Restaurants

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

Restaurants are terrible businesses but in the spirit of inversion we can learn from anyone. Lately, a quote from Barry Ritholtz’s podcast with Cal Turner Jr. has bounced around my head:

“Luther Turner, my papa, was wonderful. He only had a third-grade education. He was the head of the family after his father was killed and he had to make it all work at age eleven. What Luther had going for him, was that he assumed that everybody he met was smarter and that he should learn something from everybody he met.”

Sometimes we’re persuaded, sometimes we’re dissuaded.

No one should be persuaded to open a restaurant.

But I wrote an ebook about restaurants anyway. It’s $3.

Summarized it’s this:

Successful businesses serve customers to create sustainable profits. That starts with ‘that’s interesting’ moments which lead to the genesis of an idea. Under a low overhead, entrepreneurs then hire for their weaknesses and create teams that search for a market niche by talking to their customers.

That’s it.

In his book, Kitchen Confidential, Anthony Bourdain titles one chapter, “Owner’s syndrome and other medical anomalies.” One duo hired Bourdain, because “As this (off-Broadway shows) apparently, wasn’t unprofitable enough, they’d chosen the restaurant business as a way to lose their money more quickly and assuredly.”

Other reasons not to start a restaurant include ego, thesis creep, and food lovers. Bar owners who want to be restauranteurs should instead open a second bar. “Bar biz is good biz,” Bourdain notes.

If you like this blog it’s for you.

It’s also in podcast form: iTunes, Overcast, or Soundcloud.

 

SSAC19

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

In March 2019, The Sloan Sports Analytics Conference was held in Boston. Rather than detailed notes, this page will be a table of contents for where to find more information.

Hunting for Unicorns had good sections on two key themes; competitive advantages and communicating well. Michael Lombardi asks, can you play left-handed? Good team construction, said Paul Pierce, is when a style of play is built around a team’s strengths, starting with the best player.

Much of the second half of the talk is Celtics Mike Zarren and Golden State’s Bob Meyers going back and forth about good communication. Meyers said, “You can’t hand your coach twenty pages on the second night of a back to back on the road. But you can slowly over time.” Zarren added, “This is always the point that gets made, how do you integrate analytics into your organization such that it doesn’t feel like something alien.”

Good communication is about ease. Pierce pointed out that the data he used was colored and visual. “The ease of video that just shows up on their iPad”, said Zarren, “and everyone is used to having technology around and watching video instantly all the time. So there are no technology humps so it’s just a matter of curating information you think the players need.”

Gladwell and Epstein talked about specialization vs variation in training. Gladwell notes about 10,000 hours, “I think I made an error. I conflated two separate things. Large amounts of practice is necessary but I thought that meant specialization which I now realize is false.”

He also told Stephen Dubner that the support for this commitment is curcial.

As NASA flight controller Gene Kranz noted, “Behind every great man is a woman – and behind her is the plumber, the electrician, the Maytag repairman, and one or more sick kids. And the car needs to go into the shop.”

Epstein’s newest book, Range fits in nicely with the idea of a mental model toolbox. Ophthalmologists, Gladwell said, “who take art history lessons and learn to look at works of art end up as better diagnosticians than those who spend extra time at the medical school.”

Kudos to Epstein for this book, because illogical ideas can be hard to adopt. As Rory Sutherland said, “It’s much easier to get fired for being illogical than unimaginative.”

Mike Leach spoke with Michael Lewis about pirates, pulling kickers out of the stands, and breaking into football. Leach is passionate about football, but passion can be a dangerous word. Especially when preceded by ‘Follow your’.

Leach put it this way, “Anything that you’re passionate about doesn’t feel quite like work. There are good days and bad days and you love it and hate it but you get consumed by it.

And, “Everybody thinks they want to be in football and they’re fascinated by football because they’ve watched a bunch of games but they don’t quite realize that you sit in a dark room like a caveman with a projector for hours on end running tape back and forth.”

When Magic Johnson told Michael Ovitz he wanted to be part of the business world as well as the sports world Ovitz asked if he read the newspaper. ‘Yes,’ said Magic. ‘What section?’ Ovitz asked. ‘Sports,’ said Magic. “Wrong answer. It’s gotta be the business section,” Ovitz replied, so he made Magic a deal. If Johnson read the business section and could talk about them a month later Ovitz would represent him. Magic did.

Bill Simmons and Adam Silver was good and a reminder how much of life is relative. What do NBA players have to be upset about? It all depends on the point-of-view.

The same day I watched this, I finished Beer Money a memoir from one-time beer heiress Frances Stroh. She wrote, “Striving for something gives life it’s meaning, regardless of whether we succeed or fail. The problem was, my father had never had to strive for anything.”

Silver also had a Ted Sarandos like mindset, noting that the NBA is one of many things that compete for attention. Even small English pubs compete with Netflix.

Data is the New Black touched on all the above issues and Mike Zarren again reminded people of the importance of culture and communication. “The communication of the information is as important, if not more important, than the actual quantitative work that you do.” The Two Pauls remind analysts that their job isn’t to find good investments but to find good investments and get those investments into the portfolio.

Maryann Turcke, Amy Howe, and Jessica Gelman all reinforce how much improvement can still be done. It feels like Moneyball was ages ago but there’s always new data to collect, clean, collate, and communicate.

Daryl Morey ran through the soccer talk in An American Analyst in London as he encouraged viewers not to hold too tightly to the status quo. “In basketball it was assumed that the best coaches with the best players were also using the best strategy but it could be they just had more talent.”

The trio also talked about identifying unconventional excellence. How do you find them? Winning follows them. Chuck Hayes and N’Golo Kante don’t have the physical traits that make them seem like excellent athletes, but their results suggest otherwise.

 

Happy streaming.

Kenneth Jeffrey Marshall

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

Kenneth Jeffrey Marshall spoke with Jake Taylor about his book, Good Stocks Cheap and what it means to be a value investor. We’ll also pull a few quotes from a 2017 Financial Sense Newshour interview.

Part of the reason Marshall wrote the was to help investor use the right language. “Language really drives behavior so if you want the right behavior you really want the right language.” This echoes what Sonkin and Johnson said about good investing conversations. Misleading terms can sneak in “before you know it, and hijack our behavior.”

Marshall said Peter Lynch‘s “got misconstrued to ‘buy stock in companies whose products you are familiar with.'”

Lynch noted our ‘knowing’:

“When people buy a refrigerator they get Consumer Reports. When they get a microwave oven they do that. They ask people what’s the best range, what kind of car to buy. They do research on apartments. When they go on a trip to Wyoming they get a mobile travel guide. When they go to Europe they get the Michelin travel guide. People hear a tip on a bus about some stock they put half their life savings in it before sunset and they wonder why they lose money in the stock market.”

Marshall lays out his six parameters and then waits for a sale. “The probability something is cheap when you’re doing all this analysis is pretty slight, so what you wind up calculating is at what price it would become cheap.” And cheap matters. Margins of safety aren’t in predictions, they’re in price. “If you could somehow buy a stock for zero, your risk would be zero because there’d be nothing to lose.”

Marshall says he doesn’t care how he did last quarter, or last year and Taylor jokes that he must not be managing money. It’s a passing point but Marshall jumps on it. “This is what’s tough about running outside money as a real value investor. You have to deal with these folks that, understandably, respond to the only data they have and how you did recently.”

Good organizations align their Stakeholders so they can seize opportunities. Bruce Greenwald said, “For psychological and institutional reasons, ugly in the stock market is your friend.”

Be like Seth Klarman, said Marshall, “Klarman talks about this very eloquently. He says, ‘You want the kinds of investors that when prices go down say, ‘Can I commit more capital?'”

Taylor closes the interview asking what’s great about investing and Marshall says it’s the curious nature of the business. “If you’re a long-term value investor, I think you have a sort of requirement to continually put yourself in these very dark rooms and try to turn the light on, to try to figure it out.” And, “I like nothing better than to be the least informed person in the room.”

Time and again we hear from investors that investing is a great job because it (can) pay well, requires curiosity, and has no age-mandated retirement.

Taylor asks for an off the beaten path book suggestion and Marshall offers  Factfullness by Hans Rosling. I agree.

Marshall doesn’t suggest it, but he likes Porter’s Five Forces too.

And about Thinking Fast and Slow “(Kahneman’s) and his collaborator, Amos Tversky made folks aware that the assumption of rationality was probably wrong and probably not the right way to view human economic decision making.”

 

Thanks for reading.

Jeff Jordan

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

Jeff Jordan’s career includes stints at eBay, The Walt Disney Store, Reel.com, and Paypal and as a GP at a16z, his current role.

Listen to this post: iTunes, Overcast, or Soundcloud

Successful businesses, a friend told me, either sell the same things to new people or sell new things to the same people. That idea leads to two questions:

  • Do you have a ‘healthy’ relationship between costs and revenue?
  • Do you have the ability to add layers to the cake?

In venture capital, the goal is to stomach the former until you can feast on the latter. Temporary unprofitability is tolerated. Paul Graham wrote, “The slower you burn through your funding, the more time you have to learn.” It’s one of the six things Instagram did right.

A slow cash burn means more time to learn.

Jordan and his colleagues at a16z like Andrew Chen want businesses that can grow gigantically. That tends to mean network effect flywheels and craftsmanship like growth.

FLYWHEELS

Jordan admitted that he can’t code and he’s not a technologist but that’s not a huge disadvantage. “I love product.” Specifically technology products. His first foray was selling DVDs for Reel.com, a company that “lost money on every DVD they sold.” Realizing his mistake he fished around for another opportunity and ended up at eBay, “I went from one of the worst business models on the internet to one of the best.”

Part of the reason a platform business is a great business is that it lacks tangible assets. This was not always obvious. Newspapers knew eBay nipped away classified listings and they investigated investing in the company. But, one executive told, Brian McCullough, “he couldn’t sell it to his c-suite because eBay didn’t have any factories, or trucks and his c-suite would ask, ‘What exactly are we buying?'” That’s a feature, not a bug, replied Ben Horowitz.

Jordan succeeded at eBay and later at Paypal because these platforms allowed consumers to set the direction. His colleague at a16z, Andrew Chen, said, “What’s great about a lot of platforms is that emergent behaviors take place and one of those for the snail mail was the chain letter.”

Twitter introduced the ‘@’ sign after users created it. Netflix introduced shows based on what users watched. Paypal’s breakthrough as an eBay payments company was also an emergent behavior.

“An engineer had the idea (at Paypal) to enter payments on the computer (instead of beaming payments between Palm Pilots). A couple of months later, the business is exploding and they don’t know why. So they call the users and ask, ‘Who are you?’ The repeated response was, ‘I’m an eBay seller.’ They stumbled on the fact that eBay had a huge friction in their payment process.”

And, “The best strategy we had at eBay was to watch what the community was doing and try to make it easier.”

But not always. When Jordan considered ‘adding layers to the cake’ he considered ‘Buy it Now.’ He took this idea to the original eBay users and they hated it. The auction was part of the charm, part of the thrill, part of the esprit de corps of eBay. Jordan tested it anyway. It was a hit.

Internet companies should behave like internet companies said Andrew Ng. Malls with websites aren’t Amazon and streaming radio stations aren’t Spotify. Internet companies have to use a/b testing, bottoms-up innovation, and iteration to make their changes. The oldest users didn’t want to Buy it Now but many of the rest – and the soon to be – did.

Network effect companies enabled by the internet are one of the best business models available. But, “The hardest part is getting the network effect started.”

One option is direct payments to users for referrals, like Paypal. Another is a tool, like the OpenTable reservation system. However an entrepreneur ‘kickstarts the flywheel’ they should lean slightly toward buyers and not sellers on the network. Patrons have more and better alternatives than restaurants. “The sellers were paying us but we were biased to the buyers all day long.”

Jordan elaborated on OpenTable, “The key tactic to build the network effect was that free acquisition of consumers that the more restaurants we had, the more attractive it was to consumers the more consumers who came, the more attractive it was to restaurants. So there is a wicked network effect.”

And yet these businesses aren’t without their challenges. “Large scale marketplaces have tons of strangers doing business with tons of strangers.” It needs to be open (sell whatever you want) but not too open (don’t cheat, lie or steal). This might be best seen in Twitter and Facebook after the 2016 American elections. Some wanted limits to what individuals or businesses could post but limitlessness was what enabled those platforms to grow.

CRAFTSMANSHIP

Luckily there are other ways to build businesses. Network effect flywheels are the Simone Biles of the business world; the hardest to pull off but the largest reward if you do. Jeff Jordan and Andrew Chen address specific customer steps for budding businesses; acquisition, engagement, and retention.

From Jordan perspective, “Done right, growth is a scientific discipline because it requires you to understand your business at a micro level.” Don’t think hacks, think strategies that align with a business model.

The earliest customers have to be the shut up and take my money types. Chen explained, “you know, your initially super, super excited core demographic of customers — like they’re gonna convert the best and as you start reaching into different geographies, different kinds of demos, all of a sudden they’re not gonna convert as well.”

Jordan adds, “CAC tends to go up, LTV tends to go down. Because you’re, on the CAC side, you’re acquiring the less interested users over time.”

Unlike baseball caps, CAC and LTV are not one size fits all. Sam Altman advises founders to have their CAC match their business model. If it costs one dollar to acquire a B2B customer whose lifetime value is two and churn is almost zero then pay the dollar to acquire them.

Part of what makes platforms great is the low, zero, (or negative) CAC. It’s no surprise then to see Slack as an a16z investment. Enterprise businesses have higher hit rates but lower ceilings than consumer-focused (which are the opposite). The a16z approach also fits nicely with our Pat Dorsey inspired moats and allocators episode.

Chen said, “What entrepreneurs should think about is what is the unique organic new thing that’s gonna get it in front of people, without spending a bunch of money.” Ways to do that include Lyft’s pink mustache, Lime’s green scooters or even Waffle House’s yellow sign.

Businesses also need to think in terms of sharing. Patrick Doyle of Dominos and Ashley McCollum of Tasty both say that consumers now own the brand. Chen said, “all of these different brick-and-mortar experiences that are making themselves highly Instagrammable”

&

Businesses should consider cheap (0r zer0) customer acquisition. If that weren’t enough, businesses must then keep and engage their customers. This, said Jordan and Chen, is more about the product. “You can often hack your way into new users. It’s really hard to hack your way into true engagement.”

What should a business do? Talk to users.

Rob Fitzpatrick explains how to do this in his book The Mom Test. It comes down to finding out needs not actions, about requests, not benefits.

One of Steve Jobs’s notable quotes was that the user doesn’t know what they want. That may be true, but they do know what they need. Organizations like IDEO and practitioners like Fitzpatrick and Jan Chipchase have built businesses around this gap.

If someone follows this path they’ll see that Pinterest and eBay are browsing experiences while Amazon is a buying experience.

COMPETITION

Ideal investments are in businesses with an economical CAC built on an accelerating flywheel (e.g. mobile, internet).

Ideal, ha! These are clear concepts but hairy tasks.

OpenTable is only an example thanks to fortuitous timing. There were a handful of companies doing similar things and they happened to close a funding round before an investing winter. “If OpenTable was started today I don’t think they’d be as successful because of the emulation that happens.”

Alpha erodes. Daryl Morey said, “it’s a real problem with the draft…and this year again it was straight down our board…the draft is more efficient.”

The next edge, frontier, hummus is something weird. Jordan said, “The best pitches are some combination of analogy, ambition, and that ‘Oh my god that’s so obvious and yet no one has thought of it’.”

That’s good differentiation. If it’s bad, “and you’re highly reliant on paid marketing, the movie typically doesn’t end really great.”

Part of this is telling your story well. Aswath Damodaran says in his valuation class, “Every number in my valuation has to have a story behind it and every story that I tell about a company has to have a number attached to it.”

Terry O’Reilly noted, “When you’re starting out the lack of marketing budget is always an issue but I think the bigger issue how to differentiate your business. Amateurs always think marketing is about selling stuff and the professionals know it’s about differentiating your business.”

And don’t think about it as selling, said Jordan, “You don’t have to be a salesman, you have to be an effective seller.”

 

Thanks for reading.

DJCO 2019

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

Charlie Munger is ninety-five years old and when asked for advice his answers circle around one thing, honesty.

Honesty in education.

“My definition of being properly educated is being right when the professor is wrong. Anybody can spit back what the professor tells you, the trick is to know when he’s right and when he’s wrong.”

Honesty in problem-solving.

“Denial is a very stupid way to handle a problem.”

Honesty about limitations.

“We never had the illusion that we could just hire a bunch of bright young people and they would know more than anybody about canned soup and aerospace.”

In mapmaking, there’s always lost details. A perfect 1:1 map of France is France. So maps are scaled down to balance detail and convenience. Munger, and Warren Buffett, seek terrain they understand.

Like their famous ‘too hard pile’ – “Part of our secret is that we don’t attempt to know a lot of things.” – is full of subway maps, transit maps, museum maps and so on. They’re looking for maps where they understand what’s on the page and what’s not.

“We never thought we could get really useful information on all subjects like Jim Cramer pretends to have.”

When the right map crosses Munger’s desk he wanted to seize it.

“The whole idea of diversification when you’re looking for excellence is totally ridiculous.”

How, for example, does someone read the map of China. We have books on China but that’s only a start. We can’t ask Charlie either.

“I can’t help you, I solved my problem you’ll have to solve yours.”

“Partly because he’s (Li Lu) fishing in China and not in this over searched, overpopulated, highly competitive American market.”

Honesty about money. Munger said that his family’s net worth would be double if not for one mistake of omission. So what. There are more important things than money.

“We all know people that are out married, what a good decision that was for them, way important than money.”

And maybe in another life, Charlie Munger would be Mr. Charlie Munger Mustache (McMM).

“Controlling cost and living simply is the secret.”

If there’s one financial tip he’d like to pass along it’s probably to pay less.

“We handled those hands (department store, textile factor, trading stamp company) pretty well and we bought in very cheaply and success came from chaining our ways and getting into the better businesses. It isn’t that we were so good at doing things that were difficult, we were avoiding the things that were difficult.”

Honesty with others. Two people that came up multiple times during the two-hours were Abraham Lincoln and Li Lu, “Li Lu is the Chinese Warren Buffett. He’s very talented.” Munger admires both, in part, because of the sacrificial nature of their success. Lincoln’s stepmother taught him to read. Lu’s older brother gave up everything for him. And it’s those that might be the greatest investments we can make.

 

Thanks for reading.

 

 

Jerry Neumann

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

“There are a lot of ways to make money in this world,” said Brent Beshore, “but you ultimately get one life.” Venture capital is a small slice of the investment pie and VC is over-represented in the media but Jerry Neumann is a venture capitalist and one we can learn from.

Neumann likes to invest early. “I try to be the first money in and be very involved for the first couple of years. One of the ways I can be involved is helping raise the next round of capital.”

And got a fortunate start. “I started in 1997 and made a ton of money even though I didn’t know what I was doing.”

Circle round to 2019 and Neumann’s landscape of experience is worth driving through and these notes are from his 2017 podcast with Patrick O’Shaughnessy, his 2015 talk at Percolate, and his 2014 podcast with Nick Moran.

Listen to this post: iTunes, Overcast, or Soundcloud.

Ready?

Deal flow.

“In the past, venture capitalists would win because they would see the deals nobody else would see.”

“People have been saying deal flow is no longer a competitive advantage and that’s not entirely true but it certainly is becoming true.”

One area this advantage remains is in niches. Paul Graham noted this years ago, “our m.o. is to create new deal flow by encouraging hackers who would have gotten jobs to start their own startups instead.” Brent Beshore has done the same for ‘boring businesses’.

Inbound requests initiate because of bequests. It’s ain’t all about the Benjamins, baby. People want a something else. Expertise, experience, and connections can decrease the price and increase returns. Neumann said, “If you look at the best performing seed-stage venture funds you will find they started investing where the market price indicated a discounted price.”

Rishi Ganti said markets set prices and, “In order to get real alpha you have to avoid a price mechanism and to avoid a price mechanism you have to avoid a market.”

Neumann faces this challenge too. “So how do you win, how can you make money if the dumbest guy in the room is the one setting the price?”

Deal flow.

Default ‘No’.

When missing out is more important than getting in, a default answer of ‘No’ is often the best course of action.

“I can’t possibly evaluate ten pitches a day. I do respond to all of them and 80% are an immediate ‘No’. My default is ‘No’…for the 20% I read the pitch deck for, 80% of those are ‘No’.”

Neumann said he might entertain a pitch a week and always sleeps on a pitch. “If I made snap decisions I’d always say yes.” Meb Faber noted this about early-stage investing too, “At my core, I’m an optimist so everything sounds like a yes to me. Where in that world you need to start at no and get to a yes.”

How does Neumann invest if he mostly says ‘No’, wants to be early, and has only okay deal flow? Using his experience and the Technological Revolutions and Financial Capital theory he looks for things that kinda-sorta-mostly fit the market now but will fit wonderfully later.

Neumann said, “If people already know what they want then you’re in an existing market and selling against solutions they already have.” That’s tough. It’s like being a Jimmy Buffett wannabe in Key West.

This is why Susan Tynan got out of transportation and into displays. “When I got to Taxi Magic I thought, ‘So many smart people are competing in the category and I’ve got this category I’m so eager to make better and nobody is thinking about it.”

But it’s not enough to be different, you also have to be different and be right. Howard Marks noted, “You must learn to see thing others don’t, see things differently or do a better job of analyzing them – ideally all three.”

It’s not just having the faith and taking the step but the bridge has to be there.

This is I think where Carlotta Perez’s theory enters. The financial, cultural, and economic backdrop matters a lot. Neumann said that metallurgy, steam power, and the LLC “together meant you could build a railroad.” And,  “Until the US government came in and invested a ton of money building the interstate highway system you didn’t have the society changing aspects of the automobile.”

The automobile waterfall is clear in the stories of Ray Kroc and Rich Snyder. But there’s a Facebook and iPhone example too said Brian McCullough, “I think the reason mobile didn’t take off for so many years was that there wasn’t anything for normal people to do with it. The iPhone comes out in 2007 and six months later Facebook opens registration to everybody.”

“A technological revolution starts,” explained Neumann, “when you have a bunch of innovations that come together to form a technological system.” No one articulated burgers and milkshake franchises. No one demanded Facebook. “Steve Jobs couldn’t do customer development. You can’t do customer development with markets that don’t exist.”

Circa 2018 this is/was platform businesses. GPS devices with cameras and payments are perfect for solving the transaction cost problem, and everything boils down to transaction costs said  Michael Munger.

eBay happened because people had home computers, internet connections, and Beanie Babies.

Apple and Facebook coevolved, wrote McCullough, thanks “Maybe you had to have Facebook to go mainstream for the iPhone to go mainstream and vice-versa.”

But these co-evolutions are hard to pin down. Ben Horowitz said that no one ever predicts the killer app. Avi Goldfarb said the same thing about AI, we just don’t know what it’s going to do well.

What we know is that it takes different things coming together like metallurgy, steam, and the LLC! Independently they’re good, together they change the world.

But what happens once the world changes? “The goal for production capital is to fund innovations customers want.”

This is a drum we beat again and again, because (maybe) we’re in what Perez calls the “deployment age.”

Talk to your customers. Talk to your customers. Talk to your customers.

When Peter Rahal started selling homemade (RX)bars at Crossfit no one there knew they wanted a paleo friendly bar. But once they did he started collecting feedback, tweaking and trying again. “You should learn (the Lean Startup methodology) because these tools are meant for the deployment age,” said Neumann.

Ideally, a founder wants to be somewhere the competition is not. They need to be somewhere their competition isn’t, do something their competition can’t, or know something their competition doesn’t – ideally all three.

You can also invert the question. If I were in a big company, what would prevent me from competing?  “In a big company, you can’t walk into your bosses office and say, ‘I don’t know what the expected value is, I don’t know how big the market is going to be.’ Nobody in their right mind would do that.”

“It’s the same thing Porter says in Five Forces if a supplier has more power than you they can abstract more of the value.” “So how do you do something where they’re not going to copy? You either have complementary assets where you have some control or you have something that’s hard to replicate.”

But everything good gets copied. Alpha erodes. Albert Wenger noted, “lots of people caught up with us and started talking about network effects, and then we started talking about finding network effects in less obvious places.” Annie Duke said poker’s been like this. And it’s why investors like Pat Dorsey look for moats.

We started noting there are many ways to make money, but also some consistencies around strategy, decision making, and markets that apply beyond venture capital. There’s also an attitude of ambition, curiosity, and wonder at the world.

In his book, A Curious Mind, Brian Grazer wrote that there are two parts to curiosity; asking the question and following up with the answer. Neumann does that too.

“What you find out when you start teaching is if you don’t understand something you can’t explain it to someone else. You read a book and you’re like, ‘I get it’ but then go and explain it to someone else and then it’s ‘I don’t get this at all.'”

 

Thanks for reading.

 

Bruce Greenwald

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

Bruce Greenwald spoke in 2005 about value investing. He noted, “There is overwhelming statistical evidence that markets are not efficient.”

But finding inefficiencies is tricky. Ask, said Greenwald, “Why has God been so kind – or whoever it is who does this – as to make this opportunity available only to you?”

This is something a lot of analysts, value investors or otherwise, miss said Sonkin and Johnson. They said there are four questions investment pitches must answer; how much can I make, how much can I lose, why haven’t others grabbed this, and when will others get it?

Josh Wolfe puts it this way, we hope others agree with us, just later.

Greenwald, Sonkin and Johnson, and Wofle all want something that costs less now and more later. Usually that means it smells funky, is complicated, or unloved. “Ideally, you want to be the only one seriously studying a particular security.”

And there could be lots of reasons you get first crack at something. It could be too small. It could be the wrong category. It could have a catalyst. “Boring is your friend…people like exciting but that is not where you want to be.”

This approach works if it has support.

“But as any professional investor knows, they run up the score whether you swing or not because you’re being compared to indices.”

The organizations stakeholders are important. For investors it’s LPs. For parents it’s kids. We all have them.

“You get in trouble as an institutional money manager by significantly deviating from the performance of other institutional money managers.”

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

Once everyone is aligned, Greenwald warns investors to focus on what they know. Want to forecast returns ten years out? Good luck, said Greenwald.

“It’s about developing a circle of competence, and if their circle of competence is every industry in every country, lots of luck.”

“You want an approach to valuation that uses all the information as effectively as possible.”

That means putting more value on some things, the tangible and immediate, and less on others, the distant and intangible. Greenwald said to start with assets and current earnings and then cautiously expand from there. Pat Dorsey went to India to see what he could see and realized consumer brands were beyond his scope, noting that “We didn’t know if it was diligence-able.”

If it’s different (ideally with few eyeballs), if everyone’s aligned and if there were no big assumptions we may have a great investment.

Just hopefully not too great.

Annie Duke said the returns to poker have gone down the longer it’s been on TV. Jeff Luhnow said the moneyball advantage has dissipated. Dan Rasmussen said this happened in PE. Albert Wenger saw it in network effect businesses.

Alpha erodes.

Unless…

“Unless there is something to interfere with the process of entry, this market and earnings power value is sooner or later going to be driven to the reproduction value of the assets.”

“If you have earnings power in excess of the reproduction value of the assets, there had better be something to interfere with the process of entry.”

Can you raise prices like Harley Davidson, asked Eddy Elfenbein. Can you raise switching costs like in B2B software, asked Michael Porter. Do you have a Network effect, asked Tren Griffin.

There’s a lot in Greenwald’s presentation about DCF models (models in general). Thanks to this thread for the nudge.