Free Solo's Investing Lessons
Have you ever watched someone do something so risky that it causes you physical pain even though you’re just watching?
That’s what happened to me while watching Free Solo.
What Alex Honnold did throughout the documentary sent visceral waves of discomfort through my entire body.
How could this man risk so much for an accomplishment that would resonate mainly within the rock climbing community?
On the surface, Free Solo appears to be about someone taking one massive risk and succeeding despite the danger. But it wasn't until days after watching the movie that I realized it wasn't about a reckless risk-taker; it was about risk reduction.
Alex doesn't simply wake up one morning and climb El Capitan. He dedicates over a year to training, planning, and climbing extensively in preparation for his legendary ascent.
He works with one of his closest climbing partners to determine his optimal route as a free climber. They settle on Freerider. An "easier" route for solo climbing, and one where Alex had extensive experience using safety gear.
Only a handful of his closest friends and climbing partners knew about his plans. By keeping it private, Alex removed the external pressure of public expectations. He could attempt El Capitan on his own terms, without the burden of disappointing others if conditions weren't right.
We then watch him practice each challenging section repeatedly with safety gear until he achieves mastery.
Nothing proved more challenging than The Crux.
Alex faced two options: climb the Teflon Corner, a treacherously slippery 90-degree corner, or tackle the Boulder Problem.
The Boulder Problem would require either a leap to grab a ledge or executing a contorted Karate Kick Move to maintain wall contact, using his extended leg to push himself up to the ledge.
Alex avoids the Teflon Corner in favor of the Boulder Problem with the Karate Kick move, not the leap of faith.
“… the idea of jumping without a rope seems completely outrageous.”
Free Solo’s Investing Lessons
Everything Alex did was designed to minimize risk in an inherently dangerous endeavor.
Investing is risky.
While a mistake won't lead to sudden death like in free soloing, the stakes are still high.
In our modern world, money equals survival. It provides food, shelter, and essential resources for our families. Poor financial decisions can jeopardize not just our future but also our loved ones' well-being.
To build wealth and fund retirement, we must take calculated investment risks. But how can we minimize these risks while maximizing our chances of long-term success?
Clear Exit Strategies
Earlier in the movie, Alex starts his free solo climb of El Capitan. However, he isn't mentally focused. He feels off and forces himself to continue. He even breaks a fundamental rule of free soloing by grabbing onto a pre-laid anchor.
This becomes an immediate kill criterion. He can't claim to have free soloed El Capitan if he uses someone else's anchor.
Alex ends his climb, and only after hitting this automatic kill criterion does he fully realize he wasn't mentally prepared. This safety measure prevented him from making a potentially fatal error.
When we enter a new stock position, we have our reasons for buying. But we also need clear reasons for when we'll sell. These could be trading rules like the Assassins from The Art of Execution. If the stock drops X%, it's an automatic sell, no discussion.
For long-term quality investors like myself, it might mean identifying risks to a company's competitive advantage. If we see these risks materializing, it signals a shrinking moat, and we need to sell. We want to avoid a Quality Trap.
Of course, we could be wrong.
Alex might have completed his first free solo attempt of El Capitan. But the risks were too high.
It's the same with our kill criteria. When we pre-identify risks that make our investments too dangerous, we sell. If our kill criteria prevent just one catastrophic investment, it's worth it.
We want to protect our downside as much as possible. There will always be other stocks to provide the gains we might miss by selling based on our criteria.
The Power of Walking Away
Alex is also able to walk away from that earlier attempt because he is not married to the idea of free soloing El Capitan.
Yes, he really wants to do it, but he only told a handful of close friends about his attempt. He hasn't told the world. If for whatever reason he never attempts to free solo El Capitan, he will never be judged for backing out. His friends are climbers. They know how dangerous it is and understand that walking away when it doesn't feel right is responsible climbing.
Compare that to Alex announcing to the world that he is going to free solo El Capitan within a specific date range. He would then have outside pressure to attempt the climb even if the conditions aren't right. He would have married himself and his identity as this phenomenal climber to free soloing El Capitan. If he doesn't do it, the outside world would brand him a failure.
He doesn't need that.
The same can happen with a position. If we write about and talk about it publicly, we a become married to that position. It becomes a definition of who we are as an investor. So even if the risks we were worried about appear and the company's competitive advantage starts eroding, we may find ourselves doubling down on the stock to prove to the world that we will be right.
Don't marry yourself to a position. Don't let a single stock become your identity. Be prepared to walk away from any investment at any time.
Heed the advice of Neil McCauley, Robert De Niro's character in Heat.
The Value of Proven Strategies
Alex did not try to create a new route up El Capitan that could make his attempt easier.
He chose a route that he and others had climbed before. While he could have theoretically drawn up an easier route on paper, he would have lacked experience with it.
Blazing a new trail up the cliff face would have required more mental energy and effort to navigate. Alex wanted to conserve as much energy, both physical and mental, as possible to complete his climb.
The legendary investors before us have all given us routes to follow.
Yes, if you discover a new trading strategy that exploits an unknown market inefficiency, you could make a lot of money.
But ask yourself: how likely are you to discover a new market inefficiency? Wouldn't it be easier to follow the path laid out by others?
I like investing in Quality Companies because so many legendary investors have done it before with great success. I can follow and learn from their successes and mistakes to accelerate my investing acumen.
The quality factor has also shown persistent outperformance. I know that by limiting my investment route to quality companies, I will increase my odds of finding great long-term investments and decrease my odds of a financial catastrophe.
The Pursuit of Extraordinary Returns
Free soloing El Capitan and investing might seem worlds apart, but both require the same fundamental approach: minimize controllable risks while accepting that some dangers are inherent to the pursuit of extraordinary returns.