Essential Reading for the Serious Investor

 | Jan 22, 2013 | 2:00 PM EST  | Comments
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The biggest edge any investor can have is information. Warren Buffett says that when he was in his 20s and running his investment partnerships, his No. 1 goal was to get as much information as possible. Thanks to the Internet, investors have more information than ever before at the click of a mouse. Unfortunately, time is also valuable, and investors can waste a lot of time looking at the wrong information, or even ineffective or harmful information. 

In addition to reading specific, company-related information -- annual and quarterly reports, conference calls and so on -- investors should read what great investors have to say. Understanding the specifics about a company and its industry is critical, but understanding other concepts such as market psychology, risk, USA Inc. and other mental models is just as critical. Buffett's annual letters are a must, of course, but there are other sources that I consider just as valuable. They are required reading if you truly are serious about investing. And the best part is that the sources I'm about to reveal are free to the public.

At the top of the list are the monthly memos by Howard Marks at Oaktree Capital. If you aren't reading them, start now. Marks' ability to articulate concepts such as risk, valuation, market behavior and the macro and micro environment is second to none. The memos are readily available on Oaktree's website.

More must-reads are the quarterly and annual letters by Longleaf Partners Fund, a value fund in Tennessee run by Southeastern Asset Management via Mason Hawkins and Staley Cates. I've had the privilege of attending a few Longleaf annual meetings over the years, and the folks at Southeastern are top notch. Their investment philosophy is enduring, and I enjoy the education these letters provide each and every quarter. Consider the following snippet taken from Longleaf's 2012 year-end report:

"The beliefs that U.S. profit margins will decline to their historic mean and that earnings will grow at rates in line with permanently lower future GDP growth have exacerbated skepticism over future equity returns ... we have a different view based on two permanent structural changes as well as top line growth prospects over the next five years. First, higher profit margins are sustainable because many low-margin businesses have migrated from the U.S., leaving an era of more profitable companies based on intellectual capital such as Apple, Facebook, Google, and their successors. Second, more traditional manufacturers have improved margins employing the U.S. comparative advantages of lower energy, capital, and labor costs (automated facilities run by a minimal number of highly trained staff have replaced much manual labor). ... Given where we are in the economic cycle, top lines are likely to grow more in the next five years than in the recent past. In both the U.S. and Europe, revenues remain far below peak with significant capacity available. Top lines should also grow as companies earning nothing on corporate cash in many developed countries see interest rates increase."

Here are investors who spend all their time analyzing businesses, talking to management and other industry insiders and seeing what is happening in corporate America. They are suggesting that the U.S. economic rebound will be more robust than most people anticipate.

However, like true value investors, they are careful to note that this bullishness is not a mandate to buy anything and everything: "More importantly, we believe the companies we own have larger opportunity for earnings growth and stock return than the overall market. First, their prices are trading at a much larger discount to our intrinsic values than the market. Second, a number of companies we own have more potential top line growth than the average business because their industries, such as construction, U.S. natural gas, and non-life insurance, have yet to see much revenue recovery post-recession."

Longleaf's biggest positions include Chesapeake Energy (CHK) and Dell (DELL). In the small-cap fund, names such as Service Corp. (SCI), Madison Square Garden (MSG) and Wendy's (WEN) make the list. 

Information is invaluable to an investor. To try and successfully invest in the stock market without information is, to borrow a quote from Berkshire Hathaway's Charlie Munger, like being "a one-legged man in an ass-kicking contest."

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