It’s the 1986 World Cup quarter final and Argentina is playing England. Had you judged the game based on its boring first half, you would not have believed how the action-packed second half scripted the game in to the annals of history. In the 51st minute, Diego Maradona was playing a ‘one-two’ with his teammate Valdano, but the English defender Hodge miscued his clearance into the penalty area and the ball looped up. The English goalkeeper Shilton came off his line to clear the ball, but Maradona, already charging ahead, leapt in the air and slotted the goal with his left hand. English players complained, but the referee could not see what had happened and allowed the goal to stand. Diego later remarked in the press conference that ‘the goal was scored a little with Maradona’s head and a little with hand of god.’
Within just 4 minutes of the ‘hand of god’ goal came the ‘goal of century’. Maradona took the possession of the ball, in his team’s half of the centreline, and single-handedly beat the whole English defence and drilled the game’s second goal. Years later, in 2002, this goal was voted as the greatest goal of all time. Argentina went on to beat Belgium 2-0 in the semis and West Germany 3-2 in the finals to lift the cup.
The surprising thing, however, is that for most of his career Maradona played in teams that had no superstars. The Napoli squad (a city where Diego is still revered as deity), with which he conquered Italian soccer, didn’t have any A list names. When he signed up for the club in 1984, club Napoli had never won the Italian league. His diminutive frame notwithstanding, Maradona was instrumental in Argentina’s superlative World Cup performance in 1986, 1990 and 1994. Even as the current crop awaits the news of Ronaldo and Messi playing alongside in a testimonial match, for those of us who grew up in the 1980s, ‘El pibe de oro’ (the golden boy) and Black pearl (Pele) would always remain technically the best to have kicked the ball. We join millions of Maradona fans this week to bid adieu to the greatest player of all time.
We switch from people, on to organizations that do things differently. Erin Meyer and Reed Hastings draw on hundreds of interviews with current and past employees to write their book, No Rules Rules, about the culture at Netflix.
In his previous venture at Pure Software, Reed had tried to create rules and establish processes every time employees made a mistake. In Netflix, he wanted to promote flexibility, employee freedom and innovation instead of error prevention and strict adherence to rules. He built an exceptional talent pool and then asked the employees to openly voice opinions and feedback with positive intent. The book contains a lot of interesting reads, especially about feedback loops, but what stuck with us were the policies or rather lack thereof.
In the ‘no vacation policy’, employees could take as many breaks as they required, and for Netflix the biggest innovations happened while people were on breaks. But for the policy to be truly implemented, leaders must model big vacation talking. Yes, you read that right. Not only should the leaders take vacations, but they should openly talk about them because there should be no room for ‘soft limits’ in any department. While unlimited holidays are easy to implement, boundaries for acceptable behaviour were defined as: (a) always act in the best interest of the company; (b) never do anything that makes it harder for others to achieve their goals; and (c) do whatever you can to achieve your own goals. Even more surprising was the ‘no expense policy’. All policies related to expenses were removed, but employees had to: (a) spend money as if it was their own; and (b) act in the best interest of Netflix.
The driving principles at Netflix are: (a) Hire the best; (b) Trust employees openly and ask them to trust others. (c) Keep improving the collective talent density. The thought process behind these is that if you have good employees thinking about how to improve the organization, they are more likely to be an asset to the firm compared to a tightly controlled average bunch of people who are worried about rules, hierarchy and speaking their mind.
Most organizations aim to become efficient (tick off more items per day, reach out to more leads, process more applications and so on). But as Netflix suggests, for human beings, ‘effectiveness’ trumps ‘efficiency’. This, we believe, applies to the investment process as well.
Many a times, investment managers formulate an investment process just because it has worked well in the past (say, best company is a great investment at any price or never to buy PSU stocks and so on). Rigid adherence to the investment process implies that even when it is leading to bad outcomes, one resists disassociating from it. In short, the process becomes a part of who the investment manager is.
Contrast this with the thought process that determines the actions of one of the biggest investors Warren Buffet. In his 1992 shareholder letter, he writes, “investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it,” adding that he, “participated in this foolishness,” when he bet on US Air in 1989. And yet, Berkshire became among the largest shareholders in the big 4 airlines in the last year. Similarly, Berkshire has always shied away from investing in technology companies, but its largest investment by value today is Apple and it is the largest shareholder of IBM.
As we had argued in our previous letters (link, link), having an investment framework is good, but rigidly defining a process is unlikely to work over the long term. If there were defined rules in investing that could beat the market, then it is likely that over the past 90 odd years of institutional investing, those rules would have been discovered and negated (because everyone would follow that same rule, the alpha would disappear). By all means, stick to the process, stick to the framework, but stay open to change; it might not be as illogical as it sounds.