Tuesday, February 25, 2014

Type A and Type B Decision Making

Quick Summary:
  • Type A decision making focuses on the few key factors.
  • Type B decision making understands that the fat tail of factors might become crucial someday.
  • Ignoring the fat tails mean failing to understand that these factors could come and bite us someday. Recognizing the fat tail is the key to Type B decision making.
  • In investing, this means looking holistically at the business and asking questions all round.
  • In real-world decision making, it also means constant reviewing of past decisions.
  • One should continuously assess the situation and challenge the assumptions.
In the previous post, we established that there are, by and large, two personality types. 

Type A: Digital, task-oriented, focused on getting things done. Excellent operators and organizers.
Type B: Analogue, multi-dimensional approach, focused on innovating to a better solution. Creative problem solvers and strategic thinkers.

In decision makings, these two Types exhibit different traits and I would like to further point out  as something that is very much related to stock analysis and the final decisions to buy, sell or hold.

As an investor, or to be specific, a stock investor, a big part of our core work involves analysing stocks ie companies and their businesses. There is no escaping that.

Now, businesses are complex and various factors come into play, in different time horizons, in different situations and market conditions. However, there should be just a few key factors that would explain 80-90% of the drivers of businesses and hence stock prices, over the mid to long term. For instance in toothpastes, it boils down to scale and distribution - how big is the manufacturing footprint and how far the products go into hypermarts, rural mom-and-pop stores and e-commerce. Secondly and perhaps more importantly, its brand which translates to pricing power. There will be a thousand other factors that might come into play. But these 2 or 3 would explain most of the business and how the stock should move over time.

A Type A investor would be able to understand up till this point. Yes, these are the two most important factors. P&G has a strong position in each of them so it's a buy. Most of the time, he would be right by just focusing on these key drivers. And most probably, he would also spend a lot of his time focusing on how these key drivers such as the economies of scale and the power of distribution changes vs competitors, neglecting the fat tail which consist of the brand loyalty, the taste, the packaging, all the little, little things.

But a Type B investor, being multi-dimensional would be able to understand that 90% of the time, these drivers explain almost everything, but at the back of his head, he is constantly asking, which of the other thousand factors might become important some day? We already mentioned taste could be one. What about a safety track record? Did the company have a good one? Or the geographical distribution of its manufacturing plants, do they have a concentration risk? What if an earthquake hits? Did they capture well some of the frontier growth markets like Africa? What is their strategy in total oral care? Do they have a mouthwash product or a floss product?

Decisions while 80-90% impacted by the few key factors, are also impacted by the fat tail of other factors.

To understand this, is the essence of Type B Decision Making. 

For every decision we make, ie to buy a stock based on the few top factors, we must know that there are a lot of other things that could come in play someday and debunk the whole thesis.  This is partly why even the best investors are only right 60% of the time.

This applies to real-world decision making as well.

Years ago, I had a debate with someone about whether we should ensure that our kids are fluent in just one language (ie English) or was it better for them to be bilingual in both English and Mandarin while perhaps less proficient than native speakers in either languages. So as a parent, a decision had to be made at some point. Expose our children to both languages or just one?

The other party was adamant that exposure to just the English language was the right answer since it's better to be fluent in one than to be mediocre in both. That was Type A decision making at its best (ie best mediocrity). It failed to take into account the fat tail. What if the kid can actually handle two if not three languages and become proficient in all of them? What if China becomes so interlinked with Singapore that Mandarin becomes a critical must? What about learning the language to understand the Chinese culture. After all, we are Chinese descendants.

A Type B decision maker, while deciding to expose their kids to both languages would again be mindful that this may not be the best for the kids. It is then about constant monitoring and fine-tuning the first decision. Does it still apply 5 years from now? 10 years from now? Decide now but review in time.

Type B thinkers will continuously assess the situation and challenge the assumptions. What if the kid cannot cope? Was the home environment bilingual in the first place? Do both parents speak good Mandarin? What about the emphasis of the school? How about the future career paths and their language requirement?

Type B decision making is about finding truths via the myriad network of logic, critical thinking and constant questioning: forever asking which fat tail risk will hit us in the face?

So strive to be a Type B thinker and decision maker.

Monday, February 10, 2014

Type A and Type B Personalities

Quick Summary:

  • There are 2 type of people: Type A and Type B.
  • Type A: Digital, Task-Oriented, Focused on One Solution.
  • Type B: Analogue, Multi-Dimensioned, Innovation is the Solution.
  • Type B makes better investors.
  • Type A vs Type B - SIA vs Singtel.
  • Are You Type A or B?

Over the course of my work and investing years I have had the chance to get to know and work with lots of people. Most of them are highly intelligent, motivated, diligent and also rational. They have all the traits of being successful and most are already very successful. But one thing struck me profoundly as I see these two "personality types" over and over again that makes it very important to help us understand how to work with them, work around them or maybe even try not work with them at all, if possible.

I must admit these are strong stereotypes and the readers here should exercise caution in labelling people as such. As with most things life, this is not a digital scenario as in no single person is 100% Type A and 0% Type B. It is usually some are 60% Type A, 40% Type B while others are Type A at work but Type B at home or even Type A when dealing with subordinates but Type B when dealing with superiors etc etc.

In any case, once I described the two Types below, it should help us better understand how to deal with such people.

Let's start with Type A.

I would label Type A investors or people as very task-oriented, focused but unilateral and one-dimensioned thinkers. They use checklists, are strong in processes and are fabulous organizers. But these people see the world in digital. Their motto is do or die and they will do because they don't want to die. To them there is always a right or wrong answer and nothing in between. They are very inflexible and they cannot accept contradictions. As a result they can come across as aggressive in order to push their self-believed "right" opinions. They are all science and very little art. Innovation is not their cup of tea and when asked to innovate, they need a roadmap.

To me, they have to try really really hard to be great investors. Not just good, but great investors. They can be good investors because by being disciplined they are always able cut loss and take profit, not unlike the best traders. Indoctrinated with some value investing philosophy, they can even stand to benefit somewhat. They can also be good contrarians as they only follow processes, not the crowd. But to be great investors calls for more than what they are inherently capable of. In short, Type A investors just need a lot more effort to bend their minds.

As managers, these people are perhaps more difficult to work with because they cannot see anything in between. Remember their world is digital. It's either their way or the highway. So there is no room for negotiation. They can be good task managers and process implementors but they are not strategic and they cannot think out of the box. In short, they make good COOs but not good CEOs.

Nevertheless, Type A managers are usually considered better workers and hence promoted faster.

Type B investors are the opposite of Type A. They are very poor at organizing themselves or their workflow. They are not task-oriented and they tend to focus on what interests them. They also dream a lot. They can think in multi-dimensions and can appreciate varying points of view, drawing a deeper understanding of the context and hence able to develop more strategic answers. They see the world in analogue and their motto is about finding the right balance. To Type B people, there is always more than one right answer and the solution is to innovate to an even better answer. They understand art and are sometimes artists themselves (as photographers, musicians, painters and entrepreneurs etc)

Of course their weaknesses would then be sitting on the fence, unable to execute or simply too poor at accomplishing important tasks at hand.

But Type B investors stand a reasonably better chance to be really great investors because of their appreciation of multi-dimensional situations. They can connect the dots, exercise strategic thinking and see beyond what Type A investors cannot and hence are better able to spot good businesses over and over again. As strategic thinkers, they are also better allocators of capital and can hence manoeuvre the portfolio better by constantly shifting capital to better performing assets. In my opinion, good CEOs are usually also good Type B investors.

As a simple example to better illustrate the two. Let's imagine a portfolio with just two stocks: Singtel and SIA. Both started out in equal proportion each but over a crisis Singtel fell by 20% and SIA fell by 40% and both becomes significantly cheaper vs their calculated intrinsic values.

A Type A value investor would say, "Let's buy more SIA, because it has fallen 40% below our entry price and is now probably 60% below its intrinsic value! It's an opportunity of a lifetime!"

But a Type B value investor would be saying, "No, we should buy Singtel because although it's only 30% below its intrinsic value, it is a better business and it generates better cashflow and pays better dividends. Over time, its value will compound much faster than SIA!"

If you have been reading this blog long enough, you would know that the Type B investor probably has the better right answer. The long term charts of Singtel and SIA say so as well.

Singtel (White) vs SIA (Red)

The long term charts of these two firms deserves further scrutiny. First, note that the starting point is different with SIA at 60+ and Singtel at 40+. So an investor in Singtel would have almost tripled his money while an SIA investor merely made 50% over this long time frame.

Now, to give it another twist, another Type B observer would actually say both are right, but buying Singtel would probably make more money over a longer time horizon while buying SIA might make a better short term return. Hence a better solution could be buying SIA now, then switch to Singtel, provided Singtel doesn't rebound.

Ironically, a Type A observer would not be able to appreciate what the Type B observer just described. Because to him, there can only be one right answer.

Again, please be reminded that people are not digital. Everyone is simply more or less Type A or B. We cannot assume people are 100% A 0% B or vice versa.

So I guess the first lesson here is to try to understand whether we ourselves are more Type A or Type B and if so, how should we compensate for our lack of positive traits of the other Type. For example, if I am Type B, it would mean that I am really bad at being disciplined to set entry and exit prices, making sure dividends are duly cashed and making sure that rights issues and other corporate actions are also taken care of. Then it's really about thinking of solutions to better manage these tasks.

More importantly, in our course of work and situations in dealing with others, it could be very helpful to identify whether the other person is Type A or Type B. If you are trying to convince a Type A manager to buy your product, then you should not appeal the strategic/multi-dimensional benefits but rather just show simple superior specs vs competitors products and be prepared to back it up with more details and more data.

To conclude, by understanding what drives other people, it would be easier to think of ways to deal with them.

So are you a Type A or Type B investor?