Howard Marks of Oaktree Capital is one of the great writers on the investment process.  We enjoy reading each of his very popular memos.  Early in 2014, he published Dare to Be Great II which, building on the original Dare to Be Great, discussed the necessary conditions for exceptional investment performance.  From the memo:

“For years I’ve posed the following riddle: Suppose I hire you as a portfolio manager and we agree you will get no compensation next year if your return is in the bottom nine deciles of the investor universe but $10 million if you’re in the top decile.  What’s the first thing you have to do – the absolute prerequisite – in order to have a chance at the big money?  No one has ever answered it right.

The answer may not be obvious, but it’s imperative: you have to assemble a portfolio that’s different from those held by most other investors.  If your portfolio looks like everyone else’s, you may do well, or you may do poorly, but you can’t do different.  And being different is absolutely essential if you want a chance at being superior.  In order to get into the top of the performance distribution, you have to escape from the crowd.”

Of course escaping from the crowd is often easier said than done.  Solitary efforts are, by their very nature, lonely, and can leave one prone to self-doubt.  Again from the memo:

“Non-consensus ideas have to be lonely.  By definition, non-consensus ideas that are popular, widely held or intuitively obvious are an oxymoron.  Thus such ideas are uncomfortable; non-conformists don’t enjoy the warmth that comes with being at the center of the herd.  Further, unconventional ideas often appear imprudent.  The popular definition of ‘prudent’ – especially in the investment world – is often twisted into ‘what everyone does.'” 

The pursuit of differentiated investment performance drives much of our investigation into private businesses with a scale and location that may be unappealing to large portions of the institutional investing population.  We hope that the opportunities this inquiry provides will more than compensate us for any lonely discomfort experienced along the way.

The Slight Edge

One of our favorite books is The Slight Edge by Jeff Olson, which led us to re-evaluate our approach to seemingly “insignificant” decisions that are made on a daily basis.  We particularly liked Olson’s framework because it takes a familiar concept to those of us in finance – the power of compounding – and applies it to all aspects of life.

Olson’s Slight Edge philosophy states that success is the “progressive realization of a worthy ideal.”  He believes that with each decision a person makes, they are either taking themselves “up or down the success curve.”  From the book:

“Everybody’s busy. Everybody does the actions. But were they the right actions? Were those actions productive? Did you take a step forward? These are questions most people never take the time to think about.

Did you eat well, or did you eat poorly? Who did you associate with today? Did they empower you? How? In what way? Did you listen to good information today, or just zone out to the music? Did you engage in positive conversation, or did you gossip and complain? What did you read that contributed to your success today? Did you do any of those things unsuccessful people aren’t willing to do? Whose dreams did you build today – yours or somebody else’s?”

Olson argues that 95% of people fail to achieve true success in life because they lack a grounding philosophy.  As a result, most people choose to “not do the things that are easy to do” on a daily basis, such as getting a moderate amount of exercise, making smart nutrition choices, saving instead of consuming, returning a phone call, etc.  Over time, failing to act on these seemingly insignificant choices leads people down the “failure curve,” which tends to compound negative attitudes such as blame, neglect, entitlement and anger.

Alternatively, Olson posits that the 5% of people who achieve true success are those that habitually do the things that are “just as easy to do as not to do.” While this disciplined approach does not have an instantaneous impact, over time, the value of taking care of the easy things in a habitual manner is emotionally, intellectually and financially powerful.  

We believe in the compounding effects associated with making the right, but hard, decisions on a daily basis, and we understand that with each decision we make, we are either taking ourselves up the success curve, or down the failure curve.  Taking advantage of slight edges allows us to reflect upon our own strengths and attack our weaknesses more effectively.