Earlier this year, Tim Ferriss spoke to three guests (author Soman Chainani, author Susan Cain and investor Graham Duncan) on the topic of mitigating risk. Below are just a few of the insights that stuck with me from the conversation with Graham Duncan, who is the co-founder of East Rock Capital. Please note that these are condensed and paraphrased, so any mistakes are my own.

You can listen to the full episode here; all three conversations are well worth your time. Tim Ferriss has also kindly provided a complete transcript of the episode for his audience.

Books/mental models that have influenced his life: the concept of “source.” This is based on the work of a European management consultant who studied hundreds of start-ups and found that there was always a single “source” – the person who took the first risk on a new initiative. This person typically maintains a unique relationship with the original idea and often has an intuitive knowledge of what the right next step for the initiative is. Other people who join later to help with the execution often lack the intuitive connection to the founder’s original insight. Many organisational tensions and power struggles often revolve around lack of explicit acknowledgement of who the source of the initiative is.

Handing off the source role is possible but it is extremely difficult and often mishandled. The key to a successful transition is for the original source to move on and allow the new leader room to move. Duncan was speaking to another investment manager about this and it was consistent with a study the manager had done looking at stock performance following the departure of a founder-CEO. Any subsequent positive stock performance was correlated with the founder completely leaving the board rather than hanging around to mentor the next CEO. Through that lens, Bill Gates remaining on the Microsoft board during Steve Ballmer’s tenure may have contributed to the subsequent lackluster stock performance and Ballmer’s inability to exert his own creative vision. Whereas Ballmer leaving the board has allowed Satya Nadella to fully assert his own creative vision.

Duncan sometimes encounters this dynamic in his own role running a multi-family office. The second and third generation may struggle with how to relate to the original patriarch (in most cases) and the source of their wealth. The responsibility for a real transition is in the hands of the original source.

Bad recommendations that Duncan often hears in his field: people massively overuse the term hedge fund. They tend to fetishize it a little too much and therefore the term itself often comes with a lot of baggage. He thinks we should just focus on the concept of incentive compensation. He doesn’t think it’s useful to see a hedge fund as a product or even talk about a hedge fund “industry” – these are just temporary collections of flawed, brilliant people who in any given year decide to make a sequel to the movie they made the prior year. The only product is the set of future decisions that the portfolio manager makes. If they get divorced or depressed, if their second in command leaves, the “product” completely changes. Thinking of it as a product ignores the reality that the only source of stability is whether the mindset of the team leader is resilient (for example, can they get stronger with volatility rather than just enduring it).

The advice that Duncan would give a graduating college student entering the workplace: he says it may be helpful to picture a river flowing between two banks – one side is chaos and the other side is rigidity. Healthy integration is swimming in the middle. Most college students have started life closer to the rigidity bank. Over the course of their careers, they will experiment with swimming towards the middle. In your 20s, you are still acquiring skills. It is important to learn the jargon of an industry, apprentice under somebody to develop judgement and discover your own zone of genius. Swimming in the middle happens most often in one’s 30s or 40s. You can start crafting your own language for what you do, make your craft your own and view your life as more self-expression than just playing out other people’s roles for you. Some small percentage of people will paddle over to the lane next to chaos. We experience them as consistently asserting reality through powerful storytelling while always bearing the risk that their egos grow too big and their creative narcissism gets too well-defended (e.g. maybe Steve Jobs, Elon Musk).