On reaching world class

Today I went first looking into some take-aways on the topic of reaching world class in a field of mental performance. Objective was to then try to apply this on investing, but gut stuck and instead ended up aiming to understand and define what is world class in investing

1. Study Techniques, Principles and Theory until they are integrated into the unconscious

"The deep structure of the human mind requires that the way to full scope competency of virtually any kind is to learn it all to fluency—like it or not." Charlie Munger

The book Focus - The hidden driver of excellence talks about two brain functions, automatic and deliberate. If you have trained enough for a mental task to be automatic you need no cognitive effort for a mental task. 

In order to reach world class level in for instance chess you need many thousands hours of training to free up capacity and attention for the extra level only seen at the top. The same applies in any field of expert mental performance.

2. Deliberate practice and breaking down the area of practice in narrow fields

"To get the results very few people have, be strong enough to do what very few people are willing to do"

Deliberate practice and the 10000 hour rule became hot stuff after the book Outsiders. The numbers of hours required is still debated. However, in most literature on performance it is clear that in order to reach mastery in any field you need to break down the field into it´s component parts and focus specifically on some sub-area of performance until you reach mastery and then move on to the next area.

Time alone will not take you anywhere as anyone can see in work-life where people having 30 years of experience often are less competent than people having 2 years. In Golf it is clearly not the one who plays the most 18-hole rounds that becomes the best golf-player (I played 18 hole a day for three years and still ended up with skills as golf player that is anything but exciting).

To really improve you need to break down your area of mastery into really focused sub-areas. In chess you might study very specifics of end game (e.g. King and 3 pawns) or in Golf it could be 2 meter puts in different slopes for 3 weeks straight. Such activities are designed to improve performance, with high quality feedback and repetition, and is not that fun. Most people never come close to satisfying the conditions of deliberate practice.

3. How about reaching world class level in investing?

I really struggle to nail down what world class investing is and sat over an hour to get down to the following two bullets (not claiming bulls-eye):

1. As the investor choose when to play or not play the game. A world class investor is one who are making best predictions/analysis in the games he choose to play. 
2. But much more importantly it is about identifying attractive games to play, i.e. 
• Having a process that serves you with world class investment opportunities. 
• Being able to identify those opportunities. 

Number one is about circle of competence, quoting buffet:

What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

I completely agree with Buffet that a world class investor needs to know the boundaries of his circle of competence. In having a world class decision making quality, avoiding mistakes is crucial and to do that you must only make decisions in areas where you know what you are doing. 

On the topic of world class investor, I however disagree with Buffet notion that the size of the circle of competence is unimportant. Here is how I reason:

In the investment Universe we have tens of thousands of stocks. Let's assume an almighty analyst had plotted a normal distribution on the expected value of all these stocks based on current available information. Let's assume:

• Of all these tens of thousands of stocks
• 1/100 have a EV return of 20% p.a. over a 10 year period
• 1/1000 have an EV return of 30% p.a. over a 10 year period

The world class investor is the one who can find and correctly evaluate and buy as high percentage as possible of his portfolio in stocks as far right as possible in this normal distribution. An world class investor is therefore one who:

1. Has a process which identifies many very high expected value opportunities
2. Can correctly evaluate those opportunities

Since very high expected value opportunities will be quite few, it is unlikely to overlap with your circle of competence if you have a narrow one. 

How to set up the process and how to practice to reach world class level in investing, I must think about and try to come back in some other post.

BR / RQ