Great Investors Break The Rules 

Investing is an art form, and like any artist guiding their brush over canvas, the investor weaves together facts and observations to create their vision of the world. What is true in art holds in investing; the masters don't follow the rules, they break them. Greatness comes from redefining the game rather than simply playing it. 

Learn the rules like a pro, so you can break them like an artist. 
- Pablo Picasso 

In his early years, Pablo Picasso didn't have a unique style, instead, he adopted a conventional one; striving to be the best realist painter he could be. While his early works were impressive enough, they were also unremarkable due to the crowded field around him. It was not until later in his life that he introduced his unique style. 

Since art and investing are acts of self-expression, the limitations in these fields are largely self-imposed. To combat these boundaries, tools like self-reflection and introspection can help unlock innate potential. Only after conquering our internal limitations can we see those imposed on us by the game we are playing. 

Good investors and artists adapt themselves to the world around them, however, masters find the game forced upon them suffocating. Great investors (and artists) therefore are the ones who rebel against the system and break away to form their own. I refer to this as finding investment (or artistic) "white space." 

By breaking free of convention and creating a game that suits the individual, masters remove themselves from their competition rather than trying to beat them. We remember the Picasso's and Buffett’s of the world because, for a time, they stood alone. 

George Bernard Shaw famously said:

“The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.” 

By being unwilling to compromise, masters force others to adapt to their game rather than the other way around. 

Imagine a piece of paper with a circle drawn within it. Whatever sits inside the circle is the boundary of the conventional game, and everything outside it is the white space of free expression. The catch? The center circle is forever widening, and the amount of white space is forever shrinking. Just as our universe continuously expands, so does the boundary of conventional wisdom. In investment and art, the playing field gets ever-more crowded by the minute. 

Whenever a new idea or concept becomes part of the investing (or artistic) zeitgeist, that area of white space becomes adopted as conventional; the circle widens. In other words, what was once ‘avant-garde’ eventually becomes mainstream. 

The once-radical ideas that made Warren Buffett and Charlie Munger wealthy are no longer novel because of their consensus appeal today. These strategies do not offer unusual rewards anymore because they are a part of today’s conventional asset appraisal process. Just as cubism or rap was once considered radical, these genres are now mainstream and arguably crowded. 

To stand-out in a system of self-expression, masters push ever further outward into the frontier of what is possible. This is where shrewd investors (and artists) express themselves freely and obtain unusual rewards. 

When the industrial revolution began, owning one of the first steam engines offered significant technological advantages. However, as others adopted this technology as well, the competitive edge it offered eroded. 

Similar to early adopters of the steam engine, exploiting a fruitful white space doesn’t offer a permanent advantage; it's fleeting. Only through adaptability and continuously identifying new white spaces are excess returns safe. 

Ironically, while investors today often hunt for ‘deep moat’ businesses, they don't have one themselves. Investing and art are both ‘know-how,’ or skill businesses, and this in itself only offers a limited advantage. As I write this, my competition is likely swimming across “my moat” to steal away the excess returns I might earn. 

While this is true, I don’t need to have a wide moat to sustain outsized returns. Instead, my moat comes from continuously changing its shape or widening it. If I can do that, our returns will be safe. In investing, being more adaptable and flexible allows us to see and exploit new white spaces, wherever they might be. By doing so, I can keep the swimmers stranded in the middle of the water. 

Without a culture of adaptation and experimentation, an investor's long-term alpha reverts to zero. This logic is at odds with conventional thinking: that a clearly defined and repeatable investment process is the best way to earn outsized returns over the long-term. 

I’ll close by referring back to the words of Picasso from above:

“Learn the rules like a pro, so you can break them like an artist.” 

Investors must learn from the past greats: Buffett, Graham, and others, but they should not confuse learning as copying. As a friend put it more elegantly than I could: “children copy, masters break the rules.”