Three Simple heuristics

A heuristic is defined as a process or a method.  I have a few simple heuristics I've employed throughout life, and especially in investing.  The results from these heuristics aren't ironclad, but they have pointed me in the general direction more often than they've failed me.  They're simple things to keep in mind that get you in the ball park of reality quickly without doing much work.

How to tell if someone has money

There is a verse in the Bible that says "where your treasure is, there your heart will be also".  I've come to realize that this saying is one of the best litmus tests to whether a person is wealthy verses just living the high life.

In modern culture if someone lives well, that is they have all of the trappings of wealth people tend to presume that there is real wealth to back it.  This myth was laid bare during the financial crisis.  A lot of people who had all nice things were really just highly levered.

The litmus test is this: when people find out I am involved in investing it elicits one of two responses.  Those with wealth immediately start to talk about investing, they want to know what opportunities I've found or what things I look at.  Those without wealth nod and move onto something more interesting.

The results of this have been fascinating.  We have family friends who live very large.  We've known them for years and yet never a peep about investing.  On the other hand I was at the doctor's office recently and got into a discussion with a technician on how to buy large plots of land, subdivide and resell.  He had quite a property business on the side.

When a person is concerned about investing, business, or preserving money it's a sign that they have money.  Usually all it takes is a mention of one of these things to get a wealthy person to open up about it.  Why?  If you have money you are always on the lookout for other opportunities, and one never knows where an opportunity might come from.

Determine how well a company pays employees

In the age of Glassdoor.com this heuristic isn't as important if a company's employees self-report their salaries.  But it's very telling for companies that are too small for Glassdoor.

Consider a typical American office.  Everyone wears similar dress clothes, works in similar spaces with company supplied material and in many ways are undifferentiated from each other.  Status is granted via titles and corner offices.  But while everyone appears similar their pay might not be.  And while employees across different industries might look and talk the same their pay levels are definitely different.

I've heard it said that buying a nice car is pointless because the only people you're impressing are other drivers you don't know.  This is partially true, and partially incorrect.  As mentioned above most Americans use vehicles and houses to signal their level of prosperity.  I get that there are value investors still wearing their best JC Penny suit from 1984, driving a Datsun and eating mac and cheese for dinner while sitting on millions.  But they are the exception.  For everyone else a raise means they can afford a slightly better car, or a slightly better house.

It's hard to show off your house to your friends.  You can't take it with you, and not everyone is comfortable having friends or strangers over to their house for a party.  The same isn't true for a car.  A car can be shown off by simply driving around.  No one needs to sit in it with you, they can see how nice it is from outside.

My litmus test is this: a company's compensation level can be determined by looking at the cars in the employee parking lot.  Because people tend to want to purchase the most car for their monthly payment the average car is indicative of the average pay.


The posters speak the truth!

Walk down the hall of any company and you'll be confronted with posters.  Sometimes the posters have themes such as "Integrity" or "Ethics" or "Quality".  Let me ask a rhetorical question, do you think Apple has signs in their hallways "Quality Counts!" or "We Build Awesome Products Here"?  No, because Apple employees already know they build high quality products.  It's their nature, it's what they do.  But let me ask, do you think Samsung has posters like that hanging now?

There is almost an infinite set of qualities that are 'good'.  When people embody these qualities they don't need to be reminded to embody them, they already have them.  People need to be reminded about the things they aren't good at, or the things that need improvement.  This is the same with companies.

When I visit a company their signs and corporate material highlight the company's weaknesses, not their strengths.  Pay attention to these things.  

Let me demystify a few common ones:

Safety First - This is a dangerous environment and we employ people who make mistakes, sometimes often.  We need to shock them out of complacency to reduce errors.
Ethics related material - The company has an ethics problem.  Maybe self dealing, maybe cut corners, who knows.  A quick tell on ethics are posters indicate a minor problem, required training a major problem.
Quality related material - The company's employees routinely cut corners and need to be reminded to be careful and take their time.
Do Things Right The First Time - Speaks for itself, lots of re-work happening.

I talk about some investing heuristics I use in my Oddball Stocks mini-course. Check it out here.


8 comments:

  1. Nice post thanks. I have a comment to the cars but this is about the company cars - as a former financial auditor I used to see many companies and they had different policies in respec to cars. Sometimes the people were earning good salaries but the company policy was not too expensive cars - so they had good salaries but not so good cars. I also saw situations where salaries were rather low but people had very nice company cars. So there were different combinations.

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  2. This cracks me up-so true!

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  3. Absolutely brilliant. I put this in my morning reads post @ http://undervaluedstocks.info

    Great job!

    Nick de Peyster

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  4. I don't think you can generalize about posters in a building, especially ethics and safety. I worked for decades in the defense business. Slip-ups in either area have the potential to be career/company ending, or at a minimum, a major expense and diversion. There was company-wide annual mandatory training in each area. Some was carried to the extreme, such as lockout/tagout training for software engineers. Management wanted to make sure that we were above-board in all our activities, it was drilled into us.

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  5. Money talks, wealth whispers. The fact that I am naming myself Mr. Moneyface for this comment means that I obviously don't have an amount of money in the bank yet that I am proud of, otherwise, I would use my real name.

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  6. This is very specific to the USA and American culture; or maybe even only to parts of it. I imagine there are many well-off farmers in the US who couldn't care less about the car they drive or clothes they wear.

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    1. I'm sure it's specific to the US, that's my only experience.

      In terms of farmers you can tell how well off they are by their tractor and equipment. I grew up near farms and have had friends who were farmers. For 95% of farmers the second they get their hands on money they're upgrading their equipment. During the gas goldrush in Western PA farmers were receiving $5k/acre for the option to drill. Most of these guys had 500-1000 acres they were leasing, so they received enormous payments. What did they do with the money? Went out and purchased brand new tractors, combines, seeders etc.

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