The Waiter's Pad

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

Rory Sutherland makes a good point. He notes that if you get into a great restaurant but it smells awful you’ll have a bad experience.David Ogilvy understood this too. Terry O’Reilly’s Under the Influence podcast is built around this idea and he says; “the reason people choose certain brands has little to do with how something functions or how something tastes, because with so many categories we drink the label and smoke the advertising.”

These men are marketers. They sell the sizzle, and it’s just as important as the steak.

…

The Mona Lisa is a great technical painting but she has sizzle too. For a long time, she was merely a Renaissance painting. Then Napoleon hung her in his bedroom. A century later someone stole her. Picasso was suspected, then exonerated. The painting returned. NPR explains:

“Before its theft, the ‘Mona Lisa’ was not widely known outside the art world. Leonardo da Vinci painted it in 1507, but it wasn’t until the 1860s that critics began to hail it as a masterwork of Renaissance painting. And that judgment didn’t filter outside a thin slice of French intelligentsia.”

…

Joel Greenblatt has sizzle with his steak too:

…

Josh Wolfe told Patrick O’Shaughnessy that the best entrepreneurs have sizzle and steak.

“There are amazing credible people. And there are amazing salesmen. And sometimes those two people are one. When they are you have an amazing entrepreneur. But often times they’re not…You need a marriage of both. You need a storyteller and you need an operator.”

…

Sometimes it’s hard to match the sizzle with the steak. On Wharton Moneyball (April, 2018) the foursome talked about uncertainty in sports. Uncertainty is hard to sell. Yet life is uncertain.

https://soundcloud.com/mikesnotes/the-wharton-moneyball-crew-on-communicating-uncertainty

…

One reason sizzle and steak are both necessary could be related to Clayton Christensen’s Disruption Theory. Disruption occurs when one feature of a product becomes good enough and consumers switch their preference but producers don’t. The mp3 dominated because it sounded good enough. The key music metric shifted from quality to portability.

But the relevant feature isn’t always quantifiable. When Warren Buffett considered his investment in See’s Candy, he wrote to Charlie Huggins in 1972, “Maybe grapes from a  little eight-acre vineyard in France are the best in the whole world, but I have always had a suspicion that about 99% of it is in the telling and about 1% is in the drinking.” Once something tastes good enough it’s about the label (“with so many categories we drink the label and smoke the advertising”) that influences how we spend/Spent.

…

All sizzle no steak is derogatory but all steak and no sizzle isn’t better. Jocko Willink is fond of talking about the dichotomies of life; leadership, courage, and curiosity. The best answer is often; it depends. Situations dictate actions and that’s true here too. Some businesses need more sizzle, others need more steak, all need some of both.

The good thing is that more sizzle isn’t difficult. At Basecamp, they do this by coding good software and writing about work. David Heinemeier Hansson calls the sizzle “teaching”, and says, “every business is interesting in some way.”

The good news is that there are different forms of sizzle for different kinds of steak. The better news is that sizzle is achievable for anyone.

Rory Sutherland has another good point. Improving sizzle is a lot easier than improving steak. For example, what if trains were nicer instead of faster. “It doesn’t matter if your journey is three hours or two and a half if it’s useful time.” Better stories are easier than better tracks.

 

Thanks for reading.

 

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

Sam Hinkie joined Patrick O’Shaughnessy for a conversation about decisions, basketball, and marriage. The marriage (and parenting) portion, ~35:00 was an excellent portion. In a world of life hacks, time hacks, new apps we (I) sometimes overlook (forget) it’s the people that matter.

…

Following interests. Hinkie’s been a long-term thinker since he was fifteen. “I’m just wired this way.” Aligning actions with dispositions brings better results. Mohnish Pabrai said that if you’d rather see a movie than read annual reports, you probably won’t have the potency to be a great investor. Hinkie’s bent was toward long-term success as he defined it. It was a race where only he knew the distance. Scott Malpass told Ted Seides something similar:

“…at the end of the day we don’t really care much about what other people are doing. We’ve got our own risk tolerance, our own mission. We are going to do what we need to do for Notre Dame.”

Your mission doesn’t need to be an inebriated whim to charter a boat and sail around the world carpe diem style. Rather, pay attention. Hinkie said,”pay attention to what’s happening elsewhere and try to apply what’s working in other places to your place if it matches, to your decision criteria if it makes sense.” It sounds like Ray Dalio‘s advice to find another one of those. Dalio said, “Basically everything is another one of those … the key to success is to identify which one of those it is.” Start with, the world is this way because…

Sometimes which one of those is already figured out. Hinkie suggested; “Substitute your weak judgment, when you don’t know much about the place, for someone else’s strong judgment when they know more about it.”

And, “If it works there, kick it around and at least start with something that works somewhere else in some other place in the universe.”

And, “It’s conventional wisdom because the consensus has settled there and it’s more or less right. Conventional wisdom should be a high bar. It should be a bulwark against progressivism.”

And, “Where we are now might not be right, but it’s clearly the best answer we have.”

And, “Our early check was if the San Antonio Spurs did it.” If their day or two of analysis suggested something different from the Spurs they double checked the analysis. “The burden of proof,” Hinkie said, “is on the new comer.”

Hinkie focuses on things he can do well. He’s works best with a long-term orientation. He works best when he can help and is interested. For startups; “My criteria is; is this in a space I deeply want to learn about and I think is likely to be very big…and, is there something about their stage, experience, or needs that I might actually be able to help them?”

…

Solving puzzles. “The most fun for me,” doing data analysis, “was all the behind the scenes work with the people in the trenches trying to get to the right answer.” That’s not to say there is a right answer. Data isn’t a silver bullet, it’s a shovel.

Mina Kimes said, “I look to data to find answers to basic questions and if I don’t I almost find it more interesting that if I did find the answer.”

“There’s art to every single process,” said O’Shaughnessy. “I think you’re on a never-ending search for better inputs,” said Hinkie.

What’s important is to be solution agnostic. In another Invest Like the Best podcast, Morgan Housel said, “The most powerful concepts are those that span multiple disciplines.” Jason Zweig added, “If you are not judging the validity of ideas by long-term, objective, peer-reviewed evidence then you are just protecting your own identity and that’s foolish.” It’s the ego, not the hammer, that sees every problem as a nail.

“I don’t care how to get to the best decision, I just want to get there,” Hinkie said.

How do you get this? “What you really need are intellectually curious thoughtful people, with all their own sets of experience to bring to bear on this and to have a culture of trust where you can call BS when you see it.”

It’s good people within the right culture. Hinkie references Netlfix’s culture deck and co-molder of that deck was Netflixer Patty McCord who wrote:

“A great workplaces is not espresso or lush benefits or sushi lunches, grand parties or nice offices…Well, a question I often ask people when they ask me that, so I will ask you that, if you think about the time you went home from work and you spontaneously told your spouse or your pet, ‘Oh, my god, it was a great day at work today.’ It’s almost never that there were macadamia nuts and the cookies or that mojito was just right.”

Ben Horowitz agrees:

“Yes, yoga may make your company a better place to work for people who like yoga. It may also be a great team-building exercise for people who like yoga. Nonetheless, it’s not culture. It will not establish a core value that drives the business and helps promote it in perpetuity.”

Good culture is a decentralized command. Good culture is good arguments. Good culture is top-down support. That’s what Hinkie experienced. “I remember sending Daryl Morey a text afterward saying how proud I was to work with him because he would have the courage to do what is right even if it was unpopular.”

That unpopular move was possible thanks to top-down support. Morey’s boss, Leslie Alexander told him, “Who cares what other people think? It’s not their team.”

What Hinkie and O’Shaughnessy are striving for – what data and teams and culture are the means for; is figuring out the perception-reality gap. Hinkie tries to invert the endowment effect. “We would try to reverse it to get rid of the endowment effect. If I already had this player, would I trade for that. If the answer is clear in one direction there’s real signal in that.” Though even in his explanation if the answer is clear Hinkie implies the difficulty in this. The GMs come up with some solutions. So does Malcolm Gladwell and Bill James.

James (wrote Michael Lewis) succeeded because he was an outsider. He saw the game differently. Baseball Abstract (1984) “is a book about what baseball looks like if you step back from it and study it intensely and minutely, but from a distance.”

Gladwell told Bill Simmons this is what teams should do, literally. Have a veto-GM on another coast.

https://soundcloud.com/mikesnotes/clip-malcolm-gladwells-advice-for-gms-with-the-endowment-effect

Another puzzle solving tip is to invert. In Hinkie’s class at Stanford he teaches negotiation and says the best way to negotiate well is to prepare well. “Deeply try to understand the other side in an empathic way.” Bryan Caplan created a test for that.

https://soundcloud.com/mikesnotes/clip-bryan-caplans-ideological-turing-test

Thanks for reading.

 

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

Someone tweeted about the value rereading books. The books don’t change but the reader does. In that spirit, we’ve revisited Zero to One and today will revisit Moneyball.

Michael Lewis’s bestseller from 2003 is the quinceanera of sports analytics. Birthed by Bill James in his Baseball Abstract(s), sports analytics continues to grow, age, and mature. It was Lewis’s book that brought it mainstream and it’s from the book we’ll draw a few quotes. Ready?

1/ Measure the right thing.
“The scouts adored high school players…High school pitchers also had brand-new arms, and brand-new arms were able to generate the one asset scouts could measure: a fastball’s velocity. The most important quality in a pitcher was not his brute strength but his ability to deceive, and deception took many forms.”

As Sam Hinkie told Patrick O’Shaughnessy, for a long time, fastball velocity was a good metric. But now we have better ones.

2/ Watch your biases.
“There was, for starters, the tendency of everyone who actually played the game to generalize wildly from his own experience. People always thought their own experience was typical when it wasn’t. There was also a tendency to be overly influenced by a guy’s most recent performance: what he did last was not necessarily what he would do next.”

Like fastball velocity, our biases generally indicate the right direction but there are other tools besides what’s between our ears. This is arriving in Traffic. Good organizations have systems too,  like the The GMs.

3/ Zero fucks, enough ego.
“…if there was one thing Grady knew about Billy, it was that he could give a fuck about baseball tradition. All Billy cared about was winning.”

There’s a dichotomy of ego; gumption but not grandeur. Too much ego for Billy Beane would have been wanting to win my way.Gregg Popovich understands, “I don’t care where an idea comes from. You have to be comfortable enough in your own skin to realize that an idea can come from anywhere.”

4/ Put a Milo on him.
“‘Bad makeup’ is a death sentence. ‘Bad makeup’ means this kid’s got problems we can’t afford to solve. The phrase signified anything from jail time to drinking problems to severe personality disorders.”
“The meetings, from (Paul and Billy’s) perspective are all about minimizing risk. They can’t afford to have guys not work out.”

Warren Buffett says there are two rules to investing. Rule number one, don’t lose money. Rule number two, don’t forget rule number one. If half of success is showing up, then one-third is avoiding mistakes.

6/ Active share.

6/ We’re not selling jeans here.

7/ Career capital.
“For instance, when baseball managers talked about scoring runs, they tended to focus on team batting average, but if you ran the analysis you could see that the number of runs a team scored bore little relation to that team’s batting average. It correlated much more exactly with a team’s on-base and slugging percentages. A lot of the offensive tactics that made baseball managers famous—the bunt, the steal, the hit and run—could be proven to have been, in most situations, either pointless or self-defeating. ‘I figured out that managers do all this shit because it is safe,’ said Alderson. ‘They don’t get criticized for it.'”

Sometimes we make decisions because they are good decisions and sometimes we make decisions because they look like good decisions. Rory Sutherland gives an example:

“I’ll give you an example, if you want a good recommendation for an Indian restaurant, you are far more likely to get a good recommendation from a scaffolder called Terry than from the editor from the Times literary Sunday edition. Because scaffolders are perfect recommenders. They have quite a bit of cash but they want good food. They’re not interested in showing off their sophistication. They want a pretty good meal for a reasonable money.”

8/ 75 copies.
“It didn’t occur to him (Bill James in 1977) to be disappointed by a sale of seventy-five copies; he was encouraged! No author has ever been so energized by so little.”

9/ Incentives.
Miguel Tejada had grown up poor in the Dominican Republic, and in the Dominican Republic they had a saying, ‘You don’t walk off the island.’”

Jim Chanos told Barry Ritholtz that his first short suggestion “wasn’t received very well as you can imagine particularly because the big brokerage firms who recommended the stock were also making a fortune selling their annuities.”

Thanks for reading.

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

Roger Lowenstein’s Buffett: The Making of an America Capitalist was a good tour of WB’s investing career through the late 1990’s. The many Buffett Books, (20 pages on Amazon!), CNBC Archive, and Berkshire Letters are enough material for someone to become a Buffet expert. This post is my novice preferences.

All unattributed quotes are from Lowenstein.

Ready?

 

The volume of materials demonstrates Buffett’s emphasis on communicating with your stakeholders.

“But one purpose of his letters was to attract and knit together a shareholder group who would behave like his partners—in other words, who would stick with him.”

“He took pains to explain his approach in advance, and in concrete terms—precisely because he knew that a misunderstanding could sunder the union.”

Investors require patient capital but restless capital can walk away. Chris Douvos noted about long-term investing, that “The Venn Diagram of the people who can do it and have the courage to do it is actually pretty small.”  Writing letters was Buffett’s way of bucking up his stakeholders.

…

Flip-flopping is pejorative while updating beliefs is praised. Buffett is and was an updater.

“In Buffett’s view, (Disney’s) most valuable feature was its library of old cartoons and films, such as Snow White and Bambi. A Ben Graham would not have been interested in such an imprecise asset. However, Buffett estimated that, on a proportional basis, the library alone was worth the price of a share.”

“He was bolder than Graham: more willing to load up on a stock or to ride a winner. And, of course, his results had been better.”

“The ‘main qualification is a bargain price,’ he wrote; but he also would pay ‘considerable attention’ to qualitative factors.”

Munger may have planted the seeds for the switch from quantities to quality but Warren prepared the soil.

…

Maker Schedule, Manager Schedule. Paul Graham blasted manager schedules because, “A single meeting can blow a whole afternoon, by breaking it into two pieces each too small to do anything hard in.” Buffett’s calendar was a makers calendar.

“His day was a veritable stream of unstructured hours and cherry colas. He would sit at the redwood horseshoe desk and read for hours, joined to the world by a telephone (which he answered himself) and three private lines: to Salomon Brothers, Smith Barney, and Goldman Sachs.”

…

Berkshire Hathaway is the buyer of choice – in part – because of their Decentralized Command. Lowenstein explained that Buffett, “picked the chorus line but didn’t attempt to dance.”

DC works because the people on the ground know the details better than the people up in the offices. Andy Grove valued the wind of the real world. But front lines expertise is also an ignorance. Buffett’s managers send their profits to Omaha because Warren is a better capital allocator. Much like Charles Koch, Buffett got a detailed report from the front lines but made his decisions from a command post.

…

Coca-Cola.  In 1988 Roberto Goizueta noticed someone was buying Coca-Cola stock. Don Keough wondered if it was his fellow Omaha native, after a phone call he found out it was.

Part of the reason Buffett bought was that while Americans were drinking 74X as much Coke as Indians, even though India had 3X as many people.

…

Investing heroically. Buffett’s success – in part – is due to investing in good companies during bad times. One example was GEICO, and Lowenstein recounts Buffett’s diligence:

“Then he went to see insurance experts—the B, C, and D of the day. Every one told him that GEICO’s stock was overpriced. Buffett’s reading of the facts was just the opposite, but he found them daunting. They were experts; he was in B-school. Every stockpicker worth his salt eventually comes to such a crossroads. It is extremely difficult to commit one’s capital in the face of ridicule—and this is why Graham was invaluable. He liked to say, ‘You are neither right nor wrong because the crowd disagrees with you.'”

With Graham’s support and Buffett’s diligence, we have an example of  Howard Marks‘s matrix. Chris Douvos said that David Salem encouraged him to ‘invest heroically.’ Lowenstein wrote:

“Buffett’s portfolio was decidedly unconventional. With his big bets on American Express, Berkshire Hathaway, and two or three others, the lion’s share of the pool was in just five stocks.”

…

The real competitive advantage Warren Buffett enjoyed was being Warren Buffett. In the book, his research is almost trancelike. As Mohnish Pabrai asks students who ask him about becoming investors, “Are you wired for it?” Pabrai notes:

“The first question investor need to ask themselves is ‘Does the glove fit?’… after you read an annual report you have to ask yourself, ‘you know, I spent two hours reading that, would I have preferred doing that or watching a Star Wars movie?’…you have to ask what type of activities give you the greatest satisfaction.”

Warren’s satisfaction comes from reading the reports.

 

Thanks for reading.

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

Tren Griffin was delightful in his podcast with Patrick O’Shaughnessy. What makes these two such a treat is the enthusiasm. This post will be a snapshot whereas Tren’s blog is an ongoing story.

…

Businesses succeed when they create something of value and capture part of that value. “Just because you have a product people want to buy,” said Griffin, “doesn’t mean you’ll have any margin.”

David Chang noted this too, “One of the things I wish the public knew is that just because you’re a busy restaurant doesn’t mean you’re making money.”

You know you have value, Griffin said when, “Everyone in the company is thinking, ‘My god, how are we going to satisfy all these orders?’ You’re not sitting around in the conference room, thinking, ‘Maybe we should add a feature.'”

Word of mouth is the gasoline on the bonfire of value. “You can’t scale a business very well if you have inorganic approaches to acquiring customers. If you have to buy radio ads it’s a hard slog.” And that word-of-mouth needs to feed into a large enough market. “It’s hard to scale a business for horse blankets.”

But As a company grows they need to watch out for the Wholesale Transfer Pricing trap.

Griffin takes inspiration from Fisher, “Fisher basically says, if you’re negotiating for something and you only have one choice you’re screwed.” The Movie Pass model, he said,  “is fundamentally dependent on the price of the retail tickets and they only have one supplier.” Netflix avoided this trap with original content and it’s reflected in Ted Sarandos‘s disinterest in sports. “The reason I don’t get tempted by major league sports,” Ted said, “is that the pricing power all belongs to the leagues.” Griffin points businesses to Andy Rachleff’s advice.

…

The organizations that capture value best have moats. They can be network effects (Modern Monopolies), economies of scale, intellectual property, or brand. “But brand doesn’t mean as much anymore, word-of-mouth means more. To the millennial generation and younger, they’re hooked on getting some product that Yeezy’s.” Brand could be considered a capital light business. During Rory Week we looked at his ideas, specifically around trains. It takes millions of dollars to upgrade to faster trains, Sutherland said, but much less to upgrade to more enjoyable ones.

Griffin notes that there’s a difference between building moats and buying them. Bill Gates built one. Warren Buffett buys some. To build one, Griffin said, takes an artist. “Jim Senegal and Howard Schwartz are artists. They have a gestalt sense of where the value is and what customers want.”

Moats, wrote and spoke, Pat Dorsey have high switching costs and we used his ideas for this podcast:

https://soundcloud.com/mikesnotes/moats-and-allocators

While platform businesses dominate today, there’s more than one way to build a business.”Sometimes you have to sell a box to sell software. You sell this thing which allows you to sell this service and the margins are in the service and the stickiness is in the thing.”

GoPro, Giffin said, never invested enough in the software angle. “Software is eating the world but hardware allows for distribution.” Software businesses are great. “I’m in the software business,” Griffin said, “and I see the gross margins in other businesses and I think, ‘MyGodd. How do they survive? They’ve got no money for anything.'”

…

Griffin’s notes, quotes, and ideas come from lots of reading. His deep interest started in 1999, “People were getting rich in ways I couldn’t imagine…I just didn’t know what to do…I read The Alchemy of Finance and I said, ‘I gotta read more books’… I read Hagstrom’s books and thought, ‘Who is this Munger guy?'”

He collected quotes. He wrote up notes. He built out his set of mental models. “Looking at mental models,” Griffin said, “is a mental model.”

How should you go about this? Let the index at the end be the beginning of the next. “If you chase someone like Munger down and read the books they recommend, then you find other strands and it’s like the root system of a redwood tree.”

More specifically, it’s Munger’s Worldly Wisdom and Psychology of Human Misjudgment talks that set Griffin’s hair on fire. Learning, thinking, and reading has also led Griffin to adopt Munger’s maxim, a year in which you don’t change your mind about something is a wasted year.

For instance, “The older I get the more I realize there are more pools of alpha than I thought.”

…

Griffin’s Barksdaleisms post is full of great quotes and we’ll cherry-pick one from the podcast.

“The infantry is always ahead of headquarters.” Jim Barksdale

This, said Griffin, was “classic Jim.” “Great operators get out of their chair and find out, they go and meet with the infantry…There’s nothing like a whole day in a call center to give you a good sense of what the customers are thinking about your product.”

This was something Kayak founder Paul English followed to the letter. English installed a red phone in the middle of his office. Tracy Kidder wrote that he also:

“He had wanted everyone at Kayak—and especially the programmers—to imagine themselves in the place of that customer looking for the right flight to Cleveland. Paul had devised a scheme he called “Empath,” which had obliged every coder in Concord to answer some angry emails from customers.”

Griffin said, “You and I need to go out on sales calls. We need to sit with customers…
Bill Gates said, ‘Unhappy customers are our greatest sense of learning.'” Andy Grove said that you can’t make decisions without feeling the winds of the real world.

Going out into the real world – Chasing the Scream – teaches you that gangs are antifragile

In Shop Class as Soulcraft, Matthew Crawford puts it this way:

“This history provides a nice illustration of a point made by Aristotle: Lack of experience diminishes our power of taking a comprehensive view of the admitted facts. Hence those who dwell in intimate association with nature and its phenomena are more able to lay down principles such as to admit of a wide and coherent development; while those whom devotion to abstract discussions has rendered unobservant of facts are too ready to dogmatize on the basis of a few observations.”

…

This is our fourth post highlighting Griffin; Tren and Munger, Tren on a16z, and Tren and his book. Thanks for reading.

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

Rapid fire notes from Jim Chanos conversation with Barry Ritholtz on Masters in Business.

…

Chanos’s firm, Kynikos, is named after the Cynics of Ancient Greece. “They basically were searching for the ultimate truth.” Here is one, unique, Diogenes primer.

…

Decentralized Command. Early in Chanos’s career, he worked for Gilford Securities, a job with “the latitude to do whatever I wanted to do.” Later in the episode, Chanos said that one mentor was Bob Holmes:

“Bob Holmes was not only a mentor but he stood behind me in the darkest days of Baldwin. The stock had doubled. The New York partner was screaming for my head on a plate. I was all of twenty-five years old. But he stood behind me. He’d seen the work. He’d seen the documents. He’d said, ‘Kid, you’re right.'”

Lowenstein describes Warren Buffett’s approach to decentralized command as “he picked the chorus line but didn’t attempt to dance.” Kirk Lacob of the Golden State Warriors put it this way; “I always thought our secret sauce was that we have great people and turn them loose and let them do what they’re best at.”

…

Of course, decentralized command only works with the right incentives. It’s the Upton Sinclair warning; don’t expect someone to understand something his job demands he not. Chanos said his first short report “wasn’t received very well as you can imagine, particularly because the big brokerage firms who recommended the stock were also making a fortune selling their annuities.”

…

Tesla, Chanos said; “is one of the bellwethers of this market. It is a hopes and dreams stock. Investors have pinned their hopes and dreams on this stock and on this CEO, who has done a very good job promoting that vision. The problem is that it is an automobile company.”

It sounds like his criticism of Musk is selling too much sizzle and not enough steak. Great leaders, said Josh Wolfe, “…need a marriage of both. You need a storyteller and you need an operator.”

…

The secret to great investing is having an edge.

“Julian Roberts had said it best, ‘What is your edge?’ When having a bear and a bull discuss a stock at his shop he would constantly say, ‘What do you know that the market doesn’t?’ What is in your process that gives you an edge, trading-wise or research-wise? What makes you see things differently? Where you see the reality rather than the perception of reality?”

Edges are tricky, performance figures are easy. But as Chris Douvos noted, performance is often a lagging indicator. It sounds like Chanos agrees, “What most people do is look at performance and that alone will not do it for you because you’re always going to chase that which is behind.”

…

Around 23:30 Ritholtz and Chanos discuss China. Here’s Josh Brown’s request for readings about the country. Beyond the books and the podcast, there’s this 99PI episode about duplitecture in China and also the ghost cities.

China’s problem, said Chanos, is borrowing. “Any time you use debt to fuel grow you’re pulling forward consumption.”

…

Early in his career, Chanos learned the value of arguing well. Another mentor was Julian Robertson, and “his approach galvanized me. He’d call me up and say, ‘I see you’re short XYZ Corp. Some guys in my shop like that. Why don’t you come over for lunch.’ It was always like going into the lion’s den.”

Reporters like to know the other side too. Ritholtz asked if that’s why Chanos had a pleasant relationship with the media. “Reporters generally like talking to short sellers because they’re going to get the opposing point of view on a situation.”

A recent addition to this point is what Bryan Caplan calls the Ideological Turing Test.

https://soundcloud.com/mikesnotes/clip-bryan-caplans-ideological-turing-test

…

Books “I read a lot of history,” Chanos said.

“One of my favorite historians is William Manchester. Everyone remembers his MacArthur biography (American Caesar) and his unfinished Churchill Trilogy, but the book that’s a game changer is A World Lit Only by Fire. It’s the story of middle ages and reformation, written through this prism of great people like Magellan and Gutenberg.”

Also.

“In my history of fraud class, we love The Match King by Frank Partnoy…a wonderful story of the greatest fraudster of the 1920’s.”

Thanks for reading.

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

In honor of the Houston Rockets ascent, here are my twelve favorite Daryl Morey quotes. As Morey noted at the 2017 Sloan Conference, we need to continue our education, because, “We’re here because human beings are really really bad at making decisions.”

…

1/ “The problem, if you’re a journalist, is that you have to take an angle that’s interesting to your audience.”

News as noise is true when two groups have different metrics. Analytics are a difficult story whereas tropes are not.

…

2/ “I was really into baseball because I was a math nerd and you couldn’t get football stats, baseball was the only game in town.” Interests are your competitive advantage. As Buffett says, he and Munger aren’t going to try to out Bezos Bezos.

…

3/ “One of the tough meetings early on was meeting with coach O’Brien and saying, ‘Yes, you are number one in field goal percentage but you also are giving up the most open threes in the league.'”

Ease of measurement does not convey importance. “Someone created the box score, Morey says, and he should be shot.”

…

4/ “I was having this conversation with Frank Vogel. If you knew threes were good on offense you had to know they were bad on defense but that whole marriage hadn’t happened yet.” Invert, always invert.

…

5/ “Our poor CEO, all the press hits of negativity for our owner Leslie Alexander hiring me. He’s just dealing with the radio guys calling me deep blue, calling the owner crazy.”

Credit to Alexander for choosing to try something unconventional rather than conventional.

…

6/ “Yeah, teams have caught up (with Houston’s draft model). We feel like we’re farther ahead but the edge is much smaller. The difference between better model and slightly better model is way different than better model and no model. That edge has really eroded and we’ve adapted.”

Alpha erodes.

…

7/ “The baseball analytics guys were coming in and telling everyone they’re wrong and everything is wrong, so that was a tough sell. By the time basketball started looking at analytics a lot of our analysis was making coaches feel better. Guys like Shane Battier averaged eight points and five rebounds but coaches loved them. A lot of the advanced analytics stuff said that guys like Shane were worth a lot more than you think. When you have a message that’s like hey you’re right, here are a few areas you could improve versus, hey, you’ve been wrong your whole life you idiot the integration was a little easier.”

…

8/ “I want more bad owners… you’ve seen the poker analogy. If you’re the one shark among minnows you clean up but if you add just one more shark all the profits are divided by two.” It’s the parodox of skill.

…

9/ “I don’t think it’s really a factor (Morey’s lack of basketball experience). I mean, you don’t have to be a farmer to run Hormel.” Hardwood version of Green lumber.

…

10/ “Mike (D’Antoni) is a very good communicator and I’m reacting to him. He just says, ‘Hey, this is what I’m planning to do,’ and the answer, almost universally, is ‘sounds great.'”

As Morey’s contemporary Kirk Lacob said, “I always thought our secret sauce was that we have great people and turn them loose and let them do what they’re best at.”

…

11/ “A good strong locker room creates option value for certain guys you can add.”

Culture, said Ben Horowitz, is what people do when they aren’t told what to do. Peter Theil wrote, “No company has a culture, every company is a culture.”

…

12/ “When there’s a deal that’s fair for everyone, just do it.” Chris Douvos was encouraged to be a Partner, to be fair, and never have to go into the bottom drawer to pull out the documents that said who got what.

 

Thanks for reading.

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

At last Cade Massey was the interviewee rather than the interviewer. The podcast he co-hosts, Wharton Moneyball, is a lively discussion of sports analytics and a show we’ve covered before. These notes and quotes are from Massey’s appearance on Bet the Process.

In addition to being a Wharton professor, Massey consults with teams, mostly in the NFL. His initial research was a 2005 paper, Overconfidence vs. Market Efficiency in the National Football League authored with Richard Thaler. Massey now consults with teams because, “They want fresh eyes looking at things but they also want a bridge to what’s going on in other industries, what are best practices, what’s going on in other sports, what’s happening in the academic world.”

Teams want out of sample tests. Teams are looking for Ray Dalio‘s investment rule; “that it has to be timeless and universal.”

The smarter football teams have read The Success Equation. In that book, Michael Mauboussin writes about a continuum of luck and skill. Some actions, like chess, are more skill based. Some actions, like football, have more luck based. The luck and skill balance should influence decision making one way or another.

Sand enters our decision-making gears when we think we know something we don’t. Massey said, “Teams are too sure they know who is going to be good.”

“Teams put too much value in the top picks of the draft. Every year it feels like those guys aren’t just can’t miss but probable Hall of Famers…Every two years they’re talking about someone being a generational player.”

Teams violate Charlie Munger‘s iron rule of life, “that only 20% of the people can be in the top fifth.”

Instead, teams should pit historical data against player evaluations. But this is tricky. “Usually when people say they are ninety percent confident they are right fifty percent of the time.”

Take the Cleveland Browns. With two of the top four picks, Cleveland selected a quarterback and cornerback. Cleveland’s staff had a high degree of certainty about those picks. But consider a hypothetical trade, the sixth pick for the sixteenth and a few later ones.

“Teams don’t think enough in bundles. It’s not the sixteenth pick versus the sixth pick. It’s the sixteenth pick and a few other picks versus the sixth alone. You’re choosing one vivid, supposedly Hall of Fame player, versus three solid other players. It’s hard to keep that in mind, mostly they’re thinking about one vivid guy versus some vague possibilities.”

Layered on this decision-making quagmire is the vividness tendency. We like simple and obvious things. Ambiguity is like a puzzle piece that doesn’t immediately fit and as such we toss it out.

Instead, the Browns could have traded back.

“I’ve worked with an organization who had a philosophy of always picking up a future pick…it’s the surest return of the draft.”

Of course, trading back carries some risk.

“What you see (trading back) is that some teams are more comfortable doing those things. They’re going to take a little bit of risk and in exchange for their risk they’re going to get a little premium…if you can do that philosophically the numbers are in your favor.”

Risk is fine, so long as you’re compensated. Chris Douvos recalled David Swensen telling him, “Risk is not itself a dirty word. There are two kinds of risk, there are risks you can mitigate and there are risks that you can’t. The ones you can mitigate you want to spend all your time mitigating and diversifying them and the risks you can’t mitigate you want to make sure you get compensated adequately for.”

Trading back has the highest expected value on average but that doesn’t mean it always works.

“You have to have that philosophy and know that sometimes it’s not going to work out.”

Leaders must shoulder the shit umbrella.

 

Being on the wrong side of maybe requires top-down support for what’s happening on the field. Coaches like Bill Belichick get the benefit of the doubt whereas other coaches do not. Scout Jason Licht told this story about working for Belichick and the Patriots:

“If I said a guy was a first-round pick, the Colts picked him, and he turned out to be a bust, they (Belichick and Pioli) wouldn’t have looked down on me. They wouldn’t have said I was a bad grader. Because that player in the Patriots system might have been successful.”

Massey explained, “That is what separates the best teams from the teams that aren’t run that way and that’s the root of all these issues. You need owners who will stand in the fray and handle the flack and keep a long-term perspective.”

Belichick was focused on the process not, the outcome. If the process is the steak, managers must also sell the sizzle. This was part of Sam Hinkie‘s problem – ironically so. Massey recalled:

“I remember Sam Hinkie talking about how he conveys information to the organization. Back when he was working for Daryl Morey as assistant GM of the Rockets, Sam would give information to his head coach one way, to Daryl in a different way, to the players in a third way altogether. You’re going to be dramatically more effective as an analyst if you can communicate in different ways tailored to the audience.”

The piece Hinkie lacked was how to communicate with the media and fans. Jeff Luhnow was interviewed by Massey for the Wharton show and he noted all the different people a general manager is accountable to.

“I think it’s important in our position we spend the requisite amount of time managing the stakeholders; the fans, the media, the influencers in the organization, the ownership – all of those stakeholders. I spend a large part of my job managing those stakeholders. It all comes down to communication.”

Money managers face this too. Joel Greenblatt told Barry Ritholtz, “My investors were great but maybe they wouldn’t be so kind when that (a 20% loss) happened, and it did seem to happen every two or three years.”

Besides overconfidence and under communication teams also have to align incentives. “The fundamental issue is that the general manager has a shorter term focus than the owner,” which is, “A classical principal-agent problem with a difference in time preferences.”

When Bet the Process cohost, Jeff Ma suggests a ten-year performance bonus, even if the manager or coach isn’t with the team, Massey calls it “A great idea.” Anson Dorrance had this idea too. He suggested that any board member who votes for a coach should lose their board seat if the coach gets fired. The board members kindly passed on this idea. Nassim Taleb, we will note, was not involved.

…

At the SSAC in 2017, Massey hosted the “Moneymind: Overcoming Cognitive Bias” panel. There, Farhan Zaidi explained his regret minimization technique. When his scouts were worried about being proven wrong on a trade, Zaidi said: “‘What if instead of making this trade we took him out back and shot him?’ and everyone said to make the trade.”

Massey said regret bias is “a major issue in decision making, and probably even stronger in sports where it’s public.” Billy Beane opined to Michael Lewis that baseball managers faced second-guessing from anyone who had played.

 

Thanks for reading. We’ve only hit the big decision-making points in these notes. In the podcast, Massey, Ma, and Rufus Peabody add nuance to the conditions.

 

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

Joel Greenblatt joined Barry Ritholtz for a strong seventy or so minutes. Even though I’ve read (but need to re-read) You Can Be A Stock Market Genius I still enjoyed this episode. On to the annotations!

…

A new Point of View. Greenblatt had an hmm, that’s interesting moment in college.

“Junior year I read an article about Ben Graham’s stock picking formula and ‘net-net’ seemed very simple to me. I was at Wharton at the time and we were learning about efficient market theory and none of it resonated with me.”

“What they were telling us at Wharton was, don’t try to figure things out, stock prices are efficient.”

“It was a good age, I was twenty-one at the time.”

Time and again we this advice; pay attention to the world and if you see something that doesn’t fit your worldview note it.

…

How do you get seven million dollars from Michael Milken? Luck.

“The simple story is that I had a friend at Wharton who was one of the people in Michael Milken’s group and I had been working at a hedge fund but had always wanted to go out on my own, felt I was ready, and mentioned it to my friend, and said if I could raise X dollars I would go out on my own and he called the next day and Mike said fine.”

And then how do you return 50% a year for ten years? That’s (partially) luck too.

“One, we stayed small (“One of the ways to get those kinds of returns is not to run a lot of money. After five years in the business we returned half our outside capital.”).”

“Two, we were concentrated (“And the other way is to be concentrated. Six to eight ideas were usually eighty-plus percent of our portfolio.”).”

“Three, we got lucky. You have to have some luck to get those returns.”

I agree with Michael Mauboussin‘s comments about luck; “There is no way to improve your luck because anything you can do to improve a result can reasonably be considered a skill.” But also with Scott Adams:

“I find it helpful to see the world as a slot machine that doesn’t ask you to put money in. All it asks is your time, focus, and energy to pull the handle over and over. A normal slot machine that requires money will bankrupt any player in the long run. But the machine that has rare yet certain payoffs, and asks for no money up front, is a guaranteed winner if you have what it takes to keep yanking until you get lucky.”

The manageable variables for a lucky outcome are persistence and time.

…

Capital Allocation. In Greenblatt’s The Little Book that Beats the Market, he introduces the Just Broccoli store. What I misunderstood when reading this book were the second order effects. I thought 8% >2% returns. While true, the real value comes from reinvestment.

“All things being equal it’s better to own the business that can reinvest its money at fifty percent returns than two-and-a-half percent returns.”

After the Moats and Allocator’s podcast, I now understand that better.

https://soundcloud.com/mikesnotes/moats-and-allocators

…

Jellybeans and noise. Greenblatt started his Google Talk pointing out that Warren Buffett advocates for indexing, “But Warren Buffett doesn’t index and I don’t either, how come?”

“People are still emotional,” Greenblatt demonstrated to a ninth-grade class with a jar of jelly beans. First, he had each student privately count, guess, multiply, and estimate any way they saw fit to figure out how many jelly beans were in the jar. They wrote their estimate on an index card.

Then, he opened up a dialogue in the room and each student shared their guess OR changed it based on what they heard. The index card average was much closer than the open floor guesses. Do your own work, be disciplined, Greenblatt told the class.  “99.9% of what you read in the news each day is noise.”

…

Stakeholders. We call them stakeholders rather than shareholders to include anyone who is part of your life. Greenblatt returned investor’s money, in part, because he wanted fewer people to call him. A concentrated position, “like clockwork lost twenty percent of my net worth in two or three days.”

“My investors were great but maybe they wouldn’t be so kind when that happened and it did seem to happen every two or three years.” Today’s Gotham Capital Index Plus is a different arrangement, with different stakeholders, different rules, and different incentives.

…

Books!

“There’s a book called The Invisible Heart which explains basic economics…it’s a very short book that most people should read.”

“For investing, if you’re a sport’s fan Moneyball was one of the great ones…undervalued players are very similar to undervalued stocks.”

“I just read a book called The Power of Moments which I really enjoyed…it really comes down to doing new things.”

“I’m also having a lot of fun with Never Split the Difference.”

“Everyone who’s interested in investing needs to read The Intelligent Investor, especially chapters eight and twenty.”

“Buffet wrote a bunch of letters that were compiled by Lawrence Cunningham into topics and I always assign that in my class because I think it’s a great book (The Warren Buffett Shareholder: Stories from inside the Berkshire Hathaway Annual Meeting).”

 

Thanks for reading.