TIB 12: The herd is smart, but herding is dangerous

TL;DR - Avoid “herding”, or making a choice based on the observation of others. Search for opportunity where nobody else is looking.

This week has me feeling a bit nostalgic, because it is the six year anniversary (to the day) of a 30-minute meeting that changed my life. Now that I am six years removed, I think that I lucked into learning first-hand an important lesson that is applicable for both life and investing.

The lesson - Whether it is in markets, your career, or in life, avoid “herding” - the phenomenon where many people make the same choice based on the observation of others, independent of their own knowledge.

Search for opportunity where nobody else is looking. Opportunity is everywhere, and if there are less people looking for the same opportunity, you increase your chances of finding that opportunity early, thereby increasing the potential payoff to you.

Why we like to conform and why it can be a problem

A lot of what I like to write about has to do with the danger of following conventional wisdom for your unconventional life. There is a lot of research around why human beings like conventional wisdom, and much of the research focuses on this idea of survival.

Historically, there is safety in following the herd. We associate large groups with being less likely to be eaten by a lion, or overrun by some neighboring village. Even though these dangers no longer exist in life today, our brains and emotions are still wired to respond to day-to-day stresses in a similar way.

As John Maynard Keynes once said, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” Even today, we like being part of a crowd because it gives us reputational safety.

So why is this a problem? From an investment perspective, if you follow the herd you will likely buy high and sell low, which is the exact opposite of what you are supposed to do. Your reputation might be safe but your portfolio might be in grave danger.

From a career perspective, we tend to look at those who came before us and follow what worked for them. That makes rational sense. There is no magic formula to success in a career, but if someone else succeeded using a certain approach, then it stands to reason that if we follow the same approach we will also succeed.

This causes a herding effect around finite opportunities. There are only so many promotions, so many job openings, and so many business opportunities. If we all cluster around the same ones, the competition for those finite opportunities becomes fierce. Herding in our career can paradoxically offer us reputational safety but put our prospects of advancement in danger.

Whether it is in investing or in our career, maybe the best way forward is to learn from (but not copy) our predecessors. Otherwise, we risk following the herd right off the cliff.

Law firms 101

I think by now you know that I hated my first job at my big law firm. As soon as I started, I was instantly searching for the exit doors. I asked everyone I knew at my law firm what the fastest exit route was.

They all had the same feedback. The best path to leaving a law firm was to go work in-house at a company.

For those who are not familiar with the lingo around law firms, this just means that you work for a company that actually provides goods and services to people (like Google or Apple). Most companies will employ a lawyer (or many lawyers) to help them with their day-to-day issues that they face in the businesses that they operate.

Sometimes the issues are so complex or large, these in-house lawyers who work at these companies will then solicit help from law firms to complete whatever task needs to be done. This help usually comes either in the form of expertise (i.e., the company is facing some unique legal issue that a partner needs to help with) or manpower (i.e., the company needs a bunch of minions to do mindless work).

As a low level associate fresh out of law school, I was part of the manpower brigade. I was a minion that the law firm would throw at mindless tasks that our various clients needed to be done.

And when I say mindless, I do mean mindless. Here is a sampling of some of the mindless tasks I did during my 18 months at a law firm.

1. Making sure commas and periods were in the right place.

2. Making sure that the font and color used in a report were consistent throughout a 100-page report.

3. Organizing the physical signing of 58 signature pages for a deal closing.

When I say I was a lawyer at a law firm, you are thinking of this:

What I really was, was this:

You get the picture. So how do you get an in-house job? Apparently there was a Golden Code for escaping a law firm that nobody told me when I was in law school (sneaky bastards).

The Golden Code - You have to wait 3-5 years so that you can develop enough experience and expertise that will be valuable enough for a company to hire you to be part of its in-house legal team. Companies don’t even look at you without at least that much experience.

Like the stubborn idiot that I am, I refused to accept the wisdom of this Golden Code. There had to be another way, if only because there was no way I was going to make it that long.

How long does it take to become a crypto “expert”? In 2017, not very long.

When I first stumbled upon the crypto industry, I was interested in it from a purely investment and intellectual perspective. It fascinated me and quickly became all I could think and talk about. After coming up from the rabbit hole that I had fallen into, I discovered that there were a lot of legal issues that the industry was wrestling with, but there weren’t a lot of lawyers that wanted to engage with them.

In short, the industry needed lawyers, but very few lawyers wanted the industry. Classic case of unrequited love.

The fact that nobody else wanted to associate with the industry provided me with an opportunity.

When I looked around my firm, I saw hundreds of lawyers with decades of experience that I could never catch up to. For me the choice was simple.

I could spend decades trying to become an expert in an industry where there were already hundreds of experts. Or I could spend six months trying to become an expert in an industry that nobody was even looking at.

The latter seemed like a much faster way to gain the experience necessary to join a crypto company as part of their in-house legal team.

So that’s what I did.

I spent the next six months researching, making presentations, and becoming the annoying crypto “expert” in my office. I use quotations around the word because I was by no means an expert of the industry. I was just one of the only ones looking at the industry at all.

One night my partner called me into his office and asked if I wanted to come with him and a few other partners on a client pitch-meeting the next morning. The potential client was in the crypto industry, and I was the only person he knew who had any interest in the industry at all.

I jumped at the opportunity, but was pretty convinced I wasn’t supposed to speak during this meeting.

The combined years of legal experience of the partners? 95 years.

My minion-level experience? 1 year.

The plan? Try not to make an ass of myself.

The meeting

The meeting started fast. It was four partners, two representatives of the potential client and one minion. The four partners came out guns blazing. They told the potential client that there was a lot of uncertainty in the crypto industry, and that a lot of what they were looking to do was going to be very difficult.

Every question that the client posed was met with hemming and hawing from our side. The cherry on top was when one of the representatives for the client pulled out her phone and started scrolling while one of the partners was talking. She had clearly heard enough from the 95 years of experience.

It was at that moment that I realized I literally had nothing to lose. There was nothing that I could say that was going to negatively impact the firm’s ability to get this client; that ship had already sailed. Might as well loosen up and speak a bit about the industry that I had spent the last six months getting to know.

I swear I don’t remember what I even said. I just responded to a question that the partners had missed, and when I started talking the woman, who had previously been on her phone, looked up and started to engage. We had a brief conversation about the issue and then it was off to the next thing that was probably going to be impossible to do according to my partners.

It was an out-of-body experience, which in hindsight is pretty funny because I definitely didn’t say anything groundbreaking. After the meeting, the woman walked us to the elevator and thanked us for our time.

Three months later, I LinkedIn messaged the woman from the meeting. I had to sign up for the premium version of LinkedIn just to message her, because all I had was her name and the company she worked for. I hadn’t even been formally invited to the meeting so I couldn’t check the calendar icon to get her email address.

I told her that I was looking to make the jump into the industry and would love to ask her a few questions if she had the time.

She responded almost immediately with “Of course I remember you. Funny you are reaching out, because we are actually in the process of hiring a few members to our team. Want to come in tomorrow morning for an interview?”.

Two weeks later, I got the job at Galaxy, and the five years I spent there changed my life and accelerated my career beyond my wildest dreams. Most importantly for me, I had proven to myself that the “Golden Code” was more like a guideline than a rule.

Final thoughts

There is a lot we can learn from those who came before us, both in investing and in our respective careers. The herd is smart, but herding is dangerous.

The danger comes from wanting to copy those who came before us. We crave certainty, and it generally leads us to copy outcomes and not processes.

A well known investor goes on TV and says that they have bought Company X, and so we all decide to buy Company X not realizing that the investor has probably already made a good chunk of money on the investment and it might not still be a great investment for us.

We copy the outcome (the investment) not the process (how the investor came to the decision to make the investment in the first place).

In our careers, the wisdom of the herd tells us we need a certain level of experience to make ourselves valuable to a future employer. Herding tells us that we should copy whatever worked for our predecessors to make themselves valuable to their employer. This means more people are gunning for the same position, making it harder to get that position.

As with most things in life, the more we can think for ourselves, the better off we will be.

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