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How One Billionaire Makes Decisions

Innovation has one key thing in common with investing: the winners make smart, non-consensus bets.

Howard Marks is not as well known as Warren Buffet, but his memos are legendary on Wall Street for their clarity and wisdom.

They are great reads for anyone seeking an innovation edge.

Investing is principally about making better decisions than "the market." Mark's clearly, systematically rebuts — "being right with average consistency doesn't help" — groupthink in a most helpful way.

One of his best essays is titled "The Value of Predictions." Here is the critical passage:

Everyone's forecasts are, on average, consensus forecasts. If your prediction is consensus too, it won't produce above-average performance even if it’s right. Superior performance comes from accurate, nonconsensus forecasts. But because most forecasters aren't terrible, the actual results fall near the consensus most of the time -- and non-consensus forecasts are usually wrong. The payoff table in terms of performance looks like this:

Innovation has one key thing in common with investing: the winners make smart, non-consensus bets.

Non-consensus bets can take various forms.

For example, Zoom recently went public at a $16 billion valuation. Zoom doesn't do anything new or revolutionary. There are hundreds of companies that provide video conferencing.

However, Zoom's investors made a non-consensus bet that it would be different — and more valuable — than the incumbents in an already saturated market.

Other non-consensus bets are perceptually riskier.

To invest in SpaceX in 2002, an investor would have had to believe that space exploration would become a private-sector activity. Since most investors would have looked at the government-led history of space exploration, betting on SpaceX was very much non-consensus.

Because investing in SpaceX was non-consensus, and right, early investors in the company have generated enormous returns.

If Marks' framework leads to better decision-making, why don't more people use it?

Most people anchor their thinking to those around them.

Non-consensus thinkers, by definition, disagree with most people most of the time. That doesn't make you the most popular person at a party — and, worse, it creates the condition where you would rather be popular than right.

So remember the great philosopher, Groucho Marx, who said: "I wouldn't join any club that would have me as a member."

In short, developing a non-consensus perspective is socially and mentally challenging.

That's why it is so valuable.