Michael Mauboussin

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

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This is our fourth(!!) post from a Michael Mauboussin podcast. There were these; Michael Mauboussin and Michael Mauboussin from conversations with Barry Ritholtz, and one – Michael Mauboussin – from The Knowledge Project podcast.

I think what appeals to me about Mauboussin’s interviews is his clarity of explanation. In his talk with Ted Seides he draws from The Santa Fe Institute, Complex Adaptive Systems, investing research, Brian Arthur, Steve Jay Gould, Malcolm Gladwell and Joseph Stiglitz. That’s a lot of big ideas to simplify.

The whole episode is worth a listen. These notes are only about decision making. Ready?

Making good decisions. One thing Mauboussin referenced over and over was the reference class. “When thinking about any kind of forecast it’s incredibly important to understand the reference class from which this problem comes and to weight your own views with the evidence you have from the reference class.”

For example, data about 2017/2018 treasury notes and volatility measures are atypical. You wouldn’t expect these conditions to persist.

And when talking about Amazon, Mauboussin said that the growth rates some people expect have never occurred in a reference class of 313 examples.

Base rates and reference classes are so important to Mauboussin because good decisions come from good odds. “To me, a lot of investing decisions boil down to probabilities and outcomes and trying to be on the right side of expected values.”

Knowing what typically happens is a good starting place. It’s what Sam Hinkie and Daryl Morey used to get their General Manager jobs. When interviewing with the owners each presented what typically happens before teams win.

Choosing a reference class is an art and science. In Think Twice, Mauboussin wrote;

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Reference classes are like Goldilocks, not too big and not too small. This is something Michael Lombardi and Bill Simmons have addressed regarding the NFL:

“Charlie Casserly was proclaiming he (Andrew Luck) was the next John Elway, they both went to Stanford but he’s not the next John Elway.” – Lombardi

“I don’t think you can compare anyone’s stats from this decade to last decade. No one gets hit anymore. The interceptions are way down. Even bad quarterbacks have good stats. I grew up with Steve Grogan and he would have years where he threw nine touchdowns and seventeen interceptions.” – Simmons

“Playing in a dome is a huge advantage.” – Lombardi

How relevant are colleges, eras, and domes for football players? That’s what you’d need to figure out.

If you can find a good reference class, compute a base rate, and then tweak your understanding based on your inside knowledge you’ve made a good start for good decisions. Now, we have to deal with biases.

“Heck, if you’re in the investment business,” said Mauboussin about the confirmation bias, “and you’ve never fallen for this one you’re not doing your job. We all do it.”

Richard Thaler warned Barry Ritholtz, “If you have a certain lens that you look at things through, then you’re gonna see everything to be consistent with your point of view.”

One way to get around this is, using Thaler’s words, more lenses. Mauboussin said this, noting that quirky backgrounds are a good diversity to have. Venture Capitalist Steve Vassallo said the same thing when he wrote that there should be a designer on the founding team to “project her weirdness onto the organization.”

Another bias is hindsight bias. Mauboussin said, “writing things down is really helpful. Be aware and say, ‘ I know that we had pros and cons for manager X but now he’s underperformed so let’s revisit the pros or vice versa.”

This is something The GMs advocated among other bias busting ideas. Biases are like bacteria. Good procedures (hand washing) can help but not eliminate.

Okay, let’s see where we are on our good decision making checklist.

  • Find an accurate reference class.
  • Calculate the base rate.
  • Systemize how you’ll sterilize your biases.

Now we need to think about teams. A diversity of ideas is important because it allows you to Argue Well. Find, “people with different experiences and backgrounds and training and personalities that can surface different points of view.”

But you don’t want too many people. “Richard Hackman at Harvard studied teams across all different disciplines and found that the optimal size was four to six.”  That’s about the right number of people for two pizzas, a Jeff Bezos heuristic.

These quirky groups will – hopefully – find new and interesting ideas. That is, they’ll come across Chesterton fences and debate the merits.

Sports are a good example knocking down Chesterton Fences. Mauboussin said that Go and Chess players are awed by AI moves. Our mental blinders, said Stanford professor Bill Burnett, block innovative solutions to Wicked problems.

“Another,” said Mauboussin, “is shifting in baseball. Baseball’s been played for a hundred and twenty-five years and all of a sudden people say, ‘we tend to know where guys hit the ball, we’re just going to put defenders in those spots.’”

Seides added that Big Data Baseball was “one of my favorite books…It’s what happens after you understand Moneyball.”

Mauboussin liked it too, “The thing that blew me away from that book was pitch framing…and simply bringing in a catcher who was good at pitch framing could lead to a substantial delta in games won.”

But it takes career capital to shift in baseball and keep your job. Mauboussin explained:

“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.”

Without career capital, people are incentivized to fail conventionally. I like how Tren Griffin addressed this:

“Bucking the crowd’s viewpoint in practice in the real world is not easy since the investor is fighting social proof. Robert Cialdini: “social proof is most powerful for those who feel unfamiliar or unsure in a specific situation and who, consequently, must look outside of themselves for evidence of how best to behave there.” I discussed social proof in a recent blog post on Cialdini’s book Influence. In many cases, following the crowd (social proof) makes sense. Sticking with the warmth of the crowd is a natural instinct for most people. Many people would rather fail conventionally than succeed unconventionally. But doing the reverse is easier said that done for most people.”

Seides added that Scott Malpass and David Swensen can do things that other people can’t. We heard how Jeff Luhnow approached this problem as he built the Astros into a World Series Champion. Luhnow said “I spend a large part of my job managing those stakeholders. It all comes down to communication.”

We’ve speculated – along with Ben Falk – that part of the reason Sam Hinkie was fired was that of poor communication. As Josh Brown cautioned, “If you’re just telling a client, ‘Shut up I got this,’ you’re not going to be the client’s advisor for a long period of time.”

Successful managers – of money, people, or teams – who blaze their own path must communicate with their stakeholders.

That’s about all it takes to make better decisions; find a reference class, use a base rate, systematize how to sterilize biases, have team members with unique thoughts, on teams that aren’t too large, question things that have always been done this way, and communicate with stakeholders.

Oh, and make sure you’re constantly learning. “Constant learning is such a big deal, In this industry, you can’t live without it… But recognize it’s not about shuffling papers, It’s about thinking.” This is something Guy Spier said too:

“What’s really important is that whatever you’re doing you’ve got to be thinking intelligently. When Todd Combs talked about his five hundred pages a day it stimulated a lot of people to go find five hundred pages a day to read but you gotta be intelligent about how you’re reading it.”

For Mauboussin, the ecosystem of constant learning is healthy when he’s healthy. That means eating, sleeping, and exercising. And “You can’t emphasize enough that hard work is really important. In the investment industry hard with isn’t necessarily spending sixteen hours at your desk, it is constantly thinking and reading and learning.”

What should you read? Here’s a start:

Steven Jay Gould’s Full House. Mauboussin’s The Success Equation. Brian Arthur papers. Books like Scorecasting, Scale, Adaptive Markets, or The End of Theory.


Thanks for reading this.


Guy Spier

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

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Guy Spier joined Preston Pysh on The Investor’s Podcast for an hour on Bitcoin. Just kidding, though there was a Bitcoin discussion there was a lot more.

When asked how to build patience Spier said,  “you can’t build patience and temperament in isolation, it has to be related to something.” Look at marriage for example. There’s a big difference between having a mantra of patience and having patience. Instead, Spier suggests small steps during hard times. I found this timely considering the hullabaloo around new year resolutions.

Write to think. “The more conscious we are of what we’re doing the better it is and writing is a great way to be more conscious of yourself. Even better would be to keep an investment diary.” This is something other investors have said too. Bob Seawright said, “When I tried to organize my thoughts and put pen to paper, it forced my thinking to be more rigorous and it exposed gaps in my thinking and errors in judgment more readily.” Non-investors can benefit too. Adam Grant said that only after a long summary does he “distill why I care about it.”

Design easy choices. “When you come into my office you can go left or you can go right. When you go left it takes you to where I am now, into my busy room where my computers are and if you go right you get to my library with no electronic devices and lots of books. My goal is to spend more time going right than going left.”

Besides the physical environment, Spier has cut back on his subscriptions. “At some point, you have to get away from reading about investing to reading for investing.”

Later in the interview, Spier adds, “What’s really important is that whatever you’re doing you’ve got to be thinking intelligently. When Todd Combs talked about his five hundred pages a day it stimulated a lot of people to go find five hundred pages a day to read but you gotta be intelligent about how you’re reading it.”

More Deep Work is the toughest part of many knowledge jobs. This bar is lowered through good design. This is what Aziz Ansari told Bill Simmons:

“I get so much done on airplanes, especially if there’s no wifi…What happens when I’m writing is I’ll hit a point where I don’t know where to go. In those moments I’ll check my email or New York Times, and then I’ll go back to it. But when I don’t have my phone or I don’t have the internet I’ll hit that moment and I’m forced to come up with an idea but that idea is gone when you take that break.”

Random fools and humility. “I gave a talk to the Swiss CFA society and one of the points I made was that while I really appreciate your respect for me, all you need to do is read Nassim Taleb’s book Fooled by Randomness. While I have a twenty-year track record, there’s no way you could prove to someone who knows how the numbers work whether I’m lucky or smart.”

Spier continued, “we cannot rule out that I’m just a coin flipper who has flipped a high number of heads for many reasons that have nothing to do with what we are talking about now.”

It’s hard to Know thyself, –  and maybe impossible – but the questions are worth asking if only to see how we go about finding the answers.

At the very least it gives us a glimpse of humility. Marc Andreessen carries Charlie Munger’s shovel trying to unearth our thinking mistakes.

“Naturally as we go through life we accrue beliefs about how the world works, beliefs about causes and effects and beliefs about patterns that we’ve seen. I try as hard as I can to be as ruthless as possible in shedding the old beliefs and leaving them behind. They are so rarely predictive of something new.”

Others like David Salem call this “intellectual honesty.”

Rapid fire.

For value investors, “I think it’s far harder to sell stocks well than to buy stocks well.”

“They’re as dangerous as an MBA with a spreadsheet.” Like Jerry Kaplan and Rory Sutherland, investors know there’s more data than a spreadsheet cell allows.

“I think for the vast majority of really good investments; it’s insanely cheap, nobody disputes it’s insanely cheap it’s just that there’s this terrible thing staring you in the face that you have to overcome or understand or reason with.”

Thanks for reading.

The Increasing Returns Economy

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

When Michael Mauboussin brought up Brian Arthur’s work in his conversation with Ted Seides it woke my curiosity. In this podcast episode, we’ll cover Arthur’s 1996 Harvard Business Review Paper.

In summary; there are two economies

  • The innovation economy which is defined by increasing returns, positive feedback, heavy on know-how and light on resources.
  • The optimization economy which is defined by bulk processing, genteelism, and heavy on resources and light on know-how.

Arthur wants managers to be aware of their economy. Innovative economies require commando units who can move fast and break things. Optimization economies require hierarchy and baby steps.

Instagram‘s success aligns with Arthur’s “properties that have become hallmarks of increasing returns.” They weren’t the first or best photo filter app but they did enter an unstable market with multiple potential outcomes and the ability to “lock in” the market.

Arthur notes that all companies are some blend of innovation and optimization. Apple’s App Store, iTunes, and iOS integrations are innovative while Apple’s hardware manufacturing is optimized. What matters most for the innovation parts of a business is adaptability, “when the games themselves are not even fully defined, you cannot optimize. What you can do is adapt.”

Arthur explains that here, in my favorite passage.

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The podcast includes examples from Nate Silver, Jeff Luhnow, Ed Thrope, and Jerry Kaplan.

IDEO and d School

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


Where is your idea? 


IDEO is the design studio responsible for among other things, the first Apple mouse. Founded by David Kelley, the company has grown to include his brother Tom and annexed part of the Stanford campus for a design (d) school. In addition, the IDEO U YouTube channel has some wonderful content.

In a tweet, the IDEO ethos is; Ask then build then ask more.

In a blog post, the IDEO ethos is; SEE BELOW

In an ebook, the IDEO ethos is: here. One experiment we’re running in 2018 is these things called ‘dots.’ These are ‘distillations of thoughts’ that take about thirty minutes to read or listen to.

IDEO focuses on “human-centric design.” This is also the backbone of the d-school and IDEO U instruction. Human-centric design is about finding problems then designing solutions. As founder David Kelley said;

“So much of the world is focused on problem-solving, we’re good at that and we should keep working at that but we really believe the designer’s task is to figure out what is a problem worth working on. What’s a non-obvious need?”

Non-obvious needs come from asking a lot of questions. But don’t expect people to tell you what they want. In more than one talk by more than one IDEO-er, someone referenced Henry Ford’s quote, “If I had asked people what they wanted, they would have said faster horses.”

And the Steve Jobs one, “It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.”

I used to think that Jobs quote was a sign of his arrogance. Now I don’t. The IDEO team made me think about latent needs. Chief Executive Officer of IDEO, Tim Brown wrote that good design, “is helping people to articulate the latent needs they may not even know they have, and this is the challenge of design thinkers.” Put another way, good designers design from first principles.

These insights come from interviewing. Brown wrote:

“Walk into the offices of any of the world’s leading design consultancies, and the first question is likely to be ‘Where is everybody?’ Of course, many hours are spent in the model shop, in project rooms, and peering into computer monitors, but many more hours are spent out in the field with the people who will ultimately benefit from our work.”

For example, IDEO redesigned the school lunch experience. In interviewing students they found that they didn’t have enough time to socialize. In interviewing staff they found that the students weren’t eating healthy food. The solution was to serve the food family style, and with some clever choice architecture, bring out the fruits and vegetables first.

This school lunch solution wasn’t birthed in one great moment of Silicon Valley brilliance. Instead, it was a process of iteration. Brown wrote:

“The reason for the iterative, nonlinear nature of the journey is not that design thinkers are disorganized or undisciplined but that design thinking is fundamentally an exploratory process; done right, it will invariably make unexpected discoveries along the way, and it would be foolish not to find out where they lead.”

This is the build and ask process. Brown explains that early designs should be fast and to the point. For designing experiences the initial design can be post-it notes on a wall. The Kelley brothers said that you should “squint” at prototypes. Prototypes are like compasses, they give headings.

Good prototype builds come from good brainstorming questions. Stanford professor Bill Burnett warns against lazy brainstorming.

“The number one thing we see is that people grab the first idea, or the first couple ideas and run with them. Ninety-nine out of one-hundred times those first ideas are things that are available to you. They’re things you know how to do and so by definition, they’re not innovations.”

IDEO style human-centric design is for wicked problems. This isn’t solve-for-x. It’s why good brainstorming is collaborative and requires commitment. Burnett suggests using the comedian “yes and…” approach.

David Kelley says to brainstorm like ten-year-old girls rather than ten-year-old boys. Boys are competitive whereas girls are more cooperative. The latter comes up with more innovative solutions than the former.

Better questions help to better brainstorm and better brainstorms lead to better prototypes which lead to better questions. Good design according to IDEO is a cycle of ask and build.


Thanks for reading.

Again, the Kindle is here.

The Silk Road, a story for investors

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

In part one of our recap, we looked at the lessons for entrepreneurs from Nick Bilton’s book American Kingpin. In that post, we noted that Ross Ulbricht, aka Dread Pirate Roberts, understood his customers, created a platform business, did a lot of non-glamourous work, remixed ideas and experimented.

Today we’ll look at the law enforcement side of the book. These officers are inspiring, from department heroes to backwater nobodies. They embodied curiosity, just like successful investors.

Investors and law enforcement are both curious. Not a superficial curiosity but a deep one. In his book about curiosity, Brian Grazer wrote that curiosity takes interest and follow through. Here’s how one agent did that:

“But Jared assumed the task of finding khat with the same fanatical compulsion as someone assigned to capture the world’s most evil terrorists. He printed out hundreds of flight logs of people who had been caught with khat in the past, laid all the documents out on his living room floor as if he were Carrie Mathison on Homeland, and searched for similarities among known smugglers. He scrutinized every detail of each arrest until he found a pattern.”

The investigators in this book reminded me of investors in the real world.

It’s the curiosity to piece together a puzzle when you don’t have the box.

The best investigators settled in like an uncle who plops down on the couch with a plate of food to watch and talk football. Each had a deep understanding of their domain; mail order drugs, tax evasion, cutting edge technology.

“Jared began explaining what the Silk Road was and how it worked, and as he did, he placed envelopes from the mail tub on the table one by one, as if he were dealing a deck of cards at a casino.”

The agents were looking for clues using their pattern recognition. They built these skills by being on the ground and doing the work. It was a combination of agencies that found Ulbricht and at each agency was an individual with expertise. Jared figured out how things were sent in the mail. For example, early on no one knew Silk Road’s volume. Jared ran a test.

“Of the eighteen orders that Jared had placed on the Silk Road, one was lost en route, and the other sixteen arrived in his PO box unnoticed by anyone in the federal government. It didn’t bode well for the new war on drugs.”

Establishing the base rate was crucial for Jared to make the case to his superiors that this was something worth pursuing. Another agent – Gary Alford – did this:

“He started with the Gawker article, then clicked on dozens of other newer links, scouring the words and images, until he leaned back in his chair, staring at his computer as pages of articles about the drug-dealing site and Bitcoin and Tor flickered on the screen. He knew full well, as his supervisor had told him, that teams of law enforcement had been searching for the creator of the Silk Road for almost two years, and each road they had traveled down had gone nowhere. He also knew that he would have to find a new investigation technique if he wanted to have any chance of taking down the site and its creator.”

Alford was looking for “a parking ticket,” an allusion to the discovery of the Son of Sam, who was caught not because of crime scene evidence but parking tickets.

Each investigator took their expertise and mixed it with this new, confusing world. It was hard. Law enforcement had to understand it, but then also compile it for a trial:

“The jury’s eyes seemed to glaze over when the lawyers tried to explain how Bitcoin blockchains worked, why server encryption and CAPTCHAs and IP addresses were so important, and what happens when you run Ubuntu Linux on a Samsung 700Z.”

Investors need to convince their own stakeholders that something makes sense to do.

Soon after reading American Kingpin I read Traffic. Tom Vanderbilt’s book is about how human actions manifest behind the wheel and on the road. A small part of the book is about how technology can pick up data in different ways that people. For example, cars with adaptive cruise control use radar to judge distance. Radars in cars do this better than Neil at the wheel.

The safest driving brings humans and computers together. Each has their own data processing advantages. Investigators and investors do this too.


Thanks for reading.

The Silk Road, a story for entrepreneurs

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

In American Kingpin, Nick Bilton delivers the story of The Pirate Bay, Dread Pirate Roberts, Ross Ulbricht and the law enforcement pack that ensnared him. Bilton’s chapters are crisp, with cliffhangers and for me, it was a “2AM” book – one you start to read and look up at the clock to realize it’s suddenly two in the morning.

Aside from the intrigue though is a lesson for entrepreneurs and investors. The future founders can read this to see how to start a company – though hopefully a law abiding one. The investors can read this to see how to solve a puzzle – through the eyes of the law enforcement officers.

Today is for founders. Ready?


Ulbricht fit the founder’s framework because he had intelligence, motivation, and curiosity but also wanted to see the world a different way. Facebook encouraged people to move fast and break things and to varying intensities, it’s what all entrepreneurs do.

“While he (Ross) couldn’t talk to them about what he did for work, he could discuss what inspired him to do it. After all, in San Francisco the mentality of using technology to try to disrupt a broken system wasn’t a strange way of thinking but rather the norm. In so many ways, the programmers and entrepreneurs Ross met were just like him.”

Ken Grossman was brewing beer in his closet, breaking the rules on underage consumption and home brewing. He wrote that these sorts of efforts could have led down the wrong path if it wasn’t for some neighbors who directed him in productive directions.

Or, as Yvon Chouinard put it: “One of my favorite quotes is ‘if you want to understand the entrepreneur study the juvenile delinquent’ cause they’re saying ‘this sucks I’m going to do it my own way.’”

While Chouinard and Grossman had prosocial avenues to head down, Ulbricht only saw dark alleys:

“But what choice did he have? It wasn’t like he could go out west to Silicon Valley and get a job at a start-up. After the bubble had popped a few years earlier, companies that had been built on a wing and a prayer had siphoned people’s retirements into thin air and collapsed, leaving San Francisco a metaphorical no-fly zone.”

That doesn’t excuse actions, but it points out that this mindset has certain consequences in certain conditions.

Ulbricht didn’t know what to do so he did what a lot of people do – he went to graduate school. After falling in love but falling out of his program he was back to trying things.

“After Penn State, Ross had tried to build a video game that would help demonstrate these theories. But it had gone nowhere. Just like all of Ross’s other ideas.”

Quantity is its own quality. Alice Waters succeeded with her first restaurant but not her first meal. She had a lot of failures, tweaks, adaptations, tests, and trials before she got it right. What Waters and Ulbricht both did was remix existing things into new ideas.

For Ross that meant combining his libertarian ideals, Craigslist use, drug participation, technology interest, and of course, a TV show. “The latest show they had become obsessed with was Breaking Bad.”

Combine these ingredients and out pops Amazon for drugs. But there was a missing piece. How do you pay for this stuff? “Ross had come across a technology that had recently emerged called Bitcoin.”

Angel investor Jason Calacanis likes to ask, what makes it different this time. Both he – and to some extent Rory Sutherland – believe that Uber succeeded because of the map app. Seeing the dots on a map connected the dots in people’s head. Bilton writes that Bitcoin, “was the missing piece Ross had been waiting for to build his experimental world with no rules.”

With the ideas and the tools, Ulbricht coded the site in a weekend. HA! A weekend! Bilton wrote:

“He spent innumerable hours writing front-end code, back-end code, and code that helped sew those digital dialects together. Ross was teaching himself all of these programming languages on the fly. He was technically doing the equivalent of building eBay and Amazon on his own, without any help and without any knowledge.”

The overnight success takes years of non-glamorous work. Marcus Lemonis, Ken Burns, and Brent Beshore all make it a point to point this out.

“Ross had to oversee customer-support tickets that seemed endless, with people complaining about drugs not arriving on time, the site being too slow, or harassment on the forums. There were more hackers to fend off with even larger ransoms, the Feds to hide from, and his employees to inspire. Fudge, this was hard work.”

Ulbricht muddled along.

“To help entice potential customers to feel comfortable acquiring drugs from these mysterious new dealers on the Internet, Ross built a ratings system on the Silk Road where sellers were given “karma” points, which acted like positive or negative reviews, just as on eBay or Amazon.”

Tweak, copy, patch. The site slowly came together (Ross got help from friends and message boards, the latter would be a clue for the officers). Ross thought he was protected because of the tools he used. When asked, “Ross would calmly reply, ‘I can’t get caught because I’m protected by Tor and Bitcoin.'” Every project requires assumptions but once firm footing can become sand and slip away.

‘Liquidity’ is a common financial assumption. In our post on five market crashes this was a thread in each tragic tapestry.

Another thing we see with startups is how much time they take. Founders don’t coach youth soccer. This was the point Malcolm Gladwell tried to make about ten-thousand hours:

For Ross it was about a girl:

“She loved Ross so much, but he appeared to love his Web site more.”

But was it worth it? Ulbricht had the right idea, creating a platform business model:

“The Silk Road, which he had started only a year earlier, had just crossed a line of $500,000 a month in drug sales, which would subsequently turn into hundreds of thousands of dollars in commissions that flowed right into Ross’s pocket.”

“The Silk Road, after all, was just the platform—no different from Facebook or Twitter or eBay—on which users communicated and exchanged ideas and currency.”

Damn, if only… I thought as I read this story. Unlike some failed startups, Ulbricht did so many things right. He understood his customers, he experimented, he was curious, and he was guided by a big idea (in addition to money). It was good work in the wrong direction.

There are lessons in this story for founders, but the biggest is to do something good.