I think I found my brother from another mother and his name is Edward O. Thorp. You know, the guy who wrote the book “Beat the Dealer: A Winning Strategy for the Game of Twenty-One”. If you know anything about gambling – you are familiar with his work – card counting.
What is it about this guy that I find so remarkable that I would want to indoctrinate him into my non-familial family?
- He is “wicked smaht” (* try to say that in your best Casey Afleck from Goodwill Hunting voice)
- He is eccentric and unconventional but not in the obnoxious intellectual elitist way
- He relies on the math
- He experiments often
- He shares my fondness for Berkshire Hathaway (Disclaimer: I am an equity holder of Berkshire Hathaway.)
I find it extremely admirable when an individual finds personal and professional success through intellectual pursuits and persistence, taking calculated risks, and trusting in their personal capability and capacity. I find it commonplace that individuals extend themselves beyond what they know in pursuits of the heart and the wallet. Oftentimes these pursuits are result in outcomes that are far more devastating than they are rewarding.
In the book “A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market”, Mr. Thorp lays out the story of his life. From his humble beginnings as a mathematics student at University of California, to his teaching days at New Mexico State University and his days beating the house at Roulette or Blackjack to running a hedge fun that consistently outperformed the market. These are no trivial achievements. But for me what I find most inspiring about this man, was not necessary the his outcomes, but the process.
While I doubt that I will never be as financially successful as Mr. Thorp, there are things that he did that I believe that I can do. Specifically, be confident in what I know and realistic about what I do not, relentlessly pursue understanding, and experiment often. Similarly it is my belief as well that these efforts will result in the type of reward that truly matters – being right! Although making a little money along the way couldn’t hurt either. But that certainly is not the point. At least for me.
To my brother from another mother – if you are out there – I have a few questions I would like to ask you. To everyone else, get in line.
We live in a world where everything is about going fast. Technology is disrupting everything. Upgrade now. Evolve or face extinction. Get out of the fast lane or get run over.
At least that is what we are told. Over and over and over.
I get caught up in it. I am sure you do as well.
We are all forced to participate in a race to go fast. And then to go faster. At paces beyond our level of comfort.
But what if speeding up isn’t the answer. What if being slower, instead of faster, is better!?
Below are a few circumstances where going slow is the best option:
- Circumstances with rapid pattern changes – A lot of great ideas come and go. Some come and go so fast that they never actually have a chance to reach the mainstream. Someone who is fast will likely chase after every trend as it becomes identified – often missing the big bets and constantly chasing the next best thing. It is incredibly difficult to grow personally from trend to trend. I guess you just get good at running around in circles. Going slow when patterns shift rapidly, provides an opportunity to capitalize on the right opportunities at the right time. Chasing after each pattern could result in catastrophe or significant exhaustion of resources.
- Circumstances with uncertain future- Often the best ideas require a break from convention, thinking or acting differently, and thoughtfully evaluating and selecting a course of action. Going fast can often affect one’s ability to choose the right course at the right time – particularly if that course requires a break from convention. Being a little slow can help break down and evaluate options before aggressively pursuing a course. Certain outcomes are less known or predictable than others. While going slow does not change this, it does allow for proper preparation and contingency.
- Circumstances with chatter and noise – Many of the choices that we make in life are put through the filter of what others would do or are doing. We are constantly being encouraged to reinforce crowd behaviors. This doesn’t really leave much to exceed expectations or to standout – particularly when you are the crowd. Slowing down, also means quieting the outside influences that affect or unjustly influence thinking. I am not advising to ignore everyone and become an anti-social, but it certainly doesn’t hurt to be selective about the advice sought and taken.
- Circumstances of significant consequence – It can be hard to evaluate which moments in time are of significant consequence. Naturally, moments with life or death outcomes fit into this category, however, often in those circumstances you may be forced to make a quick decision. But what about those that are not related to life or death? Imagine you are faced with a decision determining the fate of your business, a decision about your personal health or well-being, or one related to the proper level of education for your children? In those circumstances, going slow, collecting information, and deciding is required. It also requires significant resolve to decide and stick with it. But again, there is no need to rush decisions of consequence.
As demonstrated, going fast is not always the answer. In fact, it can prove to be highly detrimental. With that said, the next time you see someone who takes their time, is being patient, or is generally slow – maybe you should pause for a moment to understand why – instead of rushing him or her.
Admittedly, the notion of slowness is not distinctively my own. It was cultivated from my recent reading of the book “The Discovery of Slowness” by Sten Nadolny. The book follows British Explorer Sir John Franklin through his arctic travels and highlights moments where Sir John is forced to quick decisions – often of life or death. Despite all of the pressure, his slowness enables him to remain poised – often resulting in life-saving decisions for him and his crew. This book brings into question everything that we are taught. Specifically the notion that the world is scary, fast paced, and if you don’t keep up you will be an utter failure. We learn from Sir John, that despite the rapidity of the world, there is always a need for those that can slow things down.
I hope to apply many of the lessons of Sir John to my personal and professional life by being more thoughtful about when and where it is advantageous for me to slow things down versus speeding things up. I now believe that striking the balance between both can create compelling results.
I plan to slow my role. And I highly recommend that you do the same.
Now that 2018 is officially in the bank, it is time for me to spend a little time reflecting on my year. Last year I spent time thinking through what I wanted to accomplish.
So how did I do against my goals from last year?
Being Present. I struggle with being present regardless of whether I am stressed or busy with work or not. Throughout 2018, I actively worked on this subject both in professional and personal environments, and while I was not perfect, there was noticeable improvement in my level of presence. This is something that I will always need to work on, but I am proud of how far I have come on this area. I effectively set boundaries regarding work time, contemplation, and my relationships.
Listen More. Talk Less. In 2018, I had my inner voice actively working. It kept telling me to “shut up and listen”. While I probably ignored the voice more than I probably should have, I find that this year I have learned more about the people in my life than probably ever before. It is tough balancing a career where everyone has something to say with just listening- I am trying. It is something that I will continue to work on, but I hope the people in my life experienced a higher level of attentiveness than previously.
Additional Sources of Income. This year, I decided to concentrate my investments by divesting things that were non-essential. As of this moment, I currently have several web domains that I am planning to sell off to focus my resources on financial investments. I also sold off a bunch of assets that I had lingering around the house collecting dust. There is still a lot of work to do to simplify my life and refocus on recurring revenue sources. I doubled down on my investment portfolio allocations and expanded my portfolio into precious metals. I have a couple of additional opportunities in the works for 2019 – more to come!
Travel Abroad. I just wrapped up a 3-week vacation throughout Asia with my better half. We visited Japan, Vietnam, Indonesia, Thailand, and Hong Kong. I find that I learn more in those very short trips than I do in the years and months leading up to them. Asia trip 2018 allowed me to spend a little time catching up on a few books that I have been meaning to read for quite some time and reflect on my goals for 2019.
Given that I accomplished most of what I wanted to personally in 2018, what do I want to accomplish in 2019?
Connect. One of the things I realized when traveling is how superfluous the relationships that I have with people generally are. For the year I intend to double down and spend more meaningful time with friends and family. It also means branching out and find ways to connect with people with related interests, hobbies, and work.
Move. For the last 10 years I have gotten a little complacent and lazy with my personal fitness. I am not “out of shape” per say but there is a lot of work that I can put in regarding my overall level of fitness. For 2019, I plan to accept all offers to do something active and spend more time on the move. That means less sitting around and more exploring – even within the communities with which I live.
Create. I have a lot of plans to create things that are currently sitting idle. This is the year that I start putting some of those plans in action. Maybe I tackle some of them myself. Maybe some of them I delegate. Ultimately, they don’t do anyone any good sitting on paper or in my head. This means experimenting more and worrying less. Nothing will ever be 100% so go for it. This is one of the things I learned while in Asia. Nothing, not even lack of infrastructure, can impede progress in certain parts of the world.
Simplify. I am a minimalist at heart. Which means excess of things gives me anxiety. In 2019, I don’t plan to go to the extreme of purging all of my belongings like they do at The Minimalist or de-cluttering everything like Marie Kondo recommends. Though, I can afford to purge objects that don’t add any utility or value (e.g. my massive book collection). My Kindle is more than sufficient to serve my literary needs. Simplifying also means I need to stop overthinking things and just go with the simple answer (Occam’s Razor). I plan to not over complicate things in 2019.
I think my list for 2019 should keep me plenty busy. Be on the lookout for my progress.
Another AWS Re: Invent in the bag. I feel much more rested and energized following this event than I have previously. Las Vegas can be exhausting. Even for those like me who would prefer to read a book than to enjoy in all the adult activities the city has to offer. For the most part, I stayed focused on networking, learning, and brand building. I met a few interesting people. Learned a few new things. Affirmed things I already knew or suspected. And on balance, came away slightly better off than I did before I started. Am I $1700 better. No. But better nonetheless.
Below are a few of my key observations from the event that summarize my sentiment.
Blazers and Chinos. Lots of it. I always feel like I go to these events a bit under-dressed. I don’t bring any dress trousers, suit apparel, or blazers. Conferences are my opportunity to chill and be myself in a relatively professional setting. I try to keep it casual. Jeans. Tee shirts. Maybe a Henley. Things that say. I am here for knowledge and insights and not selling. I know I should likely step it up a few notches but sometimes you need to meet customers where they are and how they are. I try to be approachable. There were lots and lots of blazers. To me this kind of screams, “Casual is so uncomfortable for me. But I will compromise and meet you halfway.” I generally refer to this as ‘consultant uniforms’. I probably shouldn’t criticize being a consultant and all. But a little humility and self-deprecation can go a long way.
Ugh. Skrillex. I have an appreciation for all music. Particularly 90’s pop, classic rock, indie, and techno music. Surprise. Surprise. I thoroughly enjoy the Diplo, Electric Area, BPM, and Chill stations on Sirius Radio. With that said, Skrillex is not my thing. If you like his music, god speed. Your experience at the Re:Play likely fulfilled some creepy fantasy. If you are like me, and don’t have an appreciation for his “sound”, then you left the event after the first 10 minutes. Naturally I did not leave without snapping a few awesome pictures. Your music is not entertaining for me but your visual effects made for some great photo ops. Keep it up!
Demo hall Swagu. Thanks Kanye. Every year, vendors pull out the stops for swag and technology giveaways. This year I had a vendor even drop off a flier directly to my hotel room for a Nintendo Switch giveaway. Unfortunately, I already had a Switch, else I would have been all over that. My company swag was a little underwhelming this year. Soft cotton t-shirts, shoelaces, and socks. Meh. I was thinking that the swag level should be exclusive and premium. I was thinking something along the lines of corporate designed Gucci belts, luxury bag, or high-end tech gear (more practical). In addition to things that are bold and really standout. Digitized hoodies and t-shirts. Yes please. Something that screams creativity and audacity yet at the same time is stylish and logical. I saw some people walking around with light sabers. Novelty gifts aren’t really my thing. The crowd has an appreciation for the novel. Thankfully swag strategy is not my responsibility.
Design me a Castle. The people at AWS are generally a mix of technical engineers and developers. Depending on your role, the experience that you have may vary. I don’t fall into either camp. I am primarily there to observe. In my opinion there was sufficient content for both developers and engineers. Everyone should have enough homework to keep them busy for a few weeks or months when they return from the conference. I like to go to sessions that are a bit more technically deep than what I am comfortable with to better understand gaps that I can help address in the market. It also gives me good perspective into the various cloud architectures deployed. To me the architectural diagrams alone are worth their weight in gold. If all you do is take photos of architecture the admission fee pays for itself – depending on what you are trying to do.
Staying Alive. In typical AWS fashion, dozens and dozens of new services are introduced leading up to and during Re: Invent. This likely means that many of the services that you have been selling or developing are now officially obsolete – or soon to be. Whether you tell your customers that for another 6 months is up to you…but you know! I really appreciate the Amazon model of competing with their vendors and customers. It forces companies to constantly rethink their services and value proposition and get in front of AWS. If you fall behind, you will likely come crashing down. Slowness has no place in the cloud.
Pitch Competition. The one thing that I really appreciated about the event were the smaller, startup type vendors, who would send their relationship and sales people around the floor to drum up business via alliance partnerships. Occasionally, I would get approached by a business developer looking to pitch me their wares. I may have been the right person but often I would defer them to someone else to talk to. There are channels to go through for this type of thing, demo presentations at a corporate booth are probably not the best one. Nonetheless, for some I truly listened and learned a little bit about where people are carving out niches for themselves in the cloud. For those who are truly depending on the event for brand awareness and alliances – find out what those channels are in advance and have a plan.
Re: Invent 2018 was something special. I split my time between company sponsored activities and a few sessions related to cloud economics, retail, and analytics. I observed how others interact with my employer. And furthered my knowledge of technical areas that I am already familiar. I also filled in some of the gaps regarding how to make the economics model of cloud work. It is a bit more complex than hypothesized. Where there is complexity, there is also opportunity. I also had a little fun. Made a little money. And avoided the Las Vegas shenanigans. I left excited for everything to be over and ready to get after it.
As always, I am excited to learn about the experiences of others. If you have any thoughts, feel free to leave a comment.
Ever debate someone? Been told you are wrong? Looked up the answer on your phone? And realized that your view, while not correct today would have been right several years ago? After all, times they are always a-changin’.
If you are like me, at that very moment, you came to a very harsh realization that what you thought you knew – was wrong. Or put a better way, what you thought you knew was correct, however, it was out of date.
In a nutshell, this is what the book Factfulness: Ten Reasons Why We’re Wrong About the World — and Why Things are Better Than You Think by Hans Rosling is all about. It is about the constant pursuit of understanding the world around us, acknowledging that often we make decisions based on instinct. The only way to ensure that our instincts are properly working for us is to keep them fresh.
Let me explain in more depth.
You were probably taught that certain things in life rarely change. If they do, they change so slow that it could be lifetimes before we would even notice. Particularly in an age where we have access to all the worlds information in seconds. Well that is not entirely true. Some things change slowly. Others change rapidly. Often our understanding of the world is based on the perspectives of others and inspired by uninformed opinion. If guessed the average education level between boys and a girls around the world, it is likely that you may indicate there is large gap. You would be wrong. The reality is they are nearly identical.
This example is a perfect representation of how the world has changed right under our noses and we have been none-the-wiser.
Within Factfulness, the author often asks questions to test our understanding of the world, and like you and many others the same questions – we were all wrong. The author explains why this is by highlighting scenarios which that tap into an individual’s instincts as a means for finding answers. After all, most of the decisions we make, opinions we formulate, and perspectives we craft are often based on instinct – some more informed than others.
Here is a shorthand list of the various instincts that you should be aware of and how you can be more self-aware of how those instincts affect your views.
- What is it? A narrow view of the spread in socioeconomics and demographics between different groups around the world.
- What is it? A propensity to believe that negative circumstance is weighted more heavily than positive circumstance.
- What is it? A propensity to believe that all events or circumstances tend to follow a linear trajectory.
- What is it? A propensity to believe that perceived fear is equivalent to risk.
- What is it? A propensity to believe that because you see a large number that it is significant.
- What is it? A propensity to broadly generalize a category or classification to make a point which may not fully apply to the category being represented (e.g. Most people believe, People would say)
- What is it? A propensity to generalize by not refreshing facts that you may know that have a shelf life.
- What is it? A propensity to allow a single perspective to limit your imagination.
- What is it? A propensity to use a single occurrence or individual to place blame for a statistical occurrence. This could include taking credit for an overly optimistic outcome or finding a scapegoat to take blame for an overly pessimistic outcome.
- What is it? A propensity to rush a decision without full information because of feeling rushed.
The principles of Factfulness don’t mean that you or I need to aspire to be all knowing like the “Great Wizard of Oz”. After all, we are smart enough to realize that was mostly a hoax and a grandiose illusion. Nonetheless, making being informed a priority should be something that we all general aspire to. Whether we do so or not is up to each person individually to decide.
Personally, I aspire to better knowing my limitations, managing my instincts, and being truthful about what I know and don’t know. I also aspire to be more understanding and empathetic of the world by traveling more and continuing my multidisciplinary explorations.
At the end of the day, what it comes down to is knowing your limitations, attempting to stay up to date with the times, and being conscientious of how our perspectives affect others..
I can do that.
On July 26th, 2018, I officially wrapped up at Google Next.
I feel Googley. Googlier. Googliest. Whatever.
I do not know exactly how to describe it but the vibe from Google Next. All I know is that it was different than other conferences. Like all corporate sponsored conferences, there was a salesy vibe, but it wasn’t overwhelming. The Google presenters and participants seemed to genuinely care about what they were creating on Google Cloud – and yes the focus was on “creation”. At the same time, there was a high-level of confidence. One that almost bordered on the line of arrogance. Whether justifiable or not. I can’t say.
So, what did I learn?
AI is real. And it is driven by Google. Or so that is what I was told over….and over….and over. No matter what the topic of the session was, somehow artificial intelligence was introduced. SAP…..AI. Gaming…..AI. Enterprise Compute…….AI. It is possible that if intelligence wasn’t included in the subject matter then it didn’t make it to prime time. Don’t get me wrong. This is one of the topics that drew me to the event in the first place and is also something that intrigues me. When I listen to the Googlers talk about AI, I get the warm fuzzy feeling that it is finally here. Not like SkyNet here but here in the sense that it is mature enough to improve lives and the nature of work.
I am out of touch with techno music trends. Also known as EDM (Electronic Dance Music). I thought I knew who the Chain Smokers were. Then I didn’t. Then I did. And then I didn’t. There is something about modern DJ’s that I enjoy and yet find so forgettable. I remember the 90’s and 00’s techno scene. Paul Oakenfold. DJ Tiesto. Benny Benassi, Basement Jaxx. Those were my Jam. These days I can’t seem to recall any of the popular DJ’s. I recognize the music obviously but if you asked me who was who I would have to go check the Billboard 100 to trace down the name. Assuming that Billboard 100 is still a thing. As much as I love music, I am not an avid follower like I once was. To me it is just background noise for other activities. I love to listen to EDM, but not enough to care about who the artist is. Sorry not sorry. Chainsmokers were great though on a more positive note.
San Francisco summers can get cold. Like sweater vest cold. I thought, that July in San Francisco would be hot, so I planned my wardrobe accordingly. Huge mistake. When I first arrived, and saw many of my colleagues dressed in their finest Silicon Valley chic fleece vests I should have caught the hint that I needed to go to the store and buy something warm. For the most part I toughed out the cold. Even on those sunny days where you look out your window and said “ah, today is an 80-degree day, t-shirt and shorts it is”, you need to resist – but only in San Francisco. Beautiful place. Weather is strange.
Keynotes are physically and emotionally difficult to get into On the first day, I decided not to go to the keynote and instead holed up at a Starbucks near the conference complex to watch the event via live stream on my phone. Typically, I find these sessions seem to be giant product launch events where the company releases all their latest and greatest services – Google Next didn’t disappoint in that regard. I don’t typically find the portfolio of services interesting unless I have proper context on how to actually use those services to create new solutions. The visionary work seems to only be relegated to a few so keynotes are often hit or miss. On the second day, I was running a little late and tried to get into a keynote. Forget about it. I was rejected and sent to the alternative building to watch on live feed. No thanks. My advice on key notes is to go to the ones if you already have an initial hypothesis of what types of services you want to learn more about and have the wherewithal to determine how they suit your needs. My needs right now are de minimis so I just wanted to learn about cool innovations.
Google unveiled the Gavin Belson Box. One of the highlights from the event was a Kubernetes box that Google unveiled to allow enterprises to transfer containers between on-premise and off-premise data centers. As I recall, the idea is that this box could sit in the client data center and help ensure a seamless experience between locations. Sound familiar? It did to me as well. As soon as I heard this the only thing I could think of was the Gavin Belson box from Silicon Valley. I chuckled a bit like an adult child. Then watched the video below. And chuckled again. Google officially unveiled the box and no-one flinched. Too funny. And a little disappointing.
Overall, the event was a lot of fun. The perfect amount of time at about 3 days split between client testimonials, client solutions, architecture, and engineering. Unlike AWS Re:Invent where it was blatant that everyone in attendance was in super sales mode, Google Next was a bit subtler and pure with its objective. I enjoyed that.
Instead of running around to sessions for my next conference. I think I am just going to sit tight in the corporate booth and network. It seemed like the way to go. I may also spend a little time presenting / demoing A few tools that I am working on professionally.
Be on the lookout for my write up at the end of November.
My name is Joe.
I am 34 years old (soon to be 35). I don’t know what I want to be when I grow up.
Is this normal for my age? I can’t say for sure.
To me, being grown is symbolic for having it all figured out. Therein lies the problem. Or at least I think it is a problem!?
My peers always seem to have everything figured out.
I don’t think anyone ever has it all figured out. Some are just better at faking it. Unfortunately, that isn’t a strength of mine.
When feeling uncertain with my situation, I perform my own mental Question and Answer session to get to the root of my uneasiness and figure out my path. The following questions are on repeat.
- What do I enjoy? Do others make a living at what I enjoy?
- Am I on the path to do what I enjoy? Is there a path? Do I need one?
- Do I want to work for others?
- Do I want to manage others?
- Is working independently a possibility? Now? Tomorrow?
- Does anyone want to do business with me? Is it a serious opportunity or contrived?
- Do I have to work for others (at least in a conventional sense)?
- What does making a living mean? What is driving this definition?
- Am I doing work that energizes me? Do I really need to be doing work that energizes me? If not, do I have other outlets that I can draw energy?
- Does what I want to do exist or do I have to create it? What would that take?
Out of all the questions, there is only one that stumps me regularly, “Do I want to manage others?” Not like a difficult brain teaser. But in the way that cooking is challenging. You may add a little extra parsley and the sauce tastes different. No better. No worse. Just different.
I also find the question a bit egotistical. It implies that others would want to work with me. Not an ideal place to start my Q&A but certainly something to ponder.
Eventually I hope to replace the question with, “Do others want me to lead them?” But it is a start.
I never actually edit the questions in my mental model – they are always the same. In some way they force me to revisit choices, compare my relative position to previous answers, and think ahead.
Who knows if I will ever reach career enlightenment.
I am reticent.
Ultimately, it doesn’t matter. Finding answers to those questions isn’t the point anyway.
The point is to spend time to evaluate circumstance. To test and retest my current situation. Accept where I am at professionally and what I need to take more steps forward than backward., And make change when absolutely necessary.
Not the impulsive regrettable change but the calculated change.
For now, things are balanced, tomorrow they may not be, and again I will visit my questions to determine if change is necessary.
I guess when someone asks me about my career, prospects for the future, or overall ambitions I will respond casually.
“I am working on it.”
And I always will be.
At the core of the Value Mindset are the principles of value investing. Essentially it can all be boiled down to one simple statement “pay a fair price for proven outcomes and compound the results over time.” As simple as this sounds, it is often elusive for investors, and quite frankly the statement is far too simple to accommodate the needs of an executive looking to make value based decisions.
Within this entry, we will review some of the common value investing principles, specially tailored for the Value Mindset, to focus on strategic choice making. We will discuss the common methods for evaluating and measuring value (i.e. Valuation and Appraisal Approaches). These methods should be deployed depending on the situation and scenario, however, in most cases, value based evaluation will be based on cash flows, income, or relative cost. And finally, we will discuss a few considerations which will help frame up how choices are determined, evaluated, and selected.
Value Mindset Principles:
- Value is a function of price and return. This gets to the heart of whether a choice is expensive or cheap. If you drive down the street, you may drive past 2 gas stations, one which is offering a gallon of gasoline for $3 and another which is offering an equivalent product for $2.90. In this example you have a pretty clear understanding of which gas is cheap and which is expensive – it is plain as day. Or is it? If I then articulated that the $3 per gallon would get you an additional 3 miles per gallon because it is higher octane, then you may completely reassess the value proposition. Understanding “what you get” is the most important thing when comparing the price / cost of choices. This same concept applies to almost any strategic choice. Don’t be afraid to spend a little more if the benefits are substantially greater.
- Value is a function of quality. People generally understand the concept of value when making choices in their personal lives but this notion of quality is often overlooked when it comes to strategic choices in the enterprise. When picking between two seemingly equivalent pieces of furniture, you can check the hinges, the handles, the wood, the seals, facets, and binding materials – when it comes to a strategic choice – sniff tests look a little bit different. For strategic choices, quality should be based on the reliability of the prospects of your choice. Ask yourself…For others who have made similar choices, have they yielded consistent returns over time? Are my returns protected or are they at-risk to competition? What is the certitude of positive outcomes for my choices?
- Value is a function of time. A great speculator can probably make a sizeable profit in a short amount of time; however, I firmly believe that time is the great equalizer. It makes both the exceptional and underperformers seem average. With that in mind, each executive has a different time horizon by which they evaluate a series of choices. Big bet choices can take as many as a decade or two to realize positive returns. Occasionally choices may deliver results in a relatively short period of time. When comparing options, it is important to adjust for duration. I believe the adage is “a bird in the hand is worth two in the bush.” For the most part this is true but also consider that the value of the bird anecdote is also relative to the time and potential of your ‘birds in the bush’.
- Value is a function of risk. In value investing, investors often try to isolate alpha. In other words, isolating the risk or opportunity that is specific to an investment over another investment. Typically, it is referred to as firm specific risk. Properly framing the risks and opportunities of a specific choice or series of choices helps to narrow the field of vision and properly adjust for shortcomings. When analyzing risk there are a variety of different methods which can be deployed including adjusting for confidence, establishing risk adjusted returns, factoring in market / financial risk into your discount rates, and modeling out stress test scenarios that may threaten your decision. This one is typically often overlooked in the world of consulting because often time capturing risk adjusted returns may have a significant impact on each of the choices. Creating a substantial margin of safety in the financial case helps to overcome both known and unknown risks which are either inestimable or unfathomable. Also, know that black-swan events exist, protect against their impact, but don’t overburden your case for things with unbounded liability.
- Value is a function of analytical integrity. Being honest with the prospects of a choice or series of choices is often the most difficult thing to do. It is easy to change an assumption here or there, round a figure up or down, or over project positive benefits and understate risks. Often certain choices cannot be validated based on the numbers but are the right thing to do. Understanding the qualitative benefits and how those can also be measured is important to helping make the value case when frankly the numbers may not add up. The worst thing to do, however, is to manipulate the numbers to tell a false story.
- Value is a function of management and ability to execute. While I don’t’ believe that management can overcome all, the difference between good management and bad management becomes apparent when things don’t go as planned – as they undoubtedly will from time to time. Not only is good management essential for deploying the Value Mindset when making choices, it is also essential to ensuring that value is realized once the decision has been made. Often decisions are made and many of those individuals who were part of the process move on. Someone must carry the torch. That responsibility typically falls on management. Also, transferable management principles also help to ensure continuity of value realization.
Value Mindset Methods:
- Income: The most common analysis for the Income Method is a discounted cash flow or DCF analysis. This typically identifies the net cashflows associated with a decision projects them forward and discounts them back to the present. A cost based equivalent of a DCF is a business case model which considers one-time costs, recurring costs / savings, time, and the firm cost of capital. Both types are effective at estimating the economic prospects of a choice. This is encouraged in pretty much all situations when comparing options – particularly those with different time horizons and risk profiles.
- Market: When evaluating investments, there are typically public and private markets available that you can use to compare prices and valuation based metrics. For strategic choices, this is often a bit more challenging, however, using 3rd Parties, Consultants, Financial Statements, and Press Releases, leadership can identify market signals from competitors and other firms who have already started the pathway of executing a choice. This helps to provide some market perspective on the value and potential areas of improvement to better estimate, plan, and execute a choice. For things that are not entirely identical, you can use sample cases as a proxy for value to measure yourself against and even to test / validate assumptions of value.
- Cost: The Cost Method aims to determine what it would cost to replace an asset or investment (as it stands today less accumulated depreciation). For example, if you bought a house built in the 1950’s that was refurbished, how much would it cost you to actually replace it today? Occasionally, choices can be evaluated by assessing whether you have a specific cost advantage (adjusted for capability) relative to what it would cost to replicate your choice elsewhere? If you already have elements of a choice implemented or capabilities built, then replicating that choice may be prohibitively more expensive. That has value.
Value Mindset Considerations
- Income vs. Market vs. Cost Method. Selecting the method for evaluating is probably one of the easier considerations of the Value Mindset. At a minimum, you should do an income based analysis and augment this with both a market and cost based method. This provides both an inside out and outside in estimation of value for your choices and helps to affirm or invalidate assumptions and known risks. Where asset appreciation is the primary driver of value then more market based methods should be deployed.
- Retained vs. Distributed. Determining if the returns need to be retained and reinvested or distributed is important to making a choice. If a choice is a multi-step function, the it is important to articulate the use and need of the benefits and when they may be able to be returned to shareholders – if at all. Knowing what your stakeholders expect regarding accumulation of value and how that value is deployed is essential – particularly, for complex choice cascades that are complex multi-step-functions.
- Consensus vs. Contrarianism. Determining if a choice is in alignment with the broader market sentiment or if it is contrarian is important. Justifying choices which are often not part of the standard or status quo are often viewed as “risky” despite the fact that they may be inherently less risky. Understanding the enterprise position and dynamics between consensus and dynamism is important before making choices. Knowing stakeholder expectations and your own personal style in this regard is also important to understand before self-selecting options.
- Diversification vs. Concentration. Understanding when to put your eggs all in one basket versus when to diversify choices is a critical consideration. Imagine if you invested all your time and resources into a major financial transformation and neglected to invest more broadly in choices that would drive innovation and other operational productivity benefits. Warren Buffett often says, “I put all my eggs in one basket, and watch the basket.” Most if any, don’t have the true autonomy to make those kind of large scale bets – and quite frankly it likely doesn’t make sense to do so.
- Short-termism vs. Long-termism. Evaluating the appropriate time horizon for realization of returns is really all dependent on the nature of the choices that you are evaluating. Again, certain long-lived assets require substantial investment periods before they accrete value and therefore your returns must reflect the deferred nature investment – account for all associated risks. It is important though to properly understand the true duration of a choice and not just the period analyzed. Often with technology, it is very easy to evaluate an investment over a very short life span, however, true technical capabilities do have lives that extend upwards and beyond 10 years.
- Market vs. Liquidity vs. Economic Catalysts. Understanding what if anything will make your choice valuable is important as part of the evaluation and assessment process. A market event like sizeable reduction or increase in the cost of steel may significantly affect your choice. Similarly, changes in your ability to transact, or buy / sell an asset may also affect your prospects. Additionally, things like monetary and economic policy could have sizeable impacts on your analysis if not properly assessed up front. A catalyst without real potential is just a risk.
- Singular vs. Cascades. Understanding which choices will drive economic benefit on their own and which require other choices to maximize value is important. It is very rare that a singular choice or decision ultimately results in the outcome. Additionally, be prepared to evaluate and re-evaluate along the way to ensure that as information is gathered learnings can be applied to refining the plan and the analysis. Complex choice cascades may require pivots in a different direction as they are validated and invalidated in the market.
In the next section, we will explore a few anecdotal examples to determine how the Value Mindset can be applied. Think of this as just the starting point. A juncture to ground yourself in how to think about choices and how they accrete value. Unlike value investing, the Value Mindset offers a framework to define the intercepts between complex, interrelated strategic choices, and the decisions that are required to deliver results.
Between semesters at college I held a summer job as a busser at a local restaurant on the lake. Unlike my peers who were living it up during the summer months, I usually worked 2 or 3 jobs to pay for school, my car, and other essential items.
Every couple of weeks or so this gentleman would dock his yacht outside the restaurant and walk in with his wife and young kids. I was perplexed by this situation. It seemed like the guy never actually worked. Come to find out – he didn’t. At least not in a conventional sense.
One day I mustered up the courage to inquire about his background by asking a few regulars at the bar, “What is that guy’s story?”
They responded in kind. “He day trades. Supposedly he made $10 million by the time he was 40 and decided to retire early. From then on he has been traveling the world on his boat with his family”
“Wow! How I’d love to be that guy.” I thought.
That fall I returned to school to continue my pursuit of a degree in Mechanical Engineering. I struggled. My heart was no longer in it. Engineering wasn’t my thing. In the back of my mind the whole time was this notion of “retiring early”. I was certain that engineering wasn’t going to offer me that possibility – unless I became an inventor. It sounds appealing but…no thanks.
It was after that summer, year 2.5 at Michigan State, that I decided to pull the trigger and pivot from Mechanical Engineering to Finance. It wasn’t going to be easy. I literally had to start over. And I did.
Other than some introductory Finance courses, conversations with my dental hygienist (a surprisingly informed investor), brief interactions with my financial advisor, and the story from the guys at my summer job – I really didn’t know anything about Finance.
I generally thought “how hard could it be?”.
After all, I literally just finished taking courses on Differential Equations, Multivariable Calculus, Engineering Physics (with this guy), and Chemistry – the math will not cause me any reason to worry. I figured Finance offered me my best chances at early retirement. I went all in.
Before I officially became a Finance major, my girlfriend at the time, who was already in the business school heeded me warning. She would reassure me, “Business is very competitive. You need to get involved with student organizations. And you need to try to be a leader in them as well.”
I joined all of them. At least the relevant ones. And I tried to lead them all. All attempts failed.
Being the late entrant into an election process that has been ongoing for several years doesn’t typically go well. Despite it being an “election” for the most part there was a well-established succession plan. I got it. At least I tried.
It was this pursuit that again altered my entire thinking, perspective, and understanding of Finance.
The group was called Student Investment Association. It was composed of a series of member-groups who were responsible for evaluating publicly traded companies each semester and pitching a buy, hold, or sell recommendation to the organizations leadership (aka investment committee). The organization had real money to invest and I certainly had a lot to prove so I pitched an idea every semester – from the day I joined until graduation.
Before I could pitch anything useful, I first had to figure out what the hell I was doing. The leadership team offered a brief introduction to financial modeling and analysis to get me started. Typically, they looked for the teams to develop an investment hypothesis by leveraging a Discount Cash Flow (DCF) or income approach to evaluating each opportunity. I became a sponge. And a learning machine.
The notion that the market may not accurately reflect the price (cost) of an investment completely blew my mind. It has been something that intellectually challenges me every day and has become the catalyst for me dumping my initial philosophy of “getting rich quick”.
After I graduated, I joined a boutique consulting firm, and since have been working on applying many of these principles to the work that I do. Aside from a brief stopping off point in valuation services, I have mostly been supporting clients by helping them strategize, plan, and execute large enterprise impacting transformations – particularly those that include technology. Interestingly, it is this notion of value that time and time again I constantly visit and revisit. Ultimately, I have adapted many of the concepts of value investing into what I refer to as the “value mindset”. Or more simply put, a value based framework for making strategic choices. Below are the foundational questions which are at the core of the framework.
- Is the company making choices that increase the firm’s ability to generate returns above their cost of capital? What is required to ensure this excess can be maintained over time? Does this choice accrete or deplete value?
- Is the company efficiently deploying capital? Is the best place to invest capital in the business? Buy back shares? Release a dividend? Is this choice a good use of limited resources? Will this choice free up capital to reinvest in area with higher returns?
- Is the company taking advantage of disequilibrium of price and value to benefit shareholders? Making accretive acquisitions and divestitures? Buying distressed or discounted assets? Balancing perception and reality? Is there an inherent upside that may create more benefits than initially anticipated?
I think recently I have reached a moment of clarity. Everything seems to make sense. The irony of it all is that the path to getting there was a little messy. From a student and young professional perspective – the process was a constant struggle. But here we are with a formed idea. A decade later.
In the next entry, I will explore the value mindset framework which helps clarify the above questions. Additionally, I will explore various scenarios and examples where the framework can be applied in different scenarios to understand how “all” decisions can be measured by the extent that they “add value”.
Something to Consider. Value is in the eye of the beholder. The intent of the framework is to ground the dialogue on what should be considered value in the context of the enterprise (economic value) and how decisions / choices should be evaluated on their own absolute value contribution. Standalone professions exist which are dedicated to appraisals and valuation. I don’t claim to be one of those people. Nor do I pretend to be. If your problem or opportunity is specific I recommend reaching out to someone with expertise in your area of need, particularly if the decision exceeds your core competence and knowledge base. If you need assistance with that feel free to shoot me a note. Otherwise, enjoy!
For the last several of months I have been reading the book titled “The Ancestors Tale: A Pilgrimage to the Dawn of Evolution” by evolutionary biologist Richard Dawkins (yep. that guy.). I have come across Dawkins’ name several times through my readings related to artificial intelligence and evolution. Dawkins not only provides an explanation based on evolutionary theory but also introduces a variety of perspectives spanning disciplines including genetics, archaeology, anthropology, biology, and many others. While there is a lot to be drawn from the book, specifically subject matter insights, what I have learned during my evolutionary journey, is that facts change.
So what exactly does that mean?
Scientists make educated guesses too….it is called a theory. According to Dawkins, the Pre-Cambrian period of history is kind of like a giant black box when it comes to archaeological records – the extent of fossil records just seems to disappear. Therefore, archaeologists and geneticists are forced to make some wild assumptions about the extent or pace of evolutionary change that happened during that period. Since we know what happened before and where we ended up after, scientists have generally concluded that the rate of evolution accelerated during that period? Is that true? Probably not. But again, it fits the narrative of the data until some other logical explanation or scientific method is invented to fill the gap. I guess statisticians are not the only ones who put plugs in their model until they have a logical explanation.
We often make pretty basic observations to determine comprehensive frameworks. When the author references early biologists, he often references that the earliest taxonomic classifications were based primary on the visual representation of animal species. Basically, we consistently use our basic sense of sight, touch, and hearing to make some routine assessments of species. As tools and resources improve, we could go to various levels of understanding regarding species – particularly when assessing ancestry at the genetic level. Case in point, a hippo is more directly related to a whale than an elephant. Who would have thought?
There is no singular pathway for success. One of the themes that is littered throughout the book is how each of the Concestor species was known or is known to select mates. Interestingly, as time progresses, the norms within species changes regarding what specific characteristics of a mate represent “fitness”. In one example you can think about all the warriors who go off to war, leaving behind the weaker candidates within the population to continue their genes. In that case, the most “fit” of the species are more likely to die off while the more intelligent and useful will carry on. Each species, throughout time, has adapted and created new ways of passing on their genetic material. Some species have even found ways to directly clone or replicate themselves for millions of years – one would think that this lack of diversity in the gene pool would fail – in some cases it proves successful.
No one seems to know when and how. I find it incredibly interesting that there doesn’t seem to be an scientific record explaining how and when we evolved away our tails and formed the Coccyx. Every time I sit down from now on I will always be wondering why I don’t have a tail. But I won’t wonder too hard because with time we will likely solve that mystery. Sometimes things are just entirely un-explainable – is it really that big of a deal?
As you can probably tell, I find that multi-disciplinarianism can help to solve a wide variety of different challenges – particularly when it comes to applications of scientific methods. The next time I run into an issue solving a problem at work, much like Dawkins, I will focus on the big leaps (Concestors), existing methods and tools, and go from there.