In 1911, two teams set out with hopes of being the first in modern history to reach the South Pole. For one team, led by Roald Amundsen, the trek was a fantastic success. Amundsen and his team reached the pole on December 15, 1911, and safely returned to their base camp over the next 40 days. For the other team, led by Robert Falcon Scott, the trek resulted in disaster. Reaching the pole more than a month after Amundsen, Scott and his team, exhausted and out of supplies, fell victim to the harsh Antarctic climate on their return trip.
What separated these two teams? Why was one successful and the other not? And what can you learn about investing from this example?
In their book Great By Choice Jim Collins and Morten Hansen conclude that Amundsen and Scott “had divergent outcomes principally because they displayed very different behaviors.”
Amundsen based his plan to conquer the pole on discipline, preparing for the worst and proper research on what would work in the harsh Antarctic landscape. Scott, on the other hand, relied on things going according to plan and lots of luck.
Amundsen didn’t know precisely what lay ahead. He didn’t know the exact terrain, the altitude of the mountain passes, or all the barriers he might encounter. He and his team might get pounded by a series of unfortunate events. Yet he systematically designed the entire journey to reduce the role of big forces and change events by vigorously embracing the possibility of those very same chance events. He presumed dangerous events might strike his team somewhere along the journey, and he prepared for them, even developing contingency plans so that the team could go on should something unfortunate happen to him along the way. Scott left himself unprepared and complained in the journal about his bad luck.
Dealing with an Uncertain Future
We can’t predict the future. No one can. And yet, what causes some people, companies and investors to prosper amid an uncertain future—a future we can neither predict or control—and others to ultimately fail in their mission?
Collins and Hansen refer to companies, and their leaders, that figured out how to thrive in uncertainty as “10Xers” because their results were, at least, 10-times better than a comparison company. And, since investing requires successful navigation of an uncertain future as well, their findings are relevant here.
They list three key ways to deal with uncertainty and become a 10Xer.
Fantastic Discipline – The authors describe discipline not as a blind “adherence to bureaucratic rules” but as the willingness to reject everything that runs counter to your values and long-term objectives.
Both Amundsen and Scott had the same goal. But, Amundsen was fanatical about sticking to his plan. His team made consistent progress, every day seeking to get 20 miles closer to their goal. On the good days, this meant stopping when they felt like they had more to give. On bad days, this meant overcoming the harsh weather and still putting in the miles. Scott, on the other hand, made wildly inconsistent progress—often hunkering down completely on bad days and making no progress.
Discipline is paramount to any successful investing approach. The best investors start with clear long-term goals and an investment philosophy they know to work. Then they refuse to let external forces deter them from their plan. The best way to ensure financial failure is erratic behavior. It’s tempting to start chasing performance (the latest the hot stock or strategy) when times are good, and then to hunker down and move to cash when fear strikes. As with Scott, this behavior will ultimately result in failure.
Productive Paranoia — Bill Gates said that “Fear should guide you, but it should be latent, I consider failure on a regular basis.” The authors found that 10x leaders considered the worse case scenarios, they ran stress-tests on plans, but they didn’t let the paranoia paralyze them. Instead, they used it as fuel to maintain hyper-vigilance in good times and bad. And the result of off this paranoia was the ultimate in preparation. Just like Amundsen embraced and planned for the possibility of unforeseen events on his Antarctic journey the best investors do this as well.
Investing isn’t always smooth sailing. There are bull markets and bear markets. No one knows exactly what the future will hold. Plan your response ahead of time to a market selloff. Because the future is uncertain, build diversification into your investment process and look at the worst case scenarios though an exercise like Monte Carlo modeling.
Empirical Creativity – When diagnosed with prostate cancer, Andy Grove had a legendary response. Instead of accepting the common wisdom at the time, he poured over the research, plotted the data and cross-referenced various studies. And he found disagreement within the ranks of the medical community on how best to treat his disease. Andy’s approach to “his cancer treatment was unusual, even creative, yet grounded in evidence and rigor.”
Approach investing the same way. What does the data tell us? What does the evidence say work? There are many strategies out there based on a whim, gut feeling, on someone’s prediction of the future. They don’t consistently work.
Robert Seawright CIO for Madison Avenue Securities, in his Above the Market Blog, recently wrote, “Evidence-based investing is the idea that no investment advice should be given unless and until it is adequately supported by good evidence.” Sounds like a no-brainer, right? But, unfortunately, everyone doesn’t approach investing in the same way. In the article, he goes on to list 13 alternatives to evidence based investing, most of them quite humorous, and all of them highlighting just how important it is take an empirical approach to investing.
As Amundsen demonstrated, we don’t need to know exactly what the future holds to reach our goals. We can’t control the future, but we can control our behavior. Focus on what you can control. Be disciplined. Don’t let external forces deter you from your goals. Be paranoid. Think about what could go wrong and put a plan in place to deal with the “unforeseen” events that will happen. Be empirical. Make your investment decisions based on evidence and rigor, not on the latest stock tip from your neighbor or “advice” from some screaming anchor on TV.
Seems pretty simple, but as Collins and Hansen found in their research, different behaviors do produce wildly different results.
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