Are you really sorted out?
Hard part of investing isn't finding an approach that works, but sticking to it over many years. To do so, "does this work for me" matters more than "does this work".
One of the perks of my job is meeting people who run good companies. Discussions are mostly about them sharing, in an open-ended manner, how they think about their business. Over years of closely following a small set of businesses, there’s a pattern to their thinking. They have unusual clarity on what to do and what not to do. On what matters and what doesn’t. After each such discussion, my most frequent reaction is “They seem really sorted out”.
It’s not accidental that those running fine companies seem really sorted out. In fact, causality lies in the other direction. It takes really sorted out people to build fine businesses. This trait of being really sorted out extends to Mount Rushmore type people across domains – investors, social scientists, sportspersons, public administrators. So, what exactly is this sorted out thingy?
Let’s start with Test cricket. It’s hard to find a cricketer more talented, and more frustrating, than Rohit Sharma. Despite prodigious talent, when it came to Test cricket, he just didn’t seem ‘sorted out’. Until recently. After his recent century, he spoke of the mental clarity with which he approached this overseas tour: first, survive; goal is to play balls, not score runs; trust the process. In his words “Spending time in the middle was the biggest takeaway for me in the four Test matches”. He had to make peace with a very un-Hitman approach to sort out his overseas Test batting. Hopefully, this rubs off on other talented players – Shaw, Mayank, Gill – who don’t seem fully sorted out yet. Dravid’s greatness lay in how sorted out he was for how long. Form may have seen fluctuations, but clarity on approach to Test batting was unparalleled. His nature, thinking and batting were in perfect sync.
Next, business. One of the most illuminating things to do is to study two companies in the same industry that show divergent trajectories. One knows what business and brand stand for, has consistent messaging to all constituents, follows stable policies with partners, doesn’t get distracted and gets consistently stronger within its domain. Another, often from a stronger starting point, has never got its shit together. No consistent strategy, brand, management or policies. Promoter and business are perennially distracted. Always fighting some fire or another. Every few years, there’s hope from a few good quarters, only to be belied. It’s always one step forward, two steps back. A long-run market share chart comparing the two businesses shows an unambiguous one-way shift. You can pick a fuddy-duddy category like consumer durables and find dozens of such gainer-laggard pairs across sub-categories. An analyst in IT Services is better off looking at decadal trends in market share than jargon-filled jazzy ppt shared at latest analyst meet. In my experience, root cause of divergence in performance lies in how ‘sorted out’ respective promoters are.
Finally, investing. I’ve written earlier that investing has a broken scoreboard. This makes it all the more important for investors to be really sorted out. Since link between outcome and process is broken, even over periods of a few years, investors get poor feedback from reality. We can look smart for being stupid and vice versa. We can’t tell what worked and what sucked, in a process sense. We sometimes have to stick with an approach through years of underperformance, and sometimes abandon silly ideas despite optical success. We have to ignore most of our distorted reality, without being completely oblivious to it. Regret and envy get magnified in markets. There’s nothing more mind-messing than sensibly avoiding froth, only to see some self-delusional nitwit, a veritable poster-child for Dunning-Kruger, rake it in with a YOLO approach. Without being really sorted out, we’ll be overwhelmed by immediate context and peer pressure. We become slaves of the market, not beneficiaries of it.
But what exactly is this sorted out thingy? I view it as two elements: (1) Knowing what works, (2) Knowing what works for me. Former requires a deep, historically-grounded understanding of concerned domain. Latter requires a degree of self-awareness, especially about our limitations. Having clarity on either element is non-trivial. What’s harder and rarer is for the two to overlap. Fit across both elements is what minimizes dissonance and lets a practitioner stick with an approach for decades. Fit is usually the gating factor.
Back to Rohit. His captaincy reveals a sharp cricketing mind. He’s extremely sorted out in shorter formats (reminding us that being sorted out is context-specific). He certainly knew what works in Test cricket. Hard part was making it work for him, as it wasn’t a natural fit with who he was and how he played. It took tremendous mental strength to handle dissonance of letting ball after ball just go by.
Across industries, time-tested approach for business excellence is usually known. While details vary by sector, common template can be labelled “Get rich slow” (I’m talking of my kind of companies, not the circus in town). Lending is about not losing it when others are. Consumer franchises are about staying relevant without diluting brand or terms of trade. Commodities are about an efficiency DNA and loads of cushion on balance sheet. All industries are about focus, as no human can do two things well. However, in each industry, only a few remember the obvious. Most get carried away, seemingly out of boredom or hubris. Real reason behind indiscipline is a misfit between people and approach. While people pay lip service to what works, they haven’t internalized it, as it doesn’t fit with who they are deep down. As our minds are designed to minimize dissonance, what doesn’t fit doesn’t stick. It’s hard to resist an ungainly hoick to a bouncer outside off-stump.
Back to investing. Most investors have a general sense of what has worked over the long run. Broad principles are timeless, in line with what the best have shared over decades. Context is also unchanging, despite a tendency to view each era as unique. It’s the same basic plot of excess and gloom playing on loop. ‘Fundamental’ investing can be viewed as a broad tent. Approach is to invest in stocks as businesses, without falling for extreme emotions at either end. People choose their place in the tent, depending on how they subjectively weigh various factors (e.g. risk, quality, valuation, sizing, hold-period, selling philosophy) along a spectrum. Institutional constraints also play a role. My choice of place within the tent is based on what works for me.
I know of investors who have done well over the long run, operating at very different places within this tent. Underperformance of a typical ‘fundamental’ investor has less to do with place within tent and more to do with not sticking to one place. Trouble is that every place goes through some period of underperformance. Or isn’t able to accommodate whatever is ‘hot’ at a point of time. Those who are sorted out accept this as inevitable, albeit unpleasant. Those who aren’t quite at peace dither. Dissonance makes them shift approaches. As they chase one fad followed by another, it becomes a slippery slope. Over time, outcome from shifting around tent is way worse than staying in any one place.
(A clarification on what I said above. While it’s possible to do well across a reasonable spectrum of approaches, I wouldn’t extend it to unreasonable extremes. Buy-at-any-price or Any-crap-at-a-price face poor odds.)
One important nuance about the two elements that I listed. They’re not equal. Second part is way harder. “What works” can have many answers. “What works for me” has one answer. Many can figure out first part. Only one person can figure out second part. Understanding “what works” leads folks to mistakenly believe that “it works for me”. This can be ruinous. It’s why coat-tailing isn’t advisable. It’s why investing success is hard to replicate even when practitioners transparently outline their methods. Second part is also underrated and uncomfortable. Many stop at what works, because making sense of outside world is easier than knowing oneself. If there’s an emphasis to this essay, I’d like to place it on the “what works for me” part.
At the start of any investing journey, there is no clarity on either question. In initial years, feeling our way around is unavoidable. It takes time to even get a hang of what works. However, once that stage is crossed, it’s worth explicitly reflecting on the second part. We have experienced enough discomforting situations to ask “How sorted out am I”. Is there coherence across who I am, how I think and what I do? None of us can be as sorted out as the greats, but idea of doing this is to limit dissonance.
In my case, somewhere after year-five of my investing journey, I felt at peace with my approach. It’s been a lot easier to stick with it since. While I am still feeling my way around, general direction is clear. I have fewer existential doubts every time I screw up or miss out on some shiny new thing because it doesn’t fit with my way of thinking. Like some of the promoters I know, I can reject opportunities with a simple “That’s not for me”.
I write about my approach since that’s all I know. But it isn’t the only one that works. It may not even be the one that works best. Over some period, it may not work at all. But it works for me. That is the point of this essay. Whatever be your approach, for you to stick to it over an extended period without crippling dissonance, it’s worth asking: Does this work? Does this work for me? How sorted out do I feel about it all?