Gather enough data and do enough analysis to make a good decision. Then decide. Then act.

There are many famed quotes on the theme of “how much is enough”:

Lore has it that someone once asked Abraham Lincoln, “How long should a man’s legs be?” and that he answered “Long enough to reach the ground.” Einstein is credited for a quote something like, “Make everything [i.e. theories or models] as simple as possible, but no simpler.” And my 9th grade English teacher, Mrs. Eleanor Ponder, would say this about how long our essays should be: “like a woman’s skirt: long enough to cover everything, but short enough to keep it interesting.”

At their worst, executives have a bias toward either shoot-from-the-hip decision making, or paralysis by analysis. Better off are those who know what level of confidence they need before they can make a decision, and what amount of data and analysis they need to get that level of confidence.

If you know you lean too far in one direction, make a point to ask of your partners (or engineer for yourself) a flag or alert when you need correcting action. Expect that it will take a few tries before the new habit sticks.

“See what you can do with real data?” One of my clients’ other advisors said that to my client right after I’d presented some analysis of his marketspace. In the previous year, another marketing consultant had spent a lot of my client’s time (and money) on branding analysis. But he hadn’t taken the time to understand the size and shape of the market they were going to push that brand into. And that’s why they never got confident that the “brand” they were identifying and creating would have a real shot at longterm success.

Mind you, it’s not like I did a McKinsey binder’s worth of data analysis. But after about twenty hours of sifting through trade journals, pulling data into spreadsheets (with a +/- 15% range of accuracy), I could tell them with 95% certainty that they could do 500% of their current business volume in the market space they were already living in. And that this market space was growing. And that they really ought to focus their growth energy on further penetration, instead of exploring new sectors.

Twenty hours. That’s all the data time it took to nail down the biggest strategic decision they were going to consider that year. They might have made the same decision without the data. Then again, they might have pushed hundreds of thousands of dollars of effort into an unnecessary chase after new business. Under these circumstances, twenty hours of data time sounds pretty cheap to me.

[Donald Trump] understood a famous axiom: If you owe the bank $1 million and can’t pay, you’re in trouble, but if you owe the bank $1 billion and can’t pay, the bank’s in trouble. The moment that captured his strategy perfectly came when Trump’s CFO received an $800,000 quarterly insurance bill for Trump’s yacht, Trump Princess, which was, of course, mortgaged. He simply sent the bill to the Bank of Boston, which held the note on the boat, with a reminder that if the Princess sank uninsured, there’d be no collateral for the loan. The bank paid the bill.

– Geoff Colvin in Ex-CEOs should learn from The Donald, Wall $treet Week, 13 May 2008.

I’ve been meaning to blog some version of the “if you owe the bank $x” line for some time, but this week’s W$W article gave me extra impetus.

The broader point for businesses and executives is that there are many ways for someone to hold you hostage.  Owing you too much is just one.  Customers can hold you hostage if you’re their biggest client.  Employees can hold you hostage if they’re the only ones who know how to do something essential for your business.  Neighbors can hold you hostage if they can make your block somehow unattractive to your customers.

You can’t make all these risks go away, but you sure ought to safeguard against the ones you can if they’re big and/or likely.

Hired to replace Robert Dynes in the aftermath of a management meltdown in which UC administrators flouted, circumvented and violated university policies governing pay and perks, the 63-year-old [Mark] Yudof knows his mission when he officially takes over next month.”I’ve really got to get the trains running on time (at UC). There are a lot of things I believe in, like global initiatives and dealing with the deferred maintenance on campus and being absolutely competitive for faculty,” he said in a recent interview in the East Bay. “But I’ve got to get the platform right. I’ve got to regain the trust of Californians and the Board of Regents. I’ve got to get our (number of employees) down and our budgets down. Then we can start talking about what else we want to do.”…

He recognizes that many problems are entrenched at UC. But that won’t deter him.

“There is a saying, ‘A crisis is a terrible thing to waste,’ and that is my view,” he said. “And my view is that some things we probably should have done 10 years, five years, 20 years ago may get done when you have a crisis.”

– Tanya Schevitz, San Francisco Chronicle in Next UC president - homey image, hefty mission, Thursday, May 8, 2008

The first purpose of a small business is to serve the entrepreneur who created it and who owns it. The business may have other purposes: to serve customers and even to serve the community. But before these, the business must serve the entrepreneur.

How does a business serve its owner? Certainly, the business should make money.* Beyond that, the business should make the owner happy: through the nature of what it does, through the things it allows the entrepreneur to do with his or her time, through the daily experiences that the entrepreneur has while running the business.

Every economist understands that if a business doesn’t succeed in its obligation to serve customers, it’s not going to be in business for long. But not everyone remembers that if a business doesn’t succeed in its first obligation to serve the entrepreneur, there’s not much chance that it will keep serving its customers well, and there’s not much point trying.

————-

If the business doesn’t make money, then it isn’t a business, it’s a hobby.  Or at best, an unintentional “nonprofit organization”.

Once you have a picture of how you want your life to be, and you come to the realization that it’s more than just things to have and things to do, once you realize that what you and I really want is to have the room, the openness, to expand, to grow, to be more of ourselves, whatever that means, and to find out what that means is what’s most important to us, once you see that, you can then turn to the business that’s going to help you get there; you can then turn to the development of your Strategic Objective…In this context, your business is a means rather than an end, a vehicle to enrich your life rather than one that drains the life you have.

–Michael E. Gerber, in The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It, Chapter 13 “Your Strategic Objective”.

[what we first learned in the 80s is that…] Firms that earned superior levels of customer loyalty and retention also earned consistently higher profits–and they grew faster as well….[W]e learned that customer loyalty is inextricably linked to employee and investor loyalty and that major improvements in the one often require improvements in the other two.

– Frederick F. Reichheld of Bain & Company, Inc., in his preface to The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value.

…[T]he true mission of a business is to create value. Any business muddled enough to believe that its real purpose is producing profit is probably not long for this world. Profit is absolutely essential, to be sure, but it is a downstream outcome of creating value, and so it functions very poorly as an objective in itself.

– ibid, p. 186.

Reichheld published this book in 1996 — a few years before the “balanced scorecard” entered common parlance. Indeed, “balanced scorecard” appears nowhere in the index, but it seems likely from the above two quotes that Reichheld is on the same wavelength. If you don’t take care of all the stakeholders, you’re not going to be around long.

A common piece advice in retail: “Differentiate yourself. Then let the market know how you’re different.”

That’s good advice, but here’s more: It’s easy to be different. It’s much harder to be distinctive.

“Distinctive” means you’re different in a way that gets positive attention.

Remember: it’s useless for a retailer to be different in a way that no one can notice.

It’s worse to be different in a way that people notice but don’t like (”Hey, we’re the only bookstore in town that plays really loud music.” Or “We’re the only cafe in town where all our staff smell bad.”)

But it’s great to be different in a way that people notice and like (”Hey, we’re the only bookstore in town that has an extensive collection of Spanish-language books and international newspapers” or “We’re the only cafe in town where all our coffees are fair-trade and all our meat and dairy products are free-range.”)

That’s distinctive. And if you do a good job of getting your distinctives noticed, you’ll soon enough be distinguished — that is: well-known, well-respected, and sustainably profitable.

Back in March, my friend Barry Campbell and his wife started investing in their own White Trash and Minor Vices Portfolio.

As Barry explained:

Everyone says “invest in what you know.”

I’m about to put my money where my big mouth is. Carrie and I invest, mostly in index funds and ETFs, every month through Sharebuilder, which allows fractional purchases of shares in stocks and funds for a flat monthly fee.

The vast majority of our modest monthly stake goes into a total-market index fund and an aggregated bond fund.

But I’m going to make a modest investment in a stock portfolio — a mini-fund of my own making, if you will — called “White Trash and Minor Vices” (motto: don’t beat your wife, beat the Dow) the constituent stocks of which are:

• BFB - Brown-Forman Corp. Cl BHolding company for distilleries that produce Jack Daniel’s, Early Times, Canadian Mist, Southern Comfort, Finlandia, and others. Recently acquired a major stake in a Mexican tequila manufacturer.
• BUD - Anheuser-Busch Cos. Inc.Brewer of cheap domestic beer; owner of theme parks.
• CHB - Champion Enterprises Inc.Major manufacturer of mobile homes and modular buildings.

For Barry’s description of the whole portfolio, click here.

How are they doing?

[November 8, 2007] The market has its ups and downs, but White Trash just keeps on gittin’-r-done.

Since its inception in March 2007, the White Trash Portfolio is up 11.1%.
…Over the same time period, exchange-traded funds (ETFs) tracking the major indexes performed as follows:

• DIA, which tracks the Dow Jones Industrial Average, is up 6.9%.
• SPY, which tracks the S&P 500, is up 3.2%.
• VTI, which tracks the performance of the broad US stock market as a whole, is also up 3.2%.
• IYC, which tracks the Dow Jones Consumer Cyclical index, is down 6.5%.

Go Barry!

Venture capitalist Howard Morgan long spoke of the “Four P’s” of sizing up a business for potential investment: People, Product, Plans and Profits. Later, he added two more:

Starting about 1996, when I was a lead investor in Idealab, I was inspired by Bill Gross to add a Fifth P.

Passion - the entrepreneur must exhibit real passion for the idea, since he or shee will be giving up some of their personal life to make it happen, and needs to believe strongly in what they’re doing.

More recently, as I’ve begun to reflect on the Way Too Early theme of my investing career, I’ve added the 6th P

Persistence - the ability to stay with it through all the many setbacks that happen during the long time it may take from idea to profitable execution.

Full article here: The Sixth P in “Way Too Early”