What is your firms competitive advantage by asafwewe

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									         Decision Making:
    Checklist for Investment firms
                          (slides are available from CFA London.
                         For articles referenced, please contact us.)


               Jim Ware, CFA and Brian Singer, CFA
               November 25, 2009
               CFA London

FOCUS Consulting Group               www.focusCgroup.com
Testing our “clickers”
Look at the person to your left, and to your right. Now
respond to this statement:
I am definitely smarter than these guys!
                                                    75%



1.     True
2.     False
                                                          25%



     FOCUS Consulting Group
                              www.focusCgroup.com
                                                    1       2
Why a “checklist?”

“People underutilize checklists…a good
  checklist balances two opposing objectives. It
  should be general enough to allow for varying
  conditions, yet specific enough to guide
  action. For instance, an investor evaluating a
  stock may use a checklist to make sure that
  she builds her financial model properly.”
      -Michael Mauboussin, “Think Twice”

  FOCUS Consulting Group
                           www.focusCgroup.com
We use checklists in our investment
process?
1.     Yes                                                54%
2.     No




                                                    46%




     FOCUS Consulting Group
                              www.focusCgroup.com   1       2
Agenda

   Why Philosophy and Process? Answer: Mind the Gap!
   The danger of process drift: why you need a checklist.
   Three parts of the checklist:
       Foundation (firm leadership driven)
       Interaction (team leader driven)
       Reflection (team leader driven & firm culture)
   War stories: comparing two firms via the checklist




    FOCUS Consulting Group
                             www.focusCgroup.com
What are your firm’s competitive
advantages? (Choose 2)
1.      Great people
2.      Superior processes                 19%


3.      Unique Investment
        philosophy
4.      Work ethic                                                           14%

5.      Creativity
6.      Independent                              11%
                                                       11%   11%                   11%


7.      Owner mentality
                                                                   7%                         7%
8.      Ethical/Trustworthy
9.      Leading edge IT                                                 5%
                                                                                         5%


10.     Focused, limited products


      FOCUS Consulting Group
                                            1
                               www.focusCgroup.com2    3     4     5    6     7     8     9   10
Competitive advantage according to the
managers:                “Lake Wobegone effect”
1.      Great people
                                           32%

2.      Superior processes
3.      Unique Investment
        philosophy
4.      Work ethic
5.      Creativity
                                                                                16%

6.      Independent                              14%


7.      Owner mentality
                                                            9%             9%
8.      Ethical/Trustworthy                            7%

9.      Leading edge IT                                          5%                   5%

                                                                      2%                   2%
10.     Focused, limited products
                                           1     2     3    4    5    6    7     8     9   10
      FOCUS Consulting Group
                               www.focusCgroup.com
What competitive advantage do you look
for in a manager?
                                                 25%
                                                                  Clients want these
1.      Great people
                                                       23%

2.      Superior processes
3.      Unique Investment
        philosophy
4.      Work ethic
                                                                                  14%
5.      Creativity
                                           11%

6.      Independent
7.      Owner mentality
                                                                   7%                        7%

8.      Ethical/Trustworthy
                                                             5%         5%   5%

9.      Leading edge IT
10.     Focused, limited products                                                       0%


                                           1     2     3     4     5    6    7     8     9   10
      FOCUS Consulting Group
                               www.focusCgroup.com
Investment Checklist




 FOCUS Consulting Group
                          www.focusCgroup.com
We have a clear and compelling vision of
investment success.
1.     Strongly Agree
                                                    47%
2.     Agree
3.     Neutral
4.     Disagree
                                            26%
5.     Strongly Disagree                                  21%




                                                                5%
                                                                     0%
     FOCUS Consulting Group
                                              1
                              www.focusCgroup.com   2      3    4     5
Investment Philosophy


“Investment philosophies include rules of thumb
   for distinguishing between real opportunities
   and marketing-driven pitches”
        -John Minahan, CFA “Investment Belief Systems: A
        consultant’s perspective”




 FOCUS Consulting Group
                          www.focusCgroup.com
Our investment philosophy statement
identifies real opportunities.
1.     Strongly Agree
2.     Agree                                        26%   26%

3.     Neutral                              21%                 21%

4.     Disagree
5.     Strongly Disagree

                                                                      5%



     FOCUS Consulting Group
                                              1
                              www.focusCgroup.com   2      3     4     5
Talented and Diverse Team

   “Good decision making requires equal parts
    of ability and diversity.”
       Scott Page, “The Difference”

Page’s Diversity Prediction Theorem:
       Collective error = average individual error –
        prediction diversity
   “a diverse crowd will always predict more
    accurately than the average person in the
    crowd. Not sometimes. Always.”
    FOCUS Consulting Group
                             www.focusCgroup.com
We have a talented and diverse team.

1.     Strongly Agree                               44%

2.     Agree
3.     Neutral
4.     Disagree
                                                          22%
5.     Strongly Disagree
                                            17%                 17%




                                                                      0%
     FOCUS Consulting Group
                                              1
                              www.focusCgroup.com   2      3     4     5
Sufficient Trust and Respect

Trust defined as:
  Character
         Integrity: lining up words and actions
         Intention: showing concern for others, win/win
       Competence:
         Capabilities: talents and skills
         Results: delivering on promised results


    FOCUS Consulting Group
                             www.focusCgroup.com
We have high levels of trust and respect
on our team.
1.     Strongly Agree
                                                    42%
2.     Agree
3.     Neutral
4.     Disagree                                           26%

5.     Strongly Disagree                    21%



                                                                11%



                                                                      0%
     FOCUS Consulting Group
                                              1
                              www.focusCgroup.com   2      3     4     5
Incentives Aligned

   “Many poor decisions result from inappropriate
    incentives rather than mistakes.”
       Michael Mauboussin, “Think Twice”




    FOCUS Consulting Group
                             www.focusCgroup.com
Incentives on our team are properly
aligned to promote investment success.
1.     Strongly Agree
                                                    37%
2.     Agree
3.     Neutral
                                            26%
4.     Disagree
                                                          21%
5.     Strongly Disagree
                                                                16%




                                                                      0%
     FOCUS Consulting Group
                                              1
                              www.focusCgroup.com   2      3     4     5
Decision Rights


Level
Of                                                                  Consensus
Buy-in                               Subgroup            Majority   w/fallback
                                     decides              vote
                                     w/input
                             Subgroup
                   Leader    decides
                   decides
                   w/input
         Leader
         decides


                                          Time
   FOCUS Consulting Group
                                   www.focusCgroup.com
Hiring a new analyst on to your team.

1.     Leader decide                                30%        30%

2.     Leader w/ input                                                    25%

3.     Subgroup
4.     Subgroup w/ input
5.     Vote
6.     Consensus                           10%


                                                          5%


                                                                     0%
     FOCUS Consulting Group
                                            1
                              www.focusCgroup.com   2     3     4     5    6
Meeting Protocol
- the meeting has a clearly stated purpose. Why are we here?
 -there are clear outcomes. What will we walk away with?
 -there is an agenda, preferably sent around before the meeting.
 -roles are clearly established: who has decision rights? Who is
 facilitating? Who is watching time? Who is presenting? Who is
 scribing?
 -the room and materials are optimal: plenty of flipcharts and wall
 space for hanging them. Keeping a public record of the
 conversation is critical. (And mostly not done in organizations.)
 -did the meeting start and end on time?
 -next action steps are established in this form: who will do what
 by when?



 FOCUS Consulting Group
                           www.focusCgroup.com
Our meetings are productive and efficient.

1.     Strongly Agree                               50%

2.     Agree
3.     Neutral
4.     Disagree
5.     Strongly Disagree                                  20%   20%


                                            10%


                                                                      0%
     FOCUS Consulting Group
                                              1
                              www.focusCgroup.com   2      3     4     5
Candor

   The Candor Gap:
                          5.00                         What is spoken



                                               Gap:
                                               1.27




                          3.73                         What is thought


 FOCUS Consulting Group
                                 www.focusCgroup.com
How candid is your team?

1.     Very closed, not                                   50%
       candid at all
2.     Closed, guarded
3.     Probably about
       average, somewhat                                        30%

       candid
4.     Very candid, share
       most of our ideas
                                                    10%               10%
5.     Completely candid,
       follow the rule of 3                  0%
     FOCUS Consulting Group
                                              1
                              www.focusCgroup.com   2      3     4     5
Curiosity                                Above the line: Curious and Open
                                                      “CREATIVE”
                                                  Driver: desire to learn


                     Trust-Based
                   Fear-based




                                    “Even when faced with evidence that their predictions
                                    are wrong, experts conjured up ways to defend their
                                    choices, in large part to preserve their self-images.”


                                                    “DESTRUCTIVE”
                                                 Driver: need to be right
                                   Below the line: Defensive and Closed
 FOCUS Consulting Group
                                        www.focusCgroup.com
 Visual Aids
 1) The investment strategy relies heavily on process with little
 human judgment or 9) The investment strategy relies heavily on
 analysis by individuals, using lots of judgment
1.     Very strongly first statement                                         21%

2.     Choice Two
                                                                                         19%
3.     Choice Three
4.     Choice Four
                                            14%
5.     Neutral/Balanced
6.     Choice Six                                 12%             12%


7.     Choice Seven                                                                10%


8.     Choice Eight                                     7%

9.     Very strongly second statement                                   5%




                                                             0%
     FOCUS Consulting Group
                                            1
                               www.focusCgroup.com 2    3    4     5    6     7     8     9
         Mean = 5.4524
We use lots of visual aids in our decision
making.
1.     Strongly Agree                                     48%
2.     Agree
3.     Neutral
4.     Disagree                                     29%

5.     Strongly Disagree
                                            14%
                                                                10%


                                                                      0%
     FOCUS Consulting Group
                                              1
                              www.focusCgroup.com   2      3     4     5
Which Behavioral Biases most impact your
firm’s decision making? (choose 3)
1.      Overconfidence
2.      Recency                                                                  18%


                                           16%
3.      Anchoring                                15%

4.      Cognitive Dissonance                                                           14%

5.      Availability
                                                                 11%
6.      Self-Attribution
7.      Illusion of Control
8.      Confirmation                                                   7%   7%



9.      Hindsight                                                                            6%


10.     Framing                                        4%




                                                            2%



      FOCUS Consulting Group
                               www.focusCgroup.com
Decision Rights: How to decide?
   “You could fill your shelves with books celebrating the wisdom
    of crowds, intuition, number crunching, or experts. But as a
    thoughtful decision maker, your prime task is to identify the
    nature of your problem and then consider how best to solve
    it.” –Michael Mauboussin, “Think Twice”

       Experts worse         Experts better  Experts about   Only collectives
       than                  than computers: equal to        can win:
       computers:                            collective
       • Credit scoring Chess                  • College    • Stock market
       • Simple medical • Go (a game)           admissions   investing
       diagnosis                                • Poker      • Economic
                                                             Forecasting



    FOCUS Consulting Group
                                      www.focusCgroup.com
Reflection

   A well-kept journal offers benefits. The
    journal allows you to audit your decisions.
    Too often, after we have made a decision
    and observed the outcome, our minds
    change the story of how we decided.
       Meir Statman, Financial Analysts Journal,
        May/June 2009



    FOCUS Consulting Group
                             www.focusCgroup.com
Which is true about your firm’s post-
mortems?
1.     We do not do them                                  40%
       often                                 35%
2.     We do them but the
       learnings are weak
                                                    25%
3.     We do them frequently
       and get some
       learnings
4.     We do them frequently
       and get important
       learnings                                                0%
     FOCUS Consulting Group
                                               1
                              www.focusCgroup.com    2     3     4
War stories: Comparison of two firms

   Our work so far indicates that investment
    firms which score well on this checklist--that
    is, the team is aligned around these
    principles—have superior investment returns.
   For an example of the comparisons, see
    paper by Ware and Singer, “Decision Making:
    A Checklist for Investment Firms.”


    FOCUS Consulting Group
                             www.focusCgroup.com
Investment Checklist




 FOCUS Consulting Group
                          www.focusCgroup.com
2 choices: which is most important to
success?
1.     Vision of Success
2.     Investment philosophy                        35%

3.     Team members
       (talented and diverse)
4.     Sufficient trust &                                 24%

       respect
                                                                     17%
5.     Incentives aligned
6.     Decision rights                     10%
                                                                7%         7%




     FOCUS Consulting Group
                                            1
                              www.focusCgroup.com   2      3    4     5     6
2 choices: which are most important to
your firm’s success?
6.     Meeting protocol
7.     Candor                                       31%


8.     Curiosity
                                                                     24%
9.     Visual aides
10.    Decision traps:                                    16%
                                           15%
       avoiding
11.    Use of decision                                                     8%
                                                                6%
       menu

     FOCUS Consulting Group
                                            1
                              www.focusCgroup.com   2      3    4     5     6

								
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