How to be a better investor – My approach

I posted the reply from warren buffett on the above question. The key takeaway from his reply is that one should read a lot and invest your own money based on your ‘own’ ideas and analysis.

I will touch upon my approach to improve myself as an investor in this post.

I have been reading various investment related books, articles and annual reports for some time now. However my approach to it was disorganized and did not have any pattern to it. However in the last 2 years I have developed a plan to read with specific goals in mind.

I look at reading with two key objectives

1. Find new ideas (which are profitable)
2. Develop mental models to become a better investor (read this article from charlie munger on mental models)

I have broken the second objective into the following topics (related to investing)

Finance – topics such as Balance sheet, income statement, various ratios, analysis of these statements etc
Accounting – understand various accounting concepts and standards
Valuation
Competitive advantage and strategy
Probability and analysis of risk
Study of business models
Economics – mainly micro economics
Investing – value investing
Options, derivates and other financial instruments

I have better knowledge in some these areas relative to other topics. For example I have not read much on options and derivatives till date. Somehow I get put off by all the math in it (although I am engineer by background 🙂 ).

So at the beginning of the year I try to assess myself on these areas and try to identify the specific areas on which I would focus. For ex: I am currently focussing on topic 4 – competitive advantage. I identify books for this topic and add it to the list of books I would be reading over the course of the year. I run through all the topics in this manner and try to come up with a tentative book list for the year. This is not a list set in stone. If I find a better book for the topic I am interested in, I end up replacing it with that book.

In addition to the above book list, I have also listed the industry groups I would be focussing on this year. Currently my focus is on pharma. I have shortlisted around 5-6 industry groups for the year (see my industry analysis spreadsheet here). To improve my knowledge in a particular industry (related to topic 6), I read up on the annual reports of some of the top few companies in the industry. In addition, I try to read up on industry reports if I can get access to them for free.

This industry group analysis activity helps me in increasing my circle of competence and also helps me in coming up with new investment idea. Finally as all knowledge in investing is cumulative, I can easily use this knowledge again later to come up with good investment ideas.

Finally I run valuation screens and if I can get some undervalued candidates, I read up on them. This is more haphazard as I may get candidates in industries which I have no prior knowledge. However it is a good starting point in those cases. If the candidate is in an industry in which I have done some prior study, then the analysis is faster.

The last step is – as they say on shampoo labels – rinse and repeat. That is I keep repeating the above process. Ofcourse the books, the topics and the industry groups keep changing, but the approach is the same. This approach has been helpful as it keeps me focussed on areas which i need to improve and also to enhance my circle of competence