Simple Yet Hard, Public Market Investing Edition

Anyone who touches public market investing sings endless praise for Warren Buffett. But how many public market investors invest like Buffett — that is, actually employ the same strategy to generate superior returns? Remarkably few, it seems.

The Mutual Fund Observer recently profiled the Bretton Fund and interviewed its manager Stephen Dodson:

In imagining that firm and its discipline, [Dodson] was struck by a paradox: almost all investment professionals worshipped Warren Buffett, but almost none attempted to invest like him.  Stephen’s estimate is that there are “a ton” of concentrated long-term value hedge funds, but fewer than 20 mutual funds (most visibly The Cook and Bynum Fund COBYX) that follow Buffett’s discipline: he invests in “a small number of good business he believes that he understands and that are trading at a significant discount to what they believe they’re worth.”    He seemed particularly struck by his interviews of managers who run successful, conventional equity funds: 50-100 stocks and a portfolio sensitive to the sector-weightings in some index.

Stephen says:

I asked each of them, “How would you invest if it was only your money and you never had to report to outside shareholders but you needed to sort of protect and grow this capital at an attractive rate for the rest of your life, how would you invest.  Would you invest in the same approach, 50-100 stocks across all sectors.”  And they said, “absolutely not.  I’d only invest in my 10-20 best ideas.” 

The obvious question is why this is. There are various incentives that distort fund managers’ behavior, certainly. But my guess is that a large number of public market investors think they’re investing like Buffett, but they’re actually not disciplined enough to follow the value strategy all the way. It’s no wonder the average returns from actively managed mutual funds (versus index funds) are so disappointing.

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I should note that Steve is one of my closest friends. And not just because he’s made me money from my being an investor in the Bretton Fund.

Learning to Own the Room

I recently attended an Own the Room public speaking and communication course in New York.

I’ve done a lot of public speaking, from enterprise software sales pitches in the early days, to paid keynote speeches more recently. But I’ve never formally trained. I’ve relied on some natural ability, decent content, and feedback from friends/clients along the way.

Over the past year, I felt like I hit a plateau in my verbal communication/presenting skill. I also came to the more general realization — described in my recent blog post on investing in yourself — I should be investing aggressively in my existing strengths. So I flew to New York and participated in the intensive Own the Room bootcamp, which had been referred to me by several people in my network.

It was phenomenal. I learned so much. Here are some reflections.

The native speaker who can’t write or understand grammar. When I took Spanish classes in school in California, there were always a few near-native speakers — immigrants whose parents spoke Spanish at home. Their accent was perfect and conversational pattern fluid, but occasionally they would unknowingly make very basic grammatical errors. They were never taught grammar; they couldn’t spell many words they spoke. Going through this course, I felt like I was that native Spanish speaker: when I speak or verbally communicate, I do a fine job most of the time, but now I know I make some really basic mistakes. Until this course, I wasn’t aware of the mistakes, let alone how to improve them. I’d argue that many business execs with a natural flair for speaking fall into this camp. They’re quite good, but they won’t get to great without stretching themselves beyond their natural ability.

The bootcamp model. I’ve blogged about the bootcamp model of learning. Own the Room definitely fits that mold — a couple super intensive days focused on a single topic. I still seek a framework by which you can evaluate when a format of learning fits the type of learning — i.e., I think a bootcamp model works well for public speaking, but not for language learning, say.

Demand feedback. “What did I do well? What could I do better next time?”After every module exercise, we “demanded feedback” from our partner or small group or coach by asking these two questions. This is a general learning theme, of course, but was emphasized to such a degree in Own the Room that it stuck with me more than anything else. (“What could I do better next time?” is an example of ‘feedforward’ instead of ‘feedback’ as Marshall Goldsmith calls it — constructive feedback focuses on what you can do better next time.)

Presence comes from change. Dynamic leaders have presence. It’s a hard thing to define. When do you feel someone’s “presence” in a room?  You feel presence when they change. Change their physical position. Change the volume of their voice. Change the speed of their voice. Change their point/topic. Change = presence. A huge learning.

Voice modulation and pauses. I discovered in the class two key weaknesses in how I verbally communicate. First, I don’t employ pauses enough. The rightly timed pause can make such a difference in how a point lands in the audience. Second, I don’t modulate my voice. I don’t use the full range of volume. I’m too monotone too often.

“Imagine…” Paint pictures with words. Paint pictures with words. Paint pictures with words.

Here’s a video of highlights from the first day of the course I attended.

And here’s a clip of Bill Hoogterp, owner of Own the Room, teaching voice modulation and body language:

How Busy People Find Time to Think Deeply

(Originally published on LinkedIn, where there are 300+ comments.)

During the first presidential campaign Michelle Obama was worried her husband’s schedule allowed him “no time to think.” You hear the same from business executives who traverse impossibly packed days.

But how many people budget serious thinking time on their calendar? Few. After all, what would you actually do during time set aside to just “think”? Sit in a chair, stare straight ahead, and ponder the world?

Indeed, it’s not a challenge you confront head-on. As Alain de Botton says, “The mind may be reluctant to think properly when thinking is all it is supposed to do; the task can be as paralyzing as having to tell a joke or mimic an accent on demand.”

If you want to do more proactive, deep thinking, you want to obliquely engage in two kinds of activities.

Directed Thinking Activities

Write. Famed author Joan Didion says, “I don’t know what I think until I try to write it down.” Amazon CEO Jeff Bezos preaches the value of writing long form prose to clarify thinking. Unless you’re a professional writer, writing is not always about the written output; it’s about the thinking that happens as you attempt to communicate. Do not assume you have to share your writing with others for it to be time well spent.

Read a book. Don’t read an executive summary or two-page cheat sheet. Read a full book. It’s not about the content of what you’re reading — in most business books, there’s not much new anyways — it’s about the quiet time you’re spending by yourself. Unless you’re a professional book reviewer, reading is not about reading; it’s about thinking. It’s about hearing yourself think.

Undirected Thinking Activities

“Undirected” thinking time involves activities that are themselves minimally mentally taxing, and conducive to creative thinking about other things.

Drive to and from the office. Driving a familiar route = good thinking time. “When Joan Didion moved from California to New York, she realized that she had done much of her thinking and mental writing during the long drives endogenous to the Californian lifestyle,” Steve Dodson once noted. I’m the same. I can’t tell you how many decent thoughts I’ve concocted in my head while driving on the 101 or 280 freeways in the Bay Area.

Take your dog for a walk. Same as driving, but safer.

Take extra long showers. You’re free from distraction, you’re engaged in a monotonous activity that doesn’t require active focus, and you’re in a different environment. Sounds like the perfect place for a creative thought.

Stare out of airplane windows. Travel journeys of any sort are the midwives of thought. “Few places are more conducive to internal conversations than moving planes, ships, or trains…Introspective reflections that might otherwise be liable to stall are helped along by the flow of the landscape,” says Alain de Botton. On the topic of airplane windows and thinking, I always call to mind this picture (right) of Bill Clinton, having a moment.

Organize your office/room/house. Tidy up documents, pick up around the floor, rearrange books. It’s an excellent foil to serious thinking.

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When do you find time to think deep thoughts amid the day to day chaos of professional life?

(Photo credit: Flickr)

“What Would I Need to Believe For This to Be the Right Decision?”

Long time readers know I love easy-to-remember questions, litmus tests, proxies, rules of thumb that make navigating a complex and uncertain world a little bit easier.

Dan Shapero, a VP at LinkedIn, wrote a good post recently about a way to bring clarity to a decision making process.

If you’re faced with a choice of whether or not to do something, just ask yourself, “What would I need to believe for this to be the right decision?” This simple question is incredibly clarifying.

Here’s an example: I’m trying to decide whether or not to prioritize the development of a new product. In order for that to be a great idea, I would need to believe the following assertions:

1. We have the team capable of building the product

2. Customers will buy the product at an attractive price if we build it

3. We have the distribution to reach potential customers at a reasonable cost

4. None of our competitors can replicate this offering in the next 12 months

5. There are no higher priority development opportunities for the R&D team

Simple and powerful.

How to Get Useful Feedback on Your Projects: Avoid Like/Dislike

When you show someone a plan, product demo, or piece of writing and ask for feedback, you might ask, “How do you like it?” If you don’t ask this explicitly, it is often the implied question in a feedback session.

But whether the other person likes whatever it is you’re working on is frequently irrelevant. And, in fact, asking this question can distract both of you from the real goal: discovering practical steps to improvement.

When Reid and I were writing The Start-Up of You, we asked for feedback from several friends on drafts of the manuscript. During the first round of feedback, we were genuinely curious if others liked it because we weren’t sure how much work we had left to do. Folks came back and said they didn’t like several portions of it, and that was useful: we learned we had months of work left. During the second round of feedback, I did not ask people if they liked it, because I knew by then we still had work ahead of us. Instead, I asked, “What are three specific ways you think we could improve the manuscript?”

See, once we realized we had more work to do, hearing whether someone thought the current draft of the manuscript was great or not great was irrelevant. What was helpful was how you actually make the text better. Maybe that meant making a good manuscript great. Maybe that meant making a bad manuscript simply average. Either way, better is the right mantra in an environment of continual improvement.

What’s more, opening with the “like” question can actually be counterproductive. Ask somebody who was in the audience, “What’d you think of my speech?” and you will probably get some variant of “good,” especially if the person is of lower status. Any specific tips that follow will be under this potentially sugarcoated guise. Or, if they say they didn’t like it, you could get defensive or argumentative. Ask instead, “What is one thing I could have done better in the speech?” and you’ll jump right into something that’s potentially actionable–and avoid a potentially awkward like/dislike evaluation.

Bottom Line: If you know there’s still work to do — on your draft essay, on your public speaking skills, on your product — ask people for one or two specific ideas on how they’d improve it. Focus their mind exclusively on practical, specific changes that they think would lead to improvement.

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I wrote a long essay titled “Behind the Book” summarizing other lessons learned from the process of publishing The Start-Up of You.

(Photo credit: Flickr. This post originally appeared on LinkedIn.)

Political IQ is Like “Overall Athleticism” and “Court Vision”

James Fallows, who’s one of the most consistently level headed and clear bloggers on current affairs, has a post up with two good yet different points. The first point is a worthwhile one about the role of “culture” in a country’s success.

The second point is about “political IQ”:

Political talent includes the ability to tell your immediate audience things it wants to hear — without offending people beyond that audience, who in today’s panopticon age will inevitably hear anything troublesome you say. At its crass extreme, this is the “dog whistle” — sending a coded signal that the general public will miss but only a select group of listeners will recognize and respond to. Less crassly, it is a skill both Ronald Reagan and Bill Clinton demonstrated in managing to appeal to some groups without alienating too many others. Barack Obama took such heat for his “people get bitter” comments four years ago because they violated this rule. For him it was a rare exception….

Here is the point I am building to. Three months before the election, it is fair to wonder about Mitt Romney’s basic skill level as a politician. I am not talking policy and substance, which I will do later. I’m talking about the counterpart to what coaches call “overall athleticism,” “court vision,” “ball sense,” even “football IQ.” In politics this includes an ability to read audiences, to self-edit and self-correct in real time, and to sense effortlessly how your words will sound to people on the other end. Right after Sarah Palin’s pick four years ago I guessed that she was going to have trouble with the surprisingly onerous demands of a national campaign. Now I am struck that we’re still seeing indications of limits on Romney’s “political IQ.”

“Court vision” and “ball sense” exist in a business context too, and I think it goes beyond polish. I’m reminded of my post a couple years ago on the “it” quality — the total package of qualities that so surpass simply “smart” that you’re left saying the person has the “it” factor.

When Talent Can Easily Find New Opportunity, How Do You Retain Talent?

Talent moves around more and more

Talent in Companies

There used to be a long-term economic and psychological pact between employee and employer that guaranteed lifetime employment in exchange for lifelong loyalty; this pact has been replaced by a performance-based, short-term contract that’s perpetually up for renewal by both sides.

As an individual professional, you aren’t wild about pledging lifelong loyalty to a single company because, thanks to LinkedIn and other services, you can more easily locate new opportunities and you can more easily be found by recruiters and companies. The grass is always greener on the other side; now it’s easier than ever to see that grass, and chase it. Companies, as a result, don’t want to invest in training and developing you in part because you’re not likely to commit years and years of your life to working there — you will have many different jobs in your lifetime.

In the Start-Up of You, we talk about how individual professionals should manage and invest in themselves in light of this more fluid relationship with employers.

But how should companies think about the implications of these expectations? How do companies think about HR and retention? If individuals live the Start-Up of You, it means that if you have 500 employees you do not have 500 individuals ready to be subservient and loyal for life; rather, you have 500 businesses-of-one who are leasing their talent to you at this point in time.

Instead of denying the job-hopping, opportunity-seeking ways of young talent today, it seems wiser for companies to face the reality and embrace it. Help employees develop transferrable skills. Help them build the start-up of themselves. And be very explicit with new hires about the expectations: “We expect you to give us a really strong tour of duty for 2-3 years. When you leave, we expect you to be part of our corporate alumni group. We want you to be part of our corporate alumni network. We want you to help recruit new employees. We want you to be lifelong ambassadors and evangelists for our products and services. But we know you’re super talented and will come upon many other career opportunities while you work here. We know your tenure at the company may not last more than a few years.”

Essentially, try to retain employees for as long as possible, but be frank about their likely brief tour of duty, and be clear that you expect them to be active corporate alumni members for the years after they leave the company.

Talent in Countries

Elites of troubled or poor countries ask themselves: “How we keep our brightest young here? How do we get them to build companies here, be part of the local workforce, and (re)build the local economy?” In Greece, this was the question elites in the country were thinking about. I just returned from a few days in Morocco–it was a huge topic of conversation there, too.

Usually, elder elites appeal to youth’s sense of nationalism / patriotism: “You’re Cypriot. This country raised you. Stay and help grow your country.” Or, as I suggested to some Greek entrepreneurs during my trip there, governments could appeal to the business opportunities associated with societal problems–many problems means there are many potential solutions. Trash collection has become impossible in Athens due to protests; perhaps the wealthy would pay for a private trash collection service?

But if they’re honest, older government officials and businesspeople know that for the average 18, 19, 20 year-old in Cyprus or Morocco there will, on average, be more professional opportunities abroad. Government officials fear that if they acknowledge this fact publicly, talented youth will flee. The problem is, they’re going to flee anyway, or at least try to, because they see the economic dynamism abroad. They watch MTV Cribs.

So here’s a radical view: government and business elites in certain poor/developing/troubled countries should explicitly tell their most talented youth to go abroad. Indeed, help them to do this–pay for it, even. As part of this, forge with them a new social contract. Have them sign a document stating their expectation to return after 5-10 years. When they return, they can share what they’ve learned abroad and infuse their native culture with the attitudes gleaned from the cultures in which they spent their 20’s. Plus, chances are they’ll be even more patriotic upon return. Spending time abroad can remind you how Moroccan, or American, or Greek you really are. You realize how many of your habits are cultural; you feel more affinity for your native culture.

The big difference, of course, between the company example and the country example I’ve mentioned is that once an employee leaves a company, he isn’t likely to return again later, whereas for countries, the point is the emigrant will one day return. But maybe this could be made parallel as well. Bain & Co. and McKinsey famously invite ex-employees back after they’ve gained additional experiences elsewhere.

Bottom Line: Talent seeks opportunity. With opportunity increasingly visible and accessible, talent is moving around more and more. Poor countries should relinquish the idea that they can hold onto all their best young people; instead, send a high profile number of them abroad, and get them to commit to return home later. Company executives, similarly, should relinquish the idea that employees will profess long-term loyalty to their corporation. Instead, they should be explicit with employees about signing up for a tour of duty for a period of time and, from then on, remaining an active ambassador and recruiter for the company as part of the corporate alumni group.

What Finance is About

I thought Jerry Webman, the chief economist at Oppenheimer Funds, captured the essence of finance nicely and simply in his op/ed in the FT the other day:

At its core, finance is about linking people with savings to those that can put them to productive use. Performed correctly, it can fund retirement accounts, foster growth in emerging markets and support the technology companies that help protesters assemble in a flash. A well-functioning financial system is critical for economic growth. Investments that support worthwhile projects can build the human and physical capital that generates growth and raises standards of living around the world.

I've been negative on the finance industry and bankers in a couple recent tweets, quoting Nassim Taleb and Michael Lewis. It's good to go back to the basics, as Webman does, and be reminded of what finance is really about–when it functions correctly.

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Not to be negative again on banks — just when we were being positive! — but a point about those Goldman Sachs / Citibank magazine advertisements and pre-roll online video commercials that talk about how Goldman/Citi help communities flourish, how they empower small business owners, etc. They've been in heavy rotation ever since the '08 crisis. And they are stylistically just like the Exxon and Shell Oil commercials that claim that oil companies are leading the way in finding renewable energy.

Continuous, Real-Time, Semi-Structured Feedback Instead of Annual Reviews

In a question on Quora about how a start-up should handle performance reviews, John Lilly writes:

After believing in annual reviews for most of my career, I don't really believe in them anymore. Not timely enough, demoralizing in general (everyone thinks they're above average), and just a hell of a lot of work for everyone. This negative view of annual & traditional reviews is quite strongly supported by university research — it's just counter-productive, even though we all think we should do it.

My own view is that you need tools like Rypple to do continuous, real-time, semi-structured feedback that adds up, over the course of months or years, to a real picture of how the person is performing, and gives both the employee and managers a way to get better.

Hear, hear. In particular, the "continuous" and "real-time" parts. This ensures that feedback is given soon after whatever event prompted the feedback. I've been involved in feedback sessions that reference events that occured months and months earlier–those never end well.

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Other links:

Bryan Caplan offers tips on how to reduce your envy of others.

A University of Chicago project on defining and exploring the nature of wisdom.

Tyler Cowen riffs on which intellectuals have true influence. He has a very high standard for what "influence" means. The upside to such a high standard is it helps prevent word inflation. "Brilliant" is an adjective that has lost meaning due to overuse. The downside to such a high standard is that people who truly do wield influence but maybe not world-changing influence can more easily forget the responsibility that comes with it. When Tyler blogs, people listen. His influence is non-trivial. He should not taking his writing lightly…and I know he doesn't! He's influential.

Steve Silberman's sober, reflective look at what he learned from Allen Ginsburg:

One of my favorite Zen koans is, "Who was Buddha's teacher?" You don't need a spiritual parent to tell you that contentment is elusive and fleeting, that every thing and every place you treasure is in the process of being transformed into something unrecognizable, and that every love affair, killer startup idea and Facebook thread eventually ends with shrugs and a funeral.

Serving the Audience vs. Doing Your Thing (and Other Links)

Talking Funny is a four-way conversation between Jerry Seinfeld, Chris Rock, Ricky Gervais, and Louis CK on the craft of comedy. Here's Part 1 (and embedded below). One bit jumped out in Part 1: Gervais argues that you shouldn't care about the competition or the customer or the market — you should just be you, tell your jokes. Rock and Seinfeld respond that you have to be thinking about the customer and the competition. You have to be at least as good as whoever performed previously in the venue. Both sides are right, of course. It's interesting to hear them talk about how to navigate the tension.

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Other links:

  • Robin Hanson riffs on "morality porn" and the "X porn" construct more generally.
  • The always-interesting Christopher Caldwell writes against excessively gruesome warning labels on cigarette boxes, calling it "more about class than compassion" (i.e., rich people against poor people).
  • A fascinating piece in The Atlantic called The Triumph of New Age Medicine. Here's the debate about the article. I'm sympathetic to the author of the piece. If it works, it works. Some of the harder core people opposed to alternative medicine remind of me hard core atheists who attack quiet, religious folk taking comfort from their faith.
  • Bill Simmons says Will Smith does not take creative risks by doing the same sort of movie over and over and eschewing opportunities to take on new roles. Yet, Simmons does the same thing over and over. We don't expect him to pump out fiction or other sorts of non-fiction. Why do we frown upon actors who don't dabble within their broader profession, yet we think no less of writers to stick to a shtick, be it non-fiction/fiction, academic vs. narrative, etc.? One theory: we think acting is easier than it is; we think acting is acting and there is no sub-specializing.