Sorry I haven’t posted in a while; it’s been a hectic stretch. And I also have to admit that I’ve been watching a lot of Indiana Jones movies with LittleLP lately. Every now and again, I’ll wonder if I should be doing something productive like scribbling down a blog post or paying some bills -- but the moment I see that fedora, I’m frozen in place like one of Indy’s antagonists in the presence of some ancient and mystical idol. And I’ve long thought that the best of the bunch is The Last Crusade, but only recently did I realize that the last scene of that movie offers a metaphor for the craft of investing. Stick with me on this for a moment:
As you’ll recall, the movie reaches its climax when the good guys catch up to the baddies in the Canyon of the Crescent Moon, where the Holy Grail has been hidden for centuries. Seekers of the Grail must pass three challenges of worthiness. Bodies littering the floor of the temple attest to the high cost of failing these tests, so it’s fortunate that Indy’s dad, Professor Jones, Sr., has dedicated his life to The Search and chronicled his findings. After watching the movie for what seemed like the 16th time, I finally realized that the tests are like an investor's roadmap.
Challenge #1: The Breath of God -- Only the penitent man shall pass. As he tiptoes among a jumble of beheaded precursors, Indy realizes that a penitent humbles himself before God, and he drops to his knees just as a spinning blade whirrs by at neck level.
This challenge is a warning that bad things can befall overconfident people. A mentor of mine once told me that a great analyst has no ego; one must be wary of confirmation bias and remember that big ideas often come from unexpected places. With each passing day, he concluded, you’ll realize that you know less and less, for there is no business as constantly humbling as investments.
Challenge #2: The Word of God -- Only in the footsteps of God will he proceed. Having just survived a close shave, Indy now casts his gaze on a floor-tile grid of random letters. Pretty quickly, he realizes that this clue instructs him to hopscotch across the letters, stepping only on the ones that spell, “Jehovah.” But, he momentarily forgets that the Latinate spelling is “Iehovah” and he nearly falls to his doom as he steps on a “J” instead of an "I" and the ground gives way. (Indiana Jones aficionados will recall that his father made young Indy chew garlic when he made an error in Latin or Greek.)
I’ve been thinking that this challenge is a metaphor for the diligence process: you’ve got to ask the right questions and call upon your experience and skills to get the answers. Agility, wit (in both senses), patience, and confidence will serve you well as you traverse uncertain terrain.
Challenge # 3: The Path of God -- Only in the leap from the lion's head will he prove his worth. Indy now finds himself facing a chasm separating him from the entrance to the Grail room. The protectors of the Grail, had, however, created an optical illusion by disguising the bridge such that the surface blended with the rockscape surrounding it. Indy inhales deeply as he steps out onto the ersatz gulf, only to find a bridge of faith below his feet.
Indeed, sometimes investors just need to take a breath and step into the abyss, knowing that their preparation was sound. After all, risk isn't a dirty word; investing is about optimizing discomfort, and we spend our lives seeking appropriate compensation for the risks that we do take (at least those that can’t be mitigated). If you never take the leap, the Grail will forever be out of your reach.
Having met the challenges, Indy now finds himself in the Chamber of the Grail, where he is met by an ageless knight and a room full of putative Grails. “Choose wisely,” admonishes the old knight just as the antagonist, the turncoat Walter Donovan, enters the room. Donovan grabs a bejeweled chalice, “a cup worthy of the King of Kings,” he says, drinks deeply, and perishes in a gruesome way. He chose poorly. Indy then searches for the Cup of a Carpenter, finds a modest vessel, fills it with holy water, and drinks. “You have chosen . . . wisely,” says the knight.
Now maybe I’m reading into this too much, but I saw this scene as an admonition against rashly investing in the new, new thing. Investors love shiny new pennies, but often, it’s the tried and true staples, arrived at deliberately, not snatched in haste, that offer the best outcomes.
I also recalled my days at Old Ivy’s endowment. With each investment, we felt the burden of being a bell-cow. We were proud that we did good, thorough work, but were sometimes surprised at how hastily people followed us in our investments, much like Donovan follows closely on the heels of Indy's pioneering footsteps. Of course, I was always quick to tell people that they were chasing our second-best ideas, since we kept our best ones close to the vest for as long as we could since those funds rarely had enough capacity to sate our entire appetite, not to mention the appetites of all of our friends.
It's true that the courageous investor must follow an adventuresome path in search of outsized returns. After all, the benefit of being right and alone with some frequency can generate outsized overall returns, but blazing a pioneering trail comes at the risk of being wrong and alone, as well. And for those of us who focus on long-dated asset classes, we, unfortunately, don't get the benefit of a knight that nods approvingly as we write investment memos. Only in the fullness of time will we know whether we chose wisely . . .