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Circle of Competence Issue #95

QUOTE OF THE WEEK "The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man." - George Bernard Shaw FOOD FOR THOUGHT Life's Critical Path

I had, I believe, one of those rare insights into how the world works on a deeper level one morning this week during my early commute to work. It was pouring rain and at 7:20 AM, the main highway (I-40) was a parking lot. As it turned out, there was a wreck 3 miles from my house that closed 3 of the 4 lanes that morning. So, I guess queuing theory has real world implications? (See: an introduction to queuing theory - the mathematics behind waiting in line (Thoughtco))

But the most amazing thing happened as I put my office's address into the GPS - the route that it was proposing took me a solid 10 miles out of the way, but only added 10 minutes to my typical 30 minute drive. The other option was to stay the course on I-40, but this would take 90 minutes. So I took a chance.

As I was driving through the countryside, off the main highway, a thought hit me. Humans, in almost every endeavor, want to achieve maximum efficiency on a critical path - i.e. the shortest amount of time spent possible to achieve a desired outcome. But why?

It's why we want to wait as little as possible in a line at a restaurant or a grocery store or at the bank or in a call center queue. It's what drives us to leverage up and borrow to get that house or that car before we can afford it in cash. It's why we settle for take out instead of cooking a healthy meal every night. It's why we choose 140 characters instead of Dostoevsky or Kahneman. It's why online dating, a far more convenient method of meeting potential mates, is skyrocketing. It's why (in my opinion) Amazon's Prime same-day delivery has increased the moat around the business more than any other decision in its retail division.

We've been doing this as humans for thousands of years, since our ancestors thought about the quickest way to hunt prey and prepare it for dinner. But now, technology is accelerating this desire to accomplish goals to a nearly instantaneous pace. Isn't it funny, in an age when people are living longer than ever, that we are trying to shorten timelines for tasks or projects because we have less time in the day than ever?

All of this is obvious. But what isn't obvious is how deeply it permeates our daily drives and actions, and why this can be bad.

I noticed that I didn't just want to spend a minimal amount of time in the car. I realized that I am also attempting to achieve the shortest path to wealth, wisdom, health, and a whole host of other goals. I even noticed how often I multitask on menial tasks to 'kill two birds with one stone' and be 'efficient.' But sometimes forcing shorter timelines can result in disastrous consequences - take the Boeing 737 disaster for example, all caused by cutting corners for obvious financial and aggressive schedule reasons. After all, time is money, but money ain't everything.

[If you'll indulge me for minute, the idea behind finding the shortest path to complete a project is best known as critical path theory and was formally introduced in the 1950's by James Kelley and Morgan Walker in their paper, Critical Path Planning and Scheduling (James Kelley Jr., Morgan Walker). If you would like a gentler introduction to critical path theory, check out The ABCs of critical path theory (Harvard Business Review, 1963).]

The principles behind the 'critical path' apply in almost every area of our daily lives as well as in numerous industries. The theory's principles are integral in many industries that involve large-scale engineering projects including oil and gas, real estate development, aviation, transportation, and logistics. I interact with critical path decisions every day at my current job in real estate development. The best way to determine a critical path in a project's schedule is the following 3 questions:

(1) What immediately precedes this job?

(2) What immediately follows this job?

(3) What can be concurrent with this job?

The ultimate goal of a project's schedule should be to optimize the trade offs between cost, quality, and length to completion. In my current job, we are always pushing to stay ahead of schedule and avoid delays on the critical path. However, there is a point at which the more you attempt to shorten a project, the costs actually begin to increase and the quality suffers. Let me explain - and illustrate how this is also the case in every day life.

If you are attempting to build a skyscraper in 2 years, this is certainly achievable. But if you would like to achieve this same goal in 1 year's time, you will have to effectively double (or more) your labor and coordination time, which will be difficult because you will be drawing labor from other jobs in the market. To attract them to work harder and faster, you will have to offer a premium for their services. You will also be doubling the amount of coordination between contractors on site, meaning that quality can begin to suffer as problems slip through the cracks of overworked executives. So, in the end both the budget as well as the quality of the project suffers. If you don't believe me, just ask Boeing.

The same principles apply in our personal lives. While it is absolutely fine to seek the shortest possible route to work every day, it probably isn't a great idea to speed 100 miles per hour to cut my commute down by a few minutes. While my commute may decrease linearly, the risk of adverse consequences probably increases exponentially. This is also true in trying to achieve wealth, wisdom, health, and many other items on life's checklist. The more we rush to become wealthy, the greater risks we take (leverage, moonshots, etc.). The more convenient we attempt to make our meals, the less healthy they typically are. The quicker we try to find a mate, the more likely we are to settle.

The critical path (to wealth, to health, to wisdom) involves balancing the exponentially increasing risk of failing to achieve the goal and linearly decreasing time/cost. 40% IRR's are silly if we're cranking leverage 8 turns and running the risk of bankrupting a company. Sure, stripping costs from a company increases cash flow now, but ask Sears how that worked out in the long run. We don't need fast food if we have 30 extra minutes to cook. That 30 extra minutes daily might add 10 years to your life. We don't need more twitter when we have great works of literature - does Donald Trump have the wisdom of GK Chesterton or CS Lewis?

I realize we're all trying to keep to our own critical paths in life as we attempt to achieve goals large and small. But sometimes it's nice to just slow down and enjoy the process, because compressing any schedule too tight carries risks that just aren't worth taking.

LINKS

Investing What 15 years of Y Combinator investments can tell us about startups (Y Combinator) Howard Marks' new memo: You Bet! (Howard Marks) Finding time to invest in yourself (Naval Ravikant)

Morgan Housel interviews Brent Beshore at the MicroCap Leadership Summit 2019 (MicroCap Club)

CASPERhaps (No Mercy/No Malice) Deep dive into broadcast media companies (Yet Another Value Blog)

Technology Deep dive - Epic Games and the quest to push boundaries (Master the Meta) Inside-out vs. outside-in: the adoption of new technologies (a16z) How to lose a monopoly: Microsoft, IBM, and anti-trust (Benedict Evans) Visa, Plaid, networks, and jobs (Ben Thompson)

The gene-drive dilemma: we can alter entire species, but should we? (New York Times) Macro

Princeton's rich commodity scholars (Macro Ops) The Michael Marcus tape - the tale of Commodities Corp. (Macro Ops) A succesful speculator's approach to commodities trading (Morris Markovitz)

Why Manhattan's skyscrapers are empty (Derek Thompson) Fed policy, chaos theory, shale and dangerous miscalculations in the middle-east (Capitalist Exploits)

The unsurprising repo market surprise (Integrating Investor)

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