Thread by @eboroian

This summer, it'll be nearly 20 years since I started playing guitar. Mostly Jazz & Blues, but also Folk & Bluegrass.

Of all the things I've learned, two really stand out as the biggest drivers of improvement. They both have interesting applications to investing...

In guitar soloing, there's a trend towards memorization vs understanding. People memorize scales instead of trying to understand why certain notes sound good in a given context. This is a mistake

Scales are patterns (often sets of notes in diagram form) that can be played over certain chords in a given key. They are amongst the correct group of notes to play. They're a shortcut, and are used because they're convenient.

For example, you may have heard of the 'pentatonic' scale, often used in blues. Because they are simple shapes, & because using them isn’t technically wrong, players never stop. And because of that, they end up learning to think about music the wrong way

They end up playing 'random appropriate notes at random points'. When they sound good, it's serendipitous. Most of the time, they sound 'mechanical', like many other players, stuck in a 'box' or pre-set patterns. For the first 4-5 years, this was me

Many of the best jazz/blues guitarists either weren't aware of scales, or at least didn't think about them when playing. This is the reason why certain players sound more 'musical', and you remember what they play. Wes Montgomery, Larry Carlton, BB King are great examples

You often hear them saying they play 'through' the chords vs 'over' the chords. This means grasping how chords are constructed, which group of chords sound good together (and why), and which notes can be used to outline them and transition between them (and why)

They not only know what notes to play, they know when it'll sound best. They can anticipate chord changes & thus their transitions are more pleasing to the ear. They can play 'outside' notes & improvise as long as they 'land' on right notes when it matters. This is real music

It's much more difficult to understand how they're thinking when playing than it is to memorize scales. But if you think using scales, you'll never be original. And originality is important in music

Because music is 'subjective', many musicians that get negative feedback pass it off as the result of subjectivity. They shouldn't. You enjoy yourself more when the audience is enjoying itself. There are ways to improve and get your message through to a high portion of listeners

So the first lesson is that music is like a 'language'. Yes, you need the alphabet, but mostly you need to understand how 'phrases' are put together (and relate to what you're saying) in order to communicate effectively. That's the goal in music: express yourself & get through

Without getting too technical, the key to building phrases and being musical is three things: harmony (minor or major, ie happy or sad), melody (ie the 'hook', repeated catchy notes that are the core of the message), and rythm (timing of play)

It's only possible to put this into practice if you study the drivers behind harmony, melody and rythm, and then understand how they relate to each other. Then listen to thousands of examples in use. Then practice, make mistakes, and start understanding deeply

The best teacher of this, in my opinion, is Henry Johnson.

Here's a video of him explaining it with some great examples:

Another great example is Josh Smith:

Understanding this has helped make my playing much more melodic, and I've noticed more enjoyment when I play, both for myself and the audience. It's made me a better guitarist

Regarding lesson one, and how it relates to other fields, I consider this the equivalent of Richard Feynman's idea of 'knowing the names of things' vs 'knowing things'

In investing, the equivalent to memorizing scales is memorizing or using formulas & accounting ratios (example inventory turns, EPS growth, P/Es etc). It makes it seem like you're analyzing a potential investment. But it doesn't mean you understand what really drives it

The equivalent to harmony, melody & rythm in investing might be: circles of competence (ie industries or business models, defensive or cyclical etc), value creation & intrinsic value (growth, ROIC-WACC, FCF etc), & expectations (ie valuation & mispricing)

In my opinion the best form of equity investing is finding mispriced businesses that create long term value in industries you know well. And then just hold them (until something changes). You can deconstruct each of those elements into their drivers & again with their drivers

For example...value creation depends on growth, ROIC & cost of capital. Growth depends on volume (market growth, share dynamics etc), mix, pricing, acquisitions & currency. Share gains are driven by innovation (new products, line extentions, new channels/region...), marketing...

In practice, this means looking at the value drivers and understanding why (including management incentives and capital allocation for instance) vs using superficial things like EPS growth & P/Es (& their drivers), which is what most investors do

They do this because they're easily available, convenient & seemingly simple (like scales). But are they relevant to long term share performance? I don't think so. Why? Because share prices discount future cash flows, not earnings, & P/Es aren't valuation they're a derivation

Earnings are only useful if they correlate with (and help explain/forecast) FCFs. Sometimes that's case, sometimes it's not. P/Es give no insight into value creation. I realize this might seem counter-intuitive, & many have not been taught to approach investing in this way

Many have a financial background, and were thus trained in wall street type financial analysis first, with the aforementioned metrics as the main approach (see almost any sell side note). It's what is called the 'earnings game'. Some of it might be necessary, but not enough

In the same way that I spent the first 4-5 years in music playing scales, I spent the first 4-5 years in my investing career playing the 'earnings game'...focusing on the wrong things. Sometimes it worked, but when it didn't, being honest I didn't know why, & thus couldn't adjust

Gradually, I started learning a lot more from reading annual reports, business history books, biographies of founders/CEOs, trade journals etc than I did from screening or sell side reports. Really trying to understand why certain business models create value vs others

why certain industries have better structure vs others, why certain types of growth are more valuable, the relationship between products/markets and ROIC-WACC and FCF. The most useful resources in terms of books for me were Alfred Rappaport and @mjmauboussin

On Twitter, I think @BluegrassCap , @Valuetrap13 , @JohnHuber72 , @IntrinsicInv , @WTCM3 , @GavinSBaker , @ElliotTurn (and many others) are some of the best resources. Search through their tweets and/or blogs. You'll learn a ton (I know I have)

The second music lesson is one from outstanding fusion player Scott Henderson. The video is no longer on youtube, but here's a link of someone discussing it with short clips: (check the 7.50 mark for about a minute)

He shares very useful insight in the video: the listener's brain hears things more 'slowly' than the player's brain. This is why very technical players often don't connect with the average audience. They play something that they think sounds great & will get their message out

but complexity means that it doesn't get through. It's not 'simple' enough. The best technical players like George Benson understand this. Many of you may not know that Benson is one of the most technical jazz players in history...but you remember his lines (guitar or vocal)

Requires a certain level of development to be able to differentiate between what actually matters & what doesn't, and how/when to focus on it. Sort of like the idea that you only really understand something if you can explain it to a child, because you had to think it through

Regarding lesson two, it relates to investing in two ways: one analytical, the other commercial. From an analysis standpoint, it's mostly about ability to synthesize and focus on the 2-3 key drivers of a stock. Not all technical things matter

There are usually a few key things that will determine the outcome (true in music, but also sports). And much in the same way they say that simplicity is the end result of long hard work, not the starting point, the same is true in investing

When I was younger, I used to spend weeks writing a report. And then my old boss would go over it with a pen and cross out anything that wasn't insightful and/or differentiated (ie where I was just repeating information). Most of my reports ended up in the trash

He would always ask: what are the key things that will make or break this ST and LT? What can I learn here that I can't by spending a few hours on the company? What can I learn that I won't read in many sell side reports? What is it that gives me an edge vs other smart investors?

Don't confuse plentiful information with insight. And while insight is useful, & required, it only really matters if it's not shared by others. That's the real job of an equity analyst: derive intelligent conclusions not shared by others

The lesson also relates to how you pitch and present (whether it be a stock or your fund). There should be a presentation that, whilst nuanced and somewhat technical, remains basic and well explained. Perhaps start with 40-50 slides, but get it down to 15-20

I get 'lost' reading most stock pitches or fund presentations in the same way that I get 'lost' listening to many jazz players (particularly fusion). Part of that might be that I'm not familiar enough with the subject. But I think part of it is being overly detailed or complex

What ‘makes sense’ to you has to ‘make sense’ to others…or they won’t get it. It’s not right to say ‘they don’t get it because they aren’t experienced enough’. It’s your fault

I think most people that have some technique in the financial industry are guilty of this (including me). The best teaching resource for this in my view is Terry Smith of Fundsmith. You can track down some of his presentations and videos easily

Note that he's managed to get many retail investors as well as family offices as investors. That's quite rare, and I think is explained by how he presents things. He has what some would call the fifth level of intelligence: simplicity

I hope this thread's useful (sry for the length). Are there any other musicians on fintwit? Are there any lessons from other fields that you apply to investing? What are the ideas/books/papers/videos etc. that have helped you improve most, whether in investing or another field?