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Study materials for novice investors


matjone
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What study materials would you recommend for someone who is considering starting an investing program?  I majored in engineering and have no training in investing other than reading a few editions of The Intelligent Investor and Security Analysis.  I have considered getting the CFA materials and studying them but I am wondering if it will be worth the time spent.  A lot of the material that I have browsed through seems to be concerned with theories and formulas that don't seem to have much practical use, scenarios to teach me ethics, alpha, beta, etc.  I don't think any of this will help me make investment decisions.

 

Any advice or suggestions you have would be appreciated.  If anyone has completed the CFA program I would especially like to hear their thoughts.  Thanks in advance for your help,

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I have considered getting the CFA materials and studying them but I am wondering if it will be worth the time spent.

 

Just get the Schweser Notes.  IIRC, level 1 has lots of basics, level 2 is more interesting with accounting/valuation stuff. 

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I have my CFA.  I personally don't think it is worth the time needed to complete.  You are correct there is a lot of efficient market theory, etc...  Benjamin Graham was instrumental in starting the CFA program as he advocated a certification for security analysts.  While studying for the CFA there were many times I thought Graham would've been disappointed with what it had become.

 

To truly learn about investing I would read as many books from true value investors.  Start with all of Buffett's annual letters.  Other suggestions would be Klarman's book, Whitman, Hagstrom's book on Buffett. 

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Reading ideas on VIC and reverse engineering post plays by famous investors is also useful. IMHO learning how to think and learning basic economics / accounting are all one really needs. It also helps to get screwed on a few investments but there are cheaper options if you are willing to learn from others. I do a bit of both  ;D

 

Also Pabrai and Klarman frame things very well inmo. Pabrai really shows you that you are really just making a very educated (sometimes over educated) bet on an outcome. You should ensure that even if you bet is wrong you dont lose too much and you should focus on improving your thought process so your bets are more and more accurate.

 

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Read books (accounting, valuation) + reverse engineer investment ideas off of VIC.

 

That's the best way to do it. Really you dont need to read more than maybe 1 or 2 value investing books (they are almost all theory with little practical knowledge).

 

Get good at modeling businesses in excel too.

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I would read Klarman's book, Intelligent Investor (which you have read) and Greenblatt's books (they are fun light reading with good insights).  Benjamin Graham on Investing gives you good insight into Graham's process.  More advanced would be Philip Fisher's boks which talk about the qualitative side of security analysis.  As to getting the CFA, if you are planning on entering the security anlaysis/valuaition fields as a carrer it would be worth it otherwise I would spend my time reading, thinking about and performing valuations on firms of your choice.

 

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What do you mean by starting an "investing program?"  If you mean "investing your own money" then, IMHO, the CFA exam will not be useful at all.  All the CFA exam does is put some letters by your name that will be helpful if you want to work for someone else, or perhaps impress some would-be clients. 

 

Reading all the Buffett letters is good.  But, if you have already read a "few editions" of the Intelligent Investor and Security Analysis, you should already have the concepts/tools. 

 

I think a good way of starting is to pick out a couple of successful value investors, look at all the stocks in their portfolio, and start researching the companies you find interesting.  Then, if you find some you understand/like and they seem undervalued (provide a significant margin of safety) based on your independent calculation, buy some shares.  It is a bonus if you can buy them cheaper than what the value investor you are following paid.  This makes it easier (psychologically) knowing that the investment has already passed through a professional's robust checklist. 

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My background is in engineering and did not have any economic/finance background. Reading Intelligent Investor and other value investing books, it felt like sitting in the cockpit of a space shuttle - you get exited and want to do something but did not have a real clue. I completed my CFA which provided a good background - accounting, economics, statistics, financial analysis (at least how not to do it or way it is performed by analysts). I did feel it is a waste of time relative to the time spent. If you can look at the curriculum it provides a roadmap of what things you might need to learn and in what order. It however misses completely on how to actually go about investing in the markets.

 

I found that I learned most from Graham's Security Analysis, the practical aspects of it. Then started reading and analyzing Annual Reports/10-K's, etc.  The first 200 annual reports did not make much sense, but I kept reading anyway. Then after getting a good feel for the various industries and companies from reading the annual reports, I then selected a few industries and a few companies in each. Then spent a couple of years drilling down into the industries and companies. So I would really dig deep into 2-4 companies in a specific industry. 20-30 years of annual reports if available and try to also look at data of the past 30-40 years to see how they have evolved. Now I am comfortable with valuing companies that are within these specific industries. So if I have to look at a new company within the industry it takes relatively less time to get upto speed.

 

Vinod

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My background is in engineering and did not have any economic/finance background. Reading Intelligent Investor and other value investing books, it felt like sitting in the cockpit of a space shuttle - you get exited and want to do something but did not have a real clue.

 

This is how I feel.  I got out of college in 2001 and for the first time had money to invest.  I did a little reading on it on sites like msnmoney, cnnmoney, etc., and also talked to a broker at Edward Jones and I came up with my plan, and of course I spent 10 years buying and holding mutual funds and waiting for them to go up.    After 10 years of pretty low returns I started to realize that maybe this wasn't the way to go, and I saw Warren Buffet say somewhere that if you wanted to learn how to invest you needed to read Ben Graham.  Now I've read Ben Graham and while I feel like I've learned a lot about the basic attitude you need to have as an investor, I don't really have any idea how to value a company.  This left me wondering where to turn next, and I thought the CFA program might be a good next step.

 

Thanks for all your replies, and if anyone else has any other advice for me I'd love to hear it.

 

 

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I also come from an engineering backround (petroleum) & have the CFA. The CFA should be looked on the same way as engineering courses - lots of theory & mathematics, & light on application; but without the background you really can't do anything. You learn application by getting out into the field, & being forced to figure out how to do something with squat. The result is many possible solutions.

 

Every profession has its propaganda & the CFA is no different; you just don't have to follow the herd. A securities analyst with a CFA might aspire to become a PM and/or fund partner. A PEng with a CFA might aspire to be the CFO partner within an engineering firm. Different strokes.

 

Once you have the technical, you'll probably get the most value by looking at the styles of WEB, Soros, etc. & ensuring that you include a heavy leavening of Indian, Asian, & Middle Eastern names in the mix. It's also helpful to travel to those countries to get a sense of their conditions.

 

Western culture is just one of the many pimples on the arse of the world!

 

SD 

 

 

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One suggestion is to dive in and read 10-Ks and Qs.  One place to start to look for current ideas is to go to magicformula.com and run the screen and start looking at these firms.  They will give you a flavor of current deep value plays and you can get a feel of why these firms are there.   Then you can assess whether the change is permanent or temporary and buy the temporarly out of favore firms.  I started by chosing a moated industry such as media/cable which has alot of cheap companies to look at to begin with.  Since the universe is so big, I had to focus to get my hands around something.

 

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I think a good way of starting is to pick out a couple of successful value investors, look at all the stocks in their portfolio, and start researching the companies you find interesting.  Then, if you find some you understand/like and they seem undervalued (provide a significant margin of safety) based on your independent calculation, buy some shares.  It is a bonus if you can buy them cheaper than what the value investor you are following paid.  This makes it easier (psychologically) knowing that the investment has already passed through a professional's robust checklist. 

 

My problem with this approach is it can sometimes lead to lazy analysis, especially with novice investors.

 

I recall seeing a lot of people follow notable value investors into certain stocks like Delta Financial or Ambac because they saw Pabrai or Marty Whitman buying -- and extrapolated that because they were getting in at a lower price and that Pabrai/Whitman had great track records, they would be safe. And that ended up tainting whatever analysis they did. Even if something was too complicated or over their head, they would still defer and think that since it passed the smell test of these great investors, they would be okay.

 

And instead, they lost their shirts. So you have to exercise a lot of self-control when taking that approach and I don't think new investors have that.

 

What I would instead suggest is that you start by trying to value small, simple businesses. Maybe even businesses that are near you. I regularly will sort industries by market cap and then jump into the financials of the smallest players. They tend to have less moving parts and are easier for new investors to value.

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Wow, quite a few members have an engineering background. I also studied engineering (U of Toronto). I am currently going through the CFA program. The CFA is probably most valuable if you have an interest, and/or a career in finance. Take some of the other advice, like reading the Berkshire letters. The CFA is like basic strategy for what the analysts are doing.

 

Personally, I think nothing beats hands-on experience with your own money. You'll see how you get emotional highs and lows, and you'll see how you'll deal with it. It's like a continuous feedback cycle, where you keep learning and tweaking your investment approach.

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As most people have said, practical experience is the best teacher. But I think that the threadstarter mentioned his mixed results over a 10 year period. In that case, the CFA program is a fairly inexpensive guide through major financial topics, and it will help to highlight areas that may warrant further study.

 

The major problem with the program is that it takes a pretty long time; at best, you will have to wait one and a half years to finish, but more likely it will take three or more. In addition, the course material covers a wide range of topics, and frequently dwells in minutae. The CFAI even began to bundle the course books with the testing fee because so many students bypassed the books in favor of Kaplan or Stalla materials. It may be a frustrating exercise if you do not have an immediate practical goal, i.e. promotions or raises, to push you through a convoluted yet non-technical explanation of the Black-Litterman model.

 

If you can find a program that covers the basics of financial theory and economics, I would recommend those. Books such as You Can be a Stock Market Genius and Fooling Some of the People provide good examples of market analysis and corporate analysis, respectively.

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My thinking was that the main advantage of the CFA program for a novice would be that it lays out a plan for your learning, as opposed to the meandering path that you tend to take trying to learn on your own.  The disadvantage, from my inexpert perspective, is all of the unnecessary information that you have to weed through to get to the important stuff.  Maybe the thing to do would be to get the books used on ebay and just skip over the parts about ethics and efficient market theory.

 

The time commitment isn't as much of an issue for me because my work schedule only keeps me occupied about half of the year.  I don't mind reading about this stuff for several hours a day and I actually kind of enjoy it.  My only question is whether there might be more quicker and more efficient ways to learn.

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The quickest and best way to get experience is to just do it.  The data is readily available.  For examples of good analysis see the "You can be a Stock Market Genius", "Benjamin Graham on Investing" or see the Value Investors Club board in addition to this boards entries.  From these and your reading you can reverse engineer some the techniques and perform them yourself.

 

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Another engineer here...I also completed my MBA which provided good classes on accounting, finance and investing...If you have any desire to continue your education you can add to your career prospects and learn about investing through a MBA  program.

 

On the reading side I would suggest adding some of John Templeton's booksd - Global Investing the Templeton Way and Investing the Templeton Way...They are not very technical and provide good insight into the successful methods he used to pick stocks.

 

Good luck!

 

 

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I've read dozens of books on valuation and investing. One that I happen to be reading now is "F Wall Street" by Joe Ponzio. While the title and marketing for the book are not attractive to me, the content is actually quite good. Ponzio steps through how to arrive at Owner Earnings (Warren Buffett's view on earnings that is cash-based and so the results as you would see them were you the owner of the enterprise). He also steps through how to estimate the intrinsic value of a company (also a WEB reference to the discounted cash flow model), which is a rational alternative to just "going with your gut". He actually gets both of these approximately right (which is more than you can say for many such attempts at emulating Warren Buffett).

 

I think that you could do much worse than this book as a starting place for thinking about how to value a company. He gives a few examples also, which is always necessary for me to truly internalize a concept.

 

Happy reading!

 

alpha23

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  • 5 years later...

I've read dozens of books on valuation and investing. One that I happen to be reading now is "F Wall Street" by Joe Ponzio. While the title and marketing for the book are not attractive to me, the content is actually quite good. Ponzio steps through how to arrive at Owner Earnings (Warren Buffett's view on earnings that is cash-based and so the results as you would see them were you the owner of the enterprise). He also steps through how to estimate the intrinsic value of a company (also a WEB reference to the discounted cash flow model), which is a rational alternative to just "going with your gut". He actually gets both of these approximately right (which is more than you can say for many such attempts at emulating Warren Buffett).

 

I think that you could do much worse than this book as a starting place for thinking about how to value a company. He gives a few examples also, which is always necessary for me to truly internalize a concept.

 

Happy reading!

 

alpha23

 

Another engineer, electrical, here.

 

I stumbled on Joe Ponzios's blog when he first started it, which was before his book. Unfortunately he hasn't posted since mid-2011,

 

http://www.fwallstreet.com

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