Practical Implementation of Sharpening the Saw

One of the books that really influences my thinking is Stephen Covey's "The seven habits of highly effective people". In this post I thought I could share how I am implementing the seventh habit of "sharpening the saw".

The story behind the principle is that of two woodcutters (sorry, trees and tree huggers!). The first woodcutter just kept cutting trees for eight hours a day with his saw. The second woodcutter spent the first hour each day sharpening his saw and cut trees only for seven hours each day. At the end of a month, the second woodcutter had vastly outperformed the first and also looked much less tired compared to the first one.

In today's world, especially when it comes to the IT industry, I can see these two woodcutters at all workplaces. The people who look like the first woodcutter work very hard and get quite tired by the end of the day. They don't seem to have a lot of fun at work. They are usually working on putting out fires at work, meaning they work on urgent and pressing matters all the time. They look quite burnt out at the end of the day. Usually they need some alcohol or TV after work to wind themselves down. The people who look like the second woodcutter work hard too, but they seem to be energized by their work and more productive every day. They also seem to have a lot of fun at their jobs and seem to help others a whole lot more. Somehow you feel quite relaxed and are at ease when you are around the people from the second group. They also seem to have enough energy at the end of each work day that they can spend time on more demanding tasks like helping kids with their homework or doing little chores at house in the evenings.

To implement this principle into my life, I decided that I was going to evaluate how much I was learning each day at work. On some days, the projects I do at work provide opportunities for learning something new. On those days, I don't need to separately dedicate an hour first to learn something new. But I found that at least half of my days are spent on just doing mundane work - work based on what I already knew. On these days, I decided I would spend the first hour learning something closely related to work and projects, but not exactly work on the project my boss gave me. What I found out was, though this time was spent on something else, it paid me back multiple times in the long run. Also it kept my brain fresh with ideas and gave me alternate ways of thinking about a problem at work.

Some really smart companies like Google realize the value of this and give their employees 20% of the time to work on their own projects. These companies invest in their employees. But other short-term thinking employers think of this as a waste of time. If our employer is in the latter category, then we need to take charge of ourselves and improve ourselves. After all, no one cares more about our success than ourselves!

In my previous job, I did not have the luxury of doing my own stuff for the first hour each day, so I actually spent an hour outside of my work hours to do the learning. After about a year of doing that, I was ready to move up and take on a more responsible job. This new job gives me plenty of flexibility to learn at work itself, so I give myself the first hour of my office hours to learn something new. Currently I am working in the fields of data science, machine learning and big data. There is never a lack of things to learn in these fields. I have about a dozen things in my radar to learn next.

Another way to implement this strategy is to participate in a mailing list and try to help out others with their problems. I was active on StackOverflow for about a year when I was learning Solr. It was a very rewarding experience. I could see what challenges people faced in their jobs and solved many practical problems. I would have never even thought of many things had I not looked at StackOverflow. Participating in such platforms helps us learn things that we would have never thought of ourselves to learn. For about a year, this was just a hobby for me, but a year later, a project came up at my company that no one knew how to solve efficiently. It took me a very short time to figure out how to do that project in a scalable manner with Solr. I took on that project and worked on it for a few months. It worked amazingly well and scaled to well over ten times the data my employer initially had (with the same hardware we were using)!

A huge benefit I found by spending the first hour at work learning is that I remain positive for the rest of the day, irrespective of how the work for my employer turns out that day. This is similar to the positive energy you feel if you work out in the mornings. Doing such high RoI (Return on Investment) tasks first thing in the morning helps us tremendously in the long run.

In summary, practicing the habit of "sharpening the saw" has multiple rewards and something we should practice every day in our lives.

Does value investing work?

If you are reading this article, I believe you are a person who already knows about the advantages of diversification, index fund​​s, rebalancing and low expense ratios. I also hope that your own investments are in low cost index funds already, with proper allocations to stocks and bonds, based on your risk tolerance and investment horizon.

(If you did not understand anything I mentioned in the first paragraph, please stop now and do yourself a favor. Read the book "The Bogleheads Guide to Investing" by Taylor Larimore et al. Don't worry, I am not affiliated with the Bogleheads, nor do I get compensated for referring that book, nor there is an Amazon affiliate link in that URL. That book that gets you to almost an under-graduate level in investing. Without understanding that book, I can confidently say that value investing is not for you.)

You probably have been doing some reading or research on alternative investment strategies, obviously to do better than what you think your current passive indexing strategy will probably deliver. Maybe you read some books by Benjamin Graham, or listened to Warren Buffett, or read some books about Buffett or some other value investor, and are thinking of adopting value investing strategies.

I was exactly in your situation. I and my wife have some money in our retirement accounts. Most of that is invested in Vanguard Target 2045 retirement fund, with the rest mostly in Vanguard index funds. I say "most of that" because my employer has an index fund with another company, so I have no option but to pay the 0.31% expense ratio for a total stock market index fund, for which I would pay a paltry 0.05% with Vanguard!

I read Benjamin Graham's "The Intelligent Investor" couple of years back and realized that active investing is a very time consuming process (think 40+ hours a week). I decided to be a passive investor and follow Vanguard 2045 retirement fund (the year chosen based on when I will roughly turn 65). But every now and then, I would wonder if I could do better than this passive investing strategy. I started reading a lot on value investing recently! After about two months of reading over a dozen books and several hours of online research, what I realize is that even people who are full time value investors do not succeed all the time. The ones whom you hear about are the ones who succeeded after several years of value investing. For each successful value investor, there are probably anywhere from tens to hundreds of failures. It is not because value investing principles do not work. They certainly do. But as human beings, we do not always stick to those principles! If you read Graham's book, he says repeatedly that it is easy for him to give guidelines, but difficult for us to follow it in practice. Just ask yourself - did you floss your teeth today? did you exercise for at least 30 minutes today? Two or three years of inferior returns from value investing will drive almost all of us out of value investing into indexing with our tails between our legs!

I have high regard for Warren Buffett and his sage advices on value investing, but trying to use his value investing advice in our own portfolios is impractical. He has unusual intelligence with numbers, excellent memory and has a solid command over estimating odds. He says he got wise by reading a lot - by lot, I mean he reads about 500 pages of financial documents a day! He has the ability to really understand what he reads and remember that too. And finally after several years of value investing, he says in his 80s, that for most individual and institutional investors, index funds are the best! Thank God he finally said that!

The field of value investing is very enticing to someone like me, who loves to learn a lot and think of myself as a contrarian! Let's just look at the game I am going to play. Here I am with all this knowledge I acquired by reading so much. I also have a solid engineering and math background. Most people don't understand much about stocks, most people don't take the time to read, most are not as mathematically oriented as me. Most of them buy when market goes up and sell when it goes down. So isn't it obvious that with all this intelligence I got I should do better than the vast majority of others? This kind of thinking is detrimental to our investment returns. What happens in reality is that even with all those qualifications, many have played this game and failed miserably. We don't hear much about them because no newspaper or magazine wants to hear from them! Their interviews won't sell. Even if there is such an interview, most of these investors never admit their mistakes; instead they blame someone or something else. It is very hard to tell in an interview "I thought I could beat the market by doing what I did. Now I realize that the market has beaten me to a pulp. I failed.".

Another important fact is that, historically, value companies have done better than growth companies, but that doesn't mean that same will happen in the future. Growth may very well outperform value over the next thirty years and that may very well be all the time you and I got as our investment time horizon.

Every now and then, someone will come up with some "magic formula" even within the field of value investing. It may even work for a while or even a long time, but I don't want to put my own money into figuring out if they are right or wrong. Beware of all such "magicians", since they usually run magical mutual funds which charge high fees. The magic ensures that they become rich whether we even get the market returns or not!

In conclusion, I believe that for me and a vast majority of regular people who have full time jobs (in fields other than stock market), indexing is the way to go. Spend that little extra time you got every day to doing other things - to learning more about your field of work or spending more time with family and friends or pursuing other hobbies. Manage your money passively with low cost index funds and sleep well :-)