Investing well, like any significant endeavor, requires some level of pain to succeed.
In a recent article Brad Stulberg, a writer for Outside Magazine and Runner’s World shared the advice he received from his marathon coach. To succeed as a marathoner, he “would need to learn how to be comfortable with being uncomfortable.” Stulberg says he, “didn’t know it at the time, but that skill, cultivated through running, would help me as much, if not more, off the road as it would on it.”
The importance of developing the discipline to press on when things are painful, and to execute on what’s right in front of you, goes beyond running. This trait carries over to accomplishing anything difficult in life and being a successful investor as well.
With investing the “pain” tends to come from two areas: 1) Paying attention to the fundamentals (i.e., the “boring” stuff) which is required to minimize errors, and 2) being different from other investors. Let’s take a look at each.
Investing Well Requires a Low Margin for Error
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” ~Paul Samuelson
In episode six of his excellent podcast Revisionist History, Malcolm Gladwell introduces the concept of "weak link" problems. Essentially, these are problems best solved by shoring up the weakest link, not by making the strongest link stronger. Based on statistical analysis conducted by David Sally and Chris Anderson and revealed in their book ‘The Numbers Game,' if a soccer club upgraded their weakest players, not their superstars, they would score more goals and win more games—a lot more games. The idea is that soccer is a true team sport with a low margin for error. You are more likely to get beat by one mistake than you are to benefit from some transcendent play by a once in a generation player. This is in contrast to basketball which is more of a “strong-link” game. One great player, like Michael Jordan, can determine the outcome.
Sally describes the issue like this: In soccer, eight great passes only increase your odds of winning by some small margin, but then on the ninth pass if you make a mistake you go right back to zero.
Investing is a “weak-link” endeavor. No matter how great you are managing one area of your investments if you’re making mistakes in the other areas you offset any “greatness”— or more likely, do harm. In short: investing has a low margin for error.
Consider the following:
You could have the best investment strategy in the world, but if can’t control your behavior and stick with it over time, you won’t realize these returns.
Maybe you do stick with your strategy over time, but if you don't control your investment expenses, you’re giving up your return to fees.
Maybe you minimize fees, but if you pay too much in taxes, you end up giving your returns to Uncle Sam.
These are all "weak-link" areas that many investors fail to consider or brush off as minor and trivial, but that really add up. Vanguard, in their Advisor Alpha whitepaper (pdf here), estimate that working with a skilled and comprehensive financial advisor to reduce costs, minimize mistakes, rebalance regularly, and limit taxes through tax-loss harvesting and asset location can add up to 3% per year in value.
These investing fundamentals aren't the sexy part of investing, they don't grab headlines or make good cocktail party chatter, but make no mistake: they are critical to success. It can be painful to give the fundamentals the attention they deserve, but they are truly the foundation of any successful investment plan.
Different Results Require Investing Differently
"The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd." ~Warren Buffett
Being different: easy to say but hard to actually do. Investing in a way that materially differs from other investors is many times uncomfortable, but is absolutely necessary if you want different (i.e., better) returns than others.
Consider the following example again from the Revisionist History podcast. Sally and Anderson after completing their analysis that soccer is a “weak-link” sport and that owners should spend their payroll shoring up the bottom of the roster not splurging on superstars, tried to sell this idea to team owners. They found that the owners weren’t interesting in hearing the analysis. They were more concerned with doing what everyone else was doing (spending on superstars) so they could hang out with these famous players and the marketing impact, jersey sales, etc. they get from this strategy, than they were with the impact on improving the team. It’s uncomfortable being different even if, as Michael Lewis showed in his book Moneyball on the Oakland A’s, it leads to better results.
No matter how great of an investor you are, there are going to be periods of underperformance. What matters is getting comfortable with these and having the confidence in your strategy to stick with it over time.
Again, consider Warren Buffett. In the late-nineties, he was being ridiculed as behind the times and past his prime for not jumping on the tech bandwagon. His company, Berkshire Hathaway returned 0.5% in 1999 versus 21.0% for the S&P 500—A whopping 20.5% underperformance in one year! And yet, he held true to his strategy and outperformed the next year by 15.6% and each of the next three years.
As Josh Brown recently wrote in his discussion of two very successful investors, Buffett and Jeff Bezos, investors with two very different investing styles but one common attribute, “This fidelity to their respective strategies, through thick and thin, has got to be an answer, if not the answer.”
Just like we know running a marathon is a painful undertaking, we know investing is going to require being uncomfortable at times. Sometimes consistently carrying out the fundamentals feels trivial or being different that other investors requires time for the value to show up, but with investing as with running getting comfortable with being uncomfortable leads to a better result over time.