The Incredible Power of Marginal Improvements - Becoming #1 in the World
Novak Djokovic is currently ranked as the number one male tennis player in the world. However, at the beginning of his professional career it was not obvious that he would one day become the best.
In 2004, when he turned professional, he was ranked 680th. And in the first two years of his career he did not come close to breaking into the top 100. He averaged $250,000 in prize money per year, and he lost more matches than he won.
But then, at the end of his third year, he skyrocketed up the rankings, and finished 3rd in the world.
For the next four years he held this spot, earning an average $5 million per year in prize money, and winning 79% of the matches he played.
But even though he was ranked 3rd, his game was not on par with Federer, and Nadal - the 2nd and 1st ranked players.
Fans and commentators spoke of tennis as if it was comprised of Federer and Nadal, and then everyone else.
But then, four years later, everything changed. He leapfrogged Nadal and Federer to become the best in the world.
Djokovic now wins 90% of the games he plays, and earns an average $14 million in prize money per year.
Marginal Improvements, Massive Results
How did this impressive shift happen - going from 680th to 1st?
The story above comes from an investing book called “Alpha Brain”, by a fund manager named Stephen Duneier.
When we read this story, it jumped out at us because we were fascinated to learn how Djokovic was able to shoot up to the number one spot, in a relatively short time frame, in the competitive world of professional tennis.
To understand Djokovic’s meteoric rise we need to look beyond the number of matches he won, and instead look at the number of points.
When Djokovic was ranked 680th in the world, he won 49% of the matches he played. He also won 49% of the points.
That seems like an intuitive and reasonable statistic.
When he jumped up to the number 3 position in the world, he was winning 79% of his matches. But how many of the points was he winning?
You might intuitively say that he was probably winning around 79% of the points.
However, you’d be very wrong.
He was actually only winning 52% of the points he played. He only had to win slightly more than half of the points, to win 79% of the matches, and become the number 3rd ranked player in the world.
And how many of the points did he have to win to become the number 1 player in the world, and win 90% of the matches he played?
By now you have probably guessed that the answer is going to be lower than expected.
To become the number 1, and win 90% of the matches, he only had to win a mere 55% of the points he played.
That means he went from the 680th ranked in the world, to becoming number 1, simply by increasing his success rate from 49% to 55%.
That’s an incredible statistic.
Applying it to Investing
The author does not know specifically which marginalimprovements Djokovic made to his game - that’s probably only known to Djokovic, and the people close to him - but the details are not too important.
It’s the concept we care about - the concept that marginalimprovements can lead to incredible results.
As investors we can take advantage of this insight.
The author, who spent decades in the investment industry as a portfolio manager, tells a personal story to illustrate this point.
He was asked to take over the investment process at a hedge fund years ago.
He was able to vastly improve the performance of the fund, simply by implementing one small change.
He made his portfolio managers answer a simple question: why did you make this decision?
Over the next 13 months, the portfolio managers all achieved the best buy-side performance of their careers, by a very wide margin, and the fund outperformed its benchmark by 2.5%.
He knew that he couldn’t drastically change people and their behavior; people are generally too stuck in their ways. But he didn’t have to.
He knew that he could achieve great results by simply implementing a small tweak that was aimed to marginally improve the portfolio managers’ process.
As investors we should take advantage of this concept.
We can start by following the author’s advice: asking ourselves why we made an investment decision in the first place.
Beyond that, each individual investor needs to figure out which areas of marginalimprovements they should focus on.
To give an example from our personal experience, we realised we were inclined to invest in troubled companies that looked cheap.
We liked the idea of going against the herd, and investing in unpopular companies. However, we realised that this was not a good strategy for us because we were not investing in high quality companies.
As a result our performance suffered.
We decided to start looking for companies with a good product and a proven track record of generating free cash flows, and invest in them when they were trading at a reasonable price. This was not a huge change in our process, but simply a redirecting of our focus.
As a result our performance has improved, and we are enjoying the process more.
Marginal Improvements are Still Difficult
There is a caveat to the things we have mentioned above: marginalimprovements can be difficult to implement.
Because it can feel unnatural, and challenge us, which is exhausting. If it didn’t, it wouldn’t be “on the margin” of what we are comfortable with, it would be a part of our routine already.
It is a simple concept, but it can be challenging to implement.
That doesn’t mean you shouldn’t try, it just means that it will likely be a bit harder than you expected.
We therefore suggest that you take a look at your investment process, or other areas of your life, and figure out where you can make marginalimprovements.
You don’t have to make radical changes, only small ones.
The results could be extraordinary.
All the best,
Lars and Roshni