Investing and the Power of Serendipity

In July 2003 I was fresh out of college and was waiting to join my first job. I was excited but a little anxious too. The thought of transitioning from a laid back college life to a hectic corporate job was giving me jitters.

The life in college was quite predictable. The syllabus was fixed. If I studied the textbooks diligently and attended all the classes, I was supposed to graduate in four years with predictable grades.

But in the job, I had no clue what to expect. I didn’t know how my first boss would behave. Although there weren’t going to be any exams or pop quizzes in the job, there was no set curriculum either. It was a different flavour of uncertainty out there which I hadn’t tasted before.

So, to make the best use of my vacation before the corporate grill started, I thought of meeting someone who was successful in this field. I decided to meet the president of small scale industries association in my hometown.

“Uncle, I am about to join my first job in a chemical industry. What should I do to make the best use of my time in my job?” I asked him.

“Always keep your eyes and ears open. Opportunity can come from any direction. Be ready to grab it and work hard to capitalize on it,” he said. We spoke for about half an hour but these are the only three sentences that I still remember.

At that time, those words didn’t make much sense to me. However, after spending 10 years working in different jobs, I began to realize the importance of uncle’s advice.

In fact, that’s probably the best advice one could have ever given to a young guy getting started in life. With every passing year, as I am accumulating more experience and trying out different things, the gravity of those three sentences leaves me in the state of jaw-dropping amazement.

If there was one word that captures the essence of uncle’s advice it is ‘serendipity’, or a positive happenstance. Being pleasantly surprised by an accidental discovery.

The term serendipity was coined in a letter by the writer Hugh Walpole, who derived it from a fairy tale, “The Three Princes of Serendip.” These princes “were always making discoveries by accident or sagacity, of things which they were not in quest of.”

Scientists, in hard sciences, engineering, and medicine, are realizing the importance of serendipity in all kinds of research activities. The process of research is essentially looking for something but discovering something totally unexpected. That has been the trend in most of the groundbreaking discoveries of past few centuries.

Most successful researchers understand the phenomena. In fact, they don’t call a research successful unless something happens that they didn’t really expect to happen.

In every case, from penicillin to Viagra and from microwave to Facebook, the final product was never the intended one. The people behind these things were smart enough to recognize the potential of the unexpected and then pursue it further. And that’s what separates an ordinary accidental event from an accidental discovery.

Columbus was looking for a new way to reach India and found something (America) which he didn’t know existed. Nassim Taleb, in his book The Black Swan, speculates –

No journalist was present when the wheel was invented, but I am ready to bet that people did not just em­bark on the project of inventing the wheel (that main engine of growth) and then complete it according to a timetable. Likewise, with most inven­tions.

Navigating the Randomness
Our world is brimming with seemingly random events. Amidst this chaos, occasionally, an opportunity arises for divulging something extremely useful. Question is – are your ears and eyes open to spot that opportunity?

There is a strong connection between scientific research and share market investing. Investing is essentially a process of discovering undervalued businesses that have strong competitive advantages.

Sticking to a sound investing process is of paramount importance. Not overpaying for a business, being careful with debt, being careful of unethical management, not buying businesses in highly competitive and commoditized industries, and not venturing outside your circle of competence – these are some of the guidelines that every value investor needs to stick to. But one must not forget that these guidelines are not iron rules.

Sometimes you chance upon certain company names as a footnote in the annual report of a different company. Are your ears and eyes open? Are you giving serendipity a chance to lead you to something unexpected?

Legendary investor Peter Lynch’s investing philosophy was largely serendipity driven. He kept an open eye to brands and products he would routinely come across in day to day life.

He was supremely observant to things like – which clothing brand his wife liked? Which hotel chain was he using frequently while traveling? Where was he buying his coffee from?

When Lynch would meet the company management, his favourite question was, “Who’s your favourite competitor?” Now that’s an odd question to ask a business person, but many times the answer would lead him to interesting opportunities.

In the May 2015 issue of the Value Investing Almanack, Vishal wrote a detailed post titled…

Where Do Great (Investment) Ideas Come From?
In his post, Vishal mentioned…

My limited experience in investing suggests that what is most valuable to know about ideation is not where to look for a particular idea, but how to train the mind in the method by which all ideas are produced and how to grasp the principles which are at the source of all ideas.

He also shared a five-step process in producing ideas from James Webb Young’s 1939 book titled A Technique for Producing Ideas –

While describing the fourth step of this process i.e., the a-ha moment, he wrote –

There are billions of neurons firing in our brain every second. Sometimes one random firing neuron ends making a neural connection between two unrelated segments in brain’s processing engine and voila! You get a stroke of insight…the Eureka Moment!

Then and only then, Young promises, everything will click in the fourth stage of the seemingly serendipitous a-ha moment – “Out of nowhere the Idea will appear. It will come to you when you are least expecting it — while shaving, or bathing, or most often when you are half awake in the morning. It may wake you in the middle of the night.”

Some of the most creative people in the planet including some of the famous scientists and world class musicians knew this peculiar characteristic of our brain. They would always be ready to capture those a-ha moments. Some would sleep with a pen and notebook next to their bed just to make sure they don’t miss the idea.

Prof. Sanjay Bakshi, in the note he shared with Vishal on what to read for investors, wrote –

Can you become wiser between the time you sleep at night and wake up the next morning?

I found out that the answer is yes and the discovery is to do with the science of sleep. I found that if I read some random passage from a “super text” (e.g. some page from Poor Charlie’s Almanack, or some passage from the letters of Warren Buffett or Common Stocks and Uncommon Profits by Philip Fisher) just before I sleep, then while I slept what I had read does things inside my brain. When I wake up, I get fresh insights which I can use.

There is plenty of evidence which shows that sleep makes memories and associations stronger. And learning is about making the right associations. And we sleep roughly one-third of our lives. So why not use the time to become a bit wiser while we sleep?

Remember, it’s not the conclusion but the confusion which leads to interesting discoveries. As the adage says, “Chance favours the prepared mind.” So serendipity can help you ONLY when you have the right knowledge to identify the potential of an opportunity that you have accidentally stumbled upon.

So let me ask you again, “Do you keep your ears, eyes and above all your mind open?”