“The more you seek the uncomfortable, the more comfortable you will become.”
“The mind is its own place, and in it self/Can make a Heav’n of Hell, a Hell of Heav’n.”
“Every adversity, every failure, every heartache carries with it the seed of an equal or greater benefit.”
“We must all suffer from one of two pains: the pain of discipline or the pain of regret. The difference is discipline weighs ounces while regret weighs tons.”
“Wisdom is knowing what to overlook.”
“The recipe for perpetual ignorance is: Be satisfied in your opinions and content with your knowledge.”
(as retold by W. Somerset Maugham in 1933)
The Speaker is Death
There was a merchant in Baghdad who sent his servant to market to buy provisions and in a little while the servant came back, white and trembling, and said, Master, just now when I was in the marketplace I was jostled by a woman in the crowd and when I turned I saw it was Death that jostled me. She looked at me and made a threatening gesture, now, lend me your horse, and I will ride away from this city and avoid my fate. I will go to Samarra and there Death will not find me. The merchant lent him his horse, and the servant mounted it, and he dug his spurs in its flanks and as fast as the horse could gallop he went. Then the merchant went down to the marketplace and he saw me standing in the crowd and he came to me and said, why did you make a threating gesture to my servant when you saw him this morning? That was not a threatening gesture, I said, it was only a start of surprise. I was astonished to see him in Baghdad, for I had an appointment with him tonight in Samarra.
Chief Conclusion: The discipline of discomfort demands that investors who seek to outperform must make hard choices, choices that don’t come naturally. This often means cultivating controversy in your ideas, willingly running the risk of looking foolish. The best results are most often driven not only by insightful analysis but also by eagerly embracing ideas that threaten prevailing views. That is why such ideas are so profitable! Because they are misunderstood, and thus mispriced. For those committed to winning in the investment arena, one of the most important traits is to dare to be laughed at.
Vacation time! It’s time for our annual week-long escape from the oppressive July heat of South Florida. This means loading everyone – me, the wife, all three kids, and Sherman the Wonderdog – into our car for the two day drive to the North Carolina mountains.
I thought about taking a week off from writing “Trends and Tail Risks,” but thought the better of it for a few reasons. First, after twenty years of professional investing I am now at peace with the fact that there is no such thing as “getting away,” even when you are on vacation. The joy and the burden of managing other peoples’ money is that you can’t leave it at the office.
Second, I didn’t want to do without the discipline of writing. Writing is much more than simply connecting with our clients and friends. Writing helps me think.
As I savored this view over a cup of coffee, it struck me that I have done an incomplete job of educating our clients and friends with this publication.
Frequent readers will recall that past topics have included current events in the market and reviews of the many tools of fundamental analysis and research that help us find our way in an uncertain investing world. A bigger toolbox is always better in investing, so I am proud to share mine with our clients and friends. Those tools are necessary – but they are not sufficient.
I have neglected to discuss one of the most powerful tools of investing success: discomfort. The act of constantly putting yourself in challenging and controversial investments is what I call the discipline of discomfort. This is the greatest challenge of investing: daring to look stupid while attempting to profit from that which the market does not see. The best route for this is to cultivate the discipline of discomfort.
Football is a big deal when you grow up, as I did, in Alabama. I was a reasonably competent player for the tiny, private junior high school I attended. But all that changed when I enrolled at Lee, a giant public high school in Montgomery. Lee had more than two thousand students and was a football powerhouse. Our offensive and defensive linemen outweighed those of most colleges! Overnight I went from one of the biggest players on the team to one of the smallest!
It was pretty intimidating for a while as I regularly got battered and bruised by players who were much bigger, stronger and faster than I was. I came to dread practice. I realized that I was failing – before I ever set foot on the practice field – because I was letting the size of my teammates intimidate me.
The solution was to seek out the biggest and most intimidating players on the field and pair up against them during drills. I felt like I needed to embrace what I feared to become a better player. The instinct of cultivating pain and danger did not come naturally. But, if I was determined to become a better player, I had to make myself do it. Investing is a lot like that, because you have to value success more than your personal comfort. That is the discipline of discomfort.
I have had the good fortune to work at some of the world’s best known and well-respected investment houses. During that time, I have seen and experienced my own fair share of successes and failures, and watched and learned from those of my colleagues – some of the brightest minds in investing. I have seen some remarkable achievements.
What trait have these former colleagues taught me to value the most? It may surprise you to learn that it’s not penetrating insight or brilliant analysis, although each certainly plays an important role. Rather, it’s the imperative to make yourself constantly uncomfortable. Why? Because the most powerful investment results come not just from the proper insight, but from the proper insight of something that is incredibly misunderstood and thus mispriced. Often this means investing in a “contrarian” idea that many find laughable or even stupid. The best investors I saw had the courage to consider dispassionately even the most outlandish ideas.
Steve Boesel was one of my mentors at T. Rowe Price. He recently retired after a long and successful career as a portfolio manager. Steve is a true gentleman and a gifted value investor. He also has a gift for turning a phrase. One day I told Steve that one of the most respected investors in my industry had laughed out loud at my favorite investment idea. He understood immediately how encouraging this was and told me so. I will always remember his phrase “laughter is like panic without the downside,” meaning that an idea that most find laughable has low expectations baked into it. That particular idea was a stock that would end up rising twenty-four fold in the next six years. Maybe Steve was onto something. It was a lesson I never forgot.
The psychological strain of investing is at least half the battle, perhaps more. The discipline of discomfort is a formidable challenge. The worst part of it, is that it robs you of your peace and comfort. Let me be very clear: there is no guarantee that controversial ideas will work; although I do believe that the best ideas are always controversial.
The discipline of discomfort is a constant struggle. If your investment idea does work, and the market finally embraces your once-radical view, this point of greatest vindication is often the exact moment to leave that idea behind and seek out a new controversy. The human mind finds this discomforting.
It does not come naturally to abandon hard-won and now familiar ground of a successful investment to seek out alien territory and fresh uncertainty. Few can do this well. Even fewer do it well and often.
Many investors have the necessary traits of insight and intelligence, but they will remain on the outside looking in if they squander these important tools in the study of unworthy investments. If excellence in investing is your goal, then you must dare to be laughed at.
You must be open to examining and embracing ideas that others find foolish, repulsive, or obscure. You will have to leave behind the traditional definition of comfort in pursuit of something elusive, painful and uncertain in the markets. No one said successful investing would be easy! The most challenging aspect is not the analysis but rather embracing the discipline of discomfort.