Outliers- What does it take to succeed?

I just finished Gladwell's third book and I must say that compared to Tipping Point and Blink, this one is the lightest in content and most far fetched in terms of research. Having said that, Gladwell makes even the most mundane idea come alive like no one else I know.
Lets take one idea that is not terribly original- hard work leads to proficiency.
Gladwell doesn't say it that simply. He calls his chapter on this- the 10,000 hour rule and you get hooked.
What is the 10,000 hour rule?
You keep reading and Gladwell brings you in with stories that are carefully chosen to prove his point. He cites studies that have shown that there is a 10 year and/or 10,000 hour rule to reach the stage of "proficiency" in any field. For example, a pianist who practices 3 hours per day, 6 days per week will reach 10,000 hours in roughly 10 years. Put another way, while innate talent is needed, you cant just rely on talent, it needs a lot of hard work to get REALLY good at something.

There are some other ideas that are interesting. For example, he reasons that the seemingly mundane cutoff dates for selection to school teams matters a heck of a lot in determining who would eventually play in the big league. His reason is simple- there is a distinct advantage to have a birthdate as close as possible to the cutoff date. In general, older children are bigger, faster, stronger and smarter than their age group peers. Once they selected early enough because of their performance, they are given the environment to succeed more and hence they do- a variation of the self fulfilling prophecy I guess.

Some other key points- First- IQ is just a threshold - High IQs are not necessarily a good predictor of success. However, there is a threshold where you need to be 'smart enough' to be able to succeed. As Malcolm states in his book, "being successful is about a lot more than IQ."

Second- Generational limitations - Success also depends on when you are born which drives when you reach adulthood. For example, to be born between 1900 and 1911 is demographically unlucky as you would have hit the most devastating events of the 20th century - the Great Depression and WWII - at the wrong times.

Third- Social heritance - According to Gladwell, "Cultural legacies are powerful forces" and they can persist generation after generation long after the social and demographic conditions that created them have passed. Gladwell told about a psychology study conducted by Dov Cohen and Richard Nisbett at the University of Michigan in the early 1990s around the culture of honor and violence. It turns out that there is a difference between young men from the Northern and Southern US respond to insults and which partially explains the higher rates of violence in the South.

Fourth- 7 errors - A typical accident involves 7 consecutive human errors. Gladwell examines airline crashes and it is very rare for a crash to be blamed on equipment, and the typical cause is human error. However, it is not just one human error but a series of small errors that contribute to an eventual catastrophic accident.

These are all interesting vignettes and Gladwell weaves them remarkably well, he is a better storyteller than I have read in recent times and just for that, this book is worth a read- plus you are likely to finish this in one weekend anyway!

Human behavior, Dr. Burns and Feeling Good!

I have always been a student of human behavior. I find it fascinating- why do people behave the way they do, the way they react to different situations and the way they deal with stress- are all questions that I find intriguing and incredibly interesting. It is no surprise then that I tend to read a lot of human behavior/ psychology related books.

Recently, I found one at my cousin sister's place in San Diego, that I can stack up against the very best in the subject. Titled "Feeling Good" and written by Dr. David Burns, it is the best treatise on cognitive behavioral therapy I have read. The premise of the cognitive model of human behavior is based on three simple ideas-
a) We feel the way we think.
b) Anxiety results from distorted, illogical thoughts. He clearly lays out 10 mental distortions and the way to deal with each.
c) When we change we think by correcting the distortions, we can change the way we feel.
Very simple, and very powerful.

I read the book over a weekend and got so taken in by it that I ordered his others books- When Panic Attacks, Ten Days to Self Esteem and The Feeling Good Handbook. I would highly recommend When Panic Attacks because the book builds on the foundation of CBT and takes it to another level by combining it with other techniques to reduce or completely eliminate anxiety.

Having read all these books, I am glad I was browsing my sister's library in San Diego when I was there a couple of months back, otherwise I would not have been introduced to one of the finest students of human behavior of our times!

The Buffet lessons in this environment!

Warren Buffett has already told the world what he's doing in this frightful market. The Oracle of Omaha proudly proclaimed that he's "been buying American stocks" with his personal funds.

But it should also be noted that Buffett has been putting his investors' money on the line as well. After sitting on piles of cash for several years and lamenting the lack of attractive opportunities, Buffett has made several key acquisitions through his investment conglomerate, Berkshire Hathaway, culminating in a flurry of late- September and early-October deals.

In just a two-week span, Buffett picked up Constellation Energy for the relative bargain price of $4.7 billion. He bought $5 billion in preferred stock from Goldman Sachs, receiving a fat 10% yield. And he purchased $3 billion in preferred shares of GE, also yielding 10%.

This doesn't mean Buffett is saying go out and buy Goldman or GE (GE, Fortune 500) stock. In fact, there are plenty of reasons why you shouldn't try to follow his lead, not the least of which is the fact that Berkshire gets deals that individuals simply can't.

But that's not the point. The opportunity here is to pick up some valuable investing wisdom from the greatest practitioner alive. In this spirit, here's what I think you can learn from Buffett's moves:

Be greedy when others are fearful
It's the most famous of all Buffett-isms: "Be fearful when others are greedy and greedy when others are fearful." Today there's ample evidence that people are scared, as fund investors have been redeeming record amounts of money from their stock portfolios.

By contrast, Buffett is putting his money to work. Berkshire's cash balance, by my estimate, is at its lowest level in recent memory.

Now, this doesn't mean the market will turn around tomorrow. But Buffett's point is that this is not the time to flee U.S. stocks. In fact, now is a great time to be looking for shares of high-quality firms that have been beaten down to affordable levels.

Don't be hobbled by past mistakes
Buffett's investment in Goldman Sachs (GS, Fortune 500) was surprising to many, given his frequent digs at Wall Street's casino culture and a problematic investment he made in Salomon Brothers.

In 1987, Buffett bought a stake in Salomon to ward off a hostile takeover, but the firm nearly collapsed amid a bond bid-rigging scandal a few years later, and Buffett had to step in as interim chairman.

Although the investment eventually worked out - Salomon was bought by Travelers, which merged with Citicorp to form Citigroup (C, Fortune 500) - it's safe to say that it was a longer and harder road than he had anticipated.

Still, Buffett understood that investment banking, for all its recent woes, is an attractive business if managed properly. The group of top-tier firms is fairly small, and it would be hard for a new competitor to break into the business, which gives Goldman Sachs tremendous bargaining power over its customers.

There's an important lesson in this for individual investors. Just because many financial stocks in your portfolio have imploded recently, it doesn't mean you should sell out of this sector entirely - or turn your back on these stocks for good.

Don't fall in love with your stocks
Buffett is famous for having said that his favorite holding period is "forever." But he will sell a stock he loves if conditions warrant. For example, late last year, as crude-oil prices were approaching $100 a barrel, Buffett jettisoned his stake in PetroChina (PTR).

Why? After multiplying more than fivefold since he bought it a few years earlier, PetroChina shares had reached fair value, so he sold. Since he cashed out, PetroChina shares have been cut in half.

Chalk this up to a lesson the Oracle learned in the late '90s. As he admitted in 2003, "...I made a big mistake in not selling several of our larger holdings during the Great Bubble."

Buffett similarly made what may be one of his best decisions when he sold Berkshire Hathaway's long-held stake in Freddie Mac (FRE, Fortune 500) in 2000. He's never written about exactly why, but he noted presciently at his 2001 annual shareholder meeting that Freddie Mac's "risk profile had changed."

Keep your powder dry
While the rest of the world gorged on cheap credit, Buffett maintained Berkshire's conservative profile. This hindered his returns when times were good, but having lots of cash on hand enabled Buffett to snap up once-in-a-lifetime deals, like Constellation Energy (CEG, Fortune 500).

Buffett, who owns several utilities, jumped on Constellation in September after its shares tumbled from around $60 to his purchase price of $26.50 in a mere matter of days. The result: He nabbed a company that produces nearly $1 billion in earnings a year for less than $5 billion.

Now, you may not be in a position to keep $40 billion in the bank. But as Buffett showed, it's smart to have some cash on hand for opportunistic purchases. What's more, there's nothing wrong with being disciplined enough to turn your back on stocks that you're not 100% confident in. That's sage advice.