Anyone who has played the game of chess for a fairly long time can understand the idea of ‘chunking’. Chunking, for the rest of us novices, is the ability of a seasoned chess player to identify moves or a pattern of moves within a game. This pattern recognition works like a filter in which they sort the good moves from the bad moves. This can make the difference between winning or losing the game.
So what does a novice chess player do exactly? The novice for lack of such pattern knowledge, tries to brute force his way till the end of the game. That means, the novice constantly uses trial & error to figure out which move to make. Basically trying to think ahead a few moves. This system has a very low rate of success, which is obvious because if pit against a master chess player the novice will be led into a pattern which is most favorable to the seasoned player. This will happen without the novice knowing anything of such a strategy. In fact an interesting thing to observe is that when two novice players play chess, they invariably play in a very random manner. There is no pattern to their movements & they eventually end up winning or losing merely because the game ends. But the clincher is not how many moves ahead we must see to win the game, but how many moves we can match in a pattern of good moves & bad moves.
Being a novice to investing & having spent relatively less amount of time doing it, I can only naturally see the same thing happening here. As a novice investor I have relentlessly looked at a lot of random & unwanted information & tried to make sense out of it. This has been counterproductive & at the same time, time draining. But these random explorations have had their serendipitous outcomes as well. Through my random exploring I have encountered sectors which I wouldn’t have normally looked at. Some ideas which I would have dumped as speculative on first glance, in fact turned out to be good probabilistic bets for the long run. I am still long way away from any pattern recognition.
Since investing is a long term activity, there is an implicit urge to predict future outcomes. Future outcomes are always unknown to everyone. Even if we knew the context of the event happening, no one can predict exactly how the event will take place. The previous line also sounds as a prediction, so a pinch of salt is necessary :). So it seems counter-productive to predict future events specific to an investment idea. Just like in chess, it hardly helps winning the game if you think a lot of moves ahead of your opponent. It just leads to branching of outcomes. This has been the problem with most of the computer algorithms playing chess games, which tried to predict ahead of their human opponents. Thus the human players were better at beating the machines, as they had a higher level of understanding of the patterns in the game than the machine.
Can investing be seen through this analogy? Does investing also involve a lot of trial & error to finally reach a level of sophistication which automatically tells us how to filter the information we receive? Like chess players, in order to improve their game study legendary chess games from the past, novice investors can also study scenarios where legendary investors have deployed capital. A lot can be learned from their application of knowledge in situations which we haven’t encountered so far & so we can be prepared to act when such a pattern emerges. In fact I have also heard of investors using intuition to sniff out good ideas from the bad.
All this yet again leads us to the process. The process with which we assess information can lead us into learning how to recognize patterns as good from bad. Without a process it would be like hacking our way through the jungle of knowledge only hoping to find a way out merely because the jungle got over & not because we found an efficient way to get out of it. Trial and error is extremely useful in the learning phase, but perhaps it has to adapt into pattern recognition which gives a different meaning to different people. When a novice looks at a balance sheet & an investor looks at the same balance sheet, the numbers will evoke different thoughts in both of them. The information visible may be the same but the processing will be at totally different levels. This seems merely because of the process with which the information is understood rather than merely knowing what the words & numbers mean.
Without a process to recognize patterns & trends (which I don’t know yet, how to develop), it seems that an investor can remain a perpetual amateur. Ironically, is it better to be an amateur so that we get to look at a lot of new investing opportunities or is it better to go to a zen mode where we automatically choose good opportunities?