I first learned the business value of estimating when I left home at age 14 to join the carnival. One of my early jobs was to run the “Guess Your Age and Weight” booth. I first tried to guess people’s age and weight until the booth owner slapped me on the head: “Hey kid, stop being so accurate. I want them to win, okay? If they walk all over the midway with a giant stuffed bear and our banner, it’s free advertising for me. The less accurate you are, the more money we’ll make.”
That was a real eye-opener for me, because I began to understand the nuances behind estimating. In my subsequent 40 years in business I’ve come to learn several more lessons about how to sharpen your estimating skills.
1. Don’t overestimate your intelligence or underestimate the intelligence of others.
As a cocky, freshly minted millionaire in real estate I thought I saw a tremendous opportunity in the oil and gas business. I concluded that the locals were indeed yokels too dumb to take advantage of the riches beneath their feet.
I cashed in my real estate chips and moved them all into oil production – and promptly lost my shirt. The lesson? Rather than let my tongue hang out over the prospect of riches, I should have reeled it back in and asked myself if those so-called yokels could know something I don’t and why might others also see this opportunity but not jump at it.
2. Step back for a clearer view.
I later made a fortune by correctly estimating the wave of defaulted consumer and business debt to wash over our economy in the 1990s. It wasn’t due to my intuition but rather to stepping back, looking dispassionately at prices and volumes, and extending trend lines. My competitors could have done the same thing but my guess is they were way too buried in daily operations to see above the forest.
3. Create a feedback loop for your estimates.
One of the keys to growing my business was that I made an unbreakable rule: On every single defaulted loan we bought – and we bought millions of them – we always compared actual results to our original estimates. Then we fine-tuned our estimating engine for the next round of purchases. I know it’s more fun for entrepreneurs to look to the future, but it’s crucial that you continually sharpen your estimation tool against results and adjust accordingly.
4. Don’t underestimate other people’s fear.
My company did the first-ever securitisation of unsecured, delinquent credit card debt. We were the darlings of Wall Street, which invested several billion dollars in my firm. That was until an anonymous letter surfaced with allegations about my company. I incorrectly estimated that investors and the rating agencies would listen to reason and we could calmly analyse the facts. They listened politely and then bolted for the door. Literally within days, I had lost a personal fortune. Had I properly estimated their level of fear, I would have gone into survival mode and not into talking and reasoning mode.
5. Identify the other party’s dominant motive.
When my company was in crisis I agreed to step aside temporarily, even though I had a controlling interest in the stock. I made this move because I incorrectly estimated that the new caretakers would care as much about the company as I did. It was too late when I realised why they made several cataclysmic decisions – they were too new to the company to care about its long-term survival. They were merely executing a short-term salvage operation.
To make matters worse, I continued to apply wishful thinking to the equation by repeatedly estimating that if I just worked harder and smarter, I could bail out water faster than my business ship was taking it on. If I had accurately estimated that we were in fact swamped, my decisions would have been different.
Why do we sometimes see things more clearly in hindsight? Partly it’s because we can more easily identify the important factors that determined the outcome. It’s also partly because we’re more likely to see things as they actually turned out instead of how we hoped they would turn out. In order to realise your brightest business future, you owe it to yourself to sharpen your estimating skills by examining past results, facts and using rational perspective.
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