The Adaptive "Eye of the Tiger"
What Tiger Woods can teach investors about adaptation through self inspection, refinement, and consistent execution
Too Long, Didn’t Read? Quick Highlights:
A young 21-year old Tiger Woods dominated his Masters tournament debut, winning the tournament by 12 strokes and setting or tying 27 tournament records. Despite dominating the field, Tiger analyzed his performance and concluded that his swing had multiple flaws and he would need to make changes in-order to be successful long term. Tiger’s constant self-assessment and corresponding push for continual adaptation has yielded 15 major championship victories over his career and is a major contributor to why he is considered one of the greatest (if not the greatest) golfer of all time. While investing and professional golf have many differences, we believe that applying the same principles Tiger incorporated into his golf game, i.e. adaptation through self-inspection, refinement, and consistent execution, will generate personal and economic success for investors
Markets represent complex adaptive ecosystems, which by default indicates that their constituents (businesses) do as well. One of the defining traits of such networks is that they evolve over time. The development of the internet and Brian Arthur’s idea of “increasing returns” is evidence that investors must be willing to adapt in order to consistently generate superior returns
Adaptation is synonymous with successful investors. Nearly every investor who has produced excellent long-term results has evolved and adapted over time. We submit that this adaptation is predicated on authentic game selection, or in other words, investors should play games that they are naturally suited for and are advantaged in. Once the correct game is chosen, adaptation can only occur through obsessive practice and development
Eye of the Tiger
Anyone with a slight interest in golf is aware of the tour de force that was the 1997 Masters tournament as it featured the professional debut of a young Tiger Woods, whom as an amateur had taken the golf world by storm. Not only was Tiger a supreme talent, but more importantly he was an African American that was tearing down barriers in a sport historically dominated by white males.
For those who do not follow golf, the Masters is one of the four major tournaments in professional golf and takes place every year at Augusta National Golf Club (Augusta, Georgia). In terms of prestige and recognition, it is comparable to Wimbledon in tennis or the Tour de France in cycling.
The Masters tournament lasts four days, where a round of 18 holes is played each day. Every hole has a “par”, which represents the number of strokes a golfer “should” take to get the ball in the hole (for a round of 18 holes, “par” is equal to 72 strokes). The aim is to use the least amount of strokes, and at the end of the final day, the player with the lowest score during the entire tournament wins the famous green jacket.
Even though it was his first appearance, the presence of Tiger at the 1997 Masters tournament was special. Woods had recently signed a $40mm contract with Nike when he turned professional one year prior, which solidified him as the most marketable athlete on the golf tour despite his pro career being unproven.
As an amateur, Tiger had eviscerated the competition, winning the US Junior Amateur tournament three years in a row (1991 – 1993) and the US Amateur tournament three years in a row as well (1994 – 1996). In 1996, Tiger was also the NCAA champion (Stanford), NCAA player of the year, and the PGA Tour Rookie of the year.
To begin the 1997 Masters tournament, Tiger was paired with Nick Faldo, a three-time Masters champion and the 1996 tournament winner. Tiger started out his first round with a rather forgettable performance, shooting poorly for his given hype coming into the tournament (+4 on the front nine holes). Unperturbed by his lackluster beginning, Tiger began to quickly find his rhythm, shooting a strong -6 on the back nine and finishing -2 for the day. The following day, Tiger shot -6, putting his total score at -8. During the third round on Saturday, he advanced his overall score to -15, and in Sunday’s final round, he posted -3 which gave him an overall score of -18.
Tiger Woods didn’t simply win his first Master’s tournament, he scorched the field in unprecedented fashion. The competition lagged Tiger by such a margin that it was comical; Tom Kite came in second place, 12 strokes behind. During the tournament, Tiger set or tied 27 Master’s records, a feat that no other golfer has ever accomplished.
In those four days at Augusta National in 1997, it became evident that the hype surrounding Tiger was warranted, his performance proved to the world that he indeed was the new face of golf. His level of superb execution, excellence, and sheer dominance had rarely been observed in the world of golf.
And then Tiger did something entirely unexpected, he changed his swing. Under the tutelage of famed coach Butch Harmon, Tiger chose to completely revamp his swing due to observed mechanical flaws he believed would be detrimental over the long run. Tiger said the following with regards to the sudden reconstruction:
“One night, a week or so later, after the elation had started to die down, I decided to sit down and watch a tape of the entire tournament. I was by myself, so I was really able to concentrate on critiquing my full swing to see if there was some flaw I might be able to work on.
I didn't see one flaw. I saw about 10.
I had struck the ball great that week, but by my standard I felt I had gotten away with murder. My clubshaft was across the line at the top of the backswing and my clubface was closed. My swing plane was too upright. I liked my ball flight, but I was hitting the ball farther with my irons than I should have been because I was delofting the clubface through impact. I didn't like the look of those things, and the more I thought about it, the more I realized I didn't like how my swing felt, either. From a ball-striking standpoint, I was playing better than I knew how.”
Tiger was so obsessive about his own game, and understood the fitness landscape of the PGA tour with such depth, that he realized he needed to adapt for longevities sake. Tiger wasn’t interested in a few big runaway wins, he was monomaniacal about building the greatest professional golf career of all time.
Through introspection and procedural awareness, Tiger decided that his training inputs needed to change. While his aggressive swing would assuredly yield top results when he was “on”, Tiger wanted a more controllable swing that would minimize loss when he wasn’t playing his best.
“This is a game of misses. We all know that out here everyone’s good is good… But how good is your bad? That’s the difference.” – Tiger Woods
So how did the swing change work? At first, it appeared things weren’t going well. In 1998, Tiger only won a single tournament and it seemed like perhaps the initial “surge of greatness” had been a bright, yet abrupt, flash. Tiger maintained that he saw great progress with his game and that his ability to adapt would pay off. Finally, in 1999, Tiger proved he was making progress as he won 8 tournaments, including the PGA championship (another major golf event).
The following 2000 season was where the adaptive “eye of the Tiger” took off. In the words of PGA sport writer, Jim McCabe:
The phenomenon named Tiger Woods didn’t just take his legend to another level. He brought it to another galaxy.
Tiger won 3 out of 4 major championships and was victor in 9 total tournaments. His 2000 US Open victory at Pebble Beach is considered by many to be the single greatest tournament of all time as he won by a record 15 strokes. During the 2000 – 2002 stretch, Tiger amassed 6 major championship victories and 19 total wins.
In 2003, Tiger again set out to adapt his swing at his absolute height of dominance. Woods felt that his longevity and long-term success would be predicated on changing certain swing mechanics. He fired his former coach Butch Harmon and replaced him with Hank Haney, and the following year saw similar performance drops as 1998.
Then, in 2005, just like in 1999, everything began to click for Woods as he won 2 major championships and 6 total tournaments. More impressive than the sheer number of wins alone, from the 2005 – 2009 period, Woods won 41% of his PGA tour events. He ended up winning 7 in a row during one stretch and 5 in a row during another. From 2005 – 2008 Woods also won 6 major championships, bringing his career total to 14. It is hard to argue that Tiger’s constant self-assessment and corresponding push for continual adaptation yielded otherworldly results.
Since 2010, Tiger has changed his swing a few more times mainly due to injury and stress prevention. For the golf enthusiasts among us, take a look at the short video below to observe what some of these changes have looked like over the past 20 years.
Dealing With Complexity and Adaptive Systems
In 2014, Brad Slingerlend and Brinton Johns of NZS Capital co-authored a paper titled Complexity Investing, which expanded upon initial ideas conveyed years before by M. Mitchell Waldrop in his seminal work Complexity. Slingerlend and Johns suggest that financial markets are “complex systems”, which are adaptive and ever evolving.
“Scientists define complex systems as those in which large networks of components with no central control exhibit behavior, sophisticated information processing, and adaptive learning.” – Complexity Investing
We suggest that various market constituents, companies in this case, individually represent complex adaptive systems and that the emergence of digitally native business structures have created a “new world” ecosystem. This network is based on the central tenant that adaptive companies are capable of rapidly creating optionality to drive increasing returns, which diverges from the historical belief that the return profile of a company becomes less attractive as they grow larger (law of diminishing returns). As such, successful investors have been forced to adopt new strategies in order to generate satisfactory returns; the traditional methods of seeking value from historical performance have become far less important over the last several decades.
This has forced investors to not only be willing to embrace complexity and uncertainty, but to also adapt in order to evaluate emerging opportunities and models.
“Even if you are a quote-on-quote ‘value investor’… you still need to be able to separate those that have an interesting qualitative future from those that don’t. Because one thing that we have seen over the last couple of years is even within sectors, the best companies have wildly outperformed and have gotten far better valuations than sort of the middling companies.
So even if you are looking at a quote-on-quote ‘value sector’, the qualitative insights have separated wildly the best and the median and certainly the worst. So I think it has forced investors to develop new muscles, left some behind for sure whose skillset was right for a different era.”
- Modest Proposal, Invest Like the Best
This relates primarily to Brian Arthur’s idea of “Increasing Returns”, a law stating that technology has created a powerful “winner take all” dynamic. Arthur suggested in 1996 that internet scale, and the accompanying super-power of product distribution at near zero marginal cost, created a new environment for investors.
“Mechanisms of increasing returns exist alongside those of diminishing returns in all industries. But roughly speaking, diminishing returns hold sway in the traditional part of the economy—the processing industries. Increasing returns reign in the newer part—the knowledge-based industries. Modern economies have therefore bifurcated into two interrelated worlds of business corresponding to the two types of returns.
The two worlds have different economics. They differ in behavior, style, and culture. They call for different management techniques, strategies, and codes of government regulation.”
– Brian Arthur, Increasing Returns and the New World of Business
Arthur goes on to argue that innovative companies have a strong chance of capturing additional market share through optionality, with all things being equal, leading to durable advantages over time.
“As more market share is captured, it becomes easier to capture future markets. In high tech markets, such mechanisms ensure that products which gain an early market advantage stand to gain further advantages, making these markets subject to lock in.”
We believe that over the past 2 decades, investors who have properly adapted and understood the complex and adaptive nature of technology businesses have wildly outperformed. While this seems painfully obvious in hindsight, it is far more difficult to do in real-time, especially considering that the rise of the internet and cloud have changed business model structure and key economic metrics.
Moving forward, we suggest that this adaptability will become even more critical for investors as cloud penetration continues and the ecosystem we find ourselves in becomes increasingly digitally native.
Adaptation is Synonymous With Successful Investors
We recently found a passage written by Rob Vinall, founder of RV Capital, to be helpful as we examine our investing style and ways in which it can be improved.
Rob discusses two common investing camps, growth investors (often younger and less experienced) who are willing to pay high valuation multiples for big future plans, and traditional value investors (generally older investors) who expect “reversion to the mean” overtime and are adverse to paying a premium valuation for a company.
“These two contrasting approaches to investing – one placing more weight on the future; the other on the past – are a reminder that the optimal strategy is a function of the era you invest in. If you are in a market characterized by rapid and widespread change, it pays to be forward-looking despite the inherent difficulty of judging the future. If, on the other hand, you are in a market where the pace of change is slower and more localized, then it may simply be better to bet on reversion to the mean as the future is too uncertain and genuine change too infrequent.
The contrasting outcomes of different brands of value investing in different eras pose an intriguing question. If each era selects for the type of investor who is best adapted to it, does the younger investor have an edge over the older one? My strong sense is “yes”. I am fortunate to know several successful younger investors, and they seem perfectly adapted to the market they invest in. I, by contrast, have had to adapt, which in practice does not so much mean learning new tricks as unlearning old ones. The former is certainly easier than the latter as learning is fun, but parting ways with cherished ideas is painful. Reluctant though I am to acknowledge it, as grey hairs begin to colonize my scalp, experience is a disadvantage.
In one important respect though, there is an advantage to experience. When the nature of the market does change, it should, at least in theory, be easier for the investor that has lived through different types of market to adapt than for the investor who has only experienced one type. The younger investor suddenly finds themselves in the position of the older investor without the benefit of having experienced a change in the market before.
In practice, however, few investors have sustained multidecade success. This may not solely be down to how difficult it is. It could also be that the rewards to the stellar performer are so great in one era that they lose interest in competing in the next one when they realize that their skills are no longer as finely attuned to the market. For sure though, it is a monumental challenge.
To increase the chances of adapting to different markets, I see one big thing an investor should do and one big thing they should not. The single biggest thing they should do is commit to adapt. The single biggest thing an investor should not do is tie themselves to a particular investment style or geography or industry or any other categorization. These two points may sound obvious but generally, fund managers do the complete opposite….
…It is noticeable how Warren Buffett, the single biggest exception, took the opposite route to most value investment companies. He repeatedly told Berkshire Hathaway shareholders that as the capital base grew, Berkshire would have to adapt. He committed to adapt and did. Even he, though, made the unforced error of forsaking investments in technology. That he has since corrected it, is a perfect illustration of his adaptability.”
Rob highlights that even Berkshire has recognized the need for adaptation and over the past several years we have found it interesting that Buffett and Munger have spoken about shifting to technology investing, and have noted that certain investments should have been made. In the 2019 Berkshire Meeting they relayed the following:
“Munger: And of course if something is extreme as this internet development happens and you don’t catch it, other people are going to blow by you. And I don’t mind not having caught Amazon early, the guy is kind of a miracle worker, it’s very peculiar, I give myself a pass on that. But I feel like a horses ass for not identifying Google better. I think Warren feels the same way.
Buffett: Yea
Munger: We screwed up
Buffett: He’s saying that we blew it. And we did have some insights into that because we were using them at Geico and we were seeing the results produced, and we saw that we were paying $10 per click or whatever it might have been for something that had a marginal cost for them of exactly $0…
Munger: We could see in our own operations how well Google advertising was working and we just sat there sucking our thumbs. So we are ashamed, we are trying to atone.”
Perhaps the most recent example of adaptation and strategically altering process mechanics comes from Mohnish Pabrai and his adapted investment strategy. For those unacquainted with Mohnish, he is not only an investor who we respect tremendously but also an investing legend who has generated outsized returns since 1994.
Mohnish has traditionally looked for opportunities which allowed him to buy a $1 stock for $0.40 – $0.50 and patiently wait. The way Mohnish looked at this investing approach is quite simple: a $1 stock that trades for $0.50 and then doubles to full value in three years produces a ~25% annual rate of return, a figure deemed satisfactory. Over the years, Pabrai has not deviated far from this strategy since he has been able to generate satisfactory returns while maintaining fairly low levels of risk.
During 2020, Mohnish had some spare time on his hands due to the pandemic and refreshed himself with the writings of his friend and fellow investor Nick Sleep, a pursuit that dramatically changed his investment strategy.
“What I had not kept up with Nick was he had been on this value investing learning and growth journey and he got to what he considered the pinnacle, and I’d say I’d be mostly in agreement with that. It led me to hit the reset button in many ways with how I thought about investing…
…The framework shift that I made was not so much to look at hunting and finding fifty cent dollar bills, but to look and try to find businesses that could be a 10 bagger, or preferably a 100 bagger. And of course a 100 bagger may take a couple of decades, but that’s perfectly fine…
…So if you truly truly want something and we are singularly focused on it, and we do everything in our powers to make it happen, it’s going to happen. So when I focused on fifty cent dollar bills and kept going through stock after stock after stock hunting for those mispriced bargains, of course I’m going to find them…
…My hunt now is for 100 baggers. And so when you shift the focus from a fifty cent dollar to saying ‘I want 100 baggers’ you know different things become relevant… When you put on a lens that says that ‘I want to focus on 10 baggers and 100 baggers’ the equation changes, and what you look for changes. ” – Mohnish Pabrai
What Pabrai has recently done is equivalent to the “swing change” strategy implemented by Tiger Woods. We find this reconstruction to be quite remarkable; here is an investor who had produced top decile returns for over 2 decades yet decided to adapt his selection process to fit a new framework that he felt was advantageous.
Adaptation Through Authentic Game Selection
“Barriers to entry in this business are exceedingly low, barriers to excellence are incredibly high. So for us, we had to match who we are with the strategy.” – Yen Liow
We choose to view investing as a sport, and one that is highly competitive and performant in nature. In fact, we submit that investing is perhaps the most competitive game on earth, especially when looking at the ratio of long-term successful investors compared to the total number of individuals who choose to compete in public markets. The NFL Hall of Fame currently is home to 346 athletes, we submit that if a Hall of Fame existed for public market investing it would perhaps feature no more than 40 – 50 names.
Since the public market arena is so brutally competitive, it is imperative for investors to 1) choose the right game to play and 2) ensure that they are actually obsessed with the chosen game. In the paragraph above we touched on the monomaniacal obsession of Tiger Woods. We submit that such obsession is necessary for individual investors who want to produce above average long-term results.
Authentic Game Selection via Inherent Traits
The most foundational element of investing is choosing the right game to play. Too often, investors find themselves playing games in which they have no competitive advantage and are not naturally suited. We suggest that innate interest and temperament are crucial characteristics for potential investors to identify through self-reflection. Most great investors have underlying temperamental characteristics that are quite similar, even though their overall strategies may diverge.
Through thoroughly studying the likes of Warren Buffett, Charlie Munger, Nick Sleep, Mohnish Pabrai, and Li Lu, it becomes quite evident that they all have innate characteristics that provide them with competitive advantages. For example, this cohort of investors all have deeply engrained abilities to think independently, exert extreme levels of patience over long time horizons, remain equanimous in periods of volatility, and make sizeable concentrated bets when favorable odds exist.
What these hall of fame investors have done better than the majority is authentically recognize their advantaged traits and match them with the appropriate game. By selecting games they are advantaged in, these investors have unlocked the ultimate competitive frontier; they often are playing against a large number of people who have blindly chosen the wrong game.
“I want to play the game that I know I can win. So how do you win the game? You’ve got to play according to the rules. And the good news is, I’m playing against players who don’t even fucking know the rules.” – Mohnish Pabrai
Charlie Munger relays essentially the same message, but also reminds us that authentic game selection is critical in developing one of the most important mechanisms in investing; a carefully constructed circle of competence.
“You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you are going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.”
When developing a circle of competence, it is important to remember that without refining aptitude, one can’t possibly know where the edge of their circle lies. It is only when an investor identifies the edges of their circle of competence, that they can work on slowly expanding such limits over time.
It is our fundamental belief that authentic game selection lays the foundation for matching aptitude with inherent temperamental qualities, resulting in a defined circle of competence. Then by consistently turning over rocks and digesting information to become a “learning machine”, dedicated investors are able to expand the edges to enlarge their circle of competence over the long run.
Obsession With the Chosen Game
While Tiger Woods’ results overtime are undeniable, where he truly separated himself from the competition was through training. Tiger was so obsessed with achieving excellence, that he developed maniacal training habits that incorporated both golf and fitness development. Tiger relayed the following during a 2020 tournament about his old training regimen:
“Well, I used to get up in the morning, run four miles, then I’d go to the gym, do my lifts. Then I’d hit balls for about 2-3 hours. I’d go play, come back, work on my short game. I’d go run another four more miles, and then if anyone wanted to play basketball or tennis, I would go play basketball or tennis. That was a daily routine.”
Tiger’s Obsession allowed him, through repetition, to become so sharp with fundamentals that his on course execution was essentially flawless when in peak form. Consistent execution at the right times, and when it really matters, is what high performance comes down to in both golf and investing.
“Five words separate the good from the great: flawless execution of the fundamentals.” – Gautam Baid, The Joys of Compounding
While investors don’t need to place such emphasis on physical fitness, they assuredly must develop extreme focus geared towards developing mental fitness. Once investors have selected the proper game, obsession and continual progression become paramount in developing such fitness.
Obsession should come naturally, and if it does not, we would quickly question whether the correct game has been selected.
Obsession leads investors to continually adapt through constant self-reflection, perpetual learning, and appropriate pattern recognition. Investors must first become “lifelong students of the game” if they ever want to become successful “masters of the game”. We submit that becoming an “obsessive learning machine” not only revolves around ideation and proper business analysis, but it also consists of learning as much as possible about those who have succeeded in playing the game.
Just like obsession led Tiger to develop a rigorous daily training routine, investors must develop training plans, which typically take the form of reading and thinking. Every long-term successful investor we have studied has one universal quality, they spend most of their waking time reading voraciously. Since reading is a skill that results in information synthesis, those who read more develop an accumulating advantage over time; learning, perhaps, is the ultimate example of the power of compounding. Hence, one cannot hope to achieve above average results by not constantly reading and synthesizing vast amount of materials, the competition simply digests too much information and harnesses too powerful an advantage.
“Study intensely, go away, and really think” – Nick Sleep, Nomad Investment Partnership
We have found that above average investors almost always have an obsession with investing history, and more often than not, have put hundreds, and even thousands of hours into studying successful investors to complement their practice of cloning certain successful practices. In talking with a notable, and highly performant, investor several months ago we learned that in his early 20’s, he was “staying up until 2-3 AM on a nightly basis studying everything he could about Warren Buffett and Charlie Munger”, not because he had to, but because he was obsessed with how beneficial the practice was. This tenacious pursuit of learning allowed him to develop a bedrock of fundamental investment principles, which overtime let him flex his strategy and adapt.
In his book “The Joys of Compounding”, Gautam Baid tells the following story of Todd Combs, one of Berkshire Hathaway’s leading investment managers and CEO of Geico:
“Eventually finding and reading productive material became second nature, a habit. As he began his investing career he would read even more, hitting 600, 750, even 1,000 pages a day. Combs discovered that Buffett’s formula worked, giving him more knowledge that helped him with what became his primary job – seeking truth about potential investments.”
While we don’t suggest investors must read 500+ pages a day, we do submit that there are those who make the time and obsessively engage in the pursuit.
It comes down to one simple fact: Investors must diagnose if they have an obsession with the game, because over time, only obsessive practice and the corresponding accumulated knowledge base will define long-term mediocrity vs. excellence.
Obsession with authentic games creates a powerful latticework of ideas, character traits, and behavioral qualities. It is this latticework that overtime leads successful investors to adapt and change, only because they have accumulated the knowledge and temperamental characteristics to do so.