Game, Table and Hand Selection
I’ve been spending a lot of time recently with friends weighing various career decisions and many of the situations remind me of the wonder, one has when entering a casino. The various sights and sounds of the human spirit as people win and lose across the casino floor never fails to captivate my imagination. Your ability to exit the floor with more money than you started with, is driven by a multitude of decisions one will make during his / her time on the floor. There are NO right answers in life, its what you choose to make of it
I’ll refer you to an old post, Beta vs. Alpha which I’m building off of with a focus on Hand Selection
The majority of value is derived from Game Selection. In a casino, picking roulette and merely picking between red or black has a close to 50% odds vs. slots (<1%). Almost every game has a positive expected value for the house. What am I describing with game selection as it pertains to careers? If you picked technology or healthcare, you’ve been the beneficiary of a multi-year bull run vs. if you selected Oil & Gas, you might be Warren Buffett but no amount of investment acumen is going to help you survive the carnage the sector has experienced. As Warren said, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” Picking a game where the odds are skewed in your favor requires a careful study and a fair amount of luck in its own right; when the technology bubble burst in 2000 or when oil was last above $125 in 2008 many chose to avoid / seek, respectively believing those fundamentals would remain
Upon choosing the Game, how does one think about Table Selection? In Texas Hold’em, you’ll see many spectators watching the ongoing games. They’re trying to gain an understanding of the players at the table. How sophisticated are the players at the table? How aggressive / conservative are they playing? Do I want to be downstream of someone with a big chip stack who might want to play bully? Those are all factors one should think about as part of picking the table one is staking his / her career on. I suggest you take the time to assess the table that you are at — are you at the right table (firm)? Is your firm positioned to win? Does your firm have sustainable / durable competitive advantages which gives it first / last / only look at opportunities? Have you built a reservoir of goodwill with your stakeholders or are you in a deficit? To what lengths will others seek to make you successful?
And finally, Hand Selection. I have a close friend (in private equity) who we will call Edward. Everyone in our friend group considers Edward to be “cheap”. Edward only pays the requisite blinds, and if he has a poor hand, he seeks to preserve his stack (i.e., he will fold). Everyone at the table knows if Edward is in the game (not forced to by blinds), that he has a very good hand and everyone at the table will immediately fold. Unable to get anyone to take him on, Edward’s best hands earn him very little. Slowly but surely he gets sidelined in the game and eventually eliminated. How does this relate to your career? If you want to be a player, you can NOT only play when you have a royal flush. You need to in the game through the good and the bad (obviously minimize your losses) to be in a place to win and more importantly, win big when you have a strong hand.
I often advocate for playing frequently, aggressively and quickly which is counter to what most in private equity may advocate — playing infrequently, conservatively and cautiously. NO, to be clear, I am NOT referencing your deals though I do have a strong view on that. I’m moreso referencing how you allocate your time and efforts. I’m focused on your judgement in determining that allocation. Napoleon Bonaparte once said: “Strategy is the art of making use of time and space. I am less concerned about the latter than the former. Space we can recover, lost time never.” Many in private equity are focused on playing hands to reduce their expected losses (thereby increasing overall expected value). I often find that this results in analysis paralysis. Losses are inevitable (no matter how good your judgement is), just cut them early and quickly. Admitting a mistake is tantamount to sacrosanct (for investor messaging purposes) and often results in good money being thrown after bad / time of all stakeholders being wasted. That cultural mentality is prevalent throughout private equity.
Edward is making the push for Partner but his cautious style has resulted in him having completed very few transactions albeit with strong results. In what is a relatively meritorious firm, others have reached Partner ahead of him as a result of having completed more transactions with good but NOT superb results. They’ve played significantly more hands with lower positive expected value per transaction (than Edward’s transactions) but have over time made significantly more money. Edward’s colleagues, who are now Partners, have demonstrated that they are consistent money makers / rainmakers and their constant activity gives them relevancy / currency with stakeholders which garners them the best looks. This is tantamount to playing many hands until you get a royal flush, others at the table are willing to engage with you (thereby increasing the value of the ultimate pot). Edward’s problem is that he struggles to gain access to the industry’s best deals as some view him as a bottom feeder, which reduces the number of opportunities / creates what some would consider a feedback loop, i.e., his deals get better and better, but fewer and fewer, into a paradigm that’s actually quite negative for both him professionally within and his firm as well.
Edward is known for going to great lengths to save money, nickel and diming every vendor in sight and spending countless hours “adding value”. It’s not clear to me, how much value there is generated by being in your Management team’s shorts on the company’s rebranding or minor bolt-on. Yes, your judgement likely reduced the likelihood of an expected loss but it resulted in meaningfully less bandwidth to pursue new opportunities (i.e., play more hands). Focus on maximizing your career’s expected value — I’ve also written a little on that in Not All That Glitters is Gold
Hopefully, reading this gives you some fresh perspective. Being a deprived kid, I was NOT allowed to play games. I use to wonder what value Warren Buffett gained from playing bridge and Howard Marks with backgammon. What a colossal waste of time! I’ve since come around — I’ve learned a lot about life from viewing life from the lens of card games
Frank Z. was kind enough to share feedback on, how does good Hand Selection allow one to escape the game currently being played. I fundamentally believe this goes back to being a consistently faithful steward in the little things creates luck / opportunities (i.e., opens doors) but that requires preparation and willingness to make a move when opportunity arises.
Thanks to Matt R. for his thoughts!