Learn to be a better investor

By: Melanie C
As with any pursuit, becoming an expert investor requires 'deliberate practice' and a lot of hard graft.

No-one in their right mind would think they could compete on the PGA Tour by reading the sports section of the paper and knocking a few golf balls around before retiring to the 19th hole to work on their game aided by 'memory selectus' and a noisy group of friends. Yet we often behave as if the equivalent will work with our investing.

It won't. But unlike golf, where our hooks and slices provide us with frequent and immediate feedback on our continued ineptitude, investing can at times be very forgiving. You could have made any number of mistakes over the past few years, for example, and still made excellent returns, and this lack of feedback can make it very hard to improve your skills.

Recent research in The Cambridge Handbook of Expertise and Expert Performance 2006 offers some insight into this mysterious area.

It shows that if you want to achieve expert levels of performance, it's going to take both time and application—with 10 years given as a typical time frame. It also takes a specific type of application—for which the researchers coined the phrase 'deliberate practice'.

Unfortunately this doesn't refer to the investment equivalent of kicking a football around with your mates. Rather, deliberate practice means setting specific and increasingly difficult targets and goals, finding a way to measure if they're are being achieved, and getting straight back to the drawing board if they're not.

Devilishly tricky

The stockmarket can be a devilishly tricky place to measure performance. It's not like tennis where lucky mis-hits are relatively obvious. As we've discussed before, in the cover stories of issues 135/Sep 03 and 160/Sep 04 for example, bad investment decisions can produce good investment results and vice versa.

Helpfully as ever, the great investment educator Warren Buffett identified this problem years ago and suggested focusing on 'owner earnings', which he essentially defines as the cash earnings of a business, less the average annual capital expenditure required to maintain its competitive position (see insert below for a full definition). When you purchase part-ownership of a business, as you do when you buy shares, your primary interest should be on those owner earnings.

Investment
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 

» More on Investment
 



Share this article :
Click to see more related articles