Vivek Ranadive wanted to spend more time with his daughter. So he volunteered to coach her 7th grade youth basketball team. The only problem was Ranadive had never even touched a basketball.[1] But he was sharp. The tech CEO decided to use his lack of knowledge as an advantage to think outside the box.
Ranadive noticed the girls on his team were short, small, and poor shooters. Not exactly a recipe for success. But they were fast. So, instead of letting opponents lazily bring the ball up the court, Ranadive's team full-court pressed all game long. As a result, the other teams would turn the ball over, flustered from the unexpected pressure.
The team would go on to win the championship.
BIG
A somewhat similar story comes from the movie "Big." If you've never seen it, it's about a 13 year-old who makes a wish to be "big" after not being tall enough to ride a rollercoaster.
Source: ohmyzod
To his surprise, the wish is granted and he becomes a man, probably mid-30's. The thing is, he still acts like a 13 year-old.
The movie progresses and Josh, the kid/man, gets a job at a toy company. There's this great scene where he is in an important product development meeting and one of the VPs is presenting his idea for a new toy that transforms from a building into a robot.
Everyone seems to be onboard with the idea, until Josh raises his hand. He simply says, "I don't get it."
The presenting VP exclaims, "What don't you get?"
And Josh goes on to explain why the idea won't work with kids and he makes a new suggestion for a robot that turns into a bug. Soon, everyone is singing Josh's praises, to the chagrin of the VP.
The scene is gold for a few reasons:
One, it speaks to the importance of knowing your customer. Josh is literally a kid inside a man's body. Of course, he knows what kids like.
Two, had Josh been in the corporate world for a while, he likely wouldn't have had the boldness to blurt out, "I don't get it" in an important meeting.
And three, people couldn't put their finger on it, but something about Josh was refreshing.
The Outsiders
Both Vivek and Josh were outsiders and that played to their advantage.
Had Vivek known basketball, he likely would have followed protocol. Don't press because it's unsustainable. It doesn't teach good fundamental defense. Blah, blah, blah.
Had Josh known about corporate America he likely wouldn't have suggested a robot transforming bug.
To be fair though, we can't fully discount norms. Conventional wisdom became conventional for a reason; it worked at some point.
But that doesn't mean it's always right. In fact, fairly often, I'd say it's not the best course of action.
Should everyone go to college?
Should you get a 9-5?
Should you buy low and sell high?
In each of these situations, a good answer starts with, "it depends" because they are context-dependent. If you have to go into crippling debt, college might not be the best option if you want to be a software engineer.
To the point, context matters more than convention.
Vivek's context was that he was a smart, strategic guy with unathletic players. So he made the most of his situation by analyzing how he could use his strengths even if it diverged from the status quo.
Josh's context was that he was a kid, who knew customer demand better than his fellow toy executives.
The Puzzle So even though we know that conventional wisdom isn't always right, why do we struggle to utilize the outsider's advantage?
There are two important pieces to this puzzle.
First, we have to learn how to unlearn. This might sound strange, but a big part of learning is unlearning things that don't serve you well.
If you've been a basketball coach for years, you likely know the norms. One point guard, run set plays, get the ball inside.
But maybe those norms don't serve you well in your context.
Unlearning and adapting to new contexts is a very underrated skill.
Second, true outsiders don't have to deal with emotional baggage because they don't know any better.
I can imagine Vivek having a conversation with a player's dad who "knew" basketball. I can imagine that dad saying that Vivek should listen to him because he "knows what he's doing." But, after this imaginary conversation, Vivek would need to believe in his theory more than the knowledge of someone well-versed in the game. Not exactly a circumstance that typically leads to strong conviction.
Since convention implies an accepted standard, going against it will always raise eyebrows, especially from people who "know" a lot. Holding conviction while being inexperienced is not easy.
And there's another element of emotional baggage. We are afraid to leave convention because it is safe, a place where we can hide in mediocrity.
A famous saying amongst asset managers goes something like, "Nobody ever got fired for buying IBM." The updated version of that might be Apple, but it gets to the heart of this second type of emotional baggage.
IBM was known to be safe. If it did poorly, you wouldn't get fired because many other people thought it was a solid company. If it did well, you'd get praised.
But if you tried something different and bought into an esoteric biotech and it flopped, your neck was on the line. Now, if it did well, you'd be a superstar.
It's about risk and reward. The downside of buying IBM was limited, but so was the upside. You may have become a superstar with the biotech but you also could very well lose your job and your career. To most, the choice was/is easy. Play it safe.
As the famed economist John Maynard Keynes once said,
“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”[2]
The advantage true outsiders have, like Vivek and Josh, is ignorance. Ignorance to norms that allow them to bypass the emotional baggage insiders have.
Of course, it's hard to unlearn convention and see things from a fresh perspective. But I submit that it is harder to escape the emotional baggage associated with convention.
Applying It
So the question remains, as investors, how can we apply this idea to be better?
First, we need to know our contexts. What strengths do we have? What edge? What goals?
Then we can tailor our investment philosophy to best fit these contexts.
For instance, convention may say that you need a well-diversified portfolio with equal industry weighting (healthcare, tech, oil, etc…). But maybe your edge is tech so you can adapt your philosophy to fit your advantage.
Second, we need to learn how to unlearn. We must constantly be challenging our beliefs about what we think works and what doesn't.
For example, if the first investing book you read was "The Intelligent Investor" and you have stuck to buying stocks for less than book value (the value of the assets), it's probably very difficult to find ideas. Even Ben Graham, the author, had to change his views.
One aid to help us unlearn is the concept of reasoning from first principles.
My favorite example of this concept in-use comes from Elon Musk.[3]
When he started SpaceX, he calculated the cost of the raw materials needed to create a rocket. To his surprise, it was way less than the price of competitor's rockets. Therefore, he knew it was possible, with a bit of engineering ingenuity, to create cheaper rockets. Rather than anchor to the conventional price of a rocket, he reasoned from first principles to figure out how much he could charge.
In an investing context, we could figure out what makes a stock go up and then work to find the repeatable patterns. That's what back-testing is, where you get a ton of data and then try to find patterns.
In summary, we need to know our contexts and then unlearn, which we can do through challenging our current beliefs with the aid of first principles thinking.
To End
Being an outsider has distinct advantages. By looking at problems in a different light, new solutions come into view. However, experience and convention can get in the way.
But, while difficult, we can overcome these obstacles to create an outsider's advantage for ourselves.
I'll end with the last three lines from one of my favorite poems:
Two roads diverged in a wood, and I-
I took the one less traveled by,
And that has made all the difference.
- Robert Frost
Footnotes:
[1] What a CEO Learned Coaching His Daughter's Basketball Team, Vivek Ranadive, Entrepreneur.
[3] First Principles, James Clear.
Author's Note:
silly goose!