What is Your Investing Range?
I’m halfway through the book Range: Why Generalists Triumph in a Specialized World and already think it should be required reading for anyone looking to be a happy, successful investor. The author, David Epstein, was interviewed or talked about on multiple podcasts I listen to, which has turned into a surprisingly great way to develop a reading list.
A short summary of the book would be this: popular culture would have you believe in order to be the best of the best you need to specialize and intensely focus on a task for years at a time. This has been propagated by the popularity of Tiger Woods, the 10,000-hour rule, and other common examples of “specialists” rising to the top of their respective fields. However, according to Epstein’s research, most fields in life are suited for people with a range of knowledge and abilities.
It’s fairly easy to see the investing parallels when reading the book. Here are a few that I’ve thought of so far (I’m about halfway done reading), and can hopefully apply to become an improved and more content investor.
Read Outside your Subject of Interest
It truly seems like people get stuck thinking they have to read copycats of the Intelligent Investor multiple times a year. Sure, its always good to get a refresher on how to read a balance sheet and what matters when evaluating a stock, but re-reading what GAAP principles are for the 101st time won’t do you any good.
Here are some subjects that I’ve found helpful when trying to understand businesses and predicting where they’ll be in the future:
History: This doesn’t just mean textbooks. Read some biographies on successful companies and their founders. Crack open some accounts on the Great Depression and other events in U.S. history. We are still the same species today as a thousand years ago, meaning there’s plenty to learn from our past mistakes and successes.
Psychology: Again, this doesn’t just mean textbooks. The cliche recommendation for investors is Thinking Fast and Slow, by Daniel Kahneman. And while that is a great book, there are plenty of other fascinating reads like the Power of Habit and Drive.
Quitting Doesn’t Mean Failure
The whole premise around specialization, “Tiger moms,” and the 10,000-hour rule is that if anyone puts enough effort into something, no matter what they’re bound to be successful. However, this doesn’t turn out to be true in most scenarios.
In the book, Epstein talks about how researchers found a correlation between success in the National Spelling Bee and grittiness. But this does not necessarily mean people who go far in the NSB are more satisfied and happy. From Range:
“Similarly, some people might start memorizing root words for the National Spelling Bee and then realize it is not how they want to spend their learning time. That could be a problem of grit, or it could be a decision made in response to match quality information that could not have been gleaned without giving it a try.”
The idea of “match quality information” vs. grit is quite compelling for satisfactory investing. Lots of people try day trading or being an active stock picker. If you have a knack for trading, that’s great, and you should keep doing it. But if you consistently lose money or underperform the indexes, doubling-down and applying more “grit” likely won’t help you. This applies not only to your financial but emotional wellbeing as well.
Use Fundamental Principles, not Memorized Rules
A simple thought, but hard to put into practice. In the book, Epstein uses research on students learning calculus as an example of why fundamental principles will always trump just memorizing material.
Long story short, there was a study done on different calculus classes, and the ones with professors who taught broad principles over rote memorization for exam success gave students a better chance at passing upper-level courses. These professors had the worst class GPA and bad student evaluations but ended up being the most beneficial. Why? Because their students actually took real knowledge with them when the class ended.
Just replace calculus with investing, and you can tell the mistakes many people make when trying to increase what they know about the financial world. “Buy something with a low P/E” is a rule that might work sometimes, but you know what works better? Understanding the fundamentals of a successful business so you can apply it to any scenario.
Don’t Fall for What’s Popular
This doesn’t come from having a range of knowledge, but how specialization got so popular in the first place.
“Lazlo’s experiment had worked. It worked so well that in the early 1990’s he suggested that if his early specialization approach were applied to a thousand children, humanity could tackle problems like cancer and AIDS. after all, chess was just an arbitrary medium for his universal point. Like the Tiger Woods story, the Polgar story entered an endless pop culture loop in articles, books, TV shows, and talks as an example of the life-hacking power of an early start.”
It was popular in the ’90s to try and force specialization on children. Turns out that was doing them more harm than good. FAANG stocks are popular now because they’ve had good returns, not because they will have good returns in the future (I’m not saying they won’t, just an example). Falling for fads and following the crowd will get you nowhere in life or investing. Stop watching CNBC and research something yourself for once.
If you liked these insights, that’s great, but it really doesn’t do the book justice. I am convinced as a nation we need to transition to broad-based learning, especially as computer-automation increases with every passing year. I guess the saying is true: it pays to see the forest through the trees.
Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.