Words of wisdom by Mr Jack Welch:
We have two choices, either we tell our boss “Jimmy made that terrific decision based on his tried-and-true gut instinct,” or Jimmy’s gut is 50-50 at best, ask him to stop making decisions that way.”
As a general rule, gut instinct is nothing to be ashamed of. But quite the opposite. It’s just a pattern of recognition.
Gut instinct, in other words, is a deep, possibly even subconscious, familiarity, the kind of knowing that tells us anything from, “go for it now,” to “no way, not ever.” Though we would gamble the most common gut call falls in between the two, the “uh-oh” response, in which informs us that something is not right and we should figure out what it is.
The trick with gut, is to know when to trust it. That’s an easy call when we discover over time, that our gut is usually right. But such confidence can take years of trial and error.
Until that point, perhaps the rule of thumb: gut calls are usually pretty helpful when it comes to looking at deals and less so when it comes to picking people.
Even though deals come to you with all sorts of data analysis and detailed quantitative predictions, and people decisions seem more qualitative, the numbers in deal books are just projections.
Sometimes, projections are reasonable, some cases, they are a little more than wishful thinking. When have we ever been presented with a deal with projected rate of return of less than 20%? We haven’t.
Again, sometimes that’s because a deal is great. Other times, that’s because the people proposing the deal have adjusted the investment’s residual value to make the returns reflect their hopes and prayers.
So when it comes to looking at deals, consider the numbers. But make sure our gut plays a big role in the final call as well. Say we have been asked to invest in a new office building, but visiting the city, we see cranes in every direction. The deals number is perfect, we’re told, and we simply cannot lose. But our gut tells us otherwise, that overcapacity is about a year away and the “perfect” investment is about to be worth $0.60 on the dollar. We’ve got few facts, but we have the “uh-oh” response.
Continue reading Part 2.