Box Cricket, Business or Investing - A Simple Mantra You Can Use to Win - Smart Contrarian by Equitymaster
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Box Cricket, Business or Investing - A Simple Mantra You Can Use to Win

Nov 13, 2017

Rahul Shah, Editor, Smart Contrarian

Last weekend, I was watching a box-cricket tournament and was thoroughly entertained.

To be honest, I didn't like box-cricket when I first came to Mumbai.

Having grown up in a small city with lots of open spaces, I found the concept really odd. Why play cricket at all on a ground the size of a tennis court, I wondered.

But it didn't take long for the game to win me over. I soon realised this miniature version has its own charm. It may not be as slam bang as its bigger cousin - in fact it totally prohibits hitting big, aerial shots - but is equally exciting to watch and play.

The disciplined approach to both batting and bowling, the quick thinking, the razor-sharp reflexes - all of these make it a near complete package.

Coming back to the tournament, I couldn't help but notice how the winning team played to a perfect template.

It was as if they were robots programmed to do the same thing over and over again.

It didn't matter if the opposition got under their skin or their plan backfired for a bit. Nothing seemed to deter them. They stuck to their plan all through, and were rightfully crowned the champions.

Well, in some sense it was a victory for me too as one of my favorite theories stood validated right in front of my eyes.

The Zone of Magic

The winning team seemed to be operating in the top left zone, the zone of magic. It was focused on a good process, instead of a good outcome.

In events that are probabilistic in nature and where not everything is in our control, following a proven, well-defined process reaps rich rewards over the long term as opposed to an approach that focuses only on the outcome.

Yes, there could be times when even the best processes could lead to bad outcomes. The key is to not panic and throw in the towel but to keep persevering with the same process.

A vast majority of people fail to do this.

First, they don't try to figure out whether a good outcome is because of a good process or just plain luck.

And even if they do, a couple of bad outcomes is all it takes for them to jump ship and abandon a good process. This is a recipe for disaster in my view.

A good process that sounds logical and is proven to have worked well over the long term should always be preferred over an approach where only the outcomes are good but the process appears shaky.

The discovery of a good process is what prompted me to launch my Microcap Millionaires service back in February 2014.

And while we had our setbacks or two, the long-term result has been extremely encouraging.

The service has made money on nearly 90% of the stocks recommended since inception and has outperformed the benchmark index by a factor of 2.7x.

It is indeed the power of the process behind the service that has enabled us to post such a great outcome.

Good investing,

Rahul Shah (Research Analyst)
Editor, Smart Contrarian

Brain Food for the Day

The Luck vs Skill Conundrum

The Process-Outcome grid can also be explained in the form of Michael Mauboussin's luck-skill continuum. Mauboussin is of the view that a large number of human activities lie along what he calls the luck-skill scale.

So imagine a scale where on the left hand side there is 100% luck and 0% skill and on the right hand side 100% skill and 0% luck. All the other values of course lie in between.

Thus, something like a game of chess will lie on the extreme right as it is all about skill while Russian roulette on the extreme left is simply all about luck and nearly zero skill. Cricket, as we discussed, is somewhere in between.

What about investing, where do you think investing lies? If Mauboussin is to be believed - and we tend to agree with him - investing lies more on the luck side than skill.

Surprised? Well, Mauboussin believes this is the case because in investing, there are many factors outside the control of an investor. Besides, with information about stocks being much more widely available today, luck has become even more powerful than skill in investing.

Does this effectively shut the doors on investors looking to outperform the indices? Certainly not.

The way out of this dilemma is simply to focus more on the process and rely less on short term outcomes. One simple, effective way to do this is the Microcap Millionaires process - you can learn more about it here.

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