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Take The ‘Investor Observation’ Test

“The more stuffed the mind is with knowledge, the less one can see what’s in front of him” – Lao Tzu

How good are your powers of observation? Watch the below video, and count how many passes the team in white makes?

How did you do?

The video catches a lot of us out because it uses our own attention against us. The analytical side of our brain is constantly whirring away, working on the latest task we’ve given it. When we tell it to count the passes, it springs in to action, ruthlessly focusing our attention on our latest goal. But by doing so we can completely miss what is hiding in plain sight. Even when it’s a moon-walking bear!

This simple video is a perfect parallel to the challenge we face as investors. To find the truly great opportunities that the rest of the market is missing, we need to quiet our analytical mind, and simply observe the world as it is. Business schools place a big premium on things that can be quantified and analysed in a spreadsheet, but often the most profitable investing insights come from just reflecting on the world around us.

In The Tao-Jones Averages, author Bennett Goodspeed makes a strong case that we must learn to tap in to our creative and intuitive side to be able to stay alert to investment opportunities (and threats!) before the rest of the market:

“analysts are prone to be surprised by developments outside their focus, just as, say, the Swiss watch industry was unprepared for developments in the semiconductor field”

Goodspeed’s book provides dozens of examples of how the power of observation can lead to surprising investment insights. A classic case was that of Jim Rogers, co-founder of the market-trouncing Soros Fund.

In 1973, Rogers was reading the newspaper and became puzzled by the outcome of air battles during the Six-Day War between Egypt and Israel. Always in tune with oddities in the world around him, Rogers noticed that the Israelis, who had better trained pilots and superior aircraft (supplied by the U.S.), were losing the air war to an Egyptian air force that, on paper at least, should have been vastly inferior. Most analysts at this point would dismiss the thought and head back to their trading terminals.

But Rogers was always on the lookout for pieces of information that didn’t fit with his model of the world and just couldn’t let it go.  Rogers inferred that, with inferior aircraft and training, Egypt’s success in the air battles must be the result of superior “smart” electronic weaponry such as guided missiles. Fascinated by the insight, he dug deeper, reviewing defence spending, interviewing pentagon officials, and even contacting Senator’s to get their take.

At the time, U.S. companies that designed “smart” electronic weaponry were deeply out of favour, after years of under-investment from the pentagon. At the time even Lockheed Martin (NYSE:LMT) was rumoured to be going bankrupt. But Rogers’ observation and research led him to realise that a vast wave of future investment was coming and so he bought large positions in several electronic weaponry system designers.

Over the next decade the shares Rogers purchased exploded in value with returns of 2,000 to 5,000 per cent, and Lockheed became a “blue chip” share at the top of every fund manager’s buy list.

During the decade Rogers worked with George Soros, their fund generated a cumulative return for investors of a whopping 4,200%. As for Rogers, a handful of astute observations such as these was all it took to make him a multi-millionaire, before deciding he’d had enough and retiring at just thirty-seven.

At Pro we are always on the lookout, trying to catch the next 800-pound Gorilla that’s still hiding in plain sight. As we introduced in How to Catch a Monster, over the past 21 years, shares in energy drinks maker Monster Beverage (NASDAQ:MNST) have soared a mind-numbing 2,400-fold. Every $10,000 investment in 1994 would be worth over $24 million today. During those early years, think of all the thousands of Wall St analysts that could have seen Monster Beverage cans taking over their local store, or being guzzled all around them, and yet never took the time to look up from their spreadsheets to capitalise on the opportunity right in front of them.

From time to time we all need to take some time out, give our analytical brains a break, and just observe the world as it is. Whether it’s chatting to friends and family around the barbeque, or relaxing on holiday in some exotic location, let’s keep our eyes open. The next shareholder-return-Gorilla could be moon-walking right in front of us.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Monster Beverage. Motley Fool contributor Matt Joass, CFA has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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