How to Become a Better Reader

“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads–and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”  — Charlie Munger

It is almost certain that the typical reader of this article has come across Charlie Munger’s famous quote on reading countless times.  The need to read extensively, not only when it comes to investment topics but much more broadly, is almost an article of faith for anyone who has spent considerable time studying the habits of highly successful investors.  Investing is a discipline in which one benefits from the cumulative effect of knowledge compounded over a lifetime.  In conjunction with life experience, pursuing a habit of regular reading can accelerate the wisdom required to identify opportunities with confidence.

Anyone who recognizes the truth in Charlie Munger’s statement is already well ahead of the vast majority of investors and has most likely already made efforts to emulate his approach.  For many people, doing so amounts to a completely different lifestyle in which diversions such as television are reduced or even eliminated in favor of several hours of reading per day.  However, those who are most interested in investing often make three choices that are likely to result in a sub-optimal return on the time invested.  First, most investors focus mainly on current events and therefore spend a great deal of time with newspapers and business periodicals.  Second, most investors will gravitate toward books on business or investing topics rather than adopt a more multi-disciplinary approach.  Finally, the scorecard investors use to measure their reading is often related to the sheer volume of material that has been read which puts an emphasis on speed and quantity rather than quality.

How To Read a bookThere are certain books of great value that can suffer from an overly simplistic title.  How to Read a Book, by Mortimer J. Adler and Charles Van Doren seems to fit in this category since, at a surface level, most of us have been reading books since grade school.  At varying levels of seriousness, most of us had to read hundreds of books of all types in order to graduate from college and for the most part, our intuitive sense of how to go about the process must have led to at least some success.  However, the number of truly influential books – those that we go back to mentally again and again – is a much smaller number, and perhaps it need not be so.  Perhaps we have suffered from the manner in which we have gone about reading over the years and could have retained much more value over time.

Most readers never consciously think about the various levels of reading when tackling a new book.  For the most part, readers will look at the cover, superficially skim the table of contents, and then just dive into the book and go through it in a linear manner.  However, at best, this process only goes through the first two of the four levels of reading documented in How to Read a Book. 

The first level of reading is referred to as elementary reading and is something the vast majority of people learn in grade school.  We understand what the sentences and paragraphs say in a basic sense because we understand the language that we have chosen to read in and have a decent vocabulary built over the course of many years.  However, merely understanding the words and paragraphs is only the most basic form of reading and has little to do with comprehension and true understanding of what the author is attempting to convey.  Some enhanced level of understanding occurs when one proceeds to inspectional reading which is really the art of systematic skimming.  The authors provide useful steps that will increase the return on the time spent at this level of reading.  One of the common errors is that readers often achieve only superficial knowledge of a book because they simply read through it in a linear manner rather than inspect the book systematically first.  The techniques to do so are quite valuable and most likely steps that most readers have not made explicitly in the past.

The authors emphasize that a thorough inspectional reading of a book may be all that is warranted based on the nature of the book.  It is not always necessary to proceed to the third step:  analytical reading.  Reading at this level requires a reader to go through an organized process wherein several questions are asked regarding a book and answers are sought.  As the authors state, analytical reading is “chewing and digesting it”.  This level of reading is not typically warranted if the reader is seeking entertainment or merely seeking information.  Analytical reading requires a significant time investment and it may be enough to simply do an organized inspection of a book.  It is up to the reader to determine whether it makes sense to proceed to an analytical reading of a book once the inspectional phase is complete.

Syntopical Reading is the highest form of reading because it involves reading a number of books on the same topic analytically and then placing the books in context in relation to one another and the overall subject.  This level of reading has the potential to bring about insights that are not found in any one of the books when considered in isolation.

As an example relevant to investors, one might want to conduct an analytical reading of Benjamin Graham’s The Intelligent Investor and Philip Fisher’s Common Stocks and Uncommon Profits and then come to grips with the underlying themes expressed in both volumes while drawing conclusions on investing that might not appear in either book in isolation.  This approach can, of course, be applied to other forms of literature including biographies.  It is quite possible than a thorough analytical reading of Roger Lowenstein’s Buffett: The Making of an American Capitalist and Alice Schroeder’s The Snowball: Warren Buffett and the Business of Life could lead to insights about Warren Buffett that one could not achieve by reading one of these books in isolation.

It would be difficult to do justice to the techniques expressed in How to Read a Book in a brief review, and this article is not so much a book review as a strong recommendation to pick up a copy and give the ideas serious consideration.  The fifteen distinct steps associated with reading well should resonate with most serious readers and bring about a better sense of understanding and comprehension resulting in a greater payoff for the time invested.

Charlie Munger likes to use the phrase “You are like a one-legged man in an ass kicking contest” to refer to individuals who have attempted to engage in some activity without satisfying the basic prerequisites necessary to have a good chance of success.  How to Read a Book significantly reduces the probability of being that one-legged man when it comes to reading comprehension.  It probably should be required reading for all incoming college freshmen, but it is better late than never.

In the video below, William F. Buckley interviews Mortimer J. Adler on Firing Line in 1970.  How to Read a Book was first published in 1940 and extensively revised in 1972.  Mortimer Adler died in 2001.

Book Review: Berkshire Beyond Buffett

I love running Berkshire, and if enjoying life promotes longevity, Methuselah’s record is in jeopardy.

-Warren Buffett, Berkshire Hathaway Owner’s Manual

Berkshire Hathaway will soon reach an important milestone with the fiftieth anniversary of Warren Buffett’s control of the company.  Nearly forty percent of Mr. Buffett’s tenure at Berkshire has been accomplished as a senior citizen and he is clearly not ready to retire anytime soon.  However, Berkshire shareholders are faced with the fact that an 84 year old man has an life expectancy of approximately six years.  It is prudent to consider succession issues carefully.  Mr. Buffett has assured shareholders that the company is well prepared but how can shareholders be certain?

BerkshireBeyondBuffettWarren Buffett almost certainly has higher name recognition in the United States today than all but a small number of public figures.  Even individuals who have no background in business and investing recognize Mr. Buffett’s name but what is interesting is that he is almost always characterized as an investor rather than as a manager.  In Berkshire Beyond Buffett, George Washington University Professor Lawrence Cunningham paints a compelling portrait of Berkshire’s culture that demonstrates how Mr. Buffett’s skills as a manager have been key to the company’s growth over the past two decades.

Berkshire Hathaway’s portfolio of common stocks attracts a great deal of attention, but the bulk of the value of the company has resided in wholly owned subsidiaries for quite some time.  Mr. Buffett has assembled a diverse group of businesses over the years and has characterized his management approach as delegating “almost to the point of abdication”.  While Mr. Buffett has involved himself in operating decisions in rare cases, his primary role is to allocate free cash flow generated by the non-insurance subsidiaries as well as “float” obtained from the insurance businesses.  Berkshire’s subsidiary managers have generally proven to be very capable with many of the original family owners continuing to run businesses even with no financial need to do so.

The Economist published a skeptical article on Berkshire earlier this year questioning how Mr. Buffett will “play his last hand”.  This article is useful in that it outlines many of the concerns skeptics typically point to when it comes to succession planning.  Specifically, it is alleged that Berkshire’s business model is simply not scalable or sustainable in the absence of the man who built the company.  Would a break-up of Berkshire create more long term value for shareholders after Mr. Buffett leaves the scene?

Professor Cunningham’s book is perhaps the most comprehensive examination of this question that has been published up to this point.  The book examines the origins of today’s Berkshire Hathaway and attempts to paint a picture of how Mr. Buffett has gone about building the conglomerate seemingly “by accident”.  Whether by accident or by design, over the years, Berkshire Hathaway developed a culture that ties together seemingly unrelated business units in a manner that makes Mr. Buffett’s extreme decentralization work.  Charlie Munger likes to describe the culture very succinctly as a “seamless web of deserved trust”, and Professor Cunningham’s work provides insight into how this web has developed and can be sustained.

The core of the book investigates how Mr. Buffett has balanced autonomy and authority through the examination of several Berkshire subsidiaries.  Professor Cunningham conducted numerous interviews with subsidiary CEOs as well as shareholders so the book is based on primary research and unprecedented access.  While some of the businesses have been analyzed in depth elsewhere in the past, the book also covers smaller subsidiaries that have received less attention such as the Pampered Chef.

One of the most interesting chapters goes into detail regarding the evolution of the Marmon Group, one of Berkshire’s wholly owned subsidiaries.  Marmon is a diversified conglomerate that was built by brothers Jay and Robert Pritzker. The company was considered too unwieldy and diverse to be successfully managed after the Pritzkers left the scene, but it turns out that little changed in terms of the company’s decentralized management approach.  John D. Nichols was CEO from 2002 to 2006 and Frank Ptak has been CEO since that time.  Both CEOs spent most of their careers at ITW, a diversified conglomerate with a structure similar to Marmon.  Mr. Nichols did introduce ten division presidents to logically group together Marmon’s subsidiaries but otherwise left the units mostly unchanged.

When Mr. Buffett leaves the scene at Berkshire, it is likely that the next CEO will need to create divisions since it would be very difficult to handle over eighty direct reports.  The Marmon model might offer a potential roadmap for how this can be accomplished in a manner that does not erode the operational autonomy that Berkshire has granted to subsidiaries.

Professor Cunningham concludes his book by conceding that some “slippage” is inevitable at Berkshire:

At Berkshire after Buffett, expect slippage.  Deals may not come Berkshire’s way. Offers Berkshire makes may not be on terms as agreeable as they have been.  Negotiations may be less favorable.  Getting through the screen may be a few more subpar businesses or disappointing managers.  If the big deals do not come or the great managers do not follow, returns will be lower.  But absent some extraordinary disruption, returns will not be so disappointing as to warrant dismembering Berkshire or some other radical change.  Its design for sustainability is more powerful than that.

Indeed, Berkshire Hathaway will not be the same after Warren Buffett leaves the scene.  But that is not really the question that needs to be answered.  The question really boils down to whether Mr. Buffett’s creation is worth preserving over time.  The litmus test is not going to be evaluated based on Berkshire’s stock price in the short run but based on growth of intrinsic value over many years and decades.  Logically, intelligent capital allocation across subsidiaries can remain extremely powerful even if the capital allocator in question is not Mr. Buffett.  If subsidiaries can continue to operate well in the future without significant oversight and capital allocation between subsidiaries remains intelligent, there is no reason for the model to fail anytime soon.   Professor Cunningham’s book provides ample evidence to believe that Berkshire’s business model should outlast Warren Buffett.

Disclosure:  Individuals associated with The Rational Walk LLC own shares of Berkshire Hathaway. 

Book Review: The Education of a Value Investor

I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.

— Charlie Munger, USC School of Law Commencement, May 13, 2007

The most successful individuals in any field of human endeavor are usually those who have adopted a lifestyle of constantly seeking additional wisdom.  In many cases, this wisdom involves keeping up with new advances in fields such as medicine, engineering, or other hard sciences directly relevant to an individual’s chosen profession.  Without efforts to remain up to date, a doctor or scientist will soon find that his skills have atrophied regardless of the initial level of formal education that was attained.

Professional investors who have adopted a value based approach are certainly not exempt from the need to constantly expand their horizons.  However, once a certain baseline of knowledge specific to value investing has been attained, the main goal does not involve constantly revisiting the fundamental analytical framework but attempting to expand our circles of competence so the analytical framework can be applied to a broader set of opportunities.  Perhaps even more importantly, we must seek to know our own personality and temperament and tailor our desired circle of competence and investment approach accordingly.

The Education of a Value InvestorThe Education of a Value Investor chronicles Guy Spier’s evolution from a self described “Gordon Gekko wannabe” to a highly accomplished fund manager who has found success through a constant effort of attaining worldly wisdom and seeking to understand his own personality more fully.  The core of the book is a very personal reflection of the author’s journey and is unsparing when it comes to self criticism.  In this way, the book is more of a memoir than a road map containing specific actionable investment ideas, although several valuable insights are provided which should improve any investor’s process.

From Gekko to Buffett

Mr. Spier graduated at the top of his class in economics at Oxford University and went on to earn an MBA from Harvard.  However, despite his top notch education, Mr. Spier found himself working at D. H. Blair, an investment bank with a very problematic culture that was fundamentally at odds with how he wished to conduct his professional life.

During this difficult period, Mr. Spier became more thoroughly acquainted with value investing by reading Benjamin Graham’s The Intelligent Investor and Roger Lowenstein’s Buffett:  The Making of an American CapitalistHeavily influenced by the manner in which Mr. Buffett has conducted his life, Mr. Spier made the decision to leave D. H. Blair and eventually founded Aquamarine Fund.  Through Aquamarine, Mr. Spier has posted results far in excess of the S&P 500 and is now a very well known investor.

Most successful fund managers who write a book typically devote an introductory chapter to their history and then use the book to provide an investment framework that they have found useful over the years.  Often times, such a book is mostly a marketing document used to attract new clients.  Mr. Spier takes a radically different approach and devotes the bulk of the book to continuing a remarkably honest account of his personal journey.  The fundamental premise behind much of the book is that an investor must understand himself well enough to structure his personal and professional life in a manner that allows for success.  Additionally, there is great value in being generous with others in ways where mutually beneficial associations naturally develop over time.

A Turning Point

Perhaps the most important point in Mr. Spier’s journey was when he took the seemingly trivial step of writing a thank you note to Mohnish Pabrai after attending the annual meeting of Mr. Pabrai’s investment partnership.  This simple gesture of gratitude made without any intent of receiving something in return prompted a meaningful friendship and mutually beneficial collaboration over the years.  The most famous collaboration was when Mr. Spier and Mr. Pabrai pooled their resources to bid on Warren Buffett’s annual charity auction.  They won the auction on their second attempt and met Mr. Buffett for lunch in 2008.  Clearly, this lunch had a lasting impact on Mr. Spier and in many ways changed how he would respond to the financial crisis.

Readers will benefit from a number of insights provided in the book, particularly those related to the importance of one’s environment when it comes to investing success.  Following the lunch with Warren Buffett, Mr. Spier made the decision to leave the New York “vortex” and relocate his business and family to Switzerland.  By removing himself from an environment obsessed with short term results, Mr. Spier was able to better match his environment with his personality, thereby resulting in a setup more conducive to his brand of value investing.  Altering his environment extended well beyond simply choosing to move to a different city.  Everything from the location of his home and office to the setup of his computer monitor and the creation of a “distraction free” library where electronics are banned have contributed to a more productive environment.

This book is an account of one investor’s journey and obviously not all of Mr. Spier’s choices will match any particular reader’s personality.  The important point, however, is that we must all embark on a path of discovering the environment that best suits our own personalities and allows us to achieve the best results that we can.

Checklists and Practical Advice

Toward the end of the book, Mr. Spier shares a number of specific pieces of advice that should be helpful to many investors.  Some of the advice is hardly groundbreaking like the admonition to avoid checking stock prices constantly and avoid people who are blatantly trying to sell you something.  However, two of the suggestions are particularly thought provoking and worthy of consideration.

Meat and Vegetables Before Dessert

Mr. Spier urges investors to gather investment research in the proper order and suggests tacking the primary sources (10K, 10Q, and annual letters) before reading any secondary sources such as news articles or analyst reports.  This is important because our brains are wired to give more influence to information we read first, so it is important to read the most direct sources first.  While it is intellectually less demanding to read an analyst report or a news article than to delve into a 10K report, we should avoid reaching for dessert before consuming the basics.  While most seasoned investors would never allocate capital without reading primary sources, it is common to review news articles and other data prior to more primary sources.  Perhaps this should be avoided.

Avoid Discussing Current Investments

Many value investors are familiar with Robert Cialdini’s book Influence:  The Psychology of Persuasion due to its presence on reading lists recommended by Charlie Munger.  One of the principles discussed in the book is related to “commitment and consistency”.  When we publicly take a position on a topic, we create psychological impediments to changing our views even when facts might change in the future.  For example, if an investor recommends a stock in a speech or interview and then the facts change, it can be excruciating to have to alter one’s views to match reality.  Mr. Spier suggests that we avoid discussing current investments and provides an example of where doing so backfired for his fund.

This particular advice should be particularly relevant to any investor who also writes about his or her investments.  A good example can be taken from The Rational Walk’s series of articles on Contango Oil & Gas.  After taking a bullish stand on Contango in September 2012, we published an update in October 2012 which in retrospect appears to rationalize possible flaws in the original investment case.  By May 2013, it was increasingly clear that the outcome envisioned eight months earlier was not working out, which was discussed in a final article on the subject.  In retrospect, there is no doubt that the “commitment and consistency” principle played a role in the length of time required to overturn the investment thesis.  It is very likely that without a public discussion, this realization would have arrived much sooner (and less expensively).

Recommended for Experienced Investors

Mr. Spier has provided a great service by delivering a remarkably candid and humble book that allows investors to potentially learn from his mistakes.  It is always better to learn vicariously through the mistakes of others when possible.  However, when it comes to the psychological pitfalls of investing, a certain baseline level of personal experience is most likely required before one can profit from the experiences of others.

It would be all too easy for a novice investor to read this book and arrogantly declare that there is no way he or she would fall into the same traps.  Only when one is humbled to a certain degree through one’s own errors is it normally possible to be open to learning from the mistakes of others.  The readers who will gain the most from this book are likely to be those who have made their own share of mistakes and seek to improve themselves going forward.