December 1, 2005

Are you an expert ?

Found this new article from ‘Michael J. Mauboussin‘ from Legg Mason capital management ( Links to his other articles can be found on the sidebar and his website).

A highly relevant article for an investor, especially if one is looking at improving his expertise (not necessarily trying to become an expert)
Found the following excerpts very interesting (emphasis mine, comments in italics)

  • What it takes to become an expert appears remarkably consistent across domains. In field after field, researchers find expertise requires many years of deliberate practice. Most people don’t become experts because they don’t put in the time.

  • Experts train their experiential system. Repeated practice allows experts to internalize many facets of their domain, freeing cognitive capacity.

  • Intuition is only reliable in stable environments. In domains that are nonlinear or nonstationary, intuition is much less useful.

  • Expert investors exist. Unfortunately, it is not clear that their skill sets are transferable. Expert investors are likely a product of both mental hard wiring and hard work.

Experts are not casual about their domain. They build their lives around deliberate practice and practice every day, including weekends. But experts also report sleep and rest as critical elements of their results, and they avoid overtraining or overexertion. Evidence shows that performance diminution in cognitive tasks coincides more with reductions in deliberate practice than with aging.

As it turns out, expertise requires about ten years, or ten to twenty thousand hours of deliberate practice. Little evidence exists for expert performance before ten years of practice. 3 Even prodigies like Bobby Fischer (chess), Amadeus Mozart (music) and Wayne Gretzky (sports) required a decade of practice to generate world class results - So I have a long way to go. But I enjoy the process of learning, so it is both fun and profitable


Anonymous said...

What do you think of logistics companies ? Companies like fedex and UPS created lot of wealth for it share holders . Any idea why buffet gave it a pass to Fedex ?

It got business franchise which is difficult to replicate & decent ROE(15 +).With their investment calculator i found that stock (Fedex)return 100 fold retuns in last 27 years without considering divided reinvestment.

UPS was a privately held comapany till 1999.Then it came for IPO which valued the company around 50 billion $ .Wealth creation in this
case should be even better than fedex


Rohit said...

Personally , i find logistics companies to be a very good business with strong competitive advantage due
- brand
- wide distribution network
- economies of scale
- pricing power
In addition a lot of these companies are now becoming 3PL companies which a high growth area and works to the advantage of these companies. Also globally i think there are limited number of these companies, so the competition is not intense.
Personally, i am not sure why buffett has given a pass to these companies. I think it would be more to do with the valuation of these companies.
All the above factors are commonly know and could be present in the price. So may be there was not enough margin of safety in the price.
As a side note, munger has mentioned that one key points to look at technology is to see whether it would help the business or would hurt it. Technology as such seems to have been very helpful for these companies. i think the same cannot be said for telecom or airline industry.

Vidyanshu said...

Hi Rohit,

A lot of these articles at Legg Mason have been shifted to a different location. So you have a lot of dead links.