Sunday 21 September 2014

The Value of An Education in Investing

Last week, I blogged about the value of a Chartered Financial Analyst (CFA) education to an investor and concluded that while it is useful in providing a basic grounding on the various investment concepts and methods, it does not guide an investor on what he should look out for in investing. See The Value of a CFA Education for more info. Does it mean that investors should not pursue an education in investing? On the contrary, education is important to achieving success in investing.

I have been exposed to the stock market for 28 years and been investing with my own money for the last 16 years. Prior to 2001, my investments were going nowhere, with as many misses as hits. It was not until when I picked up my first investment book titled "Buffettology" did my investments began to show some progress. You may wish to read Investing Is A Life-Long Learning Journey for more info.

The book triggered my thirst for investment knowledge. I became a regular visitor to the investment section of the National Library, reading investment books ranging from time-tested ones like "The Intelligent Investor" to more contemporary ones carrying fascinating titles like "Dow 40,000", "Dow 100,000", etc.

Among the ones that I found useful, I bought them after reading them in the National Library, to serve as an reference in future. Some of the more important ones are desribed as follow.

Buffettology (by Mary Buffett & David Clark) - This book was written by the former daughter-in-law of Warren Buffett and describes the methods Warren Buffett used to analyse stocks. The book describes the mathematical steps involved in estimating the rate of return of a stock and is fairly dry. Nevertheless, it is an important book for me as the methods in the book became the model that I use to analyse stocks to this date. It is also the book that sets me on my path to an education in investing.

Stocks for the Long Run (by Jeremy Siegel) - This book discusses that in the long run, stock investments beat all the other asset classes, notwithstanding the fact that stock market crashes happen every now and then. It also describes the various effects such as calendar effects, small-firm effects, etc. Whenever there is a stock market crash, I would turn to this book to remind myself that in the long run, my investments would turn out well, despite the heavy paper losses sustained at that time.

Common Stocks and Uncommon Profits (by Philip A. Fisher) - Warren Buffett initially started out as a pure value investor, having learnt his trade from Benjamin Graham, the father of value investing. However, over time, he has introduced a growth element to the stocks he purchases. The influence for this change is Philip Fisher and his book. This book discusses that some companies are so good that there is often no good reasons to sell them at all. The book goes on to describe the various ways of identifying such companies. If Warren Buffett could achieve such spectacular returns with his value-cum-growth approach, then there must be something valuable with this approach.

Security Analysis (by Banjamin Graham & David Dodd) - This book is known as the Bible of value investing and is written by none other than Benjamin Graham. It was written in 1934, during the Great Depression period in US. It describes the ways to value stocks, bonds, preference shares and warrants. You can find an application of its valuation method for bonds and preference shares in The Lost Art of Bond Investment. Despite reading it twice, I still have not grasped the essence of the book, probably because the investing conditions then and now are different. For example, it could be discerned from reading the book that the accounting and disclosure standards are different from today's and hence, the book spends a fair amount of time on the interpretation and adjustment of income and balance sheet items. The basis of valuation is also quite different then, when book value takes on a greater importance compared to today.

The above are just some of the books that I found useful and bought for future reference. There are a lot more books that are useful which I never mentioned, such as "The Intelligent Investor" by Benjamin Graham. Generally, the value of these investment books lies in the fact that they contain practical wisdom from market practitioners who, through past experience, have figured out what works for them. By understanding and following their approaches, we are able to shorten our learning curve and start making money sooner from our investments. After all, with a stock market cycle averaging about 7 years, how many market cycles do we have in our lifetime learning and making money from investments?

Education is important to an investor. Without education, investors can only buy and sell on gut feel and/or follow the crowd. As an analogy, if you were to go to battle, would you select a general that has fought many battles, a general who has studied the art of war, or a general who is knowledgeable in both?


  1. You can find and "follow" as many living established Generals in the markets but at the end of the day you know you have to be you and nobody else. i am sure for being able to invest for 28 years+, you are already you and nobody else.
    Yes, i agree investing should be one of our lifelong callings to be successful.

    1. Yes, everybody has to find an investment strategy that best suits them.

  2. Hi chin Wai,

    Have not got to read Stocks for the Long Run (by Jeremy Siegel) yet. Will get it soon.

    Surprised u didn't mention Pat Dorsey Books on economic moats of various industries.

    1. I haven't read Pat Dorsey's books yet. Will do so. Thanks for your recommendations.