Supported by Greenhaven Road Capital, finding value off the beaten path.
Meb Faber joined Patrick O’Shaughnessy to talk about podcasting, having a jobby, and his forever fund. Here are the notes.
1/ Design your behavior.
“So many people talk about the illiquidity in angel investing as a negative but in reality, I think it’s a massive positive. We all know the behavioral challenges of running a mark-to-market portfolio. I saw a stat the other day that the average Robin Hood account user checks their balance ten times a day. All that does is create horrific behavior. But if you buy an investment that you then can’t sell even if you wanted to … and you’re more thoughtful before you enter than investment.”
Wes Gray told Patrick that he tries to plan in System 1 so that he doesn’t act mistakenly in System 2. That’s the advantage of angel investing. Dan Ariely said:
“I believe in design. One of the major lessons from social science is that we make decisions based on the environment that we are in. This means that given a particular environment, we have less free will than we would hope, but it also means that if we take design seriously, we can design the world in a way that is more compatible with our skills, and more likely to lead to better decisions.”
2/ Reframe for effect.
“I think the only way to learn this world (angel investing) is to do it and get some skin in the game, maybe even viewing it as an education expense given the high likelihood that these things won’t pan out.” – O’Shaughnessy
Our idea of the XMBA is that you can get an education from eXperiences. Charles Lindberg learned to fly by delivering mail in crappy planes. Ty Warner learned to sell by hitting the road. Before Ken Grossman brewed beer he ran a bike shop. Elizabeth Gilbert rolled around in the world, wrote, and repeated. Ben Carlson said, “For people trying to understand how the market works, for how business works, you can do a lot worse than dabbling in stock picking when you’re first starting out.”
3/ Default No.
“One of the reasons I’m a quant is at my core I’m an optimist and maybe even a little bit gullible. One of you guests said that you have to start at No and move to Yes.”
We all start with a default choice, wrote Richard Thaler, might as well make it a good one. A Default No keeps us out of things. Pat Dorsey told Patrick to give yourself a chance to say no to opportunities. Default No works when you need to find only the best ideas. “The path to superior results,” wrote Seymour Schulich, “is to accept only the best ideas.”
However, this No will overfit. Marc Andreessen said, “all of the mistakes I care about are mistakes of omission.” Bill Gurley made this mistake with Google. He knew it was a great product and that the founders were smart. What he failed to do was ask, ‘what can go right.’ Jason Calacanis said this about Airbnb. Which brings us to…
4/ Soft spot or sweet spot?
“The hardest part for me is launching something people actually want, just because I want it doesn’t mean it’s awesome…I can’t imagine a less popular fund than going on CNBC and saying ‘We’re going to avoid dividend stocks.’ My god, people will just run for the hills.”
Meb doesn’t care for dividend investing. He’s not alone, but he’s in the minority. Dividends are bad is his soft spot but to find a market he needs a sweet spot. Knowing the difference is powerful.
Daryl Morey knows the difference, saying he can’t just draft tough big men. Scott Fearon knows the difference too, don’t open a gumbo restaurant in Marin County. Do your best to know yourself.
5/ Be different.
“It has to be something that isn’t out there already.”
There’s a whole post about the advantages in Being Different. Meb doesn’t want to launch a low-cost fund to compete with Vanguard or another me too fund.
However, some things are better off not designed. Emergence is the subject of Matt Ridley’s book The Evolution of Everything and it’s shifted my thinking quite a bit.
What’s a jobby? It’s something not quite a job, not quite a hobby. You can tap dance to work but make sure it’s work.