7 Steps to Becoming a Great Stock Investor

November 13, 2015

A lot of people have been asking me, “How do you become a great stock investor? What books can you recommend?”

Here are the 7 things I think you need to have and do to become a great stock investor:

1. You need to have a passion for investing.

-If you don’t have the passion for it, you are not going to devote enough time to improving yourself.

-Knowledge can be easily passed on, but generating insights is almost impossible to teach. Your passion will fuel you to keep on slugging away until you see what most people don’t.

2. You need to devote a lot of time.

-You’re going to need to spend at least 10,000 hours to become good, and at least double that to become great. Investing is going to be your second job if you already have one.

3. You’re going to sit on your ass and read a lot!

-For people I don’t know well, I often recommend starting off by reading “The Warren Buffett Way” by Robert Hagstrom and “Poor Charlie’s Almanack” by Charles Munger. If you have a hard time understanding these books, you’re going to need to take some undergraduate business, accounting and economics classes. If these were easy, you can move on to the recommendations below:

  • Every article, literature, book and video on Warren Buffett including all Buffett Partnership and Berkshire Hathaway Shareholder letters since the 1950s. Repetition helps you deepen and ingrain his philosophy.
  • Seth Klarman’s “Margin of Safety” and any articles and videos about him.
  • Benjamin Graham’s “Intelligent Investor” and “Security Analysis”.
  • Every book from Philip Fisher especially “Common Stocks and Uncommon Profits”.
  • Every book, letter and videos of Charlie Munger especially “Seeking Wisdom”.
  • Study everything from great investment managers such as Donald Yacktman, Bruce Berkowitz, Dan Fuss, John Templeton, Bill Ackman, Carl Icahn, Jean-Marie Eveillard and Chuck Akre.
  • Every book, letter and video of Howard Marks especially “The Most Important Thing Illuminated”. For Howard’s latest thoughts click here https://www.oaktreecapital.com/insights/howard-marks-memos/
  • Every book, letter and video of Peter Lynch especially “One Up Wall Street” and “Beating the Street”.
  • Every book, letter and video of Mohnish Pabrai especially “The Dhando Investor”.
  • Every book, letter and video of Guy Spier especially “The Education of a Value Investor”.
  • Books on all types of detecting and understanding fraud, including but not limited to “Financial Shenanigans” by Howard Schilit, “The Confidence Game” by Christine Richard, “The Wizard of Lies” by Diana Henriques, “The Smartest Guys in the Room” by Bethany McLean and Peter Elkind, and “Investing Between the Lines” by L.J. Rittenhouse. Don’t limit yourself to just investing fraud, study criminals, conmen, politicians, terrorists and more. “Fooling Houdini” by Alex Stone is a great book about magicians and mentalists.
  • A lot of Behavioral Finance and Psychology books, including but not limited to “Thinking Fast and Slow” by Daniel Kahneman, “Predictably Irrational” by Dan Ariely, “The Halo Effect” and “Left Brain, Right Stuff” by Phil Rosenzweig.
  • “The Manual of Ideas” by John Mihaljevic including all his interviews of great money managers on his website www.manualofideas.com. John has also organized a free 6 hour compilation of interviews from the best investors in the world, here is the link https://www.udemy.com/investing-stars/.
  • The show “Wealthtrack” hosted by Consuelo Mack. Watch as many episodes as you can.
  • “The Outsiders” by William Thorndike.
  • “The Money Masters” and “The New Money Masters” by John Train.
  • “Fooled by Randomness” by Nassim Taleb.
  • “The Five Rules for Successful Investing” by Pat Dorsey.
  • “The Little Book that Still Beats the Market” by Joel Greenblatt.
  • “The Great Minds of Investing” by William Green, Michael O’Brien and Dr. Hendrik Leber.
  • “Freakonomics” by Steven Levitt and Stephen Dubner, not for the specific knowledge, but to expand your way of thinking.

-I’m sure I’m forgetting a lot more books. I encourage you to read outside of investing and business. Everything is connected! The best insights are come from your knowledge of multiple disciplines.

4. You need to open and fund a brokerage account.

-You don’t learn much from investing “fake” money. The decisions you make with real money are going to be very different.

-Experiment with small amounts of money.

-Test your theories and measure them over the long-term. Be fanatical about making sure your investment results are accurate and compare them to the appropriate benchmark.

5. I highly recommend that you consider going through the CFA program. The CFA program will give you the tools you need to become a better investor.

6. There is no substitute for reading, studying and analyzing your investments.

-Read all proxy statements, quarterly and annual reports of your investments and their competitors. For beginners, I recommend you read every word. One sentence buried in the footnotes can literally cost you a lot of money. Over time, you’ll know which parts you can breeze through.

-Read articles relevant to your investments, their competitors and industries.

-Listen to every quarterly call.

-Conduct in depth market research by visiting stores and factories, looking at product reviews, talking to employees, etc.

-Read books and watch videos about the company and its CEO.

-Write key data points as you read the financial statements.

-Journal your thoughts and analyses at least once every quarter, so you can solidify your thinking and allow you to look back in the future and learn from your mistakes.

-Create a checklist of criteria to help you decide if the company is a good investment.

7. Build EQ (emotional quotient), not IQ!

-Even if you do everything above, but do not possess the right emotional temperament, your investment results will be average at best. Many smart and experienced people, including Nobel Prize Winners, have gone bankrupt because they couldn’t control their emotions.

-I believe playing poker helps you build the patience and emotional fortitude you need in investing. So read books on poker and become a winning player.

-Overcoming life’s tragedies can also offer you the skills you need to help you build EQ.

-Meditate!

-Play golf to practice focus, self-awareness, humility and patience.

 

If I haven’t scared you off yet, you might just become a great investor. If I did scare you, I just saved you at least 10 years of work.

If you know someone who is interested in becoming a great investor, please share this guide with them.

If you know someone who is interested in investing, but can’t commit to these steps, please let them know that I can help them with their investments. Share my website www.mywealtharch.com

 

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