely speak about how fundamentally flawed this method is for valuing a business. In this article, Mauboussin dives into multiples’ intricacies and what the disadvantages are in using them.

Note: A business is worth the cash flows it will produce discounted at an appropriate rate. Discounted cash flow models, DCFs, are the other most utilized method to value companies. I suspect they are overly used and I haven’t found a good read about them (nor tried to). I believe understanding the concept is what matters and you’ll get this from the recommended reads.

Poor Charlie’s Almanack

A book full of incredibly sound ideas. Charlie helps you understand how interconnected all disciplines are as well as getting a better grasp of human nature. Being remorselessly rational is highly profitable in a world full of irrationality. The book also includes an outstanding amount of analogies for better understanding the investment discipline; and gathers numerous lessons from successful businessmen of the past as well as from great physicists, statisticians, biologists, and psychologists.

Note: There is a document called “Charlie Munger in Conversation with Todd Combs.” I highly suggest that too.

Buffett Letters: January 1965 and 1983

The first of both letters was written while Buffett run his partnership, prior to being chairman of Berkshire. Warren explains in great detail his method of operation and how he thought about things. There’s a huge emphasis, partly the reason why I chose it, in the act of thinking itself.  On the other hand, Warren’s 1983 letter gives a perfect account of how his Berkshire letters look like. Additionally, it includes two fantastic parts: (i) It starts with 13 bullet points on his management philosophy; (ii) at the end shares a very insightful lesson on accounting. Although the latter does not apply any more due to an update to accounting rules, it wonderfully enhances one’s thinking of the utility thereof.

Note: I’ve been going through them all and currently am at the 1995’s letter, for which my selection does not consider the subsequent 30 years. (Disaster on my part).

Investing in the Unknown and Unknowable

This essay draws the line of what theoretical finance has faced over the decades. Specifically, the two elements Richard dives into are risk and uncertainty, to which finance has posed a “solution.” However, Zeckhauser posits that finance faces a wall when thinking about unknown and unknowable events. These are widespread and inevitable and offer very profitable opportunities. Importantly, a large part of this essay revolves around the thesis of sidecar investing, where an investor pairs himself with an extraordinary individual and reaps the rewards.

Final Remarks

I think these reads will provide you with an exquisite sense of the pitfalls that exist in the investing world, which are certainly numerous, and how to avoid them. My estimation is that you can go through all of these in 2 months by reading two hours daily. It only takes that. Personally, I suspect the return on time employed is massive.

Yesterday I encountered a very pertinent statement in one of my current reads, Meditations. To a large extent, the essence of intelligent investing was greatly captured by Marcus Aurelius:

“Within ten days thou wilt seem a god to those to whom thou art now a beast and an ape, if thou wilt return to thy principles and the worship of reason.”

If you’d like to chat or anything, you can always find me at: giulianomana@0to1stockmarket.com