Value Investing

Your learning process is just as important as your investment one

I spent time searching for the answer to this question: Why do the majority of individual investors underperform the market over a 20 & 30 year period?

A Forbes article reported these sad facts:

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Investor Learning
congerdesign / Pixabay

According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.

The same average investor hasn’t fared any better over longer time frames.  The 20-year annualized return comes in at 2.5%, while the 30-year annualized rate is just 1.9%. Wow!

I now realise that I’ve been asking the wrong question, as I should asking; what does the learning process of the individual investor encompass?

“The road to success is not easy or else everyone would be the greatest at what they do—we need to be psychologically prepared to face the unavoidable challenges along our way, and when it comes down to it, the only way to learn how to swim is by getting in the water.”
Josh Waitzkin

During the first 5 years investing my own money, I thought my returns was mainly due to luck, as I had earned 34% annualized returns.

Now luck is a major contributor in the short term (0 –24 months). But to sustain these returns requires more than luck, over the long term skill becomes the dominant factor.

And if you are choosing an investment fund, one requirement is a track record of exceeding the market return, of at least 3 years, anything returns in excess of the market under 3 years, should be put down to luck.

I was quite lucky when I started my investment journey, something I wasn’t aware of at the time.

My early schooling experience contributed to my unique ability to cut through the complexity, which allowed me to focus solely on the essential principles involved in investing.

I was not a top student, I wouldn’t consider myself in the top half. I struggled through my early schooling years, I was held back a year during primary school.

I received a lot of support from my teachers, they were encouraging, and for which I’m grateful for.

During this time I had developed, with assistance, a learning process that would pay dividends for years to come.

I always considered myself average, never smart or intelligent, and my early schooling years certainly contributed to this self-perception.

The small but significant difference that separates the top investors who outperform the market consistently, from the investors who consistently underperform the market is not their investment techniques or unique investment insights, they certainly contribute to their superior returns, but it comes down their individual learning process.

Investment is more art than science, there are numerous examples of men with formula’s who went on to crash spectacularly throughout history. (Read the book: When Genius Failed: The Rise and Fall of Long-Term Capital Management, a book by Roger Lowenstein.)

Simply having the mechanical techniques to invest rationally is not the key factor in earning superior returns.

Investing is a lifelong journey, there are two things that bring it to an abrupt end; an absolute loss, or, the investor’s own impatience with the investment process.

Both are intertwined with each other.

Hence, why Warren Buffett says the following: “The first rule is not to lose money, and the second is to observe rule one.”

The vast majority of motivated individual investors, young and old, make terrible mistakes during their investment approaches. They fall frustrated by the wayside while those on the road to success keep steady on their paths.

It is this impatience with the investment process that I’d like to talk with you about.

During my early schooling, I explained how I struggled with school and how the teachers were very encouraging, and it was this encouragement that helped me develop my own learning process.

We are taught at school to focus on results at an early age, there are the weekly spelling tests, the math’s tests and even homework is marked with a score, and don’t forget the yearly grade-book that you’d desperately hoped parents would not receive.

We begin to judge ourselves and our peers based on these scores. Your friends, family, and teachers will call you “smart” if you top the class for Mathematics, English or Science for instance.

Have you also noticed that most investors are focused on achieving specific returns, whereas the great investors do the opposite, they are focused on the investment process?

This plants that small seed, a seed that is referred to as “entity theorists” by psychologists.

Dr. Carol Dweck a leading researcher in the field of development psychology, has found that Children who are “entity theorists” — that is, kids who have been influenced by their parents and teachers to think in this manner, and we’ll call it the fixed mindset — are prone to use language like “I am smart at this” and to attribute their success or failure to an ingrained and unalterable level of ability.

They see their overall intelligence or skill level at a certain discipline to be a fixed entity, a thing that cannot evolve.

Whereas, Incremental [fluid] theorists, who have picked up a different modality of learning — let’s call it the fluid mindset — are more prone to describe their results with sentences like “I got it because I worked very hard at it” or “I should have tried harder.”

A child with a fluid theory of intelligence tends to sense that with hard work, difficult material can be grasped, step by step, and the novice can become the master.

The subtle differences in feedback can lead one child down the fixed mindset path and another down the fluid mindset path.

“Congratulations, You’re, so smart” cries one parent – no matter how well intentional the message – plants the seed of a fixed mindset into their child’s mind.

And, I’ve heard a mother say to their daughter, “don’t worry I wasn’t good at math’s either, girls aren’t good at math’s,” the child now associates success or failure to ingrained talent, something that is outside of their control.

Whereas, the parent that says; “If you study a little harder for the next test and you’ll do great! And feel free to ask me for help, I’ve been there before,” teaches the child that with just a bit more effort – study – she would have passed the test, thus associates success or failure to the amount of hard work.

So how does this affect individual investors in their investment process?

“The key to pursuing excellence is to embrace an organic, long-term learning process, and not to live in a shell of static, safe mediocrity. Usually, growth comes at the expense of previous comfort or safety.”
Josh Waitzkin

I was lucky to have received encouragement and not praise for putting in the work, at primary school. Carol Dweck has a book called Mindset I recommend you read.

Both mindsets are not fixed. This is important, as you go from fluid to a fixed mindset and not noticed it until a significant event occurs jolting you out of your arrogant state.

This may also help explain the research finding that fund managers born into low or middle class families consistently outperform their peers who grew up in a privileged family. Source.

The individual investor who is consistently persisting will have internalised the fluid mindset. They internalize their losses and turn them into lessons.

The losses are still painful, having a fluid mindset doesn’t ease the pain. But they have a system in place for when it occurs to lessen its impact and draw out the lessons.

“In my experience, successful people shoot for the stars, put their hearts on the line in every battle, and ultimately discover that the lessons learned from the pursuit of excellence mean much more than the immediate trophies and glory.”
Josh Waitzkin

This is where a coach becomes invaluable. 

If you are going to grow, move from one investment level to the next, requires you to be in a vulnerable state.

Think of it like a crab changing sea-shells.

A crab during its life will need to change sea-shells a number of times.

The sea-shell provides protection from prey, but to grow it has to change to a larger shell, which requires it to become vulnerable to prey eating it during the search for a bigger shell.

The crab is like an investor in a fluid state transitioning from a good investor to great investor.

Unlike the crab, a coach can provide the support and protection to an investor during this transition period.

“If the principles become dated, they’re no longer principles.”

Warren Buffett

Warren Buffett has moved from the small sea-shell that only accommodated the ideas of Benjamin Graham and moved, with help from Charlie Munger, into a larger sea-shell that accommodated both investment ideas from Phillip Fisher and Benjamin Graham.

If you are interested in 1:1 personal coaching sessions, email Coach Parris [] for an introductory 30 min free session.

All coaching sessions are confidential.