Stock research is less glamorous than you think. Most of us do not get to travel around the world, meeting senior management and inquiring about the business and industry they are in. Most of the phone calls we receive are from sell side analysts, where you can almost hear their employer in the background, inquiring whether or not they are making the sale. The truth is that in investment research, you spend most of the time sitting in a room alone.

Written by:

Noam Ganel is the Managing Director of Pen & Paper, a value-oriented stock research publication. Subscriptions are now available. He also serves as  Vice President in Capital Markets at Silvergate Bank and holds the Chartered Financial Analyst (CFA) credential. Click here for frequently asked questions.

Begin with the End in Mind

How to Use Deep Work in Stock Research

December 1, 2018

Stock research is less glamorous than you think. Most of us do not get to travel around the world, meeting senior management and inquiring about the business and industry they are in. Most of the phone calls we receive are from sell side analysts, where you can almost hear their employer in the background, inquiring whether or not they are making the sale. 

The truth is that in investment research, you spend most of the time sitting in a room alone.

And it is difficult to focus on what matters. If you look at my Outlook calendar of last week, here was my "to-do" list: 

(1) read one, random chapter of the CFA Institute curriculum, (2) find 10 to 15 companies that are trading at a reasonable multiple to 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 investment book club meeting, and (5) write about my portfolio of stocks return this year compared to the return of the S&P 500.

Deep Work

In one of the best 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 - or at least to sort out - our schedule. Reflecting on the question, I realized that last week I did not dedicate a single hour to the one project that mattered the most: writing a guide about the REIT industry.

I am frustrated by the lack of unbiased information over the Internet and the little information books provide about the REIT industry. There is plenty of faulty information on how to value REIT stocks. 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."

The author continues: "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.

Writing a guide about REIT stocks

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. 

As it stands today, I will be devoting 30 hours of Deep Work session per week over a period of 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 REITSs, 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 in the first place will be the topic of the fifth chapter.  

The 4DX framework

Planning a schedule is easier than its execution. To make dreams real, Cal Newport found an inspiration in the Four Disciples of Execution. The four disciplines of execution 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 for a scorecard would be to track the amount of weekly Deep Work hours. If fewer hours were achieved, you look for reasons why and try to avoid them in the following week. If you met the hours planned, then try to add an hour or two of Deep Work the following 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. 

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