Thesis: If you keep your overhead low, you get more opportunities to win big.
Low overhead is a chance for optionality. We saw this before, but if you missed it optionality is:
- When William Teschhumeh Sherman marched on Savannah he never committed to any one route, keeping his enemy off balance and his options open.
- When Nassim Taleb bought contracts to buy or not buy a stock in the future he had options for what do do (the things he bought literally are called options).
- Daymond John doesn’t focus his Shark Tank deals on any industry, instead keeping his options open.
“If you ‘have optionality,’ you don’t have much need for what is commonly called intelligence, knowledge, insight, skills, and these complicated things that take place in our brain cells.” – Nassim Taleb
It’s like a slot machine that only takes time, focus, and energy:
One way to get optionality is to keep your overhead low.
“We don’t have an isolated group [managers] surrounded by servants. Berkshire’s headquarters is a tiny little suite.” – Charlie Munger
- Failed Startups, from https://medium.com/survivorship-bias project.
- Sophia Amoruso, founder of Nasty Gal clothing, author of #Girlboss.
Failed startups. In my research on failed startups there are four financial mistake that startups make; buying inventory — hiring too quickly — paying for marketing — susceptibility to the sunk cost bias. Each of these increases overhead and decreases optionality.
One founder advised readers, “continue bootstrapping even after getting funding.”
Another wrote that things got bad when they, “stopped working on the app and devoted all of our resources to repacking our backend technology.”
Spending more on X (inventory, employees, hosting, etc) seems like it solves a problem. It doesn’t. It only bends the map.
Sophia Amoruso kept her overhead low by slowly graduating to new locations. First it was a pool house, then something larger, but always in small steps.
Eventually it was time for a move into a warehouse and she decided her team could handle the move as she took a vacation (her first in years).
Everything went smoothly, except when Amoruso got back she saw that someone ordered Herman Miller Aeron chairs. She writes: “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.”
They couldn’t return the chairs, so they sold them all on Craigslist.
Comedians. In Judd Apatow’s book Sick in the Head there are many comedians who tell him that they succeeded – in part – because they kept their overhead low.
Jay Leno worked on cars during the week and that covered his low cost of living (“I didn’t have a lifestyle to maintain.”). It also let him work on the weekends and do gigs that barely paid for his transportation and food.
When Apatow interviewed Jerry Seinfeld it led to this exchange:
Judd: The other thing that I remember about our interview is that your apartment had nothing in it. Like, it was not decorated.
Jerry: Oh, I was a minimalist from the beginning. I think that’s why I’ve done well as a comedian.
Judd: No distractions.
Jerry: If you always want less, in words
Sarah Silverman told Apatow, “I’ve always kept my overhead low so I could do whatever I want.”
Leno, Seinfeld, and Silverman all knew that keeping their overhead low led to more options in the future.
Getting it right early is easier than fixing it later.
We get used to things really quickly (hedonic adaptation) and find it hard to change from our established path (status quo bias).
Because it’s hard to scale back, make scaling up a slower process. Whether that’s in terms of the place you live, your business, or vacation plans. Move slowly, and think of financial costs like quicksand – you might get stuck as a great opportunity passes you by. People in quicksand don’t have options.