On Common Sense on Mutual Funds

I recently finished reading Common Sense on Mutual Funds – New Imperatives for the Intelligent Investor – by John C. Bogle.

Below are key excerpts from this book that I found to be insightful:

Investing is an act of faith. We entrust our capital to corporate stewards in the faith—at least with the hope—that their efforts will generate high rates of return on our investments. When we purchase corporate America’s stocks and bonds, we are professing our faith that the long-term success of the U.S. economy and the nation’s financial markets will continue in the future.

To state the obvious, the long-term investor who pays least has the greatest opportunity to earn most of the real return provided by the stock market.

In my view, market timing and rapid turnover—both by and for mutual fund investors—betray both a lack of understanding of the economics of investing and an infatuation with the process of investing.

My guidelines also respect what I call the four dimensions of investing: (1) return, (2) risk, (3) cost, and (4) time. When you select your portfolio’s long-term allocation to stocks and bonds, you must make a decision about the real returns you can expect to earn and the risks to which your portfolio will be exposed. You must also consider the costs of investing that you will incur. Costs will tend to reduce your return and/or increase the risks you must take. Think of return, risk, and cost as the three spatial dimensions—the length, breadth, and width—of a cube. Then think of time as the temporal fourth dimension that interplays with each of the other three. For instance, if your time horizon is long, you can afford to take more risk than if your horizon is short, and vice versa.

Rule 1: Select Low-Cost Funds…Rule 2: Consider Carefully the Added Costs of Advice…Rule 3: Do Not Overrate Past Fund Performance…Rule 4: Use Past Performance to Determine Consistency and Risk…Rule 5: Beware of Stars…Rule 6: Beware of Asset Size…Rule 7: Don’t Own Too Many Funds…Rule 8: Buy Your Fund Portfolio—And Hold It.

No matter what fund style you seek, you should emphasize low-cost funds and eschew high-cost funds. And, for the best bet of all, you should consider indexing in whichever style category you want to include.

There are three major reasons why large size inhibits the achievement of superior returns: the universe of stocks available for a fund’s portfolio declines; transaction costs increase; and portfolio management becomes increasingly structured, group-oriented, and less reliant on savvy individuals.

Four principal problems are created by this overemphasis on marketing. First, it costs mutual fund shareholders a great deal of money— billions of dollars of extra fund expenses—which reduces the returns received by shareholders. Second, these large expenditures not only offer no countervailing benefit in terms of shareholder returns, but, to the extent they succeed in bringing additional assets into the funds, have a powerful tendency to further reduce fund returns. Third, mutual funds are too often hyped and hawked, and trusting investors may be imperiled by the risks assumed by, and deluded about the potential returns of, the funds. Lastly, and perhaps most significant of all, the distribution drive alters the relationship between investors and funds. Rather than being perceived as an owner oi the fund, the shareholder is perceived as a mere customer of the adviser.

On a closing note, on leadership:

To wrap up this litany, I put before you—both tentatively and humbly—a final attribute of leadership: courage. Sometimes, an enterprise has to dig down deep and have the courage of its convictions—to “press on,” regardless of adversity or scorn. Vanguard has been a truly contrarian firm in its mutual structure, in its drive for low costs and a fair shake for investors, in its conservative investment philosophy, in market index funds, and in shunning hot products, marketing gimmicks, and the carpet-bombing approach to advertising so abundantly evident elsewhere in this industry today. Sometimes, it takes a lot of courage to stay the course when fickle taste is in the saddle, but we have stood by our conviction: In the long run, when there is a gap between perception and reality, it is only a matter of time until reality carries the day.

A recommended read in the areas of investing and leadership.

On The Most Important Thing

I recently finished reading The Most Important Thing – Uncommon Sense for the Thoughtful Investor – by Howard Marks.

Below are key excerpts from the book that I found particularly insightful:

Few people have what it takes to be a great investors. Some can be taught, but not everyone… and those who can be taught can’t be taught everything. Valid approaches work some of the time but not all. And investing can’t be reduced to an algorithm and turned over to a computer. Even the best investors don’t get it right every time.

Because investing is at least as much art as it is science, it’s never my goal—in this book or elsewhere—to suggest it can be routinized. In fact. one of the things I most want to emphasize is how essential it is that one’s investment approach be intuitive and adaptive rather than be fixed and mechanistic.

Second-level thinking is deep, complex and convoluted. The second level thinker takes a great many things into account: What is the range of likely future outcomes? Which outcome do I think will occur? What’s the probability I’m right? What does the consensus think? How does my expectation differ from the consensus? How does the current price for the asset comport with the consensus view of the future, and with mine? Is the consensus psychology that’s incorporated in the price too bullish or bearish? What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?

Return alone—and especially return over short periods of time—says very little about the quality of investment decisions. Return has to be evaluated relative to the amount of risk taken to achieve it. And yet, risk cannot be measured. Certainly it cannot be gauged on the basis of what “everybody” says at a moment in time. Risk can be judged only by sophisticated, experienced second-level thinkers.

The road to long-term investment success runs through risk control more than through aggressiveness. Over a full career, most investors’ results will be determined more by how many losers they have, and how bad they are, than by the greatness of their winners. Skillful risk control is the mark of the superior investor.

The pendulum swing regarding attitudes toward risk is one of the most powerful of all. In fact, I’ve recently boiled down the main risks in investing to two: the risk of losing money and the risk of missing opportunity. It’s possible to largely eliminate either one, but not both. In an ideal world, investors would balance these two concerns. But from time to time, at the extremes of the pendulum’s swing, one or the other predominates.

What weapons might you marshal on your side to increase your odds? Here are the ones that work for Oaktree: a strongly held sense of intrinsic value. insistence on acting as you should when price diverges from value. • enough conversance with past cycles—gained at first from reading and talking to veteran investors, and later through experience—to know that market excesses are ultimately punished, not rewarded. a thorough understanding of the insidious effect of psychology on the investing process at market extremes. a promise to remember that when things seem “too good to be true,” they usually are. willingness to look wrong while the market goes from misvalued to more misvalued (as it invariably will), and • like-minded friends and colleagues from whom to gain support (and for you to support).

To boil it all down to just one sentence, I’d say the necessary condition for the existence of bargains is that perception has to be considerably worse than reality. That means the best opportunities are usually found among things most others won’t do. After all, if everyone feels good about something and is glad to join in, it won’t be bargain-priced.

What We Learn from a Crisis—or Ought To: Too much capital availability makes money flow to the wrong places…When capital goes where it shouldn’t, bad things happen…hen capital is in oversupply, investors compete for deals by accepting low returns and a slender margin for error…Widespread disregard for risk creates great risk…Inadequate due diligence leads to investment losses…In heady times, capital is devoted to innovative investments, many of which fail the test of time…Hidden fault lines running through portfolios can make the prices of seemingly unrelated assets move in tandem…Psychological and technical factors can swamp fundamentals…Markets change, invalidating models…Leverage magnifies outcomes but doesn’t add value…Excesses correct.

On a closing note:

Thus, it’s our goal to do as well as the market when it does well and better than the market when it does poorly. At first blush that may sound like a modest goal, but it’s really quite ambitious.

A must read in the area of investing.

The Advantage

A few years ago, I read The Five Dysfunctions of a Team and it remains to be, for me, one of the most practical and applicable management books. Patrick Lencioni, the author of that book, has published a number of other books which have received high reviews as well, and I decided to read one of his more recent ones The Advantage – Why Organizational Health Trumps Everything Else in Business.

The main premise of this book is that:

The single greatest advantage any company can achieve is organizational health. Yet it is ignored by most leaders even though it is simply free, and available to anyone who wants it.

Sounds simple, so why is it that difficult?

But before leaders can tap into the power of organizational health, they must humble themselves enough to overcome the three biases that prevent them from embracing it. The Sophistication Bias: Organizational health is so simple and accessible that many leaders have a hard time seeing it as a real opportunity for meaningful advantage…The Adrenaline Bias: Becoming a healthy organization takes a little time. Unfortunately, many of the leaders I’ve worked with suffer from a chronic case of adrenaline addiction, seemingly hooked on the daily rush of activity and firefighting within their organizations…The Quantification Bias: The benefits of becoming a healthy organization, as powerful as they are, are difficult to accurately quantify.

What exactly is organizational health and how do I recognize it?

A good way to recognize health is to look for the signs that indicate an organization has it. These include minimal politics and confusion, high degrees of morale and productivity, and very low turnover among good employees…And so a good way to look at organizational health -and one that executives seem to respond to readily— is to see it as the multiplier of intelligence. The healthier an organization is, the more of its intelligence it is able to tap into and use. Most organizations exploit only a fraction of the knowledge. experience, and intellectual capital that is available to them. But the healthy ones tap into almost all of it. That, as much as anything else, is why they have such an advantage over their unhealthy competitors.

How do we create it, or get there?

An organization doesn’t become healthy in a linear, tidy fashion. Like building a strong marriage or family, it’s a messy process that involves doing a few things at once, and it must be maintained on an ongoing basis in order to be preserved. Still, that messy process can be broken down into four simple disciplines: Discipline 1: Build a cohesive leadership team…Discipline 2: Create Clarity…Discipline 3…Overcommunicate Clarity…Discipline 4: Reinforce Clarity.

On the first discipline – building a leadership team, let us start with the fundamentals, with the definition:

A leadership team is a small group of people who are collectively responsible for achieving a common objective for their organization…This is perhaps the most important distinction between a working group and a real leadership team. Collective responsibility implies, more than anything else, selflessness and shared sacrifices from team members.

What are the key behaviors of a leadership team:

On building trust:

Members of a truly cohesive team must trust one another. I realize that sounds like the most patently obvious statement ever made, something that every organization understands and values. As a result, you’d think that most leadership teams would be pretty good at building trust. As it turns out, they aren’t, and I think a big part of it is that they have the wrong idea about what trust is…The kind of trust that is necessary to build a great team is what I call vulnerability-based trust. This is what happens when members get to a point where they are completely comfortable being transparent. honest, and naked with one another, where they say and genuinely mean things like “I screwed up,” “I need help,” “Your idea is better than mine,” ‘T wish I could learn to do that as well as you do,” and even, “I’m sorry”…Trust is just one of five behaviors that cohesive teams must establish to build a healthy organization. However, it is by far the most important of the five because it is the foundation for the others. Simply stated, it makes teamwork possible. Only when teams build vulnerability-based trust do they put themselves in a position to embrace the other four behaviors, the next of which is the mastery of conflict.

On mastering conflict:

Contrary to popular wisdom and behavior, conflict is not a bad thing for a team. In fact, the fear of conflict is almost always a sign of problems. Of course, the kind of conflict I’m referring to here is not the nasty kind that centers around people or personalities. Rather, it is what I call productive ideological conflict, the willingness to disagree, even passionately when necessary, around important issues and decisions that must be made. But this can only happen when there is trust…When leadership team members fail to disagree around issues, not only are they increasing the likelihood of losing respect for one another and encountering destructive conflict later when people start griping in the hallways, they’re also making bad decisions and letting down the people they’re supposed to be serving. And they do this all in the name of being “nice.”

On achieving commitment:

The reason that conflict is so important is that a team cannot achieve commitment without it. People will not actively commit to a decision if they have not had the opportunity to provide input, ask questions, and understand the rationale behind it. Another way to say this is, “If people don’t weigh in, they can’t buy in.”

On embracing accountability:

Even well-intentioned members of a team need to be held accountable if a team is going to stick to its decisions and accomplish its goals. In some cases, people will deviate from a plan or a decision knowingly, tempted to do something that is in their individual best interest but not that of the team. In other cases, people will stray without realizing it, getting distracted or caught up in the pushes and pulls of daily work. In either case, it’s the job of the team to call those people out and keep them in line…At its core, accountability is about having the courage to confront someone about their deficiencies and then to stand in the moment and deal with their reaction, which may not be pleasant. It is a selfless act, one rooted in a word that I don’t use lightly in a business book: love. To hold someone accountable is to care about them enough to risk having them blame you for pointing out their deficiencies.

On focusing on results:

The ultimate point of building greater trust, conflict, commitment, and accountability is one thing: the achievement of results. That certainly seems obvious, but as it turns out, one of the greatest challenges to team success is the inattention to results. What would members of an executive team be focused on if not the results of their organization? Well, for one, the results of their department. Too many leaders seem to have a greater affinity for and loyalty to the department they lead rather than the team they’re a member of and the organization they are supposed to be collectively serving. Other distractions include a concern for individual career development, budget allocations, status, and ego, all of them common distractions that prevent teams from being obsessed with achieving results…The only way for a team to really be a team and to maximize its output is to ensure that everyone is focused on the same priorities— rowing in the same direction, if you will.

The second discipline is about Creating Clarity:

The second requirement for building a healthy organization—creating clarity—is all about achieving alignment. This is a word that is used incessantly by leaders, consultants, and organizational theorists, and yet for all the attention it gets, real alignment remains frustratingly rare. Most executives who run organizations—and certainly the employees who work for them—will readily this.

This is done by answering six fundamental questions:

1. Why do we exist? 2. How do we behave? 3. What do we do? 4. How will we succeed? 5. What is most important, right now? 6. Who must do what?

On what do we do:

If an organization’s reason for existence answers the Question, Why?, then its business definition answers the question. What? It’s critical that it be clear and straightforward. It should not be crafted so that it also be used in marketing material. The point is just to make sure that the leadership team is crystal clear about, and can accurately describe, the nature of the organization’s business so that they don’t create confusion within the rest of the company or, for that matter, in the market. It’s as simple as that.

On how we will succeed:

We came to realize that the best way for an organization to make strategy practical is to boil it down to three strategic anchors that will be used to inform every decision the organization makes and provide the filter or lens through which decisions must be evaluated to ensure consistency. Strategic anchors provide the context for all decision making and help companies avoid the temptation to make purely pragmatic and opportunistic decisions that so often end up diminishing a company’s plan for success.

On who must do that:

There is not a great deal to be said about this particular question, aside from warning leadership teams not to take it for granted. Although there is often clarity among executives in most organizations about who does what on the team, making assumptions about that clarity can lead to surprising and unnecessary problems.

The third discipline is Overcommunicating Clarity:

What those leaders fail to realize is that employees understand the need for repetition. They know that messaging is not so much an Intellectual process as an emotional one. Employees are not analyzing what leaders are saying based solely on whether it is intellectually novel or compelling, but more than anything else on whether they believe the leaders are serious, authentic, and committed to what they are saying. Again, that means repetition is a must.

The fourth and last discipline is Reinforcing Clarity:

As important as overcommunication is, leaders of a healthy organization cannot always be around to remind employees about the company’s reason for existing, its values, and so on. In order to ensure that the answers to the six critical questions become embedded in the fabric of the organization, leaders must do everything they can to reinforce them structurally as well. The way to do that is to make sure that every human system every process that involves people—from hiring and people management to training and compensation, is designed to reinforce the answers to those questions. The challenge is to do this without adding too much structure.

A concluding reminder that success in creating healthy organization rests on the leaders of the organization:

There is just no escaping the fact that the single biggest factor determining whether an organization is going to get healthier—or not—is the genuine commitment and active involvement of the person in charge. For a company, that’s the CEO. For a small business, it’s the owner. For a school, it’s the principal. For a church, it’s the pastor. For a department within a company, it’s the department head. At every step in the process, the leader must be out front, not as a cheerleader or a figurehead, but as an active, tenacious driver.

While there is a considerable effort involved, there is also a substantial reward:

At the end of the day, at the end of our careers, when we look back at the many initiatives that we poured ourselves into, few other activities will seem more worthy of our effort and more impactful on the lives of others, than making our organizations healthy.

A recommended read in the area of organizational leadership and management. If you have not read The Five Dysfunctions of a Team, I highly recommend you read that one first.


Strategies of a Negotiation Genius

People are rarely born “negotiation geniuses.” Rather, what appears to be genius actually reflects careful preparation, an understanding of the conceptual framework of negotiation, insight into how one can avoid the errors and biases that plague even experienced negotiators, and the ability to structure and execute negotiations strategically and systematically. This book will provide you with this framework—and with an entire toolkit of negotiation strategies and tactics that you can put to work immediately. As you you begin to apply the famework and strategies in the many negotiations you encounter—in business, in politics, or in everyday life—you will begin to build your own reputation as a negotiation genius.

This is the main premise of Negotiation Genius by Deepak Malhotra and Max H. Bazerman. At the heart of their work is a five-step pre-negotiation framework that I wanted to share with you:

Step 1: Assess your BATNA. The first step in any negotiation is to ask yourself, “What will I do if the current negotiation ends in no deal?” In other words, you need to assess your BATNA, or best alternative to negotiated agreement—the course of action you will pursue if and when the ; current negotiation ends in an impasse. Your BATNA assessment requires the following three steps:

1. Identify all of the plausible alternative options you might pursue if you are unable to reach an agreement            with the other party.

2. Estimate the value associated with each alternative.

3. Select the best alternative; this is your BATNA.

Step 2: Calculate your reservation value. An analysis of your BATNA is critical because it allows you to calculate your reservation value (RV), or your walk-away point in the current negotiation…What determines your exact reservation value within this range? If you are risk averse, you might be inclined to lean toward the lower end of the range. But if you are optimistic about your ability to negotiate…you might lean toward the upper end.

Step 3: Assess the other party’s BATNA. Now that you have assessed your BATNA and calculated your reservation value, you know the lowest offer you would be willing to accept…Of course, you do not want to settle for a low sale price, so you will need to figure out how high a price you might be able to negotiate. In other words, you have to figure out the other party’s reservation value.

Step 4: Calculate the other party’s reservation value.

Step 5: Evaluate the ZOPA. Once you have an idea of each party’s reservation value, you can evaluate the zone of possible agreement, or ZOPA. The ZOPA is the set of all possible deals that would be acceptable to both parties. Put another way, the ZOPA is the space between the seller’s reservation value and the buyer’s reservation value…Your task in this negotiation is not simply to get a deal, but to claim as much value as possible.

The next question, that people then often ask is whether or not they should make the first offer. The authors respond:

Whether you should make the first offer or not depends upon how much information you have. If you believe you have sufficient information about the other side’s reservation value, it pays to make a reasonable (i.e., sufficiently aggressive) opening offer that anchors the discussion in your favor. If you suspect that you may not have enough information about the ZOPA, you’d be wise to defer an opening offer until you have collected more information. In this case, it may even be a good idea to let the other party make the first offer. You might forgo the opportunity to anchor the negotiation, but you also avoid the downside of not anchoring aggressively enough. Notice that a lack of information can also lead you to anchor too aggressively, demanding an amount that might offend the other side and drive them away. In other words, asking for too little diminishes the amount of value you can capture; asking for too much diminishes your chances of consummating the deal.

In the case where the other party makes their initial offer, one can become influenced by the “anchoring” effects of that offer. Here are five strategies to counter that subtle influence:

1) IGNORE THE ANCHOR: The best thing to do in the event that the other party makes an aggressive first offer—whether high or low—is to ignore it…In this manner, you can shift the conversation to an entirely different topic, one that allows you to reassert control of the discussion.

2) SEPARATE INFORMATION FROM INFLUENCE: Every offer is a combination of information and influence. The other party’s offer tells you something about what she believes and what she wants (information), but it also has the power to derail your strategy (influence). Your task is to separate the information contained in the particulars of the offer (and the way in which it was made) from the other side’s attempt to influence your perceptions.

3) AVOID DWELLING ON THEIR ANCHOR: If you are surprised by their offer, probe a little to find out if there is in fact any substantive new information that you can obtain. If no such information is forthcoming, quickly shift attention away from the anchor by sharing your own perspective and defining the negotiation in your terms.

4) MAKE AN ANCHORED COUNTEROFFER, THEN PROPOSE MODERATION: Finally, if it is not possible to ignore or dismiss the other party’s anchor, you should offset its influence by making an aggressive counteroffer…However, countering aggression with aggression comes at a risk: the possibility that both parties will become entrenched and reach an impasse. To mitigate this risk, you should offset their anchor with an aggressive counteroffer, and then suggest that you need to work together to bridge the gap.

5) GIVE THEM TIME TO MODERATE THEIR OFFER WITHOUT LOSING FACE: When reacting to very extreme offers, your foremost goal should be to re-anchor successfully, not to convey your outrage. And re-anchoring successfully often means helping the other side find a way to retract earlier demands and arguments.

On the other hand, if you were making the first offer, what would constitute an appropriate one? The authors offer four recommendations:

1) Keep the entire ZOPA in play. If your first offer is already inside the ZOPA, you have given up the ability to claim value that lies between your offer and the other party’s RV from the very start.

2) Provide a justification for your offer. The degree of aggressiveness should be appropriate to the situation…To determine your exact offer, ask yourself the following question: “What is the most aggressive offer that I can justify”

3) Set high but realistic aspirations. Why? First, those who set high aspirations tend to make more aggressive first offers in order to reach their target…Second, those with aggressive targets work harder at haggling once both parties’ Opening offers are on the table.

4) Consider the context and the relationship. Your goal should not simply be to get the best possible deal while preserving the relationship, but to get the best deal while strengthening the relationship and your reputation. You may have to forgo some short-term gains to meet this goal, but this sacrifice will almost always be worth the price.

The authors then go on to offer strategies on how one can obtain information that can aid in determining the Reservation Value of the other party we are negotiating with:

1) Exhaust all pre-negotiation sources of information: There are often dozens of ways to collect information that do not entail guessing or asking the other party directly.

2) Identify your assumptions prior to the negotiation: Of course, in any negotiation, each party makes an infinite number of assumptions. You cannot keep track of each one—and you don’t have to. But you do need to identify and be aware of all of the assumptions that underlie your planned course of action.

3) Ask questions that challenge your assumptions: The wrong way to approach a negotiation is to start bargaining as if your assumptions are correct. Instead, ask questions to clarify matters.

4) Ask indirect questions: Naturally, the other party will sometimes refuse to answer questions that could help you determine their reservation value. In that case, you need to ask questions that are less direct—and less threatening.

5) Protect yourself from lies and uncertainty with contingency contracts: Consider the use of a contingency contract. Contingency contracts are agreements that leave certain elements of the deal unresolved until uncertainty is resolved in the future.

Every negotiation will entail haggling, and below are strategies that provide guidance on effective haggling:

STRATEGY 1: FOCUS ON THE OTHER PARTY’S BATNA AND RESERVATION VALUE – These folks tend to set higher aspirations and capture more value in the deals they negotiate.

STRATEGY 2: AVOID MAKING UNILATERAL CONCESSIONS –  Luckily, a norm of reciprocity pervades most negotiation contexts: parties widely expect and understand that they will take turns making concessions. If the other party violates this norm, you should rectify this problem iimnTiediately. The next five points show how to so.

STRATEGY 3: BE COMFORTABLE WITH SILENCE – Effective negotiators understand not only the power of silence, but also the need to be comfortable with it. Just remind yourself that if you speak when it is their turn, you will be paying by the word.

STRATEGY 4: LABEL YOUR CONCESSIONS – Instead of simply giving something away or moderating your demands, make it clear that your action is costly to you. Because labeled concessions are hard to ignore, it becomes difficult for recipients to justify nonreciprocity.

STRATEGY 5: DEFINE WHAT IT MEANS TO RECIPROCATE – Reciprocity is even more likely if you not only label your concession, but specify what you expect in return. This strategy eliminates another piece of ambiguity.

STRATEGY 6: MAKE CONTINGENT CONCESSIONS – Contingent concessions explicitly tie your concessions to specific actions by the other party.

STRATEGY 7: BE AWARE OF THE EFFECTS OF DIMINISHING RATES OF CONCESSIONS – In most negotiations, concession rates follow a pattern: early concessions are larger in size than later concessions. In other words, negotiators tend to offer diminishing rates of concessions over the course of the negotiation.

On a closing note, and as with any skill, a reminder that we all have the ability to improve our negotiation talent:

Negotiation genius is about human interaction, and the only raw material you need to achieve it is the ability to change your beliefs, assumptions, and perspective. You have this ability. If you now put forth the effort to implement what you have learned, then you will become a negotiation genius—someone who finds it easy to achieve brilliant results in all types of negotiations. We hope you will put forth this effort. We hope this book motivates you to do so and guides you along the path.

I highly recommend this book, as a follow-up to the classic Getting to Yes by Fisher, Ury and Patton as well as Influence by Cialdini. I would like to thank my friend John Walker for this perceptive book recommendation.


On The Halo Effect

I recently finished reading The Halo Effect…and the Eight Other Business Delusions That Deceive Managers by Phil Rosenzweig.

As best summarized by the author: “The central idea in this book is that our thinking about business is shaped by a number of delusions…More recently, cognitive psychologists have identified biases that affect the way individuals make decisions under uncertainty. this book is about a different set of delusions, the ones that distort our understanding of company performance, that make it difficult to know why one company succeeds and another fails. These errors of thinking pervade much that we read about business, whether in leading magazines or scholarly journals or management bestsellers. They cloud our ability to think clearly and critically about the nature of success in business.”

The book then goes on to present the nine delusions excerpted below:

“Delusion One: The Halo Effect – The tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more. In fact, many things we commonly claim drive performance are simply attributions based on prior performance.

Delusion Two: The Delusion of Correlation and Causality – Two things may be correlated, but we may not know which one causes which. Does employee satisfaction lead to high performance? The evidence suggests it’s mainly the other way around – company success has a stronger impact on employee satisfaction.

Delusion Three: The Delusion of Single Explanation – Many studies show that a particular factor  – strong company culture of customer focus or great leadership – leads to improved performance. But since many of these factors are highly correlated, the effect of each one is usually less than suggested.

Delusion Four: The Delusion of Connecting the Winning Dots – If we pick a number of successful companies and search for what they have in common, we’ll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.

Delusion Five: The Delusion of Rigorous Research – If the data aren’t good quality, it doesn’t matter how much we have gathered or how sophisticated our research methods appears to be.

Delusion Six: The Delusion of Lasting Success – Almost all high performing companies regress over time. The promise of a blueprint for lasting success is attractive but not realistic.

Delusion Seven: The Delusion of Absolute Performance – Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.

Delusion Eight: The Delusion of the Wrong End of the Stick – It may be true that successful companies often pursued a highly focused strategy, but that doesn’t mean highly focused strategies often lead to success.

Delusion Nine: The Delusion of Organizational Physics – Company performance doesn’t obey immutable laws of nature and can’t be predicted with the accuracy of science – despite our desire for certainty and order.”

Every now and then one comes across a book, that makes its reader take a step back and re-assess his views, experiences and readings. The Halo Effect is one of these books. It delivers both on account of the content and also of the numerous corporate examples and references to leading work in the leadership/management space to illustrate the concepts presented. A very refreshing and highly recommended read!

Below are excerpts from the book that I found particularly insightful:

1- “In fact, for all the secrets and formulas, for all the self-proclaimed thought leadership, success in business is as elusive as ever.”

2- “…There was talk, over and over, about customer orientation and leadership and organizational efficiency, but these things are hard to measure objectively, so we tend to make attributions about them based on things we do feel certain about – revenues and profits and share price. We may not really know what leads to high performance, so we reach for simple phrases to make sense of what happened.”

3- “If we start with the full data set and look objectively at many years of company performance, we find the dominant pattern is not one of enduring performance at all, but one of rise and fall, of growth and decline. Foster and Kaplan conclude: “…Managing for survival, even among the best and most revered corporations does not guarantee strong long term performance for shareholders. In fact, just the opposite is true. In the long run, the markets always win”.”

4- “March and Sutton explain: “In its efforts to satisfy these often conflicting demands, the organizational research community sometimes responds by saying that inferences about the causes of performance cannot be made from the data available, and simultaneously goes ahead to make such inference.””

5- “We can’t turn back the clock, change one variable, and then run the experiment again…It’s easy to blame one man for a company woe’s, but these sorts of attributions, while appealing for their simplicity, may not provide the best basis on which to manage a company.”

6- “…An organization isn’t a system of mechanical parts, interchangeable and replaceable. It’s better understood as a sociotechnical system, a combination of mean and machines, of people and things, of hardware and software, but also of ideas and attitudes. Some technical elements can often be copied and applied with predictable results…but when we begin to examine how those technical systems interact with social systems, with people and values and attitudes and expectations, the results are harder to predict.”

7- “Managers quite naturally find it easier to keep the attention on execution, which everyone will always agree can be done better.”

8- “What leads to high performance?…we’re left with two broad categories: strategic choice and execution…In spite of our desire for simple steps, the reality of management is much more uncertain that we would often like to admit – and much more so that our comforting stories would have us believe.”

9- “As Tom Peters observed: “To be excellent, you have to be consistent. When you’re consistent, you’re vulnerable to attach. Yes, it’s a paradox. Now deal with it.””


Omar Halabieh

The Halo Effect

On CIO Wisdom

I just finished reading CIO Wisdom – Best Practices from Silicon Valley’s Leading IT expert by Dean Lane.

This book is a collection of articles on topics of concern and relevance for not only CIOs by IT leaders at large. These articles are written by various authors, which ensures varied perspectives – based on their experiences. Topics range to include the people, process and technology aspects of the profession. To mention a few: Communications, IT Organization, Governance, Architecture, Strategic Outsourcing,  IT Infrastructure Management and Execution etc.

What sets this book apart is the breadth of topics covered in terms of applicability and importance to overall success of the IT organizations. While at a first glance the articles may seem disparate, there are a number of key themes/messages that emerge. Each topic is discussed enough to give the reader a basic and clear understanding, but given the book’s breadth, once cannot expect each topic to be covered in full depth. The later would require many volumes.

CIO Wisdom is a recommended read for any IT leader seeking to gain a broader understanding of the IT organization it’s challenges and opportunities.

Below are excerpts from the book that I found particularly insightful:

1- “In each business and historical phase, the position of CIO can be seen as a mirror of the broader environment.”

2- “For many years, successful CIOs have been business strategists, capable of translating the value of technology in terms that can be understood by the business leaders of the institutions. Now that skill set is being externalized…The new CIO must be an entrepreneur, a matrix manager of teams that do not report to IT and may not even belong to the company, an architect and e-business visionary, an evangelist, a relentless recruiter, a mentor, and an expert in psychology as well as the implementation of (constant) change management.”

3- “The CIO is a mirror of the institutions…The CIO is a mirror of a global economy…The CIO is at the center of our cultural crossroads…The CIO is a change agent for business processes and cultural norms…The CIO is a mentor and a leader…The CIO is the gatekeeper of the company’s intellectual assets and operational resources.”

4- “The first 90 days is the most important period in your CIO career at a new company…Focus on three major projects: a tactical plan to address time-critical issues and decisions, an IT organizational analysis with recommendations, and an IT strategic plan for the next two years…Establish a strong rapport with management during this time-frame, as you will need management support to implement your recommendations.”

5- “I believe, however, that there are five especially important fundamentals that a CIO needs to be cognizant of, regardless of the current focus. If internalized by IT staff, these fundamentals can dramatically transform a technology-centric IT organization into a business-focused one, almost without effort: passion, humility, openness, clarity, agility.”

6- “Technology by itself can never make a business more agile, but the right IT people applying the right technology at the right time can.”

7- “How to make yourself a better communicator: assess yourself, know your audience, set and manage expectations, insist on accountability, be aware of the political environment.”

8- “You can have an immediate impact in the area of training by utilizing internal resources to increase an employee’s knowledge about the processes or issues facing a company. By reserving the first half-hour of staff meetings for training…you can enable the most knowledgeable person associated with a ggiven process to provide 30 minutes of useful instruction.”

9- “More than one book has made reference to the following four elements, which must be present for communication to be possible: Message – An idea, concept, or som other form of notification. Transmitter – Someone or something that originates and sends the message. Receiver – Someone or something that gets the message. Medium – The means or vehicle by which the message is sent.”

10- “…Although published plans and strategic roadmaps are useful, planning skills and the capability for strategic thinking have the most significant value to the CIO, both personally and within the IT organization.”

11- “It is important for a CIO to have a philosophy around budgeting…Some philosophies that you may see include: Budgeting is a necessary evil…The budget is the Bible…The budget is a guide…The budget is an opportunity to influence change and support overall corporate direction…this is the most effective in our opinion.”

12- “IT marketing is the art of appropriately setting expectations between customer and service provider such that both entities enjoy a mutually beneficial economic relationship.”

13- “Jim Hackett: “The popular notions of the last decade were for companies to become customer-centered. Theories abounded that if you paid attention to what your customer wanted, you couldn’t go wrong. But the truth is that customers often ask you to do wrong things, not because they’re difficult to deal with but because they just don’t know better. The distinction is moving from customer-focused to user-centered, and the ability to understand the users of their products is a cultural shift that corporations have to make.””

14- “Once IT’s marketing advocate is identified, the lifecycle…borrowed from sound CRM best practices should be applied. In short, the plan is to engage, transact, fulfill, service, and report.”

15- “Good metrics should be used to guide the development of strategic objectives, narrow investment opportunities to minimize wasted capital, and continually evaluate status to ensure that progress is being made.”

16- “Although it may sound trite, in all of our years combined, we have learned to never fear a negative result of discovery. Such a discovery represents the opportunity you were seeking in instituting this discipline by which you will make change for the better.”

17- “Facts are the fundamental entities that an organization deals with…Data is integrated, ordered facts…Information is ordered data…Knowledge is ordered information within the context of experience in similar situations…Understanding is organized knowledge…Enabled intuition.”

18- “Project success is a function of RS^2 and VEC^3,  RS^2 is {Resource, Scope, Schedule}. VEC^3 is {VxExC1xC2xC3}, where V=Vested interest (that is, aligning the vested interests of key stakeholders), E=Ego (that is, understanding the values and culture of stakeholders), C1=Communication and alignment with executive management, C2=Communication and alignment with your peers, C3=Communication and alignment with all doers (implementers).”


Omar Halabieh

CIO Wisdom

CIO Wisdom

On The Go-Giver

I recently finished reading The Go-Giver – A Little Story About A Powerful Business Idea – by Bob Burg and John David Mann. This book was recommended to me by one of my blog followers (thank you Stephanie!).

The Go-Giver as the authors tell, revolves around the story of a young professional (Joe) who is striving for success. Joe is ambitious, however lately it seems like his hard work and efforts are not paying off in terms of results. Following a disappointing quarter – in terms of sales results – he inadvertently seeks the mentorship of “The Chairman”.

Joe then embarks on a learning journey by meeting “Go-Givers” – friends of  “The Chairman”. Through these interactions he learns of the “Five Laws of Stratospheric Success”:

1- The Law of Value: “Your true worth is determined by how much more you give in value than you take in payment.”

2- The Law of Compensation: “Your income is determined by how many people you serve and how well you serve them.”

3- The Law of Influence: “Your influence is determined by how abundantly you place other people’s interests first.”

4- The Law of Authenticity: “The most valuable gift you have to offer is yourself.”

5- The Law of Receptivity: “The key to effective giving is to stay open to receiving.”

A very insightful, powerful and enjoyable parable/story that reminds us of the basics of success – which start with giving and circle back with receiving (not the other-way around i.e. go-getter).

Below are two excerpts that resonated with me:

1- “What you focus on is what you get.”

2- “Because if you place the other person’s interests first, your interests will always be taken care of. Always. Some people call it enlightened self-interest. Watch out for what other people need, with the faith that when you do, you’ll get what you need.”


Omar Halabieh

The Go-Giver

The Go-Giver

On Pour Your Heart Into It

I just finished reading the book Pour Your Heart Into It by Howard Schultz and Doris Jones Yang. As you might guess this book is about the story of Starbucks, one of the most esteemed and recognized brand not only in the US but also worldwide. Howard divides the book into three chronologically separated sections: Rediscovering Coffee – The years up to 1987, Reinventing the Coffee Experience – The Private Years, 1987-1992, and Renewing the Entrepreneurial Spirit – The Public Years, 1992-1997. While numerous business books about specific companies focus solely on the business/financial side, Starbucks and Howard beg to differ. As he best puts it “…The Story of Starbucks is not just a record of growth and success. It’s also about how a company can be built in a different way. It’s about a company completely unlike the ones my father worked for. It’s living proof that a company can lead with its heart and nurture its soul and still make money. It shows that a company can provide long-term value for shareholders without sacrificing its core belief in treating its employees with respect and dignity, both because we have a team of leaders who believe it’s right and because we have a team of leaders who believe it’s right and because it’s the best way to do business.”

This book is filled with lessons of true leadership, about setting a vision and inspiring every single person within the organization regardless of title or rank to live it and help achieve it. This inspiration is a by-product of putting employees first, first and first. The passion that Howard and his team have about what they do clearly radiates through the book, even for someone like myself who is not a big coffee fan! I want to conclude by two excerpts that I particularly enjoyed reading:

a) “Great companies need both a visionary leader and a skilled executive: one for the top line, the other for the bottom line. As Fortune’s Ronald Henkff wrote in November 1996, “The businesses that thrive over the long haul are likely to be those that understand that cost cutting and revenue growing aren’t mutually exclusive. Eternal vigilance to both the top and bottom lines is the new ticket to prosperity.”

b) “We built the Starbucks brand first with our people, not with consumers-the opposite approach from that of the crackers-and-cereal companies. Because we believed the best way to meet and exceed the expectations of consumers was to hire and train great people, we invested in employees who were zealous about good coffee. Their passion and commitment made our retail partners our edge and fervor created a buzz among customers and inspired them to come back. That’s the secret of the power of the Starbucks brand: the personal attachment our partners feel and the connection they make with our customers.”

An enjoyable and highly recommended read! While you are at it, enjoy a Frappuccino.


Omar Halabieh

Pour Your Heart Into It

Pour Your Heart Into It