Output Vs Creativity

I’ve handed out a few bonuses in my time. Some years our results were spectacular; other times poor. Payouts went up and down accordingly. I can only remember two people opening the envelope and saying “thank you”. Both cases were in poor years. It never happened in a good one.

Has the 'celeb' thing plundered this old word?

Charisma derives from Charis, an associate of Aphrodite in Homer’s Odyssey. Charis was beautiful, but not a central character. Nothing about her seemed particularly special. She was like many of today’s “celebs”: she looked OK but didn’t do much. 

We could make similar observations about celebrity CEOs. They don’t make much difference either. Several studies show corporate performance to be anywhere from average to disastrous under so-called charismatic leaders.

Disadvantaged families can save the government money

I was abused by my own mother. She was abused by hers. I want it to stop now. I don’t want my children to go through this.

Her concern was not what happened to her. She was terrified of treating her own daughter the same way. It’s why she came to the Newpin centre.

Newpin is a voluntary therapeutic community where struggling young mothers and fathers spend as many as four days a week for up to two years.

They commit because they are troubled parents responsible for raising human beings. Despite often desperate histories of intergenerational dysfunction, they want to get it right.

They are feeling the heat too

What surprises me most in negotiations is when the other side folds. It comes out of the blue. It doesn’t seem to reflect the strength of my position. It’s often contrary to how they had presented, even the table-thumpers.

I’m not a particularly skilled or highly experienced negotiator. But one thing I’ve noticed is it’s always darkest before dawn. Just when I think I have been worn down, I find out they have been too. 

I’ve also noticed a few things common to success.

The better half of salesmanship

“He’s so gregarious. He’d make a great salesman.” It conjures up the positive, outgoing personality who always gets the order.
 
Is that actually the reality?
 
I’ve managed a lot of sales people. The ones who put runs on the board – that’s runs plural, not just the odd flashy win – often have a touch of reserve. They would place in a popularity contest, but not win it.
 
Extroverted sales executives often feel underappreciated. Sometimes they threaten to move to the opposition. I freaked out the first time that occurred in my firm. What would happen to relationships with the key clients? How would the rest of team react? What would the market think? Yet, three months later, the business was ticking over quite nicely.

Predictions are usually wrong

It’s February. We’ve made it through another prediction season. We now know what to expect in 2013.

Or do we? After all, most of the things commentators told us would happen a year ago failed to materialize. Mostly, they were wrong.

Some failures were well broadcast. US election predictions were pretty much all wrong. Left and right-wingers were equally hopeless. They had Obama winning or losing by huge margins. The result was a close call. Democracy, as usual, muddled through.

The lever you need to press is attitude          

We often think we are letting go of old ideas when in reality we are just adjusting our grip. Our lateral notion of change turns out to be cosmetic, not fundamental.

We sometimes see change only in physical terms, like an actual product or an operational process.

Those things are an outcome of change, not a driver of it. What needs to shift first is attitude.

Are successful people right, lucky or both?

In the mid-1980s, I listened to Nobel prize-winning finance professor, William Sharpe, address the Hong Kong Society of Securities Analysts.

Sharpe was one of our heroes, having developed the Capital Asset Pricing Model, or CAPM. We don’t need to go into that here, but for investment geeks at the time, CAPM was probably up there with sex.

Then the professor told us it was impossible to consistently beat the market.

Home truths and humility

Not everyone was happy with this. We admired the mathematics behind his models. It gave us the stamp-approval of science. But the idea that we couldn’t beat the market was less easy to digest. Our job was to come up with market-beating ideas. And after all, we were pretty smart.

Someone asked: how do you explain the track record of a particular fund manager (from memory, Peter Lynch, of Fidelity) who had been consistently beating the market?

Sharpe proposed a simple exercise. He reassured us we were all smart and that we would all toss a coin. Those with “tails”, roughly 50%, would leave the room. Then we’d do it again. And again, until one person was left. That person, said Sharpe, was Peter Lynch.

It’s been demonstrated many times since. It’s not simply the law of averages. You can get wrong-footed by a market but you can also get right-footed. It happens to smart people too.

A decade later, another Nobel laureate, Myron Scholes - who developed even sexier models than Sharpe - launched a fully hedged bond fund that couldn’t fail. When it did, it took a multi-billion dollar bail-out to avoid a viral financial disaster.

Both Lynch and Scholes were smart people. They were good at what they did. Markets went right for one; wrong for the other.

That’s what the chart below says. It’s from Dennison Hambling, Chief Investment Officer at First Samuel.

It’s very simple. It assumes that changes in the value of shares reflect changes in earnings per share (eps). That makes sense. If earnings go up, so will the share price. Add the dividend and you get the total return. This applies to all markets.

Using Australia as an example, eps has grown at an average of 8% per annum over the long term; the dividend yield has been about 4%. If that’s right, then total return should rise around 12% a year on average.

As the chart shows, that’s pretty much what happens.

The straight line equals 12%. The red line tracks total return. It can soar above the line or drop sharply below it. Invariably, though, it reverts to the 12% mean.

Next time you see a smart person going better than the rest, acknowledge their smarts and their hard work, but remember they may also have been right-footed. Too often we see only the downside as an aberration. In reality, the upside can be equally so.

Real value comes from sustaining earnings through both. If you can do that, it means when it comes to a business investment decision, you have the luxury of choosing your preferred aberration - whether it’s a time to sell a business, or alternatively, to invest in one.

The problems with planning

Do businesses turn out exactly like the business plan? None of mine did. Even my most sophisticated spreadsheets never produced anything like the numbers I forecast. Personal plans were not much different.

What is this historic stock market chart?

It's looks like a nice ride for any investor. It moves higher over time but not in a straight line. It does so with the usual higher tops and higher bottoms. It covers a period of several years.