Category Archives: Business & Strategery

Book Report: Fortune’s Formula

Reading Time: 3 minutes

“The sad fact is, almost everyone who gambles, goes broke in the long run.” – Fortune’s Formula, pp. 49

This is meant to be more of a book report, than a review.  In particular, I want to highlight three lessons from the book, Fortune’s Formula by William Poundstone, that I found impactful.  This also serves as a way for me to recall influential points in the book.

I enjoyed the book, which was an introduction into a few folks I did not know much about – Claude Shannon, Edward Thorp, and John Kelly, Jr.  And it covered topics that I always find entertaining – investing, making money, math, and even had a section titled “Entropy.”

However, three topics that did alter my perspective were:

  1. Correlations

“LTCM goofed by greatly underestimating the chance of a panic in which its trades would become highly correlated.  The fund was making hundreds of simultaneous bets.  It operated on the assumption that these bets had low correlation.” – pp 294

It has been awhile since I have spent time on Long Term Capital Management (LTCM), although When Genius Failed by Roger Lowenstien is still sitting on my bookshelf after many moves.

The above quote caught my attention.  

As I have written previously, the increasing correlations between asset classes in today’s market seem like something folks should be taking into consideration.  The same rising tide has caused all boats to float.

  1. Survival 

“The Kelly bettor cannot be ruined in a single toss.” – pp. 297

“It is that even unlikely events must come to pass eventually.  Therefore, anyone who accepts small risks of losing everything will lose everything sooner or later.” – pp .297

“This illustrates the ‘paranoid’ conservatism of Kelly betting.  The chance of hundreds of coins simultaneously coming up tails is is of course astronomically small.  No matter – the ideal Kelly gambler’s ‘survival motive’ precludes taking any chance of ruin whatsoever.” – pp. 295

The theme of always ensuring you live to fight another day in the Kelly system reminded me of a main theme in Antifragile by Nassim Nicholas Taleb.  To paraphrase, if the action undertaken has the risk of ruin or death, then the overall probabilities can be a little pointless.  In other words, once you are ruined or dead, the probabilities of future gains are irrelevant.

“This fragility that comes from path dependence is often ignored by businessmen who, trained in static thinking, tend to believe that generating profits is their principal mission, with survival and risk control something to perhaps consider – they miss the strong logical precedence of survival over success.” – Antifragile, pp. 160.

  1. Overbetting

“For true long-term investors, the Kelly criterion is the boundary between aggressive and insane risk-taking.  Like most boundaries, it is an invisible line.” – pp. 298

Investment sizing or “bite size”, as well as appropriate levels of diversification, is something I have been spending time on.  The entire Kelly system is designed around the appropriate way to size bets based on the ratio of the edge – how much you expect to win – compared to the odds – the public odds.

“A fractional Kelly bet doesn’t sacrifice much return.  In case of error it is less likely to push the bettor into insane territory.” – pp. 233

But given where the market seems to be and the increasing correlations, I have been keeping bite size small.

“Risk management is a tough lesson to learn on the job.  It can take years for ruinous overbetting to blow up in a trader’s face.” – pp. 303

This would be called “resulting” in the terminology of Thinking In Bets by Annie Duke.  Giving too much credit for the outcome, regardless of the process.

Book Report: The Hard Thing About Hard Things

Reading Time: 2 minutes

“That’s the hard thing about hard things—there is no formula for dealing with them.” – Ben Horowitz

This is meant to be more of a book report, than a review.  In particular, I want to highlight three lessons from the book, The Hard Thing About Hard Things by Ben Horowitz, that I found impactful.  This also serves as a way for me to recall influential points in the book.

This was another book that I did not know much about going into it.  While I am not a CEO, I sit close enough to that seat, that I got a lot out of this book.  I have spent a good portion of my career in early and growth stage companies and could appreciate a lot of the author’s experiences as well.  The book also gave me some perspective to look back at the CEOs that I have worked closely with and evaluate why some of their behaviors and styles worked and why others fell short.

However, three topics that did alter my perspective were:

  1. Reward Employees for Identifying Problems 

“The resulting action item for CEOs: Build a culture that rewards—not punishes—people for getting problems into the open where they can be solved.”

This one kind of flew in the face of a common maxim – “don’t bring up problems without solutions.”  The point being that in many cases the employee identifying the problem may not be in a position to provide a solution.  Or maybe finding a solution is going to take a broader effort or a larger organizational decision.  It makes a lot of sense, especially in the context of a start-up or growth stage business, to reward employees for raising issues.  There are going to be lots of challenges and problems.  Get them on the table so the organization can solve them.

  1. Hire for Strengths

“Hire for strength rather than lack of weakness.”

“You hired for lack of weakness rather than for strengths. This is especially common when you run a consensus-based hiring process.”

I am really not a big fan of consensus driven hiring processes.  For most hires, I think the hiring manager should have a lot of latitude in picking the person she feels best fits her team.  This is also where having an HR team in place that understands the team culture and the role can make a lot of difference.

For executive hires, I agree here as well.  I think the executive team or portions of the executive team should be consulted, but more on a confirmatory basis.  However, this is really the CEO’s job to build the team.  It’s ultimately her decision, and her decision alone.  

  1. Build A Good Company 

“If you do nothing else, be like Bill and build a good company.”

Sometimes I can get a little tone deaf on some of the softer organizational things.  This was a good reminder that building a good place to work should be a top priority.  This is not to say that I think for one minute that gift cards, swag, snacks, and other “perks” will make a company a good place to work.

At the end of the day, what else are you going to have, if you haven’t built a good company?  In my opinion, this is hiring the right kind of people, providing challenging work, rewarding the right kinds of behaviors, minimizing politics and bureaucracy, and having fun.

Book Report: Good To Great

Reading Time: 2 minutes

“Level 5 leaders display a workmanlike diligence – more plow horse than show horse.” – Jim Collins

This is meant to be more of a book report, than a review.  In particular, I want to highlight three lessons from the book, Good to Great by Jim Collins, that I found impactful.  This also serves as a way for me to recall influential points in the book.

I went into this book with few expectations.  I picked up my copy at a second hand shop years ago just because it was a title and author I recognized.  Hardcover books are a weakness of mine. The book was written circa 2001, so some of the material is a tad dated.  Maybe one of the biggest criticisms is one of the “good to great” examples went out of business since then: Circuit City.  However, I still found the main messages mostly timeless.

However, three topics that did alter my perspective were:

  1. First Who…Then What.  

“We expected that good-to-great leaders would begin by setting a new vision and strategy.  We found instead that they first got the right people on the bus, the wrong people off the bus, and the right people in the right seats – and then they figured out where to drive it.”

I have generally hired for horsepower.  A students are generally A students in any setting.  I have worked in a couple businesses that are obsessively focused on only hiring A+ players.  While this message can be a touch self-serving, I will say having the right people on the team makes a huge difference, and having the wrong people is such a drag.  So, spending the time on hiring is extremely important.

  1. A Culture of Discipline. 

“When you have disciplined people, you don’t need hierarchy.  When you have disciplined thought, you don’t need bureaucracy.  When you have disciplined action, you don’t need excessive controls.  When you combine a culture of discipline with an ethic of entrepreneurship, you get the magical alchemy of great performance.”

This is something I wrestle with frequently but thought this was a helpful way of thinking about it.  I generally have found that good people armed with the right goals and information end up generating outsized accomplishments.  My motto has been – hire good people and mostly try not stay out of their way.  And, this seems to be a similar thought process.  Also, I have never seen dictatorial leadership styles as very scalable or robust.  Instead, they tend to generate fear, resentment, and an outsized focus on politics.

  1. Hedgehogs vs. Foxes. 

“The key is to understand what your organization can be the best in the world at, and equally important what it cannot be the best at – no what it “wants” to be the best at.  The Hedgehog Concept is not a goal, strategy, or intention; it is an understanding.”

“Strategy per se did not separate the good-to-great companies from the comparison companies.  Both sets had strategies, and there is no evidence that the good-to-great companies spend more time on strategic planning than the comparison companies.

“No matter how dramatic the end result, the good-to-great transformations never happened in one fell swoop.  There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no wrenching revolution.”

I thought this was illuminating as well and sort of dovetailed with the first point.  Do not go looking for some silver bullet strategy.  Figure out why you win, and just grind on it.  There are no short cuts.  

Magnitude & Velocity

Reading Time: < 1 minute

In my experience, the velocity of change is much more impactful than the magnitude.  Most systems, companies, species, can adjust to most changes if provided enough time.

Climate change on the scale of centuries is manageable.  Climate change on the scale of years is much more problematic.

It’s the velocity, then, that has the more significant impact.  If the change happens too fast to adapt, then you have issues.

The velocity of the economic impacts of the coronavirus are almost incomprehensible.  It’s been so fast, there’s barely any real data available yet.

Act accordingly…

Pink Sky In The Morning…

Reading Time: < 1 minute

I’ve been through some interesting times. That trend seems to be continuing.

1999 – Moved to San Francisco and worked for a software company through the bursting of the .com bubble (commute times got significantly better).

2000 – Sold some stock and paid off my first car (only good trade I made that year – still have the car!).

2001 – September 9th – Flew to Australia to work for an extended period of time (airport security was much stricter on the way home).

2005 – Bought my first house (Federal Hill area of Baltimore).

2006 – Sold my first house (whew!).

2007 – Moved over the Leverage Finance team from Corporate Investment Banking (had a front row seat to a credit market meltdown).

2008 – Moved over to team managing some institutional CLO assets (at least we had work to do until our employer collapsed).

2010 – Joined a private equity backed business (figured it would be a two year stint).

2017 – Sold private equity backed business.

2018 – Joined SaaS based software company (I just follow bubbles around).

2020 – Global pandemic…?

Photo by Kolleen Gladden on Unsplash

A Sense of Accomplishment

Reading Time: < 1 minute

Am I the only one that gets a sense of accomplishment out of using up household items like a bar of soap or a bag of coffee? 

Why do I do that? Am I weird? (Rhetorical question – don’t answer that)

I think some of that ties back to work not providing much of a sense of completion on a daily basis. That’s the downside of knowledge work. I think one of the differences between working in iIndustry” versus working in consulting or banking is there is no finish line with the former.  With Banking and Consulting every project is a finish line.

The time scale in “industry” is much longer. You can look back and see “years” of accomplishment. Transitions and shifts in the business that took a relatively long time to manifest themselves.

Further reading: Shop Class as Soul Craft

Financial Model vs. Operating Model

Reading Time: 4 minutes

One of the more valuable things that I think I contribute is that I’ve worked on both sides of the table.  I’ve been an operator for almost eight years now. Prior to that I spent about five years in financial advisory and investment management roles, and another four years in consulting.

This background gives me some perspective about the modus operandi of different stakeholders in a business.  

In my prior role, our original founder (President & CEO at the time) wasn’t quite sure about that.  He had an entrepreneurial background without a lot of exposure to private equity investors. Over time though, I think he came to realize that having someone on the team that thinks a lot like our backers is pretty useful.  My next two CEOs both had considerable experience with private equity investors, and I think my background was a big plus in their eyes. Simply “speaking the language” is certainly a confidence builder and can help bridge some divides.  

Which brings me to the point I want to make here.  I still see a fairly different approach to models. And due likely to some fundamental misunderstandings of how they’re going to be used.  

I recall my first close.  Our CFO at the time sent me the ledger output and asked me to run it through what we were using as the “operating model” at the time.  So, I dutifully did. I blew out the existing values and added the new values and proudly came back to him and showed him the results.

He asked, well how did that compare to the forecast?  Yes, the forecast I had deleted and not saved. I only made that mistake once, but it was a valuable lesson in the difference between a financial model and an operating model.  Having really only run financial models as an investment banker, the operating model was not something I understood..

A financial model is mostly static.  You build it. You add your inputs. You look at the result – mostly the full year numbers – maybe out a few years.  The full year numbers are the major output. You do some y/y comparisons. But the long term values are still the key output.

Many times the financial model may be simplified (all models are simplified to an extent) in a way that standardizes the inputs and outputs across different types of businesses.  And this makes sense. Sometimes customized “helper” tabs have more company specific drivers, but in may cases those are shoehorned into the model. This is all fine. It’s a short-term work around.  

The model might be an annual model, quarterly model, or sometimes monthly.  But anyone who has spent time forecasting knows that the resolution at a monthly level a few years out is gibberish.  The only thing I am 100% sure about in any of my forecasts, is that I am off. I just don’t know the direction and magnitude.

The financial model probably has a robust set of ratios and metrics.   All of these are useful to some businesses. But all are not useful to all businesses.  This is also fine, as the financial model generally is a one size fits most type of product.

An operating model is a living, breathing, evolving creation. It’s as much a thing as it is a process.  It’s very much customized to your businesses. And, you’re going to live with it a long time and update it a lot.  Monthly or maybe more frequently. My operating model in my last role had over ten years of monthly data and I had been evolving it over almost seven years.  

And the short-term comparisons are the key output.  Comparisons to prior year, prior month, forecast, and budget (not necessarily in that order).  

I’ve been working with the operating team of our investors to setup a new reporting package.  They are much closer to understanding an operating model than others. But they’re still missing some key points.

Budget was still dynamic.  They rolled December forward and my budgeted balance sheet and cash flow statement moved. No, paste values.  My budget never changes at this point.

And where’s the spot for my forecast?  And comparison forecast? Non-existent.  Forecast does not equal budget, not even in January.  I know more about my business at the beginning of January than I did when the budget was approved in mid-December.  I still find forecasting the month and comparing actuals to my forecast, the best way for me to see if I have a good handle on the dynamics of the business.  Even if no one else wants to see it, I do it for myself. The last CFO I worked for didn’t want to see a forecast. Red flag. To be fair, our CEO never really asked either. Red flag.

What about prior month?  My current business is pretty dynamic.  We’re growing fast. We’ve made a lot of changes.  My trend to last month is probably the best way for me to see something changing.

And ideally on one page.  Keep it simple. I don’t need twelve tabs of every financial ratio you read about in a text book.  If I have to look up the ratio on investopedia, it’s not going to be useful to me on a monthly basis.

I want to peel the onion.  Provide a digestible snapshot.  This is not every line of the ledger.  This is not my expenses in three categories (G&A, S&M, R&D).  Usable. You will know it when you see it.

And, pop the important variances.  Easy to see. Depending on your business, this might be dollars, percent, or per unit.  But it probably isn’t all three. Pick the most important.

When I stepped into this role, the private equity team was running the operating model (I’m not sure they we’re running it like I mean, but they said they were).  For some reason they didn’t want to hand the model over right away.

One, if the PE team is running the operating model and the operating team isn’t asking for it, you’ve got a problem.  That’s abdication, imho.

Two, if the operating team doesn’t have an operating model, they’re steering using the rear view mirror.  Or using a financial model for the wrong purpose, so the feedback loop is going to be too long. Hand over the model.

When I didn’t get the model by week two, I went home that weekend and built my own.  I’m not doing my job without it.

Fumbling Through February

Reading Time: < 1 minute

It seems to happen every February.  

It’s the first reporting cycle of the new year (unless you are blessed / cursed with a non-calendar year fiscal year).  And inevitably something isn’t ready.

Processes that have been refined over the last twelve months, don’t go smoothly.

That trusty “fill right” that worked all last year goes awry.  There’s no data where there should be.

That analysis you setup a year ago, needs to be setup anew.

All those formulas that were trustworthy for so many months and barely required checking, are no longer reliable and need to be checked.

And in so many cases, it’s difficult to setup in advance without that first month of data.

So you fumble through the first close of the year.  Saying to yourself, that next year you will find a way to make it easier.

The only silver lining is that you have one more month until you really need to figure out those year to date reports.

Progression

Reading Time: 2 minutes

I meant to write this post about nine months ago.  A few things got in the way.

As I watched the Winter Olympics, I kept hearing a word that resonated.  Progression.

It was a word that tended to come up in some of the freestyle events.  Snowboarding. Skiing. Athletes in these sports were focused on progression.  Progressing their skills. Progressing the difficulty of their tricks. Progressing their sport.  So much progression.

At the time, the concept resonated with me.  But not really in a good way. It made me realize that I really hadn’t been progressing on a couple fronts – in particular my career.  I had been working for the same company for over seven years. And, effectively in the same role for at least half that duration.

That’s probably inevitable at some point.  Inevitable in the sense that life happens. Inevitable in that daily routines seem to suddenly turn into years passing by.  And personally, directly related to a series of conscious decisions.

First, the pace of advancement experienced in the early part of one’s career can give way to longer stints in the same or similar roles.  There are just fewer rungs of the ladder to the top.

Second, other parts of your life can take precedence for periods of time (or altogether).  Getting married. Buying a house. Having kids. Unexpected health issues. Loss of a family member.  All things I experienced over the last eight years (2014 really sucked; potentially more on that later).

Third, as you advance in an organization, personal goals may become subservient to broader goals.  I consciously chose to stay with an organization, in a large part, to be part of the team that helped take the business through a transition and provide an exit opportunity for the original investing group.  Personal development and career goals were sacrificed in the process.

All that said, the focus on progression highlighted that I wanted to repriortize some things.

Fortunately, a new opportunity presented itself in the early part of 2018.  Four months into that new role, I am excited to have found a new team and be part of company entering an exciting part of its life.  There were a few things that introduced some chaos into our lives: moving to a new city, selling our house, finding a new school for my daughter, etc.  

And the transition into an executive role at a new company has been more challenging on a couple fronts than I anticipated – but new and good challenges – hopefully leading to some progression.