The TL;DR1 abstract is that successful firms are fanatical about separating the signal from the noise, i.e. measuring only what matters. Select clear, rational Objectives for your organization, then identify measurable Key Results that, if diligently nurtured, inevitably drive said objectives to completion. Far from being just yet another Theoretical Business Guru, John Doerr has a formidable curriculum vitae, having steered his venture capital firm Kleiner Perkins into early investments in Sun, Intuit, Amazon, and Google, where he preached the OKR gospel to them all. The founding father of OKRs, however, was his mentor, Intel founding member Andy Grove, one of the great titans of modern business management.
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Investing in public markets can feel dauntingly opaque at times. CEOs spout sanitized clichés on conference calls while Wall Street analysts confidently make up numbers and opinions and then change them with little rhyme or reason. The OKR framework has given me a useful methodology to evaluate businesses strategically on an ongoing basis. Do management set sensible objectives? Do they offer transparent key results with which to evaluate their progress and achievements?
For example, one of our banks has embarked on a strategy to reduce balance sheet size in this shrinking Net Interest Margin environment (← Objective) by halting origination of fixed rate apartment loans and focusing instead on variable rate commercial & industrial loans (← Key Result #1). Without pressure to grow assets, they can also re-mix their liabilities by focusing on growing core deposits to replace higher cost debt and preferred stock (← Key Result #2). Their goal is to achieve this within 12-18 months.
This strikes me as rational goals with clearly measurable metrics that, should they be achieved, will inevitably result in better margins and higher EPS. Quarter to quarter, there will be numbers that track these “OKRs”, which help me filter out the noise in each earnings release. If Mr. Market fixates on the macro and tosses this baby out with the bathwater, I can confidently buy more. Conversely, if management tries to spin bad numbers into an alternate narrative or appear to arbitrarily change objectives midway, I can see through the attempted deception and divest.
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This framework, too, can be applied to Incandescent Capital. Our objective is to generate a double-digit rate of return over the long run. Importantly, what the stock price of our investments are on a month-to-month or even a year-to-year basis is not a key result. Key results are instead whether their underlying business fundamentals remain steady, whether their future prospects have improved, and whether we have purchased their shares at a discount to the estimated present value of its future cash flows. If the answer is yes to all of these, it is decidedly probable we will achieve our objective.
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1Too Long; Didn’t Read. Cheeky millennial internet slang but hopefully evidence that I’m still with it.
