Annie Duke is very articulate which allows me to spend more time than usual in this post just letting her make points. There is less of my usual commentary and more pointers to other material to keep the post from being too long.
Why You Should Not Angel Invest
No one has done more thinking and writing the impact of luck on making decisions than Michael Mauboussin. He writes that luck has three core elements: 1 it operates on an individual or an organizational basis; 2 it can be positive or negative; and 3 it is reasonable to expect that a different outcome could have occurred.
That is, we can identify the states of the world, but not their probabilities. There is no way that one can sensibly assign probabilities to the unknown states of the world. My th blog post on Howard Marks is about thinking probabilistically when making decisions. I doubt that is a topic I have discussed more in course of writing this blog that the importance of thinking in terms of probability in making decisions.
She believes this framing is helpful in reducing the risk that dysfunctional heuristics will interfere with a sound decision making process. I have written often on this topic. The best and easiest way to lower a failure rate is to avoid investing in situations which you do not understand or do not have experience. The goal of an investor who follows a circle of competence approach should be to consistently avoid stupidity. Everyone can benefit from having wise colleagues who can help them make better decisions.
Charlie Munger has said on this topic:. Everybody engaged in complicated work needs colleagues.
Are successful entrepreneurs just lucky? Two sides of the argument
Just the discipline of having to put your thoughts in order with somebody else is a very useful thing. We all benefit from the perspective of other people since we have lousy perspective on ourselves. Total isolation does not work. You need interaction, putting your own thoughts into expression; you learn things just from doing it.
As any semi-regular reader of this blog knows, I have written a lot on Charlie Munger more than 20 total posts just on him are linked to below. One of these posts on Munger is about how he learns from failure.
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This is a wonderful trick to learn. His influence on the most important financial decision in my life makes me feel grateful. It is also the primary reason my I wrote my book on Munger.
- The Red Gate (The ODeirg Legacy Book 1).
- Dulce escándalo (Deseo) (Spanish Edition).
- Theorien und Modelle der BWL - I: Effizienz, Effektivität, Gutenbergsches System der Produktionsfaktoren (German Edition).
- What is Happening? Body Smells and Face Bumps (Teen Topics).
- Three Saving Graces For Investing?
I wanted to get independent. I just overshot. In my blog post on poker I included this story I first heard from Mauboussin which illustrates what Duke is talking about just above:. So the dealer is asking for hits and everybody knows the standard in blackjack is that you sit on a The guy asked for a hit. But in that one particular instance: bad process, good outcome. If the process is the key thing that you focus on, and if you do it properly, over time the outcomes will ultimately take care of themselves.
In the short run, however, randomness just takes over, and even a good process may lead to bad outcomes. You dust yourself off. You make sure you have capital to trade the next day, and you go back at it. One person who is a model for thinking for yourself is Richard Feynman. Finding the optimal growth rate for a new enterprise is a difficult and critical task. To set the right pace, entrepreneurs must consider many factors, including the following:. Economies of scale, scope, or customer network. When scale causes profitability to increase considerably, growth soon pays for itself.
And in industries in which economies of scale or scope limit the number of viable competitors, establishing a favorable economic position first can help deter rivals.
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- Sous le soleil de Jérusalem (Littératures) (French Edition).
- Best Decision Making Books of All Time - BookAuthority.
- Are successful entrepreneurs just lucky? Two sides of the argument - SmartCompany.
- The Right Attitude!
The ability to lock in customers or scarce resources. Rapid growth also makes sense if consumers are inclined to stick with the companies with which they initially do business, either because of an aversion to change or because of the expense of switching to another company. Similarly, in retail, growing rapidly can allow a company to secure the most favorable locations or dominate a geographic area that can support only one large store, even if national economies of scale are limited.
If rivals are expanding quickly, a company may be forced to do the same.
Resource constraints. A new venture will not be able to grow rapidly if there is a shortage of skilled employees or if investors and lenders are unwilling to fund an expansion that they consider reckless. A venture that is growing quickly, however, will be able to attract capital as well as the employees and customers who want to go with a winner.
Internal financing capability. When a new venture is not able to attract investors or borrow at reasonable terms, its internal financing capability will determine the pace at which it can grow. Businesses that have high profit margins and low assets-to-sales ratios can fund high growth rates. A self-funded business, according to the well-known sustainable growth formula, cannot expand its revenues at a rate faster than its return on equity.
Tolerant customers. When a company is young and growing rapidly, its products and services often contain some flaws. In some markets, such as certain segments of the high-tech industry, customers are accustomed to imperfect offerings and may even derive some pleasure from complaining about them. Companies in such markets can expand quickly. But in markets in which buyers will not stand for breakdowns and bugs, such as the market for luxury goods and mission-critical process-control systems, growth should be much more cautious.
Personal temperament and goals. Some entrepreneurs thrive on rapid growth; others are uncomfortable with the crises and fire fighting that usually accompany it. The third question entrepreneurs must ask themselves may be the hardest to answer because it requires the most candid self-examination: Can I execute the strategy? Entrepreneurs must examine three areas—resources, organizational capabilities, and their personal roles—to evaluate their ability to carry out their strategies. The lack of talented employees is often the first obstacle to the successful implementation of a strategy.
During the start-up phase, many ventures cannot attract top-notch employees, so the founders perform most of the crucial tasks themselves and recruit whomever they can to help out. After that initial period, entrepreneurs can and should be ambitious in seeking new talent, especially if they want their businesses to grow quickly. Entrepreneurs who hope to turn underqualified employees into star performers are almost always disappointed. In determining how to upgrade the workforce, entrepreneurs must address many complex and sensitive issues: Should I recruit individuals for specific slots or, as is commonly the case in talent-starved organizations, should I create positions for promising candidates?
Are the recruits going to manage or replace existing employees? How extensive should the replacements be?
Should the replacement process be gradual or quick? Should I, with my personal attachment to the business, make termination decisions myself or should I bring in outsiders?
A young venture needs more than internal resources. Entrepreneurs must also consider their customers and sources of capital. Ventures often start with the customers they can attract the most quickly, which may not be the customers the company eventually needs. Similarly, entrepreneurs who begin by bootstrapping, using money from friends and family or loans from local banks, must often find richer sources of capital to build sustainable businesses.
For a new venture to survive, some resources that initially are external may have to become internal. Many start-ups operate at first as virtual enterprises because the founders cannot afford to produce in-house and hire employees, and because they value flexibility. But the flexibility that comes from owning few resources is a double-edged sword.
Just as a young company is free to stop placing orders, suppliers can stop filling them. Furthermore, a company with no assets signals to customers and potential investors that the entrepreneur may not be committed for the long haul. A business with no employees and hard assets may also be difficult to sell, because potential buyers will probably worry that the company will vanish when the founder departs.
To build a durable company, an entrepreneur may have to consider integrating vertically or replacing subcontractors with full-time employees. The hard infrastructure an entrepreneurial company needs depends on its goals and strategies. They must invest more in organizational infrastructure than their counterparts who want to build simple, single-location businesses at a cautious pace. Few entrepreneurs start out with both a well-defined strategy and a plan for developing an organization that can achieve that strategy. The founders of such ventures improvise.
They perform most of the important functions themselves and make decisions as they go along. Once that becomes their goal, however, they must start developing formal systems and processes. Such organizational infrastructure allows a venture to grow, but at the same time, it increases overhead and may slow down decision making.