Tren Griffin – Pulling the Thread - [Invest Like the Best, EP.87]

My guest this week is a bundle of curiosity, and that is one of the nicest things I could say about someone. For several years, Tren Griffin has been writing a weekly blog post that highlights things he has learned from various investors, businesspeople, musicians, comedians, and more. Lately, he has also been tackling individual businesses, and broad topics like scaling, competitive forces, and product market fit. Tren’s full time job is serving as a director at Microsoft. He’s also worked with or for several well know businesspeople and investors like Craig McCaw, and written several books including one on lessons for entrepreneurs, one on Charlie Munger, and another on negotiation. We discuss value creation vs. value capture, alpha in investing, sales, hip hop, and why he’d teach high school students about convexity through a drunk driving analogy. I could have talked to Tren for much longer than I did, but sadly, we both had flights to catch. If you take anything away from this, I hope its just how much fun it is to just be curious about business, and how you can learn a tremendous amount if you just keep reading about the things that interest you and talking to others. Please enjoy my conversation with Tren Griffin. 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 Show Notes 2:26 – (First question) – key levers of the universal business model 4:26 – How do you know when you’ve achieved real value creation 6:24 – Importance of value capture and how they enhance value creation 6:31 – Zero to One: Notes on Startups, or How to Build the Future 9:08 – Price power 10:28 – Are discussions of moats more useful to businesses than to investors 13:12 - What Tren learned during his early years working with Craig McCaw 16:28 – The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success 16:36 – The skill of capital allocation 18:37 – How would Buffett and Munger bet on tech if they were starting out today and their philosophy of betting against change 21:57 – How Tren became so fascinated with Charlie and what he’s learned from him 22:32 – The Alchemy of Finance 23:17 – Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger 23:19 – Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger 25:21 – Most memorable moment or lesson from Charlie 19:20 – How he thinks about factor investing 31:25 – What are the scalability features that make a business attractive 31:28 – A Dozen Attributes of a Scalable Business 35:37 – Exploring some of the other important levers of businesses, such as subscriptions, customer acquisition cost, and more. 36:20 – Getting to Yes: Negotiating Agreement Without Giving In 37:11 – Wholesale transfer pricing 39:18 – Pros and cons of subscription business models 43:14 – Magic of getting products distributed 44:58 – Best sale Tren’s ever made 46:46 – Most important lesson for young people 50:16 – Tren’s interest in hip-hop and how it helps him reach more people 53:49 – A look at some interesting quotes from Jim Barksdale 58:22 – Learning by doing 1:00:48 – Seeing like a State: How Certain Schemes to Improve the Human Condition Have Failed 1:01:06 – Period of his career that he felt most alive 1:03:03 – Advice for young people thinking about business and entrepreneurship 1:04:56 – Why are so few people passionate about what they do for a living 1:10:44 – Kindest thing anyone has done for Tren 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

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:32Patrick O'Shaughnessy?

  This podcast is sponsored by CFA Institute, the global association of investment professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals, working to build an investment industry where investors' interests come first, financial markets function at their best and economies grow. The Chartered Financial Analyst credential is the most respected and recognized investment management designation in the world. The views expressed in this podcast do not necessarily represent the views of CFA Institute.

• 1:11Patrick O'Shaughnessy?

  Hello and welcome everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 1:31Speaker 02

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:56Patrick O'Shaughnessy?

  My guest this week is a bundle of curiosity, and that is one of the nicest things I could say about anybody. For several years, Tren Griffin has been writing a weekly blog post that highlights what he has learned from various investors, business people, musicians, comedians, and more. Lately, he's also been tackling individual businesses and broad topics like scaling, competitive forces, and product market fit. Tren's full-time job is serving as a director at Microsoft. He's also worked with or for several well-known business people and investors like Craig McCaw and written several books, including one on lessons for entrepreneurs, one on Charlie Munger, and another on negotiation. We discuss value creation versus value capture, alpha in investing, sales, hip hop, and why he'd teach high school students about convexity through a drunk-driving analogy. I could have talked for Trent for much longer than I did,

• 2:40Patrick O'Shaughnessy?

  but sadly, we both had flights to catch. If you take anything away from this, I hope it is just how much fun it is to be curious about business and how you can learn a tremendous amount if you just keep reading about the things that interest you and talking to others. Please enjoy my great conversation with Tren Griffin.

• 2:59Patrick O'Shaughnessy?

  So, let's start to break into that universal business model. We'll talk about all sorts of different things that you've written about over the years: scalability, acquiring customers, virality, all these kind of interesting topics that are hot button issues in the business world. Maybe you could give your overall sketch. You mentioned the important terms, but maybe one or two layers of detail deeper into the sort of universal business model as you see it, the key levers that you're thinking about as you're looking at any business.

• 3:23Speaker 03

  I think the key thing is Steve Blank sort of has this definition, which I've shortened a little bit. But basically, in a business model, you're trying to do things. You're trying to create value, and you're trying to capture value. And they're very different things. And most people focus on creating value. And the problem with creating value is most people don't actually create it. And so, they try and find product-market fit, and they try, and they try, and they try. And then, most people don't get it. And even if they don't get it, they say, "I'm running out of money. I better go try and grow it." And they're growing a product that's nobody wants to buy. And so, the key thing is there, you get a death from premature scaling, which is they never find and create true product value that people want to buy. As the Y Combinator people like to say, if you don't create something that people want to buy, it's over. You may as well just put a fork in it.

• 4:08Speaker 03

  But even if you do that, and you have a product that people want to buy, then there's capture value. And this is where Buffett was really important for me, which is to understand that just because you have a product that people want to buy doesn't mean you're going to have any margin. You know, there are a lot of great products that people love, like flying in a commercial airline, or wheat, or meat, cattle, or potatoes, or whatever. Charlie said at a meeting two years ago, or something like that, someone asked him, "What do you think of the cattle business?" And he said, "It's a terrible business. One year out of 20, you have a good year." But the point here he was making is, people do it because they love it, people do it because it's a lifestyle. Buffett added that, "Well, maybe if you owned a bank on the side, you'd do OK." But also, making cattle, making food, it's an important thing. Operating an airline, making wheat, but these businesses are commodity businesses that

• 4:53Speaker 03

  have a hard time capturing any return in excess of their opportunity cost of capital, as Mobison would say.

• 4:59Patrick O'Shaughnessy?

  So let's step back and dig into those two things to begin with. So, value creation. I always think of Andy Rakleff's term, "The dogs are eating the dog food."

• 5:06Speaker 03

  Yeah, absolutely.

• 5:07Patrick O'Shaughnessy?

  So that's a simple understanding of it. But I'm curious if there's a more nuanced take on when you know you've achieved that, so you don't have that full scaling problem.

• 5:15Speaker 03

  You've got the Justin Stevens quote about, "You know it when you see it."

• 5:19Patrick O'Shaughnessy?

  Yeah.

• 5:20Speaker 03

  And, you know, in this situation, we have a situation where you know it when you see it. Usually, it's because everybody in the company's thinking, "My God, how are we going to satisfy all these orders?" You're not sitting around in a conference room thinking, "Well, maybe we should add a feature, and, you know, the sales team's really letting us down," or whatever. And technically-driven companies, oftentimes with technical founders, can fall into that trap, thinking, "Well, if only these salespeople could sell better, the stuff would be moving out the door." So, when you have product-market fit, stuff is moving. And as Andy likes to say, I learned as much from Andy as anybody in venture capital, is that the word of mouth should be growing on an exponential basis.

• 5:57Patrick O'Shaughnessy?

  Okay.

• 5:58Speaker 03

  Yeah. And the key thing about a company is, we'll get to scale a bit in a minute, but if you really want to scale, and you really want to scale and create value... It shouldn't be with marketing. And so if you look at the early days of Microsoft, or the early days of Costco, or the early days of Amazon, or the early days of Starbucks, it was word of mouth. It wasn't TV ads, it wasn't radio ads, it wasn't a guy with a spinning a mattress sign, you know, all this stuff you hear on the radio, it was hard to sell. If you have strong word of mouth, then you've got something magic, and then you really have product market fit. But unfortunately, most people, they have 24 months worth of money, they're at month 18, they know they only got six months left, they think they have product market fit, but they really don't, and they go for it, and they die of premature scaling.

• 6:40Speaker 03

  So, the phrase that you use to describe that is, most people don't die of starvation, they die of indigestion, which, there's another aspect of that, is you're trying to do too much. But, the point here is that, you really need to solve what Andy calls, the value hypothesis, and before you proceed to the growth hypothesis.

• 6:57Patrick O'Shaughnessy?

  Yeah, so we'll come back to scalability in just a minute, but I'd like to talk about value capture for a second. I think it was in Peter Thiel's book, I really have not been able to get this chart out of my head ever since I saw it, which is basically that, exactly what you're describing, value creation and value capture. And, value capture gets too little attention. So, this begs the question of, kind of, general thoughts on this general idea, where there are opportunities to capture value, where there are not. You've mentioned a few examples already. You know, I always think of things like opacity, like, everyone thinks transparency is a good thing, but a lot of times, opacity can be a good sign of potential margin. If you don't know exactly how something's made, in this kind of era of abundant information, people see something as more valuable. So, talk about your key points on value capture relative to value creation.

• 7:40Speaker 03

  So, value capture really is best described, as Warren Buffett describes it, as a moat. It is a metaphor that he used to sort of help people understand, that you can't just focus on demand, you have to focus on the supply of competing product. And so, you really have to look for some sort of sustainable competitive advantage, is what Professor Porter talks about. And in order to find that, you really have to search in a couple of buckets. And, the most important one today is, are network effects, which is basically a feedback loop, where the product becomes more valuable, the more people use it. And so, demand-side economies of scale is your first source of capture. You acquire a moat, you acquire a sustainable competitive advantage. The second one is economies of scale. If you have as many Amazon warehouses as they have, there are certain scale advantages

• 8:24Speaker 03

  that they have that are hard to keep up with, or what Netflix has. Now, both those companies also have network effects, but they also have economies of scale. And then you go into the next bucket, and then you could say, well, you can have really strong intellectual property. And in the old days, it used to be patents, or trademarks, or whatever. These days, a lot of the key intellectual property is actually just hidden in a server, and can't get added, and is protected in that way. And then, you can have a range of brand-based competitive advantage, and Charlie Munger talks about the fact that, you know, it used to be in the days of television advertising, if you had French's mustard, or whatever, the brand was worth a lot. That source of competitive advantage is sort of eroding, and you look at their 52-week lows of the brands over the last couple of months. They're struggling, because brand doesn't mean as much anymore.

• 9:09Speaker 03

  Word of mouth means more, and to the millennial generation, and younger, they're not as hooked on getting a Pines, or Hunts, or whatever. They want some product that Yeezys, you know, using, or something. You know, it's a different, it's a different world today, and they're struggling with that. But those are the, basically, the buckets that you look to find something that allows you to get enough of a barrier to competition to get you the most important thing in business. Buffett says the most important thing in business is, does the business have pricing power? If you don't have any pricing power, you're in a tough situation.

• 9:41Patrick O'Shaughnessy?

  Yeah. I always love that litmus test, because it's straightforward. Some of the sustainable fortified forces stuff, and sustainable competitive advantage, both qualitatively and quantitatively, is so hard to pin down. But pricing power is pretty straightforward. What would happen if you raised prices?

• 9:56Speaker 03

  Do you have to have a prayer meeting, Buffett says. But the key thing here is, one of my other mentors is Michael Mobison, who was introduced to me by Michael Arson, who's a guy who works and manages, one of the best investors in the world, and least well-known.

• 10:08Patrick O'Shaughnessy?

  Yeah, I don't know that name.

• 10:09Speaker 03

  Ed Cascade. He manages the Gates Foundation money, and a huge pool of money, but he's a fantastic investor. But he introduced me to Mobison, and Mobison has this classic memo on, basically essay, on measuring the moat. And basically, what he's saying is, is what creates a moat is quantitative, and it's an art, and it's a skill, and it's dynamic, and you have to do it, but the test is quantitative. And so you know you have it, because you can measure it by ROI and sustain ROI over the years. Sustain ROI over the years generated the fact that you have some pricing power, and you're not just selling a commodity product. And so, Michael's work has been sort of clarifying for me in the sense of, the qualitative side

• 10:50Speaker 03

  of business is about creating the moat, and the quantitative side is about measuring it. And keeping the two buckets in separate places mentally is helpful, because most people tend to just confuse the two.

• 11:01Patrick O'Shaughnessy?

  This is a really key place that we can differentiate between being a businessperson and being an investor. I think that the moat stuff and sustainable competitive advantage, I'm curious if you agree, is far more useful as a businessperson than as an investor, just because of what we know about quantitatively high ROIC firms, or firms with expanding ROICs, a popular measure of a moat, presence of a moat, don't necessarily do though that much better than the market do, versus like a simple statistical value factor or something, which I know you've written about is not true value investing, we can get into that as well. But I'm curious if you agree that this kind of moat competitive advantage stuff is more useful as a businessperson than as an investor?

• 11:37Speaker 03

  Yeah, the way I would describe it a little bit differently, in that what Charlie Munger says and what Buffett says is, they don't know how to build a moat. They may be able to one with reinsurance, but they never built one. And Charlie says, "We don't build them, we buy them." And if you look at what Constellation is doing, or you go down the list of Robert Smith and other people who are doing things in software, for example, they count on some founder who's totally driven, who spent their whole lives trying to build up this business and building this moat, they're in the right place at the right time with the right skills, and they built this thing, and they're artists, and they're genius. In some sense, many of them are savants about how the product should be built and what the customers want. This is a separate question is what's that worth? And that's where the investing skill comes in.

• 12:20Speaker 03

  And so Buffett will come in and say, hey, my hurdle rate's 10. This is what I'll offer. I won't strip your business. I'll let you continue to run it. And so he is a quantitative analyzer of moats. You almost have to be an artist to create one. It's just such a dynamic, because you're talking about complex adaptive systems. You're talking about multiple factors. You're talking about competitors, nests of complex adaptive systems. And so the guys like Craig McCaw, Jim Senegal at Costco, Howard Schultz at Starbucks. You know, I'm just listening to Seattle ones that could go all around the whole country. But these people, they're artists. And they're oftentimes, when you actually talk with them, they're not like you and me.

• 13:00Patrick O'Shaughnessy?

  They're not linear.

• 13:01Speaker 03

  They have this, yeah, this gestalt sense, analog sense of where value is and customers want. And it's easy to look back and say, oh, yeah, cell phones. They were going to get cheaper and they were just going to take off like crazy. The hard thing would have been that phones weighed a couple, four pounds and they were $4,000 and a lot of them were put in cars and it took a day to install them. The bills were 250 bucks to understand that someday this thing was going to be magic. And looking forward is the real test of genius. Now, you can say some of it is, it's just survivor bias. Those people had some luck in there. And there's some of both. Everybody who's successful, anybody who's successful who doesn't feel like some of it is luck is fooling themselves, right? But they also had special skills.

• 13:44Patrick O'Shaughnessy?

  Maybe we could talk about the cellular business and McCaw specifically. That's been something that public market investors have been fascinated by. I would say in large part because of John Malone and his force as a capital allocator and as an investor. I just think of him as an investor and a fantastic business person. So maybe you could begin by discussing your early experience there. We're going to spend a lot of time on business models, what makes for an interesting business, how that's evolved through time and tie that all back to this notion of investing. So it would be great to hear about those formative years with Craig and kind of what you were learning.

• 14:19Speaker 03

  So the interesting thing about cellular was Craig, because he thinks differently than the average person, he's very analog in that sense. And his favorite plane is a de Havilland Beaver seaplane, which is flown in with analog instruments and all that. But he's a very analog person. And he understood that people don't like to live and work in cubes. And where we're at right now, there are lots of cubes around, and that's an anathema to him. He thinks that people are essentially nomadic, that seeds sort of made human beings sort of stay in one place. And there's one theory that it's because they wanted to grow seeds, and because that would make a nice beer. But whatever the theory was, he thinks we like to move. And so he understood deeply that the cellphone was going to be, it wasn't called the mobile

• 15:04Speaker 03

  phone then, it was called the cellphone, was going to be something that freed people from being in a specific place. And for that reason, he understood the value was a lot higher. And so when McKinsey did their famous study about how many cellphones there were going to be in the year 2000, McKinsey assumed that anybody who had any sense would never use a mobile phone when they could use a landline phone. And so the demand, you know, is sort of like, I'm using my mobile phone all the time with my desk phone sort of right next to me. And so he had this feeling that it was going to be hugely valuable. But in those days, the phone weighed a lot, and it cost $4,500, and the bill was big, and talk time was 30 minutes. And he had the vision to see, no, this is going to get cheaper, and there's going to be demand elasticity here, and this is going to free people to do what they really want

• 15:49Speaker 03

  to do. So he saw the value that other people didn't. But he also had, his father's example, Arroy, he knew how to raise money and buy assets. Because unlike software, the business I'm in now, cellular is very capital intensive. And so it just happened this guy Milken came along just right then and was raising money for Malone and everybody else, and you're able to raise a lot of money, and he was able to roll up the cellular industry. And it was fascinating to watch that, and to watch him basically always have enough cash, but always pushing the edge of the envelope. And at one point, a key point, he sold all of his, he started in cable TV, and he sold everything he had in cable TV, was 20th biggest cable operator in the country, and he sold it all to Jack Kent Cooke, the Washington Redskins guy. And he basically doubled down on cellular.

• 16:34Speaker 03

  So he was a guy who believed, and so it was fascinating to watch him. Go through that process and then to be around when he had to sell it to AT&T because the debt service was so big, that was a huge, it was his child that unfortunately he had to sell because there was just, the cash flow was, was going to be requiring a bigger owner. And then him rolling into Nextel after that.

• 16:57Patrick O'Shaughnessy?

  So you got to see it firsthand. Many people listening will have read Will Thorndike's book, The Outsiders, and be familiar with some of these kind of general stories. But given you were sort of there watching all this happen, I'd be curious to get your take on effective capital allocation that you watched Craig when he was buying stuff, when he's selling stuff, and kind of how you think about that from then to now, as an important skill for a business operator, as something that's important for investors to consider or care about. Maybe if you could riff on capital allocation a little bit, that would be great.

• 17:27Speaker 03

  So Craig knew that these licenses, which were all allocated by regions and there was no national license, were going to be more valuable. And so he knew that if he bought a cable system and if you did some good things to it and you consolidated operations a little bit, you could basically take the cash flow from the two systems or the three or the four or the five and buy yourself another system. And classic roll-up. But the value of this spectrum was increasing so rapidly that the speed and the power of the roll-up was sort of pretty unprecedented and he was braver than everybody else. Like for example, when he bid for Lyn Broadcasting in New York, that was like, you know, nerves of steel. But also he'd seen his father who started in radio do the same kinds of, he

• 18:10Speaker 03

  was with Danny Kaye at one point, the white Christmas guy. There was all kinds of early radio stuff that he had in the back of his mind. But he knew that this asset was going to be valuable so quickly that he was always going to be able to take the equity value and roll it into the next one. And he also knew that when I first had my first brick phone, my Motorola brick phone, I couldn't take it down to Portland and use it. Roaming was like, there wasn't what's called the North American Cellular Network then. And so Craig knew that when that happened, that was going to be something like super valuable. But most people were just thinking, this is a toy, you know, no one's a desk line. And even, this is the remarkable thing. When AT&T bought McCasay Cellular in 1994, they thought it was to save the long-distance

• 18:52Speaker 03

  business. In other words, even in 94, they didn't understand what they're buying. And so the irony is AT&T bought McCasay Cellular to save their long-distance business, and so they made the right decision, which is to buy wireless.

• 19:03Patrick O'Shaughnessy?

  For the wrong reasons.

• 19:04Speaker 03

  For the wrong reasons. So they just got lucky. And, you know, sometimes it's better to be lucky than good.

• 19:09Patrick O'Shaughnessy?

  You've probably written more about Charlie Munger than certainly anyone I've ever talked to. And so I thought we were communicating back and forth, and we thought it would be fun to play sort of a, quote, "association game." And this is a great spot for the first one. So I'll read a Charlie Munger quote, and we can kind of talk about it. "So we avoided tech stocks because we felt we had no advantage there, and other people did." And I think that's a good idea, not to play where the other people are better. This is a common refrain around Berkshire Hathaway in general, that they are betting against change, not betting on change. I'm curious, given all the reading and work you've done on Munger and Buffett, if they were 30 years old today, and just starting Berkshire, and looking to the future, do you think that that stance on tech companies would be the same? And do you think that betting against change is a strategy that will continue to work in the future?

• 19:52Speaker 03

  Yeah, I think I would phrase it a little bit differently, in that, first of all, they've said, flat out, if they were younger today, they'd acquire a circle of competence in the technology business. They'd have to. And the other thing to understand about them is every one of their businesses is a technology business, because every business is a technology business. So they actually understand technology fairly well, too. But they don't have a substantial advantage over other investors. And what they're looking for, he talks about it, is he likes shooting fish in a barrel. He wants a shotgun and a barrel full of fish. He wants the easiest possible things he's looking for. And he's looking for situations like 2008, when he dumped all the data to journal money into the right stocks at the right time. But he's looking for those sort of easy bets. But also, in terms of technology for them...

• 20:37Speaker 03

  They just don't feel like the nonlinear nature of the business avails itself as easily to their particular style of investing. And it's also, they have this specific niche where I built this business, I love this business. I love this business in some ways more than my own children. But I don't want to sell it to Exco because if Exco gets it, they're going to strip it. And they're going to load it up with debt and they're going to take it public again. And then it's going to be off, you know, in a circle of bankruptcies. And so a tech seller is unlikely to say, oh, I want this to be bought by Berkshire and run in a Berkshire sort of way and I can continue to run it or somebody I know can run it.

• 21:20Speaker 03

  And so you're not handing off sort of a legacy of your distribution business or your brick business or, you know, you go down the list of those companies. And so they don't have that sort of magic thing on the private equity side when they're buying the private businesses. So for them, it's really, the last point I'll make is also, is that a key to Charlie's philosophy is the way to get rich is to not be stupid. Don't make dumb mistakes and look for really easy decisions. And so he describes his personality as, and it's almost contrary things, but he has to be amazingly patient. And yet, when an opportunity like 2008 arrives, you've got to be willing to jump in both feet. So it's a combination of patience and aggression when the time is right. And those are almost contraindicated, but to do those things, those are the people that

• 22:05Speaker 03

  jump in and that's why Howard Marks, Klarmann, all these people have this ability to say, now. They can raise a lot of additional money. Klarmann and Mark can raise additional money quickly when the time gets good, when there's a 2008. And then when you're in a 2012, 2013 to 2015, you've just got to sit on your hands. I mean, occasionally get a deal, but you know, it's, you've just got to be patient.

• 22:30Patrick O'Shaughnessy?

  Tell me a little bit about the backstory of your fascination with Charlie and why you've learned so much from him.

• 22:34Speaker 03

  I thought I knew a lot about business and I'd done a startup for six years and I'd studied it and fascinated by it. And by 1998 and 1999, things were nuts. And people were getting rich in ways that I couldn't imagine and I was getting Rich in ways that I couldn't imagine. I didn't think it was real and I didn't know where to turn to. And I was listening to value investors and Michael Ursen was nearby in the next office over and I just didn't know what to do. And so, Michael gave me The Alchemy of Finance, which is a long ways from Munger. But he gave me that book and that just set a fire under me to said, I gotta read more books. This book is the hardest book I've ever read, maybe. But it made me think in completely different ways. I gotta read more books like this. And I kept reading and then I started reading more

• 23:18Speaker 03

  Buffett books and I read Hagstrom's books again. And I said, who's this Munger guy? And I couldn't find anything written about him. So I said, okay, well, I'm gonna go out and collect every Charlie Munger book quote I know. And I'm gonna make my own book. And it's on my website right now. He's a Charlie Munger quotes. And I assembled it for my own use. Like, I was writing a book for an audience of one. So, I wrote a book and there was those quotes. And it was just like, what does he think about accounting? It's all advertising, accounting, and then there's Bs and Cs and Ds. But I wrote a book just so I can understand what the guy's philosophy was. And then later, the other books, Damn Right came out and the Almanac book came out. But really, I want to understand the way he thought because he was such a critical thinker. And this whole idea of mental models and worldly wisdom and all that. I know you're this way. When someone says something

• 24:03Speaker 03

  and you're just like, whoa! Light goes on. Like, this is a whole new way of looking at the world and-

• 24:08Patrick O'Shaughnessy?

  And you become a collector.

• 24:09Speaker 03

  Yeah, of ideas. But it's also, looking at mental models is a mental model.

• 24:14Patrick O'Shaughnessy?

  Yeah.

• 24:15Speaker 03

  It's a Russian doll kind of a thing. You know, it's like, whoa! And the fun thing about it for me is, I love to think and I love to read and I'm like Munger, a book with legs sticking out and papers sticking out and things like that, too. But the point here is that you can just learn when you find somebody like that. And then, if you chase them down and read the books that they recommend, then you find other strands and it's like the root system of a redwood tree. You're just tracking down all these things and you meet Mabeson and he's reading Annie Duke and somebody else does. And I hear something from you and Ritholtz or somebody, you know, and you're constantly getting this rich broth of stuff to read. It all fits together. The more you know, the more you know you don't know very much.

• 24:55Patrick O'Shaughnessy?

  I always say that the more you read, the more you realize that there's just more and more questions. But also that you're kind of always reading about the same couple things. It seems like they're about different things, but it's really about the same few things.

• 25:06Speaker 03

  Munger says there are about 100, I think, is what he said. Mental models that are sort of essential and 20 that are critical. And understanding those is important. But then there are many, many other ones. And there are all these like specialty ones. And then you'll learn something about- Physics, and then you find out like, wow, that's all the work at Santa Fe. I just love because it's cross-disciplinary. And you become wise, which is different than being smart, because wisdom is about understanding when you don't know something. And you can know everything in the world about anebotoned worm, and you can be really smart about anebotode worms, but you're gonna be terrible at managing your portfolio, and you're being a good father, or a friend, or community-minded, or whatever. And so, this whole idea of being broad pays dividends.

• 25:51Speaker 03

  It really pays dividends. And plus, it's fun.

• 25:54Patrick O'Shaughnessy?

  Do you remember the idea that most set your hair on fire, that kind of most sparkled, maybe it's a mental model or something like this, that you came across via Charlie that stands out in your memory?

• 26:03Speaker 03

  The whole worldly wisdom speech is one of the great speeches of all time. And God knows how many times I've read that thing. It would be even more if you added up the times that I just went back and reminded myself of reading a section of it. But those two speeches, the two human misjudgment, and those two speeches were just like ones where I just, whoa. And I go back and read them again and again. And it's also not just what he taught, but the way he thought. And the whole idea of, if you go through a year, and you haven't changed your mind on one key topic-

• 26:40Patrick O'Shaughnessy?

  You're doing something wrong.

• 26:41Speaker 03

  You're doing something wrong because you're not challenging your own ideas. It's almost like a litmus test, because it should be more than one, actually. But if you haven't even done one, then are you really challenging yourself? Are you really listening to diverse opinions? Are you listening? You know, are you trying to learn new things? And so, for example, you would maybe relate to this, which is, the older I get, the more I realize there are more pools of alpha than I thought. And when I was sort of younger, I used to think, no, these are the ways you can invest, and these are the best ways. But then you start to realize, there are different pools, and people efficient in them in different ways. Even this Mark Leonard constellation guy who I wrote about recently, he has this idea that basically, diseconomies of scale. There's an example of something that, to me, was a new idea, that I had to think, like, wow.

• 27:26Speaker 03

  There can be the flip side. For example, I remember at one point, I was thinking, well gee, network effects are really good. And I started to realize like, whoa, on the downside, when they're

• 27:37Patrick O'Shaughnessy?

  They're bad.

• 27:38Speaker 03

  Yeah, they're terrible. And, you know, when something, what happened to BlackBerry happens, it doesn't happen like slowly.

• 27:44Patrick O'Shaughnessy?

  Yeah, like that.

• 27:45Speaker 03

  Right, the same thing that sent you up, sends you down. Or just even the whole chart of the internet bubble and the telecom bubble, which were different bubbles, but if you separate them out, they have the same slope and it's up and down. And it was, you know, that to me, Gurley's talked about that. That experience of going through the internet bubble, that has forever changed my muscle memory. I think about the world differently, and I think people who didn't go through that have a different attitude about risk in life than somebody like me who went through it. It was, especially the kind of "went out of it" part. When you couldn't raise a cash, you know, there was a moment where we could raise $3 billion in January of 2001.

• 28:27Speaker 03

  We could raise $3 billion just by making a phone call. By April, you couldn't raise a nickel for anything. People were scrambling for cash. You couldn't sell. And to have something change that quickly makes you realize that you have less control and less ability to start. I thought things were funny, and unusual, and odd, and didn't seem real, but I had no idea it was going to correct that quickly. No idea.

• 28:52Patrick O'Shaughnessy?

  Can you say more about the idea that maybe there are more pockets of alpha than you originally thought there might be? Specifically, what's behind that? Is it just a bunch of examples? Are there commonalities across those examples?

• 29:03Speaker 03

  It's actually interesting to watch people who are doing factor investing, and watching them find pools, people doing private equity deals in specific sectors and different kinds of rollups, or like I said, Constellation, or what Smith is doing at Vista, or whatever. And there are different ways to find value. That I think, wow, I should have thought of that, or why I wish I thought of that. But what it makes me think when I look at the overall pattern is, I bet there are a lot more of them out there, just people aren't seeing them. You know, it's hard to see what nobody's seen before, and it takes those people who have that savant quality to say, no, there's something here. There's this thing here, and you should back me. And I just think the constellation thing is just brilliant. His letter just came out a couple of days ago.

• 29:46Patrick O'Shaughnessy?

  I've read it.

• 29:47Speaker 03

  I have a lot of admiration for what he's done, and the pools of alpha that he found that other people didn't realize existed.

• 29:53Patrick O'Shaughnessy?

  There's always the me too problem, where one of these models is proven by some pioneer, and then there's a million copycats, and something gets popularized. And typically, that's the worst possible way to invest, is in one of these copycats. But it's interesting that you bring up factor investing. Obviously, that's what I do. And like anything else, I think that there is, there are perennial strategies. There's stuff that may work to some degree forever, and we don't have to get into the reasons why today. But I would be curious, given that I've seen you write quite a bit about the contrast between, I think what you would say is true value investing, and let's say like a basket of statistically cheap, low-priced-to-book stocks, or something like that, as being very, very different things.

• 30:29Speaker 03

  Yeah, I think it's important to think about it differently. I call it value as an analytical technique.

• 30:34Patrick O'Shaughnessy?

  Okay, let's hear about that.

• 30:35Speaker 03

  So, you're looking at the fundamental DCF of a business, looking at all the factors and lifetime value and all that. You're building models bottom up and top down, and you're basically trying to discover whether the business is a good value. And so I think you can look and value Google, or to me, Apple right now is a value stock, because it's priced detractively. I don't like to pick stocks.

• 30:57Patrick O'Shaughnessy?

  Yeah, I understand.

• 30:58Speaker 03

  But for me, I would say Apple is a value stock. It's priced detractively, has a margin of safety. And people say, well, but it's not cheap compared to its past, or you know, whatever it is. And I'd say, it doesn't matter. The important thing is, when you do your DCF, and you look at the value, this is a value stock. Google can be a value stock. Lots of stock, Amazon can be a value stock. But that's using value as an analytical style. You may not do it, because that's not in your circle of competence. But then there's another style of investor, which is factor investing, which is using value as a statistical factor. But you know, there's momentum, there's...

• 31:31Patrick O'Shaughnessy?

  Many.

• 31:31Speaker 03

  Many.

• 31:31Patrick O'Shaughnessy?

  A stable.

• 31:32Speaker 03

  But I bet there are more of them out there, waiting to be discovered. With machine learning and modern data science, I'm sure that more of them will be discovered. The problem is, of course, is once somebody founds them and they try and market it, then everybody piles in and then that alpha can get harder to generate.

• 31:49Patrick O'Shaughnessy?

  I think it was Mandelbrot that said something like, "The trend is killed by its discovery," or something like that. It's amazing just to watch that happen in real time in markets. Let's talk about scalability. One of my favorite posts in reviewing on the plane out yesterday, your big backlog, was the 12 features of a scalable business. Now, we don't need to go through all 12 necessarily, but we talked a little bit earlier about product-market fit, a value hypothesis, which is you know it when you see it, you know, the demand for the product or service is very high. The other side of that equation, in Andy's way of thinking, is the growth hypothesis, and this is kind of scalability. So, maybe tell us a bit about what you think are the most important components of a business that has that scalability baked into it, presumably which makes that more attractive as a businessperson to run one, as an investor to buy and own one.

• 32:33Patrick O'Shaughnessy?

  I think this idea of scalability is fascinating in this kind of tech landscape that we're in today.

• 32:37Speaker 03

  One of these things like product-market fit and scalability is the kind of concept where there are many factors involved and it's super dynamic, and what you're looking for is a confluence of things, and you may not have everything in a particular business, but some things are sort of critical and some things are nice to haves. And so, usually if you're looking for scalability, the VCs will tell you, like Don Valentine was famous for this, which is, he wants a big market. And he didn't even want a market that might be big someday, he wanted already to be big. So, the classic chart on the slide deck of a lot of startups is huge pie chart, and they're only going to get a small part of it, and everybody, you know, is going to have their own private island in the Caribbean, right? And so, huge markets really help because it's hard to scale a business for horse bridles or horse blankets or what, you know, something like that.

• 33:22Speaker 03

  So, big market. And then the other thing is businesses that are highly people-intensive, like a law firm or an accounting firm, they are hard to scale. There's just so many people, people get jealous, or they see a chance to make more money and they break off and whatever. So, if you have very people-intensive services, it's hard to scale. So, you have size of the market, that, and then you have basically a tech, if you have a technology where costs are dropping as volume increases, if you have true economies of scale, business is more scalable. If you have demand-side economies of scale, which are network effects, and you have a lot of virality, a lot of new product getting more valuable, the more people use it, then that creates that the business is scalable. And probably the key thing is, you can't scale a business very well if you have inorganic

• 34:07Speaker 03

  approaches to acquiring customers. If you have to go out and buy radio ads, if you have to go out and do the stuff that these meal delivery firms are doing, it's a hard slog. If you have a product that is naturally viral, like Facebook was, or whatever, you're acquiring customers for almost nothing. The business is growing quickly. You don't need that many people. They don't, still don't employ that many people, given how their market is. Massive, it is, yeah. Yeah. And go down the list of these things, and there's sort of an additive effect. No business is perfect, and they're not all quite the same. But those are the sorts of factors which determine the scalability of the business. And the sort of last one, this is one of the trickiest ones, is elasticity, which is,

• 34:48Speaker 03

  if you take a business like SpaceX is in, in just the launch business, it's only a five and a half billion dollar business, only, but there's a lot of competitors. There's Russians, and Chinese, and Indians, and US government, traditional launchers, and Europeans have Ariane, and so they're all fighting it out for launches, and if you get two a month, you have big 30, 40% market share. So, the market can only get so big. And so, for launching payloads into space, also, the payloads are getting smaller, because of Moore's Law and a number of factors, and they're coming lower orbit. And so, the only way you can really grow that market is if humans start taking rides up there. So, what's the market for taking rides into space? How many people have the kind of money, they're gonna go up and for four minutes, can float around in space and come back down?

• 35:33Speaker 03

  And predicting that kind of thing is like what Craig did with the cellular business. He knew that these things were gonna be popular someday when they got cheaper. So, maybe there's a business doing that. It's certainly dicey and so one of the things that SpaceX has done and said, okay, well, we want to have a backup, so we're going to put up our own broadband satellite communication system called Starlink. That's a completely separate business and they're creating a customer that's going to be within the same P and L presumably unless they spin it off because the business is only so big. So that's an example of a company that has, I believe, some unanswered questions about the elasticity of demand.

• 36:10Patrick O'Shaughnessy?

  Maybe we could use a recent post you did on MoviePass as a way of talking about some of these other levers that we haven't gone deeply into. You mentioned Gurley, who's probably my favorite writer on this concept of lifetime value to customer acquisition costs. And reading you, reading Gurley, reading others on this topic has really made me try to think about a lot of businesses in these really, really simple elemental terms. It makes life easier, which is great, but it's always easier to learn via example. It doesn't need to be MoviePass, you can pick your business. But I wonder if you'd be willing to pick a modern business, one that people might be aware of, and maybe use that as an excuse to talk about things like lifetime value, customer acquisition costs, cost of money, how you think about these inputs into that equation.

• 36:50Speaker 03

  So one of the key things in life is Roger Fisher's G D S book has a concept called Best Alternative to Negotiated Agreement. Basically what he says is if you're negotiating for something and you only have one choice, you're screwed. And that translates into another concept that another professor has across the river at Harvard Business School. And Michael Porter said, basically, there's these five forces that you have to think about. And one of the five forces is supplier bargaining power. And so what I did in my own life with Craig was I got to have this conversation where I was listening to John Malone talk about wholesale transfer pricing. And basically, it's supplier bargaining power all the way back to basically opportunity costs.

• 37:31Speaker 03

  And the MoviePass business model is fundamentally dependent on the price of those tickets. And they're buying them at retail. And they only have one supplier because every movie isn't, you don't buy tickets in the movie industry, you buy tickets to Black Panther, or whatever, you have to go into that movie, right? So they're buying at retail and they're selling at a discount in a subscription and they have a hu- as big a wholesale transfer pricing problem as I've ever seen anywhere at scale.

• 37:59Patrick O'Shaughnessy?

  Can you describe that term in more detail? You, you talk about this a lot and it's such a great concept, wholesale transfer pricing.

• 38:04Speaker 03

  Yeah, it's basically, imagine you were, had a bakery and you were making bread. In the city, they got a lot of bread bakeries and you go down there and you had to buy your flour from Joe. You couldn't buy it from Ben or any, you had to buy your flour from Joe. You have wholesale transfer pricing problem because he can price the flour, whatever price he wants. This is Spotify's fundamental problem in that they have these-

• 38:27Patrick O'Shaughnessy?

  Their margin gets taken.

• 38:28Speaker 03

  Yeah, it gets, margin gets taken and, and if they ever got some margin, they just up the price. And so that is the same principle as Roger Fitness Batna, as Charlie Munger's optionality, his Porter's sustainable competitive advantages. You never want to have one supplier of anything. And that's something like Tel would talk about Luigi or whatever, but some basic guy who's making pasta knows that he doesn't want to be completely dependent upon his brother-in-law for vegetables because if he does, he's, his brother-in-law is going to basically take a lot of his profit. And so that applies in SpaceX. Elon, very smartly and brilliantly sort of doesn't rely on other people who can have, he's avoided wholesale transfer pricing. The inverse of that is MoviePass, which is completely dependent on these movie studios selling them, actually goes through the theaters, but they got to buy from the theaters like

• 39:13Speaker 03

  Regal at retail. And you can't make that up on volume. It just, negative gross margin is awful. It's sort of like another point we should sort of get into, which is, I'm in the software business and I tell you, I look at other businesses and I see their gross margins and I go, my god.

• 39:29Patrick O'Shaughnessy?

  What a nightmare.

• 39:30Speaker 03

  How do they survive? They got no money for anything. They got 2%, you know, net margin and gross margin's tiny and, you know, if like it snows, trucks don't roll, it's like, whoa. These guys, they better have some cash in the bank, you know, to go through these bumpy points, but I just, I'll go back to my own business and I go, god, we're lucky.

• 39:47Patrick O'Shaughnessy?

  Yeah.

• 39:48Speaker 03

  This is great. These gross margins are nice.

• 39:51Patrick O'Shaughnessy?

  You've written a ton about SaaS businesses, the SaaS business model, software business model. I'd be curious if there are other chunky categories that you think are worth explaining versus, say, the SaaS business model in today's terms.

• 40:02Speaker 03

  Well, I think one of the things that's interesting in exploring on the SaaS business model is the idea that subscriptions are somehow magical. Subscriptions are a way of charging for a product, and they're a way of getting a customer into a situation where you're not constantly fighting for renewal. And so there are some aspects of it that are good, but unless you have dog food that the dogs want to eat, subscription isn't going to get you bupkis.

• 40:27Patrick O'Shaughnessy?

  Yeah.

• 40:28Speaker 03

  And so you still have to have a product that people really love and want to buy. Subscription can make the product better, and it can make the model better because if somebody signs up for a year, you don't have to worry about them leaving for 12 months. That's the good news. Everything has a flip side. The bad news is you have to pay a little bit more to get them. Unless the product is truly viral, your CAC is going to go up. And this is the point I talk about, about all your variables in the LTV equation, which is they're all linked. They all have ropes to attach to each other. You tug on one, and the other ones all move. It's like a spider's web or whatever. And so everything's dynamic, everything's related, and that's the fun of it. It would be boring if everything was just linear and not dynamic. That's why it's a game. That's why Buffett does the tap downs on the work. It's a work every day because it's fun.

• 41:13Speaker 03

  To me, it's the biggest game of all.

• 41:14Patrick O'Shaughnessy?

  Yeah, it's something I have to remind myself of all the time as someone that's prone to want to stuff everything into a formula, that you can't always do that. And there is art to all this stuff, even if you're building quant models, there's an art component to it, and I think that that's a fantastic reminder of it. Let's take a business like Apple as an example, where, I guess, are there any subscription areas of the Apple business model?

• 41:35Speaker 03

  Oh, sure. Yeah, they have a lot of them, yeah. And they're also a wholesaler of people who sell subscription models.

• 41:41Patrick O'Shaughnessy?

  Right, sure.

• 41:42Speaker 03

  And they're a fascinating model that Bill Gurley and I talked about. So during the dot-com era, I was sent down to Silicon Valley every week. I went down on Monday, come back on Friday, and I spent a lot of time with Benchmark. And Gurley and a guy named Bruce Dunleavy and Andy Ratchliff and Bob Kegel, you go down the list, Steve Shparlock and all that, they were all mentors of mine, and they taught me a lot of things. But at the time, I was in the telecom business. And in the telecom business, we had a private equity firm, we went on Nextel, Nextel International, XO, we had a bunch of different investments. And... I was just pining for software margins. And I was pining for pricing power because it was just a tough business selling long haul, you know, against a level three or whatever. And I got this idea for a thesis, and I called it software in a box, which is basically,

• 42:27Speaker 03

  you know, sometimes you have to sell a box to sell software.

• 42:30Patrick O'Shaughnessy?

  It's like Peloton.

• 42:31Speaker 03

  Yes, and that's the classic software in a box case, which is, which is you sell this thing, which enables you to sell this service. And the margins are in the service, the stickiness is in the thing, and the enabling thing is the thing. It's like, there are no Peloton clones you can just go out and buy. But the bad news is you have to create these and sell these things. The good news is that if you get actually a feedback loop going, you can make them really more cheaply than everything else. And the thing that differentiates a GoPro from a Peloton is GoPro, I think, never, my opinion, is they never invested enough in software and creating the software that came with that box. Because that would have given them some staying power, because then you're not just competing against the latest thing to come out of China.

• 43:13Speaker 03

  And so, you know, software, it becomes critical. But sometimes the hardware is an enabling thing. Even if you take like the chips, you know, that Qualcomm or other folks make, a company like Intel employs more software engineers than hardware engineers. Software is key, and that's software in a box too. So, software is truly eating the world as End得起 says. And, but sometimes hardware is enabling the distribution. Distribution is, people who are able to get products distributed, they're magicians in their own right. And having somebody on your team who knows how to distribute and sell products, highly underrated.

• 43:48Patrick O'Shaughnessy?

  Can you say any more about that? This might be just a, we'll skip over this one because it might just purely be art. But do you think there's any commonalities across those, the VP of Sales who's, you know, really effective that you've seen in your career?

• 43:56Speaker 03

  The personality types I've seen succeed in almost every line job. I'm always shocked at how different they are. But, you know, there are certain things that you can just sense, and some people just know how to sell. And it's funny because to be a founder, you really have to know how to sell because

• 44:13Patrick O'Shaughnessy?

  For sure.

• 44:14Speaker 03

  You can't recruit if you don't know how to sell. And there's just a natural affinity to selling that you find in these people. But they have different styles. Some are more direct, some are more of a relationship sell, some are, a million different ways to do it. But they all have this sort of common core of they're not afraid of rejection, they're not willing to just keep being relentless, they have grit. There are these, some personality traits that are almost always there, but the amount of diversity is actually almost surprising.

• 44:47Patrick O'Shaughnessy?

  Who's the best salesperson you've ever met?

• 44:49Speaker 03

  Probably when he was doing recruiting, David Byrne, who was a partner at Benchmark at one point. He could sell somebody on going to a startup from a big company. He was magic at selling, at selling like that, at a high level. He'd convince some CEO to leave AT&T and come run some little tiny startup. He had that ability to, it was also the big sale. I saw, I was in meetings when Erwin Jacobs was selling his first CDMA system. He was a good salesman. He was a different guy. Had great math, he was very technical. He did a sort of a great job selling. It's just sort of different in terms of that personal sale of selling someone, you get this cushy job, you're top of the heap, you should leave that and go join this startup. That takes a salesperson, somebody who really knows how to sell.

• 45:31Patrick O'Shaughnessy?

  What's the best sale you've ever made?

• 45:32Speaker 03

  Probably selling ideas, because that's my job. And the ideas of, the best sale I ever made was, the internet bubble was upon us and things were rough. And everybody who was a capital allocator, who was an investor in private equity, had to decide where to put their chips. And we had to decide whether to put our chips in XO and fight a battle with Icon, or whether to double down on Nextel. And the best sale I ever made was to say, we need to double down on Nextel and we can let Icon have XO because there was never going to be there, there that level three was just too, going to be too problematic and it was just going to be a long haul. And I proved to be right. So I sort of believed in wireless and the scarcity, but that was, that was selling an idea.

• 46:17Speaker 03

  And that's a lot of what you do as an investor, is selling an idea as opposed to selling a new sell site or something like that. But selling ideas requires its own skill. And then the other thing, I guess another one I would say is, when I decided to go with the fourth employee of a startup. I had to sell my family on the idea that I was gonna go do something that I was gonna be traveling 500,000 miles a year for five years and I was gonna throw myself into it and I was still gonna be able to good dad and I'd still be there for them. So I had to sell that phase of my life to them and I think they just did it because they love me and they'll forgive me for it someday.

• 46:52Patrick O'Shaughnessy?

  (laughing)

• 46:54Speaker 03

  But I had to sell my family on, you know, like doing a startup, because startup is

• 46:57Patrick O'Shaughnessy?

  Hell.

• 46:58Speaker 03

  all in. It's just totally all in and you're the first person there and there's no health insurance yet. You haven't figured out things like that. Eventually you get it, but you know, all that stuff and it was also, you know, I was gone a lot. So I had to sell them on the fact that this was gonna be worth it and it would be good for them and good for me and something I needed to do. And so I had to sell that. They'll forgive me someday.

• 47:19Patrick O'Shaughnessy?

  If you could teach every high schooler kind of one core idea or impose on them one, one reading, I'm assuming the Munger speeches would probably be one and two, given your, your, your love of them. But maybe those, maybe Munger excluded. What do you think the most important lesson is for younger people that's broadly applicable?

• 47:35Speaker 03

  With my children.

• 47:36Patrick O'Shaughnessy?

  Speaking of selling ideas.

• 47:37Speaker 03

  With my, with my children, it's sort of a Taliban idea, but it's also a mandarot idea or whatever, which is this whole idea and or Sam Zell, you know, they all have the same thing, which is this concept of convexity, which you would never use that word to teach it to a high schooler. The way, way you tell the story is, okay, I know you're gonna be at a high school and you're gonna go to parties and there's gonna be drinking. And you're gonna be in a situation where maybe you haven't drunk that much, but your friend has and your friend wants to drive you home. You need to understand this math, which is probability times magnitude, which is the Mavisun classic line. You know, it's magnitude of correctness that matters. But the important point is, is even if there's only a 0.1, 0.2% chance that your friend's gonna drive into a tree and kill you, the magnitude is great. You just don't take that risk. You call me, I won't be mad at you,

• 48:19Speaker 03

  I'll come get you, but never take that risk. But then the converse of that is occasionally in your life. You're going to get an opportunity and someone's going to say, hey, the Rotary's just offered you a scholarship to go spend your junior year in Fiji or France or someplace like that. And they're going to say, I miss my friends, I'm going to do this and that. But it's like, whoa, think about the positive optionality of going to another country, learning new things. And so it's the flip side of getting into a car with a drunk friend to take the ride home, where you have big downside, you know.

• 48:47Patrick O'Shaughnessy?

  Magnitude.

• 48:48Speaker 03

  Yeah, it's magnitude. But on the other side, you should take the Rotary scholarship and get the heck over to whatever country it is and have that growing experience. And the upside of that is just potentially so massive. So that core idea of probability and statistics, I think it should be taught before calculus in high school. I think it's even more important than, like I said recently, like two years ago, I was like, I've never used calculus in my whole career. You have to use it to send someone to the moon and engineers use it and all that kind of thing. But in terms of, as an investor.

• 49:19Patrick O'Shaughnessy?

  Might be a bad thing if you're using calculus.

• 49:21Speaker 03

  Kids in high school, you know, the line is, someone who doesn't understand probability statistics is like a one-legged person in an ass-kicking class. It's like, you need to understand probability statistics. And this is a Taliban mandal brat, you go down the list of ideas.

• 49:35Patrick O'Shaughnessy?

  I love that as a key lesson. You mentioned MoviePass as a business that has a bad wholesale transfer pricing problem. I'm curious if there's a counter example, I like the two ends of the pole, of a business that you've seen recently that just really intrigues you. Maybe you haven't done a deep dive on it yet, but something that has your attention in the positive sense.

• 49:52Speaker 03

  Well, in the positive sense, I'm always interested in what Reid Hastings is doing. I think it is sort of a brilliant move. I especially admire the bravery he had when he knew that he was going to have a massive wholesale transfer pricing power, when he lost what's called the first sale doctrine on the discs in the mail where he was guaranteed a reasonable price. And he basically just did what they did in South America when the Contestadors landed, which is they burned the lifeboats. And they said, we're going to go all in, we're going to make this content. He's just brave. And he's not willing to just throw the chips down and say, this is what I'm going to do. And that level of spending and that bravery about this is customer acquisition cost and CAC, it's both. He uses that better content to acquire customers, not just that.

• 50:36Speaker 03

  And the LTV of that and the magnitude of the betty's placing, that to me is just one of the most compelling stories in business because it's, it's just sort of unprecedented bravery. Just burn the light boats and go for it.

• 50:48Patrick O'Shaughnessy?

  I love that. You've written a ton about music, and specifically hip hop music, which I found interesting and kind of fascinating. What got you into that and why the people that you focused on? The Snoop's and Kendricks and Jimmy Iovine, I've seen a post on him. Why are you so interested in hip hop?

• 51:04Speaker 03

  First of all, anybody who's my age who has kids for a time in their life, drove them in carpools to swim meets or whatever it was. And so that music was playing, so I actually know that music very well.

• 51:16Patrick O'Shaughnessy?

  Yeah.

• 51:17Speaker 03

  And particularly what would now be called old school. And I was in a situation and someone said, he said, "Guy, you're writing all these posts of all these people." He said, "I bet you couldn't write one about Biggie." And I said, "I can write one about anybody." And I said, "The reason I can is because I don't think I've ever met anybody you can't learn something from." And that applies in what Talib calls inverse role models, which is some things you can learn from people is what not to do. And so somebody's example of somebody's life. But with Biggie, you go through his things and he was a street smart guy who pushed his way out of a situation that was, it was very hard. And he learned on the street how to sell, how to take care of himself, who his friends were and all that. And so I wrote the first one on Biggie and I said, "That just felt pretty good."

• 52:01Speaker 03

  But also, part of my blog, I'm not content marketing. I don't have any ads on it. There's no business associated with my last book, All the Problems With a Charity. I'm just trying to teach as penance in a Charlie Munger style way. He says it's penance. I got lucky, as Muhammad Ali said, part of rent in life, or getting lucky is you got to pay back. So this teaching stuff for me is that way. And so how do I reach younger people? And I said, "Well, this Biggie thing that was really popular, I can see the stats. And I bet it's a different audience, so maybe I can reach more people by saying, okay, well, I'm writing about Wu-Tang, I think was next. And then there was Yeezy and Kendrick, and I go down the list." But the point was, I also did one about Sammy Hager for Equal Opportunity Time. I should probably do, you know,

• 52:44Patrick O'Shaughnessy?

  That was a good one.

• 52:45Speaker 03

  You know, some country western one soon. But the point is, I'm trying to reach people who need an introduction to the basics of, of business. And frankly, with my blog, I'd rather help a plumber in Akron than a hedge fund guy earn another two basis points. Because they're the people who are struggling. They don't know what to do. They're getting sold all kinds of rubbish. And they're getting these messages from people who are just trying to take them. So if I could reach a few of them, With a Biggie post or a post on Sammy Hagar or whoever. And then plus he just lightens it up, you know, because I got 120 posts about when I did the Biggie one and now I'm up to like 275 or something.

• 53:25Patrick O'Shaughnessy?

  One a week, right?

• 53:26Speaker 03

  Yeah, yeah, one a week, every Saturday, you know, without fail, without break. But the point here is though, how do you reach people and how do you teach young people? And I've even thought about writing a post about what should a high school finance course look like, what should be in that class, who could teach it, should it be online, could a high school sociology teacher segue to teach that, probably not. So anyway, but how do you, the people who need it the most have it the least and they don't know what to buy. And they're loading up on dentacoin or, you know, it's just, this stuff is just mind boggling. And, and, and I feel sorry for them because it's going to be bad. And then I feel bad for society because these people are going to be old and poor and are going to be a negative externality for everybody. We don't want old, poor people.

• 54:11Speaker 03

  And so how do we prevent that? You know, what's the right degree of education? How much of that should be Australia style where they have some things they have to do in terms of saving? All hard questions.

• 54:22Patrick O'Shaughnessy?

  There's a name that I think he might have mentioned it, but we didn't go into any detail. And I just, the richness of some of his quotes is a great excuse to talk about some interesting ideas and it's Jim Barksdale. So maybe you could describe who Jim is for those that don't know. And I'll read a couple of these quotes and just love to get your reaction to them. So the first one is this idea that the infantry is always ahead of headquarters.

• 54:41Speaker 03

  So this is classic Jim and the story of him is, is, is a long history of, was it Federal Express and then came to Macaw to turn Macaw into an operating company from an M and A company?

• 54:53Patrick O'Shaughnessy?

  He was the CLO at FedEx, right?

• 54:54Speaker 03

  Yes. And then he came to Macaw to basically, Craig was building a roll-up company, but it needed to have operations and needed to make the trains run on time. He was there until the sale to AT&T and then he went down to Netscape. And, you know, he's from the south, he's from Jackson, Mississippi, been to visit down there. And he's just like a monster operator guy. And he just knows how to make things work. And what he knows is people in the field are out there trying to sell stuff and they're at the point of

• 55:21Patrick O'Shaughnessy?

  Tip of the spear.

• 55:22Speaker 03

  Moment of truth, tip of the spear, and he knows what the hell's going on. They're not some guy back, you know, sipping coffee at the officers' club, you know, thinking, "Well, I think we should outflank these people." They know what the hell's going on, you know, "There are tanks coming at us," you know, whatever. But it's the same thing in business. And Jim understands that. And the great operators, guys I've seen, like John Stanton was that way, which is, they get out of their chair and they go find out. They go visit and meet with the infantry. Like in McCaw, in the old days, it was like, if you were exhibiting tea in the officers' club kind of mentality, they forced you to spend a whole day in a call center. There's nothing like a whole day in a call center to give you a good sense of what the customers are thinking about your product. Do you have product-market

• 56:04Speaker 03

  fit? You come out of the day like, "Holy crap, we've got some stuff to fix." But he's also, you can't measure something, it's hard to focus on it. There are plenty of things you can measure that you can fix. The whole thing about when you encounter a snake, shoot it. Don't write memos about it. You know, if you've got a damn snake in front of you, shoot the thing. And then if you shoot it, don't, and then don't write a lot more memos about, "Was it really dead? You know, is it still out there?" You know? It's like, "If you see a snake, shoot it." He's got these other ones. The one that I love, it's sort of off-color, but a little bit, this saying in the South, which is, "If someone comes up to you and said, 'Here's this horseshit,' would you keep this for me? You know, would you hold this in your hands for me?" And a lot of life is that way. Someone saying, "Here's this trouble,

• 56:46Speaker 03

  will you please have this?" And you have the ability to say, "Well, no, that's mighty fine horseshit you got there, but I'm not grabbing it. That's yours. I'll give you some advice about it, and I'm gonna get out of here quickly, 'cause it kinda smells, but I'm not gonna grab that from you just 'cause you asked me." And he's got all these southern stories and homilies that are, "Someone's a good salesman. He could talk a dog off a meat truck," you know, things like that. But real operating Focus things on generating results, making sure you make quota, making sure you make the numbers, and he was a role model for a lot of other people.

• 57:17Patrick O'Shaughnessy?

  A couple more, you don't have to react, but if you have reactions, great. I love this one. Quit spitting on the handle and get to hoeing. It's kind of what you just talked about.

• 57:24Speaker 03

  Yeah, it was sort of like, there are certain people, particularly if they come out of consulting firms, that just love to talk, they can talk an issue to death. They love to, "Well, I think we should do here," you know, and we think about pivoting here and all that, and eventually someone's got to go out and sell some stuff. You've got to make a sales call, and you've got to like, not sell some stuff and get some feedback and actually have real data. And so, the really great founders are doers. They roll up their sleeves and they do stuff. And like John Stanton, when the cell site was out, he'd get on a plane and go there and he'd make sure it got fixed. And he was, they'd like to do stuff. And you need a mix of doers and thinkers, and in your own mentality, you need a mix of thinking, and just all doing and no thinking is not going to have a good result. But all thinking and no doing isn't going to have a good result either. So, it's

• 58:09Speaker 03

  the idea of diversity in the broadest possible sense, in terms of what you do, and how you think, and who you read, and how you listen, you know, diversity is a big, important concept that's really big, in terms of the books you read. I know you're huge on that. But the books you read, and the people you talk to, and the friends you have, the team you recruit. Some of the teams I've seen, like Craig McCaughan's team, or the team at Microsoft early, very, very different personalities, all of them. Difference between Bill and John Shirley, and Frank Odette, and Mike Maples, they're all very different. But as a team, they were like, just magic, because it all sort of gelled. And you, you can see it, it's sort of like pattern recognition, but you've, but you've never seen that exact pattern

• 58:54Speaker 03

  before, but you've seen it.

• 58:55Patrick O'Shaughnessy?

  The last quote I'll read from, from him, just so we can move on to a few, few closing topics, is, "Nothing happens until somebody sells something," which you've talked about too. But, but I want to pick up on this idea of doing as a means of learning. A guest I had on recently had a phrase, which was, when he's looking at a startup, or really any business, the thing he cares most about is product velocity, because he views that as learning itself. The company's ability to actually put stuff out and do stuff is a Demonstration of their ability to learn. I'm curious about how you think about that balance in your own life. You're a huge reader. I'm a huge reader. And I've kind of had this existential readers crisis lately. Where I feel as though, wow, maybe I spent too much time reading. Maybe I should have taken a third of that time or half that time. And only been thinking about doing. So how do you strike that?

• 59:40Patrick O'Shaughnessy?

  How do you strike that balance personally?

• 59:41Speaker 03

  So this is a magical time. Because so many devices are connected and so many processes are connected now. That somebody like you and I, the two of us who read so much. Have actually the ability to actually have data scientists and other people's statisticians. Sure you have some working for you right now. Who can give you this feedback. Of these experiments and you can say, well, what if you did this, you know?

• 1:00:03Patrick O'Shaughnessy?

  Does it actually work?

• 1:00:05Speaker 03

  Yeah, and the velocity at which you can do that. Is stunning. And the ability to turn that thing around. So and if you have good systems. You can run. You can conceive up and run an experiment in a day. In an A B test of if you're instrumented.

• 1:00:20Patrick O'Shaughnessy?

  Hour.

• 1:00:21Speaker 03

  Yeah, exactly. And that kind of thing. Allows you to to test more doing than you've ever tested before. And what it is, is the scientific method on steroids. You know, if you look at lean startup or all these other processes or some of the things that we're talking about in A and all that is. Scientific method is is really. Super, super powerful. And if you can instrument it. And you got the modern processing and cloud power behind it. You can actually see doing more than ever. But I think in the end, though, somebody like you and I also need to go out on sales calls. And we also go need to talk to some customers. And sit in on some focus groups and. There's diversity required and you really need to get out there and sit with a customer. There's just nothing. Bill Gates said once unhappy customers are our greatest source of learning.

• 1:01:06Speaker 03

  This is back in the days of Microsoft Basic and in the early days. But basically, you know, you just got to get out there and being in a call center.

• 1:01:13Patrick O'Shaughnessy?

  Yeah, that'll do it.

• 1:01:14Speaker 03

  Yeah, it'll do it. Your eyes will get big, like, whoa, can't think about this.

• 1:01:17Patrick O'Shaughnessy?

  Have you ever read the book Seeing Like a State by George Scott?

• 1:01:21Speaker 03

  No.

• 1:01:21Patrick O'Shaughnessy?

  You should definitely check it out. So it's all about this concept of, I think it's a Greek term, metis, which is local knowledge. So it's the same idea of the infantry versus the general. That's the only like really valuable knowledge versus this centrally planned, you know, line the trees up perfectly and it works great for one generation of trees, but it destroys the soil. It's a fascinating book. Your point about getting out there makes me think of this question, which I don't ask all that often, but it seems really appropriate for you, given the diversity of experience you've had. What was the period or the time or the episode that you felt most alive in your career specifically?

• 1:01:51Speaker 03

  I felt most alive in my career when I did the startup, when there was only four of us and we were going to build a system that was going to cost nine billion dollars when we'd have any money and we had to go out and do it. And nobody had ever thought about it, or it was a clean slate. And I couldn't turn to anybody and say, you have to do this. And I think that life experience, I wouldn't trade it for anything, but it was hell on my health and some of my relationships. I had to go back and repair some things because you're just completely, when you're flying 500,000 miles a year.

• 1:02:21Patrick O'Shaughnessy?

  That's insane.

• 1:02:22Speaker 03

  I did for five years, you know, and you've got to be a dad at the same time and all those sorts of things. And I really felt alive, but I also felt like I had to rally. And even though I was getting home late on Friday night, I had to be there at the swim meet or there, you know, whatever the event was for both my kids. And it's tough, but it did make me feel alive. You know, there's this whole idea of fear, and I think fear is a good thing. The absence of any fear is like you're dead. You've got to have some tension in your life. And so that was the time where I was most terrified. Not terrified, just alive. Because if I messed up, my assistant was not going to be able to make her mortgage. But the important thing was I cared about her and her family and I didn't want to screw up. And I think about founders

• 1:03:05Speaker 03

  out there today, they're all that way. And, you know, most businesses, startups, they don't make it. And if you're a feeling person, you feel horrible if you don't make it. And some people go into startups and they just don't realize the odds. I know the odds. They don't realize that it's a power law. They don't understand. They heard about this one good one and that sounds pretty good to them. Right. But you know, if you're a caring person, you care about those people. So you gotta throw yourself into it and it's like being on a great roller coaster.

• 1:03:36Patrick O'Shaughnessy?

  Any closing advice for, we'll say, young business people out there? Would be founders, maybe those that don't have the entrepreneurial bug, but are just fascinated by business. We've covered a lot, which is great. But I want to make sure I don't leave any major points left unsaid since you've got such interesting viewpoints.

• 1:03:51Speaker 03

  I think on the young founder thing, I think it's really critical to think about who you raise money from because too many people think, okay, I'm going to raise some money and I can raise some money from my Uncle Fester and my Aunt Morticia and you know, a couple of other friends of theirs or whatever. And it's not value added money. You're not getting any intelligence from it. It's not going to help you do your A round and they're maybe going to be calling you all the time. And they have no idea that it's a 15 year, maybe 12 year, 10 year exit if it happens. And then you're maybe spoiling a relationship you have with your Uncle Fester, who you've loved since the Addams Family days, you know. All these times that people are raising money where they're not raising money from professionals

• 1:04:36Speaker 03

  is a lost opportunity to get really professional, value added money. And then the other thing is be a missionary. Don't be sitting around in your office and saying, well, Bitcoin's hot. I think I'll go do that. And you don't love the idea of it. You don't love the underlying technology. You don't love the math. You don't love the product. You don't love the thing. It's like if you're going to do something and you're going to throw yourself into it and it's going to dominate your life for like seven years. And those people around you, you're going to be with constantly. And you're in the same life, why would you do something that you weren't like super, super passionate about, that you didn't want to throw yourself into? And that's what investors look for because.

• 1:05:18Speaker 03

  Those people get over the hard times. Mercenaries say, oh, this is bullshit. I'm out of here. And so they, and they might have succeeded if they just hung in. And I guess the last piece is.

• 1:05:28Patrick O'Shaughnessy?

  Can we pause before the last one? Cause I've got a follow up question there.

• 1:05:30Speaker 03

  Sure.

• 1:05:31Patrick O'Shaughnessy?

  So my guess is if you polled the entire working population, let's say, middle class and up of the United States and said, binary, yes or no, are you passionate about what you do? Are, do you feel like you're a missionary in what you are doing? I don't know what that percentage would be, but it's pretty low would be my guess. A lot of people aren't satisfied with their job, with their work. And you've described what a, what a pleasure that can be to be, you know, sort of all in on a topic. Why do you think there's that gap? Like, what, what do you think drives the, the lack of people doing missionary work?

• 1:06:02Speaker 03

  I think some of it is, first of all, some people grew up in an environment where the job is just a place where you go so you can get home.

• 1:06:07Patrick O'Shaughnessy?

  They just don't know.

• 1:06:08Speaker 03

  Get to the lake in the speedboat. And they just think that's work is something you do so you can do things you really want to do. And then they didn't have a choice, or they had to support their family or whatever it was, and they got into something and they're just doing it and they hate it. There's that, but then there's also just not ever having seen somebody who was like too truly stoked to say, I'm going to go do this. I'm going to go create this payment system for remittance overseas or whatever it is, what's their true passion. They've never had a model for it. And then the third piece is, I won the lottery. I had models to see, I got out of college without any debt. I had great mentors, one thing after and the other. And I also had some money put away. And it's one thing for me to go out and do that startup when I have a little money put away.

• 1:06:53Speaker 03

  It's another thing to put up, but you don't got, there's no fallback and you've got young kids and, and all those sorts of things. So I feel lucky that I had a chance to be a missionary. But if you can't be a missionary and you don't have all those things, it's the worst of all possible worlds. Because at least if you're a missionary and you don't have any fallback and whatever, at least you have your passion and if it doesn't work out, you at least have said, well, I lived my dream. To go out and throw yourself at something that you don't care about, that you were doing it just for the money. I mean, they're the worst CEOs, the worst CEOs in the world, founder and CEO. It's like, we're going to do this and we're all going to get rich. It's just, it doesn't work. Those people don't succeed. They can, I'm not saying it never happens, but they don't, they're not people you want to invest in.

• 1:07:38Speaker 03

  Certainly if you ever see that with me, it's like, nope. But having that passion about that is essential. So if you're going to take that level of risk. Be passionate. Find something, if you really love X, if you really love, you know, I read about somebody that somebody the other day was doing landscape supply roll-up.

• 1:07:58Patrick O'Shaughnessy?

  I might know them.

• 1:07:59Speaker 03

  Smallish business are trying to do first national brand of landscape supply. You're gonna do better in that business if you're really passionate about that. You love plants, you love the organization, it's your thing, you're stoked. Me, I'd rather drop a large rock on my foot than be a dentist. Doing anything against dentists and next time I'm in, I hope he doesn't take it out on me, you know, for, give me a root canal I don't need because I was that way, but just for me, that's just not what I would want to do. Same thing over and over and over again, just it wouldn't, wouldn't make it for me. But the important thing is be passionate about something if you're gonna take that level of risk in your life, because it is a huge risk. Most stuff fails, but that's, that's evolution, you know, most evolutionary trails.

• 1:08:36Patrick O'Shaughnessy?

  End.

• 1:08:37Speaker 03

  End. Yeah. Badly.

• 1:08:40Patrick O'Shaughnessy?

  I diverted you, I think there was one, there was one third lesson.

• 1:08:44Speaker 03

  Oh, it doesn't matter. It doesn't matter. We could, we could go on and talk forever, you know, we, we are, we are natural kindred spirits and we're always thinking about things and we're curious about things. And for somebody to have a career like mine, somebody comes in and says, "Well, I want to do what you're doing, that sounds pretty fun." And I'm saying, "Boy, I got lucky, and this thing fell together and that thing fell together." I'm like, "How do you do that?" And I guess my advice to them is usually, "Well, the way life works is usually one thing leads to another."

• 1:09:11Patrick O'Shaughnessy?

  Yep.

• 1:09:12Speaker 03

  "I started doing this and I met this person and they introduced me to this person and I started doing this and pretty soon I was in Afghanistan and I was, you know, selling water to groups and water systems and then private equity guy met me and we started, you know, investing in South America, you know, this thing is like, and you meet people who are older and you ask them about their lives, a lot of times you'll get a story like that, that is just fantastical, that you never, you could never, you couldn't write it, you couldn't, couldn't script it. And so, life just unfolds and it's dynamic, you can't predict stuff. We haven't even talked about all these issues about the difficulty of forecasting and predicting things. And so, the good news is, it's fascinating. There was this John Cleese monologue that I was at recently and he said, his favorite

• 1:09:57Speaker 03

  line is with a woman who was dying, sort of elderly English woman, they asked her what her last words and she said, "This has all been very interesting."

• 1:10:08Speaker 03

  Which is like this conversation we're having today, which is, which is for certain people, you know, having an interesting conversation, reading an interesting book, that's its own reward. And nobody taxes it. It's great stuff. You get to keep it forever. You can learn from it. You can profit from it, too. But it is, interesting life is its own reward.

• 1:10:28Patrick O'Shaughnessy?

  I might call this episode something like Follow the Thread, or something like this. And I wanted to say a thanks. When I first started doing this, this format of learning, which is its own kind of interesting adventure versus, say, reading, conversation's a great way to learn. Your writing was one of the few, sort of, I'll call it like, content examples that has sort of been a guiding light for me. And there's one very specific thing that echoes what you just said, which is this, this like openness to new stuff. The variation of topics that you cover, the formats you do it in, the people you use as exemplars of these ideas, is truly unique. It's one of the only things I read every week. So, thank you for that. I think it's, it's an amazing way to learn. And too many people want the whole curriculum, when they don't realize that the best curriculum is

• 1:11:11Patrick O'Shaughnessy?

  one that you build sort of step by step, just pulling on a thread. So, a huge thank you for that. The last question, which I ask everybody, is for the kindest thing that anyone's ever done for you.

• 1:11:21Speaker 03

  I guess just stuff that, all the stuff that Bill Gates, Senior, did for me. Taking time to have breakfast with a young person, and just talk about life, and talk about judgment, and talk about getting involved in the community, and the importance of just showing up. That's the title of his book, is that. And just the mentoring time that this one man gave to me. I've written a post on what he meant to me, Bill Gates, Senior, Lessons From. And just hours and hours of lunches and breakfasts and sessions where I was able to talk, and he was able to come back, and just sometimes him just listening

• 1:12:02Speaker 03

  to me. And so, he's a giant person in my life. If it wasn't for that family, for the Gates family, I'd be working in plumbing supply.

• 1:12:10Patrick O'Shaughnessy?

  I don't know about that.

• 1:12:12Speaker 03

  Someplace. I mean, just all of the breaks I've had, and all the things I've learned. His mom was spectacular, Mary, and of course, all the things that's happened to Seattle because of, because of Microsoft and me. But just him taking time to mentor me would be the simple answer. Taking the time to help a young person.

• 1:12:30Patrick O'Shaughnessy?

  It's a great way to close the conversation as well. So, thank you very much for your time.

• 1:12:34Speaker 03

  Great.

• 1:12:36Speaker 04

  Hey everyone, Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter @Patrick_OShag. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.