Author: MIKE

Supported by Greenhaven Road Capital, finding value off the beaten path.

Emily Dufton spoke at Politics and Prose about her book, Grass Roots. Tyler Cowen blogged, “It is sure to make my best books of the year list, and if she had ten other books I would buy them all sight unseen.”

With marijuana investments growing, (That’s my trade, short Tesla, long pot – Danny Moses) we’ll look at pot and then parables.

In the 1860’s, marijuana was available at corner pharmacies and was used by new mothers to calm colicky babies. In 1886 Coca-Cola was born and would be one of the few to survive the patent medicines era. Salesmen traveled from town to town, sold their elixir, and left us with the expression, ‘snake oil salesman’. By 1897, marijuana’s medical use was well documented.

As the century turned over – from the Gilded Age to the Progressive – the federal government took a larger role and issued The Food and Drug Act, and Coca-Cola became more like the drink we know today. Prohibition ran from 1918 through 1933.

Fast forward to 1968 and with Richard Nixon’s election, there’s more government expansion. He wants marijuana listed as a schedule one drug on the Controlled Substances Act. The Shafer Commission, tasked with judging this request,  recommended decriminalizing small amounts. Instead, marijuana was listed as a schedule one drug.  The knock-on effects today include academic research being nearly impossible.

But states write their own rules. In 1973 Oregon decriminalizes it, making smoking a joint equivalent to running a stop sign. In 1976 the first parents against marijuana group forms in Atlanta. Around this time, one in ten high school students reported smoking dope and a dozen states have decriminalized small quantities.

In 1980 the lumbering giant known as the federal government takes another step as First Lady Nancy Reagan encourages kids to ‘Just Say No.’ In research for this post I was surprised to see that Nancy Reagan’s is often compared to Lady Macbeth, in both kind and criticizing tones. Around this time another strong California woman enters the saga.

In 1981, ‘Brownie Mary’ was arrested. She reportedly told the police, over the 18 pounds of cannabis on her kitchen table, as they entered her home, “I thought you guys were coming.” Her crime was making ‘magically delicious’ brownies. Her customers were – mainly – HIV invalids.

During the eighties, the war on drugs continues. Marijuana is seen as relatively less harmless when viewed next to cocaine. By 1990, marijuana arrests account for 30% of all drug arrests. By 2002 it’s 50%.

In 1996 Prop 215 allows medical cannabis sales in California. Fast forward to 2017. Thirty states allow medical marijuana. Nine states allow recreational marijuana. It’s estimated the legal marijuana business will have sales around ten billion dollars – that nearly the sales totals from all the Dunkin’ Brand stores.

…

So what?

Stories rule our lives. Humans aren’t absolute oracles, we compare this to that. ‘This’ is whatever is here and now. ‘That’ is whatever is easy to recall. Our conclusions ca be accurate and erratic, like a driver in the snow or a parent who yells at their kid.

Stories are like candy, and once we hear one we keep it because we’ve already digested it. It’s hard work to avoid what Tyler Cowen calls the philosophy of once-and-for-all-ism. Marijuana is a complicated subject with a sundry history. And in these five hundred words we didn’t address the elephant in the room; race.

Living life by simple stories is like asking, ‘Is the Wifi on?’

Asking questions about simple stories is like asking, ‘How is the Wifi on?’

It was two Republican presidents that restricted individual freedom. How does a party that defined the ‘nine most terrifying words of the English language’ add so much scaffolding, facade, and concrete? It was because of the stories we tell.

 

Thanks for reading.

Sponsored by Greenhaven Road Capital, finding value off the beaten path.

Michael Munger has a new book out, Tomorrow 3.0 and he’s talking to people like Russ Robert and groups at Duke about the ideas on those pages. In his walk through the economic woods, Munger found a Chesterton Fence and wonders if it’s falling down.

It might be.

We might be transitioning from an age of middlemen to an age of sharing. Like with our study of Pixar, we should keep in mind that middlemen aren’t bad/stupid/unnecessary. They’re a product of the system. They exist because they were an improvement over whatever they superseded. In that same way, the sharing system may supplement the middlemen one.

“What’s being sold is access to excess capacity.” We have a lot of stuff and it’s not often used. “I think 50 years from now people are going to look back and find it remarkable that we spent so much time and effort to ensure that the stuff that we had but were not using could not be used by anyone else.”

We literally lock it up. This may change.

Economics, Munger explains, is the voluntary exchange where providers earn profits and consumers earn a surplus. We choose to buy iPhones and Apple earns money and we listen to podcasts. It’s a win-win. Hampering this system are permissions and transaction costs. In 2017 Munger talked with Roberts about permissions. In 2018 he’s talking about transaction costs, which are “like frictions in a physical system…and prevents many otherwise beneficial voluntary exchanges.”

Munger wants to know if we can “commodify the excess capacity which can then be bought and sold on the market.” We can’t for a toothbrush but we can for a car and “Somewhere between those lies most of the profit opportunity in the new economy.” The best opportunities are “where transaction costs are high but reducible and excess capacity is high.” Think apartments, not apples.

We’ve been working on this system for a while, usually using physical systems. “When I travel for business I make it a point to never buy a car, I always rent one.” Munger uses the ‘platform’ known as ‘airport’ to rent a seat on a plane (rather than buy the plane) and rent a car once he deplanes (again, rather than buy one).

“All over the world stuff is in the wrong place, but it’s never been commodified because we don’t think of this being a commodity, that it can be bought and sold.” If we reduce transaction costs we can get Wendy a Widget from Warren with everyone being better off. “The world is a wealthier place even with the same amount of widgets.”

There are 3 obstacles to this; finding counterparts, paying counterparts, and trusting counterparts. Munger calls them the three Ts; triangulation, transfer, and trust. Middlemen can solve for this, but data can too, and data has a much lower marginal cost.  Reviews are “a way of outsourcing trust that’s extremely cheap but that provides assurance in a way we used to have to rely on reputation or brand name.” Crowds are wise when people are independent, non-coercive, and have some expertise.

It’s the information connection revolution.

We used to solve the 3Ts using physical platforms like farmer’s markets or libraries, now we can have digital ones. Ride-sharing works because they come to you, not because you go to them.

“Why does every house in a suburban neighborhood have a crappy lawnmower that’s hard to start and gets used 45 minutes once a week? There’s no reason not to share these things except that sharing is difficult.” Here Munger skipped over a nuance of the issue, but in an hour-long talk, he has to.

Transaction costs are a hurdle for commodified products. “The reason we own things is that we want the stream of services that come from the item.” It’s not that we want to own a drill, but that we want holes in our walls. Sharing works well for services that vary slightly; rides to the airport, holes in walls, apartments to stay in. But some things are more difficult to commodify.

I live in an HOA with a lawn care service. I walk my dog through the neighborhood with an HOA that has lawn car service. I talk to neighbors as I walk my dog through the neighborhood that has law car service. Law care has not yet been commodified. What local companies need is what Airbnb got with better photos; more details and more tiers. It’s not about commodifying once, it’s about commodifying to at least three levels of customer needs; good, better, best. Munger lived this nuance. He stayed in Paris for two weeks in August. A ‘good’ time to be in the country.

Software is Eating the World wrote Marc Andreessen. We can Break Smart wrote Venkatesh Rao. Software, Munger said, “is to service jobs as robots and automation are to production jobs.”

Getting there will take some work. Should we have platforms for infidelity? “Ashley Madison sells the reduction in transaction costs of meeting other married people who want to have an affair.” What about taxi licenses? When we remove middleman, Munger wonders, are we taking a full account of the promises that have been made? What about jobs? If we do more with less what does that mean for workers? The last time this happened was the Industrial Revolution. How will society handle that? How will young people? Is it The End of Jobs?

Munger thinks the answer to these questions will emerge as Amazon or Uber takes the lead. “Uber is not a taxi company. Uber is a delivery company, and right now it happens that it mostly delivers human butts.”

And “Uber is set up for delivering rentals. Amazon is set up for delivering ownership products. The way that fight works out is what is going to determine much of the economy in the future.” Though maybe it’s not a fight so much as a land grab. If we think of a barbell, Amazon can dominate the end of ownership and Uber the end of rentals.

 

If you liked Munger on EconTalk give his YouTube presentations a try, he’s quite funny.

Sponsored by Greenhaven Road Capital, finding value off the beaten path.

This talk, published in June 2015, was part of Richard Thaler’s book tour promotion for Misbehaving. Hal Varian, Chief Economist at Google, calls it “A wonderful new book.”

When asked about ‘Econs’ (a utility maximizing computational automaton – that doesn’t exist) and humans on the tour Thaler said, “You don’t get a representative sample of humanity at book talks.” This gets a good laugh and gives a good example of the sampling bias.

Varian said he’s a student of behavioral economics (BE) because he needs to be, “If you’re going to engage in business if you’re going to understand human behavior, you have to start with human behavior. You have to look at how people behave and adjust to that even though you ‘know’ they should be behaving differently.” This approach was central to Nudestock 2018 too.

It’s prioritizing action over answers. Street business forces this ordering more than academic avenues. Sunk costs, for example, shouldn’t matter, but they do. People will almost always eat until their plate is clean rather than until the marginal utility of the next bite is too low. I’ve never seen a cookie and calculated a cost-benefit analysis on chocolate chips.

Behavioral Economics is like a friction coefficient for a system. Want to sell more stuff? Decrease friction. Want waste less? Increase frictions. Nudge yourself. Or, said Mohnish Pabrai, frame sunk costs this way:

Framing and other BE tools use the indirect approach. Jocko Willink calls it ‘flanking’. Phil Jackson wrote “One thing I’ve learned as a coach is that you can’t force your will on people. If you want them to act differently, you need to inspire them to change themselves.” Lowenstein wrote about Buffett, “Instinctively, he shrank from confronting his adversaries, but he was superb at winning them over without a fight.”

Nudges are indirect. Save More Tomorrow is indirect. Talks at Google are indirect too.

On the spectrum from Econs to Humans, we might think Google engineers are closer to Econs than most. However, when Google IPO’d, and many became rich, Varian didn’t arrange financial lectures. He invited a broad base of speakers. “And I can’t count the number of people who came up to me afterwards and said, ‘Thank you, that was a great thing to do.’…I thought the Googlers were Econs but I guess not.”

Another indirect approach is not to fight the old but teach the new. Thaler said the behavioral economics summers camp is an application of Max Planck’s intuition that an idea advances as “its opponents eventually die.”

Behavioral Economics is like a finicky classic car. It looks great once you get it running. Rory Sutherland noted that replication crisis isn’t that much of a crisis, but a point about how important the nuance is. BE takes tinkering. It takes experiments.

You want your data to come from experiments, said Varian, rather than HIPPOs – Highly Paid People’s Opinions. Experiments are (one of the reasons) BE has worked so well for finance said Thaler, because, “there’s fantastic data, you can test anything. You also have very crisp predictions. We were able to test ideas and disprove them.”

 

Supported by Greenhaven Road Capital, finding value off the beaten path.

Nick Chater (@NickJChater) believes human thinking is more ‘make it up’ and less ‘look it up’. Certainly, there are automatic processes; breathing, digesting, etc. There are also learned process we engage simultaneously; running and talking.¹ But Chater makes the case  humans cannot use the same neural networks for more than one thing at a time. We think serially, “it’s much more one step at a time than you might think.”

Imagine an improvisation class. We know the story did not exist prior to the performance. “The suggestion I have for you is that that’s what you’re doing all the time….Except for the part, you’re playing is your own part.”

In Chater’s Talk at Google about his book, The Mind is Flat, he explains the 12 Black Dots, the Huang Pashler colored blocks and Kuleshov Effect. Alfred Hitchcock demonstrates how the Kuleshov Effect  transforms a benign gentleman into a dirty old man. It’s about a minute, starting at 0:18

Most of life is like an automatic transmission in a new car, but Chater’s examples turn our mental Mustang into a jalopy, and we grind the gears to find balance.

Our bumpy brains normally operate smoothly because we have a lot of practice. In the colored blocks example (below), we’re pretty good at seeing things that are organized in expected ways. Lines, rows, groups, single colors. These are all things we knock out of the park like it’s batting practice. But the whole presentation is more like a baseball game. We swing and miss.

But this isn’t bad, it’s quite good, said Chater. “Your brain is really good at making creative metaphorical jumps.” Humans can interpret anything. It’s why we need explanations like Hanlon’s Razor; never attribute malice that which is adequately explained by stupidity.

Chater analogized that our brains are like Escher’s infinite staircase. Situationally we explain anything. I did ‘this’ because of ‘that’. X caused Y. Post hoc ergo propter hoc. But that’s like looking at a set of stairs that leads from one staircase to another. Alone, it makes sense. In the context of the whole, it does not. “They (our explanations) all sound very convincing. They’re just like each patch of the image that looks three-dimensional. But if I try to get you to put those stories together it will not make sense.”

I found Nick Chater’s work from MR where Cowen blogged, “I can definitely recommend this book to those interested in serious popular science treatments of the mind, and it is not simply a rehash of other popular science books on the mind.”

 

Thanks for reading.

1/ But not driving and talking and listening. Even the most trivial auditory tasks screws up your ability to brake. Traffic, has many lessons.

Supported by Greenhaven Road Capital, finding value off the beaten path.

In 2017 I bought 100+ books on Amazon. In 2018 I haven’t bought any books from anywhere. In October of 2018, I didn’t even read a book.

Instead, I binged on YouTube and podcasts.

Books are great because they encapsulate an idea. As a kid, the library was the chocolate factory and the librarian a Willy ‘Booka.’ Want to learn about something? Read this. Want to go somewhere? Read that. Thanks to the durability of language and paper, books are a perfect vesicle.

But books are also static. They’re limited in their pages. They’re not great for people with a visual perspective. Neil Gaiman articulated this idea in a May 2017 talk in Boston:

“Sometimes things turn up with a format and then you’re lucky. Sometimes they turn up with a format and you’re wrong and then the idea sits around for a while. Anansi Boys I originally thought was a movie and I remember trying to write it as a film script several times and going, ‘this isn’t right.’”

The same idea applies to learning. Some things you have to learn by doing. No book can teach someone how to ride a bike. No bike can teach someone physics.

I watched Rory Sutherland’s Nudgestock 2018 talk this month. Sutherland said that while the replication crisis in academia may be a problem for them, it hasn’t been one for him. “My argument is that, as marketers and practitioners, it’s the failure to replicate we’re really interested in.” Things working (or not) in one area may be different for things working (or not) in another.

Maybe learning is like that too.

Not only should people follow their curiosity in subjects but also their curiosity in forms. Shane Parrish spoke about tutors. David Perell and Tyler Cowen tout travel. Ariana Simpson reads white papers now. Malcolm Gladwell digs around SSRN. Patrick O’Shaughnessy sends out a monthly book list that’s gotten lighter on books. We call these types ‘voracious readers’ but they’re really learners.

The internet is the new perfect package. It’s always there and there’s something always new. Books used to have a monopoly. Now anyone can set up a blog and share their notes, links, and ideas.

Getting Started.

Want to try this? Here are some suggestions:

• Find a conference you’re interested in and search for it on YouTube. My favorites are Nudgestock and Sloan Sports.
• Find a channel up your alley. Talks at Google is good, so is WGBH Forum and Santa Fe Institute.
• Find an author you wanted to read and watch them instead.

Design.

Our design ‘world’ influences our behavior. YouTube will be more distracting but it will also allow variable speeds. Get ready to take notes, capture screenshots, pause and search Wikipedia (Who is Paul Erdos anyway?), turn on transcript and dive in. This is what mine looked like one morning.

For this blog, I’ll get exact quotes for about one-fourth of the talk and then take short-hand notes for the rest.

Then, because writing is a form of thinking, I’ll add ‘narrative notes’. An example from Steve Krug’s 2014 talk:

Steve Krug wants people to be less busy, more lazy, yet more effective. That means regular small steps toward the most important problems. Much like how dollar cost averaging in a low-cost target date fund helps financial health and regular exercise improves physical health, regular usability testing improves a site’s design health.

Krug suggests “starting earlier than you think.” One morninga month with a few people – who were promised a good lunch – is all it takes. The most important thing is  to prioritize and execute, and focus on immediate tweaks.

Sites will always have usability problems, “get over it.” Just improve some things the remove the problem for some users and make it less for others.

The audience questions circled around resource allocation, mainly from the boss. They need educated about this problem, either through first hand experience at testing meetings or by seeing/knowing/thinking about how usability affects the goals of the organization.

Aim for proximity, not perfection and just keep learning.

Sponsored by Greenhaven Road Capital, finding value off the beaten path.

The big idea from the Nudgestock 2018 conference was to make small changes for big effects.

There were nine speakers, but a few more were referenced so, I took notes on 13 total.

Here were my favorite parts:

• Caroline Webb uses behavioral economics on herself. This never occurred to me.
• Rory Sutherland noted why the replicability crisis/circus isn’t a problem, at least for him.
• Nicholas Christakis and Albert-László Barabási gave fascinating talks about networks, and how we interact. Barabási also shared the insight for why the Kevin Bacon game works.
• Mark Brooks talked about dating fast and slow.
• Steve Krug made me laugh. For context, his book is titled, “Don’t Make Me Think.”
• Tricia Wang talked about Nokia vs iPhone and big data vs thick data.
• Bent Flyvbjerg talked about megaprojects and the planning fallacy.

 

 

 

Supported by Greenhaven Road Capital, finding value off the beaten path.

Before each NBA season, Bill Simmons and Joe House team up to pick over or under win totals for each team. Sports and forecasting go together like burgers and fries. We’ll use the Simmons and House section about the Utah Jazz (1:33:30) to look at how other decisions can be made.

Our caveat. House and Simmons are entertainers and it’s betting slips, not loose lips that tell us what they really think. Without skin in the game we know little, but can still think about better decisions.

Ready?

The Utah Jazz over-under is 49.5 and gamblers need to bet $135 to win $100. “It could be minus 235 and I would bet the over,” said House, “There’s no price I’m not willing to pay to bet the over for Utah. I think they are so good. I think they are the third best team in the Western Conference.”

October 2018 was also the Howard Marks podcast tour and Marks would disagree with House. He told Barry Ritholtz, “It’s not what you buy, it’s what you pay.”

But House believes. “They had 48 wins last years.” So, it’s not just that House likes the team but it’s that their base rate from last season is 48 wins. But we need to keep digging.  “The west got better from a top-heavy standpoint,” Simmons said. Sure, House added, “But they had the point differential of a 53 win team and I think the sky is the limit.”

Good base rates include statistics that can be measured and that matter. The Jazz under-performed based on point differential, so maybe they were better than their record suggested. In a podcast with Ted Seides, Michael Schwimer explained the nuances around hitting. It’s more than just batting average, it’s also about what types of pitchers a hitter faces. Base rates, according to Michael Mauboussin, Phillip Tetlock, and Daniel Kahneman, offer us the “outside view” and are a great place to start.

Then Joe House (possibly) oversteps. “I watched them (the Jazz) a lot. I went and saw the ‘almost Bullets’ play Utah and they could just not figure out how to get open shots against Utah. They are very well coached, they are disciplined, they have a ton of talent. This is a Joe House L-O-C-K lock.”

Later Simmons added, “Every year there’s one team that really played well in the last eight or nine weeks of the season and put up some crazy record and we’re like ‘Whoa, what about that team?’ Every year there’s a team that does that and I don’t know if that translates into them being a contender the next year. Sometimes teams just peak at the right time, take advantage of injuries on other teams, or have a favorable schedule.”

House’s possible miscalculation may be from the availability bias. This, said Haralabob Voulgaris, is why people underestimate defense. This, said Simmons, is why Doc Rivers signed players who played well against him. “Teams that perform out of the ordinary, either good or bad, will get the most attention by both the media and bettors,” wrote Kristian Brinch Hansen

Simmons noted that maybe the Jazz were lucky. That could be part of the reason too.

There’s a lot of tiny red flags with this team, concluded Simmons and House but they might have the most important thing; good culture.

Throughout the two-plus hours, the two agree to trust the infrastructure for teams like San Antonio, Dallas, Houston, Miami, and Los Angeles. For other teams like Milwaukee, they praise the coaching changes. Teams like Phoneix aren’t so lucky. “The case against them is that they have no point guard and they just fired their GM nine days before the season, which was actually kind of hilarious,” said Simmons. “Have the guy do the draft and free agency and then fire him? What kind of jackass that’s in charge of anything would do that?”

Howard Marks said to hire adults and create an environment where they could do their best work. Britian created a gold medal culture. Culture is what kept Pixar from being copied. Culture, wrote Peter Thiel, isn’t something you have. It’s something you are. Culture in sports comes from the owner’s box.

 

Thanks for reading, with love, a blog boy.

Sponsored by Greenhaven Road Capital, finding value off the beaten path.

Daryl Morey was on the Woj Pod with Adrian Wojnarowski to talk about building a team and while the episode was short, it was long with good advice. We’ve praised Morey many times.

Morey told Woj that his executive of the year trophy is still in the box. It’s an award he’d written off after Pat Riley didn’t win putting together the Miami team. “I thought, this award is stupid,” Morey said. “It’s a weird combination of moves and a popularity contest.” 

Yet, it was recognition for the Houston Rockets staff. “I like that it’s an organizational award. Our second round picks aren’t magic. We have a great staff.” 

That staff helped Houston almost make the NBA finals. Their secret to success was “not complicated.” Better players win more games. But everyone already knows that.

“From there, we said, ‘How do we create the environment that makes them (players) want to be here?’ The one thing we thought we could differentiate ourselves on (though our edge might be eroding) is to be the place where top players say ‘If I go there, I’m going to have a big voice in how everything happens.’ That makes sense from a recruiting perspective and once they’re here. If you have your top players involved there’s more buy-in.”

This is a new idea in sports. When Pete Carroll was an assistant he was specifically told not to ask the players their opinions. Yet, this is stupid. The person closest to the problem is often the best equipped to solve it.

Morey and his staff will go to Chris Paul and James Harden and say, “Here are the guys that are available, here are the ones we think can help. You’ve played against them and with them, what do you see in them that would move them up a little bit or down a little bit?’”

Tweaking prevents algorithm aversion. It creates buy-in. This, Morey said, “has been an edge for us.” 

In buzzwords; Part of the reason the Houston Rockets have a competitive advantage is thanks to a decentralized command with invested stakeholders.

This works in media at places like Seinfeld, The Simpsons, and Pixar.

This works in business at places like Koch Industries and Oaktree Capital.

This works in the military as well.

The Houston culture, “has been developed over years.” About working with Harden, Morey said, “That relationship is where both of us can give feedback to each other that sometimes isn’t easy. Like, I’m not seeing what you’re seeing, let’s talk about it.”

It takes hard work and good relationships to argue well.

Another part of the reason Houston succeeds is that they find good people; players, staffers, and coachers. Sometimes that means fishing where others aren’t. Morey explained:

“…look at it from a Moneyball type of perspective and ask, ‘What are other teams not seeing?’ Our job isn’t to know what’s going to be good, it’s to know what’s going to be good more than other teams think is good.’ Everyone knows winners are good to have, but we have to find things that other teams aren’t seeing. Maybe someone has been in a  bad situation. Maybe someone has been injured. Maybe someone has been in offensive systems that didn’t accentuate their skill. We have to choose pools that other teams don’t want to play in.” 

Houston has to be different and be right and they try to find individuals in bad situations because conditions matter.

Mike Lombardi wrote: “I couldn’t help but wonder (after Rich Gannon’s MVP award) just how many potentially great quarterbacks have wasted away in the wrong system.” 

And said:

A final part of the reason – on an inconclusive list – is Morey himself. The hardest part of his job is the “travel to obscure gyms,” and time away from his family. But those are the trips he needs to take. He needs to sit on bleachers and watch players.

“I feel like that firsthand knowledge really matters. You learn in any job that as you move up and up the information gets filtered and filtered and you can lose touch with the things that help you differentiate and be successful.”

Executives that don’t feel the winds of the real world lose touch.

Ed Catmull wrote that after the Pixar IPO he noticed that the pettiness and bickering disappeared — in his office. So he left his office, walked around, and asked questions. Going to basketball games over Thanksgiving is Morey’s version of that. This holds for PR and design too.

 

Thanks for reading.

Supported by Greenhaven Road Capital, finding value off the beaten path.

This post will use quotes from Howard Marks’s fall 2018 interviews with Barry Ritholtz,  Tim Ferriss, and the The Investor’s Podcast as well as an August 2018 talk at Wharton.

You can listen; iTunes, Overcast, or Soundcloud.

Or read; ePub.

Howard Marks’ advice is for people to think like Nassim Taleb’s dentist. Not his dentist, but the one introduced in Fooled by Randomness. Dentists in New York earn (on average) $163,000 annually. Ones in North Carolina $120,000. It’s a stable and normal distribution that one can arrive at with almost all skill and zero luck. Marks’ periodontist probabilistic philosophy makes sense.

In the terms of Michael Mauboussin’s Success Equation, dentists find “history a useful teacher.” Mauboussin introduced three questions to ask to determine if something shades towards skill or luck.

1/ Are cause and effect easily identifiable?
2/ How steep is the mean reversion curve?
3/ How predictable is it?

Careers cleaning canines and incisors is an easy example. But, dentists rarely give podcast interviews and Marks has learned some helpful lessons in the field of investing. If you want a stable career, go into dentistry. If you want a more stable career, listen to Marks.

We’ll use Matryoshka – little matron in Russian – Dolls as our model. Also, if Oaktree ever needs to raise another round, Marks Matryoshkas might be a nice bonus. It’s not unprecedented.

Marks’ Matryoshka is three versions; himself, his firm, and his situation. Good choices at one level sit within good choices at another. And it takes all three levels to have good results. Marks told Tim Ferriss, “I began each chapter ‘the most important thing’ because there are twenty-one most important things.” The capstone chapter is even titled, “Pulling it all together.”

It’s combinations that matter. Michael Ovitz told Ben Horowitz that CAA succeeded as a composite. Individually this was hard to see, but if someone looked at the whole they would get the picture.

Owen Slot saw this too after he documented the British Summer Olympic team overhaul.  Slot wrote, “It’s not just your ten-thousand hours, or your leadership, or your environment, or your talent – it’s all these things….but that doesn’t give you the opportunity to put one simple answer on the book.” Hence Marks’ titling tack.

Interacting elements also removes one-size-fits-all solutions from our list of options. Tim Brown warned that designers can’t be “exported universally” to solve problems. Margit Wennmachers warned that PR isn’t like a fireman, swooping in to limit the damage. Pat Dorsey said discount cash flow is “not a magic bullet.”

But, what Brown, Wennmachers, and Dorsey do say is that lots of hard work will pay off. If someone were to read Marks’ books, tinker with the lessons, and apply them to their lives – then you’ll have great returns. He told Ritholtz, “I never want to give people the impression that this is easy, but it can be done.”

Marks wants people to find valuable things but never pay too much for them. What’s valuable? That’s a good question. He told Ritholtz, “A good investor has to be skeptical, the great investor has to figure out the truth as opposed to the story.”

Stories are to the truth like butter is to popcorn, it makes it tasty.  Story, Robert McKee wrote, “is the metaphor for life.” McKee also quotes Plato who disdained storytellers, “Writers deal with ideas, but not in the open, rational manner of philosophers. Instead, they conceal their ideas inside the seductive emotions of art.”

Our challenge is to figure out what parts of stories, metaphors, maps, and models are true. There’s never a 1:1 to map. There’s never a model that always works.

Marks told Ritholtz, “The fact that things have gone down is not a sell signal.” Good businesses may look ugly and bad businesses may look good. Buffett said that airlines are “sexy for some reasons.” Scott Galloway told FT it’s the boring businesses that are creating shareholder value. Patrick O’Shaughnessy told Meb Faber, that “the more boring, stodgier portfolio is probably going to do better.” David Chang told us that just because a restaurant is busy doesn’t mean it’s also profitable. Pixar made great commercials and special effects but their business strategy was going to Steve Jobs, hat-in-hand, at the end of each month and asking him to cover the difference. Chris Douvos uses this formula; opportunity = value – perception.

How might someone listen critically and shift the odds? Here’s how Marks has done it.

Himself

Marks has what Mike Lombardi calls the management of self, as Lombardi told Shane Parrish, “When you make a mistake or when you do something that’s not effective, you have to be able and honest to say, ‘You know what? I made a mistake here. I need to correct that.'”

“One of the keys to successful investing,” Marks said, “is to be unemotional or – at a minimum – act like you are.” How do you do this? It’s not easy. Marks said, “In basketball, they say, ‘You can’t coach height.’”

What we can do is manage our hubris and humility. “We should never say ‘never’ ‘always’ ‘has to’ ’can’t’ – these expressions are far too absolute to be winners in a world beset by uncertainty and randomness. When you use those words you tend to get into big trouble.”

We need to see the world as flexible and ourselves as sometimes wrong. Marks uses writing as a form of thinking. He told Ritholtz, “Writing makes you tighten up your thinking.” In another interview Marks said, “One of the reasons I love to write is because I tend to think of new things as I write that I hadn’t thought of before.”

Other investors like Morgan Housel, Bob Seawright, and Eddy Elfenbein do this kind of thinking too. Author and ‘academian’ Adam Grant said, “I often find I have to write a longer summary of a study before I really start to distill why I care about it.”

Thinking, writing, and investing all take time to compound. Tyler Cowen said he’s able to read so quickly because he’s read for forty years. He has compounded returns. Marks wrote for ten years and “After ten-years I became an overnight success.”

In addition to reducing emotional outbreaks and sharpening his thinking via his pencil, Marks uses an alternative history mental model. “We need to think of the world as a probability distribution…The things that reasonably could have happened but didn’t.”

Peter Thiel could have followed the supreme court path. Charles Lindbergh could have fallen sick and we’d celebrate someone else. Even the horse, wrote Stephen Jay Gould, is only one possible outcome of many. Bill Simmons said to think of the alternative histories of a football season.

What trips us up is ourselves. Marks said, “The element that causes the problems in investing is psychology. If we knew that positive news would result in good price-performance life would be very easy.”

This applies to the professionals too. “Institutions don’t make investments, people make investments for institutions.” Sure, Marks admitted to Ritholtz, professionals may have more education, more experience, and more capital, but there’s one thing working against the professional – career risk. “The mom and pop investor has the advantage that they can’t get fired. The institutional investor has to worry about getting fired and that makes it hard to do the right thing at the extremes.”

Go back to 2008, Marks said, “Personal concerns make it very hard, even for the professionals.” Ritholtz added, “Career risk is present all the time.”

Career risk is like a crosswind in sports. Sometimes it gusts, sometimes it doesn’t. It’s a variable to consider. Pat Dorsey uses the axiom, no one gets fired for buying IBM as a way to find businesses with moats. Rory Sutherland noted how some decisions are more important for signaling something rather than being right.

Bill Belichick is brilliant. David Swensen is smart. Scott Malpass is magnificent. These things are true, but each of them also has a unique situation. They have less career risk which lets them make more interesting decisions.

Which brings us to the second vessel, his firm.

His Firm

Marks succeeds because he’s in an environment to succeed. Conditions matter. A simple example is sports. Steve Nash said about Kevin Durant, “the more he plays like a point guard the more brilliant he is.” The trouble with Durant’s previous team, Nash explained, was too much offense where he might “face five guys, put the ball on the deck and take a tough pull up.” In another episode about basketball, Bill Simmons said, “It’s a long list of people that miss Brad Stevens,” implying that the conditions on the Celtics let the players overachieve.

Like pieces of furniture in the office, there are three areas Marks has arranged.
1/ Career risk.
2/ Communication with clients.
3/ Combative and kind arguments.

Marks has little career risk, but Warren Buffett has less. “There’s a book out called The Warren Buffett Way and I was asked to write the forward for the latest edition and I wrote something called ‘what makes Warren Buffett Warren Buffett and I listed the things that characterize him; extremely high IQ, unemotional, great analysis, understands what’s important, looks at the things that are important, ignores the things that are unimportant, and on and on. The last one was one of the most important; he’s not afraid of getting fired. He doesn’t have to worry about the interim consequences of error. Most people do.”

Part-of-what allows this is clear communication with clients. Ritholtz asked about pushback and Marks said there wasn’t much. Oaktree’s clients invested their dollars and bought into the approach. Ritholtz’s firm is good at this too.

Astros GM Jeff Luhnow said this is a big part of his job, ” I think it’s important in our position we spend the requisite amount of time managing the stakeholders; the fans, the media, the influencers in the organization, the ownership – all of those stakeholders.”

And clients are only one stakeholder we all have.

Lastly, Marks and the Oaktree staff argue well. In interviews, Marks praises his partner Bruce Karsh. A good business partner is like a good tennis partner.

“The person should bring skills you don’t bring and operate in ways you don’t.” They should also have “shared values and complementary skills.” We saw this with Pixar’s story. Steve Jobs worked well with Ed Catmull and Lawrence Levy while he butted heads with Michael Eisner.

What makes Marks’ relationship with Karsh so good is that they’ve never had an argument. “Intellectual disagreements but never an emotional argument. The key is respect. Even when we disagree, we respect each other.”

And Marks warned, “Don’t equate winning an argument with success. If you’re in a business situation that proves to be a mistake, your success in winning the argument will lead to a failure. Don’t confuse winning an argument with coming to the best decision.” Sometimes your arguments wrote Ed Catmull, won’t even end in an answer. That’s okay too.

Good arguments only work with good people. “Who did you get in a partnership with. You have to share values. You shouldn’t be partners with someone you don’t like spending time with and be able to work with constructively when the stuff hits the fan. Solving most personal problems starts at the beginning, with the hiring.”

Any single advice for this? “Try to limit the testosterone.”

In his podcast with Ritholtz, John Montgomery articulated this balancing act:

“We all know that you don’t want to hire a bunch of yes people – but there is tremendous psychological pressure to hire people that look and feel and think just like you.

“You want to associate with people you trust. Who do you trust? People that look just like you. That’s a formula for disaster.

“We’re trying to intentionally hire people that don’t agree with us. People who have a different view into things.

“Some people will say, ‘Do you know that this other team member doesn’t agree with you on XYZ?’ I’m like, ‘Yes, and that’s a good thing.'”

Ben Horowitz said, “If you’re too friendly you never ask hard questions to the other one – which you need to grow.” It’s like picking fruit. Too gentle and you’ll harvest nothing, too rough and you’ll have a mess on your hands.

Our Situation

Our final Matryoshka is the situation. Marks is publishing his book as we run through a (long, longest?, TBD) bull market. It’s probably good timing. He brings this up in the interviews. Marks told Ritholtz, “My approach is that we never know where we’re going but we should know where we are,” and “The easy money had been made.” At Wharton he told undergraduates they’ll have to work a lot harder than he did.

While the self is easier to control and the people we work with manageable too, our overall situation is difficult. Which brings us back to where we started; getting the odds in our favor. For example, might this time be different?

Maybe it’s a new economy. What if modern monopolies are the new norm? What if there are two economies? What about network effects? Do these things change the calculus?

We should know where we are.

Our world isn’t designed so much as compiled. Many individuals pile into a composite. But, Marks reminded Ritholtz, “There is no market, only a bunch of people. The collective decision of the market is not better than the decisions of the individuals and they are riven with psychology.”

When to trust the wisdom of crowds and when not to? This question has been around a long time:

“According to Aristotle, ‘it is possible that the many, though not individually good men, yet when they come together may be better, not individually but collectively, than those who are so, just as public dinners to which many contribute are better than those supplied at one man’s cost’.”

But crowds are only wise when they are diverse, intelligent, and can communicate but not overly influential. But, Charlan Nemeth told Russ Roberts, “majorities can be correct but aren’t necessarily correct.” Fear of judgment, fear of looking stupid, fear of dissent can also create unwise crowds.

…

Getting the odds in your favor is like not hitting line shots in tennis. “Look in the mirror, do you see Pete Sampras?” wrote Brad Gilbert. “Unforced errors determine results more than spectacular shots.” That’s kinda what Oaktree has done. Marks said that five of the firm’s thirty years account for more than their share of returns.

 “So it’s not an investment question, it’s a management question. How do you keep an organization going when its business goes out of favor sixty percent of the time? First, you have to hire people that are long-termed oriented, that don’t need instantaneous gratification every year.” 

Matryoshka doll #2.

Marks has also been lucky. “When my mother came back from every parent-teacher conference she said, ‘Your teachers all say you are an underachiever,’ and I didn’t know what that meant or why it was a problem.” 

But he helped the tennis coach who was kind enough to write him a letter for Wharton. Then he got to Chicago right as they were teaching the new stuff. Then some guy named Milken called and he wanted help with something called ‘junk bonds.’ Marks had the ability, skill, drive, enthusiasm, curiosity, etc to turn luck into serendipity.

Matryoshka doll #3.

When asked at Wharton what separated Bruce and Marks from others he said, Why do people buy high and sell low? “I think we can lump the explanation under the heading of emotion.” 

Matryoshka doll #1.

The worst thing someone could do is try and copy Marks. It’s a fools errand. It can’t be done. What someone could do is think about making better decisions, and getting the odds in their favor.

 

Thanks for reading.

Supported by Greenhaven Road Capital, finding value off the beaten path.

After the Olympic games in 1996, where Britain finished 36th in the medal count, Sir John Major shifted some of the national lottery money towards sport. Journalist Owen Slot covered the team through this time and in 2017 wrote The Talent Lab. He told a crowd at Google, “If you just chuck money at it does that guarantee you success? Money equals medals? My answer is very much ‘No’.”

Money did not solve Britain’s Olympic issues but it did make the next steps easier – and there were many next steps.  By the 2016 Rio games, Australia spent more on their Olympic program but Great Britain won more medals. At the 2012 London games, Japan and Korea combined spent seven times what Great Britain did only to win the same numbers of medals.

In addition to the lottery money was a cultural shift that reprioritized what as important. In the past, athletes selected their own coach, facility, and process. Now the British looked for athletes for their coaches and plans. They looked at base rates and determined that rowers needed to be a certain height, taekwondo athletes needed to do thirty-five high kicks in a minute, and swimmers needed to live within twenty minutes of a pool and not be older than thirty-two.

The coaching system changed too. Athletes are benchmarked numerically and now coaches would be scored, tallied, and ranked too. Even on intangibles. Steve Nash told Bill Simmons that they track resilience in soccer. “How?” Simmons asked. Attitude, hustle plays, and teamwork Nash said. They point out when players do or don’t do certain things. The English problem was too much stress, too much pointing out flaws too close to the events.

Base rates and coaching changes weren’t a silver bullet. Slot said, “I had a massive struggle with that. I tried to please my editor, but if you’re writing about twenty some gold medals you’ve got twenty some different stories. I started telling him that we were kidding our readers if we were going to tell them there was one thing all twenty some of these people did for success. It’s not just your ten-thousand hours, or your leadership, or your environment, or your talent – it’s all these things….but that doesn’t give you the opportunity to put one simple answer on the book.” Michael Ovitz told Ben Horowitz that the CAA culture was like this, a composite solution.

With the mindset of improvement, the lessons kept coming. Someone suggested that injured servicemen would make good paralympians. Here’s a group, most with an athletic background who have already proven they will work hard and follow instructions. The serviceman to Olympian program was a bust. Why? “No serviceman who went to Afghanistan or Iraq ever had the dream of becoming a paralympian.” Motivation mattered.

For 2008, British engineers redesigned the cycling bikes and kits, but a bike can only be so light. By this point they’ve changed the physical nature (selection of athletes), the psychology (management of coaches), and the physics (weight of bicycles). ‘What else could we do?’ they asked the athletes.

They got a surprising answer. “The team found that riders were somewhat embarrassed to talk about them and they were staggered by the number of training days missed due to saddle sores. Because no athlete wants to miss a training session if they train their training isn’t as good. So instead of trying to make the bike faster, they worked on that problem.” Their solution was simple, decline the saddle angle a few degrees. Those people who face the winds of the real world often have helpful solutions.

Previous British Olympic culture was heavy on top-down expertise. Once that culture changed, the teams started to change too. Pete Carroll said one of his best meetings was when he was a young coach and went to the players to ask them what they thought they should work on. They gave him good ideas. Proud of this insight, Carroll went to the head coach, high stepping like a proud child only to be admonished to never do that again and leaving with is tail between his legs. These insights are only found when teamwork trumps ego.

Thanks for reading.