Follow Simple Rules
After I wrote about walking the fine line between knowing everything and knowing what matters, I got a nice response from @MikeBotkin who runs a holdco out of Florida. He said that he and his partner had spent hours that same day debating the same topic and reached a similar conclusion that “it depends.”
And whereas I had tackled the topic from a risk management perspective, he’d been focused on operations and specifically what does he need to know about how one of his businesses is being run versus what he trusts his CEOs to know. Then he added something profound:
“From our viewpoint, there has to be so much room for a CEO to a) lead b) perform c) grow…and most importantly…d) mess up.”
What’s interesting about those four factors is that I don’t think you can do one of them without also ending up doing the other three, yet three of them are celebrated as positives while messing up is typically not. But let me be clear, you need to mess up in order to lead, perform,and grow.
Quick aside, I was having dinner recently with a family that had a family office in which their recently graduated son was starting as an equity analyst. Mom found out what I do for a living and asked me what advice I had for her son. “Make a bad investment,” I said (Mom was not amused).
In the past I’ve expressed a pessimistic view of regulation. And it was after one such missive that my buddy Nate sent me “The dog and the frisbee.”
Published in 2012 after the Great Financial Crisis, the paper explores the idea that complexity is to blame for watchdogs’ failure to prevent crises. The entire thing is worth the read (particularly if you enjoy the minutia of financial regulation), but the two ideas that most resonated with me were “the more complex the environment, the greater the perils of complex control” and that simple strategies in sports, medicine, investing, and more tend to outperform complicated ones.
As for what these things have to do with one another, it’s the idea that no matter how much you know, you cannot prevent the realization of risk. To wit, banks have to submit tens of thousands of data points to PhDs on a regular basis and yet several more just failed.
The takeaway is that in a complex and overengineered world, whether it comes to managing investment risk, banking regulations, or people who work for you, try to follow a small number of simple rules. They won’t always work, but hopefully it will be obvious when they don’t apply, or more importantly, when you’re breaking them.
Have a great weekend.
P.S. Permanent Equity’s investing team is hiring. Click here for the details.
– By Tim Hanson
