This is the fourth issue of Outside the Box newsletter, and is authored by my friend Arpit Ranka. Arpit is a value investor based out of Mumbai. He has worked with two of the leading value investors in India, Prof. Sanjay Bakshi and Late Mr. Parag Parikh before starting out on his own.

In this post, Arpit talks about how we, as investors, need to embrace the good, bad, and ugly side of every investment thesis/strategy and be willing to live through all the seasons, if we have to stand a chance to succeed in the long run. Over to him.

The noted English singer and songwriter John Lennon said, “Life is what happens while you are busy making plans.”

As an investor, I can tweak this thought to — “Investing is what happens when you are busy pursuing the next big investment idea.”

No doubt that ideation is a very integral part of any investment process but then equally central is to develop a mindset, which allows us to capitalize on the full potential of that investment strategy.

For example, over the long run, a passive investor who has a mindset, which seamlessly compliments dollar-cost index investing can easily end up outperforming a fundamentally gifted and savvy stock-picker, who is prone to losing conviction along the way.

After all, every investment thesis has a good, bad, and ugly side to it, and you can certainly count on almost all of those aspects playing out, to varying degrees, if you were to hold an investment for a few years.

On aggregate, it may play out wonderfully well despite the intermittent obstacles. But we can rest assured that our conviction will be tested given the radically uncertain nature of the business world and financial markets. And just like any chain that is only as strong as its weakest link, our conviction is only as reliable as the amount of equanimity with which we can back it up in the midst of the inevitable hurdles (both external and internal).

Things get a bit more complicated because just as we try and hold onto our existing investments amidst all the ups and downs, the thought of finding a new investment idea, which is free of these shortcomings on the face of it, is always tempting and naturally so.

But this pursuit of the next big investment idea can be akin to running in circles and end up being counter-productive unless that quest is matched by a similar resolve to back those ideas with the requisite investment in terms of time, patience, and equanimity, while our conviction gets tested.

As they say, you can borrow ideas but you cannot borrow conviction. And as an investment community, we spend a vast majority of our time scouting for new ideas from peers, newsletters, public holdings of seasoned investors, etc. But, unfortunately, very little energy is spent on understanding the mental framework, which allows them (seasoned investors) to truly capitalize on their ideas. And sometimes, it’s their temperament, which allows them to make money even on a very mediocre idea while the majority of the people would simply end up saying ‘he got lucky.’

Moreover, it’s very much possible that if we truly understand, we may conclude that what is best for even the most successful investor out there is not a good investment for us because we can’t compliment it with our mental framework.

In that sense, we can possibly equate our job as an investor to that of a gardener — there is a time to sow, time to remove the weeds along the way, but most of the times the best course of action is to just take care of what you have already sowed and let it bloom. If you have a bad harvest, iterate and try again.

On the other hand, imagine a gardener, who is excellent at finding the best possible seeds to sow (or) even has access to a friend, who can provide him with the best seeds in the entire district, but lacks the patience to let nature take over and reward him over time. All of us have some version of this gardener in how we fail to allow our investment strategies to play out for us.

We can be very impatient, at times, with the best of ideas and extremely complacent with the worst of ideas.

At the extreme end, we can think of a gardener, who keeps looking at all the wonderful garden of people around and suddenly his yet-to-bloom garden starts to pale in comparison stealing him of his resolve to persevere and stay patient.

Let me clarify that I am not advocating complacency or lethargy. But the point I am trying to make is that along the way, what we truly need to do is embrace the good, bad, and ugly side of every investment thesis/strategy and be willing to live through all the seasons, if we have to stand a chance to succeed in the long run.

The choice is for us to make — to run in circles (or) to run a marathon.

To sum up, I think that it is not for nothing that many wise investors often mention that for them to replace an existing investment with a new one, it has to be at least 1.5x more attractive. Maybe, it’s their way of accounting for the fact that the new, new thing will almost always excite us more while what is familiar can breed contempt!

Let me end this with a few lines from T.S. Eliot, which inspired me to write this article –

The endless cycle of idea and action,
Endless invention, endless experiment,
Brings knowledge of motion, but not of stillness;
Knowledge of speech, but not of silence;
Where is the wisdom we have lost in knowledge?
Where is the knowledge we have lost in information?