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

A reader sent along the following story about Robert Rodriguez who (partially) rose to prominence for making the film El Mariachi for seven thousand dollars in 1992. The movie has now grossed more than two million dollars. Rodriguez’s IMDB profile is incredible with double-digit citations (11 total) for Producer, Writer, Director, Editor, Soundtrack, Sound department, Visual effects, Actor, Composer, Cinematographer, and Camera and Electrical Department. For context, Judd Apatow has double-digit credits in 4 categories.

Part of the reason Rodriguez does so many jobs is to keep the cost of the movie down and the scope of the project small. He’s been offered larger projects, but with larger projects come more stakeholders, our subject for this week. Rodriguez said:

“When they offer it to you, it’s still their movie. They’re going to tell you how to cast it; they’re going to tell you how to make it; they’re going to tell you how to end it. They spend a lot of money and they want their money back. I’d rather nobody spent a lot of money.

“If it’s a lower budget and a minimum payout, I can do anything I want. I never wanted to leave that behind. It was just too big of a trade-off. It sounded too much like work.”

There’s an expression especially common within the small business community where someone can be working on their business or working in their business. The connotation, as I understand it, is that working on is better than working in.

On > In.

However, there’s a more important layer beyond this quip. Both On and In are superseded by the stakeholders Of a business.

Projects like films offer a tidy closed system for examination. Films have deadlines and budgets and the more time (longer deadline) or the more money (larger budget) a filmmaker needs, the more people that need to be involved. Or, inverted, the less time and less money a film needs the more people like Rodriguez, or Jason Blum a subject of recent weeks, can work independently.

In an ideal world, in a prosperous marriage, or on a sunny day, the importance of stakeholders matters less. Everyone wants to be your client in a bull market. However, it’s the scary situations when opportunities arise. Warren Buffett said to be greedy when others are fearful and fearful when others are greedy. That’s fine for people who can act like Warren Buffett, who has great stakeholders. In investing this is called permanent capital.

But Buffett hasn’t always been so blessed. From 1954-1969 Buffett ran the Buffett Partnership Ltd. and it was then that he started to write letters to his stakeholders. In 1961 Warren wrote:

“It is most important to me that you fully understand my reasoning in this regard and agree with me not only in your cerebral regions but also down in the pit of your stomach.”

Warren knew that the best prices came at the worst times. “The pit of your stomach,” encouraged his investors to have the intestinal (and intellectual) fortitude for the bumpy ride to Earnings-ville.

Decades and many letters later Roger Lowenstein wrote about this lesson, “One purpose of his letters was to attract and knit together a shareholder group who would behave like his partners—in other words, who would stick with him.”

What Buffett wanted were stakeholders that would stick with him through thick and thin and not redeem their money when he was about to pounce on an opportunity. He wanted investors with the faith of Charlie Brown.

Last week we looked at the monkey see, monkey do nature of opportunities. Whenever a market mechanism is introduced for athletic skills, collectible items, or investing, prices inflate and risks rise. Mix in stakeholders with different incentives, time preferences, and expectations and the best action will be harder to take. Unless that is, a business cultivates its stakeholders. Buffett did it through letters and we’ll look at how to do it too.

Money and Time

No one embraces an expedition and expects to fail. I’d wager that it’s mostly smart, ambitious, hard-working people who even try. Yet projects fail all the time and stakeholders are part-of-the-reason why. When thinking about stakeholders this week, consider anything that draws on time (or indirectly via money) as a stakeholder.

Michael (a different one, I promise) wanted to be a writer. His job was as an editor and he’d submitted and sold some stories. He lived in New York City too, it doesn’t hurt to have that proximity.

During this pining-for-writing phase, Michael and his wife bought “a crummy house in Cornwall Connecticut.” The couple would go up on the weekends and as his wife painted Michael tinkered around in the garden. “I ran into problems immediately,” he said in one interview years later. It was like

“In order to conquer an animal, I have to think like an animal, and whenever possible, look like one.” — Carl Spackler

He looked for horticulture answers in books, tried and failed, and looked for more answers. Along the way, Michael wrote down what he was doing. From that came some stories. Then came a book.

That book sold well enough that Michael got a contract to write a second book, and an advance. Yet, despite the book advance money (which quickly ran out) there were too many stakeholders on his time. Michael and his wife had a kid and a fixer-upper in Connecticut. They lived in New York City and paid New York City prices.

Michael had a choice, he could pay back his advance and cancel his contract and keep his job in the city. Or give up the job, the health insurance, and the city. He moved and reflected years later, “The key to being a successful freelancer is having a low monthly nut.”

Michael Pollan made it. His books win awards and some stories even make it to television. Michael Pollan made it because he aligned his stakeholders. His wife and his lifestyle supported this path to becoming this kind of writer.

Like writing, comedy takes time. It’s months (years even) on the road figuring out what makes people laugh. Jay Leno put it this way when he talked to Judd Apatow, “I didn’t have a lifestyle to maintain.” Spending his days working as a mechanic for Mercedes and his nights driving hundreds of miles for a few minutes on stage meant that Leno had the time to develop jokes.

Even years later, Leno tries to test his material in awful places. “Like, I was in New Mexico a while ago at an Indian Reservation, just a very strange setup. Nice people, but—and they laughed. So I said, ‘Okay, this stuff is gonna work on the show.”

Pollan had a wife, a kid, and two residences. Leno had himself and his other interest to comedy was cars, something he got to at least interact with at his paying job.

Without the right stakeholders, ventures get less time and/or money than they need. Without the right incentives, things crumble too and here we have “the most profound problem in investing.”

Principal Agent

Have you ever been in an elementary school? Third-grade classroom lines provide an excellent metaphor for aligned stakeholders.

If you haven’t recently, things are much like you remember. Some kids want to get to lunch, or recess, or art immediately so they can maximize their time and some kids want to talk with friends, look about, or get the attention of the teacher. When a class is lined up straight, paying attention, and “eyes forward, lips zipped” they can move efficiently through the school. When they aren’t, they can’t.

That’s how businesses exist too and that profound problem exists when the principal and the agent aren’t in the same line going to the same place.

It was ‘super LP’, Chris Douvos who called this “the most profound problem in investing. People with money – the principals – act differently than the agents – those who are entrusted with the money.”

This problem exists under the expression, no one got fired for buying IBM too. It’s also hidden in the acronym, CYA.

Let’s look at the Warren Buffett situation we already noted. Buffett wrote letters to align and filter (we’ll get to this point) his stakeholders so that he could buy out of favor stocks. Buffett wanted superficially not fundamentally, ugly businesses.

However, Buffett had it easy. He’s the quintessential goofy ‘uncle’ or fun ‘aunt’ that every family has (though none are quite as wealthy). Buffett’s communications were the chief source of financial information for his stakeholders. I wonder what he’d do in 2019 when Twitter, cable news, and conspicuous consumption are so dominant. CNBC didn’t even start until 1989! Buffett still writes his letters and they reinforce the Buffett brand and that influences the stakeholders who are shareholders.

Remember, except in the limited-laws-of-physics world, people only look stupid relative to something else. So one solution for individuals is to cover-your-ass and purchase IBM. But the second solution is to change the relative comparison. This is what it means to align stakeholders, to frame the comparison in a different way.

Investors have an expression that makes this conveyance easier, ‘you can’t be the market and beat the market.’ The implication is that they have to be different, they have to look different. So if a limited partner thinks they’re stupid, they have to find a different metric. It can’t just be, ‘they’re not doing what everyone else is.’

In the monkey-see-monkey-do world where edges erode, businesses must act opportunistically. It must be fast, with force. That ability comes with good stakeholders, and there’s a certain time to find them.

Inbound and communication

The best time to align stakeholders is before they’re stakeholders. This was something John Wooden did while he was the coach of the UCLA basketball team. In a book that covers his playing time for Wooden, Kareem Abdul-Jabbar wrote:

“As I learned later, our first meeting was perfectly representative of his philosophy of recruiting: ‘I wanted young men who wanted to play for UCLA, and not one that I had to talk into playing for UCLA. I always believed that the way to build a great team is to find the kind of people you want to work with and tell them the truth.’”

Kareem writes that he was a bit taken aback that while Wooden was respectful, he wasn’t effusive.

Brent Beshore wrote a book and created a network because he said, “We eat on proprietary deals.” The book, the podcast, the letters, are all ways to create an inbound network for the stakeholders. Beshore told Ted Seides:

“We like to get in situations where people have educated themselves on us, people know who we are, there’s already trust built through our writings, through what we’ve talked about and they want us to buy the business. They’re coming out and seeking us.”

Jim Mattis writes about the importance of this in his new book, Call Sign Chaos. During the Vietnam War, felons, parolees, and petty criminals were offered chances to serve in the war instead of serving time. That seemed like a good deal to the judges who assigned the punishment but not to Mattis and the Marines fighting in the war. Soldiers are stakeholders too.

This brings up the question of balancing perfect clients with available ones, about employees and the unemployable. Stakeholders widen and shrink the opportunity zone of a collective. Great people expand what’s possible, unaligned ones collapse what’s possible.

Success with stakeholders seems to be like success in dating, share who you are and see if they like it.

A business should sell their strength. John Wooden’s strength was focusing on the process. Kareem wrote that Coach Wooden didn’t like sports movies because after the lesson of the movie the team won anyway. Kareem wrote, “His point was that the life lesson is the success. The traveling is the reward, not reaching the destination.”

Wooden wanted learning first because like day follows night, long-term winners are learners. Beshore wants to filter out people who won’t jive with mid-west vibe of hard work, humility, and honesty. Mattis wanted men who wanted to be “the few, the proud.”

Investor Wes Gray puts it this way, “The edge is not in building a better mousetrap. The edge is in coupling educated capital that understands why your mousetrap works and pairing the two together.”

Assistant GM for the Boston Celtic, Mike Zarren said much the same thing, “The communication of the information is as important, if not more important, than the actual quantitative work that you do.”

So what Zarren, Gray, Mattis, Beshore, Wooden, Buffett and all the others have done is communicate well. Each is and was upfront about what they’re trying to do and they find people who buy into that. How do they communicate? Easily.

Here are a few specific suggestions for general implications.

Visual or literal One advance for sports analytics was making it visual and the advice for filmmakers is just as true for sabermetricians, show don’t tell.

Entertain or Inform In the modern cacophony an easy dichotomy is to separate these two. Phillip Tetlock has studied decision making and noted, “The more accurate forecasters tend to bore people.”

Understanding is not agreement “It’s important to make people feel heard when they are giving notes about the show, make them know you are actually listening. But then it’s important that we only take the notes that will make the show better,” said Brian Koppelman.

Wrap up

In his book, Jim Mattis writes, “I aggressively delegated tasks to the lowest possible level.” It’s important to “leave the ‘how’ to your subordinates.” A decentralized command works great with stakeholder alignment. Like Mattis saw fighting in Vietnam and recruiting Marines after, people are everything.

So how much do your stakeholders “delegate tasks to the lowest possible level”?

Ultimately it comes down to two possible paths.

  • Smaller projects (in time and money) require fewer stakeholders. Fewer people, fewer complications but that requires some like Robert Rodriguez who can do more, with less. As filmmaker Steven Soderbergh said, it doesn’t matter what camera a filmmaker uses if they don’t know where to put it.
  • Coordinated projects (via communication) create aligned stakeholders. Sometimes this is done ‘at the top of the funnel’ for inbound clients. Sometimes it’s done after the fact to educate people on what you do what. Sometimes it’s homestyle letters (Buffett), sometimes it’s visual arrays (Moneyball), and sometimes it’s regular content (podcasts, emails, etc.).

So, Do your stakeholders believe this? Thanks for reading.

Bob Iger

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

Bob Iger’s career began with a lucky break, “I came to ABC thanks to my uncle Bob’s bad eyesight,” and his coincidence in sharing a hospital room with a lower-level ABC executive. With a little more luck, a lot more hard work, and paying attention to the unfolding lessons, it led to The Ride of a Lifetime, the title of his book.

One early lesson came from working for Roone Arledge at ABC Sports, “… we were telling stories and not just broadcasting events…”.

Wild World of Sports worked then and sports works now because of context. Think about how much analysis, breakdown, and backstory exists for the current, 2019 football season. There are more hours of content than hours of the events.

This early lesson is a cautionary tale. Sometimes the story we’re told is too bold. Later in the book, Iger glows about his relationship with Steve Jobs who became a close friend. He joins Ed Catmull, Kara Swisher, and Ken Kocienda who all say there were two versions of Steve; founding Apple Steve and rejoining Apple Steve.

Iger and others take effort to note this difference because they feel the ‘Steve Story’ is the wrong version. It’s incomplete.

In 1985 Iger is surprised when Capital Cities buys ABC. Part of Iger’s good luck is working for smart people and learning the right lessons. From Arledge, he learns about putting on events. From Capital Cities managers Tom Murphy and Dan Burke, Iger learns decentralized management.

The acquisition attitude was, ‘Who are these guys?’ ABC was a major network while Cap Cities was a hodgepodge–but it was a well-run hodgepodge. ABC’s revenue was 3x but earnings were only 1.5x and the companies had similar market caps.

Part of the reason for the economic success was because Tom and Dan paid smaller salaries in dollars but high salaries in trust. Iger writes that some people left after the merger, “But we stayed because we felt so loyal to these two men.”

Why did Bob stay?

“If you stuck to your budget and behaved ethically, Tom and Dan gave you room to operate with independence.”

There we go.

Any situation is filled with different metrics and how – and if – they’re measured matters. Malcolm Gladwell talked to Bill Simmons about how Kawhi Leonard wasn’t drafted because someone thought he didn’t do well under pressure based on an interview. That’s the wrong metric. Tom and Dan paid less in dollars but gave more in autonomy. That mattered.

A decade later and things change for Iger. Disney buys ABC/Cap Cities and the Disney management model “was the opposite of all that.”

That’s not to say Disney was wrong. Strategy is context-dependent. For example, both Iger at Disney and Jason Blum at Blumhouse Productions have successful, profitable, acclaimed movies and both follow their own strategy.

For the next decade, Iger learned good and bad lessons from his boss, Michael Eisner. In the book he’s complimentary of Eisner, noting how he “re-founded Disney.” Eisner understood what Iger writes during his time as CEO: as Disney Animation goes so goes the company.

Charlie Munger commented on Eisner’s reign in his 1994, Worldy Wisdom speech:

That (pricing power) existed in Disney. It is such a unique experience to take your grandchild to Disneyland. You are not doing it that often. And there are a lot of people in the country. And Disney found that it could raise those prices a lot and the attendance stayed right up.

So a lot of the great record of Eisner and Wells was utter brilliance but the rest came from just raising prices at Disneyland and Disney World and through video cassette sales of classic animated movies.

Another positive lesson from Iger was being out in the parks. “I walked miles upon miles with him in advance of the opening of these parks—and in existing parks too— getting a sense of what he saw and what he was constantly looking to improve.”

This was something founder Walt Disney wanted all his Imagineers to do. Marty Sklar is the only person to attend the opening of every Disney park and he wrote, “In the earliest days of Disneyland, when everything was new for the guests and the Imagineers, Walt Disney decreed that every designer was to go to the park at least every other week and stand in the lines (we call them queues) to understand what our guests were experiencing.”

There are two ways of accumulating information about your customers; big data and thick data.

Walking and talking is thick data and it’s been used by Tariq Farid to create Edible Arrangements, by Carl Turner Jr. to build Dollar General, and by Tricia Wang to understand the fall of Nokia and rise of Apple.

Thick data is good but not perfect, so we need big data too. Big data is using base rates, a/b tests, and revealed preferences (actions over words). But both Big and Thick depend on the people being curious, something Michael Ovitz, Iger’s brief boss wasn’t. Iger wrote that it was “the wrong guy in the wrong place at the wrong time.” That same sentiment may be true for Eisner. After twenty years, some good, and some bad, the company needed new leadership and in 2005 Iger became CEO.

At his first board meeting Iger laid out his plan, “In so many respects, Disney Animation was the brand.” And the brand sucked.

Iger’s book is a great complement to Lawrence Levy’s book, To Pixar and Beyond. Levy was the CFO of Pixar through the IPO and the (2006) acquisition by Disney. What’s fascinating was how bad both companies needed each other.

This story is playing out today too as companies experiment with monetizing content. Making movies is a terribly hard business (hence Jason Blum’s angle). However, making movies and then selling character meetings (via theme park tickets), t-shirts, and stuffed animals is a much better business. Hence, The Pixar Business Story:

Iger met with Jobs to discuss the acquisition and recalled their meeting this way, Steve at a twenty-five-foot long whiteboard poised to list the pros and cons.

“Not unexpectedly, Steve was the holder of the pen, and I sensed he was quite used to assuming that role. He stood with the marker in hand and scrawled PROS on one side and CONS on the other. ‘You start,’ he said. ‘Got any pros?'”

Iger writes that he was too nervous and ceded the floor to Jobs.

“‘Okay,’ he (Jobs) said. ‘Well, I’ve got some cons.’ He wrote the first with gusto: ‘Disney’s culture will destroy Pixar!’…’Fixing Disney Animation will take too long and will burn John and Ed out in the process.’ ‘There’s too much ill will and the healing will take years.’ ‘Wall Street will hate it.’ ‘Your board will never let you do it…'”

In the book, Iger goes on longer and wrote, “Two hours later, the pros were meager and the cons were abundant.”

Jobs conducted a pre-mortem. While nothing is foolproof, listing possible failures improves the odds.  In the under-emphasized, Sleeping With Your Smartphone it’s called ‘tummy rumbles.’ Daniel Kahneman was praised at a conference to elevating this idea. Mauboussin calls ideas like this low hanging fruit.

Another thing Jobs and Iger did well was to argue well. “He could criticize me,” Iger writes, “and I could disagree, and neither of us took it too personally.” In once instance, Jobs said Iron Man 2 “sucked” and that the value resort,  Art of Animation was “crap”. Each time Iger reminded Steve that he wasn’t the target customer.

Joe Russo made Avengers: Endgame for Iger and Disney and talked about how he’s able to argue well with his brother.

“We’ve fallen into these roles and have for years, where, when an idea comes up one of us will just assume the contrary position so that we can vet the idea and we’ll argue about it for an hour and the idea either sustains or we come up with a better idea.”

“It’s to the point now where people will freak out because we’re very passionate – and Italians. When we’re in a room it’s like, ‘No, that’s bullshit, it’s never going to work.’ Then five minutes later we go get lunch.”

“With family, it’s easy to forgive and forget when you walk out the door.”

In addition to the Pixar acquisition, was the Marvel, Lucasfilm, and Fox purchases. Each one repeated themes from Brent Beshore’s book (and podcast!) The Messy Marketplace. What haven’t you told me that I need to know? What part of this is a hustle? Who’s ego is attached here and are they ready to sell? Each one is great.

It’s not a great book in the way Shoe Dog is a great book but it’s solid. If this were a Disney movie it’s Tangled, a strong effort full of interesting moments and something the author should be proud of.

Thanks for reading. This post is a podcast too: iTunes, Overcast, or Soundcloud.


Hermann Simon

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

Part-of-the-reason See’s Candy is a great business for Warren Buffett is because of the pricing power. We’ve also noted how Restaurants sometimes do, and sometimes don’t have pricing power. A good brand, said Pat Dorsey, is worth maintaining only if it confers pricing power.

If the price is so important, why is it discussed so little? Hermann Simon recalled walking into the Harvard bookstore and “at least 100 were on advertising (and marketing) and how many were on pricing? One. My book, Confessions of a Pricing Man.”

Today we’ll look at Simon’s book. To get a sample there’s this 2017 talk.

Pricing power may be a clear idea, frequently emphasized, but the real-life implementation is anything but. Pricing is a mix of psychology, practice, and consumer preferences that changes with time. Simon addresses this early noting “…for many goods and services, prices have many dimensions.” These go by different names like premiums, fees, taxes, surcharges, subscriptions, etc.

Whatever it’s called, the only thing that matters is perceived value. How valuable a customer perceives the good or service determines how much pricing power business has.

Much of Simon’s work comes back to figuring out what-job a customer hires a business to complete. Before Adam Savage and Jamie Hyneman starred in Mythbusters, they were commercial, literally commercials, artists for companies like Coca-Cola.

In his book, Every Tool is a Hammer, Adam Savage writes about one particularly difficult job for Toys “R” Us. They’d contracted for a certain effect over a series of commercials but the effect wasn’t working. Savage wrote, “When it came time to set it up for filming, a key component exploded into three separate pieces. It was immediately obvious to Jamie and me that the rig was DOA.”

According to the letter of the contract, Jamie and Adam failed the job they were hired to do. But that’s not right at all. A company didn’t hire them for any particular effect so much as their expertise creating effects. With forty-plus people standing around the hired job became clear: effectively and efficiently create something cool.

Savage explained, “Jamie’s response to this incredible pressure was both surprising and inspiring. He didn’t show any emotion, neither perturbation nor anger, not even nonchalance. He just calmly looked a the producer and said: ‘To get this done by the end of the day I figure we have three options…’ Then he carefully laid out three brand-new solutions, complete with the pros and cons for each as they related to the original storyboard.”

One spectrum to think of jobs-to-be-done is the convenience to experience one. A business succeeds when they identify which their customer prefers, providing it, and then promoting it. Simon wrote, “…value alone does you little good unless you can communicate it successfully.”

A techno-case of what job is to compare the Apple glass keyboard with the BlackBerry chicklet keys. An interesting case of what job is the McDonald’s milkshake.

Once a business creates a solution they need to tell their potential customers about it. At a talk in New York City, Lee Child was asked about the press junket. Child said the book tour was necessary because he’s often flagged down by his ‘biggest fan’ and asked when the next book will be released. “Eighty percent of the marketing is just reminding people the book is out,” said Child.

Like any system with a variety of variables, the price fluctuates. There’s a stark difference in pricing power between high-dollar-Jonny hotels and working-Joe hotels even though both provide a bed, a roof, and a hot breakfast. One tool for pricing power is how it’s framed.

The German National Railway wanted more riders but they had a problem. When consumers compared the costs per-mile between driving a car and riding a train, the car won out. It was cheaper to buy gas than sit on your–butt.

However, that’s not the only cost of driving. There’s also insurance, wear-and-tear, and opportunity costs and depreciation. However those costs aren’t salient and when things aren’t salient people have a hard time coming up with those other factors.

Faced with this kind of thinking, The German National Railway had two options before them. They could make the automotive costs more salient, or they could make their costs less so. They chose the latter and created the BahnCard which accessed discounted tickets. Now consumers compared the cost of gas to the price of a discounted ticket(!) and neglected the sunk costs of each.

Discount brands should unsilence salience. 

The price depends on the context.

For Veblen goods, people want to pay more. Sometimes people pay more because they’re unsure of the value and slide into you get what you pay for thinking. Sometimes the price is a placebo, ask anyone who chooses Advil instead of Ibuprofen or Diet Coke instead of a store brand.

Instead of ferreting for a silver bullet solution, a business should make a lot of small bets.

Simon published his book in 2015 and included research covering the span of his career in the industry. He praised Gillette for innovating with new razor blades, maintaining pricing power, and succeeding at a high price.

And the effects of this moment in 2012 had yet to ripple to the far edges of the pond.

What changed was the job to be done. The internet reduced transaction costs. Why for example, does Apple have pricing power? Simon writes:

“A strong brand, a cool design, user-friendliness, and system integration. That combination resulted in much higher customer-perceived value, higher prices, higher value, and astronomical profits.”

And in 2010 the same could be said of Gillette. Then the perceived value shifted, as customers wanted more convenience.

One subset of pricing power is price differentiation, which Simon writes, is “high art.” If pricing relies on this weird mix of contexts then it makes sense that perceived value is:

  • different for the same person at different times
  • different for different people at the same time

This is part-of-the-reason for movie windows and why things bundle and unbundle. Chris Dixon wrote in 2012 “The benefits of bundled pricing are proportionate the buyers’ variance of preferences for the goods.” Simon writes, “The driver behind (successful different price differentiation)…is the fact that individuals at different times have different levels of willingness to pay.”

Like much business advice, this is easier said than done. Much of business is making the trains run on time, not studying topographic maps to consider and test new routes. However pricing tests can be quite valuable. Marc Andreessen wants businesses to charge more, in part to see how viable they really are.

Profits sustain businesses and the best way to earn more is to raise the perceived value and raise the prices.

Thanks for reading.



Zach Lowe and Kevin Arnovitz

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

There are few basketball commenters more thoughtful than Zach Lowe and Kevin Arnovitz and they paired up for an episode of ‘most interesting’ NBA teams. We’ve looked at one of their conversations from 2017 that asked, ‘What if Jeff Bezos were a GM?

Making predictions is difficult when we extrapolate linearly. Lowe said, “With (Celtics’s) Brown and Tatum we do this thing where we expect linear development and it doesn’t happen and then we get down on them and one of those guys is going to pop this year.”

The same reason people get down on athletes for bad years is the same reason Jason Blum is in business. Blum says that he likes directors with good past movies despite their last. This is Blum’s version of Moneyball, he explained:

“My Moneyball approach is that this guy writes and directs Saw for $800,000. He does two movies for fifteen and twenty million dollars that aren’t good. He can’t get hired. He birthed Saw, a cultural phenom and he can’t get a job. My Moneyball approach is instead of looking at the sexy statistics to look at the work.”

People over-index on recent and optimistic data instead of the more accurate base rates. In his conversations with Lowe, Sam Hinkie explained this idea.

Metrics only matter if we measure the right stuff. Why, for example, Arnovitz wonders, do the Portland Trailblazers exceed their projected win total each year? Why is some data down on them this year? “What is it that these metrics are seeing about the Portland Trailblazers that I’m not seeing?… I still see a hyper-competent team that understands how to orchestrate a hundred possessions a game of offensive basketball.”

What the metrics might be missing is the culture.

The Patriots don’t measure sacks as much as they measure pocket size. Kawhi Leonard didn’t interview well before the draft, should that matter? Only the first four-thousand of your ten-thousand daily steps make big strides.

In much the same way we make predictions using the first (and easy) things that come to mind we tend to measure the first (and easy) things. Baseball’s Moneyball began with walks but teams don’t rely on those numbers anymore.

Numbers are ‘cut and dry’ but the world they describe is anything but.

Market mechanisms set prices, and evaporate good deals. Lowe 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.”

Investors like to ‘fish’ by themselves and venture capitalists love to visit college campuses to talk to students. Fewer people means less bidding.

‘Peak Uber’ was in 2012, before they had to compete with Lyft. Moneyball was published in 2003 and now those same advantages don’t work.

Lowe and Arnovitz are thoughtful and these first three points demonstrate the holistic mindset required. It’s never just one thing. The Celtics had to make wise predictions, measure the right things, and avoid the market to trade down to draft Tatum.

Alpha erosion is the cousin to market mechanisms. Once a rival is familiar with your advantage they’ll work to reduce it. Lowe said, “Last year the sheer speed of how they (the Sacramento Kings) caught a lot of teams off-guard. Everybody knows that’s coming this year.”

Both Annie Duke and Nate Silver rode the poker wave before it got too competitive. Daryl Morey annually complains to Bill Simmons that their draft board looks more similar to the draft order. Venture capitalists pile into companies once they see something that works. It’s just the name of the game.


Thanks for reading.

Rogan and Jillette

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

“The ability to define a term in such a way to be cynical or funny is a measure of your own skepticism. Unless you can do this, you don’t understand the weaknesses in what the person is telling you.” Jason Zweig

We are comedy fans, and not just for the laughs. People like Judd Apatow and Jenna Fischer have helpful, interesting, and insightful advice, lessons, and stories about living, working, and thinking better. Penn Jillette does too.

These notes are from Jillette’s August 2019 podcast with Joe Rogan and focus on one idea: The Entertainment / Information Blend.

There’s a tag in my notes called “media b.s.” and it represents the media as a third person view in a first person world. Sometimes the change in perspective helps, sometimes not, especially not when the entertainment/information blend is too much E and not enough I.

In his study on expert judgement, Phillip Tetlock noted, “the more accurate forecasters tend to bore people.” Investors see this with bulls, and bullshitters. Ben Carlson said a lot of media forecasting is about “taking a victory lap.”

There’s a place you’ve might have seen this. Jillette said:

“I want to say this very clearly. I thought he (Donald Trump on The Apprentice) was wonderful at his job. If you had someone who was actually a business person on that show, it would be the worst show in the world because Bill Gates would make proper decisions and there’d be no surprises. You want someone capricious and crazy with no filter.”

That’s a lot of E, not a lot of I. But it’s not just politics.

Richard Jefferson gave the backstory to USA basketball. Ed Catmull gave the backstory to ‘new Steve and old Steve.’ Paul Sonkin said that he reads the WSJ just to find the stupidest story. Sam Hinkie controlled everything but the story. Andre Agassi wrote that image is everything wasn’t a thing until it was.

Why the E stories and not the I stories? The E is so much better, it’s like candy. Penn and Rogan know this because they’ve trained in the comedic arts.

Joe Rogan has a history with conspiracies and he and Penn talk about the moon landing. Jillette wanted to convince Rogan that he was wrong, the landing did indeed happen, so he called in an expert. It would be on Penn’s radio show. He planned it to be a conversation between adults.

Penn reached out to Phil Plait but warned him, “have your ducks in a row because Joe’s really good…your problem is that he’s a comic and he’s better at talking than you.” 

Like a MMA fight we have our two corners with different skills. Rogan’s got the E, Plait the I.

Fights have decisions and ‘our team’ influences how we see a game. Teams are a mental shortcut. Joe was ‘team conspiracy’, his identity footprint was (partially) tied up in Plait being wrong.

When Plait spoke Rogan entertained, and because he was “better at talking”, Jillette refereed at the end and reminded listeners we did in fact go to the moon.

Changing our minds is difficult. Sweet-talk stories stick with us, become familiar to us, and nestle into our minds. Jillette commented on the hard work required to change your mind, “Usually when I’m against something it means I don’t understand it.”

The last large chunk of the podcast is about education and life-long learning. What really matters is being curious. For someone who’s curious the spectrum of entertainment to information and back again becomes clearer. Like the twist in The Usual Suspects or The Sixth Sense, once someone’s aware of the blend they see it everywhere.

Thanks for reading, however there’s caveat to all this. I write an email that exploits our love of stories. They’re the butter on our popcorn, the sweetness in our gum. In the right proportions stories help, so sign up.

Richard Shotton

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

Richard Shotton remembers the time and place. He was in the back of a cab and in a sour mood. He’d finished a trainwreck client meeting. To mentally escape he opened a book and read the story of Kitty Gervase. Shotton entered the book, met the Bystander Effect and his whole life changed.

Bystander effect, he could use this. Shotton was spinning his wheels to increase blood donations. Incentives did matter, to a point. He couldn’t pay people more, or at all really. Goodwill helped too, but not enough. Maybe some of the things in this book might help.

Shotton recalled: “Why don’t we tweak the creative? Why don’t we stop saying blood stocks are low in England and start saying blood stocks are low in Birmingham, so please donate.” That wording change led to a 10-15% increase in local donations which added up to a rise in donations across England.

Bingo, behavioral science works. For the last fifteen years Shotton has studied behavioral economics, and wrote The Choice Factory. We’ll look at a handful some of his ideas.

Avoid HIPPOs. Some organizations have decision making obstacles known as HIPPOs, where the Highest Paid Person’s Opinions rule the day. Behavioral economics gets around that by testing, seeing what works, and iterating.

“Too much of marketing is still based around the highest-paid person in the room or the most eloquent person,” Shotton said, “Behavioral science is a significant step forward.” 

Richard Thaler agrees because, “there’s fantastic data, you can test anything. You also have very crisp predictions. We were able to test ideas and disprove them.”

Image result for in god we trust all others bring data

Besides Highest Paid, Shotton warns that the most eloquent can also dominate conversation. This was a problem Penn Jillette had when he wanted to push Joe Rogan away from his lunar landing leanings.

Jillette knew just what to do. He called up @BadAstronomer and said, “Come on my radio show and talk to Joe Rogan about the moon landing. I just want to warn you, have your ducks in a row because Joe’s really good…your problem is that he’s a comic and he’s better at talking than you.”

Rogan came on the show and crushed it. The conversation was so lopsided that Penn chipped in at the end, ‘just a reminder folks, we did land on the moon.’ That’s the power of eloquence.

Behavioral economics can bypass those conversations with evidence–but this can be tricky. Unlike physics psycholog is messy.

That’s okay, says Rory Sutherland. We don’t need peer-reviewed, double-blind, statistically-significant information. We just need a hunch to try.

When Shotton works with clients he says, “We pick the bias, the effect, the experiment that we think is most relevant for our particular client and apply that one.”  In behavioral economics the biases are the tools, “…it’s a collection of biases, and sometimes seemingly contradictory biases. But the brilliance is, whatever brief you have there will be a useful bias.”

How does someone choose? Make small bets. “There’s lot of experiments that run through the book and one of the eye opening moments was that research did not have to mean a $10,000 budget and 6 weeks of work. You could do a fast, frugal, and prudent approach over a day or two running real-life tests.” 

Small bets are how Zappos began. Small bets got 90 Day Fiancé on TV. Small bets is how Pixar makes movie changes.

Shotton tested his guesses on colleagues. David Kelley said to think of small bets like brushfires. Start them all over in weird places, and then double down on what catches. Some ideas for where to start the fires are with habits, incentives, and expectations.

Habits. “Changing behavior is very hard so you want to pinpoint these moments of flux.” 

Our post on actions after windfalls and baby steps hit on this idea orthogonally. It’s mostly in moments of transition that people change.

Principal Agents. Making small bets within organizations can be difficult without the right culture, which shapes the incentives. In their conversation, Rory Sutherland tells Shotton about the difference between brand owners and brand importers:

Culture style starts at the summit; Amazon’s culture is driven by Jeff Bezos. Netflix’s culture is driven by Reed Hastings. Seinfeld’s culture was driven by Larry David and Jerry Seinfeld.

Expectancy theory. “The enjoyment is partially determined by our expectations. If we think the product is great it’s more likely that it will be.”

Framing matters a lot. When Annie Duke – a professional poker player – taught non-professionals how to play they didn’t like it. It was too much folding and watching and not enough flopping and topping she told Barry Ritholtz. “What I found was that people don’t like winning in a mechanical way.”

They expected one thing and got another. Duke reframed the situation. Instead of playing the mechanical way all the time, she had them choose to play that way. In teaching her players Duke reframed their expectations. In teaching Duke reframed their expectations from bravado to autonomy.

Books. Shotton is an avid reader and suggests some of his favorites.

Decoded. “A big fan, another book about behavioral science.”

Rory Sutherland. “I’m a big fan of whatever Rory Sutherland does…he’s frankly a genius. He’ll take the same biases and insights that we all read about but his mind is so fertile he’ll leap in completely different directions.”

Everybody Lies. “Written by an ex-Google data scientist and a brilliant example about how if you ask people behave the way they do they will give you misleading answers.”

Thanks for reading. If you want more book suggestions I send out the ones I enjoyed once a month.

Bill Gurley

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

The podcast with Bill Gurley and Patrick O’Shaughnessy about direct listings and initial public offerings was financially, technologically and psychologically interesting.

I don’t know if Gurley’s emphasis is appropriate, but it’s clear what he needs to do, reframe the situation.

Gurley and O’Shaughnessy expect that as people get reps, direct listings will appear more normal. That’s the key for Gurley’s focus. He doesn’t need to “think slow” but rather “think fast.” Kahneman’s book by the same name includes the idea that what-you-see-is-all-there-is. Humans evolved to think like this because it works. It’s effortful to compare any two things and it’s doubly so for something brand new.


“Thinking fast” we use frames to form reactions. Direct listings need better framing. Here are five ideas about how.

Time as framing. Gurley is upset because $171 billion dollars has been lost to underpricing IPOs. “The core process of how we pull off an IPO was designed four decades ago.” Gurley is pushing against we’ve always done it that way logic.

Let’s not immediately dismiss we’ve always done it that way because traditionally it works, it’s why we’ve always done it that way. To dismiss an idea we must head to the woods and ask about this Chesterton Fence. For IPOs we should ask, ‘What’s different?’

As Michael Munger explains, the answer is transaction costs. Munger even uses similar language to Gurley to describe the sharing economy, “What’s being sold is access to excess capacity.”

Solution: Proponents of a direct listing should compare it to other technologies that reduce transaction costs. This should be easy enough, falling transaction costs are everywhere.

Reputation as framing.

Gurley compares IPOs to big southern weddings. That sounds about right.

“If you’re going to be anxious (because you’re the under skilled player) you’re very likely to fall back on tradition because it’s the safest bet. It’s like the old saying, ‘You don’t get fired for buying IBM.'”

Reputation is like an account. Do different things and the balance goes down. Succeed and the balance creeps up. Fail and the balance plummets.

In a foreword for a book about Warren Buffett, Howard Marks lists all the things that makes Warren a great investor. He’s smart, he’s unemotional, he’s focused, etc.

However, there’s something Buffett has that’s much rarer. Marks told Tim Ferriss, “he’s not afraid of getting fired. He doesn’t have to worry about the interim consequences of error. Most people do.”

Solution: Convince entrepreneurs that a direct listing is the last stage on their pioneering journey. They’ve already succeeded by being different and this is the final step.

Brand as framing.

Patrick O’Shaughnessy is a good podcast host because he lets the other person talk. Undoubtedly while listening to Gurley, Rory Sutherland’s ideas came to mind. Patrick doesn’t bring it up, so I will.

Sutherland was the first to point out that people don’t buy brands because they’re good. People buy brands because they aren’t bad.

Gurley says that the best brands in banking (Goldman, Morgan) are the worst pricers of IPOs–leaving the most money on the table. That fits Sutherland’s theory. Brands, Rory writes, are “insurance against disappointment.”

Limiting downside rather than optimizing upside often make sense. When he travels to London to catch a flight, Rory traverses the backroads rather than the highway. The trips are longer on average but avoid outlier incidents. A highway accident, though rare, will create a delay where he’ll miss a flight.

Solution: Every weakness is also a strength and every strength a weakness. Brands which are classic, leaders, and large are also old, rent-seeking, and immobile.

Money as framing.

The problem with the IPO is too much money. O’Shaughnessy said, “Everyone is showered with money too, so they feel like they’re doing pretty well.”

On an absolute basis, Gurley is right but on a relative basis, he’s fighting human psychology.

Behavioral economists make careers noting that humans don’t calculate expected values. Would Zoom’s Eric Yuan introduce any amount of risk (DL vs IPO) to go from being worth 3 billion dollars to 3.2?

Loss aversion and heuristical thinking isn’t the only issue here. There’s also the diminishing value of money. Remember this idea each sports off-season as athletes prioritize teammates, situations, and locations over more money.

How can someone ‘give up’ millions of dollars? They’ve already got millions. As the billionaire who wasn’t Chuck Feeney noted, “You can only wear one pair of shoes.”

Solution: Reframe money as time or per person. Gurley praises the work of Daniel Elk for the Spotify listing.

Media as framing.

If an IPO is underpriced and ‘pops’ then, “the press reinforces this and thinks the pop is good.” It certainly seems good

Ben Hunt warns of the “constant hot take culture” and references The Island of Blue and Green-eyed people. What matters for the islanders, the hot takes, and Hunt’s sheep is what everyone thinks everyone thinks. Who helps tell the story? The media.

Sometimes though, the media is wrong. This error is most glaring when the delta between media-knowledge and insider-knowledge is largest. The management of this framing is the reason Sam Hinkie lost his job but Jeff Luhnow kept his.

When the media frames things one way (Hinkie’s an idiot, IPO pops are good) other people adopt that as their frame too and it’s hard to change.

Solution: Direct Listings need a better story around them. Seth Godin said that global warming was a terrible story and that “atmosphere cancer” told a more accurate one.

Framing matters. I’d wager we’ll hear a lot more about this from Gurley in the future. He’s trying to reframe how people see things. Now you’ve been reframed too. Thanks for reading.

Simmons and Gladwell

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

Are Bill Simmons and Malcolm Gladwell good decision makers? Yes, yes they are. In this episode we’ll explore how they make good decisons, the narrative fallacies that trip us all up, and why understanding does not imply aggreement.

Listen: iTunes, Overcast, or Soundcloud

The biggest issue is that the world has always been what David Epstein calls Wicked. This is fine except people operate as if it’s Kind. It’s a fisticuffs face-off between the complexity of the world and the simple humans.

The episode touches on four points about how we can make better decisions.

  1. We can trust computers, when relevant, like in the Deep Patient Study.
  2. We can remind ourselves and others that retweets are not endorsements and understanding is not agreement.
  3. We can built our toolboxes to have more problem solving tools.
  4. We can choose the right (and inexpensive) metrics like Rory Sutherland, Bill Belichick, and Billy Beane.

Thanks for listening.

Kara Swisher

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

Kara Swisher joined Barry Ritholtz on the Masters in Business podcast. What a two-hour trip. We’ll touch on just a few things.

Structure. In physical spaces there’s no ‘good’ or ‘bad’ but low-friction and high friction activities.

An example is automotive infrastructure. Roads, intersections, and bridges are built for the scale of cars. Go see for yourself. Or read about it. Or search for it. Physical low/high friction is easy to see but this exists everywhere.

Twitter, Ritholtz and Swisher note is good for a certain kind of communication by a certain kind of person. They focus on politicians but that again is just an easy to see case.

An unnoticed but relevant instance is organizational structure. Swisher co-founded startups with angel investments but also operated in a skunk works arrangement within The Wall Street Journal. Now, ‘skunk works’ sounds cool and the original’s conent looks cool but it may not be the best model.

It’s not about imitating models from Google, Lockheed, Goldman, Hollywood, or sports. It’s about implementing models with the best friction coefficients for your organization.

We wrote about how the skunk works model can work. Swisher noted the startup and the skunk works model were “good and bad in different ways.” It all depends on what actions the structure makes low friction and which it makes high friction.

In a previous MIB episode, Robert Cialdini told Ritholtz how a restaurant increased their friction to decrease their no-shows.

“A hostess changed from, ‘Please call if you have to change your reservation,’ to ‘Will you please call if you have to change your reservation,’ and she waited for people to say ‘Yes I will.’
It reduced no-shows by 64%.” 

Robert Cialdini

Physical or organizational structures aren’t good or bad, they just make certain actions easier or not. One specific example is a decentralized command. As Ray Kroc said, the person closest to the problem is the one best suited to solve it. Yes!

And no. Teams need coaches, units need commanders, and newspapers need owners. Swisher said that Katharine Graham (and her family) and Jeff Bezos have done a good job owning the Washington Post because “they were not twitchy owners.”

It takes a balance of intervention and trust that can be hard to find. David Chang said one of his restaurant launches bombed because “I fucked up by not editing enough and not finding that balance. I handed it off too completely to them. I didn’t put them in a place to succeed.”

Good decentralized command requires the right people. Sometimes that means great hiring, sometimes it means great training, sometimes it means both. It depends.

When Swisher and Ritholtz both (independently) thought podcasts were a good idea they were both (independently) told podcasts were not a good idea. One way to forcast these kinds of will-they-won’t-they-work situations is to ask if a version of it is already happening.

Tony Hsieh was doubtful about e-commerce for shoes. “To me it sounded like the poster child of bad internet ideas.” But he went along (Hsieh was bored, he didn’t even fully vest after his last startup was acquired) and asked the person pitching him how this idea could work.

‘It already works!’

‘Huh?’ Hsieh thought. He was in the internet and no one was buying shoes. ‘It’s not on the internet,’ the person pitching said. It’s in catalogues. People order shoes without trying them on all the time.

Swisher was told podcasts wouldn’t work because ‘millennials like snackables’ and two hours is too long. Well, no. As Zappos was to catalog shoes, podcasts are to talk radio. Barry added, “The 92nd Street Y has been doing that (live interview and talk shows) for decades.”

Kara has done a lot of podcasts with a lot of technology leaders. She said that Marc Andreessen, “is actually one of the people who will go back and forth.” Andreessen likes to argue well. John Hempton too.

Swisher also got a chance to interview Steve Jobs and said, “I really enjoyed interviewing him. What an interesting and complex person…he was just a complicated and interesting person. A lot of people try to cartoonize a person, ‘He was mean to people!’ Yeah, but lots of people are mean.”

Ed Catmull said almost the same thing about Jobs. Ken Kocienda too. Why does the ‘mercurial’ (and it’s always ‘mercurial’) image of Jobs remain? It’s a tasty story. Our POV 40 IQ emails regularly remind us of the work required to break what Tyler Cowen warns about:

“You have to worry about many more things that might be true and it’s a huge burden and people don’t like it. They like to push that stuff away, keep things neat and easy to deal with, what I call the philosophy of once-and-for-all-ism.”

Swisher is great because she argues well, because she avoids once-and-for-all-ism, and because she recognizes the structure we live within. Thanks for reading.

Scott Kupor

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

Author of the 2019 book, Secrets of Sand Hill Road, Scott Kupor spoke at Berkeley about being a venture capitalist, the two most important things for a VC investment, and the role of luck.

Education. Kupor wanted to be a lawyer until he worked as one. His first summer internship showed that practicing was quite different from studying. He’d seen this before. As an undergraduate he’d transferred from Wharton to Stanford and “The best thing was that at Stanford I was kind of forced to, because of the general curriculum, to do some stuff in other areas. I took a religious studies class and I took some philosophy classes for the first time.”

Kupor, like a lot of young people, overindexed on certain parts of education.

  • Learning is good, to a point, and then doing is better.
  • Focus is good, to a point, and then broadening is better.

Tyler Willis saw this too, noting that he became a wiser person when, “I became a fairly voracious reader. I read a lot of nonfiction to understand different people’s opinions about different things. I read history, biographies, a lot of varied topics.”

Kupor agrees, “If I could do it (school) all over again, the extra hour I’d might have spent at the library invested in relationship development.” School is great for the things you’ll know, the people you’ll meet, and the access you’ll have.

Luck. Kupor was lucky. “The only reason I got introduced to (Marc Andreessen and Ben Horowitz) is because I knew somebody who took a job who said, ‘Hey these are interesting folks, you ought to meet them.'”

How to get an investment from a16z. We’ve covered founders Marc Andreessen and Ben Horowitz quite a bit on the blog but Kupor gives a nice overview. First, entrepreneurs should consider if they want an investment. Money is fungible so what else does a company bring? “There’s a lot of places you can get money (so) at some point you wanna be able to say, ‘Look, I’ve seen the company building process through my own eyes and how I can be valuable to you as a new CEO.'” Contrary to Kupor, David Heinemeier Hansson provides a different perspetive on the value of venture.

If a16z is the right place, entrepreneurs should prepare three things.

  1. The idea maze. Andreessen told Barry Ritholtz that “It’s this incredibly deep and elaborate process of thinking,” and the best entrepreneurs get frustrated with VC’s questions because they’ve already figured that part out.
  2. The market size. “A cardinal mistake is investing in something that turns out to be a good business in a small market.” Another mistake is when “you intuit from your own experiences.” Kupor and co. missed investing in AirBnb’s ‘A’ round because they thought the market was small, college kids on couches.
  3. Customer acquisition costs. “The major conundrum with consumer companies today,” said Kupor. Though fellow a16zer Alex Rampell has spoken at lengths about approaches to this issue.

Intellectual humility. “Your job is to know what’s happening day-to-day in your business…but I think it’s perfectly reasonable to say, ‘I’m not sure if now is the right time to bring on a head of sales or upgrade from my buddy running engineering to someone with more skill in that area.'”

In marketing there’s the expression, half of my marketing is wasteful but I don’t know which half. In decision making there should be an acceptance of the corollary, half of what I know is wrong but I don’t know which half.

No one expects you to know everything, Kupor explains, but you should know the difference between the things you should and don’t.

Thanks for reading.