Process, Practice, Perseverance

Have you ever wondered why a doctor’s clients are called ‘patients’? Even a more interesting question, why do doctors call their work as ‘practice’?

Well, one of the reasons is that you can’t become a good doctor without practicing what you learn in textbooks. For that matter, any work done under any profession is nothing but practice. And that doesn’t exclude investing in the stock market.

I recently read a nice post from John Huber on his investment process. Here’s something John wrote that caught my attention –

…stop trying to read everything under the sun and get out there and actually start investing—start valuing companies, make investments, learn, repeat, etc…Whether you’re playing the piano, hitting a sand wedge, shooting a jump shot, riding a bike, or even driving a car—the way you learned was through repetition. The same can be said for valuation. Reading books is fine, doing case studies is better, but actually valuing companies and making investments—practicing—is the best way to learn.

This made me rethink how I am spending my time. Reading about investing is not investing. It only assists in investing and beyond a point it starts becoming counter-productive if I am not applying what I read.

So what distracted me from practicing investing till some time back?

One thing that I figured in my case was impatience. I expected that any investment research work that I did had to yield result – in form of accepting or rejecting the idea – immediately. I expected my research process to end at a decision. What I forgot was that investing process is non-linear.

Investing Knowledge is Cumulative
As I have realized in my interactions with Vishal and other value investors, the best part about investing is that no effort goes waste. If you spent one month evaluating a business, reading everything about it, running through the numbers, estimating the value, and ended up discarding it – it’s not a waste of time. It’s time well spent.

John writes in his post –

Our investment results in investing are due to work and effort that has been accumulating for years. Buffett was reading Bank of America reports for decades before ever buying a share. The work that I am doing today is not going to pay off tomorrow. It is going to pay off at some unknown time in the future.

What makes value investing versatile is that all the knowledge that you gain while studying businesses is cumulative. When you study a business, even if you end up rejecting it, you gain important knowledge about the industry in which that business operates and at the very least learn more about characteristics of poor businesses.

Noted value investor Mohnish Pabrai, in his book The Dhandho Investor, describes how his knowledge about oil shipping industry (which he gained while researching a stock that he eventually didn’t invest in) helped him find another bargain later. He wrote –

I knew nothing about the oil shipping business, but was curious to find out more about the industry and why these businesses had such high dividend yields. I spent a few days studying Knightsbridge and the oil shipping business…Knightsbridge was making astronomical profits at the time, and the dividend yield went through the roof. But, of course, it was not durable or sustainable. At the time I studied Knightsbridge, I also took a look at half a dozen other publicly traded pure plays in oil shipping. Since the dividend could go to zero, Knightsbridge was an easy pass.

In investing, all knowledge is cumulative. I didn’t invest in Knightsbridge, but I did get a decent handle on the crude oil shipping business. In 2001, we had an interesting situation take place with one of these oil shipping companies called Frontline. Pabrai Funds had a 55 percent return on the Frontline investment and an annualized rate of return of 273 percent. Not bad for a near risk-free bet based on boning up on the nuances of oil shipping by reading a few documents.

In our interview with Ian Cassel, when we asked him how he went about finding his investment ideas, he said –

I find ideas through a combination of: word of mouth, private message boards (MicroCapClub), public message boards, reading filings and press releases, screens, and serendipity. I wish I could tell you there was a one best way to find ideas but it’s really the combination of all these things. You just need to put in the work and turn over a lot of rocks.

In my countless discussions with Vishal on how he works on finding his own stock ideas, he has credited a lot to serendipity and cumulative knowledge that he has built up over the years by reading and analyzing companies from various industries. He tells me –

Over a period of time, if you continue to read, study, and analyze businesses, small bulbs keep lighting up in your mind and you are able to connect them well to form ideas that you never thought existed.

Press On!
Einstein said –

It’s not that I’m so smart, it’s just that I stay with problems longer.

The former US President Calvin Coolidge said –

Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan Press On! has solved and always will solve the problems of the human race.

So don’t worry if you haven’t found any businesses worth investing after spending weeks and months together analysing and rejecting couple of dozen stocks. If you keep at it, the day is not far when you’ll be connecting the dots faster than you imagined.

Press on!