Great Investing Is Not Natural

"Be not afraid of greatness: some are born great, some achieve greatness and some have greatness thrust upon them."
-William Shakespeare, Twelfth Night

Success in active management demands skill. But where does this skill come from? Some believe it is innate, as when Warren Buffett suggests "... I was wired from birth to allocate capital..." A growing body of evidence, however, points to nurture not nature as the source of greatness in all manner of performance.

The Source of Success

Remarkable talent is no longer believed linked to inherited special traits. Child prodigies very rarely develop their early gifts and become top talents as adults, whereas the elite performers in virtually every field showed no special aptitude for the work as youngsters prior to extensive coaching. Research points to simple hard work as the deciding factor.

Well, maybe it's not that simple. In spite of extensive education, training and hard work most professional investors do not realize top performance. One reason is that all too many investors fall victim to the skill trap. They become experts but have difficulty delivering expert performance. Great professional performance necessitates more than mastery of the field; it requires the right kind of learning.

Learning to Win

Practice does not make perfect — it only makes permanent what you practice. Ironically, the lengthier the career, the more challenging it can be to perform. According to Anders Ericsson of Florida State University, "In fact, three decades of research into expert performance has shown that experience itself — the raw amount of time you spend pursuing any particular activity, from brain surgery to skiing — can actually hinder your ability to deliver reproducibly superior performance."

Professor Ericsson's pioneering work points out that great performance does not come about from innate talents or experience, but only from what he terms "deliberate practice." Deliberateness has been described this way, "It's activity that's explicitly intended to improve performance, that reaches for objectives just beyond one's level of competence, provides feedback on results and involves high levels of repetition."

Deliberate practice has two distinct qualities. First is focused execution where learning and improving are the conscious intent of every decision and action. This helps reprogram heuristics and other ideas stored deep in the unconscious, enabling skills to be honed by purposefully doing better. Second is clear, prompt feedback. It supports mindfulness and is used to measure improvement and formulate minor adjustments along the way.

Top performers, those that stand apart from their peers, never stop improving. They hone every skill needed within their careers. It is why Tiger Woods rebuilt his swing twice — after already having become the world's best golfer. Being a world-class investor is no simpler.

Building and refining mental models of your world and how it works can turbo-charge deliberate practice. The more complete the model, the deeper the skills that can be isolated and improved. Mental models also facilitate more and faster access to knowledge stored in long-term memory — supplementing skills used daily with stronger judgments as required.

Practice Schmactice

Can investing be improved with practice? Yes, but it is done differently than the way one would practice singing or fly fishing. For starters you have to practice "in the moment" of performing. You bring a heightened self-awareness to your decisions and work/practice at improving. Then use feedback to quickly assess and continue your learning.

Consider building position size. Let's say that analysis confirms that you are slow in adding to new positions with early gains. This hesitancy with feeding winners is consistent with Regret Aversion. Not being fully invested in these positions from the start is costing the portfolio considerable alpha. Your goal for improving is simple — be aware of younger winners, confirm their thesis and get to full weight as quickly as possible. Remaining mindful of this goal throughout the barely contained chaos of a typical day is the challenge. A simple tool can help. You receive a report each morning listing newer positions with gains (i.e., winners), plus their current and target weights. This information provides that extra nudge required to keep your goal top of mind. The report also provides valuable feedback on how effectively you are implementing the desired change.

Deliberate Success

Deliberateness requires a shift in mindset. Active management must focus carefully on every decision point in the investment process: name selection, sizing, adds, trims and sells. Deliberate practice is formulated to refine the skills required for each decision type, much like the way a golfer separately improves driving, the short game and putting.

The new mindset makes improving the focal point — not merely doing the job. Conscious attention is used to retrain judgments and realize better outcomes. Targeted mindfulness helps manage behavioral tendencies as specific skills are enhanced. Armed with better insights, you make better decisions that deliver better results.

Conclusion

Naturals are people who have invested ten years or more into deliberate practice. They channeled their energy into being better and better. They accomplished this by isolating specific elements of their domain and improving that skill.

Equity management is a skill that can be improved. Doing so requires a mindset that includes deliberate practice. Clear intent and focus, down to the smallest components of performance, and quick feedback are what transform desire into results. Perhaps it's time to become unnaturally talented.

References:
1. "Giftedness and evidence for reproducibly superior performance: an account based on the expert performance framework", K. Anders Ericsson, Roy W. Roring and Kiruthiga Nandagopal, High Ability Studies, Volume 18 n1, June 2007.
2. "The Role of Deliberate Practice in the Acquisition of Expert Performance", K. Anders Ericsson, Ralf Th. Krampe, and Clemens Tesch-Romer, Psychological Review, 1993, Vol. 100. No. 3.
3. "Innate Talents, Reality or Myth", Michael J. A. Howe, Jane W. Davidson and John A Sloboda, Behavioral and Brain Sciences, Cambridge University Press, 1998.
4. "What it takes to be great", Geoffrey Colvin, Fortune Magazine, October 19, 2006.
5. "Regrettable Choices", A Behavioral Matters essay, May 28, 2009, available at www.cabotresearch.com.