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Cognitive Biases | Buster Benson’s Blog, Piles
“A pile is an unstructured set of articles, books, ideas, podcasts, quotes, and other things that match a particular interest of mine. They have more weight than a single link, but haven’t yet formed into well-defined beliefs or projects.”
https://busterbenson.com/piles/cognitive-biases/
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Stanley Druckenmiller | My First Million Podcast (May 27th 2021)
Similarities between dot com bubble: Valuations are high.
Monetary policy was part of the issue in 99 when Greenspan ran an experiment to let unemployment levels below what it’s historically been.
The big winners of 99 were the ones building the infrastructure of the internet like Cisco and Sun Micro. This was like building railroads in the olden days. Your growth is rapidly going up while you are building the infrastructure like railroads but that tapers off once it's actually built. Sales went up from 50 to 70% while its being built but much less once the railroad is built. Nasdaq went down 95% because you had inflated values and way over estimated earnings from the infrastructure building time.
Differences between dot com bubble: 0% rates and QE.
Now we have an asset bubble in not just tech but in everything. Back then we had an incredible wave while the internet was being built from 95 to 2000 and now we have an incredible way of digital adoption of moving things to the cloud. Covid fast tracked this game. We were in the bottom of the 1st inning to the beginning of the 6th inning now.
The good thing is that now these tech companies are slowing down and catching up to the valuations. Amazon at 3200 and the rest of the fang stocks are at a good valuation now.
Biggest risk to equity market
First worry is that In 07 and 08, the bubble popped before inflation hit so we didn’t feel inflation at that time. However, now, interest rates could rise and the market could take a significant hit because it is currently heavily weighted towards growth names.
Next worry would be the cold war between China and America over Taiwan post 2022 after the Beijing Olympics.
“Don’t confuse genius with a bull market.”
Japanese retail investors bailed when the market collapsed in 1990, however they still haven't come back. So the after effects of these retail investors going through one bubble collapse could scar them. However, today's retail investors are much more informed and have more access to information with the internet.
What makes a good investor
1. Great investors like Buffet, Icahn, Soros, all have concentrated holdings.
Large concentrated bets with a lot of conviction. You are more focused on all your holdings and this has your attention, which reduces risk.
2. Knowing how and when to take losses.
Never uses stop losses and thinks it is the dumbest invention. But he never hangs on to a security if the reason he bought it has changed and he has lost his conviction. This is when you need to sell whether you have a loss or a gain.
3. Discipline is managing and fighting emotions.
“The higher they go, the cheaper they look.” When it goes up, you want to buy more and when it goes down, you're fighting not selling it. You have to constantly remind yourself why you bought it. No matter how much discipline you have, you will always be fighting your emotions.
Case for Bitcoin
5 years ago he believed “Bitcoin and cryptos are a solution in search of a problem.” Now the problem is that they did the Cares Act and J. Powell was crossing several lines and world bankers making fiat money more questionable. The problem is J. Powell.
When Bitcoin went from 17k to 3k, 86% of the people who owned it at 17k, never sold it during the drop.
Bitcoin has been around for 13 years and is now a household brand.
Ethereum could be MySpace before Facebook came along. Google passed Yahoo even though Yahoo was first because it was just a little bit faster. Which means that ethereum could potentially be overthrown by an alt coin.
He invested in the private sector by looking at where the MIT, Stanford engineering kids were going.
Advice for 20 year old
Find something you love because people will outwork you and out execute you. If you are after the money it, you can’t compete with someone who is in it 100%.
(Source: My First Million Podcast | Spotify)
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Creative Brief Tips | Will Humphrey - Wunderman Thompson
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Key Metrics | Y Combinator
Here is a list of key metrics by business type that we put together. You should know the relevant metrics for your business by heart.
Enterprise
Total customers
Bookings
Revenue
Revenue CMGR
Gross margin
Customer LTV / paid CAC
Burn rate / runway
Example: Scale
SaaS
Total customers
Bookings
Monthly recurring revenue (MRR)
Revenue CMGR
Gross margin
Gross account churn
Net dollar churn
Customer LTV / paid CAC
Quick ratio: a measure of a company’s short term liquidity
Magic number: a measure of sales efficiency that looks at what the output of a year’s worth of revenue growth is per dollar spent on sales and marketing
Burn rate / runway
Example: Slack
Usage-Based
Monthly revenue
Revenue CMGR
Gross margin
Dollar-based net expansion
Customer LTV / paid CAC
Burn rate / runway
Example: Twilio
Subscription
Total subscribers
Trial conversion (if applicable)
Monthly recurring revenue (MRR)
Revenue CMGR
Gross margin
Gross user churn
Customer LTV / paid CAC
Burn rate / runway
Example: Netflix
Transactional
Gross transaction volume (GTV)
Net revenue
Net revenue CMGR
Take rate (net revenue as % of GTV)
Gross margin
User retention
User transaction frequency
Customer LTV / paid CAC
Burn rate / runway
Example: PayPal
Marketplace
Gross merchandise value (GMV)
Net revenue
Net revenue CMGR
Take rate (net revenue as % of GMV)
Gross margin
Contribution margin per order
Customer retention
Seller retention
Transactions frequency
Average transaction value
Customer LTV / paid CAC
Seller LTV / paid SAC
Burn rate / runway
Example: Airbnb
E-Commerce
Total visits
Total unique visitors
Total customers
Conversion rate
Total registered accounts
Revenue
Revenue CMGR
Gross margin
Customer retention
Order frequency
Average order value
Customer LTV / paid CAC
Net working capital as % of change sales
Burn rate / runway
Example: Bonobos
Advertising
Total visits (if applicable)
Page views (if applicable)
Unique visitors (if applicable)
Minutes per session
Daily active users (DAU)
Monthly active users (MAU)
Percent logged-in
Downloads / installs (if applicable)
Mobile usage share
Impressions per user
Average cost-per-impression (CPM)
Average click-through-rate (CTR)
Revenue
Revenue CMGR
User retention
User LTV / paid CAC
Burn rate / runway
Example: Twitter
Hardware
Total units sold
Average unit price
Revenue
Revenue CMGR
Gross margin
Average transaction value
Customer LTV / paid CAC
Net working capital as % of change in sales
Burn rate / runway
Example: GoPro
Moonshots / Hard Tech / Biotech
Technical milestones accomplished
Total subject matter experts (FTEs)
Net working capital as % of change sales
Burn rate / runway
Example: Boom Supersonic
It’s most important to demonstrate that you’ve made progress towards reducing these 3 risks:
Technical risk - does the technology work?
Market risk - will people pay for this?
Execution risk - can you accomplish hard things?
Your focus here is to show that you’ve de-risked these 3 facets. This looks different for every company, but examples of how to do so include accomplishing key technical milestones or signing LOIs, pilots or contracts.
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13 Pieces of Advice for Startups | Paul Graham, founder of YCombinator
One of the things I always tell startups is a principle I learned from Paul Buchheit: it's better to make a few people really happy than to make a lot of people semi-happy. I was saying recently to a reporter that if I could only tell startups 10 things, this would be one of them. Then I thought: what would the other 9 be?
When I made the list there turned out to be 13:
1. Pick good cofounders.
Cofounders are for a startup what location is for real estate. You can change anything about a house except where it is. In a startup you can change your idea easily, but changing your cofounders is hard. [1] And the success of a startup is almost always a function of its founders.
2. Launch fast.
The reason to launch fast is not so much that it's critical to get your product to market early, but that you haven't really started working on it till you've launched. Launching teaches you what you should have been building. Till you know that you're wasting your time. So the main value of whatever you launch with is as a pretext for engaging users.
3. Let your idea evolve.
This is the second half of launching fast. Launch fast and iterate. It's a big mistake to treat a startup as if it were merely a matter of implementing some brilliant initial idea. As in an essay, most of the ideas appear in the implementing.
4. Understand your users.
You can envision the wealth created by a startup as a rectangle, where one side is the number of users and the other is how much you improve their lives. [2] The second dimension is the one you have most control over. And indeed, the growth in the first will be driven by how well you do in the second. As in science, the hard part is not answering questions but asking them: the hard part is seeing something new that users lack. The better you understand them the better the odds of doing that. That's why so many successful startups make something the founders needed.
5. Better to make a few users love you than a lot ambivalent.
Ideally you want to make large numbers of users love you, but you can't expect to hit that right away. Initially you have to choose between satisfying all the needs of a subset of potential users, or satisfying a subset of the needs of all potential users. Take the first. It's easier to expand userwise than satisfactionwise. And perhaps more importantly, it's harder to lie to yourself. If you think you're 85% of the way to a great product, how do you know it's not 70%? Or 10%? Whereas it's easy to know how many users you have.
6. Offer surprisingly good customer service.
Customers are used to being maltreated. Most of the companies they deal with are quasi-monopolies that get away with atrocious customer service. Your own ideas about what's possible have been unconsciously lowered by such experiences. Try making your customer service not merely good, but surprisingly good. Go out of your way to make people happy. They'll be overwhelmed; you'll see. In the earliest stages of a startup, it pays to offer customer service on a level that wouldn't scale, because it's a way of learning about your users.
7. You make what you measure.
I learned this one from Joe Kraus. [3] Merely measuring something has an uncanny tendency to improve it. If you want to make your user numbers go up, put a big piece of paper on your wall and every day plot the number of users. You'll be delighted when it goes up and disappointed when it goes down. Pretty soon you'll start noticing what makes the number go up, and you'll start to do more of that. Corollary: be careful what you measure.
8. Spend little.
I can't emphasize enough how important it is for a startup to be cheap. Most startups fail before they make something people want, and the most common form of failure is running out of money. So being cheap is (almost) interchangeable with iterating rapidly. [4] But it's more than that. A culture of cheapness keeps companies young in something like the way exercise keeps people young.
9. Get ramen profitable.
"Ramen profitable" means a startup makes just enough to pay the founders' living expenses. It's not rapid prototyping for business models (though it can be), but more a way of hacking the investment process. Once you cross over into ramen profitable, it completely changes your relationship with investors. It's also great for morale.
10. Avoid distractions.
Nothing kills startups like distractions. The worst type are those that pay money: day jobs, consulting, profitable side-projects. The startup may have more long-term potential, but you'll always interrupt working on it to answer calls from people paying you now. Paradoxically, fundraising is this type of distraction, so try to minimize that too.
11. Don't get demoralized.
Though the immediate cause of death in a startup tends to be running out of money, the underlying cause is usually lack of focus. Either the company is run by stupid people (which can't be fixed with advice) or the people are smart but got demoralized. Starting a startup is a huge moral weight. Understand this and make a conscious effort not to be ground down by it, just as you'd be careful to bend at the knees when picking up a heavy box.
12. Don't give up.
Even if you get demoralized, don't give up. You can get surprisingly far by just not giving up. This isn't true in all fields. There are a lot of people who couldn't become good mathematicians no matter how long they persisted. But startups aren't like that. Sheer effort is usually enough, so long as you keep morphing your idea.
13. Deals fall through.
One of the most useful skills we learned from Viaweb was not getting our hopes up. We probably had 20 deals of various types fall through. After the first 10 or so we learned to treat deals as background processes that we should ignore till they terminated. It's very dangerous to morale to start to depend on deals closing, not just because they so often don't, but because it makes them less likely to.
Having gotten it down to 13 sentences, I asked myself which I'd choose if I could only keep one.
Understand your users. That's the key. The essential task in a startup is to create wealth; the dimension of wealth you have most control over is how much you improve users' lives; and the hardest part of that is knowing what to make for them. Once you know what to make, it's mere effort to make it, and most decent hackers are capable of that.
Understanding your users is part of half the principles in this list. That's the reason to launch early, to understand your users. Evolving your idea is the embodiment of understanding your users. Understanding your users well will tend to push you toward making something that makes a few people deeply happy. The most important reason for having surprisingly good customer service is that it helps you understand your users. And understanding your users will even ensure your morale, because when everything else is collapsing around you, having just ten users who love you will keep you going.
(Source: Paul Graham Blog from Feb 2009)
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You can’t be in the shop reinventing the wheel when you need to be out in the field turning it
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UX Resource Guide
(Link: A comprehensive list of UX design methods & deliverables)
Includes:
Service Blueprint
Personas
Ecosystem Map
Competitive Audit
Value Proposition
Stakeholders Interviews
KPIs
Brainstorming
Moodboards
Storyboards
User Flow
Task Analysis
Taxonomies
Content Audit
Heuristic Analysis
Sitemap
Product/Feature Roadmap
Use Cases & Scenarios
Metrics Analysis
User Interviews & Focus Groups
Quantitative Surveys
Usability Testing
Card Sorting
A/B Test
Eyetracking
Accessibility Analysis
Sketches
Wireframes
Prototypes
Pattern Libraries & Design Systems
Diary Studies
Mental Models
Design Sprints
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Inflation and the problem with governments printing money | Peter Schiff
youtube
The real economic problem we are going to face is inflation. Inflation should be the most important factor when coming up with an investment strategy for the next 10 years. We have to consider what inflation will do to asset prices, and consumer prices.
Inflation boils down to being a form of tax.
Governments have 2 ways to pay for their expenditures. One is taxes, but this doesn't get pushed because there is a group of voters who pays taxes but don’t benefit from the programs and the people who do benefit don’t pay much in taxes. So governments don’t want to upset the people who do pay taxes.
The other way is borrowing money from a private lender. This is the US Treasury Bond, where private citizens or corporations purchase a US Treasury Bond and get paid an interest for loaning their money to the government. The government gets money to pay for the bond holders and private lenders through the taxation of future generations. They are just delaying the collection of taxes. In the meantime, the taxpayers of today have to pay the interest on the bonds until the government collects future taxes.
When the government pays for spending programs by borrowing more money, the taxpayers are on the hook for a greater cost. Now they have to pay back the principal plus all the interest. So this government debt is going to balloon to be much larger.
However, now it is impossible to borrow money from private lenders because interest rates are too low for investors to want to invest in US Treasury Bonds. Repaying all of the US debt is impossible because the principal is so large that even at normal interest rates it wouldn’t be able to cover the cost of interest.
Obama added more debt than all other presidents combined in his 8 year run. Trump added more debt than Obama in his 4 year run.
So now the government is financing it’s expenses through inflation. The government issues debt, then the federal reserve buys the debt (bond purchasing programs). But it has to expand the money supply so it can buy those bonds. In private lending, the government is borrowing real money from its lenders and then lending it to someone else to spend. . The person who lent the money can’t spend it. However, in the current environment, the federal reserve is printing money that it then lends to the government by buying government bonds. So the government is giving away new money to other people, by printing new money and borrowing from itself. The government is double dipping.
This would be impossible in normal situations because you can’t lend a dollar out while spending that same dollar. The lenders purchasing power and standard of living is diminished because they can no longer spend the money that they loaned out. But when the government still lends money out to someone else without collecting any money (by raising taxes), it hasn't diminished anybody’s purchasing power. So now you have two people with money looking to buy things, which in turn means there’s more competition to buy things and prices go up. “Too much money, chasing too little goods.” Instead of the government taking your money, the government takes the purchasing power of your money and that is a form of tax because now your money is worth less.
The old model was “borrow and spend,” but now it is “print and spend.” This is where we get into Modern Monetary Theory.
In the old system, people would either work to produce a good or a service and they would be compensated for that work. They would then go out and spend that money. In the modern system, you have people sitting at home, collecting cheques that haven’t produced anything and haven’t put anything into the economy yet they have purchasing power and can still be consumers without being producers. In one system, you are consuming goods and services but also in turn helping to produce them. In the other, you are creating consumers but no producers and in turn you have “more money chasing a diminished supply of goods.”
Capitalism creates progress by decreasing the cost of goods through innovation, and being more efficient and productive. Cost of production goes down, prices go down and demand goes up. So it is falling prices that creates a higher standard of living by creating a cheaper standard of living. Inflation prevents this. It not only creates higher prices but also prevents the cost of goods from decreasing. This is a form of tax.
Part of this inflation has moved into the asset market, like stocks, real estate, collectables and nobody complains when these go up and the people who own these asset classes love it. However, if you don’t own these asset classes, it can be difficult to buy them. So the government keeps interest rates low to artificially make these assets more affordable by allowing people to borrow more for less and driving these prices up even further.
The government is going to get their cut through inflation instead of through taxes. We were told that deflation would happen during the pandemic, however, inflation has been continuously occurring throughout the last few decades.
The current monetary policy of printing money is designed to protect the government and not the economy or its people.
Countries are printing more money while factories are shutting down, and supply chains were disrupted because there was no product to produce in these shut down factories. Pandemic increased demand (through monetary policy) and decreased supply through lockdowns.
Countries should have cut government spending instead of printing more because it would have decreased the burden on the economy. Governments produce nothing, but they are consumers. They live off the productivity of the private sector (taxes and bonds). If the private sector is struggling, it needs to cut back and reduce demand. Government spending creates more demand on the economy. They give money to other people through infrastructure projects and jobs.
How do you invest in an era of hyperinflation?
You have to go back to the 2000’s (dot com bubble) and 2010’s (real estate bubble) or back to the 1970’s and use that as a playbook to when the government was printing money. In these cases the US dollar was decreasing in value, oil prices went up, commodities and industrial metals went up and all these things are currently getting more expensive. Emerging markets went up 400 to 500%, foreign currencies increased. What stopped the bleeding in the 70’s was Ronald Reagan coming in and increasing the interest rate to 20%. The US currently can’t afford interest rates at 1%. However in the 80’s, the US was the world’s largest creditor nation, now it is the largest debtor. In the 80’s they had trade surpluses, now they have massive trade deficits.
Peter Schiff thinks the dollar is going to not only decline, but collapse and the next decade will not be a financial crisis but a dollar crisis, so he believes you should get out of US bonds, assets and stocks. If US companies are earning in US dollars and the dollar collapses and taxes increase this could be a bad situation for them. However, on the other end, as the US dollar decreases and countries who borrowed the US dollar, their debts are going to decrease as the dollar falls. Standard of living will fall in the US, while the standard of living will increase in other nations as foreigners. As the dollar decreases and foreign currencies increase, foreigners can consume more while Americans must consume less. For this reason you want to invest in businesses that can profit and sell to wealthy foreign consumers. Countries that have less government regulations, freer markets, less taxes, and more economic freedom will do better. Most of these countries are in Asia, where there is less government, biggest trade surpluses, lower regulation, better demographics and you have a population that is more self-sufficient and less reliant on government intervention. These countries will also have their exports go up as the cost of servicing their debt decreases with the US dollar.
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How to be less distracted with Nir Eyal | Harvard Business Review Ideacast Podcast
Addiction is different from habit but it is important to learn how to use habit forming technology to make our lives better while knowing how these tools are built so we don’t become addicted.
Most people believe the opposite of distraction is focus, however it is actually traction. Traction is any action that pulls you towards what you want to do with your time. Things you want to do with intent.
Why do we get distracted
This is an age-old question. Socrates and Aristotle called it akrasia. The tendency to do things against our better interest.
When asked why we do the things we do, most people will give an answer around the pursuit of pleasure and the avoidance of pain, (aka Freud’s pleasure principle). However, neurologically speaking when we feel some sort of discomfort, the brain prompts us to act, and fix that uncomfortableness. This is called a homeostatic response. Ex. When we're lonely, we check Facebook. When we feel uncertain, we google. When we're bored we check Instagram or stocks. These tools were built to cater to an uncomfortable sensation. This is known as an internal trigger.
The first step is to acknowledge that all human behaviour is driven by a desire to escape discomfort, which means time management is pain management. The difference is that now, it is easier to get distracted than ever before because of the persuasive and pervasive nature of technology.
Shamers and Blamers
Most people fall into two categories. Blamers, blame technology, companies, and think that they are being manipulated. Shamers, shame themselves and think that it’s their short attention span, or addictive personality. However, neither of these are true. The real answer is that these are behaviours that we can change if we implement four tactics.
4 pillars to become indistractable.
Master your internal triggers
Make time for traction
Hack back the external triggers.
Prevent distraction with pacts.
Master your internal triggers
First we need to recognize that our internal triggers are normal. What we need to do is, learn how to cope with those uncomfortable sensations in a way that leads us towards traction as opposed to distraction.
We can do this through 3 methods.
Reimagining the trigger.
Reimagining the tasks.
Reimagining our temperament.
Master your Internal triggers
One technique he learned from acceptance and commitment therapy is to simply acknowledge the sensation. If you can find the emotion that triggers the distraction you can correct the behaviour. Did you check your phone because you’re feeling anxious, fearful, uncertain, or lonely? Write down the sensation that led to the trigger without any judgement. Next you want to feel that sensation with curiosity instead of contempt. We tend to beat ourselves up when we get distracted but studies show that this makes the problem worse because then we spend time kicking ourselves for getting distracted.
Surfing the urge / the 10 minute rule
Ask yourself why don’t I want to do this? What is difficult about this? Is it boring? Write down and explore that feeling with curiosity by setting a timer for ten minutes on your phone and just sitting with that feeling. This is called surfing the urge or the 10 minute rule.
From acceptance and commitment therapy we know that these uncomfortable sensations subside much quicker than we think. In those 10 minutes, we can either get back to our task or sit with the sensation and at the end of those 10 minutes we give into whatever it is we want to do, the distraction or the task.
This is not about abstinence, it is about acknowledging that you can do that thing that you want to do, in 10 mins. Becoming conscious of these sensations for just 10 minutes and surfing the urge, can cause the sensation to subside 9 out of 10 times.
Make time for traction with a timebox calendar
Making a to do list is not good enough. To do lists are outputs of what we want to do. Our input is our time, so we need to budget the time needed to do everything on our to do list. First step is putting it on the list, second is deciding when you are going to do that task. This is called a timebox calendar.
Schedule syncing
You now take your time box calendar to your boss and say “This is what I have to do this week. Does this look correct? Are my priorities correct? Ok but you asked me to do these 6 other things but since my schedule is full, which one should i swap out? What is more of a priority?” This changes the work practise of dumping work on you and taking your work home with you. When we are hired we make a pact saying we will work this many hours, for this much pay. It’s not fair when our work expands outside of our working hours. Some jobs are exceptions where 60 to 80 hours are the expectations like Wall Street.
Understanding and prioritizing your values
First you need to take care of yourself. You can’t help anybody if you are not well. You need to look at your calendar and ask how much time do I need to take care of myself? To have sufficient sleep, cook healthy meals, workout?
Then we need to ask ourselves how much time do we need for the things that are a part of life, like commuting.
Then, we need to book time for relationships with friends and families.
Lastly, we want to schedule our work. It’s important to have time for tasks like emails but also equally important to factor in time for reflective work.
Hack back the external triggers
First you must differentiate between good external triggers and bad external triggers. Good ones are things that prompt you to do things you wanted to do such as your alarm clock telling you it's time to go to the gym (traction). A bad one is something that prompts you to do something you didn’t want to do (distraction). It's about carving out time in your day to do things you really wanted to do. These companies are using psychology to hack your attention and you have to hack it back. (⅔ of people don’t change the notification setting on their phone.)
Prevent distractions with pacts
The trick to a pact is to pre commit to doing something now, so that we don’t get distracted in the future. Ex. A RRSP or 401(k) is a retirement account with penalties for withdrawing funds early.
In order to get to bed in time, Nir and his wife bought an outlet timer that shuts off what is plugged into it at a certain time. So at 10pm, the internet shuts off in his house so he can stop checking emails or doing work. Going to sleep and taking care of his body is one of his values.
A price pact is when you attach a cost to not doing something you wanted to do.
An identity pact is when people form a particular identity around a certain behavior set, then that behaviour becomes much easier to do. This is from research around the psychology of religion. A devout muslim is not going say “ I wonder if I should try beer today?” because not drinking alcohol is a part of their identity. This act doesn’t require any contemplation or self-control.
Workplace culture and constant responsiveness to messages
People often blame technology for distraction issues but sometimes it could be the workplace culture. Slack is often cited as a leading culprit, as the largest group chat app. However, if you go to the Slack HQ, it's empty at 6pm, nights and weekends. Distraction doesn't happen at companies with a healthy workplace culture. Distraction is a problem, however not talking about it, could be a bigger workplace environment or culture problem.
Healthy workplace cultures have three traits in common.
They give employees a sense of psychological safety. Meaning, you can air concerns without fear of retribution.
They have a forum for employees to discuss issues, questions and concerns. Ex. Slack has a channel called Beef Tweets where people can air their beef with a company. Employees will air their frustrations and employee management will use the eyes emoji to to acknowledge that their concern has been seen and something is being done.
The management team uses the same indistractable practises. They not only talk the talk, but walk the walk. They get employees to shut off their devices because their devices are shut off.
BIG TAKEAWAY: DISTRACTION IS A SYMPTOM OF CULTURAL DYSFUNCTION, BUT CULTURE CAN CHANGE.
(Source: HBR Ideacast Podcast: How To Be Less Distracted w. Nir Eyal)
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What makes Elon Musk so great?
youtube
“An ability to think at a systems level of design. Pull together business, design and technology at a systems level and synthesize it, into one package and feel confident enough in this package to take big risks.”
Elon’s Advice
Adopt a physics approach to solving problems (first principals thinking).
Pay attention to negative feedback and look for it.
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Bill Ackman | The Knowledge Project #82
youtube
Only adds 1 or 2 ideas a year, which gives them the advantage of spending more time doing research than other investors but they only do the research that is necessary to determine that the investment makes sense in their portfolio. This could be a few hours like their short hedge during the March 2020 crash.
Process for Investments
Their investment strategy starts with a framework of what they’re looking for. The most important thing they look for is a high quality business and a business where they can predict cash flow with a high degree of confidence. They define this as a simple, predictable, free cash flow generative business.
The reason for this methodology is the value of a financial asset isn’t the present value of the business. It is the cash that you can take out of it over its life and particularly in a low interest rate environment, you need to be able to predict the cash flows for many years in order to figure out approximately what the business is worth. And for many companies, their business is so complex that it becomes difficult to predict what they will be making 3 years out, let alone 50 years out.
So they look for
Simplicity
Durability, and
Predictability.
Starbucks Example
In Starbucks what they saw was a simple, predictable, free cash flow business that they could understand. This met the first criteria.
People have their coffee habit and it's a habit that people don't like to break so they can confidently say Starbucks built a business around durability, the second criteria.
They get very high returns on every store that they build. The benefit of the restaurant business is once you understand the economics of one box and you have a company that built thousands of stores over time, it becomes more predictable and easier to understand what that business will look like over a very long period of time.
And so Starbucks met the business quality threshold and then the next most relevant consideration is price
What matters here is that there's a wide gap between price and value. And so once we understood the business and we could model the business, we could look at where it was trading and compare those two. And at the time of our investment, there was uncertainty because the recent same store sales had flattened. And this was a company that had delivered consistent sort of mid single digit same store sales over a very long period of time. And so where they spend most of their time was figuring out was this a blip or was it a reason for concern.
They don’t focus on returns quarter to quarter but rather what is this company worth over the life of the business. Markets generally overact to short term information and noise because many stocks are traded on the basis of short term investors trying to predict which direction the stock’s going in the next quarter. These short term focused predictions can lead to crazy prices.
Because of the same store sales flattening, Starbucks at the time was trading as if their fundamental business had changed and in Ackman’s opinion Starbucks was taking the right steps to address their performance issues. In their eyes, Starbucks had a lot of opportunity for growth and they were focusing on becoming a better, more focused company.
Pershing Square’s usual strategy was to figure out what a company had done wrong, buy a stake in the company and recommend changes. This strategy known as activist investing, made the core of their business. But in Starbucks’ case they were already doing the things they would have recommended.
Time Arbitrage
A big part of Ackman’s competitive advantage is that 85% of their capital in the US comes from a public company and so they can plan their investments over a very long period of time. The issues that investment funds run into is that they give their investors daily, monthly, or quarterly liquidity. Having permanent access to a very large % of their capital allows Ackman to make long term decisions and that means that time arbitrage is a big part of their advantage.
Private companies have stayed private for too long
Ackman doesn't rely on the valuations of venture backed companies. Investment firms like Softbank have done these companies a disservice by allowing them to stay private.
WeWork is a great example of when founders become godlike figures who are handed control by venture partners. These founders may be talented entrepreneurs but when a business gets to a stage past the initial start up phase it needs more professional management but that transition is difficult to make happen in private companies. So Softbank giving them a bunch of money does these companies a disservice. Ackman believes WeWork was not an anomaly but the norm.
Benefits of disclosure in public markets
Public companies are forced to report on a quarterly basis because of the SEC. Most public companies have also adopted a quarterly conference call where investors can ask the management questions which allows for a lot of transparency. Everyone no matter how many shares you own has access to the same information.
Problems with Venture Funds
Venture funds especially those that invest in start ups tend to be small and with the short life expectancies of companies you can’t know how well a VC fund is doing until they sell the business or it goes public. Because of their small nature, founders also can’t make a living off the funds so they need to markup their portfolios to show progress and convince more investors to give them their money. This encourages certain behaviours that where investors in different stages experience different rights and where later stage investors may get preferential rights over early stage investors. You also can’t short these funds.
Shorting the market during COVID
Ackman became more and more concerned that the government was not taking the virus seriously and when nobody was saying anything, he decided to voice his strategy of temporarily shutting down the country. This tweet went viral and he got a call from CNBC. The next after the interview, California shut down. Then New York, the day after.
Timeline of events (Interview was done on April 13th)
Ackman put the hedge on (shorted the market) around the 3rd week of February. By March 12th, the hedge had gone from being worth nothing to being worth $2.7 billion with the markets down about 25%. At this point they decided to take profits in case the government takes the right steps and markets recover. They started selling the hedge and started aggressively buying stocks on the 12th. They invested $2.05 billion on March 12 at 12:30 in the stock market, buying additions, and adding to their portfolio. They had sold half the hedge for $1.3 billion. And so they were $3.05 billion more long stocks, if you will, than we were on March 11th. This was a firm with total assets of about $7.5 billion. By this time they had no short positions, since his original short was a hedge and the rest of his positions were long.
He went on CNBC at 12:30 on the 18th to give a very bullish message, which was, “look, I think markets are going to soar. The virus is a really simple solution, stopping the virus. It's locked down the country for 30 days to kill off the virus and carefully continue to practice social distancing. But the stock market's a discounting machine. It will look forward. And as soon as we do this, the markets will recover. And that's why we're buying stocks..
Why he hedged
Looking at China and how they dealt with the pandemic by shutting down. Then looking at Europe with Italy and Spain shutting down, the only solution seemed to be to shut down the country. Which meant eventually America would take the same approach. Instead of selling everything and taking a big risk, hedging is a cheaper way of mitigating risk, while offering the potential for a big return. Selling everything would have also damaged the relationships they built the companies they invested in or were board members by sending a sign that they had lost faith in them.
People he looks up to
Joe Steinberg and Ian Cumming who run Leucadia National Corporation
Muddy Waters, a successful short selling fund
On Buffett and Berkshire
Berkshire is really an insurance company. Half of its real intrinsic value comes from an insurance company that Buffett bought in the 1960’s called National Indemnity for around $18 million. For certain types of insurance Berkshire is the only option especially in Omaha, so Buffett was able to build a moat or a monopoly around the insurance business where he could structure the business the way he wanted. Instead of investing the insurance float in risk-free or high rated corporate bonds like most insurance companies, Buffett was able to invest in equities. In low interest environments where bonds are essentially worthless, Buffet has a huge competitive advantage due to his exposure to equities. Most insurance companies lose money on insurance and make money on the float. Buffett on the other hand has made money on both sides at a high single digital return (around 8%).
The rest of Berkshire is made up of wholly owned or 80% ownership in businesses like Burlington Northern Railroad, Precision Castparts, that are stable, durable businesses. However, even Buffet makes mistakes like with encyclopaedias or shoes, but his wins make his mistakes become smaller and smaller.
Buffett's approach to business is very hands off. This is changing with the next generation of Berkshire investors, as Buffett's business seem to be underperforming their competitors.
What he learned from Buffett
Ackman actively studied everything Buffett wrote.
When Buffett came to speak when Ackman was at Harvard he said
“If you want to be successful, all you need to do is look around the room and think about the classmate or classmates you most admire and what qualities they have and just decide to adopt those qualities and if you do that, your chances of being successful go up enormously.”
You may not wake up and be the greatest at what you do but the little things that define your character and qualities matter. Things like working hard, discipline, returning phone calls promptly after you receive them, showing up to meetings on time, being honest and straightforward, fair mindedness, are things you can wake up and have tomorrow. Those are mindsets.
Buffett started as a very hands on activist investor in the 50’s. He charged a 25% incentive fee over a 6% return. After 15 years, and $100 million under management, with $25 million of his own capital, he wrote a letter to his investors essentially saying you can take your money or get stock in this mediocre textile company and I will take stock in this company but I will be less active going forward. He also gave up 25% of the cut of profits and took a 100k salary instead. But most importantly, what he got was stability and permanency of capital, and that was one of the most influential and important lessons Ackman took from Buffett.
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List of Free Illustrative Stock Graphics
https://storyset.com/
https://www.humaaans.com/
https://icons8.com/illustrations
https://stubborn.fun/
https://www.ls.graphics/
https://undraw.co/illustrations
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4 ingredients to great product design | John Maeda
Based on Samin Nostrat’s book and framework for cooking anything based on 4 key components Salt, Fat, Acid, Heat, John Maeda came up with LEAD as a recipe for great product design.
LEAD stands for Light, Ethical, Accessible, and Dataful.
The idea is that, in addition to providing a compelling narrative, the product better be fast; it better be easy to use; ideally it’s ethical and keeps privacy in mind; and it should use data to iterate.
“I have defined four ingredients of an important experience. First: light and quick. That’s salt. It’s so essential. When you don’t have it, an experience doesn’t taste like anything. Because you won’t want to try it.
The traditional fat to an experience was “make it pretty,” “make it distinctive,” “make it wow.” It’s like bacon fat. Bacon’s not good anymore, although it tastes amazing. It’s a bad fat. What’s an avocado-equivalent of fat? It’s fat that embodies the second ingredient of a modern experience: ethical and conscious. Millennials and Gen Z ask questions about what they buy, and not just as a story, but how it’s made. AI can easily automate unethical behavior in the data that it creates and uses. Early face-recognition systems identified people with darker skin as gorillas because it used an AI/ML system that was only trained with face data from people with light skin. From a business perspective, that’s an incredible PR risk. It’s also a retention risk for the employees of those companies. There’s a dollar value to making such a mistake—if you miss the ingredient of ethics, there’s a penalty to pay.
The third ingredient, the acid, is being accessible and open. If you have a service out there that’s not ADA-compliant, you’re at risk of litigation. If you’re even the leader in the category like Domino's, you’ll still get sued. I’d be worried if I was Papa John’s, because Dominoes is going to get even better at being accessible as a result. If you’re the most accessible, you’re the most openly useful to more people. So you grow your market size from 1 million to 1.5 million by being accessible and open. It’s a good business strategy.
What’s the heat equivalent of a great experience? We like to say something is beautiful. “That’s so beautiful, Barbara.” I want us to own the word “dataful.” If it’s dataful, it means you can leverage an iterative, agile process where you let the data influence product development, and you iterate on it.
So the four ingredients are: light, ethics, accessible, dataful. Cooking experiences with just these four ingredients let you succeed in the era of computational thinking, at a time where we all need to know how to speak machine. The four ingredients let you make products that live at exponential speeds. And it’s the norm right now. Publicis Sapient was born digital. We know that if we’re going to deliver an experience that it can’t just be more beautiful than everybody else. It can’t compete just on beauty or traditional design attributes. It needs to be dataful, not just beautiful. So you need to have these four ingredients which all influence how to do design combined with engineering, and can fully leverage the power of computation.
Having those ingredients, what does the meal look like? It looks like a combination of the best of Amazon (the expert of dataful commerce), Apple (the expert of accessible experiences), Microsoft (the expert of ethical AI) and Google (the expert of lightness)—it ultimately means being able to compete with big tech.”
Apple invested in its privacy campaign, for instance. And Google isolated speed as a secret ingredient.
(Source: Publicis Sapient)
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Building humour and characters through animation | Chuck Jones
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Chuck Jones was a director for the Looney Tunes and a master of visual comedy. Worked on Looney Tunes for Warner Brothers.
Known for his jokes which can be broken down into a two part structure. The first part leads you to make an assumption. The second part proves your assumption wrong. Simplified into an assumption and reality. Ex. Squirrel tries to open a coconut with a rock, instead the rock breaks.
However, the jokes were only good because of the long process that went into character development.
“All characters are a process of learning. It’s hard for people to understand when they watch actors to realize with actors, they come with an ability to play another part. But with a drawing, all you have is the drawing. You have to put in the character.”
First iterations of Duffy Duck were of a wild, crazy character. However, over the years his character changed. The new Duffy Duck was less crazy but we knew want he wanted. He was after glory whether that was through money or fame.
All of Chuck’s characters had a very clear “want.” Pepe Le Pew just wants someone to love. The coyote wants to catch the roadrunner. Once you figure out what a particular character wants, you have to figure out how does this particular character move?
“Every action is dictated by what goes on inside of you. You have to be able think the way the character thinks. If you can’t tell what is happening by the way the character moves, then you are not animating. It helps to have a dialogue but a dialogue isn’t the only thing you need to make it work. The story should sell itself by the way it moves.”
If you know what the character wants and you know how they move to get what they want, you can know build out a more structured joke. The assumption now includes the personality of the character. Ex. We know that Duffy will always pick a fight because it’s part of his desire for glory. However, making great jokes with a well-defined character can lead to a formula that becomes repetitive. To avoid this problem, Chuck uses “discipline.”
Disciplines are the challenges and restrictions you set for yourself. Ex. designing a character with no mouth or a signing frog that can’t talk. Because animation allows you to do anything, you have to focus on what you can’t do and for Chuck, this meant having a lot rules about the world, the characters and their behaviours. Ex. Bug Bunny never picked a fight but would only fight when provoked. He is not a bully, he needed to be provoked, first.
Chuck was known for subtle facial expressions of characters because in a world where anything is possible he focused on minimalism.
“All humor grows from two things. Human behaviour and logic. If it’s not logical is not going to be funny. And if it doesn’t have to do with human behaviour how the hell do you know it’s funny?”
Chuck recommended going and studying life and the real world. Explore other interests, read books, don’t just watch films to learn how to become a better storyteller.
“The only way you can exercise the mind is by bringing new ideas to it.”
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BBH 3 Stages of Planning | Will Humphrey, BBH London (03/04) via Praveen Vaidyanathan
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