I have been asked to review the above, Intelligent Fanatics. Please read the above link. The question I have for readers: “What EXACTLY can YOU learn from these books that you can apply to your investing? Or are you just reading narratives of past success? Think about it for awhile, then reply in the comments section. Then read on……….
good-to-great (Link:Contrary Research)
From Good to Great … to Below Average
July 28, 2008 by Steven D. Levitt
Last week, however, I picked up Good to Great by Jim Collins. This book is an absolute phenomenon in the publishing world. Since it came out in 2001, it has sold millions of copies. It still sells over 300,000 copies a year.
Good to Great: Why Some Companies Make the Leap and Others Don’t by Jim Collins
The book focuses on eleven companies that were just okay, and then transformed themselves into greatness — where greatness is defined as a sustained period over which the stock dramatically outperformed the market and its competitors. Not only did these companies make the transition from good to great, but they also had the sorts of characteristics which made them “built to last” (which is the title of Collins’s earlier book).
From Yahoo Finance.
Good To Great
Ironically, I began reading the book on the very same day that one of the eleven “good to great” companies, Fannie Mae, made the headlines of the business pages. It looks like Fannie Mae is going to need to be bailed out by the federal government. If you had bought Fannie Mae stock around the time Good to Great was published, you would have lost over 80 percent of your initial investment.
Another one of the “good to great” companies is Circuit City. You would have lost your shirt investing in Circuit City as well, which is also down 80 percent or more. Best Buy has cleaned Circuit City’s clock for the last seven or eight years.
Nine of the eleven companies remain more or less intact. Of these, Nucor is the only one that has dramatically outperformed the stock market since the book came out. Abbott Labs and Wells Fargo have done okay. Overall, a portfolio of the “good to great” companies looks like it would have underperformed the S&P 500.
I seem to remember that someone did an analysis of the companies highlighted in Peters and Waterman‘s 1980’s classic book In Search of Excellence and found the same thing.
What does this all mean? In one sense, not much.
These business books are mostly backward-looking: what have companies done that has made them successful? The future is always hard to predict, and understanding the past is valuable; on the other hand, the implicit message of these business books is that the principles that these companies use not only have made them good in the past, but position them for continued success.
To the extent that this doesn’t actually turn out to be true, it calls into question the basic premise of these books, doesn’t it?
I suggest that BEFORE you read any of the above books that you
1.) listen to this: https://youtu.be/LK8sxngSWaU
and read this:
A review from a reader:
I read “Good to Great” and “Built to Last” some years ago because they were bestsellers and had good reviews. Although I did enjoy reading them, a voice in my head kept asking questions regarding the reliability of the research and findings. After reading “The Halo Effect”, I was relieved and happy to learn that I am not the only person asking these questions.
The world of business is complicated, uncertain and unpredictable. A company’s performance depends upon a variety of factors beyond the actions of its managers. These include currency shifts, competitors’ actions, shifts in consumer preferences, technological advances, etc. The first delusion is the Halo Effect, the tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more. Our thinking is prejudiced by financial performance. In good times, companies are praised and their success is attributed to a variety of internal factors. In bad times, companies are criticized and these factors, which may not have changed, are attributed for the failures. The reality is more complicated and dependent upon uncertain and unpredictable factors.
An interesting section of this book is the one on the delusion of absolute performance. Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time. For instance, GM today produces cars with better quality and more features than in the past. But its loss in market share is owed to a myriad of factors, including Asian competitors.
This is an excellent book because it will make you THINK. Is an oil company great if its profits soared when oil prices went up? Can the formulas used by successful companies in the 80s or 90s be applied to guarantee success today? A professor once told me that to predict future performance by analyzing past data is like driving a car forward while looking at the rear view mirror. In the appendix of this book there are tables showing the performance of the companies studied in “In Search of Excellence” and “Built to Last”. It is interesting to note the difference in performance in the years before and after these studies.
The author, Phil Rosenzweig, is a professor at IMD in Switzerland and former Harvard Business School professor. He wrote this book to stimulate discussion and help managers become wiser – “more discerning, more appropriately skeptical, and less vulnerable to simplistic formulas and quick fix remedies.” In my case, this book has given me a new perspective on business books.
The following is a brief summary of the nine delusions:
- Halo Effect: Tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more.
- Correlation and Causality: Two things may be correlated, but we may not know which one causes which.
- Single Explanations: Many studies show that a particular factor leads to improved performance. But since many of these factors are highly correlated, the effect of each one is usually less than suggested.
- Connecting the Winning Dots: If we pick a number of successful companies and search for what they have in common, we’ll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.
- Rigorous Research: If the data aren’t of good quality, the data size and research methodology don’t matter.
- Lasting Success: Almost all high-performing companies regress over time. The promise of a blueprint for lasting success is attractive but unrealistic.
- Absolute Performance: Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.
- The Wrong End of the Stick: It may be true that successful companies often pursued highly focused strategies, but highly focused strategies do not necessarily lead to success.
- Organizational Physics: Company performance doesn’t obey immutable laws of nature and can’t be predicted with the accuracy of science – despite our desire for certainty and order.
Another lesson to glean is how to read the business press. Beware of backward-viewing narratives of company success. See cisco-narrative.
You need to truly dig deep into the specific causes of a company success. Was Wal-Mart a huge success in its growth phase because of the focus and leadership of Sam Walton? Sure, perhaps, but that doesn’t tell you much. How will you find the next Sam Walton? How did Wal-Mart have such success against bigger competitors such as K-Mart in its early history? You need to dig deeper!
We will discuss further in the next post.