Published in the San Diego Union-Tribune, August 19, 2019
Picking is hard.
A little known hedge fund recently closed after losing over 85 percent of their client’s money. “Our incredibly bad performance over the past four years is a result of several factors — among them bad stock picking,” said Sean Fieler, manager of the Equinox Energy Fund. I love this guy. He told the truth. Who on Wall Street tells the truth?
So let’s think about picking. After all, every day offers the opportunity to get it wrong. There are little picks, like should you have the Reuben sandwich or the smoked turkey, and then there are bigger picks, like should I ask her to marry me?
As you know I have spent some time teaching at the Donovan Correctional Facility where one of the themes I hear frequently from the inmates is, “I made some bad decisions.” Well, we all do, but some have consequences greater than others. The question that interests me is how to improve my picking — not just what company or product to invest in, but more deeply, can I improve how I think about picking? So I went back into my library and found “Smart Choices” by John Hammond. Below are some thoughts from his book.
First, define the problem. This is ground zero for picking. The core work here is to examine the so-called problem from multiple points of view. You need more room for the kids so do you renovate or move to a bigger house? That problem includes thinking about the commute to work, is family nearby or not, schools for the kids, and then the external reality of what is the real estate market doing, mortgage rates, job security etc.
Next, think about objectives. A client from another country comes to me and wants to invest in America. In this case, the primary objective is to qualify for an EB-5 visa. If that is the case, then worrying about return on equity is secondary. He does not want a technology unicorn. What he wants is an investment that fits in the narrow box for a visa.
Consider alternatives. Another client has a call with their current investor and lays out the single proposal that might possibly save the company from closing. One of the junior geniuses from the venture fund raises 127 different concerns and issues. At that moment, I politely point out that all of his concerns are deliciously insightful and valuable and worthy of serious review, but listen you chucklehead, there is only this one option — the other one is to liquidate. The universe of your alternatives is very small.
The perfect solution does not exist. My favorite Harvard professor Bill Sahlman asks his class the following question on the first day: “What is the best business?” Of course, 64 bright minds and hands shoot up to demonstrate their deep understanding of business in America. Then Sahlman says, “The best business is a Post Office box that people simply send checks to.” No people, no product, no customer service, no aggravation.
I attended an advisory board meeting called by a CEO who wanted input and a reset. Five of us sat in a four-hour meeting. At the end, the advisers made a recommendation to the CEO for which he promptly thanked us, and then said that he was not going to do what we suggested — while at the same time acknowledging that the consensus view was correct. Huh, you know it is the right thing to do, but you are going to ignore it?
Another client is having trouble selling his software solution to the chief information officer of his previous company that he left. I asked him why, and his response was elegant, “he loves the software but he hates me.” So he is going to let his personal animus keep the company from improving its bottom line profits. (Sure, that sounds rational.)
Hammond goes on to discuss consequences, trade-offs, uncertainty, risk tolerance etc. Of late, I have begun to wonder if better decision making could be more algorithmically revealed. In other words, can I better manage mathematically the human tendency to do stupid things? Can big data and machine learning move the needle for rational behavior? I don’t know, but even if it could, would anyone listen?
Rule No. 623
No, you cannot pick your nose.