We all want to emulate Buffett, Graham, Klarman, Ruane, Greenblatt et al. Their success as value investors is not in doubt. But how did they achieve it? I recently read several related books: “Bounce” by Matthew Syed, Malcolm Gladwell’s “Outliers” and Levitt & Dubner’s excellent sequel to “Freakonomics” – “SuperFreakonomics”. A common theme in all of these is what an individual has to do to become an expert in a particular task or sport. The conclusion is that talent is not really an important precursor; but practice is. Specifically, deliberate practice, a particular type of practice detailed in a paper published in 1993 by K. Anders Ericsson, Ralf Th. Krampe, and Clemens Tesch-Romer, entitled The Role of Deliberate Practice in the Acquisition of Expert Performance.
The majority of people, when they practice something, do not do so with a specific aim or goal in mind. Their practice session is not designed to iimprove performance or a key aspect of performance. They do not have immediate feedback in the form of advice from a coach or mentor. They are distracted from their practice, rather than concentrating and sustaining effort. They tend to practice only what they are already good at instead of working on weaknesses to turn them into strengths. Their practice sessions are not repeatable, presumably because they are not documented.
In its conclusion, the paper states: “We view elite performance as the product of a decade or more of maximal efforts to improve performance in a domain through an optimal distribution of deliberate practice.”
A specific figure that comes up in the paper is that it takes a minimum of 10,000 hours of (deliberate) practice in order to become expert in a particular domain, i.e. 1000 hours per year for ten years.
“The dichotomy between characteristics that can be modified and those that cannot may not be valid when we examine Ihe effects of over 10,000 h of deliberate practice extended over more than a decade.” In other words, the findings were that modification of characteristics believed to be fixed was in fact possible when the practice was sustained over a long period of time.
How is this related to investing? Well, there is no doubt that Buffett, Graham, etc., spent many many years developing and refining their investing techniques. They probably discarded what didn’t work, but – importantly – refined and stuck to what did work. They most likely easily exceeded 10,000 hours of deliberate practice in investing; perhaps many times over. They most likely kept journals and logs; indeed both Buffett and Graham, in their writings, have referred in great detail to trades made many decades earlier. How many everyday investors remember all their trades, especially the bad ones? We all may remember trades that were big winners and think they bestowed genius upon us, but did we even learn from the losers, of which there may be many more? Did we have a process? More importantly, did we follow it?
Success in investing probably starts with motivation; without motivation to learn, there can be no progress. Motivation drives us to achieve knowledge. Repeated use of this knowledge leads to know-how, or the ability to carry out a task efficiently, quickly, and accurately with little or no effort on our part. Our motivation is most likely a desire to make a decent return on our money.
If you aren’t happy with your investing returns, perhaps it would be worth looking at how you are going about it. First, design a process, and document it. Make rules you will unswervingly follow. Determine your comfort zone in terms of risk. Figure out what your asset allocation should be. Learn from your mistakes, and do not make the same mistakes again. Treat investing as a business (Graham) and be diligent about it.
But, most importantly make your practice of investing deliberate. And have fun.
{ 4 comments… read them below or add one }
The Ericsson paper is long, but very worthwhile reading. I guess too many people these days want a quick solution to their problems and aren’t prepared to put in the work necessary to make their lives better. It takes a lot of practice to make perfect. Thanks for the post.
“The amateur practices until he gets it right. The professional practices until he can’t get it wrong.” I don’t know who to attribute that to, but it pertains here, I think.
One thing that struck me when I read Buffett’s biography some time back was the degree of concentration he was able to bring to his business. He stayed at it all the time, permitting very few distractions. There is a price to be paid for that level of concentration. He was willing, and able, to pay it. This started even in boyhood, with his paper routes and other ventures. That’s what he paid attention to, dreamed about endlessly. Has anyone else ever read Moody’s Manual through, twice?
One thing that helps is a degree of talent. I’ve known people who could practice trombone 24/7 and take lessons forever, and would never be any good… they just did not have the level of talent for that to get to be really good no matter how hard they worked. Tony Quinn, the Padres Hall of Fame hitter, or Tiger Woods, are examples of combining lots of practice and a high level of talent, aptitude for the required tasks.
Another factor is that the really great ones refuse to be discouraged when things don’t work out their way. Disappointment only sharpens their resolve, it seems. They figure out what went wrong and why as best they can and keep on keeping on.
I have read that Warren Buffett has a near perfect memory. That’s got to be an enormous advantage. He reputedly entertained his fraternity brothers in college by reading an unfamiliar chapter in a book, then reciting it from memory.
Another thing I have noticed about really talented people. They are usually able to explain the most complex concepts or phenomena in their world in very simple terms. Warren Buffett certainly has demonstrated this ability over a long period of time.
If it were easy, everybody would do it!
I would highly recommend “The Talent Code” as well. It emphasizes many of these same themes in regard to gaining expertise in any area. The author contends that a chemical known as myelin plays a key role in skill development, and asserts that one must sruggle in order to gain true competence in any field.
Thanks for such a valuable article. It was very motivating for me, and I’m going to refine my investing approach now.
Regards,
Sunil