Wednesday, March 3, 2010

Beware of the super performers !

The mantra of all business (actually most walks of life) is superb & outstanding performance isn’t it ? It shouldn’t ! If this sounds absolutely ridiculous, read on …

Everywhere, the great performers are the stars. They are the ones who get big bonuses. They are the ones who get promoted lightning fast. The division that shows triple digit growth is treated akin to God. The bunch that didn’t meet its target is screwed. The lot that exceeded target by 354% is taken on an all expenses cruise to Hawaii. Right ? Maybe not so right.

One of my blogging friends took a light hearted dig at me for a mantra that features about once every month in this blog – If its too good to be true, its too good to be true ! I have learnt over the years to watch out for superlatives. Good performance – absolutely the minimum. Better than good performance; holy grail. But superfantasticstupendousunbelievable performance ? Take it with a huge pinch of salt.

One of the truisms in the business world is that there are a lot of smart people and lot of smart companies around. Its difficult to beat everybody all the time. It’s the same as in the stock market. Nobody can consistently overperform the index over say 20 years. Not even Warren Buffet. The right investing strategy is to pick an index fund and simply hold it for a long time. Actually all the smart alec fund managers are redundant. In the short run, you can beat everybody by a mile. In the long run it is empirically proven that its tough to beat the index. Good performance is the goal – not superfantastic ….

This post was prompted by the news of the sale of AIG’s Asian businesses to Prudential for $ 35bn. This business, called AIA is a star in Asia. It’s a solid business, performs very well, growing very well, etc etc. In fact most of AIG is like that. Its full of very well run businesses. One division – the Financial Products Division brought the whole house down. They were actually star performers in the years before. The Board should have looked critically at the “star performer”, instead of treating them as royalty. But then business, as indeed life, is full of "If only ...".

I am not making a case for mediocrity. Far from it. I am just cautioning not to go ga ga on exceptional performance. Look at it critically. Is it sustainable ? Was too big a risk taken ? Has there been jugglery with the numbers ? Is something being hidden ?

Superfantasticstupendousunbelievable is applicable only to God. When man lays claim to it, …. Beware. Watch out.