By Robert Bacarella | July 9, 2019
I am a big fan of author Lee Child’s “Jack Reacher” novels. I like the Jack Reacher character, as he reflects the idea of always doing the right thing and helping the little guy.
Jack Reacher is a big guy, six feet five inches, weighing 250 pounds—a beast, who is very intimidating…it still surprises me that he was played by Tom Cruise in the movies (nothing against him, but he is definitely not six foot five, 250 pounds). Reacher is an ex-military police officer with an uncanny ability for deductive reasoning…almost like a modern-day version of Sherlock Holmes.
He’s a drifter, who travels mostly by hitchhiking, carrying only a folding toothbrush and ATM card to draw money from his retirement pension. He has a need to right the wrongs he encounters, delivering justice, striving to protect the innocent. You could say he is a cross between the Lone Ranger and Rambo…except without the white horse and red bandana.
Reacher lives by his own creed. He has strict rules that he follows to deliver justice. These rules make for entertaining books—and they can also be applied to investment concepts.
Here are some of Reacher’s rules and how they line up with important investment lessons.
Reacher: “Hope for the best, but plan for the worst” – Never Go Back (2013)
Hope is not an ideal investment strategy. On the contrary, planning for the worst can often be beneficial. In investing, planning for the worst is accepting the fact that markets will be volatile and market declines are a natural part of the investing cycle. These declines are typically times when you should plan to invest…in other words, an opportunity to buy good companies at discounted prices.
Reacher: “If you can see a bandwagon, it’s too late to get on” – Killing Floor (1997)
Markets and crowds are not always wise. When people see other people pile into the stock market, they tend to also invest. This follow-the-herd mentality can eventually lead to speculative bubbles. Then, as markets start to decline, people panic (sell), leading other people to panic, crashing the market.
This bandwagon effect reflects investors’ reliance on other peoples’ judgment, not their own, when making an investment decision. Although following the crowd isn’t bad all the time, it is important to observe where the consensus is going. This trend analysis coupled with independent thinking could lead to a contrarian investment choice. A contrarian bet may endure periods of underperformance and possible ridicule from the herd, but, if you are right, the rewards could be great.
Reacher: “Nothing ever works like you predict it” – Persuader (1997)
Predicting how or when something will happen is difficult. Unless the event is science-based, your guess would be as good as mine. In investments, if you think you have a great idea you should go out of your way to find someone who disagrees with it. At best, doing so will reinforce your investment idea…at worst, you will gain valuable insight into what could go wrong.
It is important to avoid confirmation bias…in other words, beware of asking your barber if you need a haircut. There’s an art to this process of seeking out thoughtful disagreement.
Reacher: “I never believed in luck, never relied on it” – Killing Floor (1997)
In the stock market, don’t confuse luck with skill. Investors should always attempt to be skillful rather than rely on luck. Sorting out how much of a given result is skill versus luck is neither easy nor always possible. The great investors demonstrate persistent long-term performance success by staying invested, knowing the value of their companies and adding to positions when everyone else is selling.
Reacher: “Waiting is a skill like anything else…” – Killing Floor (1997)
Many people don’t have the patience or temperament to be skillful investors. Waiting is focusing on what to buy, when to buy and being prepared to act when opportunities arise. It is market volatility that creates mispriced assets and skillful investors “wait” for those opportunities.
Reacher: “When the unexpected gets dumped on you, don’t waste time” – Killing Floor (1997)
It is nearly impossible to tell if the market is in a temporary dip or the beginning of a more prolonged correction. You have no control over what’s going to happen in the markets, but you have complete control over your reactions to them.
Prepare ahead of time, act decisively and don’t “waste time,” as these opportunities don’t usually last very long. Investors can make excellent investment decisions based on present observations, with no need to make guesses about the future.
Reacher: “We investigate, we prepare, we execute” – Bad Luck and Trouble (2007)
Information-gathering generally follows the well-known 80/20 rule: you can typically gather 80% of available information in the first 20% of your investigative time. Therefore, the additional value of in-depth analysis is subject to the law of diminishing marginal returns.
So, instead of focusing your attention on a large volume of information, zero in on information that could impact the company’s long-term outlook. Be prepared to execute decisions when that crucial information prompts a change.
Also, be prepared for rough patches in the market; don’t be surprised by them. Look for opportunities to add to holdings when others are fearful.
What Would Reacher Do?
Reacher’s rules point toward an investment strategy based on extensive analysis, anticipating various outcomes and reacting to changes. Reacher doesn’t believe in luck, would not jump on a bandwagon and would “wait” for opportunities to present themselves. He expects the unexpected, accepts market volatility and is prepared to act decisively. He realizes there are no magic formulas to find good companies believing that “experience beats conjecture every time” – Night School (2016).
Is this the right strategy? Reacher would say: “But the smart money says we should act like I’m right. Just in case.” – Make ME (2015).
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