In the 1960’s my parents invested in acreage in the western part of North Carolina. They paid what we came to understand was a low price for a large tract of land. It would later sell for something like 50 times what they paid. It was a terrific investment but they were not good stewards of their money.
Later, while a broker at Merrill Lynch, some of my clients reminded me of my parents. One couple, I recall vividly, were invested in real estate as well, though through a financial vehicle rather than directly. Just as my parents had done, they spent both the profits from their investments and the principal. Try as I might, I couldn’t get them to see that when the investment ended, they would have nothing.
Others who puzzled me were my colleagues. Some were earning a lot of money but seem constantly stressed about it. Putting these experiences together, I had several observations about individual behavior that translate well to businesses:
- Net worth and income are very different and shouldn’t be confused. The same for revenue and value.
- Possessions are not proof of wealth.
- Irrational optimism about future income/revenue will lead us astray. Over-confidence is the invisible decision trap that most often ensnares even smart people.
- Income or revenue, poorly managed, will not improve your life or the life of anyone else, except temporarily.
- Margin matters, without it there is no value.
- The need to appear prosperous or successful leads some to lie, deceive and concoct “creative financial ideas.” It also contributes to the popularity of selfies.
- Spending all (or more) of your income will leave you at the mercy of others be it a bankruptcy court, investors, your boss or your family.
- If you want control of your business and your life, you need self-control.
- Counter-intuitively, personal comfort is very important to sustaining self-control. Miserly denial of all things “unnecessary” is a recipe for failure and unhappiness.
- Investment is necessary and is more likely to payoff if well reasoned. Of course, most people think their reasoning is sound. This is why we need help.
Acquiring a company based on overly optimistic projections of future revenues has harmed many a company. One such organization I was asked to help (once they realized they had made a bad deal), was not salvageable. Forced by investors to do the deal, the CEO agonized as the company slid into bankruptcy.
Reading this, you probably think that only foolish or dishonest people would get trapped by bad decisions, irrational thinking or cave in to pressure. This is not true. Smart, experienced people get caught up in rationalization, convoluted thinking and self-deception. Why? Because so many think that they are too smart to fall prey to mistakes in thinking and decision-making. Those who think they aren’t vulnerable are the most in danger.
Sadly, my parents let a lot of money slip through their fingers. Well…actually, they spent it. I watched, I vowed to do better. I became a student of decision-making, which is how I became known as The Decision Doctor®. I help leaders make high-stakes decisions, especially when they are in hot water.
The first principle is that you must not fool yourself and you are the easiest person to fool.
Richard Feynman, Winner of the Nobel Prize in Physics
