Winning Wines

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

After the story of Barefoot Wine, and a history of looking at difficult businesses like movies, and restaurants, it seemed appropriate to think about selling wine. Wine-making pays in profits and prestige and as such will attract extra competition. It’s a market mechanism on steroids. To succeed, someone needs to be excellent rather than simply above average. There are no Bemidji plumbers here.

Before we start we should note that selling wine means a lot of things. Some vineyards only sell fruit, some wineries only have events, some are large and some are small. We’ll focus on only one part of winning the wine game: the marketing.

What matters for marketing is ease.

That might mean an easy decision (Thinking Fast, heuristics). It might mean signaling and reducing cognitive dissonance. ‘Easy decisions’ does not mean simple. It means easy for the individual in that moment.

As Michael Houlihan and Bonnie Harvey of Barefoot noted, wines in the eighties were “Saturday night wine(s) where the men would sit around and talk about things like mid-notes. But it turned out the majority of wine buyers were a thirty-seven-year-old mom with two-and-a-half kids pushing a cart down the supermarket aisle and she wanted a Tuesday night wine.”

Barefoot was one company that made wine buying less whining. They made it easy, partially through their brand.

ikeaMark Ritson said that the best brands have a DNA. Remove the copy, logo, trademark, etc and excellent branding still makes clear what company is being displayed. (see image)

That’s not the case for wine.

Instead, wines need to win the label.

For the back label, wineries will do well to include information about food pairing, taste, and history of the vineyard. These make it easy for a host to plan a party. One study put it this way:

“For the overall sample of wine consumers, information on the history of a winery including a unique production method and the quality statement had the largest positive impact, followed by elaborate taste information and food pairing advice.”

That’s kind of interesting. It’s not how the wine ints the stomach but how the label hits the brain.

Another study noted that retail consumers prefer wines with simple labels. Rather than metaphorical, consumers wanted the literal. An award helped too. Gold medal winners had an inelastic demand.

For Millenials (and presumably others), the label mattered a lot. In a blind taste test, Millenials preferred the taste of ‘boomer wines‘, 3:2. When the labels were revealed the preferences reversed. This blind-taste-test shows home important branding, labels, and marketing is for consumer goods from Domino’s Pizza to Coca-Cola.

Branding is the context and everything has context. Wine, Clay Shannon of Shannon Ridge Wines, said that all they’re selling is fermented grape juice. It’s a commodity. Unless that is, a bottle is differentiated on price, quality, or story.

It was episode 282 when Gary Vaynerchuck spoke with Shannon and the duo took calls from people within the wine industry. Without a doubt, Gary’s advice was on marketing the wine. To the callers, Gary said to focus on the big and the small. The big was creating content and sharing things on social media. The small was knocking door-to-door to make as many sale calls as necessary.

Clay said that he’s noticed, “consumers want to be closer to the grower these days,” and Gary added, “it’s all storytelling isn’t it?”

Winning wines are easy choices. Depending on the consumer (target market) needs (job-to-be-done), wine-makers can tell their story (differentiate). With some luck, they’ll succeed.

One proxy for wine is the bar. Companies like RXBar, Larabar, etc. differentiated, went DTC and used new marketing. Their labels were unique, their ingredients novel, and their story was powerful. That could work for wine. We’ll let Gary, as he often does, have the final word:

“All my ‘som’ friends want to shit on Australian Shiraz because it’s over-extracted and guess what, if you want to be a scientist they’re not wrong. My thing is, if I’m hanging out with my buddies and I’m watching WrestleMania I wanna have a cabernet that was fucking aged in bourbon barrels.”

Thanks for reading.


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

On Variety’s Strictly Business podcast, Bill Abbott, president and CEO of Hallmark Channel parent Crown Media Family Networks spoke about the obstacles of running the business.

“When you say it’s a ‘Hallmark movie, you know what it is.” 

There’s a lot of emphasis on branding because a good brand affects a business like an All-Star affects an NBA team. With one, everything is easier. In 2013, Mark Pendergast finished his book about the Coca-Cola company. Near the end of a very thorough research process, he asked if he could finally see the secret recipe. Mark got lucky, a spokesman let down his guard and…

“He grinned, ‘Mark,’ he said, ‘let’s say this is your lucky day. I happen to have a copy of that formula right here in my desk…There you go. Now what are you going to do with it?”

Mark might sell it, but it would have to be a different name. He might market it, but not with those classic red and white colors. He might hint that it tastes just like Coca-Cola but as he found in his research, it’s not so much the taste that people like. Coke tastes better when people see the label (wine is this way too). Brand is one way to create Alchemy.

The Coca-Cola Company also has a successful distribution network. Hallmark, does not.

“(Disney via Hulu) shouldn’t have the ability to not carry us and carry Lifetime in a premium position when they own half of Lifetime.” 

Alex Rampell called this ‘the TiVo problem‘. Can incumbents with distribution creat innovation before upstarts with innovation attain distribution? We saw this same problem play out with Barefoot Wine. In that case, the founders tweaked the distribution model. 5-Hour Energy.

As content evolves, the distribution economics evolves too. Eventually (probably) the Hallmark content will be on their Hallmark Movies Now service, however, those economics are tough.

“I think the whole SVOD ecosystems has to go through a major change because there are now ways the economic model works if you’re creating this volume of content.” 

“It’s too much content for too low a price.”

This was the Pixar problem. Their movie investments only paid off if their movies were always awesome. One slip was trouble, two slips and bust. Pixar’s acquisition changed the economics.

Abbott is open to different ideas. As Rory Sutherland fondly notes, maybe your problem has already been solved someplace else.

“The landscape has to change in some way…the video game business has been very successful in portioning out pieces.”

“Yeah, if you want to find out if the guy gets the girl, fifty cents at the end.”

If peripheral content (like Pixar) is one model then video games are another. No matter what direction Hallmark strikes out in, they’ve got a good start. It’s a strong brand, selling out advertising each holiday season, even turning down questionable ads and being #1 in the women 25-54 bracket.

I wrote an ebook based around the content of this blog. It’s Idea Trails and it’s a collection of 50+ ideas from the blog with stories that go along with them. My concept was a book of trailheads of ideas worth exploring. Here’s an audio sample.

What’s your EDC?

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

Decision making is full of analogies. A latticework of mental models, the two-jar model, the urn of uncertainty. Today we’ll introduce another, the everyday carry (EDC). 

Like the other models, EDC has multiple dimensions. The inspiration for this idea comes from Marc Andreessen’s answer to Tyler Cowen about what television shows he recommends:

“The conceit of the show (Burn Notice) was that this spy had every conceivable skill. He could make explosives out of bleach or disarm someone with a mop handle. Whatever circumstance he was in, he had the skill. Basically I look at him and I think, that’s a good founder. A good founder has to have every conceivable skill.”

Good founders can work in product, marketing, finance, legal, and human resources. The list, Andreessen said, “goes on and on and on and there is no substitute for these things.”

EDC is an internet subculture. Often an EDC includes a flashlight, wallet, watch, and a multitool. Sometimes there are handguns, knives, and lighters. Their motto might be, *better have it and not need it rather than need it and not have it.*

In every EDC there is money and money is a great tool because it’s immediate. Order and pay.

What’s lost with quick-payment is interesting-learning. [Michael Lombardi]( wrote about this, “If copycatting were a useful shortcut to success, there would be Bagasse-Style restaurant in every city and San Francisco 49er clones in every football stadium.”

Casey Neistat noted this too in “Being RICH vs being POOR – a video essay.” Money solves all the immediate first-order needs like shelter, food, and bills but money won’t solve for the conditions that led to those predicaments. 

That’s where the EDC comes in. As Stephen Soderbergh said when questioned about filming with an iPhone, “if you don’t know where the camera should go, it doesn’t matter what you’re shooting on.” Ditto for using a wheelchair. 


This is what Andreessen is getting at. Money will only get a person or a business so far because what’s really important is the know-how of the EDC. 

The EDC approach is the heart of sabermetrics in baseball. Wins and payroll are weakly correlated. Rather than the wallet, teams reach for the tool. The Direct To Consumer revolution is filled with products that demonstrate the tool of ‘talking to your customers about what job they’re hiring for’. Large organizations could have spun up Edible Arrangements, Harry’s Razors, Instagram, Rent The Runway and so on but they didn’t. 

The EDC is there and ready. Are you?

Thanks for reading. 


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

People view acts of omission—the absence of an act—as far less intrusive or harmful than acts of commission—the committing of an act—even if the outcomes are the same or worse. Psychologists call this omission bias, and it expresses itself in a broad range of contexts.

That’s from Tobias Moskowitz’s Scorecasting. The opening chapter is about how referees tend to ‘swallow their whistle’ and let the players play. The action is decided on the field.

Fans, again, tend to, be okay with this because as one referee put it, “People aren’t paying to see us.” We want the great athletes battling it out. But while this omission tendency works in sports it doesn’t work in investing.

Marc Andreessen explained errors of omission nicely. If an investment doesn’t deliver, all that’s lost is 1X the money and time. However, if an investor misses an opportunity “you can lose 1,000x because that’s the upside of what you could have gotten. All of the mistakes I care about are mistakes of omission.”

For a long time, I thought that when investors wanted good deal-flow it was to avoid a market mechanism. People get better deals at garage sales than on eBay because there are more bidders. Now I see that the deal flow involves the chance of a good price but also any price at all.

Missed opportunities can be quite large. During the 2019 DJCO meeting, Charlie Munger said that the family fortune would be twice as large if not for a mistake of omission in the 1970s. The viewer gets the sense that Munger is frustrated less by the dollar loss and more by the mental misstep. Buffett too, notes that omissions are his “biggest mistake“.

To make this mistake, Buffett advises, focus on what really matters to a business.  Leases, contracts, patents, etc.  “are not the things that count.” Rather, “What counts is…whether you’ve really got a fix on the basic economics and how the industry’s likely to develop.”

Venture investor Bill Gurley saw this with Google. The team was well qualified, confident, and in a growing market. Gurley’s problem was the price and he neglected to invest. But, “I go back and the learning is that if you have remarkably asymmetric returns you have to ask yourself, ‘How high could up be and what could go right?’ because it’s not a 50/50 thing. If you thought there was a 20% chance you should still do it because the upside is so high.”

To get the Buffett’s fundamentals or Gurley’s ‘how-high?’ it helps to argue well. At Lux Capital, Josh Wolfe assigns, “a devil’s advocate, someone to identify why we shouldn’t do the deal, ask a priori what could go wrong.” They debate issues because the consensus ones tend to be the ones they’ve been most wrong about.

Omissions in investing are easy to see thanks to prices. Money is an easy metric but there are opportunity costs everywhere. Thanks for reading.


Pauline Brown

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

Pauline Brown was on the Hidden Forces podcast to talk about her work at LVMH and her book, Aesthetic Intelligence. Brown’s framework requires two guidelines.

First, everything is a want. Short of tragedy, modernity has only wants. People need minimum shelter, food, and safety but we’ve blown past minimum, adequate, and ‘enough’.  In the context of needs and wants we’re in the ‘gorge’ range. Brown said, “There’s no reason to buy any of them (luxury goods) for utility.”

Second, everything matters. The utility of something like food is the calories and nutrients but we go beyond that because of the other dimensions of something matter. A birthday dinner at Waffle House is different than a surf ‘n turf downtown, though both are just a meal.

Taken together, these ideas form the guardrails for aesthetic intelligence. As we noted during AI Week, there is no silver bullet solution to problems. Big data isn’t a magic wand, it’s a hammer. Aesthetic intelligence is a flashlight. It’s a latticework of tools that makes situations solvable. Let’s look at some examples from the podcast.

Air travel has gone from good to bad to bearable. Using ideas that Rory Sutherland evangelizes, we need to keep in mind what metrics matter. During the phase from good to bad, airlines looked at the economic number. Flights got fuller, seats got smaller, perks disappeared. In the bad to bearable transition, organizations realized that the easy to measure things aren’t the only things that matter.

For example, being able to work while traveling is quite nice. Sitting while traveling is nice. So too is when companies remove the ambiguity around waiting.

Screen Shot 2019-11-05 at 10.34.20 AM

Working, sitting, and understanding are difficult to measure. It’s only by being there that organizations find this thick data.

Not talking to customers, said Brown, is a problem that’s “ubiquitous and a real disadvantage. The reason entrepreneurs are gaining so much share is that they are connected to the marketplace.” Brown doesn’t have this problem. “I love going to stores, not even to shop. For me, it’s like an anthropological experience. I get more joy than kids do at zoos.”

Brown said that the top bosses at the best brands all spend oodles of time in their aisles. This was something Carl Turner Jr. did too, noting, “As CEO I’m told all kinds of things about our stores but until I get out to hear from the frontline employees and from the customers, I don’t get the real truth.”

The problem as Brown, Turner, and Wang note, is that while spreadsheets, models, and data can help, they’re not perfect. They’re maps, not the territory. When Kenneth Jeffery Marshall talked with Jake Taylor, he said that he doesn’t have a Bloomberg terminal because he wants even better data:

“I love to read, I love to think, and I love to talk to people who are in the thick of an industry. Not equity analysts that cover the industry, but the people that drive the trucks, repair the units, make the products – those kinds of people.”

Once executives get out and see what’s happening they’ll see how to fix retail. “It’s not that traditional retail stores are dying,” Brown explained, “but that they’re formulaic and forgettable. They’ve lost their way.”

We believe that retail needs to shift hard to either a buying focus or shopping focus. The buying stores will optimize for convenience. Grocery stores offer this with pre-packaging ready-to-bake meals, milk near the front, and ’10 items or less’ queues.

The flip side to that is to offers shopping. This is Brown’s wheelhouse. Customers are looking to look at makeup. Customers want to feel the cream, the lotion, the product.

Businesses must figure out all the jobs their customers hire for. Champagne is booze but with panache. Brown has an eye doctor friend who told her that one of his busiest days is after New Year’s Eve. The logical solution to this is to better barricade the bubbly. But that wouldn’t work at all. The corking, Brown said, “is part of the aesthetic experience of having champagne, it’s part of the ritual.”

Screw-top beverages might store just as well but it’s not part of what people want.

The entire episode is good but the part at the end, about Disney, is top-shelf. Thanks for reading.

This time is different

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

I was rereading one of my favorite philosophy books that’s disguised as a finance book and the idea of ‘retirement’ came up. The author lamented about abuse from the Internet Police, who mercilessly profile him. Retirement means not working, end of story. All these FIRE folks are done working!

Wait, why does anyone even care?

FIRE exists for two reasons: media and the markets. It’s easy to share your story and it’s easy to look like a genius during a looooong bull market. Those two factors make FIRE seem like a blip and the answer to, is this time different a resounding ‘No.’

Wait, but what if it is? What if the 1% of participants will double next year because this time different? 

One trick from a friend is to create mental IF/THEN statements. IF someone says to him that they should meet for lunch, THEN he immediately tries to set a time.

So if we hear that this time is different, then we can ask, ‘okay, what’s changed and is it something that changes fast?’

Some things change slowly. Coca-Cola changed slowly. People’s desire to drink Coca-Cola changed slowly. Warren Buffett’s affinity for Coca-Cola changed slowly. Some things like the tastiness of sugary beverages, the laws of physics, and human nature all change slowly.

Other things change rapidly; economic models, fashion trends, and governments. And work. People went from a single manual job with (mostly guaranteed) pensions to multiple intellectual jobs with a market retirement. Work has shifted from Coase’s firm to the iPhone and Slack. Taylor Pearson calls this the blockchain individual.  Some industries like Hollywood have long worked this way but due to falling transaction costs, maybe everything will.

Technology might be a canary that sings, yes this time is different. It’s the case for war. Carlin’s October 2019 podcast, Supernova in the East III focuses on this. It didn’t matter how many anti-aircraft guns were bolted onto the Pacific fleet, they weren’t effective against the Japanese airforce. This time is different. The Romans saw little changes, the Allied forces saw many.

In a history book, the separation from 1914 to 1944 is small. Landmasses didn’t move, consumers didn’t suddenly want more asparagus, and cars weren’t designed with three wheels. But countries were reformed, governments overthrown, and chemistry and physics were mechanized. This time is different. 

In an effort to understand people better I’ve started to read more fiction. I’m enjoying How to Stop Time and this quote in particular:

“The longer you live, the more you realise that nothing is fixed. Everyone will become a refugee if they live long enough. Everyone would realise that their nationality means little in the long run. Everyone would see their worldviews challenged and disproved. Everyone would realise that the thing that defines a human being is being a human.”

Thanks for reading. If you want more here’s a new ebook. It’s a collection of big ideas from this blog.

Barefoot Wine

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

Wine, like movies and restaurants, is a difficult business. If potential profits weren’t enough, social glamour sweetens the pot. Of course, that’s our 2019 view. Michael Houlihan and Bonnie Harvey founded Barefoot Wine in 1986 and the conditions were quite different. French wines ruled the day and American wines were viewed with disdain.

Bonnie and Michael didn’t mean to start a winery but instead when a client couldn’t get paid in dollars and was offered payment in wine the couple took the payment because it was better than nothing. “People say to ‘follow your passion'”, Michael said, “but we followed our opportunity passionately.”

With more wine than experience, Bonnie and Michael started to ask anyone who might know anything about wine. They talked to their customers.

I was reminded of a joke while listening to this episode. An aspiring entrepreneur walks into an old-time general store and sees stacks of bagged of rice. It’s almost to the ceiling. The budding business boss looks at the store owner and says, ‘Wow, I’d never thought you sell that much rice.’ The owner looks back and replies, ‘Well, we don’t but the salesman who brings it by is really good.’

“The best information we got,” Bonnie explained, “was from Don Brown who was a chain store buyer in California.” He explained that their wine needed to be a salt and pepper act, in a pig, and better and cheaper than Bob. The label should be simple, but not common, and visible from four feet away. In thirty seconds they had everything they needed.

Barefoot is a good name, it makes the consumer SMILE. “At the time wine was intimidating. People couldn’t pronounce the name on the labels,” said Bonnie.

Michael and Bonnie had an opportunity because the consumers had a latent need. Wine at the time “was a Saturday night wine where the men would sit around and talk about things like mid-notes. But it turned out the majority of wine buyers were a thirty-seven-year-old mom with two-and-a-half kids pushing a cart down the supermarket aisle and she wanted a Tuesday night wine.” Channeling Rory Sutherland, we can say she didn’t want something good, she wanted something not-bad.

Barefoot’s marketing discovery was to start small. The first distributor Michael and Bonnie approached said he wouldn’t carry their wine without a large advertising campaign attached. They couldn’t afford that and instead caught a lucky break when two months later their phone rang with a donation request.

The caller wanted to raise funds for a children’s park. Bonnie and Michael still had more wine than money so they offered a few cases and the organizer, presumably begrudgingly, accepted. Then something unexpected happened.

In the month after the fundraiser, the store sales in the area immediately around the fundraiser shot up. Bingo. Their marketing plan wasn’t going to be national but local and it was going to be a page right out of Getting to Yes.

One main idea from this classic on negotiation (published in 1981) is to offer things that are cheap to you but valuable to the other person and vice versa. My kids request breakfast for dinner and that’s fine by me because it’s cheap, quick, and healthy. Win-win. That’s what wine donations did too. Barefoot got exposure and fundraisers got another perk, some panache, and a possibly pricy basket for bidding. Win-win.

Barefoot broke through. The world is, and always has been, busy.  Even in 1961 when Rosser Reeves wrote that the world will not beat a path to your door for a better mousetrap, “for if the world does not know it is a better mousetrap, no one is going to make a beaten path to anybody’s door.”

Michael and Bonnie, as well as entrepreneurs today, face the TiVo problem; can innovators get distribution before distributors get innovation. Asking this question can help founders decide when to sell their business. It did for Lara of Lärabar. And from early on Michael and Bonnie wanted to sell. Selling is a Messy Marketplace and today Michael suggests people meet with brokers for lunch to talk, plan, and get a lay of the land.


Thanks for reading and thanks to Tim for passing this along.

Nudgestock 2019

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

Each year we do a brief recap, review, and emphasis on the Nudgestock conference hosted by Rory Sutherland and Ogilvy Change. Here are the notes from, 2018. Here is the post from 2019’s podcast recap. If someone wants more here’s the page of playlists.

Rory Sutherland‘s book Alchemy is great but he’s better in person (virtually) than on the page (physically or digitally).

Sutherland wants people to think in novel ways. It’s not so much cold-hard-logic that rules our lives but warm-fuzzy-feelings. Blocking this is the desire to appear logical in our thinking. However, said Sutherland, “There’s a lateral solution to everything.”

Stories are a great lateral solution. When Rory was on a flight and got a bus instead of an airbridge he was disappointed. Until the pilot told a good story. “Suddenly I reframed the bus from being an inconvenience to being a conveyance. Suddenly I didn’t have to walk past twenty Toblerone stands in order to get out of the airport. Tell a good story and the meaning changes.”

This tool has a name: benign bullshit. It doesn’t do any harm to tell the story of the bus instead of an airbridge and it can have great effects. It’s an asymmetric bet, just like watching any one of Rory’s many talks.

Tricia Wang on “how marketing mistook clicks for customers.”. Wang is the propagator of the term “thick data” a form of naming. She made up this name because she needed something people could understand in meetings. If clicks form big data then talking to customers is thick data.

Thick data and big data are the peanut butter and the jelly to understanding customers. (company culture is the bread). Wang said, “Thick data allows you to see the world with alien eyes, to ask questions and unpack assumptions that might lead you to make the wrong move or miss the mark entirely.”

Big data is backward-looking and numbers can’t quantify tears and smiles. Alice Waters could have counted checks and measured menu items but instead she walked through the dining room. Both big and thick data help and both help more together.

Maths Mathisen spoke about his app, ‘Hold’. If people check their phone often then maybe they should be reminded about how often they do it. A lot of Sutherland’s work and Ogilvy’s ideas are about reframing and changing the meaning. A bus becomes a conveyance. Mathisen wants to do that with how people use their phones.

Robert Frank spoke about ‘the mother of all cognitive illusions’ and he’s the reason for all this. It was his book, The Economic Naturalist that sent Sutherland scurrying along Benign Bullshit Boulevard.

You’ll need to watch for the mother of all cognitive illusions, but even if Frank is wrong it’s right to listen to him. He points out the way we listen, hear, and remember stories as well as the importance of relative comparisons. You may not agree with his conclusions but you will learn about human beings.

Stephanie Johnson spoke on diversity and inclusion. Good organizations tend to argue well and Johnson cited research that “When have a diverse room, people are more willing to play devil’s advocate.” Relatedly, Ben Horowitz pointed out this was the catalyst for casual dress, to deemphasize HiPPO decisions and focus on good ideas.

Richard Wise was hilarious about “making the ‘rational’ benefit irrationally appealing”. Explaining classic advertising campaigns like, Don’t mess with Texas, What happens in Vegas stays in Vegas, and Got Milk, Wise pointed the way lateral ideas work.

The Got Milk campaign was initially not national. It was made for the California dairy industry and the key insight was a bit of thick data. A group of people was asked not to drink milk for a week and report back on how they felt. A week passed, the group returned, and their response was unexpected. It wasn’t the glass of milk people missed but the breakfast cereal (with milk), the coffee (with cream), and the birthday party (ice-cream).


How does an ad for a product work if it doesn’t feature the product? With lateral thinking. The insight for the California dairy farmers was Milk and _____. This is hard, Wise said,  “What I like about (this approach) is taking away your pride in your product and being willing to look at where it actually lives in people’s lives.”

Gerd Gigerenzer spoke about how less (data) is more (accurate). “Logic and utility are beautiful mathematical theories but they don’t describe how most of us actually make decisions.”

Gigerenzer goes back and forth with the Thaler and Kahneman camp, but Rory likes them all because he’s focused on things that work in the real world, not things that are statistically significant in a laboratory. Gigerenzer’s chief beef with T&K is that heuristics actually work quite well and the T&K error is that they’re measuring the wrong thing.

Bob Iger’s decision not to buy Twitter is a point for Gigerenzer’s case. Iger said it was a gut call and admits it in the book. Thanks to a run of successes, Iger doesn’t have career risk to admit this. Most people don’t enjoy this buffer. Heuristics work, said Gigerenzer because they “are fit for a world where you need a robust solution because there is no optimal solution.”

Jennie Roper spoke on the mere exposure effect and noted, “When you pick a shampoo, mortgage, or mobile phone provider, most of the content is equal so why do you pick one of the other? It’s familiarity.”

For a business some exposure is good, more is better, and too much is too much. The goal is a bell curve of 9-12 moments, depending on the industry and certain goals. Thanks to digital this can be tracked and honed.

Sir Paul Collier spoke about the future of capitalism and noted that “Capitalism doesn’t work on autopilot.” Instead, there should be some kind of structure, often from the government. Collier wants to keep the rules of bowling but to have someone pull up the gutter bumpers every now and again.

Thanks for reading and enjoy the videos.

Market Mechanism

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

I was reading an investor’s letter to his stakeholders and saw a new ticker: ‘undisclosed position A’. Hmm, curious. Then I read the next line: ‘undisclosed position B’.

This isn’t abnormal as someone builds a position and it’s important to understand why. The simple answer is competition but stepping back we can see that competition only exists when there is a market mechanism. If price influences risk then buyers must tiptoe about, cautious about releasing the herd. As Jerry Neumann explained, “how do you make money if the dumbest guy in the room is the one setting the price?”

The greatest recent market mechanism has been the internet. Crashing transaction costs (and the answer is always transaction costs) led to markets for Beannie Babies, homes, and ride-sharing. How much you benefit is influenced by which side you’re on.

Bargain buyers need to work to find situations without other bidders (‘undisclosed position A’). For investors, this might mean sectors and companies with limited coverage or things that are difficult to understand or too small to warrant the effort. The inverse will be true too: that stocks du jour will have the dumbest guy in the room setting the price.

The best bargain buyers will avoid markets all-together. This idea was articulated in one of Zach Lowe’s NBA preview podcasts where he said:

“Someone asked me what I’d pay for DeMar DeRozan’s contract extension and that’s not a fair question for me because he will immediately reach a market value that I would never pay.”

If DeRozan was restricted to only his current team that’s an advantage for them. Buyers of one get good deals. However, that’s not the case.

Jason Blum runs one of the most successful movie studios in Hollywood and part-of-the-reason he succeeds is by avoiding a market mechanism in making his films. “We’re like the anti-heat production company…the director’s everyone is chasing we’re not chasing.”

Instead, Blum looks for directors who have a history of good movies–just not too recent a history. He pays less not because someone is unproven, but because they’re unloved. He also has an offer the market can’t compete with: final cut.

Sellers want more buyers or fewer sellers. That means raising the perceived value of their product.

Buyers want fewer buyers or more sellers. This might mean working with things that are difficult to understand, unloved for emotional but not material reasons, or signing players before free agency.

However a business goes about it, the more power a market mechanism has the harder you’ll have to work for the same results. Thanks for reading.

Innovation and Optimization

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

On a replay of How I Built This, Lärabar founder Lara Merriken talked about her sale to General Mills. She said:

“We finally decided in 2007 that we would entertain an offer if we felt like it was the right company because we didn’t have to sell. We were a financially stable company. But I was starting to get really tired and worn down.”

Her comments demonstrate the difference between a business and a hustle. Brent Beshore told Ted Seides that there can be some pretty big hustles, and that’s what Lärabar probably was. Brent said:

“We looked at a business recently, it was doing nine million dollars of free cash flow, that is definitely a hustle, right? It’s one person, they’re the lynchpin in this thing, everyone is an extension of them, there are no systems, the repeatability of revenue is not there, and if that person gets hit by a bus, I mean the entire company implodes within a short period of time, right? So we call that a hustle, right? That’s not a business.”

Merriken was probably tired because Lärabar lacked systems. Which makes total sense. She started with a pizza cutter and a rolling pin using store-bought supplies. However, the same environment that encourages innovation discourages processes. General Mills didn’t create raw fruit and nut bars, Lara did. She explored new lands and created new lines. Yet, once the operation was up and running she needed someone to ‘make the trains run on time.’

Michael Ovitz’s career offers this contrast too. Ovitz co-founded Creative Artists Agency in 1975 and one early innovation was ‘packages’. Actors A and B, with director C, Producer D, and script E. One such project was 1988’s Rain Man. Reflecting on the project, Ovitz wrote, “Nothing in Hollywood is anything until it’s something, and the only way to make it something is with a profound display of belief.”

However, what made Michael successful as an agent and leader of an agency failed him as a leader of a company. Reflecting on their time together at Disney, Bob Iger wrote: “I think of him (Ovitz), not as a bad guy but as a participant in a big mistake.”

Ovitz and Merriken succeeded in systems where flexibility and exploration were the most important characteristics and both needed help in systems where repeatability and optimization took the stage.

Every business and every person exists within these and other systems. Bull markets, tailwinds, ‘booms’ and ‘busts’, expansions and contractions, and so on. Every business and every person has agency and the ability to change too–though that takes time and time introduces the TiVo problem. If Merriken took too long to built systems, General Mills would have built bars.

Thanks for reading.