Author: MIKE

Twitter gets mentioned here a lot, and it needed its own post. Like any tool, knowing how to use it well makes the work we’re doing that much easier.

So far we’ve seen 4 ways to use Twitter well.

(This post will be updated as needed)

Connect with colleagues.

The first way to use Twitter well is to be connect and collaborated with colleagues. Austin Kleon advocates for creating your own “scenius.” John August uses Twitter to announce writing sprints. Nicholas Megalis talked about the value of connecting with other people.

Create a filter.

Scott Adams notes how reticular activation helps him.That is, you can use Twitter to filter inspiration. See if Gary Vaynerchuk does it for you.

Chris Dixon uses Twitter to create a his own news source. “Essentially I have two thousand of the smartest people in the world finding information for me and telling me what to read,” Dixon says.

Bust your biases.

You can use Twitter to get balanced conclusions. Jason Zweig, Tadas Viskanta, and Tren Griffin all suggested to generate conclusions from multiple perspectives. Twitter can be one where we gather those perspectives, but also test the ones we have. We can follow people we disagree with just to see how well we know our own arguments.

Connect with fans.

Amanda Palmer connects with her fans constantly. Casey Neistat uses it to get questions for his Q/A. Comedians like Judah Friedlander announce shows.

–

Thanks for reading, I (of course), am on Twitter @mikedariano.

A lot of successful people use signals to nudge them toward one action, thought, or idea compared to another. This idea has come up so often that it needed it’s own post.

---

 

Why do we need signals?

We need signals because we can only process so much information. Our attention is finite, our short-term memory limited (4-7 spots), and our resources constrainted.

In Thinking Fast and Slow, Daniel Kahneman offered the first explanation I really understood.

“You make many small decisions as you drive your car, absorb some information as you read the newspaper, and conduct routine exchanges of pleasantries with as spouse or a colleague, all with little effort and no strain. Just like an easy stroll.”

Kahneman, like good authors, is setting us up. (A quick digression, both Penn Jillette and B.J. Novak said that an unnoticed setup is the key part to their craft)

Back to Kahneman, we understand this. A lot of what we do we don’t have to pay attention to, mostly because we are already filtering it out. It’s why Scott Adams leverages reticular activation.)

But when we get to hard problems things change. Back to Kahneman:

“It is normally easy and actually quite pleasant to walk and think at the same time, but at the extremes these activities appear to compete for the limited resources of System 2. You can confirm this claim by a simple experiment. While walking comfortably with a friend, ask him to compute 23 x 78 in his head and to do so immediately. He will almost certainly stop in his tracks.”

Aha! We have something.

Not only to we have limited bandwidth, but even a task as automatic as walking gets interrupted when we need to draw more. Fascinating.

Okay, let’s get past the academic cuteness.

Why does this matter to you and me?

The most successful people succeed because they quickly get rid of what’s not important. They focus their bandwidth on the most important task at hand.

Casey Neistat asks, “is this good for me and my technology company (Beme), and if the answer is no it gets a pass.” Neistat’s signal is the question, “does this help Beme?”

Richard Feynman got so tired of choosing a dessert, that he resolved to always order chocolate ice cream. That was his dessert filter.

Barry Ritholtz said that he looks at the prices of classic cars as a signal for bull and bear markets, or if people say “ugh” to his trading ideas.

Ramit Sethi and Taylor Pearson both construct interview questions that need answered in an exact way.

Stephen Dubner called this, “teaching your garden to weed itself,” and wrote an entire book chapter about it.

Some banks figured out how to filter out dangerous marijuana growers.

The most famous of the signals might come from Van Halen.

The story goes, that when Van Halen was touring they had the latest and greatest light and sound rigs. There was just one problem. Each venue had a different person set them up. The guy who set things up in New York wasn’t the same guy that did it in Charlotte. So, according to David Lee Roth, Van Halen introduced a wrinkle to their rider.

They said that among the other rock star accoutrements, they wanted a bowl of M&M candy with the brown ones removed. Some people looked at this as divas being divas. Au contraire mon ami. Roth said they did this to see how closely a promoter read the rider. If someone removed the brown M&M candy, they probably set up the equipment correctly.

Okay, I’m a believer. How do I do this?

First, shift your self perspective.  Scott Adams calls this the “moist robot theory.”

Some of you will liken the idea of reprogramming your brain to self-hypnosis, and that might feel creepy or unlikely to work. A better approach, as I mentioned, is to think of your body as a moist, programmable robot whose outputs depend on its inputs, not magic. Imagine you’re an engineer who is trying to find the user interface for your moist robot body so you can make some useful adjustments. It’s as if you had one menu choice labeled “Make Sleepy” and another labeled “Energize.” You can choose “Make Sleepy” simply by eating simple carbs.

Ah, so I can think of signals as a very basic programming language to use on myself.

If dessert does not include fruit, then do not eat.

If spouse yells, then do not yell back.

If this takes time, money, resources, beyond X, then do not engage.

The best way to start is just to start and know that it won’t be perfect. Barry Ritholtz admits he missed some investment opportunities. Ramit Sethi says that he didn’t hire some great people.

It won’t be perfect. Good signals are a trade off:

Good results + more time > Perfect results + less time.

 

–

Thanks for reading, I’m @mikedariano on Twitter.

This post is available in podcast form. There’s a bit of scratchiness in the audio. FYI: Quarter zip fleeces are suboptimal podcasting clothes.

Ready?

Everything is a system.

A quick note on the formatting. I’ll use “quotations” for both actual quotes and to set out systems. When everything is a system we lose sight of the specialness of systems. Hopefully the quotes will set off the words, and my points.

Some systems like the “stock market system” change a lot.

Some systems like the “Lego brick system” change very little.

But we shouldn’t be fooled by the simplicity of those bricks. As parents know, they can be quite powerful on the floor of a dark room.

Those bricks are a system too – even though their simplicity suggests otherwise. The plastic is degrading (over 500 years) and this alone is a valuable lesson. Just because we can’t see a system act, doesn’t mean a system isn’t acting.

For example, not until 2009 did we realize that Jupiter and Saturn nudge the earth like a delicate surgeon might nudge a top. That ice ages come and go based on the alignment of Jupiter and Saturn, two events you and I will never see, is an example of systems acting but not easily observed.

Our simple “Lego brick system” also interacts with the “home office system.” On my desk at 1atm the “Lego brick system” is stable. Add pressure and the “Lego brick system” changes. Ditto for heat or gravity.

Our “Lego brick system” has gained complexity; plastics, gravity, and pressure in a matter of paragraphs. Now how complex does the stock market get? Global politics? Taylor Swift’s song writing?

Now hold on, this may get bumpy. Everything is a system of systems.

Systems on top of systems on top of systems….

Systems stack. We’ll use the Power of Tens video as a metaphor.

While the video is about the size of the universe, it points out something we can use – there’s never a final thing. There’s always something smaller or bigger.

The hand is small, but the hairs are smaller. Part of hair is the cuticle, part of that is the cell, part of the cell is nucleus, electrons, and so ons. In the same way we can’t observe the degradation of Legos with our eyes, or ice ages based on Jupiter’s position, we can’t see what’s smaller than quarks, which isn’t the destination, but a stop on the discovery train.

Okay, is there any good news to this mess?

The spirituality of systems.

The good news is that we’re quite good at listening to systems, even really complicated ones. But how we do that will take a bit of faith.

This idea coalesced when I read Deep Survival by Laurence Gonzales. Holy cow is it a good book.

Gonzales looks at survival from two angles. One is how to survive when you’re in a dangerous situation. The other – and relevant to us – is about how to avoid those situations.  It’s about listening to systems. 

Gonzales explains one of his moments of enlightenment when he landed in Hawaii, headed out to surf, and as he passed a lifeguard, asked how the surf was.

“‘Well,’ he (the guard) said, as if considering it for the first time, looking out to sea, rubbing his goatee. He was a redhead, thin and freckled, his face lined with experience. He came down from the tower and studied the sea. Before answering he seemed to think of something and asked my name. I told him. He grabbed my hand in a surfer’s handshake and said, ‘Mike Crowder.’ I waited. He turned back to the seas and continued to stare at it with a space-out look, and I started to wonder if he was stoned. Hawaiian weed is supposed to be bitchin’.

‘Okay,’ he said at last, as if he’d decided something. It was only then that I realized he’d been reading the waves, the lineup, the break.”

Crowder, like other surfers learned to listen to the “surf system.” He told Gonzales that the sea was dangerous.  

I dismissed this idea. It was too spiritual. But then I realized I did the same thing. I can sense the “weather system.” The darker the cloud the bigger the storm. It smells like rain. The wind is out of the northwest.

I know each of these things instinctively. Lots of people do.

Football players.

When Tony Dungy was coaching the Tampa Bay Buccaneers, he took them from being the worst team in the league to winning the Super Bowl (a year after he left). He did it by creating a new way to listen to and act with in the “football game system. 

Charles Duhigg writes about the change in The Power of Habit:

“Part of the problem was Dungy’s coaching philosophy. In his job interviews, he would patiently explain his belief that the key to winning was changing players habits. He wanted to get players to stop making so many decisions during a game, he said. He wanted them to react automatically, habitually. If he could instill the right habits, his team would win. Period.”

Dungy wanted to switch the actions within the system.

Rather than; if the systems shows A, then DECIDE. 

Instead; if the system shows A, then REACT.

Duhigg explains that Dungy understood how the players listened to the “football game system” (like you feel spring showers or lifeguards read the surf).

Duhigg wrote: “Players spent their lives building the habits that got them to the NFL. No athlete is going to abandon those patterns (–how they listen to the system–) simply because some new coach says to. When asked Dungy said, rather than creating new habits, he was going to change players’ old ones.”

Music executives.

Doug Morris, who at one time or another was in charge of every major record label knew how to listen to the “pop music system.” Morris had tried to hear hits, write hits, and see hits. Those were different – and unsuccessful ways – of interacting with the “pop music system.” Morris only succeeded in the system when he found hits. 

It’s 1964 and Morris has had limited luck with signing artists. He goes to the accounting room one day to see what’s selling. There he saw that an anomaly. A band called “Music Explosion.”

Stephen Witt explains in How Music Got Free, emphasis mine.

“One of the acts on Laurie’s roster in those days was a generic garage rock band from Mansfield, Ohio, called the Music Explosion. Side A of their lead seven-inch single was a schlocky two-minute cover of a 1964 British Invasion tune titled “Little Bit O’ Soul.” Morris, however, would forever remember this platter by a different name: Laurie 3380, the catalog number the order-taker used to track the sales of the song. Those sales were generally unimpressive, with one exception: a record store in the small town of Cumberland, Maryland, which had, during the most recent inventory cycle, inexplicably ordered two crates of discs. Morris was struck by this anomaly.

Anomalies are signals from the system.

He (Morris) was soon talking long-distance with the Cumberland store’s owner, who told Morris that through repeated heavy airplay, a local radio DJ had turned this unexceptional song into a regional hit. In fact, the owner was already planning to place another order for the single, as the two crates of Laurie 3380 he’d bought were running out.

 

Morris found that regional sales were the system’s signal.

Soldiers.

From All Quiet on the Western Front: “At the sound of the first droning of the shells we rush back, in one part of our being, a thousand years. By the animal instinct that is awakened in us we are led and protected. It is not conscious; it is far quicker, much more sure, less fallible, than consciousness. . . . It is this other, this second sight in us, that has thrown us to the ground and saved us, without our knowing how. . . .”

Soldiers understand the “war system.” Sometimes subconsciously.

Financial analysts.

Barry Ritholtz has said that he listens to the system of “stock market” by what sort of prices are sells for.

NPR had a podcast about tracking the Sotheby’s market to see how much money was moving. 

1920’s America had an essence of “too good to be true,” an odor that systems aren’t right. In Rainbow’s End, Maury Klein quotes one mother as saying: “we’d rather do without clothes than give up the car.”

Each of these were hushes, nudges, and winks from the system.

 

So what?

Okay, now harness your chakra and say twenty Hail Marys and you too can listen to systems.

Wait, that’s not right. There are some things we can do.

1. Be in and aware. Systems speak in small ways and you need to listen a lot to hear them. When soldiers are in battle there are years of self-preservation to tap into and react to the “war system.” Athletes study tape to look for “game system” clues. Whatever your system, know that it’s talking, and that you can listen.
2. Be humble. Appreciate that the systems are infinite and there’s no way to understand them entirely. If music success was only about finding regional hits, then that’s all that would happen. That’s not the case.
3. Be aware of chain reactions within systems. This is where the danger arises. A leads to B and suddenly you’re at M wondering how it all happened.

In 1914 countries began to lean into alliances that culminated in World War I.

In 1929 people lent to country banks who lent to city banks who lent to NYC banks who lent to Wall Street. When the stock market collapsed the dominos fell. 

In 1998 LTCM hedge fund needed liquidity but no one would lend to them because other banks had the same investments to invest in. 

In 1999 Al Pacino gave the Inches speech in Any Given Sunday. A more poetic, and historic, For Want of a Nail explains it as well.

In 2002 a group of four climbers hooked together to descent Mt. Hood. The most experienced of the group was who slipped and took them down. They hooked 2 more on the way. And then 3 others before heading down a crevasse. 3 of them died.

–

Thanks for reading, I’m @mikedariano on Twitter.

Cliff Asness (@Cimmerian999) joined Tyler Cowen (@TylerCowen) to talk about investing, comics, and asking the right question.

Before we start, I wasn’t going to write up this interview. The transcript and video are both online, and both great. The conversation is a little “wonky” at times, and not what I typically note.

But, this interview has stuck with me. It’s been on my phone and on my mind. I gave it another listen this weekend and I realized why.

Asness knows big things. As Cowen says in the interview:

“I think of you as doing a kind of metaphysics of human nature. On one side, there’s behavioral economics. They put people in the lab, one-off situations, untrained people. But here it’s repeated data, it’s over long periods of time, it’s out of sample. There’s real money on the line, and this still seems to work.”

Asness has theories, applies them and reports the results. You and I get to see what worked. 

Ready?

Certain strategies work best at certain levels.

Asness is a momentum trader (in general terms). This means he buys things that did well in the last 6-12 months and sells things that didn’t. It might earn 1-3% over an indexed benchmark Asness says. What matters isn’t the strategy though, what matters is that it’s aligned with your actions.

When strategy isn’t aligned with actions we get problems. Asness sees when “momentum investors are on a value time horizon.” That is, the strategy of value is mixed with the action of momentum. It’s like trying to play basketball with the mindset of football.

Why exactly does the momentum strategy work?

Asness isn’t sure, it’s probably multiple things. As Sanjay Bakshi noted, “part of the reason thinking” is a way to frame the question so you get more than one answer. This is good because it sidesteps our existing biases to see what really stands up.

Asness identifies three reasons why momentum – or any empirical strategy – works.

1 – Complete accident. This needs to be an option. Asness says:

“You never reduce that probability to zero. You just make it lower. As it works again, you go ‘chance you’re just lucky, smaller.’”

Asness says this happened with his dissertation. He datamined (bought enough lottery tickets) to find something that correlated and, presto, he had a conclusion. It’s an example of weak correlations, and they’re everywhere.

In How Music Got Free, Stephen Witt writes:

“the Napster boom coincided with the two best years the recording industry ever saw, and even (Doug) Morris (CEO of MCA music) would later concede that, for a while, Napster’s pirate trade in mp3s fueled the CD boom.”

Correlation does not mean causation goes the warning in introductory statistics class and Asness adds a layer to it. Be careful that you don’t find something just because you looked everywhere. Even a blind pig finds a nut.

Of course, there’s an xkcd comic:

2 – Behavioral reasons. Asness says that momentum trading tends to work because of one of two behavioral explanations, both of which may be part of the reason. Underreaction and overreaction. Note, Asness echoes Ken Fisher’s advice to include what other people will do in our strategy.

Here’s how we underreact.

New information is outside information, and we tend to let it slip past.

Daniel Kahneman writes that we let it go because we are biased to prefer what we already know. We underreact to new information because it doesn’t fit in our world view. “That may be true for others, but not for us,” goes the hearty attitude.

But it gets us all the time. It gets us even when we see it coming.

Jason Zweig tells the story of working with Kahneman and the two falling for the planning fallacy. That is, the man who most clearly enunciated “it may take others a long time to do this but not us!” succumbed to that very idea.

I would too. So would you. It’s hard to get the right level of reaction. Michael Mauboussin talks about the difficulties of updating our beliefs. Tren Griffin quotes Charlie Munger on it. Maria Popova notes that changing our mind (updating our beliefs, reacting correctly) is an “uncomfortable luxury.”

That it’s hard to do explains why Asness succeeds with a momentum strategy. He’s just a bit better in a world where no one is that great.

The other behavioral reason is that we overreact to new information. Cowen thinks this matters a bit more:

“You receive a signal about the world. It’s to some extent a private signal and you over-interpret that signal and you think it’s a signal about the whole world so you overreact.”

This happened to me at Pizza Hut. It was a bad experience and – while waiting for a pizza that might never come – I resolved to never eat at Pizza Hut again. Yeah right.

It was an overreaction in that I took a signal (service at the local Pizza Hut on a certain night) and over-interpreted that signal (all Pizza Huts on every night). I told you, catching our biases is a tough task.

Barry Ritholtz agrees with Cowen and it’s why he says, “don’t just do something, sit there.” We tend to associate action with solution when that’s not always the case.

Sometimes these overreactions are for all the wrong reasons. Richard Feynman writes about this idea, calling it “cargo cult science.”

Feynman says:

“In the South Seas there is a cargo cult of people. During the war they saw airplanes land with lots of good materials, and they want the same thing to happen now. So they’ve arranged to make things like runways, to put fires along the sides of the runways…They’re doing everything right. The form is perfect. It looks exactly the way it looked before. But it doesn’t work. No airplanes land. So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential, because the planes don’t land.”

We can act like the islanders. We see A lead to B and believe that A always leads to B. We’ve overreacted to a correlation. A few sentences later Feynman makes the same point as Asness:

“For example, if you’re doing an experiment, you should report everything that you think might make it invalid-not only what you think is right about it: other causes that could possibly explain your results; and things you thought of that you’ve eliminated by some other experiment, and how they worked – to make sure the other fellow can tell they’ve been eliminated. Details that could throw doubt on your interpretations must be given, if you know them.”

Remember Asness’ datamined thesis? He says:

“I sat there in my dissertation in 1990. I found this empirical relationship with a big t‑stat but I really checked 63 things so the t‑stat is a bit of a lie, and it never works again.”

3 – Risk and fundamental reasons. As it relates to investing, there a risk premium where it’s believed that riskier securities pay more than less risky ones. Asness notes this may be more true for value strategies than momentum ones.

“Now, in the value world they have the same fight. Does cheap beat expensive because it’s riskier? I don’t think they’ve done a very good job of identifying the risk but I find it inherently more plausible that something priced to a long-term lower level might have a risk element to it than a much more short-term phenomenon like momentum.”

If you’re as smart as Asness, why aren’t you as rich as Asness?

Okay, so Asness sounds like a smart guy. He’s also a rich guy. He’s giving away his trading theory. Can anyone now do this?

Not really. If everyone were to do these things, Asness says, they would go away yesterday. But people don’t because the work is too much. Asness says his system is:

“Good enough to be really important if you can follow discipline, not so good enough that the world looks at it and goes, ‘this is easy.’”

He calls it a “sweet spot.” There’s enough of a barrier that it keeps a lot of people out. (And we’ll see how little those barriers need to be).

Penn Jillette said something similar. The only trick he really does is to work harder than the audience thinks he would.

Asness on bubbles.

When asked what he thinks might be a bubble, Asness says nothing really. Bubble, like “Donald Trump” or “10 Best Ways To…” are headlines we can add to Clickbait Dictionary. All sizzle, no steak.

“A bubble,” says Asness, “is where you say ‘this cannot last.’” Things could be bad, but that doesn’t mean they are a bubble.

Take stocks and bonds, Asness says. The P/E ratio is higher than it’s been in a long time, but that doesn’t mean it’s a bubble. It just means that things are expensive. What we don’t know is whether it’s a bubble or a new normal or record high.

Asness also gives us a sharp framework for popping the next bubble you hear about. Ask, is there “a reasonable scenario that could happen in the next 20 years.”

If you can imagine  how things could work out and find an example of when they’ve done so, you’ve popped the bubble.

The best investment advice.

It’s not often that we get to pick the brain of someone smart – and Asness does not disappoint. So what does someone with Ph.D. from Chicago who worked at Goldman Sachs and runs his own investment management firm say to do with your money?!?!

Don’t overtrade.

That’s it?

Even worse than simple advice, it’s simple advice to not act (“don’t just do something, sit there”). No hot tip? No system? No trading chart with lots of green and red?

Nope.

Asness probably has all those things, just not for you and me. Regular people succeed when they don’t shoot themselves in the foot.

Asness, like Jason Zweig and Tadas Viskanta and Ken Fisher, says that overtrading is a sure way to diminish returns.

The good news to this is that there’s an easy solution. In the terms used in this post, we can easily align our actions with our strategy. Taking a cue from Brian Wansink’s book,  Mindless Eating – it’s like giving candy to a baby.

If you don’t want to eat a piece of candy, give it to a kid. That doesn’t keep you from eating it. You could physically take it from them – or do as I do and sneak it away when they’re asleep. But Wansink has found that any small obstacle – in this case your morals – can keep us from taking actions. For food it’s all about perception.

At a movie with unlimited popcorn, people with big buckets ate 50% more. People at a buffet where the tables were cleared away after each course ate 28% more than people whose table wasn’t cleared. People who drank pre-lunch smoothies from a full glass ate 12% less than those who drank from half-filled ones. Even though both smoothies had the same ingredients and calories, one just has less air.

Each step created a perception that influenced how much a person ate. None of these examples were a diet, but the results add up. Investors give us the same advice.

Why Asness (and maybe his kid) is so smart.

This interview was good for me because a lot of what Asness said caused cognitive dissonance. I had to settle competing ideas.

At one point Cowen asks Asness about hedge fund strategies, and Asness explains arbitrage:

“There are so-called arbitrage strategies … a trade that has reliably worked over time where they go long and short, fairly similar things, they are clearly not riskless. But, something like a merger, A is buying B, if the deal closes, it’s going to go to here. A is going to fall, B is going to rise.”

Long Term Capital Management used (pioneered?) this strategy in the 1990’s. They found companies like Royal Dutch Shell which was listed on both the London Stock Exchange and the Amsterdam Stock Exchange. Effectively one company with one set of revenues listed in two places. From When Genius Failed

“The English firm had historically traded at an 8 percent or so discount to its Dutch cousin. The stocks were owned by distinct pools of investors, and the Dutch stock was typically more liquid. But there was no good reason for the price differential. With Europe becoming a single economic unit, Haghani reckoned that national differences would matter less and less, and the spread between Royal Dutch and Shell would contract.”

Okay, this make sense. Normally it works. Normally it’s no big deal. Normally – well, you know what’s coming. It’s a fine position as long as you aren’t forced to act. That is, you can service the arbitrage and only sell when the time is right. This was not what happened to LTCM. Their position was big, really big.

“‘It was ridiculously big,’ said an executive at a Wall Street bank. Goldman Sachs had the same trade on. They believed it was a good trade. But Long-Term’s trade was ten times the size of Goldman’s.”

Note: Asness wasn’t on the trade:

https://twitter.com/Cimmerian999/status/676826482577117186

One more from When Genius Failed:

So arbitrage is a devastating strategy. Both investments have to go to some middle ground or else you lose and you lose big.

Why is Asness interested in all this? He explains:

“I am dying to do this, I have not done it yet, I have talked about it for two years, I am about ready to try it. I want to ask one of my two older kids, they are a set of twins, they are 12 years old, “Does this sound like a good idea to you?” I’d have to hold their attention throughout this whole thing.

“There’s about a 98 percent chance they say, “No. That sounds like a terrible idea to me, you can lose a lot, you can make a little. Who wants to do that?” I’d be the proudest pop on Earth if either one of them kind of paused and said, “how often do both of those two things happen, Dad?” Because, that’s the proper question.”

The proper question!  This is a big idea! This is something I’ve learned and written about and still I missed it until Asness pointed it out (and that his 12-year-old might know the answer).

Don’t substitute an easier question for the one at hand.

I nearly did this twice asking Is Bill Simmons a Superforecaster?.  

Kevin O’Leary uses a version of this in the Shark Tank to his advantage. O’Leary will make an early offer that effectively anchors the negotiations. It switches the entrepreneurs from talking about their valuation to talking about his.

What traders and comedians have in common.

A question that never gets answered in the interview is “whose money is Asness (or any trader) taking?” It doesn’t get answered because it’s hard to figure out.
The best you can do, says Asness, is think through know both sides. You know why you do something, but why does someone else take the opposite. And if you don’t know, know this. If you look around the poker table and can’t find the fool, it’s you.

Comedians use this system all the time. Judd Apatow,  Phil Rosenthal, Judah Friedlander and B.J. Novak all say that the key to good jokes is deep understanding. When you understand why you told a joke and why the audience gets the joke, then you really understand.

–

Thanks for reading, I’m @mikedariano on Twitter.

If you want to catch up on the last 20 posts, a Kindle copy is here.

Part 1 is here.

A quick catch up if you don’t want to follow the link. B.J. Novak likes podcasts because “it’s like an extra hour of of reading.” He commented on the advantages and disadvantages of Harvard (and we added why this perspetive is valuable).

We addressed why it’s a good thing that you can’t be B.J. Novak, but that you can imitate him to get started.

After that it’s up to you to take small steps and build career capital.

Ready for part 2?

And to be great you need to get lucky.

Everyone featured on this site has some combination of skill, hard work, and luck. Novak says two lucky things happened for The Office.

First, it was moved to Thursday night. It’s not a big deal now, Novak says, but in 2005 it was. People didn’t want to watch a show about an office early in the week, Novak guesses, plus NBC Thursday night comedy was a thing. Like the Good Housekeeping seal of approval or a verified Twitter account, it signaled something. Frasier, Friends, and Seinfeld all had that spot.

Second, iTunes helped. Novak says that at the time a lot of The Office fans were young and downloaded episodes. This meant that The Office was a top show on iTunes. The Office got into a positive feedback system known as the Mathews Effect.

Malcolm Gladwell introduced this to me within the frame of Canadian Hockey players. You see, Gladwell writes, most of the best youth hockey players in Canada are born in January, February, or March. Why?

Well it’s because of the cutoff date. Kids born in January of one year are 11 months older than kids born in December of that same year- but they’re in the same league. The older kids are bigger, stronger, and more dexterous. The older kids are “better.” The better kids get more experience and coaching. Then they really get better – and on the cycle goes.

This holds for other areas too. In the early years of Netflix, Crash was the most popular movie on the site. Not because it was great. Rather, it came out when Netflix was gaining popularity.

But don’t get too big for your britches.

Novak says that when he worked on The Office they still needed to test jokes. “You never know how something’s going to play until you test it,” Novak says, “there’s no one smarter than the audience.”

One character in Stephen Witt’s How Music Got Free is Doug Morris. Morris presided over all three major record labels at one time or another, and he did so because he could find hits. Not with his ears, with his eyes.

Morris looked at the regional sales data. If a band was selling a lot of records regionally, then they had the right stuff to sell a lot of records nationally. Limp Bizkit and Hootie and the Blowfish are both products of Morris’s system. Witt writes, “years of scouting the order-taker had taught Morris there was actually no such thing as a regional hit. There was only a global hit, waiting to be marketed.”

How B.J. Novak does creative work.

Novak says that his creative work falls into two phases; Idea Phase and Execution Phase.

Idea Phase, Novak says, is where anything goes. On The Office they had “blue sky periods.” Lasting a few weeks, it was when the writers could come up with ideas for anything. What if Dwight went to the moon, what if Pam and Jim got a divorce.

This is a big theme of James Altucher’s work too. His talk about daily ideas led to this blog – hence the name. I was writing daily ideas when one for a blog that summarized and expanded on podcast hit. It sounded great. That feeling also led to Novak’s second phase.

Execution Phase is when Novak tries to get stuff done, and it relies on the Idea Phase. During the Idea Phase you want to come up with something so good during that the excitement about that will carry you through the obstacles of the Execution Phase.

Two emotions you can leverage to get more done.

Novak says that he always tries to keep a positive attitude. “I consider being in a good mood the most important part of my creative process.”

He also uses self loathing. When it’s late in the afternoon and he’s full of caffeine, Novak says he gets a lot done.

Adam McKay also uses this technique. He takes it one step further and gets a hotel room to work in. So not only has he gotten nothing done, but he’s paying to do so.

Rapid fire.

A few other things that didn’t quite fit elsewhere in this post.

“These just feel like jokes to me.” Novak recalls Steve Carell saying that when they were reworking part of a scene. Yeah, Novak thought, that’s what we do. But it’s not.

Gary Shandling told Judd Apatow that the key is to write more than the jokes. “The struggle in the writing room,” Shandling said, “is getting people not to write just words.”

Any tool will do. When Ferriss asks about what tool Novak uses to write with, the list is notably – and somewhat ironically considering his startup li.st –  generic. Microsoft word, Moleskine notebooks, coffee. The reason that Novak doesn’t use something else is that the switching costs are too high. “I use Microsoft Word,” Novak says, “because it’s what I learned  and got in the habit of.

Casey Neistat said much the same thing about filming. “It’s not worth it to me to investigate and switch,” he said about figuring out new software. This is a big idea, and one that Ferriss misses. It’s not about having the best tools, it’s about having good enough tools and getting to work.

“You really learn something when you parody it.” Novak paraphrase P.J. O’Rourke (and joines Judd Apatow, Phil Rosenthal, and Judah Friedlander) noting that comedy is a way to understand something deeply.

“You’re not on someone’s schedule, ever.” This was a particularly good reminder for me. To remember that Robert Kurson was a lawyer before he was a best-selling (and awesome) author. That Peter Thiel hated his job in law before he became an author and thinker we look to. That it takes everyone their own time to reach their own goals was poignant for me.

On selling out. Novak has a new (to me) take on what it means to sell out. He says that early in his career he resolved not to sell out. He would only do things for their artistic rewards. Then he had a change of heart.

Who am I, Novak asks, to turn down a movie (payday). He says people in Hollywood can earn enough to put their kids through college with a single Christmas movie. So they do it.

Media suggestions.

Easy Riders, Raging Bulls was the sort of think Novak wanted to create.

Daily Rituals is a book both Novak and Ferriss like. It’s one we’ve mentioned many times.

–

Thanks for reading, I’m @mikedariano on Twitter.

B.J. Novak (@BJNovak) joined Tim Ferriss (@TFerriss) to talk about startups, starting out, and stand-up. Novak is on the podcast to talk about his app, Li.st, a place to create and share lists about anything. Beyond talk about the app (and references to Novak’s books) there’s good stuff throughout.

For example, in what ways is Harvard a disadvantage? How did Novak get on The Office? What does it really mean to be a “sell out?”

Ready?

The benefits of podcasts.

Novak says that he’s started to get into podcasts and, “listening to podcasts is like an extra hour of reading a day.”

Gretchen Rubin wrote that podcasts and audio books changed the way one friend viewed her entire job. In her book, Better Than Before, Rubin writes that she was talking with a friend that hated her job. Her friend gave a bunch of reasons why, but Rubin wasn’t convinced. As they talked more, Rubin discovered that her friend didn’t really hate her job, only her commute.

Why don’t you try audiobooks or podcasts, Rubin suggested. A month goes by and Rubin checks in with her friend, who says that everything has changed. She likes her job and her commute, actually looking forward to the latter.

The advantages and disadvantages of Harvard/The Harvard Lampoon.

Novak tells Ferriss that it took 3 attempts before he got on the staff at The Harvard Lampoon. This was his final attempt, Novak says. Which is too bad, because Novak didn’t know his numbers.

We never succeed all the time, and sometimes fail a lot. That’s normal, and important to remember for your psyche. In The Hard Thing About Hard Things, Ben Horowitz writes:

“(If) CEOs were graded on a curve, the mean on the test would be 22 out of 100. This kind of mean can be psychologically challenging for a straight-A student. It is particularly challenging because nobody tells you that the mean is 22.”

It’s not only CEOs. Investors like Ken Fisher and Brett Steenbarger and Kevin O’Leary all explicitily mentioned that failure rates can be higher than success rates.

As Horowitz found out, that can be demoralizing. What you need to do is know your numbers. Ramit Sethi talked about how to do this in business.  Mark Cuban in basketball. 

The advantage of Harvard.

The best part about Harvard, Novak says, was the environment. “Those people (at the Harvard Lampoon) train each other rigorously.” It makes sense, the list of alumni is impressive.

But there’s more.

There was also an acceptance. “The biggest advantage,” Novak says, “is to not think it’s crazy to be a comedy writer.”

Penn Jillette said the same thing when he went to clown college. “This was really really important to me,” Jillette says. He didn’t know he could do that. When he found out, it changed his life. 

The disadvantage of Harvard.

Being at Harvard creates a disconnect, Novak says. You lack life experiences and develop a form of cockiness. It’s a catch-22. If you want the environment where people push each other to be great, you can’t also have the everyman experience.

Novak’s balanced view about Harvard reminded me of “part of the reason thinking,” introduced by Sanjay Bakshi.

When we examine a situation we would do well to look at it as the sum of some parts. Harvard has lots of great things about it, but it has drawbacks too. Just like marriages, jobs, and friendships. No one, no place, no condition is perfect. Each has good and bad parts, advantages and disadvantages.

You can’t be B.J. Novak – so don’t try.

Ben Horowitz wrote in The Hard Thing About Hard Things, “the problem with these books (about business) is that they attempt to provide a recipe for challenges that have no recipes. There’s no recipe for really complicated, dynamic situations.” 

Like becoming a TV star.

Novak says the same is true for show business. “Everyone who gets a job in show business has a story that’s not replicable.” This is actually great news.

Horowitz and Novak warn not to follow anyone’s advice too closely. And that’s true, just not at the beginning. 

After college Novak ended up writing for Raising Dad, a WB comedy starring Bob Saget. Novak tells Ferriss that he looked around the writer’s room one day and realized he didn’t like what he saw. Not the people, but the paths. He wanted to be like Saget or Jonathan Katz (the show’s creator). So he decided to start like Saget and Katz, with stand-up.

This is how we start, with imitation.

Stephen King writes that imitation is good, and in some ways the only way. Ben Mezrich did it. So did  Jason Calacanis who told Tim O’Reilly, “I copied everything you did coming up, you’re my inspiration for a lot of what I do.”

You can start in a place of imitation, but then you have to go beyond that. You have to take small steps on your own.

When you’re afraid to walk, take small steps.

It’s okay if you’re afraid. Don’t do anything big.  In fact, it’s better if you start small.

But you need to overcome your fears (and sooner than later). If you want to get into stand-up, Novak says to book your entire first week of shows in advance. Otherwise you may chicken out. 

Note, this small step (schedule a week of shows) is a small hack, but small hacks have powerful effects. Food researcher Brian Wansink found that small hacks are all it takes to eat less. Smaller bowls and opaque containers cut consumption. It doesn’t take a big diet to lose weight, just small steps. So too for careers. 

You also have to be ready for small improvements. “You can’t make each night a referendum on whether or not you should be doing it,” Novak says about stand-up. If you have three good jokes, keep them and get rid of everything else.

This is exactly how Louis C.K. works. In Sick in The Head Louis says, “everything has been one foot in front of the other, one step at a time.”

Louis also explains that he constructs his act this way. If you have one good joke, that’s your closer. When you get another, that’s your opener. The third good joke is your mid point. It’s like snapping together Legos.

Okay, small steps. Now what?

Now it’s time to get work building career capital. Introduced by Cal Newport in So Good They Can’t Ignore You, it is the idea that to have a great job, you have to have a great skill.

Career capital theory explains that good jobs are the exchange of one valuable thing for another. It’s exactly what Novak did.

After Raising Dad was cancelled Novak did stand-up for 18 months, and got “decent.” That led to a stand-up showcase and Punk’d. Then came a call from Greg Daniels, who wanted to create an American version of The Office. Daniels wanted a small staff like at SNL and the original The Office. He needed people who could write and act. He needed people like Novak.

Novak got the great job because he had great skills. Look at his sequence.

High school and family experiences -> Harvard -> Harvard Lampoon -> “The BJ Show” at Harvard -> The BJ Show special with special guest Bob Saget -> “Raising Dad” -> stand-up in Hollywood and L.A. -> The Office.

Novak accumulated career capital and exchanged it for a job on one of the great comedies of all time. Of course, no one knew how great it would be.

To be great, you can’t focus on how great you might be.

“This was not considered a show with any chance for success,” Novak says about The Office.

Great things never start out as things that are expected to be great. It takes so much work to create a masterpiece that any thought of it’s relevance takes away from the resources for the work.

James Corden said this about his show, Gavin and Stacey. If this could be one person’s favorite show, that would be great, Corden said.

James Manos said the same thing about The Sopranos. “None of us were conscious of creating something that became truly iconic.”

–

Thanks for reading, I’m @mikedariano on Twitter.

Tomorrow part 2 will drop, with sections on luck, perspectives, and what “blue sky” means.

Note, there is a podcast version of this post. You can find it below, or in your podcast player of choice. Search, “Mike’s Notes.”

In his book The Hard Thing About Hard Things, Ben Horowitz notes that for hard problems there’s no prescription.

“The problem with these books (about business) is that they attempt to provide a recipe for challenges that have no recipes. There’s no recipe for really complicated, dynamic situations.”

To solve hard things you need to act and learn, get dirty, and take your lumps.

A lot of Horowitz’s book is about his own lumps, and advice for people in business. That’s not me.

It’s not that I disagree – or know enough to –  but that I’m on a different path. A lot of other people are too. Horowitz’s experiences are helpful, but, and this is his point, not prescriptive.

Like everyone else on this site, the specifics don’t matter. You can’t be the next Seth Godin or Mark Cuban or Robert Kurson. You have to be you. But that doesn’t mean you can’t learn from other people.

“Fools say that they learn by experience. I prefer to profit by others’ experiences.” – Bismarck

We want the big ideas that work most of the time. Then we can experiment on our own. We can twist and tweak from a place that worked once. That’s the systems for success here.

And Horowitz has an idea for us.

Silver bullet and lead bullet thinking.

Let’s set the scene. Ben and Mike (Homer) are working at Netscape trying to figure out a way to survive. Microsoft has just released a web server that’s better in every way. Horowitz writes:

I immediately went to work trying to pivot our server product line to something that we could sell for money. The late, great Mike Homer and I worked furiously on a set of partnerships and acquisitions that would broaden the product line and surround the Web server with enough functionality that we would be able to survive the attack.

Okay, that should work, right?

Enter Bill Turpin:

“Ben, those silver bullets that you and Mike are looking for are fine and good, but our Web server is five times slower. There is no silver bullet that’s going to fix that. No, we are going to have to use a lot of lead bullets.”

The lesson is this, there is no panacea, no cure all, no silver bullet. There is only a lot of hard work. 

We understand this, but why?

Silver bullets don’t exist because problems range from complicated to complex. Taylor Pearson explained this vis a vis jobs. We’ll look at it at the macro level.

A lot of problems exist on the complicated to complex spectrum (anything less complicated is an equation, 2+2).

The challenge for Horowitz was how to solve a complex business situation. It was closer to predicting the weather than the tides.

Horowitz’s business choices were a complex network, like an ecosystem. Pull on one string, and  another moves too. That stressed him out. Horowitz was sick and couldn’t sleep as he tried to solve these types of problems. Until he realized something, he was thinking about it all wrong.

“All the mental energy you use to elaborate on your misery would be far better used trying to find the one seemingly impossible way out of your current mess.”

Rather than worry about finding a silver bullet, Horowitz needed to spend his time firing lead ones.

It’s like untying a knot done by a 5-year-old. There’s no single tug to unravel it. You just need to start twisting and winding. That’s what Horowitz started to do.

How to solve complex problems.

Complex problems often require new questions. Ask new questions and you’ll start to get new answers.

Horowitz switched from, “what’s the worst that can happen,” to “if the worst happens what will I do?”

Like Newton under the apple tree or Archimedes in the bathtub – Horowitz got an idea.

Note, acting does imply accuracy. As Barry Ritholtz points out when he spoke with  Michael Mauboussin, Jason Zweig, and Ken Fisher – “don’t just do something, sit there” can be good advice.

When to act.

Act when you need to survive. Each big business decision in Horowitz’s book was when his company needed to just survive. That’s when you need to act, to not die.

Conclusion.

1. Complicated and complex problems have many connected nodes.
2. Those nodes tug on each other and create problems that live in an ecosystem.
3. There is no single solution to change a complex problem.
4. Change only happens through a lot of work on the different nodes.
5. To do this you need to forget about worrying and take the right action.

—

Thanks for reading, I’m @mikedariano on Twitter.

Ken Fisher joined Barry Ritholtz (@Ritholtz) to talk about process, redwood trees, and “the only three questions that count.” Fisher is an author of many books, Forbes articles, and CEO of Fisher Investments. Here’s our table of contents:

What Fisher talks about when he talks about writing — the only three questions that count — how to pick winning stocks — simple heuristics — and Fisher’s favorite books.

Ready?

About writing.

How to write well.

Ritholtz compliments Fisher’s work and says, “you’ve obviously inherited your dad’s writing skills.”

“Not true,” replies Fisher, “because if I had inherited them they would have come to me very naturally, but I worked hard to learn how to write.” Even though his dad was a great writer, Fisher needed help.

It’s easy to write words – even I do this. What’s difficult is to write well.

Garry Shandling explained this to Judd Apatow when the two wrote for the The Larry Sanders Show. “The struggle in the writing room,” Shandling said, “is getting people not to write just words.” 

Fisher saw this “more than words” idea with his own father. “He had an ability,” Fisher recalls, “for people to see themselves through things that he had interacted with them on.” It wasn’t the explicit things Fisher’s father spoke about, but the bigger ideas that people applied to their own lives.

That’s the secret sauce to write well. It has to connect with people. This is what Fisher needed to learn.

“I was a lousy writer,” he says, “until I hired someone to teach me how to write.” Only after he learned did he author bestsellers.

Writing as a form of thinking.

“I write to figure out what I think,” Ritholtz says.* Fisher says that he uses writing to clarify his thoughts too. They aren’t alone.

Michael Mauboussin said that he writes (and speaks) about his ideas to understand them.

“I write entirely to find out what I’m thinking, what I’m looking at, what I see and what it means,” said Joan Didion.

“Learning to read well and to write well is really learning to think well,” said Maria Popova.

Writing is a form of thinking much like swimming is a form of exercise.

The only 3 questions that count.

A lot of the interview circles around Ritholtz’s favorite book by Fisher, The Only Three Questions That Count. It’s a rich area and we’ll dive into it.

Question 1: What do you believe that’s false? It’s not an easy question to answer. Tren Griffin points to the Charlie Munger quote that it’s a wasted year if we don’t change our minds about something.

We should probably do this more. Ritholtz says we spend too much time rationalizing our beliefs and not examining them. We do this because it’s easy.

Ramit Sethi calls us “cognitive misers,” because we don’t do much heavy lifting with our brain. If there’s an easy way, we take it.

Fisher suggests these two steps:

First, identify what you believe. “What  do you think?” Fisher asks. Financial markets are an expensive way to find out if you don’t already know.

Second, ask, “is there a history that associates with that thing?” Fisher says to find the correlation coefficient and see if two things line up.

This isn’t as easy as it sounds. It’s hard to find good correlations because the data is cavernous. It makes “views wronger longer,” Fisher says.

One way to not be wrong is to use Twitter well.  Chris Dixon said that he uses Twitter to follow smart people who tell him what to read. That’s a good start. We also need to follow Jason Zweig’s advice, and feed ourselves oppositve views. 

If we combine these two things the worst ideas will be filtered out. 

Question 2: What can I fathom that other people can’t? From the start Fisher had an idea for something other people weren’t doing. He wanted Fisher Investments to be like IBM and Charles Schwab. “In both cases doing things that hadn’t been done yet,” Fisher explains.

This idea is similar to what Peter Thiel writes about in Zero to One. “What important truth do very few people agree with you on?” But it’s more than just that.

Thiel writes that the best companies are unions of fields rather than intersections. (I missed this on my first reading) Unions combine entire ideas to form a larger one – intersections take snippets to form a smaller one.

A successful union might be Slack. Mobile U Communication U Design. An unsuccessful intersection might be the movie Pan. Hugh Jackman ∩ Fairy Tale ∩ Movie.

Here’s where things get interesting, Thiel warns us against fooling ourselves. 

When you fathom something new, it has to be accurate. One way we mess this up is thinking in terms of intersections and not unions. Thinking with blinders. Thinking we know what we’re doing but, we’re being misled.

Question 3: What is my brain doing to mislead me?

“The first principle is that you must not fool yourself — and you are the easiest person to fool.” – Richard Feynman, Surely You’re Joking Mr. Feynman.

Fisher notes that our reptilian brains are not well adapted for our current environment.

In Mean Genes, Terry Burnham explains why.”Our ancestors got their chemical kicks the old-fashioned way: they earned them through good behavior.” Burnham explains how a plethora of today’s bad behaviors (too much weight, too little savings, risk seeking, etc.) were wonderfully helpful a long time ago. It feels good because it was good. That’s no longer the case.

“We will see that many judgement errors in human risk-taking stem from a common source:” Burnham writes, “we live in a very different world from that of our ancestors.”

The trouble is two fold- it’s hard to stop and we don’t realize when it starts. But it’s not impossible to combat.

First we play defense.

James Osborne commented about different checks we can install to slow down these kinds of actions. If you trade too much, said Osborne, give your login password to someone else. Burnham writes about the same thing. If we love eating tasty things, keep healthy tasting things on hand.

Fisher says that this sometimes happens accidentally. He mentions a study where people in funds with higher fees had greater returns. Not because of the intrinsic value or investing acumen. Rather, it cost those customers more to trade, so they traded less. It’s an example where activity does not ≠ gains.

After a good defense, comes a chance to play offense.

Fisher mentions this idea throughout the interview – watch out for your mistakes but also look for mistakes others make. It’s the business equivalent of going on vacation at during off season.

If we expect people to be greedy, take risks, or over-trade, we should incorporate that into our strategy.

How to pick winning stocks.

When Ritholtz asks how Fisher picks stocks, Fisher says, “I don’t look at stocks.”

What?! But before Fisher explains his method, we need to understand the game. It wouldn’t make sense to get basketball tips from LeBron James if we didn’t know what basketball was.

Fisher subscribes to the definition provided by Benjamin Graham:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham

Markets factor both voting and weighing into price, and Fisher thinks about both these things.

Weighing, the intrinsic value. Fisher approaches stock picking from the macro end. He looks at the world -> countries -> sectors -> sub-sectors -> factors (value, growth) -> stocks. The company choice is the caboose in his decision train.

Fisher compares it to fishing in the right pond. Whether or not you catch any fish includes a bit of luck. Being in a place helps a lot.

That’s the things that you see in the market, but it’s also important to think about what others see. 

Voting, the perceived value. What do other people believe is true? A derivative of the “3 questions,” Fisher wants to know what other people think. He says current (3-30 months) beliefs are already priced. If you want to be different (unions not intersections), you need to zig when the others zag. This is second level thinking.

We’ve seen second level thinking elsewhere. Howard Marks said,  “If you think the same as everybody else, you’ll behave the same as everybody else, and you can’t expect to outperform them.” Ray Dalio writes about it in Principles.

Richard Thaler writes about the famous “beauty study” in his book Misbehaving. The aim was to make a guess that voted and weighed an idea. 

Simple heuristics.

When you don’t know a lot, simple heuristics work well.

Casey Neistat asks, “is this good for me and my technology company (Beme), and if the answer is no it gets a pass.”

Richard Feynman got so tired of choosing a dessert that he resolved to always order chocolate ice cream.

Barry Ritholtz said that he looks at the prices of classic cars as a signal for bull and bear markets, or if people say “ugh” to his trading ideas.

Ramit Sethi and Taylor Pearson both seed interviews with questions that have specific answers. 

Stephen Dubner called this, “teaching your garden to weed itself,” and wrote an entire book chapter about it.

Some banks figured out how to filter out dangerous marijuana growers.

Van Halen found out that if one thing on their rider was wrong, other things might be too.

Simple works well because we don’t have the time or resources to always make a choice, (remember, we’re cognitive misers) but a signal might nudge us one way or another.

Fisher uses this technique as well (quoting Franklin Templeton); “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

It’s not always right, but it gets darn close.

Favorite books.

Fisher’s book list reflects his interests in the markets and outdoors. He suggests: Hunting with Bow and Arrow, Hunting American Lions, Where are the Customer’s Yachts, How to Lie with Statistics, Think and Grow Rich, and Humble Approach.

–

Thanks for reading, I’m @mikedariano on Twitter.

If you want more, become a member. 

*I couldn’t figure out who exactly Ritholtz was quoting when he said, “I write to figure out what I think.” If you know, please let me know.

Kevin O’Leary (@KevinOLearyTV) joined James Altucher (@JAltucher) to talk about money, relationships, and bass/base rates . O’Leary is one of the sharks on Shark Tank and author of The Cold Hard Truth and more recently, The Cold Hard Truth on Family, Kids, and Money. While the audio is not great, the ideas are.

Here are 6 business and life lessons from Mr. Wonderful.

Questions asked = problems people have.

O’Leary tells Altucher that this book, The Cold Hard Truth on Family, Kids, and Money came about because of the questions people asked him. “I’m going to take these hundred questions,” O’Leary says, “and put them in a book.”

A frequent piece of business advice is to find a problem which people will pay you to solve.  O’Leary was lucky, the problems came to him. Both Austin Kleon and Steven Kotler mentioned the same phenomenom. When they were on their respective book tours people in different places asked the same questions. Their next books answered those questions.

Part of the reason is money.

“Money is often a piece of that pie, but it’s not the entire pie,” said Altucher paraphrasing a section of O’Leary’s book. This single idea gets at two big pieces of life advice; the value of money and “part of the reason” thinking.

Money, Tim Ferriss reminded us, is something we exchange for something else. It’s not money we want, it’s the something else. Which means we don’t always need money. Sometime we can bypass it and go right to the thing. Look at podcasts. Both Ferriss and Altucher admit that part of the reason they podcast is as an excuse to talk to people they admire.

Stephen Dubner wanted to live in NYC more than he wanted more money. Mark Zuckerberg liked Facebook more than a billion dollars, an offer he got early in his career. Money is something, but not everything.

Part of the reason thinking was introduce by Sanjay Bakshi, and it’s a powerful idea. Bakshi noted that many things don’t have single explanations. Part of the reason O’Leary is happy is because he has a lot of money, but it’s not the only reason. O’Leary (I assume) is also happy because he’s on television, has a long-term marriage, has kids, has a boat, and gets attention. Those are all components of his life.

When we use part of the reason thinking we can get all the right answers. It also simplifies our work. In his book, Think like a Freak, Stephen Dubner explained why big problems are difficult to solve. Little problems are easier.

Anchors away.

Altucher includes a few questions from his daughters. One of which was how O’Leary anchors the negotiations by making early – hail mary – style of offers. While his response in the interview was brief, beneath it is a deep understanding of psychology.

Anchoring establishes a starting point that influences a person’s thoughts. A timely example – the holiday season 2015 – is Black Friday and Cyber Monday. Both of these days are full of deals, with huge markdowns. But markdowns from what? Why does 50% off seem like a great deal?

These steep discounts seem like a great deal because we don’t know the the intrinsic value. We don’t know what a thing is worth, so we answer a different question. How much did it originally cost?

As Ramit Sethi notes, “we are cognitive misers.” That means we like taking the mental shortcut. Rather than figure out how much we value a TV, or what a TV normally costs, we look at the original price and that’s our anchor.

Now half off seems like a great deal, but we don’t really know. What we’ve done is replaced one question with another. In Thinking Fast and Slow Daniel Kahneman explains this mental bait and switch.*

“In one of our studies, we asked participants to answer a simple question about work in a typical English text:

“Consider the letter K.

“Is K more likely to appear as the first letter in a word OR as the third letter?

“As any Scrabble player knows, it is much easier to come up with words that begin with a particular letter than to find words that have the same letter in the third position.”

K is not more common as the first letter. We answered the question, “can I think of words that begin with K more easily than words with K as the third letter?” When that answer was “yes” we switched the question at hand.

Anchoring has a similar effect. Entrepreneurs enter the Shark Tank and get an offer of X from O’Leary. If that’s not a great deal then each subsequent deal seems better than it might intrinsically be.

One meta point is to understand that we have biases in our understanding. Tren Griffin pointed out that at least knowing our biases can be helpful. One of which is how we view work.

Anchoring and jobs.

“Our economy,” O’Leary says, “provides all kinds of opportunities to make a basic living.” “There’s no shame in working hard at things and trying different ideas.”

His point was that if you want to work hard, you can find a job that pays you well.  Wayne Dyer also spoke to this in his conversation with Altucher. “I’ve never been unemployed a day in my life,” Dyer recalled. He was able and willing to work.

For them it was a matter of just working. Entrepreneurship looks great on TV whether it’s Shark Tank or The Profit with Marcus Lemonis. A lot of jobs aren’t like this.

O’Leary’s book has some ideas for this. Mr. Money Mustache does too. Taylor Pearson wrote The End of Jobs and the future he sees.

Anchor the idea of work that David Levien explained. Your early work will be “confused garbage,” and “it will be brutal toiling away in obscurity.” That’s what it takes.

3 things O’Leary looks for.

If you want to prepare for your Shark Tank meeting with O’Leary here are three things he’s looking for.

Articulate the pitch in 90 seconds or less. This shows you know your idea and inside and out. If you want to practice, make it funny.

From Judd Apatow to Phil Rosenthal to Judah Friedlander, comedians say that if you can make fun of something, you deeply understand it. You could also live it like Dick Yuengling or read about it like crazy like Mark Cuban.

What they all share is a deep knowledge which leads to clear understanding and concise articulation.

The right team. O’Leary also looks to see if the right team is in place. Brian Koppelman compliments his writing partner David Levien. Nicholas Megalis and Austin Kleon also suggest getting with other good people.

Know your numbers. Nothing crushes a Shark Tank pitch like not knowing your numbers. You need to know them cold. Jason Calacanis told James Altucher the same thing about his investment philosophy. And not only yours. You need to know the industry, everything.**

“Because you know I’m all about that bass (rate), ‘Bout that bass (rate), no treble.”

(Where else do you get Maghan Trainor and Michael Mauboussin in the same blog post?)

Altucher asks O’Leary about what multiple he looks to invest at and the magic number is 7 times earnings. That’s the going rate in the private markets O’Leary says. O’Leary expects to succeed in 4/10 investments from the show. The numbers here are key.

If initial numbers anchor our thoughts, base rates can bring us back.

O’Leary knows the private market base rate is 7X. He starts there. If he knows 4/10 Shark Tank deals succeed, he knows how to evaluate his winners and losers.

Michael Mauboussin ‘s post and writings are a good place to start if you want more about base rates.

I thought a lot about base rates during our 12 hour drive home after Thanksgiving. Our GPS said the trip would take 11 hours 30 minutes. It took more like 13 hours. At first I wondered why it took so long. Then I started thinking about accurate base rates.

I realized there’s almost no chance that two adults and two kids can make the drive in less than twelve hours. Someone always needs to pee or eat or we need to stop for gas or switch drivers. There’s too much that can go wrong.

Making it in less time is like shorting a stock. There’s a slim chance for little benefit.

What’s more likely is the drive takes longer than projected. In addition to any breaks there’s the chance of an accident, construction, or bad weather. Many things can go wrong.

The real base rate for a family of four to drive to Connecticut is 13 hours. When I realized that I felt happier, even though I was still in the car. This was the power of accurate base rates. When I switched my estimate to a more accurate one, I had a positive emotional reaction. The same is true for business.

In business we should expect turbulence. O’Leary sees this looking back. “Any business has huge volatility,” he says. “We were on the brink of bankruptcy multiple times. But that’s just the nature of what entrepreneurial business is.”

Chris Dixon said the same thing, “I’ve almost never been involved with a company that didn’t have moments of almost failure.”

If we know this going in, we’ll be more prepared emotionally. It’s Marcus Aurelius who explains this best; “How ridiculous and how strange to be surprised at anything which happens in life.”

Serendipity and luck.

“Life is very serendipitous,” O’Leary says. If we knew what worked, we would just do that. We don’t know though.

Add O’Leary’s name to the list of people who admit that luck played a roll; Jason Zweig, Kevin Kelly, Scott Adams, and Chris Dixon among others.

–

Thanks for reading, I’m @mikedariano on Twitter.

 

* “bait and switch” was termed by Philip Tetlock in his book, Superforecasting. I like it a lot more than Kahneman’s terminology.

** the second mistake after not knowing your numbers is to make what Altucher calls, “the refrigerators in China” mistake. It’s saying that with a market as big as X and if you capture %, then the result is Y. It’s never like this. Altucher comments that with a market that big you’ll be knocked off so fast. Just like hoverboards.