In lieu of a broader blog post this month, I’m sharing a link to a documentary film recently released on YouTube entitled “Tune Out the Noise.” It was featured in the Wall Street Journal this past weekend and tells the story of Dimensional Fund Advisors (DFA), a pioneering investment firm born out of exhaustive academic research at the University of Chicago. That graduate school of business, now known as the Booth School, is named for David Booth, a generous contributor to the university and a co-founder with Rex Sinquefield of DFA.
This 86-minute documentary, directed by the masterful Errol Morris, frames the practical application of decades of study by multiple Nobel Prize laureates around the triumph of passive investing over active investing. If you’re not familiar with the difference between index investors (passive) and stock pickers (active), or the alleged controversies surrounding the comparison, this film will provide an entertaining primer to one of Wall Street’s greatest battles for the hearts and minds of ordinary people putting their money to work for the long-term, particularly into retirement. I won’t spoil the punchline, but you won’t have to wait for the end of the movie to understand its thesis.
The DFA leadership team sponsored the production and made it available free of charge because they want to broaden the public’s perspective on the mathematics underlying equity markets, generation after generation. I have been a massive fan of DFA almost since its inception. Whether or not you agree with the firm’s approach to investing, I believe you owe it to yourself to better understand what they set out to do, how it has played out, and how many believers have been fortunate enough to benefit from so many serious, critical thinkers who set out to change their corner of the world and pulled it off in spectacular fashion.
I hope you enjoy the show as much as I did, and come to respect this brilliant group of financial leaders as much as I do.
If you’ve ever been in a planning meeting with me, you are familiar with this question: What does winning look like? This is how I like to frame decisions around initiatives we are considering. If we can define success in advance, we will know if we achieve it. If we have no idea what winning looks like before we commit resources to a project, how do we know if it was worth it once we deliver the work product?
We all know what winning looks like in sports. If one team has a higher score than its opponent, that team wins. Simple enough, but is it also winning if there were so many injuries in the latest game that half the team can’t play in the next game? What if the team’s coach coach delivers the win, but on a series of controversial decisions that damage team morale for the rest of the season? What if someone cheats? Some of winning is straightforward, but not all of it.
Let’s consider a working example in business.
Let’s say we have an idea for a new set of features we think we want to create for our e-commerce platform. One way to decide what winning looks like is a simple ROI (return on investment) calculation. Suppose the project cost is a million dollars. The first thing we want to do is get back that million dollars through incremental profits. Remember always that revenue is not profit. We have to take all our fixed and variable costs out of sales before we achieve a contribution to earnings. A million dollars of revenue does not pay back a million-dollar investment, but if our contribution margin on those sales is 20%, then we need an incremental $5m of revenue to produce $1m of incremental cash (presume that general and administrative costs are unchanged to simplify things).
Let’s say then we’ve articulated the minimum payback to break even we need on $1m of investment is $5m of incremental sales (that is, revenue we would not have received without the new initiative). Of course, no one wants to break even in business, we want a multiple of that investment back. Do we want 5x, 10x, or more? A lot of that depends on the scale of the business, but let’s say we want 5x our investment to call it a win. That’s $25m of sales generating $5m of cash for a 5x return.
The next question we might ask is how soon do we want that return. Some of that will depend on the numerous initiatives competing for investment. If two potential initiatives are evaluated to deliver the same 5x return, but one can do it in six months and one can do it in a year, I’d say we go with six months. So the cash we produce is important, but so is the time we have to wait to get it back.
Does winning end there? Is selecting an initiative solely based on return on investment and time? Seldom are those the only factors in play. We need to think about the strategic value of our initiative. Does it lift our customer count? Sometimes that is even more important than the incremental cash we are producing, particularly if we are focusing on the lifetime value of a customer. In this case we might set a goal that the new initiative increases our customer count by 5% in no less than a year. If we know what those customers are worth to us in the long run, we might go back and pick the initiative with the one year return on investment over the six month time frame if the additional customers we are acquiring are all the more valuable.
Another factor in winning might be market positioning in the competitive environment. Let’s say we’re convinced the feature we’re considering is something our customers have been requesting in customer service feedback, because no one else does it very well. Winning in this instance might be about acquiring market share above other metrics. When we launch the feature, if we see our online orders increase by 5% while a competitor’s volume stays the same or declines, we might call that winning, particularly if we can translate that gain in market share into higher customer count or improved lifetime value.
The point here is not to enumerate all the ways we might factor winning, but to force a robust dialogue ahead of committing to an initiative that builds a consensus around the work we will do together. If we collect data in advance, set goals for the improvement of key performance indicators (KPIs), ardently debate the relative merits of the various initiatives before us, and then make an informed choice, we can clearly measure the success or failure of the initiative. If we just reach to heaven for inspiration, how can we know if we won or lost?
Wise business leaders know that if we discuss upfront what winning looks like and then fail to achieve it, there is no blame to be assigned. We haven’t failed at all, we have learned in an experiment that mattered and held consequence. The argument is for better process management, to spend the time in advance discussing what winning looks like so we know it when we see it or don’t see it. Failure to invest that time ahead of committing resources to an initiative is indeed a form of failure, even if the initiative happens to succeed (how you know it succeeded when you didn’t address that in advance is another story entirely).
Don’t move forward without deciding what winning looks like. Crafting a thesis of the change you are trying to affect and the benefits you intend to bring establishes a benchmark for measurement. Insisting on this step early in product development will not only improve the odds of success, it will improve the teamwork and ability to share in the success a team creates together.
The change in Presidential administrations has further divided the nation. My own sense of the shared values that I presumed were unquestionable leaves me confused. I can’t make sense of the logic patterns laying the foundation for our future. The disorientation of those with opposing views seems to be intentional, and sadly, effective.
Closer to home, the wildfires in Southern California came about as close to our home as one could imagine. My wife and I are safe and without major damage to our home after a period of evacuation. We are among the lucky ones.
Everyone we know in the Los Angeles County area knows several people who have lost their homes. The damage we’ve observed can’t be described adequately in words. Whenever a natural disaster occurs, we see people on television attempting to find words to describe it. There’s a reason they mostly just cry. Experiencing the loss is not something words are meant to convey. Words fail us for a reason. Words are inadequate to express the true pain of total loss.
My point in writing here is different. It is meant as an expression of gratitude to all of you who contacted us during the fires. There were calls, texts, emails, social media posts — the kindness was endless. To say I was surprised at the expanse of outreach from around the globe would be another failure of words. Your concern wasn’t just heartening. It was rejuvenating. It was uplifting. It was empowering. It was an inspiration.
The words each of you shared meant the world to us, but more than that, the collective of those words enriched our lives with a sense of hope too easily lost in a time of crisis. We knew we had friends and people who cared about us. We had no idea how many of you there were.
Knowing you are there has proven a more powerful force than you can imagine. I tell you this because as the lucky ones, we are driven to pay it forward. One way to do that is to thank you for your graciousness of spirit. Another is to let you know your words matter more to all the people you offer them than you might think. Of course, actions of support matter in concert with words, but the words you choose to share hold a power all their own. When people know you are there, it gives them the strength to rise up.
Alone very little is possible. Together resilience is possible.
In this time of recovery, please know you are part of the solution when you choose to express kindness. It’s more than words. It’s the fuel of reenergizing those who need a boost. Where there is support, we can rekindle our dreams and muster the strength to find a direction forward. You make this possible in the very evidence of expressing care. Our humanity cannot be taken from us if we maintain the good sense to express it lavishly and without expectation.
Caring and the willingness to express it isn’t just how we get through the wildfires. It’s how we remain on course in our humanity no matter the obstacles thrown at us. Obstacles however great can be overcome when authentic charity overpowers the spoils of dislocation. This I believe is what is meant by community.
Knowing you are there has been a revelation that perhaps should have been more obvious. We can’t thank you enough, and we can only hope you continue that kindness to those who need it much more than we do.
Community is amazing. You are amazing. Together we rise.
About a decade ago I wrote a book about an internet uprising in support of a pair of unlikely criminals who kidnapped a pair of executives after accidentally killing a businessperson during the abduction. In hindsight, it’s a bit eerie given current events.
The book is called This Is Rage. It’s a novel of outlandish observations and counterintuitive character behavior I assembled from a career in technology and media. Much of the underlying ethos had been eating at me in repeated cycles. My goal was to paint in the extreme, to bridge the dying days of old world communication with the uncharted future of a world without filters. It was meant to be outrageous, plausible only at the fringes, a look into events that possibly could happen, but held resonance more as a cautionary tale than a slice of life.
I knew the premise was plausible because I’ve been a student of the commercial internet since it entered our lives. I watched it bring out the worst in people, particularly behind anonymity, but also the ways uncontainable sentiment could be exploited by businesses, politicians, and other special interests. I knew the events could spin out beyond the control of those seeding them, while a clever few would convince themselves they could harness the battered convictions of those who felt forgotten.
I meant it as satire in the spirit of Tom Wolfe. In the years that followed, the line between satire and reality began to blur. Then one day, it seemed to me the line was gone.
Skits on Saturday Night Live and news headlines often became indistinguishable. Something called fake news became identified as unreliable information emerging from unconfirmed sources that took on snowball effects with implied credibility. Just as we got our heads around the notion of fake news, it became an easy label for anything someone didn’t want to believe. Deepfakes, videos that appeared to be evidence of real activity, were revealed to be manipulated images edited for effect without regard for truth. The act of lying was sometimes referred to as alternative facts.
Imagine that, alternative facts as a reality we should consider.
This confluence of powerful, widely distributed technology and internet anarchy has exceeded most of what I imagined, yet the one storyline I hoped was long into the future no longer is. While I anticipated the fiery populism most often expressed with unchecked anonymity, I held the belief that human character would nonetheless gravitate toward a sense of justice. The stretch in my satire was that in fully unrestrained expression, a villain could in the public eye become a hero. This to me was a bridge too far, and that if a movement began to form in that direction, the goodness in us would win out. The failings in our logic would become uncomfortably apparent.
I was wrong. Today the headlines tell us popular sympathy can align behind a villain if the circumstances motivating a crime are deemed by spiraling opinion somehow more pernicious than the crime itself. It was impossible then and it is impossible now for me to believe a vote of internet emotion can take the side of the criminal who murders an insurance executive because he finds the victim’s business unethical. I say it is impossible to believe, and yet it is reality.
How did we get here? As I have written so many times before, the implications of the technology weaving through our lives takes its toll whether we understand it or not. Our ability to digest the psychological impact of technology can’t keep pace with the deployment of its power. We use the internet freely, we express ourselves in whatever form of truth we believe is appropriate, but the ability to decipher how our behavior is being altered eludes us as individuals and in the collective.
There are no alternative facts unless we allow them. Fake news is not a convenience unless we allow it be. Villains are not heroes unless we allow them to be.
There will be more rage, I am assured of that. People are angry, confused, and sadly turned against each other for the gains of those who fuel the rage. While we are free to express ourselves without restraint in anonymity, it’s hard for me to think of that as freedom when we could be empowering each other with shared values and vetted knowledge.
We don’t need to hide behind falsehoods. If we are made to feel afraid for saying the emperor has no clothes, we need to rediscover the courage to stand ahead of the herd. Transparency may prove increasingly challenging in a world gone mad, but actual facts are available if we commit to the work of identifying them. Argue with data and a passion for clarity over impulse.
It is a privilege to write for you, and I believe I have one at least one more book in me. Before I get to that, I am going to have to come to terms with what is meant by satire, and whether being predictive has any value at all. Irony is only a teacher if the comparisons we attempt are rooted in decency that is broadly recognized.
As we begin a new year, remember that there are facts worth unearthing, unsung heroes all around us worth celebrating, and plenty of villains playing out schemes to convince us they are worthy of trust. I’ll finish the year on a thread of optimism and say that together we can separate a worthy example from a fabricated manipulation. The choice to offer applause only when it has been earned remains at our discretion.
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