If you’ve never heard the name Samuel Hinkie, you’re not alone. Until recently (April 6th, 2016), Sam Hinkie was the General Manager for the NBA franchise, the Philidelphia 76ers. His resignation is no doubt correlated to the team’s lackluster performance: currently the worst in the league at 10 – 71. While the 76ers are having a poor season, Sam Hinkie’s letter of resignation to the franchise equity holders is nothing but All-Star material. Surprisingly, Sam is evidently a huge fan of value investing, as his remarks include quotes from Warren Buffett, Charlie Munger, Seth Klarman, and Howard Marks among others. In our recent post on the practice of portfolio management, I wrote about some of the overlapping qualities between the worlds of practicing medicine and finance. Sam Hinkie’s letter is yet another real-life example of someone applying value investing principles to a field far removed from investing. Yet in reading Sam’s letter, you can’t help but note how many similar ideas these two fields share. So without further ado, let’s explore some of the key takeaways from Sam’s resignation.
The first and most obvious reason for Sam’s decision to step down is his team’s current performance. But it sure will be interesting to watch the 76ers’ record over the next few years, to see if some of Sam’s long-term moves play out. On explaining the lack of short-term performance, Sam quotes Abraham Lincoln, who famously said, “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” Alluding to the fact that perhaps his strategy was still in preparation mode, could it be that the 76ers’ axe is still in the process of being sharpened? Only time will tell. But this definitely echoes the value investor, François Rochon’s comment that, “You won’t get much of a garden, if you remove a tree after six months because it hasn’t grown fast enough.” It’s at this point that Sam turns the focus back on himself, quoting another investor who decided to end his own partnership: Warren Buffett. Referring to the 1969 dissolving of the Buffett Partnerships, Sam cites:
His reason: market conditions were such that he no longer had the requisite confidence that he could make good decisions on behalf of the investors and deliver on his commitments to them. So he would stop investing on their behalf. ‘I am not attuned to this environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.’
In stepping down, Sam is humbly admitting that he might not know what’s best for the team, and it’s worth it to himself to preserve what’s left of his reputation, rather than forcing short-term results in a turbulent environment. Such acute awareness is essential in investing, because this helps you set realistic expectations for yourself. The Co-Chairman of Oaktree Capital Management, and author of the must-read value investing book, The Most Important Thing, Howard Marks has talked about this very idea. On knowing your environment, Howard comments:
That means we’re in a low return environment and one of the things I believe is that we must understand the environment we’re in. Understand the ramifications and accept it in the sense of accept the reality. One of the hardest things is to make high returns in a low return world. If you insist on doing so, you can get into trouble.
(Watch the full conversation in The Manual of Ideas Members Area.)
As the letter goes on, Sam shares his thoughts about learning from his mistakes and the importance of “cross pollinating ideas”, something that Latticework strives to promote. In addition, he quotes Warren Buffett’s partner, Charlie Munger and his thoughts about rational decision making:
Whenever possible, I think cross pollinating ideas from other contexts is far, far better than attempting to solve our problems in basketball as if no one has ever faced anything similar. Accordingly, this approach comes from a frequent search into behavioral economics, cognitive science, and a lot of observation and trial and error over my 11 years in the NBA. And mistakes. Lots and lots of mistakes. To begin, let’s stand on the shoulders of Charlie Munger, a giant to me. He is a man that’s been thinking about thinking longer than I’ve been alive. Let’s start with him and his approach. His two-part technique is: 1. First, what are the factors that really govern the interests involved, rationally considered? 2. Second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things—which by and large are useful, but which often malfunctions?
In short, Sam is making the point that to make effective long-term decisions requires that you, “Divorce process from outcome.” If that were the only nugget of wisdom from Sam’s letter, it would still have been a good one. But luckily for us, there’s much much more. There’s a section on the importance of intellectual humility, something investors are forced to confront more often than they’d like to admit. Here’s what Sam has to share on that:
Lifelong learning is where it’s at. To walk down that path requires a deep-seated humility about a) what’s knowable, and b) what each of us know. We hire for this aggressively. We celebrate this internally. And we’ve been known to punish when we find it woefully lacking. 3 We talk a great deal about being curious, not critical. About asking the question until you understand something truly. About not being afraid to ask the obvious question that everyone else seems to know the answer to. And about the willingness to say three simple words, “I don’t know.”
Admitting you don’t know is the first step to real discovery. Thus, it’s no surprise then that the next few famous figures Sam quotes are prominent scientists. First, there’s the Tesla, SpaceX, and SolarCity CEO, Elon Musk. “Tesla’s Elon Musk describes his everyday stance as, ‘You should take the approach that you’re wrong. Your goal is to be less wrong.’ Then, there’s the late great, James Clerk Maxwell whose position was, “Thoroughly conscious ignorance—the prelude to every real advance in science.” Taking an intellectually humble stance is not a sign of weakness, rather, accepting the possibility of being wrong maintains an open and growing, mind.
One of the best ways to do this, Sam writes, is to keep a decision journal. “Write in your own words what you think will happen and why before a decision. Refer back to it later.” This is not unlike the idea of keeping an investment checklist, that contain fatal past mistakes. That way, it’s not someone else’s warnings, but your own, that will caution future slip-ups. Finally, Sam quotes Charlie Munger again, about another type of error, this idea of being right, but not right enough.
The other reason to keep track yourself is you’re often the only one to see the most insidious type of errors, the ones the narrative generating parts of our lizard brains storytell their way around—errors of omission. You don’t have a wobbly understanding of just the things you got wrong, but the things you got right but not right enough. Listen to Charlie Munger talk about how he and Berkshire Hathaway should be measured not by their success, but by how much more successful they would have been if they bought more of something: “We should have bought more Coke.”
All of Sam’s thoughts about decision making seem to echo the principles of value investing and rational thinking. But as I noted earlier, even the best decisions need an appropriate amount of time to play out. Certainly when you’re being evaluated for your wins and losses, much like investors are measured for their returns, you’re only allotted a certain window before stakeholders expect to see results. Sam might not have been given as long of runway as his thesis needed, but he does acknowledge and discuss the importance of taking such forward looking positions.
Jeff Bezos says that if Amazon has a good quarter it’s because of work they did 3, 4, 5 years ago—not because they did a good job that quarter. Today’s league-leading Golden State Warriors acquired Draymond Green, Andrew Bogut, and Klay Thompson almost 4 years ago, nearly 4 years ago exactly, and almost 5 years ago. In this league, the long view picks at the lock of mediocrity.
Spotting undervalued talent, which in time will mature to its market value, sounds remarkably like value investing. There’s no doubt about it that this is something Sam brought to the 76ers. And, as most value investors know, when you find an undervalued asset, you inherently take a contrarian opinion. Otherwise, the security wouldn’t seem “undervalued”. To capitalize on this contrarian stance, Sam quotes Howard Marks and his ideas from The Most Important Thing:
Howard Marks describes this as a necessary condition of great performance: you have to be non-consensus and right. Both. That means you have to find some way to have a differentiated viewpoint from the masses. And it needs to be right. Anything less won’t work.
Whether or not Sam turns out to be right with his contrarian picks for the 76ers, it’s clear that he understood another very important rule with taking such a position; that is, being comfortable with the uncertainty. In the final few paragraphs you can see that Sam is torn, both sad, but at peace with his decision to let go of the team he’s invested in so heavily. Once again we allude to the idea of a team or portfolio as a kind of farm, which requires much work before the harvesting of rewards. But as Sam writes, that’s all part of the game.
In some decisions, the uncertainties are savage. You have to find a way to get comfortable with that range of outcomes. If you can’t, you’re forced to live with many fewer options to choose amongst which leads over the long term to lesser and lesser outcomes. The illusion of control is an opiate, though. Nonetheless, it is annoyingly necessary to get comfortable with many grades of maybe.
It’s clear now that I won’t see the harvest of the seeds we planted. That’s OK. Life’s like that. Many of my NBA friends cautioned me against the kind of seed sowing that felt appropriate given the circumstances for exactly this reason. But this particular situation made it all the more necessary, though. Part of the reason to reject fear and plow on was exactly because fear had been the dominant motivator of the actions of too many for too long. I will be repotted professionally.
While Sam’s career as a NBA General Manager may be over for now, it’s clear that he’s well equipped with the wisdom to succeed in whatever endeavour he decides to pursue next. There’s almost a striking amount of overlapping ideas between the seemingly unrelated fields of investing and managing a basketball team. But the more discoveries like this the author makes, the more I suspect that there’s some underlying core latticework principles that are fundamental, in that they work regardless of the field they’re applied to. Sam Hinkie’s resignation letter serves as a wonderful reminder of this, and that even in the darkest times, any situation can be examined for learning opportunities. I’m not the biggest NBA fan out there, but I’ll definitely be keeping my eye on the performance of the 76ers over the next couple of seasons. I salute Sam for writing such an insightful and graceful goodbye, and encourage you all to read the full 13-page note yourself.