Tag Archives: leadership

Follow the Leader

Do we suffer from an “expert” bias?

Photo: Christopher Michael. Source: Flikr

We tend to trust the views of experts, especially when it’s about something we haven’t experienced ourselves. If I haven’t travelled to Antarctica, I’ll generally trust someone who’s actually been there – even if they travelled to the islands on the Antarctic Peninsula, and I’m headed for the South Pole – over 1500 miles away.

This is natural. When we’re in unfamiliar territory, we want a guide. We look for someone to give us direction and clarity. It’s a version of the “halo effect”: if we have a good feeling about a person in one area, we put a “halo” around other more ambiguous aspects of their lives. If someone looks good, we may assume that they’re successful as well. We then notice evidence that confirms our outlook. We play “follow the leader.”

Photo: Christopher Michael. Source: Wikipedia

This can be dangerous. Just because someone is an expert in one area doesn’t make them experts everywhere. Linus Pauling received multiple Nobel Prizes (Chemistry, Peace), but then he went off the rails and started advocating mega-doses of Vitamin C for everything from colds to cancer to heart disease. People who followed this medical advice ended up spending time, money, and energy on an approach later shown to have a marginal effect.

It’s also dangerous when it comes to finance. There’s a lot of quantitative work being done today by big firms filled with PhDs that’s accepted by the financial press as the latest key to understanding (and outperforming) the markets. This research can be filled with partial differential equations and multivariate matrices. We often don’t understand the math, but we’re persuaded by the writing style of the author’s picture or the reputation of the site where we find it. We extend a halo around the work, and accept their conclusions. We even invest on these premises. Sometimes it works out.

Black-Scholes Model. Source: Wikipedia

Published research in finance is often like a back-test. It’s rarely published unless it supports the sponsor’s current views or existing products. Thus, Jack Bogle touts indexing, Fidelity encourages using easily accessible mutual funds, and TD and other brokers encourage stock-picking. For my own part, I support an all-of-the-above approach, building portfolios like I would a dinner at a Swedish smorgasbord: a little of this, a little of that. Everyone is human, and entitled to market their own business.

Just be aware of their biases, and don’t believe everything you read. We’re all human. If you don’t understand the process behind something, it never hurts to be a little skeptical.

Douglas R. Tengdin, CFA

Right Track / Wrong Track / Off Track

What makes some companies thrive while others struggle?

Photo: Lexcelsior. Source: Animal Photos

We see lots of examples in the marketplace: Facebook created the dominant digital social network, while other platforms—MySpace, Friendster—never took off. Costco has grown as a discount club while Wal-Mart struggled. Johnson & Johnson has succeeded across a range of health-care businesses, while others faltered—brought down by scandals or shrinking markets. What’s the difference?

It comes down to management. Successful companies need visionary leadership—leaders that create a sense of community where their people have a chance to grow and develop, to try out new ways of doing things, where workers know that someone takes a genuine interest in them—not only as workers, but as people, too.

The military has a phrase for this: “officers eat last.” The higher ranking you are, the further back in the chow line you’re supposed to stand. The brass may represent the brains, but the enlisted folks are the brawn. Without enlisted men and women, there’s no need for officers. The attitude of those on the front lines is critical to any mission’s success. And morale can’t be commanded. It has to be nurtured.

Photo: Mary Vogt. Source: Morguefile

But leadership isn’t enough. To succeed on the battlefield, a unit can’t just believe and trust in its commanders. It also has to be going in the right direction. Having the right strategy is critical. Steve Ballmer was seen as a visionary leader at Microsoft. But they missed to boat on mobile applications and devices. Their software become over-engineered with “feature-creep” that made it confusing and difficult to use. And they focused on their desktop platform for too long. During his tenure at the helm, Microsoft became a wealth-destroyer.

Leaders inspire their people to outperform because they present a vision that’s bigger than themselves. But they need to be going the right way. Proctor & Gamble had a vision for where they wanted to go when they acquired Gillette. They paid a very high price, and the market was skeptical that the acquisition would be successful. But P&G used its expertise to create an ecosystem of shaving products around the already-dominant shaving brand, and the merger created value for everyone: consumers, employees, and shareholders.

Source: Bloomberg

An important investment theme is quality. When investors look for quality companies, they need to look beyond the bottom line: return on assets, cash-flow management, financial structure. Those metrics are important, but they’re not enough. We need to look at people across the firm to see if they’re inspired—and inspiring others—to move in the right direction.

Douglas R. Tengdin, CFA

Chief Investment Officer

The Irrelevant Federal Reserve

What if they had a Fed meeting and nobody cared?

Janet Yellen at her press conference. Source: Federal Reserve

The FOMC had been trying to talk up rates for the past two months. Some notable policy doves were commenting that the market had it wrong—that interest rate expectations were too low, and that we should expect two or three rate hikes this year. Even Chair Yellen got in on the act. In May, she noted that long as the economy continues on-track, the Fed would continue to normalize rates.

FOMC Member “Dot Plot” 6-15-16. Source: Federal Reserve

That was then, this is now. The employment report threw a big bucket of cold water on those plans. The latest report was “disappointing,” Yellen noted. There has been a loss of economic momentum. While we shouldn’t pay too much attention to one data point, they can’t ignore broad economic indicators that are cautionary. Yellen claims that the Fed is data-dependent. So when dovish data come in, they have to re-think their position.

So who’s in charge? During a two-minute period in her press conference, she used the word “uncertain” or “uncertainty” at least five times. The Fed and the market are on the dance floor, but neither knows whether to put their hand on their partner’s shoulder or around their waist. No one knows who’s leading.

Illustration: Henriq Bastos. Source: Morguefile

All the Fed officials have been talking about normalizing rates. But their talk is aspirational: it’s more about the Fed’s hopes, and less about their plans. They aren’t leading, but they do have a $5 trillion balance sheet and an unlimited checkbook. That’s more than anyone else. We don’t want to get on the wrong side of that.

As long as we’re stuck in a slow-growth economy with no growth in manufacturing, mining, and energy jobs, we’ll feel unsettled. Janet Yellen claimed yesterday that every meeting is live, that rate changes are always possible. But given the lack of leadership, it seems that the Fed is increasingly irrelevant.

Douglas R. Tengdin, CFA

Chief Investment Officer

The Fox and the Hedgehog

“The fox knows many things, while the hedgehog knows one big thing.”

Photo: Jeremy P. Gray

The Greek poet Archilocus noticed this almost 3000 years ago. We often see two different types of people. Some people go everywhere, and study everything—pursuing contradictory ideas. They’re eclectic, diffused, and omnivorous. On the other side are souls who pursue a singular, unitary vision, an all-embracing organizing principle that gives the world coherence.

We see this all around us. In literature, Dante was a hedgehog: he wanted to give the world a great poem about heaven and hell. Shakespeare, on the other hand, was a fox. He wrote plays about everything and everybody. In history, George Washington was a hedgehog—with the simple idea of American greatness—while Thomas Jefferson was a fox. And in modern life, outstanding business leaders are hedgehogs: think of Steve Jobs with his focus on design and functionality. And superior investors are often foxes: Warren Buffett, Peter Lynch, John Templeton.

Both approaches are necessary. In business, a company needs a singular vision to cut through the clutter and make the main thing the main thing. It’s too easy to get distracted by the crisis of the day and never spend time or energy on what’s crucial. Hedgehogs get things done and keep their teams focused.

But with investing, foxes rule. A portfolio needs to be diversified, limiting its exposure to any single area–reducing risk—while spreading its assets among an array of industries that generate new products and ideas—improving return. Investors need to be fox-like and flexible. And they have to be interested in everything, from genomic sequencing to quantum computing to chain-store sales to bitcoins and block chains. Investors should leave no stone unturned when searching for value.

Foxes and hedgehogs each have an important role to play. A lot of times, they end up married to each other. Which one are you?

Douglas R. Tengdin, CFA

Chief Investment Officer

Angling and Other Anglers

“The majority is never right.” – Henrik Ibsen, An Enemy of the People

Photo: Francis Hannaway. Source: Wikipedia

Have you ever been to a fishing tournament? At the starting time, dozens of boats roar off to their favorite fishing holes, which quickly become crowded. There are usually two winners: the one that pulls in the most weight and the one that catches the largest individual fish. In the US, there are over 30,000 fishing derbies every year.

Watching a tournament can be fun. You learn where the best holes are, what the pros use for bait, and other tips. But it’s also instructive to see who wins. The biggest fish usually doesn’t come from the mass of boats gathered in the most popular spots. They come from folks who get away from everyone else, who may try something unconventional.

Investing is similar. Investing with the crowd rarely delivers exceptional performance. Put another way, conventional thinking yields conventional returns. There’s a universe of other people out there who are all evaluating the same set of investment opportunities. Following what most people are doing will give results similar to most people. But it’s not enough just to be different. Just because no one else is playing tennis on the freeway doesn’t mean it’s a good idea! Put another way, there’s no upside in taking a contrary view to the solution of 2 + 2.

You can’t just to bet against the crowd. Successful investors need to know why the mob is mistaken. Only positions taken with the confidence of a strong decision-making process can be held—and even increased—when they look like mistakes rather than winners, and losses accrue rather than gains. Markets—and companies—can remain over- or underpriced for years. Eventually, good ideas pan out. But you have to be able to hang on until they do.

Leadership is lonely. But it’s absolutely necessary if you want to achieve superior results. Jean Paul Sartre famously writes that “Hell is other people.” For investors—and anglers—sometimes you just have to ignore other people.

Douglas R. Tengdin, CFA

Chief Investment Officer

Burned Out By The List

Are you burned out?

When the to-do list is filled with urgent items that are underlined and have stars and exclamation points next to them, it’s tempting to throw up our hands and curl into a ball. The to-do list is an inescapable part of modern life. Sometimes we make lists of our lists just to keep them straight.

And these lists are usually filled with things that we do to avoid criticism, that we have to do to avoid some negative consequence, but that will have to be accomplished again in just a couple weeks or months. When every day is filled with such soul-crushing tedium, burn-out isn’t far away. The Japanese even have a word for death from overwork: karoshi.

A company filled with management reports and meetings that document failures and undone items has an unhealthy culture. That business isn’t moving forward, it’s just trying to keep from falling back. But this kind of monotony won’t attract and encourage talented staff to break out and create the next iPhone. At best it will be filled with folks who can tolerate the day-to-day drudgery of list-checking.

Shakespeare’s King Henry V understands this when he makes his St. Crispin’s Day speech in Act IV of the play. Outnumbered five-to-one, the king had spent the night before the battle among his troops, anonymously, gauging their morale. He knows he needs to stir their hearts. And that’s what he does. He promises his soldiers honor, remembrance, and even brotherhood. He concludes that “all things are ready if our minds be so.”

Some things on your daily list need to inspire you—not just keep you out of trouble. Don’t succumb to the “tyranny of the urgent.” Sometimes the most important task is the one that’s the least pressing.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

Fortune Favors Who?

Is it safe to go slow?

That’s what our instincts tell us. Whether we see a market running away, or an accident on the highway, our first instinct usually is to slow down, look around, and see what else is going on. “Haste makes waste,” goes the saying.

But slower isn’t always safer. When something truly new has been introduced, it’s important to take advantage of the changes. Watching and waiting may seem prudent, but often it’s just an excuse for procrastination and indecision. Opportunity costs are real, even if they are hard to quantify.

The Roman poet Virgil understood this when he wrote The Aeneid. In the story, the hero Aeneas leads a group of Trojan refugees to a new home after the Greek army destroys their home. When they land in Italy at the site of the future Roman capital, they are opposed by a native tribe. “Fortune favors the bold!” cries their leader Turnus, as he leads a charge against the invaders.

Leadership sometimes requires boldness–not undisciplined, rash decisions, but bold, decisive moves. The business book Good To Great describes several examples of companies that introduced transformative practices or products into their markets. They achieved sustained market leadership through their bold initiatives.

It’s important to be thorough and do your homework. But don’t get consumed by the paralysis of analysis. Sometimes a little audacity is a good thing.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net

Investment Leadership

Are investors leaders?

They should be. The same qualities that we see in the best leaders also serve investors well. Leaders need to have clear goals; they need to establish a culture of integrity; they need to understand what they can—and more importantly, cannot—do. And they need to communicate these values to those around them.

Virgil’s poem, The Aeneid, lays out these classic leadership elements: fatum, pietas, and virtus. Today we would call them vision, culture, and values. In this work, Virgil paints a picture of his ideal ruler: decisive, humble, just, honest, courageous, and so on. Investors who learn these lessons will know where they’re going and how to get there.

During his wanderings, Aeneas undergoes many hardships. In every instance, he reminds himself of his goal and the great empire he is destined to found. But he can’t compromise: his dalliance with Dido along the way caused heartache for him and was disastrous for her. In the same way, investors need to establish goals, avoid getting sidetracked, and pursue their plans with diligence.

The Aeneid is an epic poem about leadership. It tells the story of the establishment of Rome—its confusing, challenging, tumultuous founding. As we put our own resources to work, we do well if we look past present circumstances and focus on the future. Like Aeneas.

Douglas R. Tengdin, CFA

Chief Investment Officer

The Quality is Right (Part 2)

Would you rather bet on a horse, or a jockey?

A smart race-track operator would say, “both.” The horse’s name is the main event, but who the jockey is matters. A good rider can get a lot more out of a horse than people expect.

It’s that way with a company’s management. Good managers can inspire their staff, transform their marketplace, and get more value of corporate assets than anyone thought possible. Bad managers act like poison in the well: anyone who comes near gets sick.

So how do you tell if a company is managed well? I look for three things: first, is their compensation reasonable? Is it in-line with their peers and the size and nature of their business. Bosses who treat their firm like a piggy bank are more likely to break it when they need more change for their toys. Second, is the firm still managed by its original team, or has it gotten over “founder’s fever” and brought in professional management? Large, global companies need immensely talented leaders. It’s unlikely that the requisite skills will be confined to one family, however passionate they may be about the product. Finally, what is their background? Did they rise up through the ranks, mentored along the way? Executives who have been part of a coaching culture that develops leaders tend to keep up the process and develop new leaders to fill their shoes.

Of course, it’s great to meet the folks who run these firms and talk with them about what they see as their greatest challenges and opportunities. Sometimes listening to conference calls and speeches can give you a sense of their capabilities and character. But those can be misleading well. Personal charm is no substitute for effective leadership.

Great business leaders create value. Investors will profit as management implements practical processes that build their business over time.

Douglas R. Tengdin, CFA

Chief Investment Officer

The Weakness of Strength

Are your strengths holding you back?

People like to play to their strengths. But sometimes those strengths can cause problems. You may have heard of the “Peter Principle”—that managers rise to the level of their incompetence. They get promoted because they do a good job, and if they succeed they get promoted again, until they don’t excel any more—at which point they stay put.

This is the failure of success: people keep doing what they are good at, rather than what the new job needs. An example of this might be Jon Corzine of MF Global. By all accounts Corzine was an excellent trader. He rose through the ranks at Goldman Sachs because he knew how to recognize a market opportunity. But success at Goldman didn’t prepare him for managing an upstart brokerage. He tried to trade MF Global into prosperity, and didn’t expect his bank lines to be pulled due to market-to-market issues. Those things didn’t happen at Goldman!

Indeed, the Financial Crisis showed that ex-traders can make poor managers. CEOs Jimmy Cayne of Bear Stearns and Dick Fuld of Lehman were rewarded when they took big risks on the trading desk, but that didn’t work out for them as executives. Sometimes the smartest person in the room doesn’t turn out to be so wise, strategically.

You can see it in other industries as well: outstanding teachers and professors who make poor administrators; brilliant programmers and engineers who become imperious managers. Sometimes technical expertise is what’s needed at the top, but more often an organization needs a leader who can rise above the day-to-day challenges and see the bigger picture.

Smart people may know what needs to be done, but wise leadership will understand how to get there. Management is doing things right, but leadership is doing the right things.

Douglas R. Tengdin, CFA

Chief Investment Officer