How To Master The Art of Investing

For those of you familiar with Malcolm Gladwell’s research in the book Outliers, you may have heard that it takes 10,000 hours of practice/effort/research to demonstrate extreme proficiency in an activity. Michael Jordan’s mastery of basketball and Paul McCartney’s mastery of music after 10,000 hours of practice are usually the textbook examples associated with illustrating this point.

But the general premise extends to investing as well.

If I wanted to master the art of real estate investing, I would spend two hours on the website

It is a freewheeling forum where real estate investors discuss every single intricacy and minutia of being a landlord/property owner. As I type this, the current hot topic on Bigger Pockets is whether or not a landlord can deny a prospective applicant for having a bad attitude.

If I wanted to become a property owner, I would spend hours poring over those conversations before making my first foray into real estate. I would check the information I read against what the other experts are saying, and I would quickly conduct Google searches on a specific topic anytime my BS radar went off or I wanted to explore a given topic further.

In fact, the reason why I do not have an ambition to pursue rental property ownership is a largely a result of the headaches I frequently read about landlords experiencing. From what I can tell, most property renters have a stunning disrespect for property that is not theirs, and the tales of wall and window destruction, fridge theft, and flooding basements that I have read about have convinced that it would be a better use of my energy to wait for undervalued energy MLPs and REITs that yield 8-12% to meet high income needs instead of trying to own a property outright with a 10% cap rate.

And obviously, this extends beyond real estate. If I wanted to become an expert on index investing and the general philosophy espoused by followers of John Bogle, I would spend a lot of time reading the forum on Even though I do not follow index investing, I do find it to be a sound basis for a strategy.

Furthermore, reading about the investing philosophies of others is helpful because it helps me to clarify my own. For instance, one area where I disagree with the Bogleheads is in terms of stock specific risk. When it comes to individual stock picking, a typical Boglehead will cite the usual litany of failed firms like Eastman Kodak, General Motors, and Wachovia to claim that individual stock picking is a futile exercise.

I, on the other hand, reach the conclusion that certain sectors of the economy are rarely prone to failure—conglomerates like 3M and Berkshire Hathaway, water utilities like Aqua America, electric utilities like The Southern Company, diversified healthcare giants like Johnson & Johnson, consumer staples like Coca-Cola and PepsiCo, housecare companies like Colgate-Palmolive and Clorox, and energy supergiants like Exxon and Chevron, all have a very low individual chance of failure. When you own thirty or so companies that meet share these characteristics, you can usually put together a very nice permanent cash flow that increases every year (note: Berkshire Hathaway does not yet pay a dividend, as of the time of this writing).

But still, my point here is not to discourage you from becoming a landlord or declining to practice index investing. I bet that someone who reads Bigger Pockets extensively and has good common sense could put together a nice collection of a dozen or so properties that send $10,000 in cash flow to your pockets each month. Likewise, a high-powered attorney or heart surgeon that has little desire to study specific businesses would probably be better off diversifying his funds across different market indices, focusing on his savings rate, and then going about life while his life compounds.

No one is born knowing about P/E ratios, stock splits, dividend growth histories, and durable business models. The fun thing about investing is that everything we do is accretive. It has that riding-a-bike element where once you learn something, it tends to stick with you. Once you learn why it is important to use book value as a metric with evaluating financial institutions, you probably won’t have to relearn that fact. Once you learn why book value is a meaningless metric for companies that buy back stock, you won’t freak out when you see companies trading at 8x book value while buying back its own stock. With investing, the things you learn tend to stick with you. And if you can give it thousands of hours of your time, you should be able to reach a point where you are more knowledgeable about individual companies than the talking heads you see on CNBC during the day.

Originally posted 2013-08-11 08:16:55.

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3 thoughts on “How To Master The Art of Investing

  1. Grant says:

    "…book value is a meaningless metric for companies that buy back stock…"

    Tim, could expand on that or write a post on it? To me a balance sheet is important for any company.

  2. I think the most important part of your post is pointing out how paramount it is to diversify across different sectors. If you are picking individual stocks you need to play with a certain amount of defense (pricing in a margin of safety, diversification, etc). I love reading annual reports and hoarding quality stocks across multiple sectors, but every investor knows you can get burned pretty easily buy a Kodak, Enron, etc.

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