Only Trust Those Who Practice What They Preach

'Skin in the game' is an expression from the investment market that can be translated as 'having skin in the game'. In a less precise way, it's our 'putting your money where your mouth is'.

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

The financial market usually uses self-regulation mechanisms to avoid catastrophes – even though they occasionally fail – as in the 2008 American crisis.

The 'skin in the game' is not mandatory by regulation, but a fund hardly takes off without following this 'rule'.

If you are not willing to put your own skin in the game for your theory, it has no value in the market.

Coined by mega-investor Warren Buffett, acclaimed as one of the greatest of all time, the concept of 'having skin in the game' gained even greater popularity with the release of the book of the same name by Nassim Nicholas Taleb in 2008.

The book concludes the 'Incerto' trilogy, which brings together Taleb's three greatest works: 'The Black Swan', 'Antifragile', and 'Skin In The Game'. The three books are worldwide best-sellers and are popular not only in the financial market.

Acclaimed by many as one of the great thinkers of our time and hated by many others, Taleb has an unsociable style, however very popular among counterculture authors: sharp tongue, little regard for the status quo, and practical results that prove his statements.

The concept has become central in debates between academics and market practitioners.

While in Academia the weight given to the training of researchers and professors is very high, the Market values practice, the ability to make what you claim count.

It has become fashionable in recent years to idolize successful entrepreneurs who dropped out of famous Universities, but in practice the Black Swan logic applies:

Some succeeded even after dropping out of college, but dropping out of college is no guarantee of success.

The concept of 'Skin in the game' does not discredit formal education, it only validates that theory, without practical application, remains just an unproven hypothesis.

The center of the discussion is that the skills needed in Academia 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 goes through self-responsibility: valuing formal education as much as professional practice.

The difference between academic experience and practice would become evident:

1. If we placed a chemistry professor in a beer factory and placed a master brewer to teach chemistry at the University.
2. If we placed an investor to teach economics and an economics professor to invest in the Stock Market.

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

Just as it is plausible that the master brewer would probably be a mediocre chemistry professor and the investor would not know how to scientifically defend the decisions they make.

Theory, without empirical practice, lacks validation.

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

With the current pace of advancement (whether technological, cultural, communicational, market-related, any perspective you take) it has become evident that the education model can no longer keep up with the needs of the so-called 'job market'.

The very 'work' model that was established since the Industrial Revolution and evolved throughout the 20th century no longer meets the needs of today's world.

While we witness a new revolution in work, this same revolution is not happening in education. We continue training people more or less the same way for 40 years, if not 100 or 200.

The professional who today goes to college for five years only then to experience market reality arrives late. Late in their career, in life, in professional maturity.

Night courses solve part of the problem, but not the whole problem. The capacity for absorption is impaired after a workday of – at least – 8 hours and the course content itself becomes increasingly distant from the reality faced by those who work as the course progresses.

There is also a gap between what 'professors with market experience' (common sales argument in university course advertisements) teach and what pure academics teach.

The distance grows even further in two circumstances: Public Universities and Low-Cost Universities.

While in Public Universities (in Brazil) there is a natural inclination towards 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 compression of class time and a tendency to hire professionals who are not currently active in the market and who end up dedicating themselves exclusively to teaching, since they need to teach many classes to make some income.

The stereotypes resulting from these two realities we all know.

Is there a solution?

The recommendation, starting from the premise defended by Taleb, is obvious: study with those who have actually done or are doing something noteworthy, learn from those who actually practice what they preach.

It is very good advice, however quite difficult to put into practice.

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

Good professionals are well-paid, even more so in a market with a shortage of competent people like Brazil. This makes it even harder to bring them into the classroom.

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

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

Following the example above: buy craft beer from master brewers who are proven good, who have won awards even if at local festivals. Taste the beer before buying. Put to the test before trusting.

Only take a craft brewing course from someone who has brewed a lot of beer and knows how to solve problems when they occur. Because just following the recipe is not always a guarantee of making good beer.

Study investments with someone who has already achieved proven, practical results, who has already made and lost money (never trust someone who teaches how to win and has never lost—nobody is infallible). But remember the Black Swan: past results do not guarantee future success.

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

The maxim that runs through the market is based on practical observation:

You can't trust a Success Speaker who leaves a speech about How to make money in a '98 Corsa.

For many, this sounds prejudice or radical. It's not. It's just anti-hypocritical.

The best way to shape a market where parasites and promise sellers don't bother academics or market professionals is by using the skin in the game principle.

Summarizing:

• You can't trust someone who sells a 'How to succeed on Social Media' course 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 a personal trainer who is out of shape seriously.
• It's hard to trust an Uber driver with a dented car.

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

The premise of risking your own skin in the end is anti-hypocrisy.

I only trust those who practice what they preach.

And you?

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