If only a company did... then things would be better

I have a family member who believes there is a deep liberal conspiracy to smuggle illegal aliens across the border and dump them with senior citizens.  At the same time I have another family member who believes that if it weren't for those pesky conservatives they'd have pristine bridges, commuter rail, free college and whatever else they can dream up.  Maybe you can relate to one of these, or maybe like most you are chuckling at the absurdity.  The devil is in the details you say.  But what's interesting is that often investors will tout equally outlandish theories about companies, and no one bats an eye.

How often have you heard someone say "X company just needs to initiate a buyback" or "Management is a bunch of idiots, anyone could run that failing division" or "we need an activist to unlock value" or "they should sell" or maybe "they should acquire."  The list goes on forever.  And just like the wild political takes a simple capital markets act will magically make everything better.

Maybe it's just Mr Market that's like this, and you aren't.  But I doubt it, every investor does this, myself included.  We think that a few simple acts can just change the trajectory of a stock.

But let's step back.  Why is a division, company or a stock in a slump in the first place?  I look at slumps in stocks/companies (anything?) through a sports analogy.  We always love to make fun of last place teams.  But those teams with the worst records are made with players who are some of the best in the world.  Sure, a few duds might have snuck through, but there are others who have hall of fame fabric.  So why does a team do poorly? Do they wake up and say "we want to lose."  They all go out and play four quarters like everyone else.  How are they so bad?

Companies are the same.  Why does a division underperform?  Why is a company sub-par?  Do employees show up at work and proclaim "I love underperforming today!"  Of course not.  In many cases employees might be thinking they're doing a great job.  They might be exceeding expectations.  So what is it?

Most of this stems from our inability as outside investors to appreciate the nuance of a situation.  Maybe a division is underperforming because management fails to motivate employees.  Different managers who are motivational might be able to turn something underperforming into something outperforming.  But we just don't know.  Likewise it might seem foolish for a company to be hoarding cash.  Why would a company without investment opportunities save money?  What we might not know is that management had experience with a nasty downturn and wanted to make sure the company survived going forward.

My point is as outside investors we really don't know or understand the reasons for what's happening.  But insiders do.  They know why something is dysfunctional, and they know why the problem can't be fixed either.

These simple fixes we toss around as investors aren't new to management.  I sometimes laugh when I see activist proposals.  I think "I'm sure management has never considered buying back stock, they'll probably be so happy with such a great suggestion."  In a few rare cases there are managers who have their heads firmly in the sand.  But just like everything else, there is some underlying, and almost guaranteed unspoken reason why the action hasn't happened to date.

Does this mean all hope is lost?  Not at all, but we shouldn't hope for simple things either.  I could fill an afternoon sharing stories of activists who had a simple fix for a company that turned into a quagmire once they won and became involved.  As outsiders we don't know why a situation is what it is, but we should know that fixes aren't simple.

Does this mean we should avoid companies that are a mess?  If they aren't trading at a discount for the mess then I'd stay steer clear.  Why invest in a mess when you can invest in something pristine for the same price?

What this means is there are no simple fixes for companies, just like lower/higher taxes won't magically fix the nation.  The fixes required to unlock value are difficult, time consuming, and costly.  But if the discount is deep enough then they're worth it.

Success is only obvious in hindsight

My close friends and family will usually claim I'm "crazy" or "march to a different drum".  What they're saying, or so I hope, is that the challenges that excite me are far from normal.  And that's how I found myself attempting to backpack 100 miles through the mountains in less than 50 hours.

I've always been fascinated with endurance events.  Riding a bike across the state, ultramarathons, canoeing the Ohio river.  I've always been active, running, skiing, hiking, backpacking.  I started to dip my toe in the endurance waters in 2012 when a friend and I biked the State of Maryland in 60 hours.  It was a good intro, some of the trip was incredible, some monotonous, some a challenge, but enjoyable overall.  It was a good accomplishment, 200 miles in 60 hours.

Biking was one thing, but distance walking was another.  The event I walked in was in the Allegheny National Forest, an area of close to a million acres an hour and a half north of Pittsburgh.  The goal of the event was to walk the length of the North Country Trail segment that went from the north border of the forest to the south border.  The trail, a 4,000 mile monstrosity, has 100 winding and hilly miles in the forest.  You start at 1,200 feet, hike up 12,000 feet of hills and down 12,000 feet of hills to end at 1,200 feet in elevation at the end.  The challenge was to complete this hike self-supported.  There were no aid stations, no volunteers, nothing, just you, you're gear on your back, and a lot of miles.

About 20% of the people who attempt this finish.  Maybe one reason friends consider me crazy is I looked at this and said "oh, 100 miles in 50 hours? That's just 2mph at a constant pace, seems easily doable"  Uh huh... but what about sleep and eating! Well, there wasn't much sleep, and I ate as I walked.

What I worked out was that for every minute I was stopped I had to increase my average speed slightly.  That might not be bad in the beginning, but after walking 60 miles?  I determined to not stop except when completely necessary.  I slept about five hours total during the event and was moving the other 99% of the time.  Was it worth it?  It definitely was, I finished with two minutes to spare.

Over 50 hours my margin of safety was 120 seconds.  I have thought about that two minutes considerably since I finished.  What if I had dawdled at a road crossing an extra minute?  What if I took a little longer to filter my water?  What if I had sat on a rock for a few seconds a half dozen times.  There are so many variables of things that could have happened to eat that margin that it's crazy.

I trained for months for the event.  I ran considerable distances.  I woke up at 2am and would hike 30 miles in the middle of the night so I knew the feel of being in the woods at night.  Sometimes before bed I'd put on my backpack and walk a quick two miles in the dark in the neighborhood, just to get more miles in.

All of this training helped, but I was never assured completion until I crossed the finish line.  I had doubts I could complete the event up until I crossed the finish.  As a participant it was never clear I'd complete it.

To outsiders it seemed abundantly clear I'd complete this.  Afterwards my wife, kids, parents, friends all said "oh yeah, we expected you finish."  This expectation was based on my stubborn drive, and training.  But they weren't out there walking with me!

I don't know if that hike will become a lifetime achievement or not.  Maybe I'll do something wild and crazier in the future.  But what I do know is that for now it has taught me a lot of life lessons.

When I look at companies that the market has labeled "successful" I think back to my hike.  To outsiders it appears that all of the preparation will guarantee success.  When success happens everyone nods in agreement because it was expected.  But when failure occurs people are shocked.  How it this happen?  It happened because success is only assured in hindsight.  To the players involved there are a million variables, a lot of tiny stops eating up seconds that are digging into that two minute margin.

As outsiders we never see these challenges or struggles.  Even worse, as outsiders we tend to minimize these struggles.  It's not a single struggle that brings down the endurance athlete, it's a culmination of events.  Your feet hurt, your legs hurt, you get tired, you don't eat enough, your brain tells you to stop.  What was the specific event that killed the race?  You can't identify one, it's a number of things working together.  And failure in the business world is the same.  It's a culmination of many decisions working together.  Sometimes there is a single reason for failure, a big giant mistake.  But usually it's dozens of small decisions that at the time looked like the right decision that when assembled in hindsight result in failure.

Success is just like failure, a combination of multiple variables put together in a very specific way.  You can increase your odds of success by doing things correctly, but it never assures anything.  And you can increase your odds of failure by doing everything wrong, but you might succeed!

This is why I think success narratives are nothing more than false hope.  Getting up early, or drinking coffee with butter, or reading 500 pages a day assures nothing.  Even worse, if you adopt a task some successful person has deemed important, and your journey isn't the same as theirs the task might be harmful instead of helpful.

If you ask any successful person what it felt like on their journey they'd echo what I wrote above.  They were never quite sure they'd make it until they made it.  At times on the journey it feels like success is assured, but at other moments it feels like failure lurks around the corner.  It's a constant battle you fight, and if you stop fighting you fail.

I don't have any great wisdom on what it takes to be successful.  My only parting words are this, find the destination you have in mind and determine what variables will make a difference.  Then focus on those variables as you move forward.  Good luck might find you and give you a boost.  But it's always a possibility that misfortune finds you as well and derails your plans.  Either way, you won't know until you set a path, work to execute it and see what happens.