One of the most anticipated events in the financial industry each year is the release of Warren Buffet's annual letter to the shareholders of Berkshire Hathaway. The Oracle of Omaha uses the yearly piece to update investors on Berkshire's performance as well as to impart general investing wisdom. And he conveys his message in straightforward prose that anyone can understand.
In this segment from the Industry Focus: Financials podcast, The Motley Fool's Gaby Lapera and John Maxfield talk about the relationship between good writing and smart investing.
A transcript follows the video.
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This podcast was recorded on April 11, 2016.
Gaby Lapera: Let's talk about how you can use writing to make you a better investor.
I think that most people are familiar with the concept of decision fatigue, right? Just as a summary, just in case you aren't: Decision fatigue is the idea that the more decisions you make, you are more likely to make poor decisions going forward. So, say you are at the supermarket, and you are there for a whole hour, which is a long time to be at the supermarket. So maybe at the beginning, you go in and you are like, "I'm going to eat real healthy this week, I'm going to get all my fruits and veggies." But after you are there for an hour, all you want to do is get a package of Double Stuf Oreos and just stick them all in your face all at once. Because you have already made so many decisions about what brand of orange juice to get, and how many peppers you need, and I don't know what -- all the decisions you make at the grocery store.
But this applies to real life. This happens to you all the time. This is why you should not make decisions, like important decisions, at the end of the day if you can avoid it. You kind of want to go into this fresh.
Now, the reason I'm talking about this is because investing is about making decisions, a lot of decisions, and in order to make good decisions, you want to know that you are thinking as clearly and as critically and as logically as possible. So Maxfield pitched me this idea that writing is a great way to do that.
John Maxfield: Yeah, I mean, and you think about it again. First of all, I love your supermarket analogy. It makes me think about when I go to the supermarket and then I'll get like candy -- I literally just did this the other day at Trader Joe's -- and then you make them put it on the top of the bag so that you can eat it in the car. Like, what animals are we? You know what I mean? What is that all about? But yeah, I love that. When you think about writing and you think about investing there is a huge overlap, and here's where I kind of came up with that whole thought process. You know, one of the benefits of working as a writer for The Motley Fool is that we are able to read a substantial amount. I've read on average probably a book a week every week since I started writing for The Fool five years ago. And one of the things that I have come away with from that whole process is that there is a large overlap between the best investors and really good writers.
Let me give you some examples. Warren Buffett -- his annual letter to shareholders is not only interesting because this is the richest guy in America writing it but it is really well written and really well laid out. Benjamin Graham -- his mentor, who kind of started that whole value investing process, he was an excellent writer. Howard Marks at Oaktree Capital Management -- brilliant, brilliant investor; equally brilliant writer. George Soros. Henry Clews, who was the Warren Buffett of the Gilded Age, he wrote a book ... I mean these guys. David Einhorn, Peter Lynch -- and I know you're not as big of a fan of Peter Lynch -- but all of these guys are excellent, excellent writers and excellent investors. Then so you say: Is there some type of correlation here, or is it completely coincidental? To your point Gaby, I can't help but think that there is a relationship here, and here's why.
One of the things that we know about investing, is that as general rule, individual investors underperform in the market to a meaningful degree. And the other thing that we know is why they underperform. That is because they allow emotions to dictate their investment decisions in the place of logic. What writing does is, when you are forced to put down your ideas in print, you have to be more disciplined about them. So when you think that through, that allows you to take out, to a certain extent, emotions from your investing decisions. That is why, as a general rule, while writing, it's also very beneficial in a lot of other areas in your life, but it's particularly beneficial in investing.
