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Tuesday, June 2, 2009

Investment Analysis

I am updating my syllabus and preparing to teach Investment Analysis at Yale this summer. I am an oddball who writes fiction and teaches investment strategy. I was an economist for a short period; I love writing short stories and novels and even teaching the occasional short-story workshop. Yes, perhaps I am a bit schizoid. But I became interested in investing the few dollars I had during and immediately after college, because I had relatively little money and I wanted more. I didn’t want the riches; I wanted the freedom. I love being my own boss, and that’s exactly what a fiction writer is, as well as an individual investor. I also love numbers. Go figure.

In my course on Investment Analysis, I have students read favorite investment practitioners like Ralph Wanger, John Bogle, Jeremy Siegel, Benjamin Graham, David Swensen, and of course, Warren Buffett. The Essays of Warren Buffett is perhaps my favorite book. I teach my students how to analyze income statements, cash flow statements, and balance sheets for different companies, by looking at actual 10-K reports and annual reports.

I believe in learning by doing. The more actual companies you look at, the better you will understand the industry, and which companies are well-run, and why, and which waste the company’s capital, your money. If you keep looking at companies year-round, when the right opportunity comes along, you can analyze it at lightning speed and make a decision about investing in it. ‘Toochis ofn tish,’ a Yiddish phrase for ‘ass on the table.’ Skin in the game. Put your money where your mouth is. These all mean the same thing: if it’s your money, you will take the risk and you will have the responsibility for the decision.

There is one way in which literary writing and investing are similar. The more you write, the more you can write. The more you live in the writer’s world. The more a certain type of focus becomes your normal state, rather than a special state for the weekends, for example. Paradoxically, the less you write, the less you will be able to write. The less you will be able to pounce on a set of ideas when they strike you, at the oddest moments. So writing, like investing, is learning by doing. You have to practice both to become adept. That’s one of the reasons why I started this weekly blog, to keep my literary motor hummin’.

I tell my Investment Analysis students that, yes, you need to love the detail of financial numbers, and you need to be infinitely curious about companies, their stories, why someone would take such a risk, against all odds, to survive and thrive amid brutal competition. But beyond having abilities in number-crunching, I tell them, being a good investor is also about character.

Certain character traits are excellent for an investor. Other traits work against you. You need to be an independent thinker, and not give a damn what the crowd thinks. Particularly the Wall Street crowd. You need to be able to check how you react emotionally to money, not too excited when your stock is going up, and not too depressed when it’s going down. This emotional distance is crucial for taking advantage of opportunities. Buffett: “Be fearful when others are greedy and greedy when others are fearful.”

People who invest in the stock market and are not self-aware, or acutely aware of what the crowd does and why, will be fools soon parted with their money. Crotchety. Detail-oriented. Fiercely independent. Industrious. Relentlessly curious. That's the makeup of a good investment character.

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