April 2018

Thought For The Month

Reading lessons

There can be a temptation when talking about fund management to make the job of analysing and investing in stocks sound as action packed as possible, perhaps alluding to nail-biting split second trading decisions, state of the art software with vast amounts of complex data, tense confrontations with aggressive company executives, or uncovering some company bombshell via on the ground detective work.

The reality, at least in our experience as value investors, is rather less  exciting, as we simply spend most of our time just, well, reading. This has been touched on in commentaries previously written by our team, but we’re never afraid to recycle a good idea, and it’s worth re-emphasising that most of what we learn about a company (and hence a potential investment) is simply a result of spending many hours reading about it!

We’re not alone in extolling the benefits of reading, as when a certain Warren Buffett was asked how he (and his team at Berkshire Hathaway) became such a successful investor, he responded that “we read hundreds and hundreds of annual reports every year” Similarly, when Buffett was asked for advice on how to become a better investor, he pointed to a stack of annual reports and suggested “read 500 pages like this every day. That’s how knowledge works; it builds up like compound interest. All of you can do it, but I guarantee not many of you will do it”.

Not alone, but almost certainly in the minority of investors, whose attention spans and holding periods appear to be getting ever shorter, and a recent study by a finance professor at Indiana’s University of Notre Dame revealed that only 29 people per day download the average US company’s annual report when it’s released. Perhaps even more extraordinary, General Electric disclosed that its annual report was downloaded from its website only 800 times in 2013; this for a firm with over 5 million shareholders!

While describing our day to day activities as ‘sitting and reading’ won’t win us any prizes for the most exciting job (or at least the most exciting sounding job; we’re all passionate value investors after all!), we believe that it’s the most productive use of our time, and the more short-termist and impatient other investors (sic) become, the more opportunities it should provide those of us willing to dig deeper and wait a little longer for businesses to achieve their potential. Who knows, maybe the readership of these commentaries is also dwindling; if that’s the case and you’ve made it to the end then congratulations; you’ve got something in common with Investec Asset Management’s Value team!