Create Muscles Isolate 'em Maximize Growth
Introduction
Have you ever wondered that something that could be the reason of better learning and understanding could be the cause of robustness in a business and also the reason for survival or natural selection in a animal / bird / plant species. Darwin deciphered this one thing in respect to living organisms.
“Hairless dogs have imperfect teeth; long-haired and coarse-haired animals are apt to have, as is asserted, long or many horns; pigeons with feathered feet have skin between their outer toes; pigeons with short beaks have small feet, and those with long breaks large feet. Hence, if man goes on selecting, and thus augmenting any peculiarity; he will almost certainly unconsciously modify other parts of the structure, owing to the mysterious laws of correlation of growth.” - Charles Darwin, On the Origin of Species, chapter 1, “Variation Under Domestication”
[You probably read the quote thought it was vague and are probably still wondering what that one thing is]. Well if you still are wondering what that one thing is that connects learning, businesses and living organisms together it is “Hyper focus on one specific thing or task at a time”.
Focus in life
If you believe in the premise that in order to excel in any domain you need to create a habit that will take you to the right side of the normal distribution curve (top 5-10%), habit here literally defining consistency, second nature and grit all at once you might agree with what James Clear had to say in his article “The Scientific Argument for Mastering One Thing at a Time”;
“You are 2x to 3x more likely to follow through with a habit if you make a specific plan for when, where, and how you are going to implement it. This is known as an implementation intention.
You should focus entirely on one thing. Research has found that implementation intentions do not work if you try to improve multiple habits at the same time.
Research has shown that any given habit becomes more automatic with more practice. On average, it takes at least two months for new habits to become automatic behaviors.”
His theory in this article solely relied on entirely focusing on one thing and making it a habit that would help you improve in that domain. In the article he further went on to talk about “automatic behaviors” as a result of result of constant repetition or what I would like to call muscle memory
“But here’s the thing: automaticity only occurs as the result of lots of repetition and practice. The more reps you put in, the more automatic a behavior becomes.”
The first thing that popped into my head when I read this was those gym rats telling each other about isolating a muscle group for quicker and more aesthetic gains, at first I used to think that this strategy is worthless outside the gym but after hearing what James Clear has to say I beg to differ. In this new mental model that I have recently discovered I think of all aspects of life as a muscle group needed to be isolated until I reach the tipping point of making it a habit by finally reaching the state of automaticity. In his words about tipping point and in my opinion the most crucial element of this talk,
“The most important thing to note is that there is some “tipping point” at which new habits become more or less automatic. The time it takes to build a habit depends on many factors including how difficult the habit is, what your environment is like, your genetics, and more. That said, the study cited above found the average habit takes about 66 days to become automatic”
If I were to give an example about this from my life I would say that I have 2 muscle groups : Cricket & Investing. Currently I am isolating the cricket muscle (focusing entirely on cricket alone), in order to give you a full picture of my situation I am not only developing my cricket skills, I am also developing natural instincts like reflexes which automatically put me ahead when it comes to learning how to drive compared to other teens of my age, I am able to sharpen my general fitness physically and mentally which makes me a better investor because now I feel calmer and more confident [for those of you who don’t play the sport cricket teaches you to be calm in every situation and assess it to it’s entirety to determine the best possible solution in the least amount of time, a mentally unfit player cannot play cricket professionally hence physical as well as mental fitness is given equal priority]. Reflecting back on the words of Darwin, if you noticed just by focusing on one problem at a time (cricket in this case) I may have altered another muscle group in my life (investing) bringing me to my next point inspired by the book “What I learned about investing from Darwin” - Pulak Prasad.
Laws of correlation : Business vs living organisms
In the book Pulak Prasad bases his theory of finding a high quality business by singling out one quality trait that ensures robustness on almost all fronts, where did he get this idea from you might’ve guessed it, from the evolutionary theory from Darwin of-course. He started with an experiment conducted by Dmitri Belyaev & Lyudmila Trut which focused on a taming wild foxes, they were quite successful in doing so and the results were astonishing. In his words he writes in the chapter Siberian Solution,
“Dmitri Belyaev & Lyudmila Trut’s long-term experiment in Siberia has shown that selecting for tameness in wild silver foxes transforms them into a creature not unlike a pet dog over very few generations. The foxes become docile and crave human attention. They also develop floppy ears, a piebald coloration, and a shorter snout and can be reproductively active more than once a year.”
With this experiment being such a success Dmitri and Lyudmila had proven Darwin right. Darwin thought of these “mysterious laws of correlation of growth” in terms of living organisms and biology but Pulak Prasad saw them in business, in the book Pulak Prasad reveals that the one thing Nalanda (his fund, based Singapore) tries to find in a business is a high ROCE, since as per him it is the one thing that might give a business 4 other high quality attributes.
“A consistently High - ROCE business is likely to be run by an excellent management team.”
“A consistently High - ROCE business is likely to have a strong competitive advantage”
“A consistently high - ROCE business allocates capital well "
“ A consistently High - ROCE business allows companies to take business risk without taking financial risk, which increases the Chance of business success.”
I urge you to read the book for a better and clearer understanding of these concepts & also to improve your knowledge about value investing in general.
To top it up he has somewhat managed to selected the most relevant calculation of ROCE (at least as per Nalanda). He excludes cash in ROCE calculations in his words here is why,
“In the net working capital number, we like to exclude excess cash (i.e cash minus debt if cash happens to be much greater than debt) because extra cash in not an operating asset. Also, high ROCE companies generate a lot of cash, and incorporating cash into the capital employed number will unnecessarily reduce ROCE.”
Now that you have a summary of Pulak Prasad’s theory I have a little something of my own to add on to it. It is a treat for an investor to find a consistently high ROCE business but the question I ask to my fellow investors is would it be possible to do so without culture ? Yes culture, you might be thinking that I have lost it by now, how does culture relate to any of this but let me tell you it does. Unless and until the one problem at a time policy isn’t ingrained in a company it isn’t going to become a high - ROCE business. I say that the company itself has to focus on only one problem at a time for the longest possible time period to create value for it’s general stakeholders and for it’s shareholders. Let’s take Costo for example, it’s sole focus is to supply retail items at the cheapest possible rate this creates an environment, a culture within the company where each an every mind no matter what department works towards fulfilling this ideal goal. Costco created the ‘cheap retail items’ muscle for itself and is working on it everyday this is only possible because it has isolated this one muscle from the others. For as long as I can remember Costco’s operating margin’s have been nearly 3%, however it’s ROCE has always been above or close to 25%. How is that possible achieving a turnover of 8 times is no joke for a retailer, this of course shows how robust the business is without me diving into it’s details.
However keep this thought on a hold and see how we got here. We first learnt from Darwin about the single selection criterion which alters multiple characteristic, we then learnt from Pulak Prasad that this theory also works for business and that ROCE might be the ultimate singled out characteristic of a business which assures robustness, we later explored that a company that focuses on a single market problem and devotes all it’s resources to it creates eventually creates the most ideal culture to achieve it which automatically leads to the birth of a consistently high ROCE, robust business model.
[My theory might be wrong and I might end up discarding everything I wrote, after all I am just a college student but for now I believe my thesis to be true]
Conclusion
At first all this information was overwhelming but I realized the importance of focusing on one thing at time for a long long time, this mantra is applicable to almost everything in life. I would truly love to live by the formula