The Waiter's Pad

Brian Koppelman (@BrianKoppelman) and David Levien(@DavidLevien) joined James Altucher (@JAltucher) to talk about the creative process, power lunches, and making Billions (their new Showtime show).

Not until I found myself taking notes did I realize how much I enjoyed Koppelman. He’s movies are good, but it’s his podcasts that I really like. He’s talked with Altucher twice before (here and here) but has also done some great interviews of his own like this one with Seth Godin and this one with Amy Schumer.

These notes will aim to answer: how do you write a great television show? Koppelman and Levien are on to promote their new show and talk about the creative process, so it makes sense that we approach it from that angle. Remember though, the point of the notes is never just literal. This isn’t about just making a great television show. It’s about making anything.

How you write a great television show is just a proxy for how you make a great anything.

Amanda Palmer wrote that we’re all creators of one kind or another. Your creation is similar to Koppelman’s and Levien’s in more ways than you know.

Ready?

1- Partner up.

Koppelman and Levien have been writing partners for a long time, and have worked together on Rounders, Ocean’s 13, and The Illusionist. Koppelman says that the partnership pays off when they’re writing and need to switch parts or challenge each other. Someone will be stuck on something, they’ll switch, and the problem gets worked.

This happened while writing Billions. One episode script came in that wasn’t as good as the duo hoped, and they had to punch it up at the last minute. The work wasn’t easy, but there’s a thrill in doing it with others. Other smart people also suggest a partner:

Philip Tetlock found that good forecasters were even better in groups.

Seymour Schulich wrote, “the key to a successful partnership is mutual veto power. If you cannot agree on a major proposition, you don’t do it.”

Charlie Munger said, “I hardly know anybody who’s done very well in life in terms of cognition that doesn’t have somebody trusted to talk to.”

Peter Thiel said, “a lot of these companies aren’t solo efforts of a god-like person that does everything.”

It’s easier not to go it alone – and you’ll do better work.

Once you find someone to work with, you both need to build career capital.

2- Build career capital.

“Career capital” comes from the Cal Newport book, So Good They Can’t Ignore You, and is the idea that rare and valuable jobs require rare and valuable skills.

Koppelman and Levien have the career capital to create a show like Billions. They’ve put in the time and effort to have the money and experience that allowed them to write the show. Koppelman notes that they’ve worked with Paul Giamatti on The Illusionist in 2006. If they didn’t do good work then, would Giamatti work with them now? That’s one unit of career capital.

This model for career capital is everywhere. B.J. Novak worked with Bob Saget and “stunk” at stand-up for 18 months before getting hired for The Office. He earned career capital. Casey Neistat made movies and tv shows before vlogging. He earned career capital.

Newport writes that once you get career capital you can spend it on career parts you want. More/less travel. Flexible hours. Location. Koppelman and Levien used their capital to write a TV show for Showtime.

If career capital is something you want, I’ve got good news. It only takes two things. Time and effort.

3- Start early because it takes time.

It takes time to create something, so you may as well start now.  Levien says that they started working on Billions in 2013 (which was only possible because of the years of career capital they built before that). It’s been three years of writing, filming, and – now – promoting and they still don’t know if more than one season will be made.

As the Tom Petty song goes, “the wait is the hardest part.”

“It feels brutal when you’re toiling away in obscurity,” David Levien said in his first interview with Altucher. Amy Schumer looked around and wondered why her friends were getting the good offers and she wasn’t. (James Corden had this exact same experience.)

Phil Rosenthal worked odd jobs around New York City before producuing Everybody Loves Raymond. Gary Vaynerchuk uses the metaphor jab, jab, jab, right hook to explain that it takes time. Give, give, give and then ask, explains Vaynerchuk.

Things take time, and you can’t rush that. Charlie Munger was once asked, “how can I become like you, except faster.” You can’t Munger replied. Instead you need to “slug it out.”

As you start this process, start to “write more than words.”

4- Write more than words.

“The struggle in the writing room, is getting people not to write just words.” – Garry Shandling.

“These are not just jokes.” – Steve Carell to B.J. Novak.

Consistently doing good work requires deep understanding. “(The story should) communicate the themes in every way,” Levien says about the different parts you see on screen.  

Altucher says he saw this when he was on the set. He noticed that the director was shooting a car scene over and over again and then it clicked. The director wanted the car to come out of the parking lot a certain way because the person driving it would do that. Ditto for how he shot wide or tight.  

Novak was surprised when Carell said, “these are just jokes.” “Yeah,” Novak told Tim Ferriss, “that’s what do, we write jokes.” Only later did he get it. It wasn’t just the jokes. It was more than that.

Stephen King addresses this (vis a vis authentic dialogue) in On Writing:

“The Legion of Decency might not like the word shit, and you might not like it much, either, but sometimes you’re just stuck with it – no kid ever ran to his mother and said that his little sister just defecated in the tub.”

That’s more than words. It’s the stuff below the surface.

There’s a great part (25:30) of the podcast where Koppelman and Levien tell Altucher about a dinner with a billionaire. They pick a restaurant and the guy changes it to his favorite place at the last minute. The place is pricy. Then they order wine, and it gets really pricey. Their dinner bill is over $2,000. “This was a guy smart enough not to do anything on accident,” Levien says. Koppelman adds, “for many of these people each exchange has a winner and a loser… most of us don’t think of winning a dinner.”

Their interviewee needed to “win dinner.” He felt (they speculate) that because he was giving access, he needed to get something in return, and it needed to be good.

This person, Koppelman adds, isn’t “bad” or “good.” They’re a person. They contain multitudes.

Koppelman says, look at someone like Mark Cuban or Marcus Lemonis. Those guys are rich and take over businesses, but we don’t see them as “bad” – why? That’s the question Koppelman and Levien want to unearth.

Ideally as you write, “you want the people leaning left and go right,” Koppelman says. B.J. Novak said this too, that his goal is to have the punchline right in front of you the whole time.

To do good work you have to understand more than just the work. You have to know the why and how. The psychology of a person and macroeconomics of the economy.

If you can build valuable career capital by doing good work over a long period of time then you have an option about options.

5- If you can, keep your options.

Levien and Koppelman have career capital (#2), that means they can have optionality. For Billions they wrote the script on spec. They had two options.

• Someone could buy it and make the pilot. or
• No one would buy it.

In the interview the duo note that if they had even more career capital, they could have had actors attached to the script and then they could have a third option:

• Someone could buy it and make an entire season.

This spectrum, (maybe, one episode, one season) is important to Koppelman. There’s the financial compensation and there’s the I made this, I said something compensation. “The work felt important and satisfying,” Levien explains.

It reminded me of what Marc Maron told Judd Apatow,  quoted in, Sick in the Head:

“When you see a movie that Sean Penn directed, you realize he’s not fucking around. It’s like listening to a Nirvana record or something. This is not a job. They have something to say. And in comedy, the people that we like the most, when they score they have something to say that’s important to them. And to me, that’s what I’m always looking for.”

If you have optionality in your career then you can have the financial and personal rewards.

But you don’t always get this option to say what you want to say. You have to work for some options.

Chris Dixon maintains optionality with prorata rights. Scott Adams keeps optionality with his friends. Ryan Holiday keeps optionality by not signing a book deal with a publishers. If you can, keeping your options open is good advice.

There’s one final step to make a great show.

6- Work (really) hard, and pray.

As with anything else, for Billions to succeed Levien and Koppelman need some luck. Altucher says the show is good, and Koppelman and Levien are proud of it, but luck matters.

Mellody Hobson was lucky with her purchase of Madison Square Garden. Cliff Asness never rules out the role of luck. Kevin O’Leary said, “life is very serendipitous.” 

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That’s all it takes.

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Thanks for reading, I’m @mikedariano on Twitter. Want to catch up on the posts, The Waiter’s Pad: Volume 6 is available for purchase here. You can also donate a few bucks here. Also, get in touch if you want to work together. I’m looking for some creative partners.

Mellody Hobson joined Ben Horowitz (@BHorowitz) on the a16z podcast to talk about business. Talk may not be a strong enough word. Lecture? Preach? Command?

Whatever it was, it was good. Her ideas, examples, and experiences are almost too good. These notes will not be good. I mean, I’ll do my best to write them, but the audio is so very good.

Have you ever been in a new city with a walkable area, and don’t know where to eat? Most of the places will have their menu outside and you can at least glance at it, guess if you want to eat there, and eventually pick something. That’s what these notes will be. In the non-stop online buffet, this is a menu advocating (begging) that you listen to Hobson and Horowitz.

One quick note, Horowitz is the author of The Hard Thing About Hard Things, a book I was surprised I liked. The book warranted its own post where I looked at: lead bullets vs. silver bullets, complicated vs. complex systems, and when to act.

Okay, ready for Hobson?

1- Keep your optionality.

Hobson is the president of Ariel Investments and tells Horowitz they recently bought Madison Square Garden (MSG).* That sounds like a good idea.

But sounds good isn’t good enough.

Hobson explains that the investment in MSG was based on a confluence of factors; the “Dolan discount,” the NBA lockout, a retro-fit over budget, and upcoming TV contract negotiations. Hobson and Ariel were looking at a mess – and messes are good places to find optionality.

“Everything that can go wrong, has gone wrong,” Hobson explained. “You could not rebuild MSG if you tried…so we said, there’s a barrier to entry here that’s pretty significant.”

Hobson concluded that an investment in MSG was one with limited downside, and massive upside. She also got lucky, as Jeremy Lin joined soon after the purchase and “Linsanity” began.

Optionality is a fulcrum that many successful people use. Charlie Munger creates investments around it ( Chris Dixon does too). Judd Apatow interviewed Jerry Seinfeld who waited to start his career until he found optionality. If you can find yourself in situations with a big upside, you’ve found yourself in a very good place.

2- Of time & money – only one matters.

Hobson explains that she was hired by John Rogers who told her, “people undervalue time and over value money.”

Two thousand years ago, the stoic philosopher Seneca wrote much the same thing: “People are frugal in guarding their personal property; but as soon as it comes to squandering time they are most wasteful of the one thing in which it is right to be stingy.”

But we don’t get this. Charlie Munger might have given a hint why. “Well, practically everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and doesn’t mix in the hard-to-measure stuff that may be more important.”

We know how to add dollars and think that’s the only equation we need. It’s not.

“The word ‘billionaire,’” wrote Seymour Schulich (who is one, no sour grapes), “is a very crude and inaccurate measure of how well I have played the game of life.”

Sometimes you don’t even need money. Kevin Kelly, Nicholas Megalis, and Tim O’Reilly all solved problems better with less money.

3- Get to second level thinking by reframing.

Second level thinking is to think not just about the actions or reactions but the reactions to the reactions. Both Ken Fisher and Richard Thaler explain it in terms of the “beauty contest.” Tyler Cowen displayed the thinking in regards to Harvard allowing more students.

Hobson says that her team has a lot of discussions, and the key to good discussion is to talk without going “toe to toe.” How does she do that? How does Hobson create discussions that get to the second level without getting petty or personal?

– “Would we do this, if we were private?”

– What would happen if the price of a supply was cut in half?

In the first instance Hobson reframes the problem by redefining who they are. In the second she throws out a wild scenario to see how someone responds. Each of them gets to second level thinking by reframing the question.

Chris Dixon reframes startups as a maze. Dan Coyle reframes exercise repetitions as meditative. Stephen Dubner reframes shopping experiences so he’s marketed to less. Reframing is rethinking.

4- Dive deep.

If you’re going to do something well, Hobson observes, you need to have a deep knowledge of it. Her husband George Lucas, Hobson says, has a thick binder in his office for each fictional planet in Star Wars. It includes the name, people, customs, environment, and more. It’s deep.

To succeed you have to go deep.

Alex Blumberg was deep in radio before his startup Mark Cuban memorized user manuals before he sold anything. Gary Vaynerchuk knows the ins and outs of every social network. Dick Yuengling moved kegs throughout the factor to learn the ins and outs. You have to go deep to learn the most valuable parts. Hobson does this too.

She explains this using the company Bristow Helicopters.  Bristow is – among other things – an oil rig taxi service. Horowitz jumps to the conclusion that the stock was down because of low oil prices. You’re right, says Hobson (probably smiling), but the company has little to do with oil prices. The stock trades in tandem with oil, but the fundamentals are different. 

Hobson knows that Bristow is worth less on paper than liquidation value. bump That’s either Benjamin Graham rolling over in his grave or Charlie Munger slapping his head (because he missed this).

Hobson knows helicopters depreciate differently than other machinery and Bristow has other revenue streams.

Hobson has dived deep.

5- Observations > (are greater than) predictions.

When Hobson’s group purchased MSG, things didn’t look good, but only from the outside. “There may be a perspective of ‘they’re not winning,’” Hobson says, “but we can look at data like season ticket holders buying every year.”

Later in the interview Hobson applies the same thinking to hiring. If someone applies to work at Ariel Investments they can’t be seen as “job hoppers.” Those people won’t stay, Hobson tells Borowitz.

Sometimes it’s better to look at the history of something rather than think about the future. Point #4 of my Charlie Munger post gave examples. The past is often helpful because the future is very hard (maybe impossible) to predict.

Bill Simmons (former writer) – is a solid thinker and noted that the past isn’t all we want to look at.  You may not want a great pro athlete in the last year of his career over a much younger one, Simmons articulated in his trade value columns, and those were well before Kobe Bryant’s retirement tour.

6- The default is ‘no.’

Hobson says that “we like less is more,” and describes a colleague’s process this way, “she assumes she doesn’t want to own anything. Everything is a rejection.”

If no is your default then the burden of proof is on ‘yes.’

Michael Lombardi explained they evaluate football players the same way. “Scouting’s not about finding players,” Lombardi says, “Scouting is about eliminating players.”

Even though this switch is small, one tiny hurdle matters. Cliff Asness, Jason Zweig, Tadas Viskanta and Ken Fisher, all say that overtrading is a sure way to diminish returns. If you want to trade, make ‘no’ your default choice.

‘No’ doesn’t need to be limited to financial choices. We can apply this idea to our own lives. Dessert? ‘No.’ Watch TV? ‘No.’ Yell at the kids? ‘No.’

For whatever behavior you don’t want, try to make no your default response.

7- Skin in the game.

“We are looking for leaders who are aligned with the shareholder. If we see CEO’s that don’t own any stock that’s just not good. If we see CEO’s that pay themselves too much, that’s not good.” – Mellody Hobson

Without skin the game you’re playing with Monopoly money. Philip Tetlock demonstrated this in his book Superforecasting. Chris Dixon said that the a16z interests are in line with the entrepreneurs. Seth Godin compares it to being thirsty or not. If you aren’t motivated to do it, you won’t.  Tim Ferriss said that once he started playing poker with his own money the dynamics changed.

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

Want to catch up on the posts? The Waiter’s Pad: Volume 6 is available here. You can also donate a few bucks here.

* After multiple listens, I still wasn’t sure what exactly Ariel Investments bought when they bought MSG. Sorry for the lack of clarification.

Amy Schumer (@AmySchumer) joined Brian Koppelman (@BrianKoppelman) on The Moment Podcast to talk about life as a female comedian. The interview was from January 2015 (no typo) and I missed it dropped. Luckily the episode was sent out again and I took some notes.

Before we begin, I have to note a problem on this blog. There’s too few women represented. In Antifragile Nassim Taleb notes that without the word “antifragile’ we miss half of – what Taleb calls “the interesting part” – life. My problem is bigger than that. I’m missing the female perspective.

I don’t feel compelled to write about women for gender reasons, but FOMO (fear of missing out). They know secrets to a good life. I read Ray Dalio’s Principles and was blown away. That’s a guy I have almost nothing in common with, but he taught me a lot.

I felt the same way reading Will Schwab’s The End of Your Life Book Club. That book made me a better person. Ditto for Man’s Search for Meaning and Finite and Infinite Games. Female interviews are like a category of books that I have yet to find out about.

I have written up some notes from women: Amanda Palmer, Carol Leifer, Marni Kinry and Kristen Carney, Gretchen Rubin, and Maria Popova is the complete list of female only posts. That’s five out of 120.

I’ll do a better job in 2016, starting now.

This post – Amy Schumer – like a good movie, has narrative arc.

Our hero’s constraints help her in unexpected ways. She enters a battle, and loses. She trains to get better (while getting her butt kicked). She has a moment of inspiration (with instrumental swell of music, is John Williams available?). She defeats the boss, wins the prize, makes a hit. She makes friends. She gives advice. She starts it all over.

Ready?

Constraints.

Schumer is asked a lot about her looks, and she says she’s “pretty enough.” That’s good news. Constraints are part of the creative process, and sometimes they’re a straight up advantage. Being “pretty enough” helped Schumer get on stage, but it wasn’t enough to keep her there. It was a start. Anything can be a constraint you can use.

Kevin Kelly said that a lack of money helped him be more creative. Tim O’Reilly said the same thing about his business.

“Limitations can expand rather than shrink the creative flow,” wrote Amanda Palmer.

In her book, You’re Never Weird on the Internet, Felicia Day writes that being different helped, a lot:

“I’m glad I didn’t know better than to like math and science and fantasy and video games because my life would be WAY different without all that stuff.”

Even Brian Koppelman had to move to a new medium (stand-up) to have constraints that focused his creativity. Step one of our hero’s journey, you can’t start out as royalty.

When you start, you’ll stink.

Koppelman recalls watching Last Comic Standing (2007) and seeing Schumer on the show. They had both been at the same club a year before and he says to his wife, “this girl is a genius and she sucked so hard just last year.” Everybody stinks at the start.

Austin Kleon articulated why this is so hard. You start doing something – writing, stand-up, marriage – and the only people you’ve seen do that thing are good. That’s why you’ve seen them. You are not good. You are bad.

“There’s a big gap, Kleon says, “when you’re starting out between what you love and what you’re producing.”

Step two of the hero’s journey, step out the door and realize it’s a big scary world.

The grind.

Schumer says that she’s never been jealous of other comedians, but has wondered, why them and not me? She tells Koppelman that she quickly snaps out of it and remembers she has to do the work. It’s time to work, and grind, and hustle.

In Do The Work, Steven Pressfield gives advice on this part:

“Ignorance and arrogance are the artist and entrepreneur’s indispensable allies. She must be clueless enough to have no idea how difficult her enterprise is going to be—and cocky enough to believe she can pull it off anyway. How do we achieve this state of mind? By staying stupid. By not allowing ourselves to think. A child has no trouble believing the unbelievable, nor does the genius or the madman. It’s only you and I, with our big brains and our tiny hearts, who doubt and overthink and hesitate. Don’t think. Act.”

You  have to get to work and not realize how crazy your idea might be. Because it is crazy. Alex Blumberg, Robert Kurson, and Koppelman (“the line between being an artist and being delussional is very thin.”) all explicitly warn people not to examine how hard things will be. Schumer got to work.

She “barked” to get ten minutes on stage. That is, she stood outside, no matter the weather, for two to three hours at a time and yelled at people to come in. Only then did she get a chance on stage.

She worked more, she got better. She toured with Last Comic Standing. “That was like boot camp,” Schumer told Judd Apatow. She toured more. She did slightly bigger and bigger rooms. She persisted, and then she arrived, at the waiting place. Step three is a step back.

The waiting place.

At some point you’ll get to the place where it just doesn’t seem like things will happen. Koppelman’s writing partner David Levien said, “it seems brutal when you’re toiling away in obscurity.”

Brian Koppelman added, “you have to cover that difficult terrain yourself.”

Step four, our hero is stuck, can’t go on, can’t measure up. It won’t happen.

The spark.

If you listen closely, and pay attention, something in the waiting place will spark. Schumer shared two of these instances.

The first was a train ride. Schumer was on a train after a set. It hadn’t gone well. She wondered what she was doing with her life. It was late. Her boyfriend was about to dump her. Things weren’t going well.

It was then that a lady asked if Schumer had “heard the good news.” The women of course was asking Schumer to come to her church. “No, I’m Jewish,” Schumer said, but there was something else in that exchange.

Schumer went home. Told a friend. Wrote a joke. It was good. She had something.

That something is all you need. It’s a foothold on the mountain. Louis C.K. said that this step is the start of a set. You get one joke, that’s your closer. Then you get another joke, that’s your opener. You piecemeal things together until you have an act.

Schumer’s second spark was during Last Comic Standing. Schumer won a challenge and another contestant said, “you don’t deserve it.” “That broke my heart,” Schumer recalls.

But later when the episode aired, she saw the other comics. “I knocked it out of the park, I absolutely did deserve it,” she tells Koppelman.

That spark that gets you out of the waiting place can take a long time coming.

It took Andy Weir years to write The Martian after several failed attempts. Jim Luceno was a carpenter during the first years of his writing career before he believed he could make enough money writing. Jack Canfield says to build failing five times into your plan for success. It takes persistence. Koppelman knows.

“I’m sure there are days when you think the haters are right and you’re not good enough. Days you know it’d be easier to quit. But then you’ll never know what would have happened if you gave it one more push.” – Brian Koppelman

Step five, there might be a chance.

As you ascend, have friends.

There are so many people who have partners that help them on their way. Schumer is one of them. She says that her friends are always asking each other if they “have a think about this.” It’s good to have other people who support you around you. People to take comfort with in the waiting place and that can help you in the grind.

Peter Thiel said, “a lot of these companies aren’t solo efforst of a god-like person that does everything.”

Jay Jay French went through ten iterations of the band before he met Dee Snyder and formed Twisted Sister.

Adam Carolla found Jimmy Kimmel and stuck with him because, “we’re funny together.”

Many hands make light work goes the saying, good friends make the work more enjoyable might be a good second part.

Step six, I can do this – no, we can do this.

We did it. We’re famous. Now, get back to work.

Koppelman asks, “was fame a conscious part of the the thing when you were doing this.”

“No,” Schumer says – and it never is.

James Manos said that when they were writing The Sopranos, they never thought about great it might be. B.J. Novak said that the office was never expected to be a great show. James Corden said neither was Gavin and Stacey.

“My goals have been very small,” Schumer says,  “things just right in front of me.”

Even when you “make it” you realize there’s no it. There’s always a higher mountain, and the climb begins again.

Schumer – or anyone – is back where they started. Doing the work, one small bit at a time. The hecklers never die, the doubts never leave, the constraints don’t seem like blessing.

Step seven, repeat as necessary.

Caveat emptor (buyer beware).

It might never happen. To think this sequence is prescriptive would be wrong, it’s descriptive only. In the Charlie Munger/Tren Griffin post we noted how valuable it was to describe the stock market as a person, rather than machine. Mechanistic systems are computers, and even not entirely.

I was reminded of all this because at the end of 2015 I saw a Brian Regan stand-up show. Then for Christmas a friend gave me one of his old CDs. Regan has been at it a long time. Way longer than Schumer. If the path of “successful stand-up comedian” was linear, prescribed, or a checklist, Regan would be a household name. Schumer is, he’s not.

There is something we can do. We can take the advice of astronaut Chris Hadfield and enjoy the process. Hadfield wrote:

“It’s probably not going to happen, but I should do things that keep me moving in the right direction just in case – and I should be sure those things interest me, so that whatever happens I’m happy.”

You need to embark on the journey and be happy with the journey. Schumer admits a bit of this to Koppelman, saying that on Last Comic Standing she was the only one who wanted to hang out after.

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Thanks for reading, I’m @mikedariano on Twitter. Want to catch up on the posts, The Waiter’s Pad: Volume 6 is available here. You can also donate a few bucks here.

Tren Griffin has written a book, Charlie Munger: The Complete Investor. In it, Griffin breaks down what makes Munger – Warren Buffett’s partner at Berkshire Hathaway – Munger. 

It’s by no means complete, but it’s a good start. Griffin’s bibliography alone could fill the reading queue for a year, and Munger’s original writings go well beyond that. But the book serves a purpose, it gives us a place to start. Griffin has distilled and organized Munger’s ideas so anyone (even me!) can understand and learn from them.

Griffin’s been on the blog before, when he spoke on the a16z podcast about the book.

Two quick notes before we jump in. The first is for you, dear reader, to keep your guard up. Jason Zweig emphasized the importance of skeptical reading and this post is especially suspect. We’re at risk for Generation Loss. That is, a copy of a copy will always lose some of the original data.

In our case, Benjamin Graham influenced Munger who was written about by Griffin who was read by me and is now consumed by you.

Graham > Munger > Griffin > Me > You

That’s enough copies of copies that something in Graham’s original message will be lost. What I hope is that something will be added in its place.

Second, this “A Dozen Things I’ve Learned” style post is a tribute to Griffin who writes them at his blog, 25iq. If this post is bad, it’s because of me, not the premise. Griffin’s posts are some of the best writing I read each week.

Okay, ready?

1- Don’t try to be Charlie Munger. “No one can ever be Charlie Munger,” Griffin writes, “just like no one can be Warren Buffett.” So what’s the point?

The point, writes Griffin, “is to consider whether Munger, like his idol Benjamin Franklin may have some qualities, attributes, systems, or approaches to life that we might want to emulate, even in part.”

That’s the point of this website. You can’t folow the same book writing path as Andy Weir, but you could model the persistence. You can’t become a tech mogul like Mark Cuban, but you can be inspired by his attitude. You can’t make movies like Judd Apatow but you can emulate his humility.

Find something that successful people do and fold it into who you are.

2- Work hard at simple things. Investing, says Buffett, is, “simple, but not easy.” Griffin quotes Munger as saying, “take a simple idea and take it seriously.” To succeed you don’t need to solve huge problems like Elon Musk, you can work hard at smaller things.

Penn Jillette said that his only trick is working hard than the audience expects he would.

When James Corden worked with Meryl Streep on Into The Woods, he said she was great to work with because she took her work very seriously, but not her life.

3. Writing is a form of thinking. “Part of the benefit of creating a checklist is the process of writing down your ideas. I have always loved the point Buffett made about the importance of making the effort to actually put your ideas in writing. In Buffett’s view, if you cannot write it down, you have not thought it through.” – Tren Griffin

How well can I write this is a proxy for how well do I understand it. Michael Mauboussin, Barry Ritholtz and Maria Popova explicitly mention that writing is a form of thinking.

Comedians support this idea too. Phil Rosenthal said that comedy is a form of deep understanding. Only if you understand something deeply do you understand what part of it is funny. It’s the idea behind Jason Zweig’s book, The Devil’s Financial Dictionary.

4. Focus on the stones of history rather than the clouds of the future. Griffin does a wonderful job explaining how Munger and Buffett make predictions – they look to the past. Griffin writes, emphasis mine:

“Effective Graham value investors are like great detectives. They are constantly looking for bottom-up clues about what happened in the past.”

“What Munger looks for is a business that has a significant track record of generating high, sustained, and consistent financial returns.”

“By sticking to investing activities that are easy, avoiding questions that are hard, and making decisions based on data that actually exists now, the Graham value investor greatly increases his or her probability of success.”

This is what makes Griffin’s book great. In three pages he’s refined one of Munger’s big conclusions. Like a master chef who studies the recipe for Bolognese and we get to eat at the restaurant.

Munger doesn’t try to predict the future because the future is complex/chaotic. Instead, Munger looks for companies that have succeeded in dealing with the future as it came.

Chaos theory doesn’t have a large role in the book, but it underlies Munger’s thinking. That is, there are too many variable to perfectly model a future. Rather than looking at what might happen, Munger looks at what has happened. This gives him an idea about how a company will react in the future – whatever may come.

5. Everything is a system and systems are alive. Systems are alive and we should listen to them. This idea is throughout the book. From the macro chaos theory to the way Munger manages Berkshire. Griffin quotes Buffett, who warns against, “institutional imperative.”

“As if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction; just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds…”

That’s Buffett talking about his own company. Even he can’t control the “institutional system.” Griffin writes – and this thrilled me to no end – “the culture at Berkshire has been created by Buffett and Munger so as to reject the institutional imperative like a foreign body.”

Griffin compares the “Berkshire culture system”  to the immune system!

Everything is a system and systems are alive. They move to natural states. If we think of them this way we can better understand the world we live in – #6 will help with that too.  

6. Anthropomorphize to reframe something. “The Graham value investor believes Mr. Market is unpredictably bipolar in the short term; for that reason, when the market is depressed, it will sometimes sell you an asset at a bargain price.” – Tren Griffin

Note what Graham compared the stock market to. Not a machine. Not an equation. Not a computer. A person. That’s a key point, because as we noted above, “Mr. Market” can be entirely unpredictable (like that one friend where nothing he does surprises us).

Rename the stock market as bi-polar Mr. Market and we see things in a new light. This is incredibly helpful.

Chris Dixon reframes startups as a maze. Dan Coyle reframes exercise repititions as meditative. Stephen Dubner reframes himself in situations to think differently. Dubner recalls being at a “New England yard sale.” The skies were blue, the air was clean, and the stuff was laid out on tables. This stuff looks great, Dubner thought to himself, but what if this stuff was in Pier One instead? He reframed how he viewed the trinkets and decided he didn’t in fact need one.

7. Measure what matters, but not more. “Practically everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and doesn’t mix in hard-to-measure stuff that may be more important.” – Charlie Munger

Did you have a nice holiday? How do you know? Was it because you drove (walked?) 500 miles? Was it how much you spent on gifts? Pounds of mashed potatoes consumed?

Of course not, and this quote from Munger magnifies the end of the spectrum we need to think about. Remember that systems don’t always talk in numbers. But numbers are simple and we are cognitive misers. It’s so easy to just look at the numbers.

Numbers may be all you need, Munger says, but maybe not.

8. Turn problems into games. Munger says that his multidisciplinary approach has made life “more fun.” Griffin writes, “looking for models that can reveal and explain mistakes so one can accumulate worldly wisdom is actually lots of fun. It is like a puzzle to be solved.”

Remember, Chris Dixon reframed entrepreneurship to be like a maze. In Principles Ray Dalio writes about the fun of solving problems too. In Reality is Broken, Jane McGonigal examines how games help us learn better. Tyler Cowen sees games as very helpful in learning.

Turning problems into games is a reframing technique anyone can use.

9. Know the fool at the poker table. The axiom goes; if you can’t spot the fool at the poker table, it’s you. The stock market is a huge poker table with some of the best players and biggest fools.

Griffin writes, “investing is less than a zero-sum game due to fees, costs, and expenses relative to the market. If you are buying an investment, by definition someone else is selling. Either the buyer or the seller is making a mistake.”

Your job is to figure out which side you’re on – and that’s really hard.

When Cliff Asness spoke with Tyler Cowen, even he didn’t know who was on the other side of his trades. It could a pension fund manager who needs to dial down a risk figure, Asness explained, but he didn’t know. Asness has a Ph.D. from Chicago and runs AQR Capital Management and he’s not sure who the fool is.

Luckily for fools like me, Munger has another piece of advice. If you find a problem that’s too hard to solve (e.g. who’s the fool at the poker table), decide that it’s too hard, and move on to something else.

10. Be okay with the wrong side of maybe. You need to be disciplined and clear headed writes Griffin. How does Munger suggest we do that? “The right way to think is the way (Richard) Zeckhauser plays bridge,” Munger said.

Okay. So how is that? (emphasis mine)

“Bridge requires a continual effort to assess probabilities in at best marginally knowable situations, and players need to make hundreds of decisions in a single session, often balancing expected gains and losses. But players must also continually make peace with good decisions that lead to bad outcomes, both one’s own decisions and those of a partner. Just this peacemaking skill is required if one is to invest wisely in an unknowable world.” – Richard Zeckhauser.

Philip Tetlock calls this “the wrong side of maybe,” in his book Superforecating.  Tetlock explains that sometimes long odds come up. You can’t look at a forecast that says 20% chance of rain as wrong if it rains that day. The forecast said it could rain. What you need to do, Tetlock writes, is to evaluate long term predictions that people put numbers to.

Bill Simmons knows this when he bets on sports (and it’s why he’s a superforecaster). He knows bad bounces happen. That’s the understanding that Munger advocates for investors.

11. Be studios. Munger is described as “a book with legs sticking out.” He reads a lot. But then again, almost everyone who succeeds is in a state of constant learning.

Rather than a list of links, read this Reddit reply shared by Taylor Pearson:

12. There is no passion without knowledge, and vise versa. I used to think “follow your passion” was good advice. Then bad. Now I don’t know.

What I do know is that passion alone isn’t enough. Passion needs to enter a positive feedback cycle where it turns into skills and knowledge and then reinvests in passion for more skills and knowledge.

Griffin writes, “One trick related to passion is that you are not likely to be passionate about something you do not understand…the more you know about some topics, the more passionate you will get.”

When I taught at a local college I surveyed students on two questions to start the semester; what do you like doing and what are you not good at doing. Their answers never overlapped.

The things they were bad at they never enjoyed.

Then we listed those skills.  We improved those skills as the semester went on and voila, by the end of the semester they were better at them and enjoyed them more.

Ramit Sethi put it this way, “when you get good at something, you get passionate.”

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Thanks for reading, I’m @mikedariano on Twitter. If you want to catch up on the blog posts, you can buy Volume 6 here.

Twitter gets mentioned here a lot, and it needed its own post. Like any tool, knowing how to use it well makes the work we’re doing that much easier.

So far we’ve seen 4 ways to use Twitter well.

(This post will be updated as needed)

Connect with colleagues.

The first way to use Twitter well is to be connect and collaborated with colleagues. Austin Kleon advocates for creating your own “scenius.” John August uses Twitter to announce writing sprints. Nicholas Megalis talked about the value of connecting with other people.

Create a filter.

Scott Adams notes how reticular activation helps him.That is, you can use Twitter to filter inspiration. See if Gary Vaynerchuk does it for you.

Chris Dixon uses Twitter to create a his own news source. “Essentially I have two thousand of the smartest people in the world finding information for me and telling me what to read,” Dixon says.

Bust your biases.

You can use Twitter to get balanced conclusions. Jason Zweig, Tadas Viskanta, and Tren Griffin all suggested to generate conclusions from multiple perspectives. Twitter can be one where we gather those perspectives, but also test the ones we have. We can follow people we disagree with just to see how well we know our own arguments.

Connect with fans.

Amanda Palmer connects with her fans constantly. Casey Neistat uses it to get questions for his Q/A. Comedians like Judah Friedlander announce shows.

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Thanks for reading, I (of course), am on Twitter @mikedariano.

A lot of successful people use signals to nudge them toward one action, thought, or idea compared to another. This idea has come up so often that it needed it’s own post.

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Why do we need signals?

We need signals because we can only process so much information. Our attention is finite, our short-term memory limited (4-7 spots), and our resources constrainted.

In Thinking Fast and Slow, Daniel Kahneman offered the first explanation I really understood.

“You make many small decisions as you drive your car, absorb some information as you read the newspaper, and conduct routine exchanges of pleasantries with as spouse or a colleague, all with little effort and no strain. Just like an easy stroll.”

Kahneman, like good authors, is setting us up. (A quick digression, both Penn Jillette and B.J. Novak said that an unnoticed setup is the key part to their craft)

Back to Kahneman, we understand this. A lot of what we do we don’t have to pay attention to, mostly because we are already filtering it out. It’s why Scott Adams leverages reticular activation.)

But when we get to hard problems things change. Back to Kahneman:

“It is normally easy and actually quite pleasant to walk and think at the same time, but at the extremes these activities appear to compete for the limited resources of System 2. You can confirm this claim by a simple experiment. While walking comfortably with a friend, ask him to compute 23 x 78 in his head and to do so immediately. He will almost certainly stop in his tracks.”

Aha! We have something.

Not only to we have limited bandwidth, but even a task as automatic as walking gets interrupted when we need to draw more. Fascinating.

Okay, let’s get past the academic cuteness.

Why does this matter to you and me?

The most successful people succeed because they quickly get rid of what’s not important. They focus their bandwidth on the most important task at hand.

Casey Neistat asks, “is this good for me and my technology company (Beme), and if the answer is no it gets a pass.” Neistat’s signal is the question, “does this help Beme?”

Richard Feynman got so tired of choosing a dessert, that he resolved to always order chocolate ice cream. That was his dessert filter.

Barry Ritholtz said that he looks at the prices of classic cars as a signal for bull and bear markets, or if people say “ugh” to his trading ideas.

Ramit Sethi and Taylor Pearson both construct interview questions that need answered in an exact way.

Stephen Dubner called this, “teaching your garden to weed itself,” and wrote an entire book chapter about it.

Some banks figured out how to filter out dangerous marijuana growers.

The most famous of the signals might come from Van Halen.

The story goes, that when Van Halen was touring they had the latest and greatest light and sound rigs. There was just one problem. Each venue had a different person set them up. The guy who set things up in New York wasn’t the same guy that did it in Charlotte. So, according to David Lee Roth, Van Halen introduced a wrinkle to their rider.

They said that among the other rock star accoutrements, they wanted a bowl of M&M candy with the brown ones removed. Some people looked at this as divas being divas. Au contraire mon ami. Roth said they did this to see how closely a promoter read the rider. If someone removed the brown M&M candy, they probably set up the equipment correctly.

Okay, I’m a believer. How do I do this?

First, shift your self perspective.  Scott Adams calls this the “moist robot theory.”

Some of you will liken the idea of reprogramming your brain to self-hypnosis, and that might feel creepy or unlikely to work. A better approach, as I mentioned, is to think of your body as a moist, programmable robot whose outputs depend on its inputs, not magic. Imagine you’re an engineer who is trying to find the user interface for your moist robot body so you can make some useful adjustments. It’s as if you had one menu choice labeled “Make Sleepy” and another labeled “Energize.” You can choose “Make Sleepy” simply by eating simple carbs.

Ah, so I can think of signals as a very basic programming language to use on myself.

If dessert does not include fruit, then do not eat.

If spouse yells, then do not yell back.

If this takes time, money, resources, beyond X, then do not engage.

The best way to start is just to start and know that it won’t be perfect. Barry Ritholtz admits he missed some investment opportunities. Ramit Sethi says that he didn’t hire some great people.

It won’t be perfect. Good signals are a trade off:

Good results + more time > Perfect results + less time.

 

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

This post is available in podcast form. There’s a bit of scratchiness in the audio. FYI: Quarter zip fleeces are suboptimal podcasting clothes.

Ready?

Everything is a system.

A quick note on the formatting. I’ll use “quotations” for both actual quotes and to set out systems. When everything is a system we lose sight of the specialness of systems. Hopefully the quotes will set off the words, and my points.

Some systems like the “stock market system” change a lot.

Some systems like the “Lego brick system” change very little.

But we shouldn’t be fooled by the simplicity of those bricks. As parents know, they can be quite powerful on the floor of a dark room.

Those bricks are a system too – even though their simplicity suggests otherwise. The plastic is degrading (over 500 years) and this alone is a valuable lesson. Just because we can’t see a system act, doesn’t mean a system isn’t acting.

For example, not until 2009 did we realize that Jupiter and Saturn nudge the earth like a delicate surgeon might nudge a top. That ice ages come and go based on the alignment of Jupiter and Saturn, two events you and I will never see, is an example of systems acting but not easily observed.

Our simple “Lego brick system” also interacts with the “home office system.” On my desk at 1atm the “Lego brick system” is stable. Add pressure and the “Lego brick system” changes. Ditto for heat or gravity.

Our “Lego brick system” has gained complexity; plastics, gravity, and pressure in a matter of paragraphs. Now how complex does the stock market get? Global politics? Taylor Swift’s song writing?

Now hold on, this may get bumpy. Everything is a system of systems.

Systems on top of systems on top of systems….

Systems stack. We’ll use the Power of Tens video as a metaphor.

While the video is about the size of the universe, it points out something we can use – there’s never a final thing. There’s always something smaller or bigger.

The hand is small, but the hairs are smaller. Part of hair is the cuticle, part of that is the cell, part of the cell is nucleus, electrons, and so ons. In the same way we can’t observe the degradation of Legos with our eyes, or ice ages based on Jupiter’s position, we can’t see what’s smaller than quarks, which isn’t the destination, but a stop on the discovery train.

Okay, is there any good news to this mess?

The spirituality of systems.

The good news is that we’re quite good at listening to systems, even really complicated ones. But how we do that will take a bit of faith.

This idea coalesced when I read Deep Survival by Laurence Gonzales. Holy cow is it a good book.

Gonzales looks at survival from two angles. One is how to survive when you’re in a dangerous situation. The other – and relevant to us – is about how to avoid those situations.  It’s about listening to systems. 

Gonzales explains one of his moments of enlightenment when he landed in Hawaii, headed out to surf, and as he passed a lifeguard, asked how the surf was.

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

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

Crowder, like other surfers learned to listen to the “surf system.” He told Gonzales that the sea was dangerous.  

I dismissed this idea. It was too spiritual. But then I realized I did the same thing. I can sense the “weather system.” The darker the cloud the bigger the storm. It smells like rain. The wind is out of the northwest.

I know each of these things instinctively. Lots of people do.

Football players.

When Tony Dungy was coaching the Tampa Bay Buccaneers, he took them from being the worst team in the league to winning the Super Bowl (a year after he left). He did it by creating a new way to listen to and act with in the “football game system. 

Charles Duhigg writes about the change in The Power of Habit:

“Part of the problem was Dungy’s coaching philosophy. In his job interviews, he would patiently explain his belief that the key to winning was changing players habits. He wanted to get players to stop making so many decisions during a game, he said. He wanted them to react automatically, habitually. If he could instill the right habits, his team would win. Period.”

Dungy wanted to switch the actions within the system.

Rather than; if the systems shows A, then DECIDE. 

Instead; if the system shows A, then REACT.

Duhigg explains that Dungy understood how the players listened to the “football game system” (like you feel spring showers or lifeguards read the surf).

Duhigg wrote: “Players spent their lives building the habits that got them to the NFL. No athlete is going to abandon those patterns (–how they listen to the system–) simply because some new coach says to. When asked Dungy said, rather than creating new habits, he was going to change players’ old ones.”

Music executives.

Doug Morris, who at one time or another was in charge of every major record label knew how to listen to the “pop music system.” Morris had tried to hear hits, write hits, and see hits. Those were different – and unsuccessful ways – of interacting with the “pop music system.” Morris only succeeded in the system when he found hits. 

It’s 1964 and Morris has had limited luck with signing artists. He goes to the accounting room one day to see what’s selling. There he saw that an anomaly. A band called “Music Explosion.”

Stephen Witt explains in How Music Got Free, emphasis mine.

“One of the acts on Laurie’s roster in those days was a generic garage rock band from Mansfield, Ohio, called the Music Explosion. Side A of their lead seven-inch single was a schlocky two-minute cover of a 1964 British Invasion tune titled “Little Bit O’ Soul.” Morris, however, would forever remember this platter by a different name: Laurie 3380, the catalog number the order-taker used to track the sales of the song. Those sales were generally unimpressive, with one exception: a record store in the small town of Cumberland, Maryland, which had, during the most recent inventory cycle, inexplicably ordered two crates of discs. Morris was struck by this anomaly.

Anomalies are signals from the system.

He (Morris) was soon talking long-distance with the Cumberland store’s owner, who told Morris that through repeated heavy airplay, a local radio DJ had turned this unexceptional song into a regional hit. In fact, the owner was already planning to place another order for the single, as the two crates of Laurie 3380 he’d bought were running out.

 

Morris found that regional sales were the system’s signal.

Soldiers.

From All Quiet on the Western Front: “At the sound of the first droning of the shells we rush back, in one part of our being, a thousand years. By the animal instinct that is awakened in us we are led and protected. It is not conscious; it is far quicker, much more sure, less fallible, than consciousness. . . . It is this other, this second sight in us, that has thrown us to the ground and saved us, without our knowing how. . . .”

Soldiers understand the “war system.” Sometimes subconsciously.

Financial analysts.

Barry Ritholtz has said that he listens to the system of “stock market” by what sort of prices are sells for.

NPR had a podcast about tracking the Sotheby’s market to see how much money was moving. 

1920’s America had an essence of “too good to be true,” an odor that systems aren’t right. In Rainbow’s End, Maury Klein quotes one mother as saying: “we’d rather do without clothes than give up the car.”

Each of these were hushes, nudges, and winks from the system.

 

So what?

Okay, now harness your chakra and say twenty Hail Marys and you too can listen to systems.

Wait, that’s not right. There are some things we can do.

1. Be in and aware. Systems speak in small ways and you need to listen a lot to hear them. When soldiers are in battle there are years of self-preservation to tap into and react to the “war system.” Athletes study tape to look for “game system” clues. Whatever your system, know that it’s talking, and that you can listen.
2. Be humble. Appreciate that the systems are infinite and there’s no way to understand them entirely. If music success was only about finding regional hits, then that’s all that would happen. That’s not the case.
3. Be aware of chain reactions within systems. This is where the danger arises. A leads to B and suddenly you’re at M wondering how it all happened.

In 1914 countries began to lean into alliances that culminated in World War I.

In 1929 people lent to country banks who lent to city banks who lent to NYC banks who lent to Wall Street. When the stock market collapsed the dominos fell. 

In 1998 LTCM hedge fund needed liquidity but no one would lend to them because other banks had the same investments to invest in. 

In 1999 Al Pacino gave the Inches speech in Any Given Sunday. A more poetic, and historic, For Want of a Nail explains it as well.

In 2002 a group of four climbers hooked together to descent Mt. Hood. The most experienced of the group was who slipped and took them down. They hooked 2 more on the way. And then 3 others before heading down a crevasse. 3 of them died.

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

Cliff Asness (@Cimmerian999) joined Tyler Cowen (@TylerCowen) to talk about investing, comics, and asking the right question.

Before we start, I wasn’t going to write up this interview. The transcript and video are both online, and both great. The conversation is a little “wonky” at times, and not what I typically note.

But, this interview has stuck with me. It’s been on my phone and on my mind. I gave it another listen this weekend and I realized why.

Asness knows big things. As Cowen says in the interview:

“I think of you as doing a kind of metaphysics of human nature. On one side, there’s behavioral economics. They put people in the lab, one-off situations, untrained people. But here it’s repeated data, it’s over long periods of time, it’s out of sample. There’s real money on the line, and this still seems to work.”

Asness has theories, applies them and reports the results. You and I get to see what worked. 

Ready?

Certain strategies work best at certain levels.

Asness is a momentum trader (in general terms). This means he buys things that did well in the last 6-12 months and sells things that didn’t. It might earn 1-3% over an indexed benchmark Asness says. What matters isn’t the strategy though, what matters is that it’s aligned with your actions.

When strategy isn’t aligned with actions we get problems. Asness sees when “momentum investors are on a value time horizon.” That is, the strategy of value is mixed with the action of momentum. It’s like trying to play basketball with the mindset of football.

Why exactly does the momentum strategy work?

Asness isn’t sure, it’s probably multiple things. As Sanjay Bakshi noted, “part of the reason thinking” is a way to frame the question so you get more than one answer. This is good because it sidesteps our existing biases to see what really stands up.

Asness identifies three reasons why momentum – or any empirical strategy – works.

1 – Complete accident. This needs to be an option. Asness says:

“You never reduce that probability to zero. You just make it lower. As it works again, you go ‘chance you’re just lucky, smaller.’”

Asness says this happened with his dissertation. He datamined (bought enough lottery tickets) to find something that correlated and, presto, he had a conclusion. It’s an example of weak correlations, and they’re everywhere.

In How Music Got Free, Stephen Witt writes:

“the Napster boom coincided with the two best years the recording industry ever saw, and even (Doug) Morris (CEO of MCA music) would later concede that, for a while, Napster’s pirate trade in mp3s fueled the CD boom.”

Correlation does not mean causation goes the warning in introductory statistics class and Asness adds a layer to it. Be careful that you don’t find something just because you looked everywhere. Even a blind pig finds a nut.

Of course, there’s an xkcd comic:

2 – Behavioral reasons. Asness says that momentum trading tends to work because of one of two behavioral explanations, both of which may be part of the reason. Underreaction and overreaction. Note, Asness echoes Ken Fisher’s advice to include what other people will do in our strategy.

Here’s how we underreact.

New information is outside information, and we tend to let it slip past.

Daniel Kahneman writes that we let it go because we are biased to prefer what we already know. We underreact to new information because it doesn’t fit in our world view. “That may be true for others, but not for us,” goes the hearty attitude.

But it gets us all the time. It gets us even when we see it coming.

Jason Zweig tells the story of working with Kahneman and the two falling for the planning fallacy. That is, the man who most clearly enunciated “it may take others a long time to do this but not us!” succumbed to that very idea.

I would too. So would you. It’s hard to get the right level of reaction. Michael Mauboussin talks about the difficulties of updating our beliefs. Tren Griffin quotes Charlie Munger on it. Maria Popova notes that changing our mind (updating our beliefs, reacting correctly) is an “uncomfortable luxury.”

That it’s hard to do explains why Asness succeeds with a momentum strategy. He’s just a bit better in a world where no one is that great.

The other behavioral reason is that we overreact to new information. Cowen thinks this matters a bit more:

“You receive a signal about the world. It’s to some extent a private signal and you over-interpret that signal and you think it’s a signal about the whole world so you overreact.”

This happened to me at Pizza Hut. It was a bad experience and – while waiting for a pizza that might never come – I resolved to never eat at Pizza Hut again. Yeah right.

It was an overreaction in that I took a signal (service at the local Pizza Hut on a certain night) and over-interpreted that signal (all Pizza Huts on every night). I told you, catching our biases is a tough task.

Barry Ritholtz agrees with Cowen and it’s why he says, “don’t just do something, sit there.” We tend to associate action with solution when that’s not always the case.

Sometimes these overreactions are for all the wrong reasons. Richard Feynman writes about this idea, calling it “cargo cult science.”

Feynman says:

“In the South Seas there is a cargo cult of people. During the war they saw airplanes land with lots of good materials, and they want the same thing to happen now. So they’ve arranged to make things like runways, to put fires along the sides of the runways…They’re doing everything right. The form is perfect. It looks exactly the way it looked before. But it doesn’t work. No airplanes land. So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential, because the planes don’t land.”

We can act like the islanders. We see A lead to B and believe that A always leads to B. We’ve overreacted to a correlation. A few sentences later Feynman makes the same point as Asness:

“For example, if you’re doing an experiment, you should report everything that you think might make it invalid-not only what you think is right about it: other causes that could possibly explain your results; and things you thought of that you’ve eliminated by some other experiment, and how they worked – to make sure the other fellow can tell they’ve been eliminated. Details that could throw doubt on your interpretations must be given, if you know them.”

Remember Asness’ datamined thesis? He says:

“I sat there in my dissertation in 1990. I found this empirical relationship with a big t‑stat but I really checked 63 things so the t‑stat is a bit of a lie, and it never works again.”

3 – Risk and fundamental reasons. As it relates to investing, there a risk premium where it’s believed that riskier securities pay more than less risky ones. Asness notes this may be more true for value strategies than momentum ones.

“Now, in the value world they have the same fight. Does cheap beat expensive because it’s riskier? I don’t think they’ve done a very good job of identifying the risk but I find it inherently more plausible that something priced to a long-term lower level might have a risk element to it than a much more short-term phenomenon like momentum.”

If you’re as smart as Asness, why aren’t you as rich as Asness?

Okay, so Asness sounds like a smart guy. He’s also a rich guy. He’s giving away his trading theory. Can anyone now do this?

Not really. If everyone were to do these things, Asness says, they would go away yesterday. But people don’t because the work is too much. Asness says his system is:

“Good enough to be really important if you can follow discipline, not so good enough that the world looks at it and goes, ‘this is easy.’”

He calls it a “sweet spot.” There’s enough of a barrier that it keeps a lot of people out. (And we’ll see how little those barriers need to be).

Penn Jillette said something similar. The only trick he really does is to work harder than the audience thinks he would.

Asness on bubbles.

When asked what he thinks might be a bubble, Asness says nothing really. Bubble, like “Donald Trump” or “10 Best Ways To…” are headlines we can add to Clickbait Dictionary. All sizzle, no steak.

“A bubble,” says Asness, “is where you say ‘this cannot last.’” Things could be bad, but that doesn’t mean they are a bubble.

Take stocks and bonds, Asness says. The P/E ratio is higher than it’s been in a long time, but that doesn’t mean it’s a bubble. It just means that things are expensive. What we don’t know is whether it’s a bubble or a new normal or record high.

Asness also gives us a sharp framework for popping the next bubble you hear about. Ask, is there “a reasonable scenario that could happen in the next 20 years.”

If you can imagine  how things could work out and find an example of when they’ve done so, you’ve popped the bubble.

The best investment advice.

It’s not often that we get to pick the brain of someone smart – and Asness does not disappoint. So what does someone with Ph.D. from Chicago who worked at Goldman Sachs and runs his own investment management firm say to do with your money?!?!

Don’t overtrade.

That’s it?

Even worse than simple advice, it’s simple advice to not act (“don’t just do something, sit there”). No hot tip? No system? No trading chart with lots of green and red?

Nope.

Asness probably has all those things, just not for you and me. Regular people succeed when they don’t shoot themselves in the foot.

Asness, like Jason Zweig and Tadas Viskanta and Ken Fisher, says that overtrading is a sure way to diminish returns.

The good news to this is that there’s an easy solution. In the terms used in this post, we can easily align our actions with our strategy. Taking a cue from Brian Wansink’s book,  Mindless Eating – it’s like giving candy to a baby.

If you don’t want to eat a piece of candy, give it to a kid. That doesn’t keep you from eating it. You could physically take it from them – or do as I do and sneak it away when they’re asleep. But Wansink has found that any small obstacle – in this case your morals – can keep us from taking actions. For food it’s all about perception.

At a movie with unlimited popcorn, people with big buckets ate 50% more. People at a buffet where the tables were cleared away after each course ate 28% more than people whose table wasn’t cleared. People who drank pre-lunch smoothies from a full glass ate 12% less than those who drank from half-filled ones. Even though both smoothies had the same ingredients and calories, one just has less air.

Each step created a perception that influenced how much a person ate. None of these examples were a diet, but the results add up. Investors give us the same advice.

Why Asness (and maybe his kid) is so smart.

This interview was good for me because a lot of what Asness said caused cognitive dissonance. I had to settle competing ideas.

At one point Cowen asks Asness about hedge fund strategies, and Asness explains arbitrage:

“There are so-called arbitrage strategies … a trade that has reliably worked over time where they go long and short, fairly similar things, they are clearly not riskless. But, something like a merger, A is buying B, if the deal closes, it’s going to go to here. A is going to fall, B is going to rise.”

Long Term Capital Management used (pioneered?) this strategy in the 1990’s. They found companies like Royal Dutch Shell which was listed on both the London Stock Exchange and the Amsterdam Stock Exchange. Effectively one company with one set of revenues listed in two places. From When Genius Failed

“The English firm had historically traded at an 8 percent or so discount to its Dutch cousin. The stocks were owned by distinct pools of investors, and the Dutch stock was typically more liquid. But there was no good reason for the price differential. With Europe becoming a single economic unit, Haghani reckoned that national differences would matter less and less, and the spread between Royal Dutch and Shell would contract.”

Okay, this make sense. Normally it works. Normally it’s no big deal. Normally – well, you know what’s coming. It’s a fine position as long as you aren’t forced to act. That is, you can service the arbitrage and only sell when the time is right. This was not what happened to LTCM. Their position was big, really big.

“‘It was ridiculously big,’ said an executive at a Wall Street bank. Goldman Sachs had the same trade on. They believed it was a good trade. But Long-Term’s trade was ten times the size of Goldman’s.”

Note: Asness wasn’t on the trade:

https://twitter.com/Cimmerian999/status/676826482577117186

One more from When Genius Failed:

So arbitrage is a devastating strategy. Both investments have to go to some middle ground or else you lose and you lose big.

Why is Asness interested in all this? He explains:

“I am dying to do this, I have not done it yet, I have talked about it for two years, I am about ready to try it. I want to ask one of my two older kids, they are a set of twins, they are 12 years old, “Does this sound like a good idea to you?” I’d have to hold their attention throughout this whole thing.

“There’s about a 98 percent chance they say, “No. That sounds like a terrible idea to me, you can lose a lot, you can make a little. Who wants to do that?” I’d be the proudest pop on Earth if either one of them kind of paused and said, “how often do both of those two things happen, Dad?” Because, that’s the proper question.”

The proper question!  This is a big idea! This is something I’ve learned and written about and still I missed it until Asness pointed it out (and that his 12-year-old might know the answer).

Don’t substitute an easier question for the one at hand.

I nearly did this twice asking Is Bill Simmons a Superforecaster?.  

Kevin O’Leary uses a version of this in the Shark Tank to his advantage. O’Leary will make an early offer that effectively anchors the negotiations. It switches the entrepreneurs from talking about their valuation to talking about his.

What traders and comedians have in common.

A question that never gets answered in the interview is “whose money is Asness (or any trader) taking?” It doesn’t get answered because it’s hard to figure out.
The best you can do, says Asness, is think through know both sides. You know why you do something, but why does someone else take the opposite. And if you don’t know, know this. If you look around the poker table and can’t find the fool, it’s you.

Comedians use this system all the time. Judd Apatow,  Phil Rosenthal, Judah Friedlander and B.J. Novak all say that the key to good jokes is deep understanding. When you understand why you told a joke and why the audience gets the joke, then you really understand.

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

If you want to catch up on the last 20 posts, a Kindle copy is here.

Part 1 is here.

A quick catch up if you don’t want to follow the link. B.J. Novak likes podcasts because “it’s like an extra hour of of reading.” He commented on the advantages and disadvantages of Harvard (and we added why this perspetive is valuable).

We addressed why it’s a good thing that you can’t be B.J. Novak, but that you can imitate him to get started.

After that it’s up to you to take small steps and build career capital.

Ready for part 2?

And to be great you need to get lucky.

Everyone featured on this site has some combination of skill, hard work, and luck. Novak says two lucky things happened for The Office.

First, it was moved to Thursday night. It’s not a big deal now, Novak says, but in 2005 it was. People didn’t want to watch a show about an office early in the week, Novak guesses, plus NBC Thursday night comedy was a thing. Like the Good Housekeeping seal of approval or a verified Twitter account, it signaled something. Frasier, Friends, and Seinfeld all had that spot.

Second, iTunes helped. Novak says that at the time a lot of The Office fans were young and downloaded episodes. This meant that The Office was a top show on iTunes. The Office got into a positive feedback system known as the Mathews Effect.

Malcolm Gladwell introduced this to me within the frame of Canadian Hockey players. You see, Gladwell writes, most of the best youth hockey players in Canada are born in January, February, or March. Why?

Well it’s because of the cutoff date. Kids born in January of one year are 11 months older than kids born in December of that same year- but they’re in the same league. The older kids are bigger, stronger, and more dexterous. The older kids are “better.” The better kids get more experience and coaching. Then they really get better – and on the cycle goes.

This holds for other areas too. In the early years of Netflix, Crash was the most popular movie on the site. Not because it was great. Rather, it came out when Netflix was gaining popularity.

But don’t get too big for your britches.

Novak says that when he worked on The Office they still needed to test jokes. “You never know how something’s going to play until you test it,” Novak says, “there’s no one smarter than the audience.”

One character in Stephen Witt’s How Music Got Free is Doug Morris. Morris presided over all three major record labels at one time or another, and he did so because he could find hits. Not with his ears, with his eyes.

Morris looked at the regional sales data. If a band was selling a lot of records regionally, then they had the right stuff to sell a lot of records nationally. Limp Bizkit and Hootie and the Blowfish are both products of Morris’s system. Witt writes, “years of scouting the order-taker had taught Morris there was actually no such thing as a regional hit. There was only a global hit, waiting to be marketed.”

How B.J. Novak does creative work.

Novak says that his creative work falls into two phases; Idea Phase and Execution Phase.

Idea Phase, Novak says, is where anything goes. On The Office they had “blue sky periods.” Lasting a few weeks, it was when the writers could come up with ideas for anything. What if Dwight went to the moon, what if Pam and Jim got a divorce.

This is a big theme of James Altucher’s work too. His talk about daily ideas led to this blog – hence the name. I was writing daily ideas when one for a blog that summarized and expanded on podcast hit. It sounded great. That feeling also led to Novak’s second phase.

Execution Phase is when Novak tries to get stuff done, and it relies on the Idea Phase. During the Idea Phase you want to come up with something so good during that the excitement about that will carry you through the obstacles of the Execution Phase.

Two emotions you can leverage to get more done.

Novak says that he always tries to keep a positive attitude. “I consider being in a good mood the most important part of my creative process.”

He also uses self loathing. When it’s late in the afternoon and he’s full of caffeine, Novak says he gets a lot done.

Adam McKay also uses this technique. He takes it one step further and gets a hotel room to work in. So not only has he gotten nothing done, but he’s paying to do so.

Rapid fire.

A few other things that didn’t quite fit elsewhere in this post.

“These just feel like jokes to me.” Novak recalls Steve Carell saying that when they were reworking part of a scene. Yeah, Novak thought, that’s what we do. But it’s not.

Gary Shandling told Judd Apatow that the key is to write more than the jokes. “The struggle in the writing room,” Shandling said, “is getting people not to write just words.”

Any tool will do. When Ferriss asks about what tool Novak uses to write with, the list is notably – and somewhat ironically considering his startup li.st –  generic. Microsoft word, Moleskine notebooks, coffee. The reason that Novak doesn’t use something else is that the switching costs are too high. “I use Microsoft Word,” Novak says, “because it’s what I learned  and got in the habit of.

Casey Neistat said much the same thing about filming. “It’s not worth it to me to investigate and switch,” he said about figuring out new software. This is a big idea, and one that Ferriss misses. It’s not about having the best tools, it’s about having good enough tools and getting to work.

“You really learn something when you parody it.” Novak paraphrase P.J. O’Rourke (and joines Judd Apatow, Phil Rosenthal, and Judah Friedlander) noting that comedy is a way to understand something deeply.

“You’re not on someone’s schedule, ever.” This was a particularly good reminder for me. To remember that Robert Kurson was a lawyer before he was a best-selling (and awesome) author. That Peter Thiel hated his job in law before he became an author and thinker we look to. That it takes everyone their own time to reach their own goals was poignant for me.

On selling out. Novak has a new (to me) take on what it means to sell out. He says that early in his career he resolved not to sell out. He would only do things for their artistic rewards. Then he had a change of heart.

Who am I, Novak asks, to turn down a movie (payday). He says people in Hollywood can earn enough to put their kids through college with a single Christmas movie. So they do it.

Media suggestions.

Easy Riders, Raging Bulls was the sort of think Novak wanted to create.

Daily Rituals is a book both Novak and Ferriss like. It’s one we’ve mentioned many times.

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