#12 - Trends and Transitions
On Permanent Skills, ETFs, Digital Transformation, Generalists and Simpson's paradox
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Happy Independence Day to our readers in India.
One of the most powerful quotes in Robert Pirsig’s Zen and The Art of Motorcycle Maintenance is -
“The true system, the real system, is our present construction of systematic thought itself, rationality itself, and if a factory is torn down but the rationality which produced it is left standing, then that rationality will simply produce another factory. If a revolution destroys a systematic government, but the systematic patterns of thought that produced that government are left intact, then those patterns will repeat themselves in the succeeding government.”
As the debate continues on whether the transition of Work From Home (WFH) will be complete and whether it will be a continuing norm or the quintessential question - will WFH replace offices? The answer lies not in whether we found new benefits and adopted in working from home, but in the rationality that produced the offices in the first place. Are some of the reasons for the existence of huge commercial campuses and centralized workplaces still valid? Has the trend accelerated by the pandemic killed the reasons and completed the transition ?
In today’s issue we look at -
Expiring Vs Permanent Skills
Exchange Traded Funds (ETFs) and misconceptions
Fast Food and Economists
How To Change Someone’s Mind
Digital Transformation and its actual meaning
Becoming a generalist
Let us dive in.
Expiring vs Permanent Skills
Read the article here
Morgan Housel writes that every field has two skills - expiring skills which are vital at a given time but prone to diminishing as technology improves and a field evolves and permanent skills which were essential and will continue to remain essential.
Expiring skills tend to get more attention and permanent skills are hard to define and quantify. Some of the permanent skills that can be applied to many fields include -
Not being a jerk
The willingness to adapt views you wish were permanent
Getting along with people you disagree with
Getting to the point
Respecting luck as much as you respect risk
Staying out of the way as much as you offer to help
Accepting a certain degree of hassle and nonsense when reality demands it
The ability to distinguish “temporarily out of favour” from “wrong”
New trends may change styles, methods and place of working but certain skills will remain permanent.
Few Misconceptions About ETFs
Read the article here
A popular product that has picked up prominence among the investing community is the ETF (Exchange Traded Fund). They are similar to mutual funds except that they are traded on the exchange like a stock. You can see the real time price of the ETF anytime. ETFs and mutual funds are similar in many ways and some of the misconceptions about ETFs are -
ETFs are more volatile: ETFs feel more volatile as you can see the price fluctuation throughout the day as opposed to mutual funds whose price you can see only after the market has closed.
ETFs are copies of mutual funds: Most ETFs are index funds i.e. passively managed funds that seek to match the performance of an underlying index like Sensex or Nifty.
ETFs are more expensive: ETFs can be more expensive as they are brought and sold like stocks but it depends on the brokerage. Some brokerage firms offer commission free ETFs and there is no initial investment required to own an ETF unlike mutual funds which may require an initial minimum investment.
ETFs are less tax-efficient: The ETF does not have to adjust its holdings when you buy or sell it which can trigger gains or losses. The ETF buys and sells its underlying securities but the external forces do not affect the ETF as easily as a mutual fund.
All index ETFs are equal: Expense ratios and tracking errors can lead to a difference in performance of each fund. Tracking error is difference in the performance of the index and the index ETF, a positive tracking error is acceptable but a huge deviation on the negative side might expose you to a risk profile you did not sign up for.
What Fast Foods Economists Eat?
Read the article here
The price of pizza in New York or the cost of a Big Mac in Beirut tells economists and market analysts how the world is changing and managing transitions.
Pizza principle: In 1980, Eric Bram, a native of New York, noticed that the price of a slice of pizza matched the cost of a subway ride in the city for approximately 20 years. Analysts have noted that as the cost of pizza goes up, transit fares also follow the increase.
The Big Mac and KFC index: How much a Big Mac costs you in Beirut, New York and Mumbai tells you about purchasing power parity - whether exchange rates mean that a product costs the same in different countries.
Popcorn index: In 2009, Odeon cinema company announced the Odeon popcorn index which it claimed showed higher sales and therefore signs of economic recovery in Britain following the global financial crisis of 2008.
French Fries: In 1998, an article observed that sales of French fries can be a helpful indicator of trade between America and Asia as this food leads US industries into foreign markets. The consumption of French fries also indicated how well-developed an Asian economy had become.
Mars Bars: Financial Times writer Nico Colchester pointed out that the price of the confectionary in Britain was neatly correlated with the buying power of pound sterling.
Waffle House Index: US authorities have used the length of the Waffle House menu to see if supplies at the restaurant are low after hurricanes
Any other quirky indices anyone?
Changing Someone’s Mind
Read the article here
There is little friction involved in convincing people who are your natural supporters but trying to change the mind of a dissenter or a detractor can be difficult. Leaders who were successful in overcoming others’ skepticism were those who diagnosed the root of fundamental disagreement before trying to persuade. Depending on the answer, they approached the situation with the following targeted strategies -
The Cognitive Conversion: A successful cognitive conversation requires two things - sound arguments and thoughtful presentation. Not introducing emotions into discussions is important and it is possible that the detractor may disagree on a specific issue in the future. It should be used when your detractor opposes your argument for a logical reason, has a no-nonsense attitude and can set aside emotions in their decision making process.
The Champion Conversion: This requires investing time personally learning about your detractor and building rapport with them. It is not about arguments or presentation but about understanding their perspective. However, building a relationship does not mean you can rely on it alone and expect your detractor to champion and advocate your illogical decisions. It should be used when your detractor is not easily persuaded through cognitive arguments or when they harbour a grievance in your relationship.
The Credible Colleague Approach: This requires bringing an advocate of your approach from another part of the organization, a peer or a superior, who might be better suited to convince this detractor. It can be a double-edged sword as it may exacerbate your detractor’s opposition. It is important to find the right colleague who can tactfully advocate your position while maintaining a cordial relationship. It should be used when the detractor’s deeply held beliefs are fundamentally opposed to your proposal.
Managing change requires influencing skills and this is a credible approach towards trying to build influence.
Digital Transformation is Not About Technology
Read the article here
Digital transformation is a buzzword that is much used and abused like many management words.
A recent survey of directors, CEOs, and senior executives found that digital transformation (DT) risk is their primary concern in 2019. Why do some Digital Transformation efforts succeed and others fail?
Fundamentally, it’s because most digital technologies provide possibilities for efficiency gains and customer intimacy. But if people lack the right mindset to change and the current organizational practices are flawed, Digital Transformation will simply magnify those flaws.
The five lessons the article talks about are -
Figure out your business strategy
Leverage insiders
Design customer experience from the outside in
Recognise employees’ fear of being replaced
Bring Silicon Valley start-up culture inside
Digital transformation means doing things in a fundamentally different way which includes all aspects of any business. When you see a company claiming to do digital transformation, do check if they are changing the fundamental way of doing a particular process.
Becoming A Generalist
Read the article here
Many of us have been told that deep expertise will lead to enhanced credibility, rapid job advancement, and escalating incomes. The alternative of being broad-minded is usually dismissed as dabbling without really adding value. The rapid advancement of technology, combined with increased uncertainty, is making the most important career logic of the past counterproductive going forward. Today’s dynamic complexity demands an ability to thrive in ambiguous and poorly defined situations, a context that generates anxiety for most, because it has always felt safer to generalize.
Vikram Mansharamani, a lecturer at Harvard, argues that in a world that’s changing rapidly, it’s important to be flexible, agile and willing to use multiple tools. In short, be a generalist. He reminds us that “Jeff Bezos was not a retail specialist who took on his competitors and won. He was a relative newcomer to retail but was able to adapt rapidly to seize a gigantic opportunity.”
Three tips from his essay -
Zoom out and pay more attention to the context in which you’re making decisions.
Read the whole paper, not just the section about your industry.
Think about how seemingly unrelated developments may impact each other, by looking for interconnections across industries
Mental Model For The Week - Simpson’s Paradox
A trend or result that is present when data is put into groups that reverses or disappears when the data is combined.
A trend can appear in groups of data but disappear when these groups are combined. Simpson’s paradox can make decision-making hard. We can scrutinize and re sample our data as much as we are able to, but if multiple different conclusions can be drawn from all the different categorizations, then choosing a grouping to draw our conclusions from in order to gain insight and develop strategies is a difficult problem.
This effect can easily be exploited by limiting a dataset so that it shows exactly what one wants it to show. Hence, beware of the strongest correlations.
Book For The Week - The CEO Factory by Sudhir Sitapati
This is a wonderful introductory text for an MBA graduate or an entrepreneur who looks to learn the lessons of management from a practitioner’s perspective. It covers how Hindustan Unilever, an FMCG giant in India looks at marketing, branding, pricing, product development, pricing, sales, finance, HR, etc.
The author writes that there are five ingredients that define Hindustan Unilever - a middle class soul that aspires to grow and conservative on costs, a meritocratic culture, having a comfortable touch with the top leadership and also rooted on the ground with the consumer at the rural area equally, entrepreneurial professionals with unbending integrity.
Read the summary of the notes here
Afterthought
"Remember that not getting what you want is sometimes a wonderful stroke of luck."
-The Dalai Lama
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