This Week I Learned #26 - Wealthy Revisited
After 168 days of daily learnings I’ve decided to go through the inventory to pick out the top 10 learnings I continue to apply in my everyday life and/or refer my friends to and share them again for a highlight reel. I tried cutting it down to 7 to keep things consistent with the other 25 newsletters but after a few tries it didn't seem worth the time to. It's my newsletter anyways. So, here they are! Enjoy!
Wealthy: "Make a step no-one understands and learn to gain confidence from the doubt you are getting." This was the podcast episode I kept on replaying segments over and over again today. The insight has been on Scott's choices to continuously choose to take paths that aligned with what he absolutely loved doing and/or incrementally got him closer to that interest. What I also learned was on creating some effective systems within an organization. One was on how deadlines are often missed because of a misalignment in priorities so focus on that. Second is on the bias to action but creating a system where there is a reward/incentive at the end of the sprint. The carrot-stick method is highly debated and I think yes that should be applied to more algorithmic tasks or tasks that can be binary in result (yes/no). But I think for creative tasks simply applying constraints may be enough. Just give the artist a box to think outside of. Scott's also been able to operate multiple companies whilst being a solo investor/advisor, which is very similar to my end goal. So, fan-boy moment here. https://www.youtube.com/watch?time_continue=1&v=LILwniZ-sGc
Wealthy: Re-read Charlie Munger's "Talk Two" in Poor Charlie's Almanack. New learnings: 1) Dominate the niche, afterwards gain scale from dominating a niche. Scale can be in the form of an informational advantage (i.e. brand reputation in your niche is scaleable). Scale can also be FOMO, everyone buys the product so psychological perception creates such scale. Then scale gets too big, then you have bureaucracy, then you lose to the specialized new entrant. Cycle continues. 2) Companies either grow or shrink. Your moat widens or narrows. Better to see revenue grow, the cash flow growth can come later. Just make sure it will come. 3) Sam Walton's Walmart was nothing new. World already had discount stores. He just made each store identical and scalable. He built a better system and destroyed his local competitors. 4) Many markets get down to 2-3 big competitors or 5 or 6. My thought is to find those that will become the 2-3 when there are 20+ out there. Though, this doesn't matter much for pure commodities. 5) Munger asked a guy selling fishing lures: "My God, they're purple and green. Do fish really take these lures?" And he said, "Mister, I don't sell to fish." People feel insecurity with inaction. Work hard in search of ideas and just bet big on the few that are obvious.
Wealthy: Revisited Charlie Munger's Stanford University address. Learnings: 1) Play the investing game the way it fits your own psychology and marginal utility. There is no right way to make money. He was good at taking 40% losses so he could go with a 3-6 stock portfolio. 2) "I'm doing the best I can. But I've never grown old before. I'm doing it for the first time. And I'm not sure that I'll do it right." Berkshire is past $450bn in market cap, don't expect the same results or even similar from 20 years ago. Seems simple but all the morons who forecast seem to forget that. 3) Real estate investment in Manhattan compounded at 7% over 378 years. Context. Don't expect 20% or even 10% because the wealth of the world will compound at no such rate. 4) The fundamentals of the legal profession is that you will be dealing with grossly defective people because they are the ones that need lawyers. Charlie didn't like working with assholes, so he quit law. 5) Psychology models: People are heavily influenced by what other people think and do. People will repeat what worked for them the last time. That's 2 models universities will make you read textbooks for and it won't even teach it properly. 6) Aim low. I agree with setting low enough expectations for short term goals. But for long term, aim high. 7) Mark Twain: "The man who doesn't read good books has no advantage over the man who can't read them." And if you don't read books... then you're screwed.
Wealthy: Railroads. When Chris Douvos met Michael Porter at Monitor and asked him what he should do after his MBA he said go into Railroads. Everyone was obsessed with tech during the late 90s and Porter recommended going to railroads and becoming the CEO of Burlington Northern and have Buffet buy the company out. Well Berkshire did actually end up buying Burlington Northern out. But from a career perspective its looking at it again with the 2x2 that Howard Marks speaks about for great investments: the Y-axis is Right and Wrong and the X-axis is Consensus and Non-consensus. Most investors will be in the Right/Wrong and consensus and the few who are right and non-consensus will win. Same for your career. Don't get fixated on career risk. Look where you can be non-consensus and right. Even without the investing lens on the career thought examining the fund of fund space in venture capital made the interview fascinating as well. http://capitalallocatorspodcast.com/2017/07/03/superlp/
Wealthy: Interview with Michael Mauboussin and Ted Seides. A refresher on the value of base rates. Maubossin recited a story where a NY Times analyst believed Amazon would be able to grow revenues by 15% per year until 2025. Looking back to the 1950s, there have been 313 companies that exceeded $100bn in market cap and only 7 have been able to grow their revenue by 10%+ the subsequent year. That is 2% of the companies over a 50 year history. Now is it possible that Amazon grows it's revenue by 15% every year to 2025? 100%. It's a possibility. But given what we know of companies of such magnitude it's difficult to conclude that to be the base case. Understanding of such base rates can widen the sensitivity we perform for any forecast and even with that we can still be wrong. It just may limit the extent to which we are wrong. http://capitalallocatorspodcast.com/2018/01/08/mauboussin/
Wealthy: Quote to ponder on: "Anyone who lives within their means suffers from a lack of imagination" - Oscar Wilde
Wealthy: Podcast interview with Elad Gil exploring investing and operating in startups. Two interesting concepts of note in the interview. 1) Rule of 3 - All markets will eventually result in 2-4 market leaders forming an oligopoly and it's about investing in the right companies that will be able to stand on top but you don't have to be stressed about investing in the best horse because rarely is it a winner take all monopoly. This has commonly been the case in my observation of drug stores, convenience stores and packaging goods companies and investing in roll-up businesses that stand out as the best capital allocators have been an effective thesis. 2) Rachleff's law - Named after Andy Rachleff of Wealthfront and Benchmark, it's about the power of the market. Rachleff says if you have a) great culture + bad market = company dies, b) bad culture + great market = company does well, c) great culture + great market = company does phenomenally. It's looking at the market's readiness to support the company instead of going all-in on a founding team during the early-stages of the investment. There are many companies that only did well thanks to the market and did well despite implementing weird cultural quirks rather than being successful thanks to them. http://investorfieldguide.com/elad/
Wealthy: Josh Elman on podcast interview with Jason Calacanis. His presentation on product is great. They discuss the importance of focusing on the metrics that matter. The most important one being "how many people are actually using your product". It's the bottom-up approach of first understanding the intended use case for the product and how to think about tracking true customer captivity. Like Airbnb would fail if they tracked daily, weekly or even monthly use because most people don't travel every month. People that travel every month are probably business folks who would probably get a hotel since they don't need to save costs and/or aren't focused on "experiencing culture". Whereas for Uber it could be a daily or weekly tracker. For blogs it could be engagement from the subscriber base of how often they open newsletters. The higher level message of the video is to actually "think". Everyone is obsessed over MRR, CAC, LTV blah blah blah but the true competitive advantage of a product lies in its customer captivity and how will you measure it? Because that is the metric you would be investing your dollars to improve upon. The link is a video presentation. https://thisweekinstartups.com/osh-elman-greylock-rob-may-talla/
Wealthy: Podcast with Seth Godin & Tim Ferriss. 1) Think about niche-ing down to your customer segment by being ultra specific. The 500 people. It doesn't have to be demographic. It could be psychographic: this requires the use of empathy to reach that kind of audience and whats also important is to get great customers. 2) It’s fine to push away bad customers. You aren't trying to be a commodity that caters to everyone, then you are just a price taking freelancer that works for hours and gets killed in auctions. No competitive advantage what so ever. You have to fire your customers that suck and focus on only keeping the ones that are great and ones that get what you are offering. They will appreciate the price point. The $400 steak may not be great... but its for the audience that wants that experience and that psychological experience of paying up and feeling something internal. It's not what you want but what they want. An artwork, logo design, made by Milton Glazer may look like shit to the masses and only a few designers will love it regardless of the artist... the 1%... but the people that are told this is by Milton will make up all reasons to love it. This justifies the $200k vs $10 price tag difference. That's who your customers are. That's what they believe, what they want and that is what is promised to them.. not a design but a design by Milton. It's about leading with the intended customer. Who are you serving or intending to serve and have a product for those people. Don't build a product and then market to various different people. Focus on catering to a specific audience. It's scary to commit to it but that is what you need to do. https://tim.blog/2018/11/01/seth-godin-this-is-marketing/
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