In many ways, the most crucial personal trait in investing is humility. Adam Grant in his recent book Think Again brings out the power of knowing what we don’t know. In this blog, Anand Sridharan, an investor with Nalanda Capital looks back at his 15years in the firm and attributes his success (modestly calls it survival) to a similar yet nuanced concept he calls “Conscious Ignorance”.
“Nalanda Capital, as well my stint therein, complete fifteen years this month. While this is a milestone of sorts, I haven’t been counting. I just enjoy a job where weekdays feel like weekends. Fifteen years in markets is too short for a victory lap (no period is long enough). However, it is long enough to reminisce about a few good things. Like the fact that we’re still around. Or the opinion that I’m less of an idiot than when I started.”
He quotes James Clerk Maxwell “Thoroughly conscious ignorance is the prelude to every real advance in science.”
“Conscious ignorance is at the heart of what we have done since. It’s why we survived fifteen years. It lies behind key tenets of our investment philosophy, such as being risk obsessed and demanding many levels of safety-margin. I realize that it sounds horrible to claim to be more self-aware than others. It’s like claiming to be humble. But let me illustrate a few ways in which we systematically implemented ignorance.”
Of the three ways of implementing ignorance he talks about, two seem understandably not knowable – first, no forecasting (or predicting the future) and second, no view on macro. But the third can be a bit misleading – “We really don’t know any of our businesses”. Misleading if you miss the word ‘really’.
He clarifies: “I know it sounds odd for someone who builds large positions in a few companies, but it’s true. Our job is to recognize a good business when we see one. At the least, tell a good business from a bad one. World is too messy for us to know exactly why it’s good or how it got that way. Or if it goes off track, what needs to be done to fix it. This ignorance makes us avoid hard problems, not attempt them. All we can do is to ensure that broad patterns common to good businesses (e.g. return on capital, competitive position, industry economics, balance sheet quality) hold true. If these don’t line up, no matter how exciting the story, we walk away. After investing, we have no ability to ‘add value’ at an operational level to any of our companies. We can only gauge if business stays good. If a company seems irredeemably off track (e.g. consistent erosion in competitive position or balance sheet), only thing we can do is to sell and move on. This ignorance keeps us engaged at the right level, without pretending to be experts in paints, underwear and potties. Outside of occasional discussions on capital (mis)allocation, we have nothing to add to our companies despite being a large shareholder.
I started by claiming to be a lesser idiot now. At best, that holds on the margin. I’m still an idiot when it comes to knowing what over 90% of Indian listed businesses are worth. With many, including fashionable ones, I don’t even know where to start. We probably understand fewer than a hundred businesses well enough to buy them at a price. Even in those, we don’t know if the price is right over 90% of the time. Even after fifteen years, we are consciously ignorant of over 99% of our part of the messy world. It is relatively easy, even fashionable, to plead ignorance. Harder part is to be truly indifferent about it over decades. Functioning normally with a cognitive hole in the head is unnatural to buggy humans. I feel good that we have managed to do this tolerably well for fifteen years.
Thoroughly conscious ignorance leads to a few other tenets that underpin sensible investing. It’s hard, though not impossible, to be overconfident while ignorant. Ignorance fosters an inclination to play it safe. It makes it easier to put most things in a ‘too tough’ bucket. Ignorance mindset has really kept out of trouble. We may have missed some opportunities, but we missed way more wipeouts. Counter intuitively, ignorance helped us capture opportunity at the other end. At times when it felt like world was ending, not thinking too hard about an unknowable future gave us courage to act.”
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