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NATURE VS NURTURE


ubuy2wron
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I have been involved in investing for more than 25 years ,for the last decade I have managed a pretax unlevered net return of 18% compounded per annum on my personal portfolio. I have been a student of the investmant Titans for all of my life and I have concluded that the vast majority of great investors are hardwired from birth for success. I have come to the believe we all have an innate investment IQ and a Wharton finance degree will not add all that much in terms of  excess investment returns if you have not been blessed with this innate investment IQ.

To use an anology to make my point. I am a LOUSY golfer ,if I expended as much time and effort on golf as I do on investing I believe I would still be at best a MEDIOCRE golfer.

As an investor it probably makes sense therefore to try to determine as early as possible wether you have got IT or not. If you do not have IT, spend your spare time on improving your golf game  and give your dough to some one else to manage.

  I invite any debate on this topic and I suspect that many of the readers of this space have a very healthy dose of IT.

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I've never been a believer in the idea of IT.  I'm young and I still remember when I first began investing.  At the time, there was a strong urge to learn investing; and combining that energy with curiosity made me better each year; and that passion has maintained for a good eight years now.

 

Was this desire to invest an innate part of me?  Well , I remember that my interest was first peaked by a book my dad gave me.  I also remember at the time i spent a LOT of time on video games; and i thought that investing could be a "game" for which I would have something valuable to show for it.  (As opposed to all the titles and accolades i was winning for Warcraft III).  

 

So some would say that it was inevitable that I would become a good investor because i had that passion.  But then, I also know as a high-schooler, I was scrawny and not very athletic.  And so, that drove me to basketball, and I took it very seriously for several years until I got injured.  I was also terrible at communicating when I was young; but over the last few years, it has been a goal, and today I find myself very comfortable speaking, and fairly good at it too.

 

Finally, i mentioned an injury in basketball, which basically took me out of the game for the last year and half.  But this being my last semester in college, I really wanted to win one Intermural championship before I left; and so once again i devoted my time to getting back to my old self.  It was much more difficult this time; i didn't have the same mental energy as I did at 15, and it was depressing at times.  But it came back as i stuck with it; it took only about 5 weeks of intense rehab and drilling.  

 

So thinking back to when I was 14, right before i picked up that first book on investing.  Did I have IT to be an investor?  Did I have IT to be a good speaker and basketball player as well?  I believe the truthful answer was I didn't have anything that I didn't earn through energy, discipline, and curiosity, as well as intense desire to see a certain result.  And I was lucky to have a few intellectual breakthrough's along the way.  One big thing I learned about this most recent basketball rehab experience is just how easy it is to get caught focusing on the wrong things; and it is so very hard to be certain when you've came on to an idea that's right over wrong.

 

Hopefully my personal experiences and feelings on the matter are of some value to others here.

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It seems to me that having the IT gene is a necessary condition, but not sufficient. If you don't have the IT gene, then forget about investing the funds yourself. Assuming one has the IT gene, he or she needs to grow up in an environment that exposes them to finance, markets and investing (As Buffett said many times having the IT gene a few thousand years ago would not have saved him from lions). And then that person has to work very hard to succeed.

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Malcolm Gladwell's recent book, Outliers makes a good case that what's necessary for extraordinary success in almost any field is not only ability, interest and opportunity, but most importantly timing and about 10,000 hours of appropriate practice and study to become a "genius".  This covers diverse fields and achievers:  Buffett, Gates, Mozart, Michael Jordan, The Beatles, chess masters, -- You  name it!  

 

Interestingly, most fund managers don't have much opportunity to practice value investing skills because their main concern is saving their jobs by not underperforming -- a short term focus that inhibits picking bargains from stocks that fall sharply or selling bubble stocks.  Their domain for action is often restricted to stocks that are neither hot nor cold where position changes will have little impact on tracking errors.  The main exception is a tendency to sell stocks that have tanked, when the value may not be impaired, because their peers are doing the same thing.

 

The book's fascinating! Turn off your screen; get a copy and read it!

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Ubuy,

 

This discussion has interested me for quite a while to be sure, and I tend to agree that there is an "IT" factor, but would opine that the "IT" factor is more a confluence of traits rather than a single gene, and would comprise the following:

 

* Numeric Prowess - Investing does not require one to understand differential and/or integral calculus, but one does need to be comfortable with numbers and needs to be able to analyze numbers. The example is that my wife can balance a checkbook, but she is not wired to be a numeric analyst.

* Intellectual Curiosity - There needs to be an internal drive to understand how businesses function. This drives the would-be investor to be educated in how companies work, how they make money, and how financial statements reflect (or, in some cases, DON'T reflect) the economic reality of this.

* Emotional Control - Buffett often cites this as the most important factor, and who am I to argue with him! It is not easy to see the price of an investment plunge, whether it is company stock, mutual fund, etc. Peter Lynch opined that more investors LOST money on his fund then MADE money, despite an absolutely stellar run. This is because as the NAV fluctuated, many "investors" became scared when the price declined and sold at a loss. Fear overcame analysis.

* Drive - A very wise man once told me that knowledge and intelligence are additive to one's overall success in business, but drive is a multiplier. An individual with mediocre education and mediocre "brains" but superior drive will be more successful than one with superior education and "brains" but mediocre drive. Bill Porter (http://en.wikipedia.org/wiki/Bill_Porter_(salesman)) clearly demonstrates the levels of success based on high amounts of drive. Conversely, a former co-worker of mine, named "Bill", was a Masters degreed Mensa member who waited tables.

 

If one were able to assign a numerical "score" to these traits, successful investors would have differing "scores" for each but the ending sum/product of these scores would achieve a certain level. Of course, there are some outliers like Buffett/Munger who score at or near to top in ALL factors but most of us are only mediocre in one or two of the factors listed above. The sum/product still allows for a level of success, but not the "off the charts" success of Warren or Charlie.

 

-Crip

 

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I'd say 'Common Sense' trumps a lot of other investing abilities/skillls. Most people try to make investing much more complicated than it is and spend most of their time digging through crappy companies in industries they know nothing about.

 

I don't really think the time you put into it is a huge factor. When you exclude all the companies and industries you don't understand, it makes investing much easier.

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Common sense and drive. If you have those, the rest will take care of itself.

 

A CFA, an MBA, a job with a large money manager all will delay and/or hurt your ability to become competent. This is a lonely business, committees and consensus will only hurt your chances. And if you do manage money for others on your own, treating 'your business' like a business will also hurt you.

 

Common sense and passion, that's it. 

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Crip I think  that Buffett and you are right in that Emotional Control or a being natural contrarian is VERY important. My point in raising the topic is first to just discuss the topic because it is interesting but also as important to make the point that if you believe  in the existence  of inherent Investment IQ it surely becomes advisable to let someone who has IT to run the bulk of ones personal investment portfolio . It would make zero sense for me to play golf against Tiger Woods or any other PGA card holder for that matter for money no matter how much I practiced because I just do not have the natural born gifts required to compete. Given that we all play against investors of Tigers caliber every day in the investment game it just seems foolish not to, if we can, hire them to play for us at a reasonable price. Which is one of the reasons FFH is currently a significant portion of my investment portfolio. This also led me to purchase shares in BRK-B when they were selling for less than 3000.00 in the fall of 08. I "think" I am a pretty good investor however I KNOW that both Prem and Warren are GREAT investors hence my willingness to deploy a portion of my capital in their direction when it appeared that I was paying little for that expertise. Gotta go catch a plane all for now. 

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Schooling (MBA, CFA, etc) can make you a more effective investor, but you also need the innate ability to come up with your own applications/innovations. You have to have both, & be mature enough to realize it.

 

You also need interest & competency. We’re accidental investors, as we don’t have the capital to buy adequate owner-manager stakes in the companies we like. Taking the business versus investment view lets us practice, & if we’re any good – build the necessary capital the old fashioned way. By extension -  we might do well as CFO, but suck as PM; similar skill-sets but different application. 

 

SD

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Let's marry a couple of thoughts here.

 

First, ubuy:

"I "think" I am a pretty good investor however I KNOW that both Prem and Warren are GREAT investors hence my willingness to deploy a portion of my capital in their direction when it appeared that I was paying little for that expertise."

 

Next, bookie:

"You can get all the education in the world ( and it helps) BUT you can't teach common sense."

 

Ubuy's post points to a key componant of investing which is humility. Having one's ego is check is part of emotional control. My employer is a very smart man, and has been quite successful in business life, but is not a good investor. His ego does not allow him to look at a Prem Watsa and say "I want to let this person be a steward for my capital" as he feels that he can and would do more with it then Prem. He feels that he is smarter than most anyone else and his ego is way out of whack. The acknowledgment that there are others better than you at investing/managing is common sense, really, as technically only one person can be the absolute best at anything. This is not a difficult concept to grasp, but there are those out there whose ego will not let them grasp this. I've said this before a few times but look at the gurus that are followed on this board...Buffett, Wunger, Watsa, Berkowitz...all individuals who are quite humble (despite Charlie's blackbelt in "chutzpah"). The members of this board are much more likely to demonstrate a high degree of humility then the Cramers of the world. Humility, really, IS common sense.

 

-Crip

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When i think of nurture vs nature a few things come to mind

 

- Mark Seller's famous speech about this: http://www.beearly.com/pdfFiles/Sellers24102004.pdf

- David Rock's presentation at Google where he talks about the brain and the huge imbalance between threat response and reward response: 

Related to this, I wonder if some people either are just trained to handle the threat response, or their brains are wired to not feel it..  See a few points below:

- Jason Zweig's book (I haven't read it all yet), where he talks about how they imaged his brain, and while they saw that he was still susceptible to the same neurological conditions as everyone else with regards to losing money and placing bets, he had trained himself to be more patient, and the images showed that.

- Some research I read (I think it was in "Why smart people make dumb money mistakes" which talked about how they ran experiments asking people to take a bet.  People with a damaged Amygdala(I think that's what it was) would take the bet regardless of whether it made financial sense or not.  The theory being that the Amygdala is the piece of the brain that controls our ability to process threat/reward response.  What parts of the brain are and aren't active in people that can be an advantage or disadvantage here?

- Something Nassim Taleb said about Soros and some other great traders he knew.  Paraphrasing, he said that they were able to take one position with complete conviction one day, and then at the flip of a switch could take the totally opposite position, without so much as being bothered by their lack of consistency.  These types of people, who he inferred were basically sociopaths were ultimately going to do much better simply because they were built to not be bothered by such inconsistency.  (see Caildini's book Influence about how sales people use consistency to try to manipulate and close the sale.. the desire for consistency seems to be a trait most of us are wired for..)

- Genome - a fascinating book which I read a long time ago which illustrates with genetic precision that there are absolutely some things which are purely genes, and others which are a combination of nurture and nature.

 

Anyway, I do believe that it's a combination of both, and 10K Hours of training.  That said, the thing that bothered me about the 10K hours 'experiments', and mind you I'm no scientist, is that they didn't seem to have a proper control group.  Sure, people who were successful and brilliant were absolutely required to have 10K hours.  But neither Outliers, or "Talent is overrated"  talked about people who did spend 10K hours and weren't super successful (or maybe that's what how they distinguished between just practice and 'deliberate practice' .  Also I believe that there's some survivorship bias here.  If someone wasn't willing to get past the 1K hours of practice then does that automatically remove a whole pile of people who just didn't have the genetics to make it?  All food for thought, and probably questions I'll never have answered :-)

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Regarding Gladwell's book, the thing about the right place at the right time being so very, very major fascinates me very much. Bill Gates being born to relatively wealthy parents and attending a school with a computer, Buffett being too young to serve in WWII and being of perfect age during major stock market booms etc etc. Munger said it was absolutely apparent that the kids he had when he was poorer worked harder in their lives than the kids that came later, and he has no idea how to change that.

 

The scope of this problem on society level is almost incomprehensible. Just think of all the talent that goes to waste due to a huge number av variables interacting with each other (since there are lots and lots of them in each case and they must all function at the same time to generate "desired" effects naturally the lollapallooza effect generates a negative outcome more often than a positive one).

 

Regarding nature being a major component in investing ability I am absolutely positive that that is the case, though that is hardly anything controversial. Myers Briggs test would seem to be a good indicator in spotting highly disqualifying traits in people, like high scores in feeling and so on.

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Regarding Gladwell's book, the thing about the right place at the right time being so very, very major fascinates me very much. Bill Gates being born to relatively wealthy parents and attending a school with a computer, Buffett being too young to serve in WWII and being of perfect age during major stock market booms etc etc. Munger said it was absolutely apparent that the kids he had when he was poorer worked harder in their lives than the kids that came later, and he has no idea how to change that.

 

The scope of this problem on society level is almost incomprehensible. Just think of all the talent that goes to waste due to a huge number av variables interacting with each other (since there are lots and lots of them in each case and they must all function at the same time to generate "desired" effects naturally the lollapallooza effect generates a negative outcome more often than a positive one).

 

Regarding nature being a major component in investing ability I am absolutely positive that that is the case, though that is hardly anything controversial. Myers Briggs test would seem to be a good indicator in spotting highly disqualifying traits in people, like high scores in feeling and so on.

 

 

Myers Briggs is OK.  The DISC test may be more useful.  Some test for smarts -- Wechsler SAT etc. can help.  But the best test of all is drawing out a narrative of what a person likes to do and does well -- the "tropisms"articulated by the late Arthur Miller (the HR guru, not the playwrite).  Miller makes a persuasive case that our motivated abilities manifest at an early age and continue unchanged throughout our lives.

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