Consistency as the Hidden Driver of Investment Success
/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.
Many investors have great plans and strategies, if only they would stick with them. Instead, whether through fear, anxiety, or boredom, they abandon what’s been proven to work well over the long-run and start chasing the short-run.
An inconsistent investment process is a well-known problem. But my goal is to explore three other inconsistencies that plague investment organizations: Team Inconsistency, Communication Inconsistency, and Training Inconsistency
Team Inconsistency
Constant team turnover is an issue at all levels of an investment organization:
CIO Turnover. A new CIO brings the push for new strategies and the drive to “make something happen.” Much of the effort and time that was invested in the past is lost as strategies are abandoned and managers terminated. Some change is always necessary, but dealing with a new CIO and strategy shakeup every few years hinders long-term success.
Board Turnover. Board turnover causes similar issues. New board members bring half-baked theories and hidden priorities. Some have past connections and want to fill a new hire or manager with an old relationship. Some play the political game and will punish the investment organization to win political points. Others may push new strategies not based on merit, but simply based on what they did in the past. Of course, boards need to challenge and push back when necessary. But it needs to be aligned with the long-term goals of the organization.
Staff Turnover. Staff turnover is an issue at both the junior and senior level. Spending 2-5 years training junior staff only to see them leave is a huge waste of resources. It takes many years for young staff to be ready to meaningfully contribute. Having to start the process over and over again puts the workload back on others. Senior staff turnover is an issue too. It takes time to recruit high quality people, especially those who are a cultural fit. It’s easy to find a warm body to fill a seat, but it’s harder to find someone who’s a valuable long-term contributor.
Many organizations simply don’t care if their people are happy with their role. Many organizations say it, but few do it. It’s a big investment to bet on the right people, but many are more worried about trying to satisfy budget targets rather than recruiting exceptional talent.
MIT’s Endowment, led by Seth Alexander, has the right approach to hiring investment talent. In an interview with Manual of Ideas, Seth explains how they build their organization:
[Manual of Ideas] How have you gone about building the organization and team?
Seth Alexander: We have tried to find the best athletes with a passion for investing, not necessarily the most experienced investors…We started early on with a vague organizational chart and eventually eliminated it altogether to make it clear we wanted people with all levels of experience to come in and contribute as investors and partners. We do not try and hire someone every year or anything like that. Instead, we hire opportunistically. If two great people came along in the same week who would both be a great fit, we would hire them. We are always looking to hear from passionate investors about working here and really encourage people to reach out to us.1
MIT recognizes that good people don’t come around just when you have an opening or have room in the budget. Investing is a people game, and MIT is playing it the right way.
Communication Inconsistency
Top-level investors often rise to the top because they are great at investing, not because they are great leaders or communicators. Hard skills – analytical capability, financial analysis, and investment knowledge are prioritized over communication and leadership.
Unfortunately, it’s the failures in the soft skills department where team and decision-making issues arise.
Analysts are not robots (at least not yet) so we can’t manage them like we would a piece of hardware.
Leaders need to consistently repeat and emphasize the goals, missions, and priorities of the organization to each team member.
Captain David Marquet, a 28 year veteran of the U.S. submarine force and author of Turn the Ship Around!: A True Story of Turning Followers into Leaders, talks about the importance of consistent communication:
What I realized, however, is the need for a relentless, consistent repetition of the message. CONTINUALLY AND CONSISTENTLY REPEAT THE MESSAGE is a mechanism for COMPETENCE. Repeat the same message day after day, meeting after meeting, event after event. Sounds redundant, repetitive, and boring. But what’s the alternative? Changing the message? That results in confusion and a lack of direction. I didn’t realize the degree to which old habits die hard, even when people are emotionally on board with the change.2
It's often thought that high performing individuals don’t need to be reminded of their importance to the organization. But Dan Coyle, author of The Culture Code, explains why that’s a mistake:
The other feature of this list is that many of these signals could easily be viewed as obvious and redundant. For instance, do highly experienced professionals like nurses and anesthesiologists really need to be explicitly told that their role in a cardiac surgery is important? Do they really need to be informed that if they see the surgeon make a mistake, they might want to speak up?
The answer, as Edmondson discovered, is a thundering yes. The value of those signals is not in their information but in the fact that they orient the team to the task and to one another. What seems like repetition is, in fact, navigation. Those signals added up in a way that you can hear in team members’ voices.
This is the way high-purpose environments work. They are about sending not so much one big signal as a handful of steady, ultra-clear signals that are aligned with a shared goal. They are less about being inspiring than about being consistent. They are found not within big speeches so much as within everyday moments when people can sense the message: This is why we work; this is what we are aiming for.3
Consistent communication creates a growth environment that allows the team to challenge the status quo, propose and execute unpopular ideas, and openly criticize one another.
Organizations thrive when teams are free to voice opinions. When issues are buried, the problems only grow, and everyone knows it.
Legendary coach John Wooden emphasizes the importance of removing the emotional instability of peaks and valleys in organizations:
The peak that emotionalism creates is followed inevitably by a valley. I do not like peaks and valleys in effort or execution. Ups and downs are not the mark of individuals or teams that achieve competitive greatness…All else equal, the individual or team with consistently applied effort and concentration – ongoing intensity – will defeat the emotional and inconsistent opponent.4
Training Inconsistency
A small daily task, if it be really daily, will beat the labours of a spasmodic Hercules. -Anthony Trollope
The investment industry, as mentioned previously, praises exciting, short-term wins over unglamorous, yet consistent effort. Herculean efforts make good headlines, but it’s lack of consistency hinders long-term value creation.
Sean Fitzpatrick, an all-time great rugby player, describes success as modest improvement, consistently done.
Success…is modest improvement, consistently done…it is about an unrelenting focus on the big goals – winning and leaving a legacy – but also constant attention to the details of practice and preparation. The best sports people in the world practice more than they play...business people should practice too. They should go home at night and analyse their day’s performance. They don’t and they need to. To be good at something takes practice, and lots of it.’5
Investors should train like athletes by figuring out their weaknesses, developing a training plan, and consistently practicing. Just showing up doesn’t work. And relying on random seminars and half-day trainings isn’t consistent enough to improve.
No one is surprised when amateur tennis players stagnate when they don’t have a coach and just show up and hit the ball around. But we somehow don’t apply the same standard for knowledge workers, especially investors. Showing up and putting in hours is not sufficient. We need to treat improvement as if we were an athlete or musician. Anything else is a mistake.
Investment organizations need a constant purpose and edge - perhaps that’s specializing in emerging managers. Perhaps it’s superior internal management. Perhaps it’s better long-term asset allocation decisions. Whatever the purpose, it needs to be constant. A constant purpose drives improvement by focusing the efforts of the team.
Edward Deming was one of the most well-regarded operational experts who enabled Toyota to become one of the world’s greatest manufacturers. In his book, The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer, Jeffrey Liker highlights Deming’s insistence on constancy of purpose:
When I think about Toyota and how it operates, I keep on coming back to quality guru W. Edwards Deming's famous edict: "Constancy of purpose." Constancy of purpose explains why, in any given year, if you bet Toyota will make a profit, you will probably win. If you bet that its sales will grow over the year before, you will probably win. You will not see huge growth spurts from one year to the next or major shifts in strategy. You will not see boardroom coups where a new regime takes over and remakes the company. Rather, you will see a slow and steady movement forward year in and year out. This is "constancy of purpose, " as I believe Deming envisioned it, that goes beyond short - term profits and enriching a few executives.6
Operate like Toyota. Stop jumping from fad to fad and instead work on continuous, incremental improvement. Pick one thing and do it well. That doesn’t mean you won’t need to learn new strategies or embrace change. It just means acting deliberately, not reactively.
Sources:
1. Manual of Ideas: The Super-Investor Issue. December 2014
2. Marquet, L. David. Turn the Ship Around!: A True Story of Turning Followers into Leaders
3. Coyle, Dan. The Culture Code
4. Wooden, John. The Essential Wooden
5. Kerr, James. Legacy
6. Liker, Jeffrey. The Toyota Way: 14 Management Principles from the World's Greatest Manufacturer