IRON MAN: The Ultimate Compounder

On a humid night in Baltimore twenty five years ago this month, Cal Ripken broke one of the most hallowed records in baseball -- Lou Gehrig’s consecutive games played streak. From 1982 to 1998, Ripken would not miss a game (2,632 games in total). Outside of Gehrig at 2,130 games, the next closest streak is Everett Scott at 1,307 games...a streak that ended in 1925. The current streak? Roughly 300. 

During his Hall of Fame career, Ripken accumulated more than 3,000 hits, 400 home runs, and 1,600 runs batted in (“RBIs”). Impressive, but even more so when you consider the fact that he only hit over .300 four times, had more than 30 home runs once, and eclipsed the 100 RBI mark just four times. Ripken never led the league in any of these categories in a given year and rarely finished in the top 10. So what was the secret to his success? Simple. He was very good for a very long time. In investing terms, he was the ultimate compounder. 

“I haven't given it (achieving 3,000 hits) much thought. I was taught a certain approach, how to come to the ballpark. I try not to do too much thinking about things like that. In this society we measure success in different ways. Three thousand (hits) represents success over a career, not a season. It'll be nice to get to that point.”

-- Cal Ripken

The Power of Compounding

In his new book, “The Psychology of Wealth”, Morgan Housel emphasizes the “power of compounding” by highlighting the greatest investor of all time, Warren Buffett. While Buffett’s 22% compounded annual rate of return is impressive, Housel argues it is not his secret to success. Sustaining those returns for close to three quarters of a century is.

See, Buffett started investing when he was ten years old. As a result, he had accumulated $1 million by the time he was 30 ($9.3 million in today’s dollars). Compound that capital by 22% since the early 1940’s and you get a net worth of over $80 billion today. 

Housel then poses a question. What if Buffett had waited until he was 25 to start investing? Then, instead of investing into his 90s, what if he had “hung up his cleats” at 60? Would he have half as much today? A third? A quarter? Try 99.99% less. Under this scenario, Buffett’s net worth would be “just” $12 million.

The takeaway? Compounding is a long, long process. It requires patience. It isn’t sexy or exciting. In fact, it is arguably downright mundane at times. But therein lies the secret. While the masses are consumed by shorter-term metrics like a given year’s home run leader or quartile investment performance ranking, legend’s like Ripken and Buffett simply lace up their spikes up each day and focus on compounding. The result? As echoed in the classic youth baseball film, “The Sandlot”, 

“Remember kid. There are heroes and legends. Heroes get remembered, but legends never die.”

Today, the fact is few investors aim to be legends like Ripken and Buffett. I get it. It’s hard. The incentives aren’t obvious. Why pursue delayed gratification when you can get the dopamine highs from quick IRRs, high frequency trading, and even a Robinhood account? Why build a loyal fan or LP investor base when you can raise money in an instant? Why look out into the future when the present is chalk-full of profits? Yet, herein lies the opportunity and the reward for pursuing it is significant on many levels. You just need to be willing to favor becoming a long term legend over a short term hero. 

Consistently Good

When you think about the most revered stats in baseball, which come to mind? In addition to Ripken’s streak, the all-time home runs (Hank Aaron), runs-batted-in (Aaron), hits (Pete Rose), wins (Cy Young), and stolen bases (Rickey Henderson) are a few that jump out. 

What does each player have in common? Duration. Each played more than twenty seasons. Now, what if I told you that not one holds the single season record? What if I told you they only led the league in their respective categories a few times during their careers? Like Ripken, they were simply very good for a very long time. (For the record, I still consider Hank Aaron the MLB Home Run King.)

For investors, a similar dictum holds. The equivalent of the “single season leader”? Being in the top quartile in a calendar year. Superstar status? The top decile. This is not to say that successful investors shouldn’t aspire to be season leaders or superstars. They just need to be aware that the odds of staying there are not in their favor. There is a better way. 

Back in 1990, Howard Marks penned a memo titled, “The Route to Performance”. In it, Marks profiles the chief investment officer of a Mid-Western pension plan whose equity portfolio had outpaced the S&P 500 by a material amount over a fourteen year period. What was the secret to his success? By betting on a single sector? By leveraging the portfolio? By focusing squarely on that illusive first decile? Not exactly. The CIO was simply very good for a long period of time. This equated to never finishing worse than the 47th percentile or better than the 27th percentile (solidly in the 2nd quartile). As a result, for the entire period, his fund finished in the 4th percentile for the nearly decade and a half period. 

Consistently compounding has a funny way of quietly generating elite returns. 

Durability 

While Ripken’s consistency was well known, his durability was unparalleled. He certainly stayed in top notch physical shape and had a high pain tolerance, but as Tom Boswell of the Washington Post wrote recently, it was his analytical focus that kept him on the field. 

“Ripken was such a student of the game. He always turned away from inside pitches properly. He intimidated high sliding runners by jumping, then landing on them knees first so they would never try to maim him again.” 

The key for Ripken was “staying in the game”, which meant constantly looking to minimize unnecessary risks. For investors, this equates to avoiding interrupting the compounding process. 

In my career, I have seen managers “go bust” in countless ways -- taking on too much leverage, succumbing to black swan events, having weak-handed limited partners “punch out” at the wrong time, underperforming on both the upside and downside, and deviating from the strategy’s core objectives are just a few in a long list. With that said, how does an investor “stay in the game”? Interestingly 2020 has highlighted three keys. 

It starts with maintaining loyal partners. The past few months have put on full display how important it is to have the right partners. It has also provided a wonderful litmus test. For public equity managers, did they invest in their highest conviction holdings when they were cut in half or did they exit? For private investors, did they lend an operational hand and inject capital where needed or did they sit on the sidelines? For allocators, did they add to their managers or retreat? Confidence is a delicate thing, but having loyal partners can provide some pretty strong ballast. 

“Earl’s confidence gave me confidence,”

-- Ripken answering the question of how he had the confidence to go out every night early on in his career (his manager at the time was Earl Weaver)

The next is an ability to look through to the other side of a crisis. I had a call recently with one of our highest conviction managers who said that once they had re-underwritten their existing businesses on a balance sheet basis, the next step was to determine which would be worse off, the same, or stronger coming out of the crisis. This is precisely the mentality of a long-term compounder. 

Lastly, those who are committed to learning along the way are much more likely to survive and thrive over long periods of time. This is where being a “student of the game” like Ripken is paramount. The fact is, the prime for most investors is their early 40s to late 50s. This means that they have likely experienced two, maybe three cycles. You can learn a lot over two or three decades, but it goes well beyond that. Are they students of market history? Do they have an appreciation for those who have come before them? Are they good listeners? Do they self-reflect? Do they love to learn?

In short, durability is about maintaining trustworthy relationships, having vision, and being a lifelong learner. Combined with consistency, isn’t that what life is all about?

“A lot of people think I had such a rosy career, but I wanted to identify that one of the things that helps you have a long career is learning how to deal with adversity, how to get past it. Once I learned how to get through that, others things didn't seem so hard.”

-- Cal Ripken (shortly after retiring)