Someone once asked Warren Buffett how to become a better investor. He pointed to a stack of annual reports. “Read 500 pages like this every day,” he said. “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.” Here at the Fool, we are fans of Warren Buffett, and learning about the businesses behind the stock tickers. Learning about businesses can take time, and it is possible that there are a good handful of interested folks out there that have limited time to…
Someone once asked Warren Buffett how to become a better investor. He pointed to a stack of annual reports. “Read 500 pages like this every day,” he said. “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”
Here at the Fool, we are fans of Warren Buffett, and learning about the businesses behind the stock tickers. Learning about businesses can take time, and it is possible that there are a good handful of interested folks out there that have limited time to spend on investing. After all, not everyone has the time to read 500 pages of annual reports daily. To help, I would like to suggest three easy steps for the interested investor to learn faster and to invest smarter.
1. Organize all company information that you find
From the quote above, it may not surprise investors that Buffett spends the majority of his time reading. To study businesses effectively, investor might want to consider compiling all the bits and piece of important company information into a folder or document. This could include quarterly earnings summaries, interviews of the management team and pertinent news articles.
If you are interested in Keppel Corporation Limited (SGX: BN4), then this article on the history of Keppel Corp might be one for your folder, along with any historical earnings report that fit the bill.
2. Take notes and keep records
Moving to the next step, the avid Foolish investor can also take notes on the articles that he or she has read. This would mean picking out important points from various articles that adds to the investment thesis, and noting it down in a single document.
Staying with the example of Keppel Corp, the private investor may want to pick out a few key points from this analysis of Keppel Corp – like the revenue percentage of the Offshore and Marine business within the group. To keep the thesis well rounded, the astute Foolish investor may further add some points from this bearish take (of Keppel Corp) like the soft oil price forecast, and weak infrastructure margin.
3. Learn from your past decisions
Staying with the theme above, keeping notes can include noting down the review date, the share price, where oil prices are trading at, and simple share valuations such as price to earnings (PE) ratio, free cash flow yield, or the dividend yield. All these data points will be a valuable reference in the future on your decision making skills.
Going back to the Keppel Corp example, even if you choose not to invest, you can still learn from your “decision not to invest”. For instance — two years from now, you would be able to pull out all the past data points and compare how the company has grown or declined since then. In the case where the share price of Keppel Corp is higher in the next two years, you would have valuable insight to questions like: Was the higher share price due to PE ratio expansion? Or did Keppel deliver strong earnings growth to justify a higher share price? Did management execute what they said they would do? All these reflections can help you gain the experience to be smarter in your investing approach.
Foolish take away
As Buffett puts it, your knowledge on a company or business over time builds up like compound interest. Going about your day collecting company information, and compiling them into folders can help you make better decisions over time. All these notes can help you avoid costly errors like recency bias, and keep yourself grounded with the full view of the company. With that, you may find yourself getting smarter in investing.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.