Getting started... where to begin?

[Utu]

Hey guys, I've been viewing these forums for awhile now; I respect and liken to the philosophy of value investing and have been looking to learn from experts and peers.  My basic question: how did you guys get started?  What would you recommend? 

 

I've been working in corporate finance and institutional asset management for 2 years, have my CMA, sitting for the 3rd CFA exam in June, have recently read The Snowball and The Intelligent Investor (loved it!), and currently breezing through One Up on Wall Street.  I have a good amount of capital sitting in a savings account earning a measly 14bps since I began working and want to start putting it to work.  My goal is to grow my value investing knowledge and confidence to begin making individual stock investments.  My current weakness; I can only devote 10-20 hours per week until after my June exam and I have no investing experience beyond my studies and institutional work experience. 

 

It goes against my conscience to try to time the market between now and June, but I've sat on my capital for long enough.  I'm thinking dollar-cost-average into index funds until after June when I can start moving out into companies I've thoroughly analyzed. 

 

Thoughts?

[Otsog]

When Buffett appeared on the TV program, Money World, he was asked what investment advice he would give a money manager starting out. "I'd tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities." Moderator Adam Smith said, "But there are 27,000 public companies." Buffett replied, "Well, start with the A's."

[Packer16]

I would start in the industry you know - asset management sounds like a good starting place since that is where you work.  Develop a list of asset managers and look at their relative valuations based upon value/AUM and EV/EBITDA and Equity/FCF.  Try to understand why they are priced differently and if it makes sense.  Do the more profitable firms have higher EV/AUM or the firms with growing AUM have higher valuations than those who have declining AUM for example.  If you find one that stands out, ask why?  If there is no rationale reason then look on this board and Value Investors Club to see if there is a write-up on the company and discussion.  Also read some 10-Ks of the leading firms in the industry to understand what makes the companies in the industry better or worse and some of the top level industry metrics.  If you focus on one industry then it can become your circle of competence.  Then as time allows you can increase the circle.

 

Packer

[ragnarisapirate]

 

It goes against my conscience to try to time the market between now and June, but I've sat on my capital for long enough.  I'm thinking dollar-cost-average into index funds until after June when I can start moving out into companies I've thoroughly analyzed. 

 

Thoughts?

 

Sounds dangerous... being a good investor is being willing to sit on capital until you know the pitch you want to swing at.

 

Being disciplined enough to sit on cash for another 6 months (when you really don't want to) would probably be good exercise.

[Utu]

I would start in the industry you know - asset management sounds like a good starting place since that is where you work.  Develop a list of asset managers and look at their relative valuations based upon value/AUM and EV/EBITDA and Equity/FCF.  Try to understand why they are priced differently and if it makes sense.  Do the more profitable firms have higher EV/AUM or the firms with growing AUM have higher valuations than those who have declining AUM for example.  If you find one that stands out, ask why?  If there is no rationale reason then look on this board and Value Investors Club to see if there is a write-up on the company and discussion.  Also read some 10-Ks of the leading firms in the industry to understand what makes the companies in the industry better or worse and some of the top level industry metrics.  If you focus on one industry then it can become your circle of competence.  Then as time allows you can increase the circle.

 

Packer

 

Good advice...  No where to go but out and up with my circle of competence.. 

 

 

It goes against my conscience to try to time the market between now and June, but I've sat on my capital for long enough.  I'm thinking dollar-cost-average into index funds until after June when I can start moving out into companies I've thoroughly analyzed. 

 

Thoughts?

 

Sounds dangerous... being a good investor is being willing to sit on capital until you know the pitch you want to swing at.

 

Being disciplined enough to sit on cash for another 6 months (when you really don't want to) would probably be good exercise.

 

Your response feels right to me.  Guess I just wanted to confirm it. 

[west]

 

It goes against my conscience to try to time the market between now and June, but I've sat on my capital for long enough.  I'm thinking dollar-cost-average into index funds until after June when I can start moving out into companies I've thoroughly analyzed. 

 

Thoughts?

 

Sounds dangerous... being a good investor is being willing to sit on capital until you know the pitch you want to swing at.

 

Being disciplined enough to sit on cash for another 6 months (when you really don't want to) would probably be good exercise.

 

+1

 

I would focus on your exam (you're almost done with them!) and be patient.

 

If you have to do stuff now, try reverse engineering one of Packer's ideas.  He has one hell of an investment record:

 

http://cobff.chrisdrane.com/user/Packer16

 

The GNCMA thread has a telecom primer or two in it that you can start with.

[Palantir]

Why don't you start by looking at some of the simpler firms (non-tech) that are discussed on this message board, and come up with a long or short case for them...that way you will have some decent qualitative information in front of you.

[bookie71]

Have you read the letters from the Chairman:

http://www.berkshirehathaway.com/letters/letters.html

and Charley's letters:

http://www.berkshirehathaway.com/wesco/WescoHome.html

I believe that the earlier ones are easier to understand.

Then get all the annual reports for an industry you are interested in and read, read , read.

http://www.annualreports.com/

http://ft.ar.wilink.com/v5/index.asp

Lots like to look at them on line, but I am an old fa%t and much prefer to hold them and make notations.  Every once in awhile one will jump out and slap you in the face as being a screaming buy.  Then you do all the ratios etc to prove to yourself that it is a great buy/

Then . . .

Don't be afraid to make a mistake, but try to keep them small.

You have your whole life in front of you so don't get in a hurry.

[one-foot-hurdles]

"PATIENCE is the ultimate skill you can bring to investing" - I have this quote up on my wall

 

- Spend more time building on your investment process than building your investment portfolio. 

 

- Read, read and study from the investment greats, understand their investment philosophy, their process and valuation techniques. Make notes and keep a journal!

 

- Get you feet wet (when you're ready) and make an investment. Learn by doing! But keep a journal on your research and decisions - this is key to fine tuning your process.

 

- Level 3 curriculum gives you a great introduction to the various biases in investment decision-making (keep those books as reference, don't burn them!). Use that to further your understanding about your own emotional/cognitive biases, strengths/weaknesses - figuring this out(an ongoing process) will be most of the heavy-lifting done.

 

[Grenville]

I would vote against trying to time the market with an index fund especially if you're going to want to invest in individual companies in six months.

 

I would say read the Berkshire letters. Pick some companies and try to value them. Once you find stuff you feel comfortable with valuing, look to find stuff with a margin of safety.

 

If you feel comfortable enough start investing a small portion of your capital based on your analysis. As you get more comfortable with your analysis and the results, put more capital at risk. Put the lessons of the Intelligent Investor to work.

 

The other thing that was important for me was to read the 10Ks cover to cover. It's hard at first, but you'll be surprised how much better you get over time.

[Green King]

When Buffett appeared on the TV program, Money World, he was asked what investment advice he would give a money manager starting out. "I'd tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities." Moderator Adam Smith said, "But there are 27,000 public companies." Buffett replied, "Well, start with the A's."

+1

 

That is the best way. If can take the pain you can gain a lot in a short time.

 

Cheers

 

GK

 

[ASTA]

Utu

I also studied for the CMA but quit :D I think that following other great investors and reading allot of books is the easiest. I read 200 business books before I started to invest, books on this forum are a good start. After that just get a feeling on where your circle of competence is and goo slowly. I am just starting out myself and find the Tesco or KO or PM of the world are a good start to invest then once I like myself get better in say 8 years of investing I can follow my own ideas. I am not there yet but hope one day I will be. 52 week low of gurus are the best starting ground to follow people I think. And of curse like me be lucky and start in a bull market :D     

[ni-co]

I highly recommend Joel Greenblatt's "[amazonsearch]You Can Be a Stock Market Genius[/amazonsearch]" and "[amazonsearch]The Little Book That Still Beats the Market[/amazonsearch]".

 

Shameless cloning by reverse engineering investments of great investors is also a good starting point:

http://basehitinvesting.com/mohnish-pabrai-lecture-at-columbia-university-my-notes/

You have to understand what you buy and why you're buying it, though.

[Kraven]

Try to figure out who you are from an investing standpoint.  Things work best when they are most natural and not forced.  Think about what type of investing style fits you.  Are you a Buffett type investor?  A Graham/Schloss investor?  Or maybe equities aren't really your thing at all and you are more interested in the credit markets. 

 

No one necessarily needs to be pigeonholed and it's not about slapping a label on yourself and thus ends the story.  There is nothing that says that you can't like chocolate and vanilla, but when given the choice people will typically pick one or the other (although some prefer a swirl).  So lay out some different hats and try them on.  Do a lot of reading, of course, but no one ever got anywhere just by reading about things.  As a wise puppet once said, do or do not, there is no try. 

 

So get your feet wet.  Open an account and make some small investments.  Use an amount of funds that won't impact you as you make mistakes.  Look at different types of investments.  Look at compounding machines where you need to read 50 years of annual reports and look at net nets which are based on some basic numbers and metrics.  Figure out what you enjoy about investing.  Figure out who you are and what your investing philosophy is.  There is no right answer except what is right for you.

[ASTA]

Good answer Kraven.

I just thought about this but a FAQ or separate sub category regarding starting up and beginner advice to investing is needed so if one goes here one can easily read this or other informative threads.

It would help new investors how just found this site get good advice quickly and more subscribers to pay for up keep :D

PS and of curses I got my feet wet already in late 1990's in high school

[SharperDingaan]

Treat the whole thing as a business....

 

Assess your skills in a BS format. It will highlight where your competitive advantages, & weaknesses, are. Pass the CFA & your major assets will be technical expertise, youth, & just a little arrogance (OK for a time, but don't make it a habit); the weaknesses will be patience, & maturity. Mitigate the weaknesses.

 

Stay in small caps, within your circle, & only in things with option markets &/or convertibles/warrants. Sh1te quality, speculative, build a big position cheaply - & lose it. Treat it as an apprenticeship, & expect to spend at least 3-5 years at it. You have to find out who you are, learn how to extract yourself, read a company, hedge effectively, see money as the servant, handle the emotions, & control your risk. Real world experience, not books.

 

When you can systematically withdraw capital comfortably, you have become mature. Giving $ to other people to manage, because you recognise that you are your own biggest systemic risk.

 

Nothing to it!

SD

 

 

 

 

[jouni1]

the sitting on your hands thing sounds right. usually when you feel you have to buy, you probably shouldn't.

 

anything you could make(or lose) on those savings in 6 months is worth much less than 6 months of watching and learning. just read up on companies/industries/investors you're interested in or know have down well.

 

when you're (i was  8) ) just starting up and you look for the opportunity all the books told you about, you find none. then you get frustrated and do something anyway. if you can avoid this pretty common misstep and do something sensible when you first get your toes wet, you're off to a great start!

 

good luck, and keep a large (over 50%) cash balance for the first 1-2 years. you can still get great returns!

[yadayada]

greatest danger is relative thinking. We are wired to compare, not see things in a absolute way. So when the market is overpriced, something with a 10x multiple might look cheap. If multiples go to like 25x, then maybe 13-14x multiples start to look cheap. But it is probably best to wait still. Unless ofcourse you got the rare growth story in the early phase with a very nice moat for that price.

[ERICOPOLY]

My system has been to cheat off of others.  I realized that if I started by going through 27,000 public companies I would make all kinds of mistakes thinking I had a shot of becoming the next Warren Buffett.  I would have discovered every kind of financial shenanigan the hard way.

 

So instead I figured out who some of the better investors were, and limited myself to stocks that they hold in their portfolios.  This way, those investors serve as a screen that filters out a lot of the junk.  It's a more sanitized population of stocks.  Not guaranteed to be sterile, but getting closer on that spectrum.

 

I did very well with this technique.  It's like having a loosely coupled team of analysts working for me for free.  I wrote about this technique a couple of years back.  Then a couple of months ago I noticed that Mohnish was talking about the very same thing.  So I like his approach!

[hyten1]

+1

 

eric, haha this is what i do as well

 

 

My system has been to cheat off of others.  I realized that if I started by going through 27,000 public companies I would make all kinds of mistakes thinking I had a shot of becoming the next Warren Buffett.  I would have discovered every kind of financial shenanigan the hard way.

 

So instead I figured out who some of the better investors were, and limited myself to stocks that they hold in their portfolios.  This way, those investors serve as a screen that filters out a lot of the junk.  It's a more sanitized population of stocks.  Not guaranteed to be sterile, but getting closer on that spectrum.

 

I did very well with this technique.  It's like having a loosely coupled team of analysts working for me for free.  I wrote about this technique a couple of years back.  Then a couple of months ago I noticed that Mohnish was talking about the very same thing.  So I like his approach!

[rpadebet]

My system has been to cheat off of others.  I realized that if I started by going through 27,000 public companies I would make all kinds of mistakes thinking I had a shot of becoming the next Warren Buffett.  I would have discovered every kind of financial shenanigan the hard way.

 

So instead I figured out who some of the better investors were, and limited myself to stocks that they hold in their portfolios.  This way, those investors serve as a screen that filters out a lot of the junk.  It's a more sanitized population of stocks.  Not guaranteed to be sterile, but getting closer on that spectrum.

 

I did very well with this technique.  It's like having a loosely coupled team of analysts working for me for free.  I wrote about this technique a couple of years back.  Then a couple of months ago I noticed that Mohnish was talking about the very same thing.  So I like his approach!

 

Completely agree. Starting with A's is difficult. I started by cloning ideas of great investors. Learnt why they might be good investments (reverse engineer). Tell myself there is no selling for next 5 years before each buy to limit myself to the best ideas.

 

I learnt this the hard way even after reading a lot, but recognizing that we are the biggest risk to our portfolio is huge and more often than not, just by not doing anything we can minimize that risk.

 

Read as much as you can. Don't watch CNBC.

[BG2008]

Google Bruce Berkowitz, he has a list of 10 or 11 checks for an investment.  It is a pretty "short and sweet" checklist. 

 

From my experience, sizing is very important.  Anything that you size large, you should do a pre-mortem.  Ask yourself what could go wrong.  Sometimes we can get caught up in an interesting idea and how much upside it has.  Ask yourself what you would do if price moves against you.  If the response is "I would gladly double down", it's likely a worthy idea.  If the response is "it depends on what happened to the fundamentals" you should size that smaller.  If the response is "lower price could be related to an impairment in the investment" then you ought to size it as a speculative position. 

 

My other suggestion would be to find what works for you.  I started out thinking that I will buy great businesses at a fair price.  I found out that I am much better at special situations, asset plays, and reading 300 page prospectus that no one bothered to read.  Over time, you too will develop your skill.  If you're 6' 5" and 300 pounds, don't try to play wide receiver.  Groom yourself to be a left tackle.  Of course, at this point you don't know what you are.  So experiment with different investments and accept the fact that you will make mistakes with your assumptions and analysis.  Size your positions so that if it goes to zero, it will not materially impact your life.

 

It's also important to get some hands on time.  A lot of Buffet books are great.  The key is understanding some of the fundamental concepts such as voting machine versus weighing machine.  Doubling down rather than sell your losers and ride your winners.  After that, you need to start rolling up your sleeve and take the deep dives.  Learning to invest is kind of like learning how to drive.  You can ace the written test and understand all the concepts, but you really need the actual driving to understand how much to turn your steering to make a 90 degree turn or whether it's safe to make that left turn with oncoming traffic in the opposite direction.  The big picture is to buy something worth $100 for $50.  Well, how do you find such a thing?  How do you know it's not a $50 masquerading as a $100 that's on fire.  This is where the reverse engineering is very helpful.  Research others' ideas and you will start seeing trends.  A company selling a money losing division results in higher valuation for the remaining profitable company etc. 

 

Last but not least, have "situational awareness".  In 2006/2007, all the financials appear cheap based on P/E multiple.  What many failed to see is that Wall Street had an unsustainable business model of packaging dodgy subprime loans.  Many of the home building stocks looked cheap, but were trading at peak earnings.  These things are clear in hindsight but very difficult to see forward.  Do your best and ask yourself where are we in the cycle?  Is this really sustainable in the long run. 

 

Best of luck. 

[Utu]

Have you read the letters from the Chairman:

http://www.berkshirehathaway.com/letters/letters.html

and Charley's letters:

http://www.berkshirehathaway.com/wesco/WescoHome.html

I believe that the earlier ones are easier to understand.

Then get all the annual reports for an industry you are interested in and read, read , read.

http://www.annualreports.com/

http://ft.ar.wilink.com/v5/index.asp

Lots like to look at them on line, but I am an old fa%t and much prefer to hold them and make notations.  Every once in awhile one will jump out and slap you in the face as being a screaming buy.  Then you do all the ratios etc to prove to yourself that it is a great buy/

Then . . .

Don't be afraid to make a mistake, but try to keep them small.

You have your whole life in front of you so don't get in a hurry.

 

Thanks - in the books I've read so far and on this forum, I keep seeing the BRK annual letters as great learning material...  Adding this to the list. 

 

Try to figure out who you are from an investing standpoint.  Things work best when they are most natural and not forced.  Think about what type of investing style fits you.  Are you a Buffett type investor?  A Graham/Schloss investor?  Or maybe equities aren't really your thing at all and you are more interested in the credit markets. 

 

No one necessarily needs to be pigeonholed and it's not about slapping a label on yourself and thus ends the story.  There is nothing that says that you can't like chocolate and vanilla, but when given the choice people will typically pick one or the other (although some prefer a swirl).  So lay out some different hats and try them on.  Do a lot of reading, of course, but no one ever got anywhere just by reading about things.  As a wise puppet once said, do or do not, there is no try. 

 

So get your feet wet.  Open an account and make some small investments.  Use an amount of funds that won't impact you as you make mistakes.  Look at different types of investments.  Look at compounding machines where you need to read 50 years of annual reports and look at net nets which are based on some basic numbers and metrics.  Figure out what you enjoy about investing.  Figure out who you are and what your investing philosophy is.  There is no right answer except what is right for you.

 

Really good advice.. It makes sense the most important thing is to figure out what kind of investing philosophy works for me. 

 

Treat the whole thing as a business....

 

Assess your skills in a BS format. It will highlight where your competitive advantages, & weaknesses, are. Pass the CFA & your major assets will be technical expertise, youth, & just a little arrogance (OK for a time, but don't make it a habit); the weaknesses will be patience, & maturity. Mitigate the weaknesses.

 

Stay in small caps, within your circle, & only in things with option markets &/or convertibles/warrants. Sh1te quality, speculative, build a big position cheaply - & lose it. Treat it as an apprenticeship, & expect to spend at least 3-5 years at it. You have to find out who you are, learn how to extract yourself, read a company, hedge effectively, see money as the servant, handle the emotions, & control your risk. Real world experience, not books.

 

When you can systematically withdraw capital comfortably, you have become mature. Giving $ to other people to manage, because you recognise that you are your own biggest systemic risk.

 

Nothing to it!

SD

 

Good advice here again on "knowing yourself".  The emotional/cognitive bias lessons in the material were powerful reminders of the need to monitor and self-discipline. 

 

My system has been to cheat off of others.  I realized that if I started by going through 27,000 public companies I would make all kinds of mistakes thinking I had a shot of becoming the next Warren Buffett.  I would have discovered every kind of financial shenanigan the hard way.

 

So instead I figured out who some of the better investors were, and limited myself to stocks that they hold in their portfolios.  This way, those investors serve as a screen that filters out a lot of the junk.  It's a more sanitized population of stocks.  Not guaranteed to be sterile, but getting closer on that spectrum.

 

I did very well with this technique.  It's like having a loosely coupled team of analysts working for me for free.  I wrote about this technique a couple of years back.  Then a couple of months ago I noticed that Mohnish was talking about the very same thing.  So I like his approach!

 

This is a great idea - thanks for sharing.  I recall in Snowball, Buffett mentioned some of his very first ideas came from others (Ben Graham & Security Analysis) and learning along the way. 

 

Google Bruce Berkowitz, he has a list of 10 or 11 checks for an investment.  It is a pretty "short and sweet" checklist. 

 

From my experience, sizing is very important.  Anything that you size large, you should do a pre-mortem.  Ask yourself what could go wrong.  Sometimes we can get caught up in an interesting idea and how much upside it has.  Ask yourself what you would do if price moves against you.  If the response is "I would gladly double down", it's likely a worthy idea.  If the response is "it depends on what happened to the fundamentals" you should size that smaller.  If the response is "lower price could be related to an impairment in the investment" then you ought to size it as a speculative position. 

 

My other suggestion would be to find what works for you.  I started out thinking that I will buy great businesses at a fair price.  I found out that I am much better at special situations, asset plays, and reading 300 page prospectus that no one bothered to read.  Over time, you too will develop your skill.  If you're 6' 5" and 300 pounds, don't try to play wide receiver.  Groom yourself to be a left tackle.  Of course, at this point you don't know what you are.  So experiment with different investments and accept the fact that you will make mistakes with your assumptions and analysis.  Size your positions so that if it goes to zero, it will not materially impact your life.

 

It's also important to get some hands on time.  A lot of Buffet books are great.  The key is understanding some of the fundamental concepts such as voting machine versus weighing machine.  Doubling down rather than sell your losers and ride your winners.  After that, you need to start rolling up your sleeve and take the deep dives.  Learning to invest is kind of like learning how to drive.  You can ace the written test and understand all the concepts, but you really need the actual driving to understand how much to turn your steering to make a 90 degree turn or whether it's safe to make that left turn with oncoming traffic in the opposite direction.  The big picture is to buy something worth $100 for $50.  Well, how do you find such a thing?  How do you know it's not a $50 masquerading as a $100 that's on fire.  This is where the reverse engineering is very helpful.  Research others' ideas and you will start seeing trends.  A company selling a money losing division results in higher valuation for the remaining profitable company etc. 

 

Last but not least, have "situational awareness".  In 2006/2007, all the financials appear cheap based on P/E multiple.  What many failed to see is that Wall Street had an unsustainable business model of packaging dodgy subprime loans.  Many of the home building stocks looked cheap, but were trading at peak earnings.  These things are clear in hindsight but very difficult to see forward.  Do your best and ask yourself where are we in the cycle?  Is this really sustainable in the long run. 

 

Best of luck.

 

Really good overview of some important considerations..

 

 

Thanks for all the input guys; lots to think about and more to do before I feel I'm ready.  Anyone know of a forum FAQ or similar posts about getting started? 

[james22]

1. Read every post on this Board.

 

2. Cheat off the cheaters.

 

 

[undervalued]

Can someone post good websites for research please? I have only found this forum which I think is a very valuable learning tools.