Monthly Archives: September 2011

10 Ways to Improve Your Investment Process – #8. Pay Attention to the Details

The eighth idea to improve your investment process is to pay attention to the details.

The book The Extra 2% tells the story of how former Goldman Sachs colleagues Staurt Sternberg and Matthew Silverman took over operations of the Tampa Bay Rays baseball team in 2005. Prior to that, the team had been a disaster and a perennial bottom feeder.

The turnaround was dramatic. In 2008, the Rays became the first team in modern Major League history to hold the best record through Memorial Day after having the worst record the year before. They went on that year to play in the World Series where they lost to the Phillies.

How did they do it?

They relentlessly sought to improve all aspects of their baseball process, no matter how small – from parking, to concessions, to how they looked for new players. To identify undervalued ball players, they carefully analyzed statistical data – a method known as sabermetrics – to rebuild the team around lesser-known young stars.

The lesson here is fairly obvious, yet nonetheless powerful: to be successful, you need to look at all aspects of your process and look for small incremental ways to make them better. If you plug away at it, these little things – the Extra 2% – can make a huge difference.

In an earlier post on improving your investment process, I mentioned how casinos achieve a good outcome by focusing on their process, namely only playing games where the mathematical expectancy is in their favor. But they don’t stop there. They maniacally focus on little things to keep folks playing, knowing the longer people play, the more the house earns: free drinks, comps, table limits, shoes vs. single decks, “help” from the dealer, minimum bet sizes, classes on how to play, an exciting ambiance, comfortable seats, attractive servers, cameras to prevent cheating, and chips instead of cash to foster mental accounting. Nothing is overlooked.

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Links of Interest – September 9, 2011

Third Point Letter to Yahoo! Board – Includes a valuation of Yahoo!

Eddie Lampert Compares Capital Allocation Decisions Amongst Apple, Microsoft and Sears

Bruce Berkowitz interview in OID on Wells Fargo – November, 1992 – Provides a great template for how to think about investing in large banks, i.e. BAC, C, etc.

Prem Watsa Interview in CFA | ValueWalk.com

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10 Ways to Improve Your Investment Process – #7. Manage Yourself

The seventh idea to improve your investment process is to manage yourself.  I want to focus on three components of self-management: management of cognitive biases, management of your time and management of your work ethic.

We all have certain quirks in our mental wiring that impair our judgment. Behavioral scientists calls these cognitive biases.

They include being overly confident in our abilities, giving too much importance to recent events, and discounting information that runs counter to our beliefs. They influence us on a subconscious level and geniuses are not excluded.

The problem is that they lead to irrational and costly decisions.

If you want to avoid these errors, you need to understand these quirks and take precautions. Following Munger, I recommend making a checklist of the these misjudgments and studying it. You can then run it down when you’re making an important decision.

You could also collect the best books and articles on the subject and make their study a serious part of your professional development.

The second element of self-management is time management.

Time is arguably an investor’s scarcest resource. There is always something to do, along with unlimited distractions and interruptions.

A successful investor must become a master of his or her time. Having a well defined process is half the battle because it gives you a tool to say NO to things that don’t serve your objectives.

Fortunately, there are a number of good tools available to help you manage your time. Two I like are Getting Things Done by David Allen and The Pomodoro Technique by Francesco Cirillo.

Getting Things Done gives you a robust process for managing your tasks and projects. It uses checklists to manage everything from what to do now to thinking about your career over the next five years.

The Pomodoro Technique gives you a simple approach to remain focused by doing your work in pre-planned 25-minute chunks, where you work hard at managing interruptions.

The Pomodoro Technique also allows you to track your time so you’ll know how it’s really used. Self delusion is not a useful component of a winning investment process.

The third element of self-management is managing your work ethic.

Woody Hayes said, “I’ve had smarter people around me all my life, but I haven’t run into one yet that can outwork me. And if they can’t outwork you, then smarts aren’t going to do them much good. That’s just way it is.”

Alice Schroder credits much of Warren Buffett’s success to his work ethic. When digging into Buffett’s life, Schroder found no holy grail; rather, she found an intelligent man who worked very hard.

Improve your management of your cognitive biases, your time and your work ethic, and you’ll improve your investment results.

Links of Interest – September 2, 2011

Books recommended by Seth Klarman from Corner of Berkshire and Fairfax

Bill Nygren Buys Google Inc., Walt Disney, Encana Corp., Sells Johnson & Johnson – Includes Nygren’s thesis on Google.

GuruFocus Interview with Renowned Investor Joel Greenblatt – Good insights and another plug for using Value Investors Club to study valuation case studies. Buffett said that if he taught a class on investing he would just do one case study after another.

To Invest Well, Stay Bored and Eat More Often | Alice Schroeder: The Official Website

Do You Suffer From Decision Fatigue? – NYTimes.com