The first rule when reading any book is to finish it. I mentioned this before. But it’s worth mentioning again. If you have a book on investing you think you can learn from – like Ben Graham’s Security Analysis – and you read it badly, you’ll still have read it. There is no way you can read it so that you are worse off for having read it. You may have wasted some of your time. But I doubt it. Often, even if you read a book without understanding it, you’ll find that it may help you understand other books. Especially other books by the same author. Or other books in the same “tradition”.
The tradition we’ll be talking about is value investing. I’m not going to define that camp too narrowly. In fact, I’m going to put the ultimate growth investor – Phil Fisher – in that group. I’m also going to put Peter Lynch in there.
I’m not a huge fan of canons in reading. These are basically reading lists of material that others often read, think worth reading, and are the accepted listed of stuff worth reading. You can define it in other ways. But that definition will work for us here.
Of course, there is a value investing canon. I may want you to read books I think are really helpful – in fact, I know were really helpful to my own investing – and yet I can’t claim they are part of the value investing canon.
Why not?
Some don’t count as investing books. I think it’s worth your time to read “Hidden Champions of the 21st Century”, the Jim Collins books, and the Chris Zook books. But they aren’t marketed as investing books. Their authors don’t really claim they are investing books. They are business books. So they’re not part of the canon.
The other issue is when a book is very recent. A good example of this is “The Outsiders”. I would put that book near the top of any reading list for value investors. But, it just came out. A lot of people haven’t read it.
Lesser works by great authors are often not included. I think this is the biggest mistake. And one you should ignore – as I’ll show in a second. For me, any reading list should be a list of authors, not a list of books. I’m not going to recommend you read “Security Analysis” but skip “The Interpretation of Financial Statements”. If I say it’s good to read Ben Graham, then it’s especially good to read as much Ben Graham as possible.
I’m spoiling things a bit here – jumping ahead – but I’m going to suggest you should read Ben Graham. What should you read?
Here’s a good list of things Ben Graham wrote that you should definitely read:
1. The Intelligent Investor
2. Security Analysis
3. The Interpretation of Financial Statements
4. Benjamin Graham on Investing
5. Benjamin Graham Building a Profession
Why those 5 books?
Graham wrote a few other books. And a couple out of those 5 – Benjamin Graham on Investing and Benjamin Graham Building a Profession – are just reprints of articles he wrote.
You want to think of reading books as having a chat with the author of those books. What you’re trying to do is get tools – practical ideas – from the author. You don’t need him to write a book to get that. You can get it from his articles, his shareholder letters, his speeches, etc.
Ben Graham wrote articles. And when you read those articles together with his 3 books on investing, you learn a lot.
Once you’ve decided to read Ben Graham, it’s important that you immediately collect all the stuff he wrote that you have an interest in reading. I would suggest buying it. If you have a Kindle, buy it that way – it’s less intimidating to look at the length of everything you’ve just accumulated.
You want to buy everything the man wrote – not quite, but we’ll get to that – because it’ll help you understand everything else he wrote. Basically, the more you read of the same author, the more familiar his ideas become. Most importantly, the clearer you get about the stuff he isn’t saying. This unspoken knowledge is often one of the biggest practical takeaways from any book.
I also want to talk about the last two reasons a book may not be canon. And by canon, I mean just that people you talk to – other value investors – haven’t read the book, haven’t heard of the book, don’t know other who have read it, or don’t think you need to bother reading it.
One reason a book may not be canon is if it includes extraneous stuff. The title can also hurt in this respect. So, “Benjamin Graham Building a Profession” may get overlooked by folks who think it is about CFA type stuff. In a sense, it is. But only a small part is explicitly about professional concerns that aren’t primarily actual analysis. There’s a lot to be learned even from that book. The title – and the first few chapters – may confuse people as to what it’s about.
Finally, a book may not be canon because it’s hard to get a hold of. I like Ben Graham’s memoirs. There’s tons of stuff in it that won’t interest value investors. But there’s also little snippets that really, really will. I find the book fascinating. And it helps me understand Ben Graham – especially as an actual investor.
Here’s the problem. That book is out of print. New copies (meaning copies in excellent condition) often sell for $100 to $200. You have to work a little to find the book. I don’t. I’ve managed to buy a couple copies over the years and have kept them (since they’re hard to come by). Can I recommend you read it?
No. If you’re ever talking to someone and they own the book and would be happy to lend it to you – go ahead, read it. If you’ve got access to a library that will lend it out – go ahead, read it. I like the book. But there’s not enough purely about value investing in it for me to send you on an old book hunt.
So, I’ll use Ben Graham as our example of close reading. First, you gather all the stuff I think you should read. Once again, that is:
1. The Intelligent Investor
2. Security Analysis
3. The Interpretation of Financial Statements
4. Benjamin Graham on Investing
5. Benjamin Graham Building a Profession
Then you read it all through without taking notes or anything like that. You break the book up into manageable chunks of time. Fit it into your daily schedule. A good rule of thumb would be to find no more than 90 minutes of time sometime during your day to read the book. Some people may find they have less than 90 minutes. This advice is really only relevant for non-readers. Some people read a book every day for about 90 minutes. Growing up, I never saw my mom read for less than that. So many people can find a place for this kind of reading in their schedule if they really try.
If you can’t find 90 minutes – find 60 minutes or 30 minutes or 20 minutes. I wouldn’t recommend reading for more than 90 minutes at a time. You’ll get bored. I wouldn’t really recommend focusing on any one task – really focusing – for more than about 90 minutes. And 60 minutes is fine if an hour is all you have. Just do it every day and you’ll find 60 minutes a day works way better than a few hours once a week or whenever you feel you can binge read.
Now you go back to the books you’ve finished. You’ve read everything of Graham’s you want to read. But you haven’t taken apart what he wrote. How do you do that?
Again, you do it in manageable chunks.
Here’s an important – but not the most famous – bit from Chapter 8 of The Intelligent Investor:
“The holder of marketable shares actually has a double status, and with it the privilege of taking advantage of either at his choice. On the one hand his position is analogous to that of a minority shareholder or silent partner in a private business. Here his results are entirely dependent on the profits of the enterprise or on a change in the underlying value of its assets. He would usually determine the value of such a private business interest by calculating his share net worth as shown in the most recent balance sheet. On the other hand, the common stock investor holds a piece of paper, an engraved stock certificate, which can be sold in a matter of minutes at a price which varies from moment to moment – when the market is open, that is – and often is far removed from the balance sheet value.”
How do we know this is an important bit of text? How do we know to zoom in on this?
Well, we have a few clues. One, we may – or may not – know that Warren Buffett mentions Chapter 8 and Chapter 20 as being the most important in Ben Graham’s writing. Two, we may know the Mr. Market metaphor and see its relation to this bit.
Metaphors are very important clues to how an author thinks. Often, they are the most important clue. In this case, we have several uses of analogs – either metaphor or simile – that compare aspects of one thing to aspects of another.
One of these metaphors is entirely unwritten. Graham never uses the word “option”. However, a close reading of the opening of this bit of text drums the idea of option into our head. I’ve highlighted the words where Graham calls “option” to mind:
“The holder of marketable shares actually has a double status, and with it the privilege of taking advantage of either at his choice.”
What is a privilege? It’s a right. If you think about the definition of an option, it’s pretty much “the right but not the obligation” to buy a stock. Graham’s description is actually suggesting a double option in the market. You can either exercise a right to buy or a right to sell at two different levels set by Mr. Market. He makes this part very clear in the actual Mr. Market metaphor.
So, the option analog for a common stock investor, is that he can always choose to:
· Buy at a certain price
· Sell at a certain price
· Behave like a private business owner
That is what Ben Graham’s Mr. Market metaphor is all about. So analogs are the most important part of close reading.
Terms can be important. But it depends on the writer. Graham uses less technical jargon than you might expect. However, Graham writes very, very densely.
For an example of an author who does not write densely – see Phil Fisher.
Put Graham and Fisher next to each other. There is nothing to be unpacked in a Fisher paragraph. There is everything to be unpacked in a Graham paragraph.
This is mostly a matter of syntax. How they actually choose to order and arrange words, phrases, sentences, and paragraphs.
Graham writes like a philosopher. When he is difficult to read – and I personally don’t think he ever is, so I may not be the best judge of this – he is difficult because of the density of the thought content relative to the words used to express that content.
Graham often defines things, sets up their relations, mentions the limits of where this holds true, etc. all within a couple sentences of each other. He especially does not exaggerate for effect. He is a very literal writer. You can pull his quotes out of context and they will rarely contradict his overall meaning.
This is not true for most writers. You can make any writer look like an idiot by snipping one paragraph from an 800 page book and ignoring the thrust of the rest of it.
This is precisely what you don’t want to do as someone hoping to learn from a book. You need to get the gist of an author before you can really get the gist of each of his books. You may also want to get the gist of each book before you get the gist of small sections of that book.
Personally, I think that’s less important. I think – if you understand Graham well enough – I should be able to drop you in the middle of one of his books and have it make sense. This should be true even if you never get to read the beginning or end of the book, browse the table of contents, etc. You should know the parts of what he says well enough because you know the man overall.
That’s why the best way to read closely is to do the opposite of what you’d expect. Start by picking one guy. Read everything he wrote. Then – and only then – go in for a closer read.
When you do go in for a closer read, focus on analogs. These come in 5 flavors:
1. Metaphors
2. Similes
3. Coined terms
4. Thought experiments
5. Parables
If all you can understand of an author is his metaphors, similes, the new terms he coined, his thought experiments, and his parables – you’ll understand 90% of what he wrote. You’ll certainly understand more than most people.
Few “big ideas” can be written in a memorable way without using one of those 5 delivery methods. Definition based writing is an exception. Of all the value investors, Graham uses it the most. And even he can be understood without much focus on his definitions – as long as you understand his coined terms.
Margin of safety is a good example. Graham didn’t create that term. It was in common use in bond analysis. But he used the same words to refer to a broader concept. He compared bonds and stocks – legal protection and practical protection – in such a way that he could make margin of safety a bridge between the two.
In this way, he coined a term. It existed before him. But the meaning of margin of safety – within the value investing tradition – is the meaning Graham gave it.
So you need to know how Graham defines margin of safety. You don’t need to know how he defines terms he didn’t coin. That’s a mistake many readers make. They assume that all terms are equal. They aren’t. Ignore commonly accepted jargon. Focus all your efforts – as far as definitions – on understanding the terms an author coined himself.
And always start your close reading on a foundation of having read the author as much as possible. That’s the key to all of this. Once you find an author who interests you, collect everything he wrote. Don’t read it closely. Just read it.
Then you can zoom in.
Where should you zoom in first? I said if there is any value investing canon it should be a reading lists of authors rather than books. I would suggest these 6 authors:
1. Warren Buffett
2. Charlie Munger
3. Ben Graham
4. Phil Fisher
5. Joel Greenblatt
6. Peter Lynch
There are other books I would put up there. But there are probably no authors I’d put ahead of those 6. So these are the best places to start with the approach I recommend – first, read everything the man wrote.
Then – and only then – zoom in.
Talk to Geoff
The tradition we’ll be talking about is value investing. I’m not going to define that camp too narrowly. In fact, I’m going to put the ultimate growth investor – Phil Fisher – in that group. I’m also going to put Peter Lynch in there.
I’m not a huge fan of canons in reading. These are basically reading lists of material that others often read, think worth reading, and are the accepted listed of stuff worth reading. You can define it in other ways. But that definition will work for us here.
Of course, there is a value investing canon. I may want you to read books I think are really helpful – in fact, I know were really helpful to my own investing – and yet I can’t claim they are part of the value investing canon.
Why not?
Some don’t count as investing books. I think it’s worth your time to read “Hidden Champions of the 21st Century”, the Jim Collins books, and the Chris Zook books. But they aren’t marketed as investing books. Their authors don’t really claim they are investing books. They are business books. So they’re not part of the canon.
The other issue is when a book is very recent. A good example of this is “The Outsiders”. I would put that book near the top of any reading list for value investors. But, it just came out. A lot of people haven’t read it.
Lesser works by great authors are often not included. I think this is the biggest mistake. And one you should ignore – as I’ll show in a second. For me, any reading list should be a list of authors, not a list of books. I’m not going to recommend you read “Security Analysis” but skip “The Interpretation of Financial Statements”. If I say it’s good to read Ben Graham, then it’s especially good to read as much Ben Graham as possible.
I’m spoiling things a bit here – jumping ahead – but I’m going to suggest you should read Ben Graham. What should you read?
Here’s a good list of things Ben Graham wrote that you should definitely read:
1. The Intelligent Investor
2. Security Analysis
3. The Interpretation of Financial Statements
4. Benjamin Graham on Investing
5. Benjamin Graham Building a Profession
Why those 5 books?
Graham wrote a few other books. And a couple out of those 5 – Benjamin Graham on Investing and Benjamin Graham Building a Profession – are just reprints of articles he wrote.
You want to think of reading books as having a chat with the author of those books. What you’re trying to do is get tools – practical ideas – from the author. You don’t need him to write a book to get that. You can get it from his articles, his shareholder letters, his speeches, etc.
Ben Graham wrote articles. And when you read those articles together with his 3 books on investing, you learn a lot.
Once you’ve decided to read Ben Graham, it’s important that you immediately collect all the stuff he wrote that you have an interest in reading. I would suggest buying it. If you have a Kindle, buy it that way – it’s less intimidating to look at the length of everything you’ve just accumulated.
You want to buy everything the man wrote – not quite, but we’ll get to that – because it’ll help you understand everything else he wrote. Basically, the more you read of the same author, the more familiar his ideas become. Most importantly, the clearer you get about the stuff he isn’t saying. This unspoken knowledge is often one of the biggest practical takeaways from any book.
I also want to talk about the last two reasons a book may not be canon. And by canon, I mean just that people you talk to – other value investors – haven’t read the book, haven’t heard of the book, don’t know other who have read it, or don’t think you need to bother reading it.
One reason a book may not be canon is if it includes extraneous stuff. The title can also hurt in this respect. So, “Benjamin Graham Building a Profession” may get overlooked by folks who think it is about CFA type stuff. In a sense, it is. But only a small part is explicitly about professional concerns that aren’t primarily actual analysis. There’s a lot to be learned even from that book. The title – and the first few chapters – may confuse people as to what it’s about.
Finally, a book may not be canon because it’s hard to get a hold of. I like Ben Graham’s memoirs. There’s tons of stuff in it that won’t interest value investors. But there’s also little snippets that really, really will. I find the book fascinating. And it helps me understand Ben Graham – especially as an actual investor.
Here’s the problem. That book is out of print. New copies (meaning copies in excellent condition) often sell for $100 to $200. You have to work a little to find the book. I don’t. I’ve managed to buy a couple copies over the years and have kept them (since they’re hard to come by). Can I recommend you read it?
No. If you’re ever talking to someone and they own the book and would be happy to lend it to you – go ahead, read it. If you’ve got access to a library that will lend it out – go ahead, read it. I like the book. But there’s not enough purely about value investing in it for me to send you on an old book hunt.
So, I’ll use Ben Graham as our example of close reading. First, you gather all the stuff I think you should read. Once again, that is:
1. The Intelligent Investor
2. Security Analysis
3. The Interpretation of Financial Statements
4. Benjamin Graham on Investing
5. Benjamin Graham Building a Profession
Then you read it all through without taking notes or anything like that. You break the book up into manageable chunks of time. Fit it into your daily schedule. A good rule of thumb would be to find no more than 90 minutes of time sometime during your day to read the book. Some people may find they have less than 90 minutes. This advice is really only relevant for non-readers. Some people read a book every day for about 90 minutes. Growing up, I never saw my mom read for less than that. So many people can find a place for this kind of reading in their schedule if they really try.
If you can’t find 90 minutes – find 60 minutes or 30 minutes or 20 minutes. I wouldn’t recommend reading for more than 90 minutes at a time. You’ll get bored. I wouldn’t really recommend focusing on any one task – really focusing – for more than about 90 minutes. And 60 minutes is fine if an hour is all you have. Just do it every day and you’ll find 60 minutes a day works way better than a few hours once a week or whenever you feel you can binge read.
Now you go back to the books you’ve finished. You’ve read everything of Graham’s you want to read. But you haven’t taken apart what he wrote. How do you do that?
Again, you do it in manageable chunks.
Here’s an important – but not the most famous – bit from Chapter 8 of The Intelligent Investor:
“The holder of marketable shares actually has a double status, and with it the privilege of taking advantage of either at his choice. On the one hand his position is analogous to that of a minority shareholder or silent partner in a private business. Here his results are entirely dependent on the profits of the enterprise or on a change in the underlying value of its assets. He would usually determine the value of such a private business interest by calculating his share net worth as shown in the most recent balance sheet. On the other hand, the common stock investor holds a piece of paper, an engraved stock certificate, which can be sold in a matter of minutes at a price which varies from moment to moment – when the market is open, that is – and often is far removed from the balance sheet value.”
How do we know this is an important bit of text? How do we know to zoom in on this?
Well, we have a few clues. One, we may – or may not – know that Warren Buffett mentions Chapter 8 and Chapter 20 as being the most important in Ben Graham’s writing. Two, we may know the Mr. Market metaphor and see its relation to this bit.
Metaphors are very important clues to how an author thinks. Often, they are the most important clue. In this case, we have several uses of analogs – either metaphor or simile – that compare aspects of one thing to aspects of another.
One of these metaphors is entirely unwritten. Graham never uses the word “option”. However, a close reading of the opening of this bit of text drums the idea of option into our head. I’ve highlighted the words where Graham calls “option” to mind:
“The holder of marketable shares actually has a double status, and with it the privilege of taking advantage of either at his choice.”
What is a privilege? It’s a right. If you think about the definition of an option, it’s pretty much “the right but not the obligation” to buy a stock. Graham’s description is actually suggesting a double option in the market. You can either exercise a right to buy or a right to sell at two different levels set by Mr. Market. He makes this part very clear in the actual Mr. Market metaphor.
So, the option analog for a common stock investor, is that he can always choose to:
· Buy at a certain price
· Sell at a certain price
· Behave like a private business owner
That is what Ben Graham’s Mr. Market metaphor is all about. So analogs are the most important part of close reading.
Terms can be important. But it depends on the writer. Graham uses less technical jargon than you might expect. However, Graham writes very, very densely.
For an example of an author who does not write densely – see Phil Fisher.
Put Graham and Fisher next to each other. There is nothing to be unpacked in a Fisher paragraph. There is everything to be unpacked in a Graham paragraph.
This is mostly a matter of syntax. How they actually choose to order and arrange words, phrases, sentences, and paragraphs.
Graham writes like a philosopher. When he is difficult to read – and I personally don’t think he ever is, so I may not be the best judge of this – he is difficult because of the density of the thought content relative to the words used to express that content.
Graham often defines things, sets up their relations, mentions the limits of where this holds true, etc. all within a couple sentences of each other. He especially does not exaggerate for effect. He is a very literal writer. You can pull his quotes out of context and they will rarely contradict his overall meaning.
This is not true for most writers. You can make any writer look like an idiot by snipping one paragraph from an 800 page book and ignoring the thrust of the rest of it.
This is precisely what you don’t want to do as someone hoping to learn from a book. You need to get the gist of an author before you can really get the gist of each of his books. You may also want to get the gist of each book before you get the gist of small sections of that book.
Personally, I think that’s less important. I think – if you understand Graham well enough – I should be able to drop you in the middle of one of his books and have it make sense. This should be true even if you never get to read the beginning or end of the book, browse the table of contents, etc. You should know the parts of what he says well enough because you know the man overall.
That’s why the best way to read closely is to do the opposite of what you’d expect. Start by picking one guy. Read everything he wrote. Then – and only then – go in for a closer read.
When you do go in for a closer read, focus on analogs. These come in 5 flavors:
1. Metaphors
2. Similes
3. Coined terms
4. Thought experiments
5. Parables
If all you can understand of an author is his metaphors, similes, the new terms he coined, his thought experiments, and his parables – you’ll understand 90% of what he wrote. You’ll certainly understand more than most people.
Few “big ideas” can be written in a memorable way without using one of those 5 delivery methods. Definition based writing is an exception. Of all the value investors, Graham uses it the most. And even he can be understood without much focus on his definitions – as long as you understand his coined terms.
Margin of safety is a good example. Graham didn’t create that term. It was in common use in bond analysis. But he used the same words to refer to a broader concept. He compared bonds and stocks – legal protection and practical protection – in such a way that he could make margin of safety a bridge between the two.
In this way, he coined a term. It existed before him. But the meaning of margin of safety – within the value investing tradition – is the meaning Graham gave it.
So you need to know how Graham defines margin of safety. You don’t need to know how he defines terms he didn’t coin. That’s a mistake many readers make. They assume that all terms are equal. They aren’t. Ignore commonly accepted jargon. Focus all your efforts – as far as definitions – on understanding the terms an author coined himself.
And always start your close reading on a foundation of having read the author as much as possible. That’s the key to all of this. Once you find an author who interests you, collect everything he wrote. Don’t read it closely. Just read it.
Then you can zoom in.
Where should you zoom in first? I said if there is any value investing canon it should be a reading lists of authors rather than books. I would suggest these 6 authors:
1. Warren Buffett
2. Charlie Munger
3. Ben Graham
4. Phil Fisher
5. Joel Greenblatt
6. Peter Lynch
There are other books I would put up there. But there are probably no authors I’d put ahead of those 6. So these are the best places to start with the approach I recommend – first, read everything the man wrote.
Then – and only then – zoom in.
Talk to Geoff
