Hunting Ground

Circle of Competence, Environment, Opportunity Cost, Risk, Strategy / Sunday, April 19th, 2020

Hunting Ground
hʌntɪŋ ɡraʊnd/
a place likely to be a fruitful source of something desired or sought.

Imagine if you’re going on a fishing trip, what do you need? You need a location, fishing rods, reels, lures, etc. That’s the plan. But a plan doesn’t equal success. You might catch some fish if you’re lucky, but you’re more likely to go home empty-handed.

What else do you need? If you’re going to fish in a river, you have to know the types of fish because that determines the bait you use. Do you go upstream or downstream? What’s the topography of the river? Topography tells you where the fish are. What’s the water temperature? What’s the season? You have to study the biology of the river. These will be different if you fish in a pond or a lake. In other words, find your hunting ground. 

Investing is like fishing. You have to find your hunting ground by figuring out what you’re good at. You have to know the high-level stuff: How the stock market works, how to think about price etc, and then the specifics: the economics of the business you invest in, how it creates value, what’s your temperament, where is your edge, and what makes you tick.

Why should you stick to your hunting ground, or at the very least, figure out where your hunting ground is? Because it’s a fertile place that yields attractive return. You can achieve a high return on your hunting ground because you know your stuff. You’re familiar with the surrounding. You can separate the signal from the noise so you know when to act and when to sit down and do nothing. And when you act, you size your bets accordingly. You don’t run around wasting energy. All of these translate into a high hit rate with little mistakes. You achieve a high return not by taking more risk, but as a consequence of having less risk. 

How big the hunting ground isn’t important. But as Warren Buffett wrote, “knowing its boundaries, however, is vital.” Staying within those boundaries is to know what not to do. What is the quickest way to achieve a poor return? Pursue every opportunity out there. If you try to be everywhere, you end up going nowhere. Betting on opportunities where you don’t have a clear advantage does more than wasting energy, it sure lightens your wallet. As Warren Buffett is eager to say “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”

You might ask, won’t it be silly not to pursue an opportunity that has a high return potential even if it falls outside the hunting ground?

The first question to ask is whether that opportunity is indeed as good as you’d imagined. When you’re outside your hunting ground, the accuracy of your judgment falls. Your field of vision narrows; there are more blind spots and alternative scenarios that you haven’t considered. But you won’t know that because your confidence has a spillover effect. You’ll be thinking “this (bait) has worked in the past so it should work here (in this new river) because they look the same.” Experience becomes irrelevant the moment you step outside your hunting ground. The predator becomes the prey—your experience can kill you through overconfidence and excessive risk-taking. 

Another important point is opportunity cost: the time spent outside your hunting ground means less time honing skills at what you’re already good at so you can become so good that no one can compete with you. 

Put it differently, the long-term return you get by sticking to your hunting ground, because of the compounding knowledge from staying focused and crafting the skills, will outweigh whatever opportunities that you can take advantage of outside your hunting ground. As your skills improve, the incremental effort required to achieve the same high return goes down exponentially. It is nonlinear. This is what I call easy games: 1x input to produce 100x output. You can beat others by being 100x better with a 1% effort. Your hunting ground becomes the moat. Others will realize that it isn’t worth their time to come into your hunting ground despite the promising fruitful return because you’re at the top of your game. 

On the other hand, what you do outside your hunting ground are the hard games: 100x input to produce 1x output. You have to work 100x harder than the rest just to outperform them by a 1% margin. You don’t want to compete in a playing field where you don’t have an edge. You want a river you know so well that getting the fish is like shooting them in a barrel. 

Understand, most people don’t get into trouble because they fail to predict what’s going to happen in 10 years, but because they’ve done so well fishing in the river that they start hunting in the swamplands or the forest. 

Finding and sticking to your hunting ground is about staying focused and disciplined on things you have an edge. Investing is a game of odds. If you can’t tell the difference between 60:40 and 40:60, you’re the patsy. It is also having the humility to appreciate you know far less than you think you know. Hence, it is okay to say no or “I don’t know” to many things. You’ll make fewer mistakes, have a high hurdle rate, and increase your odds of success.

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