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

Brent Beshore was on the Invest Like the Best podcast with Patrick O’Shaughnessy and it was great. There was a lot of advice for business operators. Here are five things:

1. Build a moat, not as easy as it sounds.
2. Experiment, then do more of what works and less of what doesn’t.
3. But don’t expect it to be easy.
4. Find incentives then align incentives.
5. The bias to act.

Ready?

1/ Build a moat.  Brent and Patrick agree that people probably don’t design moats as much as they stumble into them. Tren Griffin reminds us that some build a moat (Bill Gates) and that some find a moat (Warren Buffett). In general, the moat menu looks like this:

1. Network effects (Facebook, WeChat).
2. Supply-side economies of scale (Coca-Cola, Tesla batteries, Amazon).
3. Brand (Harry’s Razors, Amazon).
4. Intellectual property.
5. Government regulation.

Beshore adds one – or creates a hybrid -; geographic isolation. Beshore looks for companies with a niche and “not much natural competition.”

Organizations and organisms do better when they have a niche. Seth Klarman said his niche is catalyst moments. Chris Sacca explained that Uber survived because the niche was deemed too small. Yvon Chouinard found the niche of rugged, stylish, functional apparel.

Beshore says that not every company he looks at is worth an investment. In fact, most are not. “Last year I looked at 2500 business and after a while, you get pretty good with the reflexes around what are the things you are trying to ping…it’s painting a story in my head.” Arnold Schwarzenegger said much the same:

“It is always the more you practice something the more confidence you get and the better you are going to perform when you go to those auditions. So, reps, reps, reps and keep practicing…we have a saying in German…the more you practice something the more you master something.”

Mistakes happen when you don’t have the reps, when you think there is a moat and there isn’t. Beshore says that he sees investors buy businesses only to get in trouble. “They haven’t seen enough pitches to even understand what they’re trying to look at,” Beshore explains.

Lesson: Moats are hard to construct from scratch but it’s an idea to keep in the back of your mind. You can learn what they look like through repetition.

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2/ Experiment. “The biggest secret,” Beshore says, “is there is no secret.” Experiment and then, “do more of what works and less of what doesn’t.”

When Beshore said this it reminded me of what Ben Horowitz wrote about doing hard things. Horowitz explained that there are no silver bullet solutions, only lead ones. Solving problems takes work (time * effort) and panaceas don’t exist. I sort-of knew this but Horowitz crystalized it for me.

Then, Beshore crystalized something else, there’s a lot people don’t know. Sure, doctors are mostly right. Accountants do good work. Bloggers, well, let’s not get into bloggers. Steve Jobs explained it this way:

“Everything around you that you call life was made up by people that were no smarter than you. You can change it. You can influence it. You can build your own things that other people can use.”

I couldn’t unlearn this idea. OF COURSE, WE SHOULD EXPERIMENT!  Andy Katz-Mayfield doesn’t know what he’s doing with Harry’s. The Instagram founders created a check-in app. How quaint is that looking back?  Jim Koch, Yvon Chouinard, and Phil Knight didn’t know what they were doing. They experimented and did more of what worked, and less of what didn’t.

Hopefully, that inspires you. Now, let’s get real.

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3/ Knife fights in the mud. Beshore compares running a company to getting out of bed, knife fighting through the day, and then getting back in bed. It’s hard. Beshore loves his job, loves the struggle, but notes “some days you have to trudge through the mud.”

I sense a glory around start-ups, entrepreneurship, gigs, freelancers and so on. They’re not just jobs, but cool jobs. They’re dream jobs. Mostly.

Jon Acuff and Austin Kleon are quick to point out that they too trudge through the mud. Just because you don’t have a boss doesn’t mean you don’t have to do things you don’t like. Elizabeth Gilbert said this:

“I have this theory that everything that’s interesting is mostly boring. Life is filled with all these interesting things and we chase the high and the buzz of the excitement of the thing, but 90% of the thing is boring….The trouble people get into, is that they go into creative careers because they want an interesting life and then they’re amazed to find out at how much tedium and boring is in there, but if you can stick through the boring part, there is stupendous reward.”

The key is to find a job where you – not your parents – like the balance between excitement and boredom. A job with enough knife fights and enough peace. Beshore said, “There are a lot of ways to make money in this world but you ultimately get one life.”

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4/ Aligned incentives. Money is a commodity (another lightbulb moment) says, Beshore. If the dollar doesn’t differentiate, what does? For founders who take investment dollars the answer better be the people. To put it another way, your incentives better line up.

Andy Weissman is a venture capitalist who cautioned entrepreneurs:

“If you take money from a venture capitalist, the way the economics of the VC world work, are an investor like me needs to make 10 or 100 x on our money, which means we need these companies to be really large businesses for us to return money to our investors. If they’re not, those returns make less sense to us. The time to take venture money is when you think your incentives are completely aligned with that. You have to believe it’s a big business. You are comfortable taking big risks, including existential risks around managing that business.”

When Phil Knight was short on cash – which was always in the early Nike history – he had to borrow from a shoebox supplier to pay payroll. The supplier lent the money because if Nike went out business, who would he make shoes for?

When workers went on strike against Milton Hershey the local dairy farmers came to his aid. If there was no milk chocolate being made, who would buy their milk?

When Coca-Cola expanded overseas they aligned the incentives. “As one Coke executive pointed out, ‘in Germany it is a German business; in France, it is a French business; in Italy, it is an Italian business.’ Local industries to produce glass, carton, crown and bottling equipment started in each new country.”

It helps when everyone in the same boat rows the same direction. If you take on an investor like Beshore or Weissman, make sure they want to row the same way as you.

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5/ Bias to action. “There is a constant pull to do deals,” Beshore says, “it is seductive, to say the least.” It’s “progress anxiety.”

We call this the “don’t just do something, sit there” condition thanks to how Barry Ritholtz talks about it on his podcast. This bias to action is powerful because we want to show that X leads to Y. However, there are times when no action is better.

Beshore looked at 2,500 companies and invested in two. That’s fighting the bias. Phil Jackson fought the action bias when working out difficulties with players or in the games he coached. Cal Newport suggests we take this approach to social media. Nassim Taleb points out, “It is much easier to sell ‘look what I did for you’ than ‘look what I avoided for you.’”

Brian Grazer writes, “Bob Iger, the CEO of Disney, is a close friend who once gave me a piece of advice that has stuck with me. In the right circumstances, he said, ‘Doing nothing can be a very powerful action unto itself.'”

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To run a company means to make the right decision. The bias toward action is a crosswind off the bow. Incentives and people are those on the oars. Moats are the direction you want to go, only like the island in Lost, the destination moves. All this isn’t easy because of the weather, waves, and lack of orange juice.

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Thanks for reading. If you made it this far you’ll probably like some longer, hidden stuff I write. That’s shared on this email list: http://eepurl.com/bgRZOX.

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Also, we are trying an experiment this week, an Amazon Giveaway of Organizational Alpha: How to Add Value in Institutional Asset Management. https://giveaway.amazon.com/p/c82ede01f5347009

NO PURCHASE NECESSARY. Ends the earlier of Feb 20, 2017 11:59 PM PST, or when all prizes are claimed. See Official Rules http://amzn.to/GArules.

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

Courtesy of some nudging on Twitter, I re-read Delivering Happiness by Tony Hsieh (pronounced “Shay”), the CEO of Zappos. It was great.

What struck me on the re-read was how much I missed! Or, how much I now understood. Shane Parrish wrote why:

That’s how I felt about this entire book. My first read had been BBM (before Buffett & Munger) and I missed all the parallels to them. It was before I wrote a short book on failed start-ups. It was before so much.

Reading the book also confirmed my hypothesis that podcasts make for excellent book previews and summaries. The big ideas from the book were in the How I Built This episode with Hsieh. The Russ Roberts interview with Sam Quinones was a preview of Dreamland. Podcasts are great.

Ready for my notes?

1/ Experiments. Hsieh writes, “I tried to expose myself to as many interesting things in high school as possible.” That meant classes in Morse code and Japanese. His first start-up, Link Exchange, was an experiment too. “It was more like, we were bored, let’s see what happens,” Hsieh tells Guy Roz in How I Built This. The early version of Zappos was also an experiment. If visitors ordered from Shoesite.com someone would go and buy the shows from a brick and mortar store.

Experimentation is important. “The big secret,” about business success, says Brent Beshore, “is there is no secret.” His advice is to experiment, and “do more of what works and less of what doesn’t.”

What you want to get to are that’s interesting moments. Hsieh almost passed on Zappos until he heard from founder Nick Swinmurn that catalog sales were 5% of the industry – and growing. Hsieh went from thinking ‘people won’t buy shoes without trying them on’ to thinking ‘oh, wow, people are already buying shoes without trying them on.’ The experiment of Shoesite.com started with some knowledge of how the world works.

People buy shoes without ever trying them on? That’s interesting. 

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2/ Snooze buttons. In college, Hsieh often slept through his first class. When it was time to rise for the second one he reasoned that he could skip one class he could skip two – and so on.

Hsieh graduated – thanks to some clever solutions he shares in the book – and got a job at Oracle. Soon after Hsieh and his roommate discovered, “we didn’t want to work at Oracle.” Onto the start-up!

That start-up became Link Exchange and Yahoo offered twenty million dollars for the company. ‘Okay’ thought Hsieh, if I had that much money what would I do with it? He wanted a new computer and TV. Maybe upgrade his home too. As Hsieh made the list he realized he already could do everything on his list – expect one. Run a company he loved.

“ I was already helping run a company I was excited about. It seemed kind of silly to sell a company I was excited about in order to start another company to be excited about.”

Peter Thiel recalled Mark Zuckerberg saying the same thing about his offer from Yahoo.

Hsieh concluded this by getting to the end state. What do you want from our lives? He writes:

“I thought about how easily we are all brainwashed by our society and culture to stop thinking and just assume by default that more money equals more success and more happiness, when ultimately happiness is really just about enjoying life.”

With this conclusion, Hsieh turned down the Yahoo offer. Later Hsieh woke up and realized something went wrong. “I was the co-founder of Link Exchange and yet the company was no longer a place I wanted to be at.” The culture and company had grown into something Hsieh didn’t like. The endstate he wanted had changed.

Hsieh’s path shows us a clear signal; do I want to wake up and do this? In high school, the answer was yes because he got to choose the classes. In college, it was no. At Oracle, it was no. At the start-up, it was yes, then no.

Mohnish Pabrai said the same thing about an alarm clock as a signal. I loved this advice.

To a point.

Austin Kleon pointed out that every job is still a job. Elizabeth Gilbert echoed that sentiment too. Brent Beshore said he has a great job but “some days you have to trudge through the mud.”

The key is to find balance. How many days do you push the snooze button and how many days do you jump out of bed?

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3/ Having your cake and eating it too. 

Guy Raz: “Customer service wasn’t baked into the model from the beginning?”

Tony Hsieh: “In the beginning, we always wanted to offer good service but it wasn’t until we decided that’s what we wanted our brand to be about that it was the most important thing. It led us to do many things that would not have made any sense if that wasn’t our north star.”

In episode #102 of Exponent.fm, Ben Thompson and James Allworth talk about this idea as it relates to technology. “You have to understand what your advantages are,” Thompson says. For Samsung, the advantages are manufacturing and distribution. For Facebook, the advantage is 500 million users. For Harry’s, the advantage is brand.

These advantages go by another name; moats. “There is no sustainable business model,” Thompson says, “built on features alone.” Companies need an advantage and that advantage will preclude other things. Amazon’s advantage is low prices on a wide selection. My local hardware store’s advantage is advice and convenience.

Companies need to realize this because it means doubling down on your strengths and punting your weaknesses. It means copying.

Throughout the Exponent episode, Allworth praises Instagram for swallowing their pride and copying Snapchat. Thompson points out that Nokia did something innovative – rather than copy  – “and they went to the grave.”

The advantage for Zappos is their customer service (brand). What that means though is that they can’t be anything else.

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4/ Lessons from the poker table.  This was my favorite quote from the book:

“Understanding the mathematics behind hold’em and playing against players who didn’t was like owning a coin that would land on heads one-third of the time and tails the other two-thirds of the time and always being allowed to bet on tails.”

This part of the book was so good I took pictures of the pages and saved them to Evernote.

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5/ Watch that basket! “Well, if you think we should put more money into Zappos, then we really should be spending more time with them in order to protect our investment.” – Alfred Lin

To catch you up. Hsieh leaves Oracle, starts Link Exchange, sells it to Microsoft, starts a venture capital fund, invests in Zappos and others, sees the other investments fail, and sees the funding landscape dry up. The moment of truth arrives when it’s time to double down on Zappos or let it whither. Hsieh doubles down.

Warren Buffett has used different metaphors – flashlights rather than lanterns – but the idea is to pay attention to the important things.

Putting your eggs in one basket can be great, but you have to watch that basket.

Thanks for reading. If you want to get a monthly email about the books I read (and sometimes other goodies); you can subscribe here; http://eepurl.com/bgRZOX.

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

I don’t know what to do about Phil Jackson and his book Eleven Rings. Jackson won 11 NBA championships – hence the title – and that’s excellent. He also coached Michael Jordan and Kobe Bryant, two of the best players in the game. In an alternative universe, how many championships would Jackson have won had he coached the 1996 Knicks rather than the Bulls (and Whoopi Goldberg coached the Bulls)? How much of Jackson’s success was luck and how much was skill?

We don’t know.

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Mark Suster wrote that he invests “in lines, not dots.” Suster wants to see patterns. How do founders act in meetings? How timely do they ship versions? How well do they adapt? Each action is a dot, many dots form a line.

That’s our spirit too. We look for patterns. If someone says decentralized command works, do we see it work in different domains like the military, education, and sports? What about arguing well? Bias busting?

It’s with this attitude I’ll make the case for Phil Jackson as a great coach because he does things other great leaders do too. Ready?

1/ Lead from the outside in. Don’t run with the lemmings, Jackson writes, you need to act like you. Warren Buffett said that Berkshire wasn’t going to try to out Bezos (Jeff) Bezos. You’ll never imitate your competitor better than they can be themselves. So, you may as well be you. (This is good!)

You are your competitive advantage. Harry’s didn’t try to become DSC. Why? Because Dollar Shave Club is better at being Dollar Shave Club.

Do you know why sharks still exist? Becuase nothing is better at being a shark than a shark. – Douglas Adams

Seth Rogen and Evan Goldberg say they are best at writing, so they write. Tren Griffin asks if you are a moat builder or identifier. David Chang started Momofuku because that what his advantage.

Jackson opens the book with this quote from Rumi, “When you do things from your soul, you feel a river moving in you, a joy.” Part of the reason people succeed is because they don’t imitate something that works for someone else. Jackson coached in a way only Jackson could coach.

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2/  Constraints help. “What attracted me to the triangle (offense) was the way it empowers the players, offering each one a vital role to play as well as a high level of creativity within a clear, well-defined structure.”

Constraints help for two reasons.

1. The paradox of choice. People tend to not do well with too many choices. Supermarkets that display more sample sell less. More choice means more work (and System 2, points out Daniel Kahneman, is comfortable on the couch).
2. Necessity is the mother of invention. Constraints beget more creative movies. Constraints beget better art (Sistine chapel). Constraints beget better countries (and avoid the resource curse).

Jackson thought the triangle offense could offer this on the basketball floor. It was the hardwood version of Jocko Willink‘s mantra that “discipline equals freedom.”

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3/ Chaos monkeys.  Jackson used a light touch on his team, but sometimes, “I like to shake things up and keep the players guessing.”

That meant practicing in the dark or in silence. It meant games of five on four where the team of five was allowed to grab, push, hold, and cheat. It meant odd detours on road trips. It meant occasionally getting in someone’s face. It meant randomness.

Netflix has the chaos monkey. Nassim Taleb has randomness. Jeremiah Lowin drops data. Anson Dorrance scheduled long road trips and showed up at the last minute for a game. Rorke Denver suggested “random acts of violence.”

“There is also a lot of value in a certain kind of distration which can lead to accidental discoveries.” – Sanjay Bakshi

All these leaders built resilience. The system crashed? So what. My pregame rituals got disrupted? Happens all the time. I don’t feel like it? I never feel like it.

Crazy stuff happens, chaos monkeys prepare you for it.

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4 / When in doubt, do nothing. “Basketball is an action sport, and most people involved in it are high-energy individuals who love to do something – anything – to solve problems. However, there are occasions when the best solution is to do absolutely nothing.”

Most of Jackson’s media interactions and player interventions were this hands-off approach. We (and by we, I mostly mean me) are so tempted to act because we think in linear terms. A causes B because B follows A!

This isn’t always the case (“In fact, it’s rarely the case”).

In the early days of NASA, the default was to do nothing. Gene Kranz wrote, “the first rule of flight control is if you don’t know what to do, don’t do anything.” Don Keough warned that doing something just because you can do it isn’t a good enough reason.

“Action is easy, thought is hard.” – Goethe

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5 / Be a learner. Jackson tried to nudge his players (the indirect approach) into new approaches to the game by giving them books. Jackson has always been a learner (see #1). “Playing for New York during the championship years was like going to grad school in leadership,” Jackson writes. Later on when he was hired as a scout for the Bulls, “this job was a chance for me to go to graduate school in basketball.”

Systems atrophy without attention. We are all part of systems. It could be your ecosystem, your team, your organization, your Slack group, or your industry. Uninfluenced, each system will disintegrate. What keeps our system, team, group, family, organization running is us keeping it running!  We must fight against atrophy. Learning is one way to do that.

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6/ Argue well. “What impressed me about Bill (Bradley) and Cazzie (Russell) was how intensely they were able to compete with each other without getting caught in a battle of egos.”

Micahel Jordan said about some early disagreements with Jackson, “It took me a while to calm down…(but) but our mutual respect grew.” There were some larger blow-ups, some that included blows, but Jackson’s teams mostly argued well.

When his teams didn’t argue well and manage situations well they were defeated. This is easy to see in business. Andy Grove titled his book, Only the Paranoid Survive. Peter Lynch warns investor to do the work or don’t enter the game. If an organization – like a basketball team – fails to argue well they will be passed by competitors who do.

To argue well you need the right culture. It’s why Marc Andreessen takes the opposite side of Ben Horowitz in arguments. That creates an environment (read: culture) where employees aren’t pressured to align with the boss. Bill Belichick does the same thing. Patriot staffers were rewarded for coming up with good and different ideas.

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7/ Deep understanding.  “Johnny would often show up at my desk with dog-eared books by coaching geniuses I’d never heard of and videotapes of current NBA teams using moves invented years ago.”

Despite Jackson’s real-life experience (#5) with the Knicks and Bulls, he still had to rely on others. One of those was an encyclopedia-like assistant. This was true for Bill Belichick, who has Earnie Adams. Both Jackson and Belichick have someone else who understands history. This is how and why it’s been done and what the first answer might be.

Mohnish Pabrai said that Buffett is excellent at learning from others. That’s what Jackson and Belichick try to do. Sam Hinkie addressed this in his resignation letter. How do you balance being different with doing what works? You have to have a deep understanding. Hinkie wrote:

“While contrarian views are absolutely necessary to truly deliver, conventional wisdom is still wise. It is generally accepted as the conventional view because it is considered the best we have. Get back on defense. Share the ball. Box out. Run the lanes. Contest a shot. These things are real and have been measured, precisely or not, by thousands of men over decades of trial and error. Hank Iba. Dean Smith. Red Auerbach. Gregg Popovich. The single best place to start is often wherever they left off.”

Understand deeply.

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8/ Two-jar model.  “I believe if you’ve taken care of the details, the laws of cause and effect – not luck – will usually determine the result.”

That quote addresses the two-jar model so well. Let’s summarize what Michael Mauboussin and Jackson write.

• There are two jars we draw from for any outcome.
• One jar includes our range of skill scores.
• One jar includes a range of luck scores.
• We can raise our skill scores through deliberate practice.
• We cannot change the luck scores.
• With enough work, we can raise the skills scores so high, they offset any luck score we draw.

The skill jar for Jackson’s teams included; footwork, spacing, passing, leadership, and even a chaos monkeys (#3).  “We focused most of our time on things we could control,” Jackson writes about practices.

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Thanks for reading. If you liked this post, you’ll probably like the series on Bill Belichick.

 

 

 

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

How is your “this year I will read more books” resolution coming? Good, bad, or ugly it doesn’t matter. Resolutions are lies you tell to yourself because they assume a finite game. You’ll read books for one year – so what? You’ll be healthy (lose weight, eat right, drink less) – it doesn’t matter. Resolutions are a cover for short-term thinking. Don’t do it. Play the long game.

A better approach is to be like Sisyphus. Push the rock knowing you’ll never make it to the top of the hill.

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This is the quote I’ve been thinking of most lately:

“People don’t buy quarter-inch drills, they buy quarter-inch holes.” – Theodore Levitt

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There was a large response when I tweeted this:

It was encouraging. I felt good. I was also accountable. I was now someone “no zero days.”

Accountability and excitement are tools to learn more. Another tool is; see-it-to-believe-it.

When I was a kid a popular birthday party spot was the bowling alley because they had bowling and video games. This was when the arcade games were a lot better than anything you could have at home. Two games stuck out; Street Fighter and pinball. The first because I was awful at it. The second because I learned how to unstick a ball, bump the machine. That was a see-it-to-believe-it moment

I am no pinball wizard, I have no supple wrist. I just know how to knock a ball loose (a proud skill for a twelve-year-old) because I was exposed to it at the bowling alley. Mere exposure can unstick an idea just a small bump can unstick a steel ball.

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Richard Thaler had this moment when he read Value Theory. “Now I can think that,” Thaler told Michael Lewis.  Oh, I can study this theory. 

Mohnish Pabrai thought he was a terrible student until he took an intelligence test and topped it. After that, his grades improved. Oh, I can be a good student. 

Charlie Munger thought that being a lawyer would lead to wealth. Then he started working with business owners and he realized that it was business owners, not their lawyers, who created valuable assets. Munger changed course. Oh, it’s businesses, not people, that create value.

Judah Friedlander said, “I never realized being a comedian was a thing you could do.” Oh, I can be a comedian. 

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In this spirit, I’ll offer a see-it-to-believe-it-opportunity. This isn’t the only way, and it may not even be the best way to read a book. But, if it gets you reading today, and then again tomorrow, and then again the day after that, then we have something. If this is a see-it-to-believe-it moment for you, that small bump is all that matters.

 

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

It’s Super Bowl week and what better way to celebrate that dig into the thinking behind one of the coaches (and general manager) at the game? The posts this week come from this short book. 

In my readings there were five big ideas that stood out:

1. Inversion
2. Pattern recognition
3. Top-down support
4. Argue well
5. Seek counterfactuals

This post addresses the fifth point; seek counterfactuals.

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Successful organizations will also weigh the counterfactuals, alternative histories, and possible outcomes that could have but did not occur. Consider fork-in-the road moments and think about what else may have happened.

Going for it on 4th down

In the 2016 AFC Championship game Belichick went for it twice on fourth down (4th & 1, 4th and 6) when he could have kicked field goals (from the Denver 16 and 14 yard lines). The Patriots lost by two points. Superficially it seems like kicking field goals would have won the game. But, if his team had made a field goal at either point it would have set the game down a different path of outcomes.

During the postgame press conference, Belichick was asked why to go for it twice on 4th down. “Because of the score and situation of the game,” he replied.

This idea of considering the range of outcomes happened years earlier during the regular season too. Here’s what Belichick said early that season after a loss.

“I really felt good about the team, even though we’d gotten smashed. I felt something about the team that night in the second half that I really thought we could build on. Anyone that wanted to cash it in could have cashed it in. We weren’t going to win. We were behind, we were on the road, their crowd was in a frenzy. The Chiefs were playing very well but I could see the fight.”

The ends may not have been what Belichick wanted – he lost both games – but the means were good.  The fourth down plays were the right calls at the moment, the players tried hard even though they were losing.

Good counterfactual thinking applies not only to game decisions and analysis but to the evaluation of talent too. “If I said a guy was a first round pick,” said Patriot’s scout Jason Licht, “and the Colt’s picked him, and he turned out to be a bust, they (Belichick and Pioli)  wouldn’t have looked down on me. They wouldn’t have said I was a bad grader. Because that player in the Patriots system might have been successful.”

A player could be a Patriot or not. Then he could be accurately scouted or not. The collection of outcomes for a player were one set if that player was a Patriot, another – and unimportant set – if they weren’t. That’s good counterfactual thinking.

Expanding your mind

Counterfactual thinking is the ability to come up with many possible outcomes. This isn’t easy. We usually mess it up by telling ourselves easy stories. Michael Mauboussin explains:

“Once an event occurs, all of us effortlessly and naturally create a narrative to explain that outcome. Two things kick in, the first is hindsight bias. We start to believe we knew what was going to happen with a greater probability than we actually did…And the second thing that happens is creeping determinism, where you start to believe that what happened is the only thing that could have happened.”

Our tendency is to tell a single story when there were many possible stories. When Belichick lost by two points it’s foolish to think that if he had kicked on field gold it would have changed the game. It would have, but only at that exact moment in the game. His team still could have lost.

In the book Why Everything You Know About Soccer is Wrong, economists Chris Anderson and David Sally look at what statistics matter most for soccer teams to win. The first goal, for example, is really valuable and there are better times to make substitutions. The duo also addresses our bias to favor the things we see rather than the things we don’t. That is, our bias to tell good stories.

“We remember, and place undue significance on, things that do happen while ignoring those that do that…As a result, people discount causes that are absent (things that didn’t happen) and augment the importance of causes that are present (things that did happen). This influences how we think about soccer: not only do we consider the goals that our team score more important than the goals they do not concede, but we value the tackles they make more highly than those challenges that their preternatural sense of positioning, their game intelligence, mean they do not need to make.” 

A goal is salient. A defensive stop is salient. Good position is not. Psychologist Robert Cialdini puts it this way, “because what’s salient is deemed important and what’s focal is deemed causal, a communicator who ushers audience members attention to selected facets of a message reaps a significant persuasive advantage.” 

To rephrase Cialdini, our tendency is to overemphasize what we pay attention to, and believe post hoc ergo propter hoc (after this, therefore resulting from it).  Counterfactual thinking pushes the other direction. It’s asking, ‘What didn’t I pay attention to, and how is it important?’

Here are some ways to think in counterfactuals:

• Ask ‘What if?’ questions.
• Visualize the many outcomes; like in a decision tree or roulette wheel.
• Reset variables to extremes and recompute the equations.

Good counterfactual thinking will end up with a reliable process rather than cherry picked outcomes. In that same 2016 press conference where Belichick said “Because of the score and situation of the game,” he also said, “There were a lot of big plays, any one of them could have made the difference.”  That’s counterfactual thinking! It’s an understanding that there were a range of possible outcomes. Good strategies will have come up with these.

…

Conclusion

As we noted at the start, Belichick is successful for many reasons, some of which are good strategy.

Belichick inverts the situation, asking ‘what would a good defense do against this offense.’ Former assistant Mike Lombardi said, “one of the adages Belichick always subscribes to is called the inverse theory by Charlie Munger. Instead of saying, ‘What will it take to win?’ you ask the question, ‘What can we do to avoid losing?’ and Belichick always takes that approach.” 

Belichick recognizes patterns. Whether it’s his own mental football vault, or the one Ernie Adams cultivates. Pattern recognition gets you to better answers to interesting problems faster.

Belichick provides top down support to his assistant coaches. The unofficial motto on Belichick’s teams is ‘do your job.’ Josh McDaniels said, “It was simple: If I was given something to do, I was expected to do it absolutely perfectly, as best as I could, every time I did it. And if I did those things right, I’d get something else to do.”

Belichick argues well. Unlike his former boss, Bill Parcells, Belichick embraces empirical pushback from players, coaches, and the team owner. These arguments are backed by facts and in pursuit of the truth.

Belichick seeks counterfactuals. There are no neat narratives to summarize a football game. It’s more like app development, many small choices that lead to a final product. Getting caught up in the story means you miss the bigger picture.

…

Thanks for reading. Enjoy the game.

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

It’s Super Bowl week and what better way to celebrate that dig into the thinking behind one of the coaches (and general manager) at the game? The posts this week come from this short book. 

In my readings there were five big ideas that stood out:

1. Inversion
2. Pattern recognition
3. Top-down support
4. Argue well
5. Seek counterfactuals

This post addresses the fourth point: argue well

…

To argue well is to debate but remain friends. It’s to criticize ideas and not people. It’s to stress test ideas and the humility to know that no single person is smart enough to figure out everything on their own.

Parcells and Belichick

Belichick’s relationship with Bill Parcells was testy. Though they had time and success together, it wasn’t a great relationship. David Halberstam writes, “The Bills, they were called, and those on the outside presumed they were good friends, which they were not.” Part of the reason was how Parcells communicated:

“He was volatile and wore his emotions close to the surface. He found that it worked for him, that he could use his emotions as an instrument of coaching. He had a sharp, sardonic wit and a very considerable skill with words; he could taunt a player, sometimes with cruel humor, and in the one-way coach-to-player relationship, the player dared not answer back. Even his very best players and his assistant coaches feared his tongue. He knew the game and had a very good feel for the game and for the mood of his team, but he was never an Xs and Os man, like his junior partner.”

Belichick chose a different path writes Halberstam. “What did fit his personality was the sum of his knowledge, being the best-prepared coach on the field. Players would do what he asked not because he was their pal, but because he could help them win and they came to believe in his abilities.” How do you be the best prepared to win? By being the best informed. That means arguing well in pursuit of the truth.

Writer Michael Holley spent years with Belichick’s Patriots teams and noted, “Belichick has no problem listening to any counter argument – provided that it can be supported with some type of evidence.” In fact, said Scott Pioli, arguing well is a necessity of working with Belichick. “It’s so important that part of the evaluation of you is going to be whether or not you have an opinion.”

Why argue well? Here’s Belichick:

“That way you don’t have those crude masturbation activities. Sometimes somebody can get going and then everyone follows that line of thinking, that process. And then everybody agrees. It’s better when we just analyze independently and all agree or work it out ourselves.”

It’s more valuable to come up with your own ideas and then defend them. That’s what it means to argue well.

Engineers, then and now

Good arguments sharpen the point. They remove the extraneous. Gene Wilder saw this during a meeting with Mel Brooks about Young Frankenstein. Wilder wanted something in the script, Brooks didn’t. They argued back and forth, Wilder recalls he got upset.

“Well, my temperature rose, and after 20 minutes or so of arguing, my color went from red to, I think, blue or purple. I started screaming and then all of a sudden, he said, OK, it’s in. And I said, well, why did you put me through this? And he said, I wasn’t sure if it was right. And I thought if you didn’t argue for it, then it was wrong. And if you did, it was right. So you convinced me.”

That’s what good arguments do. They figure out if someone believes in an idea. They trim the fat. They sculpt the rock. Engineers do this well.

When Andy Grove’s company, Intel, was facing major pressure on its memory chip business. Grove thought they had to pivot to something else. The question was, what? Grove writes that they figured it out by “ferociously arguing with one another while remaining friends.” Intel had to do this as fast as possible.

Grove wrote, “The most important tool in identifying a particular development as a strategic inflection point is a broad and intensive debate.” It’s powerful that Grove, the top person, suggested this. Arguing well requires top-down support. Grove understood that he didn’t know everything. In his book, he acknowledges that his understanding was formed by the past, which by definition, is how things used to be. He knew that things changed and he had to figure out if the idea born in the past could survive in the present.

Another engineer who believed in good arguments was Wilbur Wright.  “(Wilbur) was always ready to oppose an idea expressed by anybody…ready to jump into an argument with both sleeves rolled up,” said family friend George Spratt. He had to be, the Wright brothers, like Belichick, Grove, and Wilder and Brooks were doing something groundbreaking. They were trying to fly.

“A good scrap,” thought Wilbur, “brought out new ways of looking at things…helped round the corners.”

Walt Disney too believed in arguing well, “We voice our opinions and sometimes have good old fashioned scraps, but in the end, things get ironed out and we have something we’re all proud of.”

If you look at what each of these people attempted you see a pattern – each is breaking ground on a new area and needs input from others to figure out how to do it well.

• Disney was creating the field of animated movies.
• The Wright brothers were creating the field of aviation.
• Grove was creating Intel’s microprocessor business.
• Brooks and Wilder were creating a new kind of movie.
• Belichick was creating a new kind of football team.

If you are trying to do something that’s never been done, good arguments are part of that.

…

Tomorrow we’ll end our series on Belichick and look at counterfactuals.

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

It’s Super Bowl week and what better way to celebrate that dig into the thinking behind one of the coaches (and general manager) at the game? The posts this week come from this short book.

In my readings there were five big ideas that stood out:

1. Inversion
2. Pattern recognition
3. Top-down support
4. Argue well
5. Seek counterfactuals

This post addresses the third point, top-down support

…

Even the best strategies fail in the wrong environments. Company politicking, promotions, or precedents can’t get in the way. Only the truth matters. That starts at the top.

Football hierarchy

If your boss fails to listen to you, any discussion is a wasted effort. Belichick listens to Adams. David Halberstam writes;

“He was one of the very few men that Bill Belichick liked to test his own view of the game against, trusting completely Adams’s truly original mind and encyclopedic knowledge of the game; if they differed in a strategy, if they came out on different sides – which happened rarely – then Belichick took Adams’s dissent seriously. He might not ultimately adapt to Adams’s view, but he would always weigh it carefully.”

It wasn’t only Adams that had Belichick’s ear, wide receiver coach Chad O’Shea said, “he wants you to disagree, he respects that, he listens.” Former assistant Scott Pioli said, “this is why Bill is so different than so many people…when he’s asking those questions, you know that every fiber in his body is about winning and doing what is best for the team, with no personal or selfish motives.”

Former assistant Scott Pioli said, “this is why Bill is so different than so many people…when he’s asking those questions, you know that every fiber in his body is about winning and doing what is best for the team, with no personal or selfish motives.”

Even the players saw this, “We’d say, ‘Why don’t we just go to our base stuff and beat them that way?’” said Rosevelt Colvin, “and sometimes he’d say, ‘Okay.’”

This top-down support held when the roles flipped, Belichick’s boss Robert Kraft listened to and supported him. Michael Holley writes in Patriot Reign that Kraft, “knew he could talk to Belichick without any charges of being a meddlesome owner.” This wasn’t always the case for Bill.

…

Art Modell of the Browns – the first owner Belichick worked for as a head coach –  didn’t know what was going on. He asked the players if Belichick was treating them well (Bill didn’t like this). He also offered $10,000 if anyone could tell him what Ernie Adams did.  

Bob Kraft is different. In 2001 – Belichick’s first draft with the team – he prepared to tell Kraft about why he was choosing certain players. Kraft said, “Bill, I just want you to do what you think is right.” It was a different kind of leadership for the coach and organization. It was support.

Going to space, piling on

When the Apollo 11 lunar mission was about to begin its translunar injection (trip to the moon), head of flight operations Chris Kraft told flight director Gerald Griffin, “Young man, we don’t have to go to the moon today. It’s your call.” This mattered, wrote fellow director Gene Kranz,  “it removed all political pressure from the decision. Griffin knew all he had to do was make the right technical call.”

This spirit at NASA manifested itself again during the Apollo 13 disaster. Kranz wrote, “With a team working in this fashion, not concerned with voicing their opinions freely and without worrying about hurting anyone’s feelings, we saved time.” That is, they got to the facts quickly.

Culture like this can’t be manufactured. Peter Thiel wrote, “no company has a culture, every company is a culture.” You are what you do.

NASA had the kind of top-down support to make the right choices because even though there was a lot of pressure on the flight crews, each boss focused on doing what was right, not what was popular.

Another demonstration of this comes from how Marc Andreessen and Ben Horowitz run the venture capital firm a16z. Regarded as one of the better firms in the business, part of the reason a16z succeeds is top-down support.

In an interview with Tim Ferriss, Andreessen explained that anyone in the company can bring a deal to the table, but nothing gets an automatic green light. “We’ll create a red team, a countervailing force of some set of people,” Andreessen said, “to stress test the thinking.”

That’s good, but not enough. Andreessen knows that because he’s the boss (the “a” in a16z is for Andreessen) people might support him just because of that. It’s the same situation as NASA and the Patriots. Employees can’t value pleasing the boss more than finding the facts. There’s a solution to this says Andreessen. “Ben and I do this to each other. Whenever he brings in a deal, I just beat the shit out of it. I may think it’s the best idea I’ve ever heard and I’ll just trash the crap out of it and try to get everybody else to pile on.”

Belichick supported disagreement from Adams and the coaches and created an environment where people are expected to express ideas that lead to wins. NASA flight directors supported their engineers by creating an environment where the most important thing was safety. The venture capital firm a16z supports an environment where no one feels pressure from the boss because the bosses take opposite sides.

In each case the leader sets the tone for hearing the truth. Once this culture exists it’s time to argue well.

…

Tomorrow we will argue well.

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

It’s Super Bowl week and what better way to celebrate that dig into the thinking behind one of the coaches (and general manager) at the game? The posts this week come from this short book.

In my readings there were five big ideas that stood out:

1. Inversion
2. Pattern recognition
3. Top-down support
4. Argue well
5. Seek counterfactuals

This post addresses the second point; pattern recognition.

…

Pattern recognition is a superpower because it saves you resources (time, energy, money). In the same way an outdoorsman knows where to fish, an accountant knows when things smell fishy, or when a chef knows how to fillet a fish, we can have our own superpower, our own pattern recognition. Belichick has Ernie Adams.

Mr. Ernie Adams, Belichick’s Belichick

Ernie Adams is the (nearly) silent partner.  David Halberstam writes:

“Ernie Adams was Belichick’s Belichick, the film master’s master of film. He was supremely knowledgeable about the history of the game – no play was ever forgotten, and his brain was like a little football computer, always clicking away, remembering which defense had stopped which offense, and who the coaches and the players had been.”9

Adams has superb pattern recognition. He’s so valuable to Belichick that in the bank of phones along the sideline there’s a direct line to Adams. Adams is the one who will report whether or not to challenge a play and Belichick will ask during the game “What have we got, Ernie?”

Before Super Bowl 49 against the Seattle Seahawks, the Patriots practiced plays they thought their opponent would run. The person who decided which plays to practice was Ernie Adams. “Ernie would diagram plays that he thought they would run against us or that he had seen from a previous game,” Belichick said. A good thing too.

In the final thirty seconds, with the Seahawks on the Patriots’ one-yard line, quarterback Russell Wilson threw an interception that turned near-defeat into victory for the Patriots. What’s amazing about that play was the practice that preceded it. In the NFL Network film, Do Your Job, the Patriots coaching staff and film narrator talk about how the Patriots practiced the exact play the Seahawks ran.  Here’s the dialogue from the movie.

Coach 1: “What’s funny, if you look at the play is that (Brandon) Browner is telling Malcolm (Butler) what he’s going to do. I’m going to jam this guy and then told Malcolm to just go.”

Coach 2: “If you remember, Malcolm’s matchup was really Kearse, but Browner had seen enough of those pick routes. He anticipated what was coming as well as Malcolm. So he was like, let me get up here and jam the point and you go. Malcolm had seen it in practice.”

Narrator: “Butler had seen it in practice, he just didn’t stop it.”

During this narration there are nearly identical videos of the game and practice footage where you see the before and after. In practice Malcolm gets picked and the receiver catches the ball. In the game Malcolm gets the pick. Here’s what Ernie Adams says in the video:

“You’re going to win or lose games at practice. There’s no such thing as being a game day player. You see situations come up on the practice field, you’ve worked on it, you know what it takes. When it comes up in the game, because you’re trained, you’re seasoned, you’ve seen it – you react and make the play.”

That’s good pattern recognition. At the final moments of the Super Bowl, the win is decided because one team has built pattern recognition into their strategy.

Stocks and submarines

Good in-the-moment decisions come from experience in consistent situations and learning from them. Football is great for this because it’s consistent. It’s the same number of players, the same rules, and the same dimensions. The more nebulous things in life require more work.

Warren Buffett uses pattern recognition to figure out what stocks to buy and when. At the 2016 Berkshire meeting, Buffett said, “pattern recognition gets very important in evaluating humans and businesses. Pattern recognition isn’t 100%, but there are certain things in businesses we’ve seen over and over.”

In an interview with Charlie Rose, Buffett said, “I’ve been reading IBM’s annual report every year for 50 years. This year I saw something that sort of clicked.” Fifty years! That’s how long it took for Buffett to recognize something valuable. It’s what Ernie Adams does too. Adams works 100 hours a week to build up pattern recognition.

Phil Simms played under Belichick and Adams for the Giants and said Adams “is a great source of information for Bill. There’s nothing like somebody that can stand back and get a different view of what’s going on.’’ To put it another way, Adams sees the patterns than Belichick missed.

Belichick learned to invert when he coached offense and defense. Adams is another point of view, another source for triangulation, another pattern recognizer. Pattern recognition can come from any situation with repetition. Even from your youth.

As a US Navy Intelligence Officer James Bradley was trying to figure out a mission for the spy submarine the USS Halibut. Bradley wanted the crew to listen to Russian Navy communications, but do so without being detected. He guessed there was a cable that “ran from the Soviet Union’s missile submarine base at Petropavlovsk, under the Sea of Okhotsk, and then on to join land cables going to Pacific Fleet headquarters near Vladivostok and then to Moscow.”12

He just didn’t know where.

The Sea of Okhotsk is big, 611,000 square miles big. Twice the size of Texas big. The Halibut had an underwater camera, but the crew couldn’t wander back and forth. That would take too long and be too dangerous. Bradley needed to figure out something else.

This is from Blind Man’s Bluff:

“Bradley cleared his mind of charts and maps, freed himself from official assessments, from the meetings, memos, and briefings that swamped the business of intelligence in Washington. He let his eyes close and his thoughts wandered into simpler journeys taken and simpler times, before the Cold War, before World War II, back to the waters of his childhood.

“There he found an answer that was beguiling simple and just strange enough to be true. It was buried in his memories of St. Louis in the 1930’s when he was a boy and his mother packed him up to escape the summer’s heat on river boat rides along the Mississippi River.

“…Young Bradley had taken to passing time with a steamer captains in the pilothouse, and from there he could see a series of black-and-white signs placed discreetly along the shore. Most of the signs marked mileage and location.

“But they were a few, he remembered now, they declared: ‘Cable Crossing. Do not anchor.’ These signs were there to keep some idiot in a boat from snaring and snapping a phone or utility cable in the shallows. Bradley’s eyes snapped open as he realized that what was true of the Mississippi just might be true of Okhotsk. That’s how they would find the cable, he thought. That’s how they would engineer one of the most daring acts of tele-piracy of the Cold War. Halibut would be led directly to her quarry by signs placed somewhere on a lonesome beach in the Soviet Union declaring: ‘Watch Out! Cable Here.’”  

That’s exactly what happened. Commander John McNish would guide the Halibut into Soviet waters and find the cable thanks to a sign on the beach.  Notice the similar language; see something you’ve seen before, practice something, look back in time. Good pattern recognition is about memories and experiences, it’s a tool anyone can carry. You just have to read or do.

Charlie Munger is described as a book with legs. The winningest college soccer coach, Anson Dorrance reads all the time too.  Pete Carroll read Grit by Angela Duckworth and The Obstacle is the Way by Ryan Holiday and invited both to talk to his team. Shane Parrish says that his popular Farnam Street blog is his attempt to “master the best of what other people have already figured out.” Other people’s experiences are your pattern recognition data.

You can also do to build pattern recognition skills. Elizabeth Gilbert thought about going to graduate school, but tuition was too high. Instead, thought Gilbert, why don’t I go out and live and write different things. “You can learn about the thing by learning about the thing,” Gilbert said, “or you can learn about the thing by doing the thing.”  NASA learns by doing; running simulation after simulation. The last simulation before the Apollo 11 landing included an error that the crew muffed during training, but got it right during the lunar landing. That’s good pattern recognition.

Note that pattern recognition has to happen in consistent environments. Randomness conceals accurate results. Sports are remarkably consistent, as the famous scene in Hoosiers shows, the basketball rims anywhere are the same height as those at Hickory.

In areas with more randomness it’s harder to build pattern recognition. Investors see this. As great as Buffett and Munger are, they aren’t perfect. That’s because things are beyond their control. Ditto for NASA. The simulations were good, but not perfect because of randomness and unknown variables.

…

Tomorrow we’ll look at #3, Top down support.

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

The  Buffetology YouTube channel has some nice content. These are my notes from a Peter Lynch talk in 1994.

Two ideas first:

1. It’s great that YouTube has the ability to play at a faster than normal speed. Thanks YouTube.
2. We’ve entered a time when some, (all?) video content is available online. That amazes me. The only thing I’ve never found is an Emmitt Smith commercial where he’s doing bench presses the day after the Super Bowl and says something like, “no time for rest.” As a 49er fan Smith drove me crazy, but I loved that commercial.

Okay, ready?

1/ Understand deeply.  This first quote about investing was worth the time it took to watch.

“If you don’t understand it doesn’t work. This is the single biggest principle. People are very careful with their money. When they buy a refrigerator they get Consumer Reports. When they get a microwave oven they do that. They ask people what’s the best range, what kind of car to buy. They do research on apartments. When they go on a trip to Wyoming they get a mobile travel guide. When they go to Europe they get the Michelin travel guide. People hear a tip on a bus about some stock and they put half their life savings in it before sunset and they wonder why they lose money in the stock market.”

Ramit Sethi has said the same thing about buying a house. It’s the biggest purchase of your life, take some time to become an expert.

Jason Calacanis said “There’s level of deep, deep obsessive knowledge you need to have of all your competitors. Of all the nuances of their products. Of the history.”

We don’t do this. We prefer to “hear a tip on the bus.” That’s because deep understanding is hard. Fortunately, there are ways to get better at it.

• Be there. Talk to your customers, feel their pain, manage your property. Be like Samuel Zemurray.
• Make jokes. Comedy requires a deep understanding, just look at Jason Zweig, Lonely Island, and James Corden.
• Learn. Mohnish Pabrai said,  “(Warren and Charlie) get a little more information because they’re willing to dig deep and read a lot, which most people aren’t willing to do.”

You don’t have to have a deep understanding unless it’s in an area very important to you. Which brings us to point number two.

…

2/ Do the work or get out. “If you purchase a stock you should do certain things. If you’re not ready to do those things you should keep your money in the bank. Some people aren’t willing to do the homework. Some people don’t have the stomach for it. They should stay out.”

In his How to Start a Startup class at Stanford, Sam Altman said the same thing about entrepreneurship.

On Twitter, when Patrick O’Shaughnessy asked about books for entrepreneurs Wesley Gray replied:

Entrepreneurship and investing are huge challenges but also a lot of fun. What other careers, asks Charley Ellis, allows you to participate until you are one-hundred? “The rewards are really quite substantial.”

Do the work. Otherwise, get a target date retirement (choose one with the lowest expense ratio) and take Jason Zweig‘s advice. When someone asks you about the stock market, tell them, “I don’t know and I don’t care.”

About that stock market….

…

3/ Macroeconomic liars.  “No one can predict the stock market, it’s a complete waste of time.” “If you spend 14 minutes a year on economics you’ve wasted 12 minutes.”  “Economic predictions are a total waste.” “I spend zero time thinking about what is going on in Washington. I just deal with facts.”

Well, that’s clear.

But, what should I pay attention to?

…

4/ Microeconomic truths. Lynch might best be known for the “buy what you know approach.” In 2015 he clarified to the WSJ what exactly he meant by that.

He didn’t need to, it’s pretty clear in this video from 1994.

• If you’re a nurse and you see a new drug that works well, check it out.
• If you run a smelting plant and you see a new kind of aluminum, check it out.
• If you run a restaurant (this one is from the WSJ piece) and you see Panera opening on your street, check it out.

Put 10% in a stock you like, suggests Josh Brown.

“You need an edge to make money,” Lynch says, and having a job in an industry is an edge, “a big edge.”

Edges are only the first step down the path of deep understanding. You also have to be objective. “You can’t treat it like your grandchildren,” says Lynch, “If the fundamentals slip you have to say goodbye to it. Remember, the stock does not know you own it.”

“Investment is most intelligent,” wrote Benjamin Graham, “when it is most businesslike.”

Ah, NBD. Gotcha. How hard is objectivity?  It’s not like I’m prone to the endowment effect, recency bias, survivor bias, optimism/bull market bias, or the anchoring effect. Here’s how Michael Lewis described Daryl Morey’s experience with that last one.

Morey is taking a behavioral economics class at Harvard Business School during the 2011 NBA lockout. The professor asked the students to write down the last two digits of their phone number, then:

“asked the class to write down their best estimate of the number of African countries in the United Nations. Then she collected all the papers and showed them that the peo­ple whose cell phone numbers were higher offered systematically higher estimates of African countries in the United Nations. Then she took another example and said, “I’m going to do it again. I’m about to anchor you. Here. See if you aren’t screwed up.” Everyone had been warned; everyone’s minds remained screwed up. Simply knowing about a bias wasn’t sufficient to overcome it: The thought of that made Daryl Morey uneasy.”

Besides objectivity, there’s something else Lynch suggests. Forget forecasters. The auto section has better information than the financial one.

…

5/ Be patient.  “Another key element is you have plenty of time. People are in an unbelievable rush to buy a stock.” “You could have waited ten years after WalMart went public and still made thirty times your money.”

In his diary about the great depression, Benjamin Roth writes that an investor needed three things to scoop up cheap stocks.

1. “Patience to wait for the right moment.”
2. “Courage to buy or sell when that time arrives.”
3. “Liquid capital.”

Another way to put this is to wait for the right pitch. Warren Buffett said he learned this from the book by the great hitter Ted Williams. Right now – early 2017 – Berkshire Hathaway has seventy million dollars in cash.

Excellent CEOs – The Outsiders – writes William Thorndike have “crocodile-like patience.”

…

6/ Margin of safety. According to Seth Klarman:

“A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable, and rapidly changing world.”

Joel Greenblatt wrote, “Margin of safety should always top your investment list.”

What does Peter Lynch add to this idea?  “If you can add 8 and 8 and get reasonably close to 16,” says Lynch, “that’s the only math you need to know.”

If it’s not clear there is a MoS, there isn’t one.

…

7/ Luck. “In chess an outstanding player will beat a good player one thousand times in a row. In poker or bridge there’s more uncertainty. You can play a hand exactly right and lose. The stock market is much closer to poker.”

Ending on the two-jar model seems about right.

Thanks for reading.

Mike

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

This was originally published on Medium. Moving here for linking convenience. 

In episode 55 Jocko Willink answered “questions from the interwebs” and there were 3 things that stuck out.

1. Firm goals, flexible means.
2. Margin of safety in battle and investments.
3. Feel the real winds (get out of the C-suite).

…

1/ Firm goals, flexible means.

Jocko calls this “commander’s intent.” The big goal.

If you want to be healthy (the goal), it doesn’t matter that much if you run, lift gym weights, life home weights, lift body weights or do jiu-jitsu (the means). If you want to be wise (the goal), it doesn’t matter if you listen to podcasts, audiobooks, take college courses, enroll in MOOCs, or read physical books (the means).

It’s better if you are actually flexible on the means. As Adam Carolla says, life isn’t like putting together an IKEA nightstand.

Jocko, for example, now has his own line of tea. Not what you expect from a former Navy SEAL. He also runs events, writes books, hosts a podcast, and creates merchandise. Those are all – wide ranging – means that lead to a singular goal.

In Grit, a book about how people successfully achieve things, Angela Duckworth writes;

“Ideally, even if you’re discontinuing one activity and choosing different lower-order goals, you’re still holding fast to your ultimate concern.”

Duckworth’s research suggests firm goals, flexible means. It looks like this:

…

2/ Margin of safety.

A listener writes in that he was driving home with his wife and kid in the car when a drunkard stepped out in front of him. The imbiber hooted and hollered at the car. After a minute of this, the driver went around the man. He wanted to know if he did the right thing. Was he was teaching his son the wrong lessons in not standing up to the drunk?

Yes, Jocko says, you did the right thing.

Here’s an incomplete list of the things that could have gone wrong if the driver stepped out of his car. The drunk is sick and a two hit fight kills him. The driver is charged with manslaughter, hires a lawyer,  pays for legal fees, borrows money, and ultimately cleared but in debt.

To engage in a street fight you need a margin of safety. Do the good outcomes outweigh the bad?

The same idea applies to investing. A street fight won’t be clean choreography (like in the movies), and an investment won’t just go up and to the right no matter what you hear on TV. Joel Greenblatt wrote that you start with MOS in mind.

“A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable, and rapidly changing world.” Seth Klarman

This idea applies at the collective level too. In With The Old Breed, author E.B. Sledge wrote about the battle of Peleliu and — with hindsight — the invasion was a terrible idea. Did McArthur really need this island to secure his flank? Was it worth ten thousand American casualties?

Before you engage in street fights, investments, or battles, ask if 10% goes wrong is this still worth it? What about 50%?

…

3/ Leaders must feel the winds of the real world.

One of Jocko’s roles during his military career was Admiral’s Aide. It wasn’t his favorite job, but he learned from the Admiral to focus on the people on the ground. In planning meetings, the admiral would ask, “how does this affect the guys in the field?”

The best leaders answer this question.

In Only the Paranoid Survive, Andy Grove repeated this idea;

• “Our IT manager said, ‘Well, that guy is always the last to know.’ He, like most CEOs, is in the center of a fortified palace, and news from the outside has to percolate through layers of people from the periphery where the action is.”
• “We need to expose ourselves to our customers…We need to expose ourselves to lower-level employees…We must invite comments even from people whose job is to constantly evaluate and critique us, such as journalists and members of the financial community.”
• You have to spend more time with people who spend their time ‘outdoors,’ wrote Grove, “where the winds of the real world blow in their faces.”

Jocko points out that it’s because the people in the field that the people are in the meeting. If plumbers don’t plumb, salesmen don’t sell, or soldiers don’t soldier on, nothing else matters.

Being out there also gives information and builds a deep understanding. You can’t enter planning or high-level meetings, says Jocko, and demand change. No. “The way you get ready for it, is to have ammunition.” Jocko says, “You gotta have your ducks in a row.”

That means knowing what it’s like where the winds of the real world blow. You have to know your BATNA. You have to bring options to the table. You have to be able to answer the five whys. Being there helps you do these things.