#16 - Goals vs Systems
On The Battlefield Framework, Failing like a scientist, Four Quadrants of Conformism and a summary of key ideas from Buffett's letter to Berkshire Hathaway shareholders - 1980
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Greetings from the Curious Cat.
Everyone has goals which they wish to achieve in the future. You wish to lose weight, read books, make friends, achieve sales, build a company and you develop many goals. These goals help you to focus on certain priorities which you wish to accomplish in the future.
What if I tell you that there is a better ‘system’ than setting goals?
Scott Adams, the creator of the popular cartoon strip Dilbert, in his book “How To Fail At Almost Everything And Still Win Big” writes that most failures involve bad luck, ignorance and ordinary stupidity. He also mentions a key point which often escapes us - having a system rather than a goal. Adams writes that a goal is a specific objective that you either achieve or don’t in the future. A system is something you do on a daily basis that increases your odds of happiness in the long run. If you do something everyday, it is a system. If you are waiting to achieve it someday in the future, it is a goal. Reading thirty books in a year is a goal but reading thirty pages everyday is a system. Systems have no deadlines and on any given day, you cannot possibly tell if you are moving in the right direction but it helps you channelize your personal energy. Adams’ proposition is that people who succeed follow systems and not goals. When goal-oriented people succeed in big ways, it makes news, and it makes an interesting story which gives a distorted view of how often goal-oriented people succeed.
Let us try to understand few systems and frameworks.
In today’s edition, we look at -
Battlefield Framework in Investing
How To Fail Like A Scientist ?
Four Quadrants of Conformism
Key Ideas From Warren Buffett’s letter to Berkshire Hathaway Shareholders - 1980
Let us dive in.
Battlefield Framework In Investing
Read the article here (Read Time ~ 22 mins)
Sun Tzu in the book “The Art Of War” identified five key aspects that determine an army’s advantage in a war. Christopher Begg in this interview explained how this applies to business as well.
The five key aspects are:
a) Topographical advantage: How well do you know the topography of your battlefield? This is important both for the invading army and for the ones in defense. Do you have a moat to protect you?
b) Morale advantage: The culture within the group. Enjoying each other’s company can go a long way in sustaining an advantage.
c) Meteorological advantage: How resilient are you? Have you experienced significant hardship in the past and how have you responded to the hardship?
d) System advantage: Does the developed system dynamically respond to inevitable uncertainty or does it tend to crumble? Does the system experience incremental improvement with more and more iterations?
e) Commander advantage: Founder led companies enjoy this advantage. Most companies are either playing a finite game or an infinite game. The infinite game is where the time horizon is very long, if not eternal, for the way the business is being run. It’s being run for the next generation, versus some quarterly or five- year objective. Certainly, there is a plan and there are goals, but there’s a big difference both in the culture and how they think about the business when the business is run for the infinite game.
The whole interview is an excellent read!
How To Fail Like A Scientist ?
Read the article here (Read Time ~ 5 mins)
Anne-Laure Le Cunff writes that our fear of failure can be driven by many factors. The scientific method is considered as the most rigorous way of acquiring new knowledge which involves formulating a hypothesis, performing an experiment, measuring the results, and refining the hypothesis based on inferences from the experiments. However, scientific experiments are not designed to succeed. They are designed to explore a question and the outcome is to increase knowledge about a particular problem.
Failing like a scientist is about continuously challenging your assumptions rather than blindly following a linear path to a specific goal. Some practical ways to implement them can be -
Replacing imitation with exploration
Asking good questions
Building a learning loop
Celebrate progress over success
Blocking time for reflection
This method is a learning process in itself with no guarantee to succeed but it can only ensure that you are in the right direction.
Four Quadrants Of Conformism
Read the article here ( Read Time ~ 9 mins)
Paul Graham writes that one of the most revealing ways to classify people is by the degree and aggressiveness of their conformism.
Imagine a Cartesian coordinate system whose horizontal axis runs from conventional-minded on the left to independent-minded on the right, and whose vertical axis runs from passive at the bottom to aggressive at the top. The resulting four quadrants define four types of people. Starting in the upper left and going counter-clockwise: aggressively conventional-minded, passively conventional-minded, passively independent-minded, and aggressively independent-minded.
The four types are not equally common. There are more passive people than aggressive ones, and far more conventional-minded people than independent-minded ones. So the passively conventional-minded are the largest group, and the aggressively independent-minded the smallest.
These quadrants serve as a good mental model for understanding your openness to new ideas and flexibility in changing your mind.
Key Ideas from Buffett’s letter to shareholders - 1980
Last week, we summarized the letter written in the year 1979. While we summarize the key ideas in the letter, we encourage the readers to read the entire letter to capture the context in which the thoughts were expressed by Buffett.
On retained earnings - The value to Berkshire Hathaway of retained earnings is not determined by whether we own 100%, 50%, 20% or 1% of the businesses in which they reside. Rather, the value of those retained earnings is determined by the use to which they are put and the subsequent level of earnings produced by that usage. This is true whether we determine the usage, or whether managers we did not hire - but did elect to join - determine that usage. And the value is in no way affected by the inclusion or non-inclusion of those retained earnings in our own reported operating earnings.
On stock repurchases and retained earnings - One usage of retained earnings we often greet with special enthusiasm when practiced by companies in which we have an investment interest is repurchase of their own shares. The reasoning is simple: if a fine business is selling in the market place for far less than intrinsic value, what more certain or more profitable utilization of capital can there be than significant enlargement of the interests of all owners at that bargain price? The competitive nature of corporate acquisition activity almost guarantees the payment of a full - frequently more than full price when a company buys the entire ownership of another enterprise. But the auction nature of security markets often allows finely-run companies the opportunity to purchase portions of their own businesses at a price under 50% of that needed to acquire the same earning power through the negotiated acquisition of another enterprise.
On short-term and long-term performance evaluation of companies - We evaluate single-year corporate performance by comparing operating earnings to shareholders’ equity with securities valued at cost. Our long-term yardstick of performance, however, includes all capital gains or losses, realized or unrealized. We continue to achieve a long-term return on equity that considerably exceeds the average of our yearly returns.
On inflation and returns - Unfortunately, earnings reported in corporate financial statements are no longer the dominant variable that determines whether there are any real earnings for you, the owner. For only gains in purchasing power represent real earnings on investment. If you (a) forego ten hamburgers to purchase an investment; (b) receive dividends which, after tax, buy two hamburgers; and (c) receive, upon sale of your holdings, after-tax proceeds that will buy eight hamburgers, then (d) you have had no real income from your investment, no matter how much it appreciated in dollars. You may feel richer, but you won’t eat richer. High rates of inflation create a tax on capital that makes much corporate investment unwise - at least if measured by the criterion of a positive real investment return to owners. This “hurdle rate” - the return on equity that must be achieved by a corporation in order to produce any real return for its individual owners - has increased dramatically in recent years.
On indexing and inflation - Indexing is the insulation that all seek against inflation. But the great bulk (although there are important exceptions) of corporate capital is not even partially indexed. Of course, earnings and dividends per share usually will rise if significant earnings are “saved” by a corporation; i.e., reinvested instead of paid as dividends. But that would be true without inflation. For capital to be truly indexed, return on equity must rise, i.e., business earnings consistently must increase in proportion to the increase in the price level without any need for the business to add to capital - including working capital - employed. (Increased earnings produced by increased investment don’t count.)
On turnaround companies: We have written in past reports about the disappointments that usually result from purchase and operation of “turnaround” businesses. Our conclusion is that, with few exceptions, when a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.
Afterthought
“The problem is not people being uneducated.
The problem is that people are educated just enough to believe what they have been taught, and not educated enough to question anything from what they have been taught.”
— Richard Feynman
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