Investing well is first about observation — observing how the investing world operates, what investing strategies work over time, and what one’s own temperament is. In short, to be wise is to observe clearly; only then can you act with effectiveness. Observation is the start of all knowledge and insight, and it forms the basis of Zen, whose practice of meditation is nothing if not observation.

In his fabulous book Zen Mind, Beginner’s Mind, Shunryu Suzuki explains this point literally and metaphorically as bread-baking:

Bread is made from flour. How flour becomes bread when put in the oven was for Buddha the most important thing. How we become enlightened was his main interest. The enlightened person is some perfect, desirable character, for himself and for others. Buddha wanted to find out how human beings develop this ideal character — how various sages in the past became sages. In order to find out how dough became perfect bread, he made it over and over again, until he became quite successful. That was his practice.

But we may find it not so interesting to cook the same thing over and over again every day. It is rather tedious, you may say. If you lose the spirit of repetition it will become quite difficult, but it will not be difficult if you are full of strength and vitality. Anyway, we cannot keep still; we have to do something. So if you do something, you should be very observant, and careful, and alert. Our way is to put the dough in the oven and watch it carefully.

Observation leads to wisdom, so The Zen of Investing is about using my observations and the insights of masters — Graham, Buffett, Greenblatt, and others — to make smart investments. Investing wisdom is as much about doing smart things as it is about avoiding mistakes, or as Charlie Munger might say, “the best way to be smart is not to be stupid.”

So my investing process focuses on special situations, and in particular spinoffs. It’s where Graham, Buffett, and Greenblatt made their names and it remains a great “fishing hole” for profits in the stock market. This process allows us to find undervalued companies, and from time to time we’ll be able to find truly great companies that we can hold forever. Sometimes we’ll even find a totally free company hidden in the market’s garbage, obscured by a seemingly complex corporate event. My observations have led me to conclude that special situations offer one of the best opportunities to make some dough.