Jack Schwager was on the Masters in Business podcast with Barry Ritholtz to talk about traders, trading, and the big ideas. The interview covered a lot of ground but we’ll only look at 3 quotes from the episode.
The podcast version of this post is much better. It has interview clips from Daniel Kahneman and Warren Buffett along with sound effects from The Fast and the Furious and Wile E Coyote.
1/ Plan B in movies and books. “Before you take a village, a house, a hill, you know have to about getting in, getting out and what’s our exit…If our exit is blocked what’s our plan B and what’s our plan C. If you want to get out alive, you have to know what your exit strategy is and what the alternatives are if something mucks up the plan.” Barry Ritholtz
When Ritholtz began as a trader, the head of his desk, a marine combat instructor gave him that advice. Plan B is a good option when you can’t predict what’s going to happen. In finance you can buy options, the right to buy something at one price when it might change later. At Disney it’s the ‘park hopper’ tickets that gives you the option to pay to visit more than one park in a day.
Plan Bs fits nicely with the military maxim that two is one and one is none.
But Plans B can be a dangerous temptress. It can be a port in storm, but a place you don’t want to be. Marc Maron said, “If you have a plan-b, you’re just a hobbyist.” Fellow comedian Jordan Peele said, he moved to Chicago and “There’s not going to be a fallback.”
What is it? Are backup plans good options OR are they excuses?
Here we can refer to the thinkings of Daniel Kahneman as to when or if we need a backup plan. Kahneman said that “when things get really big and you’re really not sure, slow down.”
Kahneman’s research suggests that we operate in two systems, like gears on a car. System 1 is our automatic and reactive system. It’s fast and lets us catch falling things, cook a familiar dinner, or drive. System 2 is our more effortful style of thinking.
System 1 is kids playing Pokemon go. System 2 is adults playing it.
Kahneman’s research is so powerful because he noted that we tend to run in system 1 in many cases when we should run in system 2. Having a Plan B is a way to use system 2 before you have to make the choice. If you can have a backup plan before you need one, then you’ll be more likely to use it.
When things move fast and are unfamiliar we should slow down in our decision-making. If things move slow and are familiar we can make faster choices. That same framework can help us device when to make a plan B.
If we are in a fast-moving, unfamiliar situation, with large possible losses, get a Plan B.
That idea, from FF6, isn’t the best. By now, fancy chase scenes are system 1 to those characters. After about four movies you probably can with your gut. Plus, backup plans are terrible for movies, but good for real life.
Much of life is complex. You don’t know all the variables. The footing shifts. The conditions change. Unless you live and breathe something, for example Kahneman found that firefighters have very intuitive system 1 type reactions for being in dangerous buildings, you’re probably better off creating backup plans. What the marine instructor told Ritholtz. It also works for investing. You need a plan to get out, and many people don’t have one for you, especially those that talk on TV.
It’s why Tadas Viskanta said his blog is “forecast free.” If you’re going to get someone in, you also need to get them out.
Plan Bs lets you pre-program system 2 decisions into complex situations.
2/ Bull Markets and Buffett’s Ducks. “If you’ve done well in a bull market all you can assume is you’ve been long during a bull market.”
Schwager added that bull markets can go on for years.
It’s hard to separate luck from skill, especially in a changing landscape. Michael Mauboussin suggested to use inversion to figure it out.
The amount you can fail on purpose, Mauboussin said, corresponds to the amount of skill involved in a game.
As a parent I can see the role of skill in every game, race, or contest with kids. When you let a kid win that game has skill. When you try to lose on purpose but can’t, that’s luck.
My favorite example was when a 12-year-old won the 2015 NCAA basketball pool at ESPN. He was lucky. With thirty grand in prizes we can assume that there were “skilled” contestants, but here we can apply Mauboussin’s question — can I lose on purpose?
Kind of. If you always pick the higher seed you will lose. But there is a decent chunk of luck too. I’ve been in a few March Madness pools won by people who choose their winners based on colors or geographic locations. NCAA basketball pools are a more even mix of skill and luck.
Skill and luck operate like actors on a stage where the scenery is the conditions. It’s a rising tide. A bull market. The 90’s in Silicon Valley. No matter your skill level during these conditions, everyone was a winner.
It’s like having a tailwind. You don’t know how much is your skillful navigation and how much the conditions are helping you.
When asked to give investing advice, Auren Hoffman said, “none of your listeners should take advice from me on investing…I’ve been a very active investor in the last eight years, and if you were a very active investor, in the valley, 100% of them did really well.”
Warren Buffett compared this to a duck on a pond. He wrote to early investors that their duck (Buffett) should rise faster than the pond, which was the market. If they couldn’t – in Buffett’s words – flap their wings some, then the investors should take their money elsewhere.
The rising tide shouldn’t be avoided. It can be a great catalyst for something. Daymond John said that as he was staring FUBU he noticed that there was something else bubbling up. It was hip hop culture. That rising tide could lift him up as he figured things out. John’s appearance on the TV show Shark Tank suggest that he, in Buffett’s words, flapped his wings along with the rising tide.
How do we figure out the roll of skill and luck on a rising, or falling tide? Time helps as a filter. Schwager said, “there’s always luck involved, but the longer you go the less luck will win out.” Nassim Taleb said we can compare it to other moments in history. If theory A works now, would it have worked five years ago?
A current example might be truck sales. The top three selling cars in America are all trucks. If you are a successful truck salesman, is it skill, luck, or a rising tide?
My guess is a rising tide. Low gas prices and cheap financing mean that people don’t need to be sold when they enter the lot. If I were a truck salesman this would be something to keep in mind. It’s not my personal skill selling trucks, rather the rising tide of cheap gas and stable financing.
This idea of rising tides leads us to our final point. If we can seize a rising tide, like Daymond John, our truck salesman, or Auren Hoffman we can hit a home-run.
3/ Wait for a fat pitch. “One trait important for good trading is patience…patience to wait for a fat pitch.”
Schwager isn’t the only one to use that baseball analogy. Warren Buffett does too.
“Ted Williams described in his book, The Science of Hitting, that the most important thing for a hitter is to wait for the right pitch. That’s exactly the philosophy I have for investing.”
The right pitch is what Louis C.K. did when he made the show Horace and Pete. A show that’s an investment that Buffett would probably love.
Louis had the idea for Horace and Pete for a while. He had kicked around the format in his head after seeing the stage play set for television. Louis wrapped up a season of his FX show Louie and started to write. He wrote two episodes and then reached out to Steve Buscemi. Here’s what he told Charlie Rose.
“If I come up this idea a year before it wouldn’t have existed. But he had just come off this big show and I said, what are you doing. And he said “nothing, I’m looking for stuff to do.” And I said do you want to do a series with me. And he said “yes, sure.” And I said we’ll play brothers. And he goes “yeah, okay.”
That moment in Louis’s career was a right pitch moment.
Louis couldn’t have done the show if he were committed to a movie and had to do it. As it turned out, Louis was but was able to get out of it because he had enough career capital to shuffle the deck because a better idea – the idea for Horace and Pete – had come along.
It’s going to work out for Louis. The show was nominated for 2 Emmy awards and Louis has plans to sell it to a streaming service or network down the line. Louis did the 3 things Schwager. suggested
- Louis had a plan B. If things didn’t work out for the show, he could make back his money by going on tour.
- Louis focused on his skills; writing, acting, directing, and editing a show — rather than ride a zeitgeist and hope for luck. Plus like Daymond John, it’s a rising tide for streaming entertainment creators.
- Louis also got the timing right. He had a point in his career with a lot of career capital, the right skills, and eagerness from people like Netflix. An example of missing the boat for timing was the Facebook phone.
With the Amazon subsided Blu R1 HD smart phone getting great reviews – and who can argue with a $50 smartphone that you pop a new sim card into. This works for Amazon because they can advertiser on it. The home screen that used to hold kid pictures now holds Kibbles ones. Amazon is a good advertiser with lots of data, but Facebook, oh man, Facebook.
Facebook exists for advertisers. This isn’t awful. Better ads should be a win-win and if Facebook knows I like books by Daniel Kahneman and Michael Lewis (which I do) then seeing an ad for the Michael Lewis book about Daniel Kahneman is a win-win. I find something I love. Facebook sells a good advertisement.
Imagine that sort of win-win on a phone. Imagine Facebook, the place you post about movies, relationships, politics, and so on now has all your metadata.
Where you are and when is Fort Knox and advertisers are still trying to get in like Wile E Coyote.
Facebook tried a phone,but it didn’t work. Chamath Palihapitiya told Kara Swisher that the phone didn’t work because he made it difficult for Mark Zuckerberg to say yes. “It still would have cost Facebook a billion dollars to do,” Palihapitiya explained.
Well that seems like a lot of money. But Louis made a similar sized bet. He took out a loan for millions of dollars, and he was just one person. The problem for Facebook was the timing. They hadn’t gone public yet.
Facebook didn’t wait for a fat pitch. They could have waited to launch the phone a year later. At a time when people were more open to sharing their data.
Each day people mind being tracked less and less. My EZ pass knows where and when I drive on a toll road. My Fitbit tracks my steps and sleep patterns. Cookies on my computer know what websites I’ve been to and Google serves up relevant ads. We check-in on Facebook and send geofilters on Snapchat.
Why didn’t Zuckerberg see this trend? Or, what made the difference between Mark Zuckerberg at Facebook and Louis CK with Horace and Pete?
My guess is that Louis has better pattern recognition skills than Zuckerberg, and can better wait for a fat pitch. Louis’s succeeded and failed as a stand up. He’s had successful shows and cancelled ones. He’s been married and not married. Louis understands when to act and when to wait.
Zuckerberg didn’t have the same pattern recognition. He saw the value in mobile, but jumped in too early. He knows this, it’s why reading is such a priority for him. In 2015 he shared his book club with people on Facebook and wrote, “I’ve found reading books very intellectually fulfilling. Books allow you to fully explore a topic and immerse yourself in a deeper way than most media today.”
Books are also a shortcut to pattern recognition. Learning helps you figure out when to wait and when to act.
Schwager pointed this out too, “I’m only profitable as a trader because I’ve just spoken to so many people that have so much experience.”
Tren Griffin wrote about pattern recognition:
“As a manager you can’t review everything. In my experience the best managers know when they smell something rotten and drill down when they sense it. And when they sense something great they drill down so they can optimally fertilize it.”
Pattern recognition works because it optimizes time, money, and opportunity cost. If you know that restaurants with dirty windows probably have dirty kitchens you won’t eat that them. If you know human beings can be irrational, you won’t built models that make them rational. If you know you feel better after a long walk, you’ll take more long walks to feel better.
Our time to build patterns is limited and so reading is a good shortcut. Otto von Bismarck wrote “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.”
Thanks for reading, I’m @mikedariano on Twitter.
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