Category: Excerpts

Larry Summers. He’s on the board with us, the former treasury secretary of the US. He’s on the board at Sequoia. And he introduced me to this framework of a pre-parade and a pre-mortem. And we actually have made it a default in our investment memos. And it’s something that we take to portfolio companies, where we ask them, imagine three years, sometimes five years into the future. And you’ve been fabulously successful. What are the conditions that led to that? What decisions did you make that led to that success? And then conversely, write your pre-mortem. What are all the things that went wrong?

There’s a version of this in Amazon and the way that they write press releases when they start to do product development, because it’s thinking about that moment of success and what does it actually encapsulate? And the beauty of it is it clarifies the mind to focus on first order issues. I’ve seen management teams change direction and change prioritization on reflecting on these pre-parade, pre-mortem dimension. And we use it at Sequoia repeatedly at our offsites. Imagine the venture business in a decade, and Sequoia is gone. We presided over the decline of Sequoia, this team, the people here in this room, it was us. What happened? What did we not do?

–Roelof Botha, Partner at Sequoia Capital

Source: Morningstar

Horror stories are designed to artificially trigger our ‘fight, flight or freeze’ responses that send a wave of adrenalin through our bodies and prompt us to take action to escape the perceived threat.

This is typically achieved by a shocking break to gradually-built tension.

Investors will be all too familiar with this experience. Like a hapless character in a movie who runs from one threat right into the hands of the villain, a sudden fall in asset prices can prompt us to take swift action, only to discover later that we made a terrible decision.

In my previous career managing portfolios directly for individuals, I witnessed several examples of clients who insisted on selling their entire portfolio when assets were falling. While they often saved money when measured at the bottom of the market cycle, they typically failed to re-invest, believing they had escaped the threat of falling prices. Only later did they realize later that they had run into the arms of the great threat of not investing and they drifted further away from their goals.

When watching horror movies or market movements, it is typically better to look away when you are feeling uncomfortable.

-Dan Kemp, Global Chief Investment Officer, Morningstar Investment Management Europe