One of my favourite ever business books is one of the best known: Jim Collins' Good To Great.
It is terrific for many reasons, not least because it is one of the most academically rigorous books around, is painstaking in its research and application, and because it demonstrates, with clarity and simplicity, the actions and features that research suggests separate great businesses from merely 'good' businesses.
No summary can truly do it justice, and whether you're in business, the social sector, or you want to give yourself an edge as an investor, I highly recommend it.
So I won't try to summarise it, but part of the book came to mind on New Year's Eve.
It bubbled up into my consciousness as something of a response to two stimuli. Firstly, the ever-present New Year's Resolutions, and secondly because while we're all pretty keen to put 2020 behind us, the fact we're taking community spread of COVID-19 into 2021 in at least two Australian states means we can't just leave 2020 behind and start completely afresh.
Now, I covered New Year's Resolutions in an email and article on New Year's Day. I hope you had a chance to read and digest them, but if you didn't, you can catch up, here.
Today, though, I want to turn my attention to the deep desire for many to be able to draw a line under 2020, so we can start 2021 with a clean slate.
It is – I'm sorry to say – a forlorn hope. For, while we're better off than almost any country in the world (and should do everything in our power to get back to zero community transmission of COVID-19 as quickly as possible), we still have a legacy of 2020 to deal with.
There are hundreds of cases of COVID in the Australian community.
The economy bounced back strongly in the last three months of the year, but still has a way to go (and continued fear, border closures, and the resultant drop in economic activity will continue for as long as we have COVID in the community).
In short, we don't get a clean shot at 2021.
Which is not a reason to be pessimistic. At all.
But it's important to not let 'missed deadlines' undermine our confidence in long term outcomes.
And that takes me back to Good To Great.
One of the more memorable parts of the book is the "Stockdale Paradox". I will try, with the help of the good people at bigthink.com, to summarise it, and why it might be one of the most vital concepts for investors to understand.
I'm going to quote liberally from the article:
"Author Jim Collins found a perfect example … in James Stockdale, former vice-presidential candidate, who, during the Vietnam War, was held captive as a prisoner of war for over seven years. He was one of the highest-ranking naval officers at the time.
"During this horrific period, Stockdale was repeatedly tortured and had no reason to believe he'd make it out alive. Held in the clutches of the grim reality of his hell world, he found a way to stay alive by embracing both the harshness of his situation with a balance of healthy optimism.
"Stockdale explained this idea as the following: 'You must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they might be.'
"In the most simplest explanation of this paradox, it's the idea of hoping for the best, but acknowledging and preparing for the worst."
Seems simple, right?
I think, at heart, it is.
But what gives the paradox its greatest power is the explanation of those who succumbed.
"In a discussion with Collins for his book, Stockdale speaks about how the optimists fared in camp. The dialogue goes:
"Who didn't make it out?"
"Oh, that's easy," he said. "The optimists."
"The optimists? I don't understand," I said, now completely confused, given what he'd said a hundred meters earlier.
"The optimists. Oh, they were the ones who said, 'We're going to be out by Christmas.' And Christmas would come, and Christmas would go. Then they'd say,'We're going to be out by Easter.' And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart."
It is a tragic tale. A brutal one. A deeply awful lesson.
But a lesson we can – and should – learn from.
And, frankly, while I'm applying it to investing, I hope reading about it might let you apply it to your life, too.
I think it's deeply important to be optimistic in life, as in investing.
It's smart, it's positive, and it's supported by centuries of history.
I'm a card-carrying optimist, myself.
But I consider myself a 'Stockdale Optimist'.
I believe – with a tonne of history on my side – that things will get better. Whatever the current challenges at any time, I think we will overcome.
But, as Jim Stockdale reminds us, it's also incredibly important to be realistic about the timeframes of the improvements we seek.
In investing, I've lost count of the number of people who, after one market downturn, or one bad stock-pick, throw the baby out with the bathwater. They give up, put off by one (usually temporary) bad outcome.
I've had members email me: "I joined last month and bought three of your recommendations and they're all down" is one (barely) paraphrased example.
I still have people use the GFC as the reason they won't invest – even though it is the exception, and belies decades of gains.
These are the people who have missed opportunities, akin to Stockdale's example. Now, I'm the first to say that there is a world of difference between dying in a North Vietnamese POW camp, and missing out on a few dollars of gains in the stock market. But the paradox and its lessons still apply.
And the same applies, I think, to where we find ourselves right now, with COVID and the deep desire many people have to 'put 2020 behind us' as if some heavy, impenetrable curtain came down at the end of last year, severing our links to it.
I'd imagine many people will probably go into some sort of emotional funk in the next 2-8 weeks as they come to terms with the fact that our troubles weren't confined to 2020. They are the (again, thankfully less consequential) analogs to those who set arbitrary dates for their release from the NVA prison camps.
And, of course, while the example is a tragic one, Stockdale's survival and subsequent flourishing gives us an analog for success, too – a story he and Collins were only too happy to share as one way to look forward with confidence.
It is to remain brutally realistic, while retaining unshakeable long-term optimism.
It is, in some way, the very approach we've always suggested you use with your investing. I've variously described it as 'investing for the long term', 'keeping your eyes on the horizon' and in probably another half a dozen different ways.
My hope, as we get into the first work – and market – week of 2021 is that you can embrace the Stockdale Paradox for yourself, both in your investing and in life in general.
To be able to not lose hope when things don't work out as well or as quickly as you'd hoped (and to not be lost in pessimism and despair when things are going badly).
I start 2021 as I have every year – expecting a bumpy ride to ever-better places, over the long term.
I'm pretty sure Jim Stockdale would approve.
Fool on!
