Unconventional Knowledge: Mastering the Best of What Others Have Figured Out
Here are my notes from ILPA’s 2020 Members’ Conference workshop on subscription lines. Michael Mascia from Cadwalader, Wickersham, & Taft LLP led the workshop.
The workshop was a thorough review of both common subscription facility terms and more advanced provisions. The workshop was valuable for both investors unfamiliar with subscription facilities as well as experienced investors.
Read MoreVague thinking surrounds us. It’s permeated politics (“come together in a bipartisan way”), business management (“leverage synergies and create win-wins”), corporate mission statements (“build a corporate culture that respects and values the unique strengths…”), and of course, investing.
Every day we are inundated with empty rhetoric used to hide, rather than reveal, the truth. It promotes laziness and obscures incompetence. It’s a tempting way to communicate. It’s the path of least resistance.
Vague communication is standard in the investment world. Market experts talk in vague generalities and obfuscating one-liners that do nothing to further investors’ understanding of the markets.
The investment world is an unrelenting assault of vague language. Vague verbiage has become a parasite in our quest to make wise investment decisions. Everyone pretends to know the future. No one admits ignorance. The illusion of knowledge is real. It’s become absurd.
Read MoreBe careful what you ask experts. Experts are bad at predictions, but are great at assessing base rates.1
Experts are the go-to source for life’s uncertainties. We rely on them for guidance and advice during ambiguous environments. We crave their authority, confidence, and conviction.
But the evidence is clear - experts are awful at predicting the future. Expertise is not synonymous with superior forecasting ability.2
Experts are extremely useful, if properly directed. As we’ll see, we can use an expert’s deep knowledge to improve our decisions. However, the process is not intuitive and doesn’t happen automatically. The burden is on us to ask the right questions.
Read MoreAll investors make mistakes. Mistakes happen not only because of misjudgment but the nature of investing. Mistakes arise from universal conditions within the investment world.1 In other words, it’s usually not the person that’s the source of the mistakes, it’s the environmental and situational factors. It’s the system.
Rarely do we acknowledge and understand the system. We neglect environmental factors and reflexively attribute mistakes to personal factors: laziness, inattentiveness, ignorance, etc.
Investors operate in a complex world with imperfect information and an unpredictable future. Add in additional pressure from clients and organizations and investors are primed to err.
How leaders handle human error separates the great investment teams from the average. Better assessment and understanding of errors build a competitive advantage.
Yes, investors make mistakes. But they’re not made in isolation. It’s the system issues that exacerbate personal mistakes. The big idea is resolving “system” issues that will lessen the effect of unavoidable personal shortcomings.
Read MoreIn all walks of life, fear and stress loom on the horizon: they freeze cops in tight situations, paralyze concert performers on stage, and make skydiver’s brains lock up so much that they can forget the pull their parachutes. No one is immune.1
A crisis is challenging for all leaders. But they are exceptionally difficult for the people you lead. Of all the issues to navigate, managing your team’s psychology may be the most important. Not everyone responds well to adversity. Most people don’t. They perform at the lowest level of their training, which is next to nothing. Organizations don’t train to operate under stress. Because people are unprepared, it’s a leader’s job to anticipate reactions and make plans to manage it.
First, we need to understand how humans respond to a crisis. We’ll borrow the lessons of survival psychology to understand crisis reaction patterns. By understanding how people react, we can reduce stress and anxiety.
Second, we’ll discuss steps to proactively help our teams. Stop with vague, naïve advice. Start with evidence-based advice proven in real-world situations.
Read MoreOne reason for ineffective decision making is miscommunication. Unclear goals, conflicting objectives, and vague directives all play a role. But there’s one issue that underlies them all. And it’s an issue that makes us all uncomfortable.
The act of disagreement.
We’ve all suffered through a typical disagreement. It starts cordial but devolves into a free-for-all. Anything goes. Egos get in the way. Emotions rise. We feel attacked. We subtly undermine each other. We weaponize our personal grievances. We stop listening and just want to win. Instead of learning, we want domination. We let ego and defensiveness overwhelm openness and empathy. We end up faking agreement to avoid the stress.
It doesn’t have to be that way.
Read MoreMost people believe experience improves ability. As we accumulate experience, our skills grow.
At least that’s the theory. And the hope. But it’s not what really happens. In reality, we stagnate. We think we’re getting better but produce little tangible proof. As the saying goes, 30 years of experience is often 1 year of experience repeated 30 times.
Think this doesn’t apply to you? Can you honestly describe the skills you have recently learned? What can you do better today than you did one year ago? Or 5 years ago? Could your peers tell you what you’re doing better? Or would they shrug their shoulders?
Do you have evidence of improvement or just a feeling?
Read MoreBig mistakes may grab the headlines, but it’s the path leading up to the big mistakes that intrigues me. Seemingly inconsequential mistakes, compounded over time, are the foundation for disasters.
Common wisdom says we should learn from our mistakes. Easy to say, tougher to implement. There’s a tendency to look for a smoking gun – find the people that screwed up and fire them. Or find the one piece of technology that failed and replace it. If only it was that easy.
Problems are rarely traced to a single cause. Organizations often fall into the trap of seeking a convenient scapegoat because it’s easy and convenient, not because it reveals the truth. There are several conflicting factors that complicate learning from mistakes:
Read MoreIf you’re looking for guidance on how to get through tough times, turn to James Stockdale. Stockdale was a Navy fighter pilot shot down during the Vietnam War. He spent eight years in a Hanoi prison. He was tortured fifteen times, put in solitary confinement for four years, and put in leg irons for two.1
You might be facing some stress, but I can promise you are better off than Stockdale was.
Stockdale knew something about getting through bad times. He knew something about adversity and struggle.
Today’s environment demands practical wisdom from those who have overcome extreme adversity.
No matter how tough our current circumstances, others have already gone through it. What we are going through is not unique. It certainly feels unique, but it’s not. Others have dealt with the exact same situations.
Read MoreThere’s no shortage of investors trying to guess the market bottom. Fortunately, it’s completely irrelevant to delivering exceptional returns through this crisis.
We’d all love to know when the market bottoms. We’d be able to load up on risk assets and see nothing but immediate gains. But successful investing doesn’t work that way. No one consistently calls the bottom. Some get lucky once or twice, but never in a systematic way. Mostly luck, not skill.
You’ll always be too early or too late. You won’t know the bottom until you look back with hindsight years later. So if you shouldn’t be timing the bottom, what should you be doing?
Stop trying to call the bottom and start trying to find value.
Read MoreBy now, investors have felt the violent market reaction to the COVID-19 pandemic. As with any crisis, the outlook is uncertain as we scramble to latch onto any sense of predictability. But markets, especially in times of crisis, are anything but predictable. Anyone who expects the market to conform to predictable patterns set themselves up for disappointment when the unexpected happens.
Markets are complex environments – full of unknown connections and hidden feedback loops, driving drastic and extreme market moves. Expecting predictable markets is naïve and dangerous. Volatile markets bewilder overconfident investors, as the market moves don’t fit their beliefs of how a market should work.
What does this mean for investors?
Read MoreThe limiting factor for investors is not their IQ, but their temperament, rationality, and independent thinking. As Warren Buffet says, "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Rationality is essential. Even if you do have an IQ of 160, you should just give away 30 points to somebody else because you don't need a lot of brains to be in this business. What you do need is emotional stability. You have to be able to think independently."1
Investors who lack control over their temperament make foolish decisions during market extremes. They struggle to respond to unexpected events in a thoughtful way. Instead of approaching decisions in a calm and rational manner, they abandon their process and invest based on their gut. They can get lucky for a while, but eventually will fail. Even brilliant investors who get caught up in the euphoria of a market boom or the pessimism of a market crash will abandon what has worked so well for them. They can’t resist the overwhelming pressure to exert control and do something now, no matter how foolish in the long-run.
Read More#1 Routine, Not Willpower, is the Key to a Successful Workday
It was as if the first few times a rat explored the maze, its brain had to work at full power to make sense of all the new information. But after a few days of running the same route, the rat didn’t need to scratch the walls or smell the air anymore, and so the brain activity associated with scratching and smelling ceased. It didn’t need to choose which direction to turn, and so decision-making centers of the brain went quiet. All it had to do was recall the quickest path to the chocolate. Within a week, even the brain structures related to memory had quieted. The rat had internalized how to sprint through the maze to such a degree that it hardly needed to think at all. The key to a successful workday is to replace manual effort with habits and routines. Habits allow us to process more work without using extra energy that drains us by mid-afternoon. The attitude of hard work is great, but hard work has a downside because it depletes our energy levels when focused on low-value activities. We can’t produce quality work. -The Power of Habit, Duhigg
In his book, Power of Habit, Charles Duhigg explains how to channel habits into powerful assets to improve our lives.
Read MoreBecoming exceptional is hard. The professional world is competitive, full of intelligent and ambitious people vying for the same top positions.
To make things more complicated, there isn’t one exact set of rules we can follow that guarantees success. Hundreds, if not thousands of books are published every year promoting magic formulas for success. But how many of these books create lasting change?
How many of us really achieve the success we expect?
Where do we go wrong?
What do we need to change if we don’t like the path we are on?
Do we practice becoming exceptional like we practice golf, triathlons, or public speaking?
Read MoreGreat investors develop mental toughness through proper mindset and habits. These are 10 guiding principles to condition the mind for investment success.
1. They Don’t Worry About Issues Outside Their Control
Much of investing and life is outside your control. Wise investors learn to recognize what they can control and what they can’t. The things that can’t be controlled are ignored.
2. They Don’t Obsess Over Volatility
It’s a fact: every day markets go up and down. Trying to obsessively negate volatility usually worsens it. The value of every asset you own, including your own human capital, moves up and down every day. Only you don’t see it, so you normally don’t worry about it. Do the same for random market fluctuations.
3. They Don’t Judge Success by Short-Term Results
Read MoreWe say time is our most precious resource, yet our behavior and actions suggest otherwise. We waste time with haphazard and unfocused behavior but complain about how busy we are. We agonize over losing a few dollars but disregard the immense cost of poor time management. Only when we face an impending time crunch do we realize the cost of our wastefulness. Parkinson’s Law helps explain why we are so ineffective at allocating our time.
Cyril Parkinson, a British naval historian, first mentioned Parkinson’s Law in The Economist magazine in 1955. Parkinson’s Law states – “Work expands so as to fill the time available for its completion.” As Parkinson stated, “It is the busiest man who has time to spare.” (1) Parkinson extensively researched the growth of bureaucracies in Great Britain. Parkinson found that just as the growth of bureaucrats had little relationship to the increase in the actual amount of government work, the time allocated to a project had little relationship to the actual work necessary to complete the project.
Read More“The greatest obstacle to discovery is not ignorance, it is the illusion of knowledge.” -The Art of Thinking Clearly by Rolf Dobelli
We all make hundreds of decisions every day. They range from the predictable – what to eat for breakfast, to the complex – making a significant investment in the market. For the straightforward, repeatable tasks, we’ve developed routines and habits to automate those decisions. This automation serves us well. We’ve freed up our mental capacity to shift from debating non-essential decisions to focusing on major, life-changing decisions.
When we debate any high value decision, most of us follow a predictable pattern. We figure out the desired outcome, gather as much information as possible, and weigh all the information as logically as we can to come up with the right choice.
Read MoreWhen we typically think of science, we immediately bring up images of high school science: chemistry, physics, and biology. We are conditioned to think of science in a very basic manner – it’s just another subject that we used to study.
But science is more than physics formulas or chemistry experiments. It’s a way of thinking and understanding the world. Think of science as more of a “process”, and less of a “thing”. It’s a way of thinking, observation, and learning. It’s not memorizing a collection of facts. People rarely understand the power of the scientific method and the advantages it delivers in not only understanding the world, but improving yourself. The scientific method allows us to make educated guesses about the world and then design ways to test if those guesses are correct. If they are correct, we’ve succeeded in understanding a little bit more about our world. If they are not, we’ve still succeeded in understanding how the world doesn’t work, which allows us to update our knowledge, broaden our thinking, and build new guesses to test.
Read MoreToday I’m writing about the most neglected yet important thing to successful investing -the command of investor psychology. Investing is one of the most complex and stressful activities we do. Most of us know the emotional toll investing takes when markets are volatile and unpredictable. Research from cognitive psychology, neuroscience, and behavioral economics has yielded the same insight: that not only do we make mistakes, but we make bigger and more frequent mistakes when under pressure. The resources that often try to help, like the media and professional investment advice, often end up compounding, rather than eliminating, the error.
Psychology is critical because we are human. We are not robots. We are not perfectly rational. We make mistakes. It’s especially in investing where we tend to make the same mistakes and exhibit the same poor behavior. We can document this behavior starting with the Dutch Tulip Bubble in the 1630s, all the way through the 2009 financial crisis, and now with the cryptocurrency bubble.
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