Data, Dilemmas, Dashboards and Decisions
We harp a lot around here about the differences between the
underlying data and the headlines; and about the associated dilemma between today's data, underlying or not, and the context. What does it really mean in terms of trends, timeframe, pattern and change points ? What we've found over and over again is that people tend to look at today's unfiltered data, extrapolate it into the future in their heads rather than based on some deeper analysis and then be surprised when the world turns out differently than they expected. What's needed is some way to collect, filter and present that data in a user-friendly, easily grasped and accurate format. A dashboard in other words that captures the essence of a particular problem. Take another look at yesterday's post on the most recent economic data and take a look at the charts...if those aren't "dials" about the health of the economy we don't know what is. The trick to a dashboard, which historically didn't come about by accident and wasn't perfected overnight - more like decades if not a century - is that it's based on understanding the underlying "machine" in question, sampling the right data and presenting it in the right way.
The immediate trigger for these thoughts was yesterday's post on the real data behind the curtain but the real trigger was an exchange with Tim Walker of Hoover's expressing concern about whether or not people were spending too much time worrying about the economy instead of doing their jobs. Now on the surface you'd think that we, with our constant Economy-Industry-Company mantra, would be far apart on this; and we are to some extent. The point being that one can NOT ignore the economy nor the industry as it will swamp you best efforts in a blindside. On the other hand if you spend all your time obsessing about headlines, especially distortionate ones, at the expense of performance that's equally bad. Perhaps worse. Tim and I didn't finally resolve our little discussion so this is a continuation.
Have you ever gotten off the highway in a strange/new city ? And been overwhelmed looking at the street signs, power/telephone lines, traffic patterns, etc. ? Too much data, no filters and no information. But as you get familiar with the street and the patterns you can start looking for the key data - your brain (& this is biological btw) creates a filter that focuses on the key & changing elements in the overall pattern. The same way a lifeguard scans for splashes not every swimmer. The catch is that building the right filters has to be suited to the job. Too simple and you don't get enough of the right information. Too complex and it takes a lot of time to learn the data and acquire the interpretive and decision-making skills required to "fly the plane". The complex, busy and massive cockpit dashboard may be heard to learn - but is it required for the problem ? As well of course as being right, minimal, and well-designed ?
And when you need a Dashboard that covers all the relevant information across a variety of key areas and indicators now you're scaling from simple problem dashboard to Moonshot operations control center. Yet, as GE/Immelt learned and demonstrated with their last quarterly
announcements, lack of the proper control is deadly dangerous. Think about it for a minute - GE is a well-run, famously controlled company led by a CEO whom Warren Buffett describes as one of the best. And they got blindsided by economic and credit forces they didn't anticipate or position for. And yet many of those forces were visible and publicly analyzed for a long-time, e.g. real estate as CalculatedRisk handles it. Obviously GE didn't have the right kind of super-dashboard or war room for the size and complexity of their organization. Read the Wiki description of the flight control center and all the myriad functions embodied in it to get an idea of what it takes to fly a shuttle mission. And then consider the analogy/metaphor/model to a global business.
It's one thing to design and build the right kind of control room but entirely another to use it correctly. As a bit of a stretched analogy bear in mind that ALL of the functions in NASA's "little" room are required just to fly orbital missions. For the scifi spaceships of our dreams that entire team, the data, monitors and computing power have got to show up onboard the trip thruout the journey. Contrast the "panel" in MS Space Simulator to the reality of NASA's FCC and ask yourself what's reasonable ?
We've been having a little fun with the dashboard analogy and the pictures but hopefully it's clear this is a really serious business. The sub-text beyond just understanding the problem well enough to design and build the instruments for the dashboard(s) and the right dashboard(s) for the war room is what then ? You, the operations director, have to be able to interpret that information flow, make decisions, evaluate changes and then decide & act again. In a continuous and on-going loop. That's a matter of training, experience, skill and attitude. Especially attitude.
Perhaps the hardest thing in all this is finding the right decision-making patterns and training you mind to them and then sticking with that discipline. After the break you'll find an interesting collection of readings on the importance and impacts of failing to come to grips with these problems to explain why this is important. Followed by some interesting stuff on how our minds work and how filter/dashboard building is so difficult mentally along with some complementary stuff on self-development and sustainable discipline. And ending with a suggestion of some hard-won rules of thumb to get you started. We particularly like the selections on the psychologies of misjudgement and how practice is required to implement change.
You might want to reconsider yesterday's post: Behind the Misperception Veil: What's that Data Behind the Curtain ? as dashboarding exercise ! :) Take a look at the set of charts again and think of them as speedometers, power status indicators and the like. How's your/our spaceship doing btw ?
Data, Decisions and Consequences
Economic forecasting: How’s the weather for YOU? [UPDATED] Just when you think you’re getting a grip on how badly the economy’s doing, something — a good day on Wall Street, a favorable economic indicator, etc. — gets people wondering whether things aren’t quite that bad. It’s hard to know what to think about where the economy’s headed. But clearly . . . it ain’t that good. Especially since I’m a business-news junkie, I have to be careful not to spend too much time reading the economic tea leaves. And given my interest in 20th century history, it would be fascinating to spend all day deciding whether I agree with the IMF that the current financial crisis is the worst since the Great Depression. But who cares? Sure, economists do, and regulators should. Talk about the chances of a recession with your friends over dinner, if it interests you. Button up your portfolios, if you haven’t already. (Although it’s a wee bit late, by this point.) But you know what? It’s not worth that much worry — not for most people. I submit that most of us are better off more or less ignoring macroeconomic data as it applies to us personally. Sure, think about what it means in terms of your company’s strategic and tactical approaches. Lean times call for different measures — both offensive and defensive — according to what business you’re in, and according to what business function you perform. But does it genuinely matter to the marketers and product managers sitting around me here at Hoover’s World HQ whether we’re technically in a recession or not? No. It’s enough to know the basic trajectory and how it affects our customers. And it’s still more important to serve customers well and to act on their feedback. I know I’m not telling you anything you don’t already know, but given the flood of financial reporting that threatens to drown us, it bears repeating: the macro-economy is usually nowhere near as important to your career as the quality of your relationships with your customers and the quality of your business execution from day to day.
Housing's great depression - GE's Immelt General Electric CEO Jeff Immelt said the U.S. economy is in the worst condition since the burst of the dot-com bubble and that housing hasn't been in such dire straits since the Great Depression. Less than two weeks after the conglomerate shocked investors with a profit warning and revealed that its first-quarter earnings had unexpectedly fallen 6%, Jeff Immelt said things could get worse for the U.S. economy. Immelt told shareholders at the company's annual meeting that because of current conditions, GE will increase its planned cost cutting from $2 billion to $3 billion. Many investors felt broadsided because GE said as recently as March that the company would see profit and revenue growth of 10% in 2008. The company now projects earnings to be 5% or less. Immelt said GE executives are making changes in the company's operations and planning, including more internal forecasts, with Immelt reviewing the reports weekly.
· Industrial Strength Insight on industrials, with Larry Bossidy, former Honeywell CEO and CNBCs Joe Kernen.
- Economic Task Force Discussing the markets, with Matt Zeman, LaSalle Futures Group; CNBCs Rick Santelli and Steve Liesman.
- Government's 'numbers racket' is about to blow up in our faces
A look back at Wall Street's go-go days of 2007 Believe it or not, there was a time -- another era, really --when negative "exposure" on Wall Street was something that occasionally happened when a banker drank too much at the closing party for another multibillion-dollar merger. That would be about 12 months ago. It seems like a long-gone age. The issues facing Wall Street last spring would be petty annoyances today. Just a year ago, mergers and acquisitions were at an all-time record, brokerage profits had rocketed into uncharted territory, the Dow Jones Industrial Average was floating in the rarefied air above the 13,500 level and was soon to move above 14,000. The Nasdaq Composite Index was creeping above 2,600. So much was going right, it seemed we had to make up our problems. Little did we know that soon our creations would be wiped away with chief executives and fallen banks. A year ago the mortgage and credit crises were just a bad dream. We knew trouble was looming -- inflated home prices were skewing the consumer market, and cheap cash fueled a private-equity buyout boom unprecedented in history. Guys like Cayne, O'Neal and Mack were making a tidy profit off it all. Who, other than Blankfein, knew the coming write-downs would eliminate the last two years' worth of profit? Today we predict $200-a-barrel oil and another $100 billion in credit write-downs at major banks. Home prices have further to fall. The buyout boom has slowed. Wall Street will lay off another 30,000, including 9,000 combined from Bear Stearns and Lehman Brothers Holdings Inc. A regulatory crackdown outlined by Treasury Secretary Henry Paulson, the Federal Reserve and Congress threatens to curb Wall Street's ability to leverage balance sheets and profit from risk taking. Foreign ownership and diluted shareholders give the Street a watered-down feel. There's more doom and gloom on the horizon than milk and honey. All we can do is hope we're wrong -- just like last year.
Stick to your guns! 7 economists who can't make up their minds There are some unwritten rules for all economists. 1) Be careful when predicting a recession, you don't want to be wrong, so be really certain you are correct. 2) Don't predict 50-50 coin toss outcomes. When you annouce you think there is a 50% chance of recession, you are saying a) you don't know and worse b) you don't have an opinion. 3) If you do make a recession call, DON"T change your mind a month or two later and say we will avoid a recession. Economists SHOULDN'T let their forecast bounce around from one month to the next. 4) If you have flip flopped. DON"T flip back again and call a recession again. Generally the community obeys rule #1, which is why they take so long to call a recession. It's embarrassing but many violate rule #2.But now I have evidence of folks failing #3. The first hint was the WSJ survey that showed fewer economists believe a recession will hit. But now we've got names. Wachovia, I'm looking at you. Yes that is correct, Wachovia's chief economist and his team were adamant we would avoid a recession for a long time (defensible and following rule #1) by December of 2007 they still had the chance of recession at a tiny 30%. In February they violated rule #2. They said it was a 50-50 chance.In March they became believers and switched their forecast from maybe it will happen to maybe it won't, to all but certain (95% chance) a recession will occur, and they kept it at 90% in April. In May, Wachovia violated rule #3. They switched their forecast to "most likely a recession will not happen." (45% chance) If their clients are basing production from their forecast how do they make this on, off, on change? Wachovia is stuck now. After violating rule #3, will they change back yet again violating rule #4? and declare we are in a recession? Remember the confidence number we got earlier.Full caveat, I personally like this economist (John Silva), and know him to be an excellent professional. But come 'on! Stick to your forecast.
Filter and Dashboard Building
Blind to Change, Even as It Stares Us in the Face Our visual system’s inability to detect alterations to something staring us straight in the face is known as change blindness. The phenomenon that Dr. Wolfe’s Pop Art quiz exemplified is known as change blindness: the frequent inability of our visual system to detect alterations to something staring us straight in the face. The changes needn’t be as modest as a switching of paint chips. At the same meeting, held at the Italian Academy for Advanced Studies in America at Columbia University, the audience failed to notice entire stories disappearing from buildings, or the fact that one poor chicken in a field of dancing cartoon hens had suddenly exploded. Beyond its entertainment value, symposium participants made clear, change blindness is a salient piece in the larger puzzle of visual attentiveness. What is the difference between seeing a scene casually and automatically… In both cases the same sensory information, the same photonic stream from the external world, is falling on the retinal tissue of your eyes, but the information is processed very differently from one eyeful to the next. What is that difference? At what stage in the complex circuitry of sight do attentiveness and awareness arise, and what happens to other objects in the visual field once a particular object has been designated worthy of a further despairing stare? Visual attentiveness is born of limited resources. “The basic problem is that far more information lands on your eyes than you can possibly analyze and still end up with a reasonable sized brain,” Dr. Wolfe said. Hence, the brain has evolved mechanisms for combating data overload, allowing large rivers of data to pass along optical and cortical corridors almost entirely unassimilated, and peeling off selected data for a close, careful view. In deciding what to focus on, the brain essentially shines a spotlight from place to place, a rapid, sweeping search that takes in maybe 30 or 40 objects per second, the survey accompanied by a multitude of body movements of which we are barely aware: the darting of the eyes, the constant tiny twists of the torso and neck.
Professor Puts a Face on the Performance of Baseball Managers But now attention is being turned to a genus of baseball creature rarely examined through statistics: the manager, who sets the lineups, calls for hit-and-runs and otherwise turns the cranks of in-game strategy. Aside from won-lost records, few metrics quantify what these men actually do and the tendencies they exhibit. But an associate professor of statistics at Swarthmore College is trying to set that right, quite literally putting a face on managerial performance. The mathematician, Steve C. Wang, applied a method called Chernoff faces, in which data points in many dimensions are presented in a form that people react to more intuitively: the human face. While reams of categorical data can be imposing and hard to parse, translating the differences among them into facial characteristics can communicate distinctions with striking clarity. By turning rates of bunting, stealing and pinch-hitting into hair sizes, nose shapes and smile widths, Dr. Wang used a kind of statistical Mr. Potato Head to portray the spectrum of managerial characteristics in a way that intrigued even the skippers themselves. Indeed, the 2007 managerial statistics, as presented in an annual register published by the baseball analyst Bill James, are a relatively dull grid of digits. But the facial maps make comparisons much easier to grasp. But Mr. Acta also pointed out an important factor regarding all managerial statistics, regardless of how they were displayed — that managers’ tendencies were often a reflection more of the players on the roster than of the manager’s personal inclinations.
Self-development
Pitching With Purpose It’s easiest to change the mind by changing behavior, and that’s probably as true in the office as on the pitching mound. Others are eloquent about courage and creativity, but Dorfman is fervent about discipline. In the book’s only lyrical passage, he writes: “Self-discipline is a form of freedom. Freedom from laziness and lethargy, freedom from expectations and demands of others, freedom from weakness and fear — and doubt.” His assumption seems to be that you can’t just urge someone to be disciplined; you have to build a structure of behavior and attitude. Behavior shapes thought. If a player disciplines his behavior, then he will also discipline his mind. Dorfman builds that structure on the repetitiousness of baseball. It’s commonly said that it takes 10,000 hours of practice to master any craft — three hours of practice every day for 10 years. Dorfman once approached Greg Maddux after a game and asked him how it went. Maddux said simply: “Fifty out of 73.” He’d thrown 73 pitches and executed 50. Nothing else was relevant. A baseball game is a spectacle, with a thousand points of interest. But Dorfman reduces it all to a series of simple tasks. The pitcher’s personality isn’t at the center. His talent isn’t at the center. The task is at the center. By putting the task at the center, Dorfman illuminates the way the body and the mind communicate with each other. Once there were intellectuals who thought the mind existed above the body, but that’s been blown away by evidence. In fact, it’s easiest to change the mind by changing behavior, and that’s probably as true in the office as on the mound. And by putting the task at the center, Dorfman helps the pitcher quiet the self. He pushes the pitcher’s thoughts away from his own qualities — his expectations, his nerve, his ego — and helps the pitcher lose himself in the job. Not long ago, Americans saw the rise of a therapeutic culture that placed great emphasis on self-discovery, self-awareness and self-expression. But somehow the tide seems to have turned from the worship of self, and today’s message is: transcend yourself in your job — or get shelled.
Op-Ed Contributors: Tighten Your Belt, Strengthen Your Mind Interestingly, restraining our consumer spending, in the short term, may cause us to actually loosen the belts around our waists. What’s the connection? The brain has a limited capacity for self-regulation, so exerting willpower in one area often leads to backsliding in others. The good news, however, is that practice increases willpower capacity, so that in the long run, buying less now may improve our ability to achieve future goals — like losing those 10 pounds we gained when we weren’t out shopping. The brain’s store of willpower is depleted when people control their thoughts, feelings or impulses, or when they modify their behavior in pursuit of goals. Psychologist Roy Baumeister and others have found that people who successfully accomplish one task requiring self-control are less persistent on a second, seemingly unrelated task. What limits willpower? Some have suggested that it is blood sugar, which brain cells use as their main energy source and cannot do without for even a few minutes. Most cognitive functions are unaffected by minor blood sugar fluctuations over the course of a day, but planning and self-control are sensitive to such small changes. Exerting self-control lowers blood sugar, which reduces the capacity for further self-control. Focusing on success is important because willpower can grow in the long term. Like a muscle, willpower seems to become stronger with use. The idea of exercising willpower is seen in military boot camp, where recruits are trained to overcome one challenge after another.
Deliberate practice in the working world. A while back I talked about “deliberate practice” in the context of Will Smith’s career. Psychologist Anders Ericsson has been a pioneer in codifying deliberate practice and what it means.In a nutshell, deliberate practice is the sort of self-sharpening work done by the very best practitioners in a field. It’s the sort of always-getting-better discipline shared by the best athletic performers (think Tiger Woods), the best musicians (think Yo-Yo Ma), or the best . . . well, the best anything, potentially. While I was first introduced to the concept by a Geoff Colvin article in Fortune magazine, I think we’ve barely, barely tapped the potential of this idea for changing the way we think of our individual performances in the working world. It’s an idea I plan to return to in future posts. This post, meanwhile, is one of those publish-it-now, keep-adding-later numbers: I’m going to use it for collecting links to interesting items on deliberate practice. Here’s my list as it stands now:
Marc Andreessen and Charlie Munger walk into a bar . . . Evoking a post from a couple of weeks ago, here’s a recipe for some thought-provoking online goodness . . .First, take Netscape, Opsware, and Ning founder Marc Andreessen: Second, have him comment in detail on the classic “Psychology of Human Misjudgment” lecture of Berkshire Hathaway vice chairman Charlie Munger: Third, ponder what all of this means for your own career and company. Fourth, take action as a wiser businessperson. I’ll have more to say on this later — it’s right in my business-analysis wheelhouse — but for now I’ll just point you to Andreessen’s first post on this subject and encourage you to go grapple with it. Those who can free themselves from the unfruitful habits that neurology tends to force upon us will achieve true differentiation in the business world.
Perspectives and Filter Building
Macro vs. Detailed Perspective I'm a macro guy; that means I try to see the world from the 40,000 foot view. I look for big themes, long arcs, threads that run throughout the tapestry of the capital markets -- trying not to get too caught up by the day-to-day noise. That's my biggest biggest peeve about financial journalism -- they do a rather poor job separating the noise from the signal. While the day-to-day action matters very little in the grand scheme of things, its often fodder for the tv channels that have an inordinate amount of air time to fill. This doesn't mean the details matter any less; its just that some shorter term observations just hint at the bigger picture. Now, I do not disagree with anything in that statement. Its an accurate assessment of what happened this week-- but I simply believe it understates a bigger theme that is now occurring in the markets. After many months and months of denial, there is a slow recognition of the following:
1. The Economy is slowing -- possibly dramatcially
2. Inflation is problematic --a nd getting worse
3. The consumer is being hurt by #s 1 and 2
4. The Fed may not be able to save the day -- at least in terms of a recession
Whitney Tilson: Fairfax can offer a port in the post-bubble storm In Irrational Exuberance, published in 2000, Yale economics professor Robert Shiller defines a speculative bubble as "a situation in which temporarily high prices are sustained largely by investors' enthusiasm rather than by consistent estimation of real value". Such phenomena have become all too familiar in the past decade as markets have lurched from bubble to bubble, in internet stocks, housing and - most likely today - commodities. Because human nature plays such a central role in speculative excesses, it is inevitable that such manias will recur. This inevitability makes it important for investors to understand why bubbles happen - if for no other reason than to limit the damage inflicted on their portfolios by the next one. Crucial lessons in all this are: make your own decisions independent of what the crowd is doing; rely on your own estimate of intrinsic value rather than a stock's current price to tell you what it is truly worth; frequently challenge your investment assumptions, and enlist others you respect to do the same; and learn from your mistakes. Post-bubble periods can provide opportunities for smart value investors, as indiscriminate selling hits stocks of even the best companies in out-of-favour sectors. I would like to report such opportunities in the financial and real estate sectors today, but I cannot. Bottom-fishing requires believing the bottom is near, which I do not think it is with the unfolding mortgage and credit crises.
Herb Greenberg's 5 Simple Lessons In case you didn't know, Herb Greenberg has retired from WSJ and Marketwatch to go into "private practice." For his final column as a journo, he put together these 5 simple lessons for investors.
Lesson No. 1: The numbers don't lie.
That is why some short sellers and forensic analysts don't like to talk to companies. They want to avoid the spin or the face-to-face meeting that can create a psychological connection that may skew what otherwise would be black-and-white analysis.
Lesson No. 2: Quality, not quantity.
Ignore the "beat the Street" headlines on earnings. It is what goes into the earnings that counts. The real story is often on the balance sheet, and the cash-flow statement. The more complex and convoluted the financial statements get, the more reason to worry.
Lesson No. 3: GAAP isn't the same as a Good Housekeeping seal.
Generally Accepted Accounting Principles include plenty of gray areas -- GAAP is subject to interpretation. Just because its legal doesn't mean the results aren't lousy.
Lesson No. 4: Don't confuse stocks and companies.
They sometimes go in opposite directions. Stocks sometimes do lie. They can be pushed artificially higher by rotation, by short squeezes, by momentum.
Lesson No. 5: Risk isn't a four-letter word. Before you buy, instead of asking how much you can make, ask how much you can lose.
Ten investing rules that will help you weather this stormy market Rules may be meant to be broken, but with investing ignoring the rules can break you. Especially now. Investment rules are tailor-made for tough times, allowing you to stick to a plan just when you need it most. Indeed, a rulebook is important in any market climate, but it tends to get tossed when stocks are soaring. That's why sage investors warn people not to confuse a bull market with brains. So with the economy looking more and more like the oil-shocked, stagflation-strapped 1970s, and stocks recoiling from rising unemployment, record energy prices and falling home values, it makes sense to dust off the old playbook and see how it applies today.One of the most relevant lists of rules, from a legendary Wall Street veteran, is also among the least known. Beginning in the late 1950s, Bob Farrell pioneered technical analysis, which rates a stock not only on a company's financial strength or business line but also on the strong patterns and line charts reflected in the shares' trading history. Farrell also broke new ground using investor sentiment figures to better understand how markets and individual stocks might move.