- The Washington Times - Friday, June 26, 2009

“Rules of Thumb” is a part memoir, part how-to book by Alan Webber that deals with 52 rules he has developed in his career to deal with business in good and turbulent times. Mr. Webber is an award-winning, nationally recognized editor, author and columnist who launched Fast Company in 1995. Before that, he was the managing editor and editorial director of the Harvard Business Review. I appreciate Mr. Webber’s time and effort in answering some questions that I recently posed to him and I suspect his answers will prove helpful to readers of this column.

Question: There are 52 “rules” in your book. What are a few that investors can use when thinking about how to handle their money in the stock market or elsewhere?

Answer: Rule No. 3: Ask your last question first. The last question is, what’s the point of the exercise, what’s my definition of victory? Investors who don’t know what their own definition of victory is for their investments stand no chance in the market. As events and circumstances change, they’ll be whip-sawed around, rather than having a clear goal in mind.

Rule No. 16: Facts are facts; stories are how we learn. Every investor I’ve ever heard of who had advice about investing in companies always emphasized the story behind the company, not just the facts about its promise or performance. From Peter Lynch to Warren Buffett, facts were facts, but looking deeply into the story of a company or an industry provided the context for a potential investment and offered a way of understanding whether or not it made sense, not only from a financial point of view, but also from a human point of view. If more investors had looked into the Bernie Madoff “story” instead of the financial “facts” he promised to deliver, we’d have a lot fewer victims today.

Rule No. 20: Speed equals strategy. In any investment opportunity there are those who get in early and do well, and those who get in late and get done to. It always happens that way.

Rule No. 37: Not all money is created equal. This is equally true for entrepreneurs and investors: take a look at your answer to Rule No. 3 before you decide what kind of money you want to take and what kind of money you want to make.

Q: In your book, you discuss how leaders should focus on the signal-to-noise ratio. Do you see something similar when it comes to Main Street people and what is going on in the financial news?

A: Absolutely! Today we have more sources of information - radio, TV, newspapers, the Web - and fewer sources of knowledge. All that noise in the system makes it easy to lose focus, lose concentration, lose patience, lose faith - and then lose money. Whether you’re handling your investments yourself or working with someone as an adviser, you need to screen out the noise and listen carefully to the signal: What are the fundamentals telling you; what isn’t changing; what are sound practices that will meet the test of economic turbulence?

Q: One of the concepts I have talked about in this column is identifying and stitching together data points in order to help make better investment decisions. Two of the more powerful ideas you discuss, in my view are “Rule No. 10: A good question beats a good answer,” and “Rule No. 30: The likeliest sources of great ideas are in the most unlikely places.” In your view, how are those two rules related to stitching and data points?

A: Here’s another place where business leaders, entrepreneurs and investors need the same kinds of skills and aptitudes. What you call “stitching together data points” I call “making meaning” - same idea, different words. What we’re both talking about is pattern identification, based on careful observation and fearless fact-finding.

Questions are always critical - how you ask the question determines the answer you get. And when you don’t even ask questions, you leave yourself vulnerable to other people’s stories and untested assumptions. So much of what I write about in “Rules” has to do with seeing clearly, asking tough questions and facing reality. And you have to be willing to get outside of your own bubble - that’s where new data and new insights can come from.

So you and I see things very much the same: You need to have keen ears and eyes, have a willingness to explore outside your comfort zone, and then work hard to construct or stitch together a story that makes sense out of what you’re seeing and learning. From that comes your ability to decide and act faster, smarter and better than others.

Q: This past March many saw the stock market in crisis while in hindsight those who saw the opportunity generated very good returns. How do you decide when an event is a crisis or an opportunity (Rule No. 12)?

A: The story I tell in Rule No. 12 goes back literally hundreds of years to the walled city of Ragusa, a tiny independent republic that out-performed its giant neighbors, despite their massive armies and huge geographic land masses. How did the Ragusans do it? Better intelligence. They had ambassadors stationed all over the world who wrote monthly reports about what was going on in their station - preparations for war, palace intrigue, financial problems. Nothing escaped the notice of these loyal and skilled ambassadors.

Today, thanks to technology, we can all have our own network of ambassadors - formal or informal, people we rely on for those data points that need stitching together, observers who are “out there” checking out what’s really going on in markets around the world. Our job is to be hungry for ideas and knowledge and to be synthesizers who put together these reports (like the ones you offer in the paper) into cogent, smart, and practical views of what’s happening in the world, so we can see a crisis early enough to turn it into an opportunity.

Q: One of the areas I think people need to leverage when making stock decisions is their own area of expertise or at least areas that they have a passion for, be it technology, clothes or restaurants. That understanding goes a long way.

A: I’m a great believer in people following their own passion and turning it into expertise. My advice to would-be entrepreneurs is to learn everything they can about the one thing they love the most. Find someone who can act as a mentor and learn everything they have to teach. Collect artifacts that involve your passion (I collected early copies of great American magazines when I was starting Fast Company - I wanted to see what first editions of Time, Fortune, Rolling Stone, and others looked like). Read everything you can get your hands on. Submerge yourself in the raw stuff of your greatest personal love.

Out of that may or may not come an investment strategy or an entrepreneurial start-up. But what will come is a depth of knowledge and expertise that separates you from the average guy. You’ll have what I call in “Rules” “subject-matter expertise.” And these days, when most people know a little bit about a lot of things, and a great deal about nothing, you’ll have a huge competitive advantage. In a knowledge economy, having knowledge can put you on the path to having wealth.

Chris Versace is the director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at [email protected] washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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