“It is better to be roughly right than precisely wrong.”
― John Maynard Keynes
With summer in full swing, I thought it made sense to lay off the market commentary and instead celebrate leisure. Not every minute of every day needs to be occupied with work or output. Whether we realize it or not, we all require regular downtime, in which we disengage from the constant interaction and expectations of others. Ultimately, this downtime and disengagement can have a positive effect on performance, which I have found is enhanced by time away from work or switching up the daily routine.
Morgan Housel works for Collaborative Fund and wrote the recent blog post below. His advice to readers – try not to be too focused on perfection, as it is easy to miss the forest for the trees.
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Casualties of Perfection
By Morgan Housel
June 30, 2021
The key thing about evolution is that everything dies. Ninety-nine percent of species are already extinct; the rest will be eventually.
There is no perfect species, one adapted to everything at all times. The best any species can do is to be good at some things until the things it’s not good at suddenly matter more. And then it dies.
A century ago a Russian biologist named Ivan Schmalhausen described how this works. A species that evolves to become very good at one thing tends to become vulnerable at another. A bigger lion can kill more prey, but it’s also a larger target for hunters to shoot at. A taller tree captures more sunlight but becomes vulnerable to wind damage. There is always some inefficiency.
So species rarely evolve to become perfect at anything, because perfecting one skill comes at the expense of another skill that will eventually be critical to survival. The lion could be bigger; the tree could be taller. But they’re not, because it would backfire.
So they’re all a little imperfect.
Nature’s answer is a lot of good enough, below-potential traits across all species. Biologist Anthony Bradshaw says that evolution’s successes get all the attention, but its failures are equally important. And that’s how it should be: Not maximizing your potential is actually the sweet spot in a world where perfecting one skill compromises another.
Evolution has spent 3.5 billion years testing and proving the idea that some inefficiency is good. We know it’s right.
So maybe the rest of us should pay more attention to it.
So many people strive for efficient lives, where no hour is wasted. But an overlooked skill that doesn’t get enough attention is the idea that wasting time can be a great thing.
Psychologist Amos Tversky once said “the secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours.”
A successful person purposely leaving gaps of free time on their schedule to do nothing in particular can feel inefficient. And it is, so not many people do it.
But Tversky’s point is that if your job is to be creative and think through a tough problem, then time spent wandering around a park or aimlessly lounging on a couch might be your most valuable hours. A little inefficiency is wonderful.
The New York Times once wrote of former Secretary of State George Shultz:
His hour of solitude was the only way he could find time to think about the strategic aspects of his job. Otherwise, he would be constantly pulled into moment-to-moment tactical issues, never able to focus on larger questions of the national interest.
Albert Einstein put it this way:
I take time to go for long walks on the beach so that I can listen to what is going on inside my head. If my work isn’t going well, I lie down in the middle of a workday and gaze at the ceiling while I listen and visualize what goes on in my imagination.
Mozart felt the same way:
When I am traveling in a carriage or walking after a good meal or during the night when I cannot sleep–it is on such occasions that my ideas flow best and most abundantly.
Someone once asked Charlie Munger what Warren Buffett’s secret was. “I would say half of all the time he spends is sitting on his ass and reading. He has a lot of time to think.”
This is the opposite of “hustle porn,” where people want to look busy at all times because they think it’s noble.
Nassim Taleb says, “My only measure of success is how much time you have to kill.” More than a measure of success, I think it’s a key ingredient. The most efficient calendar in the world – one where every minute is packed with productivity – comes at the expense of curious wandering and uninterrupted thinking, which eventually become the biggest contributors of success.
Another form of helpful inefficiency is a business whose operations have some slack built in.
Just-in-time manufacturing – where companies don’t stock the parts they need to build products, relying instead on last-minute shipments of components – was the epitome of efficient operations over the last 20 years. Then Covid hit, and virtually every manufacturer found itself dreadfully short of what it needs.
Super-efficient supply chains increase vulnerability to any disruption. And history is just a constant chain of disruptions. So you can imagine that we’ll hear stories of companies who increased their earnings by, say, 5% by maximizing supply efficiencies only to see earnings fall 20% or more due to having no slack when trouble hit. We are in the biggest post-WW2 consumer boom and car companies are shutting down production because they’re out of chips. A little inefficiency across the whole supply chain would have been the sweet spot.
Same in investing. Cash is an inefficient drag during bull markets and as valuable as oxygen during bear markets, either because you need it to survive a recession or because it’s the raw material of opportunity. Leverage is the most efficient way to maximize your balance sheet, and the easiest way to lose everything. Concentration is the best way to maximize returns, but diversification is the best way to increase the odds of owning a company capable of delivering returns. On and on, if you’re honest with yourself you’ll see that a little inefficiency is the ideal spot to be in.
Just like evolution, the key is realizing that the more perfect you try to become the more vulnerable you generally are.
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Sincerely,
Justin Kobe, CFA
Founder, Portfolio Manager & Adviser
Pacificus Capital Management
A referral is the best compliment.
Feel free to forward this email to friends and colleagues.
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Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated. Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counter-party capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.
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