Nine Rules to Fight Deception in the Investment Process

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Independent, critical thinking is an unnatural process, especially for investors. It’s easier to go with our gut instinct, instead of relying on the facts. It’s easier to go with our emotion than diligently follow the evidence. Above all, we gravitate towards stories and promises rather than logic and reason.

Carl Sagan was one of the great astronomers and scientists of the 20th century. He published more than 600 scientific papers, co-wrote Cosmos, the most widely watched T.V. series in American history, and wrote the novel Contact, which was later made into a movie.1

One of his most important efforts was his support for independent, skeptical thinking. It’s the application of the scientific method to our daily interactions. In his book, The Demon-Haunted World: Science as a Candle in the Dark, Sagan includes a chapter called “The Fine Art of Baloney Detection.”2 Sagan proposed 9 simple rules on how to apply the scientific method to better understand the world around us and protect against deception. It’s advice that fights against lazy thinking and raises our standard on what we choose to believe.

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Bob Maynard on The Challenges of Complex Investing

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While many institutional investors have flocked to alternative assets, few have been able to translate these allocations into successful performance. Allocating is easy, performing is hard.

Bob Maynard, CIO of the Idaho Public Employees Retirement System, illustrates the difficulty of executing on alternative strategies:

All of these additional areas add complexity and require time for Boards and staffs, and are often not worth the extra effort unless there is a clear organizational commitment or belief in a certain additional approach that can survive changing Boards and staffs over the years that may occur before the extra efforts pay off. One of the most valuable resources of an investment organization is not the assets in the portfolio, but the time required of the Board and staff. After the basics have been accomplished, additional investment efforts in more complex areas have to expressly trade off the requirement of additional resources and time compared to the often problematic longer-term return benefits.1

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The Battle of Passchendaele and The Madness of Blind Effort

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In his book, Good Strategy, Bad Strategy: The Difference and Why It Matters, Richard Rumelt illustrates the folly of blind effort and unyielding motivation:

In Europe, motivational speakers are not the staple on the management lecture circuit that they are in the United States, where the doctrine of leadership as motivation is alive and well. Here, for example, is H. Ross Perot: “Most people give up just when they’re about to achieve success. They quit on the one-yard line. They give up at the last minute of the game, one foot from a winning touchdown.” Hearing this, many Americans nod in agreement. Many Europeans, by contrast, hear the echo of the “one last push” at Passchendaele. There, the slaughtered troops did not suffer from a lack of motivation. They suffered from a lack of competent strategic leadership.

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After Action Reviews: An Essential Method to Accelerate Your Team’s Improvement

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I think avoidance is the enemy of great. Avoidance – particular avoidance of discomfort – is even the enemy of good. It’s the enemy of the growth and change that lead to flourishing.1

In all organizations, mistakes are guaranteed to occur. What’s not guaranteed to occur is learning from these mistakes. The one positive that comes out of failure - the ability to reflect and correct mistakes, ends up neglected by the organization. Avoidance of intellectual discomfort is usually the preferred route.

There are several reasons organizations avoid learning from mistakes:

· Organizational ego prevents honest discussions about what went wrong

· Busyness means that people immediately move onto the next project

· A rush to judgment centers on superficial issues, rather than deep-seated problems

· Blame is quickly directed at external factors, absolving any need to discuss internal responsibility

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The Overton Window: Why Bad Ideas Prevail Over Good Ideas

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Why do good ideas sometimes gain little traction and bad ideas flourish despite obvious flaws? It’s rarely related to the merit, logic, or evidence behind the idea. Instead, acceptance is based on political and cultural popularity. If it’s an unconventional idea that disrupts tradition, it will fail. If it’s a terrible idea, but falls within a group’s norms and expectations, it will likely succeed. The Overton Window illustrates why mediocre ideas triumph over great ideas.

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High Resiliency Organizations – What Investment Firms Should Learn from High-Risk Industries

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There’s a small group of organizations that have learned to excel despite operating in extremely complex, dangerous, and unpredictable environments. For example nuclear power plants and aircraft carriers all operate in rapidly changing environments with deadly consequences for failure. They’ve learned to handle the unpredictable surprises that would decimate a typical organization. The fact that many of these organizations operate for years without failures is a testament to the deliberate design of their organization and carefully constructed team training.

Investment organizations should pay attention. Investing occurs in volatile and unpredictable environments. The future is unknowable and full of surprises. The most well-researched plans will be disrupted. For many institutional investors, the consequences for getting it wrong are measured in the billions.

Many investment firms are comforted by their highly educated and credentialed personnel, extensive technology/software resources, and a deep roster of consultants. While these components are certainly essential, they’re missing one major component.

Resiliency.

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The Right Way to Motivate Your Team: Understanding the Power of Intrinsic Rewards

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Many management systems overlook the key component of any successful organization – the people. Systems and procedures are designed to meet various financial objectives, but rarely do they prioritize the human factor. But if you design systems to maximize the intrinsic motivations and fulfillment of your team, you’ll have a better chance of meeting your objectives than if you just focus on the objectives themselves.

The organizational approach to motivation, rewards, and incentives is still stuck in the past. There is still the belief that if you want to motivate your people, you just need to increase the rewards or increase the punishment.

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Lessons from the Warrior Monk: Jim Mattis

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James Mattis is one of the most respected and revered military leaders of the last 50 years. Mattis served for over 40 years in the Marine Corp. Mattis in nicknamed the “Warrior Monk,” due to his incredible study of leadership and military history.1 It is reported that he has a personal library of 7,000 volumes on war and strategy.2 Mattis recently published his book, Call Sign Chaos, which details his leadership lessons learned from his military experience.

Leaders across all industries will improve their ability to lead by studying Mattis. Below are eight of the most important lessons Call Sign Chaos:

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Shifting Baseline Syndrome – The Consequences of Neglecting Gradual Change

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How did you go bankrupt? Two ways: gradually then suddenly - Ernest Hemingway

Gradual change is hard to manage. It’s difficult to monitor how change is slowly, but consistently, creating significant variations in our environments. Because we overlook slow change, we are shocked when small changes culminate in major catastrophes. In short, we suffer from Shifting Baseline Syndrome.

Shifting Baseline Syndrome (SBS) is an important principle found in ecology. This idea explains how many ecological systems, such as nature conservation, water quality levels, and restoration of wildlife habitats, are destroyed over time.

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Excel Under Stress: One Simple Technique Used by Elite Military Special Operations Forces

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Breathing. An action so common yet so often neglected. We don’t realize the power inherent with our breathing. We know it keeps us alive, but beyond that, we tend to just forget about it.

Improper breathing accelerates stress and anxiety while hampering physical performance.

Proper breathing gives us better conscious control over stress and anxiety and enables peak physical response.

The odds are you have never considered the critical effect proper breathing has on mental performance, especially the ability to perform under pressure and stress. Stress and pressure are constants in our lives. We face it at work, at home, and in activities like athletics. Proper breathing, especially in high-pressure environments, enables peak performance and the ability to defeat your competition.

All it takes is one simple technique.

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Everyday Survival: 9 Ideas to Overcome Life’s Challenges

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2020 has been a never-ending year of adversity and uncertainty.

How well do you feel you were prepared?

Did you easily adapt to the difficult environment? Or did it feel like an endless battle to figure out what’s going on and what to do about it?

If you’ve struggled this year, you’re not alone. Most people don’t handle the unexpected well. And the idea of hoping for assistance from the government or other institutions has been disappointing with their unreliable, haphazard efforts.

Your ability to survive chaotic environments is, and always will be, up to you.

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My Notes from ILPA's 2020 Member Conference - Scrutinizing Terms in a Down Market

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ILPA recently hosted a workshop on scrutinizing fund terms during the recent COVID-19 epidemic. Given the sudden and drastic downturn, funds used levers that caught LP’s off-guard. Below are my notes on the biggest takeaways and areas of concerns for LPs

Overall approach

· Are we getting the transparency we need?

· What do we need to be proactive about

· Are there adjustments to be made with new commitments?

· What have we learned through the COVID experience?

Do we have confidence GP's are using the following tools in the best interests of LPs?

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My Notes from ILPA's Legal Town Hall - Deal Killers

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Here are my notes from ILPA’s 3/19/20 Legal Town Hall on Deal Killers. Several LP’s discussed the most common non-investment related issues they see. While all organizations have different levels of comfortability on these issues, it’s useful to see what risks LPs are seeing and their mitigation approach. These risks focus on issues besides the typical investment and fee concerns.

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Subscription Lines: Key Legal Terms for LP Consideration

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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.

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The Curse of Vague Thinking: How Empty Rhetoric and Hollow Words Mislead Investors

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Vague 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.

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The Fallibility of Experts: How Experts Lead Us Astray and How to Prevent It

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Be 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.

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Managing Human Error in the Investment Process

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All 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.

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Managing a Team During a Crisis: Using Survival Psychology to Lead Your Team

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In 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.

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The Art of Disagreement: Using Disagreement to Build Better Relationships

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One 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.

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The Curse of Experience: When More Experience Doesn't Make You Better

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Most 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?

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