Thoughts on Investment Process & Shareholder Letters to Read

Posted on Posted in Get Better by Reading, Shareholder Letters & Reports

In the last week or so, I’ve written a couple posts on my investment process. One post discussed where I look for ideas and the tools I use, and the other briefly discussed my investment routine. Feel free to read those posts for more of my thoughts on my process, but here is a quick summary of the places I look on a daily/weekly/monthly basis for investment ideas:

  • Value Line
  • Wall Street Journal
  • Investment Blogs
  • Screeners
    • New Low List
    • Value Line Weekly Lists
    • Morningstar Screens
    • Magic Formula Screen
  • Watchlists
    • Morningstar and Google Lists (E&D)
    • Special Situations (Workouts and Spinoffs)
    • Value Line Best Companies
  • Fund Managers
    • 13-F’s
    • Fund Letters

It’s a pretty simple process, and one that I’ve basically copied from other investors. They key is consistently turning over rocks and looking for new ideas. Each stock that gets looked at further strengthens a foundation of knowledge, that continues to build each day by reading and studying stocks.

In my routine, Value Line is at the top, simply because I go through about 60 Value Line summaries per day. One thing that has always stuck with me is that Warren Buffett went through Moody’s page by page, going through every opportunity, one stock at a time. This is how I use Value Line. I understand that if screeners existed in Buffett’s early days, he certainly would have used them as well, but going through Value Line pages forces you to learn something about each stock, which is a benefit you don’t necessarily get if you only look at computer screeners.

Screeners are very important though, as they allow you to see a list of potentially undervalued stocks without any bias. Screens like the Magic Formula, Value Line weekly low lists and the 52 week low list force you to notice stocks with problems that may be mispriced.

Some aspects of the routine I spend less time on, but watchlists help me keep at least one eye on certain groups of stocks. At this time, I’ve decided to track special situation stocks, and I try to look at each individual spinoff, but I don’t always have time to investigate each spinoff and each merger. The watchlist allows me to quickly scan the list once or twice a week to see if anything interesting is happening with those stocks. I don’t always get to each one, but I also try to track stocks that are getting acquired for potential arbitrage investments. Again, I don’t spend as much time here, but the watchlist helps me at least keep an eye on those stocks. If I see something either in the price movement or the news that looks interesting, I’ll spend more time on that situation.

Reading is one of the biggest parts of my routine, and it is where I probably spend most of my time. On a daily basis, I read the Wall Street Journal and I use Google Reader to keep up with numerous investing blogs I follow. Both of these places are great sources for general investment knowledge as well as specific ideas. Many bloggers I follow write outstanding analysis work on specific stocks. It’s like having on-staff analysts that work for free. I’m grateful for the work that they do and the value they provide.

Learn From the Pros: Read Shareholder/Partner Letters

The last category-Fund Managers-is what I wanted to discuss today. Excellent sources of reading material (and investment ideas) are the fund letters that investment managers write. Mohnish Pabrai has discussed this numerous times, also referring to 13-F’s and fund managers as his own personal analysts. I’ve recently started reading through various 13-F filings on a quarterly basis, and I’ve always read fund letters. The 13-F’s bring you ideas, and the letters allow you to read the theses that the investors had when they made the investments. It’s a great education as well as source for ideas.

Here are some of the letters I read from fund managers. Some are quarterly, some are semi-annually or annually (mutual funds report twice a year, hedge funds and RIA’s often write quarterly letters):

  • Berkshire Hathaway (Warren Buffett’s Letter to Shareholders): by far the most important investment letter to read
  • Fairfax Financial Holdings (Prem Watsa is a great value investor; often called the Canadian Warren Buffett)
  • Sears Holdings: Eddie Lampert’s letter doesn’t really contain specific ideas, but it’s a great letter to learn from.
  • Third Avenue Management (These are great letters written by long time value investor Martin Whitman)
  • Tweedy Brown (A long running investment firm that learned from Ben Graham and Buffett)
  • Fairholme Funds: Bruce Berkowitz concentrates his investments, so it’s always interesting to read his letters. His site also has great case studies on a few of his major positions.
  • Southeastern Asset Management: They are value investors with a long history, and their letters often explain their logic on certain investments. They often hold concentrated positions as well, so they are a good firm to follow.

So these are the letters I read as they come out. However, there are other letters, often from smaller private investment firms, that occasionally surface on the web that are even more interesting than the ones above. Firms like Tweedy Brown and Southeastern are great value investing institutions with long term track records, but they manage billions. It’s always interesting to read what a small firm like Allan Mecham’s Arlington Value Management (read this piece for more details on his performance) are doing with their capital. These are the firms that are trying to emulate Buffett’s old partnership days. Small, nimble, and opportunistic. Searching for deep value, and achieving huge returns (20-25% for many years for some of them).

Here is a great letter that I came across last week: Coho Capital Year End Letter. I have not heard of this fund until I found the letter. I think I found this on twitter, and unfortunately I can’t remember the source, but it’s a great example of a small fund with great returns (they were up 41% last year). They also have concentrated positions, and they go into detail on why they hold the stocks in their portfolio. The firm is called Coho Capital out of Beaverton, Oregon. I hope to come across more of their letters in the future.

Hopefully this post gives you just a few ideas on where to look for investment opportunities. Keep reading, keep learning, and keep compounding knowledge (and hopefully capital!)…

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