Sam Hinkie’s letter to the equity partners of Philadelphia 76ers for the month of April, 2016.
I hope this letter finds you well. I have been serving the Sixers at your pleasure for the past 34 months. Atul Gawande, a Surgeon at Brigham and Women’s Hospital in Boston, remains (from afar) one of my favorite reads. He laughs that reading scientific studies has long been a guilty pleasure. Reading investor letters has long been one of mine.
What I hope to accomplish here is to give you insight into what has transpired behind the scenes in ways you might not have otherwise heard about. Many of you attended our most recent board meeting in New York, where many of these topics were addressed. But for all twelve of you, I hope that this provides a deeper look into what you have at your organization. Accordingly, you should anticipate some mild cheerleading (of others) sprinkled with a healthy dose of self-flagellation about things I’ve done wrong.
There has been much criticism of our approach. There will be more. A competitive league like the NBA necessitates a zig while our competitors comfortably zag. We often chose not to defend ourselves against much of the criticism, largely in an effort to stay true to the ideal of having the longest view in the room. To attempt to convince others that our actions are just will serve to paint us in a different light among some of our competitors as progressives worth emulating, versus adversaries worthy of their disdain. Call me old-fashioned, but sometimes the optimal place for your light is hiding directly under a bushel.
Lastly, this letter will only speak to the part of the business that I’m today’s steward of: the basketball team and its attendant operations. With Scott O’Neil running our business operations, you are in good hands. I can assure you that when your team is eventually able to compete deep into May, Scott will ably and efficiently separate the good people of the Delaware Valley from their wallets on your behalf. Worry not.
A league with 30 intense competitors requires a culture of finding new, better ways to solve repeating problems. In the short term, investing in that sort of innovation often doesn’t look like much progress, if any. Abraham Lincoln said “give me six hours to chop down a tree and I will spend the first four sharpening the axe.”
In May of 1969, a 38-year-old Warren Buffett sat down at a typewriter to inform his investors that he was closing his fund (then Buffett Partnership). His reason: market conditions were such that he no longer had the requisite confidence that he could make good decisions on behalf of the investors and deliver on his commitments to them. So he would stop investing on their behalf.
For me, that’s today. Given all the changes to our organization, I no longer have the confidence that I can make good decisions on behalf of investors in the Sixers—you. So I should step down. And I have.
In one sense, it pains me that it has come to this and that I would go at the end of a particularly down year in the standings, one that has been painful for all of us. But the fact is—and a young Buffett said it much better than I ever could—“I am not attuned to this environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.”
Sam Hinkie - Thinking about thinking
I admire Seth Klarman a great deal. I am consistently impressed by his conviction and humility, a rare combination. About their approach at Baupost, he says, “it isn’t the only way of thinking, but it’s how we approach it.” Below is some insight into a few things we value and how we’ve approached decision making at the Sixers.
First, this list is anything but exhaustive, and hardly mine alone. Whenever possible, I think cross-pollinating ideas from other contexts is far, far better than attempting to solve our problems in basketball as if no one has ever faced anything similar. Accordingly, this approach comes from a frequent search into behavioral economics, cognitive science, and a lot of observation and trial and error over my 11 years in the NBA. And mistakes. Lots and lots of mistakes.
To begin, let’s stand on the shoulders of Charlie Munger, a giant to me. He is a man that’s been thinking about thinking longer than I’ve been alive. Let’s start with him and his approach. His two-part technique is:
- First, what are the factors that really govern the interests involved, rationally considered?
- Second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things—which by and large are useful, but which often malfunctions?
To do this requires you to divorce process from outcome. You can be right for the wrong reasons. In our business, you’re often lionized for it. You can be wrong for the right reasons. This may well prove to be Joel Embiid. There is signal everywhere that Joel is unique, from the practice gyms in Lawrence, Kansas to Bala Cynwyd, Pennsylvania to Doha, Qatar where he does something awe inspiring far too regularly. We remain hopeful (and optimistic) about his long-term playing career, but we don’t yet know exactly how it will turn out. The decision to draft Joel third, though, still looks to me to be the correct one in hindsight given the underlying reasoning. But to call something that could be wrong (“failed draft pick”) right (“good decision”) makes all of our heads hurt, mine included.
So we have to look deeper at process. Here’s a go at it:
(I would be dismayed if you don’t see pockets of this kind of thinking throughout the organization. In fact, I will feel like I’ve let you down.)
Sam Hinkie - The importance of intellectual humility
Lifelong learning is where it’s at. To walk down that path requires a deep-seated humility about a) what’s knowable, and b) what each of us know. We hire for this aggressively. We celebrate this internally. And we’ve been known to punish when we find it woefully lacking.
We talk a great deal about being curious, not critical. About asking the question until you understand something truly. About not being afraid to ask the obvious question that everyone else seems to know the answer to. And about the willingness to say three simple words, “I don’t know.”
Tesla’s Elon Musk describes his everyday stance as, “You should take the approach that you’re wrong. Your goal is to be less wrong.” The physicist James Clerk Maxwell described it as a “thoroughly conscious ignorance—the prelude to every real advance in science.” Bill James of the Boston Red Sox (and, I might add, a Kansas basketball expert) added a little flair when asked whether the learnings available via examining evidence were exhausted: “we’ve only taken a bucket of knowledge from a sea of ignorance.”
A way to prop up this kind of humility is to keep score. Use a decision journal. Write in your own words what you think will happen and why before a decision. Refer back to it later. See if you were right, and for the right reasons (think Bill Belichick’s famous 4th down decision against Indianapolis in 2009 which summarizes to: good decision, didn’t work). Reading your own past reasoning in your own words in your own handwriting time after time causes the tides of humility to gather at your feet. I’m often in waist-deep water here.
The other reason to keep track yourself is you’re often the only one to see the most insidious type of errors, the ones the narrative generating parts of our lizard brains storytell their way around—errors of omission. You don’t have a wobbly understanding of just the things you got wrong, but the things you got right but not right enough. Listen to Charlie Munger talk about how he and Berkshire Hathaway should be measured not by their success, but by how much more successful they would have been if they bought more of something: “We should have bought more Coke.”
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Sam Hinkie - The necessity of innovation
Investing in disruptive innovation doesn’t ferment misunderstanding, it necessitates it. Jeff Bezos says it this way: “There are a few prerequisites to inventing…You have to be willing to fail. You have to be willing to think long-term. You have to be willing to be misunderstood for long periods of time.”
A yearning for innovation requires real exploration. It requires a persistent search to try (and fail) to move your understanding forward with a new tool, a new technique, a new insight. Sadly, the first innovation often isn’t even all that helpful, but may well provide a path to ones that are. This is an idea that Steven Johnson of Where Good Ideas Come From popularized called the “adjacent possible.” Where finding your way through a labyrinth of ignorance requires you to first open a door into a room of understanding, one that by its very existence has new doors to new rooms with deeper insights lurking behind them.
In most endeavors, it’s fine to be content to woodshed until you get something near perfect. You want that to be you. Grit matters. But it won’t be long until some innovation makes all that effort newly obsolete. You want that to be you, too.
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Sam Hinkie - The longest view in the room
It is critical to be cycle aware in a talent-driven league. In a situation like yours at the Sixers, where a variety of circumstances left you near a trough in the cycle (and falling), amplifying this cycle became crucial. Today’s outcomes for every team are heavily impacted by decisions past (who to draft, sign, trade, hire, etc.).
Jeff Bezos says that if Amazon has a good quarter it’s because of work they did 3, 4, 5 years ago—not because they did a good job that quarter. Today’s league-leading Golden State Warriors acquired Draymond Green, Andrew Bogut, and Klay Thompson almost 4 years ago, nearly 4 years ago exactly, and almost 5 years ago. In this league, the long view picks at the lock of mediocrity.
While some organizations (like ours) have this as part of their ethos, for others it is the ethos. Check out the 10,000 Year Clock. It is no mere thought experiment, but an actual clock being designed to be placed inside a mountain in West Texas, wound, and left to tick and chime for ten thousand years. Why? Because to design something that lasts that long makes us all consider what the world will look like between now and then. In return, we might be inspired to do something about it.
More practically, to take the long view has an unintuitive advantage built in—fewer competitors. Here’s Warren Buffett in the late 80s on this topic: “In any sort of a contest—financial, mental, or physical—it’s an enormous advantage to have opponents who have been taught that it's useless to even try.” Ask who wants to trade for an in-his-prime Kevin Garnett and 30 hands will go up. Ask who planned for it three or four years in advance and Danny Ainge is nearly alone. Same for Daryl Morey in Houston trading for James Harden. San Antonio’s Peter Holt said after signing LaMarcus Aldridge this summer, “R.C. [Buford] came to us with this plan three years ago, four years ago—seriously. And we’ve worked at it ever since.”
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Sam Hinkie - A contrarian mindset
This one is tricky, and getting more so in a league as healthy and popular as the NBA that is covered by beat writers, columnists, bloggers, commentators, and fans minute-to-minute. If you want to have real success you have to very often be willing to do something different from the herd.
A few examples might help. Step away from basketball and imagine for a moment this is investment management, and your job is to take your client’s money and make it grow. It’s January 1, 2015 and the S&P 500 is $171.60, exactly the same price it has been since January 1, 1985. No fluctuation up or down. Flat every single day. And your job for every day of the past 30 years is to make money for your clients by investing. What would you do?
In the NBA, that’s wins. The same 82 games are up for grabs every year for every team. Just like in 1985 (or before). To get more wins, you’re going to have to take them from someone else. Wins are a zerogrowth industry (how many of you regularly choose to invest in those?), and the only way up is to steal share from your competitors. You will have to do something different. You will have to be contrarian.
Howard Marks describes this as a necessary condition of great performance: you have to be nonconsensus and right. Both. That means you have to find some way to have a differentiated viewpoint from the masses. And it needs to be right. Anything less won’t work.
But this is difficult, emotionally and intellectually. Seth Klarman talks about the comfort of consensus. It’s much more comfortable to have people generally agreeing with you. By definition, those opportunities in a constrained environment winnow away with each person that agrees with you, though. It reminds me of when we first moved to Palo Alto. Within about a week of living there a voice kept telling me, “This is great. Great weather, 30 minutes to the ocean, 3 hours to ski, a vibrant city 30 miles away, and one of the world’s best research universities within walking distance. People should really move here.” Then I looked at real estate prices. I was right, yes, but this view was decidedly not a non-consensus view. My viewpoint as a Silicon Valley real estate dilettante, which took a whole week to form, had been priced in. Shocker.
To develop truly contrarian views will require a never-ending thirst for better, more diverse inputs. What player do you think is most undervalued? Get him for your team. What basketball axiom is most likely to be untrue? Take it on and do the opposite. What is the biggest, least valuable time sink for the organization? Stop doing it. Otherwise, it’s a big game of pitty pat, and you’re stuck just hoping for good things to happen, rather than developing a strategy for how to make them happen.
There has to be a willingness to tolerate counterarguments, hopefully in such a way that you can truly understand and summarize the other side’s arguments at least as well as they can. And then, after all that, still have the conviction to separate yourself from the herd.
Sam Hinkie's letter to Philadelphia 76ers
See full PDF below.