Thursday, 05 August 2010 00:00

Passion and the Successful Investor

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"Let me emphasize that it does not take genius to be a successful value analyst, what it needs is, first, reasonably good intelligence; second, sound principles of operation; and third, and most important, firmness of character." Benjamin Graham, The Intelligent Investor.

One change in my thinking from the first edition of my book is that in it I advanced the idea that anyone could become a successful focused investor. I now believe that anyone can become a focused investor but in order to do so they must devote a serious portion of their time to learning the process of investing.

What changed my thinking? I had been developing this thought for some time but it really coalesced when I read Chapter 2 of Outliers: The Story of Success by Malcolm Gladwell. The whole book is very well done but when reading the section in which he writes about the Beatles, Bill Joy, and Bill Gates and how they all become quite successful really made me think about the issue in more depth. He develops a theory about how they became so successful. In essence they are achieved a high degree of success because they wholeheartedly put many hours of work into developing insight and skill at their chosen passions.

For instance, Bill Gates had access to a computer during a time when being able to spend large chunks of time on one was quite rare and he was able to become quite skilled in a field that was in its infancy before most people even realized the field existed.

The Beatles went to Hamburg, Germany five times over a two year period where they employed to play gigs, night after night. Mr. Gladwell estimates that over this time frame the Beatles played 270 nights. This experience was an extraordinary gift as it provided them with the ability to work together, develop a stage persona, try out ideas, and in short develop and refine the processes that help make them a success later. As we shall see a little latter in this narrative though just spending 10,000 hours practicing something is not a guaranteed path to success.

I however found myself wondering if passion and repletion were the only reason they were successful? I wondered if some sort of natural ability might also play a factor. Thankfully I happened to read a book that addressed this question: The Genius in All of Us by David Shenk.

In the introduction to the book he discusses the baseball hitting skills of Ted Williams. The author tries to dispel various myths as to why Mr. Williams was such a good hitter. He stated that baseball fans thought of him as having "...a collection of innate physical gifts, including spectacular eye-hand coordination, exquisite muscular grace, and uncanny instincts."

What did Mr. Williams think of this as an explanation of his ability? Not much as is clearly evident in his reply: "Nothing except practice, practice, practice will bring out that ability... the reason I saw things was that was so intense... It was discipline, not super eyesight."

This discipline was apparent from an early age. When interviewed friends from his youth recall him constantly hitting baseballs. In fact they related that he would hit the balls so many times to practice his swing and stance that the outer shells of the balls would be worn completely off when he was finished with them.

When he achieved his dream of reaching the big leagues his search for hitting knowledge didn't slow down at all. This drive was evident to his biography writers Jim Prime and Bill Nowlin, "He discussed the science of hitting ad nauseam with teammates and opposing players. He sought out the great hitters of the game - Hornsby, Cobb, and others - and grilled them about their techniques."

Mr. Shenk also wanted to highlight that child prodigy's where not born with natural gifts. For example he examined Mozart, who is often referenced as an example of a child prodigy. The real story behind his amazing skills starts with his father Leopold Mozart, whose passion was music, and just happened to be a music teacher and composer. His father might not have been a master composer but he had a gift for teaching music and had developed methods that were quite advanced for his time.

His father had already taught Mozart's sister, Nannerl, how to play and Mozart naturally developed an interest in the music that enveloped his family's world. Under this environment and with continuous instruction from his father he went on to achieve world acclaim when he was older but during his youth his level of performance is often matched today by children who are taught today under the same type of rigorous instruction regime.

Anders Ericsson, a Swedish psychologist, has studied the issue of talent and several themes seem to equate to achieving that goal. Among those that are relevant to developing skills in investing include:

1. Practice style is all important. His studies have shown that you need to use what Ericsson calls "deliberate practice" which he explains as "... [involves] repeated attempts to reach beyond one's current level which is associated with frequent failures." (page 55, The Genius in All of Us)

2. Short-term intensity cannot replace long-term commitment.

Ericsson studies revealed no genetic components that accounted for elite athletic achievement (with the exception being body size). Given this evidence the author of The Genius in All of Us concluded that "Becoming great at something requires the right combination of resources, mentality, strategies, persistence, and time; these are tools available to any functioning human being."

A final point that I want to make that reinforces the point I am making in this section is summed up on page 20 of the book Complications: A Surgeon's Notes on the Imperfect Science by Atul Gawande. He relates that K. Anders Ericsson, a "cognitive psychologist and expert on performance, notes that the most important way in which innate factors play a role may be in one's willingness to engage in sustained training" (italics by original author).

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