The Telephone-Game Of Derivatives

One of the essential traits of a great person, great CEO, and a great investor is the unrelenting pursuit of the truth and a firm ignorance for anything else. The truth in a world that is full of smoke and mirrors, stemming from an unconnected era in which the creation of heaps of walled gardens would go unnoticed to unsuspecting participants.

Even though we don’t like to admit it, we as grownups still play the telephone game frequently, in which a chain of derivatives regularly degrades the truth.

But those days are slowly coming to an end, as the internet with the free-market principles it aims to deploy, and social networking as its unforgiving arbiter is steadily eroding misplaced authenticity and trust (see Trust is the currency of success).

Most people reading this blog will think of derivatives as a financial instrument first, but our world is chockfull of others that invade our lives from every corner. The dictionary definition holds a clue:

  • adjective: imitative of the work of another person, and usually disapproved of for that reason
  • noun: something that is based on another source, an arrangement or instrument (such as a future, option, or warrant) whose value derives from and is dependent on the value of an underlying asset

Sound decision-making comes from a clear understanding of the difference between fact and derivative. Below are examples of everyday derivatives and the impact they have on their surroundings. Some may be shocking, but I promise will yield incredible new focus and progress if merely ignored.

Markets don’t exist. We covered a whole blog about it. Read it, please. Customers do not buy products because they associate or belong to a derivative descriptor of a market. They buy because the marketplace (a mechanism to buy) offers the best opportunity to serve their (often complex) individual needs. So, go ahead and throw away your industry and market segmentation or market-share leapfrog strategies. They are worthless.

Venture Capitalists
In the investment equation between the assets of a Limited Partner (money) and the assets of the entrepreneur (idea), venture capital is merely a dating service (with no assets to speak of) that establishes the transaction of the marketplace, a financing round. While Venture Capital (VC) behaves as if it is the originator of assets and the creator of value, LPs are the ones that deploy the commitments to the creation of value by the entrepreneur. Contrary to their testimony to Congress, VCs did not create millions of jobs, LPs did by deploying their monetary assets. While VCs force entrepreneurs to buy into their (steadily commoditized) investment wisdom, more than 90% of that wisdom does not pan out. An entrepreneur is better off to ignore VC advice altogether and pursue the creation of real value to its customers. Fundraising is a lot easier that way.

Many people seek solace in the interaction with a psychologist to solve relationship problems or otherwise. While an outside perspective may be liberating at times, a sustainable solution based on a derivative opinion is highly unlikely. Spend more time with the people you have relationship problems with, than with your psychologist. Because the stories you tell him are themselves derivatives.

TV Journalists
CNN today is a prime example of a network that has gone from reporting the news (expensive) to regurgitating the news with hordes of consultants (inexpensive), delivering derivatives of the news rather than the news itself. CNN has moved from a real news source to a commodity entertainment channel, eroding and consistently being defeated at its home turf. Ignore the regurgitation by derivatives, and you’ll save precious time of your day.

The Stock Market
The stock market is an exchange but not a marketplace in the free-market definition of it. It falsely suggests the performance of a company, long or short, can be derived from something as simple as price-to-earnings ratios. Public CEOs know how to dance the dance, market to those numbers, and become short-term-focused to meet Wall Street expectations. Yet long-term and macro-economic differentiation that requires investments (expense) are arguably more important than meeting the quarterly drill of meaningless earnings reports. The performance of a stock is a derivative of the short-sellers view of the performance of the company, and by definition, inaccurate. And so are the investment decisions derived from them.

The dollar is not worth the paper it is written on. It merely communicates the value of trust attached to that piece of paper. And even though that money can buy you great things, it matters whether it is acquired from a foundation of trust. Cash is not king; trust is. Easy money has a way of punishing its acquirers in un-expecting and fleeting ways, hard-earned money amplifies itself consistently. So, money is a derivative of trust, and someone with a lot should not automatically be confused with authenticity and trustworthiness. Earn money the hard way, and you’ll be rewarded for life. Money can be a derivative of trust, but with financial derivatives amounting to eleven times the size of production better not be confused with commensurate trust.

There are many more derivatives I can talk about. But the purpose of this blog is to make you think. Hopefully, the next time you spend time with someone, you will ask yourself the following question: is that person claiming to be the authority of derivatives or the authority of our best proxy of truth. The answer will define your success.


Let’s lead the world by example with new rigors of excellence we first and successfully apply to ourselves.

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