B.J. Novak, part 1

B.J. Novak (@BJNovak) joined Tim Ferriss (@TFerriss) to talk about startups, starting out, and stand-up. Novak is on the podcast to talk about his app, Li.st, a place to create and share lists about anything. Beyond talk about the app (and references to Novak’s books) there’s good stuff throughout.

For example, in what ways is Harvard a disadvantage? How did Novak get on The Office? What does it really mean to be a “sell out?”

Ready?

The benefits of podcasts.

Novak says that he’s started to get into podcasts and, “listening to podcasts is like an extra hour of reading a day.”

Gretchen Rubin wrote that podcasts and audio books changed the way one friend viewed her entire job. In her book, Better Than Before, Rubin writes that she was talking with a friend that hated her job. Her friend gave a bunch of reasons why, but Rubin wasn’t convinced. As they talked more, Rubin discovered that her friend didn’t really hate her job, only her commute.

lightbulbWhy don’t you try audiobooks or podcasts, Rubin suggested. A month goes by and Rubin checks in with her friend, who says that everything has changed. She likes her job and her commute, actually looking forward to the latter.

The advantages and disadvantages of Harvard/The Harvard Lampoon.

Novak tells Ferriss that it took 3 attempts before he got on the staff at The Harvard Lampoon. This was his final attempt, Novak says. Which is too bad, because Novak didn’t know his numbers.

We never succeed all the time, and sometimes fail a lot. That’s normal, and important to remember for your psyche. In The Hard Thing About Hard Things, Ben Horowitz writes:

“(If) CEOs were graded on a curve, the mean on the test would be 22 out of 100. This kind of mean can be psychologically challenging for a straight-A student. It is particularly challenging because nobody tells you that the mean is 22.”

It’s not only CEOs. Investors like Ken Fisher and Brett Steenbarger and Kevin O’Leary all explicitily mentioned that failure rates can be higher than success rates.

As Horowitz found out, that can be demoralizing. What you need to do is know your numbers. Ramit Sethi talked about how to do this in business.  Mark Cuban in basketball. 

The advantage of Harvard.

The best part about Harvard, Novak says, was the environment. “Those people (at the Harvard Lampoon) train each other rigorously.” It makes sense, the list of alumni is impressive.

But there’s more.

There was also an acceptance. “The biggest advantage,” Novak says, “is to not think it’s crazy to be a comedy writer.”

Penn Jillette said the same thing when he went to clown college. “This was really really important to me,” Jillette says. He didn’t know he could do that. When he found out, it changed his life. 

The disadvantage of Harvard.

Being at Harvard creates a disconnect, Novak says. You lack life experiences and develop a form of cockiness. It’s a catch-22. If you want the environment where people push each other to be great, you can’t also have the everyman experience.

Novak’s balanced view about Harvard reminded me of “part of the reason thinking,” introduced by Sanjay Bakshi.

When we examine a situation we would do well to look at it as the sum of some parts. Harvard has lots of great things about it, but it has drawbacks too. Just like marriages, jobs, and friendships. No one, no place, no condition is perfect. Each has good and bad parts, advantages and disadvantages.

You can’t be B.J. Novak – so don’t try.

Ben Horowitz wrote in The Hard Thing About Hard Things, “the problem with these books (about business) is that they attempt to provide a recipe for challenges that have no recipes. There’s no recipe for really complicated, dynamic situations.” 

Like becoming a TV star.

Novak says the same is true for show business. “Everyone who gets a job in show business has a story that’s not replicable.” This is actually great news.

Horowitz and Novak warn not to follow anyone’s advice too closely. And that’s true, just not at the beginning. 

After college Novak ended up writing for Raising Dad, a WB comedy starring Bob Saget. Novak tells Ferriss that he looked around the writer’s room one day and realized he didn’t like what he saw. Not the people, but the paths. He wanted to be like Saget or Jonathan Katz (the show’s creator). So he decided to start like Saget and Katz, with stand-up.

This is how we start, with imitation.

Stephen King writes that imitation is good, and in some ways the only way. Ben Mezrich did it. So did  Jason Calacanis who told Tim O’Reilly, “I copied everything you did coming up, you’re my inspiration for a lot of what I do.”

You can start in a place of imitation, but then you have to go beyond that. You have to take small steps on your own.

When you’re afraid to walk, take small steps.

It’s okay if you’re afraid. Don’t do anything big.  In fact, it’s better if you start small.

But you need to overcome your fears (and sooner than later). If you want to get into stand-up, Novak says to book your entire first week of shows in advance. Otherwise you may chicken out. 

Note, this small step (schedule a week of shows) is a small hack, but small hacks have powerful effects. Food researcher Brian Wansink found that small hacks are all it takes to eat less. Smaller bowls and opaque containers cut consumption. It doesn’t take a big diet to lose weight, just small steps. So too for careers. 

You also have to be ready for small improvements. “You can’t make each night a referendum on whether or not you should be doing it,” Novak says about stand-up. If you have three good jokes, keep them and get rid of everything else.

This is exactly how Louis C.K. works. In Sick in The Head Louis says, “everything has been one foot in front of the other, one step at a time.”

Louis also explains that he constructs his act this way. If you have one good joke, that’s your closer. When you get another, that’s your opener. The third good joke is your mid point. It’s like snapping together Legos.

Okay, small steps. Now what?

Now it’s time to get work building career capital. Introduced by Cal Newport in So Good They Can’t Ignore You, it is the idea that to have a great job, you have to have a great skill.

Career capital theory explains that good jobs are the exchange of one valuable thing for another. It’s exactly what Novak did.

After Raising Dad was cancelled Novak did stand-up for 18 months, and got “decent.” That led to a stand-up showcase and Punk’d. Then came a call from Greg Daniels, who wanted to create an American version of The Office. Daniels wanted a small staff like at SNL and the original The Office. He needed people who could write and act. He needed people like Novak.

Novak got the great job because he had great skills. Look at his sequence.

High school and family experiences -> Harvard -> Harvard Lampoon -> “The BJ Show” at Harvard -> The BJ Show special with special guest Bob Saget -> “Raising Dad” -> stand-up in Hollywood and L.A. -> The Office.

Novak accumulated career capital and exchanged it for a job on one of the great comedies of all time. Of course, no one knew how great it would be.

To be great, you can’t focus on how great you might be.

“This was not considered a show with any chance for success,” Novak says about The Office.

Great things never start out as things that are expected to be great. It takes so much work to create a masterpiece that any thought of it’s relevance takes away from the resources for the work.

James Corden said this about his show, Gavin and Stacey. If this could be one person’s favorite show, that would be great, Corden said.

James Manos said the same thing about The Sopranos. “None of us were conscious of creating something that became truly iconic.”

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

Tomorrow part 2 will drop, with sections on luck, perspectives, and what “blue sky” means.

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Bundling Economics in the Connection Economy

Economic bundling is a good idea for both buyers and sellers. It’s efficient. It’s easy. It’s also going to happen less.

People are unbundling goods and services that were previously bundled. Why?

Let’s try to figure this out through four question.

  1. Why are people “cutting the cord,” when the a la carte options end up costing the same or more?
  2. What are the economics of bundling? We’ll hypothetically merge Netflix and Spotify to explain.
  3. What are the four parts that make a good bundle?
  4. Why is bundling in decline?

Ready?

Cord cutting.

“Cord cutting” via Google Trends:

There are plenty of articles that explain why and how to cut the cable cord. Like this CNN Money Article, which says:

“Dropping cable TV can be a tough choice: You’ll save money, but you’ll have to work harder to watch your favorite programs when you want to see them.”

Well, I’m not above a little work to save money, what do I need to do?

First, set up an HD antenna. Then add Hulu, Netflix, Amazon, HBO, Showtime, CBS, and SlingTV. Hmm, that sounds like a lot. How much does all that cost?

$78 !?!?

Wait a minute, that only saves me $8 a month. What gives?

The same CNN article has the answer:

“When you call your cable company, make sure an Internet-only plan is the cheapest package it has to offer. Sometimes, cable providers incentivize customers to keep their TV subscriptions by making “double play” or “triple play” phone-Internet-TV bundles cheaper than any single option — at least for an introductory period.”

The bundle isn’t cheaper because it’s a promotion, the bundle is cheaper because of bundle economics. Once the cable company is providing you one service, it doesn’t cost that much to provide more.

Bundles also work because they “elongate the demand curve” which is fancy language for “more people will want it.” Imagine if Netflix and Spotify combined.*

“Netify”

The economics behind the idea go like this. I subscribe to Netflix (69 million subscribers)for $10 a month, but not Spotify (20 million subscribers, and also $10). I’m willing to pay something for Spotify, just  not $10.

I’m not the only one. There are other people in this willing to pay something group. Call us the $5 members.

Now imagine this. What if Reed Hastings — CEO of Netflix — woke up tomorrow and wanted to buy Spotify. He’ll combine the services — now called “Netify” — and offer both for $15 a month.

This is where economic bundling theory makes a prediction. There will be more revenue from the bundled $15 service than there was for separate services at $10 each because more people are willing to pay. 

Add in a host of other savings (salary costs, royalty negotiations, etc), and “Netify” will be cheaper to provide than Netflix and Spotify were as stand alone services.

A quick explainer in terms of food.

Anytime I go to a breakfast buffet I always eat one thing I never order: biscuits and gravy. You see, I like biscuits and gravy, but I don’t want it to be the only thing I eat.

A breakfast buffet has bundled all the food in a single package, so I (over) indulge. And others do too.

One more thing about the economics of bundling.

Economic bundling only works when the marginal cost is practically zero. That means that each additional item cost almost nothing to create.

It takes a lot of time and money for Taylor Swift to write, record, and mix an album. But once the master is done, the costs are almost nothing. A CD costs less than a dollar to make, the digital download less to host. The marginal cost for music is practically zero.

Low marginal costs exist elsewhere too. The cost to build and staff a hotel are up front, each additional guest adds almost nothing. The cost to build Google was up front, each additional user add almost nothing.

This raises the question:

If bundles are great for producers and consumers, and cable packages are bundles, why are people cancelling cable packages?

Why are people cutting the cord if bundling is so great?

It’s not that people save money. The NCTA is happy to note that Spongebob, True Blood, Mad Men, and MLB Season Pass purchased a la carte are more expensive than a monthly plan.

It’s not that the quality is that bad. The Sopranos, The Wire, Breaking Bad, and Mad Men are all great shows.

Ben Thompson at Stratechery has five reasons why people watch TV (or aren’t watching TV). Listen to the podcast (it’s really good) for the specific reasons. For us we only  need the general idea: people aren’t watching TV because those other things do what TV did. 

Entertainment now is Facebook posts and YouTube Channels and blog feeds and craft pins. Those things satisfies desires that TV used to. And they do so at a “good enough level.”

4 things bundles must do “good enough.”

The good news for bundles is that they don’t have to be perfect, just good enough. Netflix is a classic case of “good enough.” Note, Netflix is “good enough” for me. This is a subjective decision on the consumer level.

Netflix have enough okay kids shows, original series, and old shows to catch up on. Netflix does four things “good enough.”

  • Bundles have consistent quality. The TV shows on HBO are varied, but the quality isn’t. Girls and Game of Thrones are both different shows, but they’re both great shows. HBO has “good enough” quality.
  • Bundles have wide and deep offerings. If I like original programming, Netflix has it. If I like old TV shows, Netflix has it. Netflix has a “good enough” spectrum of options.
  • Bundles look like good deals.I’m going to get my money’s worth” goes the saying. At $10 a month Spotify is a “good enough” deal compared to a la carte pricing.
  • Bundles are convenient. Planning a vacation to the beach is more difficult than planning a cruise. A cruise answers questions like; when and where to eat, what to do, and where to stay. It’s a “good enough” vacation bundle.

Bundles don’t have to do all these things well, only well enough. The ultimate bundle of bundles does this well.

The ultimate bundle, Walt Disney World.

Here’s what’s great about Walt Disney World. Upon landing at the Orlando airport you take a Disney bus to a Disney hotel. From there a Disney shuttle takes you to a Disney park where you see Disney shows with Disney characters and eat Disney’s food.

Disney bundles; transportation, lodging, food, shows, thrills, souvenirs, and picture packages all into a single vacation. They call it “my Disney experience.” There’s an app you can use. It’s the ultimate bundle because Disney nails the 4 things:

  • Bundles have consistent quality. You know with Disney that the entertainment will be good, not great. It’ll be clean, with some humor, and not too deep.
  • Bundles have wide and deep offerings. Walt Disney World has thrill rides, peaceful rides, and children’s rides. There are comedy shows, singing shows, and 3D shows. There are cutting edge attractions and old favorites.
  • Bundles look like good deals. Here’s where Disney branding comes in. Parents don’t know if their kids will have a good time at a generic beach vacation, but are almost sure they will on a Disney one. A good deal can cost a lot if you get a lot in return.
  • Bundles are convenient. Disney is an easy vacation to plan. Pick a hotel budget. Pick what things you want to do. Done.

Compare the Disney bundle with the worst bundle, compact discs.

The worst bundle, compact discs.

Some CD’s are great bundles. I’ve listened to Blood on the Tracks by Bob Dylan for hundreds of hours — and it only cost me ten bucks.

The problem with compact discs was that most weren’t a good bundle of songs. They failed in the same way HBO would fail if they only had one good show.

In How the Music Got Free, Stephen Witt writes about the confluence of conditions that led to changes in the music industry. There were many factors, but one of them was bad bundling. Quotes are from Witt.

  • Bundles have consistent quality. Bob Dylan aside, most albums weren’t very good. “For years the industry had been selling songs that even their creators acknowledged were not very good. Now they were paying the price. In economic terms, album sales were an example of ‘forced bundling’”
  • Bundles have wide and deep offerings. CD options were limited in a way that the mp3 — it’s successor — was not. You needed a nearby store to have an album in stock. There was no streaming, no digital download, no two day shipping.
  • Bundles look like good deals. Most albums never came down in price and didn’t warrant repeated listening. “Seeing something for efficiency gains in compact disc manufacturing brought the per-unit cost of goods below a dollar — a savings that was not passed on to the consumer, who was charged $ 16.98 retail.”
  • Bundles are convenient. Compact discs weren’t convenient to listen to.  The mp3 was much more convenient.

Bad bundling wasn’t the only thing that caused the shift in music, but it was one part.


Okay, so what do we know?

If you can do it “good enough” (HBO, Disney), then bundling has economic forces that make it smart for the provider and consumer.

If you stop bundling well (cable TV, compact discs) you may lose your chance.


The future of bundling.

I think bundling is over.  Ben Thompson notes that (same link as above), things don’t become unbundled and then rebundled the same way. There’s a reason things become unbundled and stay unbundled.

And I think it’s an emotional one.

Mystery Science Theater 3,000 (MST3K) had a Kickstarter where they raised $4.7M+. Sorted by backers it looks like this.

That green curve is PERFECT for a bundling opportunity — but it’ll never happen. There’s something that keeps that curve from being flattened and bundled. Today’s kids call it, “the feelz.”

The people who funded MST3K on Kickstarter are people with an emotional investment to the show. Ashley Holtgraver, a fan and supporter, wrote this on Medium:

My morning email check usually doesn’t contain anything worth (literally) jumping up and down about. But there I was, pre-coffee, bounding around my house, doing my best unintentional impression of an inflatable wacky waver tube man at a grand opening sale.

Emotional connection is the new transaction in the ledger.

People can now connect to a story, and be part of a story, and there’s value in that. It may not make financial sense to unbundle and choose a la carte options, but only because that equation misses something. It discounts the connection people feel. That matters too.

And connecting is so easy now. MST3K used Kickstarter. [Casey Neistat](https://thewaiterspad.com/2015/11/06/casey-neistat/) vlogs. [Alex Blumberg](https://thewaiterspad.com/2014/12/19/70-alex-blumberg/) (Gimlet Media) podcasts. [Tyler Cowen](https://thewaiterspad.com/2015/08/25/tyler-cowen/) blogs.

Through Twitter we can connect with our favorite authors, and they respond!

This connection is having “your band” or “your bar” or “your favorite author.”

In high school I remember a bunch of kids like O.A.R. They had some catchy songs, and were popular in school until the band became popular. Then no one listened to them.

The connection severed.

At first the the high school kids were connected to the band because they saw them. You could go to Columbus Ohio any weekend and the band was playing somewhere. As the band became more popular, things changed. The band toured and wasn’t in Columbus. The opportunity to connect wasn’t there.

That doesn’t happen anymore. Now every band has email and Twitter and videos. [Amanda Palmer](https://thewaiterspad.com/2015/01/14/82-amanda-palmer/) is the queen of this and writes about it in her book The Art of Asking.

Palmer writes that sending email to her fans was like giving them flowers. “The signing line is a cross between a wedding party, a photo booth, and the international arrivals terminal at the airport.” Palmer coordinated “ninja gigs,” (impromptu events). “I chatted constantly online, and listened to the input and feedback from the fans. If they wanted high-end lithograph posters, I made high-end lithograph posters.”

That’s the new exchange. That’s why people are happy to unbundle. People may pay more, but they get more. If you’ve ever supported a Kickstarter you know this. It’s about the person and idea, not only the reward.

Conclusion

Bundling can still work, but only if it’s done “good enough,” as judged by the consumer. That means:

  1. Consistent quality.
  2. Wide and deep offerings.
  3. The appearance of good deals.
  4. Convenience.

When these things don’t exist, consumers look elsewhere.

The internet has made connecting so much easier and that’s what people want.

Thanks for reading. I’m @MikeDariano on Twitter.

* This article was first published on Medium. There I completely forgot that Amazon Prime offers this bundle.

For more on bundling listen to @BenThompson and James Allworth on the Exponent podcast. Follow  @R_Thaler on Twitter. Learn from @TylerCowen and @ATabarrok at Marginal Revolution University, who explained bundling in a way that even I could understand.

How to solve “hard things.”

Note, there is a podcast version of this post. You can find it below, or in your podcast player of choice. Search, “Mike’s Notes.”

In his book The Hard Thing About Hard Things, Ben Horowitz notes that for hard problems there’s no prescription.

“The problem with these books (about business) is that they attempt to provide a recipe for challenges that have no recipes. There’s no recipe for really complicated, dynamic situations.”

To solve hard things you need to act and learn, get dirty, and take your lumps.

A lot of Horowitz’s book is about his own lumps, and advice for people in business. That’s not me.

It’s not that I disagree – or know enough to –  but that I’m on a different path. A lot of other people are too. Horowitz’s experiences are helpful, but, and this is his point, not prescriptive.

Like everyone else on this site, the specifics don’t matter. You can’t be the next Seth Godin or Mark Cuban or Robert Kurson. You have to be you. But that doesn’t mean you can’t learn from other people.

“Fools say that they learn by experience. I prefer to profit by others’ experiences.” – Bismarck

We want the big ideas that work most of the time. Then we can experiment on our own. We can twist and tweak from a place that worked once. That’s the systems for success here.

And Horowitz has an idea for us.

Silver bullet and lead bullet thinking.

Let’s set the scene. Ben and Mike (Homer) are working at Netscape trying to figure out a way to survive. Microsoft has just released a web server that’s better in every way. Horowitz writes:

I immediately went to work trying to pivot our server product line to something that we could sell for money. The late, great Mike Homer and I worked furiously on a set of partnerships and acquisitions that would broaden the product line and surround the Web server with enough functionality that we would be able to survive the attack.

Okay, that should work, right?

Enter Bill Turpin:

“Ben, those silver bullets that you and Mike are looking for are fine and good, but our Web server is five times slower. There is no silver bullet that’s going to fix that. No, we are going to have to use a lot of lead bullets.”

The lesson is this, there is no panacea, no cure all, no silver bullet. There is only a lot of hard work. 

We understand this, but why?

Silver bullets don’t exist because problems range from complicated to complex. Taylor Pearson explained this vis a vis jobs. We’ll look at it at the macro level.

A lot of problems exist on the complicated to complex spectrum (anything less complicated is an equation, 2+2).

complicatedcomplexspectrum.pngThe challenge for Horowitz was how to solve a complex business situation. It was closer to predicting the weather than the tides.

Horowitz’s business choices were a complex network, like an ecosystem. Pull on one string, and  another moves too. That stressed him out. Horowitz was sick and couldn’t sleep as he tried to solve these types of problems. Until he realized something, he was thinking about it all wrong.

“All the mental energy you use to elaborate on your misery would be far better used trying to find the one seemingly impossible way out of your current mess.”

Rather than worry about finding a silver bullet, Horowitz needed to spend his time firing lead ones.

It’s like untying a knot done by a 5-year-old. There’s no single tug to unravel it. You just need to start twisting and winding. That’s what Horowitz started to do.

How to solve complex problems.

Complex problems often require new questions. Ask new questions and you’ll start to get new answers.

Horowitz switched from, “what’s the worst that can happen,” to “if the worst happens what will I do?”

Like Newton under the apple tree or Archimedes in the bathtub – Horowitz got an idea.

Note, acting does imply accuracy. As Barry Ritholtz points out when he spoke with  Michael Mauboussin, Jason Zweig, and Ken Fisher – “don’t just do something, sit there” can be good advice.

When to act.

Act when you need to survive. Each big business decision in Horowitz’s book was when his company needed to just survive. That’s when you need to act, to not die.

Conclusion.

  1. Complicated and complex problems have many connected nodes.
  2. Those nodes tug on each other and create problems that live in an ecosystem.
  3. There is no single solution to change a complex problem.
  4. Change only happens through a lot of work on the different nodes.
  5. To do this you need to forget about worrying and take the right action.

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

Ken Fisher

Ken Fisher joined Barry Ritholtz (@Ritholtz) to talk about process, redwood trees, and “the only three questions that count.” Fisher is an author of many books, Forbes articles, and CEO of Fisher Investments. Here’s our table of contents:

What Fisher talks about when he talks about writing — the only three questions that count — how to pick winning stocks — simple heuristics — and Fisher’s favorite books.

Ready?

About writing.

How to write well.

Ritholtz compliments Fisher’s work and says, “you’ve obviously inherited your dad’s writing skills.”

“Not true,” replies Fisher, “because if I had inherited them they would have come to me very naturally, but I worked hard to learn how to write.” Even though his dad was a great writer, Fisher needed help.

It’s easy to write words – even I do this. What’s difficult is to write well.

Garry Shandling explained this to Judd Apatow when the two wrote for the The Larry Sanders Show. “The struggle in the writing room,” Shandling said, “is getting people not to write just words.” 

Fisher saw this “more than words” idea with his own father. “He had an ability,” Fisher recalls, “for people to see themselves through things that he had interacted with them on.” It wasn’t the explicit things Fisher’s father spoke about, but the bigger ideas that people applied to their own lives.

That’s the secret sauce to write well. It has to connect with people. This is what Fisher needed to learn.

“I was a lousy writer,” he says, “until I hired someone to teach me how to write.” Only after he learned did he author bestsellers.

Writing as a form of thinking.

“I write to figure out what I think,” Ritholtz says.* Fisher says that he uses writing to clarify his thoughts too. They aren’t alone.

Michael Mauboussin said that he writes (and speaks) about his ideas to understand them.

“I write entirely to find out what I’m thinking, what I’m looking at, what I see and what it means,” said Joan Didion.

“Learning to read well and to write well is really learning to think well,” said Maria Popova.

Writing is a form of thinking much like swimming is a form of exercise.

The only 3 questions that count.

A lot of the interview circles around Ritholtz’s favorite book by Fisher, The Only Three Questions That Count. It’s a rich area and we’ll dive into it.

Question 1: What do you believe that’s false? It’s not an easy question to answer. Tren Griffin points to the Charlie Munger quote that it’s a wasted year if we don’t change our minds about something.

We should probably do this more. Ritholtz says we spend too much time rationalizing our beliefs and not examining them. We do this because it’s easy.

Ramit Sethi calls us “cognitive misers,” because we don’t do much heavy lifting with our brain. If there’s an easy way, we take it.

Fisher suggests these two steps:

First, identify what you believe. “What  do you think?” Fisher asks. Financial markets are an expensive way to find out if you don’t already know.

Second, ask, “is there a history that associates with that thing?” Fisher says to find the correlation coefficient and see if two things line up.

This isn’t as easy as it sounds. It’s hard to find good correlations because the data is cavernous. It makes “views wronger longer,” Fisher says.

One way to not be wrong is to use Twitter well.  Chris Dixon said that he uses Twitter to follow smart people who tell him what to read. That’s a good start. We also need to follow Jason Zweig’s advice, and feed ourselves oppositve views. 

If we combine these two things the worst ideas will be filtered out. 

Question 2: What can I fathom that other people can’t? From the start Fisher had an idea for something other people weren’t doing. He wanted Fisher Investments to be like IBM and Charles Schwab. “In both cases doing things that hadn’t been done yet,” Fisher explains.

This idea is similar to what Peter Thiel writes about in Zero to One. “What important truth do very few people agree with you on?” But it’s more than just that.

Thiel writes that the best companies are unions of fields rather than intersections. (I missed this on my first reading) Unions combine entire ideas to form a larger one – intersections take snippets to form a smaller one.

A successful union might be Slack. Mobile U Communication U Design. An unsuccessful intersection might be the movie Pan. Hugh Jackman ∩ Fairy Tale ∩ Movie.

Here’s where things get interesting, Thiel warns us against fooling ourselves. 

britfoodpalo

When you fathom something new, it has to be accurate. One way we mess this up is thinking in terms of intersections and not unions. Thinking with blinders. Thinking we know what we’re doing but, we’re being misled.

Question 3: What is my brain doing to mislead me?

“The first principle is that you must not fool yourself — and you are the easiest person to fool.” – Richard Feynman, Surely You’re Joking Mr. Feynman.

Fisher notes that our reptilian brains are not well adapted for our current environment.

In Mean Genes, Terry Burnham explains why.”Our ancestors got their chemical kicks the old-fashioned way: they earned them through good behavior.” Burnham explains how a plethora of today’s bad behaviors (too much weight, too little savings, risk seeking, etc.) were wonderfully helpful a long time ago. It feels good because it was good. That’s no longer the case.

“We will see that many judgement errors in human risk-taking stem from a common source:” Burnham writes, “we live in a very different world from that of our ancestors.”

The trouble is two fold- it’s hard to stop and we don’t realize when it starts. But it’s not impossible to combat.

First we play defense.

James Osborne commented about different checks we can install to slow down these kinds of actions. If you trade too much, said Osborne, give your login password to someone else. Burnham writes about the same thing. If we love eating tasty things, keep healthy tasting things on hand.

Fisher says that this sometimes happens accidentally. He mentions a study where people in funds with higher fees had greater returns. Not because of the intrinsic value or investing acumen. Rather, it cost those customers more to trade, so they traded less. It’s an example where activity does not ≠ gains.

After a good defense, comes a chance to play offense.

Fisher mentions this idea throughout the interview – watch out for your mistakes but also look for mistakes others make. It’s the business equivalent of going on vacation at during off season.

If we expect people to be greedy, take risks, or over-trade, we should incorporate that into our strategy.

How to pick winning stocks.

When Ritholtz asks how Fisher picks stocks, Fisher says, “I don’t look at stocks.”

What?! But before Fisher explains his method, we need to understand the game. It wouldn’t make sense to get basketball tips from LeBron James if we didn’t know what basketball was.

Fisher subscribes to the definition provided by Benjamin Graham:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham

Markets factor both voting and weighing into price, and Fisher thinks about both these things.

Weighing, the intrinsic value. Fisher approaches stock picking from the macro end. He looks at the world -> countries -> sectors -> sub-sectors -> factors (value, growth) -> stocks. The company choice is the caboose in his decision train.

Fisher compares it to fishing in the right pond. Whether or not you catch any fish includes a bit of luck. Being in a place helps a lot.

That’s the things that you see in the market, but it’s also important to think about what others see. 

Voting, the perceived value. What do other people believe is true? A derivative of the “3 questions,” Fisher wants to know what other people think. He says current (3-30 months) beliefs are already priced. If you want to be different (unions not intersections), you need to zig when the others zag. This is second level thinking.

We’ve seen second level thinking elsewhere. Howard Marks said,  “If you think the same as everybody else, you’ll behave the same as everybody else, and you can’t expect to outperform them.” Ray Dalio writes about it in Principles.

Richard Thaler writes about the famous “beauty study” in his book Misbehaving. The aim was to make a guess that voted and weighed an idea. 

thalerbeauty

Simple heuristics.

When you don’t know a lot, simple heuristics work well.

Casey Neistat asks, “is this good for me and my technology company (Beme), and if the answer is no it gets a pass.”

Richard Feynman got so tired of choosing a dessert that he resolved to always order chocolate ice cream.

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 seed interviews with questions that have specific answers. 

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.

Van Halen found out that if one thing on their rider was wrong, other things might be too.

Simple works well because we don’t have the time or resources to always make a choice, (remember, we’re cognitive misers) but a signal might nudge us one way or another.

Fisher uses this technique as well (quoting Franklin Templeton); “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

It’s not always right, but it gets darn close.

Favorite books.

Fisher’s book list reflects his interests in the markets and outdoors. He suggests: Hunting with Bow and Arrow, Hunting American Lions, Where are the Customer’s Yachts, How to Lie with Statistics, Think and Grow Rich, and Humble Approach.

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

If you want more, become a member

*I couldn’t figure out who exactly Ritholtz was quoting when he said, “I write to figure out what I think.” If you know, please let me know.

Kevin O’Leary

Kevin O’Leary (@KevinOLearyTV) joined James Altucher (@JAltucher) to talk about money, relationships, and bass/base rates . O’Leary is one of the sharks on Shark Tank and author of The Cold Hard Truth and more recently, The Cold Hard Truth on Family, Kids, and Money. While the audio is not great, the ideas are.

Here are 6 business and life lessons from Mr. Wonderful.

Questions asked = problems people have.

O’Leary tells Altucher that this book, The Cold Hard Truth on Family, Kids, and Money came about because of the questions people asked him. “I’m going to take these hundred questions,” O’Leary says, “and put them in a book.”

A frequent piece of business advice is to find a problem which people will pay you to solve.  O’Leary was lucky, the problems came to him. Both Austin Kleon and Steven Kotler mentioned the same phenomenom. When they were on their respective book tours people in different places asked the same questions. Their next books answered those questions.

Part of the reason is money.

“Money is often a piece of that pie, but it’s not the entire pie,” said Altucher paraphrasing a section of O’Leary’s book. This single idea gets at two big pieces of life advice; the value of money and “part of the reason” thinking.

Money, Tim Ferriss reminded us, is something we exchange for something else. It’s not money we want, it’s the something else. Which means we don’t always need money. Sometime we can bypass it and go right to the thing. Look at podcasts. Both Ferriss and Altucher admit that part of the reason they podcast is as an excuse to talk to people they admire.

Stephen Dubner wanted to live in NYC more than he wanted more money. Mark Zuckerberg liked Facebook more than a billion dollars, an offer he got early in his career. Money is something, but not everything.

Part of the reason thinking was introduce by Sanjay Bakshi, and it’s a powerful idea. Bakshi noted that many things don’t have single explanations. Part of the reason O’Leary is happy is because he has a lot of money, but it’s not the only reason. O’Leary (I assume) is also happy because he’s on television, has a long-term marriage, has kids, has a boat, and gets attention. Those are all components of his life.

When we use part of the reason thinking we can get all the right answers. It also simplifies our work. In his book, Think like a Freak, Stephen Dubner explained why big problems are difficult to solve. Little problems are easier.

Anchors away.

Altucher includes a few questions from his daughters. One of which was how O’Leary anchors the negotiations by making early – hail mary – style of offers. While his response in the interview was brief, beneath it is a deep understanding of psychology.

Anchoring establishes a starting point that influences a person’s thoughts. A timely example – the holiday season 2015 – is Black Friday and Cyber Monday. Both of these days are full of deals, with huge markdowns. But markdowns from what? Why does 50% off seem like a great deal?

These steep discounts seem like a great deal because we don’t know the the intrinsic value. We don’t know what a thing is worth, so we answer a different question. How much did it originally cost?

As Ramit Sethi notes, “we are cognitive misers.” That means we like taking the mental shortcut. Rather than figure out how much we value a TV, or what a TV normally costs, we look at the original price and that’s our anchor.

Now half off seems like a great deal, but we don’t really know. What we’ve done is replaced one question with another. In Thinking Fast and Slow Daniel Kahneman explains this mental bait and switch.*

“In one of our studies, we asked participants to answer a simple question about work in a typical English text:

“Consider the letter K.

“Is K more likely to appear as the first letter in a word OR as the third letter?

“As any Scrabble player knows, it is much easier to come up with words that begin with a particular letter than to find words that have the same letter in the third position.”

K is not more common as the first letter. We answered the question, “can I think of words that begin with K more easily than words with K as the third letter?” When that answer was “yes” we switched the question at hand.

Anchoring has a similar effect. Entrepreneurs enter the Shark Tank and get an offer of X from O’Leary. If that’s not a great deal then each subsequent deal seems better than it might intrinsically be.

One meta point is to understand that we have biases in our understanding. Tren Griffin pointed out that at least knowing our biases can be helpful. One of which is how we view work.

Anchoring and jobs.

“Our economy,” O’Leary says, “provides all kinds of opportunities to make a basic living.” “There’s no shame in working hard at things and trying different ideas.”

His point was that if you want to work hard, you can find a job that pays you well.  Wayne Dyer also spoke to this in his conversation with Altucher. “I’ve never been unemployed a day in my life,” Dyer recalled. He was able and willing to work.

For them it was a matter of just working. Entrepreneurship looks great on TV whether it’s Shark Tank or The Profit with Marcus Lemonis. A lot of jobs aren’t like this.

O’Leary’s book has some ideas for this. Mr. Money Mustache does too. Taylor Pearson wrote The End of Jobs and the future he sees.

Anchor the idea of work that David Levien explained. Your early work will be “confused garbage,” and “it will be brutal toiling away in obscurity.” That’s what it takes.

3 things O’Leary looks for.

If you want to prepare for your Shark Tank meeting with O’Leary here are three things he’s looking for.

Articulate the pitch in 90 seconds or less. This shows you know your idea and inside and out. If you want to practice, make it funny.

From Judd Apatow to Phil Rosenthal to Judah Friedlander, comedians say that if you can make fun of something, you deeply understand it. You could also live it like Dick Yuengling or read about it like crazy like Mark Cuban.

What they all share is a deep knowledge which leads to clear understanding and concise articulation.

The right team. O’Leary also looks to see if the right team is in place. Brian Koppelman compliments his writing partner David Levien. Nicholas Megalis and Austin Kleon also suggest getting with other good people.

Know your numbers. Nothing crushes a Shark Tank pitch like not knowing your numbers. You need to know them cold. Jason Calacanis told James Altucher the same thing about his investment philosophy. And not only yours. You need to know the industry, everything.**

“Because you know I’m all about that bass (rate), ‘Bout that bass (rate), no treble.”

(Where else do you get Maghan Trainor and Michael Mauboussin in the same blog post?)

Altucher asks O’Leary about what multiple he looks to invest at and the magic number is 7 times earnings. That’s the going rate in the private markets O’Leary says. O’Leary expects to succeed in 4/10 investments from the show. The numbers here are key.

If initial numbers anchor our thoughts, base rates can bring us back.

O’Leary knows the private market base rate is 7X. He starts there. If he knows 4/10 Shark Tank deals succeed, he knows how to evaluate his winners and losers.

Michael Mauboussin ‘s post and writings are a good place to start if you want more about base rates.

I thought a lot about base rates during our 12 hour drive home after Thanksgiving. Our GPS said the trip would take 11 hours 30 minutes. It took more like 13 hours. At first I wondered why it took so long. Then I started thinking about accurate base rates.

I realized there’s almost no chance that two adults and two kids can make the drive in less than twelve hours. Someone always needs to pee or eat or we need to stop for gas or switch drivers. There’s too much that can go wrong.

Making it in less time is like shorting a stock. There’s a slim chance for little benefit.

What’s more likely is the drive takes longer than projected. In addition to any breaks there’s the chance of an accident, construction, or bad weather. Many things can go wrong.

The real base rate for a family of four to drive to Connecticut is 13 hours. When I realized that I felt happier, even though I was still in the car. This was the power of accurate base rates. When I switched my estimate to a more accurate one, I had a positive emotional reaction. The same is true for business.

In business we should expect turbulence. O’Leary sees this looking back. “Any business has huge volatility,” he says. “We were on the brink of bankruptcy multiple times. But that’s just the nature of what entrepreneurial business is.”

Chris Dixon said the same thing, “I’ve almost never been involved with a company that didn’t have moments of almost failure.”

If we know this going in, we’ll be more prepared emotionally. It’s Marcus Aurelius who explains this best; “How ridiculous and how strange to be surprised at anything which happens in life.”

Serendipity and luck.

“Life is very serendipitous,” O’Leary says. If we knew what worked, we would just do that. We don’t know though.

Add O’Leary’s name to the list of people who admit that luck played a roll; Jason Zweig, Kevin Kelly, Scott Adams, and Chris Dixon among others.

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

 

* “bait and switch” was termed by Philip Tetlock in his book, Superforecasting. I like it a lot more than Kahneman’s terminology.

** the second mistake after not knowing your numbers is to make what Altucher calls, “the refrigerators in China” mistake. It’s saying that with a market as big as X and if you capture %, then the result is Y. It’s never like this. Altucher comments that with a market that big you’ll be knocked off so fast. Just like hoverboards.

 

Backup Plans

 

Why backup plans are a bad idea and what we should do instead.

“Burn the boats, we are here.”

When James Corden spoke with Marc Maron, he said the only thing he wanted to do was become an actor.  Maron said this was a good idea because, “if you have a plan B, you’re just a hobbyist.”

Other people have said this too. In Sick in the Head, Jordan Peele reflects:

“When I moved to Chicago, I was like, All right, I want to be a sketch comedian and my power is going to be in the fact that I’m going to dedicate myself completely. There’s not going to be a fallback, you know? I’m going to watch people give up and I’ll still be there, learning from it all, and if I stay with it, I’ll be successful.”

Jim Norton said this attitude forced him to focus on comedy. Casey Neistat said much the same. It was make it or bust – and this perspective was part of the reason for their success.*

Plan B is a bad idea because it distracts us from plan A.

Research now shows this too. A group of researchers gave students a series of difficult puzzles to solve. The reward for solving them was to leave early from class. Some students got the puzzle. Others got the puzzle but were also told to brainstorm other ways to get the reward if they didn’t finish the puzzles.  

NPR’s Hidden Brain podcast explains that the students’ with a plan B (other ways to save time) worked less on the puzzle than those that had no plan B. From the show:

“And what we found is that the group who had thought about a backup plan, about another way that they could save five minutes today, achieve significantly less success on the task we assign them. They worked less hard, they solved fewer puzzles, and this was significantly fewer than people in either of our control groups.”

That sounds a lot like what Peele, Corden, Maron, Neistat and others have guarded against.

Rather than plan B, there are two other things you can do.

Don’t develop plan B, enhance plan A.

Rather than spend time on plan B, spend time on thinking through plan A. Chris Dixon compared starting a company to completing a maze. The best founders, Dixon observed, were those that thought through what obstacles might be ahead.

Stanley McChrystal called this “red teaming.” Jason Zweig called it the planning fallacy.

No matter the name, successful people think through what might go wrong and plan accordingly.

And get ready for turbulence.

No matter how much you work on plan A things will go wrong. Chris Dixon said that nearly every company he’s been involved with has almost failed. Random stuff (like Google releases a similar product) comes up, Dixon says.

There’s too much randomness to plan for everything. Neil Strauss released a book when Hurrican Katrina hit shore. Trip Adler showed up at Y Combinator with a ride sharing app.Naval Ravikant says that part of his success is thanks to randomness.

Like the weather one month from now, we don’t know what’s in store. The best we can do is to understand that the rain won’t melt us.

The takeaways.

Having a plan B means you’ve doubted too much and planned too little. Think through plan A as thoroughly as you can and develop a mindset of creativity and resilience to solve new problems that will arise.

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

*See the notes for Tadas Viskanta for an explanation of part of the reason thinking.

Venture Capital ideas with Chris Dixon

If you missed part 1 – the big ideas from Dixon – you can find that here. This is part 2 and it’s all about venture capital.

These notes are from Shane Parrish’s conversation with Chris Dixon on the wonderful The Knowledge Project podcast.

Ready?

Why should companies stay private?

Parrish asks why companies – like Uber – stay private. There are two reasons Dixon says. First, there’s plenty of money in the private markets. Huge public companies like Fidelity, have access to the private markets and companies like Uber don’t need to go public to raise money. Second, companies can keep a long term vision. The technology sector, Dixon says, perceives markets as too short term oriented.

Seed, series A, series B explained.

Dixon defines the different types of funding.

Seed funding (aka Angel) is investing in 1-2 entrepreneurs with an idea. This round might be for 1-2M$.

Series A is investing in a small team with an initial product. This round might raise 10M$.

Series B is investing in a company with some traction that needs money to grow. This round might be 20M$.

It’s helpful to know the nomenclature, but the big idea here is when Dixon talks about prorata rights. It’s briefly covered in the interview and worth expanding on here. Prorata rights are the option for a company to maintain their same funding level. If you invest 1M$ for 40% in the seed round, having prorata rights means you get a chance to invest enough to keep your 40% position during the Series A round. Here’s the key part of this, you get to but you don’t have to. Prorata rights are optionality.

Don’t take my word for it. Mark Suster wrote, “this (the prorata right) is important for nearly every institutional investor because once you have 25-50 investments being able to “follow” the investments that are working well is critical to making money.” Suster is explaining that VC’s expect some companies to do better than others – and it’s those positions that should be held on to. 

Fred Wilson, another VC, wrote much the same thing. “I think this is the single most important term anyone can negotiate for in a venture capital investment….The meta point I have come to understand about early stage investing is that a small portion of your investments produce all of the returns. In those investments, you want to own as much as you can.”

An investor – like Dixon – will only invoke their rights for companies that are doing well. This post includes other examples of optionality. To think well, we need to think about having options. 

On a post at his site Dixon writes about the Babe Ruth Effect. “Great funds lose money more often than good funds do. The best VCs funds truly do exemplify the Babe Ruth effect: they swing hard, and either hit big or miss big.”

Dixon says that about half of all a16z investments will fail, some will have moderate success, and some will be huge hits. It reminded me of what Seth Godin wrote, “it’s not always easy to measure what matters.”

VC wants a high slugging percentage. Baseball wants a high on base percentage. Different domains want to measure different things. It’s valuable to figure out what matters most.

The people or the product, the lyrics or the music.

In high school my group of friends used to argue whether the lyrics or music were more important to a song. One friend was a huge Dylan fan so he clearly favored lyrics. Another was a guitar player, he preferred the music.

Startups have a similar paradigm, the person or the product. Dixon makes it’s clear – invest in the person.

“It’s 90% people and 10% product at this state (Series A),” Dixon says. “At this point we know that the idea will change.” 

Dixon explains that when Dropbox was founded in 2007, mobile wasn’t a thing. The company was founded to share documents between computers. Things changed. Dixon expects to pivot and looks for opportunities with good people. But sometimes things go bad. 

Identifying failures.

“Some reasonable percentage of time the entrepreneur does everything right and things happen,” Dixon says. Google releases a competing product. The FDA rejects an application. Stuff happens. The hard part is figuring out what was due to luck and what was skill.

Michael Mauboussin provides a good framework to dismantle skill and luck. The more purposefully you can lose, Mauboussin said, the more skill is involved.

Imagine a tennis match. I could easily return each serve out of bounds and lose. Tennis is heavily skill based.

Now imagine investments. I could pick stocks that I thought were bad and maybe win or maybe lose. There’s more luck in stock picking than tennis. Some stocks labelled “sell/bad” outperform those labeled “buy/good.”*

Finally, imagine a slot machine. I could pull on the lever all day, chanting mantras and burning incense and nothing would change the odds. That’s all luck.

3skillluck

To successfully identify an outcome as skill or luck one needs to figure out where on the spectrum they are.

Dixon cleans up the situation with what he calls “Founder-Market fit.” That’s too much jargon for this site. We’ll call it “The Nic Cage effect.”

The Nic Cage effect.

I always wondered how Nicolas Cage didn’t make good movies. He won an Academy Award early in his career! Doesn’t that mean he’s a good actor? No, it means he was a good actor in that roll.

There are great actors for sure – Meryl Streep we’re looking at you – but a lot of it is about matching the person and the roll. I disliked Amy Poehler on Saturday Night Live, but Leslie Knope on Parks and Rec is my favorite character of all time. 

That’s what Dixon look for. He says there are three ways founders fit well.

The technical founder. Dixon says that technical expertise (coding) is one way a founder can be good. The business aspects, Dixon says, someone can learn on the job, but not the other way around. Both Jimmy Wales and Mark Cuban are examples of this.

The domain expertise. Other founders can have a deep understanding of their industry. This is the case of Alex Blumberg of Gimlet Media and Dick Yuengling of Yuengling Beer. 

The cultural movement founder. The final type of successful founder is one who’s part of a movement. Dixon says that the Airbnb founders fit this mode. Matt Barrie fit the freelancing movement. 

If a founder fits, Dixon has another filter, the maze.

The question is, what do you do in the maze?

Dixon says successful entrepreneurship figure out the maze. In startups there will be moments of confusion, disorientation, and wanting to resign. Really obsessed founders, says Dixon, will have thought about these dead ends and considered options for what to do next. And there are always dead ends.

“I’ve almost never been involved with a company that didn’t have moments of almost failure,” says Dixon.

That Dixon uses the analogy of the maze is interesting. A lot of successful people reframe challenges into puzzles, situations into games. In Surely You’re Joking Mr. Feynman, Richard Feynman said he couldn’t “do” good physics. But when he decided to “play with physics,” “it was like uncorking a bottle.”

Ray Dalio writes about this in Principles:

“I learned that there is an incredible beauty to mistakes, because embedded in each mistake is a puzzle, and a gem that I could get if I solved it, i.e., a principle that I could use to reduce my mistakes in the future.”

Many people use games as a filter to make solving problems fun. If you want more on that try Jane McGonigal’s book; Reality is Broken.

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

*One year ago (September 2014), ⅓ of financial analysts had “Sell” ratings for Clorox (CLX) and Campbell Soup (CPB). If you wanted to sabotage a portfolio that seems like a good place to start. But you’d only sabotage your success, because those stock soared. Those stucks are up 26% and 18%.