The one thing I’ve gotten really into in the last few years has been the NBA — I watch the highlight reel most nights. It’s a great way to see the best 10 plays of the day — mainly guys dunking on each other but entertaining nonetheless. So I was happy this weekend when I stumbled across an email that led me to a podcast by Outliers author, Malcolm Gladwell. Gladwell has a podcast series that was released last year called Revisionist History, which takes a look at misunderstood events in history. The following notes were taken from The Big Man Can’t Shoot:
Philadelphia Warriors vs. the New York Knicks: March 2nd, 1962
The star of the Warriors was Wilt Chamberlain, a 7’1” powerhouse. The 1961–1962 season saw him average more than 50 points a game; apparently still a record. That night Wilt was hungover after being out all night with a woman that he had picked up at a bar.
By the end of the game he had scored 100 points — the most anyone had ever scored in a professional basketball game. He made 87.5% of his shots from the foul line. The reason this stat is so impressive was because apparently he was a horrific free throw shooter. This was a guy who could score with two sometimes three defenders on him yet put him alone at the free-throw line and he was hopeless; some seasons he only managed to get 40% of his shots
In this season Wilt started to throw his foul shots underhand, making 28 out of 30 shots - the most anyone has made in a regular season NBA game.
Gladwell speaks to Rick Barry, another Hall of Famer Rick Barry, who shot 93.5 and only shot underhanded. Barry argues that shooting granny style is a much better way of shooting because less things can go wrong and the ‘normal’ free throw style is just unnatural as there is more margin for error when shooting underhand.
Tight games and markets
You’re a liability to your team if you can’t hit your free throws because the other team will simply foul you every time you touch the ball because they know you’ll miss your free throw and they’ll get the ball back. If you can’t hit your foul shots you won’t be used in a tight game.
We are in a tight game right now. Markets are making fresh highs. Deploying new capital into ideas that are undervalued and can be held over the long-term is hard. Just like missing a free throw, every time you recommend a new company to invest in and misjudge the business quality, valuation or management and lose a significant portion of capital — your team become reluctant to trust you.
What to do? Make less decisions.
To quote an old timer:
“We’re perfectly willing to wait for something decent to come along. In certain periods, we have a hell of time finding places to invest our money.” — Charlie Munger
“I felt silly, like a sissy, shooting underhanded. I know I was wrong. I know some of the best foul shooters in history shot that way. Even now, the best one in the NBA, Rick Barry, shoots underhanded. I just couldn’t do it.” — Wilt Chamberlain
Chamberlain stopped shooting underhand and reverted back to being a terrible foul shooter despite having every incentive to keep shooting underhanded.
Another terrible free-thrower is Shaquille O’Neal who inspired the term 'Hack-a-Shaq'. To Hack-a-Shaq means to intentionally foul Shaq or another terrible free-thrower to put them on the foul line where they are likely to miss their shots.
Shaq said he would rather shoot zero than shoot underhand. Ricky Barry had the same reaction as Chamberlain but he decided his driver to be a better shooter was stronger than his worry about what others would think.
If you have a threshold of zero, you’re someone who doesn’t need the support or the approval or the company of others to do what you think is right.
Chamberlain practiced a different technique, one which led to a better result despite the fact he ‘threw like a girl’ (disclosure: I am a girl and I definitely throw like one). For a brief period of time he did something different and it worked.
In investing it is no different. If you do things the same as everyone else you’re going to have a similar looking portfolio (looks like an index) and similar returns (no different to the index). To get better than average results you have to be doing something different. But to do something different isn’t enough, you also have to be right.
“It’s true that the investing herd is often wrong. In particular, it behaves more aggressively the more prices rises, and more cautiously the more they fall — the opposite of what should happen. But doing the opposite of what the crowd does isn’t a sure thing either.” - Howard Marks
The Threshold Model of Collective Behaviour
“There was a lot of intellectual tradition that said when people got into a crowd their independent judgement went out the window, and that somehow became creatures of the crowd, and that there was some kind of miasma of irrationality that would settle over people. And they would act in ways that they would never act if they were by themselves or they weren’t influenced by the mob mentality.” — Mark Granovetter
It’s all about thresholds
Granovetter didn’t buy the belief that being part of a herd makes everyone irrational rather it was about thresholds. Thresholds are about peer pressure and everyone has different thresholds. Your threshold is the number of people who have to do something before you join in. There are plenty of radicals who don’t need much encouragement to throw a rock; their thresholds are very low. Others might have friends and family who are also throwing rocks but resist joining in - their thresholds are high.
Rock throwing and financial journalism
“When people are uncertain…they don’t look inside themselves for answers — all they see is ambiguity and their own lack of confidence. Instead they look outside for sources of information that can reduce their uncertainty. The first thing they look to is authority.” — Robert Cialdini
There is a lot of low quality financial journalism that uses hot-button topics as click-bait; using facts to masquerade opinion. Unfortunately political correctness has meant most people resort to lowering their thresholds for the sake of conformity. Just because someone with perceived authority throws a rock doesn’t mean it is right; failure to think independently as individuals leads to a collectively lower threshold as a society.
There are a quite a few areas where rocks are currently being thrown; where thresholds are being lowered and asymmetric risks are developing…
- Central banks printing money
- Yield-seeking behaviour
- Bond proxies — property, utilities, infrastructure
- ‘FANG’ vs. everything else pre ‘FANG’
- Passive vs active investment industry
- M&A for empire building & earnings growth
It seems the common element comes back to recurrent themes of low interest rates, low future returns and old-economy vs. new-economy.
No one can time the market but there is a certain truth in having the discipline to take profits on positions that have done well and buy more of the quality, liquid assets that are the first to sell off in a downturn.
“If you’re not willing to react with equanimity to a market price decline of 50 percent two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.” — Charlie Munger
So the lesson is to throw like a granny. People may laugh and ostracise you but the humiliation will be worth it in the long-run.
Article written by Annabelle Symons, Investment Analyst, PM Capital.