Author: MIKE

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It’s that time of year. Temperatures recede, consumerism peaks, and bloggers write about their favorite books of the year. As a blogger, I will abide.

I’ve done this list the past five years, usually at my personal blog. I let that domain lapse so the list moves here. That works because most readers here are Readers.

Before we begin, this is my final post of 2016. I’m not stopping because the holidays make things too busy, though they do make things busier, but because I need to get better. I haven’t read enough books on writing better or enough books on disruption theory or enough on….

The list is endless.

The catalyst for this pause was re-listening to Cal Newport’s podcast with James Altucher. It reinforced the idea of being So Good and Deep Work. Newport’s books are some of my favorites. I nod my head as  I read them. Yet I fail to implement the lessons on a day to day basis.

I’m off to the woodshed for December. See you again in January.  Happy holidays, feliz ano nuevo, and safe travels!

For now, here are a few of my favorite books from 2016 (with Amazon affiliate links):

Investing

Charlie Munger: The Complete Investor by Tren Griffin. I like Griffin’s Blog, 25iq.com and this book was an extension of that. However, if i had to choose between Griffin’s weekly posts and this book I would take the posts.

Investing and investors is a newish area for me, and I began my journey down the rabbit hole with the familiar books. The Black Swan, Damn Right, and The Most Important Thing all lived up to their billing as good books – and ones I’ll reread.

Biographies

My biggest focus this year was on biographies, an area I had never enjoyed all that much. My hesitation was because they were biased. I remember one CEO writing about his heroics in turning his company around. It wasn’t his heroics so much as the 1990’s. Tailwinds – as we’ve noted here – have a powerful effect.

Only the Paranoid Survive by Andy Grove. This book was more business than biography but it felt too personal not to include here. In this book you get in Grove’s head to see his confusion, success, and decision making process.

Shoe Dog by Phil Knight. This also felt true to its roots. Knight, like Grove, acknowledged the gray areas and confusion he felt. It humanized him. Knight’s book is also good for people who want to start something but aren’t ready. No one, not even the founder of Nike, was ever ready.

Napoleon by Paul Johnson. A short book about a – HA! you’d thought I’d do it. Actually, this is part of the Penguin Lives series of books that cover big people in a short format. The appetizers of the book world.

My favorite biography of the year was Boyd by Robert Coram. Incredible.

History

The lesson from each history book was that a lot of little things have to go right for one big things to.

Bill Bryson taught and entertained with One Summer (about 1927). If you like Bryson, you’ll also like Eric Weiner’s Geography of Genius.

The Wright Brothers by David McCullough. This book is as good as everyone says. McCullough takes us back in time like we’re in a Hollywood movie, watching history unfold with one of the best narrators around.

Learning to Eat Soup with a Knife by John Nagl. A common sight from the history books was me slapping my forehead with the palm of my head, muttering ‘not again’, and my wife asking about my sanity. This book takes the cake for that reaction. America’s actions in the Vietnam boondoggle do not compare well to the British success in nearby Malaya. Not recommended for people with (already) high blood pressure.

Big effects

Then there is the category of books that had the biggest effect on me. These are books you can use as a lens to see the world. Boyd fits that mold because I think of this quote often:

“So you got your reward; you got kicked in the teeth. That means you were doing good work. Getting kicked in the teeth is the reward for good work.”

Another was The Success Equation by Michael Mauboussin which introduced the two-jar model.

Tribe by Sebastian Junger had an unexpected effect on me. Sometimes there are things that happen in life so related to what you read it gives you goosebumps. In the fall of 2016 I was thinking about the two largest communities where I live; college football fans and church. Fill in the rest of the week with work and school and that’s a typical week for most people. Overlay this with the sheared political election and the importance of feeling connected came into focus. Junger speaks to this feeling.

Grit by Angela Duckworth. I wrote a lot about this book here. It reminded me that to get to any vista you have to walk up a trail. I often forget about the work required for a view.

A Curious Mind by Brian Grazer. A surprisingly enjoyable book. It was a reminder to be curious.

Self contained curriculum

Books that should replace textbooks.

The Beak of the Finch by Jonathan Weiner taught me more  about evolution than anything in high school.

Erik Larson continues to write great books like Dead Wake: The Last Crossing of the Lusitania. Larson speaks to an entire period of time with a story that took only two weeks.

For God, Country, and Coca-Cola by Mark Pendergrast. The history of the world’s greatest brand. This lens on the past 130 years was fantastic because it avoided the political/military direction so often taken with looking at one period of time. A solid book on American history.

Military

I’ll blame Jocko Willink for this. I enjoyed his book, Extreme Ownership as well as Blind Man’s Bluff (submarines) and Skunk Works (B-52).

Big history

Civilization by Niall Ferguson was good.

Sapiens by Yuval Noah Harari was good too. This one I got less from because I listened to it. It was after I saw and heard the praise on other blogs and books that I realized I may have missed something. From what I remember though, Will and Ariel Durant’s The Lessons of History could be considered the abbreviated version.

Potpourri. 

Hershey by Michael D’Antonio. If you take your family to Hershey Park read this ahead of time. Quick and fun.

Let my People go Surfing by Yvon Chouinard and The Outsiders by William Thorndike. There are different ways to run companies, these two books tell those stories.

Failure is not an Option by Gene Kranz. The story of Mercury, Gemini, and the Apollo missions from someone who was there.

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Drafting this post and planning to not write in December felt odd. Like I wasn’t doing what “I should” and that I would lose readers without writing and a few other hesitations that are hard to name.

In a more clear headed moment I would say that this is “attribution substitution.” That I’m confusing posting with relevance, importance, or some other metric of vanity.

I want to write about things that good and true despite the time. A break will help prove if that’s true.

Nasty Gal filed for Chapter 11 bankruptcy protection. This surprised me. It looked like Nasty Gal was a good company, Amoruso was #53 on the Forbes self-made richest women list, and I even linked to her  book a bunch of times! What the hell happened?

In my book about startups that failed, there were 6 themes to the mistakes:

1. Failure to understand customers.
2. Failure to manage money.
3. Failure of strategy.
4. Failure of key skills.
5. Back luck.
6. Bad teams.

Let’s use those things as a template to see what parts Nasty Gal got right and wrong.

As Professor Sanjay Bakshi reminds us, we should always start with part-of-the-reason thinking. We can’t perfectly paint the picture of what happened but we can bring it into focus.

1/ Customers.

What Nasty Gal did right: In #Girlboss Amoruso wrote that she has a friend adding software on MySpace and she “responded to every single comment that anyone left on my page.”

“Social media allows me to have my ear to the ground even when I’m out pounding the pavement.”

Too often founders had the Field of Dreams delusion, if I built it they will come. That rarely happens. Instead, founders must talk to people and figure out what they want and build that. 

What Nasty Gal did wrong: Time does not scale. Early on Amoruso could devote time to each customer comment. That’s impossible now.

The problem was that Amoruso got too far on her own. In Here Comes Everybody, Clay Shirky addresses the lower operating costs available to Amoruso. Social media and online auctions allowed her to transact with customers at a cost never seen before. Shirky explains that audience size and conversation are inversely correlated.

• The larger the audience, the less conversation (and more broadcast).
• The smaller the audience, the more conversation (and less broadcast).

The Facebook group “Summer Running Club” is small and conversational. The Runner’s World magazine is large and not. As Nasty Gal grew Amoruso lost the pulse of her community.

Nasty Gal also failed to develop a system for interaction with customers. Amoruso told Tim Ferriss in an October 2015 interview, “we still don’t have the systems we’d like to have.” Add in the fact a that new customers aren’t (forgiving) brand loyalists, but people who have less affinity (and forgiveness).

2/ Money.

What Nasty Gal did right: Amoruso carefully stair stepped her location size. When the company moved and bought Herman Miller chairs, Amoruso found out and got rid of them. “It sent the wrong message,” Amoruso writes, “to preach frugality while balling out on twelve grand worth of chairs.” Nasty Gal had to be bootstrapped because no one would lend to Amoruso:

“As I had no financial cushion to support me while the business ramped up, I had to bust my ass and make it profitable from day one. In the end, this meant that I grew Nasty Gal to $28 million in revenue without borrowing a dime.

She told Tim Ferriss, “I didn’t need stuff, I lived in a pool house for 500 dollars a month.” During the early years Amoruso was frugal.

What Nasty Gal did wrong. Those frugal ways went by the wayside. Nasty Gal raised $65M in venture funding in the last four years to facilitate growth. As a private company we don’t get to see what they spent, but they did hire too fast and raised a lot of money.

Maybe the actual strategy matters less than the consistency of it. Soon after Alex Blumberg started Gimlet, he said they might be profitable sooner than expected. When Chris Sacca heard this he called Blumberg (Sacca is an investor) and told him he was going about it all wrong. Gimlet was a growth company and needed to prioritize that.

Was Nasty Gal a profitability company that mistakenly switched to growth?

3/ Strategy.

What Nasty Gal did right:

“Many of the vintage shops already on eBay were so bohemian it hurt, with names like Lady in the Tall Grass Vintage or Spirit Moon Raven Sister Vintage. So the contrarian in me grabbed the keyboard and named my shop-to-be Nasty Gal Vintage.”

Nasty Gal was differentiated. It’s brand was vintage clothes with a modern attitude.

Brand was their moat. Brand moats are some of the most difficult to build but most defensible once established. Don Keough and Mohnish Pabrai have spoken about Coke’s brand. Phil Knight has written about the Nike brand. Andy Katz-Mayfield has spoken about the Harry’s brand.

What each of them noted is that brand takes a loooong time to build. Harry’s, much like Nasty Gal, is now large enough that others are taking notice. This is dangerous territory. It’s why Nasty Gal got sued by Chanel (among others).

Strong brand moats exist when customers are insensitive to price. Nasty Gal didn’t get there as this Reddit post shows. People liked the look, but shared cheaper alternatives.

One year I volunteered at a PTO fundraiser before Christmas with some other parents. As we packaged meals we talked about Christmas gifts for our kids. One mom said her son asked for only one thing, Nike Elite socks. “They’re $14 a pair,” she said, “but it’s the only thing he wants.”

When a kid asks for socks, that’s a brand.

What Nasty Gal did wrong. Their moat was never deep enough.

4/ Key skills.

What Nasty Gal did right: Early on Amoruso had all the necessary skills. She knew what would sell:

“If it sold, cool—I’d instantly go find more things like it. If it didn’t, I wouldn’t touch anything like it with a ten-foot pole ever again.”

How to post it:

“Silhouette was always the most important element in my photos. It was critical on eBay, because that was what stood out when potential customers were zooming through thumbnails, giving less than a microsecond’s thought to each item.”

And when to put it online:

“The prime time for auctions to go live was Sunday evening.”

Amoruso had all the key skills to sell on eBay. She knew what to buy, how to describe it, how to take a good thumbnail, and when to put it online.  Jason Calacanis said he looks for founders who have a deep knowledge of their product, their competitors, and their industry. Amoruso had that.

What Nasty Gal did wrong:

As the company grew Amoruso’s skills overlapped less with what the business needed. She told Tim Ferriss that “culture can be used as a weapon…we’ve been working on a brand bible.” She didn’t need a brand bible early on because she was the brand. As the company grew, deficiencies in leadership were more damaging than deficiencies in Photoshop.

Amoruso noticed this, “the things I think I’m good at aren’t the skills a CEO needs to do,” she told Ferriss.  She told Forbes, “It takes a lifetime of chops to learn what my CEO, Sheree, knows about leadership. That’s a learning curve I didn’t want Nasty Gal to absorb.”

The mistake comes in the timing. Nasty Gal needed someone with those key skills sooner.  In the same Forbes interview she says:

“No one knows what it takes to be CEO, even CEOs. My advice would be to get some real management chops, work for some great companies, and know more than I did before you try to do what I’ve done. I have learned some hard lessons on the job, and some that I wish could have been a bit earlier in my career.”

It took too long to switch to someone who had the right skills.

5/ Luck.

What Nasty Gal did right.

It was “very serendipitous that it worked out at all,” Amoruso told Ferriss. She was a community college dropout who dabbled in petty shoplifting. But she did have some tailwinds.

Amoruso recognized the opportunity on MySpace and eBay, and cruised on those gusts as long as possible. She had good timing with social media, venture capital, and direct to consumer internet businesses. Her personal story yielded a book deal. A lot of things that could go right for Nasty Gal did go right.

Like Bill Gurley, when opportunity knocked, Amoruso answered.

What Nasty Gal did wrong. 

It’s hard to say they did anything wrong. Luck, as Michael Mauboussin points out, is something you can’t control. Nasty Gal’s success and failures very clearly fit the two-jar model.

6/ Team.

What Nasty Gal did right.

Early on Amoruso hired well. It was hard work but once she found people who could do a job she often stuck with them.

What Nasty Gal did wrong. 

The NYT reports that there were problems with the team:

Despite its successes, Nasty Gal went through several rounds of layoffs, in 2014 and earlier this year. High-level hires, like Kate Williams (editorial director) and Christian Parkes (vice president for brand marketing), left quickly, while other employees expressed discontent, rating the company 2.8 stars out of 5 on Glassdoor.

In 2015, Aimee Concepcion sued the company for laying off her and two others just before they were set to take maternity leave, while Farah Saberi claimed in a lawsuit that she was let go because she came in late to work and took a five-week leave after she was diagnosed with a kidney disease.

Team members are a stakeholder, and getting the right ones matter.  Wesley Gray said that they screen for a certain type of investor. Morgan Housel and Patrick O’Shaughnessy talk about how Valve and Zappos do this well. Louis C.K.  considered it too when he made Horace and Pete.

Closing words. 

The biggest thing I got from the articles about Nasty Gal and Amoruso was how tightly connected the two are. That worked fine early on, as Amoruso’s hustle, eye, and motivation were aligned with what the company needed.

Things went wrong when Amoruso’s skills separated from what the company needed. She wasn’t good enough, couldn’t be good enough, no one person is. Like a sports team that overachieves, Amoruso got a long ways on her own.

On Shark Tank, Kevin O’Leary often asks a pitching entrepreneur what would happen to their company if they walked out of the studio and got hit by a buss. The macabre questioning is good for TV, but it gets at something too, something Nasty Gal never answered.

Nike was never Phil Knight. Harry’s was never Andy Katz-Mayfield. Instagram was never, hold on, let me Google it…Kevin Systrom.

Nasty Gal was Sophia Amoruso. She did a good job, probably about as good a job as one person can.

Morgan Housel was on the Invest Like the Best podcast with Patrick O’Shaughnessy. O’Shaughnessy’s podcast has fast become one of my favorites. Much like EconTalk, Jocko Podcast, Masters in Business, TAL, and Recode it comes out once a week and the episodes are consistently good (and sometimes great).

When I first listened to this episode I wanted to experiment. I enjoyed it, but I was biased. The episode was fresh, Housel was kind enough to mention this blog, and I like his writing. Like tree roots that trip up hikers, a potential for bias was here; recency, reciprocity, and liking.

I sat on the episode. If I wanted to come back to it, I could. If it was good, I would. I did, here are my notes. As always, initial quotes are from the subject, Housel.

1/ The right signals. “For stock pickers or asset allocators, a lot of the due diligence and research is done in a spreadsheet. It’s, ‘let’s crunch these numbers,’… In venture capital there’s often no revenue, sometimes there’s not even a product and you move away from the analytical side to the fuzzy world of “I believe in this guy, he’s really passionate.”

Each domain has a different signal. Stocks have ratios. Venture capital has feelings. The first important step is paying attention to the right things.

Laurence Gonzalez writes in Deep Survival (a great book BTW) about heading to a beautiful Hawaiian beach to go surfing. The sky was blue, the sand was warm, the waves looked good. Gonzalez was looking forward to it after his flight.

There was a guard on the beach. Gonzalez asked about the surf:

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

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

He told Gonzalez it was too dangerous. Gonzalez never would have known. The weatherman wouldn’t have known. There was data in the waves, the lineup, the break, but you had to read those. The lifeguard could.

2/ Find good filters. About blogs Housel says,  “There’s so much material out there that you need a filter and some curation. You need a trusted list of people who are going to point to other sources. People like Tadas Viskanta at Abnormal Returns.”

You can’t consume everything. That treadmills won’t stop so we have to filter the good stuff. It’s one of the ways to use Twitter well.

In that post we looked at four ways to use Twitter well and it’s worth noting that #2 (create a filter) and #3 (bust your biases) are opposite sides of the same coin. There was a lot of talk after the 2016 United States presidential election about people who were surprised at the outcome. Part of the post-election prognostication was about these bubbles we create.

3/ Go for a walk. “I walk a lot. Just by myself, no headphones, nothing, just a forty minute walk. That’s when I think the best and figure things out…When I sit down it’s like my brain shuts off. It’s like I only think when I walk.”

‘Walking’ is my oldest tag in Evernote, germinating from Daily Rituals  by Mason Currey. Here’s two favorite sections:

“Promptly at 2:00, Dickens left his desk for a vigorous three-hour walk through the countryside or the streets of London, continuing to think of his story and, as he described it, ‘searching for some pictures I wanted to build upon.’ Returning home, his brother-in-law remembered, ‘he looked the personification of energy, which seemed to ooze from every pore as from some hidden reservoir.'”

And.

“After a midday dinner, Beethoven embarked on a long, vigorous walk, which would occupy much of the rest of the afternoon. He always carried a pencil and a couple of sheets of music paper in his pocket, to record chance musical thoughts.”

In his tour around the world and through time in search of genius, Erik Weiner writes, “I can see why the ancient Greeks liked walking so much. It quiets the mind without silencing it completely.”

3/ The MOST IMPORTANT (personal finance) THING. “I think it comes down to a handful of things; school, house, and car. For most people those are the three big things…If you can tackle those three things all the other things we talk about in personal finance – cutting out the latte, bringing your lunch to work – don’t matter at all.”

When I bought a racing bike the salesperson tried to sell me something a little lighter (but more expensive). I didn’t even consider it because the weight of the bike wasn’t that important. What was important was that I ride many (many!) miles. That’s the MIT.

Sometimes we get distracted by marginal things when we should focus on the MIT. Cal Newport calls Deep Work the MIT. Anson Dorrance had 2000+ emails before he ever checked because ‘checking email’ wasn’t a MIT. John Boyd‘s first lesson to fighter pilots taught the MIT. Warren Buffett took the advice of Ted Williams who said the MIT was to “wait for the right pitch.”

MITs are simple, but not easy.

4/ X-MBA. O’Shaughnessy said, “It seems like college’s value is mostly about – because you can learn just about anything on your own – signaling and network.” Housel agrees, and notes that when you’re young, signalling is about all you have. “As a twenty-two year old you’re showing your employer, ‘I did this for four years. I followed the rules. I checked the boxes.’ That’s the only thing you have on your resume, so people say ‘it’s just the signaling,’ but that’s extremely important for both the employers and for you as a student.”

In the first post about the XMBA, we guessed that five things were important to DIY schooling.

1. Opportunity cost.
2. Financial cost.
3. Connections.
4. Self-directed learning.
5. Experience and/or signalling.

Housel and O’Shaughnessy were in agreement with the first two, that school is expensive in time and money. “Almost everything I learned in college you can go read and do it for ten cents at the library,” O’Shaughnessy says. Housel suggests going to a community college for the first two years.

It’s in the last three where the ballast swings. Most 18 year olds need a framework. They need a color by numbers outline. College does this part well.

5/ Stakeholders. “The only way it can work at Valve or Zappos is if you get completely compulsive and obsessive about hiring the right people.”

Housel’s point here that those companies can work a certain way because they hire a certain way. This applies to anyone you allow in your life. Wesley Gray pointed out that if you get the right investors, you can organize things a certain way. Louis C.K. said he made his new show the way he did so he didn’t have to have stakeholders.

6/ “A perfect storm!!!” “The biggest events only happen because of a crazy confluence – a perfect storm of events – that come together to cause the Great Depression. A lot of this stuff is not foreseeable before it happens. When you read old newspapers that becomes clear.”

Housel says that he hates the term “perfect storm,” but it’s an apt metaphor. It’s true too for things that go right.

Phil Knight‘s book Shoe Dog will be on a lot of the end-of-the-year book lists (mine is coming soon) because it’s a great read. It’s also evidence to this point. Nike was a perfect storm.

Knight had to be cut from baseball, try out for track, and then go to Oregon. He couldn’t be an elite runner, only good enough. He had to have graduated, sell the idea of a shoe import business to Bill Bowerman, and then go find shoes. Knight had to work during the day as an accountant, at night on the shoe business, and not burn out.

These are the things that had to go right BEFORE dealing with finance, competitors, and creating the orange boxes we identify as Nikes. Starting a company like Nike is like making 100 free throws in a row, outside, during a snowstorm.

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

Dave Oliver’s book, Against the Tide, was about his experiences working in the Hyman Rickover Navy. It was a fast read, Oliver fills it with stories and lessons. Here are three things I learned.

1/ Ego and fighting the last war.

Any lesson we learn is a good lesson, but it’s not the final lesson. Fool me once, shame on you. Fool me twice, shame on me. Yes, but in addition to being fooled I shouldn’t be duped, tricked, or manipulated.

Too often we stop at fooled. We fight the last war. Oliver writes:

“Basking in the glory of its role during the sweeping Allied victory in the Pacific, most of the post WWII U.S. Navy was in no mood to consider, or even listen to, calls for radical change.”

The Navy succeeded in the Pacific, therefore, the Navy was set to succeed in future wars. The Navy was stuck fighting the last war and fighting the other armed services too. Military funding was a zero sum game. Egos battled and turf was defended.

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In any organization the individual incentives (promotion, rank, honor, pay) can move aligned with, or orthogonal to the organizational goals (win, growth, profits).

In his podcast, Jocko Willink, often points out that the military is much less formulaic that people think. We can see this is the careers of people like John Boyd, Victor “Brute” Krulak, and Hyman Rickover. Each of who pursued the truth at the expense of their career.

A good leader will hitch emotions like ego and point it toward finding the truth. That means figuring out where and how the next war will be fought, not basking in the glory of the last.

2/ Chesterton fences on nuclear subs.

Oliver describes Condition Baker as a surfacing maneuver where all the submarine cabin doors and pipes were sealed. Diesel subs often operated in shipping lanes and had to be careful during the final ascent. Condition Baker partitioned off the sub in case a ship’s hull sheared hit them. One compartment would flood, but not the entire ship.

When the nuclear Navy came around, Condition Baker wasn’t as important. Nuclear subs rarely surfaced in shipping lanes and did so only a fraction as often. But, submariners still called out Condition Baker when they surfaced.

Oliver was running a battery charge one day when Condition Baker was ordered and he realized a danger. His compartment required a cooling airflow that ceased when the doors and valves were closed.

Condition Baker was a dangerous relic.

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Chesterton fences get their name from G.K. Chesterton, who suggested that before we change something, we ask why it’s there.

“…let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it”

Understand why something exists before you remove it. Oliver understood in an all-too-real way. The climbing temperature dials indicated Condition Baker was not only unhelpful, it was potentially disastrous. The thing it sought to stop — losing the ship — became more likely, not less.

Nuclear submarines eventually stopped doing this. It was “cleared away.”

3/ Extreme ownership.

“People may not be prepared for the situation in which they find themselves in life. The good leader recognizes this and reassigns them to a place or position where they can be successful.”

One of the maintenance procedures (O/I 62)on electrical equipment requires the power to be shut down. The engineers would do this at night, part because the air conditioning units would be offline and it was cooler.

One day Oliver read a report where on another ship an engineer had been electrocuted during the procedure. The report said it was an accident. A few months later the same thing happened. Another engineer died and another accident was the cause.

That didn’t smell right to Oliver.

How does the same procedure lead to the same outcome in two independent places and both times it’s an accident? Something else was going on and Oliver wanted to figure out what.

The best way to go through the procedure on his ship. After everyone went home, he and his head engineer got out the manual and started.

Things began well enough. At one point Oliver thought that maybe it was just an accident. Then he caught himself. As he was reaching toward the back of a control panel to take a reading, he realized his arm was a quarter of an inch from 450 volts of electricity.

“I carefully swayed right and abruptly sat down. The chief wordlessly lit a cigarette, bent over, and stuck it between my teeth. Then he lit one for himself. His hands were shaking. I was sitting on mine.

In doing the procedure Oliver realized a slew of problems that didn’t come up when the procedure was outlined:

• It got hot and people sweated.
• The work was done after a full day of work.
• Important components were tucked in the back.

Oliver diagnosed the problem, closed everything up, and drafted a solution. With a few dollars in parts from the local hardware store he amended the system and sent a memo to the fleet.

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Leaders need to own everything. Oliver didn’t have to deal with this problem, in fact, he had to jump through hoops to get all the details about it.

In Only the Paranoid Survive, Andy Grove wrote that leaders need to listen to the people in the field because they have the winds of the real world blowing in their faces. It’s often calm and comfortable where leaders are but they fail to see all the conditions on the ground. They fail to understand problems deeply enough.

When Samuel Zemurray went from selling ripe bananas out of a cart in New Orleans to running the entire import business, he attributed his success to being there. Zemurray relished that his competitors sat in their Boston offices. “They’re there, we’re here,” he would say.

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

Victor Krulak was a Marine whose service time covered the major American wars and whose ideas are still being used today. Here are 3 things I learned from Robert Coram’s book Brute.

1/ Finding truths

Every person in every organization is motivated by incentives. Within some organizations — and the military is no exception — people operate with the wrong incentives.

Soldiers who seek personal gain/promotions are derisively called “boot lickers.” They operate with an imbalance of emphasis between the self and the whole. They are yes men. Krulak was not this type. Coram writes, “being both impertinent and right did not endear Krulak to his superiors.”

Krulak’s focus was on the truth. At times this helped his career. Certain commanders accelerated his promotions because he did good work for them. Other commanders retarded his climb because the truth was contrary to their agenda.

The ability to disagree should not be underestimated. It was a key part of Krulak’s success. Coram writes that Krulak’s first instance of speaking with candor was “a quality that later would make him invaluable to a series of generals whom he would serve in a staff capacity.”

Finding the truth isn’t passive, it’s combative.

Wilbur Wright welcomed a “good scrap” because it helped “round the corners.” Jeff Bezos installed a combative culture at Amazon. Geniuses flyt. Bill Belichick encourages his assistant coaches to disagree. Great CEO’s compare meetings to wrestling matches. Marc Andreessen push against the ideas his partner brings.

Healthy disagreements only work when each boss; Wilbur, Bezos, Andreessen, etc., creates an environment that allows disagreement. They can’t pull rank.

In one combat simulation, Army commander Walter Short was ordered to guard against a Marine landing. Short chose not to guard the section where the Marines ultimately landed. From there they “captured Short’s entire headquarters staff.” “(Short) then used his seniority to nullify the capture of his headquarters.” Short refused the truth and it cost him later on.

Krulak never let rank, agenda, or ego be an obstacle for the truth.

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2/ Short, bald, and fat

Krulak was a small man. When he became a general he called up the base photographer. The man entered and Krulak climbed on top of his desk. “This is what I want to look like in the pictures you take,” Krulak said to the man.

When the photographer talked to his boss about it, he said that Krulak wanted him to bend down to take the photos. The photographer’s boss said that wasn’t it at all. Krulak wanted him to dig a six-foot hole and take the picture from there.

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Early in his life, Krulak’s father told him:

“You will be short, and you will be bald. But you don’t have to be fat.”

There are things we can control and things we can’t. The short episode with the photographer aside, Krulak focused on what he could control. He learned as much as he could. He exercised. He traveled, talked, and thought. He knew he could control his hustle.

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3/ Hustle

Towards the end of his career, Krulak’s driver Sam Mayer had this to say:

“I never saw anyone so constantly in motion, so full of energy, always, under all circumstances and under all conditions.”

Teddy Roosevelt’s roommate said that when Teddy came home he would be halfway up the stairs before the door closed behind him.

Some things in life pay extra. Fighters “punch above their weight.” Certain books are better per page. Companies have “synergy.”

In one of his letters, Seneca wrote that just because a man has gray hair or wrinkles doesn’t mean he’s lived. That man has punched below his weight. That man isn’t Krulak.

During Vietnam Krulak flittered about the countryside talking to soldiers for his report. When he was stateside Krulak left work with his briefcase full. He was up early, stayed late, and kept a vigorous pace between.

Krulak did so much in his life because he hustled.

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I liked Brute, though not as much as Boyd. One final note, Krulak wasn’t a saint. He had an ego. He concealed parts of his past. As a father the best that might be said was that he was gone a lot.

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In The Success Equation, Michael Mauboussin introduces a framework for figuring out the secret sauce.

“Useful statistics have two features. First, they are persistent, which means what happens in the present is similar to what happened in the past. If the job you do is predominantly a matter of skill, you can expect to be able to repeat your performance reliably.”

Good statistics are also predictive of the goals you seek. Let’s say that we keep track of the percentage of shots that a player makes in a basketball game, and the goal of the team is to score points when playing offense. We see that, all things being equal, the higher percentage of shots a player makes, the more points he produces…This is an obvious case, of course, but not all relationships between cause and effect are as clear.

Mauboussin points out that the Moneyball theory of baseball succeeded because some teams figured out that certain statistics were more predictive of wins.

Our question then is this, can we apply this to stories rather than statistics? If Mauboussin read this I’m afraid he would cringe.

What a show.

A frequent mistake is to confuse A preceding B, with A causing B. I’ve written at length about the narrative fallacy, logical errors, and survivor bias. Here we will not address that.

Here we will note what Harry’s has done and compare it with what other companies have done. Sometimes it is the case that A precedes B, because A caused B.

Let’s begin.

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Table of contents:

1. Scratch your own itch.
2. Focus on you.
3. Use disruption theory as a template.
4. Don’t fish in an empty pond.
5. Build out your moat.
6. To merge or not to merge, that is the question.

1/ Scratch your own itch.

“The company was born out of an experience I had just going to a drug store and having a nervous breakdown in the aisle because blades were so expensive.” AKM

A good place to start is by solving your own problem, by scratching your own itch.

Paul Graham wrote a decade ago:

Many of the applications we get are imitations of some existing company. That’s one source of ideas, but not the best. If you look at the origins of successful startups, few were started in imitation of some other startup. Where did they get their ideas? Usually from some specific, unsolved problem the founders identified.

Find what people complain about and solve that.

This can’t be the only thing you do though (and Graham notes that too). In my book on startups that failed, too many founders stopped at their itch. It was the idea that if I build it they will come. They won’t, you have to do more than just that.

Scratching your own itch is only the start.

2/ Focus on you.

Harry’s and Dollar Shave Club (DSC) both launched around the same time. Calacanis commented that you often see this. It makes sense that if there’s a problem, more than one person sees it.

Treated incorrectly, competition can drift your focus. Katz-Mayfield didn’t let this happen. He focused on manufacturing, packaging, and selling. He didn’t let the actions of DSC or the in-store brands dictate what Harry’s would do.

Compare the YouTube Home videos for each company:

That DSC video was great and it’s exactly what Harry’s shouldn’t have done.

A helpful warning comes from Gowalla founder Josh Williams. Go read his piece on the “check-in wars”: Play by your own rules.

You are your competitive advantage.

3/ Disruption theory as a template.

Disruption theory from Clayton Christensen goes like this (emphasis mine):

“Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality — frequently at a lower price.

Katz-Mayfield said:

“The razors out there today almost feel like children’s toys. There’s like bells and whistles and all sorts of colors. We took the opposite approach. Let’s make the product speak for itself. A streamlined and simple design. We wanted the brand to feel elevated but approachable.”

In the terms of disruption theory, customers “hire” a product to complete a job. What job are men “hiring” their razor for? A clean shave, but done procured quickly and cheaply.

According to disruption theory, the job to “hire” for has three parts; shave, price, procurement. When one part is more than satisfied (clean shave) customers will move on to another (price, procurement).

When Harry’s bought a German blade factory they satisfied the first “need of some segment.” The other razor blade companies did this too but they did it well before they changed the colors or added batteries. The shave was already good enough.

The “more-suitable functionality” is the other parts. People don’t want to wait, have the razor cage unlocked, and then buy the razors. In fact, I don’t want to go to a store at all.

Read what Christensen writes about Netflix and Blockbuster:

“However, as new technologies allowed Netflix to shift to streaming video over the internet, the company did eventually become appealing to Blockbuster’s core customers, offering a wider selection of content with an all-you-can-watch, on-demand, low-price, high-quality, highly convenient approach.”

Overlay that onto Harry’s. The new technology of the internet allowed Harry’s to create disruption in much the same way. Christensen is careful to point out that disruption theory is only a diagnosis. It’s a definition. It’s not an if-this-then-that statement. It’s not predictive and it’s not conclusive, but it is helpful.

Christensen’s book, The Innovator’s Solution, describes how Wal-Mart after their Jet.com purchase or Unilever after their DSC purchase can stop disruption from happening.

Disruption theory can be a template for underdogs.

4/ Don’t fish in an empty pond.

When Harry’s got their first lawsuit:

“It’s like 90% scary and 10% affirmative. It’s like, well at least we had enough of an impact to catch somebody’s attention.”

To get different returns you have to be different. To survive you have to be right. Getting sued (is one way that) validates that.

The challenge is to fish (v.) where the fish (n.) are going to be.

If Harry’s had tried to enter stores they would have been squeezed out, almost literally. Each episode of Shark Tank on ABC or The Profit on CNBC that has a consumer goods company speaks to “shelf space.”

That space is great, but getting a foothold is next to impossible. There are a lot of fish there, but it’s hard to fish there.

Instead, try to find where the fish are going to be.

Success investors like Howard Marks, Bill Miller, and Warren Buffett all have theories about fishing on uncrowded shores where fish may be.

• Howard Marks wrote. “I think it’s essential to remember that just about everything is cyclical ” This seems to be the angle Katz-Mayfield and co. are taking too. “We looked at a hundred years of shaving history and facial hair trends are cyclical. If you look back in the 60’s and 70’s it was like it is today. Everybody had beards.”
• Bill Miller says to do different things. Miller’s success in the 1990’s was thanks in part to being one of the few value investors who invested in technology stocks.
• Warren Buffett says to move in the opposite direction of the crowd; “be fearful when others are greedy and greedy when others are fearful.”

The key is to be different and right. Amazon was different and right. One executive said that Bill Gates was “flabbergasted” at the idea. Sam Adams was different and right. Founder Jim Koch’s darker beer established a foothold because it wasn’t like water. Phil Knight was different and right. Knight wrote that only Nike when “weirdos went out for a three-mile run.”

5/ Build your moat.

“As long as we continue to differentiate on product and brand, we believe there is space for that.”

On Shark Tank Kevin O’Leary asks the pitching entrepreneurs what’s keeping him from entering their industry if he had a lot of money. He’s asking what differentiates them. Often the presenter says they’re the differentiator. That’s the wrong answer.

Charlie Munger explains that there are five kinds of differentiation (moats); supply side economies of scale, demand side economies of scale, brand, regulation, intellectual property. Let’s look at each in turn and see where Harry’s might establish a moat.

Supply side economies of scale. This is an ability to keep prices low because the volume of product and fixed costs spread out over a large volume. Amazon, like an 800 pound gorilla, sits in this moat area (as well as others). Wal-Mart, Ford, and other physical goods companies leverage their advantage of scale.

Demand side economies of scale. Also known as network effects. The more people who use something the better it is. Here we have communication systems; iMessage, Snapchat, Facebook. Microsoft Word and Excel are here. Amazon is here too. AirBnB and Uber both straddle supply and demand side economies of scale.

Brand. A valuable but elusive moat. Tesla’s moat is brand. Nasty Gal’s moat started as a brand.

Regulation. A ruling body like the government decides who can provide a service.

Intellectual property. When Harry’s bought their German factory they got some IP that protected them from lawsuits. How much meat is left on this bone though? Gillette has patented everything from blade coating to “shaving razor demonstration apparatus.”

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Katz-Mayfield is already thinking about digging a moat. “You have to find a niche and differentiate on some dimension. You can’t hope to out Amazon Amazon,” he told Calacanis.

That means they won’t win on the supply side, Amazon’s volume and margins prevent that. They probably won’t win on the demand side. There’s no regulation and little IP. That leaves brand as the moat.

While Harry’s is limited to a single moat, there are companies that create more than one.

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Coca-Cola, the greatest brand ever.

While Amazon is a good brand Coca-Cola is great. They’ve captured more than one moat and it makes their positioning almost unassailable. The biggest problem is that the core cola brands have better moats than the new brands; Minute Maid, Monster, and milk.

Supply side: Coca-Cola owns about 25% of its bottling business. While it may sell this part of the company, they’ve developed systems to create their beverages as cheaply as possible.

Demand side: If you’re a restaurant owner, what do you do when people say, “I’ll have a coke.”

Brand: Coca-Cola gave store owners signs in Coca-Cola red. They created the red Santa. Mohnish Pabrai said, “whenever people are generally happy, Coke wants to be there.”

IP: What’s in the can can be (mostly) replicated, but more importantly, the outside of the can cannot.

Coca-Cola is a great company because they are differentiated. The razor companies were not, and that as Mr. Frost says, made all the difference.

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In the same way that disruption is a process not a product, so is moat building. Competitive advantages get worn away from competition or changing environments. The Gillette advantage — The Best a Man can Get — was neutralized when Harry’s bought a German blade factory. Both of these ideas are about quality and one perception cancels the other.

6/ Mergers?

“I love these Tommy Johns, I’m obsessed with them. It’s almost a subscription for me. I look at your brand…why doesn’t somebody roll up five of these…Warby Parker, Casper, someone should just take a whole group of these and say, ‘here’s a collection of them.’ Now we have a database of 10 million credit cards plus emails, that’s super powerful.” — JC

To merge or not to merge. Superficially it sounds good but so does cheesecake.

Successful mergers leave a whole that is greater than the sum of the parts. Disney’s purchase of Pixar is held up as a the gold standard for mergers. Ben Thompson and James Allworth explained why acquisitions make sense:

• Talent acquisition. John Lasseter turned around Disney animation.
• Long-term planning. Disney is able to make choices in regards to the future of Pixar characters with more certainty and commitment than Marvel, which they don’t own fully.
• If revenue or cost savings (ideally both) rise. Heinz buys Kraft foods, enhances supply side economies of scale.
• Apple buys Netflix and can bundle the app as a default on the phone. Removing small barriers or setting defaults leads to big changes.

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In the same podcast the pair share what makes mergers fail to work.

• When they are empire building.
• When they become huge distractions.
• Synergies fail to materialize. Like AOL Time Warner.
• Redundancy of moats. Tesla and Apple both make great products, but the chief asset of each is brand.
• Cash for the sake of cash. Shark Tank sharks often say that they could just write a check, but for it to be worth their time they want something they can make a difference in.
• Pay too much. Thompson guesses Apple would have to pay a 20% premium to buy Netflix. “There’s no such thing as a good or bad idea regardless of price,” write Howard Marks.

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Now, back to Harry’s Razor. Calacanis suggests they bundle with Tommy Johns, okay, but what else?

A quick Google search for “direct to consumer brands” led to a listicle of listicles. There are a lot of them. There are plenty of opportunities, so what should Harry’s do?

“I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.”
— Charlie Munger

The case for Harry’s to merge:

Katz-Mayfield should merge with other D2C brands because it will allow them to sell more things to more people. A razor with your underwear, cologne samples with your socks, supplements with your coffee. Merge with the right brands and a marriage, you’ll do more together.

A merger would allow automatic enrollment to begin with less friction. On the Tommy Johns page I click a box that says to add a razor for $2. On the Harry’s page I click a box that says to add underwear.

A private market price could be less than a public premium.

The case for Harry’s not to merge:

Most of what Harry’s can get they can get from a partnership. They can offer the underwear, tie, sock, etc., either way. Partnerships also allow more room for expansion, Harry’s has moved on from razors to include balms and gels.

A merger does not help differentiate the company. Each of these D2C companies is small-ish, their chief asset is their brand. Much like a stadium sponsorship, if you get tied to a loser that’s a waste of your resources too.

Whether Harry’s — or any — of these companies survives and thrives will not be dependent on whether or not they merge. They will either sell something people want or they won’t.

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Having a default stance to start from is very powerful. “The path to superior results,” wrote Seymour Schulich, “is to accept only the best ideas.” Schulich expanded on that saying that unless something is twice as good, don’t deviate.

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

Jon Stein is the CEO and founder of Betterment. He was interviewed by Patrick O’Shaughnessy on the Invest Like the Best podcast. Here are three things I learned.

1/ Good nudging

Stein explains that Betterment has a Tax Impact Preview for trades.

“We try to help you make good decisions around that (trades). One of the things we’ve done is when you’re about to make a transaction we’ll tell you what are the likely taxes you’ll pay on that transaction.”

This doesn’t stop you from trading on the Betterment platform, but nudges you to not. It works too! Stein said that 75% of people with costly tax implications choose not to go through with the trade, and trading more frequently leads to lower returns.

Nudging is a good tool for this because, as Richard Thaler says, “because we are dealing with humans rather than Econs, they sometimes need help.” People are good at many things, calculating potential tax liability is not one of them.

The case for nudging — any nudging — begins with the idea some option has to be the default. Researcher Brian Wansink has found many ways to change how much and what you eat. Each way could start with a nudge; default to smaller plates, opaque food containers, not clearing dishes. Even the positions of food in a cafeteria line — high or low, front or back — affect what people put on their trays.

Stein has nicked nudges from cafeterias to save people money.

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2/ Talk to customers & scratch your own itch

“I was consulting to banks and helping them with product management, risk management, investment portfolio policy and things like this. I found through that experience working with banks that I learned a lot, and I loved it, but I found so often they were building products without talking to their customers.”

When I wrote my book about failed startups one of the most common pitfalls was a failure to understand customers. Founders were intimidated, they talked only to friends and family, or they didn’t ask the right questions. Stein saw this not at a startup, but big bank.

A lot of companies start because a founder wants to scratch their own itch. Sometimes this works.

Naval Ravikant created AngelList. Barbara Corcoran’s Shark Tank investments are itch scratchers. Mark Zuckerberg started Facebook. Etc.

Scratching your own itch is a fine way to start.

But, it’s not enough. You have to get to this moment:

The founders that I wrote about failed to get to this point. They asked friends who were just being nice. They asked people who said, “well it’s not for me but it would be great for my brother-in-law.” In reality, it’s bad for everyone.

Building something without talking to your customers is like a blind pig looking for nuts.

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3/ Slow down when things are confusing, complex, or unrelated to the past

Rather than a quote about Betterment freezing trading during Brexit, here’s the WSJ post:

Here’s what Stein had to say about the matter:

“We always look at volatility and thoughtfully trade for our customers. We always pause trading at the open because markets and ETFs tend be quite volatile. We watch out for things like that, and Brexit was one of those days when all the major banks paused trading because they were worried about volatility.”

I actually like this strategy because it’s aligned with what Daniel Kahneman has said.

“When things get really big and you’re really not sure, slow down.”

There are situations (with limited volatility) where humans can keep up with changes in the system. Sports is one, fire fighting another, piloting a third. We can succeed in those domains with lots of practice, feedback, and consistent condition.

If we don’t develop an adequate skill — fighter pilots call it being “behind the plane” — the system will eat us up.

When Gene Kranz worked at NASA during the Mercury, Gemini, and Apollo missions he wrote that they trained rigorously because, “During a mission countdown or even a flight test, so many things would be happening so fast that you did not have any time for second thoughts or arguments. You wanted the debate behind you.”

Kranz’s rockets went from 5 miles/minute to 5 miles/second. Trading data is 30,000 times faster. It’s too fast. Acknowledge your limits and slow down.

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To recap:

1. Decision options always have some sort of default. Arrange the default in such a way to nudge someone into what’s best for them.
2. You can start by building something to scratch your own itch but eventually you have to get people to pay you. The sooner you prove/disprove this, the better you’ll be.
3. In similar situations (“Same as the gym back in Hickory”) practice, checklists, and feedback work. When things move fast, the situation may have changed and you don’t know it. In that case, slow down.

Update 11/14/16: The first version of this post misspelled Jon as John. 

Let’s not bury the lede. When Bill Miller joined Barry Ritholtz on the Masters in Business podcast, he admitted the secret of his success. Ready?

“Luck.” 

Lifehacker can’t write an article about that.

But, there was another answer too. It wasn’t articulated, but it was there. I had to listen carefully to find it, thankfully I’ve done that before.

In my youth, when time was plenty, the internet allowed people like me to find the answer to the deep questions of life, like, if you play Led Zeppelin backwards could you hear satanic messages? I wanted to know, not for fiendish reasons but engineering ones. Was it possible to make something sound coherent forwards and backwards?

Using this same detective style, I figured out the secret to Miller’s success: He succeeded because he does a lot of small things right everyday.

Is this more helpful than ‘luck’?

In large stretches of episode 47 of his podcast, Jocko Willink talks about this. This idea was the subject of the Grit post.

That’s all it takes to have the success of Bill Miller. Do lots of small things well and get lucky. Well, it takes more than that, here’s some other things I noted:

1/ Why Moneyball no longer works. Miller says he’s a “long-term oriented value investor with a contrarian mindset.” Not like Graham and Dodd, “those things no longer work because they became replicable.”

If you aren’t familiar, Moneyball is the idea brought to light by Michael Lewis’ book Moneyball. It’s the story how one not-so-good baseball team improved by looking at statistical areas other teams undervalued, but that led to wins. Their success like an Apple design, led to a slew of imitators.

As more settlers crowded the fertile ground of ‘valuable things’ the value became harder to find. The smartest teams searched for new ground.

The champion Chicago Cubs, for example, pivoted away from the Moneyball angle and look for soft skills.  The original Moneyball club, the Oakland A’s moved away from Moneyball too. The Pittsburgh Pirates have also broken off in a new direction.

Baseball, like investing, is a Red Queen Effect world. It’s a place where you can improve absolutely but where the results are relative. Your 5K time may improve, but so too does everyone else.

If you want to do more than anyone else, you have to do things differently than everyone else (more at #3).

2/ Measure headwinds and tailwinds. “If the economy is in a recession or a boom, we’ll tend to normalize that. If the economy is growing more rapid than normal, we’ll bring it back to a normal growth rate.”

Here Miller is pointing out that as his team evaluates companies they evaluate the type of environment too.

In November you can plant tomatoes in Florida, but not in Ohio. That’s a big difference if you want to compare the tomatoes each area has in a few months time. Conditions matters and it helps if you can normalize success or failure.

Judith Elsea said that in 2006/2007 venture capital was a different game because, “there was less competition for these deals. The valuations were super low. The aqui-hire machine didn’t start with the dial set at 11.” Auren Hoffman refused to give investment advice because everyone investing at the same time he did, did well. Warren Buffett compares it to a rising tide that lifts all boats (and ducks). Coca-Cola could only have been started in Atlanta.  The ‘Black Soxs’ players did throw the World Series only because they were corrupt, but also because they were poorly paid.

Conditions matter. At the minimum, figure out which way the wind is blowing and factor that into the results.

3/ Be different.  IF there is a ‘secret sauce’ this is it. Much like ‘be persistent’ and ‘get lucky’, ‘be different’ isn’t that instructive. It’d be much tidier if Miller confessed his magic ratio, but we already know silver bullets don’t exist.

Miller has been different and his comments were similar to what Howard Marks wrote:

“I think it is essential to remember that just about everything is cyclical.”

Here’s what Miller said:

• About Price/Earnings ratios in 1999, “we knew the growth wasn’t going to be linear and some interruption would occur.”
• About Q1 results in 2000, when 70% of managers beat the benchmark, “that told me that everybody was in tech.”
• “Because we were contrarian value investors, we were liquidity providers when people wanted out of something.”

Miller’s success partially comes from zigging while other zag. If people are selling, he’s buying (“liquidity providers”). If people are buying, he’s selling (“everybody was in tech”).  “So at the extremes, which are created by ‘most people believe,’ most people are wrong,” writes Marks. Much like our point about Moneyball (#1),  value is inversely related to participants. When more and more people do a thing, the value becomes less and less.

Miller explains that being different isn’t easy. It’s hard to go against the crowd, but easier if it’s at an individual stock level. When I write about this, it’s this difficulty that’s hardest to convey. “Accepting the broad concept of contrarianism is one thing,” writes Marks, “putting it into practice is another.”

Companies like Nike, Sam Adams, and Instagram all did something different, but it was never easy. Listen to and read their stories (Nike, Sam Adams, Instagram) and you’ll start to understand that being different is difficult.

4/ Fighting the last war. “We had a pretty robust strategy,” BUT “this particular crisis was different because it was as asset based crisis and not a liquidity based crisis.”

Oops.

Miller’s admission surprised me. You think someone like BILL MILLER who worked at LEGG MASON with MICHAEL MAUBOUSSIN would be immune to mistakes like recency bias and lack of imagination.

Nope.

Of course it makes sense to account for the last thing. Fool me once, shame on you. Fool me twice, shame on me. In addition to solving the last thing though, let’s extend our understanding using a technique Charlie Munger and Seth Klarman suggest; inversion.

During the Mercury, Gemini, and Apollo missions the astronauts and engineers involved were learning as they went along. No one was an expert. Gene Kranz writes “all of us learned to say ‘I don’t know.'”

One thing they had to figure out was the hatch system for the Apollo capsule. During the Mercury missions, Gus Grisson’s hatch had opened during the water landing, the capsule took on water, and sunk. This mistake was “not easily forgotten,” Kranz writes.

To solve for this the Apollo 1 hatch was “a brute, heavy and awkward.”

“Given the design, a rapid escape from the spacecraft was impossible. But the NASA and North American designers hadn’t been as worried about escape contingencies as they were about the possibility of a hatch popping open into the vacuum of space or another inadvertent opening during a water landing.”

During the Apollo 1 ignition sequence, a fire spread through the capsule and killed all three astronauts. No missions were named Apollo 2 or 3 in honor of the crew and for Apollo 4 the hatch could swing out and be opened in 10 seconds.

Fighting the last war meant the hatch withstood outside forces but not the inverted, opening from the inside.

Fighting the last war meant planning for a liquidity crisis but not the inverted, an asset one.

Fight the last war, but also think about the opposite.

5/ Partnerships. “When we’re in the office we’re talking all the time. When we’re not there we’re emailing and talking on the phone.”

Successful teams align on the ends and most, but not all, of the means to get there.

Miller has Samantha McLemore. George Bush had Karl Rove. Bill Belichick has Ernie Adams. Warren Buffett has Charlie Munger. Marc Andreessen has Ben Horowitz.

No one is right all the time. Good partnerships mean better ideas, faster.

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

Jim Koch was on the How I Built This podcast to talk about founding Sam Adams. HIBT is one of my favorite podcast series, with interviews around Instagram, Spanx, Clif Bar, Airbnb, and Dermalogica. Podcast fans should subscribe. Here’s what I learned from Koch.

1. Knowing things deeply.
2. “Can I bum a quarter?” (low overhead)
3. A sweet spot for work.
4. I saw it in a magazine. (see it to believe it)
5. Dangerous or scary?
6. The first Sam Adams employee.
7. “American Beer is like making love in a canoe – fucking close to water.”
8. Luck.

If you’re short on time skip to #5.

1/ A deep understanding. Though Koch was an MBA/JD and worked at Boston Consulting Group, he also came from a family of brewmasters. “My dad was a brewmaster and it was like being a chef in a kitchen,” Koch explained. He had his great grandfather’s recipe – one that had fell flat in previous decades – and hired someone to “adapt a 19th century recipe into a 20th century brewery.” Koch had a deep understanding of his niche.

A deep understanding is a pillar for a lot of industries. Bill Belichick has it for football, studying film and being around teams from an early age. John Boyd had it for ariel warfare, flying combat missions and then teaching pilots. Yvon Chouinard had it at Patagonia, testing and experimenting with the gear himself.

Each was in an industry; consumables, football, warfare, clothing where things change and each survived the changes because they had a deep understanding.

2/ A low overhead. “I learned that you don’t need that much to live on if you’re really enjoying what you’re doing.” “We rented space, brewed the beer, and they packaged it and I didn’t have to have my own brewery for several years. When I started we didn’t have things you think you need for business. We didn’t have an office. We didn’t have a telephone. I asked myself, ‘am I spending money on things that are going to make the beer better or am I spending money on things just because that’s what you’re supposed to spend it on?’” “We were profitable from the first full month. It was the ultimate lean startup. We had no office. We didn’t even have a telephone. We did all of our business from pay phone and I knew where all the good payphone were in Boston; the ones that were warm in the winter, the ones that had a shelf you could put stuff on. It was very clear to me when I started there were only two things we needed to do really well; make great beer consistently and work our butts off to sell.”

It was refreshing to hear someone talk about a tangible goods business this way. That kind of industry seems ripe for bloat. Not for Koch. Keeping a low overhead isn’t the end itself. Low overhead extends a runway and allows for more chances to get things right.

• Amazon was built on ‘door desks’ in a garage.
• CAA started with donated office supplies.
• Walt Disney used an alleyway to film.
• Nasty Gal started on eBay and at estate sales.

In The Outsiders, William Thorndike writes, “There’s an apparent inverse correlation between the construction of elaborate new headquarter buildings and investor returns.” The Instagram founders said:

“…so here are two guys with a prototype, a couple of computers, and no office, who raised a half a million dollars who are looking at each other like, we think we can make this last. We were living on peanut butter and jelly sandwiches.”

Paul Graham writes “When and if you get an infusion of real money from investors, what should you do with it? Not spend it, that’s what,” and to “encourage a culture of cheapness.”

Koch also noted the importance of making something great. The a16z podcast had a fantastic episode with David Oyelowo that echoed and elaborated on this point. Oyelowo said part of the reason The Queen of Katwe was made was because everyone involved had a strong resume of work.

3/ A sweet spot. “After six years (at BCG) I had this epiphany. I asked if I wanted to do this for the rest of my life and the answer came back, ‘no.’ The corollary to that was that if I don’t want to do this for the rest of my life, I probably don’t want to do this tomorrow.”

Mohnish Pabrai said much the same thing:

“I have a rule I’ve followed for my entire career: if on Monday morning I’m not fired up for work I do two things. Number one, I don’t go to work. Number two, I hit the reset button.”

In Tim Ferriss’s 2016 podcast with David Heinemeier Hansson the duo talked about the difficulty in defining this. It’s not happiness per se, but something closer to tranquility. It’s a feeling of flow. It’s challenge. It’s a nebulous brew of success and failure. It’s a sweet spot.

4/ See it to believe it. “My dad had given me a copy of Inc magazine and there was an article in there about Anchor Steam, this small brewery in California owned by this great guy named Fritz Maytag and Fritz had a viable small brewery. It was an outlier. When I was a consultant, what always fascinated me were the outliers because that’s where the real learning was.”

There was nothing about American beer culture that suggested a beer like Sam Adams would succeed. So no one pursued it. It wasn’t until Koch saw an example where it was like, yeah, this can work.

For Judd Apatow this moment was when he saw Steve Martin. “Steve Martin was a revelation when I was a kid,” Apatow said. He tells a great story about meeting Martin, negotiating (unsuccessfully) for an autograph, and then sending him an angry letter. The key part though was just seeing Martin. “Unconsciously it put a lot of gas in my tank,” Apatow says, “and it showed me he exists, all these people exist.” It showed him what was possible.

5/ Is it dangerous or is it scary? “There are plenty of things that are scary but aren’t dangerous and there are things that are dangerous but not scary, and those are the things that get you. I’ll give you an example from climbing. Rappelling is a very scary thing to do, but you’re held by a belay rope and that rope will hold a car. Walking off the cliff backwards is scary, but not dangerous. Walking across a thirty-five degree snowfield on a beautiful late May afternoon with a bright blue sky is not scary at all, but it is very dangerous because the snow is melting, and eventually there will be an avalanche. My staying at BCG was dangerous but not scary. The danger there was continuing to do something that didn’t make me happy and looking back when I was 65 and going ‘oh my god, I wasted my life.’”

I loved this idea. Not scary yet dangerous things are the ones that get us. Part of the problem is a misdiagnosis. We aren’t scared enough or we think a danger is too small.  Morgan Housel wrote:

“The most useful lesson from the 2008 financial crisis is that big risks hide under your nose and cause more havoc than you imagined, so having more room for error in your finances than you think you need is a smart idea. Less reliance on forecasts, more time to wait things out, a greater willingness to accept lower returns than you’d prefer.”

Nassim Taleb writes a lot about this. So too does  Greg Ip in Foolproof.

6/ Teamwork. “My dad has told me, if you’re going to have a business Jim it’s lonely, it’s going to have its ups and downs, see if you can find a partner. So I looked around BCG. It was full of the best and brightest from the top business schools, but somehow I couldn’t see them being my partner because they had all the same skills I had. Then I realized there is a person here who is energetic, talented, resourceful, a great people person, has all the skills I don’t really have – and she was my secretary…we were the perfect compliment.”

Good partnerships, I suggested in the Jeff Bezos post, have people aligned on the ends but not the means.

For Koch that meant someone that had a different set of skills (means/ways). No one person can do it all.

In episode 44 of his podcast, Jocko Willink said about one of his favorite guys in the SEAL teams, “when I started to get a little off the reservation about something…he’d look at me and be like ‘hey Jocko, come back to the light, it’s gonna be okay…When I would start to get negative he would pull me back and the same thing me with him.”

7/ Be Different. “All the Boston beer distributors turned me down because this was the heyday of light beer.”

Being different and being right is great advice but challenging IRL. It’s the idea of finding an idea that’s stupid now but could be brilliant.

In The Everything Store, Brad Stone quotes someone saying that Bill Gates was “flabbergasted” when he heard the plans for Amazon.com. Chew on that.

Phil Knight founded (what would become) Nike when running was different. “To go out for a 3 mile run was something weirdos did, presumably to burn off manic energy.”

Ben Horowitz wrote, “The trouble with innovation is that truly innovative ideas often look like bad ideas at the time.”

8/ Luck. “In all humility, a lot of it was luck. I look back and a lot of things could have gone wrong…a lot of things didn’t go wrong that could have.”

Control what you can, and understand the roll/role of luck.

Thanks for reading, I’m @mikedariano on Twitter. If you liked this post, I sometimes write long posts as short books. Here’s one on Bill Belichick and red teams.

Want to listen instead? This is episode 044 of my podcast, Mike’s Notes.

Well, I  liked The Everything Store by Brad Stone. In my monthly newsletter about books I noted that while this book is about a popular subject (Bezos/Amazon) it’s not perishable. The Amazon juggernaut is here to stay and this book had enough background to get anyone caught up on how we got to now.

I took so many notes on Bezos that he inspired this post about mercenaries, missionaries, and maniacs and I’m digging deeper into the theory of disruption for another written piece. This post will be everything else I learned. All unattributed quotes are from Stone.

1. Second level thinking with a small change.
2. You’ll never be ready.
3. Argue well.
4. Luck.
5. Decentralized command.
6. Always be learning.

1/ Second level thinking (via finer print). 

This is my favorite riddle:

“As I was going to St. Ives, I met a man with seven wives. Every wife had seven sacks, every sack had seven cats, every cat had seven kitts. Kitts, cats, sacks, wives, how many were going to St. Ives?”

Before you open a tab for some calculations (or Google the answer), let me rephrase it:

"As I was going to St. Ives, I met a man with seven wives. Every wife had seven sacks, every sack had seven cats, every cat had seven kitts. Kitts, cats, sacks, wives, how many were going to St. Ives?"

Better?

Theories about information processing suggest that the second presentation will lead to more correct answers. The reasoning goes that because the font is more difficult to read, it nudges us into a mode of closer attention.

In The Success Equation Michael Mauboussin gives us another example (p102):

Jack is looking at Anne, but Anne is looking at George. Jack is married, but George is not. Is a married person looking at an unmarried person?

(A) Yes

(B) No

(C) Cannot be determined.

When I read the book I skipped right over this entire setup, ready for the payout. Why did I do this? Because I knew Mauboussin would tell me the answer. I didn’t need to do any heavy lifting. Then, in the very next paragraph Mauboussin writes:

“The natural tendency when solving problems is to rely on cognitive mechanisms that are fast, low in computational power, and require little concentration…”

Which is exactly what I did in reading rather than thinking.

What does this have to do with Bezos? At Amazon employees don’t use PowerPoint, they have to “write six-page narratives laying out their points in prose, because Bezos believes doing so fosters critical thinking.” Jeff Holder, who worked with Bezos at D. E. Shaw told Stone, “PowerPoint is a very imprecise communication mechanism. It is fantastically easy to hide between bullet points.”

Different fonts to think better seems a bit Gladwell-ian. Here’s this funky little finding from psychology, extrapolate as needed, ad infinitum, caveat emptor. 

Of course we should use a bit of trepidation.

The introduction of Stone’s book includes a warning too. When he approached Bezos, Bezos asked about the narrative fallacy (Antifragile  is one of Bezos’s favorite books, “which all Amazon senior executives had to read”).  Thinking more deeply about something can help us make better choices but it’s not a silver bullet. It’s one of many things that solve black box problems.

2/ Never ready. “By the first weeks of 1996, revenues were growing 30 to 40 percent  a month, a frenzied rate that undermined attempts at planning and required such a dizzying pace that employees later found gaps in their memory when they tried to recall this formative time. No one had any idea how to deal with that kind of growth, so they all made it up as they went along.”

This is starting to seem like a late-night-glass-of-wine confession. If you catch people in an honest and reflective state they’ll admit they had no idea what they were doing in the moment. You can prepare, but a lot of it seems to be like treading water.

Michael Lombardi said that football is this way. You never really get a chance to get ahead, to be ready. It’s more like a just-in-time manufacturing system.

Angela Duckworth wrote, “As anyone who has started an organization from scratch can tell you, there are a million tasks, big and small, and no instruction manual for any of them.”

When Gene Kranz showed up to shoot rockets, he was picked up by a test pilot, in his own car. Kranz wrote “without knowing much about anything, I was telling people how to do everything, writing the rules for the control team that would support the Mercury-Redstone launch….Since there were no books written on the actual methodology of space flight, we had to write them as we went along.”

Phil Knight recalls the early days of Nike and sending his chief retail person to run a factory. The guys said that he didn’t think he could do it, that he was in over his head. “Over your head?” Knight recalls saying, “We’re all in over our heads, way over.”

If you can’t be ready what can you do? Take the course that Andy Grove suggests, prepare like firemen prepare for fire.  Bezos uses a different analogy but the same effect. “(Bezos) was looking for versatile managers – he called them ‘athletes’ – who could move fast and get big things done.”

3/ Argue well. Good organizations and the people within the organization argue well. No one person knows everything and ideas need sharpened. “Amazon’s culture is notoriously confrontational, and it begins with Bezos, who believes that truth springs forth when ideas and perspectives are banged against each other, sometimes violently.”

Credit is a power law distribution. Jobs, Wozniak, Cook. Jordan, Pippen, Horry. Buffett, Munger, and, umm, err, – well that proves the point.

Laurie Woolever was on the Salt of the Earth podcast to talk about her career working with people like Mario Batali and Anthony Bourdain. Woolever carefully noted that those high wattage people work hard, but that there are a lot of people behind the scenes. Even the cookbook she wrote with Bourdain took some back and forth before it emerged.

One example at Amazon was Joy Covey, an early CFO, who, “became an intellectual foil to Bezos and a key architect of Amazon’s early expansion.”

I didn’t get the idea that Bezos was combative for the sake of being combative, but for the sake of the truth. As Amazon grew larger Bezos added the position of Technical Advisor and his first appointee was Andy Jassy, who:

“would define the shadow role as a quasi chief of staff, and today the position of Bezos’s shadow, now formally know as technical adviser, is highly coveted and has broad visibility within the company. For Bezos, having an accomplished assistant on hand to discuss important matters with and ensure that people follow up on certain tasks is another way to extend his reach.”

Bezos wanted someone who could think like him, but not completely. This is true of a lot of partnerships. The Warren Buffett and Charlie Munger duo is like this. Ditto for Marc Andreessen and Ben Horowitz. Bill Belichick and Ernie Adams have this too.

You have to argue well to find the truth. Stephen King writes that the truth of a fiction story is like a fossil. The story is there, it just needs exhumed. It means flyting like geniuses,  and constructive confrontation.

4/ Luck. Amazon fits the two-jar model. There were high skill draws; Bezos is smart and relentless. There were also high luck draws. For example, Amazon wrapped up funding in 2000. “While other dot-coms merged or perished, Amazon survived through a combination of conviction, improvisation, and luck.”

Their luck wasn’t done there. Amazon Web Services was a bit of luck too. Bezos said, “Developers are alchemists and our job is to do everything we can to get them to do their alchemy.” He could have used another analogy; builders, creators, dreamers, but he chose alchemy. Something great could come out, but he didn’t know what.

Even the chief Amazon product – the Kindle – benefitted from a bit of luck. “In a sense, Amazon got lucky. A technology (e-ink) perfectly suit for long-form reading on a device (and terrible for everything else) just happened to be maturing after a decade of development.”

As an individual Bezos was lucky.

“At age eight, Bezos scored highly on a standardized test, and his parents enrolled him in the Vanguard program at River Oaks Elementary School, a half-hour drive from their home…(where) A local company donated the excess capacity on its mainframe computer to the school, and the young Bezos led a group of friends in connecting to the mainframe via a Teletype machine that sat in the school hallway.”

Bezos’s story could be the brother to the one Malcolm Gladwell tells in Outliers about Bill Gates:

And Bezos’s mother?

“Jackie Bezos prevailed on the local school officials to let her son into the middle school’s gifted program despite the fact that the program had a strict one-year waiting period….’You want to account for Jeff’s success, look at Jackie,’ says Bezos’s childhood friend Joshua Weinstein. ‘She’s the toughest lady you’ll ever meet and also the sweetest and most loyal.'”

Parenting isn’t all luck though. Seneca has this advice:

Control the things you can as best you can. We don’t get to choose parents that accidentally or on purpose, get us hands-on experience in an industry that changes the world. But we do get to choose who we learn from.

5/ Decentralized command. Bezos said:

“A hierarchy isn’t responsive enough to change, I’m still trying to get people to do occasionally what I ask. And if I was successful, maybe we wouldn’t have the right kind of company.”

Stone clarifies:

“Bezos’s counterintuitive point was that coordination among employees wasted time, and that the people closest to the problems were usually in the best position to solve them.”

The solution to this was Amazon’s “two-pizza teams.” The idea that if a group is working late on a problem, there shouldn’t be more people than what two pizzas can feed.

Neil Roseman put it this way, “Autonomous working units are good. Things to manage working units are bad.”

Decentralized command works really well in complex adaptive systems where things are always changing. CEO’s like Tom Murphy said to “Hire the best people you can and leave them alone.” Warren Buffett suggested to “hire well, manage little.”

There’s only so much arguing well (#3) that Bezos can do. Eventually he needed to let other people make the right decisions. Andy Grove said that it’s hard to weigh how much to trust people, but they know things out there with the “winds in their face.”

6/ Always be learning. What surprised me in the book was how many other people were mentioned. Newton attributed his work by standing on the shoulders of giants. Bezos, it seems, fully internalized this.

Anything successful Bezos tried. He met with Jim Sinegal, the founder of Costco who told him, “you can fill Safeco Field with the people that don’t want to sell to us.” The lesson was that some people won’t like what you’re doing. That’s a good thing. As John Boyd told his accomplices, “So you got your reward; you got kicked in the teeth. That means you were doing good work. Getting kicked in the teeth is the reward for good work.”

Sinegal also told Bezos that customer loyalty was key. Amazon has emphasized that too.

Bezos wanted AWS to be like building blocks, an idea he got from a book, a book he read during a Think Week (an idea he may have picked up from Bill Gates).

Books are a great source for this, and are often recommended. Read a lot like Bezos, Gates, Munger. Also, do. Munger said, “If we hadn’t bought See’s (candy), we wouldn’t have bought Coke.” They had to do that to learn. Bezos, of course, would learn by doing too.

“I didn’t know Jeff Bezos,” said Stephen Graves, a consultant hired to help get fulfillment operations optimized, “but I just remember being blown away by the fact that he was there with his sleeves rolled up, climbing around the conveyors with all of us. We were thinking critically and throwing around some crazy ideas of how we can do this better.”

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

Anecdotal data point: A watch I bought on Amazon stopped keeping time after six weeks. Every few days it would reset to 1/1/12. I emailed them about it. They told me it was beyond the 30 day return period but because I was a valued customer they would refund my money, AND I didn’t have to go through the process of shipping the watch back.  It was this last part that made me feel “valued.”