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"Some entrepreneur ventures turn you inside out".
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The Gullible and Bernie Madoff
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Like many of us, I have been both mesmerized and appalled by the Bernie Madoff scandal. The numbers are staggering – $50 billion gone up in smoke. The names who have been hurt range from the very famous to the nobodies – but the underlying question remains – how did it happen that no one figured it out? And even more to the point, what human factor allows and even encourages one to engage in this kind of investment?
Stephen Greenspan, a psychologist, has analyzed some of the behaviors in his recent article in the Wall Street Journal. Herewith are some of his thoughts (intertwined with a few of mine).
Situations: Greenspan contends that every gullible act occurs when an individual is presented with a social challenge that he has to solve -- and the Madoff story is replete with social feedback pressures --- it was a hard club to get into, Bernie was not accessible, and you could only invest if you knew somebody or were approved by him personally or else you had to go through feeder funds – i.e. access was limited. My Baby Billionaire Rule #215 (with appropriate reference to my personal idol Groucho Marx) is this: Any club that would have me as a member, I don’t want to join.
If it is that hard to get into, then count me out. But we all have the human nature to want to belong and to want to say yes and to be part of something private, special, limited and closed to the hoi polloi. This explains all kinds of clubs, from golf to eating – from investments to tailors and even doctors. When the door is closed, we want to get in even more than before.
So, the question is: Why is it so special that I am willing to suspend disbelief – and especially in the financial world, there is the perception that “the big shots are getting a special deal, and I want some of that also. I want to be special too.” So Baby Billionaire Rule #217 is: Beware of doors that only open with a secret knock.
Greenspan talks about cognition and how it impacts gullibility – and gullible acts are increased by intuition, impulsivity and non-reflective actions. It is amazing that smart people can act so dumb…..and the answer is simple -- because the decision feels good…..feelings are deceptive….smart people often suspend their skeptical faculties when their gut trumps their brains.
If you are ignorant in a certain area, do not assume you can overcome that by trusting other “smarter” people. At some level, the people hurt by Madoff were culpable as well – they were greedy in a benign way – they looked at the other members of the club and they trusted. So Baby Billionaire Rule #311 is: Trust is only earned in a deeply personal way – it cannot be garnered and granted by someone else.
Personality: If you are like most of us, you want to say “yes” more than you say no -- it is easier to say yes and go along for the ride – after all, what can happen --- saying no is a learned response….and in the case of your financial well-being, it is wise to practice your “unloved” quotient from time to time. So remember Baby Billionaire Rule # 210: A movie studio executive would be right 84% of the time if he said no to every film project that came across his desk --- don’t bet against the macro.
Emotion: The emotion to watch out for is two fold – one is obvious and that one is greed….and here is a story I tell often. When I am offered a fabulous deal, I always wonder: why did he call me? If it were so fabulous, why did I get called? Was I his best friend, was I the first call he made, did he owe me one, do I bring something unique to the table that is important to the deal – in other words, what makes me so special that I get this opportunity and if I can’t think of at least two really good reasons – then the obvious conclusion is – why me?
And so Baby Billionaire Rule #225 is: If you look in the mirror and see yourself as opposed to Brad Pitt, then pass the deal or get a new mirror. And finally the best rule of all from the Easter bunny – don’t put all your eggs in one basket.
January 4, 2009
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"D" Stands for Dissention in Decision Making
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When companies, teams or groups make decisions do they encourage, listen to, and even follow the dissenting dialogues that might arise?
When one of your team pipes up in the back that maybe x and y should be considered – after the CEO, the leader, the “head dog” on the sled, says we are doing a and b…how does one make sure that the head dog and the other members of the sled – actually listen to the small dog in the back of the room?
So first let’s look at a few examples of what it costs when you do not listen….
Top of the list – George W. Bush, August 2001, when the report comes in that says some people are going to fly a plane into some tall buildings – he did not think much of that dissent.
Dare I continue to pick on W. … the dissent said there were no WMD’s, but Joe Wilson was shitcanned…..yet we pressed on…..and we will be pressing in that sand for quite some time.
Ok – I’m a democrat but there is enough blame in this area to go around…..take John F. Kennedy and the Bay of Pigs...his invasion plan was a disaster...there were dissenters, but they could not be heard above the war drums.
How about 1996 on Mt. Everest when several professional climbers died in part because the junior members of the team did not speak about certaint safety rules that were being ignored…just read Jon Krakauer’s book Into Thin Air.
Let’s take a peek at NASA back in 2003 – the shuttle launch of Columbia when the foam broke off and damaged the thermal protection system. It was a known problem…..NASA knew about foam shedding and the damage it would cause, but engineers, fearing for their jobs and the reputation of NASA, looked the other way. Their dissents were not registered by the top brass and Columbia disintegrated upon re-entry.
Researchers at Harvard Business School found when they studied this phenomenon that “the propensity to maintain a silence, at both the personal and organizational level, is widespread and problematic” in both the public and private sectors.
But the issue is not only in the negative….it also turns up in large organizations with respect to good ideas. People are afraid to speak up unless they are sure that the idea is good and will be well received.
This is anathema in any high performing company – it is the CEO’s job to make sure that dumb ideas at least see the light of day. If he doesn’t, he is operating in a windowless room, but if he encourages it, he gets a chance to find the one in thirty really good idea. You know – it’s the “kiss the frog, find the prince” rule, right?
The fear is at the lower levels, where the “sherpas” are reluctant to speak up for fear that the supervisors will look down on them, criticize them, think them stupid, or even fire them.
Here is how the researchers described it –“the potential costs for speaking out are clear and immediate; the potential benefit, however, is unclear and certainly long range.”
So shut up and get back to work…
More examples…
New Coke was doomed to failure - they ignored market research that said no one was going to like it.
General Motors – it took years before they believed the research that said people wanted more fuel efficient small cars.
You know the old mantras –
Don’t rock the boat
You get along by going along…
How is it possible in 2007 – in a flat word that is changing at hyper speed that these old shibboleths still exist?
And so we come to Baby Billionaire Rule # 307 – candor must be rewarded and incentives must be in place to encourage it.”
As I always say – “It’s what you don’t know that you don’t know that will kill you.”
And it is inconceivable to me today that corporations allow this kind of fear to still exist. New thoughts, and more accurately dissent – disagreeing with the old man in the corner office – must be promoted.
I am not suggesting you pipe bomb the old man--there is a coherent and rational way to present dissent-- but the atmosphere in the corporation must allow it to breathe and blossom.
Leaders with preconceived notions – dare I mention W. and Iraq again –who are bound and determined to carry through on their ideas – regardless of the dissent, are demonstrating a costly behavior – whether in the government or in a little company.
Just because you think you know what is best for the company doesn’t mean you actually do know what is best. That is why you have employees instead of deaf, dumb and blind robots.
Robert S. McNamara – Vietnam era Secretary of Defense put it this way,
“Controversial issues do not surface because it is threatening to organizational harmony as well as to individual careers.”
The domino theory was never given a full hearing – and so we had Vietnam. Nice job, Bob.
Listen to these words from Alfred Sloan 1922 president of General Motors,
“Gentlemen, I take it we are all in complete agreement on the subject here…” (the heads all nodded, then Sloan continued) “…then I propose we postpone further discussion of this matter until our next meeting to allow ourselves time to develop disagreement and perhaps a better understanding of what the decision is all about.”
How can you not love that guy?
If you want good decision making, contention is essential. Or said another way – Take a good look at the elephant in the room and if you can’t find it, then go to the pet store and get one and bring it into the board room. For the price of a large bag of peanuts, you will be better for it.
Promote the mavericks and reward intelligent dissent – otherwise you will lose the creative vital edge in a company.
Make your senior team learn to hold paradoxical points of view….tolerate and embrace ambiguity. If you only rely on the past, you will always see 20-20, but you won’t see the cliff you are driving off right in front of you.
The smartest guys in the room need to listen better, be humble and remember that decisions are never better for silence.
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Solar Power is our "Moon" Shot
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I recently attended Solar Power 2007, the largest solar energy event ever held in the United States. Five years ago, 800 people came, and this year, there were over 9,000 at the Long Beach Convention Center which was picked because they have a large solar installation. The enormous increase in the number of attendees indicates the amount of potential that companies and investors see in solar. I am one of those people.
The first keynote speaker was Ray Lane, one of the managing partners of Kleiner Perkins, one of the premier venture capital firms in the world, and the second was Ted Turner, the founder of CNN and a winner of the America’s Cup.
Lane’s message was “Global warming. It’s game over by 2050 if we don’t deal with them.” He contended that the problems will be so big by then that they will be irreversible. Quoting one of his partners Gene Kleiner, Lane said, “There is a time when panic is the appropriate response.” Kleiner Perkins has allocated several hundred million dollars to solar power investments, and Lane noted that there is no shortage of energy because all you have to do is look up and see the sun.
The Holy Grail of course is making more efficient solar cells that can produce power at prices equal to the grid, and all of a sudden solar becomes a real business. Kleiner Perkins’ plan is to invest in companies that make solar cells and those that store the electricity. Lane told the audience that 100 square miles of land covered with mirrors called concentrators could produce 100% of the power needed in the US. That certainly seems reasonable.
In conclusion, Lane said, “The bottom line is solar power is our generation’s moon shot,” making an analogy to President Kennedy’s call to action more than 40 years ago. That time our nation succeeded. I agree with Lane that solar power can be our moon shot and that it represents the largest economic opportunity of the 21st century.
Next I heard Ted Turner, and he’s an extraordinary fellow. He said solar power is a “no brainer” and is the greatest business opportunity ever in the history of mankind. Turner concluded with three compelling observations.
1. Never build another coal burning plant
2. The US doesn’t have any enemies except the ones it makes.
3. You can’t expect someone who can’t run a baseball team to run a country.
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Subprime Had Its Prime
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I have a view on the subprime mess that is slightly contrary.
While I know that it is a serious issue and that people’s lives are being thrown into turmoil, I am going to suggest that the mess has several participants and the question for the entrepreneur is, can you profit here and, if so, how?
First, the fault, Dear Brutus, lies in ourselves…the borrower did not understand the terms and conditions.
I just finished trying to buy life insurance. I have the benefit of being reasonably smart and have a cadre of smart advisors, but I can swear to you that the insurance business is not a business…it is a racket...and it is damn near impenetrable. I have been on the problem for 6 weeks...two brokers…two companies…and I cannot get a straight answer.
The reason I mention this is because the mortgage business, for most people, is equally opaque. What the borrower wants is the house. He or she wants it now….and will worry about the reset of the rates when that happens.
Nobody reads the fine print…the agent, broker, etc. told me that everything would be ok. So the first entrepreneur rule is: read the damn fine print. Yes, read it! Get a magnifying glass, ask questions…even stupid questions…it is your responsibility.
I have to tell you that I know lawyers who have closed giant multi-million dollar financings and the CEO has never read the docs. They rely on the lawyer or someone else… or maybe no one reads them.
Second on the guilty party list is the broker or agent. The compensation system rewards crookery, scammery and high pressure tactics. The broker is long gone when the loan blows up….he sells it, you sign, he gets paid, then he is “adios vaminose” and on his way to Hawaii. Reward unintended consequences when you design compensation packages for the salesmen in your company.
Number 3 – Wall Street. The packagers--they bundle the mortgages, slice and dice and rate them, and then they sell them to someone else who doesn’t know the broker, doesn’t know the borrower and doesn’t know the real estate.
So when the “plaintiff cry” from the homeowner says, “Hey, gimme a break…a little time,” the guy that owns the loan doesn’t know the borrower from nobody.
The owner of the mortgage is not the local banker who knows your family….it is First United Interstate Global American Financial Advisory Hedge Fund Corporation…so basically, you are a dead man.
Now to the point of the rant... making subprime loans put millions of people into homes and that is a good thing. As a percentage, the number of defaults is small compared to all the subprime loans made.
So, it is a mixed bag…there was awesome greed, no controls, wrong-headed compensation, and a “take the money and run” mentality which is sickening to me.
But it is also true that Betty and Bob got their first home.
Regarding the last point…if, not when, Betty and Bob lose the house in foreclosure, do not think you are going to steal it and get rich. Here is the reason: there are ads today in the paper for eight different seminars on how to make money in the coming real estate foreclosure mess. If it were so easy, they would not be giving a seminar – they would be doing it. Stop and think --- if eight guys in Sunday’s paper are pitching crap, do you think the horsehoe is possibly rigged?
The little guy has no business tangling with the monster on the Midway or Wall Street.
Focus on your business, grow your customers, create value, and make your mortgage payment each month. Do not touch the fire and brimstone...you will get burned.
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Great Teams Win Super Bowls
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Currently, I’m running a tiny technology company based in San Diego, and we’re in desperate need of a particular skill set. We advertised on Craig’s List and got one spectacular resume. We had the candidate meet our technical team on the east coast, and they said that he has everything that we’re looking for.
I checked his references, and we had an initial conversation about compensation that is probably going to be less than he earned in his prior position. Let’s call this gentleman Mr. Tolstoy since he’s from Russia, like the technical founder of the company.
The references turned out to be medium, and I then had another conversation with him and I said: “Why don’t you do a couple of days of work with the technical team so that we can make sure that this is a good fit.” It’s easy since he’s 30 minutes away, he’s unemployed, and I agreed to pay him for the two days.
He has the skill sets, but…..
After the two days, the technical team said that he definitely has the skill sets. So we agreed to hire him as a consultant at a salary that was higher than we pay anyone in the company. I discussed this with the technical team and the chairman of the board. This was a joint decision because we really needed his skill sets. We wrote up a consulting agreement clearly delineating his compensation and a modest stock option grant, and he sent it back with two changes.
First, he broke down the compensation into an hourly wage to the penny, and he wanted the consulting agreement to terminate at the end of four months. This is clearly a very precise guy. So the questions I asked myself were: “Will this guy fit into the corporate culture of a start up where people don’t look at the clock? Should we hire him because we are so desperate for his skill sets?”
Arguing with the CEO
At the end of his email, he said to call him if I had any questions. I called and told him that I was a little troubled that he figured this out on an hourly basis, which led to an argument and I had to stop. Here’s a guy who has never worked for us, he’s never met me in person and he’s already arguing with the CEO. So I said I’d have to think about this, and I’d get back to him. Next, I talked with the rest of the team and concluded that this behavior doesn’t work for us and we’re moving on. So we’re still looking for a person with these skill sets and it does somewhat delay us.
Don't try to fit a square peg into a round hole
Building a team is the key to creating a successful start up—pick the people who will fit into the culture. The CEO’s most important job is hiring well and being the visionary and model for the culture that you want in your company.
There are great players, but what wins Super Bowls are great teams.
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