I only trust those who do what they preach

‘Skin in the game’ is an investment market expression that can be translated as ‘risking your own skin’. In a less precise way, it is our ‘face to face’.

The concept is taken very seriously among investors: fund managers must have a large part of their investment assets allocated to the fund they manage, so that their skin is also at risk when making decisions to buy and sell assets, stocks, and other investments.

The financial market usually uses self-regulatory mechanisms to avoid catastrophes – even if they fail occasionally – such as in the American crisis of 2008.

The ‘skin in the game’ is not mandatory by regulation, but it is difficult for a fund to take off without complying with this ‘rule’.

If you’re not willing to risk your own skin for your theory, it has no value in the market.

Coined by mega-investor Warren Buffet, acclaimed as one of the greatest of all time, the concept of ‘risking one’s skin’ gained even greater popularity with the release of the eponymous book by Nassim Nicholas Taleb in 2008.

The book closes the ‘Uncertain’ triad, which brings together Taleb’s three greatest works: ‘The Logic of the Black Swan’, ‘Antifragile‘ and ‘ Skin In The Game ‘. All three books are worldwide bestsellers and are popular not only in the financial market.

Acclaimed by many as one of today’s greatest thinkers and hated by many others, Taleb has an unaffable style, but is very popular among counterculture authors: sharp tongue, little appreciation for the status quo, and practical results that prove his statements.

The concept became central to debates between academics and marketers.

While the Academy places great emphasis on the training of researchers and teachers, the Market values practice, the ability to assert what is affirmed.

It has become fashionable in recent years to idolize successful entrepreneurs who abandoned their studies at famous universities, but in practice the logic of the Black Swan applies:

Some succeeded even when they dropped out of college, but dropping out of college is no guarantee of success.

The concept of ‘Skin in the Game’ does not detract from formal study, it only confirms that the theory, without practical application, remains just an unproven hypothesis.

The focus of the discussion is the skills that are needed at the Academy are not always those needed in the Market and vice versa.

So how do we train the professionals we need in the 21st century?

My answer to this is self-responsibility: to value formal study as much as professional practice.

The difference between academic and practical experience would be evident:

1. If we placed a chemistry teacher in a brewery and if we placed a master brewer to teach chemistry classes at the University.
2. If we asked an investor to teach economics and an economics teacher to invest in the Stock Exchange.

In this scenario, it is more plausible that the chemistry teacher will succeed in the factory than the economics professor in the market.

Just as it is plausible that the master brewer would probably be an average chemistry teacher and the investor would not know how to scientifically defend the decisions he makes.

The theory, without empirical practice, needs validation.

This does not diminish the importance of any of the four professionals above, but it emphasizes the increasingly glaring differences between theory and practice: just as knowing how to explain is not knowing how to do it, knowing how to do it also does not guarantee knowing how to explain what is done.

With the current pace of advancement (be it technological, cultural, communicational, marketing, whatever the perspective), it became evident that the education model no longer meets the needs of the so-called ‘labor market’.

The very ‘work’ model that became conventional since the Industrial Revolution and evolved throughout the 20th century no longer meets the needs of today’s world.

While we are witnessing a new labor revolution, this same revolution does not take place in education. We have been training people in more or less the same way for 40 years, if not 100 or 200.

Professionals who currently attend college for five years and only then experience the reality of the market arrive late. Late in career, in life, in professional maturity.

Evening courses solve part of the problem, but not the whole problem. Absorption capacity is impaired after a working day of at least 8 hours and the course content itself becomes distant from the reality faced by those who work as the course progresses.

There is also a gap between what ‘professors with market experience’ (a common selling point in advertisements for university courses) teach and what pure academics teach.

The distance is growing even more under two circumstances: Public Universities and Low-Cost Universities.

While in Public Universities (in Brazil) there is a natural inclination for research, greater resources for investment in laboratories and technical centers than in Private Universities (which I personally think is good), in Low-Cost Universities there is a flattening of class time and a tendency to hiring professionals who are not active in the market and who end up dedicating themselves exclusively to classes, since they have to teach many classes to make up some income.

We are all familiar with the stereotypes stemming from these two realities.

Is there a solution?

The recommendation, based on the assumption defended by Taleb, is obvious: study with those who actually did or do something noteworthy, learn from those who actually practice what they preach.

This is very good advice, but it is very difficult to put into practice.

Good professionals are generally more dedicated to doing than teaching, which makes their existence scarce by nature.

Good professionals are well paid, especially in a market with a shortage of competent people such as Brazil. This makes it even more difficult to get them into the classroom.

So how can you learn based on the experience of professionals who are not available?

The answer, for a Taleb reader, is evident: use the reverse validation of what is taught by the professional.

Following the example above: buy craft beer from proven good master brewers, who have been awarded even at local festivals. Try the beer before you buy. Put it to the test before you trust.

Only take a craft brewery course with those who have brewed a lot of beer and know how to solve problems when they occur. Because just following the recipe is not always a guarantee of making good beer.

Study investments with those who have achieved proven, practical results, have won and lost money (never trust someone who teaches how to win and never lost, no one is infallible). But remember the Black Swan: previous results don’t guarantee later successes.

I took a sushi course in 2018. My teacher has a busy sushi restaurant and is recognized as a great sushiman. The experience was sensational.

The current market maxim is based on practical observation:

You can’t trust a Successful Speaker who comes out of a lecture on How to Make Money in a 98 Corsa.

To many this sounds biased or radical. It’s not. It’s just anti-hypocritical.

The best way to shape a market in which parasites and promise sellers do not hinder academics or market professionals is to use the principle of skin in play.

In short:

• You can’t trust someone who sells a course ‘How to succeed on Social Networks’ and has 1,000 followers.
• You can’t trust a dentist with dirty teeth.
• It’s hard to trust a fat cardiologist.
• You can’t take an out of shape personal trainer seriously.
• It’s hard to trust an Uber driver with his car all crumpled up.

Appearances deceive those who allow themselves to be deceived, since the world is already full of discourse.

The premise of risking one’s own skin in the end is anti-hypocrisy.

I only trust those who do what they preach.

And you?

AUTHOR: Rafael Rez, with whom I had the honor of becoming a student.
Original text published here.