Sunday, August 27, 2023
Saturday, August 12, 2023
Discovering the Power of Asymmetry
When I started my investing career, I focused almost exclusively on what I believed were the two fundamental rules of investing: Rule One: Don’t lose money, and Rule Two: Never forget Rule One.
We bought some companies at very low prices and others at a discount to their net asset values. On three separate occasions, the memo I wrote to our investment committee claimed, “It is mathematically impossible to lose money on this investment.” We lost money all three times. In fact, I personally lost money on five of my first eight investments, and we lost money on our first fund.
Over my 29-year career as a professional investor, I have come to realize that in those early days, I was dead wrong in my thinking about investing. If I had to summarize great investing in a single word, it would be “asymmetry.”
I learned that, yes, it is possible to reduce one’s downside, but it is not possible to eliminate it. The better strategy is to seek opportunities where the possibility of gains wildly outweighs what you can lose, which is typically capped at 1x your investment.
Further, there are criteria, which, when you stack them on top of each other, don’t stack linearly; they become logarithmic — or asymmetric. For example, if you have an incredible management team who builds a great team to support them, moves at a fast pace, operates in a large industry, can redeploy large amounts of capital at high returns, and is willing to do so over a long time – then you’re not playing for a 1.5x or 2.0x outcome, you could be playing for a 10x, 20x, or even 100x outcome.
Investing is about finding those asymmetric opportunities.
Living an Asymmetric Life
As I started applying the principle of asymmetry to investing, I also began to realize that the principles were even more powerful when I applied them to other areas of my life. And just like in investing, I was playing small in my life — playing not to lose.
I uncovered several principles that would allow me to create asymmetry in my life, and these also stack logarithmically. Apply one of these to your life, and you will improve your life significantly. Apply two or three, and you will live an incredible life. And, if you can run the table and apply all four of these principles, you can live a life with joy, energy, and meaning — and you can sustain it for decades.
Principle 1: Do Hard Things
Our whole lives, we have been led to believe that the goal of life is ease and comfort. We can order food from an app and binge-watch movies from our couch for only $9.99 per month. The less energy we exert in getting what we want, the more we pat ourselves on the back for having “made it” in life.
What a fantastic lie.
When I rowed crew in college, we measured our fitness level with a 2,000-meter test on a rowing machine. From the first day of the season to my peak fitness six months later, I would get about 20 seconds faster. Ten of those seconds would come from the work we put in – rowing, weightlifting, and running for two or three hours a day for six months. But surprisingly, 10 of the 20 seconds came in the first two weeks of the season. It did not come from improvements in cardiovascular fitness, strength, VO2 max, or technique. It came from psychology. Specifically, I would get comfortable being uncomfortable. I would realize that I could sustain a high heart rate longer than I thought and that when I got to 1,500 meters and was in pain, I could keep going.
The graph above depicts growth and change in our lives. We typically hit a plateau at some point, shown by the red circle. Once we reach a plateau, things are going to have to get worse before they get better. This is true for nearly all growth and improvement. For example, if you need to have a difficult conversation with your partner, your life will get worse first. But once you have the discussion, you will work through the issue and become closer. If you need to leave a difficult relationship, you might have a painful breakup, be lonely for a while, and then experience the anxiety or nervousness of dating again. Your life will get worse before it gets better. This is true for changing jobs, starting a new career path, learning a new skill, or starting a new habit.
Everything you want is on the other side of “worse first.” But when you can get comfortable being uncomfortable, you can have nearly anything you want in this life.
“When you can get comfortable being uncomfortable, you can have nearly anything you want in this life. ”
If you want to live an asymmetric life: Do hard things.
Principle 2: Do Your Thing
When I graduated from Stanford Business School, I had two alternatives for my career. One option was the job I had before business school, working at a large private equity firm. This path was clear. It had a salary and bonus, and several other classmates would be joining me at the firm.
The other option was to try to start my own company. I had bought several companies as a fundless sponsor in business school, but this path was far from clear in my mind. I didn’t know how to start, how to raise money, or even if I could afford to pay myself. With all these unknowns looming large in my head, I chose to take the big private equity job.
The job was hard. I took early flights, traveled across the globe, stayed up late meeting bid deadlines to purchase companies, and worked 80+ hours per week. I didn’t have kids yet, but if I had, I would have gotten home late, been away a lot, and missed little league games. The job I had billed as the “easy” option in my head was actually really difficult.
The first principle of Buddhism is Dukkah, which translates to “suffering.” Life has suffering. As I learned during this phase in my career — and Buddha learned 2,800 years before me — there is no “easy” or “safe” path. No matter what path you take, life will present suffering.
Life is suffering. So figure out something worth suffering for.”
While still in that big PE firm job, I met a guy at a dinner named Dave who had the same role as me at a rival fund. As we ate, Dave told the story of a deal he had just bid on. He lit up as he talked about debt covenants, leverage multiples, and the intricacies of his bidding strategy. He had so much energy and enthusiasm — about debt covenants, of all things! Instead of enjoying my overpriced meal, I had a sinking feeling in my stomach. I realized my energy for this role was not even close to the passion Dave had. I also realized that Dave, and anyone else who was that fired up about this job, would crush me. He was living his dream; I was just going through the motions.
When faced with choices about what we want to do, most of us miss one important piece of the equation. We factor in all the risks and tradeoffs, but we completely discount how differently we will show up when we’re truly energized about something. When our whole being is fully invested, we tap into a superpower, and we can sustain that for a long time. You won’t tap into this power as long as you’re living someone else’s dream.
“When faced with choices about what we want to do, most of us miss one important piece of the equation. We factor in all the risks and tradeoffs, but we completely discount how differently we will show up when we’re truly energized about something.”
If you want to live an asymmetric life: Do hard things. Do your thing.
Principle 3: Do it for decades
In 2004, at my fifth business school reunion, one of my classmates put his arm around me and punched me in the gut (literally and figuratively). He said, “Graham, during the greatest wealth creation of all time (Internet 1.0), you’re buying stupid label printing companies.” And I remember thinking, “Yup, that’s pretty much right.” But neither my classmate nor I were thinking very far beyond that moment.
Vince Lombardi, the legendary coach of the Green Bay Packers, once said, “The Green Bay Packers never lost a football game, but on a few occasions, we ran out of time.”
I loved what I was doing. And therefore, I was willing to do it for a long time. I am now 22 years into my role as CEO of Alpine Investors, and I’m still fired up!
“I loved what I was doing. And therefore, I was willing to do it for a long time. I am now 22 years into my role as CEO of Alpine Investors, and I’m still fired up!”
The equation for returns is X = (1+R)^N, where N is quadratic. Consider this equation where X represents your competence in any given role. The R represents everything you’re doing to improve yourself: coaching, reading, learning, writing out your goals, using your imagination, etc. The most powerful part of the equation is the N, the number of years you are in your role. If you love what you do, you will do it for a long time, and your N will be large. And if you improve at a reasonable rate over a long period, you can become the best in the world at what you do.
There is almost no obstacle that won’t yield to you at full power for a decade.
If you want to live an asymmetric life: Do hard things. Do your thing. Do it for decades.
Principal 4: Write your story
During the Great Recession, I hired my first-ever executive coach, JP Flaum. At the time, Alpine’s largest company was in default. Understandably, I blamed the company’s performance on the economic recession, but JP pushed me on this. He encouraged me to write a new story for this company based on three principles:
Describe the company five years from now, in detail. Get out of the fog of war in front of your face.
Describe it as the outcome you would want if you knew you would not fail. Picture your Nirvana.
Remember, “The ‘how’ is the killer of all great dreams.” So, don’t worry about how you will achieve any of the story as you’re writing it. Just write down the dream.
We wrote a new story for that company, which involved hiring a new CEO, building an all-star team, improving the technology and the uptime of the product, building a world-class sales and marketing team, and winning new contracts. It was fun to write that story, but of course, it felt aspirational and out of reach.
But we got to work on the first step: hiring a world-class CEO. And then, together with the CEO, we began to methodically execute the plan. We brought on an all-star team, improved our product, created a world-class sales and marketing organization, and ultimately won every contract (except one) which came up for bid over an 18-month period. The market didn’t change; the industry didn’t change; the competition didn’t change. We changed. We wrote a different story.
Since then, we’ve written hundreds of stories. We wrote stories about the performance we wanted to achieve, the talent program we would build, the culture we needed to retain the best people, the training program we would create for new MBAs to become CEOs, the sourcing platform to find proprietary investments, and our plans to be a force for good in the world. All those stories seemed aspirational when we wrote them, and nearly all of them came true.
No matter where you are in your life right now, you can write a new story.
If you want to live an asymmetric life: Do hard things. Do your thing. Do it for decades. Write your story.
One of the biggest things that will hold you back in life is fear. Fear is a master manipulator. It will disguise itself as helping you, as being practical, as keeping you safe. And ultimately, fear will disguise itself as “not me” and “not now.” It might already be creeping in as you read this.
These principles are the antidote to fear. Each of these four principles is a tangible, tactical way to look fear in the face and make a decision — one based not on fear, but on what is possible — on playing for the asymmetric upside in your life.
Now is the time to do hard things. There is something you fear. Go do that. There is something you’re putting off. Do that. Because everything you want in this life is on the other side of “worse first.”
Now is the time to do your thing. No matter what path you choose, you will suffer. But some things are worth suffering for, and you vastly underestimate your expected value when you are excited and at your full power.
Now is the time to do it for decades. Great things take time. Because there is almost no obstacle that you can choose that won’t yield to you at full power and in control of the game clock.
Now is the time to write your story. As your life goes on, you will realize how precious it really is, and you don’t want to spend it living someone else’s life. You have a magical life inside of you. Give yourself permission to live it. Take the time to write your story. Ask for what you want, and the universe will respond.
You did not come this far to play small. You came this far to move the world. Now is your time.