This book holds that the sequence technological revolution – financial bubble – collapse – golden age – political unrest recurs about every 50 years and is based on causal mechanisms that are in the nature of capitalism. These mechanisms stem from 3 features of the system, which interact with and influence one another
The fact that technological change occurs by clusters of radical innovations forming successive and distinct revolutions that modernize the whole productive structure
The functional separation between financial and production capital, each pursuing profits by different means; and
The much greater inertia and resistance to change of the socio-institutional framework in comparison with the techno-economic sphere, which is spurred by competitive pressures
The techno-economic paradigm is both a propeller of diffusion and a delaying force – it provides a model that can eventually be followed by all but this learning must eventually be overcome
It is precisely the need for reforms and the inevitable social resistance to them that lies behind the deeper crises and longer-term cyclical behavior of the system. Each technological revolution, originally received as a bright new set of opportunities, is soon recognized as a threat to the established way of doing things in firms, institutions and society at large
Old industries rejuvenated as well
New input (iron, steel, chips) reaches mass scale economics which creates massive price drops and it can therefore spread further
All areas of society are interconnected and impact each other – technological, social, political
Big bang leads to irrational exuberance which leads to structured adjustment, then installation period (irruption and frenzy), and eventually to deployment (synergy and maturity)
How new tech goes to third world and financial / debt’s role
Financial capital plays a crucial role all along. It first supports the development of the technological revolution, it then contributes to deepen the mismatch leading to a possible crash, it later becomes a contributing agent in the deployment process once the match is achieved and, when that revolution is spent, it helps give birth to the next
Regulation is the last part that is needed as part of the cycle
Monopolies, oligopolies in phase 4 must try radical innovations to stretch lifecycle, reduce cost of peripheral activities
Installation leads to turning points which leads to deployment
The turning point has to do with the balance between individual and social interests within capitalism. It is the swing of the pendulum from the extreme individualism of Frenzy to giving greater attention to collective well-being, usually through the regulatory intervention of the state and the active participation of other forms of civil society
Related services, cultural adaptation, education, regulation all come up
Becomes ubiquitous, common sense which leads to coherence. When exhausted and tired, ripe for new paradigm
Financial vs. Production Capital
Financial capital – invest, money to make more money
Production capital – builders, scaling more profit, making capacity
Little knowledge in an area vs. a lot; foot loose vs. roots
When productional capital is in control (post bubbles) it leads to real wealth creation
Financial capital should be the facilitator, not the game itself
When the companies (engines of growth) start seeking unorthodox ways to deploy their profits, that stage is at maturity (M&A, conglomerates)
In maturity, financial capital also becomes unorthodox. Idleness leads to bad loans
Provides the funding for the next paradigm
Taking a successful behavior to its extreme causes failure
Big crashes teach big lessons, but are often short lived
Cost reductions in the core inputs/infrastructure leads to further explosion
What I got out of it
Love seeing and learning about these centuries-wide deep dives that helps stitch together patterns. The cycle from irruption to frenzy to tipping point to synergy and finally maturity plays out time and again and having the image and jargon to think about it is so useful
One truth of archaeology in particular bears directly on my thinking. Archaeologists have their specialties, and one of the curiosities of the field is that those who specialize in one aspect of antiquity tend to be blind to anything else. Archaeologists who look for pottery sherds will not see coins, and, conversely, those who look for coins will not find sherds. Same dig, but those sifting the soils see entirely different things. So it is with markets. Most people believe that markets are driven primarily by economic factors, and that psychology plays a minor role. I take the position that markets are driven by both psychological and economic factors. I owe a great debt to economists for their inability to acknowledge the degree to which psychology moves markets. (In this sense, it’s unfortunate that economics now seems to be embracing psychology. I suspect that economists will always retain the illusion that numbers can capture mood.) My approach to the markets has been to take a long-term perspective, a natural predilection that has on numerous occasions saved me from getting lost in the froth of daily events. I admit that there is something self-serving in this strategy as well. Long-term goals postpone days of reckoning, and if you can identify a goal that takes a lifetime to achieve, you won’t be disappointed.
Good times breed laxity, laxity breeds unreliable numbers, and ultimately, unreliable numbers bring about bad times. This simple rhythm of markets is as predictable as human avarice.
Investors are very good at recognizing the moods of the past—for example, the Roaring Twenties, the Great Depression, the Swinging Sixties—but we tend to be oblivious to the mood of the present. When do we notice that the world has changed? Sometimes change arrives with a bang. The dropping of the atomic bomb on Hiroshima instantly and permanently changed the stakes of great-power conflicts. But more often, change creeps upon us incrementally, punctuated by upheavals that, often as not, are rationalized as part of business as usual.
Those most adept at profiting from a particular market are often least likely to notice when the game is over, and probably the least psychologically prepared to profit from the successor market.
But the market has even crueler twists. It’s not sufficient that a player figure out when the game has changed. When a market shifts, it usually requires the investor to adopt a psychological stance anathema to the precepts upon which he built his earlier success.
The message is that mood or investor psychology is as important to markets as is information. It requires tremendous discipline to apply this understanding to one’s behavior.
A good idea, a long-term perspective, and the creativity to implement a strategy to profit from your insight are necessary to prosper in finance, but they are not sufficient. None of these qualities will bear fruit unless you have the discipline to stay with your strategy when the market tests your confidence, as it inevitably will.
This saga was more colorful than today’s studies of pricing anomalies in the derivatives market. Unencumbered by the received wisdom of a business education, I had to figure things out for myself. If you think things through for yourself, you may waste some time, but you also may stumble onto something that has been ignored or disregarded. Doing so has enabled me to look at the financial world with fresh eyes.
I think that one of the greatest mistakes of economics was to separate itself from other disciplines. You can’t understand economics without understanding philosophy and history.
If intelligence is the ability to integrate, creativity is the ability to integrate information from seemingly unconnected sources, and a measure of both abilities is necessary for long-term success in the markets.
My passion for ancient history and archaeology also gives me perspective.
All we can ever do is look at the past to predict the future, but life is dynamic and constantly changing, so the assumptions governing predictions are bound to be wrong.
All specialists have a time frame that they believe is important—the astrophysicist who thinks in terms of billions of years can’t put himself in the mind of the meteorologist who thinks about the future in terms of hours and days. Both will be befuddled by the archaeologist whose time scale spans less that that of the astrophysicist but more than the meteorologist.
Although Danny was clearly a master of the game, making money was not an end in itself for him. I think that is true of many successful people in finance. Apart from giving money away, they have passionate outside interests.
mistake in launching the Oppenheimer Fund was in not sufficiently appreciating how skepticism about the unfamiliar can obscure the merits of even the best ideas.
We hired Milton Pollack, a brilliant lawyer who later became a distinguished federal judge. The suit unfolded slowly, and I fell into a ritual of having dinner with Pollack once a month during which he would update me on our progress and his methods. At that time he had a daughter in elementary school; he told me that before he asked any question of a witness, he would test it on his daughter.
Some of the best opportunities involve badly managed companies, if only because the situation can improve rapidly with the imposition of good management. No matter how bad a company, there is almost always a point where it is a bargain.
the proper perspective on an investment is not what you have made so far, but rather the risk and reward ratio at any given point. The price you paid for a stock is irrelevant.
I have thought about the myriad ways in which money flows toward tax incentives and away from high taxes and have concluded that taxes play a profound role in shaping history. Give officials control of the tax code and they can change society, either deliberately through the wise use of incentives or, more commonly, inadvertently through a misunderstanding of how people react to taxes. Until
It is interesting to note that any profitable market strategy, no matter how obviously it is driven by greed, always is deemed good for society by those who reap the profits.
Napoleon’s delusion was to believe in military strategy and underestimate the role of morale; his generals failed to appreciate that Russian citizens battling for their lives on their home soil had far greater incentive to fight than did a poilu from Paris yearning for the Champs Elysées. The LTCM strategists’ delusion was to watch a market go mad and fail to appreciate the degree to which their own actions contributed to the insanity.
In August alone, the fund lost roughly 45 percent of its capital, an event that the fund’s risk analysis predicted should happen no more than once in the history of Western civilization. It shouldn’t be unduly difficult to draw a conclusion about whether LTCM was extremely unlucky, or whether its managers misunderstood the nature of the risk.
Risks don’t disappear from markets or businesses; they are merely transferred or sold.
What I got out of it
Good book about risk, reward, psychology of a successful investor
The 80/20 Principle applied to business has one key theme—to generate the most money with the least expenditure of assets and effort. But, what is the 80/20 Principle? The 80/20 Principle tells us that in any population, some things are likely to be much more important than others. A good benchmark or hypothesis is that 80 percent of results or outputs flow from 20 percent of causes, and sometimes from a much smaller proportion of powerful forces…The 80/20 pattern that we have come to recognize for over a century—and which has been remarkably consistent, varying mainly between, say, 70/30 and 90/10—is rapidly increasing to 90/10 and 99/1. Understanding this trend and how to be on the right side of it can change your life
It is very rarely true that 50 percent of causes lead to 50 percent of results. The universe is predictably unbalanced. Few things really matter. Truly effective people and organizations batten on to the few powerful forces at work in their worlds and turn them to their advantage.
In 1949 Zipf discovered the “Principle of Least Effort,” which was actually a rediscovery and elaboration of Pareto’s principle. Zipf’s principle said that resources (people, goods, time, skills, or anything else that is productive) tended to arrange themselves so as to minimize work, so that approximately 20–30 percent of any resource accounted for 70–80 percent of the activity related to that resource.
In 1963, IBM discovered that about 80 percent of a computer’s time is spent executing about 20 percent of the operating code. The company immediately rewrote its operating software to make the most-used 20 percent very accessible and user friendly, thus making IBM computers more efficient and faster than competitors’ machines for the majority of applications.
The reason that the 80/20 Principle is so valuable is that it is counterintuitive. We tend to expect that all causes will have roughly the same significance. That all customers are equally valuable. That every bit of business, every product, and every dollar of sales revenue is as good as any other. this “50/50 fallacy” is one of the most inaccurate and harmful, as well as the most deeply rooted, of our mental maps. The 80/20 Principle asserts that when two sets of data, relating to causes and results, can be examined and analyzed, the most likely result is that there will be a pattern of imbalance. The imbalance may be 65/35, 70/30, 75/25, 80/20, 95/5, or 99.9/0.1, or any set of numbers in between. However, the two numbers in the comparison don’t have to add up to 100. The 80/20 Principle also asserts that when we know the true relationship, we are likely to be surprised at how unbalanced it is.
Related to the idea of feedback loops is the concept of the tipping point. Up to a certain point, a new force—whether it is a new product, a disease, a new rock group, or a new social habit such as jogging or roller blading—finds it difficult to make headway. A great deal of effort generates little by way of results. At this point many pioneers give up. But if the new force persists and can cross a certain invisible line, a small amount of additional effort can reap huge returns. This invisible line is the tipping point. The concept comes from the principles of epidemic theory. The tipping point is “the point at which an ordinary and stable phenomenon—a low-level flu outbreak—can turn into a public-health crisis,”10 because of the number of people who are infected and can therefore infect others. And since the behavior of epidemics is nonlinear and they don’t behave in the way we expect, “small changes—like bringing new infections down to thirty thousand from forty thousand—can have huge effects…It all depends when and how the changes are made.”
A few things are important; most are not.
The common view is that we are short of time. My application of the 80/20 Principle suggests the reverse: that we are actually awash with time and profligate in its abuse.
Conventional wisdom is not to put all your eggs in one basket. 80/20 wisdom is to choose a basket carefully, load all your eggs into it, and then watch it like a hawk.
A new and complementary way to use the 80/20 Principle is what I call 80/20 Thinking. This requires deep thought about any issue that is important to you and asks you to make a judgment on whether the 80/20 Principle is working in that area.
Application of the 80/20 Principle implies that we should do the following:
Celebrate exceptional productivity, rather than raise average efforts
Look for the short cut, rather than run the full course
Exercise control over our lives with the least possible effort
Be selective, not exhaustive
Strive for excellence in few things, rather than good performance in many
Delegate or outsource as much as possible in our daily lives and be encouraged rather than penalized by tax systems to do this (use gardeners, car mechanics, decorators, and other specialists to the maximum, instead of doing the work ourselves)
Choose our careers and employers with extraordinary care, and if possible employ others rather than being employed ourselves
Only do the thing we are best at doing and enjoy most
Look beneath the normal texture of life to uncover ironies and oddities
In every important sphere, work out where 20 percent of effort can lead to 80 percent of returns
Calm down, work less and target a limited number of very valuable goals where the 80/20 Principle will work for us, rather than pursuing every available opportunity.
Make the most of those few “lucky streaks” in our life where we are at our creative peak and the stars line up to guarantee success.
Consider the Interface Corporation of Georgia, now an $800 million carpet supplier. It used to sell carpets; now it leases them, installing carpet tiles rather than whole carpets. Interface realized that 20 percent of any carpet receives 80 percent of the wear. Normally a carpet is replaced when most of it is still perfectly good. Under Interface’s leasing scheme, carpets are regularly inspected and any worn or damaged carpet tile is replaced. This lowers costs for both Interface and the customer. A trivial 80/20 observation has transformed one company and could lead to widespread future changes in the industry.
Understanding the cost of complexity allows us to take a major leap forward in the debate about corporate size. It is not that small is beautiful. All other things being equal, big is beautiful. But all other things are not equal. Big is only ugly and expensive because it is complex. Big can be beautiful. But it is simple that is always beautiful.
All effective techniques to reduce costs use three 80/20 insights: simplification, through elimination of unprofitable activity; focus, on a few key drivers of improvements; and comparison of performance.
Because business is wasteful, and because complexity and waste feed on each other, a simple business will always be better than a complex business. Because scale is normally valuable, for any given level of complexity, it is better to have a larger business. The large and simple business is the best. The way to create something great is to create something simple. Anyone who is serious about delivering better value to customers can easily do so, by reducing complexity. Any large business is stuffed full of passengers—unprofitable products, processes, suppliers, customers, and, heaviest of all, managers. The passengers obstruct the evolution of commerce. Progress requires simplicity, and simplicity requires ruthlessness. This helps to explain why simple is as rare as it is beautiful.
But profitability is only a scorecard providing an after-the-fact measure of a business’s health. The real measure of a healthy business lies in the strength, depth, and length of its relationship with its core customers. Customer loyalty is the basic fact that drives profitability in any case.
When something is working well, double and redouble your bets.
Impose an impossible time scale This will ensure that the project team does only the really high-value tasks:
When I was a partner at management consultants Bain & Company, we proved conclusively that the best-managed projects we undertook—those that had the highest client and consultant satisfaction, the least wasted time, and the highest margins—were those where there was the greatest ratio of planning time to execution time.
Build up a long list of spurious concerns and requirements early in a negotiation, making them seem as important to you as possible. These points must, however, be inherently unreasonable, or at least incapable of concession by the other party without real hurt (otherwise they will gain credit for being flexible and conceding the points). Then, in the closing stages of the negotiation, you can concede the points that are unimportant to you in exchange for more than a fair share of the really important points.
If your insights are not unconventional, you are not thinking 80/20.
We have been conditioned to think that high ambition must go with thrusting hyperactivity, long hours, ruthlessness, the sacrifice both of self and others to the cause, and extreme busyness. In short, the rat race. We pay dearly for this association of ideas. The combination is neither desirable nor necessary. A much more attractive, and at least equally attainable, combination is that of extreme ambition with confidence, relaxation, and a civilized manner. This is the 80/20 ideal, but it rests on solid empirical foundations. Most great achievements are made through a combination of steady application and sudden insight. The key is not effort, but finding the right thing to achieve.
The Top 10 highest-value uses of time
Things that advance your overall purpose in life
Things you have always wanted to do
Things already in the 20/80 relationship of time to results
Innovative ways of doing things that promise to slash the time required and/or multiply the quality of results
Things other people tell you can’t be done
Things other people have done successfully in a different arena
Things that use your own creativity
Things that you can get other people to do for you with relatively little effort on your part
Anything with high-quality collaborators who have already transcended the 80/20 rule of time, who use time eccentrically and effectively
Things for which it is now or never
When thinking about any potential use of time, ask two questions: • Is it unconventional? • Does it promise to multiply effectiveness? It is unlikely to be a good use of time unless the answer to both questions is yes.
It is important to focus on what you find easy. This is where most motivational writers go wrong. They assume you should try things that are difficult for you;
The 80/20 Principle is clear. Pursue those few things where you are amazingly better than others and that you enjoy most.
10 golden rules for career success
Specialize in a very small niche; develop a core skill
Choose a niche that you enjoy, where you can excel and stand a chance of becoming an acknowledged leader
Realize that knowledge is power
Identify your market and your core customers and serve them best
Identify where 20 percent of effort gives 80 percent of returns
Learn from the best
Become self-employed early in your career
Employ as many net value creators as possible
Use outside contractors for everything but your core skill
Exploit capital leverage
Obtain the four forms of labor leverage. First, leverage your own time. Second, capture 100 percent of its value by becoming self-employed. Third, employ as many net value creators as possible. Fourth, contract out everything that you and your colleagues are not several times better at doing.
Koch’s 10 commandments of investment
Make your investment philosophy reflect your personality
Be proactive and unbalanced
Invest mainly in the stock market
Invest for the long term
Invest most when the market is low
If you can’t beat the market, track it
Build your investments on your expertise
Consider the merits of emerging markets
Cull your loss makers
Run your gains
No doubt you have your own pressure points. Write them down: now! Consciously engineer your life to avoid them; write down how: now! Check each month how far you are succeeding. Congratulate yourself on each small avoidance victory.
I think I know the explanation, and it also explains why 80/20 is becoming even more prevalent, affecting our lives in mysterious and perplexing ways. The answer is in the burgeoning power of networks. The number and influence of networks has been growing for a long time, at first a slow increase over the past few centuries, but since about 1970 the increase has become faster and more dramatic. Networks also behave in an 80/20 way—in the way characteristic of 80/20 distributions. And often in an extremely lopsided way. So the principle is becoming more pervasive because the same is true of networks. More networks, more 80/20 phenomena.
In keeping with the selective nature of the principle, this short chapter gives you the five most potent hints that I have discovered in four decades of searching.
Only work in networks
Small size, very high growth
ONly work for an 80/20 boss – someone who consciously or unconsciously follows the principle
Find your 80/20 idea
Become joyfully, usefully unique
Those who have embraced the principle find that the line between work and non-work becomes increasingly blurred. In this sense, the yin and yang of life are re-established. Although there are two apparently opposite dimensions to the 80/20 Principle—efficiency and life enhancement—the dimensions are entirely complementary and interwoven. The efficiency dimension allows us room for the life-enhancing dimension. The common thread is knowing what gives us the results we want, and knowing what matters.
What I got out of it
Nothing “new”, but incredible reminders and thoughtful ways to implement 80/20 thinking into your life. Be ruthless about finding what these things are and double down on them
The best investors are worth studying as they are practical philosophers, those seeking worldly wisdom. Their influence and practices can help us become better thinkers and decision makers. The purpose of this book is to share ideas worth cloning
Studying investing is not only about learning how to make money, but learning how to think and make decisions
Learning how to think by probability will do you more good than any book on investing. A dispassionate analysis of the facts and probabilities is one of the best mental habits you could build. They key lies in understanding how to optimize the odds for success
Game selection is key. If you don’t have an edge, don’t play. There are many ways to make money, but they all require an edge
Pabrai – clone the best ideas and habits of the giants
People have a bug in their DNA where they feel shameful stealing the best ideas of others. DON’T!
Clone the best ideas but be open to personalizing it to your personality and context
Whenever you come across a principle that is correct but that most of humanity doesn’t understand or isn’t willing to follow, make the most of it! It’s an enormous competitive advantage
Templeton – to get different results, you must act differently than the crowd
You have to have the inner calm, willingness, and disregard of what other people think. You have to be ok with being lonely, different, and misunderstood for long periods of time. These investors favor winning and being right than sticking with the crowd
Beware your own emotions and aim to take advantage of others’
Beware your own ignorance, diversify broadly, have great patience, study the abysmally performing companies and industries, don’t chase fads, focus on value and not outlook
Mastering yourself is of supreme importance
The future is ever changing and it is your job as an investor to prepare as well as you can, knowing what you and do not know, making the best decision possible. Be humble and know that you are never immune from forces greater than you
Marks is a master in risk, cyclicality, probabilities, playing the odds, seeking ideas in unloved areas
Understand how big of a role luck plays in your success
The question to ask is “how cheap is this asset given what I think it’s value is?” Don’t worry if it’s sexy or not, just look at value
Everything that is important about investing is counterintuitive and everything that is obvious is wrong
Beware the pendulum of history. Know your history but don’t expect it to exactly repeat. Never rely on things that cannot last. Be ready for change, for it will come
Structure your life, portfolio, and relationships to be robust. Don’t maximize. Be ready for change. Adapt and evolve
See reality as it is and adapt to it. Don’t fight it. If things are frothy, pare back. When there is opportunity, seize it
Jean Marie Eveillard
Eveillard was equipped to outperform over the long haul, avoiding all tech stocks in the late ‘90s. He underperformed for years, lost most of his investors, but didn’t budge. He was eventually proved right, seen as a sage, and funds rushed back. This takes great fortitude and the right temperament to go against the crowd. However, he was structurally fragile. Investors redeemed at horrible times, forcing him to sell when he least wanted to. He was also pressured by internal stakeholders at his mutual fund
Don’t be in a rush to get rich. The key is safety, capping your losses. The gains will take care of themselves. This is resilient wealth creation
It is all about surviving the dips. That’s the first step, even better is the ability to take advantage of them
Joel Greenblatt – simplicity is the master key
Figure out what it is worth, and pay less for it
Stocks follow earnings (eventually)
Take a simple idea and take it seriously
Seek to reduce the complex to its essence. Only true understanding allows for this to happen
Don’t make your biggest investments in the companies that can make the most, but in those you are most confident to not lose
Cheap + good business is the holy grail
For most people, the ideal strategy is not the one day of the highest returns, but the one you are most likely to stick with in bad times
Nick Sleep and Qais Zakaria
These two ran Nomad for 13 years and had wildly successful returns in a very concentrated portfolio
They used what they call destination analysis, aiming to understand where a company is, where it can go in 10 years, and what would help it get there or veer it off course. This type of inversion or reverse engineering is wildly helpful in all areas of life. Where do you want to be at the end of your life and what can you do today to help you get there?
They also took a simple idea seriously. They intensively researched companies they thought would do well over 5-10 years and spent all their time reading annual reports and talking to companies
They came up with the model of “scale economics shared.” Amazon and Costco perfectly follow this playbook. As they get bigger, they use their scale to get lower prices and pass those savings onto consumers, fueling the cycle even further.
Make quality the pursuit – in your investing, decision making, and life. Nomad wasn’t about raking in money, but a metaphysical experiment to see if pursuing quality would work. It did.
Focus on the things with the longest shelf life, not the ephemeral
Must look long term and have the capacity to suffer. This is another principle that applies far beyond investing. Sacrifice today so that you can have more tomorrow
Tom Gaynor – The best investors build habits that compound over time
Seek small marginal gains that are relentlessly followed. Time is the enemy of bad habits, the friend of the good
Don’t let perfect be the enemy of the good. A good enough habit you follow is far superior than the perfect habit you don’t
Directionally correct, moderate efforts demonstrably work
Find good things that last and stay the course. Don’t be caught up in the frenzy and fads
The name of the game is longevity, not perfect maximization
You don’t have to be extreme to get extreme results
Gaynor considers himself a node in a massive neural network. He cultivated relationships and has many people helping him and rooting for him to succeed – the compounding of goodwill
Forget about perfection, instead focus on continuous improvement that can compound over time. This is the aggregation of marginal gains
Write down good habits as well as a list of things to not do
Charlie Munger – aim to be consistently not stupid
Inversion is a really powerful thinking habit. Before trying to help, first ask how you might harm. Must have great clarity on what not to do
Collect stupidities and learn vicariously through the mistakes of others
Rub your nose in your mistakes and learn from them
Rely on first principles, don’t try to be perfect, be patient, adopt some guidelines and restraints to handicap massive mistakes
Gain self awareness and beware psychological biases, hubris, the desire to get rich quick
Learn to destroy your best loved ideas
Pre-mortems and devils advocate reviews are excellent ways to mitigate your biases
Be aware of your emotions and physical state before making a decision. A question as simple as “are you hungry or tired?” Can help your decision making
Expect your portfolio to hit 50% drawdowns at some point. The point is to be ready and to be able to act rationally on the hard times. You have to instill good habits before you need them
Be proud not only of your results, but also how you’ve attained them
Life is a series of opportunities to learn how to behave well in difficult circumstances
Build up wealth to be independent, to live the life you want without having to compromise or answer to others
Arnold Van Den Berg – survived the holocaust as a child and this had a tremendous impact on his view on life
Being rich consists of money, happiness, and peace of mind. Use your wealth to help and serve others
What I got out of it
Really enjoyable book with some tangible takeaways for your life, investing, and relationships. Love his approach of highlighting eminent investors he admires and helping the reader understand how it can apply outside of the field of finance
Through Socratic dialogue and real-world life lessons, a successful businessman (Mr. X) shares his wisdom and learnings with a skeptical young student, Nick.
Strategy ROIC > project ROIC
Longer term, more fluid and dynamic
Capital allocation is the study of opportunity cost. This skill is extremely important as it helps usher in resources to the highest return areas. This will not and cannot solve all problems, but if structured and incentivized correctly, can alleviate many ills
What I got out of it
Really fun fiction book that gets across many important capital allocation, business, and financial ideas across in a narrative format. This short summary does not do the book justice – what took several books to convey many financial / capital allocation topics in a dry fashion, this book was able to do in a fun, narrative manner. This could and maybe should be the entry point into the world of finance and capital allocation
John Neff, former fund manager of Windsor, recounts his history and lessons learned running one of the best performing funds of his era.
Contrarian that I am, the format for this book is intentionally unorthodox as books on investing go these days. It is not about Hail Mary passes; it’s about grinding out gains quarter after quarter, year after year. My kind of investing rests on three elements: character, goals, and experience. With patience, luck, and sound judgment, meanwhile, you keep moving forward. That’s the nature of the investment game: now and then a windfall, but mostly a four-yard gain and a cloud of dust. tilt investment style can give investors a lucrative edge over the long haul. But if you can’t roll with the hits, or you’re in too big a hurry, you might as well keep your money in a mattress.
Windsor’s roller coaster experience with Citi underscored a crucial point: investment success does not require glamour stocks or bull markets. Judgment and fortitude were our prerequisites. Judgment singles out opportunities, fortitude enables you to live with them while the rest of the world scrambles in another direction. Citi exemplified this investment
Shortcuts usually grease the rails to disappointing outcomes.
One time, we delivered a compressor to Tecumseh Products in Tecumseh, Michigan. We got top dollar because they needed it right away.Working for my father at least taught me that you don’t need glamour to make a buck. Indeed, if you can find a dull business that makes money, it is less likely to attract competition.
The Navy paid us every two weeks, and the first night after payday six or seven poker games sprang up. By the following night, there were only one or two poker games. Much like money in the stock market, poker money migrated to the most proficient and well financed players, a group that usually included me. Observing occasionally, I noted how sailors who ultimately went home with cash in their pockets played consistently and with good knowledge of the odds. They were not lured into action for big pots unless the numbers were on their side. If those sailors applied the same philosophy to stocks, some of them are successful investors today.
In classic fashion, frantic efforts to correct the underperformance only compounded Windsor’s plight. Windsor had succumbed to infatuation with small supposed growth companies without sufficient attention to the durability of growth. Then, as now, I assigned great weight to a judgment about the durability of earnings power under adverse circumstances.
I’d seen enough hitting behind the ball. By playing it safe, you can make a portfolio so pablum-like that you don’t get any sizzle. You can diversify yourself into mediocrity. This sounds like heresy to many advocates of modern portfolio theory, but sticking our neck out worked for Windsor.
Brain surgery it’s not, but I’ve always found that investors who skip elementary steps stumble sooner rather than later.
Windsor was never fancy, fad-driven, or resigned to market performance. We followed one durable investment style whether the market was up, down, or indifferent. These were its principal elements:• Low price-earnings (p/e) ratio.• Fundamental growth in excess of 7 percent.• Yield protection (and enhancement, in most cases).• Superior relationship of total return to p/e paid.• No cyclical exposure without compensating p/e multiple.• Solid companies in growing fields.• Strong fundamental case.In a business with no guarantees, we banked on investments that consistently gave Windsor the better part of the odds. It wasn’t always a smooth ride; at times, we took our lumps. But, over the long haul, Windsor finished well ahead of the pack.
Windsor was not fancy. As in tennis, I tried to keep the ball in play and let my adversaries make mistakes. I picked stocks with low p/e multiples primed to be upgraded in the market if they were deserving, and endeavored to keep losers at break-even levels. Usually, I returned home with more assets in the Windsor Fund than the day before. And I slept well-and still do.
Low p/e companies growing faster than 7 percent a year tipped us off to underappreciated signs of life, particularly if accompanied by an attention-getting dividend.
No solitary measure or pair of measures should govern a decision to buy a stock. You need to probe a whole raft of numbers and facts, searching for confirmation or contradiction.
Judgment lies in recognizing which way the fundamentals point. Conventional wisdom and preconceived notions are stumbling blocks as well as signs of opportunity.
You can sum up the Street’s psychology this way: Hope for the best, expect the worst. Meantime, don’t stick your neck out.
Dramatic actions taken by companies, as opposed to broad challenges posed by difficult industrial or economic climates, can trigger unwarranted selling pressure.
Investing is not a very complicated business; people just make it complicated. You have to learn to go from the general to the particular in a logical, sequential, rational manner.
Refusal to partake in groupthink caused us to underperform the market by 9.8 percentage points in 1980 but cascaded to Windsor’s benefit in 1981. We recovered our footing and surpassed the S&P 500 by better than 21.7 percentage points. We’d pinned our reputation to a rout of that sort.
Windsor did not achieve superior results by going against the grain at every chance. Stubborn, knee-jerk contrarians follow a recipe for catastrophe. Savvy contrarians keep their minds open, leavened by a sense of history and a sense of humor.
Measured Participation established four broad investment categories:1. Highly recognized growth.2. Less recognized growth.3. Moderate growth.4. Cyclical growth.Windsor participated in each of these categories, irrespective of industry concentrations. When the best values were available in, say, the moderate growth area, we concentrated our investments there. If financial service providers offered the best values in the moderate growth area, we concentrated in financial services. This structure enabled us to flout the constraints that usually condemn mutual funds to ho-hum performance.
The debate over top-down versus bottom-up investing has always seemed a little fuzzy to Inc. I just keep an eve on the economy and ask, where is a sector that’s overdue for recognition
Many investors can’t bear to part company with a stock on the way up, lest they miss the best gain by not holding on. They persuade themselves that a day after they sell, they will have short-changed themselves by not capturing the penultimate dollar. My attitude is: I’m not that smart.
When you feel like bragging about a stock, it’s probably time to sell.
Conventional wisdom suggests that, for investors, more information these days is a blessing and more competition is a curse. I’d say the opposite is true. Coping with so much information runs the risk of distracting attention from the few variables that really matter. Because sound evaluations call for assembling information in a logical and careful manner, my odds improve, thanks to proliferating numbers of traders motivated by tips and superficial knowledge. By failing to perform rigorous, fundamental analyses of companies, industries, or economic trends, these investors become prospectors who only chase gold where everyone else is already looking.
At least a portion of Windsor’s critical edge amounted to nothing more mysterious than remembering lessons of the past and how they tend to repeat themselves. You cannot become a captive of historical parallel, but you must be a student of history.
As the market grew more excited, we grew more cautious.
I wasn’t uncomfortable going into retirement. I had given Windsor my all. I was going out while I still had a lot left, which had been my intention.
What I got out of it
Entertaining book, simple language, some important takeaways. Take a simple idea, and take it seriously
What is a star venture? It has two qualities. One, it operates in a high-growth market. Two, it is the leader in that market.
The answer is not to work or invest in the great majority of ventures. The key is to select the ventures that are likely to succeed anyway. Without superhuman people. Without perfect balance between the skills of the people. Without blood, toil, tears and sweat.Without the need to keep chopping and changing before the correct formula emerges. The useful answer is not ‘people, people, people’. The really potent, consistently successful answer is ‘positioning, positioning, positioning’.
There is another clue as to whether or not a niche market is viable, and it is simply this: is the niche highly profitable? Does it generate a lot of cash? Leadership in a niche is not valuable unless, sooner or later, the niche is very profitable and gushes out cash.
A leading firm should have higher prices, or lower costs, than a similar business that is a follower. Why higher prices? Because the customers prefer the product. Why lower costs? Because the firm can spread its fixed costs over a much greater volume of business than competitors can.
About 1 in 20 start-ups is a star. So stars are rare. But they are not so rare that, with a bit of patience and careful thought, you can’t discover one – or create one yourself. If you look intelligently for a star, you will find it.
My own experience is that, as I have made more money and started more successful ventures, the less I have worked. Hard work is either a red herring, or negatively correlated with success.
A cash cow can be turned into a star when the concept of the product category is transformed – David’s vision of personal organisers as upscale fashion accessories reinvented the whole market.
A star that is fast losing market share, or an ex-star that has lost it, may be an attractive prospect.
It’s not as unusual as you might expect to find a hole in the market – even a market as big and profitable as gin. Seek a hole and sooner or later you will find one.
Ecologists know that two species of animal that try to exist in exactly the same way become deadly enemies. If two species compete head-on for food, only one of them can win. The other species must change either the food it seeks or the way it hunts for it. If it does neither, the weaker species will die out. It is the same with business, except the time to extinction is compressed. Any business that imitates another slavishly will not be successful. The numbers are against it. It will be competing in the same market as the market leader. It will be smaller. It will have less appeal to customers. It will be less profitable and usually loss-making. It will have to do something different, or die.
Imitation, even of a highly profitable and savvy player, won’t lead to a star business. There are only two exceptions. One is geography – a player may be imitated in a new country or region where it is not present, and sometimes the advantage of being first and the differences in the local market’s preferences can lead the imitator to a star position that can be defended even against the business imitated. The other exception is where the follower has more money or a much better approach than the originator.
There are seven steps necessary for creating a star venture.The seven steps give you an easy template for devising your star.
Divide the market.
Select a high-growth niche.
Target your customers.
Define the benefits of the new niche.
Ensure profitable variation.
Name the niche you plan to lead.
Name the brand in a way that complements the category name. Make the name short, memorable, easy to recognise, appealing to the target market and associated with the niche.
Many great innovations simultaneously divide markets and combine the attributes of two previously unrelated markets.
Start with the markets you and your friends know. How could you turn them upside down, inside out, to create a new category? Here are 32 useful triggers. Some of them are opposites, using one extreme or another to create a new niche. Go against the conventional wisdom of the main market. Many of these triggers are related or similar, but they are included just in case they prompt an idea that otherwise might not occur to you. Don’t be overwhelmed by the list – it’s there to help, not to hold you up. If you can’t relate to a prompt, pass swiftly on to the next.
YOUR IDEAL PRODUCT DOESN’T EXIST
MARKET VERSUS NICHE
BIGGER PRODUCT VERSUS SMALLER PRODUCT
EMOTIONAL VERSUS FUNCTIONAL – Emotion is warm and expensive. Function is no-nonsense, rational, inexpensive, stripped down to the essentials. Can you create a new niche by going ‘emotional’ in a market that is mainly ‘functional’?
HEALTHIER VERSUS TEMPTING
SAFE VERSUS RACY
CONVENIENCE VERSUS PURITY
SAVING TIME VERSUS EXTENDING TIME
FIXED VERSUS MOBILE
UNISEX VERSUS SINGLE SEX
MASCULINE VERSUS FEMININE
GO GREY – Education: universities for those aged 50-plus?
LOW VERSUS HIGH SERVICE, AND DIFFERENTSERVICE
DIY VERSUS PROFESSIONAL SERVICE
PERSONALISED VERSUS UNTAILORED
BUNDLED VERSUS FOCUS AND SUBTRACTION – Focus is by far the best way to create a new star venture.
EXPERT VERSUS INEXPERT USERS
CENTRALISED VERSUS DECENTRALISED USE
TOTAL COST VERSUS INITIAL PRICE
FIRST PLACE VERSUS THIRD PLACE
SECOND PLACE VERSUS THIRD PLACE
OWNED VERSUS RENTED VERSUS FRACTIONALLY OWNED
NARROWED EXPERTISE VERSUS ADDED EXPERTISE
ORCHESTRATING A SUPPLIER ALLIANCE
ONLINE VERSUS OFFLINE, OR A DIFFERENT DISTRIBUTION CHANNEL
ENTREPRENEURIAL JUDO – This is a different kind of prompt, courtesy of the management guru Peter Drucker. The idea is to catch the leading players in a market off balance by turning their strength into a weakness.
IDEAS FROM OTHER INDUSTRIES – Identify an industry that has a peculiar practice that somehow seems to work well. Could you adapt the practice to a completely different context?
IDEAS FROM OTHER PLACES
We cannot create a new star without creating a new category. The new niche must be oriented towards the target customers and must offer a sharply different basket of benefits from the main market. The more the benefits of the new category vary clearly and substantially from the existing market, the greater the chance that the new venture will fly. There are three ways of varying the benefits:
increasing one or more benefits of the product in the main market to a marked degree;
creating one or more new benefits that do not currently exist in the main market; and
subtracting benefits that exist in the main market.
To launch a star venture successfully, three conditions must apply.
Your target customers want something different from the main market.
You understand what it is that they want and can provide it with a new product category.
The new category can be supplied profitably, because you can charge more for it, and/or because you can subtract elements of the main market product that are expensive to provide, so that the new category has lower costs than the main market.
Make things happen reliably, consistently, economically. Make the venture a machine.
The delivery formula has been cracked when all the following events always happen.
Products are delivered to the same high standard, on time, every time.
This year’s product is measurably better than last year’s.
This year’s product costs at least 5 per cent less to make than last year’s.
Volumes can be doubled within a year without panic or loss of quality.
Work is delegated to the lowest-level person who is fully competent to do it.
Everyone increases his or her skill level significantly each year and works better and faster.
The workplace exudes calm, order and discipline.
Standards and procedures are written down, clear, unambiguous – and observed!
Logos, colours and designs are attractive and consistent.
Budgets are always met or exceeded.
Cash is always higher than planned.
The firm is a machine – smooth-running, reliable, relentless, self-maintaining and self-improving.
Nobody is indispensable. If the best people leave, the firm rolls on regardless. New leaders come to the fore.
The way to maximise your chance of take-off is to form four small teams – each comprising a founder and two other employees – charged with masterminding each element of take-off: customer attraction; the commercial formula for fat margins; delivery; and innovation.
At least 90 per cent or more of a star’s value over the long haul derives from its growth. For businesses that grow for a very long time, such as McDonald’s and Coca-Cola, the number is over 99 per cent. Nearly everyone hugely underestimates the growth potential of stars. Typically, the growth potential is underrated not by 100 or 200 per cent but by 1,000 per cent or 10,000 per cent.
Almost all founders of star businesses underestimate their growth potential and value. Two action implications: never sell a star business (while it remains a star); and demand much faster growth.
The nub here is that you should generally ‘outsource’ as much of your operations as possible, retaining only the few things that you do uniquely well. In particular, get other people to make things for you. Since you probably won’t be investing in factories, offices or other physical cash sinks, what’s left is expense investment – the costs of your people, plus external marketing. The joy of stars is that they take modest investment to get to cash break even. Thereafter, investment can be funded out of the star’s own cash flow.
Be willing to accept lower profits to build a dominant market position. As long as you remain cash-positive, short-term profits are totally irrelevant to the long-term value of the business. Build by far the best product and service in your niche, moving further away ahead of would-be rivals.
The trouble with founders who remain executives is that it is very difficult to shift them, even when they are palpably acting in the interests of the managers rather than the owners.
Growth is everything. Star ventures should grow at least 20-50 per cent each year in their first decade. This rate of advance is so far beyond most people’s experience that enormous effort is required to impose ‘unreasonable expectations’.
Profits also rise because of the market growth, but profits should rise faster than sales. In a normal market, profitability is constrained by competition. In a star market, profitability is constrained only by what customers will pay.
Only puny secrets need protection. Big discoveries are protected by public incredulity. Marshall McLuhan
What I got out of it
Niche that is growing 10%+ each year, leader in that market
The research reported in this book supports his latter view: it shows that in the cases of well-managed firms, good management was the most powerful reason they failed to stay atop their industries. Precisely because these firms listened to their customers, invested heavily in new technologies that would provide their customers more and better products of the short they wanted, and because they carefully studied market trends and systematically allocated investment capital to innovations that promised the best returns, they lost their positions of leadership. What this implies at a deeper level is that many of what are now widely accepted principles of good management are, in fact, only situationally appropriate. There are time at which it is right not to listen to customers, right ot invest in developing lower-performance products that promise lower margins, and right to aggressively pursue small, rather than substantial markets.
One common theme to all of these failures, however, is that the decisions that led to failure were made when the leaders in question were widely regarded as among the best companies in the world
The failure framework is built upon 3 findings. The first is that there is a strategically important distinction between what I call sustaining technologies and those that are disruptive. Second, the pace of technological progress can, and often does, outstrip what markets need. This means that the relevance and competitiveness of different technological approaches can change with respect to different markets over time. And third, customers and financial structures of successful companies color heavily the sorts of investments that appear to be attractive to them, relative to certain types of entering firms
Case for investing in disruptive technologies can’t be made confidently until it is too late
Established firms confronted with disruptive technology typically viewed their primary development challenge as a technological one: to improve the disruptive technology enough that it suits known markets. In contrast, the firms that were most successful in commercializing a disruptive technology were those framing their primary development challenge as a marketing one: to build or find a market where product competition occurred along dimensions that favored the disruptive attributes of the product.
It has almost always been the case that disruptive products redefine the dominant distribution channels, because dealers’ economics – their models for how to make money – are powerfully shaped by the mainstream value network, just s the manufacturer’s are.
Principles of disruptive innovation
Companies depend on customers and investors for resources – difficult for companies tailored for high-end markets to compete in low-end markets as well. Creating an independent organization that can compete in these disruptive technologies is the only viable way for established firms to harness this principle. Promise of upmarket margins, simultaneous upmarket movement of customers, and the difficulty of cutting costs to move downmarket profitably create a powerful barrier to downward mobility. In fact, cultivating a systematic approach to weeding out new product development initiatives that would likely lower profits is one of the most important achievements of any well-managed company. Creates a vacuum in the low-end market that attracts competition
Small markets don’t solve the growth needs of small companies – create small organizations that get excited about small opportunities and small wins
Markets that don’t exist can’t be analyzed – those who need analysis and quantification before they invest become paralyzed when faced with disruptive technologies
Technology supply may not equal market demand – sometimes “good enough” is competitive and established firms tend to overshoot what the market demands. Moves from functionality to reliability to convenience to price
Not wise to always be a technological leader or a follower – need to take distinctly different postures depending on whether they are addressing a disruptive or sustaining technology. Disruptive technologies have a large first-mover advantage and leadership is important
What I got out of it
Great way to think about how you could do all the right things and still lose. Helmer’s counterpositioning in action
A behind the curtain look at the early days of Benchmark, one of the premier venture capital firms
Benchmark / VC
It is a wee bit eerie to see, in hindsight, how the Benchmark boys’ original notion of a partnership of equals turned out to have been echoed in impersonal performance statistics. Even the partners themselves would never have guessed in advance that four and a half years after Benchmark’s founding, of the five investments that were the firm’s all-time biggest hits to date, no two had been discovered and directed by the same partner: five hits, five partners.
A group of three young venture capitalists in Menlo Park—Bruce Dunlevie, Bob Kagle, and Andy Rachleff—decided to step free of their old firms, and with software entrepreneur Kevin Harvey they set up Benchmark Capital.
Entrepreneurs who sought venture funding usually did not need to invest any more personal money into the venture than they had already spent to bring it to life. But some venture capitalists did demand more. Arthur Rock, the senior dean of American venture capitalists and an early investor in Intel, always insisted whenever his venture firm put money into a start-up that the entrepreneur co-invest one third of his total net worth, whether it be large or small. If the entrepreneur was extremely wealthy, the venture firm had higher expectations about his co-investing. The venture guys didn’t want the high-net-worth entrepreneur to regard the start-up as a hobby. To prove commitment, he was asked to have skin in the game, and that was what Beirne asked of Borders,
On the golf course the other day, he said, a friend had floated a theory that leaders, in business or anything else, are driven by demons. The best guys have them—implacable, subterranean demons that are the source of greatness.
Daniel Webster: “There is always room at the top.”
No company looks better than the one that professes it does not need your money.
Kagle gently cautioned Beirne: “We all have our blind spots, right? Our greatest strength is our greatest weakness. And I think in this case, Dave, we’re all conscious of the fact that there’s a lot of marquee players around this thing. You’re all about marquee players. So we need to make sure that you’re not getting too colored by that relative to all the other stuff.” “Salesmen are more likely to be sold,” Rachleff added.
What the partners were looking for were categories that were ripe for “disintermediation”—removing a middle layer in the distribution chain. In this case, that layer was the twelve thousand or so art galleries in the country
“There sure are a lot of signs,” Rachleff repeated. He wasn’t concerned about Benchmark’s overall reputation being badly damaged. “The amazing thing about our business is, everyone forgets the losers—they remember the winners.”
Rachleff pointed out that in a portfolio, the emotions that Beirne would experience would always be biased toward the end of the spectrum representing pain. “The amazing thing is it hurts more on the downside than the good feelings on the upside.”
“That’s my experience—three orders of magnitude,” Dunlevie quickly agreed. “Yeah,” Rachleff said, and then redid the ratio of intensity of pleasure versus pain. “One-X versus fifty-X.”
Bob Kagle could not take much pleasure in the event either, imagining, as he did, whispers that the eBay success was a fluke, akin to picking up a winning lottery ticket. He found himself working all the harder after eBay, to silence criticism that he had not actually heard but that he could imagine, beyond his hearing. One monkey don’t make no show, he’d say.
When the Benchmark partners got together, most days, most of the time, their conversations were interrupted by jokes, laughter, word play, self-confessed foibles, and still more laughter. They positively reveled in one another’s company.
The cultural fit had to be just right, too. It was this issue that the partners would spend the most time agonizing over. The five Benchmark partners felt keenly the closeness of a basketball team; in moments of private vanity they liked to think of themselves as the Chicago Bulls in the early nineties, but it wasn’t apt—this was a team that was knocking down wins but without a single dominating presence like Michael Jordan. So maintaining the chemistry that permitted all to feel that the others brought out their individual best was regarded as paramount, even if it meant Benchmark could not expand.
Beirne added his own high praise, which was that the attention Gurley received as a sought-after speaker at industry gatherings had secured for Gurley “a lot of mindshare.”
You think he’d be a good investor?” asked Bruce Dunlevie. “I do, but the reason I do is because he’s a rare combination of highly intellectually curious and humble. I think he really is open to questioning his own thought process and what’s really working, what’s not working.”
Benchmark’s self-proclaimed “fundamentally better architecture” was based on a bedrock tenet: equal partners, without hierarchical separation, with equal votes and equal compensation. They had used it brilliantly from the beginning to differentiate themselves from the rest of the firms on Sand Hill Road.
Bill doesn’t know what hiring people is all about. He wants to learn it all. He’s a total learn-it-all guy. He was asking me questions: ‘How do you spend your time? How do you recruit? What do you look for? What do you ask people? What do you do?’ ” “He’s pretty humble,” said Rachleff. Beirne agreed, and added, “He does a very good job at the shows. He doesn’t just stand in the back and not talk to anybody—he’s out talking to everybody.” “How old is he?” asked Kagle. “He’s thirty-two.” “He’s a mature thirty-two, too.”
Harvey had also been impressed by his willingness to chase a wild boar down a steep cliff. “He is kind of an animal,” Harvey said with manifest respect. “I love that,” said Kagle.
Kagle said to Harvey, “Okay, make him the offer.” Harvey turned to Gurley. “First, I want to know if you’ll take it.” This was the way Harvey preferred to seal a deal with an entrepreneur: to secure the agreement before bringing out the term sheet with all of the details. Here Harvey feared that if he brought out the terms of the partnership offer, Gurley’s analytical bent would lead him to say, “Okay, I’ll take this home and think about it.” Harvey wanted him to show trust that the partners had put together a generous package that accorded him fully equal status from day one. Gurley came through and, without asking to see the terms, accepted on the spot.
Gurley cast cold water on the proposal to go public, however, by asking, “Is it built to win?” He explained, “GM is built to last, but it’s got so much bureaucracy, it’s not going anywhere.” Maybe “built to last” was not the right criterion to optimize on.
When eBay, a small Internet auction company based in San Jose, California, sought venture capital, it had to pass an informal test administered by the venture guys before they would consider making an investment: Was there a reasonably good likelihood that the investors could make ten times their money within three years?
It was late 1996, and eBay’s online auction business had been solidly profitable since it was launched; the company did not need a cent. But Pierre Omidyar, twenty-nine, the original founder, and his new partner, Jeff Skoll, thirty-one, were the rare entrepreneurs who knew they needed to hire a CEO and other seasoned executives with skills they lacked. It appeared to them that the only way they would be able to attract people with deeper management experience than they had was by obtaining the imprimatur of a well-regarded venture capital firm. Selling a minority share of their equity to venture capitalists was the intermediate step they had to take to get the good people they sought.
Over the next two weeks, he met with Omidyar outside of Benchmark’s office and discovered that he was an anomalous kind of engineer, one who was consumed by the idea of community—every other sentence, he spoke about the eBay community, building the community, learning from the community, protecting the community. It was a passion similar to what, in Bob-speak, Kagle had for deals that brought out the humanity; that’s what Kagle liked most of all, the humanity. The more Omidyar talked about his community vision, the more Kagle, as he put it, was “lovin’ him—this guy is good people.” And Omidyar felt the same way about Kagle.
EBay was an anomaly: a profitable company that was able to self-fund its growth and that turned to venture capital solely for contacts and counsel. No larger lesson can be drawn. When Benchmark wired the first millions to eBay’s bank account, the figurative check was tossed into the vault—and there it would sit, unneeded and undisturbed.
By temperament, Skoll could not help but pour himself into the work in a scarily total fashion—once he started at eBay, he worked hundred-hour weeks for the next two and a half years. But he wasn’t driven by materialist hungers, and he thought of himself not as a businessperson but as a writer.
EBay had an enormous advantage over the competition that it only then, under challenge, was coming to appreciate: a nicely balanced critical mass of sellers and buyers in each of hundreds of categories. This delicate balance had been achieved through the natural evolution of the eBay ecosystem, without the intervention of any guiding hand. If in any given category there were too many sellers compared with buyers, the sellers would have been discouraged and quick to jump to eBay’s rivals to try their luck there. If there were too many buyers, and in order to win an auction one had to offer up a ludicrously high price, this too would have led to mass defections. Fortunately for eBay, the number of sellers and buyers, while growing exponentially, had remained well apportioned. EBay’s users remained loyal for another reason: feedback ratings. Buyers, after a transaction, could send in a report about their experience with the seller, which future prospective buyers could consult; sellers had an identical opportunity to evaluate their experience with the buyer. Over time, both sellers and buyers accumulated a number of positive-feedback ratings at eBay, a neatly quantifiable reputation, that they were loath to abandon. The eBay “community” stayed put.
“That’s the biggest risk in the whole thing,” Kagle said. “In fact I can argue with you guys very persuasively that keeping this low profile we’ve had in the company has been absolutely the healthiest thing to do. Absolutely the healthiest thing to do. We’ve already broken the systems a couple times, in spite of that. So we’ve been barely able to manage the traffic operationally so far.” Kagle said there had been a second benefit. “This organic growth has led to this very nice set of community values; people are honest, people treat each other fairly, there’s not a lot of scamming going on in it. And if you turn up the volume way high, the woodwork gets filled with a lot of weird guys, and the whole tone of the thing could change. So that’s a risk.”
On the day after eBay’s IPO, when Pierre Omidyar, just back from New York, stood on Benchmark’s terrace, he observed that the world had imputed strategic savvy to the company that it did not really have. “Our system didn’t scale,” he said, “so we didn’t grow big enough to attract competition. Everybody thought we were flying below the radar screen on purpose.” He gave a little laugh.
Up until early summer 1998, eBay’s primary competition was Jerry Kaplan’s Onsale Exchange, which had launched in October 1997 and had failed to attract a critical mass. When Bob Kagle introduced eBay to Benchmark’s limited partners at the annual meeting in early June, eBay had an 89 percent market share. Kagle said that the company anticipated major entrants, but “we think they don’t get it. We think they don’t understand all the stuff about the community and what’s really special and unique about this.” He also noted that in addition to first-mover advantage, economies of scale, and definitive selection in the various categories, eBay also enjoyed another advantage: Users faced high switching costs. “After you get this reputation built up online,” Kagle explained, “you’ve got all these people who have dealt with you, you’ve got seventy-five people who’ve said good things about you. That’s a pretty fundamental thing.”
A good business will attract good competitors. This eBay’s executives knew in the abstract, but like the abstract concept of war, the theory necessarily bore a limited relationship to the thing itself.
But knowing that the CEO was personally fielding calls from angry customers when they could not find someone to speak with in his department would provide all the incentive he needed, and she knew it.
Our biggest competition, Walker explained, was cars and couches; Priceline’s system “collected demand” from people who would not otherwise be flying. And by promising to get back with an answer within one hour—why one hour? Glasses in an hour, photos in an hour; consumers already understand the unit—Walker was deliberately creating in the consumers’ mind the idea that Priceline was a virtual gladiator fighting on their behalf: “It’s going to take us an hour to knock on everybody’s door, punch him in the jaw, give him your offer, and get back to you with an answer, but be assured we’re out there working for you!”
Since we’re not actively shopping for capital, Walker summed up, this isn’t about the money per se. It’s really about two teams—your team, our team. We’ve got a multibillion-dollar asset here if played right. We’re not greedy; we’re not pigs. We’re players. Game theorists that we are, we understand the game trade. And we’re not afraid to make a trade for the right set of circumstances.
The very reason that start-ups had an advantage over these incumbents—speed in execution—was the same reason that the old companies acted so slowly, even when the task was to organize a new entity that would be free to compete without organizational drag. “So they know they’re in a tough spot.” Still, the inertial drag in a big company was the most powerful factor in the equation.
Edward Chancellor’s history of financial manias, Devil Take the Hindmost, urging them to read it. Chancellor’s account of England’s railway mania of 1845 had made an especially deep impression on Kagle, who saw all of the similarities between the railroad, then hailed as a revolutionary advance without historical parallel, and the Internet. In both cases the technological change was as fundamental as its champions claimed, but investors’ enthusiasm about imminent opportunities to reap fortunes moved beyond the reasonable. All businesses must earn a profit in order to be viable; Kagle refused to relinquish this simple truth.
Kevin Harvey took the view that Red Hat could avoid a frontal challenge to Microsoft’s business model; he worked to reposition the company away from the business of selling packaged software in boxes (Harvey’s old business) and move it toward providing support services and a central website for the Linux community. The only way Microsoft could compete with Red Hat, he would say gleefully, “is by abandoning five billion dollars of annual revenue, which they can’t!”
His firm, TVI, had funded Microsoft, Compaq, and other notable technology companies, but it was not these that McMurtry wished to talk about. Rather, he wanted to talk about the companies that did not succeed. He recalled that in the mid-1970s, having been in the business a number of years, he had become depressed because “out of ten start-ups, we would lose three or four—lose all our money. Maybe just get our money back in two deals. Then you’ve got two or three where you get one to five times your money. That leaves just one or two deals [out of ten] where you make more than five times your money.” The high payoffs for one or two never erased the pain of those that did not survive: “You feel so responsible for the disasters.”
The claim was empty bluster, however. Mike Moritz, of Sequoia Capital, peeled back the truth with mordant detachment: “One of the dirty little secrets of the Valley is that all the jobs-creation we like to talk about is probably less than the Big Three automakers have laid off in the last decade. One of the best ways to have a nice Silicon Valley company is to keep your head count as low as possible for as long as possible.”
What I got out of it
Really fun book that gives an inside look at VC investing – power law returns and their importance really stuck out to me, as did the culture at Benchmark and how they thought about their investments
Latticework: success in investing based on a working knowledge of a variety of disciplines
Latticework is itself a metaphor. And on the surface, quite a simple one at that. Everyone knows what latticework is, and most people have some degree of firsthand experience with it. There is probably not a do-it-yourselfer in America who hasn’t made good use of a four-by-eight sheet of latticework at some point. We use it to decorate fences, to create shade over patios, and to support climbing plants. It is but a very small stretch to envision a metaphorical lattice as the support structure for organizing a set of mental concepts
Physics – Equilibrium
Physics is the science that investigates matter, energy, and the interaction between them – the study, in other words, of how our universe works. It encompasses all the forces that control motion, sound, light, heat, electricity, and magnetism, and their occurrence in all forms, from the smallest subatomic particles to entire solar systems. It is the intellectual foundation of many well-recognized principles such as gravitation and such mind-boggling concepts as quantum mechanics and relativity.
Equilibrium is defined as a state of balance between opposing forces, powers, or influences. An equilibrium model typically identifies a system that is at rest; this is called “static equilibrium.”
The concept of equilibrium is so deeply embedded in our theory of economics and the stock market, it is difficult to imagine any other idea of how these systems could possible work…One place where the question is being raised is the Santa Fe Institute, where scientists from several disciplines are studying complex adaptive systems – those systems with many interacting parts that are continually changing their behavior in response to changes in the environment…If a CAS is, by definition, continuously adapting, it is impossible for any such system, including the stock market, ever to reach a state of perfect equilibrium. What does that mean for the stock market? It throws the classic theories of economic equilibrium into serious question. The standard equilibrium theory is rational, mechanistic, and efficient. It assumes that identical individual investors share rational expectations about stock prices and then efficiently discount that information into the market. It further assumes there are no profitable strategies available that are not already priced into the market. The counterview from SFI suggests the opposite: a market that is not rational, is organic rather than mechanistic, and is imperfectly efficient.
The SFI pointed out 4 distinct features they observed about the economy: dispersed interaction, no global controller, continual adaptation, out of equilibrium dynamics.
Biology – Evolution
What we are learning is that studying economic and financial systems is very similar to studying biological systems. The central concept for both is the notion of change, what biologists call evolution. The models we use to explain the evolution of financial strategies are mathematically similar to the equations biologists use to study populations of predator-prey systems, competing systems, or symbiotic systems.
Complex systems must be studied as a whole, not in individual parts, because the behavior of the system is greater than the sum of the parts. The old science was concerned with understanding the laws of being. The new science is concerned with the laws of becoming
Social Sciences – Complexity, Complex Adaptive Systems, Self-Organized Criticality
Although Johnson’s maze is a simple problem-solving computer simulation, it does demonstrate emergent behavior. It also leads us to better understand the essential characteristic a self-organizing system must contain in order to produce emergent behavior. That characteristic is diversity. The collective solution, Johnson explains, is robust if the individual contributions to the solution represent a broad diversity of experience in the problem at hand. Interestingly, Johnson discovered that the collective solution is actually degraded if the system is limited to only high-performing people. It appears that the diverse collective is better at adapting to unexpected changes in structure.
Folly to think you can eliminate every waste, every performer who doesn’t meet the highest bar, and excel and survive. Can shift the entire bell curve to the right, but you still need the full spectrum
Notes: We have observed anecdotal evidence of emergent behavior, perhaps without realizing what we were seeing. The recent bestseller,Blind Man’s Bluff: The Untold Story of american Submarine Espionage, presents a very compelling example of emergence. Early in the book, the authors relate the story of the 1966 crash of a B-52 bomber carrying four atomic bombs. Three of the four bombs were soon recovered, but a fourth remained missing, with the Soviets quickly closing in. A naval engineer named John Craven was given the task of locating the missing bomb. He constructed several different scenarios of what possibly could have happened to the fourth bomb and asked the members of the salvage team to wager a bet on where they thought the bomb could be. He then ran each possible location through a computer formula and – without ever going to sea! – was able to pinpoint the exact location of the bomb based on a collective solution
It is when the agents in the system do not have similar concepts about the possible choices that the system is in danger of becoming unstable. And that is clearly the case in the stock market…The value of this way of looking at complex systems is that if we know why they become unstable, then we have a clear path to a solution, to finding ways to reduce overall instability. One implication, Richards says, is that we should be considering the belief structures underlying the various mental concepts, and not the specifics of the choices. Another is to acknowledge that if mutual knowledge fails, the problem may center on how knowledge is transferred in the system.
Psychology – Mr. Market, Complexity, Information
Another aspect of behavioral finance is what some psychologists refer to as mental accounting – our tendency to think of money in different categories, putting our funds into separate “mental accounts,” depending on circumstances. Mental accounting is the reason we are far more willing to gamble with our year-end bonus than our monthly salary, especially if it is higher than anticipated. It is also one further reason why we stubbornly hold onto stocks that are doing badly; the loss doesn’t feel like a loss until we sell
Philosophy – Pragmatism
Strictly for organizational simplicity, we can separate the study of philosophy into 3 broad categories. First, critical thinking as it applies to the general nature of the world is called “metaphysics”…Metaphysics means “beyond physics.” When philosophers discuss metaphysical questions, they are describing ideas that exist independently from our own space and time. Examples include the concepts of God and the afterlife. These are not tangible events like tables and chairs but rather abstract ideas that metaphysical questions readily concede the existence of the world that surrounds us but disagree about the essential nature and meaning of the world. The second body of philosophical inquiry is the investigation of 3 related areas: aesthetics, ethics, and politics. Aesthetics is the theory of beauty. Philosophers who engage in aesthetic discussions are trying to ascertain what it is that people find beautiful, whether it be in the objects they observe or in the state of mind they achieve. This study of the beautiful should not be thought of as a superficial inquiry, because how we conceive beauty can affect our judgments of what is right and wrong, what is the correct political order, and how people should live. Ethics is the philosophical branch that studies the issues of right and wrong. It asks what is moral and what is immoral, what behavior is appropriate and inappropriate. Ethics makes inquiries into the activities people undertake, the judgments they make, the values they hold, and the character they aspire to achieve. Closely connected to the idea of ethics is the philosophy of politics. Whereas ethics investigates what is good or right at the individual level, politics investigates what is good or right at the societal level. Political philosophy is a debate over how societies should be organized, what laws should be passed, and what connections people should have to these societal organizations. Epistemology, the third body of inquiry, is the branch of philosophy that seeks to understand the limits and nature of knowledge. The term itself comes from two Greek words: episteme, meaning “knowledge,” and logos, which literally means “discourse” and more broadly refers to any kind of study or intellectual investigation. Epistemology, then, is the study of the theory of knowledge. To put it simply, when we make an epistemological inquiry, we are thinking about thinking. When philosophers think about knowledge, they are trying to discover what kinds of things are knowable, what constitutes knowledge (as opposed to beliefs), how it is acquired (innately or empirically, through experience), and how we can say that we know a thing.
For pragmatism, anyone who seeks to determine the true definition of a belief should look not at the belief itself but at the actions that result from it. He called the proposition “pragmatism,” a term, he pointed out, with the same root as practice or practical, thus cementing his view that the meaning of an idea is the same as its practical results. “Our idea of anything, Peirce explained, “is our idea of its sensible effects.” In his classic 1878 paper, “How to Make Our Ideas Clear,” Peirce continued: “The whole function of thought is to produce habits of action. To develop its meaning, we have, therefore, simply to determine what habits it produces, for what a thing means is simply what habits it involves.”
A belief is true, James said, because holding it puts a person into more useful relations with the world…People should ask what practical effects come from holding one philosophical view over another
If truth ad value are determined by their practical applications in the world, then it follows that truth will change as circumstances change and as new discoveries about the world are made. Our understanding of truth evolves. Darwin smiles.
So we can say that pragmatism is a process that allows people to navigate an uncertain world without becoming stranded on the desert island of absolutes. Pragmatism has no prejudices, dogmas, or rigid canons. It will entertain any hypothesis and consider any evidence. If you need facts, take the facts. If you need religion, take religion. If you need to experiment, go experiment. “In short, pragmatism widens the field of search for God,” says James. “Her only test of probable truth is what works best in the way of leading us.”
Pragmatism, in summary, is not a philosophy as much as it is a way of doing philosophy. It thrives on open minds, and gleefully invites experimentation. It rejects rigidity and dogma; it welcomes new ideas. It insists that all possibilities should be considered, without prejudice, for important new insights often come disguised as frivolous, even silly notions. it seeks new understanding by redefining old problems.
One of the secret to Bill Miller’s success is his desire to take a Rubik’s Cube approach to investing. He enthusiastically examines every issue from every possible angle, from every possible discipline, to get the best possible description – or redescription – of what is going on. Only then does he feel in a position to explain. To his investigation he brings insights from many fields…He continually studies physics, biology, and social science research, searching for ideas that will help him become a better investor…In an environment of rapid change, the flexible mind will always prevail over the rigid and absolute…Because you recognize patterns, you are less afraid of sudden changes. With a perpetually open mind that relishes new ideas and knows what to do with them, you are set firmly on the right path.
Literature – self-education of a Latticework through books, Adler’s Active Reading
We must educate ourselves and the vehicle for doing so is a book supplemented with all other media both traditional and modern…So we are talking about learning to become discriminating readers: to analyze what you read, to evaluate its worth in the larger picture, and to either reject it or incorporate it into your own latticework of mental models…We can all acquire new insights through reading if we perfect the skill of reading thoughtfully. The benefits are profound: not only will you substantially add to your working knowledge of various fields, you will at the same time sharpen your skill at critical thinking.
The central purpose of reading a book, Adler believes, is to gain understanding…This is not the same as reading for information.
Reading that makes you stop and think is the path to greater understanding – not solely because of what you are reading but also because of the process of reflection in which you are engaged. You are learning from your own thinking as well as from the author’s ideas. You are making new connections. Adler describes as the difference between learning by instruction and learning by discovery. It’s evident of in the satisfaction we feel when we figure out something on our own, instead of being told the answer. Receiving the answer might solve the immediate problem, but discovering the answer by your own investigation has a much more powerful effect on your overall understanding.
Adler proposes that all active readers need to keep 4 fundamental questions in mind: what is the book about as a whole, what is being said in detail, is the book true, in whole or in part, what of it? The heart of Adler’s process involves 4 levels of reading: elementary, inspectional, analytical, and syntopical. Each level is a necessary foundation for the next, and the entire process is cumulative.
Elementary reading is the most basic level, the one we achieve in elementary education
In inspectional reading, the second level, the emphasis is on time and the goal is to determine, as quickly as possible, what the book is about. It has two levels: prereading and superficial reading. Prereading is a fast review to determine whether a book deserves a more careful reading. Look at the table of contents, index, how much can you learn about the main themes through this overview. Next, Adler recommends systematic skimming. Read a few paragraphs here and there, read the author’s conclusion. These two activities should take between 30-60 minutes and help you determine if it is worth your time to read the book
Analytical reading is the most thorough and complete way to absorb a book. Through analytical reading you will answer what is the book about as a whole and in detail and provide you the most complete answer to if the book is true. It has goals: develop a detailed sense of what the book contains, interpret the contents by examining the author’s own particular point of view on the subject; and to analyze the author’s success in presenting that point of view convincingly. Take notes, make an outline, write in your own words what you think the book is about, write the author’s main arguments
The fourth and highest level is what Adler calls syntopical reading, or comparative reading. In this level of reading, we are interested in learning about a certain subject, and to do so we compare and contrast the works of several authors rather than focusing on just one work by one another. Adler considers this the most demanding and most complex level of reading. It involves two challenges: first, searching for possible books on the subject; and then deciding, after finding them, which books should be read
The challenge for us as readers is to receive that knowledge and integrate it into our latticework of mental models. How well we are able to do so is a function of two very separate considerations: the author’s ability to explain, and our skills as careful, thoughtful readers. We have little control over the first, other than to discard one particular book in favor of another, but the second is completely within our control
I believe in…mastering the best that other people have figured out, [rather than] sitting down and trying to dream it up yourself…You won’t find it that hard if you go at it Darwinlike, step by step with curious persistence. You’ll be amazed at how good you can get…It’s a huge mistake not to absorb elementary worldly wisdom…Your life will be enriched – not only financially but in a host of other ways – if you do. – Charlie Munger, Poor Charlie’s Almanack
Decision Making – Continuously add more building blocks to your knowledge base in order to build more robust mental models
Failures to explain are caused by our failures to describe
Our institutions of higher learning may separate knowledge into categories, but wisdom is what unites them.
What I got out of it
A beautiful book on how to approach being a multidisciplinary thinker as it applies to investing.