Coffee, a Strong Dollar, and the Reverse Pareto
Our joke with investors is that the biggest risk to our ability to execute our investment strategy is cholesterol. So it wasn’t a surprise when Brent handed me a copy of Unreasonable Hospitality – Will Guidara’s recounting of how Eleven Madison Park became the best restaurant in the world – and said it was the best book he’d read in some time. I figured he’d been focused on the food, but what, he asked, does unreasonable hospitality look and feel like in the investing industry?
I’ll leave the answer to that question for another time (or email me back if you have opinions)...
Today’s focus is on the very average cup of filtered coffee Will writes about that he sipped at the end of his first dinner at Per Se. If you don’t know Per Se, it’s the restaurant famed chef Thomas Keller opened in NYC in 2004. Guidara describes the experience as “spectacular” and that “the attention to nearly every invisible detail” filled him with awe.
Nearly, he writes, because of that cup of coffee. It stood out because it was “just okay” when everything else had been so “perfect perfect.”
Guidara goes on to write how that experience inspired him to create an incredible coffee program at his restaurant, but what’s interesting to me is how that small detail marred the overall experience. Because it wasn’t a small detail that Per Se had gotten wrong. Rather, it was a small detail the restaurant hadn’t considered carefully.
We all know about the Pareto principle, which is the idea that 80% of results come from 20% of causes. If you get the big, important things right, in other words, then the outcomes take care of themselves. But Per Se’s cup of coffee is an exception to this rule. It’s evidence of the reverse pareto.
I don’t know if the reverse pareto is actually a thing, but for me it’s the idea that if you don’t carefully consider all of the forces that might influence your outcomes, you might be undone by something you were neither right nor wrong about, but just that you hadn’t tried to control for. Per Se didn’t make a bad cup of coffee. Instead they took it for granted that coffee was coffee.
Back when I was investing in emerging markets we tended to buy and sell stocks in local currency on local exchanges. If we wanted to buy an Indonesian stock, for example, we’d turn dollars into rupiah and make the trade in Jakarta. And when we did that we thought we were making a decision about the merits of that Indonesian company. But what we didn’t fully appreciate is that we were also making a decision about the merits of the Indonesian rupiah.
Of course we knew about currency risk and the fact that currencies strengthen and weaken over time, but our thought was we were long-term investors and that we shouldn’t hedge currencies because hedging is expensive and the exposures would all even out eventually. In hindsight, that was incredibly naive. What ended up happening is that the dollar strengthened against almost every foreign currency for years and years and years, creating a massive headwind for our portfolio. And even though our stock picks were beating their benchmarks in local currencies, our fund was losing to its yardstick in dollar terms – all because we hadn’t had a strong opinion about currency.
What’s the point? Being wrong about something sucks, but we are all wrong from time to time and when we get something wrong it’s frustrating, but fair, to take our medicine. What kills is when something you could have gotten right, but didn’t really bother thinking too much about because you assumed it would take care of itself, ends up being the undoing of your enterprise.
Incidentally this is why, at Permanent Equity, we don’t mess around with our coffee. (Shoutout James, Taylor, and Danny Coffeepot.)
— By Tim Hanson