(Ack.. I was updating this post to remove some spelling errors, and the first half of it got nuked.Â I’m going to reproduce it as best I can)
(Note that I’m not trying to disparage Mr. Setty.Â I’m politely disagreeing with him)
Here are his thoughts:
Think about it – if he didn’t kill the goose, he is making a couple of assumptionsa. the goose will continue to lay golden eggs
b. the goose won’t die of other causes
If he had not killed the goose, he would have taken care of his long-term needs?
I thought about this for a bit, and decided to run through some thought experiments.
Actual Gold Mine
First – what’s the most precise real-world equivalent to a goose that lays golden eggs?Â Probably a gold mine. Â So now let’s pretend you own a gold mine. Â Based on Mr. Setty’s approach, you should run the gold mine for a couple of days and then blow it up, because a) the mine might run out or b) an earthquake might shut the mine down.Â Otherwise, you’ll get complacent, and won’t take care of your long term needs.
Already, I feel that the guy is just plain stupid.Â Who would blow up a perfectly good gold mine?Â Even if its production was falling every month, it’s still a gold mine!Â Â And there are other ways to avoid complacency and take care of your long term needs.Â Â A clever person would have taken some of the income from the mine and used it to diversify his holdings, so the eventual failure of the mine would not have ruined him.
Given Mr. Setty’s background, a gold mine is probably not what he was thinking about.Â He was probably thinking about a service business, or a new technology business, where changes in technology can render you out-of-date with frightening speed. Â So let’s use that.Â Imagine that you are a consulting business, and you get a long term contract with Merck pharmaceuticals. Â Â You “milk” it for years, growing prosperous and successful. And then you get greedy, and start demanding that Merck pay you more money. Instead, they cancel the account on you.
According to Mr. Setty’s approach, what you have done is very forward thinking and wise, forcing you to confront reality and prepare for the inevitable.
But is it really wise? I mean, it would be wise to expect that the contract would end, and it would be wise to have contingencies in place. It would be wise to use your incomes and your talents to diversify your business, find other clients and protect yourself and your company from single-contract vulnerability. If you did those things, and then cancelled the account with Merck, you might have a leg to stand on.
On the other hand, cancelling the account with no contingency is just stupid.
The Hand of FateÂ
Another thought experiment – let’s say you have this account with Merck, and you piss them off and it is cancelled. Later on that day, you find out that your contract was going to be cancelled within the next month anyways.
Are you wise now? Certainly you are pretty much “break even” in terms of money (If the man had killed the goose, but fate decreed that a fox would have killed the goose later that day). So from that perspective, you don’t look completely bone-headed. But did you do contingency planning? Did you diversify your portfolio? In short, did you do all of the “common sense” things one would do when dealing with a long term income stream… If you didn’t, you’re just dumb.
Back to the Goose
Let’s take it all the way back to the goose – I own the goose, the goose produces one egg a day, and one day I get greedy and want more. So I grab my axe and head out to the barn. I stand in front of the goose. “What if there aren’t more eggs in there?” I ask myself. “What do I do if I’m cutting off my income stream permanently by killing it?”
And at that point, I put the axe back on the wall, go back inside and call my accountant to help me prepare myself for an “unprofitable” demise of my goose.
Mr. Setty made some very accurate and pointed comments in this particular discussion:
- People grow complacent when they have success handed to them, day after day
- People let greed get in the way of common sense
- Not letting yourself get greedy or grow complacent is a wise thing to do
Having said that, I don’t think the man in the parable was wise.Â He was an idiot who let himself grow complacent and got greedy. Â In the end, he has to find a new way to live because he made a bad, poorly thought-out decision, not because of competitive pressure.
(Mr. Setty and I talked on the phone yesterday afternoon, and I added the summary section to describe some of the thoughts that came out of that discussion)