Weekly Digest #11 [Stocks, Confidence, Internet of Things, Talent]
A snapshot of article summaries that we enjoyed reading ( Jan 14— Jan 19)
“Is it better for a man to have chosen evil than to have good imposed upon him?”
— Anthony Burgess
Stocks over Bonds and Cash: Inflation corrodes most of the householder wealth. It is important to build steady funds in the future. The assertion is that in any given year, stocks show tremendous volatility but over long periods, they trounce cash and high-quality bonds in terms of return. It’s not investing but reinvesting that leads to wealth accumulation. The longest time horizon investors have to hold their assets without touching their principal and income is their pension and retirement funds. Short term market fluctuations have little to do with long term wealth creation. Stock returns depend on economic growth and productivity but the ability to create value springs from skillful management, stable political system and value creation for customers in a competitive environment. Long horizons like ten or twenty years are more relevant than most investors recognize and it is important to stay through the market cycles and not time them. There is no compelling reason for investors to reduce their holdings no matter how high the market seems. If investors can identify the peak and troughs of the market, they can outperform the buy and hold investor. You must pay for growth as good growth stocks are worth the price you pay for it. Among good growth stocks, those with lower price to earnings ratio tend to outperform those with a higher price to earnings ratio. It is important to be diversified in your stock allocation. Diversification is key to cutting risks and maintaining returns. Rather than opting for conventional index funds, opting for fundamental investing. Rather than assembling an index by market capitalization, fundamental indexing uses metrics like earnings, dividend yield, and book value. This results in a passively managed fund which avoids getting overweighted in specific stocks and industries.
Talent and Technology: 60 percent of global executives in a recent McKinsey survey expect that up to half of their organization’s workforce will need retraining or replacing within five years. More than one-third of the survey respondents said their organizations are unprepared to address the skill gaps they anticipate. Organizations that expect to benefit from a digital transformation or a promising new strategy won’t get very far if they lack the people to bring the plans to life. Adjusting the skills of a workforce requires a blend of rigor and creativity; it also requires dedicated commitment and attention from senior management. One way to spark a fruitful C-suite conversation about talent supply is to borrow a page from the dismal science and look at skills in the context of surplus and shortage. While talent shortfalls arise for many reasons, the supply-side remedies can be summarized in just three watchwords: Should we build on our existing skills? Should we acquire them? Or should we “rent” them? One way that companies can acquire skills en masse is through M&A, an approach pioneered in the tech industry, where it was given the portmanteau “acquihiring.” It has since become more common in other industries. Walmart used it in 2011 when the company bought Kosmix, a social-media company, to form the nucleus of what would become Walmart Labs, the retailer’s digital-technology unit. Companies can also start nurturing skills today that they may benefit from later. Finally, companies can obtain skills by “renting” talent; for example, through outsourcing partnerships that bring specialized skills or by tapping the gig economy, where the rise of digital platforms has rightly captured executives’ attention. All these were remedies if you were short on talent. But what if you are long on talent? The option is to Redeploy or Release. Invariably, the changing nature of work will create skill overages that even the most inspired corporate upskilling or reskilling programs can’t manage. In these cases, companies must choose whether to redeploy workers or to find thoughtful ways to let them go. In the private sector, meanwhile, the video-game industry has long “loaned out” the specialized skills of software engineers to other video-game companies, including competitors, when their own projects hit unforeseen snags. Amazon seeks to address the issue thoughtfully, through a voluntary severance package it calls ”The Offer.” Every year, the retailer tempts each customer-service and warehouse worker with up to $5,000 to quit. The approach helps Amazon strengthen its workforce by shedding less-committed workers and improving retention among others. It’s no coincidence that the employees to whom Amazon extends the agreement are in roles particularly susceptible to automation. Other companies can learn from this and even consider including voluntary attrition in certain contracts proactively, as part of a broader process of aligning financial benefits (such as early-retirement packages) with the company’s changing needs for talent. the nature of the evolving workplace confronts leaders with the need to think quite differently about people’s relationship to work. Yet if companies are to bring ideas such as these to fruition, and truly reorient their organizations around skills and not just roles, they will need more than just a mindset shift. Many, if not most, companies will find their people-operations infrastructure & talent-management system creaking under the strain of new challenges. Designing a winning employee value proposition is much harder when career paths are themselves in flux. Indeed, HR will need to sharpen its own skills, not only in traditional areas, like employee retention and performance management, but also in new ones, such as managing the risks associated with gig work.
Trajectory Of Ideas: When you have a great idea and you tell people, no one gets it because no one has thought about it. People get confused and tend to dismiss the same. The moment you start defending your idea, it is a path to success and also where seeds of deeply held bad ideas are planted. With grit and effort, you convince people that your idea is great. After you execute the idea and everything works, you gain attention. This attention results in competitors copying and emulating your ideas. Competition creates more layers of problems than earlier imagined. Eventually, the idea loses its appeal. Not because the idea was wrong but because it was so right that other people copied and captured value from the uniqueness. The idea which was an inseparable part of your identity had a shelf life and acknowledging this is difficult. The same trait that made you push ahead when nobody believed your idea makes you oblivious to the great idea’s demise. Finding great ideas requires conviction and survival requires humility and adaptation — both of which can be conflicting. This is also part of why competitive advantages die. Knowing that you have a competitive advantage is the enemy of a beginner’s mind. Traits that make good leaders and investors are usually skills that push you in the same direction but lasting results requires traits that are polar opposites of each other. Something like unwavering conviction and the ability to move on from the idea when time’s up. Being locked in a single view is fatal in an economy where reversion to the mean and competition constantly dismantles old strategies. As the belief goes “strong beliefs weakly held”
Failure of Intelligence: You can be deceived despite having intelligent people around you. In spite of tremendous credibility, intelligence and a vast amount of resources at their disposal, Enron and Long-term Capital Management tasted failure. One thought was that too much of intelligence is dangerous. It leads you to overthink things and become overconfident in your own abilities. Unchecked intelligence becomes worse as you assume you are unstoppable. The overconfidence bias and illusory superiority come into play complicating things that have simple solutions. Emotional intelligence is underrated. High intelligence comes with a lack of common sense, self-awareness, and humility. Talent is overrated in business and people skills are underrated. The more emphasis on people skills, the better for organizations. Complexity bias — A preference for complicated stuff rather than simple things. Nobody likes to look stupid as they are all intelligent in their own eyes and end up taking risks that they don’t understand in complex businesses and investment strategies. People make constant forecasts in the future so that they feel they are in control despite grappling with an uncertain future. Risk is inherent in every decision despite being blind to it. One method of overcoming the complexity bias is using the Occam’s razor which suggests that the simplest solution or method is usually the correct one when we don’t have enough evidence to disprove a particular hypothesis. Overconfidence bias can cause one to underestimate their limitations. It is important to know one’s limitations.
Attention Economy: Tech companies are facing stagnated growth. The challenge of owning our entire lifecycle of spending habits is the future and it lies ahead. Death has several definitions. For a person, it means the end of life and for an industry, it means the end of growth. Tech sector is dead and new frontiers with opportunities are waiting to be explored. The tech stocks have seen their P/E ratios collapse by 60% in the past two years. But this death also signifies death by conquering the world and exhausting their main markets. Smartphone sales have reduced, spends in advertising has peaked which points to a Malthusian trap in the attention economy. Tech companies have solved media problems by building a hardware platform for media consumption, a software portal for access to the world’s information, a global village to talk about media and monopolize media consumption. Now the next area after media could be life sciences, household construction, elderly care. Tech has already started gnawing at e-commerce. Many of today’s tech companies want to evolve into digital retailers. Bundling services for an annual subscription fee. Earlier, every tech company was a media company and now for the next decade, every tech company will be a mall. The future of tech can be huge by bundling and subscriptions. A bundle for fitness, a bundle for health, etc. can be built. These bundles would require mountains of capital, herculean lobbying with regulators and long periods of trial and error with the next challenges being tougher than earlier ones.
Internet of Things — Leaders & Laggards: IoT’s impact varies greatly from one company to other. even among companies with large-scale IoT efforts, a significant gap separates the top tier of performers from the bottom tier. In a survey of IoT practitioners at 300 businesses with mature IoT programs, about one-sixth said their companies had seen a significant payoff from IoT, an aggregate cost and revenue impact of at least 15 percent. We call these companies IoT leaders. At the other end of the spectrum, about 1/6th of respondents — the IoT laggards — said their IoT efforts had yielded an aggregate revenue and cost improvement of less than 5 percent. The superior performance of the leading companies appears to be a function of much more than luck. These companies are aggressive: by pursuing a large number of IoT applications, they quickly climb the IoT learning curve and pass the point at which new applications consistently generate a great deal of value. Some of the top practices that are closely associated with these leaders are: First — Being Aggressive: IoT leaders implement many more potential IoT applications than their less successful peers. IoT has a steep learning curve, such that companies that get an early start or move quickly will reap the rewards of their efforts before slower-moving companies. Second — Change business processes to unlock the IoT’s value: IoT leaders were three times more likely than IoT laggards to say that managing changes to business processes is one of the three most important capabilities for implementing IoT solutions. Third — Use advanced endpoints: Some of the most promising IoT solutions involve advanced technology endpoints. Augmented and virtual- reality applications, for example, can feed real-time instructions to workers based on what they are seeing in the field. Leaders make the most of this practice. Fourth — Define how the IoT will create value: IoT leaders were 75 percent more likely to cite preparation of a strong business case or articulated vision for value creation as a key success. Without such a vision, companies can find it difficult to tie their IoT programs to their business strategies or prioritize a coherent and well-integrated set of use cases. Fifth — Spur action from the C-suite: Executive-level involvement appears to be a factor in the sophistication of IoT programs. the leaders’ IoT programs are particularly associated with a clear commitment and investment of time from the CEO. Sixth — Mobilize the entire company: it’s important for the whole company to understand and get behind the IoT strategy. The difference that organization-wide commitment makes can be stark. Seventh — Start with existing offerings: Besides transforming their business processes to capture value from the IoT, companies can generate revenues by either adding connectivity to existing products or creating new connected products. IoT leaders strongly favor the former approach. Eight- Tap into an ecosystem of partners: The preferences of IoT leaders suggest a greater willingness to draw capabilities from an ecosystem of technology partners, rather than rely on homegrown capabilities. While laggards and leaders are equally interested in the software-development environments supported by IoT platforms, leaders are more likely to choose IoT platforms according to whether they support third-party developers and the advanced endpoints that are integral to practice 3. Ninth — Prepare for cyber attacks so they don’t slow things down: a higher percentage of the leaders said their companies had been the target of cyber attacks. our experience suggests that companies usually ramp up their levels of cybersecurity protection after experiencing cyber attacks, which could leave them feeling surer of their ability to withstand subsequent attacks. Succeeding at scale depends greatly on sound decisions about business fundamentals — strategy, leadership, investment, organizational change, partnerships — and not just on decisions about technology. IoT leaders complement their technological prowess with business discipline and a bold, enterprise-wide commitment to a well-defined course of action.
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The link to the original articles is hyperlinked in the title of each summary.
