The road to stronger investment decisions | Economic Times

In some of my last few columns in these pages, I had been on a sort of Buffett-and-Munger roll, quoting and expounding on the wisdom on offer in a recent video and letter. The video is the annual shareholders’ meet of a small company named Daily Journal and the letter is of course the annual letter to the shareholders of Berkshire Hathaway from Chairman Buffett.This time, I have a gem from Charlie Munger which is about business school curricula but which applies even more so to individual investors trying to understand companies and businesses in general.Munger was asked: You’ve said several times that the best way to learn about business is to study the multi-decade financial results of great companies. You’ve even said business schools that don’t adopt this method are doing their students a disservice.Munger answered: Well, here’s what I meant. By the way, the Harvard Business School, when it started out way early, started out with a history of the business. They’d take you through the building of the canals and the building of the railroads and so on and so on. You saw the ebb and flow of industry and the creative destruction of the economic changes and so on. It was a background that helped everybody... If you stop to think about it, business success long term is a lot like biology. And in biology, what happens is the individuals all die, and eventually, so do all the species. Capitalism is almost as brutal as that. Think of what’s died in my lifetime. Just think of the things that were once prosperous that are now in failure or gone. Whoever dreamed when I was young that Kodak and General Motors would go bankrupt? You know, it’s just, it’s incredible what’s happened in terms of the destruction. It sounds like a very strange idea but since this is one of the great investors speaking, let’s see what he means. Imagine you’re looking into a couple of companies as investments. Normally (by which I mean the settled way) would be to read a few broker reports and look into what the last 3-4 years’ numbers have been and what people say (guess) about what will happen over the next 4-5 years. Then some ratios etc and then some rumours and you’re done with your research. This is what a GOOD investor does. Most do not even do this.So what is Munger recommending? Let’s say you’re wondering whether to invest in a private bank’s stock. For this, you should spend a few days understanding the history of banking, first in general and then in India. No specific reason— it’s just good to know. Then, you should go through (at least) the last 10 years’ annual reports of the company, and all the news and information archives you can find. Again, you’re not trying to look for anything specific. So why should you do this? All you’re doing is absorbing background knowledge about businesses. All businesses are a progression, a story and knowing what happened in the past helps you understand not just that business but all other businesses. It’s a vague idea and it’s hard to point out a single instance of any particular kind of information you will find.However, people like Munger, as well as many lesser investors have experienced over the years that the more you know, the better decisions you take. People develop a feel for business and investing when they read and learn a lot about it.It’s the same for anything in life really. Would you rather eat a dish made by someone who has been cooking for years or someone who has just bought a book of recipes? It’s an easy choice to make.(The writer is CEO, Value Research)