139. Efficiency can be your Enemy
“To arrive at the simplest truth, as Newton knew and practiced, requires years of contemplation. Not activity Not reasoning. Not calculating. Not busy behaviour of any kind. Not reading. Not talking. Not making an effort. Not thinking. Simply bearing in mind what it is one needs to know.” — George Spencer-Brown
Would you do your morning walk with an audio book playing on your earphones or without earphones altogether. It depends but more often than not, one would go with an audio book or music while walking. Why not two birds with one shot?
“Long term capital management” (LTCM), a storied hedge fund of the 1990s, was directed and helmed by the masters-of-finance (including Nobel laureates in economics) of that time. LTCM performed very well in terms of returns until it had to be bailed by the US Fed in 1998. They had such a good thing going that they effectively leveraged up to 250:1 to multiply that good thing. In other words, for every dollar they had, they effectively borrowed $250 dollars and invested all of that. It seems like Lehman Brothers was leveraged in excess of 30:1 when it collapsed. Many other big name financial institutions were in similar boat at that time but did not collapse only because they were bailed out by the US Fed just in time.
“Life is too complicated not to be orderly.” — Martha Stewart
Scheduling every minute of our day is the modus operandi of living modern life. Workout, commute, work, dinner, lunch, everything is more or less scheduled in and most people are hardly left with any “unstructured” free time. Even vacations are planned up in such detail that they turn out to be more tiring than non-vacation days. We want to extract maximum value out of our vacation time — they have to be efficient too.
I personally experienced all of these. I used to schedule every minute of my waking hours. When I realized that the available time was not sufficient, I sacrificed a significant amount of sleep to schedule more things in. I synthesized my own leverage.
However, nothing in my life reflected extraordinary value — at least until a couple of years back. Until I inadvertently recognized what was ailing me.
Maximizing efficiency was coming in the way of maximizing value.
A number of things have to fall in place for maximizing value and foremost among those things is to survive/sustain long enough for these things to come together. An easy way to increase value is by creating it over a long period of time. Low efficiency sustained over a long period of time typically trumps high efficiency over a short period of time. Sustaining for long is a highly accessible strategy.
“Don’t equate activity with efficiency.” — Harvey Mackay
Redundancy is a cornerstone for survival. Let me explain.
According to kidney.com, the organ most commonly donated by a living donor is the kidney. Apparently, after kidney donation, the remaining kidney will increase in size and take over the whole job of filtering your blood. So, why did nature endow us with two kidneys and when one can do the job. Redundancy!
Most (perhaps all) civil structures like buildings, skyscrapers, ships, bridges etc are built with a significant amount of spare capacity to bear burden. Redundancy!
If you have not read Peter Thiel’s book called “Zero to One” yet, I recommend that you do. One of the biggest insights I drew from that book is that monopolies are essential for progress (of entire humankind, if I am allowed such a sweeping statement). Monopolies do not have to worry about competition and thereby can spare funds and management capacity to experiment with creating new and unrelated products. They can afford to fail often and occasionally big too. Redundancy!
Most consequential progress in human’s history, including in arts, has happened under benevolent dictators. Democracies are more about efficient allocation of resources. Powerful rulers are not questioned as much on their allocations. Benevolent among them tend to create orbit-shifting progress. Again, redundancy!
Bearing debt allows companies to reduce their average cost of capital. So, a more efficient way of raising capital is by raising debt. However, most great (let’s say, in terms of innovation or wealth creation) companies do not take debt — even when they can get it at very attractive rates. Debt creates leverage and reduces the average cost of capital but it could squeeze you in adverse times. Even survival could be at stake.
“Multitasking, throughput, efficiency — these are excellent machine concepts, useful in the design of computer systems. But are they principles that nurture human thought and imagination?” — Ellen Ullman
In my personal finance strategy, I have significant (over 40%) allocation to liquid instruments where post tax returns may barely meet inflation if that. This is not because I have excess capital at my disposal. This is because I want to be able to weather volatility from my remaining investments — a highly concentrated portfolio of select small-mid cap stocks. To give myself any chance of creating reasonable wealth from my equity investments, I should leave them alone for at least ten years and that means I should leave a lot of unallocated funds at my disposal. Redundancy! (this is a developing story, not yet proven!)
Bottomline
“The worst enemy of life, freedom and the common decencies is total anarchy; their second worst enemy is total efficiency.” — Aldous Huxley
Fully efficient allocation of your time may be holding your real progress back. You can’t build relationships by scheduling time with people. You just have to be around a lot with your spouse, children, parents or friends with no specific agenda. Looking for efficiency can be your enemy. Ditto with creative thinking. You cannot schedule creativity. I cringe whenever I come across statements such as a large company, to enable innovation, started to allow their employees to work on personal projects on Friday afternoons or something like that. It is unhurried calendars that pave the path to creativity. To bring meaning and aesthetic into your life’s work, abandon efficiency a little.
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I help people make better decisions.
I coach people on “Making Better Decisions”, “Financial Intuition” and “Building Great Careers”. I’m open to run sessions on these topics in institutions — this will help me create larger impact.
I’m also an Investment Advisor (RIA) registered with the Securities and the Exchange Board of India (SEBI). As an RIA, I analyze and prepare financial plans to help people achieve their financial goals.
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