I read this study over on the Journal of Obesity – The Effect of High-Intensity Intermittent Exercise on Body Composition of Overweight Young Males and it got me thinking about personalities and trading vs investing. It is revealing that the High Intensity workouts that are being made popular by Crossfit, 4 Hour Body, P90x, The Biggest Loser, etc. are the kind of workouts that show quick results and burn a lot of fat. It is also interesting that a dabble into day trading with the right methods also show quick results and increase bank accounts.
What is more revealing though is that these high intensity workouts are not usually sustained over a longer period of time. It is easy to join Crossfit or start doing P90x and burn through all the fat, but once the majority of the fat is burned the obvious need to stick with the program goes away and the participant is left with a lack of knowledge of how to maintain an enduring healthy lifestyle. This results in a cycle of high intensity workouts, lulls of activity, and high intensity workouts in the same way that the diet industry has created a cycle of diet, indulgence, diet. There is a lack of focus on enduring the lifestyle change in favor of a more efficient route to fast results.
The same is true for investing and trading. I personally have done the day trading thing, watched the S&P 500 futures market go up and down and make trades based on technical indicators. This is actually a great way to make money. I have done the same with the 3x ETF such as $TNA, $FAZ, etc. also a great way to make money. Although the rapid effectiveness or upside of this type of trading has fewer and fewer similarities with high intensity workouts as the downside risks are a lot lower for trading than they are for overworking your body. What is interesting though are the similarities…
If you think about it, good value investing is a lot like good endurance excercise. There is a focus on the details, an understanding of the factors involved, an appreciation that small decisions will have a long running impact, and a general lack distraction caused by interim behaviors. This is drastically different than the short term goals that come about in day trading and high intensity workouts.
Focus on details
Focusing on details of endurance running is all about the details of the form, do you need your foot to land differently on different terrain and if it does, what is the corresponding modifications to the rest of your form (back, butt, etc.). I find that what make the difference between a great long run and crappy long run is the difference in what details I am worrying about. If there are cars and lots of painful sharp rocks that I need to avoid I feel like the run was kind of crappy.
Similarly an Real Estate investment where I have to worry about the light bulbs going out or the tenant actually paying the electric bill is a crappy tenant and crappy investment experience. The same holds true for equity investments. If I make an equity investment and the company is churning a lot (e.g. $IGOI) I get frustrated with the investment. I worry about the new website launch that SUCKS, I worry about the shitty deal with Shaq (I haven’t seen Shaq anywhere explaining the vampire power problem), I worry about the mediocre partnership with brightstar.
The important thing here is that when going on an endurance run or making an investment you need to have a plan for focusing on the details because in the end all of these details are what make the run or investment a good one.
Variables that affect the investment
Understanding the variables that will come into play over the course of the run… fatigue, the hill at mile 20, the ongoing calorie problem, hydration, etc. are important to understand. Just like the details – these variables will creep in and suprise you over time. If you are getting a cramp for example, you likely weren’t hydrating properly to start with and will hopefully know better next time.
Understanding those variables in an investment can be more difficult, but they are just as important. Knowing how the Chevron refinery will affect oil and gas prices and therefore the shipping of goods that your investment is depending on is important. Not because you need to personally plan for what you’ll do when the cogs goes up for the Amazon on Prime accounts due to the gas/shipping price increase – but because you need to see if Amazon is planning for those things and therefore demonstrating expertise in their business.
As an investor it is important to see that landscape of variables from private and public sources that will affect business and determine if the managers of that investment have a clear grasp on them. If they don’t – you can simply think of your investment as planning to go for a 30 mile run without food or water and expecting to have no problems.
Making decisions is a never ending topic of discussion. How people make decisions, what part of the brain is used, etc. etc. I even have a post on the topic that I put together after reading Daniel Kahneman’s Thinking Fast and Slow (Highly recommend this book by the way). Decisions during an endurance run are important and difficult. The reason they are difficult is that your mind and body are working on running and your adrenaline is at a higher than normal level. You can easily sustain small to moderate injuries on a run without even noticing due to this physiological difference in how your body is operating. This of course makes it harder to make decisions about the course (keep running next to the exhaust fumes or try to navigate an unknown trail), about your personal ability, and about your condition.
The hard part about investments is that when they start to lose money an investor has to make a decision. Has the thesis on the investment changed and if it has should I close the position? This is true on building products, building startups, investing in markets, or investing in Real Estate and with all of these it is hard to make decisions due to the emotions and time that have previously been spent on the investment. Just like during an endurance run, these mental and physical factors cloud the decision making process and make it harder to make the decisions.
Experience and reflection are critical factors in building these decision making capabilities. The ability to recognize situations and make decisions quickly only comes with both of these. The
Short term influences
Short term influences are pretty varied when endurance running, in fact today I was out for a ten mile run on my way to my son’s soccer game. I took a wrong turn because I couldn’t run down a particular street I thought I would be able to and got a little lost. My ten mile run got a little longer (I think I added an extra mile or so), the point is though that my pace slowed down due to the confusion and I started to get frustrated with being late to my son’s match.
The same holds true for investments in businesses for the long term. There will be many short term influences from economic influences to market influences that will change the appearance of value or strategy. The long term investor needs to focus on what the overall strategy is and whether or not the management team can acheive those despite the short term influences. I still made it to my son’s game today, a little later than I had planned, but arrived and watched the win. The same holds true for many of the investments I have made when the team held on despite those short term influences and moved to the end goal.