I’ve just finished reading Moonwalking with Einstein: The Art and Science of Remembering Everything by Joshua Foer. Similar to Fooling Houdini, Moonwalking with Einstein is a non-fiction and non-investing book that was recommended by two value investing blogs that I follow. It also has the honor of being described as phenomenal by Bill Gates. As always, I’ll try to focus on how I think the book can be applied to investing.
The book contends that on average, people can only think about or remember roughly seven things at a time. One of the ways that people remember more than seven things is through the process of chunking. For example, the 22 letters HEADHSOULDERSKNEESTOES would be difficult to remember compared to the 4 chunks of letters – HEAD, SHOULDERS, KNEES, and TOES. Likewise, compare 120741091101 to 120-741-091-101, or 12/07/41 and 09/11/01. The book contends that experts take meaningless bits of information, run them through a filter that applies meaning to them, and make that information stickier. Experts use associations in their long-term memory to see things differently. They have built up a bank of experience that shapes how they perceive new information. For example, Zen-Nippon Chick Sexing School graduate has developed the perceptive skills that allow them to determine if a chick is a boy or a girl, often before a conscious thought is made. Likewise, a SWAT officer doesn’t just see a man walking, instead he notices a nervous twitch in the man’s arm that brings to mind associations with dozens of other nervous twitches he’s seen in his years of policing. Often, we call this intuition. This intuition has been shaped by years of experience. Experts see the world differently. They notice things that non experts don’t see and hone in on the information that matters the most, and have an almost automatic sense of what to do with it. The book further contends that this skill and intuition is not the result of conscious reasoning, but pattern recognition, and so is a feat of perception and memory, not analysis.
I think this is very relevant to my day job as a commodities trader, and to my passion as a value investor. If anything, I’m trying to develop an intuition to the markets that will guide me to make the right trade each day or to identify a bargain stock instead of a value trap.
I had been taught some of these memory techniques while in junior high school but they weren’t explained very well. Mind-mapping and mnemonics are not new memory techniques, but I never found them effective because I wasn’t taught how to use them. In essence, Joshua argues that our visual and spatial memories are very powerful and so the key to having a good memory is to tap on them. The main memory technique explored in the book is known as the memory palace technique. In this technique the subject memorizes the layout of some building, or the arrangement of shops on a street, or any geographical entity which is composed of a number of discrete loci. When desiring to remember a set of items the subject literally ‘walks’ through these loci and commits an item to each one by forming an image between the item and any distinguishing feature of that locus. Retrieval of items is achieved by ‘walking’ through the loci, allowing the latter to activate the desired items.
Another takeaway from the book is the idea of the OK plateau and deliberate practice. After a few months into Joshua’s training, his memory stopped improving regardless of how much he practiced. He had reached a plateau. It turns out that we all reach OK plateaus in most things we do. A classic example of this is in speed typing. When people first learn to use a keyboard, they improve very quickly from using a single-finger, to two handed typing, to touch typing where they can type without looking. At this point, most people’s typing skills stop progressing even though they continue type. Everyone goes through three stages when acquiring a new skill. The first phase is the cognitive stage where you intellectualize the tasks and discover new strategies to increase proficiency. In the second associative stage, you concentrate less, makes less major errors and generally become more efficient. Finally, in the autonomous stage, you are as good as you need to be at the task and are basically running on autopilot. Usually, this is a good thing since you no longer have to focus on this task, and can instead concentrate on something new.
In order to break free from the OK plateau, experts have to engage in a very directed, highly focused routine called deliberate practice. Top achievers develop strategies for consciously keeping out of the autonomous stage while they practice by doing three things: focusing on their technique, staying out goal-oriented, and getting constant and immediate feedback on their performance. In other words, they force themselves to stay in the cognitive phase. For example amateur musicians tend to spend their practice time playing music whereas pros are more likely to focus on specific, difficult parts of pieces. Regular practice is not enough. To improve, we must watch ourselves fail and learn from our mistakes. To get off the OK plateau, we actually have to practice failing. One way to do that is to put yourself in the mind of someone far more competent at the task you’re trying to master and try to figure out how that person works through problems. For example. chess players replay the games of grand masters one move at a time and try to understand the expert’s thinking at each step. The best way to force yourself to type faster is to allow yourself to make mistakes. Typists who are repeatedly flashed words 10-15% faster than their fingers were able to type gradually started to type at the faster speed.
All in all, the book was an entertaining read and I hope to be able to apply what I’ve learnt to my investing career.