Consistency as the Hidden Driver of Investment Success

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Many factors contribute to investment success, but consistency is too often underappreciated.

Consistency isn’t exciting. And consistency doesn’t get headlines. But consistency does allow an organization’s investments and people to compound and grow over time.

Consistency means showing up, day after day, improving little by little.

Consistency lacks the excitement of the next big thing, but it’s not the big things that generate durable returns.

Instead, it’s the consistent improvement in your people and the consistent value added by your portfolio over long periods of time.

Consistency in investing is like consistency in athletics, music, or art. It’s the constant grind of consistently pushing yourself towards a common goal. But, it’s a slow and invisible process – you don’t see improvement every day. You have to trust your process.

Investors lack the staying power to build impressive results. People want variety and stimulation. Sticking with the same thing can be monotonous, even if valuable. It’s during the boring stage that we get the itch to do something more and make a big change. But doing something more is often used as an excuse to do something flashy, something that excites us. It’s not excitement that drives returns, it’s consistency.

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The Illusion of Explanatory Depth: Why We Know Less Than We Think We Do

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We know less than we think we do.

Most of the time, it’s not a big deal. We can navigate our days just fine.

In many areas, however, it’s critical to acknowledge what we know vs. what we don’t know.

We need to be well-calibrated. That is, we need to make sure our confidence matches our actual knowledge. When we think we know more than we do, we make bad decisions, even though we remain supremely confident in our decisions. This mismatch has real consequences:

· Thinking you know more about money and investments than you really do means you will lose money

· Thinking you know more about leadership and management than you really do means you will lose good people

· Thinking you know more about communication than you really do means strained relationships

· Thinking you know more about parenting than you really do means you will struggle to raise good kids

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Security Theater

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Security theater is a concept that you’ll experience everywhere once you know what it is.

Bruce Schneier, a security expert who created the phrase, explains:

Security theater refers to security measures that make people feel more secure without doing anything to actually improve their security.1

Here’s how Schneier describes the concept:

An example: the photo ID checks that have sprung up in office buildings. No-one has ever explained why verifying that someone has a photo ID provides any actual security, but it looks like security to have a uniformed guard-for-hire looking at ID cards. Airport-security examples include the National Guard troops stationed at US airports in the months after 9/11 — their guns had no bullets. The US colour-coded system of threat levels, the pervasive harassment of photographers, and the metal detectors that are increasingly common in hotels and office buildings since the Mumbai terrorist attacks, are additional examples.

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Nine Rules to Fight Deception in the Investment Process

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Independent, critical thinking is an unnatural process, especially for investors. It’s easier to go with our gut instinct, instead of relying on the facts. It’s easier to go with our emotion than diligently follow the evidence. Above all, we gravitate towards stories and promises rather than logic and reason.

Carl Sagan was one of the great astronomers and scientists of the 20th century. He published more than 600 scientific papers, co-wrote Cosmos, the most widely watched T.V. series in American history, and wrote the novel Contact, which was later made into a movie.1

One of his most important efforts was his support for independent, skeptical thinking. It’s the application of the scientific method to our daily interactions. In his book, The Demon-Haunted World: Science as a Candle in the Dark, Sagan includes a chapter called “The Fine Art of Baloney Detection.”2 Sagan proposed 9 simple rules on how to apply the scientific method to better understand the world around us and protect against deception. It’s advice that fights against lazy thinking and raises our standard on what we choose to believe.

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Bob Maynard on The Challenges of Complex Investing

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While many institutional investors have flocked to alternative assets, few have been able to translate these allocations into successful performance. Allocating is easy, performing is hard.

Bob Maynard, CIO of the Idaho Public Employees Retirement System, illustrates the difficulty of executing on alternative strategies:

All of these additional areas add complexity and require time for Boards and staffs, and are often not worth the extra effort unless there is a clear organizational commitment or belief in a certain additional approach that can survive changing Boards and staffs over the years that may occur before the extra efforts pay off. One of the most valuable resources of an investment organization is not the assets in the portfolio, but the time required of the Board and staff. After the basics have been accomplished, additional investment efforts in more complex areas have to expressly trade off the requirement of additional resources and time compared to the often problematic longer-term return benefits.1

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The Battle of Passchendaele and The Madness of Blind Effort

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In his book, Good Strategy, Bad Strategy: The Difference and Why It Matters, Richard Rumelt illustrates the folly of blind effort and unyielding motivation:

In Europe, motivational speakers are not the staple on the management lecture circuit that they are in the United States, where the doctrine of leadership as motivation is alive and well. Here, for example, is H. Ross Perot: “Most people give up just when they’re about to achieve success. They quit on the one-yard line. They give up at the last minute of the game, one foot from a winning touchdown.” Hearing this, many Americans nod in agreement. Many Europeans, by contrast, hear the echo of the “one last push” at Passchendaele. There, the slaughtered troops did not suffer from a lack of motivation. They suffered from a lack of competent strategic leadership.

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After Action Reviews: An Essential Method to Accelerate Your Team’s Improvement

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I think avoidance is the enemy of great. Avoidance – particular avoidance of discomfort – is even the enemy of good. It’s the enemy of the growth and change that lead to flourishing.1

In all organizations, mistakes are guaranteed to occur. What’s not guaranteed to occur is learning from these mistakes. The one positive that comes out of failure - the ability to reflect and correct mistakes, ends up neglected by the organization. Avoidance of intellectual discomfort is usually the preferred route.

There are several reasons organizations avoid learning from mistakes:

· Organizational ego prevents honest discussions about what went wrong

· Busyness means that people immediately move onto the next project

· A rush to judgment centers on superficial issues, rather than deep-seated problems

· Blame is quickly directed at external factors, absolving any need to discuss internal responsibility

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The Overton Window: Why Bad Ideas Prevail Over Good Ideas

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Why do good ideas sometimes gain little traction and bad ideas flourish despite obvious flaws? It’s rarely related to the merit, logic, or evidence behind the idea. Instead, acceptance is based on political and cultural popularity. If it’s an unconventional idea that disrupts tradition, it will fail. If it’s a terrible idea, but falls within a group’s norms and expectations, it will likely succeed. The Overton Window illustrates why mediocre ideas triumph over great ideas.

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High Resiliency Organizations – What Investment Firms Should Learn from High-Risk Industries

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There’s a small group of organizations that have learned to excel despite operating in extremely complex, dangerous, and unpredictable environments. For example nuclear power plants and aircraft carriers all operate in rapidly changing environments with deadly consequences for failure. They’ve learned to handle the unpredictable surprises that would decimate a typical organization. The fact that many of these organizations operate for years without failures is a testament to the deliberate design of their organization and carefully constructed team training.

Investment organizations should pay attention. Investing occurs in volatile and unpredictable environments. The future is unknowable and full of surprises. The most well-researched plans will be disrupted. For many institutional investors, the consequences for getting it wrong are measured in the billions.

Many investment firms are comforted by their highly educated and credentialed personnel, extensive technology/software resources, and a deep roster of consultants. While these components are certainly essential, they’re missing one major component.

Resiliency.

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The Right Way to Motivate Your Team: Understanding the Power of Intrinsic Rewards

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Many management systems overlook the key component of any successful organization – the people. Systems and procedures are designed to meet various financial objectives, but rarely do they prioritize the human factor. But if you design systems to maximize the intrinsic motivations and fulfillment of your team, you’ll have a better chance of meeting your objectives than if you just focus on the objectives themselves.

The organizational approach to motivation, rewards, and incentives is still stuck in the past. There is still the belief that if you want to motivate your people, you just need to increase the rewards or increase the punishment.

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Lessons from the Warrior Monk: Jim Mattis

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James Mattis is one of the most respected and revered military leaders of the last 50 years. Mattis served for over 40 years in the Marine Corp. Mattis in nicknamed the “Warrior Monk,” due to his incredible study of leadership and military history.1 It is reported that he has a personal library of 7,000 volumes on war and strategy.2 Mattis recently published his book, Call Sign Chaos, which details his leadership lessons learned from his military experience.

Leaders across all industries will improve their ability to lead by studying Mattis. Below are eight of the most important lessons Call Sign Chaos:

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Shifting Baseline Syndrome – The Consequences of Neglecting Gradual Change

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How did you go bankrupt? Two ways: gradually then suddenly - Ernest Hemingway

Gradual change is hard to manage. It’s difficult to monitor how change is slowly, but consistently, creating significant variations in our environments. Because we overlook slow change, we are shocked when small changes culminate in major catastrophes. In short, we suffer from Shifting Baseline Syndrome.

Shifting Baseline Syndrome (SBS) is an important principle found in ecology. This idea explains how many ecological systems, such as nature conservation, water quality levels, and restoration of wildlife habitats, are destroyed over time.

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Excel Under Stress: One Simple Technique Used by Elite Military Special Operations Forces

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Breathing. An action so common yet so often neglected. We don’t realize the power inherent with our breathing. We know it keeps us alive, but beyond that, we tend to just forget about it.

Improper breathing accelerates stress and anxiety while hampering physical performance.

Proper breathing gives us better conscious control over stress and anxiety and enables peak physical response.

The odds are you have never considered the critical effect proper breathing has on mental performance, especially the ability to perform under pressure and stress. Stress and pressure are constants in our lives. We face it at work, at home, and in activities like athletics. Proper breathing, especially in high-pressure environments, enables peak performance and the ability to defeat your competition.

All it takes is one simple technique.

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Everyday Survival: 9 Ideas to Overcome Life’s Challenges

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2020 has been a never-ending year of adversity and uncertainty.

How well do you feel you were prepared?

Did you easily adapt to the difficult environment? Or did it feel like an endless battle to figure out what’s going on and what to do about it?

If you’ve struggled this year, you’re not alone. Most people don’t handle the unexpected well. And the idea of hoping for assistance from the government or other institutions has been disappointing with their unreliable, haphazard efforts.

Your ability to survive chaotic environments is, and always will be, up to you.

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My Notes from ILPA's 2020 Member Conference - Scrutinizing Terms in a Down Market

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ILPA recently hosted a workshop on scrutinizing fund terms during the recent COVID-19 epidemic. Given the sudden and drastic downturn, funds used levers that caught LP’s off-guard. Below are my notes on the biggest takeaways and areas of concerns for LPs

Overall approach

· Are we getting the transparency we need?

· What do we need to be proactive about

· Are there adjustments to be made with new commitments?

· What have we learned through the COVID experience?

Do we have confidence GP's are using the following tools in the best interests of LPs?

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My Notes from ILPA's Legal Town Hall - Deal Killers

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Here are my notes from ILPA’s 3/19/20 Legal Town Hall on Deal Killers. Several LP’s discussed the most common non-investment related issues they see. While all organizations have different levels of comfortability on these issues, it’s useful to see what risks LPs are seeing and their mitigation approach. These risks focus on issues besides the typical investment and fee concerns.

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Subscription Lines: Key Legal Terms for LP Consideration

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Here are my notes from ILPA’s 2020 Members’ Conference workshop on subscription lines. Michael Mascia from Cadwalader, Wickersham, & Taft LLP led the workshop.

The workshop was a thorough review of both common subscription facility terms and more advanced provisions. The workshop was valuable for both investors unfamiliar with subscription facilities as well as experienced investors.

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The Curse of Vague Thinking: How Empty Rhetoric and Hollow Words Mislead Investors

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Vague thinking surrounds us. It’s permeated politics (“come together in a bipartisan way”), business management (“leverage synergies and create win-wins”), corporate mission statements (“build a corporate culture that respects and values the unique strengths…”), and of course, investing.

Every day we are inundated with empty rhetoric used to hide, rather than reveal, the truth. It promotes laziness and obscures incompetence. It’s a tempting way to communicate. It’s the path of least resistance.

Vague communication is standard in the investment world. Market experts talk in vague generalities and obfuscating one-liners that do nothing to further investors’ understanding of the markets.

The investment world is an unrelenting assault of vague language. Vague verbiage has become a parasite in our quest to make wise investment decisions. Everyone pretends to know the future. No one admits ignorance. The illusion of knowledge is real. It’s become absurd.

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The Fallibility of Experts: How Experts Lead Us Astray and How to Prevent It

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Be careful what you ask experts. Experts are bad at predictions, but are great at assessing base rates.1

Experts are the go-to source for life’s uncertainties. We rely on them for guidance and advice during ambiguous environments. We crave their authority, confidence, and conviction.

But the evidence is clear - experts are awful at predicting the future. Expertise is not synonymous with superior forecasting ability.2

Experts are extremely useful, if properly directed. As we’ll see, we can use an expert’s deep knowledge to improve our decisions. However, the process is not intuitive and doesn’t happen automatically. The burden is on us to ask the right questions.

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Managing Human Error in the Investment Process

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All investors make mistakes. Mistakes happen not only because of misjudgment but the nature of investing. Mistakes arise from universal conditions within the investment world.1 In other words, it’s usually not the person that’s the source of the mistakes, it’s the environmental and situational factors. It’s the system.

Rarely do we acknowledge and understand the system. We neglect environmental factors and reflexively attribute mistakes to personal factors: laziness, inattentiveness, ignorance, etc.

Investors operate in a complex world with imperfect information and an unpredictable future. Add in additional pressure from clients and organizations and investors are primed to err.

How leaders handle human error separates the great investment teams from the average. Better assessment and understanding of errors build a competitive advantage.

Yes, investors make mistakes. But they’re not made in isolation. It’s the system issues that exacerbate personal mistakes. The big idea is resolving “system” issues that will lessen the effect of unavoidable personal shortcomings.

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