Investment lessons from Olympic judo

09-16-2021
Investment lessons from Olympic judo

Smart strategy, not brute strength, is the key to winning

 

At Pender, we have been looking at the techniques, lessons, and values from the Tokyo Olympic Games that could help investors win with their investment strategies. At this year’s Tokyo Summer Olympics, Team Canada took home two medals in judo. Jessica Klimkait made history when she became the first Canadian woman to reach the Olympic podium in the sport. Catherine Beauchemin-Pinard later captured a bronze medal in the women’s 63 kg category.

Judo, which was the first martial art to become an official Olympic event, is not too dissimilar from the world of investment. Both undertakings require players to act quickly to create a competitive advantage and be adaptable to the next move of their opponent. Here is how investors can up their game with lessons from the guiding principles of judo.

Maximize efficiency, promote mutual benefit

At a glance, judo may seem like a contest in which the strongest combatant will prevail. But in reality, any judoka can fight a much stronger opponent and still win if the right strategy is deployed. To do this, we have to look at two guiding principles in judo philosophy: maximum efficiency and mutual welfare and benefit. These were both established by Dr. Jigoro Kano, the founder of Kodokan judo.

The goal of maximizing efficiency directs students to use an enemy’s strength against them. This concept is known as jū yoku gō o seisu, which means “softness subdues hardness.” When a judoka can use flexibility and the right timing, they can evade an attack and overpower their opponent, either executing a throw or making their opponent lose balance before using hold-down techniques to win the bout.

The goal of mutual welfare and benefit was an extension of Dr. Kano’s belief that judo could help the individual become a better member of society. In judo, this concept is known as jita-kyoei, which promotes harmony and cooperation between two opponents. When judo is played with this principle in mind, the sport promotes mutual learning and growth.

Some of the biggest winners in the global economy over the last two decades have been those that enter the arena with strategy rather than with sheer strength. The following cases demonstrate how a judo strategy helped create two of the largest and fastest-growing companies in the world.

Tesla vs. everyone

With over $30 billion in revenue last year, Tesla Inc. (NSD: TSLA) is considered the top dog in the realm of electric vehicles. But its path to success was not forged with brute strength.

Initially, Tesla’s research and development budget was small relative to the development budgets of traditional automakers. But Tesla was not trying to compete against the strengths of these legacy manufacturers – instead, the company focused on maximum efficiency in areas most of its competitors ignored. For example, the company ramped up its supercharger network, developed a strong battery supply chain and released new software to augment its fleet of vehicles.

In judo terms, Tesla had quickly flipped the incumbents on their backs, and before legacy manufacturers could blink, Tesla put them in the choke-hold. The company’s next big move is autonomous driving and artificial intelligence, which could create a competitive moat for the firm.

Meanwhile, Tesla’s innovation is underpinned by a mission to accelerate the world’s transition to sustainable energy. Not only does this mission resonate with consumers, but it also promotes the idea that as a business, Tesla can benefit more than just its shareholders.

Apple “judos” Nokia into oblivion

In the early 2000s, Nokia Corp. (NYSE: NOK) was undoubtedly the world’s dominant mobile phone manufacturer, but by 2013, Apple Inc. (NSD: AAPL) had seized almost 40% of the U.S. smartphone market. If Apple decided to fight Nokia on Nokia’s metrics (patents, hardware, relationships with mobile carriers), it is fair to say Apple would have lost this battle. But instead, Apple brought in a new strategy: leveraging software to develop engaging mobile experiences.

With its software play, Apple managed to maximize efficiencies by scaling its innovation more quickly and cost-effectively. Within a few years, Nokia had been flipped on its back.

When Apple released its store platform, which offered consumers far more functionality and utility than traditional applications, it effectively put Nokia in a choke-hold. Apple’s app store also created a win-win opportunity for developers looking to monetize their work, ushering in more participation, more customers, and more sustainable sales. By the time Nokia sought to play catch up to Apple, it was already too late.

Disrupting opponents

Though Tesla and Apple are considered two of the biggest winners from applying a judo-like business strategy, we are seeing the next generation of business judokas disrupt legacy industries.

This strategy is helping Zillow Group Inc. (NSD: Z) change the face of real estate; Stitch Fix Inc. (NSD: SFIX) rethink retail clothing; and Square Inc. (NYSE: SQ) usher in a new era of banking. These companies are not competing on the same basis as the legacy players in their respective industries. They are playing a fundamentally different game and, in doing so, are creating their own competitive advantages.

Investors need to take the same approach. Change is not a possibility; it is a certainty. Investors must be ready for the next big threat to the status quo and need to be prepared to absorb and adapt to these changes, rather than fight them.

Be a generalist

Judo is a sport that comprises various techniques that have been perfected over decades. It might appear to be a highly specialized endeavour, but to win at judo, you need to keep your skillset varied.

This is also true in investing. Conventional wisdom tells us that a good investor is highly specialized in a particular market or geography. But as the case studies of Tesla and Apple reveal, the market is complex and adaptive, and the final outcome is unpredictable. For this reason, the modern investor should be a generalist – someone who sees opportunities from the entire spectrum of the market rather than just one pond.

This is our guiding philosophy at Pender. We are trying to find the high-calibre companies that play with a different set of rules and create an unfair advantage that neutralizes competition. By remaining open to the inevitability of market disruption, we can identify the next set of movers and shakers, and stand behind them rather than against them.

David Barr, CFA, is the CEO and a Portfolio Manager at PenderFund Capital Management, setting the direction for Pender’s overall investment strategy. This article first appeared in the Pender blog. With contributions from the Pender team. Used with permission.

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