October 4, 2009

Practice Investing

Investing is just like any other discipline you need practice to develop the skills to be good at it. For awhile I have been thinking about a framework of skills and how do I practice to improve my game. I have broken it down to three elements that need to be developed and worked at constantly:
  1. Knowledge
  2. Skills
  3. Behaviour

If you have read Poor Charlie's Almanac, which I recommend highly, you will see that he harps on what he calls "mental models". This is the equivalent to knowledge in my framework. However, I want to further detail these models into two elements:
  1. Systems Knowledge: similar to Munger's description, it is your knowledge of the necessary sciences to enable you to decipher your way through events, readings and decisions:
    • Accounting
    • Mathematics
    • Psychology
    • Language
  2. Domain Knowledge: Munger did not explicitly break out this element as a distinct "mental model" but he emphasized reading a lot. Domain knowledge is the structure of information and data or "insights" about a specific industry. You can't be knowledgeable sufficiently about several domains so you have to keep your efforts focused on few ones, the less the better investor you will be.
How do you practice your knowledge building capacity? By writing down notes about what you read. What you need to write is not a summary of the information but an answer to the questions: so what? What will be the impact of the news item on you, your business and the companies involved?

To develop the knowledge required, you will need to read and read a lot, this has to be evident by now. Here are the skills that you need to work at as well to be more effective and efficient:
  1. Speed reading: you need to read quickly because knowledge has one limitation and that is time. The skill is hard but you need to work at it to continuously improve the yield on your time by acquiring more knowledge for each unit of time spent.
  2. Memory: what is the point of reading if you can't remember the information you need to analyze a particular situation or identify a unique opportunity. This is a skill that can be improved by practice as well.
  3. Creativity: Munger in his book said to "invert, always invert" well to do so you need imagination. Creativity is needed in order to develop future scenarios and imagine possible risk for business.

I have identified three behaviours or personality characteristics that need to be nurtured as well:
  1. Passion: your passion should be about the process not the outcome. If you are passionate about the process you will think and have perspective on how to improve it rather than use it in a mechanical fashion.
  2. Adaptation: one of the most valuable traits of humans is their ability to adapt to their circumstances and learn from their mistakes. But this require that you take responsibility and internalize errors and mistakes rather than blaming it on chance or others.
  3. Determination: because you will fail but you need a combination of strong will, ambition, and discipline to keep going as what I outlined here is a lot of hard work.

Train hard!!!!


chrispycrunch said...

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Incidentally, the site is very good for implementing, testing, investment strategies

Anonymous said...

THanks Sami,
I really enjoy your blog and I learn a lot from following your evaluation process. If I may ask a question...
Approximately how much reading did you do before you began to invest based on your own analysis?
I have been reading as much as I can about the stock market an I've read most of the value investing classics but I still do not feel comfortable acting on my analysis and trusting that I know something the market doesn't. Was it a gradual process for you or did you plunge in? Thanks,

Sami said...

thanks guys.

Anon. it is really hard to tell how much reading you need to do before investing. for me, it is still work in progress and will always be. You just can't have enough.

you need to read beyond investing books. marketing, demographics, psychology, I like to read books that are written about failure and errors, you learn a lot from these one rather the ones about success.

also you have to develop a process that breaks down into the following:
1. how to search for ideas
2. how to evaluate these ideas
3. how to keep invested against price fluctuation

these are to help you with your emotions rather than anything else because you will discover emotional control and mental discipline is much to do with success than knowledge and analytical abilities.

I suggest if you are apprehensive is to scale gradually, because no matter how much preparation you will still learn on the go. and that's why i say adaptation is critical. deploy 25% of your capital and gradually increase that.

Hope that helps

Anonymous said...

great post! how would you suggest one improves their memory and speed reading abilities?

Sami said...

there are a lot of resources on the web here are two:

speed reading:

mindtools.com have a lot of memory drills

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