Deep Work for Stock Investors

How to Use Deep Work in Stock Research

Published on:
December 1, 2018
Reading Time: 4 Minutes
Written on:
December 19, 2019

About The Author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Noam worked as a Vice President in Capital Markets at Silvergate (publicly traded on NYSE under SI since Nov-2019.) At SI, which he joined in 2010, Noam was responsible for advisory services to family offices,  private companies, and financial advisors.

Stock research is less glamorous than you think. Most of us do not get to travel around the world. We never meet executive management. And the only calls we get are from sell-side analysts [1].  

The truth is that in investment research, you spend most of the time sitting in a room alone. And it is often difficult to focus on what matters. Just take a look at my last week's "to-do" list:

(1) Read one, random chapter from CFA Institute curriculum. (2) Find 10 to 15 companies that are trading below the 10-year average earnings per share. (3) read the 10-k reports of Vivint Solar, United Natural Foods and Interactive Brokers Group. (4) finish reading Howard Market's Mastering the Market Cycle for next week's book club (5) write about the 2018 rate of return.

Deep Work

In one of the best self-help books I read this year, the author asks, "How long would it take (in months) to train a smart, recent college graduate with no specialized training in the field to complete the task?"

It is a simple-but-sophisticated tool to manage our time - or at least to sort out our schedule. Reflecting on the question, I saw that  I did not dedicate a single hour to the one project that mattered the most: writing a guide about the REIT industry [2].

There is plenty of incorrect information on how to value REIT stocks.  I wanted to correct that. And this is exactly that type of work, Cal Newport argues, that is very valuable in our economy and is also extremely difficult to pursue due to distractions.

In Deep Work, he defines this type of activity as "a professional activity in a state of distraction-free concentration that pushes your cognitive capability to its limit. This effort creates new value, improves your skills, and is hard to replicate."

He writes: 

"The ability to perform deep work is becoming increasingly rare at the same time it is becoming increasingly valuable in our economy. Consequently, the few who cultivate this skill, and then make it the core of their working life, will thrive." 

For stock research, in short, Deep Work is a powerful tool that sorts our time by order of importance, and that demands us to focus on what matters most.

Deep Work is a powerful tool demands us to focus on what matters most.

A case study (writing a REIT guide) 

Invigorated by this concept, I set out to complete, over the next 45 days, a guide about REIT investing. I carefully blocked out four hours per day to focus solely on the project; specifically, between 6:30 AM and 8:30 AM, I will write the chapters of the guide, and between 7:00 PM and 9:00 PM, I will research REIT companies to write about. 

I will be devoting 30 hours of Deep Work sessions per week over several weeks. In terms of output, I plan to write 30,000 to 35,000 words and will determine the guide successful if it serves as a starting point for an investor who is looking to buy REIT stocks.

The strict schedule requires me to write a guide outline. So, in the first chapter, I will write about the origin and history of REITs in America. The second chapter will be devoted to the types of REITs, such as equity and mortgage REITs.

 In the third chapter, I will describe how to value REIT stocks using the income approach, the private valuation approach, and the comparable approach. The fourth chapter will include metrics about the industry, such as the leverage ratios, risk, price multiples, and red flags. And why invest in REITs will be the topic of the fifth chapter. 

You can read now read the Guide to REIT investing

The 4DX framework

To make dreams real, Cal Newport found inspiration in the Four Disciples of Execution. The four disciplines of performance are: 

(1) Focus on the wildly important - The idea here is to channel concentration into a single thing that is paramount. As example would be my goal of publishing five high-quality investing guides in 2019.

(2) Act on the lead measures - Lag measures describe the thing you're ultimately trying to achieve (in my case, write an eBook guide on how to invest in REIT stocks). The lead measures the new behaviors that will drive success on the lag measures. Which, in my case, was scheduling 10 Deep Work sessions over the weekdays.

(3) Keep a compelling scorecard - An example of a scorecard would be to track the amount of weekly Deep Work hours. If you met the hours planned, then try to add an hour or two of Deep Work the next week. 

(4) Create a cadence of accountability - The idea here is a weekly reflection where you will review what was achieved and look for ways to improve.

Deep work, I learned, is a skill - not a habit. It requires more than the ability to focus on a subject. For the stock researcher, Deep Work is a technique that forces you to concentrate on the value you bring. 

As an equity analyst, Deep Work forces you to concentrate on the value you bring.

And by doing so, you give up on questionable uses of your time [3]. Deep Work, in short, forces you to begin with the end in mind.

[1] You can almost hear their boss in the background, querying whether or not they are making the sale. 
[2] I am frustrated by the lack of unbiased information over the Internet and the little information books provide about the REIT industry.
[3] such as commenting on articles on Seeking Alpha and meeting for lunch various professionals in the industry that "would like to know more about what you do."
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