The Full Reset
To understand the power of starting clean, you have to know the nuance of why the Nazi military became as strong as it did.
It starts at the end of World War I, when the defeated German army was stripped clean.
Part of the Armistice that ended the war forced the dismantling of Germany’s military. This included virtually every weapon it owned. In the years after World War I the Allies undertook one of the largest industrial demolition campaigns in history. Six million rifles, 38 million projectiles, half a billion rounds of ammunition, 17 million grenades, 16,000 airplanes, 450 ships, and millions of tons of other war equipment was destroyed or stripped from Germany’s possession.
But 20 years later, Germany had one of the largest and most sophisticated militaries in the world.
It had the fastest tanks. The strongest air force. The most powerful artillery. The most sophisticated communication equipment, and the first missiles – all of which went on to inflict more suffering than the world had ever known.
A catastrophic irony of Germany’s military resurgence is that it partly took place not in spite of, but because of, its earlier disarmament.
As war in Europe began in 1939, George Marshall, Army Chief of Staff, made a critical point to President Roosevelt about the Nazi’s technological capabilities:
After the [first] World War practically everything was taken away from Germany in the way of materiel. So when Germany rearmed, it was necessary to produce a complete set of materiel for the troops. As a result, Germany has an army equipped with the most modern weapons that could be turned out. That is a situation that has never occurred before in the history of the world.
Supplying a military is one of the most expensive and logistically complicated things a country does. So it tries to get as much use out of its equipment as it can.
But technological improvement doesn’t wait. It happens on its own terms, often very quickly. So militaries can be caught supplied with woefully outdated equipment. Deciding when upgrading is worth the cost is a terribly hard decision.
Germany in the 1930s didn’t have to make that decision. If it wanted a military – and it did – it had to build everything from from scratch. A full reset. Germany’s upside was that every piece of equipment it had in 1939 was based off the latest technology. Not a single possession – from uniforms to guns to submarines – was outdated or obsolete.
That wasn’t the case for the Allies at the start of the war. When the war began in 1939, U.S. Army troops carried 1903 Springfield rifles. France had sluggish World War I-era tanks. Britain, at one point, pulled 19th century cannons out of museums to prepare for a German invasion.
The Allies eventually caught up, of course. But there was a hard lesson: There’s a set of advantages that come from being endowed with resources. There’s another set of advantages that come from starting from scratch. The latter can be sneakingly powerful.
Part of the reason the economy recovered slowly after the financial crisis was that businesses, spooked by the recession, relentlessly reviewed their costs. “I just see business after business after business which has rationalized so that it can protect its balance sheet and earning power while utilizing fewer people” Charlie Munger said in 2010.
So began a new life for the concept of zero-based budgeting.
Zero-based budgeting is the idea that each year’s budget should be created from scratch, rather than using the previous year’s budget as a baseline. Jimmy Carter made it famous during the 1970s – the last time business and government budgets were as strained as they were in recent years. The number of large companies using zero-based budgeting has increased 50% since 2008, according to Deloitte. Campbell Soup, Kellogg, and Kraft now use it.
It’s based on a profoundly sane idea: Things change and evolve, so the phrase “this is how we’ve always done it” should be replaced with “what do we need right now?” A full reset, unburdened by the past.
It’s an idea investors can learn from.
Craig recently explained:
Do not hold on to something if it is not working. Try and view every investment as if you did not own it and be disciplined.— Craig Shapiro (@cshapiro) October 25, 2017
There is a counter to this: The secret to investing is enduring uncomfortable situations, so selling at the first hint of imperfection is usually regretted. But its opposite – an unshakeable anchor to past decisions – is perhaps worse. The saying, “Our favorite holding period is forever,” should be replaced with, “Our favorite holding period is until the facts change.”
How many of us, if given a blank slate, would create an identical portfolio to the one we have now? Some would. Many of us would do something utterly different. But we don’t, because we’re burdened by past decisions and, like the military with an aging fleet, are unsure if updating our equipment is worth the high cost. In this case, the cost of updating your portfolio is the emotional sting of admitting you were wrong on some positions, and releasing all hope that you’ll eventually be proven right.
This is true for big theories, too. Investor Dean Williams once wrote: “Expertise is great, but it has a bad side effect. It tends to create an inability to accept new ideas.” Those who learned how to invest in the ‘70s and ‘80s never quite shook the idea that low inflation could persist as long as it has. Those who invested through the late ‘90s will perpetually see a bubble in anything that trades over 20 times earnings. Anyone under age 25 will have an easier time seeing the potential of blockchain than those over age 55. Same was true for the internet 30 years ago.
Anything that evolves – markets, technology, careers, etc – has to be approached with the mindset that once-great ideas can expire, and when they expire you’re better off walking away rather than attempting to repair them.
Michael Batnick once told the story of billionaire Stanley Druckenmiller, who was promoted to a senior executive in his second year at an investment firm:
When he asked why he was promoted above the others around him … the reason he was given was because he didn’t yet carry the burden of experience … His boss said, “We around here have been in a bear market since 1968.’ This was 1978. ‘I think a big secular bull market’s coming. We’ve all got scars. We’re not going to be able to pull the trigger. So I need a young, inexperienced guy to go in there and lead the charge.”
A full reset of ideas and expectations.
When writing his book, Thinking, Fast and Slow, Daniel Kahneman could tear up entire chapters and start over. Jason Zweig, who helped Kahneman write the book, explains:
The first time this happened, I was thunderstruck. How did he do that? How could anybody do that? When I asked Danny how he could start again as if we had never written an earlier draft, he said the words I’ve never forgotten: “I have no sunk costs.”
Jason described what he learned from this. “Danny taught me that you can never create something worth reading unless you are committed to the total destruction of everything that isn’t.”
Same thing applies to business strategies, investing ideas, and careers.