The Breeding and Nurturing of Ideas

I must own up to something. I am not a prolific writer. I get that compliment quite often by readers of my articles. But I do not produce 3 to 5 major ideas a week. I harvest them.

What do I mean when I say that I harvest my ideas? Nobody can come up with so many ideas on a consistent basis. My ideas did not form in the days before I wrote an article. They formed over the period of my professional career, and even before that. And when I needed them, either to do my job or to write an article, well there they were.

I fell in love with investing and finance in my early teen years reading The Economist. In my first summer attending university I was lucky enough to land an internship at an investment institution. The internship was on the trading floor of one of the more active departments. It was fascinating.

I had assumed that trading happened constantly with people staring at screens and screaming into the phones, like the movies. It doesn’t, especially not on the buy side. What did happen constantly was non-stop scenario discussions. What happens if the Fed tightens? How much will they tighten by, 25bps, 50bps, 75bps? What will the primary effect be? Banks will raise rates? What about secondary effects? Will borrowers default, pay down or stay steady? What about tertiary effects? Will people stop buying houses? The various options multiply.

In the same day the discussions would continue. What happens if the SPD wins an upset election in Germany over the CDU? Where does dollar-mark go? Mark weakens? What happens to German exports? Imports? What happens next? What about the upcoming OPEC meeting? Will they cut production? What happens next? Will they maintain production? What happens next?

The discussions never ended. They were the one constant of the trading room. There was no wrong answer. The point was not to arrive at an answer. It was to be ready to react instantaneously should the scenario materialize. To avoid having to think about the problem in the midst of the problem, which invariably involves emotional thinking.

But it didn’t stop there. Whenever an event happened, the traders would react as they had planned. Then, they would do a post mortem. We thought the JGB’s would tank, instead they rallied. Why? What did we get wrong? What can we learn?

I was 19 years old, and this was one of the greatest gifts to my professional career that could ever happen. In the two months that I spent with this gifted team of 8 people, they helped me develop a habit that became a corner stone of my success: Don’t assume you can read the future, instead evaluate dozens, if not hundreds, of scenarios constantly and figure out how you would respond in advance.

So I started breeding ideas.

Where is dollar-yen going? What will make it move? What won’t make it move?

How is ADNH trading? What is positive for it? What is negative? What would I do in either case?

Why is management performance below expectations? Are expectations too high? Is management sub-par? What can the board do? How? When?

My scenario solutions for the first few years where almost always wrong. Thankfully I was still a student and my decisions were not being applied. But having learnt the importance of a rigorous post mortem, I began to learn. More importantly, I learnt how to learn.

There is a school of thought that you should focus only on what you are doing and ignore everything else. This actually works quite well in the first decade or two of one’s career. But then you hit a brick wall, and it is difficult to move forward.

Continuous scenario planning generates ideas. A lot of them. But young ideas, like anything else that has not fully matured, will not provide you with what you need. So if scenario planning breeds the ideas, what nurtures them? What makes them robust and useful?

The initial scenario solution is usually to a very specific problem. To make the idea more robust, more durable, means attempting to apply it to different but similar scenarios and seeing if it is a sensible solution. Initially the answer is ‘no’ it is not robust. But evolving and adapting it to a wider scenario set makes it robust.

A critical part of this nurturing includes debating your ideas with different people. This not only allows you to learn new ways to think of the solution but to also learn how to best communicate the solution.

If you do this over two decades, you will be at the top of the game. But even if you do this for just one year, you will still be well ahead of the game.

The best way to start is by writing out your scenario plans. There is no need to publish your writing, just put your thoughts down on paper or the electronic equivalent. Writing forces you to structure your thoughts and develop a rigor in generating your ideas.

After a few weeks, you should have a good flow of ideas (the flow will be good, the ideas don’t have to be). Now you need to discuss them. Don’t make the mistake of thinking that this can be done online. You need to do it in person. The best setting is with your work colleagues. Then you can start adding to your idea breeding network. Colleagues from other companies. Active participation in conferences. Etc.

The final part is the post mortem. This is where you create the most value from your ideas. Every time you apply an idea, review it in light of the results.

Sterling was far more volatile than you expected? Why? Were the assumptions wrong? Was the data set constricted, i.e. you need to include more information? Was the model flat out wrong?

You felt that replacing the Head of HR would improve employee morale but things got worse? Why? Was the Head of HR actually improving the situation? Do you need to run an employee survey? Is the measure of morale wrong, i.e. the market baseline is worse than the company and therefore things aren’t that bad? Is it a cultural issue?

Once you do this, you will find yourself building a large repertoire of highly effective ideas, ideas that you know well and can apply in various situations. This encyclopedia of ideas becomes your main playbook that you refer to repeatedly to develop and execute strategy, and it is more valuable than anything that you will find in a library or bookstore.

The encyclopedia of ideas becomes a core competency. The breeding and nurturing of your ideas becomes a competitive advantage. It is a wonderful habit to cultivate. I hope you do.