June 23, 2016
The Family Office Alpha Report by Witherspoon Partners May June 2016
Two Votes for Greatness
By Keith Danko
In May I attended the graduation ceremonies at Duke University, where I was treated to legendary Duke coach Mike Krzyzewski giving his first ever commencement speech. As a complement to this, on the trip down to Durham I read investor and technologist Peter Thiel’s Zero to One. Both Coach K’s speech and Theil’s book offer some timely nuggets of wisdom for today’s family office and institutional investors.
One piece of advice resonated in the words of both Coach K and Thiel: choose greatness as the goal. Coach K went so far as to create a class motto for the 2016 graduates before him: “We’re the class of 2016: we expect great things.”
Greatness, however, is not necessarily fostered through competition, whether it be in sports, education, or investing. In his book Thiel argues that startup companies who target being competitive in industries, believing that they can compete and achieve some percentage of market share, miss the point. Although praised by our society, competition to Thiel is actually an ideology that over time reduces and eventually eliminates profits.
In a time when so many believe their portfolios of assets are underperforming or that truly outstanding returns are a thing of the past, this is the lesson for investors: We should all examine our approaches, investment processes, the structures of our investment teams or committees, and the guidelines under which we operate, to seek greatness.
Standards, Not Rules
In his speech, Coach K emphasized that in all of the teams he has coached, he has begun with a discussion of fundamentals. He noted, “We don’t have rules, we have standards.” Members of a team can believe in, buy into, and take pride in standards much more than they would in rules.
How many of us use investment guidelines that consist of lengthy checklists (rules) of minimum this, or maximum that, which have little bearing on whether the investment being judged is an exceptional opportunity or not? Imagine how different most investment committee meetings would be if the initial criteria to introduce ideas were standards of uniqueness or exceptionalism rather than ‘does it have a three-year track record’ or ‘does it operate in an area where we are already comfortable’?
Some of those standards could in fact in the end appear to be very similar to rules, but the process to get there and how it is labeled makes all the difference. Coach K described how he opened up a discussion about standards when coaching the US Olympic basketball team. This group included individuals like Le Bron James and Kobe Bryant—talents self-protective of their well-deserved status as the hearts of their respective worlds. One of the standards they aired and then devised as a group was that they wanted to be a team that was on time—that everyone should always show up prepared to go. Coach K could have imposed that as a rule; however, the team wanting it as a standard, almost as a statement of team character, raised it to a whole different level.
Greatness Over Competitiveness
One of the pitfalls of current day investing is the crowded trade or crowded strategy. Investors who enter crowded areas generally believe that if they focus on finding the best managers in those strategies, this dynamic will somehow overcome the disadvantage of a big crowd already there.
“The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Any big market is a bad choice, and a big market already served by competing companies is even worse,” writes Thiel. Although he is addressing startup companies in this context, his theme can also be applied to crowded investment strategies. Ultimately, competition destroys the potential returns, no matter the quality of the competitors. A focus on being great forces a reconsideration of the me-too ideas, an appreciation of standards over rules, and an openness to fresh concepts and business models.
Seeking greatness also rewards courage, or at least allows it to manifest as much as possible. “Brilliant thinking is rare, but courage is in even shorter supply than genius,” Thiel writes on the opening page of the first chapter. We are not advocating dropping or radically changing risk profiles or going out on a flimsy limb, but rather encourage brandishing some courage as a way to nurture and circulate fresh ideas.
Choose Good People
One of Coach K’s other admonishments of the commencement speech was to choose good people, and to choose good people up and down the team, including advisors. Then, advised Coach K, give them a respectful hearing when they speak: resist any structure or protocol where senior members of the team can intimidate or criticize lesser members for speaking up.
Clearly both Coach K and Peter Thiel were able to get on “the right bus” (advice given by Coach K’s mother when he was young) and to let only good people on it. The winningest coach of all time (five NCAA championships and two Olympic gold medals), and the founder of PayPal and financier behind Facebook, have some valuable insights that have universal relevance, including in the world of investing. And now is the time. As Coach K says, “You can’t wait for great things.”
Coach K’s commencement speech can be viewed here. Zero to One: Notes on Startups or How to Build the Future, by Peter Thiel.