Business
What if we didn’t have to worry anymore? In this episode for anxiety-ridden overthinkers, I’m going to distinguish between worry (non-productive, anxious, hand-wringing) and work (productive, effective steps toward good decision-making). Then I’ll offer up some tactics to reallocate your resources into the work bucket. Let’s take a step back No matter what our goals are, we have a few things in common. We want to create a high chance of winning and a low chance of losing. And we want a big reward for winning and a small penalty for losing. Here’s the rub We get into trouble because we often mistake activity for production. The future is foggy and uncertain. I like Howard Marks’ description: the future is a spectrum of possible future outcomes. Humans hate uncertainty. It’s painful because it’s scary. And it’s scary because we don’t know what’s going to happen. It’s the grown-up version of being scared of the dark. We’ll do almost anything to get rid of the nagging doubt and anxiety about the future. We are driven to confirm there isn’t a monster under the bed. After we lay our baseline of fear, we stack on another dangerous brick: unfounded hope, otherwise known as simple psychological denial. In other words, as the saying goes “as we wish, so we shall believe.” We want to find a light switch. We want to find a flashlight. We want to know for sure that monsters aren’t there. We’re scared and we want to deal with it. Maybe I can relax once I check “x,” once I look at “y,” once I confirm “z.” So we cake hope on top of fear, and we end up with what Charlie Munger calls a Lollapalooza effect—a nasty combination of powerful psychological factors. If you’re like me, you might begin to create a feedback loop. Fear, unfounded hope, checking behavior, lack of material results. Rinse, lather repeat. Two absurd extremes Let’s illustrate the spectrum with a ridiculous example. On one end, there’s driving down the road with a blindfold on. That’s zero analysis. Action without forethought. On the other end, there’s learning Japanese to consider the historical context of other cultures and their attitudes toward motor vehicles. That’s over-analysis. Forethought without action. Let’s get back to reality Recently, I’ve been looking through Distressed Debt Analysis by Stephen Moyer. For many of you, that might not sound like a super-thrilling read. But there’s an EXTREMELY helpful concept in the book. Moyer addresses the critical challenge of investment analysis: when do you know enough to make an educated decision in the face of an uncertain future? On page 258, Moyer says: Realistically, however, the investor cannot “know” with metaphysical certitude that the firm will be able to access the capital markets in the future, and, mathematically, it is difficult to meaningfully or rigorously “quantify” the risk of refinancing. The investor can make an investment judgment based on an experienced assessment of the environment. However, that investment judgment will be erroneously derived, if the investor fails to uncover that another bond indenture of the firm prohibits the refinancing of the subordinated debt with other than junior securities, for which there may be no market, or that the working capital facility has a lien on all assets, not just the typical accounts receivable and inventory. Those factors were not in the “terms” of the bet. It would be like making a bet on a horse in a given race and then finding out that at the last moment the jockey was being changed or that three very strong horses had been added to the field. To properly calculate the odds, you need all the facts. That is the role of “due diligence.” So that’s the key idea. If there are material, discoverable unknowns affecting your decision-making, it makes sense to invest your time to find out the facts. On the other hand, if there aren’t material, discoverable unknowns affecting your decision-making, it’s time to calculate your best move. Importantly, this guideline applies throughout the decision-making process. At any given moment, your best course of action is determined by the facts. If you’ve already “decided,” and you are presented with information material to your decision-making—you should change course. It’s no use staring at a broken window and crying about what a wonderful window it used to be. Move on. The art is to construct a process that drives efficient discovery of the material facts, balancing a fact’s impact with its cost of discovery. This idea was one of Calvin Hawkes’ closing thoughts during Episode 013. If you haven’t heard it, I highly recommend that series of episodes. Calvin is super interesting and super smart. Now let’s bring this full circle Above, I’ve described the strategy for structuring a decision-making process. It’s all about material, discoverable facts. Finding those facts is what I call “work.” On the other hand, there are immaterial, impossible-to-find facts. The facts are there, but the cost to acquire the fact is too high or the impact of the fact is too low. And that’s where worry lives. Worry is the nightmare union of wasted time and energy. It’s a wheel-spinning, cortisol-dumping, mental sludge factory. Returning again to Charlie Munger, this is a great time to invert. Worry is where we can’t afford to live, and it warrants some deep thought. Everyone is different, and everyone has different circumstances. So—as always—there isn’t a one-size-fits-all solution. Here are some questions to help expose wasteful allocations of mental your energy. What are your fears? Which of your fears are uncertainty-driven? Which of the many possible futures scare you? What facts would help you narrow the distribution of probable futures? Objectively, are you likely to find those facts? Objectively, what is the cost—in time, in cash, in opportunity, in anxiety—required to find those facts? Imagine the worst-case scenario. Is that an acceptable outcome to you given your current levels of uncertainty? If you make a decision, are you likely to spin your wheels in search of answers you won’t find? What could make you comfortable with the uncertainty? Are you prone to checking behaviors that don’t deliver material new information? How can you change your decision-making structure or daily habits to side-step these checking behaviors? Strategy Chain Links Rate and review the podcast at https://podcasts.apple.com/us/podcast/strategy-chain/id1492935567 Find Amazon affiliate links at http://strategychainpodcast.com/support Send me questions at http://strategychainpodcast.com/contact Sign up for the email list at http://strategychainpodcast.com/ Social Media @strategychain (Facebook, Twitter, Instagram, Medium)