Author: MIKE

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

In American Kingpin, Nick Bilton delivers the story of The Pirate Bay, Dread Pirate Roberts, Ross Ulbricht and the law enforcement pack that ensnared him. Bilton’s chapters are crisp, with cliffhangers and for me, it was a “2AM” book – one you start to read and look up at the clock to realize it’s suddenly two in the morning.

Aside from the intrigue though is a lesson for entrepreneurs and investors. The future founders can read this to see how to start a company – though hopefully a law abiding one. The investors can read this to see how to solve a puzzle – through the eyes of the law enforcement officers.

Today is for founders. Ready?

Founders

Ulbricht fit the founder’s framework because he had intelligence, motivation, and curiosity but also wanted to see the world a different way. Facebook encouraged people to move fast and break things and to varying intensities, it’s what all entrepreneurs do.

“While he (Ross) couldn’t talk to them about what he did for work, he could discuss what inspired him to do it. After all, in San Francisco the mentality of using technology to try to disrupt a broken system wasn’t a strange way of thinking but rather the norm. In so many ways, the programmers and entrepreneurs Ross met were just like him.”

Ken Grossman was brewing beer in his closet, breaking the rules on underage consumption and home brewing. He wrote that these sorts of efforts could have led down the wrong path if it wasn’t for some neighbors who directed him in productive directions.

Or, as Yvon Chouinard put it: “One of my favorite quotes is ‘if you want to understand the entrepreneur study the juvenile delinquent’ cause they’re saying ‘this sucks I’m going to do it my own way.’”

While Chouinard and Grossman had prosocial avenues to head down, Ulbricht only saw dark alleys:

“But what choice did he have? It wasn’t like he could go out west to Silicon Valley and get a job at a start-up. After the bubble had popped a few years earlier, companies that had been built on a wing and a prayer had siphoned people’s retirements into thin air and collapsed, leaving San Francisco a metaphorical no-fly zone.”

That doesn’t excuse actions, but it points out that this mindset has certain consequences in certain conditions.

Ulbricht didn’t know what to do so he did what a lot of people do – he went to graduate school. After falling in love but falling out of his program he was back to trying things.

“After Penn State, Ross had tried to build a video game that would help demonstrate these theories. But it had gone nowhere. Just like all of Ross’s other ideas.”

Quantity is its own quality. Alice Waters succeeded with her first restaurant but not her first meal. She had a lot of failures, tweaks, adaptations, tests, and trials before she got it right. What Waters and Ulbricht both did was remix existing things into new ideas.

For Ross that meant combining his libertarian ideals, Craigslist use, drug participation, technology interest, and of course, a TV show. “The latest show they had become obsessed with was Breaking Bad.”

Combine these ingredients and out pops Amazon for drugs. But there was a missing piece. How do you pay for this stuff? “Ross had come across a technology that had recently emerged called Bitcoin.”

Angel investor Jason Calacanis likes to ask, what makes it different this time. Both he – and to some extent Rory Sutherland – believe that Uber succeeded because of the map app. Seeing the dots on a map connected the dots in people’s head. Bilton writes that Bitcoin, “was the missing piece Ross had been waiting for to build his experimental world with no rules.”

With the ideas and the tools, Ulbricht coded the site in a weekend. HA! A weekend! Bilton wrote:

“He spent innumerable hours writing front-end code, back-end code, and code that helped sew those digital dialects together. Ross was teaching himself all of these programming languages on the fly. He was technically doing the equivalent of building eBay and Amazon on his own, without any help and without any knowledge.”

The overnight success takes years of non-glamorous work. Marcus Lemonis, Ken Burns, and Brent Beshore all make it a point to point this out.

“Ross had to oversee customer-support tickets that seemed endless, with people complaining about drugs not arriving on time, the site being too slow, or harassment on the forums. There were more hackers to fend off with even larger ransoms, the Feds to hide from, and his employees to inspire. Fudge, this was hard work.”

Ulbricht muddled along.

“To help entice potential customers to feel comfortable acquiring drugs from these mysterious new dealers on the Internet, Ross built a ratings system on the Silk Road where sellers were given “karma” points, which acted like positive or negative reviews, just as on eBay or Amazon.”

Tweak, copy, patch. The site slowly came together (Ross got help from friends and message boards, the latter would be a clue for the officers). Ross thought he was protected because of the tools he used. When asked, “Ross would calmly reply, ‘I can’t get caught because I’m protected by Tor and Bitcoin.'” Every project requires assumptions but once firm footing can become sand and slip away.

‘Liquidity’ is a common financial assumption. In our post on five market crashes this was a thread in each tragic tapestry.

Another thing we see with startups is how much time they take. Founders don’t coach youth soccer. This was the point Malcolm Gladwell tried to make about ten-thousand hours:

For Ross it was about a girl:

“She loved Ross so much, but he appeared to love his Web site more.”

But was it worth it? Ulbricht had the right idea, creating a platform business model:

“The Silk Road, which he had started only a year earlier, had just crossed a line of $500,000 a month in drug sales, which would subsequently turn into hundreds of thousands of dollars in commissions that flowed right into Ross’s pocket.”

“The Silk Road, after all, was just the platform—no different from Facebook or Twitter or eBay—on which users communicated and exchanged ideas and currency.”

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Damn, if only… I thought as I read this story. Unlike some failed startups, Ulbricht did so many things right. He understood his customers, he experimented, he was curious, and he was guided by a big idea (in addition to money). It was good work in the wrong direction.

There are lessons in this story for founders, but the biggest is to do something good.

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

Rather than reading, today is for listening. The inspiration is Tom Vanderbilt’s book, Traffic and we’ll cover adaptation (why your commute still sucks), feedback (investing in bull markets and driving in good conditions), and assumptions. Enjoy.

https://soundcloud.com/mikesnotes/traffic-assumptions-traffic-feedback-traffic-adaptations

Here are the iTunes and Overcast links.

 

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

Eddy Elfenbein spoke with George Pearkes on the Bespoke podcast. Articulate individual investors like Elfenbein provide a nice glimpse of markets and decision making.

Elfenbein and Pearkes are both fans of a multidisciplinary approach to understanding markets. “I liked the stock market,” said Elfenbein, “but I didn’t take a single business class as an undergrad.” Pearkes agreed with a liberal arts style approach  “It gives you a framework that will create a different impression about what’s going on rather than the lens of business, accounting, or economics.”

How so? Look at history, said Elfenbein, and you realize things are more complicated than they seem. “One thing you learn studying something- like the civil war or Vietnam – is that it is a lot more complicated than you realized.” This helps filter out the noise of the markets. “Investing is a minefield for the meta-narratives. You have to be very practical-minded and lose these absurd larger explanations and come at this without an ideological view.”

“This really comes in handy when you’re looking at the market and everyone has their little slogans.”  – Eddy Elfenbein

This is the same mindset Esther Duflo used when she studied non-investors, the world’s poor. Duflo wanted her research to be free from this is a supply side problem, no it’s a demand side problem squabble. That’s why both Duflo and Elfenbein take a research-focused approach.

Michael Mauboussin wrote about this approach: “you will be a better investor, executive, parent, friend, – person – if you approach problems from a multidisciplinary perspective.”

Morgan Housel agreed, “The most powerful concepts are those that span multiple disciplines.”

A multidisciplinary approach may also encourage life-long curiosity. Elfenbein said, “I’m a big believer in the liberal arts education, how it teaches you how to think and how it teaches you to teach yourself.” This book may be a good one to get you started.

Elfenbein wasn’t born this way. He grew into this mindset. His first job was terrible. Then he wrote a newsletter, mostly for fun. “It was fun to do, a very informative learning experience.” Jason Calacanis said almost this same thing about angel investing. You may not make money, but the connections and lessons may be more valuable. Writing the newsletter also gave Elfenbein, “a position I couldn’t have applied for.”

In 2005 he started Crossing Wall Street. His strategy? “There was no orderly plan. I just like to write what I thought about stocks. It’s what I enjoy.” Writing for Elfenbein is “thinking out loud.” Writing is often a form of thinking.

Interviewees like Adam Grant, David Gardner, and Bob Seawright recommend writing as a form of thinking.

This comes easier to people like Elfenbein because he likes what he does. “I like the movement and energy of the financial markets.” Verbs are easy to outsource. That means that the best will be those who enjoy it and are willing to do the (extra) work.

An interesting point in the podcast is when Pearkes brings up the fact that high tax companies have had low returns so far this year. It’s a hmm, that’s interesting moment. Why would a company with potentially favorable future conditions not have a price increase? Elfenbein guessed:

“The conventional wisdom is that retailers pay the highest taxes and technology companies pay the lowest. I’d imagine that the macro trends impacting both those industries is a tidal wave compared to anything that will be implemented in the tax code.”

This single quote shows depth. Elfenstein avoids the narrative bias, the easy answers, and simple solutions. He engages in what Howard Marks calls second level thinking. Later in the episode (45:00), he extends this type of thinking to Signature Bank ($SBNY) and AIG.

Elfenbein also reveals the secret sauce to good investments. Just find companies with strong returns on equity, good performance in their market, healthy margins, low debt, a comparative advantage at a good price. Or you can buy his ETF.

Remember though, numbers only lead to letters:

“Numbers can only tell us a nice story of what’s going on…If a company has strong cash flow and good numbers it means the product is good, the management is good. But why is the product good? Because it does something it’s competitors can’t. That’s the end result.”

Often good products are quasi-monopolies.

“I like to look for a company that does something another company can’t. It’s not technically a monopoly but is sort of a monopoly that no other company can do it.”

Harley Davidson is one example. A lemonade stand with a patent might be another. “A good way to see this,” Elfenbein said, “is to ask; ‘Who can raise their price?’ That’s the sort of business you want to own.” Along with Pat Dorsey and Connor Leonard, Elfenbein has some good ideas about moats.

Elfenbein reminds us that these moats are temporary. “Always be aware that these advantages are not permanent.” There’s alpha erosion. Daryl Morey sees it in basketball, Nate Silver saw it in online poker, Leigh Drogen sees it in data sets.

 

Thanks for reading. Want another email? Of course not, but if you want the archives of my newsletter they’re here.

 

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

This post is part of the TIL2017 Summary Series.

Eliud Kipchoge said, “one-hundred percent of me is nothing compared to one percent of my team.” Even solo-efforts like running a marathon take a team to get ready for. The best results come when those stakeholders are aligned.

Investors know this. “Permanent capital” like Trish and James Higgins, Brent Beshore, and Warren Buffett and Charlie Munger are the pinnacle. They are the stakeholders. It’s a committee of (nearly) one.

Other investors have similar situations. Wes Gray called it “educated capital.” Thomas Russo found business owners. John Montgomery uses stewardship questions as a screening tool. Good investment managers will follow Barry Ritholtz and Josh Brown’s et al. lead and communicate with their investors about how they think about something and why.

Investors are like spouses, it may be enriching to lie about the size of your returns but the truth will come out.

Non-investing businesses have stakeholders too, they’re called customers. Andy Rachleff said that successful startups must preach to the converted. They’ve reached the “shut up and take my money” meme stage.

Customer groups aren’t the only collections of stakeholders. The GMs, Ben Falk, and Jeff Luhnow all had to answer to owners, peers, fans, and the media.

Non-professional stakeholders are your family and friends. This is why Marcus Lemonis advocates for people to start businesses when they’re younger rather than older. Not having kids, he says, is a competitive advantage.

Morgan Housel said that few stakeholders is part of being like Elon Musk or any CEO. The stakeholders of ‘reading’ or ‘coaching soccer’ take a back seat to the business. Ken Grossman gave a first-hand account of this as he started the Sierra Nevada Brewing Company.

Malcolm Gladwell clarified this point about support in the Freakonomics podcast:

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Everyone in our life makes it better or worse. Some people more, some people less. Success comes from filtering out the wrong stakeholders, as best you can, and then limiting the existing ones to only those you enjoy. From companies to families, the best results come from everyone not only rowing in the right direction but wanting to be in the boat.

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

This post is part of the TIL2017 Summary Series.

America’s founding king is personal responsibility. Yet, conditions matter too. Introduce the same situation in different ways and the same person will have different responses.

Kara Swisher thought that maybe this contributed to the problems on social media. Without a real name or avatar, people act differently. The same goes for sharing, if it’s easy to tweet, post, snap or gram we will. If it’s easier it’s more frequent. I’d never taken a picture of food before Instagram.

Defaults are an example of conditions that matter. When schools switch apples for chips at the checkout, students take and – mostly – eat more apples. However, when they replace apple slices with french fries earlier in line, students switch from the default back to the fries.

Richard Jefferson found that the mood of San Diego was to relax. Unfortunately, this didn’t make him a better basketball player and he moved to Los Angelos.

Meb Faber found that the ten-year (plus?) holding period for angel investments instilled patience. Not getting his capital back was a good condition.

Cal Newport writes about Deep Work. This kind of effort is so important it should dominate your day but we get distracted by shiny objects. Newport’s blinders are designed to block out these things.

Alice Waters said that moving from Santa Barabara to Berkley changed her life forever.

When Eliud Kipchoge and his Nike compatriots tried to run a marathon in two hours they picked a setting at a low, flat, easy turning course. Those conditions matter.

Conditions were a common part of the Rory Sutherland Series too.

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If conditions can make changes, we can design conditions for positive ones. Investors, athletes, and executives all make choices ahead of time. Generally:

• Make good things easy.
• Make bad things difficult.

Thanks to technology, tracking how you spend your time or money are easy. Use Wes Gray’s advice and “plan in system two.” For me this means logging out of Twitter, removing it from my phone, and creating a laborious password. These choices don’t prevent my using it but do keep me from picking this low hanging fruit. Conditions matter and conditions are malleable.

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

This post is part of the TIL2017 Summary Series.

As we saw in the Rory Week posts, presentation matters. Which is why we say to “argue well” rather than “avoid yes men.” Arguing well is doing, not avoiding. Here’s how people suggested it this year.

Matt Wallaert said he likes to return to Oregon because it’s the kind of place where you can argue with someone but still break bread – or in the Pacific Northwest case, drink beer. Good arguments don’t have baggage.

Charles Koch said they try to do this at his companies too. Remember, Koch said, the boss knows some things and the employees know other things. Both sets include important variables.

Within Bill Belichick’s New England Patriots, an argument is rewarded. It isn’t disagreeing for its own sake but having an opinion. Jamie Dimon said he’ll cancel meetings if people don’t do the work required for having an opinion ahead of time. Good arguments, conversations, and meetings are all preceded by preparation.

It’s his name that’s the brand, but Ken Burns encourages disagreement too. Even his interns can voice contrary opinions if they are developed and related to the subject at hand.

At Bridgewater Ray Dalio calls this “thoughtful disagreement.” Dalio believes in it so much that he’s built tools for people to share how they disagree and their domain accuracy. If someone is known for having accurate intuitions about an area their arguments are granted more weight.

Adam Grant said much the same thing in his interview with Shane Parrish. Aim for friendly competition said Grant, where you try to make each other better. This kind of environment requires giving rather than taking norms, explained Grant in the podcast and elaborated in his book.

Leaders have to create the environment for this. Gregg Popovich models it by disagreeing with his boss, General Manager RC Buford and encouraging it from the people under him. Other GMs have said that this is the kind of thing you should look for in hiring. Find people who can argue well.

This isn’t easy said John Montgomery. Often we want to hire people we like. Those people look like us, think like us, and talk like us. Agreement is comfortable, but as the adage goes; if we’re all thinking the same no one is thinking.

Disagree and be ready for discomfort. This surprised Dan Egan. Good arguments chip away at our beliefs about the world.

The archetype of argument might be Dwight Eisenhower who kept his inner circle running in circles. Ike never tipped his hand, especially in cards, about what he was thinking. Instead, he egged on one point of view in a morning meeting and took the other side in the afternoon. The Presidency may have been a demotion from Supreme Allied Commander, but Ike knew his subordinates were more likely to bend at the knee than stand up in opposition.

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Good arguments aren’t off the cuff. They’re more like deep, heart-of-the-mater problems that matter. Too many smiles or too many tears are two signs you aren’t arguing well.

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

This post is part of the TIL2017 Summary Series.

Along with internal objectivity (know thyself) comes external objectivity. This is seeing the world as it is, not as you’d like it to be.

This came up as ‘tailwinds.’ That is, understand what part of your success wasn’t you. Wes Gray said that aside from the internet crash, any small-cap value investment went up. Michael Lombardi applied tailwinds to football to tease out if a team was good or bad. Absolute stats – see our Trust but Verify post – are limited. Instead, ask ‘compared to what?’

Bill Simmons wondered about this when he asked how good Dirk Nowitzki was. He tried to compare him to Kevin Durant but noted how difficult it was because they had different situations, Durant’s tailwinds are his teammates.

Maha Ibrahim and Kara Swisher talked about how this relates to gender. Like a bull market or a bad opponent, men have had tailwinds in tech. The men, these women note, often fail to recognize this.

Cliff Asness and Ray Dalio both wondered about the other side of their trades. Who is buying if you are selling? That’s a depth of objectivity neither of these successful investors has plumbed.

Objective thinking requires an out of body experience to not be tricked and instead be treated. Jason Calacanis advised to “think like a journalist.” Try to find the truth as you’d report it. Ken Burns said he tries to keep his thumb off the scale when he’s making his movies.

Matt Wallaert said to make sure you are solution agnostic. Esther Duflo saw this with her work in India and Africa. Our views of the world; political, social, physical influence our solutions. Our initial views are tainted. Instead, do what Wallaert and Duflo did, go out into the world and see what works.

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Tailwinds, as runners and cyclist know, are hard to notice. All progress has friction, but some progress is helped along by outside factors. Try to figure out those factors and see the situation as clearly as you can.