Our New Year’s resolution

Tomorrow is a significant day.

Data from the world’s most popular activity tracking app suggests that 19th January has the dubious honour of being the day when most New Year’s resolutions will be abandoned. Strava are trying to brand it “Quitters Day” to drive downloads of their product, but to most fund managers this is nothing new – it’s just another example of mean reversion at play in our lives.

Regardless of how you feel about New Year’s resolutions, they are very much a feature of office life in January. Everywhere we look people are eating healthily, avoiding alcohol, hitting the gym and generally indulging in wholesome and (in some cases), completely unsustainable activities. We’re all secretly excited about our own Three Body Capital Quitter’s Day, likely sometime in early February, when we will inevitably gather around the table at Five Guys Camden for burgers, fries, milkshakes and other delicious, mega-calorie victuals that nobody seems to eat in January.

In recent weeks, the internet has exploded with articles promising to “level up your life”, “unleash your potential” and a bunch of other irresistible promises. Self-help is a fully fledged industry, and the January onslaught of good intentions is just the tip of the iceberg. In 2017, the self-help market was worth $9.9 billion in the US alone, with a projected average annual growth rate of 5.6%. With the proliferation of digital platforms, it has expanded from paperbacks and cheesy conferences to websites, apps and streaming services. This stuff is literally everywhere, and (almost) everyone is now a self-helper, despite the somewhat paradoxical nature of the exercise:

“If you’re looking for self-help, why would you read a book written by somebody else? That’s not self-help. That’s help! There’s no such a thing as self-help. If you did it yourself, you didn’t need help.”
– George Carlin

Semantics aside, it’s easy to get lost in the flood of ideologies, life hacks and mental models that swirl around us as we go about our everyday lives. With so many ideas and techniques available to us, how do we move forward and actually execute on our promise? How can we fulfil our potential as investment managers and human beings in the months and years ahead?

Here’s how.

A brief history of self-help.

The concept of annual rebirth and renewal is as old as the hills, if the hills were 4,000 years old. Pledges to drink less alcohol and do more exercise were made by the Babylonians, but they didn’t celebrate New Year in January – their big reset happened at the start of the spring harvest in mid-March, when they held a raucous 12-day festival known as Akitu. Historical artefacts talk of promises made to the gods at the start of each year to return borrowed objects and pay debts. Later, the Romans began each year by making promises to the god Janus, after whom the month of January is named. These days, we make promises to ourselves.

The tradition crops up in many of the world’s major religions – during Rosh Hashanah, through the High Holidays and culminating in Yom Kippur (the Day of Atonement), one is invited to reflect on one's wrongdoings, both seeking and offering forgiveness. Christians do something similar during Lent.

The practice of making resolutions might be ancient, but “self-help” is a more modern phenomenon. It seems to have emerged from the classical liberalism of the mid 1850s, when Scottish author and government reformer Samuel Smiles declared that “Heaven helps those who help themselves”. His book – entitled Self-help – was so popular that it actually outsold both Charles Darwin’s The Origin of Species and John Stuart Mill’s On Liberty. More recently, self-help has exploded in popularity, and New Year’s resolutions are the most commonplace manifestation of its omnipresence. At the end of the Great Depression, about a quarter of American adults made resolutions. Today, data suggests that around 40% of Americans are at it. But do they actually work?

According to the scientific evidence, the answer is yes. A study published in 2009 by John C. Norcross found that those who made resolutions reported higher rates of success than non-resolvers, stating “At six months, 46% of the resolvers were continuously successful compared to 4% of the non-resolvers.” Despite all the hype and hysteria, it turns out New Year’s resolutions are a pretty effective way to enact behavioural change.

The not-so secret, secret to success.

The problem is that resolutions tend to rely on a finite and notoriously fickle resource – motivation. The aforementioned study found that:

“Desire to change did not make a difference in success. Successful resolvers used more self-liberation, stimulus control, reinforcement management, positive thinking, and avoidance strategies to keep their resolution. Non-successful resolvers used more self-reevaluation, wishful thinking, self-blame, and minimized threat than the successful contingent.”

There’s lots of good stuff to dig into in this statement, and we’re not trained psychologists, but the body of the study suggests that mitigating risks to successful execution is more effective than relying on motivation alone.

This got us thinking. What if success in adhering to New Year’s resolutions is about systems rather than goals? What if improving ourselves – be it our health, our relationships, our lifestyle or our careers – is about designing systems which mitigate your intrinsic biases?

This is precisely what we’ve done with our investment process here at Three Body Capital. We’re big advocates of multidisciplinary thinking and we’re accustomed to taking learnings gleaned from out in the big, bad world and applying them to the domain of investing. We’d rather “pick ‘n mix” ideologies than buy into them wholesale.

Our approach.

Behavioural psychology provides fertile hunting ground for investors looking to better understand themselves, their limitations, and their promise. From day one we’ve sought to apply what we’ve learned about this field to our investment process here at Three Body Capital, creating favourable asymmetries that enable us to cap downside risk but profit from upside potential. We’re not about ideology, intuition, conviction, wishful thinking and finger-pointing when things don’t work out as planned – we’re about the strategies described by John Norcross in his study – self-liberation, stimulus control, reinforcement management, positive thinking, and avoidance strategies.

But what if the reverse is also true? What if we can apply learnings from our experiences as investors to become better people? Focusing on process and systems that minimise our chances of failure doesn’t make us any less human. By providing a blueprint for living, carefully refined processes can give us much needed structure and enable us to relax and enjoy whatever life throws at us.

Our unfair advantage.

The truth is, investing isn’t some esoteric thing that we go to an office to do. It’s real life. The so-called real economy and the financial markets might seem like discrete domains, but they exist in a holistic, fluid state. The same is true of life and work. Becoming a better person can make you a better manager.

We’re conscious that anyone can design (or replicate) a process that’s been validated by others. Our unfair advantage, our edge, is ourselves – applying creative, imaginative and disruptive ways of looking at the world to assets like stocks and digital assets. Then the process takes over.

There is nothing new under the sun. Our world is governed by natural laws and timeless truths, but at times, it seems saturated with at best, classical wisdom repackaged as cutting-edge thinking, or at worst, ephemeral nonsense. When planning for the future, we like to remind ourselves that good things take time. Lurching from one trendy idea to the next is unproductive and frankly, unfulfilling. Life-hacks aren't sustainable. Better to stay true to yourself, follow your curiosity, and trust in the process.

That’s what we’ll be doing in 2020 – and 2030, for that matter.

Edward PlayfairJanuary 17, 2020