Everything In It's Place
A Short Memo on Mise en Place and Investing
In an average week, I likely spend ~1 hour each day in the kitchen between whipping up dinner and preparing meals for the following day. Whilst this habit is borne of necessity (myself and my partner need to eat), I genuinely enjoy the process. The act of studying a recipe, preparing the ingredients and then executing on all of that to create a dish is therapeutic. Although nothing beats the consumption of that output, I have found that cooking is one of the rare activities that I engage in that allows me to remain present, and occasionally achieve a flow state. In today’s environment, we are essentially cyborgs with our mobile phones and gadgets acting as our biomechatronic body parts. Within my line of work, there is also the added pressure of feeling as though you are “always-on”. Having an activity that I enjoy, and can remain exclusively fixated on throughout, gives me a strange sense of rest bite from the financial world. Cooking can be stressful. But like most things, a well-defined process can extract much of the “stress of thinking” from the equation.
Mise en Place
The culinary term, mise en place, translates from the French language to mean ‘everything in its place’ or ‘putting in place’ and typically looks something like the below image.
Mise en place is not simply about laying out the ingredients. It encompasses every aspect of cooking. First, understand the recipe. Ideally without having to flick through the text during the cooking phase. Second, bring out all the necessary ingredients and cooking appliances (pots, pans, spatulas, knives) and lay them in your station. Third, prepare all of the ingredients in the manner they will be utilised during the cooking phase. Lastly, keep all of these items at arm’s reach so that they are instantly accessible once the heat enters the kitchen.
This way, once the cooking is underway, the chef can be entirely focused on the cooking process, and avoid wasting precious moments searching for olive oil, peeling garlic, or scoring the fat on a pork chop (which you should always do by the way). All of the inputs are accessible, the recipe is known in advance, and the chef can more readily enter a flow state because the process was manufactured ahead of time and all the steps are known in advance. All they have to do is execute. As a result, the outcome is often more delicious.
This concept is one of the core factors that underpin the success of many great restaurants, Michelin standard or not. This is important both for home cooking, but also important for replication at scale. Cooking a dish in your home is fine, but imagine the chaos of scrambling for ingredients and cookware, preparing those ingredients from scratch, and repeating the process countlessly in a restaurant setting. Orders will fly in at differing intervals, so the best course of action is to ensure the process from the time of order to finished dish is as smooth, and with as few steps, as possible. Gordon Ramsay, one of my personal favourite figures in the space, attests that “time spent getting yourself ready is never wasted”.
I am someone who organically embraced mise en place in the kitchen long before I ever knew that it had a term. It just made sense to me to be prepared. After all, the majority of the stress of cooking originates from the moment the process becomes “live” and things are thrown into the pan, greeted with a crisp sizzling sound as the ingredients acquaint themselves with a heated pan of olive oil. Why taint that, and risk the ruin of burnt ingredients by prepping during the act of cooking? Prior to that, you have all the time in the world to get ready and set yourself up for success.
My long-winded point is this. Once you start cooking in such a way, you rarely go back. The benefits of preparing ahead of time are too obvious. Part of what is relatable between cooking and investing (to me at least) is that both are process-driven activities where greater outcomes can be attained by preparing ahead of time. Assume the moment the cooking process begins (hobs on, ingredients sizzling) is identical to the moment you initiate a position in a company (capital invested). Before each of these moments, the individual has time to prepare, relatively stress-free. You are under no pressure and there is no requirement to ‘act’. Ex-post, you are in the heat and have to then focus on what your salmon fillet (or position) is doing in the pan (or market). An investor would not begin studying a company only after they have parted with their capital.
Mise en Place and Investing
The correlation between mise en place and investing is not an original thought. Jake Taylor once identified this relationship on the Value After Hours podcast, and I am certain someone else pondered it before him.
In my eyes, entering an investment or managing a portfolio of assets without a pre-defined process is similar to turning on the heat of the pan, placing a fillet of seabass into the heat, but with all of your other ingredients (still confined to their packaging) in the fridge, your cooking utensils dispersed amongst several cupboards, and the recipe sitting inside the pages of a book on your bookshelf, that you have not yet read. Like cooking, failing to prepare when allocating capital can lead to less than satisfactory results and frantic decision making. The key difference, of course, is that with the former you risk the loss of a few bucks worth of ingredients and an unsatisfactory meal. With the latter, you are risking the returns that you are seeking to compound for your future. It seems intuitive, but for most newer investors this can take a number of years to sink in. I know this from my own early experiences, throwing everything at the wall to see what would stick. All without any direction, I might add.
There are various tangents this conversation could venture into, but to keep it simple (and concise) I will focus on; why process matters, the flow state, and conviction.
Why Process Matters
Having a well-defined process can take a great deal of the stress out of decision making. The saying goes; “a fool and their money are soon parted”. Without breaking off into a discussion of various investing styles, the mise en place of investing boils down to:
Understanding what type of investor you want to be: Whether you wish to outstrip an index by a particular margin, achieve optimised performance, compound at modest rates whilst avoiding capital loss, or actively trade for residual income, figuring that out is the first step.
Understanding how you want to manifest that investor type: Are you going to be long-only? How concentrated do you wish to be? What investing style best resonates with your personality? What portfolio turnover are you comfortable with?
Define what opportunities you seek: For me, I largely look for market leaders with a low likelihood of moat erosion, future market leaders with competitive advantages, and “interesting situations”. I am agnostic to labels such as ‘growth’ or ‘value’ and prefer simplicity and understanding over everything.
My modus operandi (way of doing things) is quite loose, by design. I try to stick within my core competencies and dabble in new areas (sized accordingly) but my goal is not performance optimisation. It is more so a long-term goal of compounding above the market rate, whilst investing in businesses I can understand and will be happy to follow for X years.
Writing it down: I find a personal investment policy statement helps. Having a place to revisit these assertions can be invaluable during times of volatility or uncertainty. As humans, our internal narratives like to construct their own orchestra when the pace changes. Instead, read from the sheet music and stay on tempo with your ambitions.
That’s watered down, of course, but for most retail investors that’s all it needs to be. When you have that down, you can more readily identify companies that fit within your own investing universe. At this stage, the cooking process has still not begun.
Popularised by Mihaly Csikszentmihalyi in his 1999 book titled “Flow in Sports”, a flow state is when an individual is carrying out a task (or activity) with a complete sense of fluidity between their body and mind. It’s a state of deep focus, whereby the individual is fully absorbed into whatever it is they are doing, devoid of distraction. Obstacles come forth, and the body and mind instinctively respond, almost without thought. This sounds peaceful but oddly enough this state of ‘being’ typically arises during moments of intense pressure. For those of you who drive, think back to a time when you were first learning with an instructor. Most people become incredibly aware of everything they are doing. Every pedestrian, every oncoming vehicle, every stop sign. It feels as though you are processing every single move with great scrutiny.
Now think about how you drive today. It’s almost subconscious behaviour. I can recall a time in my life when I would drive ~22 miles to university each morning and barely remember the journey once I had arrived. Travelling along similar routes almost became a flow activity, where the mind and body are so in sync that the body would act as though the brain was not even controlling it. This is not because you are not paying attention. Rather, you are so focused that the tension is massaged out of the equation. I recall listening to Roger Federer (20x Grand Slam Tennis Player) speak once about how tennis players often spend too much time consciously thinking about each shot in a match. This overthinking comes at the expense of the part of the brain which was tasked with actually playing the shots. Interfering with one’s ability to subconsciously respond to the shots and remain undistracted.
How does one achieve a flow state in investing?
Whilst I am not certain one can ever experience such as a state when investing (perhaps I am just doing it wrong), I am confident that the decision-making process can become a great deal more frictionless when the investor knows what they intend to do under certain circumstances. So, after establishing your own process for investing, and deciding how you wish to undertake the construction of a portfolio, the next step is to discover the companies that will populate it. Assuming you have discovered a company, and it fits your criteria, it’s important to understand what you might do if things don’t go your way, ahead of time. Better this, than to only ponder these things once they happen.
Proactive Decision Making > Reactive Decision Making
Extracting the emotion from the investment equation is hard, but for most people it makes decision making a great deal more “flow like”. Something as simple as outlining a list of reasons that would allow you to sell a position can benefit you as it:
A) It allows you to remember why you are invested, and why you would sell, and;
B) When those occurrences happen, it’s a regimented activity and doesn’t require extensive pondering and anxiety over what to do.
Whether that means selling once a certain IRR has been achieved (well done) or when there are signs of managerial deterioration, accounting irregularities, thesis creep, or some other red flag factor in the business, you are not acting on emotion. Instead, acting on a pre-defined catalogue of responses. This deviates from cooking where, presumably, the chef knows what is coming next. Your salmon skin is now crispy, so you sear the flesh side for one minute, add a dash of lime into the pan, and serve. Sadly, as investors, we don’t have the benefit of knowing what is coming next. But the best way to navigate that omission is by knowing what you will do when one of the outcomes arises.
You can take the time to prepare. Whether it is slicing onions, laying out spices, or conducting thorough research on the company and deciding what you might do in the event of X, Y, or Z. For the investor, chopped onions won’t help alleviate the stresses of active investing. Rather, having a deeply researched base layer for conviction, and a well-defined process will. It’s really about doing the work ahead of time, as opposed to only catching up when needed.
If you find your conviction wavering on a weekly basis then did you really have any conviction, to begin with?
The best antidote is simply knowing what you own, knowing why you own it and knowing what would have to occur to make you lose conviction. If you lose conviction based on share price alone (assuming you are not someone who practices technical analysis) then you are going to fall sick to this illness frequently. A significant decline in share price can mean many things.
It may be an opportunity. It may be external forces at play. The valuation may have simply been too rich. It may be a sign that you missed something in your original thesis. Equally, there may have been an overzealous (or justified) reaction to some information that has been newly surfaced. Whilst being an advocate of “when the facts change, so too can my opinion”, in these moments, I find it best to revisit my initial thoughts and use that as a landing pad from which to move forward. Borrowing from Yen Liow (as I find myself doing often), this can help you better understand if the situation elicits actionable volatility.
Imagine two investors (Andy and Beatrice) and one company (Car Company Ltd). Andy has studied the business extensively and has followed it for a number of years. Beatrice, on the other hand, has never appraised the filings but is aware of the business. Neither investor owns shares.
Event A: The company files earnings, missed on revenue guidance, with some transitory margin decline. The stock falls 25%.
At this point both investors are faced with the same information, the stock has fallen 25%. Both investors may contextualise this as an interesting opportunity. Andy, however, has the added benefit of knowing the company well already. Therefore, can more readily ascertain whether or not this is an opportunity (actionable volatility) or not. In a relatively short amount of time, Andy can catch up and deduce his own conclusion.
Beatrice will have no context or understanding as to whether or not the reaction is just. Only that that share price has been hammered. She will have to undertake a study of the company in an effort to understand the business before truly grasping the legitimacy of the reaction, and only then can she decide if it’s actionable or not. By the time that is done, the opportunity will likely have evaporated. Perhaps not in this one case, but in the aggregate, the market can be fairly efficient. The same idea goes for conviction in names you own. Conviction is borne from understanding what you own. It’s a virtuous cycle. A cycle that all boils down to preparation.
Growing a DataBase of Companies = Mise en place
I wrote a memo back in July (discussing competency circles) that explained the benefits of having a mental database of companies that you understand fairly well. I suggested getting deep into the weeds on one new company each month. The TL:DR is that, over time, you will eventually create a mental ‘database’ of ~50 to ~100 companies that you know really well. Well enough to decipher between what is actionable volatility and what is not, with a relatively small catch-up period.
Whilst it may not appear obvious at first (the sunken costs of non-actionable ideas), building this database is like preparing 100 meatballs and placing them into the freezer. At some point in the future, those meatballs will satisfy a need or come in handy. After a quick re-heating period, and they are ready for consumption. The impetus here is that the preparation is already largely complete thanks to the chef’s foresight.
Poorly executed food puns aside, these thoughts have been circulating in my mind for the past week, so I thought it would be best to jot them down on ‘paper’. To break the memo down to one takeaway I would say:
Preparation, when pressure is low, is a critical ingredient to ensuring that an investor can more readily focus on the task at hand when the act of investing becomes live. Flow states are impeded by distraction. The contemplation of appropriate response is a distraction best remedied by proactively establishing your catalogue of responses, ahead of time.
As Ramsay suggests, “time spent getting yourself ready is never wasted”.
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