by Jacob Taylor
“Certainly the owners,” I said.
“OK,” Mr. X replied. “We’ll call them shareholders in this context. Businesses that make great capital allocation decisions deliver higher returns for their shareholders. They earn higher returns on capital and they don’t squander the money once they earn it. In fact, it’s hard to imagine a higher-leverage effort for an investor than improving management’s capital allocation skills.”
“Speaking of management, they should have a vested interest in proper capital allocation, right?” I asked.
“Good, that’s another layer,” he said. “I believe the vast majority of CEOs want to do a good job. Unfortunately, most haven’t been properly trained, at least not to where they’d feel comfortable setting an independent course for their companies. They don’t teach much about capital allocation in school. I had to learn it slowly on my own through trial and error.”
“I certainly haven’t learned it in school yet,” I concurred. “What about employees?”
“Of course. Anyone who has been restructured out of a job knows how awful it is,” he said.
“That seems to happen all the time at the companies Big Rock acquires. Chopping the workforce is part of their blueprint.”
“No doubt,” he said. “When leaders choose projects, employees come naturally attached. When management makes the wrong decision and is forced to change course, the collateral damage rains down on the helpless employees. Writedowns, restructurings, and layoffs represent failures of past decisions, of bad capital allocation.”
“How about customers who depend on a company for their various wants and needs?” I said. Hit this one next, old timer.
“Absolutely,” he continued with a verve. “Remember back to our lesson on strategic versus non-strategic expenses. Good capital allocation means doing more with less to create happier customers. The pressure to continually deliver value is one of the wonders of the free market.” It was amazing how far I’d come in appreciating that sentiment.
“You know,” I said, “when I first met you, I thought business just existed to take advantage of the little guy. You’ve changed how I see the world.”
“Thank you,” he said. “You certainly had a long way to go to get there, but I knew it’d be worth the journey.”
“A very long way,” I said with a smile.
“Let’s go down another layer,” Mr. X continued. “Roll up all of those customers into society at large. When you are able to provide value for the least required cost, you free up resources that can go toward adding value somewhere else.”
“Can you explain that a little more?” I asked.
“Sure. Imagine that inside you are all of these different locks. Each lock represents one of your wants or desires. You have a lock for food, a lock for shelter, a lock for water, a lock for the opposite sex.” He paused to raise a joking eyebrow. Still a feisty old codger. “You get the idea. Now imagine that each capital allocation project creates one key. Ideally, the entrepreneur knows the lock their key will fit beforehand. A restaurant provides you food, a hotel gives you shelter, shoes protect your feet. The role of business is to use the least amount of resources to create the key that fits a certain lock. Doing a proper job spares resources to create more keys for other locks. In this sense, profit should be celebrated as a signal that an entrepreneur provided value while consuming the least amount of resources to do so. When all of society’s businesses are properly allocating capital, more locks get keys, and we’re all better off. That’s all technology really is: the means for us to turn more locks using fewer and cheaper keys.”
“I love that analogy, Mr. X,” I said.
“And since you’re from California,” he continued, “you’ll probably like this last one.”
“Oh, boy…” I said playing along.
“It requires scarce resources to create all of our technology keys. From an ecological perspective, aren’t we protecting the environment by properly marshalling our resources?”
“Sure,” I said.
“Eliminating the waste of bad capital allocation is a step toward increasing resource productivity and the sustainability of our planet. Good capital allocation saves the environment, if you can believe it.” Huh, there’s a mind-bender. Mr. X may have done more to protect the environment than my parents ever had with their ecological crusades.
“There really are a lot of invisible layers,” I said. “I think I understand why it’s so important now.”
“That’s good, Nicky,” he said warmly. “You have to promise me something before I’m gone.”
“Anything, Mr. X.” A lump swelled in my throat.
“Promise me that you’ll give this book your best effort. I know how rare it is for a book to change the world. But if you throw even a small rock in the pond, you never know where the ripple might travel.”
I took his hand and a tear escaped onto my cheek. “I promise I’ll give you my best. You have my word.” I meant it to the core of my being.
“Thank you, son,” he said.
We both sat for a while until he fell asleep. Eventually Cathy returned and relayed the message that Mr. X’s daughter was on her way. Cathy and I exchanged a worried look. We were both wondering if Mr. X could hold out until Mary got there.
Eventually Mary did arrive. And boy, did she have a surprise for us.
CHAPTER 36
A middle-aged woman stood in the hospital room doorway.
Mr. X’s eyes fluttered open, and a look of noticeable relief washed across his face. “Mary! Come in, please.”
“Hi, Frank,” she said. Frank? Her demeanor was cool, but her eyes suggested she had been crying not long ago.
As Mary entered the room, I noticed an elderly woman lingering in the hallway behind her. She reminded me of Jackie O. in her later years--classy and put-together. The elderly woman drew in a deep breath and walked toward the doorway. I’ll never forget the look on the old man’s face when he saw her. His mouth just hung open. He couldn’t say a word.
“I brought someone with me,” Mary said with the smile of a kid who had a secret.
“Hi, Frankie,” the older woman said. I looked at Cathy for a clue to what was going on. She just stood there, completely in shock.
“Helen…” Mr. X said. “I thought… I thought I’d never see you again.”
“I guess that was one promise I couldn’t keep,” she said. Mary and Helen came into the room, which suddenly felt too small. Cathy and I were clearly unintentional intruders to a very intimate moment. We beat a hasty retreat and shut the door behind us.
“Who is that older woman?” I asked outside. I was beyond confused at this point.
“Helen,” she replied. “She’s Mr. X’s wife.”
CHAPTER 37
“His wife…,” I repeated dumbly. “I thought his wife... was dead?”
“Nope, she’s alive and kicking. Obviously.”
“Mr. X said on a few occasions that he’d lost her?” I said.
“He did--she left him more than twenty years ago,” Cathy said.
“I had always assumed she’d passed away.”
“No… well, it’s complicated,” she said. “Here’s my understanding. She didn’t want to live in the Midwest anymore. Mr. X didn’t want to leave the business, so she left to pursue her own life. At least that’s the story I was told.” We settled into the waiting room. How do I process the last five minutes?
After a good while, a nurse appeared to notify us that Mr. X wanted to see us. We made our way back to the room and entered timidly. Whatever they’d talked about, the frost in the Xavier Family had thawed. Each woman had taken a side of the bed, each holding one of Mr. X’s hands. Anyone who didn’t know better would assume they were a normal, happy family and the last twenty years of strife had never happened. Cathy and I stood at the foot of the bed.
“We’ve had a good run, haven’t we?” Mr. X said, looking at Cathy.
“We have, Mr. X,” Cathy said.
> “I don’t have much left in the tank,” he said between difficult breaths. “I poured myself into my work at the expense of everything else. I sacrificed a lot. And so did my family,” he acknowledged, smiling forlornly at the women on either side of him. “I was able to do more for humanity as a businessman than I ever could as a husband or father. Even though it meant shortchanging those close to me. I feel terrible about that, but it was how I was able to be most useful. As painful as it is to say, I wouldn’t change anything.” Mary and Helen exchanged a quick, pained look over the top of his head.
“Wherever life takes you… follow your inner scorecard...” he whispered. It wasn’t clear if he was speaking to me or everyone, but I took it to heart.
Those were his last words before he slipped quietly out of consciousness. His wife and daughter sat by the bed and gently stroked his hands. Mr. X couldn’t speak, but he still held onto their hands as a sign of life. Mary caressed his head, “If you want to go, it’s OK. You can go, Dad.” Tears now streamed down Mary’s cheeks. Helen whispered something in his ear--a final message from wife to husband.
“I love you, Daddy,” Mary said. “I always will.”
At that moment, Mr. X smiled. His face relaxed and his grasp loosened.
He was gone.
CHAPTER 38
I don’t remember walking out of the hospital, but I found myself outside. The sun was fully radiant--a glorious day in Wichita that stood in stark contrast to the dense mental fog I was swimming in.
I wandered the streets, not knowing where I was or where I was going. The tears streamed down my face. I avoided eye contact with strangers, sure they figured me for a lunatic but unable to care. I kept walking and crying uncontrollably.
How do people deal with losing someone important to them? I felt hopeless, rudderless, defeated. My mind spun at a thousand RPM yet went nowhere.
How was I going to make good on my promises to Mr. X? I hadn’t learned enough. My mentor was gone before we could finish our lessons. How was I going to write this book?
I was defeated and I knew it.
A buzzing in my pocket broke my trance. I blinked the tears out of my eyes. It was a voicemail from my parents. They wanted to know if I had any extra cash that I could send to help make the next mortgage payment. Impeccable timing, guys. Eventually I caught a cab and found myself on the next standby flight to California. There weren’t any answers left for me in Wichita.
CHAPTER 39
It turned out there were no answers waiting for me back in California either, just more grief. I opened the front door to the apartment and found a bag sitting accusingly in the center of the entryway. Inside the bag I found a few sets of clothes and my toiletries neatly packed. On top of the bag was a note from Stephanie. It said we needed some time apart and that I should think about my priorities. When it rains, it pours.
I called Larry and asked if I could crash on his couch while I tried to extinguish the dumpster fire of my life. He was his usual amiable self and invited me without hesitation. I hung up and wandered the apartment aimlessly. Our apartment. I was hit with a flood of memories. Funny moments. Fights. More good than bad. I thought about what Mr. X had said about not letting her get away. Was it already too late? Was she already gone?
I flopped miserably on the couch and glanced at the coffee table, strewn with folders, notebooks, and printed out journal articles. It was a stabbing reminder that I’d never find another girl as smart as Steph. I picked up the top one and mindlessly read the title: Clinical Versus Mechanical Prediction: A Meta-Analysis. The words barely registered, but for some unknown reason I kept reading.
On average, mechanical-prediction techniques were about 10% more accurate than clinical predictions. Superiority for mechanical-prediction techniques was consistent, regardless of the judgment task, type of judges, judges' amounts of experience, or the types of data being combined. These data indicate that mechanical predictions of human behaviors are equal or superior to clinical prediction methods for a wide range of circumstances.
An idea tickled at my subconscious. I could feel the build up of mental static, like a bolt of lightning about to crack the sky. I was onto something, but I needed to pull at the thread. I tucked her article under my arm and took off for the library, my sad bag of belongings in tow.
CHAPTER 40
The next week flew by as I prepped for my fateful board meeting presentation. I desperately needed this Big Rock promotion to help me dig out of my Grand-Canyon-sized life hole and buy some time to write Mr. X’s book. I needed a lucky break, but as the genius behind McDonald’s, Ray Kroc, once said, “The more you sweat, the luckier you get,” so sweat I did. Imagine a montage of me hustling at work by day, buried under a mountain of books at the library, pouring through psychology research, and grabbing a few winks on Larry’s couch before waking up to do it all again the next day. End montage.
I tried the safer back-channel of small talk text messages with Stephanie. She wasn’t having it. She didn’t seem that eager for reconciliation at the moment.
The afternoon of the Big Rock presentation arrived. Presenters were randomly assigned time slots, and wouldn’t you know it, I was going right after Vance. FML. Word around the office was that he was working on something transformative. No one knew the full details, but it involved machine-learning and neural networks that would change everything we did at Big Rock. He had artificial intelligence that was accurate out to the fourth decimal place. A rumor was circulating that he’d personally hired outside expert consultants and AI researchers from Carnegie Mellon to help him with his presentation. Probably more accurately, his father had hired them, but why sweat the details? I didn’t even know what half of those words meant.
I showed up to the boardroom fifteen minutes before my scheduled time, my stomach in a familiar knot. Vance’s presentation was just letting out. I caught a snippet of two higher-ups conversing as they passed.
“Wow, that was on a whole different level. That guy will probably be our boss soon.”
“Yeah, I feel sorry for the poor schlub who’s presenting next.” I’ve been called worse.
Vance emerged triumphant and was immediately surrounded by colleagues who appeared just in time to slap him on the back. After a few minutes, I was looking for the ref to throw the flag for excessive celebration. Eventually the clingers disbursed and Vance walked over to me.
“Oh, you’re presenting today?” he said. “I figured you would have been in Wichita burying an old man.” My stomach knot dissolved in a bath of hot acid. He smiled knowing he was getting to me and pressed on. “I’m not sure why you’re even bothering. I’ve already got this in the bag. But I guess losers always think they have a chance, don’t they?” He winked at me as he strutted off. Where’s a random lightning bolt when you need one?
The Big Rock higher-ups were filtering back into the room. Normally this would have been the last chance to do my customary dry heave in the bathroom. Yet a feeling of calmness washed over me. Little did Vance know, I had an ace up my sleeve.
CHAPTER 41
Around the boardroom table sat a familiar collection of middle-aged men and women in business suits. The Big Rock management team--different, yet somehow all the same.
I silently stared around the room, making purposeful individual eye contact before I started speaking. Command the Room was tip number four in an article I had read, “10 Hacks For a Killer Presentation.”
I cleared my throat and started my PowerPoint. “Baseball drafts. Medical diagnosis. University admissions. Wine pricing. Criminal recidivism. Measuring brain damage. What do these all have in common?” I paused for effect. My audience gave me nothing in return. “They’re all domains where a simple model beats the so-called experts. The evidence is clear: quantitative models provide a ceiling, which us humans subtract from, not a floor on which we build upon.”
At least the puzzled faces around the table weren’t buried in their phones. They were confused, but I had the
ir attention.
“America’s pastime,” I said, turning to a slide with a picture of a baseball player. “Professional athletes have a certain look. Baseball scouts know a good player when they see one in action. They can feel it in their gut; some guys just have it. Then along came Billy Beane, the General Manager of the Oakland A’s. He started looking at numbers, not if the player had ‘the look.’ He stopped caring if the prospect seemed athletic. He keyed in on the player’s on-base and slugging percentages. To Beane, the numbers didn’t lie. He ignored his team’s internal scouting recommendations. He didn’t even want to know what a player looked like for fear it would taint his impression of the numbers. He had created a simple quant model for what made for a good baseball player. He was leaving his gut feelings out and trusting the numbers. Guess what? It worked. In 2002, the Oakland A’s won 103 games, including an unheard of twenty straight. All this success came against teams whose payrolls were three times bigger. Michael Lewis wrote the best-seller Moneyball about the triumph of Billy Beane and the Oakland A’s. Can you imagine the temerity of trusting simple numbers over scores of well-paid, lifelong baseball experts?”
The shift in body language in the room told me they were interested. Behind me I put up a slide with a picture of a handsome, competent-looking man clad in scrubs. Paging Dr. McDreamy.
“I have something disturbing to tell you. Researchers asked doctors the seven most important factors to determine if an ulcer is malignant or benign. Size, shape, location, etc. Very basic stuff for any doctor. The researchers then developed a simple model based on the doctors’ answers. It was stupidly simple--too basic to be of use. The researchers then asked the doctors to look at ninety-six different individual stomach ulcers and score them on a scale from “definitely malignant” to “definitely benign.” Here’s where it gets interesting. Without telling the doctors, the researchers mixed in duplicates at random so that the doctors actually saw each ulcer slide twice. Sneaky, right?”