I’ve been reading Malcolm Gladwell’s Outliers. One of the key themes of the book is that experts in a field became experts through 10,000 hours of deliberate practice. There are numerous academic papers that support this view including The Role of Deliberate Practice in the Acquisition of Expert Performance.
[this article] explains expert performance as the end result of individuals' prolonged efforts to improve performance while negotiating motivational and external
constraints. ... Individual differences, even among elite performers, are closely related to assessed amounts of deliberate practice. Many
characteristics once believed to reflect innate talent are actually the result of intense practice extended for a minimum of 10 years…
For us the interesting question is what would deliberate practice look like for a value investor. Mark Sellers suggested some things that are not in his speech titled “So you want to be the next Warren Buffett? How’s Your Writing?”
- Reading books and magazines – the law of diminishing returns applies once you have the core knowledge and at best this allows you to keep up
- MBA, CFA or CPA – these teach you how to exactly match the market
- Experience – if this were true then the best investors would be in their 70’s
and then he suggests 7 traits that make a great investor and that cannot be learned
- Ability to buy stocks when others are panicking
- Obsessive about playing the game and wanting to win – this often means a hard time maintaining personal relationships
- Willingness to learn from past mistakes
- Inherent sense of risk based on common sense
- Confidence in their own convictions and stick with them even when faced with criticism – this also means no 2% positions, what’s the point
- Ability to use both sides of your brain. It’s not enough to be able to do the math you need to be able to write and think of inventive ways to solve problems. You do need to be able to do the math!
- The ability to live through volatility without changing your investment process
So what might deliberate practice for a value investor look like? Tony Schwartz in this HBR article distils the steps required to be an expert into these six steps:
- Pursue what you love
- Do the hardest work first
- Practice intensely
- Seek expert feedback, in intermittent doses
- Take regular renewal breaks
- Ritualize practice
|Deliberate Practice||Not Deliberate Practice|
| Detailing how specific news items may impact your investments ||Reading the newspaper|
| Valuing & evaluating Businesses ||Reading Annual Reports|
| Engage the ideas in books ||Reading Investing Books|
| Engage the ideas and authors ||Reading Articles|
| Manage a portfolio ||Buying and selling shares|
| Writing your own research ||Posting on message boards|
| Be a contrarian ||Buying when the market is doing well or selling when it's doing poorly|
If you can engage in 20 hours of deliberate practice a week then you’re looking at about 10 years to become an expert. Over that time you would have read around 3,600 annual reports and evaluated around the same number of companies. You would have read 9,000 articles, reviewed 450 personal trading decisions and written around the same number of articles/ research pieces.
Finally the “Dan Plan” describes Dan McLaughlin’s efforts to go from no golf experience to a golf pro using deliberate practice. He’s at about 1,200 hours and so far has only practiced putting. He hasn’t played a single game of golf yet as playing a game isn’t deliberate practice. Buying and selling stocks is not going to make you an expert value investor. Doing the hard work, practicing your analysis skills intently and then critically reviewing your results just might!
Let me know your ideas for deliberate practice (or examples of not-deliberate practice) in the comments!