Michael Mauboussin 3

Michael Mauboussin joined Barry Ritholtz on the Masters in Business podcast and I loved every minute of it. Mauboussin is great, and I’ve taken notes on some of his other conversations; Michael Mauboussin with Shane Parish and another with Michael Mauboussin and Ritholtz.

I saw a lot of tweets about this interview and someone said that what makes Mauboussin a good interviewee is that he understands things deeply and can speak clearly. I couldn’t agree more. If you want to skip ahead there were 7 parts to my notes.

  1. Know the pot and the payout.
  2. Incentives matter.
  3. The inside and outside views.
  4. Wonderful story telling machines.
  5. How should you invest?
  6. Hold my beer and watch this.
  7. Rising ducks on rising tides.

This post is a longer one. If you want to buy it for ease of reading on a Kindle or via the Kindle app, purchase it on Amazon. If you want to listen, get the podcast version. If you’re reading it here, let’s get started. 

1/ Know the pot and the payout. (“Any damn fool can see.”)  “If you’re a handicapper and you want to make money there are two things that are important. One is how fast the horse is going to run (the fundamentals). Second is the odds on the tote board. The way you make money isn’t picking a winner. The way you make money is picking mispriced odds. That idea really carries over to investing. I think as investors many of us blur those two things.”

Jeff deGraff puts it in poker terms “if the opportunity to stay in the pot is low enough and the reward is high enough, absolutely stay in. Even though there might be a very slim chance of pulling a straight, the chance to stay in makes an awful lot of sense.”

Charlie Munger is – of course – the most colorful conveyor of this idea:

“Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it’s not clear which is statistically the best bet using the mathematics of Fermat and Pascal.”

Short seller Jim Chanos said he’s seen “seen far more stocks go to zero than infinity.” If you short a stock, you could theoretically, have uncapped losses. The sky’s the limit, but Chanos says this rarely happens.

Cliff Asness explained this to Tyler Cowen:

“I want to ask one of my two older kids (age 12)… ‘Does this (merger arbitrage) sound like a good idea to you?’…There’s about a 98 percent chance they say, ‘No. That sounds like a terrible idea to me, you can lose a lot, you can make a little. Who wants to do that?’ I’d be the proudest pop on Earth if either one of them kind of paused and said, ‘how often do both of those two things happen, Dad?’ Because, that’s the proper question.”

The point we want to get to is the “pause.” It’s not to “blur” the two things. We want to think through the idea. We want to ask why it’s a good bet to make.

Sometimes longshot bets are worth placing if the cost is low, and  sometimes almost certain bets are worth placing even if the cost is high. Most things are somewhere in the middle. 

Know the pot. How much you can win?

Know the odds. What’s the chance for each outcome?

Do the math.

Note that this gets harder the more people doing it. Mauboussin calls this the paradox of skill, “if the people who are less capable are walking away from the poker table, who’s left?” As my dad says, if you look around and can’t tell who the fool is, it’s you.

The paradox is that, “when activities have both skill and luck, as most things do in life, as skill increases luck becomes more important,” explained Mauboussin. Luck becomes more important because there are fewer fools at the poker table and the range of skills has narrowed.

Burton Malkiel used this to explain why it’s hard to be an active investor, “the problem is, as the market gets more and more professional, when people are better trained, when people have better sources of information…it’s then harder and harder to actually beat the market.”  

Nate Silver said he stopped playing online poker because of exactly this. Stephen Jay Gould called it the “right wall” and explained how it works with distributions.  Former Philadelphia 76ers General Manager Sam Hinkie put it this way in his farewell letter:

“Opportunities in a constrained environment winnow away with each person that agrees with you, though. It reminds me of when we first moved to Palo Alto. Within about a week of living there a voice kept telling me, “This is great. Great weather, 30 minutes to the ocean, 3 hours to ski, a vibrant city 30 miles away, and one of the world’s best research universities within walking distance. People should really move here.” Then I looked at real estate prices. I was right, yes, but this view was decidedly not a non-consensus view. My viewpoint as a Silicon Valley real estate dilettante, which took a whole week to form, had been priced in. Shocker.”

There are two parts to any investment; the horse/company/house/investment and what people think the horse/company/house/investment are worth. Ideally something is accidentally mispriced (Seth Klarman talked about this), but it doesn’t happen often.

Situations get even harder to figure out when the novices leave the table and the remaining skill level is high.

2/ Incentives matter. Mauboussin was once asked to suggest a better research process. He proposed the research team be split. One group works on one area, one on another. Then they come together at the end of the process and compare notes. “They kind of said ‘that’s a cool idea, see you later,’ it didn’t go very far.”

Mauboussin’s idea was probably good, but the people listening weren’t incentivized to try it.

Incentives are a powerful force. Charlie Munger says “what wins in human affairs are incentives.” He tells this story:

From all business, my favorite case on incentives is Federal Express. The heart and soul of their system—which creates the integrity of the product—is having all their airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can’t deliver a process full of integrity to Federal Express customers.

And it was always screwed up. They could never get it done on time. They tried everything: moral suasion, threats, you name it. And nothing worked.

Finally, somebody got the idea to pay all these people not so much an hour, but so much a shift—and when it is all done they can all go home.. Well, their problems cleared up overnight.

So getting the incentives right is a very, very important lesson. It was not obvious to Federal Express what the solution was. But maybe now, it will hereafter more often be obvious to you.

Mauboussin suggested the company split their research according to point #1.

  • What’s the fundamentals of the business, the skill of the team, the cards in your hand, the quality and location of the house?
  • What’s the stock price, the odds of the team, the chances with your cards, the housing market? 

Answer these questions separately and then at the last moment bring them together to get an accurate picture of what’s happening. My guess is that the idea didn’t go very far because the managers had the wrong incentives. Their incentive was career preservation. One way we do this is erring to fail in normal ways rather than succeed in abnormal ones.

A profession that’s had this examined a lot is football, here’s coach Kevin Kelley.

Kelley doesn’t punt on fourth down. He’s been very successful, but recognizes the traditional incentive system.

I liked was this quote most ( 1:12).


That’s the impression. That’s the incentive. Don’t be a crazy nutjob. Especially when things are going well. What’s the incentive if you’re doing well? Don’t rock the boat.

Toward the end of the interview Mauboussin comes back to this point about sports. “This remains remarkably pervasive… they’re still doing things that don’t make a lot of sense…A lot of it is that people grew up with the sport. They can’t expand their view.”

I’d argue that the things they are doing do make sense in the system of incentives that exist in sports.

Sports aren’t completely about winning and losing. Sports are about reputations, attitudes, attendances, feelings and ego. If sports were all about winning and losing then things like prima donna soccer owners wouldn’t be a thing and Sam Hinkie would still have his job as GM of the 76ers.

In episodes #3 of Malcolm Gladwell’s Revisionist History podcast he looks at this very thing. Wilt Chamberlain refused to shoot his free throws underhand – EVEN THOUGH IT MADE HIM A BETTER SHOOTER!!! – because he didn’t like the way it looked. Sports isn’t always about winning.

When the Philadelphia 76ers fired Sam Hinkie, it was about more than basketball. Hinkie wasn’t trying to win in the traditional way. He could be bad, but not that bad. His system I guessed was good, but the incentives weren’t to win that way. 

Hinkie’s situation reminded me of when Bill Belichick was the Cleveland Browns head coach. Neither guy was great with the media (think about their incentives when a coach doesn’t appear buddy-buddy). Belichick’s demise began when he cut quarterback Bernie Kosar. This is from The Education of a Coach.

“On Monday, November 8, they cut him, and they did it with a certain brutality, as Belichick spoke of Kosar’s diminished skills. For Cleveland the unthinkable had happened. He had cut their favorite son.”

The people of Cleveland doubted him. Doubted the football coach who is a defensive mastermind. The coach whose father was a long tenured assistant. The coach who won two Super Bowls with the Giants with Bill Parcells. The coach who no one outworked. Here’s what an early peer said.

“I think a lot of it came from the fact that he had not played big time football and because of that he felt he had to work twice as hard as anyone else to prove himself, to prove his bona fides…he was someone who was simply not going to be denied.”

That’s the guy who was fired a week after the team owner moved the franchise to Baltimore. That’s the guy who the fans changed “must go” for each home game after Kosar was canned.

The incentives in sports go beyond only winning.

Incentives matter and figuring out which incentives matter to which people is a powerful tool.

3/ The inside and outside view. Mauboussin uses the example of a kitchen remodel to explain the inside and outside view.

The inside view is what you know about the kitchen, the contractor, the job, and the situation. “Left to our own devices,” Mauboussin says, “that’s how we solve problems.”

Then we see our neighbor one day and he asks about the van in the driveway. We tell him about the remodel (already delayed, countertops) and he smirks. He knows that remodels take longer and cost more. He’s the outside view.

“Psychologists have found,” Mauboussin says, “that introducing the outside view almost invariably improves the quality of decisions.” The problem is that we loaf. It takes a mental effort to come up with the outside view  and then compare it to what we were thinking. You need to figure out the range of outcomes for the kitchen remodel then where yours might fall in that range.

There’s a way to make this easier. Rules, numbers, and formulas.  

“The virtue of basic rules for buying and selling are precisely because you take the emotion out,” Mauboussin says, “and you’re making fundamentals and expectations two separate things.” Emotions are the inside, rules and numbers are the outside. Remember, when dealing with people (you included), you will be dealing with emotions. Those can cloud the inside view even further.

Business is emotional. Andy Grove wrote, “People who have no emotional stake in a decision can see what needs to be done sooner.” That is, people who see more of the rules and numbers side. But you can’t just present the facts. You have to untangle them. “Confusion engulfs you,” Grove wrote. “In many instances, your personal identity is inseparable from your lifework.”

That’s the kind of emotional investment involved. That’s why, Mauboussin says you need rules. “I felt the frustration that comes when the things that worked for you in the past no longer do any good,” wrote Grove. Look at that not from the Intel executive angle but from the investor angle. You had a system that worked, it made you one of the best in the world, then it stopped. Is it permanent? Maybe a dip? A blip? It’s certainly how you define yourself.

It’s easy to write about the inside/outside view or to listen to Mauboussin talk about it. Application is much harder. The inside/outside view is a simple but not easy system. To do it well we need practice. Fortunately this starts the same way, it’s all about the base.

In situations without a big swing (Intel), we can look at the base rate. We can ask “What normally happens?” Remember coach Kelley? Want to guess the base rate for fourth down conversions of three yards or less?  It’s one hundred ten out of two hundred twenty. That’s the NFL number. Start there. That’s the base rate, the outside view.

What if your team practices this skill and gets better than the base rate? What if the other team knows this and practices against it? Start with the base rate and move around from there.

Screen Shot 2016-08-20 at 7.13.50 AM.png
Or just Google it. These are expected points from fourth down attempts based on field position.

Another reason to get the base rate/ the outside view/ the numbers and rules point of view because the people involved in a project tend to be more optimistic about its completion and success than people not involved (like the kitchen remodel). This happened to Daniel Kahneman. He was part of a team of people tasked with writing a new textbook. They began the work and in the beginning it was easy. He writes that the team had made good progress over the first year.

Soon they began to write about the planning fallacy (Chapter 23 of Thinking Fast and Slow ).

Well, thought Kahneman, let’s see what this looks like up close. He asked each team member to write down how much longer they thought the book would take to finish. The collective average was 2  years. Not bad, but Kahneman didn’t stop there. He writes:

“I turned to Seymour, our curriculum expert, and asked whether he could think of other teams similar to ours that had developed a curriculum from scratch… and Seymour said he could think of quite a few.”

Okay, so far so good.

“I asked him to think of these teams when they had made as much progress as we had. How long, from that point, did it take them to finish their textbook projects? He fell silent.”

Uh oh.

“I never realized this before, (Seymour said), but in fact not all the teams at a stage comparable to ours ever did complete their task.”

Oh no.

In groups with comparable situations 40% failed to finish. Of those who finished, none did it in less than 7 years. But, wait! This group has Daniel freaking Kahneman, a man who would go on to win a Nobel Prize. Surely a brilliant star can lift a team. Kahneman asks about this:

“I grasped at a straw: ‘When you compare our skills and resources to those of the other groups, how good are we? How would you rank us in comparison with these teams?’ Seymour did not hesitate long this time. ‘We’re below average,’ he said, ‘but not by much.’”


No matter how great you are, the base rate is a good place to start. Especially because of an omnipresent villain, storytelling machines.

4/  Wonderful storytelling machines.  “Once an event occurs, all of us effortlessly and naturally create a narrative to explain that outcome. Two things kick in, the first in hindsight bias. We start to believe we knew what was going to happen with a greater probability than we actually did…And the second thing that happens is creeping determinism, where you start to believe that what happened is the only thing that could have happened.”

What we need are counterfactual stories and the honesty to admit we were wrong. First we’ll look at the stories we tell, then about being wrong.

As football season is almost here, let’s continued that theme. Here’s a nice counterfactual from the NYT:

Here’s a thought exercise for you. Imagine that for decades no one ever thought of the punt. Teams knew nothing else than to run or pass on 4th down. And then one day it’s invented. Some guy comes up to a coach and says, “Kick the ball on every 4th down and the other team gets possession 37 yards further down the field.” The coach would think he was crazy: “Wait, you want me to give up one quarter of my opportunities for a first down on every series…just for 35 yards of field position? Do you realize how much that’s going to kill our chances of scoring?”

And that coach would be absolutely right. It’s funny how boxed in our thinking can be. Except for the most desperate of circumstances or with inches to go just outside of field-goal range, today’s N.F.L. coaches will choose to punt.

“Boxed in thinking” is another way to say that we stink when it comes to coming up with counterfactuals. That quote is from 2009, but the point is the counterfactual. We have a tendency, as Mauboussin puts it, “to believe that what happened is the only thing that could have happened.”

“Coincidence is logical,” said a great football/soccer player and coach Johan Cruyff.

In the book Why Everything You Know About Soccer is Wrong Chris Anderson and David Sally write “we remember, and place undue significance on, things that do happen while ignoring those that do that.” In soccer this is easy to see, goals.

A goal is salient. A defensive play is not. So what? “People discount causes that are absent (things that didn’t happen) and augment the importance of causes that are present (things that did happen),” the duo wrote. 

Counterfactuals are a tricky creature. We tend to like them if they confirm our self-image but reject them if they tell us we may be wrong. Philip Tetlock found this in his research on predictions and concluded, “Experts were open to “I was almost right” scenarios but rejected “I was almost wrong” alternatives.”

That is, when presented a counterfactual, something else that could have happened after a small tweak, people wanted to believe it if it made them right but rejected it if it made them wrong.

A quick summary: We tend to overemphasize the things we see happen and deemphasize the entire range of other possible outcomes. 

A lovely example of this has been the Chuck Klosterman podcast tour for his latest book; But What if We’re Wrong. I’m a huge Klosterman fan and liked his interview with Russ Roberts the most.

I haven’t read Klosterman’s book (yet), but the premise from the interviews he’s done is that we can’t predict what will be remembered from any certain time period. Popular music, for example, will be viewed differently in 100 years in the same way that we view music from 100 years ago. Klosterman explains:

“But for the most part, everything, whether it’s music, film, books, whatever the subject may be, culture seems to operate like this over time. You start with a huge field of potential candidates. There are many people who could be seen as really central to the existence of that art form. And then time plods along. And as time plods along, certain candidates drop by the wayside. They get lost or they disappear, or their relevance changes. And eventually you get down to only one artist remaining. And then, the significance of that artist is kind of amplified and exaggerated. And that person ends up becoming interchangeable with the art form. John Philip Sousa being this example–there were many people creating marches.”

It’s hard to think of what else could have happened. In the late 1800’s Sousa was one of many marching music composers, but we tend to remember only him. Why? If you asked someone 100 years ago, would they come up with this outcome? 

I tried to consider counterfactuals in my book, 28 Lessons from Start-ups That Failed. The question was, what contributes to a start-up failure?  

Remember the movie The Social Network. Watch that and you could think there is a recipe for a successful start-up. Good idea (social networks), test case (Harvard campus), roll out, smart people, tweak the product, hoodies. But what if other companies do those same things? Will they succeed?  How do you tease out who succeeds and who doesn’t? Coming up with counterfactuals helps you see the world in truer terms. 

Now, about being wrong.

On some level we all know we are wrong. Mauboussin references Kathryn Schulz and she has a great TED talk about being wrong. After a funny story to start, she says;

“We get it in the abstract…but when it comes down to me, right now…suddenly all this abstract appreciation of fallibility goes out the window and I can’t think of anything I’m wrong about.”

How great is that? Of course I’m wrong about some things, but what? Just like the counterfactuals, it’s hard to come up with things that aren’t there. To create a story from scratch. This blog is probably wrong about a lot of things, but I can’t tell you what any are.

Schulz thinks we’ve messed up culturally about the feeling of wrongness. We wrongly emphasis wrongness in school. “So by the time you are nine years old, you’ve already learned that people who get stuff wrong are lazy irresponsible dimwits. Second of all, the way to succeed in life is never to make any mistakes.”

We equate wrong with bad. Being wrong means lower grades in school. It means isolation from one group. It means being that kind of kid. These expectations creep into the teacher’s lounge and they creep into our lives. “We learn these really bad lessons really well,” Schulz says.

But being wrong is rational.  “What’s it mean to be rational?” asks Mauboussin, “That your beliefs map accurately to the world. That’s a real challenge because the world is constantly changing and requires you to change your own views.”

If the facts change, you need to change your mind. You were wrong, now you’re right.

How do we do this? Two ideas come to mind; be comfortable in the wrongness but don’t stay there.

Part of the reason that Anson Dorrance succeeded as a soccer coach is that he trains his teams to be comfortable in uncomfortable situations. Running late? Not a problem, his teams are late all the time. Tired? Not a problem, his team conditions ruthlessly. Fifty fifty ball in the box? Not a problem, that’s his favorite drill and they run it all the time.

If you can weave comfort with wrongness into your decision-making process you’ll panic less and have fewer knee jerk reactions. Seth Klarman spoke about how culture matters here. If someone makes a mistake, don’t yell at them, Klarman said. That’ll incentivize them to just not tell you the next time. In Schulz’s terms, don’t equate wrong with bad. 

The second thing you need to do is not stay there. As Ritholtz likes to say, “you can be wrong but you can’t stay wrong.” Know the feeling of being wrong, that’s it’s not the end of the world, and move on. To put it differently, succeed by adapting.

We saw how Steve Callahan did this when he was lost at sea. Callahan didn’t have enough food, so he focused his efforts on catching more food. When he needed water, he switched his focus to that. He succeeded by adapting.

The history of Coca-Cola is one of adaptation too. Coke began as a patent medicine, all sizzle no steak. Then it was a pick me up beverage, both steak and sizzle. When people thought there might be too much pick me up (was it the caffeine, the sugar, or the cocaine derivative?) it was a refreshing beverage. Then it was an American beverage and so on. Coke has evolved, in name and formula because the times they are a changin. Coke succeeded by adapting.



Charlie Munger said about the Berkshire Hathaway success, “It is remarkable how much long-term advantage [we] have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” Berkshire succeeded by adapting. They’ve been wrong but haven’t stayed wrong.

But it won’t be easy.

“In life consistency is valued as a good thing.” Mauboussin says, “If you’re changing your view you’re called a flip flopper. In investing, if you’re doing the right thing, that’s what you need to do.”  

Andy Grove explained this beautifully in his book Only the Paranoid Survive. His thesis was that at strategic inflection points (SIPs), a business has to be open to change. This is what Intel did. They had to shift from memory chips to microprocessors.

Grove/Intel faced a SIP just when they were most profitable in memory chips. There was so much money it was hard to tell they were wrong. They were. This is also part of Clayton Christensen’s disruption theory. Grove explains it best with just the title of his book ONLY THE PARANOID SURVIVE. If you carve out a niche, people will come for you.

Sometimes numbers will tell you that it’s time to change. That you’ve been telling the wrong story. Intell saw the price of Japanese chips and knew the story was about to change. Coca-Cola saw Pepsi’s market share and knew the story was about to change. Google saw Yahoo’s search numbers and knew the story was about to change. Sometimes numbers will tell you, sometimes it has to be people.

That person is a Devil’s Advocate. Anson Dorrance, Marc Andreessen and Ben Horowitz, and Bob Seawright all suggest you have someone push back on your ideas. Stanley McChrystal talked about it in war games. It’s part of being a genius.

We are wonderful storytelling machines. The problem is that we tend to create narratives that only look at the most visible actions and miss things that mattered but are harder to see.

5/ So how should you invest? Index funds.

Mauboussin says this is the way to go for most people, and I agree. Why should you? Let’s apply our four big idea so far.

  1. The stock price (odds) is easy to find out but the quality of the business (fundamentals) is much harder. You may use an iPhone Mr. Lynch but is Apple a good business? 
  2. Incentives are often misaligned and not always financial. How does your broker make money? What’s the incentive for the person giving you advice? 
  3. The inside and outside views are hard to balance, especially for people emotionally involved. It’s one thing to say you’re ready for a drop, another thing to ride one out.
  4. How good are you at coming up with counterfactuals? How good are you at storytelling? Most people excel at the latter but require the former to pick the right stocks. 

James Osborne had a nice post in August 2016 about “Spicing things ups.” Osborne is good about taking the planned, rational, organized, act-don’t-knee-jerk-react path. But even he is sometimes tempted.

“Some days this is just so excruciatingly boring I can barely stand it. I never get to do anything new. I never find some exciting stock or fund to buy. I never get to tell a great story over beers about the great trade I made in my account that week. I don’t have a new painstakingly crafted white paper to defend some exotic currency trade I just put on.”

Listen to Jason Zweig’s advice and get comfortable telling people “I don’t know and I don’t care,” when they try to talk about the stock market.

6/ Hold my beer, and watch this. Mauboussin recalls Dan Gilbert’s book Stumbling on Happiness and says, “mentally healthy people are mildly cognitively delusional.”

We sometimes smirk at these people, but we need these people.  To paraphrase Nassim Taleb, the failures of the individual make success for the group.  

  1. At the individual level we don’t want to overestimate our own abilities.
  2. At the collective level we want people who overestimate their own abilities.

Zoom in and we in we see it this way.  Burton Malkiel explained:

“You ask a group of 200 students, are you a better driver or a worse driver than all the other students in the room, and 90% of them say they are better than average. It’s like Lake Wobegon, we’re all better than average.”

“The iron rule of life is that only 20% of the people can be in the top fifth,” said Charlie Munger. Individually we need to see this. But as a whole, we don’t want everyone to see this.

Look at Phil Knight. Knight had to believe he was better than average to create Nike. We need many “Knights” to believe they are better than average because some unpredictable amount will get lucky and we all will be better for it. We benefit from the risks people like Dan Coyle take in writing books, David Chang take in opening restaurants, and Alex Blumberg take in starting podcasts.

7/ M R Ducks. “People massively underestimate the role of their organization in their own success. They think they’re the one carrying the weight when in fact it’s everything that’s going on around them.” Mauboussin recommended Chasing Stars as a book that looks at this. We call this ducks on rising tides and we’ve seen it a few places.

We guessed Marissa Mayer benefitted from the tide known as Google. Jack Schwager said to watch out for bull market tides. B.J. Novak and The Office floated up with the tide of iTunes.

We hijacked the idea of ducks on a rising tide from the early Warren Buffett letters. Buffett wrote to shareholders that they should know if the returns were due to a rising tide or him “flapping his wings.” 


That’s probably enough for now. Thanks for reading, I’m @mikedariano on Twitter.

Notes: I used the funky fraction 110/220 so you couldn’t peek ahead and immediately see the answer.

How I write these posts v3.0

A different tack today, so skip it now if you aren’t interested in the process behind these posts. I always enjoy the this is how I write posts or videos (Ryan Holiday just did one), and this is one for  how the Andy Grove post happened.

1/ Find the source. Tren Griffin writes the wonderful 251q.com blog had a post about Grove. Some of the quotes sounded interesting so I ordered the book on Amazon.com (we have Prime).

For podcast notes this just means listening to episodes as they come up. I subscribe to 80 feeds. If I’ve started an episode, I’ll continue it. I’ll skip quickly, and start from the top.

2/  Read the book (or listen to the podcast). For Grove’s book, Only the Paranoid Survive it meant reading it. I try to follow Stephen King’s advice as closely as possible and take a book everywhere.

I take a book with me everywhere I go, and find there are all sorts of opportunities to dip in. The trick is to teach yourself to read in small sips as well as in long swallows. Waiting rooms were made for books – of course! But so are theater lobbies before the show, long and boring checkout lines, and everyone’s favorite, the john.”

At first taking a book everywhere was odd, but now it feels normal along with the phone, wallet and keys. The hard part is reading the book, a simple but not easy exercise for sure.

As I read/listen I let my confirmation bias work for me. If there’s an idea, like, keeping a low overhead I’ll make a note of it. To get new ideas I try to look for areas of a book or podcast episode where I didn’t take any notes. Why is the person writing this? Why did they include this? How else could this have happened?

More often than not I can’t answer, but sometimes something good comes from these questions.

3/ Put ALL THE NOTES in Evernote. Overcast, my podcast app of choice, allows you to export at a certain time to a variety of services, one of which is Evernote. Mostly I listen to podcasts on runs, and export timestamps to Evernote to look at later.

For book notes it means paging through the book and copying what I underlined. The books notes for Only the Paranoid Survive were 1400 words in total, but only 500 made it into the Grove post. How? I chose the most common themes.

While I transcribe my notes and Grove’s quotes from the book, I organize it by theme. Here’s a snippet of that.

Screen Shot 2016-08-14 at 8.05.02 AM.png

Two similar ideas thirty pages apart. I include terms “devil’s advocate, flyting, argue well, etc” to search for this later. In my head these are adjacent ideas, and I want (hope) that future searches for this concept would show this quote.

Flyting by the way, is the wonderful term I got from Geography of Genius, another book that promotes constructive confrontation. Wilbur Wright was a flyter too, “(Wilbur) was always ready to oppose an idea expressed by anybody…ready to jump into an argument with both sleeves rolled up,” said family fried George Spratt. “A good scrap….brought out new ways of looking at things…helped round the corners,” Wilbur said.

4/ Outline, write, proof, publish, (fix mistakes I find later). I’ll outline a post with the major ideas, fill in the direct quotes, and add the links. One helpful tool for this is aText. It’s a software program that lets you have key sequences that fill in programmed text. So, if I want to link to a post like this: Peter Thiel, I’ll only type “;;pt1.” That five character segment expands to Markdown code, which WordPress turns into hyperlinks.

I’ll try to write the first draft fast, making lots of errors, including too many words, and with more examples that are necessary. Then it sits for a day or two. Then I edit it. Then I publish it. Then I find another spelling error and update the post.

The actual writing of each post might take an hour. The note organization thirty minutes. The book reading, three hours. A podcast, one hour.

Ed Catmull

Ed Catmull joined Jason Calacanis on the TWIST podcast for a two-part interview. Here are some notes from part one.

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1/ Decentralized command. “It (The University of Utah) was completely free and open. There were great professors, and they weren’t micromanaging. It was like, ‘okay, we’re at the front of the easter egg hunt, cut the line and let’s go’.”

I loved this idea of less talk more action that Catmull describes as the front of an easter egg hunt. It reminds me of the way that Andy Grove described the approach of a Strategic Inflection Point. Grove explained that when you face a 10X size change in your job, you need to let “chaos reign” as part of the problem solving process. That is, you don’t know what to do so you should get going trying things.

The best way to try things is to let people do what they think is best. Rather than top down instructions, you try bottom up experiments.

Being bottom up is a key “pillar” for Seth Klarman. It’s also suggested by Clayton Christensen when Disruption is afoot.

2/ Nobody knows what the hell they’re doing at the start. “I modeled my hand and then wrote a little programming language to move the fingers. I made it out of plaster and forgot to put the vaseline on my hand and had to use a knife to get the mold off.”

It’s easy to look at today’s Pixar and think I could never do that, whatever that is. Well, that’s true at every start. Nike started with a ruined waffle iron. Patagonia started with shorts so rigid they stood up on their own. UNC Women’s soccer had donated uniforms at the beginning, and only had matching sweatshirt after an alumni thought they looked too disheveled. Coke was one of thousands of generic “patent medicines.” Stephen King through Carrie in the trash because he thought it was bad.

If you’re at the start, just keep doing it. It’s nothing now, but might be something someday.

3/ Be there – or not. “He (George Lucas) wanted to be in the Bay area. He did not want to be close to that system (Hollywood) because it was ingrown and closed and so forth. Up here he could be free to do what he wanted to do.”

Lucas followed the path of Buffett, who works in Omaha so he’s not around the cacophony of sellers and buyers on Wall Street. Tadas Viskanta works out of Indiana. Josh Kopelman is a venture capitalist based in Philadelphia. Sometimes it’s better to not be there. Often because there is too noisy.

In the Andy Grove post and podcast we looked at the value of being there. It’s usually more helpful to be there than not. Grove is smart enough to point out that just because you’re there, talking to customers or inspecting facilities doesn’t mean those people are correct.

For Lucas and Catmull, it’s good that Pixar wasn’t in Hollywood. I’m not sure the same Pixar would have survived in Hollywood.

4/ Get the right stakeholders. “Lucas got divorced and his first wife got the money and he got the company. It meant that for the time being he was no longer in the same cash position. He had to pare back to his core, the filmmaking. And he sold us.” “When he (Steve Jobs) actually acquired us from Lucas Film he put his arms around us and said, ‘whatever happens, we have to be loyal to each other.”

Lucas had the wrong stakeholder in his personal life, an ex-wife.

Jobs had the wrong stakeholders in his professional life, Apple.

The former sold Pixar to learn that lesson. The latter bought Pixar with that lesson learned.

Wesley Gray and Seth Klarman both try to get the right investors, the right stakeholders, for what they’re trying to do. “How do you make an investment decision for a 3-5 year hold when you don’t know if you’ll have that capital for 6 months,” asked Klarman. Brian Koppelman did too when he married the right person. Anson Dorrance gets the right soccer players. Yahoo did not get the right type of quantity of employees.

The people you answer to (husbands, cable providers, bosses, kids, family, clubs) matters. The more people and type of demands, the less flexibility in your choices. Lucas had to sell Pixar to get flexibility back. Jobs kept options by being in tune to the Pixar requests.

And options are…

5/ And options are good.  “When he (Michael Eisner) renegotiates, I want to come in as an equal partner which means we need to put up half the money which means we need to have the money in the bank, therefore we have to go public.”

Catmull recalls Steve Jobs saying this as Pixar prepared to release Toy Story and go public around the same time.

It reminded me of what Chamath Palihapitiya said about the Facebook phone and Facebook going public. In the case of Jobs and Catmull, they had just enough money to finish their project (Toy Story) but they would need more money to do the next thing. Palihapitiya also had just enough money to finish his project (the phone) but needed more money for the next thing.


Palihapitiya couldn’t convince Mark Zuckerberg to go public sooner, and the funding dried up.

Cash means chances. Comedians like Sarah Silverman live frugally so they can do more of the right kind of comedy. Failed start-ups mess this up. Sophia Amoruso sold office furniture that was too fancy to get back cash (and chances).

“There was no way that I was going to have interns rolling around on these things! It sent the wrong message to the company to preach frugality while balling out on twelve grand worth of chairs.”

Thanks for reading, I’m @mikedariano on Twitter.

ps. One final quote, “Afterwards both (Jeff) Katzenberg and Steve (Jobs) thought ‘that’s the worst deal I ever did.’” We’ll get into this idea in an upcoming podcast episode about the book Getting to Yes.

Andy “Paranoid” Grove

Andy Grove’s book Only the Paranoid Survive is great. It’s a book that explains one thing from a person who did it.

Grove’s thesis is that strategic inflection points (SIPs) are “full scale-changes in the way business is conducted, so that simply adopting new technology or fighting the competition as you used to may be insufficient.”

These points rarely “come in with a bang,” but instead “approach on little cat feet.” “You may have a hard time even putting a finger on what has changed, yet you know that something has.”

These moments affect businesses and in turn affect people. When Wal-Mart entered a town it affected the business, and in turn the people who worked there. When larger container ships required larger ports, it affected the businesses, and in turn the people who worked there. When high speed internet allowed people like Casey Neistat to make videos it affected the content companies and the people who worked there.

Grove’s book is full of ideas and explanations about SIPs and he points out time and again the fractal nature of them. SIPs happen at all levels, it just depends on your point-of-view. “Your career is literally your business,” Grove wrote, “You own it as a sole proprietor. You have one employee: yourself.”

We’ll touch on four things that apply to the businesses of people and to the people of businesses.

  1.  Be there to know what’s going on.
  2. Have a Devil’s advocate.
  3. Decentralized command is a powerful tool.
  4. People are involved and people have emotions.

Before we start, a podcast version of this episode is/will be available here: https://soundcloud.com/mikesnotes, https://overcast.fm/itunes1055386383/mikes-notes, https://itunes.apple.com/us/podcast/mikes-notes/id1055386383 


1/ Be there. Being there is all about having the right information, not filtered information. Grove wrote, “Our IT manager said, ‘Well, that guy is always the last to know.’ He, like most CEOs, is in the center of a fortified palace, and news from the outside has to percolate through layers of people from the periphery where the action is.”

Each layer between the c-suite and the customer is a layer where filters naturally happen. As Tren Griffin wrote, “as a manger you can’t review everything.” The fact that you have middle managers is precisely because they have a certain skill at filtering. Unless they filter the wrong stuff. How do you get around that?

“We need to expose ourselves to our customers…We need to expose ourselves to lower-level employees..We must invite comments even from pole whose job is to constantly evaluate and critique us, such as journalists and members of the financial community.”

You have to spend more time with people who spend their time ‘outdoors,’ wrote Grove, “where the winds of the real world blow in their faces.”

We saw this with Neville Isdell. He wrote about route riding in all black townships in South Africa “observing what was happening in the marketplace while he (a salesman) went about his normal sales job.”

Wherever Isdell went for Coca-Cola he visited bottlers. He visited plants in East Germany and traveled through Checkpoint Charlie. He drove around the Philippines. He visited all kinds of places in Australia.

We saw this with Samuel Zemurray, who worked in the banana fields.


Wesley Gray saw this when he was in Iraq. The things he had learned (from the c-suite) were not what he saw on the ground.

Startups failed because they weren’t there.

But, the doesn’t mean they’re right. “I feel much safer back here in California than he does in ‘enemy territory,’” Grove observed, “But is my perspective the right one? Or is his?”

The goal is to see which way the wind is blowing, it’s to hear if people say, “people don’t just…” and ask them follow up questions. It’s getting your hands dirty, and when you wash them to question the work being done.

2/ Appoint a devil’s advocate. “We developed a style of ferociously arguing with one another while remaining friends (we call this “constructive confrontation”).

Intel mastered the art of argument. You have to. SIPs sneak up on you. Hence the subtitle of the book, “Only the Paranoid Survive.”

Not every middle manager or plant manager is going to be right. They can’t be. Instead you need people who will argue a position to its finest point. “The most important tool in identifying a particular development as a strategic inflection point is a broad and intensive debate,” wrote Grove.

Other successful organizations suggest a Devil’s advocate. Ben Horowitz, a disciple of Grove, instilled it at his venture capital firm a16z. He did such a good job this is how his cofounder,  Marc Andreessen put it:

“It’s the responsibility of everybody else in the room to stress test the thinking. If necessary we’ll create a red team. We’ll formally create the countervailing force and designated some set of people to counter argue the other side.”

“Whenever he (Ben Horowitz) brings in a deal, I’ll trash the shit out of it,” Andreessen bragged like a brother.

Andreessen takes the other side because you need people of authority and power on both sides. UNC soccer coach Anson Dorrance has Bill Palladino. “No one else is going to say ‘no’ to Anson.” Palladino said. Bob Seawright said that the other side needs to be “empowered” or you won’t really get good pushback.

Why do you need one? Because you’re old, man. Grove wrote that his experiences (and success) happened in the past twenty years. If things are about to change, then he’s probably not prepared for it at all. A devil’s advocate helps you see that.

3/ Decentralized command. Something in this book that’s not in a lot of other is an admittance of non-brilliance. Phil Knight did this well in his book Shoe Dog and Grove does it too.

When he writes about profiting from a SIP, Grove notes that it’s the front line people that made a lot of decisions about what to do.

“It (production numbers) got there by the autonomous actions of the finance and production planning people, who sat around painstakingly allocating wafer production capacity month by month.” When these middle managers looked at what was profitable, they made the choices that helped lead the company out of a SIP. “The process of adapting to change starts with employees who, through their daily work, adjust to the new outside forces.”

You have to trust your people for this to work. Skunk Works did. Nike did, “I let them be” wrote Knight. Navy Seals did, it’s a favorite topic of Jocko Willink. Louis C.K. did, and Horace and Pete was better because of it.

How do you use decentralized command?

  • Give people some space (like children).
  • Hire for strengths.

Kids love to explore the world but don’t (always) know not to get in stranger’s cars, stick things in outlets, or click on certain internet links. Parents eventually let them spread their wings, but create a net of sorts for them to fall into. Good managers do this too.

Anson Dorrance tries to create artificial chaos so his team is prepared. That means running late to get to games, long road trips, and intense drills at practice. Then, when stressful situations arise, the players are somewhat prepared. Ditto for their play on the field. Dorrance prepares them and then lets them play. Grove suggests this too:

“Resolution of strategic dissonance (that is, not knowing what direction to go as a company) does not come in the form of a figurative light bulb going on. It comes through experimentation. Loosen up the level of control that your organization normally is accustomed to. Let people try different techniques…Management has to become more tolerant of the new and the different.”


To get the right people you hire for strengths. Dorrance hires soccer players that hustle, which is harder to teach than footwork. Ben Horowitz said you hire for strength rather than lack of weakness. Gary Vaynerchuk said to doublt down on your strengths and punt your weaknesses.

Individual strengths are an advantage, especially as companies move from being vertically structured, (the whole hog) to horizontally structured (selling bacon or chops).  Mark Zuckerberg coded the first Facebook, but as the company has grown he’s done less. Mark Cuban started off installing routers, now he has a specialist take care of the technology. Walt Disney did almost everything on the first Mickey Mouse, but delegated to others later on.

4/ It’s emotional. I was surprised by the amount of emotion in Grove’s book. SIPs are hard and take a toll on everyone involved. “It’s very personal…I learned how small and helpless you feel…Confusion engulfs you…I felt the frustration that comes when the things that worked for you in the past no longer do any good.”

That’s just from one page.

Sophia Amoruso said, “sometimes you just kind of explode and hopefully no one else is around.” In my research on failed startups, the emotional weight was harder than anyone realized.

Grove wrote, “businesspeople have emotions, and a lot of their emotions are tied up in the identity and well-being of their business…In many instances, your personal identity is inseparable from your lifework.”

Early Warren Buffett understood this. In his letters to shareholders he tried to head off their emotional trains. “It is most important to me that you fully understand my reasoning in this regard and agree with me not only in your cerebral regions, but also down in the pit of your stomach.” Buffett needed them to know that when things got rocky, when they felt a swell of emotions, that they understood his system.

Teddy Roosevelt said he saw men crying when they weren’t selected to go with him to fight in Cuba. The Chicago ‘Black’ Soxs players were upset when they couldn’t play baseball. “The center of their lives was talent on spiked shoes. Without the demonstration of this, they were nothing.”

We are more than our jobs, but that realization carries more emotional freight than most people expect.

Thanks for reading, I’m @mikedariano on Twitter.


Steve Callahan

This is a repost from Medium. Putting it up here for linking convenience. 

In 1982, Steven Callahan was lost at sea for 76 days after his boat, the Napoleon Solo sunk. Here are three things I learned from Callahan’s book,Adrift.

1/ Stoicism can save your life.  I believe in stoicism, and have seen the benefits for parents. With any philosophy though, it feels good when others validate it. Callahan does.

“The sea has no wrath to vent,” he wrote, “time will pass.”

His situation wasn’t personal. The sea has not selected him — though he regularly toys with this idea — for this challenge. It is merely a circumstance.

Seneca wrote about this:

“What can happen to one can happen too all. If you let this idea sink into your vitals, and regard the ills of other people as having a clear path to you too, you will be armed long before you are attacked.”

Being lost at sea could happen to anyone, and Callahan comes to grips with it.

Seneca again:

“No one could endure lasting adversity if it continued to have the same force as when it first hit us.”

Callahan knows that this too shall pass. 

2/ Lots of little things have to go right. As time passed, Callahan’s gear started to fail. His solar stills stopped distilling. His raft sprung a leak. About it, Callahan wrote, “if any one thing goes wrong I will not survive.”

Later in the book he questions the calculations derived from his homemade sextant and guesses of speed that if his estimations are off (even 5 miles a day), he could remain lost for another three weeks.

Success if often a lot of little things going right.

David McRaney spoke about this, saying, “success boils down to serially avoiding catastrophic failure while routinely absorbing manageable damage.”

Daymond John said, “all entrepreneurs that are successful take affordable next steps, they don’t mortgage the entire farm on the first bet they have.”

Nick Murray said the easiest way for investors to blow up is to chase big gains.

The Wright brothers had to have good weather, their materials shipped in one piece, their calculations precise.

My book on failed start-ups is full of stories where one little thing goes wrong; a hire, a credit crunch, a bad launch and the whole thing crumbles.

Survival in any area is about a lot of little successes lining up.

3/ Simple does not mean easy.  About survival Callahan writes, “the script sounds simple enough.” Eat. Drink. Keep afloat. Each of these is constantly challenged. Whenever he was able to get slightly ahead in one area, he fell behind in another. He needed fish to eat, but fishing wore him out. He wanted to reach land sooner, but those pushing winds and storms nearly capsized him.

Simple, but not easy exists all around us.

  • Cal Newport wrote that Deep Work is simple, but not easy. (“Craftsman like (Ric) Furrer tackle professional challenges that are simple to define but difficult to execute — a useful imbalance when seeking purpose.”)
  • Carl Richards wrote that personal finance is simple, but not easy. (“Repeating that process over and over may not be sexy, but it gets the job done.”)
  • Cliff Asness wrote that investing is simple, but not easy. (“We basically know how to invest. A good analogy is to dieting and diet books. We all know how to lose weight and get in better shape: Eat less and exercise more.”)
  • Marc Andreessen said that starting another Silicon Valley is simple but not easy.
  • Tony Robbins said that living a joyous life is simple but not easy.
  • Anson Dorrance said succeeding in sports is simple but not easy.

Thanks for reading, I’m @mikedariano on Twitter.

One final quote I liked about survival bias:

“I think of the pilot chart figures, which are averages taken from ships’ data. There might be some truth to the idea that charted estimates of gale strength tend to be low. After all, if a captain hears of bad weather, he doesn’t usually head his rust bucket for the center of it in order to get some fresh air.”

Tony Robbins

Tony Robbins was on the Tim Ferriss podcast and it was good.

Sometimes I think Robbins is more ‘Tony full of baloney’ and sometimes I hear him speak and find myself nodding along, clenching my fists, and getting ready to take over the world.

The truth is somewhere in between.

Today we’ll just touch on just three ideas.

  1. Doing simple but not easy things.
  2. Inversion as  way to solve problems.
  3. Learning from others.


1/ Daily habits. “It’s a daily practice…as you do it more and more it’s like a muscle.”

Here Robbins was talking about practice of living a joyous life, but this idea can be applied to anything.

Head coach of the University of North Carolina women’s soccer Anson Dorrance frames it the same way. The task is easy, but you need to do it daily. Dorrance compares it to flipping a light switch. “That’s all it takes, but you have to make that decision every day.”

A lot of what we want in life is simple but not easy.

Marc Andreessen said setting up another Silicon Valley is simple; “you want rule of law, you want ease of migration, you want ease of trade, you want deep investments in scientific research.” That’s very formulaic. It’s like a recipe, but it’s not easy. When Andreessen tells people they often “get a stricken look on their face and they’re like, ‘what if we want Silicon Valley but we can’t do any of those things?”

Simple, but not easy.

Or, a grander example. Steve Callahan was lost at sea for 76 days. An experienced sailor he had lifeboat and some basic supplies. He wrote that the survival process is simple but not easy.

“I must work harder and longer each day to weave a world in which I can life. Survival is the play and I want the leading role. The script sounds simple enough: hang on, ration food and water, fish and tend the still. But each little nuance of my role takes on profound significance. If I keep watch too closely, I will tire and be no good for fishing, tending the still, or other essential tasks. Yet every moment that I don’t have my eyes on the horizon is a moment when a ship may pass me.”

Survival is simple; eat, drink, and watch for ships but it’s not easy.

Or with money. Cliff Asness wrote:

“We basically know how to invest. A good analogy is to dieting and diet books. We all know how to lose weight and get in better shape: Eat less and exercise more. But as Warren Buffett would say, that is simple—but not easy. Investing is no different. ”

This is what Robbins was channeling. Choosing a joyous life is simple, but not easy. You have to do a little thing each day and that’s the challenge.

2/ Inversion. “I don’t know what would cause someone to kill men, women, and children…but I can tell you who didn’t do it, a happy person.”

Robbins’s quote is from when someone asked him what would make a person commit a mass shooting and Robinson says he doesn’t know. But he uses inversion to figure out who did not do it and if we know who didn’t, that helps give an answer too.

Neville Isdell used inversion when he worked at Coca-Cola and asked, what could Pepsi do that would take market share?

Bill Simmons used inversion when he asked, what can the opponent do that scares me the most?

Terry Gross used inversion when she said, “you find out who you are by finding out who you’re not.” Morgan Housel lived this when he worked at an investment bank, left, and ruled that out as a career choice.

In Flash Boys, Michael Lewis wrote that one aha moment was when the RBC team slowed down their trade requests rather than speeding them up.

“It was counterintuitive,” says (Rob) Park. “Because everyone was telling us it was all about faster. We had to go faster. And we were slowing it down.”

Inversion reframes a problem. Rather than trying to solve what to do, you can solve what not to do.

  • What would hurt Coca-Cola? Letting anyone else use the term “cola” and they litigated aggressively.
  • What thing could a sports team do? Play a lineup that scares you.
  • What do you want to be when you grow up? Well, I’ll tell you what I don’t want to be.

This works at many levels too. Tren Griffin said, want to have a good spouse? Then be a good spouse. 

3/ Time travel. “My father had talked about this guy that had been such a loser before and now he was so successful so I asked the guy ‘What did you do?’ and he told me he had gone to this seminar by a guy named Jim Rohn I asked ‘What’s a seminar?’ and he said ‘This man gets up and shares the best of what he’s learned over thirty years of his life in an evening, and it saves you all those years.”

Learning from other people is the best way to save time, and you always need more time. Casey Neistat vlogged that what he really wants is more time.  neistattime.gif

Time is all there is. Startups need time. Yahoo needed more time. And the best way to find time is to skip mistakes. You do that by learning from others.

Reading books is the most prescribed solution. (If you want my suggestions sign up for a monthly email).

Robbins got it by going to a seminar, and now he gives them. David Chang and Ezra Klein read biographies. We’ll give the last word(s) to Charlie Munger:

“You’d be amazed at how much Warren reads – at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

Thanks for reading. Hopefully this saved you some time too. I’m @mikedariano on Twitter if you want to talk more about books.

Seth Klarman

Serendipity led me to this video of Seth Klarman from 2009. Here’s what I loved about it; it’s timeless.

Or, in modern terms, this content is evergreen.

No matter when you watch it, it’ll be valuable. We say it over and over again here, if something is true over time and domains it’s valuable. Hopefully this blog demonstrates that. It’s why we range in topics from Skunk Works to Walt Disney to Marc Andreessen and Ben Horowitz.


1/ XMBA.  “I learned an enormous amount there (Mutual Shares), probably more than in my subsequent two years of business school.”

Klarman joins the ranks who say that some non-school experience was formative. Sometimes that means skipping school entirely. Elizabeth Gilbert considered an MFA degree but decided against it. Why? “Why learn about the thing by learning about the thing, when you can learn about the thing by doing the thing,” Gilbert said.

David Chang framed it the same way. Graduate school or restaurant? Chang figured he’d learn the same at either, so he chose to start a restaurant.

Shane Parish created Farnam Street as a sort of XMBA. Tim Ferriss did it via investing. The Wright brothers often skipped school to focus on learning whatever interested them at the moment.

Want to get your eXperiential Master’s degree? Be like Klarman and just keep learning.

2/ Imitation is a fine place to start.  “We always follow value principles but try to improve on them through in-depth fundamental analysis and detailed research.”

Klarman studied the Benjamin Graham, Warren Buffett, and Charlie Munger style of value investing. It was a good start. Later on in the video, Klarman emphasized having a niche.

“A lot of people mock fandom and fan fiction,” wrote Felicia Day, “like it’s lazy to base your own creativity and passion on someone else’s work. But some of us need a stepping-stone to start.”

Stephen King encouraged new writers this way, “stylistic imitation is one thing, a perfectly honorable way to get started as a writer and impossible to avoid really.”

Jason Calacanis told Tim O’Reilly, “I copied everything you did coming up. You’re my inspiration for a lot of what I do.”

Anson Dorrance pilfered bits and pieces from other college coaches for his program at the University of North Carolina.

Start by imitating, but move to being different. Walt Disney imitated cartoon animals before he settled on a mouse. Warren Buffett imitated Benjamin Graham before forming his own style. Klarman imitated Buffett before moving on.

3/ Who are your stakeholders? “The more flexibility you have, the better your ability to maneuver in complicated, volatile, and fairly competitive markets.”

Klarman, and Wesley Gray, both try to get the right kind of stakeholders to invest with them. It matters who you answer to.

Klarman explained that if he had a narrow mandate like investment grade debt he would be handcuffed. It’s better to have “more weapons at your disposal.”

Look at real estate for example. Klarman explained that someone could invest in actual real estate, REITs, bonds that back real estate and so on. Had his stakeholders limited his choice, he would have had fewer options, and options are good.

Jack Schwager and Barry Ritholtz talked about Plan B as a form of having options. Napoleon Bonaparte had no religion and rode the political trends like a teenager follows music. Judd Apatow said he only has options now because he did good work years ago.

Success usually comes one of two ways.

  1. Like Klarman and Gray, you get the right stakeholders to answer to. Brian Koppelman did a version of this when he “married the perfect person.”
  2. You can also minimize the stakeholders, limiting how many people you answer to.

The second goes hand in hand with Low Overhead. Apatow remembers visiting Jerry Seinfeld’s apartment early in his career. There wasn’t much. It was minimal. Apatow asked why Seinfeld wasn’t jumping into the type of sitcoms that were popular at the time and Jerry said he was waiting for the right opportunity. He could afford to wait because kept a low overhead, because he limited his stakeholders.

4/ Exploring niches.  “We don’t think we’re the best analysts of business, but we are good at complicated situations. The messier the better. We like situations with a catalyst.”

Klarman started by imitating (#2) and continued learning early in his career (#1). He explored niches and found his own areas of focus. Klarman landed on messy situations with a catalyst.

Klarman explained that a catalyst is some event that triggers investors without the same flexibility (#3) to sell. If a stock is taken out of the S&P 500, that’s a catalyst. Spin offs are catalysts. Downgraded debt is a catalyst.

Note here that each of these conditions are external observations, that may or may not be true. “A rose by any other name would smell as sweet,” and AA debt by any other name  still has underlying assets. Klarman has gotten great because he found a niche and dominated it. He found something different.

Which leads to #5…

5/ Be different. “Often the greatest opportunities are around the edge of things. If everyone is looking at something a certain way, looking at it a little differently can be incredibly refreshing. If everyone is looking for stocks in the S&P 500, you’d want to look at S&P 501.”

think-differentYou have to think different. You have to ask yourself a version of Peter Thiel‘s question; what do I think is true that others do not. 

For Phil Knight it was the idea that people would go running.

For Sophia Amoruso it was that a vintage clothing store could be called Nasty Gal.

For Ken Fisher it was to ask what can I fathom that other people cannot?

For Morgan Housel it was to ask what can I do that others can’t or won’t.

For Phil Rosenthal it was to make Everybody Loves Raymond and not another copy of Seinfeld.

6/ How many baskets for your eggs? “We think one of the mistakes most investors make is overly diversifying. Owning 100 one percent positions and not willing to identify their very best ideas, trying to limit their losses by at most losing ten or twenty basis points. The problem with that is that it presupposes that all your losses will be one-off events from a company having a particular problem rather than the whole market going down.”

If you put your eggs in one basket you should follow the adage of Mark Twain and watch that basket.

Peter Thiel writes that “life is not a portfolio,” and the “entrepreneur cannot diversify herself.”

At some level, everything is a concentrated bet. Even a diversified SP500 index fund is a concentrated bet on the capitalism and success of those companies.

Klarman also says, “if you can tell a good idea from a bad idea, how can you not tell a great idea from a good idea?”

7/ Finish line fallacy. “We had a client come in one time and say ‘we want to come in and tell you how we’re benchmarking you.’ I said, ‘I won’t meet with you. I’ll meet with you on anything else, but not that because it will change what I do.'”

Klarman’s client wanted to come in and explain how he would compare his results to a benchmark. He was going to create a false finish line.

Sometimes this works. Warren Buffett created one for his early investors so they would know if he was doing a good job or not. Buffett wanted to know that an asset (his investment) wasn’t a great situation (the market on the whole).

Sometimes it doesn’t. Part of Yahoo’s demise was because Marissa Mayer was buoyed while at Google. What people thought was a great asset (Mayer) was a great situation (Google).

Klarman opted for a take-it-or-leave-it approach. He knew that if someone else compared him to a benchmark, that if someone else created a finish line for a race he wasn’t running, that he would change his strategies – and for the worse. Instead, he kept doing what he was doing.

Thanks for reading, I’m @mikedariano on Twitter.