Categories
Books

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning by Gautam Baid

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary

  1. Value investing is not just a system for success in the market. It is also an intellectual toolkit for achieving a deeper understanding of the world. The author takes a holistic approach to value investing and philosophy from his wide-ranging reading, combining practical approaches, self-cultivation, and business wisdom.

Key Takeaways

  1. The best investment of time is to invest in personal development.
  2. The way to achieve success in life is to learn constantly. And the best way to learn is to read, and to do so effectively.
  3. rich have money. The wealthy have control over their time.
  4. Knowledge is overrated. Wisdom is underrated. Intellect is overrated. Temperament is underrated. Outcome is overrated. Process is underrated. Short-term outperformance is overrated. Long-term adherence to one’s investment philosophy is underrated. Gross return is overrated. Stress-adjusted return is underrated. Upside potential is overrated. Downside protection is underrated. Maximization of returns is overrated. Avoidance of ruin is underrated. Growth is overrated. Longevity is underrated. Entry multiple is overrated. Exit multiple is underrated. Price-to-earnings ratio is overrated. Duration of competitive advantage period is underrated. Categorization of stocks into large cap, mid cap, and small cap is overrated. Categorization of businesses into great, good, and gruesome is underrated. Being more frequently right than others is overrated. Being less wrong than others is underrated. Forecasting is overrated. Preparation is underrated. Confidence is overrated. Humility is underrated. Conviction is overrated. Pragmatism is underrated. Complexity is overrated. Simplicity is underrated. Analytical ability is overrated. Personal behavior is underrated. Having a high income level is overrated. Inculcating a disciplined saving habit is underrated. Competition with peers is overrated. Helping our peers is underrated. Large personal net worth is overrated. Good karma is underrated. Talent is overrated. Resilience is underrated. Being the best investor is overrated. Being the most authentic version of yourself is underrated.
  5. Study the science of art. Study the art of science. Develop your senses—especially learn how to see. Realize that everything connects to everything else. —Leonardo da Vinci
  6. excellent resource to build up one’s latticework.1) As the Chinese proverb goes, “I forget what I hear; I remember what I see; I know what I do.” Because the best way to learn something is by practicing it, we must routinely apply the mental models to different situations in our daily lives.
  7. deliberate practice, it helps us identify our leverage
  8. Doubt is not a pleasant condition, but certainty is absurd. —Voltaire
  9. Charles Collier writes, in his guidebook on philanthropy Wealth in Families, that “according to Aristotle and his latter-day student, Thomas Jefferson, the ‘pursuit of happiness’ has to do with an internal journey of learning to know ourselves and an external journey of service of others.”
  10. Buffett’s key takeaway from The Intelligent Investor was this: If you eliminate the downside, then all that remains is the upside. After that, the key is to keep emotions in check and be patient. It really is that simple.
  11. Investing is not about being original or creative; it is about looking for the greatest amount of value (for the price paid) with the least amount of risk. Putting in more time and effort does not guarantee better results in investing. Rather, it is more beneficial to do less and make fewer but better choices.
  12. As Charlie Munger says, “The goal of investment is to find situations where it is safe not to diversify.”
  13. One of the hardest things to do in life is to avoid good opportunities so that you have time to devote to great opportunities—and having the wisdom to know the difference.
  14. Instead, ask yourself, “What is the most important thing I can do today? What is the one thing that would make everything else in my life either easier or unnecessary?”
  15. There is no path to peace. Peace is the path. —Mahatma Gandhi
  16. The parable of the Mexican fisherman and the American banker is one of my favorite stories and contains an important life lesson. It is habitual for most of us to build incessantly and forget that the endgame should really be happiness and a fulfilling life. It is equally easy to overlook all the goodness we are surrounded by today. It doesn’t take a lot of money to have a truly wealthy life, but it does take financial independence, which gives us control over our time.
  17. The goal of financial independence is to stop depending on others (bosses, clients, a schedule, a paycheck). True wealth is measured in terms of personal liberty and freedom, not monetary currency. Money alone does not signify independence. Control over time does. The only definition of success is to be able to spend your life in your own way.
  18. Growth and contribution are the bedrocks of happiness. Not stuff.
  19. Personal freedom allows us sufficient time to think. Making good decisions requires quiet time alone in our heads to think through a problem from multiple points of view. Uninterrupted personal time is life’s most valuable limited resource. Several notable creators, including Bill Gates and Mark Zuckerberg, regularly take “think weeks” to invigorate their thinking and to allow their minds to wander.
  20. Do you ask what is the proper limit to wealth? It is, first, to have what is necessary, and, second, to have what is enough.
  21. A contrarian isn’t one who always takes the opposite path just for the sake of it. That is simply a conformist of a different sort. A true contrarian is one who reasons independently, from the ground up, based on factual data, and resists pressure to conform.
  22. To invest in companies with “the capacity to suffer,” we must be willing to suffer along with them. In other words, we need a high tolerance for short-term pain.
  23. Embracing deferred gratification is what leads to the single biggest edge for an investor. Human nature makes it difficult to utilize this edge. This difficulty is the very reason the edge exists, and because human nature will never change, this edge is a durable one for those who possess the right temperament to capitalize on it. Bezos
  24. The path to lasting wealth is deferred gratification, savings, and compound interest. Develop the habit of saving in such a way that you enjoy your present reasonably well and also ensure a bright future tomorrow.
  25. Ask the right questions; you’ll get valuable answers.
  26. Markets systematically underprice quality over long time periods.
  27. High quality always beats a bargain over time. Although there are certainly exceptions, in the long run, bargains never outperform solid investments. This simple yet profound principle can be applied to virtually every area of life. Crash diets, predatory pricing, dishonesty, and shortcuts can work well for a while, but they are never sustainable.
  28. Techno-Fund investors tend to believe in two key principles, in addition to strong earnings growth and industry fundamentals, when analyzing potential buys: first, stocks that show relative strength, that is, that go sideways or consolidate during significant market pullbacks, tend to outperform significantly during the subsequent market recovery; and, second, the first stocks that break out to new fifty-two-week highs after, or during, a major correction tend to become the leaders of the next rally.
  29. When you truly embrace lifelong learning, Lady Luck and serendipity eventually reward you in a big way.
  30. The right book at the right time will speak to you in a way that the right book at the wrong time just won’t.
  31. Well-managed low-cost commodity producers usually do not generate higher returns. High-cost producers do, because they show a higher percentage gain in profitability. This is highly counterintuitive for most investors.
  32. Commodity stocks are not long-term investments. They generate alpha in portfolios in a short period of time, driven by a combination of financial and operating leverage, and you exit them not on peak reported earnings but when the expectations of margin improvement peak out. A good time to begin planning your exit from a commodity industry is when the government decides to curb its profitability.
  33. When only a single firm in the entire industry is profitable, then the commodity in question may be at or near the bottom of the cycle.

What I got out of it

  1. A comprehensive, fun read on the benefits of compounding in various life domains. Even if you don’t care about investing, the mindset and examples Gautam shares will be useful regardless of age, industry, or passions
Categories
Books

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary

  1. In finance, the soft skills (how you behave) is typically more powerful than the hard, technical skills. Finance is guided more by psychology than laws and this book will help you better understand this idea and how to counter some of the more deleterious effects that ignoring them might bring

Key Takeaways

  1. Luck and risk are inescapable – nothing is ever as good or as bad as it seems
  2. “Enough” is a powerful word and one of the most valuable financial skills is to keep the goal posts from moving.
  3. Compounding is a true superpower. A mentality of frugality, paranoia, survival is key. Don’t do anything that can wipe you out and understand that staying wealthy is a different skill than getting wealthy
  4. Honor the power of tails, 80/20
  5. Money’s greatest value is to give you control over how you spend your time
  6. Wealth is what is hidden
  7. Reasonable > Rational – having an approach which you’ll sustain and which allows you to sleep at night is better than what is mathematically optimal
  8. Think of volatility as fees rather than fines
  9. More than some dollar amount, seek independence, the ability to do what you want, when you want. Save more than you spend, keep your lifestyle spending in check, understand your priorities, and give yourself a nice margin of safety

What I got out of it

  1. An incredibly applicable, approachable, and useful book for those who want to better understand how to think about money, investing, saving, and what true wealth really means
Categories
Books

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Perez

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary

  1. 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
    1. The fact that technological change occurs by clusters of radical innovations forming successive and distinct revolutions that modernize the whole productive structure
    2. The functional separation between financial and production capital, each pursuing profits by different means; and
    3. 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

Key Takeaways

  1. 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
  2. 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
  3. Old industries rejuvenated as well
  4. New input (iron, steel, chips) reaches mass scale economics which creates massive price drops and it can therefore spread further
  5. All areas of society are interconnected and impact each other – technological, social, political
  6. Big bang leads to irrational exuberance which leads to structured adjustment, then installation period (irruption and frenzy), and eventually to deployment (synergy and maturity)
  7. How new tech goes to third world and financial / debt’s role
    1. 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
  8. Regulation is the last part that is needed as part of the cycle
  9. Monopolies, oligopolies in phase 4 must try radical innovations to stretch lifecycle, reduce cost of peripheral activities
  10. Installation leads to turning points which leads to deployment
    1. 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
    2. Related services, cultural adaptation, education, regulation all come up
    3. Becomes ubiquitous, common sense which leads to coherence. When exhausted and tired, ripe for new paradigm
  11. Financial vs. Production Capital
    1. Financial capital – invest, money to make more money
    2. Production capital – builders, scaling more profit, making capacity
    3. Little knowledge in an area vs. a lot; foot loose vs. roots
    4. When productional capital is in control (post bubbles) it leads to real wealth creation
    5. Financial capital should be the facilitator, not the game itself
  12. When the companies (engines of growth) start seeking unorthodox ways to deploy their profits, that stage is at maturity (M&A, conglomerates)
    1. In maturity, financial capital also becomes unorthodox. Idleness leads to bad loans
    2. Provides the funding for the next paradigm
  13. Taking a successful behavior to its extreme causes failure
  14. Big crashes teach big lessons, but are often short lived
  15. Cost reductions in the core inputs/infrastructure leads to further explosion

What I got out of it

  1. 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
Categories
Books

The Mind of Wall Street by Leon Levy

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary

  1. 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.

Key Takeaways

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. My passion for ancient history and archaeology also gives me perspective.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. 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.
  18. 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
  19. 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.
  20. 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.
  21. 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.
  22. Risks don’t disappear from markets or businesses; they are merely transferred or sold.

What I got out of it

  1. Good book about risk, reward, psychology of a successful investor
Categories
Books

The 80/20 Principle by Richard Koch

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary

  1. 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

Key Takeaways

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.”
  6. A few things are important; most are not.
  7. 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.
  8. 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.
  9. 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.
  10. Application of the 80/20 Principle implies that we should do the following:
    1. Celebrate exceptional productivity, rather than raise average efforts
    2. Look for the short cut, rather than run the full course
    3. Exercise control over our lives with the least possible effort
    4. Be selective, not exhaustive
    5. Strive for excellence in few things, rather than good performance in many
    6. 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)
    7. Choose our careers and employers with extraordinary care, and if possible employ others rather than being employed ourselves
    8. Only do the thing we are best at doing and enjoy most
    9. Look beneath the normal texture of life to uncover ironies and oddities
    10. In every important sphere, work out where 20 percent of effort can lead to 80 percent of returns
    11. 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.
    12. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. When something is working well, double and redouble your bets.
  17. Impose an impossible time scale This will ensure that the project team does only the really high-value tasks:
  18. 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.
  19. 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.
  20. If your insights are not unconventional, you are not thinking 80/20.
  21. 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.
  22. The Top 10 highest-value uses of time
    1. Things that advance your overall purpose in life
    2. Things you have always wanted to do
    3. Things already in the 20/80 relationship of time to results
    4. Innovative ways of doing things that promise to slash the time required and/or multiply the quality of results
    5. Things other people tell you can’t be done
    6. Things other people have done successfully in a different arena
    7. Things that use your own creativity
    8. Things that you can get other people to do for you with relatively little effort on your part
    9. Anything with high-quality collaborators who have already transcended the 80/20 rule of time, who use time eccentrically and effectively
    10. Things for which it is now or never
    11. 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.
  23. 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;
  24. The 80/20 Principle is clear. Pursue those few things where you are amazingly better than others and that you enjoy most.
  25. 10 golden rules for career success
    1. Specialize in a very small niche; develop a core skill
    2. Choose a niche that you enjoy, where you can excel and stand a chance of becoming an acknowledged leader
    3. Realize that knowledge is power
    4. Identify your market and your core customers and serve them best
    5. Identify where 20 percent of effort gives 80 percent of returns
    6. Learn from the best
    7. Become self-employed early in your career
    8. Employ as many net value creators as possible
    9. Use outside contractors for everything but your core skill
    10. Exploit capital leverage
  26. 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.
  27. Koch’s 10 commandments of investment
    1. Make your investment philosophy reflect your personality
    2. Be proactive and unbalanced
    3. Invest mainly in the stock market
    4. Invest for the long term
    5. Invest most when the market is low
    6. If you can’t beat the market, track it
    7. Build your investments on your expertise
    8. Consider the merits of emerging markets
    9. Cull your loss makers
    10. Run your gains
  28. 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.
  29. 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.
  30. 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.
    1. Only work in networks
    2. Small size, very high growth
    3. ONly work for an 80/20 boss – someone who consciously or unconsciously follows the principle
    4. Find your 80/20 idea
    5. Become joyfully, usefully unique
  31. 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

  1. 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
Categories
Books

Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life by William Green

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary

  1. 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

Key Takeaways

  1. Studying investing is not only about learning how to make money, but learning how to think and make decisions
  2. 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
  3. 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
  4. Pabrai – clone the best ideas and habits of the giants
    1. People have a bug in their DNA where they feel shameful stealing the best ideas of others. DON’T!
    2. Clone the best ideas but be open to personalizing it to your personality and context
    3. 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
  5. Templeton – to get different results, you must act differently than the crowd
    1. 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
    2. Beware your own emotions and aim to take advantage of others’
    3. 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
    4. Mastering yourself is of supreme importance
  6. Howard Marks
    1. 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
    2. Marks is a master in risk, cyclicality, probabilities, playing the odds, seeking ideas in unloved areas
    3. Understand how big of a role luck plays in your success
    4. 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
    5. Everything that is important about investing is counterintuitive and everything that is obvious is wrong
    6. 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
    7. Structure your life, portfolio, and relationships to be robust. Don’t maximize. Be ready for change. Adapt and evolve
    8. 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
  7. Jean Marie Eveillard
    1. 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
    2. 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
    3. It is all about surviving the dips. That’s the first step, even better is the ability to take advantage of them
  8. Joel Greenblatt – simplicity is the master key
    1. Figure out what it is worth, and pay less for it
    2. Stocks follow earnings (eventually)
    3. Take a simple idea and take it seriously
    4. Seek to reduce the complex to its essence. Only true understanding allows for this to happen
    5. Don’t make your biggest investments in the companies that can make the most, but in those you are most confident to not lose
    6. Cheap + good business is the holy grail
    7. 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
  9. Nick Sleep and Qais Zakaria
    1. These two ran Nomad for 13 years and had wildly successful returns in a very concentrated portfolio
    2. 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?
    3. 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
    4. 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.
    5. 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.
    6. Focus on the things with the longest shelf life, not the ephemeral
    7. 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
  10. Tom Gaynor – The best investors build habits that compound over time
    1. Seek small marginal gains that are relentlessly followed. Time is the enemy of bad habits, the friend of the good
    2. 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
    3. Directionally correct, moderate efforts demonstrably work
    4. Find good things that last and stay the course. Don’t be caught up in the frenzy and fads
    5. The name of the game is longevity, not perfect maximization
    6. You don’t have to be extreme to get extreme results
    7. 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
    8. Forget about perfection, instead focus on continuous improvement that can compound over time. This is the aggregation of marginal gains
    9. Write down good habits as well as a list of things to not do
  11. Charlie Munger – aim to be consistently not stupid
    1. 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
    2. Collect stupidities and learn vicariously through the mistakes of others
    3. Rub your nose in your mistakes and learn from them
    4. Rely on first principles, don’t try to be perfect, be patient, adopt some guidelines and restraints to handicap massive mistakes
    5. Gain self awareness and beware psychological biases, hubris, the desire to get rich quick
    6. Learn to destroy your best loved ideas
    7. Pre-mortems and devils advocate reviews are excellent ways to mitigate your biases
    8. 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
    9. 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
    10. Be proud not only of your results, but also how you’ve attained them
    11. Life is a series of opportunities to learn how to behave well in difficult circumstances
    12. Nothing is more essential than simply surviving
    13. Build up wealth to be independent, to live the life you want without having to compromise or answer to others
  12. Arnold Van Den Berg – survived the holocaust as a child and this had a tremendous impact on his view on life
    1. Being rich consists of money, happiness, and peace of mind. Use your wealth to help and serve others

What I got out of it

  1. 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
Categories
Books

The Rebel Allocator by Jacob Taylor

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary

  1. Through Socratic dialogue and real-world life lessons, a successful businessman (Mr. X) shares his wisdom and learnings with a skeptical young student, Nick. 

Key Takeaways

  1. Strategy ROIC > project ROIC
    1. Longer term, more fluid and dynamic
  2. 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

  1. 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
Categories
Books

On Investing by John Neff

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary

  1. John Neff, former fund manager of Windsor, recounts his history and lessons learned running one of the best performing funds of his era.

Key Takeaways

  1. 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.
  2. 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
  3. Shortcuts usually grease the rails to disappointing outcomes.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. Brain surgery it’s not, but I’ve always found that investors who skip elementary steps stumble sooner rather than later.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. Judgment lies in recognizing which way the fundamentals point. Conventional wisdom and preconceived notions are stumbling blocks as well as signs of opportunity.
  14. You can sum up the Street’s psychology this way: Hope for the best, expect the worst. Meantime, don’t stick your neck out.
  15. Dramatic actions taken by companies, as opposed to broad challenges posed by difficult industrial or economic climates, can trigger unwarranted selling pressure.
  16. 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.
  17. 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.
  18. 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.
  19. 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.
  20. 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
  21. 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.
  22. When you feel like bragging about a stock, it’s probably time to sell.
  23. 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.
  24. 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.
  25. As the market grew more excited, we grew more cautious.
  26. 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

  1. Entertaining book, simple language, some important takeaways. Take a simple idea, and take it seriously
Categories
Books

The Star Principle by Richard Koch

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary

  1. 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.

Key Takeaways

  1. 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’.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. A star that is fast losing market share, or an ex-star that has lost it, may be an attractive prospect.
  8. 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.
  9. 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.
  10. 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. 
  11. There are seven steps necessary for creating a star venture.The seven steps give you an easy template for devising your star.
    1. Divide the market.
    2. Select a high-growth niche.
    3. Target your customers.
    4. Define the benefits of the new niche.
    5. Ensure profitable variation.
    6. Name the niche you plan to lead.
    7. 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.
  12. Many great innovations simultaneously divide markets and combine the attributes of two previously unrelated markets.
  13. 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.
    1. YOUR IDEAL PRODUCT DOESN’T EXIST
    2. UPMARKET/DOWNMARKET
    3. AFFORDABLE LUXURIES
    4. MARKET VERSUS NICHE
    5. BIGGER PRODUCT VERSUS SMALLER PRODUCT
    6. 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’?
    7. HEALTHIER VERSUS TEMPTING
    8. SAFE VERSUS RACY
    9. CONVENIENCE VERSUS PURITY
    10. SAVING TIME VERSUS EXTENDING TIME
    11. FIXED VERSUS MOBILE
    12. UNISEX VERSUS SINGLE SEX
    13. MASCULINE VERSUS FEMININE
    14. GO GAY
    15. GO GREY – Education: universities for those aged 50-plus?
    16. LOW VERSUS HIGH SERVICE, AND DIFFERENTSERVICE
    17. DIY VERSUS PROFESSIONAL SERVICE
    18. PERSONALISED VERSUS UNTAILORED
    19. BUNDLED VERSUS FOCUS AND SUBTRACTION – Focus is by far the best way to create a new star venture.
    20. EXPERT VERSUS INEXPERT USERS
    21. CENTRALISED VERSUS DECENTRALISED USE
    22. TOTAL COST VERSUS INITIAL PRICE
    23. FIRST PLACE VERSUS THIRD PLACE
    24. SECOND PLACE VERSUS THIRD PLACE
    25. OWNED VERSUS RENTED VERSUS FRACTIONALLY OWNED
    26. NARROWED EXPERTISE VERSUS ADDED EXPERTISE
    27. ORCHESTRATING A SUPPLIER ALLIANCE
    28. ONLINE VERSUS OFFLINE, OR A DIFFERENT DISTRIBUTION CHANNEL
    29. 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.
    30. GO GREEN
    31. 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?
    32. IDEAS FROM OTHER PLACES
  14. 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:
    1. increasing one or more benefits of the product in the main market to a marked degree;
    2. creating one or more new benefits that do not currently exist in the main market; and
    3. subtracting benefits that exist in the main market.
  15. To launch a star venture successfully, three conditions must apply.
    1. Your target customers want something different from the main market.
    2. You understand what it is that they want and can provide it with a new product category.
    3. 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.
  16. Make things happen reliably, consistently, economically. Make the venture a machine.
  17. The delivery formula has been cracked when all the following events always happen.
    1. Products are delivered to the same high standard, on time, every time.
    2. This year’s product is measurably better than last year’s.
    3. This year’s product costs at least 5 per cent less to make than last year’s.
    4. Volumes can be doubled within a year without panic or loss of quality.
    5. Work is delegated to the lowest-level person who is fully competent to do it.
    6. Everyone increases his or her skill level significantly each year and works better and faster.
    7. The workplace exudes calm, order and discipline.
    8. Standards and procedures are written down, clear, unambiguous – and observed!
    9. Logos, colours and designs are attractive and consistent.
    10. Budgets are always met or exceeded.
    11. Cash is always higher than planned.
    12. The firm is a machine – smooth-running, reliable, relentless, self-maintaining and self-improving.
    13. Nobody is indispensable. If the best people leave, the firm rolls on regardless. New leaders come to the fore.
  18. 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.
  19. 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.
  20. 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.
  21. 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.
  22. 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.
  23. 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.
  24. 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’.
  25. 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.
  26. Only puny secrets need protection. Big discoveries are protected by public incredulity. Marshall McLuhan

What I got out of it

  1. Niche that is growing 10%+ each year, leader in that market
Categories
Books

The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail by Clayton Christensen

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary

  1. 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. 

Key Takeaways

  1. 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
  2. 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
  3. Case for investing in disruptive technologies can’t be made confidently until it is too late
  4. 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. 
  5. 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. 
  6. Principles of disruptive innovation
    1. 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
    2. Small markets don’t solve the growth needs of small companies – create small organizations that get excited about small opportunities and small wins
    3. 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
    4. 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
    5. 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

  1. Great way to think about how you could do all the right things and still lose. Helmer’s counterpositioning in action