The Illusion of Progress

In investing, as in many other aspects of life, we at times tend to mistake inputs with outcomes, efforts with progress. Working hard is important, but efforts, if misdirected are a waste of time. This paradox is even more extreme in the field of investment where what is commonly regarded as the main activity of investors (i.e. trading) is actually an almost total waste of time. On the other hand, what most people would regard as a poor use of time (i.e. sitting and reading for hours at a time) is the most important thing an investor can do to be useful to his clients.

“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero. You’d be amazed at how much Warren reads – and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
― Charlie Munger

If you have ever travelled to, or lived in Bengaluru, there is a high chance that one of the things you dread most is a cab ride to the airport for an evening flight. You dread it because you never know for sure if the traffic will allow you to get to the airport on time. Having missed, or barely caught many flights, I can say I do not miss those long and tense cab rides.

The cabbies in Bengaluru however are very resourceful. If they hit a patch of traffic on any of the arterial roads leading to the airport, they are quick to veer in to one of the many smaller bye-lanes, then zigzagging through even narrower streets and finally joining the arterial road some kilometres down the way.

However, more often than not, there is hardly any time saved by these antics. First of all, by taking an alternative route, the distance to be covered increases. Secondly, since the smaller lane is also narrower, the cab does not move at a speed that can fully compensate for the additional distance it needs to cover. And lastly, when a number of cabbies do this, the traffic on the smaller lanes also rises, equalising the journey time no matter what route one has taken. But for some reason, I have yet to come across a cabbie who does not try these experiments.

And the reason this continues is something strongly psychological. The passenger, seeing the car moving steadily, breathes easier than she would when stuck in bumper-to-bumper traffic. And the cab driver thinks he is taking some decisive action to get the passenger dropped off in time, rather than simply letting the traffic dictate terms. Both of them equate ‘movement’ with ‘progress’.

Similar illusions exist in the world of sport as well. For example, in the most demanding format of cricket i.e. test cricket, you will see some players batting in a hyperactive fashion whereas others such as Rahul Dravid will bat in a more sedate, more patient manner. Patient to the extent that Dravid holds the record of facing more deliveries than any other player in the history of test cricket, leading him to score more runs batting at no. 3 than anyone else! Over a 16-year international career, Dravid scored more runs in that period than Sachin Tendulkar. Sounds unbelievable for someone who is not seen as a flamboyant batter, right? In fact, Dravid’s patient, sedate batting helps him avoid common errors and stay on the pitch longer. And that is the very key to his success! As Sambit Pal has noted in his book, Timeless Steel, “Dravid’s batsmanship is often taken for granted because it is so firmly rooted in the time-worn traditions – leaving the good balls, not hitting in the air and on the up, and because it was so utterly comprehensible and lacking in mystique.”

Such ‘illusions of progress’ are common in many other aspects of life because we generally tend to measure efforts and not outcomes. An appearance of some activity – really, any activity – is considered a sign of ‘working hard’, even though these efforts could be misdirected and have no bearing on the outcome. To be sure, the right efforts do lead to the right outcomes, but what efforts are right? For example, a lot of start-ups in India have achieved massive revenues in a short span of time. They tout the ‘Gross Merchandise Value’ achieved as a measure of success. But as public market investors, we see no progress (profits) for all the efforts (customer acquisition) they have put in.

In the world of investing, we frequently encounter such ‘illusions of progress’, of which, two are remarkably interesting. The first is an example of intense activity which bears no worthwhile fruit. And the other is an example of what seems like complete inactivity but is the most fruitful.

When activity does not equal progress

Consider a case of a market scenario where stocks that you own are consistently falling. Your portfolio is down not only in absolute terms but is also underperforming on a relative basis. Investors in your fund are, as they should be, worried. And a few of them are writing in to ask if you want to reconsider your investing strategy and approach in a market where sectors that you own are ‘out of favour’ and if you should be buying those stocks that are rising. How do you respond?

One common way to react is to summon your research team for an urgent meeting. In the meeting room, project a spreadsheet with a list of the best performing stocks of the recent past which you do not own. Then go around the room asking each person why they had not recommended buying those stocks. Ask them why you do not see any of them stressed enough about the underperformance. Ask how they are able to sleep peacefully, question their analytical skills, warn them about reduced bonuses, get all mercurial and demand an action plan to recoup the underperformance! The team, now feeling adequately threatened, goes back and tries to rush through the research work to see if there is any merit in still trying to buy those stocks that are ‘in favour’. Over the next few days, there is a frenzy of activity, but no one is sure of what to do. How do you steer your core investing philosophy and go chasing after stocks that don’t fit in to it at all? But the team makes sure it appears to remain busy and appropriately stressed so that you, the boss, feels that something is being done to address the underperformance.

But does this help? There is always some group of stocks that is ‘in favour’. Do you go chasing after each and every one of them? The answer to that should be obvious. In fact, in all the frenzy, you may fail to notice that in a few months your portfolio stocks more than make up for the temporary underperformance. The point is that if you have been true to your investing philosophy and focused on high-quality stocks with strong fundamentals, a temporary underperformance is not something that should hassle you. Everything that you do in a panicked state will only be an illusion of progress.

So, what should you then do? Go back to your investment theses for the stocks that you own. See if there is something that has fundamentally changed in the business and its ability to earn and grown cash flows. If the thesis stands, there should be no reason to panic. We’ve covered the subject of how to think about periods of relative underperformance in our newsletters, including Studying the ‘Holiday Schedule’ of Consistent Compounders – Marcellus and Maximise the ‘Signal’, Minimise the ‘Noise’ – Marcellus

When inactivity can be progress

From time-to-time we have the good fortune of some of our clients (or potential clients) visiting our workplace in Mumbai. In our early days, most visitors expressed an interest in going around the office – we suspect they wished to see if we were a proper organisation and not a rag-tag group to whom they were about to hand over a part of their hard-earned income. When passing by our research team’s workspace, we would invariably hear the comment, “It seems very quiet”, accompanied by a suspicious look which suggested that something was out of place. In our research offices, there are no TVs that run any business channels, no rows of Bloomberg connected computers flashing live prices of stocks, currencies, metals etc. and no incoming calls from brokers with updates of the latest news on a stock or its quarterly results. Our team is either out of office doing on-ground research, or if in office, on their desks, reading. No wonder the offices seemed quiet to visitors.
Sitting at a desk for a few hours at stretch and just poring over a company’s annual reports is the most productive work an investment analyst can do. What’s second-most productive? Even more reading! Our team devours books, blogs, articles from subjects as varied as sports, psychology, history, in addition to finance and business. Most of what we read also finds its way to our weekly 3 Longs & 3 Shorts newsletter and our Book of the Month updates. Varied reading is as close to an investing superpower as you can acquire.

As the legend Charlie Munger has said about himself and his partner Warren Buffett, “We make actual decisions very rapidly, but that’s because we’ve spent so much time preparing ourselves by quietly sitting and reading and thinking.” But most do not see sitting quietly and reading as an ‘activity’ and therefore, what is real progress appears as an illusion of inactivity.

So, the next time you decide on a course of action, ask yourself beforehand how you will measure the success of your efforts. And plan ahead to avoid the pitfalls of measuring output over outcomes.

Salil Desai is a part of the investments team at Marcellus Investment Managers www.marcellus.in