Back in 2010, Google’s data nerds estimated that there existed approximately 130 million unique books in the world.
For the last decade, that number has kept on climbing. In the United States alone, more than one million books are published every year. Let’s say about a third of those are non-fiction books. The ocean for book knowledge is huge. It’s so huge that you can only expect to explore a tiny droplet of it in your lifetime.
Your universe of exploration can only be so big which means that you have to be picky about what you spend your most valuable currency—time—on. You want to make the most of it and direct it at knowledge that lasts.
But a lot of times, you can’t tell which books will be great and which ones won’t. So you shouldn’t be too snobby when picking either. For example, a lot of avid readers I know automatically discard modern books because they use a made-up time filter in their mind about how new books are full of empty promises. But that’s a mistake. Of course, any “new” book, like Sapiens or Thinking, Fast and Slow, can contain lasting knowledge to the same degree as any book that has stood the test of time.
This is an important lesson because, with books, you don’t need to finish what you start. You can stop reading without guilt. I think this is the biggest constraint holding people back from reading. We tend to think that we’re forced to finish what we start, or it’s a waste of time. Articles are shorter, easier to finish, and so we read more of those, leaving books on the shelf. It’s a sunk cost fallacy. If you pick up a bad book with empty words, whether that book is old or new, simply put the book down and go on to the next one.
Here’s the optimal strategy for reading books: Skim a lot of them, read a few, and re-read the best ones.
You want to follow this same strategy when picking stocks.
As for the stock market, the ocean isn’t nearly as huge. But it’s huge enough. According to Refinitiv (formerly known as Thomson Reuters), there are 108,790 listed companies around the world. If you exclude the number of ADRs, GDRs, cross-listings, over-the-counter listings, pink slips, and so forth, you have about 46,000 companies left to explore. In the U.S. alone, approximately 6,000 companies trade between the NYSE and Nasdaq.
If you’re a serious bottom-up investor, it likely requires that you read through hundreds, maybe thousands, of pages about the company collectively in terms of legal filings, transcripts, interviews, and articles before coming to a valuation and decision. So in order to get to a satisfactory level of knowledge required to make an intelligent investment decision, it would likely require the reading material equivalent to a very thick book. It’s simply not possible to be an omniscient investor because there isn’t enough time. So you must pick where you will grow your circle of competence.
And just like you can’t be too snobby when picking books, you can’t be so when picking companies either. You want to follow what sparks your curiosity. In doing so, you want to question the filters you have in your head about high multiples and momentum—that a >50 P/E stock or a company in a hot industry cannot mean value. Warren Buffett has said: “I would say that if it’s a really wonderful business, we probably come up with higher intrinsic values than most people do.” Sometimes, value can hide right in plain sight. You’ve got to approach the stock market with an open mind and flip as many stones as possible for you to optimize your opportunity set and breadth of knowledge.
So, as you flip through those annual reports, remember to follow the optimal book reading strategy: Skim a lot of them, read a few, and re-read the best ones.
Here’s a tip: As you read through an annual report, ask yourself whether you would be excited to read the company’s next annual report a year into the future. Then you know whether it’s worth diving into.