Thoughts on Applying it All

I remember back to the Berkshire Hathaway Meeting in May of 2010 and chuckle to myself… there were many great moments that stick out, but there is one in particular that I want to discuss.

A man heads up to the microphone, it is his turn to talk.  He takes a deep breath, and asks Warren Buffett a question (I’m paraphrasing here):

Warren, I’ve read every book about you, every shareholder letter, and every article in which you’ve been interviewed. I’ve gone through Graham & Dodd’s work, read Peter Lynch, and a lot about other great investors. My question is, what do I do now?

I forget what Warren said, but it was something along the lines of confusion and misunderstanding; he couldn’t understand why this guy had read & learned so much and yet didn’t use it to analyze businesses.  It reminded me of a time I got “stuck”, so to speak.

I had just spent the last 16 months continuously reading & taking notes through various books on investment strategy and theory, only to sit down and say, “Hey, why don’t I try to compile everything I know in a Word document to reference for later?”  And you know what? I couldn’t even fill up two pages. I became very distraught; this was an activity that had consumed more than 16 months of my free time and I didn’t have anything to show for it. I was in the “reading phase”, trying to learn enough to apply it to something, and this was my first attempt in the application of my knowledge.  It failed miserably.  I became very upset and stopped reading for about a week to think about it all.  My epiphany moment came toward the end of the week. I decided that I needed to start researching different businesses instead of continuously reading about the same investment principles from different investors. In the end, most successful investors view the market similarly & there is only so much benefit to gain from hearing all their views.

So, after having spent 16 months in preparation, I set off to begin my application of it all. It was a lot more difficult than anticipated, and at first, I found I didn’t like it.  My search strategy was terrible (online screening tools), I didn’t enjoy going through SEC documents at first, and I had trouble identifying what constituted an “undervalued” company.  I understood all the principles to become a great investor, I just didn’t know how to use it all effectively.  These things take time, as I have learned.

Then I discovered the power of Value Line. I remember Buffett talking about his early days, going through pages upon pages of the Moody’s Manual. It was how he began to develop an encyclopedic mind about different industries and businesses. I’ve gone through just about every issue (23 out of 26) and this is probably the most beneficial exercise I’ve found. I’ve seen over 3,000 companies (even if many were just for 5 minutes) and laid a great base for myself. Although I get the service for free at IU, I’d recommend paying for it if you are truly dedicated. It’s a great way to learn. Now if you ask me what constitutes a good business, a general idea of each industry, and what companies are the best in each industry, I can easily answer you. Just as important, it’s the place where I find the most undervalued opportunities.

I’m including an article written by Mohnish Pabrai here for you to see what his thoughts are on being both an astronomer (investor) and an astronaut (businessman): Click Here

This post is just for those of you starting out. I hope you’ll step away from the books every once in awhile & try to apply what you’re learning as you read about it. Otherwise, the only thing you can do with what you learn is argue with others over the finer points of investment philosophy (astronomer), without being able to analyze and understand the non-linear nature of businesses (astronaut).

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About Andrew Schneck

I am a value investor focused on misunderstood securities and industries, with an eye for long-term stock ownership.
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6 Responses to Thoughts on Applying it All

  1. Edward Desouza says:

    Hey Andrew,
    A very timely post for me . I say this because after reading your post on valuation , I decided to build a screeener ( I call it the Andrew Schneck screener ) to see if I could find similar stocks to Noble , ARO and HRB. I am really interested in your experiences with building online screeners. Why were do you say that your search results were terrible using an online screener ?
    Also, I have been contemplating whether to purchase a subscription from morningstar or valueline. the morning star subscription is much cheaper ( about 1/4 th the price of valueline ) . I am not really interested in the qualitative aspects of what these providers think ( example Mornignstars economic moats ) about stocks but purely quantitative historical data and SEC filings . As part of my valuation excercise , I decide to make the qualitative decisions myself.

    Cheers.
    Ed

    • schn1eck7 says:

      Ed,

      My results were terrible because the screener’s financials weren’t necessarily accurate all the time & I always found companies that appeared undervalued, but almost always were a waste of my time. If you look closely into studies of metrics like P/E ratio or P/BV, you’ll notice that they are always for a diversified portfolio; I’m not into diversification & thus any things I plug into a screener won’t do much for me. I have yet to get something good out of a screener & I most likely won’t do it again.

      I’m not too familiar with Morningstar from a search strategy basis (I do know them well with their ratings of mutual funds), but I’d tell you to check that out also to see what works better for you. And yes, the qualitative aspects are terrible most of the time; ValueLine typically upgrades companies after they go up, don’t have reasonable expectations for the future, etc… and I’m sure Morningstar is similar. Really, I use it for the same reason you are looking to- historical financials- so you should look at which does a better job.

  2. Leivo says:

    I have also faced the same situation and when I finally started just to do, instead of just reading I learned a lot faster. And when you start applying you start thinking things more analytically and it all comes a lot more intuitive.
    I also guess that it´s just too easy to call one self an investor and spend time reading those How to books compared to getting your hands dirty and spend loads of time reading SECs.

    Personally I also want to say this. Once I started to make my own analysis I faced the problem of falling in love with them (the companies), or if the company wasn´t as good as I had thought I still wanted to forgive them…mainly cos I had spend huge amounts of time analysing them and it would have been wasted work.
    But even an analysis that shows the company to be too expensive etc. is useful. It´s all building your own database and your understanding about the businesses you analyse.

    ‘btw. Andrew, I happened to read your blog almost by mistake but I´m happy that I did read it cos it´s one of my favorite US based investing blog already. And when I noticed you were only 19…wow. I wish I would have been this good back then (well 3 years ago).
    Anyhow I will keep on reading your blog and… stealing your ideas if I like them. I guess that´s the biggest compliment I can give to you.

    There`s a smilyface on the bottom of the page.

    • schn1eck7 says:

      Leivo,

      Thank you for your kind words. At 22 years old? you’re still in the same generation; a couple years here and there aren’t going to change all that much.. especially considering investing is a lifelong development process.

      I can understand the falling in love with your work; but therein lies the key to value investing. Instead of being motivated by emotion and buying what we love, we need to buy what makes sense economically. There are different ways to define it, but you must stay true to paying good prices. I have felt like some research was “wasted work” the way you have, but thinking about it like building an encyclopedic mind is the way to be. Just keep building up your knowledge.

      And feel free to “steal” ideas; they’re free & being shared on purpose! haha

      I see you wrote about ARO on your blog; I commented there on it.

  3. Leivo says:

    I noticed.
    And you might have noticed that I used your idea of ROA +12% and P/ OCF< 10. Thou that´s an idea I have seen couple of times before (but as ROA +16% and OCF <12). I haven´t really focused on analysing retail or manufacturing(my focus is just junior mining and finance) so I havent been using OCF, but now when I finally bought my first retailer I understood the idea behind those numbers.
    And I really like the idea when it comes to retail.

  4. Pingback: 50 Companies: the Good, the Bad, and the Ugly. « The ST Report

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