Wednesday, January 13, 2010

Deliberate Practice: Becoming a Better Investor

Tariq at the Street Capitalist blog had a great post on a frequent topic on this blog: deliberate practice. He had some great thoughts on applying deliberate practice to investing, which are pasted below. I gave a presentation on this topic last March. Some of my thoughts on the topic from that presentation are available HERE. If you have any other thoughts on deliberate practice and investing that you’d like to share, send me an email and let me know.

For any investor seeking to become better, deliberate practice is essential. The key is figuring out what deliberate practice should consist of in investing. Most of us read newspapers and blogs daily. This helps keep up to date with what is going on in the world. But is that enough? I am not too sure.

I think that taking a more active approach with news reading would be helpful. Recently, the Wall Street Journal ran an article about how David Tepper bought Bank of America stock at its low. A good exercise would be to actually sit around and try to reverse engineer that investment. Eddie Lampert has said that in college he reverse engineered many of Warren Buffett’s investment. This kind of activity would not only increase your understanding of investing but also build a model for you to look at if you ever find a similar investment.

Other investors strive to read one 10K a day. This can help build your circle of competence, but I believe it has some shortcomings. A more targeted approach with 10Ks will be more beneficial than simply jumping from reading about Exxon to reading about Bank of America. You should define goals where you are mastering knowledge of a specific industry or area of the market.

Maybe you want to learn the billboard/outdoor advertising business. Instead of looking at just Lamar Advertising (NASDAQ:LAMR) you would look at Clear Channel Outdoors (NYSE:CCO) as well. If you want to master restaurants, you would maybe start at a fast food company like McDonalds (NYSE:MCD) which is the best in its class. Then seek out Chipotle (reputed to have the best economics in the fast food business) and branch out so that you build familiarity with the industry which will help you evaluate lesser known companies like Steak N Shake (NYSE:SNS).


Related previous post: What it takes to be great