Beanie Babies

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

It was the late 1990’s and the world had gone crazy. Like other instances of insanity, it didn’t seem like it at the time. But when a small stuffed-with-beans bear sold for thousands of dollars something was terribly wrong.

In The Great Beanie Baby Bubble Zac Bissonnette tells the story of the Beanie Baby rise and fall. Before we get into some lessons, let’s brush up on the history of it all.

Beanie Babies were created by Ty Warner after he quit/was fired from his job selling stuffed animals (plush) for another company. Warner had been an excellent salesman but thought he could do better. The cause for his dismissal was selling his own creations along with his employers. A no no.

Warner didn’t care. He thought, no he knew, he could do better. His first solo plush creation was a cat that sold well to – and this is not a joke – quilt collectors. This business was fine but grooming each longhaired cat took a lot of work and Warner searched for another option and he landed on the Beanie Baby.

Warner made repeated visits to Chinese manufacturers, talked to people at trade shows and in stores, and had a had a hyper focus on his product. Once it was finally good enough he sold them only to small store owners, believing that big box stores would put the Beanie Babies in bins and that would diminish their value. He also demanded full payment up front.

Parents bought them for their kids. Kids took them to school. The phenomenon spread through Chicago. Some parents became more active collectors. To keep track of the available Beanies some people took to sharing a checklist.

Warner continued to tinker, making changes in different lines. If something wasn’t to his liking he would order the next batch slightly different. This purposeful tinkering led to the accidental phenomenon of retirement. The early collectors started to search eBay for these “retired” Beanies and would call their friends around the country to look for them.

Warner’s production was limited. Later this was a marketing ploy but early on it was an issue of cash flow and how much credit his bank would loan for inventory. Scarcity led to increased prices and the internet led to the conveyance of this information. As some people started to make money, more people piled in. At the end of 1998, 7% of all eBay listings were for Beanie Babies. The mania continued. McDonald’s got involved. Warner wised up to the idea of scarcity and took to actively retire more Beanies and created limited runs.

The cycle continued; people saw other people make money off Beanie Babies, people joined those other people, more suppliers meant more supply and with an undifferentiated product they had to compete on price. Prices were pushed down. Warner at this time had ramped up supplies to the point that so many Beanies were being produced that everyone who wanted one could get one. By 2000 the craze was over.

What the hell happened?

Let’s start with Warner. Unlike startups that fail, Warner understood his customers. Part of what made him a great salesman was this deep understanding. He talked to customers, store owners, and even quizzed his girlfriend’s daughters about what they liked and didn’t. Warner got his XMBA from his time at Dankin, his first plush employer. Warner was a good surfer but he also caught a great wave.

The 1990’s was the era of getting online. Warner’s sales were helped by the proliferation of the checklists and secondary sales on eBay. He was also fortunate in that there wasn’t much competition. Bissonnette wrote, “ the idea of starting a plush company in the early 1980s was no one’s idea of smart. It was a stagnant industry, fifty years past its prime, with no growth in sight.” Much like the Instagram guys or Ken Grossman, the best time to start something is when no one else is starting the same thing. Warner had some nice tailwinds to push his company along.

Another advantage was wise financing. Warner never took on debt and required his retailers to pay-in-full upon delivery. He also stocked the Beanies in airports, thinking they would be a good last-minute gift and traveling from airport to school book bag would be good marketing. In the beginning, he convinced retailers this was a good idea, in part, because of the simple product lines. Beanies retailed for $5 or $10.

While Warner had great financial success there were some lessons on what not to do as well. For starters, Warner succeeded despite his ego. Bissonnette wrote:

“”I am the designer! I designed everything!” Controlling every aspect of the animals’ existence was a fixation, and it stood in stunning contrast to his nearly total disregard for the feelings of the people he was closest to. He carefully excised everyone else from the story of his rise: his father hadn’t gotten him his first job, he hadn’t used freelance designers to create his bears, and he’d started the company all by himself.”

Warner’s ego was helpful in that it helped him maintain a great focus. One former employee said:

“That’s the secret: focus. If this is what you want, then go for it. Nothing crosses that road, nothing gets in the way, nobody changes it. This man wakes up in the morning, and he’s thinking about the product. He goes to bed at night, and he’s thinking about the product: Should it be a blue ribbon or a red ribbon? I can’t tell you what we went through to get the eyes to be absolutely what he considered perfect. Every detail on every animal was gone over fifty times. It had to be as close to perfect as you could possibly get. Or do it again.”

Chamath Palihapitiya said about the dichotomy between too much ego and not enough: “Ego is a terrible way to make decisions, it’s really good things to have, to make ourselves feel valuable and be confident, but that shouldn’t drive our decision-making.”

Warner’s success came from an obsessive attention to detail. From the product to the people who bought it, Warner understood what was most important. Because of this, he designed the animals using quality materials in a manner that was different from other toys. As sales grew he lucked into marketing ideas and favorable competition. He was finally brought down not by a competitor but by his own ego, believing he could roll-up (or appear to) the Beanie Baby line and replace it with a new one.


Thanks for reading,


Brian Stout

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

Brian Stout joined John Mihaljevic on The Zurich Project podcast to talk about his journey to value investing.

1/ Deliberate practice. “The way that I learned things was deliberate practice. You can’t read about things or hear people talk about them and know how to do them. There’s a large amount of the learning process where you just have to go out there and do it. It’s like riding a bicycle. You can’t watch someone ride a bicycle and ride a bicycle for the first time.”

This is especially true writes Michael Mauboussin in areas with a strong skill component. Pilots, surgeons, and accountants can all use deliberate practice to get better. These domains can also use small sample sizes, checklists, and let history be their guide. Stout has used deliberate practice to get better at value investing and math, two areas where success is based much more on skill than luck.

2/ Epiphany.  “When I read The Intelligent Investor I had that moment that value investors talk about which was, this made so much sense that it was like an epiphany.”

Lightbulb moments are the first step in finding an idea to follow the rest of your life. The second part is if you have the right attitude to do the work. Stout did, “pouring through a lot of information and thinking through problems resonated with me.”

If we combine the ideas of Mohnish Pabrai, Charlie Munger, and Cal Newport we get this:

What rare and valuable skills do you have the disposition to develop such that you choose to do that rather than go see the newest movie?

These skills don’t need to be hidden. Stout’s two areas of focus, value investing and mathematics, continue to be rare and valuable. Why haven’t these opportunities been whittled away?

“We’ve all heard that argument from various people and my response is, ‘you’ve taught students just as long as I have, how many times have we given them a textbooks that tells them how to do all these computations, and we teach them how to do it in the classroom, we give them homework on it and they still take a test and can’t do it. Even though you present all the information and show them how to do it doesn’t necessarily mean people will do it.”

3/ Two tools. “When I think about my investing framework there are two principles; there are some psychological principles that are very scientifically established and then there are some mathematical principles that are very relevant.”

In the summer of 2017, my daughters were wondering why they had to read and do math before using their iPads. I told them that reading and math were important because, in reading, you learn about people and in math, you learn about computers.

Jeff Annello gave us the toolbox metaphor for mental models. While Stout calls them principles we can think of them as containers too. In the “MATH” toolbox we have as many valuation equations as screwdrivers, or if you’ve been to IKEA more than once, hex wrenches. In the “PSYCHOLOGY” toolbox we have ideas like recency, availability, and inertia. Rory Sutherland told Shane Parrish that we sometimes forget about this set of tools. “It’s always more acceptable to spend money on infrastructure than to spend money on psychology.”

Like tools, skills are only as helpful as your ability to use them.


Thanks for reading,



Podcast Update #5

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

The last one of these was way back in September 2016, so this post will be an update and quick primer for anyone interested.

I (too) record a podcast. It comes out on Thursday mornings. It includes ideas that are either too small for the blog, audio versions of the posts, or ‘thinking out loud’.

The most recent episode is from June 1st. Each episode opens with a quote and then dives into some number of points.

The opening quote is from Startup and Jerry Kaplans 1987 (!!) meeting at Apple to see the precursor to Newton which was the precursor to the iPhone/iPad. It took over twenty years to build something they thought would take only a few.

1/ I quoted from Chris Cole’s Star Wars convexity. Convexity isn’t an idea that comes naturally to me, or most, writes Cole. This short pdf explains it in terms that I can better understand.

2/ Checklists are fun! An idea that’s bubbled up repeatedly is the value of checklists and part-of-the-reason may be our enjoyment crossing things off lists and completing them. For example, here’s what Tracy Kidder wrote about his time with Paul Farmer:

“On the wall beside his desk, Farmer has taped up three sheets of yellow legal paper, on every line a task to be completed, and beside each of those a hand-drawn box, in Creole a bwat. I’ve noticed that if he completes a chore that he forgot to put on the list, he writes down the chore, makes a bwat beside it, then puts a check in the box. This seems to give him an inordinate amount of pleasure, and I must admit that I feel some myself, completely unjustified, when he says, ‘We’re getting a lot done.'”

3/ Base rates on motorcycles. I first heard about the idea of base rates from Michael Mauboussin, and much like convexity, I didn’t understand it. Tynan wrote a blog post titled Analyzing Risk where he explained the inside and outside view.

“In some cases, they’re (risks) fairly universal. My risk of dying in an airplane crash is the same, per mile, as anyone else’s….But some statistics can be very accurate for a population yet way off for an individual. When I began riding a motorcycle I looked carefully at what actually caused motorcycle accidents. Alcohol was a factor in 50% of crashes, and since I don’t drink I can eliminate that.”

Mauboussin instructs to start with the base rate/outside view. Then, figure out the inside view. This is the ‘well sure it happened to them but it won’t happen to me’ phase. After that consider how much you can move the needle. It helps to understand the two-jar model and how much of results are luck and how much are skill. Then adjust the expected outcome.

4/ The stories we tell ourselves. Scott Alexander wrote about aliens in Budapest. The whole post is interesting but in the podcast, we just touched on our story-telling nature.

Again, thanks for reading,

The Simpsons

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

The Simpsons is thirty. Wow. NPR’s Fresh Air had an episode that featured interviews through the years with different contributors. It was a fun trip down memory lane for someone – me – who grew up with that show. I was amazed that my parents even let me watch it, much less supported it when I parrotted an argument from the show.

I also remember passing around a 3.5″ floppy disc with sound effects from the show. This was years before Napster, not that it would have mattered with a dial-up connection. But getting your hands on those sounds felt so cool. The most popular one?

What a show. Onto the notes.

The Simpsons started as an experiment, appearing first in segments on the Tracey Ullman show. The creators soon realized they had something that could stand on its own.

Accurately predicting what will work, especially in art or technology startups is hard. Experimentation was a hallmark for example, of the Intelligent Fanatics. Ken Fisher too praised the importance of experiments:

“”I’ve been prepared to operate by trial and error, you can do a huge amount of small things on a small scale, test them and see if they work, and if they work do them on a bigger scale and if they don’t work move on to the next one.”

Nancy Cartwright originally went in to read for the part of Lisa but liked the lines for Bart more. She read them and Matt Groening immediately awarded her the part. Cartwright went on to do the voices for Nelson, Ralph Wiggum, and Todd Flanders. How does Cartwright have the ability to do all this? She copies life.

“Or say you’ve got a 7-year-old kid who’s got a split in his two front teeth or he’s missing one of his teeth at age 7. (Imitating Mara Wilson) So he would be talking sort of like this. And you can put a sort of a sound in there sort of like that little actress that played on “Mrs. Doubtfire.” So I can steal from, you know, Mara Wilson I think was that little actress’ name. And I totally ripped that off from her. When I go to the mall or just, you know, people watching or I go to movies and watch television, I’m inspired by live action actors and recognizing sounds and trying to duplicate that.”

Inspiration through imitation is a great place to start wrote Stephen King:

“You may find yourself adopting a style you find particularly exciting, and there’s nothing wrong with that. When I read Ray Bradbury as a kid, I wrote like Ray Bradbury – everything green and wondrous and seen through a lens smeared with the grease of nostalgia.”

It’s why this blog exists! Find the things that worked, try them, keep what works for you. Charley Ellis and David Salem both spoke about David Swensen at Yale. They agreed – in separate podcasts – you can imitate Swensen’s processes but not his results.

Julie Kavner does the voice of Marge Simpson along with her sisters and said:

GROSS: Oh, that’s great! You have a wonderful voice. Was your voice husky when you were young?

KAVNER: Yeah, I was born this way. I came out of my mom and said, hello, Rose, hello, Dave.


GROSS: But did you have a deep voice when you were young?

KAVNER: Yeah. They used to send me home. They always used to think I had laryngitis.

Kavner was born with a deep voice, something we might think is a weakness until it is turned into a strength. This applies to organizations too. Clayton Christensen [wrote]( “An organization’s capabilities become its disabilities when disruption is afoot.” Ben Thompson and [Bill Gurley]( both mention that Facebook’s strength, its network size, is also its weakness. One teen told Gurley that Facebook is to them as LinkedIn is to us.

Hank Azaria wasn’t the original voice for Mo the bartender.

“And I was 22 years old – this was a long time ago. I’m 40 now. I was 22 years old, and I hadn’t worked much. There was an original voice of Moe the Bartender that I guess they weren’t too happy with and wanted to replace”

He got the role and started to do more voices, like Apu. Terry Gross asks how he came up with the voice for Apu and Azaria said:

“He really is just an Indian guy. I mean, in Los Angeles pretty much every 7-Eleven or convenience store worker is either Indian or Pakistani or from this area. And when I first moved to LA, these were the people I really interacted with, mostly, because I didn’t know anybody. So I would talk to these guys.”

Looking back, The Simpsons is a cultural monolith. The show prospered in an era of limited competition. The fragmentation of entertainment – not necessarily a bad thing – means we’ll probably not see another show like it. Tyler Cowen likes to point out that he’s lived in a sweet spot for infovores. He grew up reading physical books and developing his thinking in a quieter world. Now those abilities and habits help him navigate in a louder place.

Even though we won’t see something like this again, we can still apply the principles. Success isn’t formulaic, it takes experimentation and/or imitation. People need roles that play to their strengths. Sometimes this means finding something once considered a weakness.


Thank you for reading,

If you liked this post you’ll probably like this one too: How Louis C.K. made Horace and Pete.

David Salem

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

Once again Patrick O’Shaughnessy has a ranging and enjoyable interview on his podcast. This episode was with David Salem, Managing Partner and Chief Investment Officer of Windhorse Capital Management.

The episode covered many different ideas but in this post, we’ll look at Ethical and Intellectual Integrity. Salem says that he “could stop right there” with the list of desirable attributes of a manager.

The ethical integrity spectrum begins with criminal activities but extends to how you treat other people, whether you keep them waiting for dinner and how you act if you do, and if you act with a client’s best interests at heart with the courage to say, “we were wrong.” Do you follow the Golden Rule? Treat others as you’d like to be treated. Or, do you follow the MBTI Rule? Treat others as they’d like to be treated. Sometimes this means saying ‘No.’ Michael Lewis explained the same attitude in a different situation this way:

“The RBC trading floor had what the staff liked to refer to as a “no-asshole rule”; if someone came in the door looking for a job and sounding like a typical Wall Street asshole, they wouldn’t hire him, no matter how much money he said he could make the firm.”

Salem also looks for intellectual integrity. Markers of this include; curiosity, grit, hope, hunger, and endless questioning.

Why are these two attributes of managers so important? Salem said:

“The pendulum is swinging more and more in the direction of focusing on the person and the culture and not the processes or actual approach…you cannot know ex ante the date on which the process they employ today will become obsolete. So you ought to assure yourself that the human beings you’re dealing with treat money management as a profession and not a business.”

On Twitter Patrick teases “the Mt. Everest question”

Which is this; if you could accomplish one feat but no one would know, what would it be? Salem asks this question to people and it reveals the two things he’s looking for. Do you have the intellectual integrity to strive for something great and do you have the ethical integrity (humility) to be comfortable with not bragging about it?

The question may be structured nicely to get at these two ideas but the answers won’t necessarily be. Figuring this out requires committed listening, a point that comes up again and again.

It’s not easy, but reading people and getting to know them in an hour is a valuable skill, especially for Salem who is tasked with choosing investment managers that invest capital he deploys. He wants to sniff out ego early. How has he cultivated this skill? “As with much of what we do evaluating managers, you build up a reservoir of experience and pattern recognition for when you sit down with someone and try to determine if they are excessively insecure.”

Egotistical, ungraceful, and insecurity are all “unfavorable” ethical traits. I was glad that he used different words and different examples (Lance Armstrong, Donald Trump, Bernie Madoff) to create a mold for our pattern recognition.

Another way to get at someone’s intellectual integrity, said Salem, is to ask, “do I see evidence that they’ve consciously pursued excellence in everything they’ve done?”

  • Are you improving in such a way that you’re changing your mind about things? Charlie Munger said at the 2017 Daily Journal meeting, “I’m very busy destroying bad ideas because I keep having them. It’s hard for me to just single out one from such a multitude. I actually like it when I destroy a bad idea because it’s my duty to destroy it.”
  • Are you curious like Brian Grazer or Eric Maddox?
  • Are you writing? “I think that clear writing and clear thinking are synonymous,” Salem said. William Thorndike said much the same thing in his time with Patrick, “It’s interesting to write when you are trying to figure something out. It’s fun to try to solve an interesting problem and write about it.”
  • Are you reading? Salem has some suggestions. Poor Charlie’s Almanack is “just fantastic.” Beyond books the Berkshire letters, David Swensen’s letters, and Peter Bernstein’s letters (unpublished, for the moment) are all great too.

Thanks for reading,

If you liked this post, you might like my podcast “Mike’s Notes.”


Dan Carlin

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

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Dan Carlin joined Daniele Bolelli on the History on Fire podcast for a great ninety minutes. Fans of Carlin’s other shows like Hardcore History or Common Sense will enjoy it.

We will think about what Carlin says about nuanced thinking. For starters, it’s hard. “There’s an ease to adopting an ideology,” Carlin said, “because it gives you ready-made answers for any situation.”

Brett Steenbarger said, “people are averse to effort and there is a certain hope they can get rich quick.” Ramit Sethi called us “cognitive misers.” The work of Robert Cialdini is built on the idea that we reciprocate, use social proof, like to be consistent in our actions, believe in affinity and authority, and will act with the threat of scarcity. Those defaults lead us to the easy decision path.

Carlin and Bolelli want us to be more nuanced.

“There’s this thinking that if we try to understand them we’re justifying them and that’s not what we are doing. You want to understand what makes monsters tick.” – Bolelli

“If you put a middle ages executioner on trial in a modern courtroom but the jury had to be made up of people from his error, does the guy get acquitted or found guilty? Some of the bad people of history would be found innocent by a jury of their peers but some of them stand out in such a way that even in their time period they would be convicted by the people of their era.” – Carlin

“I’m a devil’s advocate kind of guy.” – Carlin

“It’s more complicated than an either or question; it’s both.” – Carlin

“Anytime I hear an argument that’s black and white I can almost automatically assume that it’s wrong. Sometimes reality is black and white but that happens so rarely. The majority of the time it’s complex.” – Bolelli

Why is nuance important?

Good organizations argue well. Bill Belichick and Marc Andreessen both have people take the other sides of their arguments. Jeff Bezos has a “combative” culture at Amazon. Good decisions are forged.

There are very few perfect dichotomies. Most things are a shade of gray. The best answer is ‘it depends.’ Jocko Willink often points out this balance. John Nagl warned, “The American way of war is marked by a belief that the nation is at war or at peace, the binary nature of war leaves no space for political-military interface.” If someone gives you an either-or, don’t.

Finally, a nuanced view creates empathy (not agreement). Empathy is important in How to Negotiate Well. Danny Meyer prefers people with strong people skills – like empathy – over people with strong cooking ones. General Mattis said to build empathy and “try to walk a mile in their shoes.”


Thanks for reading,

William Thorndike

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

William Thorndike joined Patrick O’Shaughnessy on the Invest Like the Best podcast to talk about his book and his investments. Thorndike’s book The Outsiders is great and we’ve covered it before – The Outsiders. In that post we introduced the decentralized command stool.

The recent post on Intelligent Fanatics, and accompanying book is another source of these ideas. In that book, Sean Iddings writes that people and the culture they sew, may be one of the best competitive advantages a company can create.

Thorndike’s interview with O’Shaugnessy touched on the book but not excessively. Instead we’ll look at Thorndike’s experiences and advice for decision making. Ready?

1/ Lightbulb. “I read it (The Money Masters by John Train ) and immediately realized this was something I wanted to learn more about and eventually do.” This book started a “process” and Thorndike sent away for the Berkshire Hathaway annual letters.

“Lightbulb moments” doesn’t mean flip of the switch results. It’s more akin to “overnight success.” Naval Ravikant, Haralabob Voulgaris and Jim O’Shaughnessy all had these moments that inspired some digging. They were moments that turned them quizzical. It was a feeling of, ‘that’s interesting’ rather than AHA!

2/ Pattern seeing. Thorndike’s book came out of his pattern recognition skills. He researched companies and started to see that great companies had great capital allocators in charge of them.

Building pattern recognition takes time. Judith Elsea said, “How do you evaluate founding teams? You do that by a process of triangulation, some pattern recognition skills that have been developed over multiple observations. You spend a lot of time talking to the partners.”

Patterns are good first filters to find ideas that trip our ‘that’s interesting switch.’ At her VC firm, Elsea has a model that does this. Others like Ian Cassel told Patrick in his episode that he builds his from “qualitative and quantitative nuggets.”

But remember that constellations are patterns too. We see stars and connect them with imaginary lines based to create things our culture values.

3/ Productivity. Beyond allocating capital, the outsider CEOs were productive too. This tended to manifest in two ways. They hired strong COOs and they had limited investor relations.

The best managers hire people who do some job better than them. If you can’t do this, says Jocko Willink, maybe you better check your ego. Jim O’Shaughnessy agrees.

Once The Outsiders got great people in those jobs, they limited who was at the table. Wesley Grey told Barry Ritholtz:

“We know multiple multi-billion dollar hedge fund managers with heavy value focus that are literally out of business because the back half of 2015, because deep value got destroyed and redemptions overwhelmed their ability to convince capital to stay.”

In his book about Charlie Munger, Tren Griffin wrote: “Graham value investor Marty Whitman has even said he does not what people in his fund who do not understand Graham value investing system because he must sell shares when they redeem their ownership interest.”

To put it another way, limit the people who can force a decision.

4/ Writing as thinking. “It’s interesting to write when you are trying to figure something out. It’s fun to try to solve an interesting problem and write about it.”

On the podcast, I talked about how checklists relate to this. If you write down your mistakes and successes, you can create a checklist for avoiding the bad and pursuing the good. Or, you can use what others have learned.

Charley Ellis told Ted Seides what the checklist looks like to be like David Swensen at Yale:

  • “A chief investment officer who is brilliant.”
  • Someone who is “exceedingly modest.”
  • Rationality. As Peter Lynch said, “You can’t treat it like your grandchildren. If the fundamentals slip you have to say goodbye to it. Remember, the stock does not know you own it.”
  • Experience. “He’s been doing it for more than thirty years.” This has led to a terrific network. “If I could ever do something that David found useful I would do it immediately.”
  • Governance structure. (see #3 above) Ellis said the Yale committee could “play well with others” and were prepared for the meetings. “All of us on the committee scared ourselves into being fully prepared.”

Following a checklist won’t create success. “Take all the different comparative advantages,” said Ellis, “and it’s virtually impossible to replicate.” But, like Thorndike says, writing is a way to solve your problems.

5/ From structured checklists to adaptive questions. One theme of late has been the idea that good decision makers use a rigid structure to filter ideas and from a smaller set of options become more flexible in their inquiry.

Thorndike appears to do this. His initial filter is companies with recurring revenues and growing markets in non-capital intensive industries.

Royce Yudkoff gave similar advice for ‘search funds,’ noting that you won’t get everything you want but filters help you narrow things down.

Whether it’s a formula, ‘black box’, algorithm, filter, philosophy, or checklist, good decision makers start with structure and finish with finesse.

Thanks for reading,

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