In Pixar’s wonderful film Up, the main characters find themselves amongst dogs who have collars that translate their thoughts into English. The thoroughly insightful dog Doug explains then explains to them how “his name is Doug” and he has “a good and smart master who made this collar so I can talk” and then “SQUIRREL!”
Doug immediately loses track of what he’s talking about and stares off camera at the squirrel for several seconds before returning his attention to our protagonists. And this joke is repeated throughout the movie to great effect.
Unfortunately, many real estate investors and other business owners might as well be yelling “SQUIRREL!” at every perceived opportunity that crosses their desks. This is the dreaded Shiny Object Syndrome, which has sunk many a great investor.
For example, while we have been fortunate enough to be successful in real estate investment, we have also drifted off course from time to time. One time we bought several semi-trucks to open a small trucking business on the side, despite having almost no knowledge of the business. And of course, it failed miserably. One real estate investor I knew decided to open a car wash out of the blue. It didn’t work.
Related: One Proven Piece of Advice to Improve All Your Investing Decisions (The Buffett Series)
Indeed, I’ve seen real estate investors move from one investment class to another to another without ever planting a firm foundation in one niche (you know, where the riches are). These investors always seem to be doing something interesting that makes for great conversation, but they also tend to do little more than tread water, financially speaking.
All too often, those perceived opportunities are little more than distractions. Doing the same thing over and over again may sound boring, but it can sure be effective.
Great Companies Avoid Shiny Objects
There’s a lot of empirical evidence that dabbling in many different areas is less effective than focusing on one. In Jim Collins’ most famous book, Good to Great, he looked at 11 companies whose stocks performed at or below the market for 15 years before a transition, which saw them beat the market for 15 consecutive years by at least a factor of three. He then compared them to 11 similar companies that made no such transition. One of his team’s key discoveries was what he phrased “The Hedgehog Concept.” The term comes from Isaiah Berlin’s essay, “The Hedgehog and the Fox.” As Collins describes it,
“The fox knows many things, but the hedgehog knows one big thing… Berlin extrapolated from this little parable to divide people into two basic groups: foxes and hedgehogs. Foxes pursue many ends at the same time and see the world in all its complexity. They are “scattered or diffuse, moving on many levels”… never integrating their thinking into one overall concept or unifying vision. Hedgehogs, on the other hand, simplify a complex world into a single organizing idea, a basic principle or concept that unifies and guides everything.” (Good to Great, pg. 90-91)
To put it simply, the great companies Collin’s studied implemented The Hedgehog Concept, whereas the comparison companies acted like foxes. For example, Walgreen’s (a hedgehog) drove fanatically to create convenient drugstores and nothing more. They went so far as to close down a Walgreen’s store in a good location and open a new store “if a great corner location would open up just half a block away” since corner lots allowed customers to “enter and exit from multiple directions” (pg. 92), and were thereby the most convenient.
The comparison company to Walgreen’s was Eckerd, who by contract, “…compulsively leapt at opportunities to acquire clumps of stores – forty two units here, thirty six there, in hodgepodge fashion with no obvious unifying theme” (pg. 93), while also throwing itself into the home video market and other industries. Walgreen’s flourished, while Eckerd floundered.
Indeed, in my previous article that recommended expanding at a slow and deliberate pace, I referred to Bank of America in the 1980’s, which diversified and expanded at a break neck speed, only to wind up with “…some of the largest losses up to that point in banking history” (How the Mighty Fall). In that article, I highlighted the foolishness of the speed at which they expanded. And while that’s true, the problem also included the variety of different things they were trying to do all at the same time. Bank of America expanded too quickly and in too many directions.
Collins found that companies that stagnated diversified and expanded on a whim, whereas those that succeeded pursued growth in the intersection of a Venn diagram with three circles including:
1. What you are deeply passionate about,
2. What you can be the best in the world at, and
3. What drives your economic engine (pg. 96).
Great Business Leaders & Investors Avoid Shiny Objects
I’ve seen this process repeated over and over again. John Maxwell discusses the same thing in his book The 21 Irrefutable Laws of Leadership. Rule 17 is the Rule of Prioritization, and he notes how Jack Welch took GE to unprecedented heights when he made the company focus on what it was best at, rather than dabble in a little bit of everything. As Maxwell notes,
“When Welch assumed leadership of GE in 1981, it was a good company. It had a ninety year history, the company stock traded at $4 per share, and the company was worth about $12 billion, eleventh best on the stock market. It was a huge, diverse company that included 350 strategic businesses. But Welch believed the company could become better. What was his strategy? He used the Law of Priorities.” (The 21 Irrefutable Laws of Leadership, pg. 181-182)
Jack Welch summed up his approach as follows,
“To the hundreds of businesses and product lines that made up the company, we applied a single criterion: can they be number 1 or number 2 …read more