It was sometime in 2003 when, after joining my job as an equity analyst and after getting my first measly paycheque, I wanted to get my rented apartment painted. I was about to get married and welcoming my bride in a house with unpainted walls was a bad idea.
So, with the little I could afford then, I searched for the cheapest painter, and with him, went searching for the cheapest paint. But I couldn’t find one. In fact, no paint store was willing to sell me the cheapest paint, and instead, everyone seemed to nudge me to buy the most expensive of the lot.
“Sir, you would get your house painted once in five years, so why go for a cheap, low-quality paint?” one shopkeeper tried his persuasion technique, “So my suggestion is that you must go with this XYZ brand of paint.” My painter added, “This brand is really good, sir. Or why would everyone buy this one only?”
“But isn’t this expensive as compared to other brands?” I revolted.
“If you don’t buy this now and come back a year later,” a shopkeeper warned me, “it would get even more expensive!”
“How can you say that?” I retaliated. “Because this company has been raising its prices every year,” he replied, “and despite this, more and more people are buying it.”
Well, what I had heard from these paint shopkeepers was true, as I saw from the previous years’ financial statements of this XYZ company. Year after year, the company had been raising the price of its products, and year after year, its volume sales were also rising.
When I talked about this business with my senior colleague, he dismissed it as a random idea coming from a junior.
“But see the pricing power,” I told him, “And everyone is buying its products despite the constant increases in prices every year! And the company has no debt. And the management is clean.”
I tried to hard-sell this idea to my seniors, but not many took it seriously. And I, being an obedient, inexperienced junior into his very first job, stopped taking it very seriously, and did not buy the stock. What a huge mistake of omission it turned out to be!
If you have not realized by now, the XYZ company was Asian Paints, and the quoting price then was less than Rs 30 per share. Today, it’s around Rs 800, a 27-bagger in 12 years, or a 31% CAGR return.
I did not buy Asian Paints in 2003, which was otherwise a great insight then and one that was sparked off by nothing more than an observation of what people around me were buying and what people around me were hard-selling.
If I were to use the language of human psychology, Asian Paints was a business (and still is) that benefited tremendously from the biases of social proof (everyone was buying) and anchoring (high and rising price, and thus better products). And, to repeat, I got the insight out of simple observation and common sense, and no deep analysis of the business and no complex theories to support my arguments.
“My simple art,” said Sherlock Holmes in The Blanched Soldier, “is but a systematized common sense.”
Many times in life, all we need is a touch of common sense to reach a Eureka moment. And of course, we need the knowledge of separating sense from nonsense, because the latter is in great supply all around.
“But using common sense is not a process of idea generation, right?” you may wonder. “It seems like a flash of random thought that may have worked in the past.”
Yes, what I described above is not a process of generating investment ideas. It was just a flash of insight that came with using a little bit of observation and common sense. But over these years, I’ve realized that using common sense, knowledge, and observation can surely result in a process of ideation (process of producing ideas), which can be learned and practiced over time.
I had no idea about this process of ideation back then, but as I realize now, there surely exists a process to combine various observations that reside in your mind with your knowledge and common sense, and create profitable ideas out of them. This process, like all others, may not have a 100% success probability, but you don’t anyway need a 100% strike rate to succeed in investing.
Let me now step a bit aside from core investing and share with you my ongoing learning in…
How to Produce Ideas
“The production of ideas is just as definite a process as the production of Fords,” wrote James Webb Young way back in his 1939 book titledA Technique for Producing Ideas –
That the production of ideas, too, runs on an assembly line; that in this production the mind follows an operative technique which can be learned and controlled; and that its effective use is just as much a matter of practice in the technique as is the effective use of any tool.
My limited experience in investing suggests that what is most valuable to know about ideation is not where to look for a particular idea, but how to train the mind in the method by which all ideas are produced and how to grasp the principles which are at the source of all ideas.
Young talks about a five-step process in producing ideas in his book, which I explain below with respect to producing investment ideas that have a high probability of working in your favour –
The 5-Step Ideation Process
Step 1: Gathering Raw Material
In the first step of producing ideas, Young talks about the importance of building a rich pool of “raw material” — mental resources from which to build new combinations – which is similar to the concept of ‘latticework of mental models’ that Charlie Munger suggests so as to enable ‘multi-disciplinary’ thinking.
Now, Young also articulates the increasing importance of quality information filters in our modern information diet, which is made largely of noise. What you learn is as important as how much you learn. Here, I am reminded of what Sherlock Holmes told his accomplice Watson in A Study in Scarlet –
I consider that a man’s brain originally is like a little empty attic, and you have to stock it with such furniture as you choose. A fool takes in all the lumber of every sort that he comes across, so that the knowledge which might be useful to him gets crowded out, or at best is jumbled up with a lot of other things so that he has a difficulty in laying his hands upon it.
Now the skillful workman is very careful indeed as to what he takes into his brain-attic. He will have nothing but the tools which may help him in doing his work, but of these he has a large assortment, and all in the most perfect order. It is a mistake to think that that little room has elastic walls and can distend to any extent. Depend upon it there comes a time when for every addition of knowledge you forget something that you knew before. It is of the highest importance, therefore, not to have useless facts elbowing out the useful ones.
What Young wrote and what Sherlock Holmes advised Watson are great lessons for us investors in terms of gathering our raw material for the ideation process. What we read is of utmost importance in gathering our raw materials. I wrote about this subject in the April 2015 issue of the Special Report, but just to reiterate, reading things outside newspapers – things like investment super-texts, biographies, annual reports, and good books – is what would help you in this process of gathering your raw material, which is the very first step of the ideation process.
Not to be overly simplistic, but a lot of idea generation comes down to reading. You never know what might jump off the page and say, “Look at this!”
As an example, sometime in 2004, I was reading an interview of a senior manager from L&T, India’s leading engineering and construction company that was taking up a lot of projects in the Gulf region then. He mentioned how the company was taking up all parts of a project, except air-conditioning, for which they were tying up with Tata-group’s Voltas. That sounded to me like an opportunity, as Voltas had just come out of a tough period of restructuring its balance sheet.
During that time, it happened so that I got my hands to another interview, this time with the CFO of LMW, India’s leading manufacturer of textile machineries. The CFO mentioned how LMW was utilizing the services of another company for the sales and services of its machineries, apart from doing it through its own arm. The company again was Voltas, and on checking, this business was the most profitable of all its business segments.
Validation from two major companies – in separate industries – was reason enough for me to explore and subsequently buy into Voltas. I bought at around Rs 15, and sold at around Rs 200 in late 2007. I bought again in December 2011 at Rs 80 and continue to own the stock.
So, reading a lot helps a lot, and you never know when that Eureka moment appears. Another great benefit of reading is that apart from getting to know what can work, you also get to know what won’t work. This happened to me in the case of Suzlon, the dream stock of most people ever since its IPO in 2005, and till the crash of 2008.
In one of his interviews after the success of Suzlon’s IPO, someone asked the company’s founder Chairman about the origin of the word ‘Suzlon’. He replied something like this, “To succeed in a business, you need two things – sujh bujh (intelligence) and loan (borrowed money) – and thus the name Suz-lon.”
This was hilarious, and at the same time insightful. If the businessman believes that he must combine his intelligence with borrowed money, I must not touch the stock with a 100-feet pole. I knew the effects of the combination of borrowed money and intelligence (look at LTCM), and this helped me and my research team to avoid Suzlon outright. We looked like fools as the stock rose and rose on the back of the company’s fast-paced growth (thanks to its leveraged acquisitions), and then the company lost the wind in its sails!
So, reading can help you in a lot of ways in identifying good (and bad) ideas. I know it may seem like a long, dreary process, but when you are looking to become a successful investor, stop hoping for inspiration to strike. Instead, do the hard work…and read.
And why just reading? Even attentively observing things around you can bring you a lot of ideas. Whether you act on them or not is another story.
Here I am reminded of what Shyam Sekhar talked about in his interview with Safal Niveshak for the April 2015 issue of VIA –
Every Sunday morning, I sell my farm produce, which are organic products, on the beach. I go at 4 O’clock in the morning. On one of those mornings, at about 5 O’clock, a lot of bikes were parked there. They were all avid bikers and they were all getting ready to go for a ride. A person was sitting next to me and he was not going. I just struck a conversation with him. And I asked him, “Why aren’t you going?” He said, “Whenever I ride these bikes, I have already had two falls. I don’t want to have another fall.” Then I asked, “Then why are you coming and sitting here when you aren’t the biker?” He said, “I am the CEO of this bike company.
So I asked him, “I understand your bikes have 6 months waiting period. People are not able to buy and you have set up a new capacity and you are still not able to fulfil the market demand. And for next 4-5 years nothing is going to change.” He said. “Yes, that’s how it seems to be.
Those 2-4 hours in the morning, mentally, I compartmentalize my life. So what I do there, I don’t carry back. It’s like you go and see a sunrise and come back. It never occurred to me that the interaction that day, I should’ve carried the next morning. I didn’t think about it after that. I just said, “Oh he was a very nice guy and I was very impressed with him.
All along, I was very bullish on his business. And here there was something that was placed just next to you. The CEO of the company coming and sitting next to you, making a casual conversation. It was a conversation that gave that comfort that there is nothing left to revalidate. But I just passed it. I usually don’t do this kind of mistakes. And this company was Eicher Motors
This shows how a casual conversation with a stranger could actually expose you to ideas and opportunities. Talking to people from different walks of life with different experiences could also be an interesting source of ideation and insights. You just need to observe carefully and act if you find something nice.
You see, when it comes to observation, it’s not just the passive process of letting objects enter into your visual field. It is about knowing what and how to observe and directing your attention accordingly – What details do you focus on? What details do you omit? And how do you take in and capture those details that you do choose to zoom in on?
In other words, how do you maximize your brain attic’s potential? You don’t just throw any old detail up there. Like when it comes to reading and observing while analyzing business, it’s important to pay close attention to just a few important questions that would provide you more than 80% of your answers –
1. Is the business simple to understand and run? (Complex businesses often face complexities difficult for its managers to get over)
2. Has the company grown its sales and earnings per share consistently over the past 8-10 years? (Consistency is more important than speed of growth)
3. Will the company be around and profitably better in 10 years? (Suggests continuity in demand for the company’s products/services)
4. Does the company have a sustainable competitive moat? (Pricing power, gross margins, entry barriers for new players)
5. How good is the management given the hand it has been dealt? (Capital allocation, return on equity, corporate governance, performance against competition)
6. Does the company require consistent capex and working capital expenditure to grow its business? (Companies that have to spend continuously on such areas are like running on treadmills, which is not a good situation to have)
7. Does the company generate more cash than it consumes? (Cash generators have a higher probability of surviving and prospering during bad economic situations)
These questions would help you answer whether the business you are looking into is great, good or gruesome as Warren Buffett has defined each one of them to be.
Now, attention is a limited resource. Paying attention to one thing necessarily comes at the expense of another. So it’s important to observe carefully only those things that can provide you important clues about a potential idea, and nothing else.
A checklist, like the list of questions above, can be of great help here on focusing on only what’s important. Checklists also play a very important role in helping automatically avoid the System 1 thinking that Daniel Kahneman talks about – what you like you like, and what you like you trust, and that’s it – and thus leave you with System 2.
Now, in the usual course of things, our brains pick and choose where to focus without much conscious forethought on our part. What we need to learn instead is how to tell our brains what and how to filter, instead of letting them be lazy and decide for us, based on what they think would make for the path of least resistance.
Sherlock Holmes illustrates four elements most likely to allow us to do just that i.e., filter what we observe –
1. Selectivity – Remember what Holmes said about your brain attic? It’s precious real estate. Tread carefully and use it wisely.
In other words, be selective about what you observe and pay attention to. At first glance, this may seem counterintuitive – after all, aren’t we trying to pay attention to more, not less? Yes, but the crucial distinction is between quantity and quality. We want to learn to pay attention better, to become superior observers, but we can’t hope to achieve this if we thoughtlessly pay attention to everything. That’s self-defeating. What we need to do is to allocate our attention mindfully. And mindset is the beginning of that selectivity.
Now, one way I am trying to work on this selectivity part is by being careful in how I am spending my reading time. Having worked on what I must read and what I can avoid – the enduring versus ephemeral sides of my reading spectrum, as I shared in the April 2015 special report – I am trying to become focused on spending more time on the enduring side, because that is what would matter in the long run.
2. Objectivity – Here is where I have failed quite a number of times – in being objective and unbiased in my idea generation process – but those failures have served as big lessons.
Francis Bacon said –
The human understanding when it has once adopted an opinion (either as being the received opinion or as being agreeable to itself) draws all things else to support and agree with it.
It’s the rare mind that has trained itself to separate the objective fact from the immediate, subconscious, and automatic interpretation that follows. But as Sherlock Holmes teaches us, to observe, we must learn to separate situation from interpretation, us from what we are seeing.
Consider my research of the sanitaryware maker Cera in September 2012, when the stock was trading at around Rs 350. My basic assumption of the stock’s intrinsic value was much lesser than the stock price (so much for calculating exact intrinsic values!), and around this I framed my entire thesis of avoiding the stock.
I found all the reasons to avoid the stock, like –
1. Valuations being higher as compared to my intrinsic value calculations;
2. Brand not commanding as wide a recall as its bigger competitor, Hindustan Sanitaryware;
3. Promoters paying themselves large salaries; and
4. Negative free cash flow (despite knowing that the company was spending to expand capacities).
If you were to read my report now, you would find how I found the business good, but also found all reasons to avoid the stock, simply because I was not objective in my research and observations on the company. The stock is now a 6-bagger, and I hate it even more…because I missed it! 😉
Another mistake I made on this account of not being objective was the one on Opto Circuits, where I did the reverse of what I did with Cera. I found Opto’s valuations reasonable, and thus thought that the negatives that surrounded the company then – and there were many that I had mentioned in my report – were all factored in the stock price. Opto is, well, down almost 85% since I wrote that report in June 2012!
The lessons I have learned from my missteps in Cera’s and Opto’s cases, and through my reading of Sherlock Holmes is that I now avoid looking at a stock’s price before doing an objective analysis on the underlying business.
For investors, stock price is one of the biggest factors that kill objectivity in analysis. So when I remove that from the analysis itself, I find myself better off. Writing, or reading my investment thesis aloud has also helped me in my attempts to become more objective in my research. When I state my observations in such a way, gaps and inconsistencies that weren’t apparent before come to the surface.
In x`x, the author Maria Konnikova writes –
It’s an exercise not unlike reading your own work out loud to catch any errors in grammar, logic, or style. Just like your observations are so entwined with your thoughts and perception that you may find it difficult, if not impossible, to disentangle the objective reality from its subjective materialization in your mind, when you work on an essay or a story or a paper, or anything else really, you become so intimately acquainted with your own writing that you are liable to skip over mistakes and to read what the words should say instead of what they do say. The act of speaking forces you to slow down and catch those errors that are invisible to youreyes. Your ear notes them when your eye does not. And while it may seem a waste of time and effort to reread mindfully and attentively, out loud, it hardly ever fails to yield a mistake or flaw that you would have otherwise missed.
Now, every time I find myself making a judgement immediately upon observing, I try to stop myself, write my brief thesis, and then repeat it. Out aloud instead of silently. In writing instead of in my head. And I can see that this process saves me from many errors in perception.
3. Inclusivity – Consider that you are looking to buy a stock and the two that you come across on your screen are, say, Company A and Company B. Here are a few data points about the two companies, which are the only factors you would look at while making your decision. Look at them and think which one you would rather purchase –
Did you make a decision? Before you read on, jot down either Company A or Company B. Now I’m going to give you some more data points on these companies. No information has been changed, but some has been added
Chances are, somewhere between the second and third lists of data, you switched your allegiance from Company B to Company A. And yet the two companies didn’t change in the least. All that did was the information that you were aware of.
This is known as omission neglect. We fail to note what we do not perceive up front, and we fail to inquire further or to take the missing pieces into account as we make our decision.
Some information is always available, but some is always silent – and it will remain silent unless we actively stir it up. In investing, such information that remains silent – or that you fail to notice – can be dangerous to your capital.
Consider my experience with the stock of Hotel Leela. I was in Bangalore sometime in early 2006 and visited Leela Palace to meet a friend who was attending a conference there. I was in awe of the property – it was grand, and amazingly beautiful.
The story was same everywhere – most of Leela’s properties were booked for months, despite their premium pricing.
“What an amazing business!” I told myself. “Just imagine the kind of profits these guys must be making. I must have this stock in my portfolio!”
The next day, without enquiring more about Leela’s business and financial performance, I bought the stock, expecting it to be a story that was waiting to be unveiled. My premise was – Great hotel + Premium pricing + Overbooked = Great profits.
Well, it was indeed a story waiting to be unveiled…and for me! When I glanced through the company’s annual report after buying its stock, I saw a business that was badly managed.
The debt/equity was rising, much more cash was burned than was generated, return ratios were average at best, and the profit growth had followed a highly inconsistent path. As I included more information on the company in my analysis, I started ruing my decision to buy the stock more.
Anyways, by the time I had realized and then accepted my mistake, the stock was already down around 45% from my purchase price. But I still sold it off. And thankfully so, as the company remains in doldrums and so does the stock.
Now, my idea is not to lead you to conclude that you need to gather a world of information on a business while doing its analysis (in fact, the first 20% information will tell you 80% about the business), but it’s important to pay attention and include the most important information while doing your analysis.
Don’t suffer from inattention blindness bias, as shown in this invisible gorilla experiment.
To pay attention means to pay attention to it all, to engage actively, to take everything around us, including those things that don’t appear when they rightly should. It means asking important questions (like some I listed earlier in this past) and making sure we get answers.
Even when you do this, you may not be able to emerge with the entire situation in hand, and you may end up making a choice that, upon further reflection, is not the right one after all. But it won’t be for the lack of trying. All you can do is observe to the best of your abilities and never assume anything, including that absence is the same as nothing.
4. Engagement – I’m sure you know how important engagement is for proper observation and thought. Konnikova writes in Mastermind –
Your mind needs to be active to be involved in what it’s doing. Otherwise, it will get sloppy – and let pass a crucial detail that almost gets the object of your observation killed. Motivation matters. Stop being motivated, and performance will drop off, no matter how better you’ve been doing up until the end – even if you’ve successfully done everything you should have been doing up to now, the moment motivation and involvement flag, you slip up.
When we are engaged in what we are doing, all sorts of things happen. We persist longer at difficult problems – and become more likely to solve them.
We experience something that psychologist Tory Higgins refers to as flow, a presence of mind that not only allows us to extract more from whatever it is we are doing but also makes us feel better and happier. What’s more, engagement and flow tend to prompt a virtuous cycle of sorts – we become more motivated and aroused overall, and, consequently, more likely to be productive and create something of value.
We even become less likely to commit some of the most fundamental errors of observation (such as mistaking a company’s outward appearance for factual detail of its underlying quality – like I did with Hotel Leela) that can threaten to throw off even the best-laid thoughts.
And yet we constantly make the choice to disengage. We listen to our headphones as we walk, run, or travel. We check our phones when we are having dinner with our friends and family. These are all poor habits when you are working on your ideation process, investment-related or otherwise.
As a matter of building some good habits – amidst all the bad ones I have – I have started turning off my email and Internet access for two hours every day. I find this self-enforced discipline and distance a great method to improve my engagement while reading books and annual reports and analyzing businesses.
Consider the results of a recent nature intervention by a neuroscientist who wanted to demonstrate what could happen if people took three days to be completely wireless in the wild – creativity, clarity in thought, a reboot of sorts of the brain.
We can’t all afford a three-day wilderness excursion, but maybe, just maybe, we can afford a few hours here and there where we can make a conscious choice to engage and focus…just engage and focus.
Anyways, let’s now move to the next step of the ideation process.
Step 2: Digesting the Material
For his second stage of the ideation process, digesting the material, Young wrote –
What you do is to take the different bits of material which you have gathered and feel them all over, as it were, with the tentacles of the mind. You take one fact, turn it this way and that, look at it in different lights, and feel for the meaning of it. You bring two facts together and see how they fit. What you are seeking now is the relationship, a synthesis where everything will come together in a neat combination, like a jigsaw puzzle.
Like I wrote about Suzlon’s case above, my understanding of the dangers of combining excessive debt with ambition helped me avoid the stock.
In another case, my study of Asian Paints and how its pricing power was benefiting the company also helped me in identifying a similar story – Pidilite, the maker of Fevicol brand of adhesives. When more and more people were painting their houses, more and more people were also re-decorating their houses with new furniture etc. And the only player that I saw in the market everywhere that could have benefited from this opportunity was Pidilite. The company was consistently raising its product prices but more people were still buying the same. Effectively, the same facts that helped me identify Asian Paints also helped me identify Pidilite.
In the March issue of VIA, we’d carried the interview of Shyam Sekhar, who had mentioned his experience in identifying TTK Prestige in 2001. Shyam told us –
I had identified and bought TTK prestige at Rs 20 in the year 2001. I had bought it at Rs 20 because the book value was Rs 120. The IPO price was also little higher than that. Plus there was a good yield. And there was no way I was going to lose money in 2001. It was after the crash. TTK at that time was going through a very rough phase. The reason I bought the stock was very simple. I met an elderly person and she told me that she had a smoker’s lung. I thought what nonsense is this. She said, “Next door to my house, they cook in chulhas. And that smoke comes everyday into my room. And that’s how I have contracted this.”
It struck me that this kind of situation is untenable. That was one thing. The second thing I thought was that the urban Indian woman had no time to cook. She had to go to work. If she didn’t have time to cook, then she would be investing in her kitchen to multitask and do many more things in the same hour. So you can’t do it with one set of equipments. So you’re going to invest in whole lot of things in kitchen, right?
I felt that TTK Prestige, with that kind of brand equity, could easily widen the array of products and they only need to do labelling. Meaning they could get it outsourced, manufactured, many things could be done to have the whole array of products. And the theory was absolutely right.
What is this if not seeking the relationship between different thoughts – rough phase for the company, need for people to shift to healthier ways of cooking, and the urban Indian women’s lack of time and thus her need for a modern kitchen – and bringing them together in a neat combination?
That’s how you digest the raw materials – the learnings through reading and observation – that you gather in the first part of the ideation process by combining them together to create a coherent whole.
Step 3: Unconscious Processing
In this third stage of the ideation process, Young stresses the importance of making absolutely “no effort of a direct nature” –
It is important to realize that this is just as definite and just as necessary a stage in the process as the two preceding ones. What you have to do at this time, apparently, is to turn the problem over to your unconscious mind and let it work while you sleep.
When you reach this third stage in the production of an idea, drop the problem completely and turn to whatever stimulates your imagination and emotions. Listen to music, go to the theatre or movies, read poetry or a detective story, or simply go for long walks.
Noted German physician Helmholtz said,
So far as I am concerned, they [ideas] have never come to me when my mind was fatigued or when I was working at my working table.
American psychologist Rollo May believed that inspiration comes from sources in the unconscious that are stimulated by conscious ‘hard work’ and then liberated by the ‘rest’ that follows.
I, for instance, go for regular long walks, which help me a lot in connecting with the ideas in my mind, unconsciously. Effectively, I disconnect to connect…and that helps.
Step 4: The A-ha Moment
There are billions of neurons firing in our brain every second. Sometimes one random firing neuron ends making a neural connection between two unrelated segments in brain’s processing engine and voila! You get a stroke of insight…the Eureka Moment!
Then and only then, Young promises, everything will click in the fourth stage of the seemingly serendipitous a-ha! Moment –
Out of nowhere the Idea will appear.
It will come to you when you are least expecting it — while shaving, or bathing, or most often when you are half awake in the morning. It may wake you in the middle of the night.
Some of the most creative people in the planet including some of the famous scientists and world class musicians knew this peculiar characteristic of our brain. They would always be ready to capture those A-ha moments. Some would sleep with a pen and notebook next to their bed just to make sure they don’t miss the idea.
Prof. Sanjay Bakshi, in the note he shared with me on what to read for investors, wrote –
Can you become wiser between the time you sleep at night and wake up the next morning?
I found out that the answer is yes and the discovery is to do with the science of sleep. I found that if I read some random passage from a “super text” (e.g. some page from Poor Charlie’s Almanack, or some passage from the letters of Warren Buffett or Common Stocks and Uncommon Profits by Philip Fisher) just before I sleep, then while I slept what I had read does things inside my brain. When I wake up, I get fresh insights which I can use.
There is plenty of evidence which shows that sleep makes memories and associations stronger. And learning is about making the right associations. And we sleep roughly one-third of our lives. So why not use the time to become a bit wiser while we sleep?
My best stock market investments have been a result of such ‘a-ha’ moments and while I was sleeping on my ideas. In fact, my idea of starting Safal Niveshak was an a-ha moment after months of conscious and unconscious deliberations. 🙂
Step 5: Idea Meets Reality
Now, while many would consider the a-ha moment as the culmination of the ideation process – the end of idea discovery – Young goes a step further. He calls the last stage “the cold, gray dawn of the morning after,” when your newborn idea has to face reality –
It requires a deal of patient working over to make most ideas fit the exact conditions, or the practical exigencies, under which they must work. And here is where many good ideas are lost. The idea man, like the inventor, is often not patient enough or practical enough to go through with this adapting part of the process. But it has to be done if you are to put ideas to work in a work-a-day world.
What Young suggests here is that after you reach an idea after thorough analysis – and this holds true for investment ideas too – you may not want to make the mistake of holding your idea close to your chest. Instead, it pays to submit it to the criticism of the judicious – someone you respect and can give you added perspectives on the idea, or even play a devil’s advocate.
Now, when you go through this last step of the ideation process, a surprising thing will happen. A good idea has self-expanding qualities and it stimulates those who see it to add to it. Thus, when you submit your idea to someone who can add valuable perspectives to it, you will see that new possibilities which you may have overlooked will come to light.
I have acted upon (and also rejected) a lot of my best researched ideas through this process of talking to 1-2 of my close friends-cum-investors. I don’t do it every time (thanks to lethargy on my part), but consider it a valuable step in the process of idea generation.
Way to Win in the Stock Market
A lot of people may worry when they read about the ideation process I’ve explained above, given that it seems like tedious process. Of course, it is a long-drawn process but only till the time you ingrain it as part of your habit – the way you look at and observe things, the way you engage with them, and the kind of questions you ask that will give you the most important answers with respect to your idea. And then you have to consider what Charlie Munger said –
The way to win is to work, work, work, work and hope to have a few insights.
So, as Munger said, you don’t need many ideas in your investing lifetime….
…you don’t need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that’s with a very brilliant man—Warren’s a lot more able than I am and very disciplined—devoting his lifetime to it. I don’t mean to say that he’s only had ten insights. I’m just saying, that most of the money came from ten insights….and since you don’t need many ideas, you can always spend time with ideas you consider as having the potential to become valuable…very valuable.
What do you say?