Category Archives: Daily Top Ten

Topley’s Top 10 – November 27, 2023

1. What Happens After 20% Rallies Off S&P Lows

JP Morgan Wealth Management

Is the coast clear? Investing amid the rally | J.P. Morgan Private Bank (jpmorgan.com)


2. 308 of 503 S&P Companies Still 20% Below Peak

Cresset Jack Ablin Of the S&P ‘s 503 companies, 308 are trading more than 20 per cent below their peak: they represent 38 per cent of the blue-chip Index’s market cap. Nearly half of Index constituents are off more than 30 per cent from their peak. While deteriorating growth is not a bullish catalyst, most stocks appear to have already priced in a recession.

Since When Does a Slowing Economy Mean Risk On? | Cresset Capital


3. Is the Magnificent 7 High Growth?  130 Companies Growing 25%+

Richard Bernstein Research

A once-in-a-generation opportunity (rbadvisors.com)


4. Non-Tech Leading November Rally-WSJ

https://www.wsj.com/finance/stocks/these-are-some-of-the-stocks-leading-the-markets-year-end-rally-0da16b93?mod=itp_wsj


5. Bearish Put Options Buying in Crude Oil


6. Small Cap India New Highs +27% YTD


7. Argentina New Highs


8. GLP-1 Weight Loss Reducing Food Consumption

Capital Group

Weight loss drugs could reshape industries beyond health care | Capital Group


9. Biggest Seasonal Hiring Yet at Amazon


10. 40% of people willfully choose to be ignorant. Here’s why

We all have a place in our lives where we look the other way and pretend everything is fine. It’s a built-in excuse to act selfishly.

KEY TAKEAWAYS

  • Willful ignorance occurs when someone intentionally avoids information about the negative consequences of their actions. 
  • A new meta-analysis found that 40% of people will choose to remain ignorant of how their decisions affect others. 
  • The evidence suggests that willful ignorance provides people with a built-in excuse to act selfishly.

Kevin Dickinson

Do you have an uncle who believes vaccines cause autism but refuses to study the reams of research showing them to be safe? What about a friend who avoids information about factory animal farming so they can eat cheap meat guilt-free? Or how about that CEO who claims their business is ethically minded, yet doesn’t investigate its supply chain for exploitation of the environment or the impoverished?

Each is an example of what psychologists call willful ignorance — the intentional act of avoiding information that reveals the negative consequences of one’s actions. Not to judge: We all have a place in our lives where we look the other way and pretend everything is fine. It may be personal, political, or professional in nature, but just below the conscious surface, we know our actions don’t align with our stated values.

“Examples [of] willful ignorance abound in everyday life,” Linh Vu, a doctoral candidate at the University of Amsterdam, said. “We wanted to know just how prevalent and how harmful willful ignorance is, as well as why people engage in it.”

To find out, Vu and a team of researchers performed the first meta-analysis on the current empirical evidence of willful ignorance, and it was published in the Psychological Bulletin, a peer-reviewed journal published by the American Psychological Association. They compared the results of 22 studies with a total of more than 6,000 participants. Here’s what they found. 

Moral wiggle room

The classic experiment for studying willful ignorance is known as the moral wiggle room task. It was designed by Jason Dana, an associate professor of marketing and management at Yale. Participants are randomly assigned the role of decision-maker or recipient. The decision-maker is given a choice: They can take either a $5 or $6 payout. If they take the $5 payout, the recipient will receive $5 as well. If they take the $6 payout, the recipient will receive $1.

When provided with this information by a researcher, the majority of decision-makers act altruistically. They sacrifice the slightly larger payout for themselves to give the recipient more money. On average, only about a quarter of decision-makers act selfishly. But this full-information condition is simply the control. The experiment really begins when the researchers become less forthcoming.

In the experimental condition, the decision-makers can still choose between the $5 or $6 payouts, but this time they are not told what the recipient will receive. There’s a 50-50 chance the recipient will receive $5 or $1. Importantly, the decision-makers can ask the researchers what payout the recipient will receive, and they can do so at no cost to themselves. In other words, while the decision-makers start out blind to the consequences of their actions, they don’t have to stay that way if they don’t want to.

In Dana’s original 2007 study, 44% of decision-makers in the experimental condition chose to remain willfully ignorant and took the selfish option.

Some studies in the meta-analysis were variations on this original design. For instance, one version of the game included ultimatum bargaining where the recipient could accept or reject the decision-maker’s offer. If they reject it, both participants walk away empty-handed. Another version had group members vote on payouts for the group and an unknown recipient.

But across all the studies, the researchers found Dana’s original split to be fairly consistent. On average, 40% of people chose not to learn about the consequences of their actions, and such ignorance was associated with less altruism compared to those who became informed.

Ignorance as an excuse

The researchers hypothesized two potential motivations for willful ignorance. First, they thought willful ignorance may offer a built-in excuse for not acting generously. If a person doesn’t know the consequences of their actions, the internal logic goes, then they still can consider themselves a morally upstanding individual even if they decide to act selfishly. Willful ignorance serves to protect their self-image.

The second potential motivation is known as “cognitive inattentiveness.” That is, people dislike thinking more than they have to. It may stem from laziness, not paying attention, or not wanting to take the time to learn more. Whatever the case, they favor the quick-and-easy decision — even if they would have acted altruistically had they been informed upfront. 

To test this, the researchers compared the choices of participants who chose to inform themselves with those who learned about the consequences by default. The researchers reasoned that if the driver was cognitive inattentiveness, then the percentage of altruism would be roughly the same between the two. 

On the other hand, if those who chose to learn about the consequences acted more generously, this would suggest that those informed by default would have “self-selected” to remain ignorant if given the option. And that’s what they found. Across the studies, participants who chose to be informed of the consequences were 7% more likely to make the altruistic choice. 

Being righteous is often costly, demanding people to give up their time, money, and effort. Ignorance offers an easy way out.

Shaul Shalvi

“The findings are fascinating as they suggest a lot of the altruistic behaviors we observe are driven by a desire to behave as others expect us to,” Shaul Shalvi, co-author and a professor of behavioral ethics at the University of Amsterdam, said in a statement.

He added: “A part of the reasons why people act altruistically is due to societal pressures as well as their desire to view themselves in a good light. Since being righteous is often costly, demanding people to give up their time, money, and effort. Ignorance offers an easy way out.”

With that said, the analysis couldn’t eliminate cognitive inattentiveness as a potential motivation. In fact, willful ignorance could be the cumulative effect of many motivations, including those not considered in the meta-analysis, such as reputation. The data simply suggest that maintaining a positive self-image is one of those motivations.

The Enron Complex as seen at night. After the Enron scandal came to light in 2001, CEO Jeffrey Skilling mounted a legal defense of willful ignorance. He claimed he remained unaware of the corporation’s fraudulent practices. It didn’t work, and he was found guilty of conspiracy, securities fraud, and other charges in 2006. (Credit: eflon / Flickr)

A little less ignorant about willful ignorance

The meta-analysis does have limitations that should be mentioned. To start, participants overwhelmingly came from Europe and the U.S., meaning the results may not be replicated in other cultures. The studies also looked at willful ignorance in the lab versus actual decisions in the real world. Finally, they focused on discrete tasks, meaning they were only performed once. It’s possible that continuous rounds of give-and-take between decision-maker and recipient would yield different results (like in many game theory games).

Still, the authors conclude that “taken together, the aggregate evidence suggests ignorance is indeed in part ‘willful’ and driven by excuse-seeking and self-image maintenance motives.” Thanks to them, we are all a little less ignorant about ignorance.

https://bigthink.com/neuropsych/people-choose-willful-ignorance/

From Barry Ritholtz Blog

https://ritholtz.com/2023/11/10-wednesday-am-reads-356/

Topley’s Top 10 – November 22, 2023

1. Forward P/E of Magnificent 7


2. Another History of Concentrated Stock Rallies

Alpha Architect Blog Larry Swedroe on Stock Market Concentration

Consider that as of October 6, 2023, while the iShares Russell 1000 Growth ETF (IWF) had a P/E of 24.2 and Vanguard’s S&P 500 ETF (VOO) had a P/E of 20, the P/E of the Vanguard Russell 1000 Value ETF (VONV) was 15, the P/E of the Vanguard Russell 2000 ETF (VTWO) was 13.3, and the P/E of the Vanguard Russell 2000 Value ETF (VTWV) was just 10.5. Now consider the P/Es of the magnificent seven: Apple, 29.8; Amazon, 100.7; Microsoft, 33.8; Nvidia, 110.5; Alphabet, 29.4; Tesla, 73.8; and Meta Platforms, 36.8. That’s an average P/E of 59.3.  

One of my favorite expressions is that what you don’t know about investing is the investment history you don’t know. With that in mind, let’s review the list of the 10 largest stocks by market cap in the S&P 500 Index at the turn of the century. They were Microsoft, Cisco Systems, Exxon Mobil, Intel, Citigroup, IBM, General Electric, Oracle, and Home Depot. From January 2000 through September 2023, Vanguard’s 500 Index Fund (VFINX) returned 6.5% per annum. How did the top 10 perform?

  • Microsoft: 9.5%
  • Cisco Systems: 1.6%
  • Exxon Mobil: 7.9%
  • Intel:1.7%
  • Citigroup: -7.1%
  • IBM: 3.8%
  • General Electric: -1.8%
  • Oracle: 6.6%
  • Home Depot: 8.6%
  • AT&T: 1.4%

The average return to the 10 largest stocks in the S&P 500 Index from January 2000 through September 2023 was just 3.2%, underperforming the index itself by 3.3 percentage points. Because these were the largest stocks, the underperformance relative to the remaining 490 stocks was even worse. Investors in the top 10 stocks took a much greater degree of idiosyncratic risk and earned lower returns. Forewarned is forearmed.

https://alphaarchitect.com/2023/11/the-magnificent-seven/


3. U.S. Bank Stocks at Record Low Valuation vs. S&P


4. Banks Ongoing Headwinds.

Torsten Slok, Ph.D. Chief Economist, Partner-Eight months after the SVB collapse, large banks continue to enjoy significantly lower funding costs and, hence, higher profit margins than regional banks, see the first chart below.

With ongoing headwinds from CRE holdings, the held-to-maturity book, and regulatory uncertainty, it is going to take some time for regional banks to repair their balance sheets.  This continues to be a macro problem, because banks number 5 to 4000 by assets make up 60% of all assets in the banking sector see also the second chart showing the ongoing sharp slowdown in bank lending.


5. Interest Rate on U.S. Debt Up $924 billion in 12 Months.

When Debt Matters

When interest rates were at record lows in 2020, many said that the exploding National Debt “didn’t matter” because servicing that debt was costing us very little.

Fast forward to today and few are making that same argument, as National Debt has continued to increase (now at $33.7 trillion) and the average interest rate on that debt has moved substantially higher.

The result: the Interest Expense on US Public Debt has now moved up to $924 billion over the last 12 months, another record high. If it continues to increase at the current pace it will soon be the largest line item in the Federal budget, surpassing Social Security.


6. Argentina About to Make New Highs on Milei Presidential Victory

www.stockcharts.com


7. Better Breadth…Equal Weight S&P Closes Above 200-Day


8. Consumer View Current Buying Climate for Homes as Worst in History.

The United States: Consumers view the current buying climate for houses as the worst in recent history.

https://dailyshotbrief.com/


9. The Share of Americans Who Are Mortgage-Free Is at an All-Time High

Bloomberg By Alexandre Tanzi

https://www.bloomberg.com/news/articles/2023-11-17/amid-high-mortgage-rates-higher-share-of-americans-outright-own-homes?sref=GGda9y2L


10. The False Picture on How Success Happens-The Daily Stoic Blog

We have a false picture about how success happens. We often only see the results and almost never the process of things, so we tend to think that the finished product—a book, being in shape, being wise—is impressive, and therefore the process by which that event was created must have been equally brilliant.

In fact, it’s not.

All success happens the same way: “action by action,” as Marcus said. Just after the release of Metallica’s eleventh album, Metallica’s Lars Ulrich explained the simple secret to their high output:

“I wish I could romanticize it, and tell you that we’re sitting down and there’s a destination, but it’s basically just work. You write one song, then you write another song and eventually you’ve got an album.”

This is what the Stoics believe too. That the little things add up to make the big things. This is what Zeno meant when he said, “Well-being is realized by small steps but is truly no small thing.” And what Seneca meant when he wrote, “Each day, acquire something that will fortify you against poverty, against death, indeed against other misfortunes, as well and after you have run over many thoughts, select one to be thoroughly digested that day.”

One gain per day. That’s it. It’s not romantic. It’s basically just work.

https://dailystoic.com/

Topley’s Top 10 – November 20, 2023

1. Where to Get Stock Market Returns if Interest Rates Peaked?

WSJ-By Derek Horstmeyer

https://www.wsj.com/finance/investing/investing-peak-interest-rates-89b9c8d5


2. Another New Record in U.S. Equity Concentration….5 Stocks 70% of Nasdaq Gains.


3. Quant Traders Covered Shorts Tuesday.

Marketwatch..Who were the big buyers of Tuesday’s stock rally? Vanda Research says institutional buyers stepped in for fatigued retail traders, specifically “systematic strategies being forced to cover their short positions.”  Vanda Research  Systematic traders make use of factors such as quantitative models, historical data and technical indicators to figure out when to get in and out of trades. The Vanda team also says discretionary hedge funds have also been buying up some excess tech stock supply out there, and that may also help draw in retail investors ahead of seasonal tailwinds.


4 . Last Week I Showed Office Transactions -84% ….Real Estate Sector vs. S&P All-Time Low…..REITS Now Only 5% of S&P

REIT Sector Rallies to 200-Day Moving Average


5. U.S. Dollar Fails at Previous Highs.


6. What is an AI Fund?  What are the Holdings?

State Street


7. Tesla is down since it joined S&P 500

Barrons Tesla’s (ticker: TSLA) truly terrible performance since being added to the index is something that deserves much more attention. I hadn’t realized how wild Tesla’s ride has been for long-term S&P 500 fund investors—including me—until a recent conversation I had with Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.  During our talk in early November, Silverblatt mentioned that Tesla’s share price was below what it had been when it first joined the S&P 500 in late 2020. I found that hard to believe—but when I hunted up some numbers, I saw that Silverblatt was right.  According to Silverblatt’s numbers, the S&P 500 had a total return—price gains plus reinvested dividends—of 27.02% from the time Tesla joined the index through Nov. 15. Because Tesla doesn’t pay a dividend, its return during that period was a mere 4.82%—the increase in its share price over that period. (After a bad day on Nov. 16, its return had fallen to 0.08%.) By Allan Sloan

https://www.barrons.com/articles/tesla-stock-price-musk-5e6c38ae?mod=past_editions


8. Leading Home Builder Toll Brothers.

Bounces hard at 200-day and rallies to new highs.

TOL New High Long-Term Chart.

www.stockcharts.com


9. Recessions and U.S. Home Values….Makes Sense as the Fed will be Lowering Rates.


10. How Ultra-Processed Foods Affect the Body.

WSJ By Andrea Petersen

https://www.wsj.com/health/wellness/ultra-processed-foods-dietary-guidelines-de00ccaa

Topley’s Top 10 – October 31, 2023

1. Put Quarterly Letter #1


2. The Nasdaq Averages a -10% Correction Every 175 Days.

Nasdaq Dorsey Wright The Nasdaq 100 Index NDX fell into correction territory on Thursday as it closed lower than 10% off the 15,841 high seen in mid-July. We have seen NDX fall over 4.5% in the past week alone, and it has declined more than 2% in back-to-back weeks for the first time since December 2022. This 10% correction comes 303 calendar days after the last 10% correction was reached on December 27, 2022, which is quite a long gap based on historical averages. Going back to 1992, we see a 10% correction in the NDX every 175 days on average, with a median gap of about 110 days between such events. That average equates to roughly two 10% corrections experienced each year. Of course, some years have far more than that, with nine corrections events seen in 2000 and four events seen last year in 2022.

The current correction has also been more drawn out than normal. We typically see the peak-to-trough decline in prior correction events take 46 days on average, while the current correction has already taken 100 days. Past corrections show an average pullback-to-trough timeframe of 21 days, with a median of 11 days. If we hold those historical norms, that will see NDX put in at least a near-term bottom before we see family for Thanksgiving.


3. Software ETF -17% from Highs


4. 20-Year Treasury New Lows…Inflows Massive.


5. Fund Managers Consensus is Lower Rates 2024


6. UPS Chart Heading into Holiday Season.


7. Cryptocurrency: Crypto trading volumes have dropped globally across all exchanges this year.

Source: @KaikoDatahttps://dailyshotbrief.com/


8. Average Price of Used Tesla Updated

@Charlie Bilello Fast forward to today and that game has ended in tears for anyone that bought in the summer of 2022 with the expectation of selling to a greater fool.

The average price of a used Tesla is now $28k lower than the peak price in July 2022, a 41% decline. Cars are once again a depreciating asset.


9. White House opens $45 billion in federal funds to developers to covert offices to homes

Morningstar By Joy Wiltermuth 

Biden administration turns to developers to help ease U.S. housing crisis

The White House kicked off a multiagency push on Friday to help finance real-estate developers convert more office buildings in big cities emptied by the pandemic into affordable housing, taking aim at the nation’s housing crisis.

The initiative looks to harness an existing $35 billion in low-cost loans already available through the Transportation Department to fund housing developments near transit hubs, folding it into the Biden administration’s clean energy push.

It also opens up additional funding sources and tax incentives, offering a new guidebook to 20 different federal programs that can be tapped by developers and offers technical assistance in what can end up being tricky and expensive conversions.

A third peg of the program will see the federal government draw up a public list of buildings it owns that could be made available for sale to help bolster development.

“These downtowns and central business districts that we are taking about today often already designed and orientated around public transit,” said Transportation Secretary Pete Buttigieg, in a press briefing. “Our intention is to make the most of this opportunity to add more housing near transit in ways that not only reduces the cost of housing, but also often reduces the cost of transportation.”

National office vacancies have neared 25%, versus 8% in Europe, according to Savills, a real-estate firm. Vacancy rates in hard-hit cities like San Francisco have gone even higher, setting fresh records as property values plunge and more owners default on their mortgage loans.

“The only thing that is missing today is a lack of financing,” said Nathan Berman, a founding principal of Metro Loft, a go-to firm for New York City office-to-residential conversions that helped transform lower Manhattan in the past 20 years.

The heart of many cities in the wake of the COVID crisis are littered with sparsely populated office buildings available at bargain basement prices. But Berman told MarketWatch that financing has all but stalled for conversions. “It’s really interest rates that are killing everything.”

Borrowing costs have shot up since the Federal Reserve began raising rates last year to fight inflation, resulting in a credit crunch on building owners with debt coming due. Companies also remain unsure about how much space they need, or what they’re willing to pay for it.

Read: More office zombies? Only 11% of maturing loans repay in September, Moody’s Analytics says

In Washington, D.C., where the federal government has a major office footprint, years of remote federal work have been a key source of industry angst. Government efforts to breath new life into obsolete buildings by turning them into rentals could be a rare redevelopment opportunity, as MarketWatch reported in August.

See: White House wants federal workers back in the office in September

The federal government owns about 1,500 office buildings nationally and had leases on almost 200 million square feet of additional space as of April, according to Barclays analysts, who said in a recent report that much of that office space was underused.

The new White House effort, in addition to DOT funding, will give developers access to $10 billion in funds allocated to the U.S. Department of Housing and Urban Development’s community development block grant program.

“With a shortage of millions of homes nationwide, we need to utilize every resource at our disposal to increase housing supply, which in turn, given the high demand, will help with rent levels and purchase costs,” said Adrianne Todman, HUD deputy secretary, during the press briefing.

Related: San Francisco’s push to turn office buildings into homes hinges on this simple idea

-Joy Wiltermuth

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

https://www.morningstar.com/news/marketwatch/20231027198/white-house-opens-45-billion-in-federal-funds-to-developers-to-covert-offices-to-homes


10. Life Lessons From Byron Wien-RIP to Wall Street Legend

  1. Network intensely. Luck plays a big role in life, and there is no better way to increase your luck than by knowing as many people as possible. Nurture your network by sending articles, books and emails to people to show you’re thinking about them. Write op-eds and thought pieces for major publications. Organize discussion groups to bring your thoughtful friends together.
  2. When you meet someone new, treat that person as a friend. Assume he or she is a winner and will become a positive force in your life. Most people wait for others to prove their value. Give them the benefit of the doubt from the start. Occasionally you will be disappointed, but your network will broaden rapidly if you follow this path.
  3. Read all the time. Don’t just do it because you’re curious about something, read actively. Have a point of view before you start a book or article and see if what you think is confirmed or refuted by the author. If you do that, you will read faster and comprehend more.
  4. Get enough sleep. Seven hours will do until you’re 60, eight from 60 to 70, nine thereafter, which might include eight hours at night and a one-hour afternoon nap.
  5. Travel extensively. Try to get everywhere before you wear out. Attempt to meet local interesting people where you travel and keep in contact with them throughout your life. See them when you return to a place.
  6. On philanthropy, try to relieve pain rather than spread joy. Music, theater and art museums have many affluent supporters, give the best parties and can add to your social luster in a community. They don’t need you. Social service, hospitals and educational institutions can make the world a better place and help the disadvantaged make their way toward the American dream.
  7. The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons. Shortcuts can be construed as sloppiness, a career killer.
  8. Don’t try to be better than your competitors, try to be different. There is always going to be someone smarter than you, but there may not be someone who is more imaginative.
  9. When seeking a career as you come out of school or making a job change, always take the job that looks like it will be the most enjoyable.If it pays the most, you’re lucky. If it doesn’t, take it anyway, I took a severe pay cut to accept each of the two best jobs I’ve ever had, and they both turned out to be exceptionally rewarding financially.
  10. Never retire. If you work forever, you can live forever. I know there is an abundance of biological evidence against this theory, but I’m going with it anyway.

Write to Andrew Bary at andrew.bary@barrons.com

https://www.barrons.com/articles/byron-wien-obituary-4e72c28e?mod=past_editions

Topley’s Top 10 – November 15, 2023

1. Inflation Data

Nasdaq Dorsey Wright Headline and Core CPI inflation lower than expected  Today’s inflation data was exactly what the Fed and markets were looking for.

Both headline and core CPI inflation came in lower than expected, solidifying market expectations that the Fed’s rate hike cycle is over and more cuts are on tap than the Fed projects, which is a boost to markets.

Headline inflation fell to 3.2% YoY from 3.7% (chart below, orange line) and core slipped to 4.0% YoY from 4.1% (blue line). From here, many economists expect inflation to approach the Fed’s 2% target around mid-2024 (dashed arrows).

https://www.nasdaq.com/solutions/nasdaq-dorsey-wright


2. And..Gas Prices Down 8 Straight Weeks.

Advisor Perspectives Blog-Gasoline Prices Have Now Fallen for 8 Straight Weeksby Jennifer Nash, 11/14/23

Gas prices have now fallen for 8 straight weeks, the longest streak of the year. As of November 13, the price of regular and premium gas each fell by 5 cents from the previous week. According to GasBuddy.com, California has the highest average price for regular at $5.00 and Texas has the cheapest at $2.73.

Currently, the national average price for a gallon of regular gasoline stands at $3.35, with premium gasoline averaging $4.26 per gallon. One year ago, regular gas was priced at $3.76 per gallon, while premium gas was at $4.62 per gallon.

https://www.advisorperspectives.com/dshort/updates/2023/11/14/gasoline-prices-have-now-fallen-for-8-straight-weeks


3. 78% of Buffett Stock Portfolio is 5 Names

WSJ By Karen Langley


4. Semiconductor ETF One Tick Away From New Highs

www.stockcharts.com


5. Uranium Price 15-Year Highs

Y-Charts

https://ycharts.com/indicators/uranium_spot_price


6. Uranium Stock Yellow Cake


7. Small Cap Call Volume Spike


8. Office Vacancy Rates Still Rising

Zerohedge Blog According to real estate specialist Jones Lang LaSalle (JLL)office vacancy rates are higher than ever, reaching 21 percent in the U.S. and Canada in Q3 2023 and 16 percent globally, i.e. in the 100+ markets analyzed by JLL Research. In both cases, that’s an increase of 60 percent compared to pre-pandemic vacancy rates, which stood at 13 and 10 percent in North America and globally in Q3 2019, respectively.

https://www.zerohedge.com/personal-finance/out-office-global-vacancies-hit-record-high


9. K-12 Shooting Incidents.

The Daily Shot Brief Blog Food for Thought: K-12 school shootings:

Source: @TheDailyShot


10. Why Creativity Gets Driven Out of Your Organization as It Grows-INC

You need to balance rules and creativity.

BY JIM SCHLECKSER, CEO, THE CEO PROJECT@THE_CEO_PROJECT

As a rule, organizations in their early stages are highly creative and have few rules or low rule density. They might have a rule guiding everything they do in the business, such as “We want to make the customer happy.”

This makes sense in these early days because the goal is to do everything possible to survive.

As companies scale, rules and bureaucracy come into play to keep things organized. The catch is that entrepreneurs tend to hate rules–which is why most organizations find themselves at a crossroads if they continue to scale.

But the secret to long-term success for organizations is to find ways to instill some rule density while embracing creativity.

Finding a balance

There has been a lot of research on the concept of complex adaptive systems. These systems that can adapt and evolve embrace both rules and creativity.

Think about it: there are areas in every organization where rules make sense. You need stability and predictability, like making monthly payrolls and ensuring books are accurate. That’s why departments like HR, accounting, and even operations rely heavily on rules. In the complex system of a human being, the comparison might be things that need to happen all the time and automatically, like breathing.

But we also know what happens when rules dominate everything: it squeezes out the creativity that is vital for the organization to move ahead innovatively. The hard can push out the soft.

For example, if you want your marketing team to develop creative and innovative campaigns for your products and services, you can’t load them up with rules. The same goes for product development. You want them to think far less about following the rules and more about breaking them in search of new ideas.

The goal, therefore, is to find that balance where your organization can adapt and grow.

The role of the leader

As a leader, you should strike that balance between rules and creativity. And it’s that zone where opposing forces meet and conflict often occurs. 

You can imagine a scenario where your sales team is chasing a big $20 million deal, and they neglected to file their expense report on time–which infuriates the accounting team. What do you do? Which is more critical in this scenario: the sales team chasing the big deal or following the rules when it comes to expense reports?

Another example: When I was running an early-stage company that was scaling fast, one of my administrative leaders devised a plan to write a 50-page employee handbook with rules defining everything everyone had to do in the company.

But I saw this kind of project as a slippery slope to becoming a rules-based business at a time when we were trying to adapt and survive. So I nixed the employee handbook project in favor of a much simpler concept: our one rule was that every employee was expected to “Behave like an adult professional.” That’s it. Simple, and it provided a tremendous guiding principle for us as we continued to grow and scale the business over the next few years.  I knew that eventually, we would need to add rules as the organization scaled, but that would happen after we had refined and grown the business.

The trick, again, is balance. Low rule density when you are seeking innovation, and higher rule density when you are looking for predictability.

Adapting to the future

Every organization will face this conflict between following rules and breaking the rules in search of creativity and innovation. And the truth is, you need both. But the laws of nature tend to lead to the hard rules pushing out the soft creative ones over time. Don’t let it happen in your organization. When too many rules creep into your organization, you risk losing your ability to adapt to the future.

Why Creativity Gets Driven Out of Your Organization as It Grows | Inc.com