The Straight Line: A Seductive Lie
Businesses don't grow in a straight line. In this article, I discuss the straight line mentality that can take root in the investor’s subconscious and why it it is a seductive lie.
In 1985, Friedensreich Hundertwasser, an Austrian artist and architect wrote:
“In 1953 I realized that the straight line leads to the downfall of mankind. But the straight line has become an absolute tyranny. The straight line is something cowardly drawn with a rule, without thought or feeling; it is a line which does not exist in nature. And that line is the rotten foundation of our doomed civilization. Even if there are certain places where it is recognized that this line is rapidly leading to perdition, its course continues to be plotted. The straight line is atheistic and immoral.”
Clearly, Hundertwasser was not a fan of straight lines!
When I first read it, the quote was confronting in a couple of ways. Firstly, it seemed unnecessarily hostile and aggressive towards straight lines. Secondly, despite its explicit hostility, the quote resonated strongly. The problem was—I didn’t know why.
“Businesses don’t grow in a straight line.”
Reasonably often at TDM, we remind each other that “businesses don’t grow in a straight line.” By that we mean, there are inevitably bumps along the road. We mean it both literally in terms of financial results and figuratively in terms of challenges along the way. Revenue will accelerate and decelerate. Company cultures will change. Competitive dynamics are almost always in flux.
No matter how good the business or how good the investment ultimately becomes, it has never felt like or exhibited the qualities that a straight line implies. Our best investments have been characterised by 50%+ share price declines, CEO changes, existential crises, recapitalizations and just generally hard shit.
If you look over long enough periods, these same investments look like reasonably smooth “up and to the right” share price appreciations. Take Mineral Resources, for example, which we have owned for almost 20 years. Total shareholder return is 100x money but it has had no fewer than ten 50%+ share price declines over that period.
Straight lines don’t exist in nature
Hundertwasser was somewhat of an ecologist and environmentalist. His disdain for straight lines comes from his observation that they don’t exist in nature.
In nature, the environment is consistently exposing everything in it to some dose of stress. Wind, rain, sun, storms—stress in various doses cannot be escaped. It is difficult to imagine how any straight line could survive.
The stress inflicted by Mother Nature gives rise to a process called hormesis; a phenomenon borrowed from the study of toxicology. Hormesis is a process whereby an organism can be exposed to low-dose amounts of a toxic agent with a beneficial effect. In nature and in business, the same principle applies: Low doses of stress lead to positive adaptation and strength.
Biosphere 2 is the largest enclosed ecological facility ever created. It was developed to help us study and better understand the world’s natural environment. One of the unexpected but most profound discoveries was that, whilst trees grew more rapidly inside Biosphere 2, they consistently fell over before maturity. Scientists discovered that the trees need the stress of the environment to grow in an enduring way.
I can’t help but think of all the fast-growing businesses that were founded during the recent multi-year zero interest rate period or the cohort of investors who have known nothing but the bull market since 2009. Will they have the strength to survive and thrive outside the artificial world of “free money”?
The straight line mentality
In the real world of business and investing, “straight lines” also don’t exist. This is probably not a controversial statement. Just opening the Wall Street Journal every morning makes it pretty obvious that markets and businesses consistently experience all sorts of volatility and turbulence.
However, in my experience, too much of both the business and investing world is framed as a “straight line”. At the very least, both worlds implicitly or unconsciously strive for “straight line” outcomes. Here are some examples of this straight line mentality:
Pitch decks with perfectly growing revenue charts.
Analyst forecasts with linear decelerating revenue growth.
The pressure on public companies to “beat and raise” every quarter.
The belief in a bull market that prices will continue to rise forever or continue to fall to zero in a bear market.
The preoccupation of both fund managers and their clients aspiring for positive returns every year with minimal volatility.
All examples of phenomena that we rationally know aren’t true or possible but they seep into the investing subconscious unless we actively fight them.
The straight line is a seductive lie
As an investor, don’t believe in the straight line. It is a seductive lie. In the same way as Hundertwasser suggests that the straight line will lead to the downfall of mankind, a straight line mentality will lead to your downfall as an investor.
As an investor or as a business owner, I want bumps in the road. I want to be constantly buffeted by the harshness of the environment. This is where strength and wisdom come from. If you believe in or even aspire to the straight line, you are doomed for failure and disappointment.
But hormesis bears an important reminder—Investing is psychologically and emotionally taxing, and whilst low doses of stress are beneficial, too high a dose can be detrimental, even to the point of death. If you want to be an investor, managing the dosage of stress you are exposed to is paramount—both physically and mentally. I have seen some great investors break, sometimes irreparably, by exposing themselves to too much stress.
Expecting bumps along the way will prepare you to deal with them calmly and appropriately. Embracing the twists and turns will allow you to see the opportunity they can present. It’s with that mentality that you can endure the months and years when it feels like things aren’t going your way. It’s the scar tissue from tough times that develops strength and wisdom.