Whatever it was, it was good. Her ideas, examples, and experiences are almost too good. These notes will not be good. I mean, I’ll do my best to write them, but the audio is so very good.
Have you ever been in a new city with a walkable area, and don’t know where to eat? Most of the places will have their menu outside and you can at least glance at it, guess if you want to eat there, and eventually pick something. That’s what these notes will be. In the non-stop online buffet, this is a menu advocating (begging) that you listen to Hobson and Horowitz.
One quick note, Horowitz is the author of The Hard Thing About Hard Things, a book I was surprised I liked. The book warranted its own post where I looked at: lead bullets vs. silver bullets, complicated vs. complex systems, and when to act.
Okay, ready for Hobson?
1- Keep your optionality.
Hobson is the president of Ariel Investments and tells Horowitz they recently bought Madison Square Garden (MSG).* That sounds like a good idea.
But sounds good isn’t good enough.
Hobson explains that the investment in MSG was based on a confluence of factors; the “Dolan discount,” the NBA lockout, a retro-fit over budget, and upcoming TV contract negotiations. Hobson and Ariel were looking at a mess – and messes are good places to find optionality.
“Everything that can go wrong, has gone wrong,” Hobson explained. “You could not rebuild MSG if you tried…so we said, there’s a barrier to entry here that’s pretty significant.”
Hobson concluded that an investment in MSG was one with limited downside, and massive upside. She also got lucky, as Jeremy Lin joined soon after the purchase and “Linsanity” began.
Optionality is a fulcrum that many successful people use. Charlie Munger creates investments around it ( Chris Dixon does too). Judd Apatow interviewed Jerry Seinfeld who waited to start his career until he found optionality. If you can find yourself in situations with a big upside, you’ve found yourself in a very good place.
2- Of time & money – only one matters.
Hobson explains that she was hired by John Rogers who told her, “people undervalue time and over value money.”
Two thousand years ago, the stoic philosopher Seneca wrote much the same thing: “People are frugal in guarding their personal property; but as soon as it comes to squandering time they are most wasteful of the one thing in which it is right to be stingy.”
But we don’t get this. Charlie Munger might have given a hint why. “Well, practically everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and doesn’t mix in the hard-to-measure stuff that may be more important.”
We know how to add dollars and think that’s the only equation we need. It’s not.
“The word ‘billionaire,’” wrote Seymour Schulich (who is one, no sour grapes), “is a very crude and inaccurate measure of how well I have played the game of life.”
3- Get to second level thinking by reframing.
Second level thinking is to think not just about the actions or reactions but the reactions to the reactions. Both Ken Fisher and Richard Thaler explain it in terms of the “beauty contest.” Tyler Cowen displayed the thinking in regards to Harvard allowing more students.
Hobson says that her team has a lot of discussions, and the key to good discussion is to talk without going “toe to toe.” How does she do that? How does Hobson create discussions that get to the second level without getting petty or personal?
– “Would we do this, if we were private?”
– What would happen if the price of a supply was cut in half?
In the first instance Hobson reframes the problem by redefining who they are. In the second she throws out a wild scenario to see how someone responds. Each of them gets to second level thinking by reframing the question.
4- Dive deep.
If you’re going to do something well, Hobson observes, you need to have a deep knowledge of it. Her husband George Lucas, Hobson says, has a thick binder in his office for each fictional planet in Star Wars. It includes the name, people, customs, environment, and more. It’s deep.
To succeed you have to go deep.
Alex Blumberg was deep in radio before his startup Mark Cuban memorized user manuals before he sold anything. Gary Vaynerchuk knows the ins and outs of every social network. Dick Yuengling moved kegs throughout the factor to learn the ins and outs. You have to go deep to learn the most valuable parts. Hobson does this too.
She explains this using the company Bristow Helicopters. Bristow is – among other things – an oil rig taxi service. Horowitz jumps to the conclusion that the stock was down because of low oil prices. You’re right, says Hobson (probably smiling), but the company has little to do with oil prices. The stock trades in tandem with oil, but the fundamentals are different.
Hobson knows that Bristow is worth less on paper than liquidation value. bump That’s either Benjamin Graham rolling over in his grave or Charlie Munger slapping his head (because he missed this).
Hobson knows helicopters depreciate differently than other machinery and Bristow has other revenue streams.
Hobson has dived deep.
5- Observations > (are greater than) predictions.
When Hobson’s group purchased MSG, things didn’t look good, but only from the outside. “There may be a perspective of ‘they’re not winning,’” Hobson says, “but we can look at data like season ticket holders buying every year.”
Later in the interview Hobson applies the same thinking to hiring. If someone applies to work at Ariel Investments they can’t be seen as “job hoppers.” Those people won’t stay, Hobson tells Borowitz.
Sometimes it’s better to look at the history of something rather than think about the future. Point #4 of my Charlie Munger post gave examples. The past is often helpful because the future is very hard (maybe impossible) to predict.
Bill Simmons (former writer) – is a solid thinker and noted that the past isn’t all we want to look at. You may not want a great pro athlete in the last year of his career over a much younger one, Simmons articulated in his trade value columns, and those were well before Kobe Bryant’s retirement tour.
6- The default is ‘no.’
Hobson says that “we like less is more,” and describes a colleague’s process this way, “she assumes she doesn’t want to own anything. Everything is a rejection.”
If no is your default then the burden of proof is on ‘yes.’
Michael Lombardi explained they evaluate football players the same way. “Scouting’s not about finding players,” Lombardi says, “Scouting is about eliminating players.”
Even though this switch is small, one tiny hurdle matters. Cliff Asness, Jason Zweig, Tadas Viskanta and Ken Fisher, all say that overtrading is a sure way to diminish returns. If you want to trade, make ‘no’ your default choice.
‘No’ doesn’t need to be limited to financial choices. We can apply this idea to our own lives. Dessert? ‘No.’ Watch TV? ‘No.’ Yell at the kids? ‘No.’
For whatever behavior you don’t want, try to make no your default response.
7- Skin in the game.
“We are looking for leaders who are aligned with the shareholder. If we see CEO’s that don’t own any stock that’s just not good. If we see CEO’s that pay themselves too much, that’s not good.” – Mellody Hobson
Without skin the game you’re playing with Monopoly money. Philip Tetlock demonstrated this in his book Superforecasting. Chris Dixon said that the a16z interests are in line with the entrepreneurs. Seth Godin compares it to being thirsty or not. If you aren’t motivated to do it, you won’t. Tim Ferriss said that once he started playing poker with his own money the dynamics changed.
Thanks for reading, I’m @mikedariano on Twitter.
* After multiple listens, I still wasn’t sure what exactly Ariel Investments bought when they bought MSG. Sorry for the lack of clarification.