Blow

The Subtle Art of Internal Deliberation

There is a deep bias towards action in society today. When the world is moving so fast, how can we slow down, right? We should say something, we should do something. Silence doesn’t count for much. Oftentimes, wrong actions can be more counterproductive than doing nothing. We need to stop and deliberate even if for a short while. The most successful people know that they don’t have answers. In the light of additional information, they feel more uneducated. This is because more you know, the more you understand that you know less.

Rapid change is precisely the reason we need to slow down for a while, rethink our approach and discern the signal from the noise. In other words, blow the smoke away from our thinking to be able to see clearly. This article discusses some techniques to blow the smoke away from your mind and to improve your decision making in the process.

What Question Are We Solving For

The biggest problem with moving too fast is solving for the wrong question. Using the 5-Why approach is a simple first step to realize the actual root cause instead of the symptoms of a problem. Most profound questions are also very simple. Let me give you an example. One of my colleagues once asked me: should a person have more technical skills (IQ) than soft skills (EQ) at the beginning of his career and does that shift more towards EQ as one climbs the corporate rungs. Sounds very familiar and most people would say that EQ becomes more important as one progresses. My answer was to reframe the question thus:

Let’s assume your subordinate or direct report went on leave? Would it be an acceptable excuse if you told your boss I cannot so things a,b and c because my subordinate is on leave especially when it is an emergency?

This reframing blows the smoke away and brings better clarity to the situation. In most cases, situational leadership comes into play. As long as you have enough skills to carry your subordinates work through, it is a clear danger if you can’t roll up your sleeves and be able to deliver.

Probing questions don’t have to be complicated as long as they help you remove any obfuscation from your thinking.

Listen To Connect Seemingly Random Dots

People always tell me I hear but I don’t listen.

However, if I listen closely, I can make connections. I was having coffee at a coffee shop called Blondies in downtown St Louis. I was engaged in a dialog with a close friend and he was mentioning all the things he needed to get a project started. So, I listened carefully and connected his every need to the people I thought would help him. He was relieved and he said “a burden was lifted from my shoulders, buddy. So, thank you!!

It’s all because I listened, made his pain my own and then found a solution.

Brandon Stanton (of Humans of New York fame) once said about Lyndon B Johnson (LBJ) that he was the US president who has the least resources to run the presidency. However, he was a great connector or power broker.

If you listen carefully, you can connect dots other people cannot. In doing so, it will help you elevate your vision to a higher, strategic level. You will be at a place where people follow you out of love and respect. All because you gave your empathy, time and access to resources unconditionally. Give first without thinking of asking later.

Get To Know Yourself Better Everyday

Statistician Hans Rosling said: “I am not an optimist. I am a very serious possibilist.”

I rarely debate politics with anyone. I don’t remember when I last engaged in that fruitless endeavor. It’s not because I don’t have a view at present. It’s a realization that information is asymmetrical and I don’t know the complete truth to engage in a meaningful debate. Secondly, my views may change when new information is revealed and I don’t have the gumption to become a politician myself.

In others words, it’s not others but it’s me. Once you start asking probing questions of people who vociferously back a particular world view, you begin to realize that the information supporting their arguments is from a limited set of media sources- sources that could be possibly biased. How then, is their argument holistic and unbiased? When I apply the same logic to my own arguments, I realize I am guilty of a similar flaw. But, the real question I ask people who are loudly backing their political views is: would you become a politician to bring about the change you wish to see in the world? Predictably, I am greeted either with a deafening silence or with a litany of excuses. I make the very same excuses myself and therefore feel like the best approach is to remain apolitical. One of the best ways to know yourself is whether you will put money behind your claim:

Listen To Your Gut More Often

There is a short article I recently read on Long Tails was specially in the venture capital industry. Long tails or outliers on a normal distribution curve drive a lot of things. One of the starkest examples is wealth inequality. Let’s look at the long tail phenomenon more closely.

1. I am not using the Pareto principle and the long tail interchangeably although I feel there are cases where you can. Pareto is what jumps to my mind instinctively as I think of the long tail. In both cases, the essence is the same: few things with outsized contributions. Take the wealth disparity with the richest 20% earning 81% of income. There will be multitudes of statistics on this topic but this topic is so symbolic of Both the Pareto principle and the long tail (super rich people) who are the outliers on the normal distribution curve if you take a frequency distribution of population and yet, this long tail contributes 80% of global income. Anyways, long tails drive a lot of things.

2. I will try to remain fact based as much as I can and try to stay way from tangents that obfuscate the argument. Again, these are just my assumptions. If you change some of them, I understand that the argument changes completely. With that, let’s see :

In my example, I am looking at apple’s 2017 results because 2018 is not halfway through but I am confident that the broader. trends of 2017 which I discuss below will persist in 2018. Now, You could say I selectively chose my data and company in my example. This is a fair objection and I can’t hold you to it. I am an Apple fanboy.

But, then you risk missing the broader point which is that this trend of a few products (Iphone and services including Apple care which is the warranty part) in many businesses with a diverse product portfolio (iMac, MacBook laptop series, accessories,iPods etc.) have outsized margins (+2/3 standard deviation from the mean gross margin) which in Apple’s case is easy to understand. This is the ‘Long Tail’. If this is not a textbook definition of long tail, I don’t know what else is.

The average (mean) gross margin of Apple is around 38 to 38.5 % based on Apples own published financial results.

However, if you Google Apple’s Gross margins by product, you will quickly realize that the iPhone and its services business have a gross margin which is much higher ie 2/3 SD away (on a normal distribution) from the average gross margin ie the long tail in a frequency distribution of gross margin returns by product. Apple doesn’t publish gross margins by product but its widely known that Iphone and services are much higher margin products. Also, Apple sells many more units of iPhone than any other hardware so I feel like the shape of the normal distribution curve would be a little different.

I don’t have any definite resource that proves the margin differences conclusively for the same reason I mentioned below. So, I am guilty of that flaw. If you think it’s a fundamental flaw, i do understand your point.

However, It’s very intuitive and makes perfect common sense. Most service businesses (including subscription models) requires setting up a platform and a network which in Apples case largely existed before services such as Apple Music and icloud storage began. This makes the marginal cost of each new unit sold (ie a single membership) very low and in some cases close to zero (apple care) resulting in outsized gross margins compared to other products. The iPhone may enjoy outsized margins because the smartphone is the computer in your pocket and you know that the world has moved away from the pc as the platform of choice to the mobile. While Iphone lags behind android in global market share terms, it profitability beats most android products hands down.

Because of its outsized margins, the iPhone and the services business accounted for roughly 70–71% of Apples revenue and margins in 2017. If you are a good businessman/business woman, you obviously like to sell your higher margin products more. So, you see, 2 products out of a Portfolio of lets call it 10 products (20%) account for 70–71% of revenue or profits. If this isn’t a textbook example of the Pareto principle, I don’t know what else is. You can argue that it’s 70% and not 80% as they say in the Pareto principle but then it becomes form over substance. Again, I cannot hold you to it.

For everyone seeing the coming doom in Apples performance, it’s a little hard to argue with a company with a war chest of cash on its balance sheet and the only US company closer to achieving $1 trillion in market capitalization (Amazon’s market cap is $841 billion which makes it a close second) facing similar threats to many of its peers. I am not saying Apple is invincible and that Steve Jobs isn’t a hard legacy to beat. Again, I am just looking at present day numbers which may change very quickly in the future.

This is how the long tail (few products with outsized margins ) is directly linked to the Pareto principle (80–20 rule) where those very same long tail products (Iphone and services business) which are 20% of the product Portfolio account for 80% of revenue or profits in Apples case. these observations apply to many things in life. In amazons case, it’s AwS and prime which contribute to Amazon’s profits in an outsize way. (-again long tail with the Pareto principle at work). Both the long tail and the Pareto principle have withstood the test of time.

Finally, going back to my original point. Passive investing will work for the average investor (who doesn’t have the time or inclination to do research on seeking Alpha ie excess returns over the market return ) over a long term horizon. But, that doesn’t mean you cant. make money in the short term riding on the ‘long tail’ of stocks from a diversified (in this case index) of stocks by a) being pure lucky in stock picking or b) choosing stocks that outperform the index in the short term. Again, not everyone wins all the time. That is why markets are a great humbling experiment. By that very same token, you don’t need to bet the farm on risky asset classes.

Again, everything is subject to your risk appetite and I agree there is a short line between bravery and foolishness. Find out one person who can see that line and you spotted a clairvoyant. Even the most astute hedge fund manager crosses that line once a while. But, that is a debate for a different day.

That is where your gut comes in. It will guide your decisions on the line between bravery and foolishness.

Include Unintended Consequences

When you think of any decision or action, think of the unintended consequences of your actions. Take the famous case of a recent airline where a passenger was mistreated on an airplane belonging to that airline. The airline received a lot of flak from the press and the general public because of the way the CEO handled the situation. Whether the airline personnel mishandled a passenger is a different but very critical question. However, the perception that people have simply because the incident took place on a plane belonging to THAT particular airline is one of holding the airline accountable. Therefore, most of the times, we are not battling reality but a perception of reality. As historian Deirdre McCloskey says, “For reasons I have never understood, people like to hear that the world is going to hell.”

Think about that and think about the unintended consequences every time you take a decision. It is an extremely powerful way of removing any confusion.

Sometimes, I Wish Life Was A Science

The truth of the human condition, today, is that life is more art than science. I wish everything could be broken down into a decision tree that was easy to follow. But, there is no playbook or guidebook to live life. Rules get broken all the time because they are a framework. All we have for our decision making are frameworks. However, we forget to leverage the biggest framework of all — an empathetic understanding of someone else’s world view. Just so you know, I gave you a shortcut to wisdom. Although I am far from being a wise person, I can only share my learnings from my mistakes in the hope they help you too.