Saturday, June 30, 2018

Jeff Bezos on High Standards

From the most recent Amazon (AMZN) shareholder letter:

"High standards are contagious. Bring a new person onto a high standards team, and they'll quickly adapt. The opposite is also true. If low standards prevail, those too will quickly spread...I believe high standards are domain specific, and that you have to learn high standards separately in every arena of interest. When I started Amazon, I had high standards on inventing, on customer care, and (thankfully) on hiring. But I didn't have high standards on operational process: how to keep fixed problems fixed, how to eliminate defects at the root, how to inspect processes, and much more. I had to learn and develop high standards on all of that (my colleagues were my tutors).

Understanding this point is important because it keeps you humble. You can consider yourself a person of high standards in general and still have debilitating blind spots. There can be whole arenas of endeavor where you may not even know that your standards are low or non-existent, and certainly not world class. It's critical to be open to that likelihood."

A similar thing seems relevant to the world of investing.

I think it's fair to say that some seem more than willing to offer their views on just about every investment in every industry. Well, those willing to opine on most anything in the universe appear unaware of what Jeff Bezos is saying above. Such behavior, when on display, usually warrants a healthy dose of skepticism. The opinionator may use all the right terminology, have a solid understanding of the macro factors, and may even know quite a bit about lots of businesses across many industries.

At least enough to sound impressive.

Yet it doesn't necessarily follow that they'll sufficiently understand those businesses well enough to justify putting capital at risk. If someone, for example, were capable of evaluating the prospects of a particular technology business, it does not automatically mean they'll also understand how to capably judge the prospects of a steel producer.

Necessarily, there'll be different competitive dynamics, different industry-specific opportunities and challenges, and the things to consider and understand in depth just goes on and on.

Behaving otherwise lacks the kind of wise humility that Jeff Bezos refers to in his letter.

Low levels of humility can prove more than somewhat correlated with low returns (or worse). In fact, when combined with early investing success overconfidence may lead to increasingly spectacular and costly failures. In other words, for the overconfident investor, the longer a series of early wins happens to be likely means bigger more expensive mistakes at a later time.*

Hubris and investing don't mix.

The reality is that even very talented individuals often have "debilitating blind spots".

High levels of competence and prior accomplishment, however impressive, do not automatically provide an exemption.

Worse yet, there's a tendency to think blind spots are someone else's problem.

In fact, there's some evidence this may especially be applicable to highly capable individuals.

Those who think they have somehow developed some kind of blind spot immunity run the risk of being (or becoming) a latent or blatant liability.

That such a liability hasn't explicitly revealed itself just yet doesn't prove its nonexistence.


No position in AMZN

* It's worth noting here, as an aside, that the relationship between risk and reward is frequently misunderstood. The risk/reward relationship is vastly more confounding than the prevailing view -- that there inevitably must be a positive correlation between the two -- would suggest.
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