Ask Colin

How does your ten-year learning idea relate to Gladwell's 10,000-hours rule?

The long version of this question was:

A few months ago in one of your newsletters you mentioned that people need to study the markets for about ten years before everything starts to make sense. That statement immediately rang true with me because my interest in the market started in late 1999 and everything clicked into place in late 2009. The outcome of this is that my trading plan has only had to be touched up around the edges for my last four plan reviews and I am very happy with the plan (despite not making any money for the last 14 months!) .

I have been wondering if you plucked that ten year figure from the air or if it had some basis.

I have just read a book called ‘The Outliers’ by Malcolm Gladwell, and his second chapter is called the “10,000 hour rule”. In it he states that all so-called genius’s (or traders?) all had to put the work in. He cites examples such as the Beatles, Mozart, and Bill Gates and others, as people who all put in their ten thousand hours before producing their best work. He gives academic references for this hypothesis and if you google “the 10000 hour rule” you will see that several scholars have looked into this. I know the figure is not meant to be taken literally but it gives an order of magnitude for the effort required.

My share market involvement over the ten years included a lot of reading, analysis, back testing (including using the A/D data you kindly provided about eight years ago), and investing (and often losing money). I have a passion for it and I conservatively estimate that I averaged between twenty and thirty hours per week doing all that. Coincidentally that corresponds to over ten thousand hours! No doubt you reached that milestone many years ago!

I’m bringing this to your attention because I’m sure the ten thousand hour rule is applicable to being able to successfully trade in the share market. It might even be twenty thousand hours for the share market because it certainly takes time for all the pieces to come together and for the market to experience different market regimes. Like you, I am a professional trader (and a ‘market timer’) and I am as confident of my abilities in the market now as ever; that is, as confident as you can be in these fickle markets! But this is only after I studied the market for over ten years and particularly after being fortuitous enough to experience a major market downturn following the GFC.

The interesting thing is that the three or four main trading rules by which I live or die by now are things that were known to me very early on. However, it took considerable time for me to sort out the nuggets from all the other information that is not relevant or useful. There is so much information for new traders now that it is difficult for them to know what is critical to them and what is not. Also, obviously the time of learning has to be long enough to allow the market to go through several up and down cycles and for the strategies to be evaluated over as many market regimes as possible.

It is not just a matter of knowing what to do. Even that may not accelerate the process all that much. I feel I could tell all my trading secrets to someone (assuming they really are secrets to success) and that person wouldn’t see their value because they can’t see them in the same context as I can. I’m sure you feel the same when you are passing on your ‘nuggets’ of knowledge.

I think the obvious conclusion is that novice traders need to do a lot of work, and experience different market regimes before they can be proficient in the market. There is nothing new in that statement! But unfortunately this fact often means that novice traders will lose both money and interest in trading at the same time. I suppose this is all part of weeding out those traders who aren’t as passionate about the art form as others.

Final Observation: I know you suggest to all new traders that they come up with a written trading plan, and this is common advice, and I would echo those sentiments. However I found the written plan difficult because I was always changing it in monumental fashion, up until the end of the ten years. This was because I could not settle on a basic strategy that I knew would work in the long term. So it wasn’t a matter of refining the plan but throwing it out and starting all over again. The plan is written so that you can define the strategy and adhere to it and not allow impulsive actions to take over. But the plan is useless if the basic strategy does not produce results over the longer term.

My strategies over the April 2003 to Nov 2007 period worked remarkably well (as did nearly every other ASX strategy in the known universe!).....but that was proven not to be ‘the longer term’! So the plan, and its implementation, is not important if the strategy is not going to work over the longer term. This is where the ten thousand hours needs to come in.

It has been a relief of late to know I am happy with my basic trading plan, and that I only have to fine tune it now and again. I think novices need to be reminded that while they are trying to settle on a trading plan which describes their strategy, it will probably have to be totally rewritten many times along the way. They need a workable strategy before they can put it in to plan form and only lots of analysis, back-testing and time will determine whether they have come up with one or not. This is where they need to spend ten (or twenty thousand hours)! This is why it may be ten years before they have a plan which doesn’t fundamentally change.

I have not read all your literature so you may already be on top of most of what I have written above. But I may have touched on a few points that you might be able to expand on in future articles and might provide some food for thought.

Answer:

The 10-year idea came from personal experience and observation. I have been talking about it for a good 20 years and further refined it as I went along. My basic idea came from my own experience of how long it took to become good at trading/investing. It took me more than 10 years, but I had a full-time job that involved travelling and a family, so I could not devote myself to developing my skills on a full-time basis.

I saw lots of others with a similar path to competence. Thinking about it, I found that it takes 10 years of learning and experience to become expert in any profession – roughly five years of learning (say to a Masters degree level) and then another five years of on-the-job experience. That has certainly been my experience in my job (marketing and sales) and in the markets.

Since I outlined my thoughts on this in my books The Aggressive Investor  and Building Wealth in the Stock Market, I have read Geoff Colvin’s book Talent is Overrated and Malcom Gladwell’s book Outliers, which dumbs it down a bit. I have read much more besides, but these were the best in the order above. I have also spoken on the subject several times and some of those presentation slides are on the members’ website and in The Wiley Trading Guide Volume 2.

The 10,000 hours idea seems to be largely Gladwell’s own invention. I think he was coining a phrase he thought might stick, as he has done in his other books. He is a good writer in this respect. Nevertheless, for years I used to paper trade stocks in real time. I have roughly calculated that I must have spent more than 10,000 hours doing that over many years. Not that my singular experience proves anything, it is simply of interest.

Your description of your journey is typical – I have been there and seen it in many others.

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