Self-Efficacy: The exercise of control

Introduction

This blog post is an attempt to condense some learnings on self-efficacy. Some of us have been introduced to the concept by this illuminating book – A Defining Decade by Meg Jay.  The internet unfortunately does not provide good content on what self-efficacy is, how to build it up, the numerous aspects in which it affects your life, so the only way to dig these up is to go straight to the source – Albert Bandura’s psychology textbook that collates his pioneering research on the subject. The book, however, is 604 pages long and extremely dense with strictly academic language. A tl;dr version exists here; short, approachable, yet in heavily academic language as well. This blog post is a ‘notes to self’ version of the book, and an attempt to make learnings from the book accessible.

What is self-efficacy?

Self-efficacy is the set of beliefs and attitudes that you can get something done, influence things and events in your environments and cause certain outcomes.
Self-efficacy is not the same thing as confidence – you can be supremely confident that you will fail. Confidence is the degree of strength of a belief.
Self-efficacy is also not the same as knowing you will succeed – self-efficacy says you have a sense of agency, and that you have control, no matter what the outcome.

If you have heard any of the following references growing up and wondered if they were merely feel-good things to tell yourself, here is the good news – self-efficacy research that provides a solid backing to and understanding of these popular sayings

  • Whether you think you can or you cannot, you are right.
  • I am the master of my fate, I am the captain of my soul. 
  • Life’s battles do not go to the strongest or biggest man, sooner or later (they) go to the one who he thinks he can.

Why should I care about it?

Research shows that people with a self-efficacious outlook –

  • approach difficult tasks as challenges to be mastered rather than threats to be avoided.
  • foster an intrinsic interest in the activities they take up, and are deeply engrossed in them.
  • set themselves challenging goals and maintain a strong commitment to them.
  • heighten and sustain their efforts in the face of failure.
  • quickly recover their sense of efficacy or belief in themselves after setbacks or failures.
  • attribute failure to insufficient effort or deficient knowledge and skills which are acquirable, rather than some innate deficiency with themselves.
  • approach threatening situations with an assurance that they can exercise control over them.
  • have reduced stress and lower vulnerability to depression.
  • have higher levels of accomplishment.

If such people sound awesome, self-efficacy is worth learning about.

 

This sounds like it is about work and accomplishments. I am not ambitious or I don’t like talking about these subjects. Why should I care about it?

Efficacy doesn’t just affect how you perform, it affects your thought-processes, the attitude you carry to pretty much any situation and as a consequence, social and emotional aspects of your life. For example, take shyness. Research shows that shy people know perfectly well how to behave socially and how to pull off smalltalk. They are simply reticent because their perception (self-efficacy) of their social skills is poor.

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Book Summary: The Happiness Advantage

Seven principles from the book:

  1. The happiness advantage: Happiness does not follow success. The reason is that each time we are successful, we change the goals (the definition of success) just a little bit so happiness remains a moving target. Instead, research shows that success orbits around happiness. Behaviors that create happiness and positivity lead to success.
  2. The fulcrum and the lever analogy: Your belief of your talent and capability to get outcomes is analogous to the length of the lever you have. Your mindset about yourself and the task at hand is the fulcrum. Remember that by shifting the fulcrum you can lift a larger weight using the same length of lever.
  3. The tetris effect: People who play too Tetris have their brains wired to spot for Tetris-like patterns and shapes in the real world. They are constantly on the lookout for ‘gaps’ that can be filled to complete a Tetris line. The human brain works similarly in the real world – you will spot whatever you are primed to look out for, so prime yourself to look for the good, the positive.
  4. Falling up: There is a way to use your failure and suffering (‘downward momentum’) to propel yourself upward. Highly resilient people are able to cope with many falls and eventually succeed because they are falling up, learning and growing with each fall.
  5. The Zorro Circle: There are two categories of people – one with an internal locus of control (they believe they have the power to shape things), another with an external locus of control (believe they can be helpless and other people or luck play all the role). Build an internal locus of control, starting with a small circle. The small circle is a metaphor for one small task that you can build control over and do well. Then gradually expand outwards to take more challenges as you strengthen your belief.
  6. The 20-second rule: Humans end up not picking happiness-generating things or activities (e.g. actual hobbies, exercise, social bonds), because they require a non-trivial initial investment or overcoming inertia. Humans instead pick activities that are low-friction, easy to start (e.g. watching TV) but don’t generate happiness or satisfaction. To change this, change the direction of friction by just 20 seconds. The author placed a guitar on a stand in the center of his living room, to avoid the 20-second effort of picking it up, and got better at keeping his goals of playing everyday. Similarly, he took off the batteries of the remote and placed them 20 seconds away, and it got easier to shun TV.
  7. Social Investment: When adversity strikes, some people are the first to abandon their investment in the people around them, spending less time with their mate, kids or friends to work instead. This is counter-productive. Your social support network is the biggest investment you can make in times of adversity – it helps you pull through.

Notes:

  • US Navy’s research shows that the prizes for efficiency and preparedness go to squadrons whose commanding officers are openly encouraging. Squadrons getting the lowest marks are frequently led by officers who are negative, controlling and of an aloof demeanour.
  • Mental construction has a direct impact on the physical aging process. In a study, a group of men of age ~75 were isolated and put into settings that faked the appearance of the year when they were 55. They spent one week in these circumstances, and objective markers of youth – agility, memory etc went up for them.
  • Mental construction and perception influences the impact of external circumstances: A group of youngsters rubbed with a placebo but told that they were being rubbed with poison ivy started showing actual signs of irritation. In another group that was actually rubbed with poison ivy but told that they were being rubbed with a harmless substance, only 2 out of the 14 allergic people developed rashes.
  • Mental construction of our daily activities, more than the activity itself, defines our reality. This is why job crafting is a good exercise. It involves looking at the activities of your day-to-day job and trying to connect parts of it with your long-term purpose and larger calling.
  • Mindset: The most successful people are not the ones who have the longest hours. These are people with a mindset that helps them work more productively and amidst more pressure than their peers. They take the same units of time given to everyone and use their mindset to become efficient and productive.
  • Note the lever in the lever and fulcrum analogy is not ‘ability’ but ‘belief in your own ability’. Belief in your own ability is a stronger predictor of on-the-job performance than the actual level of skills or training that you have had.
  • Not pursuit, but creation or construction of happiness: The term the ‘pursuit’ of happiness is misleading. It is in your power to create happiness for yourself, so use the phrase ‘creation/construction of happiness’ instead.
  • How can your current tasks be connected to your larger personal goals in life? Jot down the work that you do, and then draw an arrow to the right, and jot down the outcome. Jot down what the outcome means after another arrow, and keep asking ‘what does this lead to’ and drawing more arrows till you get a consequence of your work that is meaningful and impactful to you.
  • “A few choice words can alter a person’s mindset, which in turn can change their accomplishments.” This is worth keeping in mind as you interact with your spouse, kids, friends and colleagues.
  • Words matter: Two groups of people were asked to play the same game. One group was told it was the ‘wall street game’, the other was told it was the ‘community game’. People’s behavior and level of cooperativeness in the game was very different in the two cases, despite it being the same game.
  • The Pygmalion Effect: Pygmalion was a sculptor who created a beautiful woman’s status out of a marble block and fell in love enough to ask a Goddess to make the statue come to life. The Pygmalion effect in real life is demonstrated when absolutely ordinary kids are presented to the teachers as having ‘gifted ability’ in a class, and a year later, their performance has actually shot up. The teachers’ beliefs spread into their non-verbal cues and behavior to the students’ morale and their efforts.
  • Expectations we have about our children, co-workers and spouses – whether or not they are ever voiced, can make that expectation a reality.
  • Deadline is a negative word: Use something like lifeline instead. Talking or thinking about deadlines make you focus on the ‘end’. When you reconnect yourself to the pleasure of the ‘means’ as opposed to only focusing on the ends, you adopt a mindset that is more conducive to not only enjoyment but also better objective results.
  • The Tetris Effect is a metaphor for how our brains dictate the way we see the world around us.
  • The gorilla experiment shows we can miss something obvious when we are not looking for it. When we are looking for something, we see it everywhere. Positive tetris effect is scanning the world for opportunities and ideas that allows our success rate to grow.
  •  Optimists are able to maintain high levels of well-being during times of hardships; they hone skills crucial to high performance in a demanding work environment.
  • The photo-counting experiment shows that luck is not entirely extrinsic, unlucky people have just primed themselves to not spot opportunities that are staring them in the face.
  • This is where the ‘writing what you are grateful for, daily’ exercise helps. It primes your brain to spot goodness, till it comes to you naturally. CEOs who attempted this experiment found two useful side-effects – enlisting their kids to do this with them at the dinner table, they found that the kids refused to have dinner till the exercise was completed, holding them accountable and forcing them to ‘see’ goodness when days at work were horrible. Secondly, they became better at seeing the things to be grateful for in their marriages as well.
  • Adversarial growth – there are several calamities from people are known to emerge stronger from, including breast cancer, natural disasters and refugee displacement. By having a positive reinterpretation of the situation, and developing resilience and hope, they ‘fall up’.
  • Learned helplessness – Dogs were placed in a box with two chambers, one with shocks and one without. They could easily jump from one chamber into the other. Researchers periodically rung a bell and started the shock. They expected the dogs to jump each time the bell rang after a few attempts, instead the dogs learned to be helpless and just bear the shock.
  • People are often quick to learn helplessness. If their efforts to do something to make things better don’t work in one attempt, the first pass of the experiment, they don’t even try when faced with the situation again. Furthermore, the learned helplessness is applied (often wrongly) to other situations as well.
  • ABCD paradigm: Adversity, Belief, Consequence and Disputation. Your beliefs after adversity will shape whether you think the consequences are good, bearable or bad. If they are bad, you should dispute that in your head.
  • Two parts of the brain – the jerk and the thinker: The pre-frontal cortex is for rational decision making, its motto is ‘think, then react’. The limbic region where amygdala dominates is more emotional and its motto is ‘fight or flight’. For more effective people, their pre-frontal cortex wins in a stressful situation. Brain scans show that it lights up more. For people who are easily worried or stressed, the limbic region dominates. Irrespective of the person, once the stress has reached a critical point, even the smallest setback can trigger an amygdala response, essentially hitting the brain’s panic button.
  • Developing effective stress response: Step 1 is to verbalize it, put your feelings down into words. Step 2 is to which aspects of the situation you have control over and which ones you don’t. Surprisingly, when people focus on aspects they can control, their work ends up influencing the other aspects, seemingly out of their control, as well and the overall result is positive.
  • Self-awareness is a swift antidote for emotional hijacking.
  • Habits are like financial capital – forming one today is an investment that will automatically give out returns for years to come. By forming positive habits, you are making your nervous system your ally instead of your enemy. The dividends paid off by habits come without continued concerted effort, or extensive usage of willpower reserves. A powerful example – the author slept in gym clothes, with sneakers by the bed and a mental plan of what to do for the workout at night, for a few months. As it became a habit, working out in the mornings came naturally to him.
  • Set rules in advance, and free yourself from the barrage of choices that deplete your willpower.
  • When we encounter an unexpected challenge or threat, the only way to save ourselves is to hold on tight to the people around us and not let go. Research shows that people who believe success is a lonely path, and divest themselves socially in hardship fare worse than those who capitalize on their social support networks.
  • “Love  – full stop”: A study at Harvard followed 268 Harvard graduates for 70 years. The researcher who supervised it for 40 years, summarizes it as ‘love – full stop’. Those who scored highest on ‘warm relationship’ aspects earned $141,000 a year more at their peak than others. Social capital provides stress relief and a significant competitive advantage.
  • “If somebody must jettison a part of their life, time with a mate should be last on the list. He needs that connection to live.”  Not following this when pressed for time, is like dumping food on a life-raft but keeping the life-raft furniture.
  • We each have our own versions of the offensive line (football metaphor) -with our spouses, families and friends, big challenges feel more manageable and small challenges don’t even register on the radar.
  • How a person responds when you share good news with them, is way better a predictor of your bond with them than anything else.
  • Experiments show that in work environments, just one positive team-member can change the objective accomplishments of the group. Power to spark and spread positive emotion multiplies if you are in a leadership position.

 

Action Items from the book (do the following everyday):

  1. List 3 things that happened during the day, that you are grateful for. A persistent habit of looking for 3 good things each night will prime your brain to spot positivity and increase gratitude.
  2. Maintain a journal. The people who recover the best from setbacks and distress are those who can understand what they are feeling and put those feelings into words. Journaling helps increase self-awareness, which is the first step to gaining control.
  3. Adopt a positive tone and facial expression. It benefits the objective performance and results of people around you.

Book Recommendation: Principles of Psychology by William James

Learnings from ‘Creativity, Inc’

Ideas from the book

  • Make sure your environment facilitates, and not hinders, the culture that you want to foster. If you want open communication oblivious to ranks and pecking order, a rectangular meeting table is a bad idea. So are name or place cards. The author changed the meeting room at Pixar to have a square table and had positions (name cards) mixed up so that executives were sitting next to front-line employees.

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Learnings from ‘The Defining Decade’

The Defining Decade‘ is a book by clinical psychologist Meg Jay who has spent her career studying adult development and spent multiple years doing therapy for twenty-something clients helping them sort out their lives. Notes below are not exhaustive, those can be found at getAbstract which has a concise yet thorough summary of the book here.

On individual development, career and networking

  • Focus on Identity Capital not Identity Crisis: Time spent brooding over who you really are or what you should be doing should really be spent on developing identity capital. Identity capital is how you come across to the world – from how you look or speak to what you choose to focus your efforts/work on.
  • The only way to figure out what to do is to do something. As a therapist, the author met a bunch of twenty-somethings who wasted a lot of time trying to find the ideal thing to do rather than jumping into something they liked, experimenting and iterating.
  • Are you capitalizing on your weak ties?  The strength of weak ties is a seminal paper by Stanford professor Mark Granovetter – the research behind it shows that most major life-defining changes happen due to weak ties, not due to one’s inner circle.  Most people stick to their comfort zone of a small number of people they know – this is detrimental, perhaps dangerous, for personal development.
  • Weak ties promote (and sometimes force) thoughtful growth and change. Weak ties force us to communicate from a place of difference. The similarities and shared context that we have with our inner circle makes us comfortable, but also complacent.
  • Once you start getting comfortable making use of and growing/developing your weak ties, “the world seems suddenly smaller and easier to navigate”.
  • Ben Franklin effect:  If weak ties do favors for us, they start to like us. Ben Franklin’s story/anecdote is worth understanding and analyzing.
  • How Ben Franklin positioned himself for success (and what we should emulate):
    • He found out the person’s area of expertise.
    • He presented himself as a serious person with a need that matched.
    • He made himself interesting and relevant.
    • He asked for a clearly defined favor.

On marriage and picking a partner

  • The author worked on a study that followed ~100 women from their twenties into their seventies. The women were asked to write one page about their most difficult life experience so far. The saddest, most protracted stories  were about bad marriages.
  • It is a misconception that getting married later can set one up for marital success, it is however true until age 25. Research shows that after 25, one’s age at marriage does not predict divorce.
  • Cohabitating before a social commitment such as engagement or marriage usually leads to bad outcomes, contrary to assumptions that living together will prepare the couple for marriage.
  • Travelling together in a third world country is the closest thing there is to being married and raising kids.
  • Bring personality to the forefront sooner rather than later – eHarmony claims better success of the couples it matched due to ‘personality fit’.  While this is hard to prove, research does show that the Big Five personality traits are key predictors of marital success. The more similar a couple is in their extremes of the big five, the more likely to stay together.
  • Neuroticism is the only trait where an individual’s own (and not the couple’s match) trait matters – high neuroticism leads to lower relationship success.
  • People often think that relationships end or marriages break because something changed – habits, betrayal etc. In reality, more often, people split up because things don’t change. Couples reluctantly admit that the differences were there all along.

On thought patterns

  • The slower you go, the faster you get there” – the best way to help people is to slow them down enough to examine their thinking and see the gaps in their own reasoning. Shine a light on those mental ellipses and you’ll find assumptions that drive behavior without our ever being aware of them.

On brain development

  • The frontal lobe of the brain is where we learn to move beyond our search for black-and-white solutions and learn to tolerate and act on shades of grey. This portion develops/matures through your twenties.
  • This explains, why as a therapist, the author often encountered school valedictorians and high-achievers who couldn’t figure out who to date or who got nerves at the workplace. Objective problem-solving skills are located in a different part of the brain, which develops before the frontal lobe.
  •  Calm Yourself – “It may be a match made in hell, but that’s the way it is.” Twenty-somethings who get to the workplace  are still in the frontal-lobe development phase. To make things worse, they are usually paired with new, inexperienced managers. The key is to stay calm and be emotionally resilient as a twenty-something.
  •  Realize that what you are going through is normal. Twenty-somethings who don’t feel anxious and incompetent at work are usually over-confident or underemployed.

Getting along and getting ahead

  • Making strong commitments to our social roles is good for twenty-somethings. Being a cooperative colleague or successful partner is what drives personality change.

Present-bias

  • Human nature is to emphasize the present and discount the future. Most twenty-somethings can think of the here-and-now, perhaps the next five years and have a faint vision of when they are very old – close to the end of life. Not enough people have a realistic sense of what it might be to be 30 or 40, or how their current decisions influence their future life.
  • This leads to things such as (a) not enough thinking about starting a family or the challenges of fertility over 30 (its not just the women, older sperm is an issue as well). (b) not thinking enough about retirement planning (c) not thinking about what you might cherish or value at age 30 or 40 (time with your kids) and spending time in your twenties doing things you will regret later.
  • Great experiment that shows present bias: Twenty-five people entered an augmented reality environment and saw an age-morphed version of their future selves. A control group of the same size just saw themselves in the mirror. Both groups were then asked to allocate money to a hypothetical retirement savings account. The mirror group set aside ~$75, the group that saw an aged AR version of themselves set aside ~$180 (almost 2.5x).

Good stories and happy endings are way more intentional than that.. 

  • Be intentional about your life. Good authors don’t just stumble into a well-forming story with a great ending as they are writing it. More often, they start with the end in mind, working their way backwards through the plot, to figure out where the story should begin.
  • Treat your life the same way, be intentional.

Recommended reading:

  1. Self-efficacy: The exercise of control by Albert Bandura.
  2. Similarity, convergence and relationship satisfaction in dating and married couples.

 

Notes from “The Virgin Way” by Richard Branson

  • Listen intently to everyone who has an opinion to share (whether you accept it or work on it is a different story, but do soak it in).
  • On luck – “you can really work at helping it along”. Being at the right time at the right place is a situation that gets created because you were persevering with something along a planned path.
  • Shepherding a company through its various stages of life is very much akin to raising a kid:
    • Early years – young, naive, anything goes (unstructured). You tumble, make silly mistakes and learn from them.
    • Teenage – know-it-all, cockiness.
    • Adulthood – maturity, smooth operations, but several risks such as getting complacent.
  • Take notes. Note-taking is a great skill complementary to listening.  Richard himself has taken copious notes about everything ever since his first venture (‘The Student’ newsletter). Not only does it help fill gaps in memory, it is also of service during lawsuits.
  • Importance of listening skills:
    • Listen, to the spoken word.
    • Listen, more intently, to the unspoken word. What is left out is often conspicuous.
    • Listen, to the manner of speaking.
      • Body language
      • Facial expressions
      • Subtle innuendos
      • Enunciation of certain words.
  • If you are in management, walk around. NEVER have people *come* to *your* office. You are making your employees way more comfortable if you walk into their workspace rather than having them come to yours.
  • “If only we had the power to see ourselves the way others see us.” Strive for this, to objectively judge yourself the same way someone else would judge you.
    • Look in the mirror every night, ask yourself “how does my customer see me”. Make it a habit.
  • If you have family and friends who are also customers, it is downright foolish not to take full advantage of their outside-in points of view.
  • Richard has favored outsider CEOs for many Virgin companies, to get a fresh perspective.
  • When speaking, a rightly timed pause is every bit as critical and effective as choosing the right words.
  • Avoid the following in your language:
    • Umms, ahhs, “you know”, “like” and other filler words.
    • Double negatives – “not a bad idea”. This is especially important if you are in  a position where people take your opinion seriously, they will read deeply into your statement and double negatives can go either way.
    • Vague statements  – “this is certainly different” (is it different in a good or bad way?)
    • “having said that” – this phrase kills the weight of your statements
    • “OK” – avoid when your opinion is important or critical. Culturally, interpretations of “ok” vary widely.
    • “quite” – quite means “very good” for an American but ranges from “reasonably good” to “barely acceptable” for Brits.
  • On his successes as a leader/manager: “It is the thought that counts.” Richard highly encourages taking your team out to lunch, giving them a surprise day off or at the very least, walking over, shaking their hands and saying a heart-felt thank-you.
  • Leadership is the ability to hide your panic from others” – Lao Tzu.
  • Delegate, not relegate: If you push a problem away to someone else (usually a subordinate), also include the power to really do something about it, along with the problem you pushed.
  • Anyone who wants to make the effort to work on their luck can and will seriously improve it.” (Thanks for the certainty in your statement, Sir Branson!)
    • As a corollary, one must stop creating circumstances (via one’s nature or habits) that lead to one’s bad luck.
  • Great piece on ‘apparent’ luck: The story of Alberto Chang-Rajii, who bought 1% of Google with the $10,000 he had saved up for a second-hand car as a graduate student, after meeting Sergey Brin outside a downtown Palo Alto movie theatre, where both of them heard ‘sold out’ waiting in line.
    • Non-obvious pieces of the ‘luck’ here: He took Sergey out to coffee when both were equally miffed on not getting the movie. He learnt about the project when it was still a research project and bet 10k (huge amount as a grad student). He did not sell through the rocketship rise (and apparently still holds GOOG).
  •  Asking questions instead of assuming the status-quo can’t be changed has tremendous merits. Richard asked why airlines couldn’t give away electronic earpieces to passengers instead of rubber tube ‘headsets’ with horrible sound quality that was the norm with airlines back then. Everyone had just assumed the electronic headphones would be more expensive, but it turns out they were better compared to the cost of cleaning and eventually disposing the rubber tube sets. Suddenly, families and kids wanted their people to travel Virgin on business trips so they could get those headphones.
  • The merits of “excellent and plentiful customer service supplied by real people”, quantified:
    • US avg. retail sales per sq.ft of store area (annual): $341
    • Same stat for second best retailer in the country (Tiffany jewellers): $3017
    • Same stat for the best retailer (no prizes for guessing… Apple): $6059 (double than Tiffany, and 18x the national average)
  • It is no coincidence that the staff at Apple retail stores is plenty (almost one in two people you’ll see at the store will be a retail employee) and diverse. Richard was served by a guy his age with a beard similar to his. Coincidence?
  •  Big dogfights don’t always to the biggest dog. That’s what  you learn from Virgin v/s British Airways.
  • React swiftly, change situations to your advantage.
    • “Virgin Mobile FreeFest”: Virgin Mobile used to hold an annual (paid?) music fest. When swine flu and job layoffs happened in late 2009, they didn’t shut down the festival. Instead they made it WAY more fun AND made the best parts exclusive for people who could provide pink-slips and show they were laid off. They garnered great goodwill by allowing other stressed-out people to have a day of absolute fun and pay homage to pink slips!
  • Sara Blakely of Spanx (someone Richard finds similar to himself): “The smartest thing I ever did was hire for my weaknesses.”
  • Richard’s hiring style – focus on personality rather than what you see on the CV.
  • Google’s ‘Project Oxygen‘ identified 3 key reasons why people leave – they don’t connect with the mission, don’t get along with their coworkers or find their manager bad.
  • Greedily picking up every great practice that is good for the customer or your employees – Richard praises a bunch of companies in the book. It is clear that Virgin has been quick to ape the goodness – Apple for retail and customer service, Hyundai for providing beats-everyone-else-by-far-margins 10 year or 100k miles warranties, Netflix for providing unlimited leave.
  • In praise of Herb Kelleher of Southwest (only airline in the history of aviation to report 40 consecutive years of profits) – “avoiding any and all kind of unnecessary complexity is the cornerstone to Herb’s business philosophy.”
  • Company culture is like coral reef. Takes years and lots of effort to build, and is very quickly and easily destroyed by the wrong actions.
  • Book recommendation: The Happiness Advantage by Shawn Achor. 90% of one’s happiness comes from within, and it makes you more successful (not the other way round). Rewire your brain to be happy – e.g. start each day with a random act of kindness and gratitude for 21 days.
  • Mentors, with experience and wisdom, are key to young businesses. Behind each blockbuster story, you will find one of them. It was Mike Markkula for Apple and Freddie Laker for Virgin Airlines.
  • Be brave, stand for your troops, but don’t needlessly (and foolishly) sacrifice like the troops in Charge of the Light Brigade (old story about an army that rode into a valley knowing that their chances of victory were none and got all 600 of themselves killed).
  • A good employee ‘covers all bases’. When John Caulcutt,who ran a company that helped Virgin with advertising stuff pulled a prank with Richard Branson to cover BA’s Concorde plane model at Heathrow with the Virgin logo, he also booked all available cranes in the city for the day, so BA couldn’t take it off easily!
  • There would be no problem with square pegs and round holes if the pegs department and the holes department were the whole department.” This brilliant line demonstrates why it is important to break down silos and get all stakeholders to work together, be in one room when the decisions are made.
  • Richard Branson ran a *full* marathon at age 60 in 2010!
  • It would be nice to integrate executive decision-making into the Just-In-Time philosophy – not too late to be rushed, and not too early to sit around before it got outdated.
  • Learn ‘the art of orchestrated procrastination’ – this is the ideal middle-ground between the rash ‘screw it, lets do it’ attitude and the ‘paralysis by analysis’ case. Ask yourself, is it a ‘carpe diem’ moment? What happens if you don’t jump in and save the day?
    • Example – Virgin passed over the opportunity to invest in Goldman Sachs’ subprime mortgages via ‘orchestrated procrastination’.
  • Take risks, but do everything you can to protect the downside.
    • When Virgin jumped into the airlines, Richard’s team was skeptical, but their hedge was a deal that would get Boeing to buy back their only 747 if things don’t go well in the first year of operations.
  • Crisis Management: As a leader, show that you care enough to ‘be there’. That is usually all you can do anyways. Richard recalls instances of crises and catastrophes where he tried to get to the spot ASAP and console the affected, and also instances where some prominent leaders missed doing this.
    • 90% of life is just showing up.
    • Step up, gather as much reliable information as is available.
  • “Change your ways or we’ll change our supplier” is a very straight-forward demonstration of how money can talk.
  • “What’s trending out there and how can I reinvent my business to take advantage of it?” Asking this periodically is something Richard claims to have learnt from Tony Fadell.

Book Summary: ‘The Outsiders’ – Eight unconventional CEOs

“You are right not because others agree with you, but because your facts and reasoning are sound.” – Benjamin Graham

Importance of capital allocation

The 8 CEOs studied in the book far outperformed the S&P 500 over a 20-30 year period and this is attributed to their capital allocation strategies. All CEOs are investors AND managers, but the ‘investors’ part is typically ignored. As Buffett says, capital allocation is one of the most important tasks of a CEO, yet almost none of the people who rise to be CEOs are trained for it. They rise to the top based on their engineering, marketing, sales or other skills. This is analogous to a master musician being promoted to being Chairman of the Federal Reserve.

The capital allocation toolkit

  • Ways to deploy capital:
    1. Invest in existing operations
    2. Acquire other businesses
    3. Pay down debt
    4. Issue dividends
    5. Repurchase stock
  • Ways to raise capital:
    1. Tap internal cash flow
    2. Issue debt
    3. Raise Equity
  • Together, these 8 mechanisms form a tool-kit. Long-term returns provided by a company to its shareholders will depend heavily on how the CEO uses these 8 options. Companies with identical operating results and different approaches to allocating capital will lead to different outcomes for shareholders.

Themes common to all the eight outsiders

  • Free cash-flow, not earnings: Pay attention not to earnings, but cash-flow. Quarterly earnings reports are a distraction. This shapes company decisions including accounting policies.
  • Clever buy/sell of own stock: Buy-back own company’s stock aggressively when it is running low and attractively priced. Use the stock to finance acquisitions or get cheap debt when the stock price runs high. Stock repurchases are a more tax-efficient method of returning capital to shareholders than dividends, which are taxed twice (corporate and individual level).
  • Fly under the radar: Wall Street and the press are a distraction, ignore them. Great CEOs (as measured by return delivered in multiples over S&P 500) also avoid frequent magazine covers, interviews etc and fly under the radar.
  • Anorexic HQ: Run decentralized operations, with rigorous budget monitoring. Headquarters should be ‘anorexic’, with only enough staff as absolutely needed to support the general managers of the various business units. The GMs are given utmost authority and autonomy.
  • Traits as an investor:
    • Concentration: “Be comfortable with concentration and buy only a few things that you understand well.”
    • Patience: Be willing to wait long periods of time  (while the market complains about your inactivity), often a decade or more, for the right opportunity to emerge.
    • Boldness: Each of the 8 CEOs made at least one acquisition or more that exceeded 25% of their firm’s enterprise value.
    • Frugality & Tax Minimization
  • Focus on ‘value per share’: Do not shy away from shrinking the company if that is the best move. Most of corporate America focuses on growth, these 8 CEOs focused on increasing ‘value per share’.
  • Individualistic thinking: “Cut through the glare of peer activity and conventional wisdom to see the core economic reality and act accordingly.”
  • To sum it up, their advantage relative to their peers was one of temperament, not intellect.

1. Capital Cities Broadcasting –  Tom Murphy and Dan Burke

  • Sign of a well-run great company: Diaspora are all over the industry. For Capital Cities, the alumni went to Disney (Bob Iger, CEO), Pulitzer (CEO). Dan Burke’s son Steve was COO of Comcast, followed by CEO of NBCUniversal.
  • Bought ABC, when it was 4 times bigger than Capital Cities. Warren Buffett helped finance the deal in exchange for a 25% stake in the combined company.
  • Most companies fall into the trap of a ‘prosperity blinded indifference to unnecessary costs’. CC executives remained focused on the core businesses.
  • Simple cycle that Tom Murphy used, which most people fail to remember or apply:
    • Look for attractive economic characteristics in a business or undertaking
    • Use whatever leverage you can apply to get that attractive business
    • Once you have it, improve operations.
    • Use the cash flow from the improved operations to pay down debt.
    • Rinse and repeat.
  • The above practice today is known as a ‘roll-up‘. Many companies collapsed under the burden of bad roll-up debt – they acquired too rapidly and did not integrate and improve operations well.
  • Tom Murphy finally sold to Disney for an extraordinary $19 billion.
  • “Paint the two sides facing the road, leaving the other two sides untouched.” – Murphy when asked to touch up a building for the advertisers who visited it.
  • Be frugal, but invest heavily where it is needed – every one of CC’s TV stations led in its region, because they invested heavily in the news talent and technology.
  • What employees and general managers said about CC – “the system corrupts you with so much authority and autonomy that you cannot imagine leaving.”
  • Tom Murphy spent years developing relationships with the owners of desirable properties, and worked very hard to become a preferred buyer.

Teledyne

  • While Teledyne’s own stock ran at P/E multiples in the 20-50 ranges, CEO Henry Singleton never bought companies with a P/E multiple higher than 12.
  • Great investors are able to sell high and buy low: Teledyne’s stock issuances happened at P/E multiples of ~25 and buybacks at around ~8.
  • Singleton, like Buffett designed an organization that allowed him to focus on capital allocations, not operations. Both viewed themselves primarily as investors, not managers.

General Dynamics – Bill Anders, Nick Chabraja

  • Bill Anders, CEO, had been the lunar module pilot on Apollo 8. “After orbiting the moon, mundane business problems did not faze him.”
  • Anders’ turn-around strategy to exit all businesses with low returns, commodity businesses and ones which it did not know well. He systematically shrunk the company in an era where CEOs prided on size and growth.
  • Warren Buffett bought 16% of General Dynamics in 1992 after two years of observing Anders’ work.
  • Nick Chabraja, a successor, sold almost one-third of company stock to acquire GulfStream when GD was trading at 23 P/E multiples (history, was 16). This was counter-intuitive as such massive stock selling hadn’t happened before. The best capital allocators are opportunistic, practical and flexible. They are not bounded by strategy or ideology. Nick sold the stock at its highest P/E and got a company that provided almost 50% of the combined company’s cash flow.

TeleCommunications Inc – John Malone

  • Ditch Wall Street’s metrics: John Malone at Tele-communications Inc was among the first to realize that the first among the cable operators to hit high scale would be able to lower programming costs and create a virtuous loop (higher subscribers, move leverage with content programming costs, lower costs imply more ability to buy subscribers..). This scaling would come at the expense at EPS, which was the holy grail of Wall Street.
  • It pays better to be a technology “settler” rather than a “pioneer” in traditional industries like cable – John Malone waited for other companies to test out the merits of a new technology before investing in it.
  • Comcast took until mid-1980s to realize this and switch from EPS-focused to growth-focused approach.
  • John Malone introduced the concept of EBITDA (earnings before interest, taxes, depreciation and amortization).

General Cinema – Dick Smith

  • Learnings from Dick Smith – recognize the strong, underlying demographic trends of your generation (sub-urban theatres would be beneficial in the 1960s) and then go after them trying to gain an advantage over others (used lease financing to expand theatres faster rather than buying land like everyone else was).
  • He repeated the same act with the beverage bottling businesses – recognizing that they would grow in the coming decade (1970s) and creatively growing them (financing via a sale/leaseback of the manufacturing facilities).
  •  Be opportunistic and willing to make sizeable bets when the circumstances warrant it (the HBJ acquisition was 62% of General Cinema’s value at that time, but it was an attractive bet since they were buying a business at 6 times its cash flow. They would later sell it for 11 times the cash flow).
  • “It is remarkable how much value can be created by a small group of highly talented people.” – Spoken by a media investor about the General Cinema team.

Washington Post – Katharine Graham

  • A rigorous and cautious capital expenditure approval process meant Washington Post avoided expensive investments in new technology printing plants until her competitors had vetted it.
  • Stringent acquisition criteria – acquisitions needed to earn a 11 percent return without leverage over a ten-year period.
  • Being part of the insider circles help – Buffett was friends with both Katharine and Tom Murphy of CC, so when FCC rules forced CC to divest some of its stations, the Washington Post got to take an exclusive look at the deal and they bought it.

Berkshire Hathaway – Warren Buffett

  • Until age 35, Warren Buffett ran a non-descript investment partnership out of Omaha. He did a ‘hostile takeover’ of Berkshire Hathaway, a 100-year-old but undifferentiated/unremarkable textile company based in MA.
  • Charlie Munger – “Berkshire’s long-term success stems from its ability to generate funds at 3% and invest them at 13%.
  • Advantage of being an outsider CEO (Buffett was an investment manager before Berkshire – he did not hesitate to divest the textile holdings when he did not see growth and good returns in the textile business) – you are not wedded to a particular business or industry. It is easier for you to exit businesses/industries with low returns and concentrate on those which are likely to meet their investment targets.
  • Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
  • Buffett’s portfolio management philosophy: a high degree of concentration and extremely long holding periods.
  • Warren Buffett to students – your investments results will improve if, at the beginning of your careers, you are handed a 20 hole punch-card symbolizing the total number of investments you can make in your investing lifetimes.
  • Institutional Imperative” – this is the big-company/CEO equivalent of ‘teenage peer pressure.’ Buffett scorns this.
  • “Be greedy when others are fearful, and fearful when others are greedy.”

Overall Take-aways

  • Act boldly when you see a difference between value and price.
  • When your stock is low, buy it back. When it is high, use it raise debt or buy other companies.
  • The best defense against revenue lumpiness is a constant vigilance on costs.
  • “When you see something that you like, make a very large bet.” 

Notes from Zero To One by Peter Thiel

On Startups

  • Successful people find value in unexpected places and they do by thinking about business from first principles instead of applying formulas.
  • Peter Thiel’s mandatory interview question –  “What important truth do very few people agree with you on?”
  • Going from 1 to n is horizontal progress. An example is globalization where you take something that works at one place and replicate it elsewhere in the world.
  • Going from 0 to 1 is vertical progress or ‘technology’.
  • A startup is the largest group of people you can convince of a plan to build a different future. Its hard to do it alone and impossible to do it in big organizations.
  • “How much of what you know about business is shaped by mistaken reactions to past mistakes?” A lot of people took away the wrong lessons thanks to the dot-com bubble.

Competition v/s Monopoly

  • Creating value is not enough – you also need to capture some of the value you create. For example, Google creates less value than airlines (monetarily) but airlines capture very little of what they create and Google captures a lot.
  • Competition destroys profit. Aim for monopoly. Capitalism and competition are opposed.
  • Both competitive companies and monopoly players are incentivized to bend the truth. Competition players will frame their market as an intersection of several markets to make them seem more relevant than they are. Monopolies will frame their market as a union of several markets to make them seem smaller than they actually are.
  • The competitive ecosystem pushes people towards ruthlessnes or death.  Paypal and X.com decided to merge because they were losing a lot of energy competing as opposed to building what they wanted to.
  • In business, money is either an important thing or everything. Monopolists can afford to think about things other than money. Non-monopolists can’t.
  • All happy companies are different (they found monopoly in a different way). All failed companies are alike – they failed to escape competition.
  • “All Rhodes scholars had a great future in their past.” Refers to how competition destroys individual potential.
  • In business, if you recognize competition as a destructive force,  you are already more sane than most. Use the clear head to build a monopoly.

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