Many aspiring value investors often ask me “How do I get started?”
The value investing foundations were laid by Benjamin Graham and were further developed and refined by many of his followers.
Before learning how to invest, one has to know how to read financial reports. The good news is that you don’t have to be an accountant in order to do that, but some practice is required. There are plenty of books, websites and online videos that teach basic accounting. Make sure you can read a profit and loss statement, balance sheet and a cash flow statement before moving on. Think about it as a language that you need to know in order to be able to invest.
The best way to learn how to invest is by reading, and reading and reading. The more you read the better you become at it. The best way to start is by reading books that go through the fundamentals of investing. But that is only the beginning. You have to keep on reading financial reports and industry-specific books all the time in order to move from theory to practice.
Here is a list of books that will help you to become familiar with the principals of value investing:
The Intelligent Investor (Benjamin Graham)
Security Analysis (Benjamin Graham) – this is a very thick book that you need to read some of it’s chapters more than once because it contains so many deep insights. That is Warren Buffett’s favorite book on investing.
Value Investing: From Graham to Buffett and beyond (Bruce Greenwald)
The Quest for Value (Bennett Stewart) – not directly related to investment but clearly explains that forces that drive value creation and therefore stock prices in the long run.
Once you look for these books on sites like Amazon, you will get recommendations for many other books. This list is just the tip of the iceberg. Use it as a starting point. Some other resources are:
Warren Buffett’s letters to shareholders (http://www.berkshirehathaway.com/letters/letters.html) This website contains all the letter from 1977 and on. There are some websites that have Buffett’s earlier letters.
After reading these you will have some idea about value investing and then the real journey begins. That means reading financial reports and industry-specific books (for instance, “The House of Morgan”/”The Partnership” to learn about investment banking).
You can also read the letters that we send to the partners of Eden Alpha – http://www.eden-partnerships.com/en/letters-articles
Another important aspect of investing is behavioral. Beginners tend to neglect this aspect and focus on stock picking and valuations but this aspect is at least as important. Understanding our behavioral biases is crucial in avoiding mistakes and investing is all about reducing the numbers of mistakes you make and their magnitude. Books like “Thinking Fast and Slow” will teach you a lot about how our mind works and how avoid common pitfalls. In addition, books like “Talent is Overrated” will motivate you to spend more time to refine your investment skills. Don’t neglect the behavioral aspect!
Investing is not easy – it is a very competitive game as basically anybody with a computer and some money can enter the arena and try to make money. Some of the people on the other side of the trades that you will be doing are highly sophisticated. While I’m not an advocate of the efficient market theory, I can attest that the market is pretty efficient in about 99% of the time so when you buy a stock you should have a very strong conviction for why you are right and the side that is selling the security to you is wrong. It takes a lot of time and experience, but the good news is that it is not as difficult as it may seem, if you are willing to invest a lot of time into it. As Warren Buffett once said “Many of you can do it, but very few will.”
Good luck in your journey!