Author: MIKE

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

Scott Young wrote:

Young’s plan is this:

• 3 years living abroad
• 1 year of philosophy
• 6 months of religion
• 6 months on world history
• 2 years on math and hard sciences (but mostly math)
• 1 year of art
• 6 months on music
• 6 months on meditation
• 6 months on economics and psychology
• 6 months on practical skills (e.g. plumbing)

Young admits that this isn’t linear (or practical). Who has enough resources (time, money, ability) and few enough commitments (family, work, bills) to do this? But if we start from an idealized place and work backward we might find something worthwhile, maybe better. Lifelong learning – or as David Salem calls it, “intellectual integrity” – is a common theme around here.

We’ve seen snippets in the XMBA posts. Elizabeth Gilbert‘s story may be the most instructive of the group.

Gilbert wanted to enroll in an MFA program but it was too expensive. “I made a commitment to devote myself to becoming a writer, and for five seconds I considered going to graduate school, but it’s really expensive…and I wasn’t sure that was the best place for me to be.” Gilbert considers the MFA program like Stephen King considers the writing camp:

In the same way that home cooking can be a better, cheaper, simpler version of a restaurant meal, Gilbert decided to teach herself. “I needed to go roll around in the world…(and)…I created – really intentionally – my own postgraduate MFA program.”

Gibert worked in dinners and talked to the customers. When she ducked back to get a tuna melt she would note what the people said and how they talked. She worked hard and saved up. She would take months off to travel. One time she ended up in Wyoming working as a trail cook. She wrote a piece about it and Esquire published it.

About her DIY MFA, Gilbert said, “I’m not expecting this to work, but I don’t know how to do this without trying.” Gilbert created a win-win situation. Even if the outcome (“I’m not expecting this to work”) was unwelcome, the process wouldn’t be.

…

Young wrote:

“Think of this as the educational equivalent to the what-would-you-do-with-a-million-dollars speculation we often engage in to think about what are interests would be if we didn’t have to worry about money.”

Rather than a ten-year plan, let’s look at the logistics for any length plan. Specifically; who to meet, what to learn, and how to do it.

Who to meet?  Tyler Cowen noted on his link to Young’s post, “I would put more stress on role models and who you get to meet, not to mention romantic partners.” People matter quite a bit. Listen to the closing questions on Patrick O’Shaugnessy and Barry Ritholtz’s podcasts and you can hear guests glowingly gush about mentors.

Meeting people also creates see-it-to-believe-it moments. Bill Simmons guessed that kids like Steph Curry so much because he’s relatively short. ‘If Steph can do it, I can too’ goes their thinking. See it, believe it.

It happens to adults too. Often the revelation is, ‘Wait! That’s possible?!?!’, Both Ken Grossman and Mohnish Pabrai had moments as kids that changed the direction of their lives.

Meeting people you (may) want to be like can also rule things out. Morgan Housel got a job at an investment bank and realized it wasn’t for him. Royce Yudkoff cautions his students about this too. Just because you like to do something as a hobby, doesn’t mean you’ll still enjoy it as a job.

People are multipliers. A good person in your life improves you by 1.2X. A bad one is worth 0.65.

What to learn? Anything you want! Young tilted toward a classical education (I like this or this overview). He also pointed out something Shane Parrish writes about at Farnam Street. If you’re going to study something deeply, study something that isn’t likely to change. Think of this as a continuum. Starting with ideas that are least likely to change:

• The cave and the painted porch (philosophy)
• 2+2 = 4 (mathematics)
• F =M*A (physics)
• Ecosystems (biology)
• Price elasticity and moats (microeconomics)
• Ann the librarian who buys too much jam (psychology)
• The wisdom of crowds and madness of mobs (sociology)

Rory Sutherland noted that the fuzzier things are still worth studying. If something only affects 20% of people 35% of the time there can still be a business around it.

In addition to these external subjects, study yourself. What are your limits? What do you enjoy? Investors enjoy the research process, and they’d better! There’s a lot of other things you could do with that time. Jeremy Liew pointed this out in another area.

“I think you really have to know what you’re good at. To be a great operator I think you need to have a singular focus and a level of leadership and management charisma that can make you incredibly successful. I’ve seen what good looks like and I’m okay, but I’m nowhere as good as the best operators and CEOs in the world.”

Liew knows what he’s good at, what he isn’t, and what he can work on. That gives him an advantage. Reed Hastings said he likes running companies. Jim Clark said he likes starting them. What do you like?

How to do it? Start a blog because writing is a form of thinking. “Writing is refined thinking,” wrote Stephen King. “I think clear writing and clear thinking are synonymous,” said David Salem. “By writing the notes and putting them in the podcast and thinking about which direction I’m going to go – I’ve learned it better,” said Jocko Willink.

Writing, teaching, explaining, or podcasting are ways to do the thing you’re learning. Brian Stout put it this way:

“The way that I learned things was deliberate practice. You can’t read about things or hear people talk about them and know how to do them. There’s a large amount of the learning process where you just have to go out there and do it. It’s like riding a bicycle. You can’t watch someone ride a bicycle and ride a bicycle for the first time.”

There is a balance of consumption and production. I read a lot more than what makes it into this blog or the podcast. To produce something requires raw materials. Writers like Anne Lamont and Sebastian Junger both talk about not so much writers’ block as writer’s chasm. One way to learn is to accumulate materials and then share what you learn.

 

Thanks for reading,
Mike

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

One theme that’s come up on this blog are moments where someone thinks, “Hmm, that’s interesting.”

These ideas emerge when someone’s perception of the world doesn’t match reality. When this happens we can do three things.

• Dismiss reality (stubborn), That person is an idiot. Of course, he would think that. 
• Accept reality (compliant). I’ve been wrong this whole time. I will update my views. 
• Be curious. Hmm, that’s interesting. 

Curiosity is a form of intellectual integrity said David Salem.  It’s a superpower said Brian Grazer.

Let’s see how this works.

…

Raj Chetty told Tyler Cowen that he was struck by the difference between how economists thought people approached taxes and how his friends approached taxes.

Richard Thaler kept a list of “dumb things people do” in this office.

Haralabob Voulgaris heard Phil Jackson say that corner three-point shots were a terrible choice because they led to fast breaks. Voulgaris dug into the details.

Eric Maddox thought it was interesting that all of Sadaam’s bodyguards were uninvolved except one.

Jim O’Shaughnessy heard ‘adults’ explaining how they picked investments based on the people and not the financials. He wondered if there was a better way.

Patrick Collison saw how easy it was to sell apps in Apple’s App store and wondered why it wasn’t as easy to sell things on the internet in general.

Ray Kroc wondered why people kept telling him about a restaurant in sleepy San Bernadino.

Michael Ovitz said his curiosity, “drove people crazy, I drove people out of their minds, but they liked it. I was this brash, inquisitive lunatic.”

Elizabeth Gilbert said “The tricky bit is starting from a place you are very curious because in six months it’s going to feel very boring and tedious because making things is very boring and tedious. Another idea is going to come along very seductively and do the dance of the seven veils in the corner of your studio and say ‘I am a much more interesting, much more exciting idea.’”

…

Hmm, that’s interesting isn’t easy. It takes work. You have to pay attention. You need ideas – not idealogies. You have to be willing to dig, reassess, and dig more. You need a willingness to be wrong. You have to be okay being empty handed. Of course, that won’t be true, you may be curiouser.

 

Thanks for reading,
Mike

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

Larry Kochard joined Ted Seides @TSeides on the Capital Allocator’s podcast. My one big takeaway was this – – good decisions are the result of good ideas and good actions.

Throughout the episode, Kochard points out (e.g. a long-term orientation, good people) that what he’s doing isn’t new. These ideas are actually so well known we have a name for them, best practices. What matters is if you actually do the things that are good for you.

Okay, into the notes and quotes from Kochard.

…

“If you’re managing someone else’s money you have to have an understanding that there’s some level of absolute loss or relative loss that you can’t go beyond.”

An idea we’ve seen before is aligning stakeholders with your direction. Kochard has that, to a point, in managing a university endowment. Others like Seth Klarman and Wesley Gray (try to) only embark stakeholders of a certain disposition.

Influential stakeholders exist outside of finance. Louis C.K.  said he made Horace and Pete a certain way in response to the advertising stakeholders. For Phil Knight it was the bankers who were stakeholders as he ordered more inventory each cycle.

Everyone answers to someone – sometimes many someones – and that type of person can matter a great deal.

…

Kochard has five core principles that he builds ideas around. This is a theme I’ve noticed, everyone starts thinking from somewhere.

1/ “Everyone is a long-term investor but can you build a decision-making framework, a governance framework, and a team that will enable you to do that? Knowing there are so many impediments whether they are behavioral biases, organizational constraints, or market constraints to cause you to not behave that way.”

As we noted in the opening, there are obstacles to best practices. This was Sam Hinkie‘s problem in Philadelphia. His process for long-term success was to acquire talented young players on cheap contracts. The best way to do this is draft high. The best way to draft high is to lose a lot of games the preceding year. Hinkie had a good process, but there were “impediments” that changed the behavior (and the person in the job).

2/ “Value added managers tend to be bottom up, company specific and actively involved in shaping the future of those companies.”

It’s important to play games you can win, or at least games you won’t lose. We saw this in the 2017 NBA Finals. Top-down macro is too damn hard. Peter Lynch said that twelve minutes reading macro forecasts is ten minutes too long. Patrick O’Shaughnessy said about this type of investing, “I’ve always felt that macro investing is so hard because you need to get two things right; accurately forecast what’s going to happen, but more importantly, you need to position your portfolio in a way that will actually benefit if your forecast come true.”

Kochard added at the end of the episode:

“Everything I’ve tried to develop in our culture is to play to our strengths. If we’re good at something let’s do more of it. If we’re really bad at something let’s not do it, or, try to figure out what we can do to get better. But not force an allocation so we can look like our peers.”

3/ “Again, everyone says this. These are not unique core principles. Price matters.”  Kochard clarifies that this doesn’t mean a low number that shows up on Yahoo! Finance but something distinct.

This requires two things; knowledge and time. If a purchaser – of stocks, homes, groceries – doesn’t have the option to wait they’ll likely pay an above average rate. Additionally, if they lack the knowledge to know what is a good price they’ll pay too much too.

4/ “The more experience I’ve had, you just realize it’s all about the quality of people.” David Salem had a nice framework for finding good people – ethical and intellectual integrity.  Ethical integrity means things like loyalty, honesty, and how you treat other people. Intellectual integrity means curiosity, reading, and changing your mind.

5/ Kochard tries to diversify his investments and team, “and having a team that’s very diversified in their backgrounds and the way they view the world. If everyone is in complete unison you’re going to be making awful decisions.” Kochard wants an organization that argues well. Michael Lombardi said that it matters who you let in the room. Phil Jackson found out that good arguments mean leaving aside egos.

…

 

Thanks for reading,
MIke

This idea of starting your thinking from somewhere is salient because you can change where that somewhere is. Rory Sutherland uses psychology to reframe situations, similarly, we can reframe our starting position to test different lines of thought. More to come on this…

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

Rory Sutherland (@RorySutherland) joined Shane Parrish on The Knowledge Project podcast. It was nearly two hours of stories and foibles. Here are some abbreviated notes.

1/ Framing. Most of the conversation works its way back to this; perception matters. We don’t always think of perception as a way to solve problems. Sutherland said, “no one would have gone to an advertising agency to solve this problem ten or fifteen years ago…It’s always more acceptable to spend money on infrastructure than to spend money on psychology.” Do we feel like it’s cheating?

Maybe we feel like it’s cheating? Yet we know this matter in other areas. Sutherland explained, “the taste of the food will be affected by the decor of the restaurant.”

“Wine will taste better if you pour it from a heavier bottle, wine will taste better if you tell people it is expensive…cheating or not it is inescapable.”

He also told the story of a creative pilot who, because his gate was backlogged, had to deposit the passengers on the tarmac. Passengers thought we’re being dumped on the tarmac and herded to a bus but the pilot reframed it as you’re being let off earlier than normal and we’re transporting you straight to customs. Same situation, different story.

It’s because of examples like this that Sutherland calls this, “a kind of alchemy.”

…

2/ CAS. Sutherland said, “An automatic door is not the same as a doorman.”

Complex Adaptive Systems are not like Humpty Dumpty – you can’t put them back together again. In the podcast I explained this in terms of multiplication. My daughter is learning her multiplication facts and knows up to five. Six, seven, and eight are much harder. Once I explained that 88 is the same as 84*2 she understood.

Multiplication is a simple, linear system. Cause, effect. Numbers don’t have feelings being ripped apart to teach a nine-year-old. Not many systems are like this.

“Complex adaptive systems effectively obscure cause and effect.” Michael Mauboussin.

“In complex systems, malfunctions may not be detected for long periods, if ever.” John Gall, Systematics.

Problems bubble when you think you are solving a simple problem but it’s a complex one. Complex problems do not require complex approaches.

…

3/ SITG. Sutherland said:

“Effectively I can still put my two teenage daughters into a black cab in London, driven by a total stranger and without bother to memorize the badge number, I can say, ‘can you take them there?’ Without giving any thought to their safety. Part of the reason is because if you’re prepared to spend four years becoming a cab driver and four years of your life – that you’ll never get back – is spent reaching that qualification, you’re committed to the job and secondly, you have a lot of skin in the game.”

From Yvon Chouinard (carabiners) to Seth Klarman (cash), it helps to have skin in the game. One scout said about scouting players for Bill Belichick, “your balls are on the line if you say a player isn’t going to be a problem off the field. If he is, then it’s your fault.”

People like this idea, but implementing it is hard. Anson Dorrance suggested to a group of administrators that anyone who voted for a coach should lose their position if the coach was fired. No one took him on it.

…

4/ The experiment on the road to Damascus. Sutherland says he doesn’t have the time he’d like to read but that early in his career, books forced a change in his thinking:

“In 1989 I had a kind of road to Damascus moment, where I said, ‘however elegant economic theory may be it patently doesn’t describe individual real world behavior very well.”

Sutherland had a that’s interesting moment.

“My luck was, when I went into the advertising industry I first started working at a place called Ogilvy One – the direct marketing wing of the agency – and there you effectively do social science experiments very well funded at a grand scale.”

He started experimenting, reading, and experimenting some more. He asked academics about their research. Not the popular stuff, but the “rubbish”.

“In business if only 30% of people do a weird thing 20% of the time there’s still a business opportunity in that…the problem with economics isn’t only that it’s wrong but that it’s incredibly creatively limiting.”

What Sutherland discovered during this period was that it was worthwhile to experiment on just about anything. Even – or especially – on things that academic economists thought was sound.

Richard Thaler‘s book, Misbehaving covers this period of time where Sutherland was adapting his approach, with the same sort of that’s interesting attitude.

…

5/ Rapid fire. Just go and listen already.

• Why is it that Americans (and Canadians) have so little vacation time? Wouldn’t working less when younger be worth working slightly more when older? (51:20)
• “In business, you have to act like there’s science behind your decision.” Did you predict it ex-ante? What can you learn from it ex-post? (55:00)
• “We call this the Heathrow effect.” (59:00)
• “There has to be a borderline pain threshold for that placebo to really work.” (1:14:00)
• “Effort can destigmatize price.” Pick your own strawberries and rinse them in your IKEA kitchen.
• “Anything that costs now and only pays off in the long term is a reliable signal of a business or individual who is playing the repeat game and not the one-off game.”(1:27:30)
• “If you test counterintuitive things it’s much more valuable when they pay off. Test counterintuitive things because your competitors won’t.” (1:53:00) The cost to test is low but the upside is huge. Chris Cole talked about this for everyday things.

 

Thanks for reading,
Mike

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

It’s fun and interesting to cross domains to get ideas, use them, mash them into a workable form, and declare victory or defeat. Bill Simmons chatted with Joe House about the 2017 NBA Finals and there were a number of goodies. I’m a fan of Simmons and think he’s a superforecaster. Let’s see what we can learn.

1/ Play games you can win. “It did seem like they (Cleveland) weren’t trying to turn it into a track meet quite as much.” – Simmons

The Cavalier’s opponent, the Golden State Warriors, are the best scoring team in the NBA this season. One way to beat them is to slow the pace of the game. Simmons said that’s what Cleveland tried to do. If the Cavaliers try to be better than the Warriors in a game with a lot of three-point shots at a fast pace, they’ll lose.

We’ve seen how companies like Instagram, Sam Adams, and Airbnb and Uber use this. Playing a game against your opponent’s strengths doesn’t work.

…

2/ Availability tendency. “We are always mindful of not overexaggerating what is right in front of our eyes, but…” – House

It’s entertaining to make claims like this, and it can get us to fruitful discussions but we should at least be aware of the ease with which examples – like Kyrie Irving – come to mind. Psychologists like Daniel Kahneman and economists like Richard Thaler wrote that because we are cognitive misers we tend to equate how easy an idea comes to mind with how accurate it is.

Dan Carlin said about ideologies, “there’s an ease to adopting an ideology because it gives you ready made answers for any situation.”

Kyrie Irving may be the best, but there are warning signs we should be aware of.

…

3/ Shift the odds. “I would let Draymond and Iguodala shoot threes all day. I would leave them wide open…because Durant and Curry are the guys that just kill them.” – Simmons

“You need to do everything you can to tilt it a little bit. Cleveland was inviting Shaun Livingston and Draymond to take shots. It’s not like that all by itself is going to change the outcome of the series but Cleveland needs to be doing all that it can.” – House

Much like investing, business, or relationships there are no sure things. All we can do is shift the odds. This is why Warren Buffett and Charlie Munger suggest avoiding dumb things. If you can avoid terrible outcomes you’ve shifted the odds.

In past episodes, Simmons and House have admitted this too. (If gambling were legal) some bets can be good even though they didn’t pay off.

…

4/ Tailwinds, rising ponds. “Do you think Dirk ever played better than this?” – Simmons

“I’m having a hard time making the comparison because this Warriors team isn’t like any team I’ve seen in thirty years.” – House

Jack Schwager said, “If you’ve done well in a bull market all you can assume is that you’ve done well in a bull market.” That articulates the point House made. Durant has succeeded on a team that’s the equivalent of a bull market. Dirk succeeded on a team that was not.

In sports, this balance can be difficult to shake out because it’s a complex system. Having one great player on your team makes the second best player a little better. House and Simmons point this out when they talk about the LeBron-Kyrie pairing. That second best player makes the third best player better and so on down the line. But like point #2 (availability tendency), we should be aware of situations with tailwinds.

Great business leaders like The Outsiders and Intelligent Fanatics grow their businesses in any market condition. Great people grow their businesses in any market condition too. Ben Horowitz suggested hiring the best salesman on the second best brand rather than the second best salesman of the best brand. Kara Swisher wondered if this was part of what happened to Yahoo?.

…

5/ Argue well. “People always want us to disagree more on the podcast and this is a good disagreement for us.” – Simmons about the Love for Wiggins trade.

The best organizations welcome thoughtful challenges and arguments:

After spending years with the Patriots Michael Holley wrote, “Belichick has no problem listening to any counterargument – provided it can be supported with some type of evidence.” Good leaders encourage debate and we get that from Simmons and House.

…

6/ Too hard pile. “Here’s the problem – and this is why modern basketball is becoming harder and harder to gamble on – you just don’t know when someone gets twenty-four threes.” – Simmons

A related point to number #1 (play games you can win) is to skip things that are too hard. Buffett and Munger have a “too hard pile.” Daniel Kahneman said, “I’ve always felt ideas were a dime a dozen. If you had one that didn’t work out you should not fight too hard to save it, just go find another.”

Simmons and House said parts of football gambling are too hard too:

…

7/ Linear thinking. “There’s no reason to think they (Golden State) couldn’t do it again next year.” – House

This comes when the duo talks about dynasties in the NBA. In the modern NBA, only LeBron’s Miami teams made it to the finals four consecutive years. It’s possible, but like points #2 (availability) and #4 (tailwinds) we should consider the nuance and not get stuck in a linear mindset of ‘this is how things are now and is how things will always be.’

The 2012 Oklahoma City Thunder team wore this narrative. The team was young, athletic, and talented. What could go wrong?

…

8/ Toward the end of the podcast Joe House’s blood sugar must have bottomed out, or he entered the initial phase of food poisoning because he said, “I have talked myself into Dwight Howard as a Washington Wizard.”

When House, a normally astute observer says something like this I can only assume he was ill, or this is code for him being held hostage.

If he actually talked himself into this – please Joe, say it ain’t so – it’s because he’s focused on immediate results. House’s team, the Washington Wizards have two players in the prime part of their careers. House feels a win now pressure. This is too bad.

Charley Ellis said that investing was easy because the competition wasn’t very good. This works for any area, said, Ellis. It’s what Sam Hinkie worked toward in Philadelphia.

Like #1 (play games you can win) and #6 (skip games you can’t), it’s more difficult to win short-term games than long term ones.  Marc Andreessen said that at a16z their orientation is toward long-term investments and Ben Carlson said that long-term thinking was the last true advantage.

 

Thanks for reading,
Mike

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

Marc Cohodes @AlderLaneEggs is ornery. He spoke with George Pearkes on Bespokecast and it was great. Here are my notes.

1/ “Don’t let school get in the way of your education.”

…

2/ When Cohodes looked at an early investment in high-fructose corn syrup he noticed something interesting. This was in the days before HFCS was ubiquitous and Cohodes wondered, what if it was. What if it replaced sugar?

Cohodes found asymmetrical payoffs in a simple system.  Heads I win, tails I don’t lose, on a fair coin. ‘APs’ are a simple model to use for our decision making. Gary Taubes believes cutting out sugar is an AP. Jocko Willink said that jokes in Powerpoint presentations have AP – to the downside. Bill Gurley said that after he missed investing in Google this idea became more clear.

…

3/ KISS “If you can’t explain your investment thesis to a tenth grader in a paragraph or less you probably shouldn’t be involved. Convoluted stories are loser stories. I try to keep things simple and try to find numerous ways I can win.”

Years ago I read Michael Pollan’s books and heard his (simple) advice on what to eat: If it’s made in a plant, don’t eat it. If it’s made by a plant do.

Of course, that didn’t stick.

Somehow we don’t trust that simple is best. Ben Carlson said, “People assume they have to make it complex to succeed, to change strategies with every macro environment.”

Jim O’Shaughnessy said much the same, “Investing is like dieting. There are a million diet books on the market today. Most of them have simple, easy to execute plans and it is remarkable difficult to get anyone to use that simple system. It’s all emotion.”

I remember writing papers as a graduate student and using lots of big words. A student of such advanced standing ahem, a graduate should converse in the correct lexicon. I was full of fecal matter. I wrote complicated sentences because I didn’t understand the basics.

…

4/ Be there, ask questions Another of Cohodes early investments, this time on the short side, was against pinball machine manufacturers. He saw video games and wondered if they would take business away from the silver ball game. So he watched people play and counted the quarters at the end of the night.

We see this kind of curiosity over and over. Someone observes something – like when Haralabob Voulgaris heard Phil Jackson say corner threes are bad shots – and they start digging.

Brian Grazer wrote that curiosity has to be supported by two other parts:

1. Attention to the answers to your questions.
2. A willingness to act on what you learn.

To combine the advice of Peter Thiel and Marc Andreessen; the future is somewhere already, be curious and start looking.

…

5/ Rapid fire. The interview was full of good quotes.

• “The rule of thumb I have is; if this company went out of business tomorrow who would miss them?”
• “If you’re not a tough mother fucker you shouldn’t do this.” Temperament matters.
• “Everyone wants everyone to perform on a daily basis. You can only be long stocks that go up and you’re only supposed to be short stocks that go down. You’re not allowed to deviate and if you have too much of a drawdown people get upset.” The right stakeholders are like a balanced boat.
• “I don’t think you can have rules in a market like this…In shorting stocks it’s very hard to have these hard and fast rules.” Rules and checklists are helpful early in the decision-making process but later flexibility becomes more important.
• “Where there’s smoke there’s fire and I will throw fifty-five gallons of kerosene on the fire and I will burn the fucking house down.” Once you find a good idea, pounce.

 

 

Thanks for reading,
Mike

 

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

It was the late 1990’s and the world had gone crazy. Like other instances of insanity, it didn’t seem like it at the time. But when a small stuffed-with-beans bear sold for thousands of dollars something was terribly wrong.

In The Great Beanie Baby Bubble Zac Bissonnette tells the story of the Beanie Baby rise and fall. Before we get into some lessons, let’s brush up on the history of it all.

…

Beanie Babies were created by Ty Warner after he quit/was fired from his job selling stuffed animals (plush) for another company. Warner had been an excellent salesman but thought he could do better. The cause for his dismissal was selling his own creations along with his employers. A no no.

Warner didn’t care. He thought, no he knew, he could do better. His first solo plush creation was a cat that sold well to – and this is not a joke – quilt collectors. This business was fine but grooming each longhaired cat took a lot of work and Warner searched for another option and he landed on the Beanie Baby.

Warner made repeated visits to Chinese manufacturers, talked to people at trade shows and in stores, and had a had a hyper focus on his product. Once it was finally good enough he sold them only to small store owners, believing that big box stores would put the Beanie Babies in bins and that would diminish their value. He also demanded full payment up front.

Parents bought them for their kids. Kids took them to school. The phenomenon spread through Chicago. Some parents became more active collectors. To keep track of the available Beanies some people took to sharing a checklist.

Warner continued to tinker, making changes in different lines. If something wasn’t to his liking he would order the next batch slightly different. This purposeful tinkering led to the accidental phenomenon of retirement. The early collectors started to search eBay for these “retired” Beanies and would call their friends around the country to look for them.

Warner’s production was limited. Later this was a marketing ploy but early on it was an issue of cash flow and how much credit his bank would loan for inventory. Scarcity led to increased prices and the internet led to the conveyance of this information. As some people started to make money, more people piled in. At the end of 1998, 7% of all eBay listings were for Beanie Babies. The mania continued. McDonald’s got involved. Warner wised up to the idea of scarcity and took to actively retire more Beanies and created limited runs.

The cycle continued; people saw other people make money off Beanie Babies, people joined those other people, more suppliers meant more supply and with an undifferentiated product they had to compete on price. Prices were pushed down. Warner at this time had ramped up supplies to the point that so many Beanies were being produced that everyone who wanted one could get one. By 2000 the craze was over.

…

What the hell happened?

Let’s start with Warner. Unlike startups that fail, Warner understood his customers. Part of what made him a great salesman was this deep understanding. He talked to customers, store owners, and even quizzed his girlfriend’s daughters about what they liked and didn’t. Warner got his XMBA from his time at Dankin, his first plush employer. Warner was a good surfer but he also caught a great wave.

The 1990’s was the era of getting online. Warner’s sales were helped by the proliferation of the checklists and secondary sales on eBay. He was also fortunate in that there wasn’t much competition. Bissonnette wrote, “ the idea of starting a plush company in the early 1980s was no one’s idea of smart. It was a stagnant industry, fifty years past its prime, with no growth in sight.” Much like the Instagram guys or Ken Grossman, the best time to start something is when no one else is starting the same thing. Warner had some nice tailwinds to push his company along.

Another advantage was wise financing. Warner never took on debt and required his retailers to pay-in-full upon delivery. He also stocked the Beanies in airports, thinking they would be a good last-minute gift and traveling from airport to school book bag would be good marketing. In the beginning, he convinced retailers this was a good idea, in part, because of the simple product lines. Beanies retailed for $5 or $10.

…

While Warner had great financial success there were some lessons on what not to do as well. For starters, Warner succeeded despite his ego. Bissonnette wrote:

“”I am the designer! I designed everything!” Controlling every aspect of the animals’ existence was a fixation, and it stood in stunning contrast to his nearly total disregard for the feelings of the people he was closest to. He carefully excised everyone else from the story of his rise: his father hadn’t gotten him his first job, he hadn’t used freelance designers to create his bears, and he’d started the company all by himself.”

Warner’s ego was helpful in that it helped him maintain a great focus. One former employee said:

“That’s the secret: focus. If this is what you want, then go for it. Nothing crosses that road, nothing gets in the way, nobody changes it. This man wakes up in the morning, and he’s thinking about the product. He goes to bed at night, and he’s thinking about the product: Should it be a blue ribbon or a red ribbon? I can’t tell you what we went through to get the eyes to be absolutely what he considered perfect. Every detail on every animal was gone over fifty times. It had to be as close to perfect as you could possibly get. Or do it again.”

Chamath Palihapitiya said about the dichotomy between too much ego and not enough: “Ego is a terrible way to make decisions, it’s really good things to have, to make ourselves feel valuable and be confident, but that shouldn’t drive our decision-making.”

…

Warner’s success came from an obsessive attention to detail. From the product to the people who bought it, Warner understood what was most important. Because of this, he designed the animals using quality materials in a manner that was different from other toys. As sales grew he lucked into marketing ideas and favorable competition. He was finally brought down not by a competitor but by his own ego, believing he could roll-up (or appear to) the Beanie Baby line and replace it with a new one.

 

Thanks for reading,
Mike

 

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

Brian Stout joined John Mihaljevic on The Zurich Project podcast to talk about his journey to value investing.

1/ Deliberate practice. “The way that I learned things was deliberate practice. You can’t read about things or hear people talk about them and know how to do them. There’s a large amount of the learning process where you just have to go out there and do it. It’s like riding a bicycle. You can’t watch someone ride a bicycle and ride a bicycle for the first time.”

This is especially true writes Michael Mauboussin in areas with a strong skill component. Pilots, surgeons, and accountants can all use deliberate practice to get better. These domains can also use small sample sizes, checklists, and let history be their guide. Stout has used deliberate practice to get better at value investing and math, two areas where success is based much more on skill than luck.

…

2/ Epiphany.  “When I read The Intelligent Investor I had that moment that value investors talk about which was, this made so much sense that it was like an epiphany.”

Lightbulb moments are the first step in finding an idea to follow the rest of your life. The second part is if you have the right attitude to do the work. Stout did, “pouring through a lot of information and thinking through problems resonated with me.”

If we combine the ideas of Mohnish Pabrai, Charlie Munger, and Cal Newport we get this:

What rare and valuable skills do you have the disposition to develop such that you choose to do that rather than go see the newest movie?

These skills don’t need to be hidden. Stout’s two areas of focus, value investing and mathematics, continue to be rare and valuable. Why haven’t these opportunities been whittled away?

“We’ve all heard that argument from various people and my response is, ‘you’ve taught students just as long as I have, how many times have we given them a textbooks that tells them how to do all these computations, and we teach them how to do it in the classroom, we give them homework on it and they still take a test and can’t do it. Even though you present all the information and show them how to do it doesn’t necessarily mean people will do it.”

…

3/ Two tools. “When I think about my investing framework there are two principles; there are some psychological principles that are very scientifically established and then there are some mathematical principles that are very relevant.”

In the summer of 2017, my daughters were wondering why they had to read and do math before using their iPads. I told them that reading and math were important because, in reading, you learn about people and in math, you learn about computers.

Jeff Annello gave us the toolbox metaphor for mental models. While Stout calls them principles we can think of them as containers too. In the “MATH” toolbox we have as many valuation equations as screwdrivers, or if you’ve been to IKEA more than once, hex wrenches. In the “PSYCHOLOGY” toolbox we have ideas like recency, availability, and inertia. Rory Sutherland told Shane Parrish that we sometimes forget about this set of tools. “It’s always more acceptable to spend money on infrastructure than to spend money on psychology.”

Like tools, skills are only as helpful as your ability to use them.

 

Thanks for reading,
Mike

 

 

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

The last one of these was way back in September 2016, so this post will be an update and quick primer for anyone interested.

I (too) record a podcast. It comes out on Thursday mornings. It includes ideas that are either too small for the blog, audio versions of the posts, or ‘thinking out loud’.

The most recent episode is from June 1st. Each episode opens with a quote and then dives into some number of points.

The opening quote is from Startup and Jerry Kaplans 1987 (!!) meeting at Apple to see the precursor to Newton which was the precursor to the iPhone/iPad. It took over twenty years to build something they thought would take only a few.

1/ I quoted from Chris Cole’s Star Wars convexity. Convexity isn’t an idea that comes naturally to me, or most, writes Cole. This short pdf explains it in terms that I can better understand.

2/ Checklists are fun! An idea that’s bubbled up repeatedly is the value of checklists and part-of-the-reason may be our enjoyment crossing things off lists and completing them. For example, here’s what Tracy Kidder wrote about his time with Paul Farmer:

“On the wall beside his desk, Farmer has taped up three sheets of yellow legal paper, on every line a task to be completed, and beside each of those a hand-drawn box, in Creole a bwat. I’ve noticed that if he completes a chore that he forgot to put on the list, he writes down the chore, makes a bwat beside it, then puts a check in the box. This seems to give him an inordinate amount of pleasure, and I must admit that I feel some myself, completely unjustified, when he says, ‘We’re getting a lot done.'”

3/ Base rates on motorcycles. I first heard about the idea of base rates from Michael Mauboussin, and much like convexity, I didn’t understand it. Tynan wrote a blog post titled Analyzing Risk where he explained the inside and outside view.

“In some cases, they’re (risks) fairly universal. My risk of dying in an airplane crash is the same, per mile, as anyone else’s….But some statistics can be very accurate for a population yet way off for an individual. When I began riding a motorcycle I looked carefully at what actually caused motorcycle accidents. Alcohol was a factor in 50% of crashes, and since I don’t drink I can eliminate that.”

Mauboussin instructs to start with the base rate/outside view. Then, figure out the inside view. This is the ‘well sure it happened to them but it won’t happen to me’ phase. After that consider how much you can move the needle. It helps to understand the two-jar model and how much of results are luck and how much are skill. Then adjust the expected outcome.

4/ The stories we tell ourselves. Scott Alexander wrote about aliens in Budapest. The whole post is interesting but in the podcast, we just touched on our story-telling nature.

Again, thanks for reading,
Mike

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

The Simpsons is thirty. Wow. NPR’s Fresh Air had an episode that featured interviews through the years with different contributors. It was a fun trip down memory lane for someone – me – who grew up with that show. I was amazed that my parents even let me watch it, much less supported it when I parrotted an argument from the show.

I also remember passing around a 3.5″ floppy disc with sound effects from the show. This was years before Napster, not that it would have mattered with a dial-up connection. But getting your hands on those sounds felt so cool. The most popular one?

What a show. Onto the notes.

…

The Simpsons started as an experiment, appearing first in segments on the Tracey Ullman show. The creators soon realized they had something that could stand on its own.

Accurately predicting what will work, especially in art or technology startups is hard. Experimentation was a hallmark for example, of the Intelligent Fanatics. Ken Fisher too praised the importance of experiments:

“”I’ve been prepared to operate by trial and error, you can do a huge amount of small things on a small scale, test them and see if they work, and if they work do them on a bigger scale and if they don’t work move on to the next one.”

…

Nancy Cartwright originally went in to read for the part of Lisa but liked the lines for Bart more. She read them and Matt Groening immediately awarded her the part. Cartwright went on to do the voices for Nelson, Ralph Wiggum, and Todd Flanders. How does Cartwright have the ability to do all this? She copies life.

“Or say you’ve got a 7-year-old kid who’s got a split in his two front teeth or he’s missing one of his teeth at age 7. (Imitating Mara Wilson) So he would be talking sort of like this. And you can put a sort of a sound in there sort of like that little actress that played on “Mrs. Doubtfire.” So I can steal from, you know, Mara Wilson I think was that little actress’ name. And I totally ripped that off from her. When I go to the mall or just, you know, people watching or I go to movies and watch television, I’m inspired by live action actors and recognizing sounds and trying to duplicate that.”

Inspiration through imitation is a great place to start wrote Stephen King:

“You may find yourself adopting a style you find particularly exciting, and there’s nothing wrong with that. When I read Ray Bradbury as a kid, I wrote like Ray Bradbury – everything green and wondrous and seen through a lens smeared with the grease of nostalgia.”

It’s why this blog exists! Find the things that worked, try them, keep what works for you. Charley Ellis and David Salem both spoke about David Swensen at Yale. They agreed – in separate podcasts – you can imitate Swensen’s processes but not his results.

…

Julie Kavner does the voice of Marge Simpson along with her sisters and said:

GROSS: Oh, that’s great! You have a wonderful voice. Was your voice husky when you were young?

KAVNER: Yeah, I was born this way. I came out of my mom and said, hello, Rose, hello, Dave.

(LAUGHTER)

GROSS: But did you have a deep voice when you were young?

KAVNER: Yeah. They used to send me home. They always used to think I had laryngitis.

Kavner was born with a deep voice, something we might think is a weakness until it is turned into a strength. This applies to organizations too. Clayton Christensen wrote, “An organization’s capabilities become its disabilities when disruption is afoot.” Ben Thompson and Bill Gurley both mention that Facebook’s strength, its network size, is also its weakness. One teen told Gurley that Facebook is to them as LinkedIn is to us.

…

Hank Azaria wasn’t the original voice for Mo the bartender.

“And I was 22 years old – this was a long time ago. I’m 40 now. I was 22 years old, and I hadn’t worked much. There was an original voice of Moe the Bartender that I guess they weren’t too happy with and wanted to replace”

He got the role and started to do more voices, like Apu. Terry Gross asks how he came up with the voice for Apu and Azaria said:

“He really is just an Indian guy. I mean, in Los Angeles pretty much every 7-Eleven or convenience store worker is either Indian or Pakistani or from this area. And when I first moved to LA, these were the people I really interacted with, mostly, because I didn’t know anybody. So I would talk to these guys.”

…

Looking back, The Simpsons is a cultural monolith. The show prospered in an era of limited competition. The fragmentation of entertainment – not necessarily a bad thing – means we’ll probably not see another show like it. Tyler Cowen likes to point out that he’s lived in a sweet spot for infovores. He grew up reading physical books and developing his thinking in a quieter world. Now those abilities and habits help him navigate in a louder place.

Even though we won’t see something like this again, we can still apply the principles. Success isn’t formulaic, it takes experimentation and/or imitation. People need roles that play to their strengths. Sometimes this means finding something once considered a weakness.

 

Thank you for reading,
Mike

If you liked this post you’ll probably like this one too: How Louis C.K. made Horace and Pete.