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It was 127 slides long, with no music or animation. It has been viewed more than 21 million times on the web. Sheryl Sandberg, Meta platforms’ COO, once called it one of the most important documents to ever come out of Silicon Valley.

Have I managed to create enough suspense, or should I go further?

It later became the foundation material for a superlative book on work culture, “
No Rules Rules”, co-written by Reed Hastings, the CEO of Netflix. The aforementioned slide deck was his presentation on Netflix’s work culture.

It is a great read for all budding entrepreneurs (including me) trying to set the right culture in their firms. In his previous avatar as CEO (of Pure Software), Hastings tried laying down a policy for even the smallest thing one could think of and had failed miserably. In his second role as CEO (of Netflix), Hastings decided to do it differently.

To him, a successful company is an outcome of high talent density, a lot of candour and an environment devoid of dumb policies. A company with a smaller group of great talent will always outperform a large one with so-so employees as high performance is contagious. Consequently, investments (high salaries) should be made to achieve this objective.

Netflix also prioritises “radical candour”. It is perfectly normal for employees to disagree with their superiors in meetings. One cannot lash out, but feedback is acceptable so long as it is given to help and is actionable.

Lastly, there is no room for useless policies. Netflix tracks people from effectiveness standpoints as efficiency is tracked for machines (my words, not his). Netflix doesn’t track hours or days that people work and does not even have a vacation policy. On the flip side, Netflix sees itself as a pro-sports team, not as a family. Underperformers are let go after being given a good severance package, but the talent density of superior achievers is preserved. From what we traditionally understand as management self-help, this book is different.

The point I want to make today, however, is a different one. The prologue of the book mentions that Netflix has been remarkably successful. By 2019, 17 years after Netflix went public, its stock price had gone up from $1 to $350. By contrast, the same amount invested in S&P 500 or Nasdaq would have yielded only 3-4 times returns.

There is a decent chance that this is not the first time you are hearing about Hastings’ book. The CEO of such a successful company baring his soul; it must have pearls of wisdom, right? Right, but let us consider another story. This time about the CEO of company A, who was a nervous wreck before his upcoming meeting with the CEO of company B (A’s competitor and 100 times its size). CEO of A had worked for months just to get CEO of B to respond to his calls.

After a little small talk at a massive glass table, the CEO of A began his pitch. He suggested that B buy out A. The CEO of B nodded a few times and eventually asked how much it would cost him. The CEO of A replied $50 million. The offer was flatly declined.

The question I am struggling with is: Today, we do care about what Hastings has to say in his book, but would we have cared equally if it was written by the CEO of A, which folded? Would it have become a bestseller? What do you think?

Now, let me tell you that the company B here is Blockbuster, the $6-billion giant that dominated the home entertainment space at the start of this millennium. The CEO of A is Hastings. Netflix vociferously tried to sell itself to Blockbuster for a princely $50 million in 2000. They got that valuation when they went public in 2002. By 2010, the world had changed. Unable to cope with the shift from rent to stream, Blockbuster filed for bankruptcy. In 2019, Netflix’s film
Roma won three Oscars, and Blockbuster had only one store standing, in Oregon. By 2021, Netflix’s peak market cap would cross $300 billion.

If I started this column going ga-ga over a failed entrepreneur who folded to his competition, would you have read this far? It would have been the same set of instructions — don’t have policies, have talent density, etc., but it wouldn’t have mattered.

Because Netflix found success, we automatically believe that it must be on account of the CEO’s policies. Because, for many of us, the proof of the quality of our decision is solely and totally dependent on its eventual outcome. If you have won, it must be because you made a good decision; and if you lost, it must be because you made a bad one.

Let us take this argument to its extreme. No sober person thinks that driving back home after getting drunk reflects good decision making or good driving ability. You have managed to reach safely despite a bad decision to drive while drunk. This is a case of a win (reaching home safely) despite making a bad decision (driving when drunk).

Annie Duke, the author of “
Thinking in Bets”, says that professional poker players have a word for it: resulting. Just because they won the hand, they must have played well. Nassim Taleb summarises it in one sentence: “If you are so rich, why aren’t you so smart?”

This is equally true for market participants too. As investors, we need to ask ourselves how many times we resort to resulting — thinking that we are smart investors just because we made money. Or believing that an investment strategy is great just because it led to a momentary outperformance. An investment manager is great because she presents a nuanced and well-thought-out argument, not because she is an articulate storyteller who is outperforming today’s market.

By that logic, does Hastings’ book become any less impressive because its market cap has now corrected drastically (below $100 billion as of this writing)? It’s high time we stopped judging a book by its cover, investment strategy by its recent outperformance and investment decisions by the size of profits. Heroes are heroes because they are heroic in their behaviour, not because they won or lost.

(The author is Co-Founder & Director, Buoyant Capital. Views are his own)

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