Survival Mode
Our periodic communication that reminds you to ask, “Should I react to those headlines?”
“Luck don’t live out here. Luck lives in the city…You know, that’s whether you get hit by a bus or not. Whether your bank is robbed or not, or whether someone’s on their damn cell phone when they come up to a crosswalk. That’s luck. That’s winning or losing. Out here, you survive or you surrender. Period. That’s determined by your strength and by your spirit. Wolves don’t kill unlucky deer. They kill weak ones. You fought for your life, Jane. Now you get to walk away with it. You get to go home.”
- Cory Lambert, Wind River
I was watching the movie Wind River a while back, and the above quote struck a chord in me. Finally, I had to heed the muse’s calling, and I started working on a “DIS and DAT” around this idea of luck versus survival.
That was in October. For months I worked on it, never able to get the thoughts from my brain onto the page. But when I submitted the rough copy of this edition to the editor for help, she asked for terms of clarity, not advice: “How does one tell the difference between a good investment that takes time to mature or show progress, versus a bad investment performing badly?”
And just like that, I was back to the original quote: “Out here, you survive, or you surrender.”
Our industry tries to complicate and confuse so often that they begin to speak like gamblers. They speak about luck. They speak about winning or losing. Investing, when done right, is about survival. As luck would have it (pun intended), I ran across the next quote to re-enforce that concept:
“One of the stupidest things I’ve repeatedly seen smart people do – I call this Advanced Stupid – is that they get so fixated on trying to optimize something complicated, that they forget to optimize for survival, and then they get knocked out of the game.”
Are you serious? - by Visakan Veerasamy (substack.com)
At this point in my life and my career, I have seen a lot of different strategies for participating in the markets. Participants usually follow one of two paths. The first path begins easily with plenty of immediate gratification validating their choice(s)—depending on luck, but not preparing for survival. Small win after small win, and a consensus rises from the crowd of likeminded players, praising the participant on their intelligence, bravery, and foresight.
But then the winning stops. And it isn’t of the small loss variety, the gambler crashes with irrecoverable losses. They must surrender. I call this path the inverse checkmark pattern—up at first, yet ultimately ending with a wipeout.
Tick, tick, tick, crash.
The other path is one that begins slow and is fraught with outflow after outflow, loss after loss, frustration after frustration. Survival is all they seem able to do, always lagging others. But, years later, a pop of success here, then a pop over there. Then without knowing exactly when it happened, our investor looks back at the prices originally paid and thinks, “I survived.”
It’s a lonelier path now for the investor, the crowd having moved on to the next flashy thing. Over and over, the gamblers try their luck, but this investor survives. I call this path the checkmark pattern.
Therefore, my answer to the editor’s question is that it is not necessarily the investment that’s performing badly. It’s the market participant behaving badly that makes the most difference in the long run. It’s choosing to follow the logical path rather than the popular one, and it’s choosing to seek long-term gratification over immediate validation.
- Charlie Munger, Caltech interview, December 14, 2020
News and opinions will not help you to survive.
- Warren Buffett
How, then, can we behave like investors, focusing on surviving over being lucky in a world where the shouts, asking us to join the fun of the gamblers’ parties, are so loud?
War, political divides, industry supply problems, worker shortages, inflation, digital disruption—this is the news of today, fear and destruction. At the same time, the S&P 500 just made a new high, and the market is enamored with exciting news of great progress and growth.
The two seem diametrically opposed, unable to coexist. Yet these opposing ideals feed the financial system. Their coexistence encourages trading and risk-taking. Instant feedback on your bet for the future creates an environment where market participants believe if they were just smarter, luckier, quicker, then and only then will they win. Unfortunately, studies have found that the opposite is also true: as market participants receive positive feedback (wins), they start to believe they are smarter, luckier, quicker than others, so they begin to bet larger. Which, as we know, leads to their surrender and eventual defeat.
Focusing on the characteristics of the business itself instead of the dancing stock price helps to create a positive investing environment. Houses are built on stone foundations, after all, rather than ever-shifting sands. To this end, we look for businesses with stockholder-friendly managements, a sizeable competitive advantage, a long runway to re-invest those profits, and a price discount at initial purchasing.
Now this list is mostly subjective. It is not easy to find these companies or even know when you have found one. The point is, if you could jump 30 years into the future, then the best investments—the ones that will help you survive—over that period would have possessed those characteristics. The worst investments would be in businesses that have the opposite of those characteristics.
What do we think separates the managements of businesses that are good for investing?
Of course, this type of survival technique is not easy, it is not glamourous, it is not a get-rich-quick approach, and it’s not an approach that avoids sharp price declines (large losses).
Most managers try to appeal to the overwhelming request by analysts to give growth guidance for the next quarter, not for long-term growth. Some of our favorite companies are those with managers which shun these requests. Traveling down that other path is not easy for managers.
Realizing that their industry will eventually cycle to very difficult times, some leaders focus on survival first. As we see it, those companies which constantly put surviving first have a long-term advantage. The competitors focusing on growth of the short-term nature will eventually need to flip to a culture of survival when supply becomes plentiful, and demand seems to evaporate. They will have a difficult time maintaining their balance (and balance sheets). The prepared leaders can gain market share through those periods due to their competitors’ struggles with implementing “survival mode.”As it turns out, the real luck wasn’t in the fleeting wins along the way, but in coming out the other end all the better for the path you chose.
