Other People's Numbers

Not all good ideas are good business ideas. Good business ideas require the ability to control supply and demand. To create shape and form around an idea through barriers to entry. Demand is not good enough if supply is a free for all. It is easier to control things when you can reduce them to numbers. Which is why STEM areas (Science, Technology, Engineering, and Maths) typically make better business ideas. They focus on areas that are easier to box into products that can be paid for. A clear ask. A clear offer. Not everything can be boxed. Even good business ideas will be exposed to qualitative questions that cannot be reduced to numbers for comparison. You can force anything into a 1-5 ranking or a Yes/No binary. That is often useful just to force you to think about something, but then you have to avoid being seduced by the numbers. Falling in love with the illusion of control so much that you forget that numbers make better questions than answers. Especially when they are other people’s numbers, and you did not do the work yourself.

Not all Ones and Zeros

Alternative Worlds

“Price is not Value” is perhaps the most important lesson to learn in navigating wealth creation, financial planning, and building a career. I constantly find myself wanting to believe price is more than it is. Feeling like the way I see the world is reality. All price is, is a communication tool between different realities. We see the world based on what we have seen. We see the world from within our self and community created containers. That is where value sits. Price is where different value systems briefly and fuzzily meet. Price is a crude tool to artificially, and temporarily, simplify qualitative ideas of what something is worth down to a number. As individuals, we can then rank and compare all the other things that come into our decision making. Then make choices based on bringing things into and out of our world, based on price.

 

Holding the Knife

Price is not value. Salary is not worth. The best way to see this is to speak to someone who has moved from a big company to a small company. Especially if that small company is a start-up. The layer of story-telling that gets added onto a business to do salary negotiations is simply that. A story. The magic of markets are they let us quantify things that cannot be quantified. If you have someone who wants something (because they think it is worth more than the price) and someone who has that thing to offer (because they can supply it at sufficiently less than the price). Price is just an agreement. In most businesses price determines the size of the pie. Then story gets added and sliced by the person with the knife. If the company has a stable cash flow that allows the illusion of sticky wages (annual increases in only one direction), then people can live in the false security of salaries that reward seniority and perceived merit. Key performance indicators are a tool for those who hold the knife. They are not a market price.

In Between

Actions have consequences. Both intended and unintended. The desire to count and maximise has the unintended consequence of undervaluing the future. If you make your decisions by simplifying complexity down to two simple numbers (Return and Risk), the result is a just-watching-your-feet time horizon. The underlying assumption is you will have the opportunity to make a different decision for the next time frame that does consider the future when its turn comes. Aiming for returns of 15-20% would mean anything beyond a 5 to 10-year time horizon almost does not enter your consideration. The most powerful investment forces are space and time. Space between production and consumption. Time between contribution and extraction. Rather than short sprints, thinking with a long timeframe in mind allows you to focus on sustainability and consistency. A long timeframe forces you to think of things that cannot be simplified into numbers.

Observable Universe Logarithmic Map

Hairy Bottomed Spaniard

Not all good ideas are good business ideas. Not all good ideas can be quantified, contained, and controlled. Good business ideas exist within a container, supported by capital. Great business ideas are self-financing and scalable. They pay for themselves. Generating the profit to reinvest and grow. A lot of the very best ideas can not pay for themselves, and are so amazing because of their intimacy. Zero scalability. Tossing quantification, barriers, and control off like the unwanted clothing of a hairy bottomed Spanish Grandpa running naked into the Mediterranean after ten too many Sangrias. Good business ideas will always be necessary to build engines. Good business ideas require attention to the loud voices of supply and demand. They require us to separate our identity and worth from problems, so that we can solve them and move on. There will always be new coal (problems) to feed these engines. We can then attach engines to great ideas. Powering our ability to create value in spaces that cannot be priced.

Sangria

Finding Balance

Key Performance Indicators (KPIs) and Balanced Scorecards are ways of managing performance. They are particularly challenging in areas that are hard to quantify and articulate. A lot of my work for money involved taking technical concepts, trying to wrap my head around them, then trying to make them easier for others to wrap their head around. Understanding is incredibly hard to quantify. Trust even more so. It takes years to build, and can be broken in an instant. Particularly if you are looking for reasons or data points to not trust someone. Everyone is holey. Everyone is flawed. A bigger flaw is looking for holes in other people. To look for reasons to distrust. The problem with KPIs is the list gets long fast. So if a task (maintain trust) is “worth 2%” of a year’s assessment, the quantifying or checklist becomes a spurious form of false confidence. Easier is to have a list of things you won’t do. Even better is to have an incredibly short list (three key things), and to trust people. Trusting doesn’t mean being a sucker. You can build buffers, checks and balances. But it does mean accepting that not everything can be controlled or quantified. It does mean building systems that aren’t designed to cut people off like gangrenous limbs.

Wafer Thin

You can’t have a discussion about Meritocracy, without a discussion about Privilege. It is like buying shares in a business based on its share price movements alone, without looking at the balance sheet, income statement and cash flows. That is trading, not investing. Fundamentals matter. Wafer thin margins can make Mr Creosote look really profitable, until you see how much debt he has and take cover for the imminent explosion. Huge revenues can be more than swallowed by runaway costs. Valuable tangible assets may have to be sold at a fraction of their normal market price because of poor cash flow management. Meritocracy is just a number. Numbers are meaningless when they stand alone. They only have value in comparison. Privilege may be messy and qualitative unlike conspicuous merit. Sorry. You have to do the work. The work is deeper than prejudice. Even the prejudice you don’t know you have till someone shows you a mirror.

Beyond You

Financial Yoga recognises that not all ideas are good business ideas. You can’t always define yourself in the way you truly want to if you insist on packaging “that” (you) as a business idea. Most people have to be their initial source. They have to personally take on the role of Productive Asset, and figure out a way to generate an income. There are lots of things that are of incredible value that are awful business ideas. Start by accepting that. You have to articulate an Ask/Offer. Not everything can be expressed in words. You have to have something you can count. Not everything can be counted. There has to be some control over supply and demand. Some things of incredible value are abundant. The random cards you have been dealt (talents, wiring, community, world view) can be tweaked with a lot of effort. With daily practice. Gradually you can release the obstacles that define you. You can free yourself from the constraints of what makes you a good business. You can start to look at what makes a good business (beyond you). You can use good businesses to power good ideas. Expanding your possibilities.

Double Standards

Consistency is a great thinking tool. If you believe “A” and “not A”, you can’t believe them in the same room. I used to think you can’t be intelligent and racist. But then I read about Dr.Death. The cardiologist and former head of Apartheid South Africa’s chemical and biological warfare project. You can believe contradictory things if you switch off part of your brain. That is why Double Standards grate me so much. Business can encourage a brutal offswitch for seeing people as people. It can encourage “tough decisions” that impact people more than the business. Often those standards don’t work both ways. You don’t see people higher up the chain of command falling on their swords. When the numbers support the argument, they are used. When the numbers don’t support their argument, the Defence Attorney and Public Relations Officer replace the Scientist at the Q&A session. The business becomes a church. The danger with numbers, is there are always other numbers.

STEM Engine

What are you counting? I have always had a love for both Art and Maths. In deciding on a career, I chose to be pragmatic. The harsh reality is STEM (Science, Technology, Engineering and Mathematics) subjects are more efficient money-making containers. Money making requires something you can count. If you can’t count it, you can’t measure it. If you can’t measure it, you can’t manage it. If you can’t manage it, you can’t control it. If you can’t control it, you can’t make money from it. It is a fundamental misunderstanding of pricing to think qualitative subjects don’t add the value of quantitative subjects. Price isn’t value. It just reduces the complex down to a tool for comparison. It creates a market that allows Due Diligence (alternatives, reliability, fairness). This doesn’t mean we have to live in a STEM world. It does mean that STEM Engines are more reliable. It is far easier to use Maths to make money, and free your Art from the constraints of supply and demand. Build an Engine you can count on, for the things that count.

Steam Locomotive

Horsepower

Not all good ideas are good business ideas. Not all good business ideas are good ideas. We can’t reduce a complex world down to clear decisions that don’t have trade-offs, and uncertainty. Decisions have consequences. Within businesses, this complexity can be left to the judgement of those where authority lies. Businesses have Cost Centres, and Profit Centres. Things that don’t bring in money, but are still considered ambiguously worth it. Maybe even considered the Core Purpose. The Profit Centres are the Engine. Print Media has gone through the disruption of having its Engine removed. Quality Content was the Core Purpose. But Advertising was the Engine. Search and Social Media swooped in. Now lots of people produce content (of ambiguous quality) for almost free. I have written over 2,400 posts in the last 5 years for £23.44. Except I don’t get paid till that hits £60. Don’t hold your breath. I’m not. No one clicks on my ads. It is important to work towards a detached Engine, so that your purpose doesn’t get its financing removed if the rules change.

Generating Power

Revert to Mean

Reversion to Mean is the reliable default assumption that you should take “this changes everything” with a pinch of salt. Habits run deep. Normal changes slowly. Normally. The hardest part of a fast is breaking the fast, gradually returning to more sustainable behaviour while maintaining the essence of the changes you took to an extreme. The danger is that big changes lie in the tails. The Fat Tails. Thinking the world can be neatly summarised into Risk and Return numbers that drive your decisions is like learning to drive on a farm, or learning to shoot fish in a barrel. Reversion to Mean works well enough that it is a Hubris factory. It can build track records of success that turn men into demi-gods. Till the day you realise the world is too complicated, ambiguous, and random to control. Till you realise you are not a God, and the best everyone can do is do their best. Till you personally, revert to mean.

Beware the Extremes