Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.
This Tiger Cub Giant Is Betting On Banks And Tech Stocks In The Recovery
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— Charlie Munger
I ordered 55 books for myself in 2016, and downloaded 18 audiobooks. I didn’t read every word in every book—not by a long shot. I read some books three times.
I approach a new book like a new dish at a restaurant. I’m curious and cautious at first, but if its delicious, I consume the whole thing with gusto. If the dish is bad after a few bites, it’s probably not going to get better, and I allow myself skip around and look for good parts. I don’t understand the masochists who insist on finishing full plates of bad food.
In the spirit of Charlie’s quote, I thought I’d review the most important ideas I picked up from my reading and thinking this year. To generate the list, I asked myself which ideas spent the most time at the front of my mind, hoping that time roughly correlates with importance.
Some ideas are new, some are old, but hopefully there’s more here than the normal value investing fare. Enjoy!
2016 marked the first full calendar year that I worked for myself. I am my own boss, and my own employee (I am happy to report labor relations are very good).
Left to my own devices, I made inversion my project manager. For any given project, I ask myself what the stupidest way to go about something would be, and then proceed to chart the opposite path. I am embarrassed to admit how often I find myself slandering something I certainly would have done but for having taken the time to slander it first. It’s a wonderful mental trick.
The most common outcome of project management by inversion is that I assign myself a lot of reading. What could be dumber than failing to read the five best books on something of great importance to you? This usually only takes a week or two tops if I’m efficient, and I always end up enormously ahead of where I started. All it takes is a library card, some sitzfleisch, and enough chutzpah to believe you can learn.
Invert, always invert – Carl Jacobi
I’m amazed how many people devote a career to something without having devoted a week to studying their craft. I also wonder how many expensive consulting projects could be avoided if a company assigned a smart person to read five books and then summarize them first. Probably a lot.
Sales versus Marketing
I hated sales for most of my professional life. Even as a kid, I had the impression that sales were undignified, and somehow beneath me. I don’t like saying that, but I definitely believed it.
I didn’t become fully conscious of my own bias until I read Jim Koch’s book Quench Your Own Thirst. Koch is a recovering management consultant turned entrepreneur (like me), and reading his story was like looking in a mirror, albeit a far less successful one (Koch founded Samuel Adams).
Before I read Koch’s book, I thought that marketing was the thinking mans way of generating revenue, and that sales were merely a low level function. After all the top business schools don’t teach any courses on sales, but they teach dozens on marketing. Fortunately, Koch set me straight:
“The difference between marketing and sales is the difference between masturbation and sex. One you can do all by yourself in a dark room and fool yourself into thinking you’re accomplishing something. The other requires real human skills and all the fury and muck and mire of real human-to-human contact.” – Jim Koch
Koch destroyed the anti-sales mental roadblock that had been preventing me from studying the sales seriously. That was no easy task. The anti-sales ignorance was very strong within me just a few years ago, and that ignorance, along with a lollapalooza of other compounding errors, is why my first entrepreneurial venture hardly lasted two years before failing.
Racking the Shotgun
When I began my study of sales, I searched for the five best books on the subject. Of the many I’ve read, 80/20 Sales and Marketing is far and away the best.
Perry’s “racking the shotgun” parable is the most powerful idea I have ever read about the act of actually being involved in sales
“In a noisy club in Las Vegas, a professional gambler pulled a sawed-off shotgun out of his jacket, racked it, and looked around to see who recognized the ratcheting sound and turned their heads. He said to his protégé, “John, the people who turned their heads are not marks. Do not play poker with them. Gamble with everybody else.”
The basic wisdom is that sales is an elimination game. If you send one signal to an audience that most people ignore, but qualified leads respond to, you have massively simplified the sales process. I think there is a broader point for all kinds of selection scenarios, including investing: its all about finding the right fishing holes.
“Most people think they understand 80/20. Not one person in 1,000 people actually does.” – Perry Marshall
A year ago I would have told you I understood 80/20. I even thought I understood it better than most business people and mused that it would be funny to name a pet (or a kid) Vilfredo, after the Italian economist who first identified the unequal relationship between inputs and outputs.
80/20 Sales and Marketing showed me about a dozen ways 80/20 worked that I had not understood. The most important new idea is that 80/20 relationships are fractal. This means that if 80% of the results come from 20% of the work, its also true that 80% of the 80% of results comes from 20% of the 20% of the work, and so on, ad infinitum.
In other words, the most important things are exponentially more important than non-fractal 80/20 would suggest. If 80/20 is fractal, 64% of the results (80%2) comes from 4% (20%2) of the inputs, and 51% of the results (80%3) come from less than 1% (20%3) of the inputs.
The takeaway is that your best customer, opportunity, investment, etc is probably not two or three times more important than the median, but potentially 50-100 times more important.
Ask versus Guess
The basic idea here is that some people are from “ask” cultures, and other people are from “guess” cultures (here is a link to the article).
An “ask” person is taught that it is perfectly polite to make nearly any request one may feel like asking, because it is assumed that if someone does not want to comply with the request, they will politely respond “no”. Because asking and answering are both permissible and even encouraged, neither party is offended by any outcome.
A “guess” person or culture is not comfortable asking direct questions. Bold requests are considered rude and forward. Instead of directly asking for things, the appropriate course is to put out gentle feelers, insinuate your desires, and only ask questions you are relatively certain you will receive positive responses to. If a “guess” person plays it perfectly, they may even entice the person they want something from to offer something peremptorily, thereby avoiding the embarrassment of asking any questions at all.
The magic here comes from understanding which culture you were raised in, which culture you are currently in, and which approach might be more appropriate at a given time. I was raised in the Midwest (definitely a guess culture)but the world I work in now, and perhaps most markets in general, are ask cultures.
Two Ways to Tether Stock Prices to Reality
Are stocks pieces of paper to be endlessly traded back and forth, or are they proportional interests in underlying businesses? A liquidation settles this debate, distributing to owners of pieces of paper the actual cash proceeds resulting from the sale of corporate assets to the highest bidder. A liquidation thereby acts as a tether to reality for the stock market – Seth Klarman
Warren Buffett has said that a good investing class would teach two things: how to value a business, and how to think about market prices. I humbly propose that a field trip to the federal bankruptcy courts in Delaware would make an excellent addition to this basic syllabus.
I’ll never forget what it was like to watch a set of creditors (or were they hyenas?) devour the corporate assets of a company I had been the legal owner of just weeks before. After you watch a bankruptcy, there can be no doubt about the nature of the stock market. Stocks are most definitely partial ownerships interests in real business that can really be liquidated.
On the flip side, my partial ownership of a non-traded company has illuminated the possibility for total control as a second tether between stock price and reality. If a stock price is somehow chronically low in relation to the fundamentals of the underlying business, buying 100% of the outstanding shares removes the veil, and closes the gap between price and value.
Jeremy Miller’s book Warren Buffett’s Ground Rules details Buffett’s long history of taking personal control of companies. By controlling the firm’s flow of earnings, he reduces the markets ability to either radically undervalue or overvalue the real value of the business.
In other words, after you have control, there really is no price, provided that you never intend to sell. The only way you can extract value from the firm is by consuming the free cash flow the business throws off. Ironically, over the long term, that was precisely the case that existed when the company was traded, but this truth was obscured by the expansion and contraction of trading multiples. Bankruptcy and private control both reveal the reality of the situation.
The central idea of the book is that real world forecasting can be quantitatively expressed, measured, scored, and calibrated to a degree I had never thought possible. Tetlock not only hypothesized that it could be done, but also rigorously showed the way how, citing tremendously clear examples from his work with the intelligence community.
Tetlock was at his best when explaining how forecasters can improve their performance by carefully layering new information upon well selected base rate probabilities. Guy Spier has made a similar point by suggesting that investors should use an “inflight” checklist in addition to a “preflight” checklist to make sure you focus on both the initial conditions, as well as how the situation may be changing.
Superforecasting is an extremely successful blend of theory and practice. I couldn’t stop thinking about this book, and am still trying to integrate its lessons into my life and work.
The Power of Working Alone
As I previously mentioned, 2016 was the first year that I worked alone. My nearest colleague lives nearly 1,000 miles away, and I see him roughly six times a year, although we talk on the phone quite frequently.
My isolation is an accident of my career trajectory, geography, and (lack) of money. I think it may be one of the most important accidents of my life. Through sheer happenstance, I have ended up in a working environment not terribly different from the one employed by Buffett, Munger,and other likeminded value investors. After a year of working this way, I’m noticing tremendous upside to the situation.
Working alone has been a boon to my productively, happiness, calm, and freedom. I read when I want, set my own work hours, and feel very little compulsion to produce anything but tangible results, which are usually the outcome of having harvested good ideas from books.
Working alone means I have no human resource issues. I am immune to the contagions of other’s moods, biases, and desires. When I hear about the pressures of hiring, firing, promotions and other cancers of office politics, I get positively giddy about my situation.
As an aside, I definitely didn’t understand this a few ago (and it may not be right for all people at all times). I once wrote a letter to Mohnish Pabrai and told him I’d pay him to let me work for him (he once made a similar offer to Buffett, allegedly). He politely turned me down, and said he didn’t work with analysts. I have a new appreciation for why.
Other Ideas in the Mix (New and Old)
In addition to the big ideas enumerated above, there are a few golden oldies I can’t help but touch upon briefly:
- The power of coaching: I hired a (remote) strength coach for the second time. I made more progress in the last twelve months than I’ve made in 9 years of working by myself. My coach Andy Baker cowrote the books Practical Programming and The Barbell Prescription, both of which are worth careful study. I’m looking forward to starting several business coaching relationships in 2017. A good coach or mentor is invaluable.
- Mutually exclusive, collectively exhaustive: I still use this consulting trick every day, and can’t imagine working without it.
- The systems in Getting Things Done: I’ve been using this management system for six or seven years, but never more fully than this year. It’s simply incredible.
- Talking to management: as I mentioned in my Horsehead postmortem, I previously under appreciated what can be learned by talking to a company’s management. Now that I am a company’s management in a startup, my old idea of ignoring management seems borderline insane.
- Multiple languages of politics. Arnold Kling’s The Three Languages of Politics, got taken a step further by Jonathan Haidt’s theory of moral tastebuds in The Righteous Mind. Both ideas are tremendously useful for understanding why people don’t believe what you believe.
- I thought about the dynamics expressed in Charles Murray’s Coming Apart at nearly every turn in the 2016 election. I also thought money would be more important to political outcomes. I read this book nearly three years ago, and still think about it almost daily.
- The ideas and processes in Quantitative Value, by Wes Gray and Tobias Carlisle. This book set my brain on fire when I read it, and remains my gold standard for adding rigor and processes to a subject.
- The business model canvas has become one of my indispensable tools for evaluating or creating businesses. Once you’ve used it and seen it, I find it impossible not to use it.