Thread by @heymaxkoh

Investing is about connecting the dots.

Many investors fail terribly at this.

So here's a thread on developing Pattern Recognition:

When starting on my investing journey at first...

I only read about the companies that

i) I already owned, or

ii) planned to own

I tuned out all the rest that did not fall into either of the two buckets.

Bad move.

I realized that my growth as an investor was stagnant.

I didn’t have enough mental models in my head to spot new opportunities.

I needed to develop pattern recognition.

But that’s a big word.

How do we develop it?

Answer: It comes from reading. A lot.

Annual reports, deep dives, earnings call transcripts, industry reports, books.

Anything.

Isn’t that too random and unstructured?

Yes, but so are our ideas and insights.

They come when we least expect it.

They happen out of luck and serendipity.

But is it simply lady luck smiling down on us?

Partly so, but it’s not the full story.

Good fortunes come to those with a prepared mind.

Thus the goal in investing should NEVER just be to accumulate returns...

But also to amass more business models in our minds over time.

Instead of just tracking our monthly or yearly returns…

We should make it a point to track:

1. number of business models we know

2. number of companies we deep dived into

But how do you build the motivation to do that?

You have to be happy putting in the reps.

Reading annual reports day after day, week after week...

while keeping faith that all these actions will pay dividends down the road.

You must enjoy the learning process.

If learning and reading is purely just a means to an end...

you will start keeping count.

And once you start counting, you lose patience.

Warren Buffett has more mental models in his head than most of us...

purely because he’s been doing this for the last 80 years.

and still does so today because he enjoys it.

No amount of intense cramming in a short time frame can match up to that.

You need patience.

You can’t make a baby in a month by getting nine women pregnant.

Patience aside, you also need CURIOSITY.

How do you develop that?

You start by reading what interests you.

If it’s fiction, start there.

If it’s biographies, start there.

The goal is to develop the reading habit and a love for reading.

Let your curiosities guide you.

Slowly, you will widen the mental models in your mind...

which gives you more hooks for future new knowledge to latch onto…

And the more you read, the more you realize how much you don’t know.

So you develop the curiosity to read more.

It starts the virtuous cycle.

Over time...

that’s how we form a mosaic of mental models in our heads.

And they come in handy when the right opportunity presents itself.

My breakdown:

1) To be a good investor, we need to develop pattern recognition...

2) Pattern recognition can only come from wide exposure...

3) Wide exposure can only come if we read a lot

4) To read a lot, we have to be curious

5) We can develop curiosity by reading the things that interest us

If you've found this to be useful, follow me here at @heymaxkoh.

I tweet about my personal investing journey, plus...

How I was able to achieve financial freedom before I turned 30.