10 Lessons From 10 Years In the Trenches
Tuesday was a special day for us at Strategas. It marked our 10th anniversary as a company, when five of us left good jobs at a great company to try our own hand at navigating the rocky shoals of entrepreneurship. We have many miles to go before we sleep, and the competitive nature of the industry ensures that we never forget Andy Grove's admonition that only the paranoid survive. Still we've learned a few lessons along the way that we thought might be worth sharing:
1. The Partnership Structure is the Best Risk Model Yet Created. The famed founder of Drexel Burnham Lambert Tubby Burnham famously said about his equity "the more I give away the more I make." As the managing partner, that approach takes, frankly, a lot of guts and trust. But I am more convinced than ever before that lashing the financial fortunes of talented people with the same values and complementary skills together leads to far better investment conclusions and management decisions than one would be able to make alone. Perhaps, even more important, a good partnership helps to avoid mistakes that put the entire enterprise at risk. One wonders whether the global financial crisis could have been avoided if Wall Street firms remained partnerships focused on being fiduciaries rather than becoming public companies with "permanent" capital. People behave a bit differently with their own money.
2. Establish the Culture of the Firm Before It Starts. The fact that we have made plenty of mistakes but none of them have yet proved to be fatal can largely be attributed to the fact that we created our Management and Research principles as well as our motto - bonitas (class), probitas (integrity), fides (faith) -before we opened our doors for business. These principles have served as a Constitution of sorts, helping us to create a consistent culture and to never forget what, ultimately, it was we were trying to achieve. If you don't know those things before you start any venture, being an entrepreneur can be an extremely expensive way to find out.
3. Incentives Are Everything. While Joe Stiglitz and other intellectuals are now openly questioning the neoliberal school of economics from which they so greatly benefitted, it strikes me that few of these types have ever signed the front side of a paycheck. Ten years in business has taught all of us that people do almost precisely what they are incentivized to do. Get the incentives right, and wonderful outcomes will follow that require little management oversight. Get them wrong, and people will give you exactly what you asked for regardless of whether it's in the long-term interest of the company. Even if there were someone smart enough to try to "fix" this universally human reality (and I sincerely doubt such a person exists here on Earth), management would find their time much more efficiently allocated to creating the correct incentives in the first place.
4. "People Pay People." This chestnut is directly attributable to our old boss Ed Hyman, the best sell-side analyst of all-time. His point was that when it comes to gaining market share in a highly competitive industry the relationships one builds with clients are equally as important as the quality of one's product. Human beings are social animals and long term success in the financial markets requires an understanding of both mathematics and the social sciences. What differentiates research from information and opinion is the ability to understand and meet the needs of your clients through frequent contact and discussion. As Maya Angelou once observed "people may forget what you do, they may forget what you say, but they'll never forget how you make them feel."
5. Costs Are Easier To Predict than Revenues. This may seem to be a completely irrelevant and Victorian notion to a start-up flush with venture capital cash, but when it's your own dough, it's pretty important to remember that the only thing one can forecast with any precision are costs. Our mentor and friend, Jim Moltz, former (and current!) Chairman of C.J. Lawrence told us this before we opened our doors and urged us to keep as many of our costs as variable as possible. We've never forgotten it and make every effort to avoid "the creep" of expenses and attitudes about profitability that can prove to be fatal for any company.
6. Hire Slowly, Make Personnel Changes Quickly. We started with five people in Pulse Trading's conference room on 48th and Third. We're now pushing 60 colleagues in offices in New York, Washington, D.C., and Columbus, Ohio. We've had the great fortune to work with many talented people throughout the years and many of them, thank goodness, are still with us to this day. Our hiring process was largely derivative of what was so common at large investment banks in the 80s and 90s. Candidates would come in a few times, meet a lot of people, and then be evaluated largely by how much we liked them. After a while, it became obvious that many of our hiring successes could largely be attributed to chance. As a small company with variable hiring needs and limited resources, we had to find a better way. The result was a far-more serious and well-thought out process to determine who might and might not succeed. We still make mistakes, but we are quick to correct them with humanity and empathy when they occur. In the end, it is far better for the individual involved and the organization to move on.
7. Eliminating Tax Withholding Would Solve our Debt Problem in Five Years. It was difficult to get accustomed to being without the niceties afforded to associates at a large firm, but the greatest adjustment, I found in transitioning from an employee to owner, was my quarterly ritual of paying my estimated taxes rather than having my taxes withheld from my paycheck. (And I was then, and remain, a committed supply sider.) Believe it or not, there was no consistent and permanent income tax in the United States until 1913 and the practice of withholding wasn't introduced until World War II when the cash flow needs of the country skyrocketed. Milton Friedman worked at the Treasury Department during the war and was instrumental in introducing the practice. He claimed that the perpetuation of withholding taxes in peace time was among his great regrets, for it makes the process of paying taxes painless and invisible, providing little check on government spending. If everyone had to write a check for what they owe the government every quarter, I sincerely doubt that Washington would be among the most prosperous cities in the country today.
8. Ignore Status, Focus on Achievement. For those who work in the financial services industry in New York, it can be difficult to avoid the siren song of gossip of who's up, who's down, and who just bought a beach house. "Comparison," as Teddy Roosevelt once observed, "is the thief of joy." That is especially true in an industry with more bullshit artists per capita than any other. It is important to be aware of the fortunes of your competitors but it should rarely be the overriding focus of the strategic vision of your company. Focus on servicing the needs of the clients and good things will happen. At one point, we opened up an office in Geneva. It sounded great and looked even better on our stationary. It proved to be an ill-fated venture. On the other hand, we bought a small company (John Schoger's Voyager) and now have an office in Columbus, Ohio. The casual visitor will never confuse Geneva with Columbus, Ohio. But the work the office does is of incredible value to our clients. Ultimately, of course, that's all that matters.
9. Nothing Fun Ever Happens After the Phrase "Hey, gotta minute?" I must admit that there have been times in the course of running this company that I wished I could treat it like nursery school and have everyone lay their heads on their desks for a half-hour. With highly motivated and talented people that is, of course, pure fantasy. Good people are ambitious, are always looking for greater opportunities professionally and financially, and are infrequently shy about letting you know about it. Creating the right balance between current needs and future opportunities is tough and must be met, however difficult it may be, with patience. A corollary to the lesson above is Nothing Good Happens When You Get a Call From Nick on the Road. As our President and Chief Operating Officer, Nick deals with the day-to-day drama in the office. At various times, a call from Nick on the road has meant the loss of a key employee, the discovery of someone on our team doing something stupid, or other unexpected bad news. People sometimes wonder why I have a blood pressure monitor on my desk and keep Rosary beads in my suit pocket. Serenity now!
10. "Love all, trust a few, and do harm to none." The older I get the more I realize that this is great advice for business and for life. You can always count on Shakespeare - All's Well That Ends Well. Disagreements and tense moments between any firm and its clients, staff, vendors, and competitors are a natural part of human commerce. With big egos and, at times, big money on the line, it is easy to blow these events out of proportion and, at times, hold grudges. This is, naturally, a waste of time. I don't know what it is about us as people that lead us to focus far more on the few people that have let us down than on the far greater number that have come through. I do know that like all great temptations, it is human weakness. Life is hard enough without enemies.
Sempre avanti, forti e uniti,
Jason DeSena Trennert
& My Partners:
Nicholas Bohnsack
Don Rissmiller
Dan Clifton
Chris Verrone
Eileen Gabay
Larry Castellani
John Ghize
Aaron Long
