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industry primers


racemize
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I'm asking this not to offend, but because I'm very curious:

 

What's the marginal value of reading through all of this industry research vs reading through the same amount of annual reports from companies in each industry?

 

It seems there's probably about 1500 pages of information in there with a lot of repeat (Oil and Gas).  It seems the research would be useful in knowing nuances in each industry, but could you learn those from reading annual reports?  I guess if you want to be an expert on one field this stuff looks pretty good. 

 

Any thoughts?

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I haven't started reading them, but thought it would be useful in conjunction with annual reports in a specific industry.  e.g., for expanding my circle of competence and not only reading information biased by the company(ies) I'm analyzing.

 

Alternatively, just expanding understanding while I'm not analyzing individual companies that much.

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So I started surfing that WallStreetOasis site, and found this:

 

http://www.wallstreetoasis.com/forums/if-i-know-everything-there-is-to-know-about-og-what-do-i-know

 

I guess this is the crux of what I was asking for the industry stuff.  People there are saying to really "know" the industry you need to be a geologist, PhD etc.  Sure that makes sense if you want to know the minute details of how something works.  My question is how much of this is in the weeds irrelevant information vs useful for investment purposes.

 

Has anyone ever made an investment where it went wrong and they thought "If only I had a PhD in Geology I could have seen the outcome of this?"  I guess that would apply in maybe looking for new O&G investments, if you can read those charts you have an edge.

 

Anyways just thinking out loud on this one.

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Don't get to caught up with WSO. Those guys over there focus on trying to break into the sellside especially investment banking. It seems there are value investors over there in the HF forum but they seem to be beginners, this message board is the place to be. WSO can be full of trolls and there can be a lot of drivel. Once in a while there are gems such as that guys post but I think guy could be doing it for the silver bananas. (It is a point system on that website)

 

Anyway, you're right about not needing minute information and it has been known that experts don't do well investing in their own fields especially doctors. James Montier has briefly written about this.

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I'm asking this not to offend, but because I'm very curious:

 

What's the marginal value of reading through all of this industry research vs reading through the same amount of annual reports from companies in each industry?

 

It seems there's probably about 1500 pages of information in there with a lot of repeat (Oil and Gas).  It seems the research would be useful in knowing nuances in each industry, but could you learn those from reading annual reports?  I guess if you want to be an expert on one field this stuff looks pretty good. 

 

Any thoughts?

 

Your point is not specific to these, but rather a general one (ie. you always have to ask yourself if there's something better you could be doing instead of what you are doing now).

 

I think it's very useful to have these around if you are looking for something that you aren't finding in your other sources, but the opportunity cost calculation must be made before reading any source at all.

 

The question rather is: are those more useful than what you've been reading lately?

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These types of threads seem to occur every few months or so.  "Circle of competence" has to be one of the most misused and misunderstood concepts in investing.  People have taken it to mean that if they need expertise in an industry in order to invest.  I couldn't disagree more.  In fact, I don't believe that is what Buffett ever meant when he said it.  I believe he simply means a basic understanding of the business and what the numbers mean.  One doesn't need to have a pilot's license to understand how an airline works.  One doesn't need to be chemist to understand a chemical company and one doesn't need to be a doctor to understand a pharmaceutical company.  I'm with some of the other posters like Oddball who said that reading annual reports is probably the better use of time. 

 

I would be willing to bet that between someone reading a company annual report and someone else reading that annual report and the 1500 pages of industry research, the first person is able to make a better investment.  Their mind isn't clogged with a lot of information that gives a false sense of expertise and competence.

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I'm definitely in the camp where you don't need to be an expert in a field to be able to invest, though I'm sure there are specific companies where it is "too hard" unless you are such an expert.  With the caveat that I have not read these particular primers yet, but thought they might be a good resource, there is a large difference between a primer and over-reading industry information.  In my mind, a primer is useful for giving you the conceptual models for operation of companies in the industry and letting you understand the esoteric language that is used.  For example, if you don't understand how reserving works in insurance or banks, or the language used by companies in that industry, a primer in reserving may be the means for helping you understand the SEC filings.  The cost of 100 or 200 pages of reading to be able to more fully understand a 10-k is not that high, particularly if it helps you understand each further 10-k in the industry for the rest of your life.

 

Moreover, there are times when you want more information about the industry or a company after reading the 10-k to round out your knowledge.  IMO, there is a fine line between over-cluttering your mind with information and the Dunning Kruger effect (http://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect).

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A potential problem with reading just 10Ks is that if there's important info that isn't in them, how are you supposed to know? By that I mean, if you don't know you don't know, you can get stuck in a loop. That's why it can useful to look elsewhere. It's not always required or useful, but having a quick look can't hurt, and if you find useful stuff, you can dig deeper.

 

To that some will say, "if you can't understand it just from the 10K, you probably shouldn't invest", which isn't a bad way to do things. But on the other hand, businesses that require a bit more work to understand (but are still understandable) can be a great hunting ground for those willing to put in the extra effort, because they can have an informational edge over investors who are too lazy to dig.

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I see industry reports as a way to get up to speed in a new industry or just to update myself on an industry that is already within my circle of competence as I sometimes pick up a data point or an industry nuance. If I know the industry, it would be a quick review so not that much time is involved. Learning about a new industry just broadens my understanding of how different businesses work. I cannot get such a quick overview by reading a couple of annual reports of a few companies in that industry.

 

Agree completely that you do not need to be an expert on all the low level details of an industry.

 

Vinod

 

 

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To that some will say, "if you can't understand it just from the 10K, you probably shouldn't invest", which isn't a bad way to do things. But on the other hand, businesses that require a bit more work to understand (but are still understandable) can be a great hunting ground for those willing to put in the extra effort, because they can have an informational edge over investors who are too lazy to dig.

 

I would challenge the edge you gain here.  If something is too hard most average investors will walk away so the only people left in it are professionals.  Now you're looking to gain an edge against people who are spending 60 hours a week looking at the minutia of the company because they're being paid to, and because there is a lot of money on the line.

 

I veer towards small caps, and very small caps because the dynamic is the opposite.  Most professionals avoid the space, so I'm left competing with average investors.  I feel that when put up against the average Joe reading annual reports can be a huge edge.  I would rather be buying my shares from someone who's selling because they like the newest Corvette model verses someone who's selling their shares because they noticed a tiny detail in a note that relates to some outside knowledge they have and I'll never have about an investment that spells doom.

 

Liberty as to your earlier question as to what I'm reading, a case in point.

 

I've been looking at a British company in liquidation, they're selling for slightly less than cash listed investments.  The bonus is they also own a nicely profitable company in the thread industry.  Now I could dig in and try to understand if they have a competitive advantage etc, but I look at it and figure I'm getting the thread company for free.  They earned £88m last year and are being valued at less than zero.  Maybe business is terrible next year and earnings shrink 90% and they only earn £8m, even then they're still worth more to a private buyer than what I'm paying.

 

These are the sorts of situations I like to look at, a wide margin of safety.  As Kraven mentioned, I understand thread, and as long as I can understand the downside I don't have to bother myself with much industry knowledge.

 

This has been a good discussion.  I should mention as for industry primers I found the book by Pat Dorsey "Five Rules" to be really good.  They have 5-10 pages on maybe 10 different industries talking about key points.  Such as key metrics for an industry etc.  This is crucial knowledge, I just read a book on community banking.  I couldn't have learned some tricks just looking at annual reports.  But from this point I'd be better served looking at banks rather than reading the American Bankers Journal for example.

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  • 3 months later...

Seems like it was deleted. I made an account but couldn't open the topic.

 

Then I found this: http://www.wallstreetoasis.com/blog/industry-primers-not-ready-to-go

 

Perhaps anyone here saved them on their pc? Would be a great help.

 

Btw, the discussion about whether or not it improves your results is nice, but shouldn't you mainly read it because you are interested in the industry? I couldn't be bothered to read much if I did it simply to achieve better returns.

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Seems like it was deleted. I made an account but couldn't open the topic.

 

Then I found this: http://www.wallstreetoasis.com/blog/industry-primers-not-ready-to-go

 

Perhaps anyone here saved them on their pc? Would be a great help.

 

Btw, the discussion about whether or not it improves your results is nice, but shouldn't you mainly read it because you are interested in the industry? I couldn't be bothered to read much if I did it simply to achieve better returns.

 

Some one saved them from this thread on /r/securityanalysis. You can contact them to get copies:

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  • 6 years later...

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