Patrick O'Shaughnessy's Blog, page 21
February 14, 2017
Investing In Tiny Stocks, with Ian Cassel – [Invest Like the Best, EP.25]
My guest this week is Ian Cassel, a microcap investor who is always on the lookout for small companies which are run by men and women who are what he calls intelligent fanatics. Ian’s livelihood is based on the success or failure of a small group of companies that you have never hear of—he takes the idea of “skin in the game” to another level. We explore what Ian looks for in managers, why investors might want invest in microcap companies and the benefits of a frugal approach to life. Buying public companies that are as small as the ones which Ian considers is an entirely different style of investing than what most of us are used to in the public markets. Please enjoy!
Books Referenced
Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses
Zero to One: Notes on Startups, or How to Build the Future
How to Win Friends & Influence People
Getting There: A Book of Mentors
100 Baggers: Stocks That Return 100-to-1 and How To Find Them
Links Referenced
Seven Intelligent Fanatics From India
Show Notes
1:53 – (first question) – What is an intelligent fanatic and what drew Ian to it for his career.
2:28 – Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses
4:58 – Why intelligent fanatics is so important to him as a microcap investor
5:32 – Seven Intelligent Fanatics From India
6:00 – What are the most common characteristics shared by intelligent fanatics
7:21 – What drew Ian to microcaps and what unique opportunities does it present
10:52 – What makes this such a fertile but less efficient space to invest in
14:48 – What happens when you buy these small companies with market cap under $50 million
15:51 – What does Ian look for to avoid pitfalls when buying into microcap companies
17:07 – Looking at Ian’s portfolio and the number of stocks and how often he turns them over
18:49 – Exploring the process and characteristics that are important to Ian when choosing a company that he will take a position in
22:43 – How is Ian’s valuation approach different from a systematic strategy to choosing microcaps
25:09 – Ian’s price discipline and when does something become too expensive
26:17 – Does statistical achievement matter
26:40 – What are the reasons to sell a position in a business
29:37 – Does intuition play a large role for Ian when exploring a company
30:32 – Does Ian think about going into the private company space
32:00 – What does the average microcap investor look like and why does Ian not take outside money for his investments
32:40 – MicroCapClub
33:45 – Ian explains how he got started and why he is focused on Microcap investments
37:09 – What was the next step for Ian that led him into analyzing larger microcap investments
40:09 – After landing on Ian’s radar, what does he do in terms of approaching a new business
43:06 – Any industries or companies that Ian actively avoids
44:30 – The formula for what makes a company un-disruptable
45:42 – What are the most common dimensions of an enduring moat
47:58 – What is Ian’s philosophy when it comes to the investment of his time and how frugality plays into it
52:33 – The power of his persistence and luck to be able to do this
54:13 – The most memorable individual day for Ian
55:56 – Kindest thing anyone has ever done for Ian
58:01 – Floats and Moats
58:55 – Some of the publications that have changed the way Ian thinks and acts
59:22 – Zero to One: Notes on Startups, or How to Build the Future
59:45 – How to Win Friends & Influence People
59:54 – Think and Grow Rich
1:01:00 – Getting There: A Book of Mentors
1:01:57 – What company should people go back and look at old company reports to help them understand how things flow
1:03:24 – 100 Baggers: Stocks That Return 100-to-1 and How To Find Them
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on twitter at @patrick_oshag
February 7, 2017
Lessons From Morningstar’s Founder, Joe Mansueto
My guest this week is Joe Mansueto, the founder, longtime CEO, and current executive chairman of Morningstar, Inc. Joe is an entrepreneur at heart. He has the gene for spotting good business ideas and building them out with the customer in mind, so it is no surprise that the story behind Morningstar’s birth and growth is both entertaining and enlightening. While there are many business lessons in this episode, there is just as much to be learned from the way Joe conducts himself. He was kind, welcoming, and humble—you’ll see what I mean. There is something timeless and classic about his journey—I hope you enjoy hearing about it as much as I did.
Books Referenced
Presentation on Moats and Floats
Shoe Dog: A Memoir by the Creator of Nike
The Warburgs: The Twentieth-Century Odyssey of a Remarkable Jewish Family
Titan: The Life of John D. Rockefeller, Sr.
The Everything Store: Jeff Bezos and the Age of Amazon
Let My People Go Surfing: The Education of a Reluctant Businessman, Completely Revised and Updated
The Systems Bible: The Beginner’s Guide to Systems Large and Small
Links Referenced
Moats and Floats by Sanjay Bakshi
Show Notes
2:25 – (first question) – Joe is asked how the book Walden was the inspiration for the name of the company, Morningstar.
2:51 – Walden
4:23 – Looking back at whether Joe returns to Thoreau and ‘Walden’, which has led him to simplify things in his life.
5:36 – If he had to, Joe said he would give every 22-year-old ‘Walden’ to read.
6:37 – Walking
6:45 – Exploring the early parts of Joe’s life, and first business ventures that eventually led him to launch Morningstar
8:52 – When Joe first got interested in investing and how that sparked the idea of compiling investment information
9:09 – The Money Masters
10:47 – Went to get some more real world experience
12:56 – Patrick pushes Joe on his soda selling business that he started in college
14:18 – How a focus on reducing transaction costs can lead to great business ideas and the first product launched by Morningstar
17:17 – The power of floats in launching businesses
17:21 – Presentation on Moats and Floats
19:29 – The Financier
20:55 – Is the ability to identify arbitrage innate or can it be learned
22:40 – What were the principles that were used to maintain the Morningstar brand in the beginning and over the years.
26:17 – What did Joe think about when he was hiring those first few fund managers for Morningstar
28:06 – Exploring Joe’s thoughts on some of the trends in investing, from active to passive management, or from boutique investors to larger mutual fund type companies.
31:06 – The origin of the Morningstar style box
33:55 – A look at Joe’s personal investing styles
35:17 – What is the importance of confidence when it comes to investing in a company and does Joe’s role with Morningstar provide him with added confidence
36:59 – A history of Joe’s roles and views as a capital allocator
40:45 – The benefits of repurchasing stocks
42:27 – Why do companies still favor dividends
43:56 – Exploring Joe’s management style and what has changed over the last 30 years
46:52 – Are there common traits to look for when hiring people
50:14 – Are there any negative screens that Joe wants to avoid when hiring people
51:02 – Favorite recent books/topics that Joe has explored
51:15 – Shoe Dog: A Memoir by the Creator of Nike
51:46 – The Warburgs: The Twentieth-Century Odyssey of a Remarkable Jewish Family
51:50 – Titan: The Life of John D. Rockefeller, Sr.
51:59 – Alexander Hamilton
52:56 – The Everything Store: Jeff Bezos and the Age of Amazon
53:01 – Let My People Go Surfing: The Education of a Reluctant Businessman, Completely Revised and Updated
53:07 – Exploring the darkest moments for Morningstar
55:18 – How does Morningstar foster innovation and not get too comfortable with their success
59:20 – Looking at Joe’s most memorable day at the company
1:02:14 – In what ways has Joe simplified his life through his daily routine
1:04:35 – Joe explains how he became a member of Warren Buffett’s Giving Pledge.
1:06:12 – The importance of being able to say ‘no’.
1:08:22 – The Systems Bible: The Beginner’s Guide to Systems Large and Small
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on twitter at @patrick_oshag
January 31, 2017
Private Equity, Venture Capital, and the Future of Money Management, with Brent Beshore – [Invest Like the Best, EP.22]
Brent Beshore and I spoke for 10 hours about all things investing and business and decided to record a 2-hour chunk of our conversation. We start by discussing private equity, venture capital, and the importance of brand. We then explore the difference between public and private company valuation, and the potent idea of peer mentorship. The conversation wraps up with Brent’s recent experience with one of the greatest investors and thinkers of all time. Above all, this is a conversation about what is right and wrong in the world of money management and investing, and where the business is heading.
Please enjoy!
Books Referenced
Drive: The Surprising Truth About What Motivates Us
The Fish That Ate the Whale: The Life and Times of America’s Banana King
Mountains Beyond Mountains: The Quest of Dr. Paul Farmer, a Man Who Would Cure the World
Links Referenced
Show Notes
2:18 – (first question) – Brent is asked to paint a picture of the private company market and what are some key features of it
4:50 – What does the diligence look like when you get down to examining companies that could be a potential investment target
9:50 – Exploring whether certain moats are more attractive to Brent vs others
12:28 – Can moats be developed ahead of time or do you stumble into them
14:53 – How do you turn around a company and develop huge growth, like a 90% growth rate.
17:14 – It’s hard to run a company
18:40 – Cleaning out the entrenched aspects of a business
22:36 – Drive: The Surprising Truth About What Motivates Us
23:25 – What is good and what makes no sense about the way private equity operates
31:29 – What about venture capital, from the perspective that run venture funds, want to start a venture fund, and from entrepreneurs seeking venture capital.
39:13 – Why being skilled in relationships is such an important trait, in venture capital, and almost anything
40:13 – Wrong and right reasons to get into venture capital
40:50 – Shift to personal brand and the right time to focus on developing it.
47:04 – How branding impacts our expectations from a company
52:30 – When people are pursuing personal brand at the wrong time or for the wrong reason
55:03 – Monetization of and worth of a brand
57:20 – The discovery of Warren Buffet’s brand.
58:46 – Circle back to the top LP investors in venture capital funds
1:04:47 – Looking at some of Brent’s results and how they compare to the alternative options in investing today
1:19:24 – The impact of companies being acquired at what could be exaggerated multiples of their value
1:22:50 – Looking at Brent’s process of learning outside of books and acquiring businesses
1:24:50 – The Fish That Ate the Whale: The Life and Times of America’s Banana King
1:25:18 – An example of an adjustment that Brent has made based on a lesson he’s learned in the past year
1:29:45 – Understanding the importance of empathy and really listening to people
1:30:03 – Eric Maddox podcast episode
1:31:05 – Mountains Beyond Mountains: The Quest of Dr. Paul Farmer, a Man Who Would Cure the World
1:33:45 – Looking at other notable experiences for Brent over the last year
1:36:00 – Brent is asked whether his growth strategy would be better if he looked to outward at landing more deals, or if he should go upward and focus on larger deals
1:39:24 – Companies are just messy people and it’s about finding the least messy people at the top
1:42:58 – Two keys to finding the right deals, ability to scale and ability to withstand lumpiness
1:46:02 – Exploring the problems within the capital raising system
1:51:23 – Brent is asked about his recent experience with Charlie Munger
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on twitter at @patrick_oshag
January 24, 2017
Chasing Curiosity, with Brian Koppelman — [Invest Like the Best, EP.21]
My guest this week is writer, director, producer, and podcast host Brian Koppelman, who’s film credits include ‘Rounders’, ‘Oceans 13’, and ‘Solitary Man’. More recently he co-created the Showtime show, ‘Billions’, which allowed us to have some fun talking about the world of hedge funds and investing. Brian’s method for chasing curiosity is something that everyone can learn apply in their own lives. In this chat, we discuss creativity, the importance of storytelling and why we are all so intrigued by billionaires.
Please enjoy!
Subscribe here:
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Stitcher
Google Play
TuneIn
Books Referenced
What I Talk About When I Talk About Running: A Memoir
Catching the Big Fish: Meditation, Consciousness, and Creativity
Buffett: The Making of an American Capitalist
The Anxiety of Influence: A Theory of Poetry
The Artist’s Way: A Spiritual Path to Higher Creativity
Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism
Let My People Go Surfing: The Education of a Reluctant Businessman
Shoe Dog: A Memoir by the Creator of Nike
Links Referenced
Happy People: A Year in the Taiga
180 Degrees South: Conquerors of the Useless
Show Notes
1:28 – (first question) – Patrick asks Brian if he did TM as soon as he started getting into meditation. The two discuss the benefits of meditation.
2:57 – Looking at other experiences that match the feeling of meditation, which includes a discussion on running and sports
4:06 – What I Talk About When I Talk About Running: A Memoir
4:12 – Couch To 5K
5:57 – Catching the Big Fish: Meditation, Consciousness, and Creativity
6:10 – Looking at how the idea for ‘Solitary Man’ came to be and the creative process that led to it finally getting done
12:30 – Why Brian must be curious about a character’s motivation to write about them
13:20 – Why it can be difficult to stand pat
13:23 – Buffett: The Making of an American Capitalist
14:05 – Exploring the creative process, which requires curiosity and strangeness
14:29 – The Anxiety of Influence: A Theory of Poetry
16:39 – What does Brian do to make it possible to be creative. He discusses routines and the morning pages
16:59 – The Artist’s Way: A Spiritual Path to Higher Creativity
18:51 – How Brian met his writing partner and how David helped him become a successful writer
23:43 – Getting immersed in a subject and how Brian got interested in the topic that led to the Showtime show Billions
26:15 – Interesting discussion on how billionaires are more like nation-states than citizens
28:35 – Exploration of why billionaires are celebrated in the US, even more so than athletes and rock stars
32:48 – How having lots of money can impact the way people relate to you
37:14 – Why so much reverence for billionaires and why they are obsessed with attaining that kind of wealth
40:48 – When people have a passion for something, they seem to be happier in life.
41:22 – Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism
44:48 – Patrick talks about why some carpenters have unmatched happiness in life
46:08 – Happy People: A Year in the Taiga
46:30 – Grizzly Man
46:49 – Why we tell stories and some of the rules that need to be followed
49:48 – Why Brian started his podcast
50:33 – Stories across time are all the same and curiosity is the best way to discover good ones
51:07 – Meru
51:26 – 180 Degrees South: Conquerors of the Useless
51:57 – Let My People Go Surfing: The Education of a Reluctant Businessman
52:04 – Shoe Dog: A Memoir by the Creator of Nike
52:35 – The financier
53:19 – Looking at Brian’s most memorable day
58:30 – Kindest thing anyone has done for Brian
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on twitter at @patrick_oshag
January 17, 2017
Machine Intelligence and Risk Management, with Jeremiah Lowin – [Invest Like the Best, EP.20]
Jeremiah Lowin is probably the smartest guy I know, and that is saying something. He is an expert in the fields of statistics, artificial intelligence, and risk management—among many other things. He is currently the Director of Risk Management for a private investment firm in the New York area, but has spent years working with machine learning and AI. This conversation is broken up into two parts. In the first part, we explore artificial intelligence, machine learning, and models. Then we shift to what risk means in a portfolio and how it can be managed or at least redistributed (which starts around 40 minutes into the conversation).
Please enjoy!
Subscribe here:
Itunes
Stitcher
Google Play
TuneIn
Links Referenced
google’s exploration of machine learning in translation.
A Practical Guide to Training Restricted Boltzmann Machines
Show Notes
2:19 – (first question) – Looking at Jeremiah’s background and how he got started in a place where he could work in artificial intelligence
4:43 – The first exposure to necessary approximations and how that led to building models
6:10 – His time at Amaranth and how that led him to getting an advanced degree
8:35 – How does machine learning relates back to the simplest of models and where it goes from there.
10:50 – How does machine learning help break down data sets more quickly
13:35 – Explaining this concept with the example of google’s exploration of machine learning in translation.
16:30 – Google has had a huge leap in accuracy as they had time into their models and a recurring neural network
18:01 – The creation of the Lowin Data Company, what they do, and what has worked for them
21:01 – The Chinese Room Argument (John Searle)
22:19 – The Turing Test
22:55 – What will all this machine learning mean in terms of replacing jobs in society
26:27 – What are the jobs that will tough to replace with a machine
28:02 – Cultivating relationships and the movie Her
29:46 – Why AI machines aren’t intelligent
32:39 – Defining intelligence in machines as possible decision making or leaps of intuition
33:30 – Could discovery by a machine be the sign of intelligence in machines
35:55 – What can we learn from the findings of Lowin Data Company that can be applied to our own ability to learn and improve ourselves
38:35 – What led Jeremiah to start Lowin Data
Geoffrey Hinton – A Practical Guide to Training Restricted Boltzmann Machines
41:17 – Jeremiah’s working definition of risk
44:34 – The tenements of risk management
46:22 – A big part of risk management is shifting the distribution around
49:59 – How much of this is quantitative vs qualitative
53:14 – Why one of the most important skills in risk management is uncovering unknown unknowns and how Jeremiah applies this in his day-to-day job
56:58 – Getting information out of a closed system
59:59 – How often did Jeremiah’s involvement in a portfolio have a major impact on the decisions that were made
1:02:13 – What are the dimensions that Jeremiah plots out in his 3D graph that he uses to analyze a portfolio
1:05:15 – Where does Jeremiah fall when it comes to a simple index portfolio verse a more active portfolio
1:08:23 – What has driven the change that has led people away from active managed funds
1:11:01 – Has anything changed internally among hedge fund managers that could lead to a shift towards more passively managed funds
1:14:11 – Will artificial intelligence based tools become a bigger part of the investing process going forward?
1:17:52 – Looking at Jeremiah’s most memorable day
1:20:36 – Kindest thing anyone has ever done for Jeremiah
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on twitter at @patrick_oshag
January 10, 2017
Watching a Venture Fund at Work, with Lauren Loktev, Kanyi Maqubela, & Craig Shapiro [Invest Like the Best, EP.19]
This week’s episode features the partners of the Collaborative Fund, a venture-capital firm based in New York City. This is a unique, group interview with Lauren Loktev, Kanyi Maqubela, and Craig Shapiro that explores all aspects of their search and investing process, including how they identify thematic change in the world and then build a portfolio around those themes. The quality of a team is crucial to success in investing and this is a great example of a team with chemistry on a singular mission. They all offer great advice on how to operate a business, build a team, and find interesting new investments.
Also, stay tuned to the end for a bonus segment captured while the tape was still rolling.
Subscribe here:
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Please enjoy!
Links Referenced
Show Notes
2:28 – (first question) – Start by exploring Lauren’s background and how that impacts her world view.
5:11 – Does Lauren have a specialty in sustainability, clean-energy, clean-technology investments because of her interest or location.
6:15 – Kanyi goes through his background
7:51 – Kanyi talks about his parents coming to this country as a refugee and why education is so important to him
9:02 – How education is an important theme to Collaborative Fund
9:49 – Exploring a day in the life of a venture capitalist
12:21 – How do venture capitalists look at valuation
15:45 – Craig says the market helps to drive valuation
19:26 – The impact of high valuations early on for both successful and non-successful companies
20:33 – How do you know when a company is worthy
21:14 – Brand is a huge part
22:11 – Simply Gum
23:45 – Some of the factors that helped them invest in a company and what gave them the edge
24:31 – Lauren talks about one of her recent interests – Osmo – Kids toy company
28:02 – How does competition play into their decisions
33:39 – Kanyi talks about one of his recent investments and how we went about it.
35:18 – Exploring the pre-product market fit
37:28 – Rapid learning is important to venture, but it’s also something they look for in potential investment targets
40:19 – Advice for any entrepreneurs/founders
45:05 – What are the dimensions of brand that make it so important to a company
50:00 – Looking at Lauren and Kanyi’s most memorable day. (You can find Craig’s in his previous episode)
55:03 – What is the kindest thing anyone has ever done for Lauren and Kanyi
57:58 (BONUS SEGMENT) – A look at a research paper discussing the declines in IPO’s and the fact that there is about half as many publicly traded companies as there were several decades ago.
1:01:47 – Is the IPO process and liquidity a necessary step in a company’s life cycle
1:04:55 – A look at The Long-Term Stock Exchange (LTSE) and how it could help the market for publicly traded companies
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on twitter at @patrick_oshag
January 3, 2017
Designing Better Decisions, with Dan Egan [Invest Like the Best, EP.18]
My guest today is Dan Egan, who is the managing director of Behavioral Finance and Investing at Betterment. In this wide-ranging role, Dan has his hands is most of the ways that Betterment interacts with its clients and how it invests their money. This is one very interested and smart guy who is clearly passionate about helping investors make better decisions. In this conversation, we explore everything from science fiction, automation, investor behavior and how Betterment tries to solve problems that goes beyond the automated asset allocation that is their bread and butter.
Please enjoy!
Subscribe here:
Itunes
Stitcher
Google Play
TuneIn
Books Mentioned
The Moral Philosopher And The Moral Life
Stories of Your Life and Others
The One Sentence Persuasion Course – 27 Words to Make the World Do Your Bidding
Links Referenced
Kahneman, Mental Effort, and the Scary Parole Study
Show Notes
2:04 – (first question) – The conversation starts with Dan’s passion for Sci-Fi because the two talked about it at length when they first met at the evidence-based investing conference.
2:41 – Harrison Bergeron
4:31 – What really makes for good sci-fi and some of Dan’s most favorite
4:36 – The Moral Philosopher And The Moral Life
5:39 – Your life and People like You (short stories)
5:49 – Sum: Tales from the Afterlife
8:44 – Ubik
10:30 – What books would identify whether a person is a sci-fi fan
10:47 – Iain M. Banks
11:39 – The Three-Body Problem
12:46 – What does it mean to be a behavioral economist, especially when it comes to the day-to-day tasks
14:11 – Designing systems that make people better investors
15:15 – All of the different areas that Dan influences the Betterment experience
17:03 – The idea of nudges that will help people make better decisions and improvements to the dashboard
19:22 – How does Dan think about nudging people to stop making the same mistakes that are becoming more common as the tools have made trading more accessible
21:33 – One system designed called Tax Impact Preview and how it helps people make better decisions
23:46 – How are these systems delivered to the consumer and help them make a better decision
25:00 – What other ways that Betterment nudges customers to make better decisions
25:02 – The One Sentence Persuasion Course – 27 Words to Make the World Do Your Bidding
27:25 – How Betterment is preparing its customer base and itself for the next downturn
30:48 – Preventing people on Betterment from making the same mistakes that are made in other places
33:45 – Reassuring investors when they log into the site as opposed to emailing them and causing panic
34:39 – Exploring Dan’s philosophy roots
36:44 – How to remove fallible human factors from decision making
38:36 – Kahneman, Mental Effort, and the Scary Parole Study
39:30 – How worried is Dan about automation and the jobs of the world
43:18 – We have to look at how to combat inequality but not as a financial problem, but as a motivation problem
45:00 – Dan’s decision to come to Betterment and the idea of money vs happiness
49:35 – Helping customers design indices for every single individual and every goal
53:25 – What aspect of Betterment’s offering makes it so unique from its competitors
55:45 – How do you scale a company and keep up the hiring of high quality talent
58:45 – Looking at Dan’s most memorable day
1:00:07 – Kindest thing anyone has done for Dan
1:02:48 – What advice would Dan give to students and graduate students interested in getting into the markets
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on twitter at @patrick_oshag
December 30, 2016
The Strain Resolution
The best resolutions are ones which you’ve already started. Growth is addictive. To have tasted a certain type of growth is to want more of it, so in 2017 I am doubling down on what worked best in 2016. To sum up that strategy in a word: strain.
I learned through experience this year that growth and discomfort go hand-in-hand. When faced with almost any choice, I took the harder option whenever I could.
Three stories:
I.
Josh Brown invited me to speak at the evidence based investing conference, on a panel for Smart Beta. Smart Beta is in my wheelhouse, and playing antagonist on the topic is great (but easy) fun. I asked Josh to instead put me one-on-one with Jim Chanos, discussing short selling.
I am not a short seller. Jim Chanos is one of the most (if not the most) successful short-seller of all time, and certainly the most famous. Jim turned out to be the most impressive fundamental investor I’ve met, with an incredible (INCREDIBLE) command of every topic we discussed. And an extremely nice guy. I have already learned a ton from Jim, and hope to learn more in the future.
It was the first time I’d been nervous for a public speaking event since my first one, at age 22. Being nervous is a sign that you made a good decision. I loved every second of it.
II.
Pride is my sin. I think it’s in my genes: generations of stubborn, competitive, contentious, striving Irishmen. I knew ego was an issue, and that it was my biggest weakness (still is). Ego is the mind-killer. I was used to being the guest on other people’s radio shows, TV shows, and podcasts–which meant it was about me. So I launched my own podcast, to make it (as much as possible) about someone else.
On spring break in Cozumel, 2006, I was walking on the beach and saw a girl I had always had my eye on. A little nervously, I walked up behind her and playfully bear-hugged her. She’s now my wife. Mother of my two kids. Most beautiful, fun, strong woman on the planet.
After that bear hug, the podcast may be the best decision I have made. The lesson: other people are MUCH more interesting than me. I know all my stories! How boring! I can’t learn, or grow, by talking about myself. When I do talk on the podcast, I try to limit myself to ideas and stories which illustrate a useful or interesting idea. I’m not perfect, but I bite my tongue as much as I can.
The podcast itself requires constant strain. Finding new people, reading everything they’ve written, convincing them to come on the show, listening as carefully as possible (Thanks Eric). But it is a beautiful kind of strain.
Books are a distillation of the author’s thousands of hours of learning. A conversation is an even more potent distillation. I am so glad I started doing this, and will work as hard as I can to make it better next year.
III.
The hill.
I live right next to the largest forest preserve in Connecticut. In the morning, I run a four-mile loop through the woods. About three-quarters of the way through the run is the hill. It is vertical, and takes about 1-minute to get up. The hardest I ever run is up that hill, to the point that I taste iron and get dizzy. It teaches me the same lesson every day, one that is easy to forget if you don’t keep teaching yourself: you have more in the tank than you think.
***
The body and mind both serve as a compass for growth. They quickly identify strain…and then incline you away from it. Turns out that by identifying areas of strain for you, the body and mind give you a true north.
In 2017, strain will be my guide. I will listen for opportunities more carefully. I have some ideas already, but I try not to think ahead. Strain should not be planned for. It is of-the-moment. My (ongoing) resolution is to say yes when presented with a chance to strain. I hope you do the same.
Thank you for reading, listening, writing, getting together, and being (almost) universally kind. Have a wonderful year.
December 28, 2016
Biology Enables, Culture Forbids
Shane Parrish has collected, applied, and explained more mental models than anyone I know not named Charlie Munger. Below is a particularly fun part of the conversation I had with him on the podcast. I ask Shane to explain the idea that “biology enables and culture forbids,” and how this idea applies to our personal and business lives. At the end, I suggest some questions to ask yourself to apply what Shane and I are talking about to your life. You can listen to the entire conversation at the end.
Shane:
Biologically, we can do anything. It’s cultural that restricts us and culture that creates proper norms that shape behavior. Biologically, we have none of that. We have no restrictions on what we can do. We put these restrictions on through laws, through culture, through what’s acceptable societally, and what’s not. I think that’s an interesting concept. We are naturally very free but culturally we are not. What did you think when you read that?
Patrick:
My experience is through the lens of physical learning. For “biology enables,” I have typically learned the best lessons exploring some physical frontier. I run a lot. Understanding what it feels like physically to break down a barrier is an incredibly powerful bit of knowledge you can then port over to non-physical tasks.
I have a hill in the woods where I run every morning and I force myself to run harder up the hill than I do the rest of the time because I know that that daily reminder, that bit of physical learning of messing around at a frontier, mental and physical, then bleeds into the rest of my day.When I read that phrase “biology enables” I think of that hill.
When I read “culture forbids,” I think the phrase encapsulates in two words what I have realized about the working world and society in general as I’ve gotten older. There are more and more moments for me where I notice how much of my behavior, my friend’s behavior, and my family’s behavior is due to an external locus of control, or is based on this set of cultural norms we live with. It can be in your town, your country, whatever it is that drives so much of your behavior and that just strikes me as insane and so limiting.
Shane:
Think about that in the context of a business. Businesses have norms and it is deviating from those norms, from the standard practice, that moves you from the middle of the distribution to one of the tails. If you are deviating correctly that’s how you outperform. It’s very hard to outperform doing the same things everybody else does unless you are doing them at a lower cost or doing them better or faster.
If you are a textile company in the 60s, you will take the profits and reinvest them back in textiles. Then you have Buffett who deviated from that and created something great. There’s a lot of people who deviate and create something we don’t even know the name of today because it failed, but it’s that deviation that’s correct which is important.
From a biological perspective, nothing is unnatural. Nothing a company could do in that sense–relating it back to companies again–is unnatural, like investing in an insurance company. That’s not unnatural. We just have this cultural norm around not doing it.
I don’t want to get into too much religion, but one of the main things about religion and the value it has served (whether you believe in a God or whether you don’t is irrelevant for this argument), is it has shaped society and while it has caused a lot of suffering, it has also prevented a lot. It has shaped norms. It has helped move society forward. I think that’s an incredibly valuable thing, but it’s all cultural. It’s all something we have agreed to, whether we implicitly thought about it or not. A lot of what we think today is derived from that and a lot of how we behave is derived from that.
But in business, think about what’s the norm in the industry we are operating in. What do other people do and where do I think they are wrong? Those are great sources of “Oh, well maybe I can do this differently?” That’s a great place to explore improving your business.
Patrick:
You mentioned this idea of the Gaussian distribution, which you take every one of your talents or your inferiorities. You plot somewhere on a distribution, but obviously only 1% of people are in the top 1%, and I am probably not in the top 1% of any one individual thing.
I am the quant that thinks in multi-factor models. A stock might be in the second decile by a whole lot of different things, but it’s in the 1st percentile when you combine those things and re-rank. That’s one of the open questions in factor-based investing, but I think it applies personally, too, that if you are in the 15th percentile on three things, it’s likely if you did a three-factor model based on those three things you are in the 1st percentile. I think that’s an interesting source of personal competitive advantage and business competitive advantage and that time spent identifying that personal multi-factor model if you will, is time well spent.
Shane:
As you were saying that I was thinking one particular skill matters if you are in a niche and you want to be the expert, the domain expert on that. I want my brain surgeon in that niche. I want them in the top 1% of all brain surgeons. There are specialties where that matters. We want our pilots to be like that. We want our military to be like that.
But for most of us, we are not going to be in the 1%. I am never going to be in the top 1% of neurosurgery no matter how hard I try. I am never going to be an elite basketball player. But I can create a reasonable skill set that if aggregated combines to form something stronger than they would individually and then offers an advantage if I can apply it. That’s a great area for people to explore, which is why we are pursuing this worldly wisdom from multi-disciplines. If we up our game across the board,we can combine these things into something that is more than the sum of the parts.
Patrick:
It is such a neat way to view the world and is something that people can do. It requires effort, of course, and learning, but you can identify those strengths and combine them and yield unexpected results. There is a non-linear payoff to this that is really great … You have to do it. You have to get a little experience of those payoffs to appreciate them, but it works.
Shane:
That comes back to diverging as well. Non-linear can work both ways. It can work positively and negatively. It’s through divergence usually when you get these non-linear payoffs.
***
Ever since our conversation, Shane has me thinking about divergence and using “biology” to figure out where I should diverge. One interpretation of biology is what I write about here: the obvious over the clever. Ask yourself, what doesn’t make sense? What am I really sick of? What would I do here if no one was watching? Try asking those questions in all aspects of your life and you’ll surprise yourself with some very interesting answers.
December 27, 2016
Mastering Mental Models, with Shane Parrish [Invest Like the Best, EP.17]
My guest this week is Shane Parrish, who created the extremely popular Farnam Street—a website dedicated to understanding the world by mastering the best of what others have already figured out. More than 100,000 people subscribe to the Farnam Street Newsletter which summarizes what Shane and his team learned and wrote that week. I read it every Sunday. Shane and I cover a lot of ground including the future of work, automation, mental models, and reading. Shane is a voracious reader and offers unique suggestions for finding your next great book.
Please enjoy!
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Books Mentioned
The Psychology of Man’s Possible Evolution
The Personal MBA: Master the Art of Business
The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich
Links Referenced
Farnam post (biology enables, culture forbids)
Show Notes
1:31 – (first question) Looking at some of the things that have helped Shane with his success, starting with things that look easy to him but require hard work.
2:56 – Exploring the pace at which Shane reads books and why reads many of them twice
4:40 – Looking at books that Shane has read twice and got a lot more out of it the second-time through
4:46 – The Psychology of Man’s Possible Evolution
4:48 – The Personal MBA: Master the Art of Business
5:00 – Marcus Aurelius Meditations
5:59 – How Shane’s reading has shaped the Farnam Street newsletter and how that led to a huge audience.
8:30 – The Books for Schools program and why having a real person behind made all the difference
9:35 – Shane is asked about the future of work
11:55 – We don’t have enough uninterrupted time to work through a problem
13:25 – The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich
14:07 – Will the future of work be focused around smaller teams and outsourcing more tasks
15:17 – What are valuable aspects of computer science and programming that anyone can use to improve their work environment
18:14 – Figuring out what processes can be automated vs what should be done creatively
20:50 – How automation may create a blindness
22:20 – The two mindsets at war, the growth mindset vs the fixed mindset
25:07 – How does Shane personally keep the growth mindset
27:48 – The way Shane has his day set up to improve his life
30:33 – How the people around will help you maintain the growth mindset in your life
34:34 – Looking at a recent Farnam post on how biology enables and culture forbids
39:40 – Mapping out your personal and competitive advantage
42:32 – Why every day is very memorable for Shane
43:52 – What is the kindest thing people do for Shane
45:05 – Figuring out what books or genre of books you should avoid
45:38 – Potbelly of Ignorance (article written by Shane)
47:57 – Shane explains why forcing people to read something would not be beneficial to them
50:18 – Why checking in with a variety of resource is so important
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on twitter at @patrick_oshag
