The meaning of "People say that life is the thing, but I prefer reading."

... life is the thing.

The definition of the thing that is being used here is:

informal what is socially acceptable or fashionable

And the definition for life is

vitality, vigour, or energy

Smith is saying that he prefers reading to that. It is somewhat sarcastic.

My interpretation is that he finds more satisfaction in the world of books and reading than actual physical experiences in life, contrary to the generally held view that physical experiences are what most people find more satisfying.

More simply: he prefers reading to physical activities and social interaction.

Maybe it is just hyperbole. Of course (ordinary) life is enjoyable, but reading can provide special vicarious experiences.