How to Become a Great Investor
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? 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 improve 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.
“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 can 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 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.
