The Index Mindset
To index or not to index, that is the question.
As a player, Michael Jordan was perhaps the ultimate “bet on himself” guy. When the game was on the line, we wanted the ball in his hands. Overall, it worked out spectacularly.
As a business owner … not so much.
Last week, ESPN’s Adrian Wojnarowski reported that Jordan, now owner of the Charlotte Hornets, was engaged in “serious talks” to sell his majority stake in the NBA team. In March of 2010, Jordan paid $275 million for his interest. Forbes valued the team, as of last October, at $1.7 billion.
Rich men have a long history of paying far more than expected value1 for sports franchises, perhaps the ultimate ego investment. But, if Jordan “only” gets $1.7 billion for the Hornets, he will have achieved roughly a 15 percent annual return on his investment – an outstanding profit by any measure, made much more so on account of the Hornets’ pitiful record with Jordan in charge.
Poor drafts, poor roster construction, poor player development, and all around poor play have led to a poor record and mediocre attendance.
After getting smoked by the New Orleans Pelicans last night, Charlotte has posted a record of 419-596 in the roughly 13 years of Jordan’s ownership. The team is far out of contention today and has had only three winning seasons during that period, only two playoff appearances, and zero postseason series wins.
Overall, Jordan’s ownership has worked out spectacularly badly.
It’s an exceedingly good thing for Jordan that he will get the benefit of market returns, rather than personal achievement, when he sells the team. His profit will come from rising NBA team values generally rather than any premium for having made the Hornets more attractive and more valuable. At the franchise level, MJ is thrilled to be an index investor. It will pay off handsomely for him.
His active management of the Hornets (as with the Washington Wizards before that) has been dreadful.
The “index mindset” is the subject of this week’s TBL. If you like The Better Letter, please subscribe, share it, and forward it widely.
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The Index Mindset
The NCAA Tournament and “chalk” don’t go well together. And that’s a good thing. Top-seed Purdue, a 23.5 point favorite, lost to Fairleigh Dickinson, a 16-seed, one week ago. A bettor placed a $33,000 wager on FDU and won a staggering $495,000.
We humans are both terrified and transfixed by extreme events. In the financial world, for example, we routinely overpay both for insurance and for lottery tickets (literal and figurative). There is good reason for that generally, as Morgan Housel has explained (emphasis in original).
“Long tails drive everything. They dominate business, investing, sports, politics, products, careers, everything. Rule of thumb: Anything that is huge, profitable, famous, or influential is the result of a tail event.”
Our world is increasingly characterized by an “index mindset,” in John Luttig’s brilliant construct. The idea comes from the success of index investing, whereby investors eschew active management of their portfolios (searching for big winners) in order to own an entire index of stocks, providing a mechanism for (mostly) not losing big.
Very broadly speaking, the index mindset favors average results over extreme ones, a bird-in-hand over two in the bush, relative over particular truth, function over form, quantity over quality, mandate over merit, efficiency over exploration, passivity over action, predictability over tails, determinism over freedom of choice, mistake avoidance over smart decisions, evolution over revolution, adaptation over reformation, safety over risk, diversification over concentration, preservation over creation, velocity over due diligence, optionality over decisiveness, the general over the specific, and growth over profit.
This approach is often an appropriate default – as with investment in public markets, where it works very well; even Benjamin Graham thought them a good idea – especially in relatively efficient and liquid markets.2 In other contexts, it is usually pedestrian and often dangerous.
The index mindset is about risk mitigation rather than ambition. It is about management and administration rather than opportunity. It is about the efficient frontier rather than the bleeding edge. It is about scale and cost efficiency rather than uniqueness and quality.
It solves for minimax rather than maximin optimization. It doesn’t want the last shot.
The index mindset always plays it safe. It throws away a big shot for index returns.
Broadly speaking, the index mindset forgets that long tails drive everything and that risk and reward tend to correlate. The index mindset offers no framework for determining when we shouldn’t index … when the juice is worth the squeeze.
The idea that we can be whatever we want is a pernicious lie, but so is the idea that the seemingly impossible is, of necessity, truly impossible. Our opportunities can be enormous and are almost surely greater than we tend to assume.
“Why not you? Why not more? Why not us?”
“Some people want it to happen, some wish it would happen, others make it happen,” said Michael Jordan (in The Last Dance), referring to himself, of course.
As Wayne Gretzky famously said, “You miss 100 percent of the shots you don’t take.”
The index mindset doesn’t dare to dream, doesn’t run for president, doesn’t go for the gold, doesn’t take leaps of faith, doesn’t take the last shot, doesn’t go out on her own, doesn’t create the next big thing, doesn’t go all-in, doesn’t storm the beachhead, and doesn’t demand (or expect) true love.
The index mindset is all evolution and incrementalism but no revolution.
The index mindset follows “the rules.”
The index mindset gets an MBA, takes a salary, and goes into consulting (best case).
The index mindset increasingly dominates our cultural milieux. Diversification and risk avoidance now generally rule the day.
In philosophy, we’ve seen a shift from capital-T Truth to a multitude of small-t truths – “your truth” and “my truth” – within a moral relativism.
In physics, we’ve seen a shift from a certain Newtonian physics to probabilistic quantum mechanics.
In politics, globalism replaced nationalism after World War II. Fewer and fewer of us accept the idea of American exceptionalism anymore.
The arts should be well positioned to reject the index mindset both in the sense that artists think we can recognize and create good over bad, great over good, and that Truth and “true love” are worth seeking and even dying for. Yet we index there, too. We are oh so eager to proclaim that those who don’t learn from the past are doomed to repeat it – right before watching a movie with a numeral in the title. For the third time. Having purchased it via DVD.
Private life has also become indexed. Just a few decades ago, marriage was the rule and marriage at a young age was common, with partners committed until death parted them. Not anymore. Today, marriage comes six years later and schooling lasts five years longer. Tinder and other dating apps allow people to diversify their relationship capital across an index of dozens of partners while avoiding a commitment to marriage and a family.
Diversification and risk avoidance for the win … something.
An extraordinary 75-year study followed Harvard graduates from 1939 to 1944, into their 90s, and considered all aspects of their health and well-being. The principal author, psychologist George Vaillant, summarized the findings as follows.
“Happiness is love. Full stop.”
People who have loving relationships with family and friends thrive; those who don’t, don’t.
Even college and career choices have become indexed and hedged.
The more our decisions are algorithmically derived, the more humanity will be required to stand out. The index mindset is comfortable – avoiding decisions requires the least amount of effort. But if you index across every domain, you lose any differentiating features, becoming little more than an average of everyone else.
Because it emerges in liquid markets, and because technology supercharges liquidity generally, the index mindset won’t be going away. However, ever-increasing liquidity is an enemy of community. If you can readily change careers, jobs, houses, locations, and families, there are far fewer incentives to stick around.
The question, then, is when and if you should index. The short answer is “almost surely a lot less than you do now.”
To be sure, the risks of stepping out of the index mindset are both real and substantial. The world, as ever, is increasingly complex and often wildly random. Our abilities are limited. Our analysis is flawed. Our judgments are highly imperfect. Our priorities are at cross-purposes. Or wrong. We are human, for good and for ill.
As I say in my day job, returns needn’t turn up when you want or need them. They may not turn up at all.
We lust after certainty in a highly uncertain world.
On one level, regret minimization feels like an index mindset. Avoid errors and especially big errors. However, in my experience, regret is more often a product of not doing something than of doing something that doesn’t turn out optimally. Or at all.
It’s the Jeff Bezos regret minimization framework.
“I wanted to project myself forward to age 80 and say, ‘OK, I’m looking back on my life. I want to minimize the number of regrets I have.’ And I knew that when I was 80, I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the Internet that I thought was going to be a really big deal. I knew that if I failed, I wouldn’t regret that. But I knew the one thing I might regret is not ever having tried. I knew that that would haunt me every day.”
We must concede that this idea is more fraught with difficulty than we might tend to assume. There are trade-offs to be made. The world changes. We change. We can’t do everything. What we think we’ll regret today may be different than what we regret in the future.
But, it’s a good starting point.
In As Good as It Gets, Jack Nicholson plays Melvin Udall, a successful romance novelist who is also an obsessive-compulsive whose communication with the world is mostly limited to abuse. When Melvin makes an unannounced visit to his former therapist, he gets a perfect Jack Nicholson line: “How can you diagnose someone as having obsessive-compulsive disorder and then act as though I had some choice about barging in?” When the perfect line fails, Melvin storms off and asks the existential question we all ask from time-to-time.
“What if this is as good as it gets?”
Here’s the bottom line: If we truly want things to become markedly better than they are, the index mindset isn’t likely to be the way to go.
Don Draper, whose entire life was predicated upon creating and recreating himself, for good and for ill, recognized the “twinge in your heart far more powerful than memory alone” to be “back home again, to a place where we know we are loved.”
We all want meaning and mattering, which are more important to well-being than mere happiness. Without them, we can try … and try … and try, but satisfaction won’t be forthcoming.
Satisfaction requires risk, concentration, and perhaps a leap of faith. Being unhappy is easier than being happy because it’s easier to destroy than to create. The index mindset is easier, too. But creation – the active management of our lives – is where the meaning and mattering are. Meaning comes from giving more than receiving and from being a part of something bigger than oneself.
Therein we can find not so much happiness as joy, that which can even count it a blessing to suffer, that cares for the widow, the orphan, and the stranger, that builds a family. As Carl Jung wrote: “The least of things with a meaning is worth more in life than the greatest of things without it.”
Changing the world starts with changing yourself (and that starts with the small stuff, like making your bed).
For crucial matters such as these, passivity, inertia, hedging, and diversification are enemies. The index mindset won’t cut it. The active management of your life is required.
Totally Worth It
Oh, my, this song is wonderful.
Always check the door before you lay down Keep a glass of water by the bed A dose of local honey will keep your nose from runnin’ Little things like that she's always said Never back up farther than you have to Pray for those that don’t have a prayer Honey, trust yourself You better love yourself ‘Cause ‘til you do, you ain’t no good for anybody else And honey, boys are dumb But you’re gonna find your one Love him hard, bless your heart You’ll need someone to listen That’s why I leave a light on in the kitchen Pancakes just taste better after midnight When you make friends, always be color blind Your freckles make you pretty There’s more to life than bein’ skinny When you feel fat, it's mostly in your mind So honey, trust yourself You better love yourself ‘Cause ‘til you do, you ain’t no good to anybody else And honey, boys are dumb But you’re gonna find your one Love him hard, bless your heart You'll need someone to listen And that's why I leave a light on in the kitchen Well honey, trust yourself Laugh at yourself If somethin' tries to hold you back Get up and give it hell And for heaven's sake Always have a place That you can do some cryin' and some bitchin' And always leave a light on in the kitchen
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Benediction
To those of us prone to wander, to those who are broken, to those who flee and fight in fear – which is every last lost one of us – there is a faith that offers hope. That offers enough. And may love have the last word. Now and forever.
Amen.
Thanks for reading.
Issue 147 (March 24, 2023)
The Phoenix Suns just changed hands at a $4 billion valuation. In October, Forbes had valued the team at $2.7 billion. If Jordan gets a similar bump, the Hornets’ sale will be for about $2.5 billion. That would be an annual return for MJ of about 18.5 percent.
That said, investing successfully – investing at all – requires the active management of one’s life. The decisions to save, how much to save, and how consistently to save must all be actively made. Figuring out one’s hopes, dreams, and goals, developing a plan around them, and implementing that plan is decidedly active management. Evaluating risks and opportunities and acting on them is, by definition, an active endeavor. Determining a course, adjusting course as one’s situation changes, and staying the course during difficult times all require action. Staying smart when the markets are going wild takes active involvement and management, at least with respect to one’s emotions and biases.
I continue to be blown away by your writing, Bob. I really connect with your messages and how you weave them together with music and sports, two things I also love.
I really LOVED this!