Coaching lessons from the world of investing

When I present coaching seminars about planning and periodization, one key concept I talk about is opportunity cost. For those that do not know me, coaching is my hobby, not my job. During the day I work as a finance attorney at an asset manager. I used to think these two worlds were in different universes, but the longer I work in both the more I see how their orbits intersect.

Where coaching meets investing

At their core, both coaching and investing are fields that try to get the most out of a fixed amount of resources. Athletes have only so much time and energy and cannot do everything. Similarly investors have limited capital and have to choose the best investments. Performance in both fields is also relative: we might earn a client 10%, but we have failed them if the market moved up 15% during that timeframe just as we fail athletes who improve at a slower pace than their opponents. Every opportunity we choose to chase is at the expense of another option we could have chosen. In both fields it’s not just about picking something that works, but about picking the things that work the best.

The amount that you beat the market is called alpha. Alpha is rare. In investing the vast majority of advisors simply cannot consistently produce alpha. The same is true in coaching. It is the rare few that can produce alpha over the long term and we can learn from them not by looking at their decisions, but by looking at their decision making processes. After all, planning and performance are simply the result of decision-making over the long term. In the past this site has shared some insights from the likes of Warren Buffett and Charlie Munger, Ray Dalio, and Nassim Taleb. Below I want to add some ideas from one name lesser known to the mainstream world: Howard Marks. Marks is not only a succesful investor, but also a prolific writer who has been sharing memos about his analytical and decision making process for decades.

Embrace the limits of knowledge

Investing and coaching are all about the future. Marks defines investing as simply positioning capital to benefit from future events. Therefore we are essentially trying to predict the future: what companies will grow and what exercises will help our athletes grow? But as smart as we might think we are, nobody can predict the future.

In the memo The Illusion of Knowledge Marks has some great quotes to share:

There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know. – John Kenneth Galbraith, economist

No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future. – Ian Wilson, former GE executive

In a recent podcast interview Marks shared a great example of the trouble we can get into when we don’t acknowledge our own limitations:

Two kinds of people get into trouble: the people who know nothing and the people who know everything . . . It is important to be brutally frank about all the stuff you do not know. If I had to drive from London to Leeds what would I do? I would get a map, turn on the GPS, ask directions, and drive slowly to make sure I don’t pass the exit. But if I think I know the way I don’t use a map, don’t turn on the GPS, don’t ask directions, and I drive fast as hell because I’m confident of the route. If it turns out I was wrong, I end up in Devon.

Nobody knows it all. The key to success isn’t always knowing more, it is often simply acknowleding what you don’t know.

Strategies for dealing with uncertainty

So what do you do if the future is unknowable? One reaction would be to do nothing. But as he notes in his most recent memo: “deciding not to act isn’t the opposite of acting; it’s an act in itself.” Therefore we need to do something, and in various writings and interviews, Marks has shared four ideas I highlight below to help make better decisions in an uncertain world.

You can’t predict, but you can prepare. As the saying goes: plans are useless, but planning is essential. We might not be able to predict the future, but we can prepare for it. And Marks discusses that true preparation means not just preparing for one outcome, but having an approach which prepares you for a range of outcomes. Think about the possible outcomes, not just the one that seems most likely and choose an approach that can adapt to or make the most of all situations that can arise.

It’s about finding the best data, not the most data. Data is taking over sport and often the volume of detailed data simply distracts us from the big picture. In the podcast interview Marks highlights what that means for him and other investors like Warren Buffett:

You have to accept early that success doesn’t come from knowing everything. It comes from knowing the things that are important. Give up on knowing the minutae. Don’t think that being well informed means knowing all the facts . . . [Warren Buffett] figures out which few things are important and then he studies the hell out of those as opposed to trying to know all the facts. Usually those few things that are the most important are not current data. They are the forces that will make the company successful or unsuccesful. So it takes a singular intelligence to figure out what they are and a singular insight to predict what will happen in regards to those few things. That’s how you reach success, not by being an encyclopedia.

Circumstances change, and you better change with them. The universe is constantly changing. Finance is seeing a lot of sea change at the moment. Interest rates have moved higher in the past years after 40 years of nearly continuous decline. And a century-long trend of globalization and free trade has now been upended as well. In the sporting world we also see tactics constantly progressing, rules changing, and athletes evolving. What worked before might not work in this new environment. As Marks put it in the podcast:

Einstein said that the definition of insanity is doing the same thing over and over again and expecting a different outcome. I think another version of insanity is doing the same thing in a different environment and expecting the same outcome.

Always keep an eye on the circumstances and how they are changing. Decisions are never made in isolation and you have to keep in mind the environment in which you are making them.

Focus on the fundamentals. A big question in training is when to change things up. Similarly, in investing the question is when to sell your position. Marks wrote a detailed memo about when to sell. In it he highlights that most people decide to sell either because a position went up, or because a position went down. Relying on that logic is nonsense, as he described in the podcast:

Both can’t be right. Neither is right. You shouldn’t sell things just because they are up. If it was a good buy in the first place maybe it has further to go. And you shouldn’t sell things just because they are down. If it was a good buy in the first place maybe it is a better buy now that it is cheaper . . . There is one reason to sell: reanalyze the position, you examine your prior thesis, look that is still correct, see if there is still room for appreciation, update your thesis, and then ask is it an investment I would make today?

In other words, the decision to change comes down to the fundamentals. Every day you need to ask yourself again if the path you are on still makes sense. Maybe it has worked so far, maybe it hasn’t. But ask the question to see if it still makes sense.

Final thoughts

Nobody knows it all. Nobody makes all the right decisions. The key lesson I take from Marks is that some simple processes can help improve your decision-making just a little bit. Things like acknowledging your blind spots and focusing on what matters are truly simple, but we still overlook them too often. When you are playing a game of inches, those small, simple things are often enough to move ahead of the competition.