Scott Cox: If you don’t know the why, you may miss the signal

Many more people know how to do their job, than know why a given approach works. 

This can cause severe and unknown risk, because if circumstances change, the previous “right” solution may no longer work, or opportunities may be missed. 

A couple of examples:

Risk Example

In the mid- to late 1990s, as Sacramento was recovering from the aerospace collapse in California, a pair of young developers just starting out, began optioning land on the outskirts of growth corridors. They’d process them and then flip them to a developer or builder, depending on size. They did very well and kept at it – going a bit farther out, buying a bit more as they had more money. 

After a number of years they were developing a reputation as visionary, and frankly, they began to believe their own … well, you know.

Ultimately – like anyone who keeps doubling down in Las Vegas – it can end only one way. And it did in the financial crisis. 

Probably not uncommon story, so what’s the point? 

They started optioning land far out because they did not have the money to option great ground closer in.  There was no incredible insight or thoughtful calculations on pricing differentials driving the process. It was simply what they could afford to do.

Nothing wrong with that per se, but because they did not acknowledge why they were doing what they were doing and simply began to make up a story in their heads about their foresight, they had no “turn off the road” signs to help them know when it was time to stop. 

It may seem ridiculous to say, but many people don’t actually know why they are doing well. Which leads to outsized risk.

Opportunity Example

My firm was invested in a home builder in Atlanta and I was driving around with the area land guy looking at potential deals. As he’s pointing out parcels they are looking at, did try for, etc., I noticed on all of them he was describing optioning them and then processing them for approvals.

I asked him, “how often – if your ‘ask’ was reasonable – did you get nothing on approvals in this area?”

He said, “doesn’t happen, but you might get less than you were shooting for.”

“How much less?”

“I doubt it would ever be more than 15% of the units you were trying for, if you were reasonable”

“Ever try to just buy the land for less up front then, before the approvals?”

“No.  That would be too risky”

“You just told me if you know what you’re doing you should not get hit for more than 15% of what you were asking for.  So if you bought it up front for 20% less paying cash, you’d either be OK, or way ahead”.

He just looked at me.

I explained, “do you know why no one does this? Public builders don’t want to buy unentitled ground. [They choose not to for] lots of good reasons, not the least of which is it takes time, and they are trying to be efficient. Not to mention not all their teams know how to do this, and evaluate the risk. It’s just easier to tell them all, ‘we don’t do that.’

Private builders don’t, because you can’t borrow from a bank on unentitled ground and they don’t have enough cash to put it into unleveraged land. You have an equity partner who can, why aren’t you thinking about it?”

He knew what common practice was, but didn’t really know all the reasons why. 

So he was missing an opportunity.

These are deal examples, but the principle applies to everything we do – from choosing an operating system to organizing our companies, and countless other decisions. When you can’t articulate the “why” behind your approach, you become blind to changed circumstances and new opportunities.

Understanding why something works isn’t just intellectual curiosity; it’s the difference between repeating success and stumbling into failure, between seeing an opening and missing it entirely.