Disciplined reading - Chetan Parikh

In a great book “Hedge Hogging”, the author, Barton Biggs, writes about the importance of disciplined reading to investing.

“Recently I read an interview with Charlie Munger, Warren Buffett's al­ter ego. Munger is a great investor and a really smart, wise old guy:

I have said that in my whole life, I have known no wise person over a broad subject matter area who didn't read all the time-none, zero. Now I know all kinds of shrewd people who by staying within a narrow area can do very well without reading. But investment is a broad area. So if you think you're going to be good at it and not read all the time, you have a different idea than I do. . . . You'd be amazed at how much Warren [Buffett) reads. You'd be amazed at how much I read.

-Charlie Munger at the Berkshire Hathaway

2003 Annual Meeting

Reading is definitely my thing, too, and I think you have to read not just business stuff but also history, novels, and even some poetry. In­vesting is about glimpsing, however dimly, the ebb and flow of human events. It's very much about breasting the tides of emotion, too, which is where the novels and poetry come in. Besides, sometimes you have to refresh your mind and soul by consuming some crafted, eloquent writ­ing. When I get home at the end of a business day, after being absorbed in investment babble and dull, plodding writing, replete with trite phrases such as make no mistake, which is my pet peeve, I am stuffed with babble. My gorge rises at the thought of more business carbohydrates. So I sit down with a nice big glass of wine and immerse myself in something I want to read. I always have at least one book going, and my taste is eclectic, but the sine qua non is that it has to be well written. At this moment, I am rereading William Blake's great biography of Disraeli, a complex and intriguing figure.

I am a visile. A visile primarily absorbs information through the eyes by reading. An audile ingests information mostly through the ears, through talking and social interaction. Charlie Munger, too, is a visile. Of course, we all do some of both, but I share Munger's skepticism that someone who doesn't read much can be a really successful investor. I do know a number of people who are very successful traders and specula­tors who don't read anything but the sports page.

One of the biggest, most difficult issues I have is time manage­ment. Receiving and processing information and data in order to have the knowledge to make wise investment decisions is what the profes­sional investor does all day and night. For example, one friend of mine, a visile who has been in the business a long time and has a fab­ulous record, is a truly compulsive but very disciplined reader. By dis­ciplined, I mean that he has a keen eye for junk research and wastes no time on it, but he is continually looking for the pearl of knowledge, the flash of insight that makes the pieces in an investment puzzle fall into place.

Not only does this fanatic read all week long, but every weekend, to his wife's dismay, he comes home with several heavy satchels full of re­search reports and magazines. He gets up early and spends six to seven hours each weekend scanning this mass of material and scrawling notes on it to his analysts and portfolio managers. Perhaps 10% of it he reads and studies carefully. Of course, he also talks and listens, but neverthe­less, this visile gets most of his information by reading. "You get less lies and BS this way," he says.

Another friend, who also has a brilliant investment record and is equally obsessive but very different, an audile, used to read a lot, but now he doesn't read much at all, although he carries around a briefcase full of research, which he paws and shuffles. Yet he still wants to be on every mailing list and becomes very insecure when he thinks you have a piece of research he doesn't. There is research all over the floor of his of­fice. and once last summer, when he opened the trunk of his car to get his golf clubs, I saw great mounds of moldy old research reports that had been there for God-only-knows how long.

Instead of reading, this guy obsessively works the phone. All day long, including weekends and evenings, he makes calls that usually be­gin, "Big guy, what's going on?" Yet in his own way, he is very disci­plined, too, because each conversation is short and to the point, and once he has pumped dry the person on the other end of the phone, he terminates the call with, "I gotta fly." There is no idle chatting. In effect, he has decided that after 30 years of reading research reports, the return on his investment is low, and that the best stuff isn't on paper. So he spends his time gathering information from talking and listening to an eclectic variety of sources.

As for me, although, Lord knows, I spend a lot of time every day chattering with my investment buddies, I am a compulsive reader. Sometimes, getting through my inbox can be compulsions that hurt rather than help. The objective is not to prove how much you can read but rather to unearth insights that lead to money-making decisions.

I find it's almost impossible to do serious reading in the office because there are so many interruptions, so I spend a lot of time nights and weekends reading. Often I wonder if it's all worthwhile or just an addiction. Although I know there is no direct correlation on a day-to-day basis between reading and making money, somehow I feel less guilty if I read everything in my in-box. As investment managers, we must control our reading by being disciplined and ruthlessly se­lective rather than let it rule us. I want original information or analy­sis about the state of the world, an industry, or a company that is going to help me make money. Change at the margin is what moves markets. Of the written material I receive each day, 90% is worthless to me because it either repeats what I already know or is irrelevant. The odds are almost zero of my finding anything new in one more 20-page report on GE. The problem is that I can't winnow out the 10% without glancing at the rest, and no secretary, no matter how smart, can do it for me. When I do find a report or an article that has truly fresh, at-the-margin thinking, I try to take the time to read it carefully. I find underlining helps.

So here is what I read, for better or worse. Obviously, a lot of topi­cal, random stuff comes up, but what follows is my regular fare. Every day on the train going to work I read the New York Times and the Finan­cial Times. I always read Thomas Friedman's columns. The FT is excel­lent for corporate news. Later in the day, I try to scan the Wall Street Journal. When I am traveling in Asia or Europe, it's The International Her­ald 'Tribune, which, in my opinion, is the best single newspaper in the world. The Asian and European editions of the Wall Street Journal in some ways are even better than the one in the United States. I am be­ginning to think I should spend more time reading corporate news in newspapers, which at least doesn't pretend to be anything but reporting, and less on brokerage research, which often is just biased reporting of what has already happened. A good read for out-of-consensus content is Kiril Sokoloff's What I Learned This Week. It has to be taken with a grain of salt because Kiril has a tendency to present only one side of whatever view he is taking. However, he is an original thinker.

Each weekend I try to read The Economist carefully. It is unques­tionably the best magazine in the world, and nothing else has close to its global reach. I review Time, The New Yorker, and Newsweek (Fareed Zakaria is excellent) by looking at the table of contents to see what sounds interesting. All three used to be better, and they still have some good pieces, but they have been junked up. I usually look at Fortune. It has been junked up, too, but it has some of the very best, most incisive long articles. Carole Loomis is great. Institutional Investor, Absolute Re­turn, and David Smick's International Economics are on my reading list, too. However, you can go through only so many magazines, because there is so much promotional babble in them. I must confess I am a huge Sports Illustrated fan because the writing is so superb and because I like sports.

We get massive amounts of research and market letters every day, mostly bye-mail. My way of dealing with the sheer volume each week is to focus on about 25 different sources, ranging from Ed Hyman, Jim Paulsen, and Jim Walker to Byron Wien, Steve Roach, and Chris Woods. There is meat to be found in scanning the company summaries issued by serious research firms. I don't disdain by any means Wall Street re­search or Wall Street analysts. They are still valuable to check out ideas with, and sometimes a conversation with them can be very instructive. Our primary research sources are Morgan Stanley, J.P. Morgan (for eco­nomics), Goldman Sachs, Credit Lyonaisse, ISI, Bernstein, Credit Suisse, The Bank Credit Analyst, Merrill Lynch, Intregal Associates, and Bear Stearns. My assistant erases everything else. From time to time I add sources to and delete from the primary list. Otherwise, I would get overwhelmed with stuff I really don't pay any attention to.

I do this because I used to lug around a heavy briefcase full of re­search. I had the bad habit of wanting to reduce the load by discarding paper. I would end up putting aside the really good stuff to read later while I compulsively worked through the junk. I found I was reducing the weight I was lugging, but ending up carrying around, not reading, the meat, which, after a week or so, I would throwaway because it was stale. Obviously, not a best practice.

I don't bother to read most economists (particularly those who insist on being called Dr. Sam or Dr. Eric) and strategists because they tell you only about what has happened, not what will happen. They don't forecast; they just extrapolate recent trends into the fu­ture. They are mostly followers, who revise their forecasts of the fu­ture based on the direction of the latest economic numbers or what markets have done recently. As a result, they are always behind the curve instead of in front of it. They always underestimate the dimen­sions of the swings that economies are capable of. Of course, there are a few exceptions. Dr. Copper is still the best economist I know. Some of my best sources are businesspeople because they give me a flavor of what's going on. And then, of course, there are always those people who are contrary indicators.

It is very hard to read in the office, what with interruptions from phone calls and the inevitable seduction of the screens. E-mails and the Bloomberg are huge distractions and time wasters. Staring at Bloomberg screens is not productive for thinking. Cleaning up your e-mail in-box can easily become another compulsive activity. I find myself responding to trivia e-mail messages instead of thinking. The same applies to voice mails. We have a reading room, almost a library, in our office. Good light, reasonably comfortable chairs, no phones, no chatting of any kind allowed. Without interruptions, you can go through an incredible amount of research in an hour. Nevertheless, the most productive reading time in my day is the 85 minutes on the commuter train.

As an investor, you have to dominate your intellectual intake envi­ronment and not let the outside world control you. You have to be adamant that you make the choice of who accesses you and not be at the mercy of others. The conventional wisdom now believes that the Internet and e-mailing are brilliant, time-saving inventions. They can be, but as noted earlier they can also be huge distractions. We all tend to cite studies that confirm our prejudices, so here's mine. A recent study of 1,000 adults by the University of London found that habitual e-mailing and text messaging reduces intelligence and intellectual pro­ductivity more than being a regular pot smoker. Most office workers, the study found, are seriously e-mail addicted. A third of them are so totally plugged into their screens that they respond to an e-mail imme­diately or within 10 minutes. One in five routinely interrupt a meeting to answer an e-mail.

The study found that the average reduction of intelligence from e-mail interruptions was 10 IQ points compared to 4 points from smoking cannabis in the office. A loss of 10 points is associated with missing a night's sleep. Of course all three are temporary. The other fascinating finding was that women are less affected than men. The av­erage IQ decline for women from e-mail addiction was 5 points whereas for men it was 15. In other words, women are much better than men at multitasking.

"It's not just reading but reading smart.”