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Investing Mastery Through Deliberate Practice

To achieve expertise in any field of study usually requires thousands of hours of deliberate practice.

In 2010, Dan McLaughlin was a 30 year old commercial photographer who after much thought, decided to enlist himself in a 10,000 hour experiment of his own design.  He wanted to prove that if a person performed the right kind of focused practice over thousands of hours, one could become an expert in the chosen field.  Although he had no particular experience as a competitive athlete, McLaughlin settled on golf as his chosen field for his experiment.

Dan McLaughlin

Prior to 2010, McLaughlin had never played a full round of golf.  He created a plan known as The Dan Plan, where his goal was to one day play on the PGA Tour.  To reach his goal, he would dedicate 30 hours each week to performing focused practice and he hypothesized that it would take roughly 10,000 hours of practice to reach his goal.  We’ll come back to McLaughlin and his golf experiment later, but to design his roadmap to get to his goal, he drew heavily on the work of a psychologist named Anders Ericsson.

Anders Ericsson has spent his career analyzing experts.  He has studied elite performers from dozens of disciplines, and his study has focused on the routines they use to consistently improve their performance.  In every field that he has studied, the common thread that ties these elite performers together is their dedication to thousands of hours of what Ericsson calls deliberate practice.  Deliberate practice consists of practice sessions that involve deep concentration and setting well defined goals that focus on a specific skill that needs improvement.  These sessions stretch us out of our comfort zone and result in improved mental processes.

To achieve expertise in any field of study usually requires thousands of hours of deliberate practice.   Some fields like chess, musical performance, mathematics and several athletic sports have highly developed, broadly accepted training methods that, if intensively followed will likely lead to expertise.  For other fields, like investing, the training roadmap to expertise is not quite as clear.  However, to guide us in our deliberate practice journey in investing, we can draw from other fields where deliberate practice methods have been much better developed.

Focus on the Fundamentals First

In The Little Book of Talent, Daniel Coyle wrote about his experience visiting several talent hotbeds.  He singled out Spartak, the tennis club in Moscow that is known for developing a number of top Russian tennis stars who have gone on to win Grand Slam titles.  Coyle explains:

“At Spartak, coaches enforce a simple rule:  Young players must practice for three years before entering competitive tournaments.  While I can’t imagine that such a rule would fly in America, it reflects Spartak’s determination to build trusty, reliable forehands, and backhands before injecting the distorting pressures of competition.”

As with tennis, time spent learning fundamental skills in investing will accelerate the path towards expertise.  Learning components of the fundamental skills such as corporate finance, accounting, business valuation and behavioral finance is critical to becoming an expert in investing.

When determining which fundamental skills to focus on,  it would help to follow Warren Buffett’s advice in his letter to Berkshire Hathaway shareholders in 1996 that “investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices”.  The majority of your deliberate practice should focus on building the components to these two broad investment skillsets.

Study the Grandmasters’ Past Moves 

What sets expert performers including investors, apart from everyone else is the quality and quantity of their mental representations or structures.  Through years of practice, they develop highly complex and sophisticated mental structures that help them make faster and better decisions.

Chess is one field that provides insight into how chess masters encode these structures into their memories.  In Peak: Secrets from the New Science of Expertise, Ericsson and his co-author Robert Pool explain:

“Anyone who is serious about developing skills on the chessboard will do it mainly by spending countless hours studying games played by the masters.  You analyze a position in depth, predicting the next move, and if you get it wrong, you go back and figure out what you missed.  Research has shown that the amount of time spent in this sort of analysis – not the amount of time spent actually playing chess with others – is the single most important predictor of a chess player’s ability.  It generally takes about ten years of this sort of practice to reach the level of grandmaster.  These years of practice make it possible for chess players to recognize patterns of chess pieces.”

If chess players can achieve grandmaster status by spending thousands of hours intensely studying the chess masters’ moves, similarly investors should be able to improve their skills by studying the investing masters by analyzing the masters’ past investing moves.  This is exactly what investment grandmaster Eddie Lampert did when he was learning the investment ropes in his early twenties.   A Businessweek article from 2004 sheds some light on this:

“Lampert has carefully studied Buffett for years. He started reading and rereading Buffett’s writings while working at Goldman after college. He would analyze Buffett’s investments, he says, by “reverse engineering” deals, such as his purchase of insurance company GEICO. Lampert went back and read GEICO’s annual reports in the couple of years preceding Buffett’s initial investment in the 1970s. “Putting myself in his shoes at that time, could I understand why he made the investments?” says Lampert. “That was part of my learning process.”

By deeply studying the past investment moves (many of them in microcap companies) of grandmaster investors like Warren Buffett, Charlie Munger, Joel Greenblatt, and Fred Astman [see article: The Best Microcap Investor You’ve Never Heard Of], an aspiring investor is able to imprint the patterns of these successful investments into their long term memory to be recalled at a later date as needed.  By performing a comprehensive analysis of Buffett’s blockbuster investments in companies such as Western Insurance Securities and Mid-Continent Tab Card Company, an investor can create a mental filing cabinet of models to draw from at a later date.  This should allow an investor to make faster, more accurate decisions when presented with similar investment situations in the future.  

Get Feedback to Accelerate Your Learning

Feedback is important in the deliberate practice process.  Without feedback (from yourself or outside observers), it is difficult to identify what you need to improve on and how close you are to achieving your goals.  In a 2007 Harvard Business Review article, Ericsson pointed to the importance of feedback:

“Arguably, the most famous violin teacher of all time, Ivan Galamian made the point that budding maestros do not engage in deliberate practice spontaneously: ‘If we analyze the development of the well-known artists, we see that in almost every case the success of their entire career was dependent on the quality of their practicing.  In practically every case, the practicing was constantly supervised either by the teacher or an assistant to the teacher.’”

Whether the goal is achieving expertise in violin performance, or investing, it’s clear that immediate feedback is important.

Warren Buffett (far left) and Ben Graham (third from left)

Grandmaster investor Warren Buffett and Walter Schloss cut their teeth as analysts working for Benjamin Graham.  Seth Klarman learned his craft under Max Heine and Michael Price. Eddie Lampert sought out Robert Rubin and Richard Rainwater as mentors at different points in his career.  Many of the greatest investors had a mentor or teacher that provided feedback to them and helped guide their development as investors.

When Buffett and Schloss were analysts under Graham, they most likely presented multiple ideas to their mentor every day.  Every time they presented an investment idea to him, they would have been given immediate feedback on the idea in the form of a yes or no.  With each bit of feedback, they would have built the mental structures to recognize the patterns that made for a good investment.

Personally, I have never had a formal mentor on my investing journey.  But over the years, I have surrounded myself with experienced investors that were willing to give me critical feedback and provide guidance and direction in their areas of expertise.  I’ve always considered these investors informal mentors, and I am sure it has accelerated my development as an investor.  I was recently listening to an episode of the Invest Like the Best Podcast where Brent Beshore described this type of mentoring as “peer mentoring”.  I think it’s a very valuable type of mentoring where having a single mentor may not be feasible.  For it to work, you need to soak up as much as you can from each peer mentor.  It’s helpful to check your ego at the door, and be willing to ask what may appear to be naive questions.  It is also important to find some way to provide value back to these peer mentors.

Self-Monitoring is the Next Step

Early in any type of training, much of your feedback may come from coaches, teachers or peer-mentors.  With time and experience, you can learn to monitor yourself.  After your training has progressed, you should be able to spot mistakes and adjust your practice techniques on your own as needed.

A great way to self-monitor is by keeping an investment decision journal in which you record key investment decisions.  Over time, you can review past decisions to identify mistakes to learn where your weaknesses are and where you need improvement.  From there you can design practice methods to build the skills to improve on these weaknesses.

Ericsson gives a great example of one method of motivated self-monitoring used by Benjamin Franklin:

When he wanted to learn to write eloquently and persuasively, Franklin began to study his favorite articles from a popular British publication, the Spectator. Days after he’d read an article he particularly enjoyed, he would try to reconstruct it from memory in his own words. Then he would compare it with the original, so he could discover and correct his faults. He also worked to improve his sense of language by translating the articles into rhyming verse and then from verse back into prose. Similarly, famous painters sometimes attempt to reproduce the paintings of other masters.

An important skill as an investor is being able to pitch a stock idea in a written report.  If you wanted to improve this skill, you could apply Franklin’s  method of self-monitoring in the following way.  There is an investor on Value Investors Club “VIC” who goes by the handle Charlie479.  He is an extremely skilled analyst, and one that grandmaster investor and Columbia Business School professor Joel Greenblatt has suggested his students study.  As a deliberate practice exercise, you could read one of his company profiles on VIC (which are accessible to the public) and in a few days time, you could do a deep analysis of the company and then write up your own report.  When you are done, compare it to Charlie479’s writeup so you can discover and correct your faults.  This same exercise could be done by reproducing the reports written by other top ranked members of VIC or MicrocapClub, or your favorite investment bloggers.

Get Out of Your Comfort Zone

The purpose of deliberate practice is to figure out where your weaknesses are and focus on getting better in those areas.  Deliberate practice is intense, focused practice operating just outside of your comfort zone.  This means you should be reaching slightly beyond your current ability making some mistakes.  This is the sweet spot of deep practice.

One deliberate practice technique that might push you out of your comfort zone is the blind stock valuation exercise.  This exercise was originally used by Benjamin Graham in his investment classes and has been popularized recently by investment blogger Geoff Gannon.  As investors, we are so used to looking at a company’s stock price before we value a company.  But this often leads to a biased valuation because we are often influenced by the valuation other investors assign when the price is set in the public stock markets.  If we want to become better analysts, we should step out of our comfort zones and do our valuation work first and then look at the stock price after.

A blind stock valuation is done by performing a valuation exercise on a company, blinded to the company name, industry, and stock price.  An easy way to do this is to use a financial data website like  Punch in a random ticker and pull up a company that you do not recognize and bring up the financial information over the last five to ten years.  Don’t worry about the lack of any qualitative information.  With the financial information provided, value the company and estimate a per share valuation range.  At this point, compare your estimate to the current stock price.  The purpose of the exercise is not to get as close to the current stock price but to improve your valuation skills.  A similar exercise could be done by pulling old Value Line reports and covering up company names and stock charts and running a blind valuation.  For a twist, cover up the last 3 years of Value Line data, and try to estimate the revenue and earnings in the missing 3 years, as well as a future projected valuation.  You can then reveal the last 3 years of data to check to see how close you were on your projections.

Getting Past Training Plateaus

Often in your training, you will reach a plateau where it feels like you have hit a ceiling in your progress.  It will usually be just one or two components of a skill that are impeding your progression.  To figure out which components are causing the plateau, try pushing yourself a little harder than normal to figure out where your sticking points are.

In the Little Book of Talent, Daniel Coyle provides some insight:

“The best way past a plateau is to jostle yourself beyond it; to change your practice method so you disrupt your autopilot and rebuild a faster, better circuit.  One way to do this is to speed things up – to force yourself to do the task faster than you normally would.  Or you can do the task in reverse order, turn it inside out or upside down.  It doesn’t matter which technique you use, as long as you find a way to knock yourself out of autopilot and into your sweet spot.”

In investing, there are numerous practice methods to jostle yourself over a plateau in your progress.  For example, if you have identified financial statement analysis as an area that needs further skill development, you could try the following exercises:

  1. If you are forever analyzing small, one division companies, it may be time to tackle analyzing a larger, more complex company.
  2. Challenge yourself to speed up your analysis. If it normally takes you 30 minutes to read through the financial statements and accompanying notes for the average company, challenge yourself to read the next one in 20 minutes.
  3. Reverse the order in which you normally read the financial statements and notes. To do this, pull up the financial report of a company you are unfamiliar with.  When you begin to read the report, skip over the balance sheet, income statement and statement of cash flows.  As you are now blinded to the company’s balance sheet, take out a piece if paper.  On this piece of paper, try your best to re-create the balance sheet as you read through the notes to the financial statements.

The areas you are weak in should be more obvious as you struggle to push to accelerate through these tough areas.  At this point, you may find that your sticking points are in accounting areas such as business combinations or taxation or perhaps some other area.  Once you determine your weaknesses, you could then focus on improving those areas through deliberate practice exercises.  For this, you could study the relevant sections of an intermediate or advanced accounting textbook and perform the study guide questions.  Or you could design other practice methods to challenge yourself in these areas.  Your ability to design practice exercises is only limited by your imagination.  Just remember, your practice sessions should be very focused, should stretch you out of your comfort zone, and should focus on building skills, not just knowledge.

Back to The Dan Plan

So whatever happened to Dan McLaughlin, our aspiring golfer whose goal was to make the PGA tour?

The first thing he did when he embarked on his golf journey was to enlist a PGA certified golf coach, a strength and rehabilition specialist as well as a mental coach.  With the help of his golf coach and following the principles of deliberate practice, he layed out a training roadmap.  His first phase focused on building the fundamental skills before he put himself into a real game situation.  In the first five months, all he worked on was putting.  At 12 months, he took his first full swing.  After 18 months, he swung a driver for the first time, and it was nearly 2 years before he played a full round with a full set of clubs in his bag.  Nobody said deliberate practice is fun.

During this time, he was getting feedback from his coach on what specifically he needed to improve on and to provide experienced guidance on specific practice drills to perform.  McLaughlin also self-monitored his progress and kept a detailed journal where after each practice session, he would record what was working and what wasn’t.  When he finally started to play a full round on the golf course, he would hit several shots from the toughest lies on the course.

In late 2015, he was 6,000 hours into his 10,000 hour experiment in deliberate practice and continued to follow the deliberate practice principles meticulously.  He had made vast improvements in his game, and had improved his handicap into the 2.6 range the previous golf season.  This is a pretty respectable handicap and would have put him in the top 5% of registered golfers.  It looked like if he continued on his path, he had a shot at achieving his goal of making the PGA Tour.

Unfortunately, it was at this point that he had a back injury that prevented him from continuing on his journey, and it looks like his plan has been suspended.  If McLaughlin is unable to continue, we will never know what may have come of his experiment and we are left to wonder if he might have made the PGA Tour someday.

Some may view this as a failed experiment because he did not reach his goal.  But I believe there is a valuable lesson in McLaughlin’s journey.  That is, by applying the principles of deliberate practice layed out by Anders Ericsson, virtually anyone, including investors, can show significant improvement in their chosen skill.

As an investor, you don’t have to practice 30 hours a week, as Dan McLaughlin did to get the benefits, although if you did I’m sure it would accelerate your growth immensely.  However, I think that if you can dedicate one hour a few times a week on one specific investment skill, it would result in meaningful progress in your investing ability.  Whether you are a microcap investor, a large cap investor or an all-cap investor, I hope deliberate practice can help you become a better investor.

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