Peak: Secrets from the New Science of Expertise - Anders Ericsson et al.

[Jurgis]

I have not read it yet, though I've read some of Anders Ericsson's articles.

 

$2.99 on Amazon: http://a.co/1oLgOLv

 

I was also looking at

Grit: The Power of Passion and Perseverance

by Angela Duckworth

She has done shared work with Anders Ericsson.

Let me start a separate thread on that.

 

[JayGatsby]

Brad Stulberg's podcast on Invest Like the Best was quite good if you haven't listened to it: http://investorfieldguide.com/brad/

 

He wrote Peak Performance, which looks to discuss some similar topics.

[Jurgis]

I am reading through this and I think this is one of the best books about how to become world-class performer in (any) field.

 

Having said that (to wet people's appetite :P ), there's a number of difficulties in applying deliberate practice to investing. Author acknowledges as much for investing and some other fields, though he still thinks it's possible to benefit by getting as close to deliberate practice as possible in given field.

 

I'd be interested to talk to people who have applied deliberate practice to investing or other fields and have achieved positive results. Can do it on this thread or PM me directly.

 

I'd be also interested to talk to people who have read the book and are looking to apply deliberate practice to investing or other fields. Same as above.

[vinod1]

The concept of "deliberate practice" is something that I have been applying both to investing and for teaching my children - from baseball to math.

 

I picked up this concept sometime in 2011 after reading "Talent is Overrated". To me the whole idea around deliberate practice made a ton of sense the moment I read about it and it has stuck with me since.

 

As far as Investing is concerned here are some things I do that I think helped (what else would I think? :) )

 

1. I do a detailed write-up of every investment idea I research. Some more thoroughly than others. It has either a 3 or 5 or 7 or 10 year expectation of how I would expect the business to evolve. What I think are the key drivers and what I think are the key risks. It also has my expectation of revenues and/or earnings or book value for whatever period.

 

2. Keeping an investing diary where I record what I researched, why I either bought or did not buy and at what price.

 

3. Any major ideas that I have about things like say profit margins of US companies, my interest rate expectations, market multiple expectations if I have any,  how some industries are going to evolve, etc also go into the diary.

 

After 3-5 years, I look back at my ideas and see how they performed relative to my expectations (business drivers, not price) and try to figure out why I diverged. Is it some random event that I did not account for or whatever.

 

I also look at things that I passed up on and the price at which I passed them on and what the current price is.

 

I also look at big ideas and see how I fared. What I learned about the big ideas is to have low confidence in any of these. To take them with a grain of salt and be fully prepared to be completely wrong. Believe me this has/had been a massive help. This big idea part I have been doing since 2005. I got out of market in 2007 (went to ~35% stocks) due to worries about profit margins and market multiples and realized that was a dumb mistake and did not make that same one again in 2011/12/13...

 

Vinod

[vinod1]

To give an example from investing, what I am looking at ADS around $200, it reminded me of the mistake I made in IBM. When I looked back at the mistakes I made when I bought IBM, the similarities are striking. Right down to management commentary. So I laid out what I thought is most likely to play out for ADS through 2021. What I expected in 3 years, it played out to a T in 1 year. I am cherry picking something that played out really well, but in other cases it helped me to get out before any damage is done when I realize similarities to other mistakes. Still too early to tell if I am right for the right reasons.

 

Vinod

[Jurgis]

Vinod1,

 

Glad to hear that you are using deliberate practice and you are getting good results with it.

 

I see that you are handling some of the difficulties with deliberate practice application in investing:

 

1. The important part of deliberate practice is frequent factual feedback. Your approach gives you factual feedback even if it's not frequent. You got it on the spot by using business results for predictions instead of stock price. So you can avoid resulting.

I am not sure if there is a way to get more frequent feedback in investing. It might be possible to do more analyses and then get more feedback coming in 2-3 years. But feedback after shorter timeframe is probably difficult to come by. Unless we invest in special situations like writser.

 

2. Ericsson places a large value on a teacher or coach. This is difficult to get in investing because of couple of reasons: (a) determining who are world class performers is difficult by itself - it only appears in long term and even that might be not very objective (b) even assuming we know great performers, most of them are self-taught © because of (a) and (b) it is near-impossible to find a teacher who has a history of teaching world-class performers. I see you are avoiding this area altogether which is probably a way to go. Some people might be able to apprentice to exceptional performers but that is likely an exception rather than possibility. Maybe another possibility is to learn from Damodaran, though I am not sure if we know whether what he teaches makes people great investors.

 

I had one question to you. Ericsson also emphasizes the pain part of deliberate practice: "Deliberate practice takes place outside one’s comfort zone and requires a student to constantly try things that are just beyond his or her current abilities.". In other words, if one is not doing something outside their comfort zone, they are not getting better. Do you have any comments on this? Or do you feel that this does not apply to investing and it's enough to find your area/niche and just keep at it inside the niche? Or perhaps you have a different interpretation of constantly stepping outside comfort zone in the area of investing?

 

Another more wide topic: perhaps "investing" per ce is too wide an area and the deliberate practice should concentrate on smaller area. In some sense you are doing that by saying "I'll practice business result prediction" and get feedback on that. This then excludes a lot of other parts of investing like position sizing, buy/sell decisions, etc. Would be interesting to hear what other smaller parts of investing might be amenable to deliberate practice. 8) For example, something like position sizing seems to be difficult to get factual feedback on. Similar issue with buy/sell decisions.

 

Anyway, it was great to hear about your experience.  8)

[vinod1]

Jurgis,

 

I would try to answer this in separate posts as time permits.

 

Regarding frequent factual feedback. This is tough to get in investing as you noted. So a focus on the business results would mitigate some of it but, even then, you do not know if some unexpected tailwind/headwind or some random event impacted the business results. For example, in bank stocks, I (a) overestimated revenues and (b) underestimated how efficiently they could be run and © how much credit costs would be lower than normal. The end result is that my earnings forecast for a number of bank stocks hit target very closely as (a) got balanced out nicely by (b) and ©. So I know that it is a result of two mistakes cancelling each other out. That feedback helped me fine tune my go forward estimates.

 

Even PE multiples or market prices are important to get right. We know that over the long run the market is generally right. So if a business is consistently being priced at a higher or lower multiple than my expectations means that I could be missing some factor that market is paying attention to and I am not. So that is a good data point as well to know. Lots of issues with this as well since the stock would be greatly impacted by the market multiples, so we need to take that into account as well.

 

Vinod 

[vinod1]

Regarding a coach. I wanted to learn from 1. Ben Graham or 2. Buffett or 3) Seth Klarman. Not going to happen. So I did the next best thing that I could think of.

 

I spent nearly 6 months reading almost exclusively about Ben Graham. Going through security analysis with a fine toothed comb and making notes of each chapter of two versions of the book. If interested my notes are below.

 

http://vinodp.com/documents/investing/security_analysis_index.html

 

I want to get into his head and see what he is thinking. So I read the book, took the notes as above. Then took a break and tried to summarize the whole thing at a higher level in a couple of pages. Ended up with 3 pages. After that I felt like I understood his approach.

 

Going off topic here but the most surprising thing I found is he does not really try to find IV.  Rather he is trying to say the business cannot be worth less than $x. This is a tidbit but there much to learn from his approach. Sad that his approach gets boiled down to net-nets, cheapo stocks and formulas.

 

Similarly with Buffett I summarized his teachings and incorporated his main points into my investing approach. I did not spend focused time like Graham since I have been reading about him for a long time and I just needed a couple of months for this.

 

As far as valuation is concerned I spend maybe 6 months on Damodaran's book. Did the same by developing a chapter by chapter summary and then a 2 pager of higher level summary. I think I got into his head pretty well.

 

Even though I spent a long time on Damodaran, I ignore many of his recommendations and think he got somethings not wrong but of little practice use. I ignore for specific reasons but the end result is consistent with his intent. Learned a lot though and it improved the nuts of bolts of my valuation.

 

I try to summarize a lot of other investors as well but the above three are my shadow mentors who had a big influence on me. There is a lot of writings from these people and I think anyone willing to put in the effort can learn a lot by such study.

 

There are advantages to learning from a real live person and honestly if someone I had a shot with someone I admire I would have loved to jump on that chance.

 

Vinod

 

 

 

 

[vinod1]

I had one question to you. Ericsson also emphasizes the pain part of deliberate practice: "Deliberate practice takes place outside one’s comfort zone and requires a student to constantly try things that are just beyond his or her current abilities.". In other words, if one is not doing something outside their comfort zone, they are not getting better. Do you have any comments on this? Or do you feel that this does not apply to investing and it's enough to find your area/niche and just keep at it inside the niche? Or perhaps you have a different interpretation of constantly stepping outside comfort zone in the area of investing?

 

The way I think about this, is to try to learn about other businesses, even those that are not in my circle of competence or even interest. For example, I went through the valuation exercise for a few dozen SaaS stocks, even though it was pretty clear to me that these are no where near the range of where I would be willing to buy them. Planning to study blockchain, etc. May not be strictly deliberate practice but idea is to learn other businesses and especially where value is being created in the economy. Since that is where the money ends up being made and it might inform you about a thing or two about the impact they might have on the companies you own.

 

Vinod

[vinod1]

Another more wide topic: perhaps "investing" per ce is too wide an area and the deliberate practice should concentrate on smaller area. In some sense you are doing that by saying "I'll practice business result prediction" and get feedback on that. This then excludes a lot of other parts of investing like position sizing, buy/sell decisions, etc. Would be interesting to hear what other smaller parts of investing might be amenable to deliberate practice. 8) For example, something like position sizing seems to be difficult to get factual feedback on. Similar issue with buy/sell decisions.

 

On many of these things, I just defer to Buffett, Graham and Damodaran (for valuation related). These guys are the best in the business, and have spent a lot of time thinking through these problems and have also written extensively. So no need to reinvent the wheel. Many of these other things you mention like position sizing and buy/sell decisions are not very amenable to deliberate practice I think.

 

On sell decisions, one thing I did make a change is how long I am going to wait for business under-performance. If business is going according to my expectations, I am not going to bother much with price. If a business does disappoint after several years of steady performance, what I found is that it is going to disappoint for a while. So tend to look very closely and critically at the business and bite the bullet and sell it at a loss. I am not talking about a quarter or two and I am not a momentum investor. But what I want to avoid is the drip, drip of a little underperformance in a quarter and stock is down 10%-15% and one generally thinks the price/IV ratio has improved since your estimate of change in IV is lot lower than the change in stock price.

 

This might not be strictly deliberate practice but watching the business results of a large number of businesses you get a good feel to make decisions based on gut. Not very scientific.

 

Vinod

[Gregmal]

I had one question to you. Ericsson also emphasizes the pain part of deliberate practice: "Deliberate practice takes place outside one’s comfort zone and requires a student to constantly try things that are just beyond his or her current abilities.". In other words, if one is not doing something outside their comfort zone, they are not getting better. Do you have any comments on this? Or do you feel that this does not apply to investing and it's enough to find your area/niche and just keep at it inside the niche? Or perhaps you have a different interpretation of constantly stepping outside comfort zone in the area of investing?

 

The way I think about this, is to try to learn about other businesses, even those that are not in my circle of competence or even interest. For example, I went through the valuation exercise for a few dozen SaaS stocks, even though it was pretty clear to me that these are no where near the range of where I would be willing to buy them. Planning to study blockchain, etc. May not be strictly deliberate practice but idea is to learn other businesses and especially where value is being created in the economy. Since that is where the money ends up being made and it might inform you about a thing or two about the impact they might have on the companies you own.

 

Vinod

 

This is an excellent point.

 

Along these lines I found that if you take it a step further and force yourself to buy a nominal number of shares in one of those companies(preferably a market leader), you force yourself to follow it a little bit, read the transcripts and filings, and come to understand what you should appreciate in that area.

[Jurgis]

Thanks vinod1 for your posts. This is a very recommended thread because of your input.  8)

[Jurgis]

A friend recommended "Ultralearning" as having some practical ideas supplementing "Peak"

 

"Ultralearning: Master Hard Skills, Outsmart the Competition, and Accelerate Your Career" by Scott Young " is on sale for $2.99 at Amazon today:

 

https://www.amazon.com/dp/B07K6MF8MD/?coliid=I36OAZYU0ZXCRK&colid=22BZEZ4H8JQEA&psc=0&ref_=lv_ov_lig_dp_it

[boilermaker75]

A friend recommended "Ultralearning" as having some practical ideas supplementing "Peak"

 

"Ultralearning: Master Hard Skills, Outsmart the Competition, and Accelerate Your Career" by Scott Young " is on sale for $2.99 at Amazon today:

 

https://www.amazon.com/dp/B07K6MF8MD/?coliid=I36OAZYU0ZXCRK&colid=22BZEZ4H8JQEA&psc=0&ref_=lv_ov_lig_dp_it

 

Thanks Jurgis, just bought it.

[saleen998]

Along with Talent is Overrated, which someone already mentioned in this thread, Bounce by Matthew Syed is great book that covers very similar ideas.