Many more people know how to do their job than why a particular approach works.
This can pose serious and unknown risks, because if circumstances change, the previous ‘right’ solution may no longer work or opportunities may be missed.
A few examples:
Risk example
In the mid-1990s, as Sacramento was recovering from California’s aerospace collapse, a few young developers just getting started began buying land on the edge of growth corridors. They processed them and then passed them on to a developer or builder, depending on the size. They did very well and continued: they went a little further away and bought a little more because they had more money.
After a few years, they developed a reputation as a visionary, and honestly, they started to believe their own reputation… well, you know.
Ultimately, like everyone else who keeps doubling down in Las Vegas, it can only end one way. And that also happened during the financial crisis.
Probably not an unusual story, so what’s the point?
They started buying land far away because they didn’t have the money to find big land closer. There was no incredible insight or thoughtful calculations about price differences driving the process. It was just what they could afford to do.
Nothing wrong with that per sebut because they didn’t recognize why they did what they did and simply started making up a story in their heads about their foresight, they didn’t have “turn off road” signs to help them know when it was time to stop.
It may seem ridiculous to say, but many people don’t actually know why they’re doing it right. Which leads to excessive risks.
Example of an opportunity
My company was invested in a homebuilder in Atlanta and I was driving around the area with the landman looking at potential deals. As he points out the packages they are looking at, tried, etc., I noticed that he described on all the packages that he had chosen options for them and then processed them for approval.
I asked him, “How often – if your ‘ask’ was reasonable – did you hear nothing about approvals in this area?”
He said: “That won’t happen, but you may get less than you hoped for.”
“How much less?”
“I doubt it would ever be more than 15% of the units you were aiming for, if you were reasonable”
“Have you ever tried to buy the land for less money up front, before the approvals?”
“No. That would be too risky”
“You just told me that if you know what you’re doing, you shouldn’t get hit for more than 15% of what you asked for. So if you bought it upfront for 20% less cash, you’d be fine, if not way ahead.”
He just looked at me.
I explained, “Do you know why no one is doing this? Public builders don’t want to buy land without rights. [They choose not to for] There are many good reasons, not least that it takes time, and they are trying to be efficient. Not to mention that not all their teams know how to do this and assess the risks. It’s just easier to tell them all, “We’re not doing that.”
Private builders don’t do that, because you can’t borrow from a bank on land without rights and they don’t have enough money to put it into land without debt. You have an equity partner who can do that, why don’t you think about it?”
He knew what was common, but didn’t really know all the reasons why.
So he missed an opportunity.
These are examples of deals, but the principle applies to everything we do – from choosing an operating system to organizing our businesses and countless other decisions. If you cannot articulate the ‘why’ behind your approach, you become blind to changed circumstances and new opportunities.
Understanding why something works is not just intellectual curiosity; it’s the difference between repeated success and stumbling upon failure, between seeing an opening and missing it completely.
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