Street Capitalist: Event Driven Value Investments

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Street Capitalist: Event Driven Value Investments

Deliberate Practice: Becoming a Better Investor

Searching for Bobby Fischer
(from one of my favorite films: Searching for Bobby Fischer)

In 2009, Charlie Munger recommended Malcolm Gladwell’s book Outliers which studiers outliers throughout history and discipline to find commonalities. One of the ideas professed by Gladwell is a 10,000 hour rule, where if you want to master something you must practice it for at least 10,000 hours. Gladwell uses the Beatles as evidence of this rule, pointing out that their time in Germany was spent constantly performing live which helped them gain the mastery needed to become great musicians when playing concerts and on TV.

The folks over at Study Hacks find that in chess, to become a grandmaster, you do not just need to spend 10,000 hours practicing chess. You must also spend those hours doing the right kind of work or deliberate practice.

1. It’s designed to improve performance. “The essence of deliberate practice is continually stretching an individual just beyond his or her current abilities. That may sound obvious, but most of us don’t do it in the activities we think of as practice.”

2. It’s repeated a lot. “High repetition is the most important difference between deliberate practice of a task and performing the task for real, when it counts.”

3. Feedback on results is continuously available. “You may think that your rehearsal of a job interview was flawless, but your opinion isn’t what counts.”

4. It’s highly demanding mentally. “Deliberate practice is above all an effort of focus and concentration. That is what makes it ‘deliberate,’ as distinct from the mindless playing of scales or hitting of tennis balls that most people engage in.”

5. It’s hard. “Doing things we know how to do well is enjoyable, and that’s exactly the opposite of what deliberate practice demands.”

6. It requires (good) goals. “The best performers set goals that are not about the outcome but rather about the process of reaching the outcome.”

If you’re in a field that has clear rules and objective measures of success — like playing chess, golf, or the violin — you can’t escape thousands of hours of DP if you want to be a star. But what if you’re in a field without these clear structures, such as knowledge work, writing, or growing a student club?

…It seems, then, that if you integrate any amount of DP into your regular schedule, you’ll be able to punch through the acceptable-level plateau holding back your peers. And breaking through this plateau is exactly what is required to train an ability that’s both rare and valuable (which, as I’ve argued, is the key to building a remarkable life).

This motivates a crucial question: What does DP look like for fields that don’t have a tradition of performance-optimization, such as knowledge work, freelance writing, entrepreneurship, or, of course, college?

The Grandmaster in the Corner Office: What the Study of Chess Experts Teaches Us about Building a Remarkable Life (Study Hacks)

For any investor seeking to become better, deliberate practice is essential. The key is figuring out what deliberate practice should consist of in investing. Most of us read newspapers and blogs daily. This helps keep up to date with what is going on in the world. But is that enough? I am not too sure.

I think that taking a more active approach with news reading would be helpful. Recently, the Wall Street Journal ran an article about how David Tepper bought Bank of America stock at its low. A good exercise would be to actually sit around and try to reverse engineer that investment. Eddie Lampert has said that in college he reverse engineered many of Warren Buffett’s investment. This kind of activity would not only increase your understanding of investing but also build a model for you to look at if you ever find a similar investment.

Other investors strive to read one 10K a day. This can help build your circle of competence, but I believe it has some shortcomings. A more targeted approach with 10Ks will be more beneficial than simply jumping from reading about Exxon to reading about Bank of America. You should define goals where you are mastering knowledge of a specific industry or area of the market.

Maybe you want to learn the billboard/outdoor advertising business. Instead of looking at just Lamar Advertising (NASDAQ:LAMR) you would look at Clear Channel Outdoors (NYSE:CCO) as well. If you want to master restaurants, you would maybe start at a fast food company like McDonalds (NYSE:MCD) which is the best in its class. Then seek out Chipotle (reputed to have the best economics in the fast food business) and branch out so that you build familiarity with the industry which will help you evaluate lesser known companies like Steak N Shake (NYSE:SNS).

Feel free to use the comments or e-mail me with suggestions for implementing deliberate practice in investing.

Category: Charlie Munger, Eddie Lampert, Mental Models, Superinvestors, Warren Buffett

  • Thursday links: error prices Abnormal Returns

    [...] On the practice of “deliberate practice” and its implications for investing.  (Street Capitalist) [...]

  • robertjfischer

    This is a brilliant, but misguided post. The idea of deliberate practise comes from the book Talent is Overated which has as its thesis that to become a star, what is much more important than God given ability is the right type of practise. This is why people like Bill Gates, Tiger Woods, and Jerry Rice were so good at what they do.

    However, there are certain activities in which practise is of little value, and investing is probably one of them. If you buy a stock based on your analysis and the stock goes up, you can conclude that this is because your thinking was sound. And the fact that the stock went up may have nothing to do with your analysis. This is why the feedback your get from investing is so different than the feedback your get from chess.

    To be succesful at investing, we need to learn to think about processes instead of stocks. This is why we should as investors think about creating a set of empirically based rules for the purpose of selecting stocks, instead of thinking about stocks themselves. We can back test these rules on different sets of data. This way we will avoid emotional investing and the overconfidence that has led to many top advisors to have too much faith in their own abilities.

  • David_Merkel

    I have done 10K+ with investing. I started 21 years ago, putting in a minimum of 1 hour a day improving my skills. After 9 years, I landed my first job in an investment department at the ripe old age of 38. Cramer asked me to write for RealMoney five years later. Being a value investor on that site is lonely.

    Becoming a good investor requires time and effort. It is not easy, but just learning to avoid simple errors can improve investment results dramatically — there are enough promising situations — if an investment seems too complex, move on. Don't anything that you can't understand. When you do investments that you do not understand, you will not know when to buy and sell.

  • planmaestro

    This is one of your best posts ever, and can not believe it has not gotten more attention.

    Always wondered how I got stuck in the transition between being a chess expert and a chess master even though the hours of study and playing accumulated. An important part was loosing my mentor so most of the studying and practice was not focused where it was needed. And it is difficult to know what you do not know when you reach that level. The low hanging fruit has been taken.

    I also wondered how age affects this process. In chess it used to be that you reach your top performance at your 40s. You have perfected your openings and reached positional understanding. However you are now seeing generation after generation of “prodigies” using computers to obliterate those advantages. Today's game is much more about tactics, solving mathematical puzzles where you reach your zenith in your 20s

    Regarding the issue of process vs results, just look at poker where luck is even more important and you see the same guys time and again in the final tables. In chess I have beaten NMs and IMs, but the hit ratio is not that high. The same with investing.

    I still think that I could have beaten Henry Singleton though.

  • Tariq

    Yeah, I've read that up and coming chess champions are often younger and benefit from receiving mentoring from older more experienced players. You are right, I would bet that their benefit comes from guiding the younger players with their practice.

    Age is an interesting thing to look at especially in investing. I think that with practice you can accumulate knowledge from the past that is applicable to investments today. They often say that Buffett is a learning machine. He finds information that is worthwhile and files it away, only to use it later. This is probably most helpful when you start approaching investments that have more 'art' than science, think of all the crazy deals he has made. For younger investors, I would guess that things are much more process driven which is not necessarily bad. A disciplined young investor seeking out Graham-style investments will probably do well until they grow their assets in a way that makes those investments no longer viable. Then it becomes a matter of using your knowledge and more of the 'art'

  • Getting Better: Deliberate Practice (II) | Street Capitalist: Event Driven Value Investments

    [...] a previous post, I described my attraction to the theory of deliberate practice. Deliberate practice is an idea [...]

About Me

My name is Tariq Ali, I run Street Capitalist. I recently graduated from the University of Texas at Austin. There, I stumbled onto value investing via the school library. I read everything I could and now I'm here, writing out my thoughts and investment ideas.

I have a lot of heroes when it comes to investing, it seems like every investor has some kind of niche. Some, whose books and writings have had the biggest impact on me are: Warren Buffett, Benjamin Graham, Joel Greenblatt, Seth Klarman, and George Soros.

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