Isiah Thomas used to say, “The secret of basketball is that it’s not about basketball.
Bill Simmons wrote about this in his book. He said:
Those teams were loaded with talented players, yes, but that’s not the only reason they won. They won because they liked each other, knew their roles, ignored statistics and valued winning over everything else. They won because their best players sacrificed to make everyone else happy. They won as long as everyone remained on the same page. By that same token, they lost if any of those three factors weren’t in place…Year after year, at least one contender fell short for reasons that had little of nothing to do with basketball. And year after year, the championship team prevailed because it got along and everyone committed themselves to their roles…The secret of basketball is that it’s not about basketball.
Similarly, the secret of stock picking is that it’s not about stock picking. It’s about position sizing, humility, risk management, your opponents, yourself, the right partners, the right people and the right culture, to name a few.
I thought about this today after I read Tyro Capital’s 2019 annual commentary.
Here are a few snippets from their piece that struck a chord, none of which are about selecting stocks.
The fundamental error in defaulting to low valuation instead of deep fundamental underwriting work as a top of-funnel screen is best explained if one were to imagine the stock market as a retail store. You speak to the salesperson and they say to you, “OK, we have 1000 different things you can buy. These 800? They’re all the same price. These 100? They’re super nice and very expensive. Finally, we have these 100 that no one wants. They’re very cheap.” Now, imagine after that he told you, “Oh, and a thousand people already picked through the cheap ones.”
This is something you can’t learn about in The Intelligent Investor
Investing is a very difficult and complex game, and many money managers will lose regardless of style. The opportunity lies in expanding one’s skillset from purely fundamentals to understanding how and why other investors lose and using these structural factors to determine how to allocate capital based on fundamental views. In poker terms, one needs to know the quality of a hand (fundamental views), positioning and the texture of the board (flows, pricing views), and how the weaknesses of other players will allow you to profit from that information (structural inefficiencies).
In 1936, Keynes compared investing to a beauty contest:
Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitor, all of whom are looking at the problem from the same point of view.
Here is Tyro on outside forces updated for the 21st century.
Social Cost Arbitrage: Don’t forget the pecking order.
❖ Micromanagement: At the firm level, active managers increasingly have to justify individual positions to LPs, meaning investments not only have to be attractive to the manager, but also saleable to the client. Depending on the biases of the clients, managers may be unable to take advantage of insights because they risk losing clients.
❖ Boss Bias: Managers may have concerns with or even obsessions about a particular issue (election risk, fed balance sheet, etc.) that put employees in a bad spot because they will get fired if a particular investment does poorly around that same time that the issue manifests. Employees will not escalate ideas that they know go against their boss’s biases.
❖ Boy Who Cried Wolf: Individuals inside institutions generally cannot escalate views that have been escalated previously multiple times, even if the conditions for a good investment were not met in prior iterations. Managers scoff at pitches they have heard before.
The secret of stock picking is that it’s not about stock picking. Read the whole thing and you’ll see what I’m talking about.