Supported by Greenhaven Road Capital, finding value off the beaten path.
Brian Stout joined John Mihaljevic on The Zurich Project podcast to talk about his journey to value investing.
1/ Deliberate practice. “The way that I learned things was deliberate practice. You can’t read about things or hear people talk about them and know how to do them. There’s a large amount of the learning process where you just have to go out there and do it. It’s like riding a bicycle. You can’t watch someone ride a bicycle and ride a bicycle for the first time.”
This is especially true writes Michael Mauboussin in areas with a strong skill component. Pilots, surgeons, and accountants can all use deliberate practice to get better. These domains can also use small sample sizes, checklists, and let history be their guide. Stout has used deliberate practice to get better at value investing and math, two areas where success is based much more on skill than luck.
2/ Epiphany. “When I read The Intelligent Investor I had that moment that value investors talk about which was, this made so much sense that it was like an epiphany.”
Lightbulb moments are the first step in finding an idea to follow the rest of your life. The second part is if you have the right attitude to do the work. Stout did, “pouring through a lot of information and thinking through problems resonated with me.”
If we combine the ideas of Mohnish Pabrai, Charlie Munger, and Cal Newport we get this:
What rare and valuable skills do you have the disposition to develop such that you choose to do that rather than go see the newest movie?
These skills don’t need to be hidden. Stout’s two areas of focus, value investing and mathematics, continue to be rare and valuable. Why haven’t these opportunities been whittled away?
“We’ve all heard that argument from various people and my response is, ‘you’ve taught students just as long as I have, how many times have we given them a textbooks that tells them how to do all these computations, and we teach them how to do it in the classroom, we give them homework on it and they still take a test and can’t do it. Even though you present all the information and show them how to do it doesn’t necessarily mean people will do it.”
3/ Two tools. “When I think about my investing framework there are two principles; there are some psychological principles that are very scientifically established and then there are some mathematical principles that are very relevant.”
In the summer of 2017, my daughters were wondering why they had to read and do math before using their iPads. I told them that reading and math were important because, in reading, you learn about people and in math, you learn about computers.
Jeff Annello gave us the toolbox metaphor for mental models. While Stout calls them principles we can think of them as containers too. In the “MATH” toolbox we have as many valuation equations as screwdrivers, or if you’ve been to IKEA more than once, hex wrenches. In the “PSYCHOLOGY” toolbox we have ideas like recency, availability, and inertia. Rory Sutherland told Shane Parrish that we sometimes forget about this set of tools. “It’s always more acceptable to spend money on infrastructure than to spend money on psychology.”
Like tools, skills are only as helpful as your ability to use them.
Thanks for reading,
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