“They’re not gonna give it to you? So what? You’re gonna take it. You’re gonna do whatever it takes. Do you hear me? You’re gonna go your own way. You’re gonna do what they won’t do. You’re gonna be smart. You are gonna cut corners, and you are gonna win. They’re on the 35th floor? You’re gonna be on the 50th floor. You’re gonna be looking down on them. And the higher you rise, the more they’re gonna hate you. You don’t matter all that much to them. So what? So what? Screw them. Remember, the winner takes it all.”
Better Call Saul, Season 4, Jimmy McGill to Kristy Esposito
It’s not easy to talk about conflict. Or competition. Most want to run from it. Or paint the world in a rosier picture. We are mostly afraid to look into what it really means in our day-to-day lives.
Who is your enemy? I use the word “enemy” lightly here. What I mean is, who are you going up against in your career or passions? Who else wants the same thing you want? There are rarely multiple winners. We memorize the names of successful business people and athletes. We never know the names of the other people who wanted the same exact thing, and failed.
I was once told for every billion dollar startup idea, even more is lost among those chasing similar dreams. The drum beat of the few who win is all we ever come to know. Bill Gates beat a lot of people in software for several decades. Buffett destroyed hedge fund gurus year after year. The Warriors and Patriots keep winning despite any amount of fan negativity. Bezos is still eating the retail businesses around him.
At the end of the day, everyone, and I mean everyone, is just like you in that they have a goal to accomplish.
It can be easy to mistake success with hard work. Those who work the most, will win the most. We hear athletes talk about it all the time. They thank their hard work. But the unsung reality is that someone else had to lose in order for them to win.
They worked hard? Yes. They were dedicated? Yes. But more importantly, they were aware of a counter force. They outsmarted someone going after the same thing. Ultimately, this is the sole point of business. To fight for market share. It’s what the analysts are doing at your local prestigious banking job. Eventually, there can only be one managing director. This is the war we are constantly waging. It happens to everyone, all the time.
As an investor, the same story arch governs the markets you play in. You can work as hard as you can, study a stock for months, and calculate the odds of that stock doing well with the greatest statisticians. The problem, though, is that you’ve left out the most important thing. It’s as if you blind folded yourself before walking into the arena.
Who are you going up against?
For investors, the goal is to outperform the S&P 500. If you can’t, you should buy the Index, and sleep easy. Everyone is going up against something. No profession avoids it. Maybe you run a repair shop in your local town. You certainly are not the only repair shop. To grow your business, it’s not about who works harder. It’s about doing something fundamentally better than whoever it is you compete with. These rules have held held true since 500 BC when Sun Tzu wrote:
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.”
Sun Tzu
It’s not an easy task to know who you’re playing against. Sometimes the enemy is hidden. Designing a perfect plan to play your best game against that enemy is equally a difficult thing. If it were easy, I wouldn’t be writing this and you wouldn’t be reading it. I think of two teams studying their opponent for hours, in a war room, film running, and notepads out. They are trying to understand the force they are going up against.
Who is the opposition?
How do they play?
What are they good at and bad at?
How will the weaknesses be exploited and the strengths contained?
I know most people reading are investors, both individual and professionally. So I can start this exercise for you by examining what it means to be going up the ultimate force – the S&P 500. I’m reminded about the strict process the index follows to add, and subtract stocks:
1. Liquidity
The stock should have sufficient liquidity in the form of shares outstanding, and trading volume. One example of this is monthly trading volume divided by shares outstanding of at least 0.3.
2. Fundamental Analysis
The selection here is surprisingly simple. The absolute must to be added is four quarters of positive net income. That’s the only must. The absolute has to happen criteria on fundamental analysis.
3. Market Capitalization
For a comparison ny to be included, it has to have a market cap greater than $4 billion. In addition, the company should be considered a leader or top name in its industry.
4. Sector Diversification
The S&P 500 is a collection of all the major industries and sectors. The Index is designed to weigh each sector of industry as a fairly as possible without overweighting one or underweighting another.
5. Fair Representation
The S&P 500, when looking to remove a company, or potentially add one, asks a single question: “if the Index was created today, would this company be included because it absolutely meets the criteria above?”
The criteria above should hang across office walls across Wall Street. It’s how the competition selects the stocks they’re trying to outperform. To be ignorant of that, or to think, “everything will take of itself” is a complacent approach. And nothing great was ever built on complacency.
Economists say there’s no such thing as a free lunch. I think that’s mostly true. You’re not going to get much without putting in the necessary work. I might also take it a step further and say there’s also no such thing as an easy lunch. We’re all in a crowded restaurant with a table for one. Your job is to figure out how you will get it, even if that means just a bite or piece of bread to gift to someone else.
We are all going up against something.
It’s not an ugly truth. It’s not a harsh reality. It’s just the nature of things as they are. It can be fun or exciting coming to this awareness. Most of us take it for granted. We’ve stumbled into fortuitous situations entirely overlooking all the people who tried to beat us. Most us don’t even know who we overcame or when. But we did, and the sooner we realize it, the better planned we will be when we suffer our first big loss, and more proud we can be when we get our first big win.
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If you missed it, here’s what I learned about the stock market in 2018.
