I'm impressed with the clarity of thought the folks at "Motley Fool". I could not say this better in the context of self - evaluation and articulation of imaging oneself. No more comments:

My 4 Failures and 1 Major Flaw

Motley Fool CEO Tom Gardner enjoyed a recent article by Fool analyst Scott Hall so much that he wanted to share it with all Fools. Tom called Scott's commentary "as useful as it is eloquent." We hope you'll think so, too.


By Scott Hall (TMFRosetint)

Inclement weather here in Alexandria recently caused Fool HQ to close for the day, so I'm writing this in my apartment at 4 a.m. I keep odd hours. This may not seem particularly relevant, but I've found that reflecting on my life -- while in solitude -- helps me crystalize the lessons I've learned so far.

While I was staring at my ceiling trying (and failing) to go to sleep, my thoughts took a turn toward my own flaws and failures.

Failures in how I've perceived myself and the world around me. The sort of failures that are hard to understand and change because they require looking in the mirror and admitting long-lasting mistakes.

I compiled a list of these failures, mostly relating to mental traps I've caught myself in over the years. They're not all directly related to investing, but to bastardize Charlie Munger's teachings, having a multidisciplinary understanding of just how dumb you really are is probably useful. And in the end, I realized that all these failures stem from just one major flaw in myself.

Failure No. 1: Writing Off Rule Breakers

This one is probably the flaw that has cost me the most monetarily. When I first came to The Motley Fool three years ago, I was a diehard value investor -- a true believer in the writings of Benjamin Graham.

With history as my guide, I was certain that value stocks outperformed growth stocks, and I was pretty sure anyone buying stocks with a P/E ratio of 100 was just asking to go bankrupt.

But being so dismissive of the growth-fueled Rule Breakers investing style was absurd, given that I was working for the company that pioneered it. To make matters worse, I ended up penning an article about Facebook (NASDAQ: FB) when its stock price was hovering around $30 per share.

In it, I pointed out the company's "slowing" growth and sky-high P/E ratio of 106 as reasons some insiders were cashing out, and I used Facebook as a warning to avoid getting suckered in by the "Wall Street hype machine" next time.

Since then, Facebook's stock has risen about 190%, compared with just about 60% for the S&P 500. Whoops. Not only does my article look stupid in hindsight (it was), but I also cost myself a lot of money by writing off the stock so quickly.

What did I do wrong here, aside from being way too sure of myself? I misused historical analysis to try to understand what would happen in the future. Just because high-multiple stocks have been known to underperform in the past doesn't mean that they will continue to do so, and it certainly doesn't mean that any individual high-multiple stock will fare poorly.

For Facebook in particular, I underestimated the power of its network effect, which is perhaps the largest in the history of humanity, and the fact that its business model has essentially no comparison going back more than a decade or so.

Put more simply, Facebook is not the same sort of high-multiple stock your grandparents would have owned. It is a nearly infinitely scalable business that requires relatively minimal capital reinvestment.

Furthermore, Facebook's growth feeds off itself and has created a power-law dynamic, putting it in prime position to be one of the main beneficiaries as ad dollars shift from old media to new. I didn't adequately recognize this and viewed Facebook as just one of many players in the online advertising market.

In reality, it will probably end up being one of a few companies that will split the majority of the pie. When you apply conventional thinking to power-law businesses, they will almost always appear "overvalued." I missed a substantial gain because of this, though I've since purchased shares.

Failure No. 2: Complaining Without Doing

My second failure can be applied to a lot more in life than just investing and is much simpler to understand. It's complaining about what's wrong with something without stepping up and trying to improve that something yourself.

Not only does complaining have a 0% chance of improving the situation, but it's also likely to make other people resent you. Once that seed is planted, it's much harder to work with those people later if you do have suggestions -- because you've given them every reason to question your motives by letting them know what a poor job you think they're doing.

Unless you're willing to put your boots on and test new ideas together, it's probably better to just keep quiet and let other people do what they do best. Otherwise, you're contributing nothing of value. I've learned this one from experience multiple times.

Failure No. 3: Doing Without Understanding

This is tied pretty closely to the previous failure and is probably the most important of the three, as far as improving yourself is concerned. Let's say you've conquered Failure No. 2, have put your boots on, and are ready to parachute in and fix everything you see wrong with the world.

Well, then, you've hit Failure No. 3: doing without understanding. As it turns out, for just about every process in the world, someone at some point decided it was the best way to deal with the problem it addresses.

Why does that matter? Because more likely than not, the dragon you're trying to slay exists for a reason. It probably works decently well, or at least did at one point. Otherwise it wouldn't have been created in the first place.

Before you jump in and try to change the process, you need to understand why the process works as it does in the first place. What's it optimized for? Why was it designed that way? Have any other processes been tested? If so, why aren't those processes the ones that survived?

If you don't take the time to do this, you'll be going in dark -- with no real idea of how to build a new process to your satisfaction while incorporating the attributes that made the old process successful.

Fortunately, although this lesson is very important to understand, it's also simple to understand. To ensure you don't fall into the trap of building a useless process, you need only learn how the existing process works, bottom to top. You must also leave your ego at the door so you can learn from the people who have mastered the existing process. Once you have, you may discover that your attempts at improvement were misguided, or at least will be much harder to successfully implement than you originally thought.

Failure No. 4: Undervaluing Incremental Improvement

This can be applied to investing or process-making. Often, we like to go for the big score; a company that will become a 100-bagger or creating a process that completely changes how something gets done.

Those things can be wonderful, but they're rare and not essential to success. Suppose the market returns 10% per year for 50 years, while you manage to earn 11% per year. That doesn't sound like a big difference on a yearly basis, but it adds up over time.

Starting with just a $10,000 investment, you'd have roughly $1,173,908 after 50 years by getting the 10% return. But if you got the 11% return (although it doesn't seem like much of a difference) you'd have $1,845,648 instead -- almost $700,000 more.

The same thing can be applied to churn rates for subscription businesses such as Netflix(NASDAQ: NFLX). Although a few percentage points of difference might not seem like much, over time, they can compound out to be an enormous difference.

For example, if you have 1 million subscribers and 98% of them renew their contracts annually, you'd have about 817,073 at the end of 10 years. But if only 95% renew annually, you'd only have about 598,737 left after 10 years.

The percentage-point change in renewal is very small, but it makes a huge difference in the value of those customers over time. It goes to show that you really should sweat the small stuff.

I underestimated the implications of this for a long time before I joined the Fool and would often try to hit home runs with my investments, concentrating pretty heavily in these ideas. It worked out modestly favorably on average, but it was tax-inefficient, required a lot of effort, and was very risky.

These days, I buy two or three companies a year and just hold them. It saves a lot of time and energy, and assuming I can earn just a few points of market outperformance, will add up to a material amount over time.

The Common Theme

You're probably wondering by now what all of these things have to do with one another. The answer is hubris.

The idea that I knew so much about Facebook that I was certain it was a bad investment. That I knew more about whatever I was complaining about that day than people who'd dedicated their lives to it. That I should try to hit home run after home run with a concentrated portfolio, despite the risk of a massive drawdown.

All of these failures ultimately tie back to my own ego. I was far too confident about too many things. I've become better about this over the past year-and-a-half, but my ego's still there.

It's not even entirely bad, as long as it's managed -- you have to have some level of ego to try your hand in any new field.

The key, I think, is not to stop trying to improve things: it's to try to improve things while understanding that you probably know nothing about what you're trying to improve.

Act according to your inexperience, gain understanding, and then create your plan of action. Otherwise, you're just tilting at windmills.

Scott Hall owns shares of Facebook. David Gardner owns shares of Facebook and Netflix. Tom Gardner owns shares of Facebook. The Motley Fool owns shares of Facebook and Netflix.

Truth is elephants are not afraid of mice and traditional media is still more effective than digital age newbies. 

As context for our story, an early stage B2B service client was determined to test a comprehensive marketing campaign with significant emphasis on social media.  The premise was we would be effective in using Internet marketing along with traditional vehicles to build relationships with prospects in advance of direct sales meetings. 

This core effort was further supported by a significant free downloadable books and business evaluation guides, along with direct mail effort.  Traditional networking continued as well.  The target audience was top executives of middle market companies within a defined geographic area. 

The yearlong test failed to generate any new business for the client and thus was abandoned. While any failure is a composite of several elements, we conclude these are the five primary reasons for the outcome: 

  • The target audience was very resistant to the media used i.e. LinkedIn and Twitter. e-Mail drives and direct mail proved equally ineffective. Generational shift of business ownership may change behavioral disuse or distrust of Internet based campaigns. Further, the vast majority of the target market companies did not participate on either LinkedIn or Twitter.
  • Copy strategy and execution across all messaging was judged strong, tested well in advance of actual campaign but clearly missed the mark of being compelling. We conclude the media was the message, thus the copy failed to initiate a trusting relationship with prospects as expected.
  • While true social media as an advertising medium exchanges high media costs for high human capital costs
    • Operationally, finding and developing social media management required more time than allocated and longer continuity of effort than the client’s test plan afforded;
    • The cost of actionable lists of private company executives was the client’s budget limitations.
  • The comprehensiveness of the marketing campaign exhausted the time limitations of the client’s executive pool to execute consistently. Less may be more.
  • Even thought the test market was well funded, the expected efficiencies of using social media to reach a difficult to reach audience never materialized. Net, the cost of Internet marketing in a B2B environment is equal to or higher than the costs of traditional media campaigns.

 Do you have different stories to tell? Please share.

 

Kit, my wife and partner, lost her life to cancer in May 2012. Some events just overwhelm everything despite bringing every available resource to bear. As Kit said, "We did our best, no regrets." So, what does any of this have to do with management?

In September 2011 I wrote a blog "My Wife Has Cancer" sharing a management lesson derived from a family tragedy. The lesson, in a nutshell, is that over the course of time businesses, like people, need a disruptive way to look independently at overall health.

KPIs that at one time gave owners early warning of changes in performance may not be appropriate as business conditions evolve. Undetected growth in international competition or new technology or even the composition of your own management team tend to produce subtle yet incremental changes in vitality, like HGH in building strength or cancer in taking it away. 

One solution is to bring in additional resources and new advisers (business or medical) to audit the way things are and provide invaluable help in spoting trends that entrenched and vested teams miss.

A significant challenge in our cancer battle was keeping hope alive. As a resultI became acutely aware, in a highly personal way, how stress affects decision making. Reflecting on corporate as well as private company leadership roles, I realized that business stress affects everyone in different ways. The one constant is that under high stress (as opposed to everyday stress to achieve) people behave differently from when they are relaxed.

Athletes offer immediate examples of this principle. Think match point at Wimbledon, a field goal kick for a Super Bowl win, sudden death playoff hole at a PGA event...pressure changes behavior. For the majority, nerves seem to expose individual vulnerability. After all, there's only one champion, a few playoff contenders and a ton of all others. Winners and loosers in competition say the same thing: "It's all mental."

Recognizing this behavior characteristic, at another consultancy I helped start with Ken Drossman and Bill Donnelly, Oak & Apple Partners, LLC, we are focused on how teams respond to extraordinary stress involved with either very rapid growth or its evil twin financial distress. 

Do you have a story to share about how high stress brought out the champion or simply the competitor?

 

 

Steve Jobs died tonight. It is a sad day for us who are still here without a man who changed the world.

Years ago Steve offered me a career at Apple working for him spearheading the LISA project. Although I was leaving Mattel Electronics, as the digital game division was known in 1981, I turned down the offer. Any success would be his, any failure mine. I thought.

As history shows, Lisa (named after a girl friend) failed. It's competitive platform at Apple, Macintosh, succeeded.

The big idea is the question of opportunity lost. What would my life have looked like had joined Apple reporting to him?

There is no answer, but the key learning is how decision paths for corporate executives or entrepreneurs influence life long term. Looking at Apple today versus 1981, looking at Steve Jobs in historic terms rather than real time in 1981 still offers no answer to me. Hindsight is not 20:20, but Steve's passing for me emphasizes the need to identify life changing, key strategic decisions compared to other hot issues that have little lasting consequence. Long term outcome reflects leaders' choices.

My 1981 career decision punctuates the question, what if...

 

 

 

People don't follow titles, they follow courage. In a society with as much dourness as there is today, I attribute this condition to a lack of courage in decisions being made in both public and private institutions. This is causing citizens and employees dissidence in reaching alignment with the people we follow because leaders seem to make decisions based on personal interests rather than the courage of following strategic principles.

Often we think of leaders in terms of politicians. Democrats and Republicans alike have demonstrated self - serving hubris rather than the transcending mission of government. Examples are everywhere, but on the Democratic side we have Eliot Spitzer disgraced AG from New York and Charles Rangle censured Senator for ethics violations and tax evasion. Republicans fare no better with Tom Delay jailed for money laundering and Duke Cunningham jailed for bribery and corruption.

Many leaders in private industry also appear to have self interest as a guide for their behaviors lacking courage to honor strategic principles.  For example, despite all corporate posturing about being solid citizens, twenty five of the largest one hundred companies pay their CEO more than the corporation pays in taxes (Reuters, August 31, 2011). Examples are GE, eBay and Boeing. The accounting is presumably legal, but is this socially in the best long term interest of shareholders, other stakeholders and overall global wellnes?

As simple as it sounds, I work with CEOs and boards to find decision making courage within the framework of their company brands. As the Constitution is the time - honored strategic guide to public mission, brand is the corporate commitment to customers and embodies the company's mission. Thus a brand model becomes a process, like the Constitutional one for government, which causes deep reflection on the promise to customers. And if used to its fullest, brand concepts serve as a management decision making platform from employment to investment, from social initiatives to fiscal imperatives.

An corporate example of this principle i.e., using brand credos to frame complex management decisions, is when James Burke, CEO of J&J during the 1982 Tylenol - cyanide crisis. Burke believed that J&J's first responsibility was to its customers, second to its shareholders. During the crisis management meeting he asked his executive team what the basis of the J&J brand was with its customers. The response: TRUST.

He had the courage to order a recall Tylenol product, which could have been the death march for the leading analgesic brand in the US. He said: "It became clear that our value system had been vital to our ability to outperform the competition for nearly one hundred years.  Whenever we cared for the customer in a profound-and spiritual-way, profits were never a problem." After pulling all product from the shelves, Burke's courage was vindicated within three years when Tylenol regained its market share which increased later based on demonstrated goodwill and innovative tamper proof packaging and new product forms like caplets.

Net, decision making, whether guided by the Constitution for government or brand strategy for business offer frameworks for leaders to use in building commitment to goals and actions that achieve results.