If you’re going to look around you, what do you think makes a person great in a particular field? Is it because they have become a master of one specialization since birth? Or is it something else?
Do great investors become great because they started early? Is everyone really has no chance because Buffett started at 11 years old and everyone starting older than that will never become someone like him?
I came across this video that explains clearly what I believe — that mastery of something does not necessarily mean you’re spending most of your time specializing in a certain field. Its more of a cross pollination of ideas that makes anyone a master. But, don’t get me wrong, I still believe that deliberate practice of more than 10,000 hours will still result in mastery, but I don’t think its the only criteria for being a master at something. If that is the case, why are people with Phd degrees on Business Administration aren’t populating the list of billionaires? You will become competent in deliberate practice, but to truly master something will require much more. In other words, its just one part of it.
Truly mastering something means there is cross pollination of different experiences and mental models that makes you think differently from the pack.
The video below explains it brilliantly.
The idea of dabbling around different fields and taking with you what you learned is how MMA come to dominate martial arts. Gone are the days of a martial arts master specializing in just one kind of martial arts spending his lifetime on just that one art. We know that those kinds of breed of martial artists will not stand a chance with someone who have decent knowledge of all the aspects of fighting and exposure to different kinds of arts. Taking all the good parts of each martial art and combining them into one strategy is much much better than being a specialist.
Same is true with investing. You can’t do investing if you only know investing. Meaning, you can’t properly invest if you only know how to read financial statements or make financial models or worst read charts. You need a lot more knowledge from each and every field of human knowledge and take with you the best mental models.
Thinking in Probabilities
The first thing an investor should know is how to read financial statements and use fundamental analysis. You also should know the intrinsic value of stocks you are buying. But it’s not the be all and end all of investing. Knowing how to read the financial statement can only get you so far.
One such aspect of investing that most people ignore is thinking in probabilities. Its not enough that you can only read financial statements. Its not enough that you know all the ratios. You also need to know how to think in probabilities. Actually knowing the risk and reward of a bet is paramount to investing. Knowing how much to bet, how much you can lose and knowing when to go all in and when to fold. And it doesn’t come naturally. You really have to know it and use it regularly not only in investing, but also in your daily lives. What’s the probability of dying from COVID without a vaccine and dying from a vaccine complication? — Is in the same line of thought when you think “what’s the probability that a company will go to zero?”
And you can’t deny the fact that every genius out there on any field didn’t became a genius because they focused on one special thing and spent the rest of their lives on just that one thing. There are exceptions of course. Though, focus is great to have and is one of the key ingredient to be successful, but you still don’t know what you don’t know. And being a specialist makes you live in some kind of bubble, unaware of the other fields that might make you better. And its tempting to look at things the way you want to look at it.
A man with a hammer everything looks like a nail.
As the saying goes, if you’re focused on one thing, its like you are using the same thing that’s always been familiar to you to judge those things. Like using only one lens to look at the world instead of using many lenses (mental models). And its no different with investing.
In investing, the obvious way to become great is to read annual reports, learn all the fancy ways to analyze the stock, know all the formulas, know all the financial models, but it is just like being a specialist PhD on something without having to use the other disciplines that could help you invest. Knowing how to read the financial statement is just the beginning.
There is no doubt that all of the great investors have a history of gambling or good at card games or are atleast fascinated by the fact of using probabilities to win at a gambling table. We all know Buffett likes Bridge. Munger was a good poker player during his time at the military. Greenblatt on the horse races. Marks on the backgammon. Thorp on blackjack. And the list goes on. Investing is not just pure, “knowing how to read the financial statements”. You also have to use other field of experiences to give you an edge since everyone has the same information as you. Information is everywhere.
I am fortunate enough to have learned probabilities in computer engineering. Its one of my favorite subjects aside from Philosophy. To think that logic and probabilities came from Philosophy is no accident. They are related and an investor would benefit from learning them, even just learning the main basic ideas.
But I don’t consider myself great at probabilities, as in I’m not as good as an actuary to know the probabilities of things. And that’s the beauty of it, you only need to know enough to help you. If you know the main idea of a discipline, you can bend it to your will and help you invest.
You also need to know psychology. Psychology of self and psychology of others. The 2nd one is easier than the first one. Because we are the easiest person to fool. If you read up on psychology, particularly those that represent all of the human misjudgments, you’ll be able to think clearly and not be swayed by other people. You will get to form your own opinions and see the madness in others.
You will be able to know if something that crashed is actually permanent or just people being scared.
You can not underestimate the fact that all the booms and bust in our world, are as a matter of fact, just a cycle that repeats itself over and over again. And because of psychology, it repeats. Since people never change and new bloods can’t remember the past they never experienced, they are bound to make the same mistakes their predecessors have learned the hard way.
I just recently finished reading books about the market crash of 1929. Then read books about 2001 crash and the 2008 crash. And all of them have a common theme. They never learned from the past. And it just repeats. The causes are different but its intrinsically the same thing. So if you’re knowledgeable about history, you have an edge. And you’ll also be well prepared.
Why investing made sense to me is because its basically a simple form of engineering. Margin of Safety is a concept that came from engineering. You know the idea that, in order to build a bridge that can take on 10 tons of weight? Well, you have to build it stronger that can take on 15 or 20 tons of weight. Why? Because of margin of safety. In case, you made made a mistake, or someone made a mistake of driving through that bridge that is heavier than 10 tons, the bridge won’t collapse.
The same is true in investing. You don’t want one crash to wipe you out. You don’t want to invest in a company where you will never get your money back. And in the case of me making a mistake of analysis, you don’t want your money gone in case you made the wrong analysis. You got to have a margin of safety and its the basis of engineering and the basis of everything investing.
All other forms of investing like diversification is just a way to mitigate risk. A way of adding a margin of safety to a portfolio. You need to be able to spread your eggs on different baskets but not too much. If you’re investing in the Philippines, why not invest in the US?
There are lots of ways to diversify and it may not only be in stocks of other countries. Other forms of investments may also provide safety for you. Just because you invest in stocks does not mean you are a specialist in stocks. Like I said, the best way to become a great investor is to be knowledgeable of many things. And learning about investing on other things like real estate, private equity is just a natural flow of learning for an investor.
I just recently got interested in learning about real estate. And while learning, I realized that real estate is more about knowing the laws rather than actual investing so I read up on property laws. Nobody is telling me to read all this stuff. I just find it interesting and just following my curiosity. I even applied to a job for a publicly owned real estate company just to learn about the real estate field. I have since resigned once I learned all I needed to learn.
You can consider this my scuttlebutt approach but I did learned a lot. And I wouldn’t learn much about all those things I know now just by reading financial statements. Sometimes, reality is so much different on what we read. You really have to see it with your own eyes and make your own conclusions.
So the most important part of being an investor is not merely because of knowledge related to finance. It’s actually those things that are not related to finance that are more important. The more you learn, the more you get competence and the more edge you have. And you add to that edge if you read a lot or experience a lot.
Some of the great investors are not graduates of business degrees. Soros was a philosophy major. Akre, english literature. Burry, a doctor. Pabrai and engineer. You can become a great investor if you can use your knowledge of something and turn it over to investing. That’s why reading and taking courses are very important for an investor. Your mind is your capital. You should invest in it regularly.
In conclusion, my point is…
You have to learn a lot, from different fields…
Its better to learn a lot of things, outside of investing and finance. Than it is to focus all your efforts to learning every little detail of analyzing a financial statement. To become a better investor, not only you should become a businessman (like Buffett said), you should also become a student of the world. Be interested in a lot of things and expose yourself to a lot of things. You may feel that what you are doing does not relate to giving you an edge on investing, like learning how to play the violin perhaps. But you’ll never know. If you’re interested in something, just do it. And with it, you’ll learn and you increase your circle of competence.
I am no way a great investor. I would consider myself just average. This post is just my opinion of what I notice other great investors are doing. And hopefully it would help us become great just like them.