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

People view acts of omission—the absence of an act—as far less intrusive or harmful than acts of commission—the committing of an act—even if the outcomes are the same or worse. Psychologists call this omission bias, and it expresses itself in a broad range of contexts.

That’s from Tobias Moskowitz’s Scorecasting. The opening chapter is about how referees tend to ‘swallow their whistle’ and let the players play. The action is decided on the field.

Fans, again, tend to, be okay with this because as one referee put it, “People aren’t paying to see us.” We want the great athletes battling it out. But while this omission tendency works in sports it doesn’t work in investing.

Marc Andreessen explained errors of omission nicely. If an investment doesn’t deliver, all that’s lost is 1X the money and time. However, if an investor misses an opportunity “you can lose 1,000x because that’s the upside of what you could have gotten. All of the mistakes I care about are mistakes of omission.”

For a long time, I thought that when investors wanted good deal-flow it was to avoid a market mechanism. People get better deals at garage sales than on eBay because there are more bidders. Now I see that the deal flow involves the chance of a good price but also any price at all.

Missed opportunities can be quite large. During the 2019 DJCO meeting, Charlie Munger said that the family fortune would be twice as large if not for a mistake of omission in the 1970s. The viewer gets the sense that Munger is frustrated less by the dollar loss and more by the mental misstep. Buffett too, notes that omissions are his “biggest mistake“.

To make this mistake, Buffett advises, focus on what really matters to a business.  Leases, contracts, patents, etc.  “are not the things that count.” Rather, “What counts is…whether you’ve really got a fix on the basic economics and how the industry’s likely to develop.”

Venture investor Bill Gurley saw this with Google. The team was well qualified, confident, and in a growing market. Gurley’s problem was the price and he neglected to invest. But, “I go back and the learning is that if you have remarkably asymmetric returns you have to ask yourself, ‘How high could up be and what could go right?’ because it’s not a 50/50 thing. If you thought there was a 20% chance you should still do it because the upside is so high.”

To get the Buffett’s fundamentals or Gurley’s ‘how-high?’ it helps to argue well. At Lux Capital, Josh Wolfe assigns, “a devil’s advocate, someone to identify why we shouldn’t do the deal, ask a priori what could go wrong.” They debate issues because the consensus ones tend to be the ones they’ve been most wrong about.

Omissions in investing are easy to see thanks to prices. Money is an easy metric but there are opportunity costs everywhere. Thanks for reading.


Pauline Brown

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

Pauline Brown was on the Hidden Forces podcast to talk about her work at LVMH and her book, Aesthetic Intelligence. Brown’s framework requires two guidelines.

First, everything is a want. Short of tragedy, modernity has only wants. People need minimum shelter, food, and safety but we’ve blown past minimum, adequate, and ‘enough’.  In the context of needs and wants we’re in the ‘gorge’ range. Brown said, “There’s no reason to buy any of them (luxury goods) for utility.”

Second, everything matters. The utility of something like food is the calories and nutrients but we go beyond that because of the other dimensions of something matter. A birthday dinner at Waffle House is different than a surf ‘n turf downtown, though both are just a meal.

Taken together, these ideas form the guardrails for aesthetic intelligence. As we noted during AI Week, there is no silver bullet solution to problems. Big data isn’t a magic wand, it’s a hammer. Aesthetic intelligence is a flashlight. It’s a latticework of tools that makes situations solvable. Let’s look at some examples from the podcast.

Air travel has gone from good to bad to bearable. Using ideas that Rory Sutherland evangelizes, we need to keep in mind what metrics matter. During the phase from good to bad, airlines looked at the economic number. Flights got fuller, seats got smaller, perks disappeared. In the bad to bearable transition, organizations realized that the easy to measure things aren’t the only things that matter.

For example, being able to work while traveling is quite nice. Sitting while traveling is nice. So too is when companies remove the ambiguity around waiting.

Screen Shot 2019-11-05 at 10.34.20 AM

Working, sitting, and understanding are difficult to measure. It’s only by being there that organizations find this thick data.

Not talking to customers, said Brown, is a problem that’s “ubiquitous and a real disadvantage. The reason entrepreneurs are gaining so much share is that they are connected to the marketplace.” Brown doesn’t have this problem. “I love going to stores, not even to shop. For me, it’s like an anthropological experience. I get more joy than kids do at zoos.”

Brown said that the top bosses at the best brands all spend oodles of time in their aisles. This was something Carl Turner Jr. did too, noting, “As CEO I’m told all kinds of things about our stores but until I get out to hear from the frontline employees and from the customers, I don’t get the real truth.”

The problem as Brown, Turner, and Wang note, is that while spreadsheets, models, and data can help, they’re not perfect. They’re maps, not the territory. When Kenneth Jeffery Marshall talked with Jake Taylor, he said that he doesn’t have a Bloomberg terminal because he wants even better data:

“I love to read, I love to think, and I love to talk to people who are in the thick of an industry. Not equity analysts that cover the industry, but the people that drive the trucks, repair the units, make the products – those kinds of people.”

Once executives get out and see what’s happening they’ll see how to fix retail. “It’s not that traditional retail stores are dying,” Brown explained, “but that they’re formulaic and forgettable. They’ve lost their way.”

We believe that retail needs to shift hard to either a buying focus or shopping focus. The buying stores will optimize for convenience. Grocery stores offer this with pre-packaging ready-to-bake meals, milk near the front, and ’10 items or less’ queues.

The flip side to that is to offers shopping. This is Brown’s wheelhouse. Customers are looking to look at makeup. Customers want to feel the cream, the lotion, the product.

Businesses must figure out all the jobs their customers hire for. Champagne is booze but with panache. Brown has an eye doctor friend who told her that one of his busiest days is after New Year’s Eve. The logical solution to this is to better barricade the bubbly. But that wouldn’t work at all. The corking, Brown said, “is part of the aesthetic experience of having champagne, it’s part of the ritual.”

Screw-top beverages might store just as well but it’s not part of what people want.

The entire episode is good but the part at the end, about Disney, is top-shelf. Thanks for reading.

This time is different

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

I was rereading one of my favorite philosophy books that’s disguised as a finance book and the idea of ‘retirement’ came up. The author lamented about abuse from the Internet Police, who mercilessly profile him. Retirement means not working, end of story. All these FIRE folks are done working!

Wait, why does anyone even care?

FIRE exists for two reasons: media and the markets. It’s easy to share your story and it’s easy to look like a genius during a looooong bull market. Those two factors make FIRE seem like a blip and the answer to, is this time different a resounding ‘No.’

Wait, but what if it is? What if the 1% of participants will double next year because this time different? 

One trick from a friend is to create mental IF/THEN statements. IF someone says to him that they should meet for lunch, THEN he immediately tries to set a time.

So if we hear that this time is different, then we can ask, ‘okay, what’s changed and is it something that changes fast?’

Some things change slowly. Coca-Cola changed slowly. People’s desire to drink Coca-Cola changed slowly. Warren Buffett’s affinity for Coca-Cola changed slowly. Some things like the tastiness of sugary beverages, the laws of physics, and human nature all change slowly.

Other things change rapidly; economic models, fashion trends, and governments. And work. People went from a single manual job with (mostly guaranteed) pensions to multiple intellectual jobs with a market retirement. Work has shifted from Coase’s firm to the iPhone and Slack. Taylor Pearson calls this the blockchain individual.  Some industries like Hollywood have long worked this way but due to falling transaction costs, maybe everything will.

Technology might be a canary that sings, yes this time is different. It’s the case for war. Carlin’s October 2019 podcast, Supernova in the East III focuses on this. It didn’t matter how many anti-aircraft guns were bolted onto the Pacific fleet, they weren’t effective against the Japanese airforce. This time is different. The Romans saw little changes, the Allied forces saw many.

In a history book, the separation from 1914 to 1944 is small. Landmasses didn’t move, consumers didn’t suddenly want more asparagus, and cars weren’t designed with three wheels. But countries were reformed, governments overthrown, and chemistry and physics were mechanized. This time is different. 

In an effort to understand people better I’ve started to read more fiction. I’m enjoying How to Stop Time and this quote in particular:

“The longer you live, the more you realise that nothing is fixed. Everyone will become a refugee if they live long enough. Everyone would realise that their nationality means little in the long run. Everyone would see their worldviews challenged and disproved. Everyone would realise that the thing that defines a human being is being a human.”

Thanks for reading. If you want more here’s a new ebook. It’s a collection of big ideas from this blog.

Barefoot Wine

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

Wine, like movies and restaurants, is a difficult business. If potential profits weren’t enough, social glamour sweetens the pot. Of course, that’s our 2019 view. Michael Houlihan and Bonnie Harvey founded Barefoot Wine in 1986 and the conditions were quite different. French wines ruled the day and American wines were viewed with disdain.

Bonnie and Michael didn’t mean to start a winery but instead when a client couldn’t get paid in dollars and was offered payment in wine the couple took the payment because it was better than nothing. “People say to ‘follow your passion'”, Michael said, “but we followed our opportunity passionately.”

With more wine than experience, Bonnie and Michael started to ask anyone who might know anything about wine. They talked to their customers.

I was reminded of a joke while listening to this episode. An aspiring entrepreneur walks into an old-time general store and sees stacks of bagged of rice. It’s almost to the ceiling. The budding business boss looks at the store owner and says, ‘Wow, I’d never thought you sell that much rice.’ The owner looks back and replies, ‘Well, we don’t but the salesman who brings it by is really good.’

“The best information we got,” Bonnie explained, “was from Don Brown who was a chain store buyer in California.” He explained that their wine needed to be a salt and pepper act, in a pig, and better and cheaper than Bob. The label should be simple, but not common, and visible from four feet away. In thirty seconds they had everything they needed.

Barefoot is a good name, it makes the consumer SMILE. “At the time wine was intimidating. People couldn’t pronounce the name on the labels,” said Bonnie.

Michael and Bonnie had an opportunity because the consumers had a latent need. Wine at the time “was a Saturday night wine where the men would sit around and talk about things like mid-notes. But it turned out the majority of wine buyers were a thirty-seven-year-old mom with two-and-a-half kids pushing a cart down the supermarket aisle and she wanted a Tuesday night wine.” Channeling Rory Sutherland, we can say she didn’t want something good, she wanted something not-bad.

Barefoot’s marketing discovery was to start small. The first distributor Michael and Bonnie approached said he wouldn’t carry their wine without a large advertising campaign attached. They couldn’t afford that and instead caught a lucky break when two months later their phone rang with a donation request.

The caller wanted to raise funds for a children’s park. Bonnie and Michael still had more wine than money so they offered a few cases and the organizer, presumably begrudgingly, accepted. Then something unexpected happened.

In the month after the fundraiser, the store sales in the area immediately around the fundraiser shot up. Bingo. Their marketing plan wasn’t going to be national but local and it was going to be a page right out of Getting to Yes.

One main idea from this classic on negotiation (published in 1981) is to offer things that are cheap to you but valuable to the other person and vice versa. My kids request breakfast for dinner and that’s fine by me because it’s cheap, quick, and healthy. Win-win. That’s what wine donations did too. Barefoot got exposure and fundraisers got another perk, some panache, and a possibly pricy basket for bidding. Win-win.

Barefoot broke through. The world is, and always has been, busy.  Even in 1961 when Rosser Reeves wrote that the world will not beat a path to your door for a better mousetrap, “for if the world does not know it is a better mousetrap, no one is going to make a beaten path to anybody’s door.”

Michael and Bonnie, as well as entrepreneurs today, face the TiVo problem; can innovators get distribution before distributors get innovation. Asking this question can help founders decide when to sell their business. It did for Lara of Lärabar. And from early on Michael and Bonnie wanted to sell. Selling is a Messy Marketplace and today Michael suggests people meet with brokers for lunch to talk, plan, and get a lay of the land.


Thanks for reading and thanks to Tim for passing this along.

Nudgestock 2019

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

Each year we do a brief recap, review, and emphasis on the Nudgestock conference hosted by Rory Sutherland and Ogilvy Change. Here are the notes from, 2018. Here is the post from 2019’s podcast recap. If someone wants more here’s the page of playlists.

Rory Sutherland‘s book Alchemy is great but he’s better in person (virtually) than on the page (physically or digitally).

Sutherland wants people to think in novel ways. It’s not so much cold-hard-logic that rules our lives but warm-fuzzy-feelings. Blocking this is the desire to appear logical in our thinking. However, said Sutherland, “There’s a lateral solution to everything.”

Stories are a great lateral solution. When Rory was on a flight and got a bus instead of an airbridge he was disappointed. Until the pilot told a good story. “Suddenly I reframed the bus from being an inconvenience to being a conveyance. Suddenly I didn’t have to walk past twenty Toblerone stands in order to get out of the airport. Tell a good story and the meaning changes.”

This tool has a name: benign bullshit. It doesn’t do any harm to tell the story of the bus instead of an airbridge and it can have great effects. It’s an asymmetric bet, just like watching any one of Rory’s many talks.

Tricia Wang on “how marketing mistook clicks for customers.”. Wang is the propagator of the term “thick data” a form of naming. She made up this name because she needed something people could understand in meetings. If clicks form big data then talking to customers is thick data.

Thick data and big data are the peanut butter and the jelly to understanding customers. (company culture is the bread). Wang said, “Thick data allows you to see the world with alien eyes, to ask questions and unpack assumptions that might lead you to make the wrong move or miss the mark entirely.”

Big data is backward-looking and numbers can’t quantify tears and smiles. Alice Waters could have counted checks and measured menu items but instead she walked through the dining room. Both big and thick data help and both help more together.

Maths Mathisen spoke about his app, ‘Hold’. If people check their phone often then maybe they should be reminded about how often they do it. A lot of Sutherland’s work and Ogilvy’s ideas are about reframing and changing the meaning. A bus becomes a conveyance. Mathisen wants to do that with how people use their phones.

Robert Frank spoke about ‘the mother of all cognitive illusions’ and he’s the reason for all this. It was his book, The Economic Naturalist that sent Sutherland scurrying along Benign Bullshit Boulevard.

You’ll need to watch for the mother of all cognitive illusions, but even if Frank is wrong it’s right to listen to him. He points out the way we listen, hear, and remember stories as well as the importance of relative comparisons. You may not agree with his conclusions but you will learn about human beings.

Stephanie Johnson spoke on diversity and inclusion. Good organizations tend to argue well and Johnson cited research that “When have a diverse room, people are more willing to play devil’s advocate.” Relatedly, Ben Horowitz pointed out this was the catalyst for casual dress, to deemphasize HiPPO decisions and focus on good ideas.

Richard Wise was hilarious about “making the ‘rational’ benefit irrationally appealing”. Explaining classic advertising campaigns like, Don’t mess with Texas, What happens in Vegas stays in Vegas, and Got Milk, Wise pointed the way lateral ideas work.

The Got Milk campaign was initially not national. It was made for the California dairy industry and the key insight was a bit of thick data. A group of people was asked not to drink milk for a week and report back on how they felt. A week passed, the group returned, and their response was unexpected. It wasn’t the glass of milk people missed but the breakfast cereal (with milk), the coffee (with cream), and the birthday party (ice-cream).


How does an ad for a product work if it doesn’t feature the product? With lateral thinking. The insight for the California dairy farmers was Milk and _____. This is hard, Wise said,  “What I like about (this approach) is taking away your pride in your product and being willing to look at where it actually lives in people’s lives.”

Gerd Gigerenzer spoke about how less (data) is more (accurate). “Logic and utility are beautiful mathematical theories but they don’t describe how most of us actually make decisions.”

Gigerenzer goes back and forth with the Thaler and Kahneman camp, but Rory likes them all because he’s focused on things that work in the real world, not things that are statistically significant in a laboratory. Gigerenzer’s chief beef with T&K is that heuristics actually work quite well and the T&K error is that they’re measuring the wrong thing.

Bob Iger’s decision not to buy Twitter is a point for Gigerenzer’s case. Iger said it was a gut call and admits it in the book. Thanks to a run of successes, Iger doesn’t have career risk to admit this. Most people don’t enjoy this buffer. Heuristics work, said Gigerenzer because they “are fit for a world where you need a robust solution because there is no optimal solution.”

Jennie Roper spoke on the mere exposure effect and noted, “When you pick a shampoo, mortgage, or mobile phone provider, most of the content is equal so why do you pick one of the other? It’s familiarity.”

For a business some exposure is good, more is better, and too much is too much. The goal is a bell curve of 9-12 moments, depending on the industry and certain goals. Thanks to digital this can be tracked and honed.

Sir Paul Collier spoke about the future of capitalism and noted that “Capitalism doesn’t work on autopilot.” Instead, there should be some kind of structure, often from the government. Collier wants to keep the rules of bowling but to have someone pull up the gutter bumpers every now and again.

Thanks for reading and enjoy the videos.

Market Mechanism

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

I was reading an investor’s letter to his stakeholders and saw a new ticker: ‘undisclosed position A’. Hmm, curious. Then I read the next line: ‘undisclosed position B’.

This isn’t abnormal as someone builds a position and it’s important to understand why. The simple answer is competition but stepping back we can see that competition only exists when there is a market mechanism. If price influences risk then buyers must tiptoe about, cautious about releasing the herd. As Jerry Neumann explained, “how do you make money if the dumbest guy in the room is the one setting the price?”

The greatest recent market mechanism has been the internet. Crashing transaction costs (and the answer is always transaction costs) led to markets for Beannie Babies, homes, and ride-sharing. How much you benefit is influenced by which side you’re on.

Bargain buyers need to work to find situations without other bidders (‘undisclosed position A’). For investors, this might mean sectors and companies with limited coverage or things that are difficult to understand or too small to warrant the effort. The inverse will be true too: that stocks du jour will have the dumbest guy in the room setting the price.

The best bargain buyers will avoid markets all-together. This idea was articulated in one of Zach Lowe’s NBA preview podcasts where he said:

“Someone asked me what I’d pay for DeMar DeRozan’s contract extension and that’s not a fair question for me because he will immediately reach a market value that I would never pay.”

If DeRozan was restricted to only his current team that’s an advantage for them. Buyers of one get good deals. However, that’s not the case.

Jason Blum runs one of the most successful movie studios in Hollywood and part-of-the-reason he succeeds is by avoiding a market mechanism in making his films. “We’re like the anti-heat production company…the director’s everyone is chasing we’re not chasing.”

Instead, Blum looks for directors who have a history of good movies–just not too recent a history. He pays less not because someone is unproven, but because they’re unloved. He also has an offer the market can’t compete with: final cut.

Sellers want more buyers or fewer sellers. That means raising the perceived value of their product.

Buyers want fewer buyers or more sellers. This might mean working with things that are difficult to understand, unloved for emotional but not material reasons, or signing players before free agency.

However a business goes about it, the more power a market mechanism has the harder you’ll have to work for the same results. Thanks for reading.

Innovation and Optimization

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

On a replay of How I Built This, Lärabar founder Lara Merriken talked about her sale to General Mills. She said:

“We finally decided in 2007 that we would entertain an offer if we felt like it was the right company because we didn’t have to sell. We were a financially stable company. But I was starting to get really tired and worn down.”

Her comments demonstrate the difference between a business and a hustle. Brent Beshore told Ted Seides that there can be some pretty big hustles, and that’s what Lärabar probably was. Brent said:

“We looked at a business recently, it was doing nine million dollars of free cash flow, that is definitely a hustle, right? It’s one person, they’re the lynchpin in this thing, everyone is an extension of them, there are no systems, the repeatability of revenue is not there, and if that person gets hit by a bus, I mean the entire company implodes within a short period of time, right? So we call that a hustle, right? That’s not a business.”

Merriken was probably tired because Lärabar lacked systems. Which makes total sense. She started with a pizza cutter and a rolling pin using store-bought supplies. However, the same environment that encourages innovation discourages processes. General Mills didn’t create raw fruit and nut bars, Lara did. She explored new lands and created new lines. Yet, once the operation was up and running she needed someone to ‘make the trains run on time.’

Michael Ovitz’s career offers this contrast too. Ovitz co-founded Creative Artists Agency in 1975 and one early innovation was ‘packages’. Actors A and B, with director C, Producer D, and script E. One such project was 1988’s Rain Man. Reflecting on the project, Ovitz wrote, “Nothing in Hollywood is anything until it’s something, and the only way to make it something is with a profound display of belief.”

However, what made Michael successful as an agent and leader of an agency failed him as a leader of a company. Reflecting on their time together at Disney, Bob Iger wrote: “I think of him (Ovitz), not as a bad guy but as a participant in a big mistake.”

Ovitz and Merriken succeeded in systems where flexibility and exploration were the most important characteristics and both needed help in systems where repeatability and optimization took the stage.

Every business and every person exists within these and other systems. Bull markets, tailwinds, ‘booms’ and ‘busts’, expansions and contractions, and so on. Every business and every person has agency and the ability to change too–though that takes time and time introduces the TiVo problem. If Merriken took too long to built systems, General Mills would have built bars.

Thanks for reading.


Marty Neumeier

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

One of the best things about the internet is links, more the concept than the technical. It’s amazing that someone, (anyone!) can follow, flick, tap, and click their way through ideas, people, and sites.

Today’s feature, Marty Neumeier happened just that way. First, someone shared a book suggestion and tagged someone who shared it with them. Both are good follows. I ordered the book, then Amazon suggested related authors. One of which was Marty Neumeier who has a trove of talks, which is what we’ll look at today.

What is a brand? “A brand is a person’s gut feeling about a product, service, or organization. It’s not what you say it is, it’s what they say it is.” Neumeier’s comments are identical to Ashley McCollum’s insight about food and the launch of Tasty. 

If brands like Harley Davidson, Apple, Coca-Cola, Subaru, Yeti, and so on confer pricing power it’s because they offer something unique, they offer a feeling.

This means brands have to be different. Neumeier counsels businesses to ask, who are you, what do you do, and why does it matter? And there should be focused answers. Neumeier calls this, ‘ONLYNESS’. Terry O’Reilly hammers this point in This I Know and writes that it’s the “critical lesson” of his book.

“Successful products don’t win because they’re better or cheaper. They win because they’re different.”

Differentiating means being distinguishable. Neumeier says that if you can cover the logo, name, or product and still tell what the brand you’ve got it. Otherwise, you don’t. In his talks, Mark Ritson calls this a brand’s DNA and points out how the colors, the styles, and presentation all mesh.

For example, this is ONLYNESS:


Good marketing and branding are difficult because differentiation is lonely. As such, only organizations with the right culture will succeed. “Branding needs to be led from the top. It is not something you give to a marketing director,” Neumeier noted. A good leader will, “banish the fear of stupid.”

Building a strong brand is hard but worth it. Coca-Cola survived New Coke because it was a strong brand. It wasn’t only Coke that people trusted but recent successes with Cherry and Diet Coke too. When Netflix attempted to spin off its DVD service the company survived because its brand was strong.

Brands are not HIPPOs creations. Like evolution, they fit it a niche. Businesses must find what job customers are hiring for. “Find out what your customers are trying to do in their lives,” Neumeier said, “and help them do it.”

This isn’t a question to answer but instead a process to embrace. Like IDEO, Neumeier advocates for design thinking where a business communicates with its customers, creates prototypes, collects feedback, and prototypes again. As Richard Shotton saw, this doesn’t have to be fancy.

For books, Neumeier likes classics like Positioning and The 22 Immutable Laws of Marketing in addition to Confessions of an Advertising Man by Ogilvy. Also, The Medium is the Massage, which, “used all these great photographs of journalistic photographs of the time, diagrams and all kinds of stuff. It was graphically really arresting and very ’60s, hip-’60s and I just thought, That really spoke to me, and I really could understand that much easier than reading the full Marshall McLuhan book.”

Thanks for reading, HIPPO stands for HIghest Paid Person’s Opinion.


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

A reader sent along the following story about Robert Rodriguez who (partially) rose to prominence for making the film El Mariachi for seven thousand dollars in 1992. The movie has now grossed more than two million dollars. Rodriguez’s IMDB profile is incredible with double-digit citations (11 total) for Producer, Writer, Director, Editor, Soundtrack, Sound department, Visual effects, Actor, Composer, Cinematographer, and Camera and Electrical Department. For context, Judd Apatow has double-digit credits in 4 categories.

Part of the reason Rodriguez does so many jobs is to keep the cost of the movie down and the scope of the project small. He’s been offered larger projects, but with larger projects come more stakeholders, our subject for this week. Rodriguez said:

“When they offer it to you, it’s still their movie. They’re going to tell you how to cast it; they’re going to tell you how to make it; they’re going to tell you how to end it. They spend a lot of money and they want their money back. I’d rather nobody spent a lot of money.

“If it’s a lower budget and a minimum payout, I can do anything I want. I never wanted to leave that behind. It was just too big of a trade-off. It sounded too much like work.”

There’s an expression especially common within the small business community where someone can be working on their business or working in their business. The connotation, as I understand it, is that working on is better than working in.

On > In.

However, there’s a more important layer beyond this quip. Both On and In are superseded by the stakeholders Of a business.

Projects like films offer a tidy closed system for examination. Films have deadlines and budgets and the more time (longer deadline) or the more money (larger budget) a filmmaker needs, the more people that need to be involved. Or, inverted, the less time and less money a film needs the more people like Rodriguez, or Jason Blum a subject of recent weeks, can work independently.

In an ideal world, in a prosperous marriage, or on a sunny day, the importance of stakeholders matters less. Everyone wants to be your client in a bull market. However, it’s the scary situations when opportunities arise. Warren Buffett said to be greedy when others are fearful and fearful when others are greedy. That’s fine for people who can act like Warren Buffett, who has great stakeholders. In investing this is called permanent capital.

But Buffett hasn’t always been so blessed. From 1954-1969 Buffett ran the Buffett Partnership Ltd. and it was then that he started to write letters to his stakeholders. In 1961 Warren wrote:

“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.”

Warren knew that the best prices came at the worst times. “The pit of your stomach,” encouraged his investors to have the intestinal (and intellectual) fortitude for the bumpy ride to Earnings-ville.

Decades and many letters later Roger Lowenstein wrote about this lesson, “One purpose of his letters was to attract and knit together a shareholder group who would behave like his partners—in other words, who would stick with him.”

What Buffett wanted were stakeholders that would stick with him through thick and thin and not redeem their money when he was about to pounce on an opportunity. He wanted investors with the faith of Charlie Brown.

Last week we looked at the monkey see, monkey do nature of opportunities. Whenever a market mechanism is introduced for athletic skills, collectible items, or investing, prices inflate and risks rise. Mix in stakeholders with different incentives, time preferences, and expectations and the best action will be harder to take. Unless that is, a business cultivates its stakeholders. Buffett did it through letters and we’ll look at how to do it too.

Money and Time

No one embraces an expedition and expects to fail. I’d wager that it’s mostly smart, ambitious, hard-working people who even try. Yet projects fail all the time and stakeholders are part-of-the-reason why. When thinking about stakeholders this week, consider anything that draws on time (or indirectly via money) as a stakeholder.

Michael (a different one, I promise) wanted to be a writer. His job was as an editor and he’d submitted and sold some stories. He lived in New York City too, it doesn’t hurt to have that proximity.

During this pining-for-writing phase, Michael and his wife bought “a crummy house in Cornwall Connecticut.” The couple would go up on the weekends and as his wife painted Michael tinkered around in the garden. “I ran into problems immediately,” he said in one interview years later. It was like

“In order to conquer an animal, I have to think like an animal, and whenever possible, look like one.” — Carl Spackler

He looked for horticulture answers in books, tried and failed, and looked for more answers. Along the way, Michael wrote down what he was doing. From that came some stories. Then came a book.

That book sold well enough that Michael got a contract to write a second book, and an advance. Yet, despite the book advance money (which quickly ran out) there were too many stakeholders on his time. Michael and his wife had a kid and a fixer-upper in Connecticut. They lived in New York City and paid New York City prices.

Michael had a choice, he could pay back his advance and cancel his contract and keep his job in the city. Or give up the job, the health insurance, and the city. He moved and reflected years later, “The key to being a successful freelancer is having a low monthly nut.”

Michael Pollan made it. His books win awards and some stories even make it to television. Michael Pollan made it because he aligned his stakeholders. His wife and his lifestyle supported this path to becoming this kind of writer.

Like writing, comedy takes time. It’s months (years even) on the road figuring out what makes people laugh. Jay Leno put it this way when he talked to Judd Apatow, “I didn’t have a lifestyle to maintain.” Spending his days working as a mechanic for Mercedes and his nights driving hundreds of miles for a few minutes on stage meant that Leno had the time to develop jokes.

Even years later, Leno tries to test his material in awful places. “Like, I was in New Mexico a while ago at an Indian Reservation, just a very strange setup. Nice people, but—and they laughed. So I said, ‘Okay, this stuff is gonna work on the show.”

Pollan had a wife, a kid, and two residences. Leno had himself and his other interest to comedy was cars, something he got to at least interact with at his paying job.

Without the right stakeholders, ventures get less time and/or money than they need. Without the right incentives, things crumble too and here we have “the most profound problem in investing.”

Principal Agent

Have you ever been in an elementary school? Third-grade classroom lines provide an excellent metaphor for aligned stakeholders.

If you haven’t recently, things are much like you remember. Some kids want to get to lunch, or recess, or art immediately so they can maximize their time and some kids want to talk with friends, look about, or get the attention of the teacher. When a class is lined up straight, paying attention, and “eyes forward, lips zipped” they can move efficiently through the school. When they aren’t, they can’t.

That’s how businesses exist too and that profound problem exists when the principal and the agent aren’t in the same line going to the same place.

It was ‘super LP’, Chris Douvos who called this “the most profound problem in investing. People with money – the principals – act differently than the agents – those who are entrusted with the money.”

This problem exists under the expression, no one got fired for buying IBM too. It’s also hidden in the acronym, CYA.

Let’s look at the Warren Buffett situation we already noted. Buffett wrote letters to align and filter (we’ll get to this point) his stakeholders so that he could buy out of favor stocks. Buffett wanted superficially not fundamentally, ugly businesses.

However, Buffett had it easy. He’s the quintessential goofy ‘uncle’ or fun ‘aunt’ that every family has (though none are quite as wealthy). Buffett’s communications were the chief source of financial information for his stakeholders. I wonder what he’d do in 2019 when Twitter, cable news, and conspicuous consumption are so dominant. CNBC didn’t even start until 1989! Buffett still writes his letters and they reinforce the Buffett brand and that influences the stakeholders who are shareholders.

Remember, except in the limited-laws-of-physics world, people only look stupid relative to something else. So one solution for individuals is to cover-your-ass and purchase IBM. But the second solution is to change the relative comparison. This is what it means to align stakeholders, to frame the comparison in a different way.

Investors have an expression that makes this conveyance easier, ‘you can’t be the market and beat the market.’ The implication is that they have to be different, they have to look different. So if a limited partner thinks they’re stupid, they have to find a different metric. It can’t just be, ‘they’re not doing what everyone else is.’

In the monkey-see-monkey-do world where edges erode, businesses must act opportunistically. It must be fast, with force. That ability comes with good stakeholders, and there’s a certain time to find them.

Inbound and communication

The best time to align stakeholders is before they’re stakeholders. This was something John Wooden did while he was the coach of the UCLA basketball team. In a book that covers his playing time for Wooden, Kareem Abdul-Jabbar wrote:

“As I learned later, our first meeting was perfectly representative of his philosophy of recruiting: ‘I wanted young men who wanted to play for UCLA, and not one that I had to talk into playing for UCLA. I always believed that the way to build a great team is to find the kind of people you want to work with and tell them the truth.’”

Kareem writes that he was a bit taken aback that while Wooden was respectful, he wasn’t effusive.

Brent Beshore wrote a book and created a network because he said, “We eat on proprietary deals.” The book, the podcast, the letters, are all ways to create an inbound network for the stakeholders. Beshore told Ted Seides:

“We like to get in situations where people have educated themselves on us, people know who we are, there’s already trust built through our writings, through what we’ve talked about and they want us to buy the business. They’re coming out and seeking us.”

Jim Mattis writes about the importance of this in his new book, Call Sign Chaos. During the Vietnam War, felons, parolees, and petty criminals were offered chances to serve in the war instead of serving time. That seemed like a good deal to the judges who assigned the punishment but not to Mattis and the Marines fighting in the war. Soldiers are stakeholders too.

This brings up the question of balancing perfect clients with available ones, about employees and the unemployable. Stakeholders widen and shrink the opportunity zone of a collective. Great people expand what’s possible, unaligned ones collapse what’s possible.

Success with stakeholders seems to be like success in dating, share who you are and see if they like it.

A business should sell their strength. John Wooden’s strength was focusing on the process. Kareem wrote that Coach Wooden didn’t like sports movies because after the lesson of the movie the team won anyway. Kareem wrote, “His point was that the life lesson is the success. The traveling is the reward, not reaching the destination.”

Wooden wanted learning first because like day follows night, long-term winners are learners. Beshore wants to filter out people who won’t jive with mid-west vibe of hard work, humility, and honesty. Mattis wanted men who wanted to be “the few, the proud.”

Investor Wes Gray puts it this way, “The edge is not in building a better mousetrap. The edge is in coupling educated capital that understands why your mousetrap works and pairing the two together.”

Assistant GM for the Boston Celtic, Mike Zarren said much the same thing, “The communication of the information is as important, if not more important, than the actual quantitative work that you do.”

So what Zarren, Gray, Mattis, Beshore, Wooden, Buffett and all the others have done is communicate well. Each is and was upfront about what they’re trying to do and they find people who buy into that. How do they communicate? Easily.

Here are a few specific suggestions for general implications.

Visual or literal One advance for sports analytics was making it visual and the advice for filmmakers is just as true for sabermetricians, show don’t tell.

Entertain or Inform In the modern cacophony an easy dichotomy is to separate these two. Phillip Tetlock has studied decision making and noted, “The more accurate forecasters tend to bore people.”

Understanding is not agreement “It’s important to make people feel heard when they are giving notes about the show, make them know you are actually listening. But then it’s important that we only take the notes that will make the show better,” said Brian Koppelman.

Wrap up

In his book, Jim Mattis writes, “I aggressively delegated tasks to the lowest possible level.” It’s important to “leave the ‘how’ to your subordinates.” A decentralized command works great with stakeholder alignment. Like Mattis saw fighting in Vietnam and recruiting Marines after, people are everything.

So how much do your stakeholders “delegate tasks to the lowest possible level”?

Ultimately it comes down to two possible paths.

  • Smaller projects (in time and money) require fewer stakeholders. Fewer people, fewer complications but that requires some like Robert Rodriguez who can do more, with less. As filmmaker Steven Soderbergh said, it doesn’t matter what camera a filmmaker uses if they don’t know where to put it.
  • Coordinated projects (via communication) create aligned stakeholders. Sometimes this is done ‘at the top of the funnel’ for inbound clients. Sometimes it’s done after the fact to educate people on what you do what. Sometimes it’s homestyle letters (Buffett), sometimes it’s visual arrays (Moneyball), and sometimes it’s regular content (podcasts, emails, etc.).

So, Do your stakeholders believe this? Thanks for reading.

Bob Iger

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

Bob Iger’s career began with a lucky break, “I came to ABC thanks to my uncle Bob’s bad eyesight,” and his coincidence in sharing a hospital room with a lower-level ABC executive. With a little more luck, a lot more hard work, and paying attention to the unfolding lessons, it led to The Ride of a Lifetime, the title of his book.

One early lesson came from working for Roone Arledge at ABC Sports, “… we were telling stories and not just broadcasting events…”.

Wild World of Sports worked then and sports works now because of context. Think about how much analysis, breakdown, and backstory exists for the current, 2019 football season. There are more hours of content than hours of the events.

This early lesson is a cautionary tale. Sometimes the story we’re told is too bold. Later in the book, Iger glows about his relationship with Steve Jobs who became a close friend. He joins Ed Catmull, Kara Swisher, and Ken Kocienda who all say there were two versions of Steve; founding Apple Steve and rejoining Apple Steve.

Iger and others take effort to note this difference because they feel the ‘Steve Story’ is the wrong version. It’s incomplete.

In 1985 Iger is surprised when Capital Cities buys ABC. Part of Iger’s good luck is working for smart people and learning the right lessons. From Arledge, he learns about putting on events. From Capital Cities managers Tom Murphy and Dan Burke, Iger learns decentralized management.

The acquisition attitude was, ‘Who are these guys?’ ABC was a major network while Cap Cities was a hodgepodge–but it was a well-run hodgepodge. ABC’s revenue was 3x but earnings were only 1.5x and the companies had similar market caps.

Part of the reason for the economic success was because Tom and Dan paid smaller salaries in dollars but high salaries in trust. Iger writes that some people left after the merger, “But we stayed because we felt so loyal to these two men.”

Why did Bob stay?

“If you stuck to your budget and behaved ethically, Tom and Dan gave you room to operate with independence.”

There we go.

Any situation is filled with different metrics and how – and if – they’re measured matters. Malcolm Gladwell talked to Bill Simmons about how Kawhi Leonard wasn’t drafted because someone thought he didn’t do well under pressure based on an interview. That’s the wrong metric. Tom and Dan paid less in dollars but gave more in autonomy. That mattered.

A decade later and things change for Iger. Disney buys ABC/Cap Cities and the Disney management model “was the opposite of all that.”

That’s not to say Disney was wrong. Strategy is context-dependent. For example, both Iger at Disney and Jason Blum at Blumhouse Productions have successful, profitable, acclaimed movies and both follow their own strategy.

For the next decade, Iger learned good and bad lessons from his boss, Michael Eisner. In the book he’s complimentary of Eisner, noting how he “re-founded Disney.” Eisner understood what Iger writes during his time as CEO: as Disney Animation goes so goes the company.

Charlie Munger commented on Eisner’s reign in his 1994, Worldy Wisdom speech:

That (pricing power) existed in Disney. It is such a unique experience to take your grandchild to Disneyland. You are not doing it that often. And there are a lot of people in the country. And Disney found that it could raise those prices a lot and the attendance stayed right up.

So a lot of the great record of Eisner and Wells was utter brilliance but the rest came from just raising prices at Disneyland and Disney World and through video cassette sales of classic animated movies.

Another positive lesson from Iger was being out in the parks. “I walked miles upon miles with him in advance of the opening of these parks—and in existing parks too— getting a sense of what he saw and what he was constantly looking to improve.”

This was something founder Walt Disney wanted all his Imagineers to do. Marty Sklar is the only person to attend the opening of every Disney park and he wrote, “In the earliest days of Disneyland, when everything was new for the guests and the Imagineers, Walt Disney decreed that every designer was to go to the park at least every other week and stand in the lines (we call them queues) to understand what our guests were experiencing.”

There are two ways of accumulating information about your customers; big data and thick data.

Walking and talking is thick data and it’s been used by Tariq Farid to create Edible Arrangements, by Carl Turner Jr. to build Dollar General, and by Tricia Wang to understand the fall of Nokia and rise of Apple.

Thick data is good but not perfect, so we need big data too. Big data is using base rates, a/b tests, and revealed preferences (actions over words). But both Big and Thick depend on the people being curious, something Michael Ovitz, Iger’s brief boss wasn’t. Iger wrote that it was “the wrong guy in the wrong place at the wrong time.” That same sentiment may be true for Eisner. After twenty years, some good, and some bad, the company needed new leadership and in 2005 Iger became CEO.

At his first board meeting Iger laid out his plan, “In so many respects, Disney Animation was the brand.” And the brand sucked.

Iger’s book is a great complement to Lawrence Levy’s book, To Pixar and Beyond. Levy was the CFO of Pixar through the IPO and the (2006) acquisition by Disney. What’s fascinating was how bad both companies needed each other.

This story is playing out today too as companies experiment with monetizing content. Making movies is a terribly hard business (hence Jason Blum’s angle). However, making movies and then selling character meetings (via theme park tickets), t-shirts, and stuffed animals is a much better business. Hence, The Pixar Business Story:

Iger met with Jobs to discuss the acquisition and recalled their meeting this way, Steve at a twenty-five-foot long whiteboard poised to list the pros and cons.

“Not unexpectedly, Steve was the holder of the pen, and I sensed he was quite used to assuming that role. He stood with the marker in hand and scrawled PROS on one side and CONS on the other. ‘You start,’ he said. ‘Got any pros?'”

Iger writes that he was too nervous and ceded the floor to Jobs.

“‘Okay,’ he (Jobs) said. ‘Well, I’ve got some cons.’ He wrote the first with gusto: ‘Disney’s culture will destroy Pixar!’…’Fixing Disney Animation will take too long and will burn John and Ed out in the process.’ ‘There’s too much ill will and the healing will take years.’ ‘Wall Street will hate it.’ ‘Your board will never let you do it…'”

In the book, Iger goes on longer and wrote, “Two hours later, the pros were meager and the cons were abundant.”

Jobs conducted a pre-mortem. While nothing is foolproof, listing possible failures improves the odds.  In the under-emphasized, Sleeping With Your Smartphone it’s called ‘tummy rumbles.’ Daniel Kahneman was praised at a conference to elevating this idea. Mauboussin calls ideas like this low hanging fruit.

Another thing Jobs and Iger did well was to argue well. “He could criticize me,” Iger writes, “and I could disagree, and neither of us took it too personally.” In once instance, Jobs said Iron Man 2 “sucked” and that the value resort,  Art of Animation was “crap”. Each time Iger reminded Steve that he wasn’t the target customer.

Joe Russo made Avengers: Endgame for Iger and Disney and talked about how he’s able to argue well with his brother.

“We’ve fallen into these roles and have for years, where, when an idea comes up one of us will just assume the contrary position so that we can vet the idea and we’ll argue about it for an hour and the idea either sustains or we come up with a better idea.”

“It’s to the point now where people will freak out because we’re very passionate – and Italians. When we’re in a room it’s like, ‘No, that’s bullshit, it’s never going to work.’ Then five minutes later we go get lunch.”

“With family, it’s easy to forgive and forget when you walk out the door.”

In addition to the Pixar acquisition, was the Marvel, Lucasfilm, and Fox purchases. Each one repeated themes from Brent Beshore’s book (and podcast!) The Messy Marketplace. What haven’t you told me that I need to know? What part of this is a hustle? Who’s ego is attached here and are they ready to sell? Each one is great.

It’s not a great book in the way Shoe Dog is a great book but it’s solid. If this were a Disney movie it’s Tangled, a strong effort full of interesting moments and something the author should be proud of.

Thanks for reading. This post is a podcast too: iTunes, Overcast, or Soundcloud.