What if I told you you'd been going about decision-making all wrong?

I know that's arrogant of me.

But I only got here through my own journey and reflection.

Because I made the same mistake you did and saw how it hurt me.

What was that mistake?

Trying to make the optimal decision every single time.

Then I switched it up... this one small change changed everything.

But first, our sponsor.

Thanks ​BisonCFO​ for sponsoring this issue.

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More than 50% of business owners say they wish they knew more about their financials.

And those are the ones who admit it!

While it's easy for me to sit in my CFO seat and say how dare you, I'll admit something to you: when I first started, despite all the formal training, I felt ill-prepared just like you.

Mike Tyson once said "Everyone has a plan: until they get punched in the face."

And holy smokes, how true is that?

And that's what business is. Getting hit in the face time and time and time again.

So, that's where we come in.

Need a strategic sparing partner? We got you. Growing quickly and don't the next steps? We got you. Never took an accounting class and don't have a clue? We got you. Need a budget and/or forecast and never worked a spreadsheet? We got you.

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Yes, we do all the typical Fractional CFO stuff. We:

1. Establish goals
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Stop trying to make the best decision; avoid bad ones instead

During the market panic last week, I had two thoughts/lessons:

1. Most people had no idea anything was happening
2. Historically, the worst decision you could have made is to sell

We talked about ​#1 and how two effects​ (Echo Chamber Effect and Filter Bubbles) could drastically impact your decisions negatively.

Today we’re going to talk about #2. But more specifically, instead of trying to optimize decisions, we should focus on minimizing bad decisions instead.

We can never guarantee good decisions, but with the right guardrails we can reduce the probability of bad ones.

The worst decision you could have made is to sell

Selling during a downturn is one of the worst decisions you can make.

People sell, assuming they’ll get back in when the volatility decreases. But when has confidence ever been higher at a lower number?

It’s an illogical story we tell ourselves to justify a bad decision today.

I’ll just jump out and back in you say.

But research suggests that missing the best days in the market drastically decreases the average return.

Between February 1994 and January 2024 (30 years), the S&P 500 had an 8% annualized return.

If you missed the 50 best days during that 30-year period, returns actually turned negative for that period (-0.86%). 50 out of 10,950 days accounted for all the S&P 500 returns.

Even removing the 10 best takes returns from 8.0% to 5.26%.

And here’s the other crazy thing: the 10 best trading days (by percentage gain) took place during a recession (and six of those were in full-out bear markets).

If you think about it, business is just the same: most of our best decisions come from outliers and are not easily predictable.

So, in a quest to optimize our decisions, we’re chasing the “50 best days” of market returns.

It’s impossible. It can’t be done.

How do we know this? Because the average investor gets returns almost 3% less than the pure S&P 500 play.

We are horrible at picking the right times to jump in and out.

So what should we do?

We should “buy and hold.”

Historically the markets go up. Yes, there are periods, even up to a decade long, when markets have remained flat. But with a time horizon of decades instead of days, the prospect of the market going up is as close to a certain bet as anything else.

Most people seem to think they can predict the movements, but very few can. Even the pros can’t! Only 8% of large-cap fund managers (the pros of pros) ​outperformed the S&P 500​ over the last 15 years.

As I thought about this, the parallels to business were undeniable.

1. It’s impossible to predict which decision will be best in the moment.
2. The “best” decisions are outliers and account for the majority of business success.
3. And time (buy and hold) gives us the best chance to succeed over time.

So what is the buy and hold equivalent in business?

Quit trying to pick the “best” decision.

Instead, focus on minimizing bad decisions by making them intentionally and systematically.

When I was in my senior year of college, I interviewed for a number of jobs and ended up with multiple job offers.

As I weighed these others, I became overwhelmed with the thought of making the “wrong” decision. I remember calling my mom and explaining to her to the two offers and what I thought about each.

She took in all this information and asked me a simple question: did you pray about it?

Being a Christian, I knew this important decision was something I should pray about. I was almost insulted that she even asked. Yes, of course I prayed about it mom.

Her response to my answer jolted me. She said “well if you’ve prayed, weighed your options, and still can’t decide, one decision doesn’t have to be right and the other wrong.”

She went on to say that as long as I didn’t have a “check in my spirit” when praying about either, they wouldn’t be outside God’s will.

I’m no theologian, but this struck me.

Here I was almost 22 years old and having never considered: there might not be a right and wrong to every decision. They’re just two different paths.

Whether you’re a Christian or not, the message is the same.

There can be multiple right paths. There can be multiple wrong paths.

We see our lives as a story. We see how each success or failure built upon each other to get to the point we’re at today. We see that if one or more of those things were different, our life outcomes could be different.

We assume that different is worse, but what if that different is just different? What if that different is the same spot, or a reasonably similar one, just with different stories?

Instead of being so worried about the optimal right path, worry more about eliminating the wrong ones. Then, choose one of the right ones and move on.

In any decision tree, there are multiple “right” decisions that could work out just fine. In an attempt to find the optimal decision, we could end up indexing for the wrong things:

1. Index for best outcome over most enjoyment
2. Short-term gain over long-term gain
3. Consensus over gut/expertise
4. Speed over thoroughness
5. Revenue over profit
6. Cost over quality

In reality, seeking to make the optimal decision increases the likelihood of us choosing a bad decision. By seeking optimal, we ignore our desires, our instincts, our previous decision-making successes, and instead are worried about other factors.

If we instead work to minimize the likelihood of the bad decision, we then have a menu of “good” decisions to choose from. Sure, each option will lead to different outcomes. But a 15% return instead of a 20% return is okay. Right? Right?

Yes it is. Especially if that 15% return brings less stress, more happiness, and more sustainability in making the next best decision after that.

We often over-index the importance of the decision today but forget that it’s just one decision in a line of many decisions to come. This one decision, in most cases, doesn’t mean you can’t make the other (theoretically more optimal) decision later on.

So, consider 2 things:

1. How can you identify the bad decisions?
2. The Waterline Principle

I write about the waterline principle in depth ​here​, but to summarize: when looking at a decision, if the potential failure is “above the waterline,” make the decision quickly. When failure is “below the waterline,” meaning water comes rushing in and leaves the possibility of catastrophic results, proceed with caution.

This means acting quickly with above the waterline decisions. Ask:

1. Is it reversible?
2. Is it cheap?
3. Are other options still available?

When the answer is “yes,” proceed quickly. When no, consider putting a decision-making framework in place.

Identifying bad decisions

If we change our focus from making the best decisions to avoiding the bad ones, the natural next question is: well, how do I do that?

1. Identify your goals/ideal outcomes
2. Establish a consistent decision-making process
3. Seek “outside” council where appropriate (see last week)

Identify your goals/ideal outcomes

The key to any decision-making process is to know what you’re ultimate goal is. Without it, you’ll jump from initiative to initiative without any real purpose.

When you do establish those goals, you can view everything through the lens of achieving that goal.

I like to set goals at 3 intervals: 1 year, 3 years, and 10 years. The 10-year goals are really more of a “vision” or north star. They’re the ultimate prize that today seems unattainable.

The 1 and 3-year goals are then the 10-year goals broken down. Ultimately you break the one year down to quarterly, weekly, etc, but parsing that is not the point of this post.

Establish a consistent decision-making process

Once you have the goals, step two becomes a lot easier.

There is no perfect process for evaluating decisions. Different businesses will have different types of decisions which will require different processes.

The key is establishing a process that is:

1. Simple
2. Flexible
3. Repeatable
4. Measurable
5. Documented

Documenting is key, as you can reflect back at the decisions you made in the past and see how your assumptions were off.

This helps ensure you don’t make the same mistakes twice.

I like to review the decision documents from the year annually and summarize them into a “Year End Review.” This makes it easy to go back many years and see the highlights.

Seek “outside” council

I won’t go into this much since we discussed this last week.

But here’s the deal: we are blind to the majority of the world out there.

Our experiences are each very narrow, which puts us at a disadvantage anytime we’re making a decision.

How do we counteract that?

We create an environment that introduces us to other opinions.

Whether that be a board, an advisory council, mentors, or just experts in the area of the decision, it’s important to seek out advice anytime there is a “below the waterline” decision.

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Avoiding bad decisions is critical to the success of your business. Even more critical than making great decisions.

How have you avoided bad decisions in the past?

I’d love to hear your experience. Share it with me on X.

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