We Study Billionaires - The Investor’s Podcast Network - TIP 045 : Leadership You Can Invest In (Investing Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 45 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is The Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:31 This is Preston Pish, and I'm your host for The Investors Podcast. And as usual, I'm accompanied by my co-host, Stigbroterson, out in Denmark. And this is going to be a really fun episode for everyone because we're talking with Mike Figliolo. And he has a book that he recently wrote. And it's called Lead Inside the Box. Mike and I have talked in the past. And we have a mutual friend whose name is Jan Rutherford. And Jan wrote this book called The Littlest Green Beret.

Starting point is 00:00:57 And Jan introduced me to Mike because Mike is a West Pointer from 1993. Is that right, Mike? 1993? That's correct. So you were 10 years earlier than I, and so I was class at 2003. And so we're just really pumped to have you on the show. And I'm really excited to talk about this book because you wrote a book that is really kind of ironic. I really like the title. And I think that the title is pretty fun the way that you did that. But this is like value investing for leadership. And so one of the things that we do that Stig and I talk about all the time is leadership being one of the key principles for Warren Buffett in the way that he invests. And we're huge value investors. Our audience are big

Starting point is 00:01:38 value investors. And so one of the things that's really hard to do as an investor is to gauge the power and the effectiveness of good leadership. And that's your forte is leadership. Because after Mike, Mike went to West Point. He was in the Army for a little bit. And then he got out after five years, correct, Mike? Yes. Okay. So you were out after five years. And then you And you have just been really killing it on the outside as a business individual. And you went and you worked for McKinsey Company, which I'm sure everyone knows McKinsey out there. You went and got your MBA at Dartmouth College. And then you started your own consulting company.

Starting point is 00:02:15 And his consulting company, their specialty is training executive management and leadership. So he is just a wealth of information in this area. And what's going to be really neat for our audience is going to be able to pick up on the key points that you discuss. and how do you describe great leadership whenever you're looking at a business? And that's what we're really going to be talking about today. So, so exciting to have you on, Mike, and we're really excited to dive into some of these questions and talk about what you talk about in your book. It's my pleasure.

Starting point is 00:02:43 And it's a really fun topic to take this look at investing in your people because when you look at the capital budgeting process, we spend thousands of hours trying to figure out where we're going to invest our money. and then we spend pretty much zero trying to figure out where we're going to invest something even more finite and valuable, which is our time as leaders. And that's the whole premise behind the book is doing that thinking about where you're going to invest your time and energy as a leader. Okay.

Starting point is 00:03:12 So the thing I briefly touched on was the title of your book. And I like that because it's really ironic. So the name of his book is Lead Inside the Box. So most people are always saying to think outside the box, but the title of your book is lead inside the box. So as a note of irony, your catchy title is definitely outside the box. And I know that I've probably confused everyone with how many times I've said that. But could you explain to our listeners the premise of your book and your experiences as an executive leadership consultant and how it kind of all culminated with this book? Yeah. So first of all, I hate the

Starting point is 00:03:47 phrase, think outside the box, as does my co-author, Victor Prince. So it was a little bit of a cheeky way to take a jab at that. The title itself lead inside the box. The box is what we call the leadership matrix. And that leadership matrix is a two by two matrix where we look at how much time and energy leaders are investing in a person. So this is individual leadership. And we call that leadership capital because it's an investment. And then you look at the corresponding results that you get out of the individual and that forms the other axis of the two by two. So it's an input output model. You end up with four quadrants, four behavioral archetypes that we look at.

Starting point is 00:04:30 And within that, you've got subcategories. And what the whole book is about is first, understanding where you're investing. Second, understanding the results or the return that you're getting on that investment. And then third, figuring out how to move people and change their performance so that you get to a higher return box. And we try to make it really tactical, straightforward, and immediately applicable. So, Mike, how do we do that in practice? If we return to the concept leadership capital that you just briefly introduced before, and as far as I understand, this is about using your resources,

Starting point is 00:05:07 whether that's time or money, whatever that is as a leader, most efficiently. But how do we apply that as a leader in our daily work? So within the book, we actually drive it down to the level of very specific assessments that leaders can do to say, where are you spending your time and energy and are you over-investing or under-investing as you do it? So we look at things like whether a leader is deciding and how are you behaving there. How are you developing your people? How are you running the team and setting goals and setting direction? So we look at what we call the leadership services that a leader is providing to their team. And then you ask yourself the question for given where this individual is in

Starting point is 00:05:51 their career, in their development, in their responsibilities, are you investing more than you should or less than you should in their behavior and in their performance? So that assessment, we actually boil it down to a really detailed level in terms of the activities that leaders can do. And then we later obviously talk about how they can redeploy that time and energy more efficiently. So, Mike, the thing that I really got away from reading through your book was really it's like value investing for leadership. You're going out and you're looking at all the different people that might work under you as a top manager. And you're saying that person's adding a lot of value. That person is really taking a lot of my time and not adding much value. And you're looking at that

Starting point is 00:06:35 from like a quantitative and a qualitative piece. And then you're optimizing it so that you're just getting pure performance and you're maximizing that performance and you're maintaining that motivation within your people. And I guess my question is, how did you arrive at this formula? Was this something that you learned at McKinsey? Is it something you learned back when you were at West Point? Or did it just mature through your lifetime as you just continue to see example after example of going into these different companies? So I think you're spot on in terms of thinking it as value investing. But the one difference here is when I go out and buy a stock, I can't really change the company's performance. All I'm doing

Starting point is 00:07:15 is betting that I'm buying it at a price where the management team is going to change performance and I got value from it. What's interesting here is you as the leader can and should be changing performance. So if you have an individual who is low performing, but you're not investing a lot of time and energy in them, if you change your investment strategy and you work with them differently, you can improve their performance and drive a higher ROI on that investment, which is pretty fascinating to think about you having an ability to change your portfolios performance. In terms of where it came from, I think it's bits and pieces of a lot of different experiences.

Starting point is 00:07:52 So Victor, my colleague, Victor has a very similar background to mine. He has a great educational background, spent time in government service. He was a Bain guy. He was a contemporary of mine at Capital One and has had some government service since then. And he and I have been working together at my firm thought leaders for a while. and Victor came to me one day and said, hey, Mike, you've written a book previously. And I want to run an idea by you to get your thoughts on if this is possibly a book as well.

Starting point is 00:08:24 And he ran the notion of the leadership matrix in front of me. And I said, first of all, there's absolutely a book here. And second of all, I think it's something that's going to hit a pain point with a lot of the folks that I coach and train. And then Victor asked me to co-author it with them. So that's sort of the origin of it. And as the framework was under development and we were writing it, I was very much applying it to executive coaching engagements that I was in the midst of or had previously completed to essentially validate the framework. So it's sort of the summation of victors 20 years, my 20 years, both in military or government leadership, corporate leadership, and then layering on it our understanding of training and development from the decade or so that I've been running thought leaders. So, I mean, I'll just throw it out there.

Starting point is 00:09:13 Having read through this, I was looking at each of these chapters. And I'm like, man, these guys get it. Like, this is really, I like how simple the approach is, but at the same time, it's, it's really got a lot of depth to it. And it's, you can tell it's been really thought out. And if a person could put that into application and really start thinking in terms of, hey, I'm making this investment, but I'm making this continual investment in a person that isn't going to give me the return back versus, hey, I can do a little bit here. and I'm going to get a much bigger solution or an 80% movement. We like to refer to the Pareto principle, the 80-20 rule, as much as possible. But I saw a lot of that in your book.

Starting point is 00:09:53 You reminded me a lot of a person that maybe has gone through like Lean Six Sigma and optimization within a company. And it was just really a fantastic read. Well, first of all, thank you for the comments. And second, yeah, it is about making those wiser investments. And too many leaders out there will sit there and say, well, I want to go out and hire a whole bunch of rising stars and high performers. And that's how I'm going to have an awesome team. And the thing is, you're stuck with the people you get, right?

Starting point is 00:10:23 It's very rare that we get a chance unless we're forming our own company or we're brought in at extremely senior levels in an organization to say, well, I'm going to get rid of everybody here and I'm going to create my own team. More often than not, it's, hey, here's you know, welcome to the company. here's your team, go. And you have to play the hand that you're dealt. So the book really helps leaders assess that team and then figure out where do I invest, how do I change their performance and get them really delivering at the level that I want. Yeah, that's so true. That's so true.

Starting point is 00:10:54 So my next question is about bad leadership. And I'm pretty sure that's something that, you know, everybody experienced either if you were the leader or if you were an employee. But I think that many people in that is definitely including myself. You know, I can be quick to blame others. So my question to you would be, how do you personally look back at a situation as a leader and objectively evaluate what you could have done differently? So, first of all, I think there's a great degree of maturity for anybody to even be able

Starting point is 00:11:26 to do that. You have to admit that I was wrong. I could have done things differently. My way isn't always perfect. And there's just a level of self-awareness that has to come with it. And if you don't bring that maturity to it and the ability to see. set aside value judgments around, gee, I'm a good person or a bad person, but instead look at it as why behave this way and I could have done this differently. You won't get there if you can't

Starting point is 00:11:50 bring that maturity. So that's first, is really getting yourself in the right frame of mind. Second is then looking at the situation. And then here's one of the big insights that comes out of the book is so many times we look at a given situation and say, well, I did this when I led Preston and here's how I behaved and it worked out great. Therefore, I'm going to use the same exact approach when I lead Stig. And okay, the problem is Preston is not the same as Stig, but I'm applying the same tool to very different situations. So what we try to get to in the book is helping leaders understand. Look at the situation you're in with that individual and there are going to be different techniques that are appropriate or inappropriate. So what that then enables leaders to do when

Starting point is 00:12:35 they're going through that situation of saying, hey, there was some bad leadership here on my part. It allows them to look at that situation objectively and say, I behave this way. I did these things. And here was the result. And here was a different way I could have or should have behaved that would have gotten me a different result. So I really like boiling it down to the level of individual behaviors because those are the things that you can observe and change. Yeah. It's amazing the correlation between just basic leadership and investing and where people might apply one type of technique in the past with investing. And they think that they can just apply that again during the next point in time where they see a similar circumstance and it's not. And you see the exact same thing on the leadership front. I know I see that with the different leadership experiences that I've had as well. So that's a really good point. On the first thing that you said, Mike, as far as just being open to the leadership front. the suggestion that, hey, I could be wrong. So there's this billionaire that we study, and we talk about them all the time on a show. His name is Ray Dalio.

Starting point is 00:13:37 And Ray really took this to, like, an extreme level. Are you familiar with Ray Dalio? I'm just curious if you know who I'm thinking. No, I'm actually not, so I'm very interested to hear. So there's this guy. His name's Ray Dalio. He's a billionaire. He runs the biggest hedge fund in the world.

Starting point is 00:13:51 And he took that idea to like this total extreme, where he basically came up with the idea that I am most likely wrong. wrong, no matter what I say or no matter what I think. And he, he has framed his entire company, it's called Bridgewater Associates. He has framed his entire company around this idea of, hey, here's an idea. It's most likely wrong. And I want you to tell me why it's wrong. And then whenever he can't find anybody who's really saying it's wrong for all these, you know, these five different reasons, then he's more of the opinion that maybe he is in fact right. It's just a really kind of fascinating approach. And you don't really see it in executive leadership too often.

Starting point is 00:14:29 So with all that said, it really comes down to my next question and why we're talking about Ray Dalio as a billionaire. And so we're really curious. Do you have, and I know you've worked with just countless individuals at the executive level. So we're really curious if you've ever had a billionaire, any good billionaire stories that demonstrate this idea of optimizing their leadership capital within their companies. You know, it's really funny to watch leaders at all levels demonstrate these skills. I've worked with several very senior executives. They didn't disclose to me their net worth, but I'll put them in that same sort of stratosphere. And just watching them interact in different situations.

Starting point is 00:15:10 And I think this is the differentiator is that they can sit there and have somebody come into their office or interact with them. And you see them pause. You almost see them visibly pause and assess, okay, here's the problem that's being presented to me in terms of this person's behavior or the issue that they're trying to solve. And then you watch an hour later, they interact with somebody else and they do the same thing and they size up that situation. That pause, I think ends up being that differentiator because what they're doing is saying, I have all these instincts that say I should apply my tried and true tools and approaches here because they've always worked in the past. And what they're doing with that pause is saying, wait a minute, let me check my instincts for a moment before I act and really understand the situation I'm in. So I'm not going to get into names of those individuals, but the ones who have done it have been true artists with it. And then the ones who don't, right, and aren't as successful are the ones who say, oh, I've seen this a million times before.

Starting point is 00:16:07 And they start talking before the person has even finished explaining this situation. And they're going to invariably miss things. And I've seen them miss things because they're forming that opinion too quickly. And they're saying, I've been here. I've done that. But the problem is, well, the world is different or this situation is different. And that's where you're going to miss. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:20:28 That's Shopify. com slash WSB. All right. Back to the show. Mike, I'm really curious about this because on one side you're talking about in your book about this formula. You have a very quantitative approach in many ways to leadership, which I find really fascinating. And then the other side, you also bring this up about leaders, you know, acting on the instincts. So I'm just curious, like, in your opinion, what do you think,

Starting point is 00:20:58 like how should leaders weigh, like the quantitative approach with, say, instincts? So what we like doing is just asking questions, and I don't want to make it seem like, wow, there's this huge quantitative model behind the scenes that's driving this. We asked some questions and ask people to do some very simple scoring to get them looking in the right place. So like I said, it's a two by two matrix. We want to get them to say, okay, you should be looking in the upper right corner or the lower left corner based on a few really simple answers. So we used to quantitative stuff just more to direct people on the type of situation they might be in. And then we very quickly shift over to the qualitative judgment-based

Starting point is 00:21:43 space where, okay, does this sound like the situation you're in? If it is, does it sound more like this or more like that? Are these the behaviors you're seeing or are those? And it really gets into stopping and thinking about the actual situation you're in, then that guiding the recommendations on here are the actions that you can take. In all cases, I think where, arguing against following that first instinct and saying, look, this type of assessment doesn't take long to do. It requires you to stop and think about a couple of dimensions in terms of what you're having to put into the individual and what you're getting out of them in terms of results. And just that momentary pause is enough to check potentially a bad instinct to keep you

Starting point is 00:22:29 from acting inappropriately in that situation and deploying the wrong leadership techniques. And instead that pause lets you say, okay, I need to do something different here, or the pause may well say, hey, I need to follow my instinct. My first instinct was correct. But again, we have that moment of validation where we're saying that's the approach to follow. I really like that point, because a lot of these leaders at the top level, they're very calm and they're extremely thoughtful. And I think that that's the thing that I know I have an appreciation for whenever I'm around a great leader is, like you said, they just, they take that pause, they think about it. they think about all the different variables, they think about all the different people that they could maybe access before they just get excited and don't act in a calm manner.

Starting point is 00:23:16 I don't know. I just find calm being such a key element to success in leadership. And I'm based on your comment, I'm assuming you agree with that, Mike. Absolutely. And there are very few situations where you have to spring into action with your cat-like reflexes. It's like, look, unless the building is on fire, it doesn't, you know, you can probably pause and think about it. And very few things require an answer within an hour or within even a day. When you're looking at some of these leadership decisions, you've got the time.

Starting point is 00:23:49 So it's a mistake to rush it. And instead, just spend a little bit of time thinking before you act. Yeah. Yeah, I love that. Okay. So our audience is obviously really interested in investing. And so one of the things that we did on our Buffett's books website is we were talking about these four rules that Warren Buffett has and measuring the leadership as being one of those key rules that he has. And what we did on the site, and this might not be the way you would maybe do it.

Starting point is 00:24:16 And that's why I'm bringing up this question is we use the key ratios more from like an accounting and from an analytical standpoint to say if you see these stable results with the current ratio, with the debt to equity and you see a company over the past 10 years that really kind of. of manage their finance as well. There's probably good leadership sitting behind that. But I was really curious to know kind of what your opinion, as an outsider, somebody that doesn't own this controlling share in a publicly traded company, what can you really do as an investor to say, there's great leadership behind that company? What are those things that you're looking for? So for me, it ends up being about the way you talk about the business and the way you

Starting point is 00:24:57 think about the business. So I could very easily see a company that is churning out great financial results that has horrible leadership. And this goes to your investing time frame as well. But I've been in organizations where people just beat the numbers out of their teams. And eventually the team leaves and you have turnover and eventually the business hits that point where it runs into a crisis and they fall apart because they don't have good leaders. And have been in other organizations that drive the same exact race.

Starting point is 00:25:29 but they're leading very differently. They're treating their teams differently. They're empowering people. They're making the right investment decisions in terms of investing in their people, investing in their time. So I think it can be really dangerous to just look at those financial metrics and equate it to good or bad leadership. I think there's correlation, not necessarily causality.

Starting point is 00:25:52 So for me, I'd much rather get into, you know, if I had a chance to talk to management and even if you can't talk to management, a proxy is just reading their earnings releases and listening to their earnings calls and listening to how they talk about their people and the actions that they're taking and the way they're thinking about investing in the business. So for me, running a training firm,

Starting point is 00:26:14 you know, one of the best examples I can use to illustrate this point is I have some clients who say, hey, we're all set to do the training. And then I get a phone call a few weeks later and they say, hey, we need to defer the training for, three months because we're going to make our numbers for this quarter. And I kind of scratched my head going, wait a minute. So the training has a positive ROI, correct? And the answer is yes. And now you're telling me you're going to defer that investment because of some arbitrary number that's out there

Starting point is 00:26:45 set by someone on Wall Street. So you're letting outsiders run your investment decisions in terms of improving your people. And instead you're going to defer a positive investment by three months, six months, nine months, however long, the organization, and I would say that's management. That's not leadership, right? You're letting the numbers drive your business decisions. As opposed to organizations that say, hey, we know that we get a return on this investment. We're going to invest in our people now. We understand there's negative effects, quote unquote, from a budget standpoint. We're going to be over on our budget on our spend, but it was a positive investment to make. So it really ends up being that mindset of how are you,

Starting point is 00:27:26 you thinking about investing in your people? How are you thinking about growing the capabilities of the organization? And where you see organizations, and I've seen this so many times with our clients over the years, when, for example, we had one client got bought out by a private equity firm. The first thing they did was got the training budget. They said basically, no one's getting trained for the next three years. And we immediately, right? We immediately walked away from that organization. Now, the financial results were like amazing. Gee, I wonder why. But over, you know, that three year period, so much talent left the organization.

Starting point is 00:28:04 Now, that private equity firm didn't care because they were going to flip the company in two and a half to three years. So their investment horizon, they made absolutely the right financial decisions. But I'd submit that was management and really poor leadership. They lost so much talent from that organization long term. So this is, these are the risks. I think of just looking at things purely on a quantitative basis. And instead you've got to look at what are the individual decisions they're making related to their people. Well, I think you gave a huge nugget there because what you're really getting at is when you see a business's leadership turnover, that can be a good thing or that can be a bad thing.

Starting point is 00:28:41 And I think a lot of people as investors, especially as an outside investor that has no controlling piece in this, when that management takes that turn, you've really got to keep your head on a swivel as to what kind of changes are they coming in? and doing and what are they disrupting? If their numbers are really good, that should be maybe some red flags. What are they compromising? What did they do to knock this thing out of balance in order to make those numbers so good, so fast? And what are they going to compromise on the tail end of that in the long run because they made those decisions?

Starting point is 00:29:12 And that is a really fantastic point. I love that. Yeah. If you can actually get deep enough into their financials and you can pull up their year over year training per associate spend. You know, just look at total number of employees. You look at the dollars that they're dedicating towards training and development and assuming they haven't changed any of their accounting principles or how they're

Starting point is 00:29:34 allocating stuff. If all of a sudden you see that training investment drop precipitously, you know exactly where they're pulling it from. And I will tell you exactly what's going to happen is your best people are going to leave that company. The poor ones are going to stick around because they don't have alternatives. and the good ones are going to go elsewhere because they want to go and go work at companies that are going to invest in their careers, in their developments.

Starting point is 00:29:58 So short term, it's going to be awesome. But in the three to five year horizon, you're going to hit the wall. Well, I think that's a really neat metric you're talking about, Mike. So you're looking at how much they invests per employee. So as a stock investor, and I never ever thought about using this metric. So that's definitely helpful for me. I'm just curious, which other metrics could I look at? So I think the, you know, if you get access to any sort of promotion data or hiring data that they've got in terms of associates that they're bringing in versus attrition, if they are willing to share any sort of voluntary attrition versus layoffs, right?

Starting point is 00:30:40 And maybe you look at that is what's the population of the company been and has that been affected by layoffs or has it been just attrition, right? So it's very different when you shut down a division of a thousand people and the associate base is a thousand less than it was last year. Or if there have been no layoffs and the associate base is a thousand associates less than last year, you may have a flight to quality of those higher potential individuals going somewhere else. And that ends up being the canary in the coal mine that things are not going well and your talented people are departing of their own volition. Mike, could you tell us an entertaining personal story could be either good or bad of how you increase your output as a leader by optimizing your interactions with key performers? So I've got one individual who I am an executive coach for, and he was lamenting how little time he had to spend with his team. He said, I'm just crushed. I have zero time in the day to

Starting point is 00:31:40 work with my team. And when we talked about what he was doing, some of the activities he was performing were tasks that members of his team should have been doing instead. And when we got into it a little bit more, I understood he was putting a lot of time into this stuff. So he's making a big leadership capital investment in these people. And essentially, what he was doing was work that should have been delegated or that he should have been forcing them to do rather than letting them dump it on his desk. And when we talk through that tradeoff, he said, well, I don't have time to train them. It's just much easier for me to just do it rather than have to correct all the mistakes that I know they're going to make if they do it. And I said, okay, that makes

Starting point is 00:32:23 sense today. That makes sense for today's workload. But what about over the course of three months, six months, nine months? How much time are you going to spend doing their work for them instead of the time to train them to do it properly and to force them to do their work by coaching them and developing them. And that was sort of his epiphany moment that said, I'm misallocating my leadership capital because I'm doing work. I shouldn't. I need to wean them from my support. And it's going to be painful and they're going to complain. And they're going to be mad at me for me. You know, I'm making them do all this extra work, even though it's their work. But ultimately, once he was able to wean them, he freed up a bunch of his time that he could invest in other people and get a higher return on that

Starting point is 00:33:05 investment because he was training people or spending more time with his star performers and getting them to the next level of performance. And it was just really fascinating. The insight that came from, do you understand the investment that you're making in these people? And he really didn't appreciate that. But once he changed how he was investing, all of a sudden, there was all this extra time that he had. And he was able to do some awesome stuff with it by deploying that time differently. I love how you're talking about the time element because that's really the most precious asset that every single person has, whether it's a leader or you look at the time of your subordinates, and optimizing that and just becoming more fruitful in that little time that you have every single day to make a difference is just so important. And so I guess the question I got for you, Mike, is in your book, you're really talking about how to optimize the time of your subordinates. but as a leader, if you could just name three things that you really think are just so important

Starting point is 00:34:04 for a leader to really become better at what they do, better at managing their people, what three things would you say that people should really focus on to get a lot of value added into their own leadership style? So I think one of the first things is you're not just looking at optimizing the time of your subordinates. What we're really getting at is how you're optimizing your own time as a leader and being deliberate about how you spend it. So I think the most successful leaders out there understand their calendar, understand where they're spending their time and more importantly why they're spending it there.

Starting point is 00:34:35 So that's first and foremost. The second thing I'd encourage leaders to take away is really understanding the individual situation you're dealing with. So when Preston walks in my office with problem X, that's one type of situation. When Stig walks in with problem Y, it's going to be a very different situation and understanding the individual circumstances is going to allow you to be more effective as a leader to change performance in that very moment. I think the third thing is really understanding as a leader how people move in this matrix. So the matrix is not static. Somebody's positioning on it is not static. And understanding that when I hire somebody who is a square peg and they're a low performer and I'm investing a lot of time in them because I got to coach them and train them

Starting point is 00:35:25 and teach them, understanding that can be a really worthwhile investment because once they are trained and taught, you can spend less time on them. So you're reducing your investment and you're going to get better results out of them because they now have the skills. All of a sudden, that became a very high ROI investment. And really because you understood somebody's trajectory within the matrix and what it takes to get them to move to a different performance pattern or level of performance. So Mike, how do you evaluate this? Because you are talking a lot in your book and also here during the interview about how to move people's performance, perhaps also move them from the role that they're having in the team. Now, how much training should you put into and how much leadership capital should you put into an employee compared to perhaps letting them go?

Starting point is 00:36:17 Yeah. So for me, it's always a difficult tradeoff when you move somebody out of the organization and letting them go. For me personally, as long as somebody's trying and I'm seeing progress in terms of their results are improving or I'm having to invest less of my time in them. If I'm seeing that progress and I don't have a burning platform elsewhere that, gee, they're just not progressing fast enough. I'm going to keep them around and keep growing them and developing them because that's what the organization is paying me to do is to build better people and build better leaders on my team. Now, the point at which you do cut bait and we encourage people to look at moving somebody on, a lot of times it's a motivational issue where the person says, I'm just not going to try. It's like, well, I've given you a few months and you've decided you're not going to try.

Starting point is 00:37:05 So we're going to move you on. Sometimes moving somebody on is also a function of you've trained them for so long and it's just clear they're never going to pick up this skill. Therefore, you shouldn't just let them go, but instead find a more approach. role for them within the organization. Can you change their job responsibilities and put them in a role where they can be more successful? So, for example, I'm really, really good at teaching and training on the podium, but if you gave me exceedingly complex, you know, financial analysis to do, it's going to take me a little bit longer. So could you change my role from being the financial analyst to somebody who works in the training and development organization? So as long as you're seeing progress and that progress is at an acceptable rate, you hang on to them. And if they say, gee, I don't want to invest and work any harder, well, then it's time for you to go.

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Starting point is 00:41:20 This is a paid advertisement. All right. Back to the show. And I think another part that's important with what you're saying here, Mike, is if you're the type of leader that just wants to cut bait because the person, you're just really quick to let the person go. go, that sends a shockwave through the rest of the team that you might not necessarily be prepared for as a leader because everyone then is scared.

Starting point is 00:41:42 Everyone's like, I'm the next guy to go or you don't know what the third and fourth order effects are whenever you are just quick to remove this person or this individual that appears to really be a problem for you. So I really like that response. And I think that it's really thoughtful that you continue to try to work them through because that sends a message to the rest of your team. And that's what leadership is all about is building that cohesive team. So I really like that comment.

Starting point is 00:42:08 Yeah, nothing happens in a vacuum, right? And when you make a decision to fire someone or move them on, that's going to be scrutinized. And people will either say, gee, I'm next. And you can create that fear and hysteria. Sometimes you have to remember, if you don't move them on and you should have, people know that that person should be fired or moved to a different role. And if you're just going to tolerate it, well, those people are going to get frustrated, right, because they say, well, I'm performing. Why does that person get to stick around?

Starting point is 00:42:37 And honestly, some of the best leaders I've worked with have seen them take over teams, quickly do their assessment, identify the people who probably should move on. They then put in place a plan to say, I'm going to give this person a chance. I'm going to try to get them to improve. And if they don't see the improvement over an agreed upon and reasonable period of time and the person isn't trying, then they move them on and they get them out of the organization. And when you hear people say, oh, thank goodness, somebody finally did something about that problem, it's the sign of a strong leader being in that role that they stepped up and took action. And it's all about balance. I mean, what you're describing is that that fine balance. It's really hard for a lot of people that

Starting point is 00:43:16 are new into leadership is just you've got to find that happy medium between, hey, I'm not too aggressive, but at the same time, I'm being considered and I'm building a team. And it's really great. I mean, that's such awesome comments. I love this. Yeah, and that goes back to the like pause and think, right? You don't go in and just start firing people or replacing them. You pause, you think, you evaluate, and you take appropriate action for that particular situation. And that's why we were so passionate about writing the book because we give that kind of guidance as to what you do in each of those situations in very great detail. Mike, speaking about books, one of the questions we always like to ask a guest is, can you recommend one of your favorite books to the

Starting point is 00:44:00 audience that you think they can benefit from and why? So one book that I have always loved, and it's a very quick read. It's called The Obstacle is the Way. It's a quick read, and it's really about understanding adversity and how you react to it. And it goes back to stoicism in its earliest form, and a lot of it would remind you, Preston of time at our Rockbound Highland home at West. best point and how do you deal with adversity and what do you do when you're faced with these insurmountable challenges and how you react to them and the ability to turn adversity not just

Starting point is 00:44:41 into something that you get past but into something that builds you something that creates new opportunities for you it's a really fascinating read the first half of the book is really about case studies and folks who dealt with adversity and how they dealt with it but the real reason I fell in love with it was the second half of the book that says, here's how you can do that. Here's how you can apply those principles to other parts of your life. And personally, for example, in the past year and a half, I've had a couple of heart attacks, which wasn't fun. The first one was my fault because of some habits that I had fallen into.

Starting point is 00:45:17 The second one was not my fault because I had fixed all those habits. But in both cases, you look and say, wow, that's really debilitating stuff and that's a nasty the obstacle. And I've turned it into great interview topics with people. I've turned it into coaching sessions with some of the people I'm coaching to help them be healthier. I've turned it into keynote presentations. And it's just been something that has become an opportunity for me that most people would look and go, oh my gosh, why are you even happy about that? It's like, well, I learned something from it. And I turned it around. So the book is a great read that way to help people understand how to turn adversity into opportunity. I love it. Stig and I talk about

Starting point is 00:45:56 that a lot on the show is just sometimes the things that you think are the biggest detriments in your life end up being the biggest blessings in disguise. And it's really hard to see that when it's happening. I'm sure as you were experiencing the heart attack, the last thing you were thinking about is how this is going to be a good thing for my life. But as you look back at it and you see what emerged out of that, I love this take on this. I've never heard of this book, which is really exciting because Stig and I get a lot of the same books recommended to us via email and online and stuff. So it's really kind of cool. I'm

Starting point is 00:46:30 interested to look this up. But I love the point, Mike, and it's something that we definitely agree with you on. All right, Mike. So that's all we have. I want to give you the opportunity for our audience. If everyone out there wants to learn a little bit more about you in your book Lead Inside the Box, where can they find out more about you? So the book has a full dedicated website at lead inside the box.com. There's even an assessment on there for assessing how you're spending your leadership capital and the results that you're getting. And this back to leaders pausing for a moment, thinking about the situation. So the assessment takes all of five minutes. So that's a great resource. And then about my company itself, it's thought leaders,

Starting point is 00:47:11 LLC.com. And that's where we talk about leadership on a regular basis on our blog. We've been writing it for eight years now. A ton of great articles on there. And I really encourage folks to take a look there for some good resources. That sounds fantastic. And I know everybody out there is wanting to improve their leadership ability. So if you want to improve your own individual leadership skills, or if you want to learn how to assess management's leadership ability, if you're a stock investor, whatever the case might be, there's a lot to learn as you go there to the sites that Mike recommended. And Mike, thank you so much for coming on the show. This has been a, fantastic interview. We really enjoyed this.

Starting point is 00:47:49 It's my pleasure, and thank you very much for giving me the opportunity. You bet. Okay, so this is the point in the show where we take a question from a member of our audience, and this question comes from Jesse Colts. Hi, guys, this is Jesse Coltis calling from New York City, New York. I had a quick question about calculating intrinsic business value. From Warren Buffett's letters in your show, it's clear that Buffett is a fan of net present value calculations and even traces that theory back all the way to the theory of investment value by John Burr Williams. Calculating intrinsic business value is obviously at the center of Warren Buffett style value investing,

Starting point is 00:48:23 so it's a really important concept. I've also heard Monash Burrai lean on this concept heavily. At the same time, I've heard Monash Perbray say that he considers firing up Excel to be a bad sign for finding an investment, which I think he's using to convey the point that being too detailed can be a problem. You really want the numbers to smack you over the head when you know it's a good investment. That makes sense to me, but my question is, do you think typical value investors actually fire up Excel and complete discounted cash flow analysis to come to a precise number of intrinsic

Starting point is 00:48:56 business value? Or do they more or less put their finger in the air and estimate that number using rough metrics? Thanks very much. So, Jesse, I love this question. This is a question that everybody's interested in, and that's intrinsic value. So I'm going to throw this over to Stig first and see what he has to say, then I'll maybe piggyback on his comment. So, Jesse, I think the best way to really understand the framework of this is to listen to Warren Buffett himself. And he's talking about his purchase of Patriot China, which he did in spring 2002. And, you know, he said that he never asked anyone about, you know, their opinion on Patriot China. He said that after reading the annual report, he said it was approximately worth $100 billion and the market cap was $35 billion.

Starting point is 00:49:41 So, I mean, there you go. You don't need to do any finer math when it comes to that. He even says that if the market cap was $40 billion, he would probably need to refine the analysis. But what he also says is that he doesn't like to do an analysis with three decimal. I mean, that's simply not the way to do it. And basically what he's saying is that you need to have a margin of safety. No, more above it might not be right that it's worth $100 billion. It might only be worth $80 billion.

Starting point is 00:50:14 And another thing I really like about this, and this is a great reason we'll make sure to link to this also in the show note, is that he's saying, you know, if you can't make a value from the figures, you should probably go on to the next stock pick. And I think that's another good part. And like if you read the end report and you have no clue what the company is worth, it's probably not a type of company that you should evaluate. So how did that investment turn out for him? Well, you know, fantastic. I mean, he invested $488 million and he sold that stake in 2007 for $4 billion. So that's actually like eight times his initial investment. I mean, that's huge.

Starting point is 00:50:59 And that's not to say that. And so there's a perfect example that Stig gave you where, you know, Buffett made the calculation. It came out to be a good calculation and what he thought was going to happen actually. actually did. Now, he does have other picks that he thought we're going to materialize into the intrinsic value and they moved away from him. But in aggregate, he has obviously been doing these calculations for a reason and they've worked for him for 50 years plus. So there's something to this. Now, the thing that I really liked about your question is you referenced John Burr Williams. And John Burr Williams, I read his book, The Theory of Investment Value. And this is, this book

Starting point is 00:51:34 was really amazing because this book was written back, I believe it was written back in the 1930s. And he wrote his doctorate thesis at Harvard. And the thing that's really fascinating is in this book, he talks about the value, basically calculating the intrinsic value. And Buffett has also read this book that John Burr Williams wrote. And really what John Burr Williams taught was how to do a discount cash flow analysis. That's what he's really teaching in this book. Now, when you read the book, it is highly mathematical, very involved. There's a lot of calculations in there.

Starting point is 00:52:06 So I think what your question's really getting at is, is Buffett and these other guys that are calculating intrinsic value? Are they really getting that far down into the math when they're calculating the potential value of the business? I would argue that they're not. I don't think that they are. I know I'm not personally doing that whenever I'm calculating the value of a business. But what I am doing is I am doing a discount cash flow model. In fact, on Buffett's Books.com, we have our calculator that I personally use for individual stock picks.

Starting point is 00:52:34 And that is, and the page that I use is the discount cash flow calculator. So we'll have a link to that in the show notes of this episode. If you're interested in checking that out and using it, we have a video that goes with it so I can show you how I go through, how I look at what the free cash flow of the business is, how I discount it back to today's value so that it matches the current market price and I can see what the yield is. I do that for any individual pick. Whenever I'm investing in an index, I am not doing that.

Starting point is 00:53:00 I'm really just kind of looking at the P.E ratio and taking the inverse to figure out what I think the yield might be based on the current market prices. But I think that any real hardcore value investor out there is definitely doing a discount cash flow analysis that try to determine what they think the value of the business is. And I think if you're not doing that, I really think that you are potentially jeopardizing and assuming some risk by not knowing what you think the value of the company is worth. And I'm definitely positive that Pabra is doing the same thing. Now, he might not fire up Excel, but he's probably smarter than Preston Nye, so he can probably do that in his head. And I know that Warren Buffett said something like he can do an intrinsic value calculation like five or ten seconds, but basically he's doing the same thing.

Starting point is 00:53:44 And I think that especially if you're a beginner in investing, I think it's really, really good to use a calculator, especially in the beginning to see like if you're on the right path. But clearly, if you're evaluating a bunch of stocks, no, just really to figuring out where you should put your focus, I'm pretty sure that pretty soon you would come up with a rule of thumb of where to look. Yeah. When you look at enough companies and you see what the free cash flow is and when you can see what it's trading for, it's kind of a quick, it's kind of a quick analysis whenever

Starting point is 00:54:18 you get onto it and you've looked at quite a few companies. But I think for the person that out there that's just starting out, that might sound like, how is that even possible? But that's because a lot of people really haven't put in some hardcore assessments and have done it for years. And that's why those guys have those quotes where they say, I can do the intrinsic value in a matter of a minute. You know, that's how they can do it is because they've done it so many times.

Starting point is 00:54:42 All right. So, Jesse, we love this question. This was a fantastic question. We're going to send you a free signed copy of our book, the Warren Buffett Accounting book. And for anybody else out there, if you're like Jesse and you want to get your question played on the show, go to asktheinvestors.com, and you can record your question there. So we've really enjoyed having Mike on the show.

Starting point is 00:55:00 He gave us some fantastic tips on how to become a better leader, how to find management in your investments that is going to continue to provide value to you as an investor. And we're just really thankful for him to come on the show. Make sure you check out his book, Lead Inside the Box. And for anybody else out there, if you forget the title or whatever, go to our show notes and we'll have all the links there so you can quickly access them. So we just want to thank everyone in our audience for listening. If you have time, please go to iTunes, leave us a review.

Starting point is 00:55:27 That helps us out tremendously. And we really appreciate when people do that. But that's all we have for you guys this week. and we hope you guys have a fantastic week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.com. Submit your questions or request a guest appearance to The Investors Podcast

Starting point is 00:55:49 by going to www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 045 : Leadership You Can Invest In (Investing Podcast)

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