Immeasurably Important

Robert McNamara was hired by Henry Ford II to help turn Ford Motor around. Ford was losing money after World War II and needed a “whiz kid” – that’s what Henry Ford called it – who saw running a business as an operations science, driven by the ice-cold truth of statistics.

McNamara took that skill to Washington when he became Secretary of Defense. Ken Burns’ documentary on the Vietnam War describes McNamara’s philosophy:

Robert McNamara vowed to make America’s military be cost effective. He demanded that everything be quantified. Commanders dutifully complied. He and his staff generated mountains of daily, weekly, monthly, and quarterly data on hundreds of separate indicators – far more data that could ever be adequately analyzed.

But the strategy that worked at Ford had a flaw at the Department of Defense. Rufus Phillips, a former CIA agent, describes in the documentary where McNamara’s management strategy backfired during the Vietnam War:

Secretary McNamara decided that he would draw a chart to determine whether we were winning [Vietnam] or not.

He was using things like the numbers of weapons recovered, numbers of Viet Cong killed, numbers of Viet Cong defectors. Very statistical.

He asked Edward Lansdale, head of special operations at the Pentagon, to come down. He said, “Look at this [data].” Lansdale looked, and he said, “There’s something missing here.”

McNamara said, “What?”

Landsdale said, “The feelings of the Vietnamese people.”

You couldn’t reduce that to a statistic.

This was a central issue with managing the Vietnam War. The difference between battle statistics brought to Washington and the feelings among those involved could be 10 miles apart.

General Westmoreland, who commanded U.S. forces, told Senator Fritz Hollings, “We’re killing these people [Viet Cong] at a rate of 10 to 1.” Hollings replied, “The American people don’t care about the 10. They care about the 1.”

Ho Chi Minh put it more bluntly: “You will kill ten of us, and we will kill one of you, but it is you who will tire first.”

Hard to contextualize that on a chart.

Some things are immeasurably important. They’re either impossible, or elusive, to quantify. But they can make all the difference in the world, often because their lack of quantification causes people to discount their relevance, or even deny their existence.


Lehman Brothers was in great shape on September 10th, 2008. That’s what the statistics said, anyway.

Its Tier 1 capital ratio – a measure of a bank’s ability to endure loss – was 11.7%. That was higher than the previous quarter. Higher than Goldman Sachs. Higher than Bank of America. Higher than Wells Fargo. It was more capital than Lehman had in 2007, when the banking industry and economy were about the strongest they had ever been.

Four days later, Lehman was bankrupt.

The most important metric to Lehman during this time was confidence and trust among short-term bond lenders who fed its balance sheet with capital. That was also one of the hardest things to quantify.

You could try to measure trust with bond spreads, but that was imperfect. Short-term trust is like musical chairs – only measured at a moment of truth while otherwise giving the impression that everyone is having a good time. In hindsight, we know bond investors were losing faith throughout 2008. But the music was playing, so they kept lending. Then one morning they got scared and ran off.

You can’t measure what’s going on inside people’s heads to know when or why that happens.

And this stuff happens a lot.

Two things in business and investing tend to be immeasurably important.

The stickiness of support from customers, employees, and investors. Measuring why they feel the way they do and when they’ll start feeling something different.

Chris Rock once described the careers of musicians: “Here today, gone today.” This is partly due to one-hit wonders. But tastes also change. Or sometimes they do. We got sick of the Backstreet Boys, but Madonna became timeless. Seven years into their careers, each had sold about the same number of records: 70 million. Then fans kept lining up for one and left the other. Very difficult to measure how and why that happens, or when it will. Taste is not a science, and predicting taste’s change is close to sorcery. Asset bubbles work the same way. You can measure everything about a bubble except the most important part: When investors will stop believing in it. The end of the bubble is just the end of enthusiasm. And enthusiasm isn’t a tamable statistic. It’s a hormone that owes nothing to the logic of your data.

Whether the act of measuring something has an impact on what you’re measuring, like capitalism’s version of Heisenberg’s Uncertainty Principle.

Give a smart person a big incentive to increase sales in a short period of time, and they’ll probably do it. But a relentless focus on sales numbers does more than track sales. It changes how sales are done, how customers are treated, what kind of customers you’re willing to partner with, how sales are accounted for, when they’re logged, how the product is produced, etc. Measuring induces incentives, and incentives impact everything. Recent example: “Tesla stopped a ‘brake and roll’ test as it pushed to hit Model 3 goals.”

What’s hard to measure is whether the act of measuring something today changes how it’s done in a way that will affect tomorrow. It shouldn’t be hard to measure that, but it is in practice. If your goal is to make a metric go up, the temptation is to declare victory when it does, without digging deeper to look for collateral damage. The most common error here is focusing on rising sales as the end-all metric without realizing that pushing sales through aggressive promotions or high-pressure marketing can turn off customers, and turned-off customers are the strongest anchor on future sales. Another is the relentless pursuit of high profit margins. That can, when achieved by lower investment or cutting corners, come at the expense of profits. Jeff Bezos explained:

Percentage margins are not one of the things we are seeking to optimize. It’s the absolute dollar free cash flow per share that you want to maximize. If you can do that by lowering margins, we would do that. Free cash flow – that’s something investors can spend.


The point here is that investing is both art and science. Some things are countable. Others you have to just feel out.

Gathering information is a science. Filtering out noise is an art.

Net present value is a science. Identifying the trust and passion of a CEO is an art.

Measuring what worked in the past is a science. Understanding why things are different now is an art.

Since those are conflicting skill sets, toggling between the two is hard. Which is why business and investing is hard. Steve Jobs was both a technical and artistic genius. Warren Buffett can calculate DCF figures in his head, but he also drops fluffy feelings like, “With Coke, it’s not about share of market; it’s about share of mind.” That kind of mental flexibility is a rare trait.

If you think the world is all art you’ll miss how much stuff is too complicated to think about intuitively. Most people get that. But if you think the world is all data you’ll miss how much is too complicated to summarize in a statistic. That one’s a little harder.


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