Review – Common Stocks And Uncommon Profits

Common Stocks and Uncommon Profits: And other writings by Philip A. Fisher

by Philip A. Fisher, published 1996, 2003

Stock market investors who have studied Warren Buffett in detail know that he has cited two “philosophers” of investment theory more than anyone else in being influential in the formation of his own investment approach: Benjamin Graham and Phil Fisher. Graham represents the cautious, conservative, balance sheet-driven Buffett, while Fisher represents the future-oriented, growth-focused, income statement-driven Buffett. If you ask Buffett, while Graham got him started and taught him key lessons in risk management (Margin of Safety and the Mr. Market metaphor), Fisher was the thinker who proved to have the biggest impact in both time and total dollars accumulated. Buffett today, whether by choice or by default due to his massive scale, is primarily a Phil Fisher-style investor.

And yet, in my own investment study and practice, I have dwelled deeply on Graham and did little if anything with Fisher. I tried to read Fisher’s book years ago when I was first starting out and threw my hands up in disgust. It seemed too qualitative, too abstract and frankly for a person of my disposition, too hopeful about the future and the endless parade of growth we’ve witnessed in the markets for several decades since the early 1980s. Surely there would be a time where the Fisher folks would hang their heads in shame and the Grahamites would rise again in the fires of oblivion! After all, “Many shall be restored that are now fallen and many shall fall that are now in honor.”

As my professional career wore on, however, I found there was less and less I could do with Graham and more and more of what Fisher had said that made sense. And if you’re in business, you can’t help but be growth oriented– buying cheap balance sheets isn’t really the way the world works for the private investor. So, I decided it was time to take another look at Fisher’s book and see what I could derive from it as an “older and wiser” fellow. What follows is a review of Part I of the book; I plan to read and review Part II, which is a collection of essays entitled “The Conservative Investor Sleeps Well At Night”, separately.

Keep Your Eye On The Future

One thing I noticed right away is the consistent theme of future-orientation throughout Fisher’s book. Whereas balance sheets and the Graham approach look at what has happened and what is, Fisher is always emphasizing a technique that involves conceptualizing the state of the future. For example, in the Preface he states that one of the most significant influences on his own investment results and those of other successful investors he was aware of was,

the need for patience if big profits are to be made from investment.

“Patience” is a reference to time preference, and time preference implies an ability to envision future states and how they differ from the present and therein see the arbitrage available between the two states. The other key he mentions is being a contrarian in the market place, which sounds a lot to me like the lesson of Mr. Market.

Fisher also says that market timing is not a necessary ingredient for long-term investment success,

These opportunities did not require purchasing on a particular day at the bottom of a great panic. The shares of these companies were available year after year at prices that were to make this kind of profit possible.

While he cites the structural inflationary dynamic of the modern US economy and seems to suggest the federal government’s commitment to responding to business cycle depressions with fiscal stimulus puts some kind of ultimate floor under US public company earnings (unlike in Ben Graham’s time where large companies actually faced the threat of extinction if they were caught overextended in the wrong part of the cycle, Fisher suggests the federal government stands ready to create conditions through which they can extend their debt liabilities and soldier on), he says that the name of the game over the long-term is to find companies with remarkable upside potential which are, regardless of size, managed by a determined group of people who have a unique ability to envision this potential and create and execute a plan for realizing it. In other words, the problem of investing is recognizing strong, determined management teams for what they are, that is, choosing superior business organizations in industries with long runways.

Getting the Goods: The Scuttlebutt Approach

People who know about Fisher typically identify him with the “scuttlebutt approach”. Fisher says scuttlebutt can be generated from:

  • competitors
  • vendors
  • customers
  • research scientists in universities, governments and competitive companies
  • trade association executives
  • former employees (with caveats)

Before one can do the scuttlebutt, however, one has to know where to look. Fisher says that “doing these things [scuttlebutt] takes a great deal of time, as well as skill and alertness […] I strongly doubt that [some easy, quick way] exists.” So, you don’t want to waste your time by going to all the trouble for the wrong idea. He says that 4/5 of his best ideas and 5/6 of the total gains generated over time that he could identify originated as ideas he gleaned from other talented investors first, which he subsequently investigated himself and found they fit the bill. Now, this is not the same thing as saying 4/5 ideas he got from others were worth investing in– the proportion of “good” ideas of the “total” he heard about is probably quite low, but the point again is not quantitative, but qualitative. He’s talking about where to fish for ideas, not how successful this source was.

When I thought about this section, I realized the modern day equivalent was investment bloggers. There are many out there, and while some are utter shit (why does this guy keep kidding himself?) some are quite amazing as thinkers, business analysts and generators of potential ideas. I have too many personal examples of my own here to make mention of them all. But I really liked this idea, cultivating a list of outstanding investment bloggers and using that as your primary jumping off point for finding great companies. The only problem for me in this regard is most of my blogroll are “value guys” that are digging in the trash bins (as my old boss sarcastically put it), whereas to find a Fisher-style company I would need to find a different kind of blogger interested in different kind of companies. But that’s a great to-do item for me to work on in this regard and should prove to be highly educational to boot!

So, assuming you’ve got a top notch idea, what’s next? Fisher is pretty clear here: do not conduct an exhaustive study of the company in question just yet. (In other words, don’t do this just yet, though I loved SoH’s follow-up where he explained what kind of things would get him to do that.) What he does do is worth quoting at length:

glance over the balance sheet to determine the general nature of the capitalization and financial position […] I will read with care those parts covering breakdown of total sales by product lines, competition, degree of officer or other major ownership of common stock […] all earning statement figures throwing light on depreciation, profit margins, extent of research activity, and abnormal or non-recurring costs in prior years’ operations

Then, if you like what you see, conduct your scuttlebutt, because,

only by having what “scuttlebutt” can give you before you approach management, can you know what you should attempt to learn when you visit a company […] never visit the management of a company [you are] considering for investment until [you have] first gathered together at least 50 per cent of all knowledge [you] would need to make the investment

This is the part that really gives a lot of investors pause about Phil Fisher’s approach, including me. Can you really do scuttlebutt, as he envisions it, in the modern era? Can the average investor get the ear of management? Does any of this stuff still apply?

First, some skepticism. Buffett’s biographer Alice Schroeder has said in interviews that much of what made Buffett successful early on in his career is now illegal and would amount to insider trading. The famous conversation with the GEICO chief is one of many that come to mind. This was classic scuttlebutt, and it worked amazingly well for Buffett. And even if it wasn’t illegal, most individual investors are so insignificant to a company’s capital base that they can’t expect nor will they ever receive the ear of management (unless they specialize in microcap companies, but even then management may be disinterested in them, even with significant stakes in their company!) And, assuming they DO somehow get management’s ear, they aren’t liable to learn much of value or interest specifically because most managements today are not only intellectually and politically sophisticated, but legally sophisticated and they are well aware that if they say anything more general than “We feel positive about our company” they’re liable to exposure under Reg FD. This seems like a dead end.

But let me try to tease the idea out a little more optimistically. Managements do provide guidance and color commentary on quarterly earnings calls, and if you are already dealing with a trustworthy, capable management (according to the 15 points outlined below), then there is opportunity to read between the lines here, even while acknowledging that there are many other people doing the same with this info. And people who do get managements’ ear are professional analysts employed by major banks. Again, lots of people read these reports, but there is some info here and it adds color and sometimes offers some “between the lines” information some might miss. And while the information you can get from any one company may be limited, by performing this analysis on several related companies you might be able to fill in some gaps here and there to the point that you can get a pretty fair picture of how the target company stacks up in various ways.

I hesitate a little, but I think the approach can be simulated to a fair degree even today. It’s still hard work. It can’t be done completely, or perhaps as Fisher imagined it. But I think it can be done. And it still comes down to the fact that, even with all this info that is out there, few will actually get this up close and personal with it. So, call it an elbow-grease edge.

After all,

Is it either logical or reasonable that anyone could do this with an effort no harder than reading a few simply worded brokers’ free circulars in the comfort of an armchair one evening a week? […] great effort combined with ability and enriched by both judgment and vision [are the keys to unlocking these great investing opportunities] they cannot be found without hard work and they cannot be found every day.

The Fisher 15

Fisher also is known for his famous 15 item investment checklist, a checklist which at heart searches for the competitive advantage of the business in question as rooted in the capability of its management team to recognize markets, develop products and plans for exploiting them, execute a sales assault and finally keep everything bundled together along the way while being honest business partners to the minority investors in the company. Here was Fisher’s 15 point checklist for identifying companies that were highly likely to experience massive growth over decades:

  1. Does the company have sufficient market scale to grow sales for years?
  2. Is management determined to expand the market by developing new products and services to continue increasing sales?
  3. How effective is the firm’s R&D spending relative to its size?
  4. Is the sales organization above-average?
  5. Does the company have a strong profit margin?
  6. What is being done to maintain or improve margins? (special emphasis on probable future margins)
  7. What is the company’s relationship with employees?
  8. What is the company’s relationship with its executives?
  9. Is the management team experienced and talented?
  10. How strong is the company’s cost and accounting controls? (assume they’re okay unless you find evidence they are not)
  11. Are there industry specific indications that point to a competitive advantage?
  12. Is the company focused on short or long-term profits?
  13. Can the company grow with its own capital or will it have to continually increase leverage or dilute shareholders to do it?
  14. Does the management share info even when business is going poorly?
  15. Is the integrity of the management beyond reproach? (never seriously consider an investment where this is in question)

What I found interesting about these questions is they’re not just good as an investment checklist, but as an operational checklist for a corporate manager. If you can run down this list and find things to work on, you probably have defined your best business opportunities right there.

In the chapter “What to Buy: Applying This to Your Own Needs”, Fisher attempts to philosophically explore the value of the growth company approach. First, he tries to dispel the myth that this approach is only going to serve

an introverted, bookish individual with an accounting-type mind. This scholastic-like investment expert would sit all day in undisturbed isolation poring over vast quantities of balance sheets, corporate earning statements and trade statistics.

Now, this is ironic because this is actually exactly how Buffett is described, and describes himself. But Fisher insists it is not true because the person who is good at spotting growth stocks is not quantitatively-minded but qualitatively-minded; the quantitative person often walks into value traps which look good statistically but have a glaring flaw in the model, whereas it is the qualitative person who has enough creative thinking power to see the brilliant future for the company in question that will exist but does not quite yet, a future which they are able to see by assembling the known qualitative facts into a decisive narrative of unimpeded growth.

Once a person can spot growth opportunities, they quantitatively have to believe in the strategy because

the reason why growth stocks do so much better is that they seem to show gains in value in the hundreds of percent each decade. In contrast, it is an unusual bargain that is as much as 50 per cent undervalued. The cumulative effect of this simple arithmetic should be obvious.

And indeed, it is. While great growth stocks might be a rarer find, they return a lot more and over a longer period of time. To show equivalent returns, one would have to turnover many multiples of incredibly cheap bargain stocks. So this is the philosophical dilemma– fewer quality companies, fewer decisions, and less room for error in your decisions with greater return potential over time, or many bargains, many decisions, many opportunities to make mistakes but also less chance that any one is critical, with the concomitant result that your upside is limited so you must keep churning your portfolio to generate great long-term results.

Rather than being bookish and mathematically inclined (today we have spreadsheets for that stuff anyway), Fisher says that

the successful investor is usually an individual who is inherently interested in business problems. This results in his discussing such matters in a way that will arouse the interest of those from whom he is seeking data.

And this still jives with Buffett– it’s hard to imagine him boring his conversation partner.

Timing Is Everything?

So you’ve got a scoop on a hot stock, you run it through your checklist and you conduct thorough scuttlebutt-driven due diligence on it. When do you buy it, and why?

to produce close to the maximum profit […] some consideration must be given to timing

Oh no! “Timing”. So Fisher turns out to be a macro-driven market timer then, huh? “Blood in the streets”-panic kind of thing, right?

Wrong.

the economics which deal with forecasting business trends may be considered to be about as far along as was the science of chemistry during the days of alchemy in the Middle Ages.

So what kind of timing are we talking about then? To Fisher, the kind of timing that counts is individualistic, idiosyncratic and tied to what is being qualitatively derived from one’s scuttlebutt. Timing one’s purchases is not about market crashes in general, but in corporate missteps in particular. Fisher says:

the company into which the investor should be buying is the company which is doing things under the guidance of exceptionally able management. A few of these things are bound to fail. Others will from time to time produce unexpected troubles before they succeed. The investor should be thoroughly sure in his own mind that these troubles are temporary rather than permanent. Then if these troubles have produced a significant decline in the price of the affected stock and give promise of being solved in a matter of months rather than years, he will probably be on pretty safe ground in considering that this is a time when the stock may be bought.

He continues,

[the common denominator in several outstanding purchasing opportunities was that ] a worthwhile improvement in earnings is coming in the right sort of company, but that this particular increase in earnings has not yet produced an upward move in the price of that company’s shares

I think this example with Bank of America (which I could never replicate because I can’t see myself buying black boxes like this financial monstrosity) at Base Hit Investing is a really good practical example of the kind of individual company pessimism Phil Fisher would say you should try to bank on. (Duh duh chhhhh.)

He talks about macro-driven risk and says it should largely be ignored, with the caveat of the investor already having a substantial part of his total investment invested in years prior to some kind of obvious mania. He emphasizes,

He is making his bet upon something which he knows to be the case [a coming increase in earnings power for a specific company] rather than upon something about which he is largely guessing [the trend of the general economy]

and adds that if he makes a bad bet in terms of macro-dynamics, if he is right about the earnings picture it should give support to the stock price even in that environment.

He concludes,

the business cycle is but one of at least five powerful forces [along with] the trend of interest rates, the over-all government attitude toward investment and private enterprise [quoting this in January, 2017, one must wonder about the impact of Trump in terms of domestic regulation and taxation, and external trade affairs], the long-range trend to more and more inflation and — possibly most powerful of all — new inventions and techniques as they affect old industries.

Set all the crystal ball stuff aside– take meaningful action when you have meaningful information about specific companies.

Managing Risk

Fisher also gives some ideas about how to structure a portfolio of growth stocks to permit adequate diversification in light of the risk of making a mistake in one’s choices (“making at least an occasional investment mistake is inevitable even for the most skilled investor”). His example recommendation is:

  • 5 A-type, established, large, conservative growth companies (20% each) -or-
  • 10 B-type, medium, younger and more aggressive growth companies (10% each) -or-
  • 20 C-type, small, young and extremely aggressive/unproven growth companies (5% each)

But it is not enough to simply have a certain number of different kinds of stocks, which would be a purely quantitative approach along the lines of Ben Graham’s famous dictums about diversification. Instead, Fisher’s approach is again highly qualitative, that is, context dependent– choices you make about balancing your portfolio with one type of stock require complimentary additions of other kinds of stocks that he deems to offset the inherent risks of each. We can see how Buffett was inspired in the construction of his early Buffett Partnership portfolio weightings here.

For example, he suggests that one A-type at 20% might be balanced off with 2 B-type at 10% each, or 6 C-type at 5% each balanced off against 1 A-type and 1 B-type. He extends the qualitative diversification to industry types and product line overlaps– you haven’t achieved diversification with 5 A-types that are all in the chemical industry, nor would you achieve diversification by having some A, B and C-types who happen to have competing product lines in some market or industry. For the purposes of constructing a portfolio, part of your exposure should be considered unitary in that regard. Other important factors include things like the breadth and depth of a company’s management, exposure to cyclical industries, etc. One might also find that one significant A-type holding has such broadly diversified product lines on its own that it represents substantially greater diversification than the 20% portfolio weighting it might represent on paper. (With regards to indexation as a strategy, this is why many critics say buying the S&P 500 is enough without buying “international stock indexes” as well, because a large portion of S&P 500 earnings is derived from international operations.)

While he promotes a modicum of diversification, “concentration” is clearly the watchword Fisher leans toward:

the disadvantage of having eggs in so many baskets [is] that a lot of the eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after the eggs get put into them […] own not the most, but the best […] a little bit of a great many can never be more than a poor substitute for a few of the outstanding.

Tortured egg basket metaphors aside (why on earth do people care what their egg baskets look like?!), Fisher is saying that the first mistake one can make is to spread your bets so thin that they don’t matter and you can’t efficiently manage them even if they did.

Aside from portfolio construction, another source of risk is the commission of errors of judgment.

when a mistake has been made in the original purchase and it becomes increasingly clear that the factual background of the particular company is, by a significant margin, less favorable than originally believed

one should sell their holdings, lick their wounds and move on. This needs to be done as soon as the error is recognized, no matter what the price may be:

More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.

Further,

Sales should always be made of the stock of a company which, because of changes resulting from the passage of time, no longer qualifies in regard to the fifteen points… to about the same degree it qualified at the time of purchase […] keep at all times in close contact with the affairs of companies whose shares are held.

One vogue amongst certain investors is to be continually churning the portfolio from old positions to the latest and greatest idea, with the assumption being that time has largely run its course on the earlier idea and the upside-basis of the new idea is so much larger that liquidity should be generated to get into the new one. Fisher advises only using new capital to pursue new ideas rather than giving in to this vanity because,

once a stock has been properly selected and has borne the test of time, it is only occasionally that there is any reason for selling it at all

The concept of “investment” implies committing one’s resources for long periods of time. You can’t emulate this kind of trading activity in the private market, which is a very strong indication that you should try to avoid this behavior in public markets. A particularly costly form of this error is introducing macro-market timing into one’s portfolio management, ie, this stock has had a big run up along with the rest of the market, things are getting heady, I will sell and get back in at a lower cost. I’ve done this myself, most recently with Nintendo ($NTDOY) and even earlier with Dreamworks ($DWA). Fisher says it’s a mistake:

postponing an attractive purchase because of fear of what the general market might do will, over the years, prove very costly […] if the growth rate is so good that in another ten years the company might well have quadrupled, is it really of such great concern whether at the moment the stock might or might not be 35 per cent overpriced? That which really matters is not to disturb a position that is going to be worth a great deal more later.

It plays to a logical fallacy that a company that has run up has “expended” its price momentum, while a company that has not had a run-up has something “due” to it. On the contrary, Fisher points out that many times the material facts about a company’s future earnings prospects change significantly over time from the original purchase, often to the good, such that even with a big run-up, even more is in the offing because the future is even brighter than before– remember, always keep an eye on the future, not the present or the past!

And similarly, if one has an extremely cheap cost basis in a company, one has an enormous margin of safety that should give further heed to trying to jump in and out of the stock when it is deemed to be overvalued.

He adds that, like wines, well-selected portfolio holdings get better with age because,

an alert investor who has held a good stock for some time usually gets to know its less desirable as well as more desirable characteristics

and through this process comes to develop even more confidence in his holdings.

If you’ve read some of my thinking about the philosophy of building multi-generational wealth through a family business, you’ll see once again the direct parallel to private market investing in Fisher’s conclusion:

If the job has been correctly done when a common stock is purchased, the time to sell it is– almost never.

Conclusion

Distilling Part I down to its essence, I concluded that the most important skill for generating long-term gains from one’s investing is still about having a disciplined and consistent investment program followed without interruption and in the face of constantly nagging self-doubt (“In the stock market a good nervous system is even more important than a good head.”) The particular program that Fisher recommends be followed is to:

  1. Create a network of intelligent investors (bloggers) from which to source ideas
  2. Develop a strong scuttlebutt skill/network to develop superior investment background
  3. Check with management to confirm remaining questions generated from the 15 step list
  4. With the conviction to buy, persevere in holding over a long period of time

If you can’t do this, you probably shouldn’t bother with the Fisher approach. Whether it can be done at all is an entirely separate matter.

Review – Family Fortunes

Family Fortunes: How to Build Family Wealth and Hold on to It for 100 Years

by Bill Bonner, Will Bonner, published 2012

What kind of habits and modes of thought separate Old Money families from everyone else? How do you build a family fortune? How do you get a family to work together toward a single purpose as the “core” is continually invaded by new spouses and children? How do you invest your prodigious wealth at high rates of return? How do you hold on to your family fortune for 100 years? Why does 100 years seem like a long time when it’s really only 3-4 generations of people?

Frustratingly (maddeningly?), the answer most often given in this book to questions like these is, “We don’t know, but here’s our guess.”

What I didn’t get from this book, then, were many specific, useful ideas for implementing with my own family enterprise– or family-as-enterprise. What I did get, and what will be the focus of this review, are a lot of questions, principles to ponder, and general strategic problems in need of robust solutions. This is not a how-to manual for putting together the essential structure of long-lived family institutions such as tax and estate planning, family organization and branding, household management.

Most people will not have a family fortune to contend with. It is not something that can be acquired through a known formula, but rather it is the outcome of an entrepreneurial process that is, epistemologically speaking, random. Just as one can not predictably create a family fortune, one can not predictably control the size or scope of the family fortune, within certain bounds. In other words, your family may have the good fortune to stumble upon a business opportunity with a significant market capitalization. That’s the first hurdle, and there’s no formula for getting there. Then, that fortune might turn out to be worth $50M, $100M, or $5B. That’s another hurdle, and there’s no formula. Failing to seize every opportunity you are presented with might limit your total fortune, and being eager and observant for those opportunities might extend the limit. But there is no recipe for turning something that is worth $50M into $5B unless it was the kind of opportunity that can scale that big in the first place.

Some market opportunities are worth a lot to one person who owns them (“he made a fortune!”), but they’re still not worth a lot to the market or economy as a whole (limited scale). This is an important point because of the gilded cage nature of family fortunes– once you have one, you’re kind of stuck with it, but it’s really tempting to think you have a lot more control over it than you do, or that it’s a lot more durable than it might be.

Imagine you’re the guy with the $50M fortune. You’re pretty happy with your luck, assuming everything else is right in your life, but you’re aware of people with $5B fortunes. If you can generate a $50M fortune, why can’t you generate a $5B fortune? Are those people smarter? Better connected? More productive? What’s the difference?

Luck, and leverage, but using leverage without blowing up is really just a residue of luck.

So you’ve got this $50M fortune. What can you do with it? If you have it invested in the business that created it, you enjoy a nice income stream from it each year (maybe that’s worth $2.5M, maybe it’s worth $5M if you’re really lucky) and you reinvest where and when you can. If your business doesn’t scale easily though, you can’t put it back in and make more. You’re stuck at $50M. What if you take the $50M out by selling the business? Now you have $50M in cash with no annual return and an investment problem. Where are you going to put $50M to work such that you can, say, spend $5M per year and still have $50M left over to do it again next year? Know any hot stocks? You didn’t make your fortune in investing the first time around, what makes you think you’re going to make it there the second time around just because you have $50M now? (Note: you are statistically and logically unlikely to achieve this outcome if you so desire it.) Know any good businesses for sale? Oh, that’s right, you just sold one!

That’s the gilded cage. You’re stuck with a $50M fortune. It’s a nice problem to have, but it’s still a problem. And nothing changes at scale besides the difficulty of the problem. It isn’t easier but actually harder to achieve yield at higher increments of invested capital due to the economic phenomenon of diminishing marginal returns (if this were not the case, you could infinitely scale things by always adding more resources to every project; DMR ensures that the more you add over time, the less incremental gain you get to the point that you get no return or a negative return, ie, waste). If you had $5B, you’d have even fewer places to put it and you’d have given up an even rarer business opportunity in selling.

Unless your business value is about to become permanently impaired and you can see the writing on the wall when no one else can — technological change, regulatory change, some kind of disastrous political or economic event — your business will never be as valuable to you on the market as it is under your ownership, assuming you’re a competent operator. I’m not going to explore what you do if you’re incompetent because that’s a special case, although it follows the same general logic and leads to the same general investment problems.

I think what this means is that the primary challenge for a family with a fortune in terms of managing their business is to be sensitive to the innovation required over time to maintain the economic value of the assets, to manage the capital structure of their business intelligently (ie, not too much debt) so they don’t lose control because of the volatility of the business cycle, and to build cash up and keep their eyes peeled for a truly unique investment opportunity, the kind that made the first family fortune possible. That means it’s more important to avoid doing the wrong things than it is to try to be finding the right things to do. It also means it requires great patience. If we’re talking about building multi-generational wealth, patience is implied in the premise, but it’s still worth repeating. Bonner emphasizes this frequently– find ways to let time work for you, not against you. He believes luck, advantages and businesses all tend to grow over time so the idea is to set things up so those advantages will accumulate in your favor.

Smart investing is not the way to build a fortune. Some people will build a fortune building an investment business (ie, a wealth manager), but it will not be the investing itself that makes them rich but the operational leverage they gain through their fee structure. Because Bonner is a skeptic of “investing” as a tool for wealth building, he would land squarely on my side of the skeptic’s divide about the value public capital markets play in economic growth. Why should a person find it necessary or valuable to contribute capital to a company building things in other people’s towns instead of investing in opportunities in their own town, right “down the street”? Profit signals and differing equity returns will attract capital from disparate areas and thereby indicate relative value across an economy, but I am skeptical that this process and the capital markets in general would be as big a part of the economy overall as they are presently if we were in anything more closely approximating free market conditions without crony capitalist interventions.

So, you may get lucky and find yourself with a fortune, small or large, from a family business. If you do, hold on to it, appreciate it, care for it, tend to it responsibly and hope you or one of your descendants has an opportunity to take another swing at an uncertain point in the future. But don’t try to force it, and don’t think there’s anything you can do to greatly enhance your opportunity beyond what it is. And understand that it will never be as valuable to you as a pile of cash as it is invested in your business.

The other big topic in the book is building the institutional framework of a long-lived family that can participate in this family business over the generations and can also be “true” to the family culture and values. Family planning is an idea that attracts me, and I have spent considerable time on my own with the concept of creating a family brand (what the ancients’ termed a coat of arms) to identify the family and its enterprises.

The trouble I have with family planning is the same trouble I have with all planning, particularly that of the central variety– what if the individual members of your family don’t really find value in your plan? Obviously, raising them with certain values and viewpoints creates a better chance for a kind of coalescing around this identity and direction. But is that how I want to raise my children, by telling them what is important? I think they can figure that kind of stuff out on their own, just as I did. Hopefully I can lead by example, and provide a demonstration of the virtue of the family virtue. But I think a potentially frustrating consequence of putting this emphasis on building multi-generational institutions together is you might find out your family just doesn’t see the use in them. That’s kind of worse case, though, and doesn’t necessarily argue against the project in general.

Yet, what if you’re successful at this? Building a business and building wealth is a coordination problem resolved by growing trust. Who can you trust more than members of your own family? Creating a family organization based on shared values and common identity and linking that organization to a business entity could allow for a uniquely successful competitive strategy and management continuity over a significantly longer timeline than the average public or private competitor– in other words, huge competitive advantages over time. Simultaneously, this arrangement could solve one of the common problems of families and their constituent members, that being how each as an individual and the family as a whole can achieve security, success and satisfaction with one’s productive efforts and life. As I’ve argued in the past, I believe the family is the best institution for accomplishing this task and it is certainly far superior to the currently dominant model of public corporations (for-profit and nation-states/institutional gangsterism).

Review – The Life-Changing Magic Of Tidying Up

The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing

by Marie Kondo, published 2014

This is a work of philosophy under cover of personal organization and household habit. The question at the center of the book is “Why do you own what you own?” Put more bluntly, it is, “Why do you have so much stuff you don’t use and never will?” If those don’t seem like profound questions, maybe you don’t live your life and enjoy your material existence in a thoughtful way.

The book’s weakness, ironically, is in the specific tidying, folding and organizing methods Kondo advocates. Reading on Kindle, I did not find any helpful pictures or diagrams (but thankfully, there is a wealth of videos on YouTube where people have demonstrated her techniques) and I found the text-explanations of how to fold or where to store different things in a closet generally confusing. I believe my confusion will be relieved with some practice and patience in experimenting with different techniques over time. But if you’re hoping to learn the “KonMari Method” for folding, storing and the like, I don’t think this book is the best resource.

Instead, the book’s strength is its principles– always key to the strength of any philosophical work. Kondo suggests a general method for tidying one’s living space– start with your own possessions, then move to shared possessions; begin with clothes, then work through to other easily accumulated items such as books, kitchen and toilet supplies and finally to trinkets and trash; when tidying by category, locate ALL such possessions throughout the home and dump them in a pile on the floor before sorting. Anyone can grasp the principles of this method regardless of their specific circumstances. Her criteria for keeping things (note: this is a positive criteria, NOT a negative criteria for determining what to eliminate) is to hold the object and ask oneself, “Does this spark joy?” It seems ambiguous, emotional… subjective. But that’s the point! It’s a deeply individual approach to tidying. Neither Kondo nor anyone else can tell you what objects bring happiness to your life and which you can do without, you have to sense that on your own.

As a rational person I was alarmed by this at first. It seemed goofy and mystic, maybe not even serious. “Spark joy”, I don’t think in those terms. But I gave it some time and realized it made sense. I started thinking about shirts and sweaters and pants I look for an excuse to wear. I have a pair of corduroys, for example, that almost make me excited for cold weather. And then I have articles that are just taking up space in my dresser and closet, items that I can never seem to find a good opportunity to use them but nonetheless I keep holding on to them because they still fit and they are nice and in good condition. But every sweater I have that I don’t wear and won’t get rid of is another sweater I can’t acquire that I might actually enjoy.

When Kondo pointed out the cost of storing all this useless stuff, I was floored. I would never pay for a “self-storage” unit somewhere, or turn my garage into anything other than a place to put my car. In fact, I regularly shake my head when I peer into neighbor’s open garages as I walk past with my dog seeing them bulging with stacked crap all the way up to the door. What on earth are these people thinking? They’re never going to use this stuff!!

But then I realized that all the items I keep around my home that I have no use for is effectively absorbing part of my rent each month– I am paying to store these items! And what’s worse, as Kondo points out, much of the time these are items I bought in bulk to “save money” but which are in such significant supply that they will last me multiple months if not years. I am effectively floating the manufacturer’s inventory and parking part of it in my home, or thought of another way, I am subsidizing his production by buying several items I don’t really need and won’t ever use with each one I do need. Rather than saving money, I am costing myself– once for buying more than I needed and twice for paying to store it in my home. For me, I’d argue a third time with the emotional cost of being aware of and surrounded by these unused possessions that continually fail to “spark joy.” Just the other day I bought a pack of 12 pens for annotating books as I read. I was unhappy with my previous pens and wanted to try something new. I didn’t need 12 pens, I needed 1 or 2. But I bought 12 for around $10 because I was “saving” money over buying a pack of 3 for $5. The problem is, it turns out I kind of hate these pens and now I have enough to last me a couple years at my current rate of use. Kondo made this so clear to me!

Another startling revelation was the way I’ve shifted some of my own tidying burden to family members. It’s hard to visit my childhood home at times because my parents have a bad case of hoarding. But I’ve had no problem storing my finished or unread books in an unused room of the house I used to occupy when I occasionally stop by. One part of me has been mentally scolding my parents for hoarding and not cleaning up their living space. But another part of me has been dumping off my own clutter on them, completely unaware! I have resolved to go over there and dump a bunch of the stuff that remains.

While I am excited to declutter clothes (and look forward to the opportunity to purchase new articles I might actually enjoy wearing with the newly freed space), hallway closets, linen storage, bathroom and kitchen cupboards and more, one area I struggled with was her suggestion for decluttering one’s library. I love books. Or, rather, I love the idea of reading my books. But Kondo helped me clarify another meaningful point– many of the books I purchase and do not read were meant only to gratify my own ego, ie, “It’d be so great to know more about X.” When I purchase a book and don’t read it for months, I probably won’t read it ever. The inspiration and desire to study that topic has come and gone. I have made the mistake, time and time again, of purchasing far more books than I could ever hope to read and that I will ever be able to sustain an interest in. It’s wasteful.

There are a few books I really do enjoy and which I will read again. There are books I’d like to keep which I may not read again, but which I believe my children will gain a benefit from studying at an appropriate time in their life as I did. You can argue that it’d be better to buy them their own copy at that time, which is true, but this is a limited case in which I am okay holding on to a few titles for them in the meanwhile. But most of the books I own that I haven’t read yet, won’t get read– they’ll remain as costly monuments to an ambition not realized. And many more which I have read and absorbed from them what I can will similarly sit on my shelves unused as a monument to the hope that there is more juice to squeeze. But the pulp is dry at this point. I have made another resolution, which is to keep the few titles I know I will re-read because I’ve re-read in the past, the few titles I want to share with my kids and the few titles I am excited to read in the next month or two at my normal pace of reading. Everything else (read, unread) is getting sold or donated. I want to have a limited library of titles that “spark joy” and feel good to see on my shelf and not a stack of paper that I subconsciously feel a burden to get to as some kind of project.

Marie Kondo’s “Life Changing Magic” invites us to live our lives more consciously and to purchase, use and store with purpose. Any book that helps me to resolve logical contradictions in my own thoughts and actions is valuable to me. I took far more away from this book than I thought I would going into it given that I already have a reputation for being a neat freak!

 

Notes – The Organized Executive

I recently had the good fortune to listen to Bruce Breier, a time management and organization guru, give a presentation on “The Organized Executive”. What follows are notes from his handouts and the discussion that I considered valuable. Bruce is a professional consultant and can be reached by e-mail. He’s located in La Jolla, CA.

“What’s your biggest time management challenge these days?”

The best place to start in improving one’s time management and organizational practices is to consider a simple needs assessment. Which of these are you missing or need help with?

  1. a methodology for building and managing your annual business plan
  2. an organized program for your direct-reports that define goals, metrics and strategy
  3. a master task list to track commitments and to-do items
  4. a consistent daily and weekly planning system
  5. scheduled private work time (PWT) each day to accomplish priorities
  6. reducing unjustified interruptions to your workflow throughout the week
  7. method for delegating tasks for on-time delivery through the efforts of others
  8. effective and efficient meetings within the business
  9. a system for organizing and managing the email environment
  10. an uncluttered office and work area

Try printing this list and seeing which items you are missing. Then observe your direct reports and do the same for them (or ask them to complete the needs assessment on their own and share the results with you). You will quickly identify the high priority items missing from your time and workflow management system. Start with the most critical item first, then work through the remainders in order.

Building the system

An effective time and workflow management system is a system. That seems redundant but it’s worth repeating– all the elements must work holistically. You task management system should work with your calendar system; your communication system (email, phone and live meetings) should work with your goals and annual plan process. The idea is to create consistency between all the elements to drive a focused effort in the direction of greatest personal and organizational priorities. As an executive, you can not afford to use a system that operates any other way.

After performing your needs assessment, you can consider the following recommendations as solutions to the gaps in your organizational process. Remember, these elements all work together so make sure you understand how, if you don’t have a gap in a particular area, maintaining your current system in that area will serve to complement these recommendations:

  1. use a sequential checklist to develop, finalize and regularly manage the business plan for the fiscal year
  2. establish “success descriptions” for each position on your staff, defining priority goals, metrics and the organizational strategy to achieve excellence for the fiscal year
  3. utilize a master task list system for your role and populate it with to-do items, attaching due dates or deadlines to all tasks
  4. establish a recurring appointment for weekly planning on your calendar, a day and time to get ready for the following workweek; utilize the “bookends” concept, allowing a 15-30 minute start up period each morning and a 15-30 minute wrap up period each afternoon
  5. schedule 5-10 hours per week of Private Work Time (PWT) to accomplish daily and weekly priorities; pre-determine how this time will be spent during your morning book end
  6. establish a written policy for diagnosing all interruptions for urgency prior to causing or accepting them and communicate it to all members of your team; lead by example by respecting other people’s time accordingly
  7. delegate through acutely clear language in terms of what the desired outcome looks like and when it must be accomplished by; proofread for clarity, accuracy and tone before sending electronically
  8. commit to a standard protocol for meetings (such as the structure outline in Death by Meeting) and establish a zero tolerance policy for meetings that do not comply
  9. purge inbox and sent items folders of all inactive messages and institute the “Active Only” or “Inbox Zero” method
  10. allocate time to completely purge and organize your physical workspace, establish a filing system for active and inactive documents

Putting It All Together

Now that you’ve performed a needs assessment and considered specific recommendations for improving your organizational practices, what follows are guidelines for implementing each recommendation successfully.

The Business Plan Model

The BPM begins with an executive summary of the the business in terms of where it has been and where it is going and what needs to be accomplished in the next year to get there. This is followed by the vision statement, which outlines the guiding principle of the organization’s actions (such as “To be the highest quality provider of fresh seafood groceries”). The business plan should include a strategic assessment (SWOT analysis) and an outline of the top 3-5 fiscal year priorities. Who will be in charge of these priorities and accomplishing them is the goal leader identification component, followed by the strategy for accomplishing each. Key Success Indicators provide agreed upon metrics for measuring progress toward the achievement of each priority. The team should also develop graphical scoreboards to aid in “at a glance” study of performance to help the team know if it is winning or losing and how much time is left to get the job done. Finally, the team divides the strategy into 90-day plans and meets monthly to review the effort to date.

The Success Description

This is a one page business plan for each position on the team (the executive needs this for the direct-reports on his staff, but they in turn should develop them for each position on their departmental teams). The idea is to make it clear what everyone’s responsibility is to help achieve the annual business plan outlined above, so these descriptions need to reference the items developed in the business plan to produce clarity of vision and harmony of effort. Each position should have three top priorities and an organizational strategy for success as well as unique KPIs. Like the annual business plan, 1-3 graphical scoreboards for each position help each “player” to tell if they’re winning or losing and how much time they have to turn the game around. Reviews should be conducted, utilizing the graphical scoreboards, monthly.

The Master Task List

The MTL is simple to employ. First, select a method for managing the MTL, such as a notebook and pen, online software like Evernote or even an Excel spreadsheet. Next, fully populate the list with ALL tasks and to-dos. Every document sitting on your desk or in your email or residing on other assorted task lists should be translated into an actionable activity and placed on the MTL. The most critical step is to assign a due date or deadline for every task, ie, “Deliver inventory analysis report to inventory manager by Tues, July 1st”. A task without a due date can not be prioritized and is unlikely to be accomplished. Once each task has a due date, sort the list by priority, earliest due dates first. Scan the list periodically to make sure you are aware of intermediate steps necessary to accomplish long-dated items– you can also consider creating intermediate, sort-term tasks and due dates for such items to make sure you don’t miss a deadline far in the future because you forgot to prepare essential steps ahead of time. Items which come due repeatedly should be on a calendar and set up as an “appointment” rather than as part of the MTL; they can be added to a daily priority task list during morning planning as necessary.

New tasks should be “downloaded” from sources (email, notepads/meeting logs, conversations with others, etc.) daily, deadlined and re-sorted. Another good practice is to have a “parking lot” on your MTL that tasks can be added to ad hoc throughout the day, then re-sorted at the end of the day for future work. As an executive, request MTLs for ALL managers and check-in on their MTLs occasionally for organizational awareness.

Weekly Planning

Private Work Time (PWT) is essential for every organized, effective executive. This is time in which the individual is inaccessible to anyone else and can focus resolutely on their own work and priorities. Select the day of the week and the time of that day and then make it a recurring appointment on your calendar. Develop a realistic task list to get accomplished during each PWT period during that day’s morning start-up. To allow availability for PWT, confirm meetings for the following week by Friday afternoon and then do not schedule new meetings and activities during the week that weren’t confirmed the week previous, otherwise you can quickly over schedule all “available” gaps on your calendar and leave no time for PWT. Utilize acutely clear delegation to keep yourself uninterrupted and your organization moving while you are in the zone.

Workday Bookends

Workday bookends are the way to synchronize activity between the MTL and actual daily workflow. Begin with the Morning Start-up: scan email for urgent messages, define today’s priority tasks (3-5) and prepare notes and research for scheduled meetings. Time permitting conduct email correspondence as necessary. At the end of the day, leave scheduled time for the Daily Wrap-up: download new tasks to the MTL, file/toss new paper documents, preview tomorrow’s schedule, engage in acutely clear delegation as needed and finish with clean-up email correspondence. Establishing this “spool up/spool down” rhythm to your day is critical to getting control over your time and workflow. The time spent in preparing and debriefing will save much more time lost to interruptions, lack of focus, confusion of priority, etc.

Private Work Time (PWT)

One of the most powerful and most overlooked concepts in every organized executive’s arsenal. Key considerations are how much time per day to devote to PWT? All at once or split it up? What specific time(s)? When will you begin using PWT and when will you schedule it? The concept is pretty self-explanatory. Think of it as a “meeting with yourself”, put it on your calendar and don’t allow interruptions just as you wouldn’t allow interruptions in a meeting with staff, vendors or customers.

Interruptions Management

Interruptions confuse prioritize, ruin focus and create a culture of crisis and anxiety for everyone. It’s critical that everyone in the organization be offered the opportunity to work without interruption as much as possible during the day. An interruptions management system is the solution. First, develop a policy about interruptions in terms of urgency and importance– what kind of interruptions, if any, are acceptable to make (ie, “The building is burning down” or “A key customer is on the line and threatening to end his contract”). Every interruption must be able to be classified as important according to a pre-determined standard, and urgent in terms of not being able to be handled any other time than NOW. Develop a procedure for communicating interruptions and issue a directive to all team members instructing them on how to handle interruptions going forward. There may be different policies based on departmental versus organizational needs (ie, “You may interrupt the sales manager with a customer pricing request; you may not interrupt the CEO with a customer pricing request.”) Request compliance from all team members and monitor for effectiveness monthly.

Acutely Clear Delegation

Acutely Clear Delegation means delegating with instructions that leave no ambiguity or room for creativity in terms of the quality of output or the return time necessary. ACD must explain, specifically WHAT is to be accomplished by WHEN. Attention should be given to the receiver of the instruction in terms of their level of sophistication and communication preferences (ie, don’t send an email to someone who is known for failing to check it). If being sent electronically, proofread. The most important part of ACD is the timing component– if the person receiving the delegated task does not think it can be accomplished in that time frame, they need to immediately communicate with the delegator and explain the obstacles to completing the task on time and requesting a new deadline that is realistic. Finally, the person delegating must “Delegate and Trust”– they have to have faith that the person responsible will take ownership and see it through. Failure to do so should result in a coaching session on commitment to accountability. Repeat failure may be grounds for reviewing the employment agreement. An organized executive does not have time to micro-manage delegated tasks.

Standard Meeting Protocol

A well-run meeting involves several elements. The first is to note at the beginning of the meeting the cost of the meeting in terms of the time value of money or the money value of a goal to be communicated and achieved after the meeting, or the strategic value to competition in failing to meet on this issue. This sets a meaningful context for meeting participants to appreciate the seriousness need for focus and attention. Any items requiring preparation in advance by meeting attendees should be made known by the meeting leader. The meeting must start on time and end on time so that everyone can plan their day around it and not develop resentment about meetings creating interruptions or unplanned challenges for their other activities that day. Meetings require active participation by all participants– if there is nothing for them to do, they shouldn’t be there. All participants should take notes so they have their own records and if there is an official secretary for the meeting, notes should be collected and distributed after the meeting is over. All meetings should end with an “Acutely Clear Ending”, ie, “Person X will accomplish Task Y by Time Z following the conclusion of this meeting” so everyone knows what must be done before the next meeting. For more meeting structure and concepts, consider the Death By Meeting.

Email Management

The first task to get control of email is to decide on the Active Only or Inbox Zero method. Active Only means your inbox only contains items you’re actively addressing– all others are trashed, archived or added to a task list for future follow-up. Inbox Zero is a slightly more extreme version of this approach where all emails requiring follow-up are created as tasks on the MTL and everything else is archived when read or trashed if it is pure junk. In this situation, no items are left in the email inbox once the inbox has been scanned and sorted. Once a method is chosen, purge/file/task all inbox messages accordingly. If your email software is capable of it, sort your email inbox by oldest on top– it’s easy to get distracted by the “First In, First Out” email management method and ignore aging items received earlier. Always proofread emails before sending, particularly when delegating tasks that you expect follow-up on from others. Hold all emails that are not crucial right now. Finally, utilize the workday bookends concept to catch up on non-critical email correspondence.

Office Organization

Begin with a total office purge. Accumulate all items on desktops or work surfaces, filing drawers, etc. into one stack. Create a new filing system in filing drawers based on anticipated or most logical filing categories for your workflow or business needs. Then, go through your pile and choose to either File/Archive in your new filing system for later reference, Task for an item requiring follow-up (then trash once Tasked) or Trash for anything that does not require follow-up and is no longer relevant or valuable. For items requiring archiving, consider scanning a copy into your computer and maintaining your filing system electronically instead. On your desk, set up chronological desk trays for incoming media. To maintain your office organization system, institute a “File/Act on/Delegate/Shred” process at your Daily Wrap-up. You should come to and leave from a spotless office/desktop everyday.

Additional Resources and Further Reading

Here is a list of books for the “Organized Executive” recommended by Bruce Breier for further study:

  • The Effective Executive, by Peter Drucker
  • The 7 Habits of Highly Effective People, by Stephen Covey
  • Good to Great, by Jim Collins
  • Death By Meeting, by Patrick Lencioni
  • The Way We Work Isn’t Working, by Tony Schwartz
  • Getting Things Done, by David Allen

Other Notes
Here are other notes I took during the discussion which help give further context and detail to Bruce’s system:

  • Start your day with a daily plan numbering top 3 priorities for the day; do this in the first 15 mins after arrival
  • Friday is the best day of the week to plan for the following week, 15-30 mins of uninterrupted time around 3/330pm
  • “What gets scheduled, gets done.” Schedule “PWT” (Private Work Time), 1-2hrs, 1-2x per day on your calendar where you are unavailable, inaccessible and uninterruptible to focus on your primary tasks; this is your executive privilege and you should make full use of it
  • A task, project or goal without a deadline or due date is a philosophical statement; use a master task list sorted by due date to keep yourself organized and productive
  • “Good is the enemy of great”, we must be selective to be excellent
  • Never let anyone sit down in your office until you know what they want
  • 5 necessary characteristics of those who work for you: initiative, self-reliance, commitment, accountability and empowerment
  • You need a written policy about how to handle disruptions: all disruptions must be prioritized for urgency and answer in the affirmative the question, “Does this need to be addressed RIGHT NOW?”
  • Maslow, human beings are deficiency-motivated, ie, avoidance of fear or pain; hard to make change happen until a person experiences enough fear or pain without it
  • Goal-setting approach for annual business plan: 1 goal each related to customer service, business development, financial performance, staff effectiveness and operational efficiency
  • By Friday afternoon of the present week, next weeks meeting calendar should be finalized, all new requests can be made for the following week; this prevents you from filling your calendar with meetings in “open slots” and never having time to get work done; also ensures you can be prepared for all meetings with plenty of time
  • Delegation depends on trust; trust requires your direct reports be “CMO”, Competent, Motivated and Organized; if your manager is not competent, you can train them; if they are not motivated, you can coach them; if they are not organized, you can help them build systems; if they are unresponsive, you may need to find someone else to get the job done
  • Successful leadership entails continually accomplishing pre-determined priorities primarily through the efforts of others
  • You don’t keep up with what you delegate to others, you delegate and trust. If you can’t trust, you have a problem and need to work on that
  • Let your leadership team run your annual plan, and your annual plan run your business; run your daily plan, and let your daily plan run your day
  • Schedule monthly reviews with your direct reports to see where tweaks need to be made