What's Behind Successful Investing?

There are many considerations whether choosing a Financial Advisor or deciding to go it on your own. The following was written to help both my existing clients as well as those who are considering establishing a relationship.

In one chapter of his fascinating book Outliers, Malcolm Gladwell discusses studies that have explored the question of what it takes to attain true mastery in various endeavors. The chapter dealing with this question is aptly named The 10,000 - Hour Rule because that was what researchers found, that it takes 10,000 hours of practice to attain mastery in any field of endeavor.

For the sake of brevity I will summarize the key points found by researchers such as psychologist K. Anders Ericsson and neurologist Daniel Levitin:

  • The closer they looked; innate talent seems to play a smaller role in attaining true expertise while preparation seems to play a larger role.
  • Their studies did not find any "naturals" that rose to mastery due to innate talent alone without really hard work.
  • Their studies also did not find any people who worked harder than everyone else yet could not make it into the top ranks.
  • The people who made it to the top in their fields didn't work just a little harder; they worked much, much harder than everyone else.
  • Researchers settled on what is believed to be the magic number for true expertise; ten thousand hours. "It seems that it takes the brain this long to assimilate all that it needs to know to achieve true mastery.”
  • "Practice isn't the thing you do once you're good. It's the thing you do that makes you good.”

As I read the chapter I thought of the movie Amadeus which told the story of Mozart. Gladwell had that base covered as well. It seems that Mozart's early works were really not outstanding and many were merely arrangements of works by other composers. Mozart's earliest "masterwork" was completed at age 21 after he had been composing for ten years. One music critic argues that Mozart actually "developed late" and did not produce his greatest work until he had been composing for over twenty years.

And what, you ask, has this ten-thousand hour stuff to do with investing? Everything! Periodically I encounter people who seem to think that successful investing can be done as a hobby and really doesn't take any real expertise; just subscribe to a newsletter, watch CNBC, do a little so-called "research" on the internet, maybe purchase a software program that produces buy and sell signals, or maybe just "buy and hold." With the aging of our population combined with difficult markets since the market top in 2000 there are fewer of these investor types now but they do still exist. Interestingly enough, after over thirty years in the investment business, I have observed that those who have acquired significant wealth are less likely to hold these do-it-yourself illusions. The truly high-net-worth people understand how hard it is to acquire wealth yet how easily it can be lost.

Like many things in life, investment management does not take exceptional intellect or some rare, innate talent. Anyone of above average intelligence can become a successful investor. It just takes time, tools, training, desire, commitment, consistency, experience, a sound mental state, and of course, practice, lots and lots of practice.

Time

If one worked solely on investment skills eight hours a day, taking time off for holidays, weekends, and vacations, it would take nearly six years to log 10,000 hours. Even in my profession I can't devote my attention solely to honing my investment skills. I would say that realistically, it would take ten years for one who is highly focused and disciplined and more like fifteen to twenty years for most, even for those of us working in the business.

Tools  

Right out of the blocks I have an advantage over the hobbyist. I have both technical and fundamental tools and resources at my fingertips; some furnished by my employer and some I pay for out of my own pocket. We have a staff of analysts, strategists, and other talents that provide ongoing research, insight and observations. I can call these people for more information when needed. I also have access to strategists, portfolio managers, and analysts from other investment management companies. All of these resources can be mind-boggling but, more on that later. The point is that I have access, insights, and exposures that the non-professional just can't get; no matter what the TV commercials claim. In addition, most in my office have gray hair; we’ve all done this for a very long time. We all have different styles and areas of expertise. I can walk down the hall and pick professional brains whenever I want.

Training  

Since entering the investment business in 1984 I have read close to 100 investment books, attended numerous courses and seminars on investment management, and constantly strive to improve my skill sets. For example:

  • I belong to a professional organization not open to non-professionals where we can exchange ideas.
  • In the mid 90's I completed a course in investment management that took four months of study - nights and weekends - with a case-study final exam.
  • Since 2003 I have completed three financial planning programs and two qualified plans certifications.
  • In 2002 I completed requirements for a designation that took three years of hard work and study to complete. In September of the first two years we were given a list of books to read and concepts to know. Each spring we sat for a four-hour exam. In the third year I presented a research paper. This took disciplined study - nights and weekends - all the while reinforced by working in the same field.
  • As I write I have just started another home-study course containing five books. I'm told that this one should take about four months.
  • Several years ago, one of my designations required that I document my annual continuing education. Much to my surprise I found that I've been completing 60 to 70 hours of "Continuing-Ed" annually. Forty hours are required.
  • All of the above is in addition to my Finance major and Economics minor in college.

The training and study regimen should satisfy the prerequisites of desire and commitment. If one does not have the desire to devote this amount of time and commitment to investing they are going to be very disappointed with their results. I have come to realize that in matters of investment management, the learning curve is life-long; it is endless. My wife tells me that the perpetual learning curve is what holds my interest.

Experience

There is no substitute for experience. Experience cannot be bought or "certified” by some program that gives you letters behind your name. Experience is the sum total of education, repetition, practice, and study. From experience comes judgment which separates winners from losers. Judgment comes from a lifetime of learning, watching, and doing. Experience gives us the ability to act intuitively but without emotion.

I think the following quote from Walter Deemer regarding the markets when interviewed for the Book Heretics of Finance is worth including here:

"Ultimately, experience is the only way you learn. Somebody can show you something, but you've got to find out for yourself that that's not going to work all the time. I've seen the wheel go around and into the mud and come back out again. You've got to live through it a couple of times to realize that things at the bottom really do look ugly. You can't get an idea out of a book of how ugly it can be. And you can't get out of a book how euphoric it can be at the top.”

Earlier I mentioned the plethora of professionals and tools at my disposal and how the choices could be mind boggling. The combination of time, training and experience allow me to quickly discern between opportunity, incompetence, or flawed logic.

Whether investing or planning for clients, I have the advantage of having worked with hundreds of clients in a variety of market conditions. I have observed a variety of attitudes and personalities in a variety of situations. There is a saying that “no one rings a bell at market tops and bottoms." I disagree; the bell that rings is my telephone: at market tops investors call wanting to add money to the market or to finally "get in!" At market bottoms I will have calls to sell everything – even investments unrelated to the stock market! Such actions are emotional, impulsive, undisciplined, and unprofitable. Part of my job is to help temper these emotions.

Closing Thoughts 

Investment management is a full-time job. For those who are convinced that they can do their own investing there are some things you may want to consider:

  1. Do you have the time and desire to devote a significant amount of time to studying, managing, building the various skill sets and the discipline to be successful? Studies show that most private investors significantly underperform.
  2. Is this a passing interest that will fade as many previous hobbies have?
  3. What happens when (not if) your physical and/or mental health begin to fade and you're unable to devote the necessary time to the demands of investment management? Yes, you could then decide to hire a pro but that would be under stress and time constraints; virtually overnight one would need to place their trust in a new relationship.
  4. What happens if you pre-decease your spouse and he or she is left with a task they may not understand or never really cared about?

All investment styles rotate in and out of favor throughout a market cycle. All asset classes will rotate in and out of favor: stocks, bonds, real estate, commodities, and collectibles. And those cycles can be very long or short lived. It takes a trained, experienced eye to evaluate the probabilities of short vs. long cycle environments? No investment manager or advisor is right all of the time. I recall, for instance, that Warren Buffet's Berkshire Hathaway was down 42% at the bottom of the bear market of 2000 – 2003.

What I offer is an educated, experienced, and intelligent approach to planning and investment management. I have clients who have been with me for many years because we have developed the synergy to work together and because there is a level of trust and mutual respect; we also communicate well. I deeply value these relationships; many have become friends. It's not just the learning curve that keeps me coming back but the many valued relationships.

I hope that this has helped you in some way and welcome constructive feedback. Please call if you would like to discuss any of these issues.