Here’s another gem from Anand Sridharan for more reasons than one, least of which is the cricketing analogy to drive home an important lesson in investing. As fans of the game, especially of Rahul Dravid, we have indulged quite a bit in our recently published book Diamonds in the Dust. But more importantly this essay brings out the simple yet profound point about building clarity of thought around what works for me i.e, there are several approaches to success in investing (or life in general?) but most of us can succeed in only one way and the key is to figure that out sooner than later and tougher still, stick to it come rain or shine over long periods of time. One of Anand’s best so far.
“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.”
‘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.
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.”

 

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