Daryl Morey

Supported by Greenhaven Road Capital, finding value off the beaten path.

In honor of the Houston Rockets ascent, here are my twelve favorite Daryl Morey quotes. As Morey noted at the 2017 Sloan Conference, we need to continue our education, because, “We’re here because human beings are really really bad at making decisions.”

1/ “The problem, if you’re a journalist, is that you have to take an angle that’s interesting to your audience.”

News as noise is true when two groups have different metrics. Analytics are a difficult story whereas tropes are not.

2/ “I was really into baseball because I was a math nerd and you couldn’t get football stats, baseball was the only game in town.” Interests are your competitive advantage. As Buffett says, he and Munger aren’t going to try to out Bezos Bezos.

3/ “One of the tough meetings early on was meeting with coach O’Brien and saying, ‘Yes, you are number one in field goal percentage but you also are giving up the most open threes in the league.'”

Ease of measurement does not convey importance. “Someone created the box score, Morey says, and he should be shot.”

4/ “I was having this conversation with Frank Vogel. If you knew threes were good on offense you had to know they were bad on defense but that whole marriage hadn’t happened yet.” Invert, always invert.

5/ “Our poor CEO, all the press hits of negativity for our owner Leslie Alexander hiring me. He’s just dealing with the radio guys calling me deep blue, calling the owner crazy.”

Credit to Alexander for choosing to try something unconventional rather than conventional.

6/ “Yeah, teams have caught up (with Houston’s draft model). We feel like we’re farther ahead but the edge is much smaller. The difference between better model and slightly better model is way different than better model and no model. That edge has really eroded and we’ve adapted.”

Alpha erodes.

7/ “The baseball analytics guys were coming in and telling everyone they’re wrong and everything is wrong, so that was a tough sell. By the time basketball started looking at analytics a lot of our analysis was making coaches feel better. Guys like Shane Battier averaged eight points and five rebounds but coaches loved them. A lot of the advanced analytics stuff said that guys like Shane were worth a lot more than you think. When you have a message that’s like hey you’re right, here are a few areas you could improve versus, hey, you’ve been wrong your whole life you idiot the integration was a little easier.”

8/ “I want more bad owners… you’ve seen the poker analogy. If you’re the one shark among minnows you clean up but if you add just one more shark all the profits are divided by two.” It’s the parodox of skill.

9/ “I don’t think it’s really a factor (Morey’s lack of basketball experience). I mean, you don’t have to be a farmer to run Hormel.” Hardwood version of Green lumber.

10/ “Mike (D’Antoni) is a very good communicator and I’m reacting to him. He just says, ‘Hey, this is what I’m planning to do,’ and the answer, almost universally, is ‘sounds great.'”

As Morey’s contemporary Kirk Lacob said, “I always thought our secret sauce was that we have great people and turn them loose and let them do what they’re best at.”

11/ “A good strong locker room creates option value for certain guys you can add.”

Culture, said Ben Horowitz, is what people do when they aren’t told what to do. Peter Theil wrote, “No company has a culture, every company is a culture.”

12/ “When there’s a deal that’s fair for everyone, just do it.” Chris Douvos was encouraged to be a Partner, to be fair, and never have to go into the bottom drawer to pull out the documents that said who got what.


Thanks for reading.


Cade Massey

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Supported by Greenhaven Road Capital, finding value off the beaten path.

At last Cade Massey was the interviewee rather than the interviewer. The podcast he co-hosts, Wharton Moneyball, is a lively discussion of sports analytics and a show we’ve covered before. These notes and quotes are from Massey’s appearance on Bet the Process.

In addition to being a Wharton professor, Massey consults with teams, mostly in the NFL. His initial research was a 2005 paper, Overconfidence vs. Market Efficiency in the National Football League authored with Richard Thaler. Massey now consults with teams because, “They want fresh eyes looking at things but they also want a bridge to what’s going on in other industries, what are best practices, what’s going on in other sports, what’s happening in the academic world.”

Teams want out of sample tests. Teams are looking for Ray Dalio‘s investment rule; “that it has to be timeless and universal.”

The smarter football teams have read The Success Equation. In that book, Michael Mauboussin writes about a continuum of luck and skill. Some actions, like chess, are more skill based. Some actions, like football, have more luck based. The luck and skill balance should influence decision making one way or another.

Sand enters our decision-making gears when we think we know something we don’t. Massey said, “Teams are too sure they know who is going to be good.”

“Teams put too much value in the top picks of the draft. Every year it feels like those guys aren’t just can’t miss but probable Hall of Famers…Every two years they’re talking about someone being a generational player.”

Teams violate Charlie Munger‘s iron rule of life, “that only 20% of the people can be in the top fifth.”

Instead, teams should pit historical data against player evaluations. But this is tricky. “Usually when people say they are ninety percent confident they are right fifty percent of the time.”

Take the Cleveland Browns. With two of the top four picks, Cleveland selected a quarterback and cornerback. Cleveland’s staff had a high degree of certainty about those picks. But consider a hypothetical trade, the sixth pick for the sixteenth and a few later ones.

“Teams don’t think enough in bundles. It’s not the sixteenth pick versus the sixth pick. It’s the sixteenth pick and a few other picks versus the sixth alone. You’re choosing one vivid, supposedly Hall of Fame player, versus three solid other players. It’s hard to keep that in mind, mostly they’re thinking about one vivid guy versus some vague possibilities.”

Layered on this decision-making quagmire is the vividness tendency. We like simple and obvious things. Ambiguity is like a puzzle piece that doesn’t immediately fit and as such we toss it out.

Instead, the Browns could have traded back.

“I’ve worked with an organization who had a philosophy of always picking up a future pick…it’s the surest return of the draft.”

Of course, trading back carries some risk.

“What you see (trading back) is that some teams are more comfortable doing those things. They’re going to take a little bit of risk and in exchange for their risk they’re going to get a little premium…if you can do that philosophically the numbers are in your favor.”

Risk is fine, so long as you’re compensated. Chris Douvos recalled David Swensen telling him, “Risk is not itself a dirty word. There are two kinds of risk, there are risks you can mitigate and there are risks that you can’t. The ones you can mitigate you want to spend all your time mitigating and diversifying them and the risks you can’t mitigate you want to make sure you get compensated adequately for.”

Trading back has the highest expected value on average but that doesn’t mean it always works.

“You have to have that philosophy and know that sometimes it’s not going to work out.”

Leaders must shoulder the shit umbrella.


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Being on the wrong side of maybe requires top-down support for what’s happening on the field. Coaches like Bill Belichick get the benefit of the doubt whereas other coaches do not. Scout Jason Licht told this story about working for Belichick and the Patriots:

“If I said a guy was a first-round pick, the Colts picked him, and he turned out to be a bust, they (Belichick and Pioli) wouldn’t have looked down on me. They wouldn’t have said I was a bad grader. Because that player in the Patriots system might have been successful.”

Massey explained, “That is what separates the best teams from the teams that aren’t run that way and that’s the root of all these issues. You need owners who will stand in the fray and handle the flack and keep a long-term perspective.”

Belichick was focused on the process not, the outcome. If the process is the steak, managers must also sell the sizzle. This was part of Sam Hinkie‘s problem – ironically so. Massey recalled:

“I remember Sam Hinkie talking about how he conveys information to the organization. Back when he was working for Daryl Morey as assistant GM of the Rockets, Sam would give information to his head coach one way, to Daryl in a different way, to the players in a third way altogether. You’re going to be dramatically more effective as an analyst if you can communicate in different ways tailored to the audience.”

The piece Hinkie lacked was how to communicate with the media and fans. Jeff Luhnow was interviewed by Massey for the Wharton show and he noted all the different people a general manager is accountable to.

“I think it’s important in our position we spend the requisite amount of time managing the stakeholders; the fans, the media, the influencers in the organization, the ownership – all of those stakeholders. I spend a large part of my job managing those stakeholders. It all comes down to communication.”

Money managers face this too. Joel Greenblatt told Barry Ritholtz, “My investors were great but maybe they wouldn’t be so kind when that (a 20% loss) happened, and it did seem to happen every two or three years.”

Besides overconfidence and under communication teams also have to align incentives. “The fundamental issue is that the general manager has a shorter term focus than the owner,” which is, “A classical principal-agent problem with a difference in time preferences.”

When Bet the Process cohost, Jeff Ma suggests a ten-year performance bonus, even if the manager or coach isn’t with the team, Massey calls it “A great idea.” Anson Dorrance had this idea too. He suggested that any board member who votes for a coach should lose their board seat if the coach gets fired. The board members kindly passed on this idea. Nassim Taleb, we will note, was not involved.

At the SSAC in 2017, Massey hosted the “Moneymind: Overcoming Cognitive Bias” panel. There, Farhan Zaidi explained his regret minimization technique. When his scouts were worried about being proven wrong on a trade, Zaidi said: “‘What if instead of making this trade we took him out back and shot him?’ and everyone said to make the trade.”

Massey said regret bias is “a major issue in decision making, and probably even stronger in sports where it’s public.” Billy Beane opined to Michael Lewis that baseball managers faced second-guessing from anyone who had played.


Thanks for reading. We’ve only hit the big decision-making points in these notes. In the podcast, Massey, Ma, and Rufus Peabody add nuance to the conditions.


Joel Greenblatt

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Supported by Greenhaven Road Capital, finding value off the beaten path.

Joel Greenblatt joined Barry Ritholtz for a strong seventy or so minutes. Even though I’ve read (but need to re-read) You Can Be A Stock Market Genius I still enjoyed this episode. On to the annotations!

A new Point of View. Greenblatt had an hmm, that’s interesting moment in college.

“Junior year I read an article about Ben Graham’s stock picking formula and ‘net-net’ seemed very simple to me. I was at Wharton at the time and we were learning about efficient market theory and none of it resonated with me.”

“What they were telling us at Wharton was, don’t try to figure things out, stock prices are efficient.”

“It was a good age, I was twenty-one at the time.”

Time and again we this advice; pay attention to the world and if you see something that doesn’t fit your worldview note it.

How do you get seven million dollars from Michael Milken? Luck.

“The simple story is that I had a friend at Wharton who was one of the people in Michael Milken’s group and I had been working at a hedge fund but had always wanted to go out on my own, felt I was ready, and mentioned it to my friend, and said if I could raise X dollars I would go out on my own and he called the next day and Mike said fine.”

And then how do you return 50% a year for ten years? That’s (partially) luck too.

“One, we stayed small (“One of the ways to get those kinds of returns is not to run a lot of money. After five years in the business we returned half our outside capital.”).”

“Two, we were concentrated (“And the other way is to be concentrated. Six to eight ideas were usually eighty-plus percent of our portfolio.”).”

“Three, we got lucky. You have to have some luck to get those returns.”

I agree with Michael Mauboussin‘s comments about luck; “There is no way to improve your luck because anything you can do to improve a result can reasonably be considered a skill.” But also with Scott Adams:

“I find it helpful to see the world as a slot machine that doesn’t ask you to put money in. All it asks is your time, focus, and energy to pull the handle over and over. A normal slot machine that requires money will bankrupt any player in the long run. But the machine that has rare yet certain payoffs, and asks for no money up front, is a guaranteed winner if you have what it takes to keep yanking until you get lucky.”

The manageable variables for a lucky outcome are persistence and time.

Capital Allocation. In Greenblatt’s The Little Book that Beats the Market, he introduces the Just Broccoli store. What I misunderstood when reading this book were the second order effects. I thought 8% >2% returns. While true, the real value comes from reinvestment.

“All things being equal it’s better to own the business that can reinvest its money at fifty percent returns than two-and-a-half percent returns.”

After the Moats and Allocator’s podcast, I now understand that better.

Jellybeans and noise. Greenblatt started his Google Talk pointing out that Warren Buffett advocates for indexing, “But Warren Buffett doesn’t index and I don’t either, how come?”

“People are still emotional,” Greenblatt demonstrated to a ninth-grade class with a jar of jelly beans. First, he had each student privately count, guess, multiply, and estimate any way they saw fit to figure out how many jelly beans were in the jar. They wrote their estimate on an index card.

Then, he opened up a dialogue in the room and each student shared their guess OR changed it based on what they heard. The index card average was much closer than the open floor guesses. Do your own work, be disciplined, Greenblatt told the class.  “99.9% of what you read in the news each day is noise.”

Stakeholders. We call them stakeholders rather than shareholders to include anyone who is part of your life. Greenblatt returned investor’s money, in part, because he wanted fewer people to call him. A concentrated position, “like clockwork lost twenty percent of my net worth in two or three days.”

“My investors were great but maybe they wouldn’t be so kind when that happened and it did seem to happen every two or three years.” Today’s Gotham Capital Index Plus is a different arrangement, with different stakeholders, different rules, and different incentives.


“There’s a book called The Invisible Heart which explains basic economics…it’s a very short book that most people should read.”

“For investing, if you’re a sport’s fan Moneyball was one of the great ones…undervalued players are very similar to undervalued stocks.”

“I just read a book called The Power of Moments which I really enjoyed…it really comes down to doing new things.”

“I’m also having a lot of fun with Never Split the Difference.”

“Everyone who’s interested in investing needs to read The Intelligent Investor, especially chapters eight and twenty.”

“Buffet wrote a bunch of letters that were compiled by Lawrence Cunningham into topics and I always assign that in my class because I think it’s a great book (The Warren Buffett Shareholder: Stories from inside the Berkshire Hathaway Annual Meeting).”


Thanks for reading.



Chris Douvos

Supported by Greenhaven Road Capital, finding value off the beaten path.

Chris Douvos spoke with Patrick O’Shaughnessy, Ted Seides, and gave a pair of presentations at Stanford (2016 & 2017) that we will use for these notes on venture capital investing.

Douvos’s investing career began with some choice teachers; David Swensen at Yale, experience at Princeton, David Salem at TIFF. Douvos learned to be a BLT investor – beyond the long-term. Swensen told him:

“Investing is about optimizing discomfort. If you’re feeling too comfortable you’re not taking enough risk. Risk is not itself a dirty word. There are two kinds of risk, there are risks you can mitigate and there are risks that you can’t. The ones you can mitigate you want to spend all your time mitigating and diversifying them and the risks you can’t mitigate you want to make sure you get compensated adequately for.”

From David Salem he learned to invest heroically, as a robust nonconformist with courage in his convictions. Douvos presents it this way:

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Howard Marks has a similar matrix that inspired Andy Rachleff to start Wealthfront. David Salem explained to O’Shaughnessy in their podcast that to be right and alone you need degrees of freedom. Or as Brent Beshore puts it, you need a shit umbrella above your head.

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Besides support from the top, Douvos warned Patrick that investors shouldn’t choose venture if they have the wrong timeline. “The biggest drive of venture success is a willingness to have a long horizon.”

High tolerance for risk, illiquidity, and a distant horizon, Douvos said, “is a rare trio.” Yale is the canonical example. “But Yale has a comfort envelop dynamic. They have an accommodative committee that will stick with them through thick and thin. They have a time horizon that is much longer than most folks.” This was a point Salem made too; someone can’t imitate the Yale strategy without imitating the Yale people and processes too.

But imitating Yale is comforting. Those folks are doing it. Being different takes career risk. Jeremy Grantham told Douvos, “Over ninety percent of decisions as an asset manager first take into account the career risk associated with those decisions.”

No one gets fired for IBM and not-buying IBM takes career capital. Michael Mauboussin explained it this way:

“I do think there’s an element of career risk, and this spans not just sports but also investment management. Bill Belichick goes for it on fourth down and it doesn’t work out and people give him the benefit of the doubt. But if you’re a coach who has a .500 team, it may be the correct decision but if you lose that game people don’t think about the quality of your decision-making process, they do think about the outcome, that’s a real big problem.”

Rory Sutherland said that this comes from our willingness to signal competence.

“If I pretend everything is logical, it may not be a really good decision but if things go wrong no one can blame me. This is an extraordinary form of corporate insurance.”

“The Venn Diagram of the people who can do and have the courage to do it is,” said Douvos, “that interaction is actually pretty small.”

The Venture Captial Model. According to Douvos, there’s no great model. As he says in a presentation at Stanford; “you don’t have winners repeating.” But, he tells O’Shaughnessy, it’s not as extreme as monkey’s throwing darts. That said, factors may not be the best approach. “If you found four factors, I’m not sure they would correlate with success, but they would certainly correlate with volatility.”

His best guess for a venture capital model with quantifiable inputs would be; concentration, scientific processes, early-ness, and size discipline. Like he says, it’s not easy.

One thing he wouldn’t include is performance. “I actually think track record is a lagging indicator, not a leading indicator.” Part of the reason is the time it takes for venture investments. The average investment, Douvos explains, lasts longer than the average marriage. Also, size isn’t a perfect indicator. “Someone once told me, it’s harder than you ever dreamed it would be to raise fund one, but far easier than you ever thought it would be to raise fund two.” O’Shaughnessy adds, “I call this assets vs alpha.”

Venture capital hasn’t always been so difficult and messy. Douvos admits in talks that he does a kind of “voodoo.” But it wasn’t always voodoo. No, this problem began with David Swensen.

“After Swensen placed all his chess pieces on the board he wrote a book and when I pitched non-profits I would sit down and say, ‘Now a reading from the book of David.'” That book, Pioneering Portfolio Management, became an investment tome. Swensen wrote for so much of an allocation in venture capital and groups invested so much in venture capital.

Money flowed west and the landscape bloomed. “All these things led to a flowering of entrepreneurship.” But opportunity withered. Douvos is electrified in his chats and likes to quote Buffett; Opportunity = Value – Perception, though he’s not sure Buffett ever said such a thing.

“A thousand flowers are blooming and the vast majority of those will die off but the few that survive with thrive and be transformative.”

And that’s the stage venture capital is today. The innovators were followed by the imitators who are followed by the idiots – and “sometimes I feel like we’re in the idiot phase.” Things are feverish. “I think a lot of people in this zip code think about sexiness as a proxy for an opportunity but it’s the exact opposite.”

Douvos recalled his time as a “Henry McCance barnacle.” Following McCance around he recalled, “He told me, ‘When an asset class works well, capital is expensive and time is cheap. What we saw in the bubble was that capital got cheap and time got expensive.'”

Today, Douvos repackages a Gatsby line for the Valley.

“The tempo of the city had changed sharply. The uncertainties of 1920 were drowned in a steady golden roar and many of our friends had grown wealthy. But the restlessness of Palo Alto in the 2000’s approaches hysteria. The parties were bigger. The shows were broader. The buildings were taller. The morals were looser.”

Perception isn’t value. Indexing isn’t value either. “If you were to index venture you would waste your time.” Venture capital returns are like average income when Bill Gates is in your sample. “Skewness can drive sadness,” said Douvos when he presented that the mean return for a vintage of funds was 45% higher than the median return.

This doesn’t mean good ideas, good companies, and good people aren’t out there. They are. The world is getting better. But investors have to work harder to find them.

Douvos is perplexed when he reads articles about another app. Come hang out at his portfolio companies “and you’ll see smart, domain focused people doing amazing world-changing stuff.”

Douvos looks on college campuses. “If I could make a pairs trade I would go long Berkeley and short Stanford.” That’s nothing against Stanford, where Douvos has given presentations, but more for Berkely. It’s a Moneyball approach, find value where others aren’t looking.

Douvos models himself after Herodotus. After an early visit to California he reflected, “I thought I needed to be in the land of the start-up-ians.” Walt Wittman’s Song of the Redwood Trees also inspired Douvos. “Populous cities—the latest inventions—the steamers on the rivers—the railroads—with many a thrifty farm, with machinery,”

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West, young man, go west.

He knew from his days at TIFF and Princeton that running up and down Sand Hill Road, “You just get his warmed over conventional wisdom and sometimes a healthy dose of politics on the side…Historians prize primary sources and the primary sources were the entrepreneurs.” So he moved west and starting showing up at companies with a case of beer on a Friday afternoon. “People are thrilled to talk about what they’re up to.”

“I asked Mike Maples, ‘How is your success so repeatable?’ and he said, ‘I’m looking to meet with ten people a week that are really smart that no one else is meeting with.”

“I set a rule for myself to be like Herodotus. For every hour I sit with a VC I’m going to sit with an entrepreneur.”

“Creativity doesn’t come from within the community of consensus.”

Though different in words, the spirit is the same as How Brian Koppelman made Billions. If you have genuine interest people will talk.

But not necessarily believe. Douvos told a group of students, “(To do this job) you have to be a professional skeptic, everyone is a fantastic salesman. You can sit there all day and get pitches from people and every opportunity is as exciting as the last.” He wears many hats; investigative journalist, counselor, teacher.

Douvos raises money then gives it away, then (hopefully) gets more back. The model works, for now.

Patrick O’Shaughnessy asks if he’s worried about Initial Coin Offerings but Douvos isn’t perturbed. “You created a more effective vehicle in a sense – but you still need help. So much has to go right in building a company that you want more people in your squad than you ever dreamed possible.” He points to a 2014 blog post that Josh Kopelman titled Domino Rally Business Models. In that post, Kopelman notes that you need a lot of things to go right for a business to succeed. Douvos said, “taking a company from 10M to 100M in revenue is an amazing challenge…It’s like riding a tiger whose fur is on fire running through an oil field.”

Help comes as doing something, making connections, offering insight. “One of my views is that active management will look like catalytic management.”

Douvos, again and again, lays out what he looks for. He’s teaching not obstructing, he wants to educate not confusticate. His process?

1/ The people. Do they have an edge somewhere? They must be “people who are reflective, opinionated, and have humility.”

“Every great partnership is a well-rounded whole of jagged pieces that fit together nicely.”

2/ The strategy. “Is there a resonance between the strategy and the people?” It’s like Christensen’s Disruption Theory, only instead of the firm, it’s applied to the individual.

“It’s amazing how often I meet middle managers from Proctor and Gamble who all of a sudden want to run a micro-cap buyout firm. They say they can bring operational experience but, no, you had a staff of thirty people for all these years in Cincinnati. What do you know about being in the weeds and deploying all these other plays in the playbook?”

3/ The portfolio. “These are fragile.” How does someone diversify the risk when “Bob the VP of sales sleeps with Jane the wife of Bill the VP of engineering.”?

Then we get into PE math “I tell entrepreneurs, once you take venture capital the venture capitalist’s business model is your business model.” Douvos wrote:

“Here’s where it gets dicey for the masses, though (and I’ll make some gross simplifying assumptions): if you’re an LP and investing in an run-of-the-mill $500 million fund hoping to get a 3x net return, that fund has to generate $1.75 billion in returns ($1.25B in profit less 20% carry equals two turns of profit). Of course, that’s just the capital that accrues to the firm’s ownership stake. Since a lot of firms end up owning only 10-15% of their companies at exit, you’ve typically got to gross the $1.75 billion up by a factor of between 6.67 and 10. That suggests that those firms need to create between $12 and $17 billion of market cap just to get a 3x fund-level net return to their LPs. Caliente!”

4/ The performance. It takes seven years and by the time you see results, it’s like looking through a telescope at life in the past. “The challenge is that performance is easy to measure,” but it may not be the right metric.

“People focus on a few metrics because they are easy to extrapolate but if you’re doing this job well it’s crazy time intensive.” It’s getting a beer with people, it’s walking tours, it’s visiting.  It’s “building the mosaic and that takes time. It’s why people take shortcuts and that’s why you default to brand.”

So what makes Douvos work?

When asked about his day, Douvos explained his average week; meeting with a manager about their portfolio with mental notes about cross-references to check, meeting with investors, a Palo Alto walking tour and history of the electronics industry, meeting with entrepreneur, “hopefully I’ll have a neuron fire from a conversation from a few days earlier.”

After that, he’ll drive to a robotics or AI lab and talk with the teams there.

Douvos got to this point by standing out. He visited campuses before others. He started blogging before others. He wore a red t-shirt before others, actually, the t-shirt is a good story. He realized, “ I can educate people.” When you’re the first voice, you get to choose the conversation.

“Venture Capital,” Douvos said, “has more units of ego per dollar of return than any other asset class.” But Douvos tries to build partnerships and community. He tries to manifest what Mr. McCance at Greylock told him. “If we ever have to go into the bottom drawer to pull out our documents we lost. We should have a partnership with a capital ‘P’ where we do right by you and you do right by us.”


Thanks for reading.

Andy Rachleff

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Supported by Greenhaven Road Capital, finding value off the beaten path.

Andy Rachleff joined Jason Calacanis for a nice seventy-five minutes of startup, investment, and strategy talk. Much like his conversation with Aaron Watson, Rachleff reminds us to revisit Howard Marks. Here are my notes.

Luck Rachleff started venture investing in 1996, “Right when Netscape and the Mosaic browser came out.” Sometimes, he said, “Better to be lucky than good.”

Starting Benchmark. The company’s start came from envisioning someone else’s end. Throughout the interview, Rachleff’s advice for founders is, figure out your competitor’s greatest strength and make it their greatest weakness. In venture capital, John Doerr was Kleiner Perkin’s strength. “We figured the best way to beat an individual was with a team.” And so Benchmark’s structure was created. And it worked well.  “We thought an equal partnership would attract talent like no other firm…On and on we keep attracting great people who are better than the founders were.”

What’s the name of this magical arrangement? “We call it communist capitalism.”

What job are your customers hiring you for? When the conversation switches to Wealthfront, Rachleff explains, “millennial pay us not to talk to them.” How do they do that?  “What might surprise people is the thing that most attracts people to our service is we do everything in software.”

Calacanis is surprised when he hears travel agents are still around, but if we ask what job are your customers hiring for? we can see why. Baby boomers and large groups use travel agents because of an informational disparity the internet can’t bridge. Millenials have the mindset of, I’ve got an app and I’ll figure it out.

But Wealthfront isn’t a casino. Their job is to provide the best service they can.  Crytpo is “a great interest to our target demographic, but we are a boring service that’s focused on investment strategies that have been academically proven over time.”

“Everything we do,” Rachleff said, “is rules-based and unfortunately crypto doesn’t qualify for that.”

Some rules originated with cash flows.

“My investment idol is a guy named Howard Marks who runs a hedge fund called Oak Tree, and Howard likes to say, in order for something to be an investment it has to have a cash flow because the only way you can evaluate something is by evaluating its cash flow. If there isn’t a cash flow it’s speculation.”

But that doesn’t mean you shouldn’t invest in crypto. “If you think about buying Bitcoin as entertainment you’re going to be fine,” Rachleff said. Calacanis said he gets similar questions about angel investing since he wrote his book. Others have said this about DIY investing. If you’re going to put in the time to master something then go for it but don’t invest so much you blow up.

Zero Marginal Cost & Economies of Scale. That Wealthfront even exists is interesting. Besides learning from Marks, Rachleff mentions Bridgewater and other pioneering financial firms that innovated something which is now deliverable to the masses. This was a theme to Albert Wenger’s podcast with Patrick O’Shaughnessy too. Wenger’s big idea is that everything has become (or will become) computable and distributable thanks to zero marginal cost.

Besides distribution, the beauty of software Rachleff says, “it keeps getting better.” For example, Wealthfront combines your ‘house’ savings account with data from Redfin and Zillow to give an estimate about buying a home, the number one withdrawal reason of millennials.

The software also lets Wealthfront install bias frictions.

“There’s a lot of research that suggests human nature is such that we want to sell when the market goes down and buy when the market goes up, which the exact opposite of what you should do. The problem is, it doesn’t feel right. it doesn’t feel right to sell when you’re winning and it doesn’t feel right to buy when you’re losing.”

Calacanis put it better; “Anyone who has played blackjack and was up ten grand will tell you, leaving the table is heartbreaking.”

Nudging. “You don’t pick the risk level, because most people don’t know how to. We tell you what we think it should be and you can adjust it if you want.”

For a long time, I viewed nudging as a panacea without realizing that nothing is a panacea. Everything has tradeoffs. Nudging too.

Lessons from Reed Hastings. “There’s no one I think more about as I run Wealthfront than the lessons I learned from Reed Hastings.”

What makes him good?

“He keeps it really simple.”

How so?

“He takes asymmetric risks.”

Is that a better form of risk?

Yeah, and it comes from pattern recognition.

Venture Capital Pattern Recognizers. “I don’t think the vast majority of people should invest in startups,” Rachleff explains as he tells Jason that the top two-percent of firms generate ninety-five percent of the realized gains. What makes that top group so good?

Success. “You have to know which leaps of faith to take.” You have to know which asymmetrical risks are worth it. “The thing that separates the premier firms from the other firms is they’ve had a lot of success and they’ve learned from that success which leaps of faith to take – which you wouldn’t know unless you’ve had those successes.”


Thanks for reading.

Albert Wenger

Supported by Greenhaven Road Capital, finding value off the beaten path.

After Albert Wenger was on Patrick’s O’Shaughnessy’s Invest Like The Best Podcast I thought, this guy sounds fascinating, I gotta see what else he’s said. Hours – really days – later with viewed YouTube videos, exhausted podcasts, and creased pages from his book, World After Capital here are three things I learned from Wenger.

1/ The steps to thesis-driven investing. These including understanding the thesis deeply (i.e. network effects don’t overlay old businesses) and changing your thesis as others come in.

“To me, the idea of having a thesis is a little like the idea behind science.”

2/ Crypto-currency and techno-economic revolutions with a specific focus on the work of Carlotta Perez.

“My view is that when the dust settles there will be a dozen or so protocols that matter and to get to the ones that matter we’re going to have to try thousands if not tens of thousands.”

“The zero-knowledge position is that your best prediction for how long something will be around is how long it has been around. That predictor is very very powerful.”

3/ The World After Capital, why we need to sell the sizzle with the steak.

“We have failed to provide a good forward-looking narrative.”


Thanks for listening, and of course, the book’s pages were only metaphorically creased.


China Books

Supported by Greenhaven Road Capital, finding value off the beaten path.

Imitating his Gotham neighbor, Commissioner Gordon, Josh Brown put up the book signal.

Like the Deep Books request from Patrick O’Shaughnessy, I went through the 100+ replies to the above tweet. Below is the best. These are Amazon Affiliate links.

But first, consider travel. Tyler Cowen told David Perell that books are a good precursor for travel. “I’ve tried reading (about how the Balkan states are messed up) and I can’t grasp it. I go there and the mix of going there and the books make it all work.” Going there was a suggestion from the Twitter crowds to Brown too.

In honor of Cowen, we will include @MR links when available.

The Best! This is based on ranking books by the number of reviews, then reranking books by percent of reviews that are four stars or above, then adding one ranking score to the other. Or, more people read and liked this books than any other.

Country Driving by Hessler. “I found this to be an excellent travel memoir, a very good book on transportation economics, a wonderful book on China, and most of all a first-rate study of the adjustments and changing norms which accompany rapid economic development,” wrote TC@MR

Age of Ambition by Osnos. This was one of my favorite books from 2017. Osnos writes, “This book is an account of the collision of two forces: aspiration and authoritarianism.” “This is one of the best books on contemporary China, maybe the best,” wrote TC@MR.

Tai Pan by Clavell. I remember reading this as a teen and liking it. Jane Wells liked it too.

Wild Swans by Juan Chang. Wikipedia describes it as; “a family history that spans a century, recounting the lives of three female generations in China…”

Most reviewed These were the books with the most reviews on Amazon. It turns out people really like fiction, historical fiction, and/or gripping narratives. Art of War, The Three Body Problem, The Good Earth, and The Ghost Fleet topped the list.

Highest rated. These were the books with the highest percentage of 4 + 5-star reviews. This was trickier because the top few books here all had fewer than twenty reviews. Past that group of small numbers it was; Little Soldiers, Wish Lanterns and Search for Modern China.

Africa. There were a lot of books that included references to Africa. I was surprised, though I shouldn’t have been. On a Caribbean cruise a few years ago, our family took an island tour and there were a set of apartments so colorful they looked like an Instagram picture.

‘What’s that?’ I asked the guide.

‘China money,’ he replied. The full list lets you dig in for more. Or…

Podcast it. Of course, you don’t have to actually read anything on this list. There are many YouTube talks and podcast interviews. I thought Graham Allison’s conversation at a16z gave me enough. Here is Allison and Kissinger (whose book On China also scored highly) on YouTube.

Multiple people suggested the TV The Three Kingdoms as well. Here’s the Wikipedia page.

Marginal Revolution is my go-to place for book suggestions and footholds, here is more Cowen; in 2006,  in 2011, New books and notes on China, and 2017, How to understand modern China.