How to Think (and Work) Like a Billion Dollar Investor | Adam Karr

0:00:03 How do we go about selecting the game that we’re playing in life?
0:00:07 Thinking about what game is it that you’re playing, and so just using the investing landscape,
0:00:13 it surprises me all the time that people don’t think about that more deeply. You see this over
0:00:17 and over again in markets, and there’s a whole continuum. One end of the continuum,
0:00:24 the algos that are scraping to the millisecond, to a day trader, to the hedge funds and pod
0:00:29 shops that are trading on a catalyst, to call it Stan Druckermiller, who just talk about,
0:00:33 “I want to look 18 months out to us,” so we consider ourselves long-term investors. We’re
0:00:40 trying to take a four to five-year view to be infinite investors. Depending on what game you’re
0:00:44 playing, you’re going to approach it quite differently. A really important question,
0:00:48 and I see it over and over even today, people in the business for years of like,
0:00:53 “Well, what game are you playing?” Being really clear and thoughtful about that and then really
0:00:58 leaning into them playing to that, I think makes a huge difference.
0:01:11 Welcome to The Knowledge Project. I’m your host, Shane Parish. In a world where knowledge
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0:01:24 Go ahead and hit that follow button right now. Thank you. My guest today is Orbis President
0:01:29 and Portfolio Manager Adam Carr, who reveals his battle-tested system for creating advantages,
0:01:34 a method that’s transformed organizations and careers. He calls it the blueprint and for good
0:01:40 reason. You’ll discover how to identify patterns that others miss, exploit hidden edges others can’t
0:01:46 copy, build repeatable success in any arena. Warning, this is not another work harder sermon.
0:01:53 It’s a practical proven framework for outperforming your competition. It’s time to listen and learn.
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0:03:47 How do we go about selecting the game that we’re playing in life?
0:03:54 Using the investing landscape, it surprises me all the time that people don’t think about that
0:03:58 more deeply. You see this over and over again in markets, and there’s a whole continuum from
0:04:05 one end of the continuum, the algos that are scraping to the millisecond. That’s their game,
0:04:08 and if that’s your game, you have to do certain things. You have to invest in certain infrastructure
0:04:14 and certain capacity to a day trader, to the hedge funds and pod shops that are trading on a
0:04:21 catalyst and around a quarter to, call it, Stan Druckermiller, who I want to look 18 months
0:04:26 out to us. We consider ourselves long-term investors. We’re trying to take a four to five-year
0:04:34 view to the infinite investors above it, who is trying to own things forever. That’s a huge
0:04:40 continuum, but depending on what game you’re playing, you’re going to approach it quite
0:04:45 differently. A really important question, and I see it over and over even today, people in the
0:04:52 business for years of like, “Well, what game are you playing?” Being really clear and thoughtful
0:04:58 about that and then really leaning into them playing to that, I think makes a huge difference.
0:05:00 I mean, in theory, you’re not going to be good if you’re playing a long-term game. You’re not
0:05:04 going to be good at day trading because the skills and the environment necessary to be
0:05:09 successful at those two things are sort of opposed. How do you think about Buffett and his
0:05:14 style changing four or five times over the course of his career? He was never a day trader, but he
0:05:21 went from cigar butts to buying, and I wouldn’t say holding, but trading quite frequently to
0:05:26 buying and not trading as frequently. How are you going to adapt your game to something that’s
0:05:31 authentic to you in a way that can play to your strengths? Market change. I’ve even seen that
0:05:38 from the time that I started the mid-90s to today. If you’re playing cigar butts, which can be very
0:05:44 profitable, but it’s difficult to scale that. As his capital grew over time, you have to think
0:05:50 about how you show up and how you approach it. We know that Munger was also a key part of that
0:05:56 conversation and framing and helping Warren think about what he focused on. Underneath that is
0:06:01 thinking about how he needed to adapt based on his own size and the amount of capital he was trying
0:06:06 to deploy. The environment is not just the computers you might need to fear day trading.
0:06:11 It’s like if you’re running a public firm, it’s how do I maintain control of that firm
0:06:15 so that we don’t have an outside shareholder come in and take control. That’ll make me change
0:06:20 strategy or change environment. How do you think about environment and the role that it plays?
0:06:24 Try to think about your obsessions. You never want to compete with somebody who’s obsessed.
0:06:31 Kobe Bryant, he would say, “What’s your 4 a.m.? He’s at the gym at 4 a.m., shooting baskets.
0:06:35 Are you at the gym at 4 a.m.? Because if you’re not, you’re competing against that guy who is.”
0:06:40 He took up tap dancing because he wanted to strengthen his ankles so he could be a better
0:06:44 basketball player. Are you obsessed to that degree that you’re going to undertake those
0:06:49 kind of actions? The elements that you’re so drawn to that you’re willing to do those kind of
0:06:56 things and whatever the kind of chosen aspect is, is really powerful. If you consistently do that
0:07:04 over time in that compounds, set yourself up to play to your obsessions. I mentioned to you last
0:07:10 night that I just back from Japan and the author, Mirakami, is one of my favorites. He’s like,
0:07:16 “Set your life up for your obsessions.” Because if you do that, you’re all in. You’re grinding
0:07:21 at that in a way that very few other people will do. It’s to the setting up your environment,
0:07:28 the plays to all of the ways that you do your best work. The other side of that is just the concept
0:07:33 of alignment. You might say, “I’m a long-term investor, but you’re only going to be able to
0:07:40 be as long-term as your clients.” Allow you to be. If you’re in a position that’s off-sides to
0:07:44 kind of the market sentiment at that time and you have in your mind that this is something that’ll
0:07:49 play out over four to five years, but your clients are knocking on the door and want to redeem,
0:07:55 you’re not going to be able to play your game. You have to think going in, how am I going to
0:08:00 communicate in a way that I’m looking at this kind of time horizon? How am I going to attract and
0:08:06 retain the types of clients that have genuinely have that same kind of time horizon? Because that
0:08:12 will empower you to actually be in that environment that serves you the best. How do you find obsessed
0:08:18 CEOs? What are the markers from the outside as an investor looking in because I’m assuming you want
0:08:23 to invest with people who are obsessed? It’s just doing the work. It’s looking at their track record,
0:08:27 demonstrated action. One of the things that I spend a lot of time on is thinking about the
0:08:33 questions. We do a lot of work before we initiate a position. We tend to take reasonably sizable
0:08:39 positions, go and sit down with a team. You’ve done a ton of work in advance, really looking at
0:08:42 their demonstrated track record, but then you want to have that conversation. What are the
0:08:48 questions you ask? What are the questions that come to mind when you’re like, if I had 10 minutes
0:08:53 with a CEO and my goal is to determine if they’re obsessed or not? What are the questions you’re
0:08:58 asking? Context matters a lot. You kind of never know. You got to be prepared to play jazz in the
0:09:04 moment, but sometimes a very generative question that really opens it up and seeing where they take
0:09:10 it can be super helpful. Sometimes they’re putting in the CD and they’re giving you the script.
0:09:13 That’s not going to be really helpful. You got to approach that very differently.
0:09:18 But one of the things that I like to go to is around culture. More often than not,
0:09:22 they sit down with folks and they tend to be relatively short-term oriented. They want to
0:09:29 understand something around the quarter or a particular profit margin point or capital allocation
0:09:33 point. Tell me about your culture and what’s important here to be successful or my nephew is
0:09:40 going to start at your company next week. What would you tell them to be successful? They probably
0:09:45 haven’t gotten that question and so they can’t use the CD script. They got to go somewhere else.
0:09:50 What do they talk about in that? Do you see that passion come out and then you just follow
0:09:54 that thread? Not always, but it can often be very telling. We talked about alignment,
0:10:01 but one aspect of alignment is timeline. The average tenure for an S&P 500 CEO is,
0:10:05 I don’t know what it is, but it seems pretty short. How do you go about building a long-term
0:10:10 position? Your average holding period is longer than the average CEO tenure. How do you think
0:10:16 about the mismatch between quarterly, annually, long-term investing, building a company that
0:10:22 lasts? These are all interconnected. A good question can often be just very simply
0:10:26 sitting down with the CEO and saying, “What’s important to you?” How they answer that can be
0:10:32 very telling. I want to build something special versus they go into hitting their quarterly
0:10:38 guidance very different lens. I think the average S&P tenure is somewhere between three and four
0:10:43 years. To your point, it is relatively short. We very much approach it as owners and we’re
0:10:49 thinking about what you would as an owner, like capital allocation and defensibility of the business
0:10:53 and what they’re able to create over time and show up in that way asking questions around that.
0:10:59 In the midst of that conversation, you can typically glean pretty quickly the way in which
0:11:02 they’re thinking about the business and that’s an important tell. I think that’s part of the
0:11:07 reason controlling your fate is so important too, because I often think of CEOs and this
0:11:12 analogy is not perfect. Correct me here, but they’re almost like coaches going into a losing team.
0:11:16 There’s a reason the old CEO is no longer there in most cases and it’s not retirement.
0:11:22 You know, it’s sort of like being pushed out. Your incentive is I know I have three years to
0:11:28 term this program around like going back to the NFL thing or any sports team. I’m going to take a
0:11:33 risky behavior that is increasing. I’m going to trade the first round draft pick. I’m going to
0:11:38 bet the farm on a player because I know at the end of the day, I have three years to win or I’m
0:11:43 out anyway, but then the next person comes in and you’re in this increasingly worse and worse
0:11:48 position and then you don’t get the endurance of a 100-year, 200-year company that survives.
0:11:53 And culture is always taking a hit because it’s like one hand you’re preaching long-term, on the
0:11:58 other hand you’re taking these increasingly risky short-term actions. Before I was doing public
0:12:05 market investing at Orbus, my current firm, I did distress turnaround investing, private equity.
0:12:09 We were often going in situations where you’re buying it based on asset value, buying a deep
0:12:15 margin of safety. You have contractual value, hard asset value, and very often you are changing
0:12:18 the management team. We’re just buying the assets or we’re going to bring the team in and it’s going
0:12:24 to make a difference. When I made the pivot and I came to the public market side, I very much had
0:12:29 that mindset. And it turns out in the public market side, that’s pretty difficult. Like public
0:12:34 market turnarounds are tough and have very low base rates for all the reasons that you were just
0:12:40 trying out. The market’s tolerance for doing the hard work is very short. One can take a lot of
0:12:46 shortcuts in doing that. And it’s probably the way that I’ve changed the most as a public market
0:12:54 investor over the past 20-plus years is very leery to go into turnarounds situations where
0:12:58 I’m betting on the management team making some kind of dramatic change. Like the base rates
0:13:02 suck. It’s very difficult to do in the public vice. I mean, it’s almost like I would sit down and
0:13:07 advise them like you’d be better off going private and kind of doing this outside of the lens of
0:13:10 the public world because you’re going to be able to do it in a better way. When you have those
0:13:15 conversations, it could be very telling in terms of how they respond, how they’re going to approach it,
0:13:19 what their scoreboard is, just asking like what are the KPIs that you’re going to hold that are
0:13:24 really important to you. Talk to me about the blueprint. First step, know yourself. Second,
0:13:29 be clear on the game you’re playing. And then third, like have a blueprint. So what do I mean?
0:13:35 Like this is invoking Charlie. Like one of my favorite Charlie quotes is take a simple idea
0:13:39 and take it seriously. Everybody as they’re coming up should have a clear blueprint of
0:13:46 somebody that does what they want to do has done it really well. A lot of times people talk about
0:13:51 mentors and one of the things that always frustrates me with young people when they ask me like,
0:13:56 “Oh, it’s difficult to find a mentor.” And I’m like, “What? You can have any mentor in the world
0:14:02 that you want.” There’s so much out there like pick somebody that you really respect and just like
0:14:08 be a sponge, get obsessive, learn everything you can about them. How did they do it? What did they
0:14:13 do? Like you can really, you can watch videos, you can read, and you really develop a mosaic,
0:14:18 a blueprint of what they did and why they did it. And pretty much everybody’s accessible to you.
0:14:23 You’d use it the same way that you would with any mentor, right? And so I’m going to go see my mentor.
0:14:29 What questions do I want to ask my mentor? You can do that virtually, right? And so you study
0:14:33 somebody, you can pose those questions to yourself so practically and you could answer the way that
0:14:38 they would answer it for you, right? Yeah. And I don’t understand why more people don’t do that and
0:14:42 take it take it really seriously. But the most important thing is for whatever your domain is
0:14:47 and the way that you want to do it, like have a clear blueprint for you. In the beginning, you’re
0:14:50 just, you know, you’re imitating it. And then you’re going to find there’s certain things that
0:14:55 don’t totally resonate with you and they’re not completely authentic. And you change those things
0:15:00 and there’s going to be some new things that you draw in that you kind of adapt from whatever that
0:15:04 blueprint was. And then that’s going to become you. And over time, it becomes you and it’s something
0:15:08 completely different. A friend of mine says you have to imitate before you can innovate. I mean,
0:15:13 there’s so many examples when you start thinking about it like Jay-Z, I think his best album 2001
0:15:19 called The Blueprint. I think it was paying respect and homage to those that he studied,
0:15:22 right? And when he was growing up, you know, he used to always carry a notebook with him and he
0:15:27 would write lyrics or ideas that he had and he would take it with him everywhere. And that was
0:15:33 his thing. I mean, to this day, like I still carry a notebook every day, like this is with me
0:15:39 every day. And when I have an idea, like I’m on it, like, and that comes from the blueprint, right?
0:15:44 And it works for me. So then you go to people like, you know, Saul Price, like he, the Price Club,
0:15:51 I mean, the people that he laid the blueprint for from Jim Senegal with Costco to Bernie Marcus with
0:15:59 Home Depot to Sam Walton. Who’s laid a bigger blueprint than Saul Price or Arnold Schwarzenegger?
0:16:04 Like, I mean, it’s a fascinating story if you think, I mean, he grew up in Austria and his original
0:16:08 blueprint is I want to be Mr. Austria. And then he did that. And it was like, I want to be Mr.
0:16:13 Universe. He followed Reg Park. And then he decided he wanted to be a big movie star and he
0:16:16 did that. And then he decided he wanted to go into politics, became governor of California.
0:16:20 Three different domains, completely different. Each one, he had a blueprint. And so it just
0:16:27 could be really, really powerful. And so if you’re looking to acquire a skill, and you’re using a
0:16:33 blueprint or a mentor as a role model, you almost want somebody who just did the thing, not somebody
0:16:39 who did it 30 years ago, unless what happened 30 years ago is enduring. So the way that you set up,
0:16:44 maybe, you know, Price Club or something is enduring or Costco is sort of like enduring,
0:16:50 right? Where you have this operating model where we operate basically, break even, and then we make
0:16:56 our money on memberships. That would endure in like 30 years, probably. But often we look for
0:17:01 skills. We look for sort of like, I want to do this particular skill, I want to learn this,
0:17:06 I need this, this is going to make me get a promotion, go to the next level. But if I go to,
0:17:11 you know, my mentor in the organization, he’s like 30 years older than me, who did this thing
0:17:16 before, but now the environment is like so different. And in their mind, it hasn’t really
0:17:20 changed. You know, it’s like, well, here’s how I did it. This is what you should do. But if you
0:17:26 follow that particular blueprint, you’re not going to be successful. To start, you just want to
0:17:31 emulate it, right? And then that gives you something to scaffold up over time. But as you’re scaffolding
0:17:35 it, then you’re also questioning not just what they did, but why they did it. So lots of things
0:17:39 will probably change. Well, what’s not going to change? Like the concept of having a membership
0:17:45 club hasn’t changed. Like powerful concept of being low cost hasn’t changed. There are other
0:17:51 elements of that in the delivery that have changed. And so those are the parts that you will adapt
0:17:55 as you scaffold it out. If you want perspective, you want to go to somebody who’s at the end of
0:17:59 the maze, who’s done it before. And it’s almost regardless of when they did it. It could be,
0:18:04 you know, six months before, and it could be 20, 30 years before. But they’re going to give you
0:18:09 perspective, which removes blindspots. And if you want skills, you have to go to people who
0:18:14 have relevance in the current operating environment and copy those sort of like skills,
0:18:19 because they’re more likely to be successful. But I like the idea of adding this extra layer of
0:18:26 what’s not going to change from the past that I can also bring back to right now. Like it might
0:18:31 work for them, but it may not be so good for you, which ties back to knowing yourself and listening
0:18:37 to that tell, I think is important. So who are some of your role models and like how did you use
0:18:43 the blueprint methodology with them? The first blueprint for me in investing goes back, I remember
0:18:48 for the high school or in college, but was Peter Lynch, you know, his book one up on Wall Street.
0:18:55 I think it’s one of the best, like incredibly accessible. I remember that reading that and
0:19:02 just totally connected for me, right? And, you know, a lot of people cite security analysis
0:19:08 of Ben Graham, like I’ve read it, like it didn’t, it put you to sleep. Not exactly a page turner,
0:19:11 right? Opposite with Peter Lynch, one up on Wall Street, I was like, like it just
0:19:18 really resonated and connected. And I think one of the big themes was focus on the things that
0:19:22 you know that are accessible. Buffett might call it circle of competence. He didn’t call it that,
0:19:28 but it was focus on the things that you touch, see, know, understand, like make a difference for
0:19:33 you. Just look at your bank statement and what are the things that you spend money on? And what
0:19:37 are the things that you really like in that experience? Now, it’s not just that, like you have
0:19:43 to understand the valuation and other elements of business, but like a guiding principle was right
0:19:49 there. He talked a lot about win ratio, like you’re not going to be right a lot. And I think as
0:19:57 a young investor, that’s an important concept to internalize because you see young kids come
0:20:02 through and it pretty much been successful at everything that they’ve done. And then you’re
0:20:08 investing in, like if you’re right 55% at a time, like you’re doing pretty darn well. And so being
0:20:15 wrong a lot is an important concept to internalize. And then the last one, he talks about, he had six
0:20:23 categories for his stock, slow growers, fast growers, stalwarts, turnarounds, cyclicals. And
0:20:28 it was just, it was a categorization framework, almost like a mental model for each type of stock.
0:20:36 I don’t use those exact frameworks today, but when I was starting, having a clear framework and
0:20:41 thinking about them kind of in mental models for each was, you know, was insightful. Talk to me
0:20:46 about being wrong. How do you recognize you’re wrong and then do the hard thing, which is sell
0:20:53 it a lot. Write it down, show your work, track it, measure it. As that thesis is evolving and
0:21:01 events occur, measuring it relative to that and trying to be as accountable and objective as
0:21:05 you can. That’s always hard. It’s nice to have people also around you that will push you to do
0:21:10 that. I think having your own investment journal, and so it’s different than the specific decision,
0:21:16 but just understanding what emotions are at play for you. There are studies that show that those
0:21:22 people that are better at describing what emotions they’re feeling end up demonstrating better
0:21:28 investment performance. And it’s just the simple concept of having a better read of what you’re
0:21:36 feeling. I used to have a framework for myself that when I came to a decision, I wouldn’t sell
0:21:41 the same day. And it turns out like that’s a really good kind of level setter because you go
0:21:47 into a meeting with the management team and they do something that sparks you and you’re like,
0:21:52 particularly turned off. You’re like, I’m selling this. If you just give yourself a little bit of
0:21:58 space to step back from that, go back, look at what you wrote originally, pair that up with what you
0:22:03 saw, that can be really helpful in like putting you in a better mindset to make a more objective
0:22:08 decision. The data would say I’m better at cutting a loss earlier, knowing something’s off in the
0:22:14 decision. There’s some situations where I hang with it. It’s continued to not work. And then I
0:22:19 have this sort of endowment effect of like, I want to see it play out over time and I stay
0:22:24 with it for whatever reason. So it’s an interesting question for me of like, what causes it to flip
0:22:29 from one to the other? What role does writing play in terms of thinking and what’s the process?
0:22:34 Do you share this with the team? Is there a format? What variables are you writing about?
0:22:39 One of the themes is like, how do you accelerate learning and accelerate feedback loops?
0:22:45 And so one of the things that we do is all of our analysts run paper portfolios or model portfolios.
0:22:49 And this is something we’ve done for decades. When you go through the investment process,
0:22:53 you write up your various research reports. When you want to buy it, you put forward something to
0:23:00 investment committee, you debate it, and then you buy it in your paper portfolio. And for any
0:23:05 decision to buy or sell, you’re writing down your reasoning. You’re putting down why you’re buying,
0:23:10 what the thesis is. I like it when you show the things that I want to be looking for and holding
0:23:16 accountable to you. Just writing things down like helps you crystallize the why and putting it down
0:23:20 and then tracking, show your work and then track it. One of the things that we do every six months
0:23:26 is we consolidate that, we look at the performance, and then we share that with the team members.
0:23:31 And it’s a really powerful feedback mechanism for the analyst, but it’s also powerful for us
0:23:37 as we’re thinking about looking at the simulation, if you will, like who’s making good decisions
0:23:43 and what kind of decisions. Are you demonstrating more skill in the buy decision, the sell decision?
0:23:48 Are you doubling down when something’s working against you? Are you making better decisions
0:23:52 of pining on stocks that you’ve researched yourself versus stocks that somebody else
0:23:58 has written up? Those are all dimensions that are in there that’s giving you feedback, which
0:24:06 is a really powerful way to help the improvement algorithm. One of the things that we did a couple
0:24:12 years ago, which has been really interesting, is we created this what we call decision analytics
0:24:21 initiative. So we have a standalone team for individuals. We went out and got third-party
0:24:29 software, and we run all these decisions from our portfolio managers and our analysts through,
0:24:35 and we’re looking at to pick up strengths, weaknesses, and biases. It’s meant to be
0:24:42 internal coach. And what’s fascinating about it is it’s showing you these patterns. I have
0:24:47 specific patterns that I’ve demonstrated over time. I talked about one of them already with
0:24:52 regard to the endowment effect. Another one is regret aversion. The riskiest position in the
0:24:57 portfolio is my newest position. So when I’m initiating a position, I tend to scale into it.
0:25:02 So let’s say I want to take it to 3% of capital. I’ll buy 50 basis points, and then I’ll,
0:25:08 another 50, and I’ll scale into it. Turns out that’s wrong. The bias that I’m demonstrating,
0:25:16 the reversion, is a regret aversion, is if it’s reached the hurdle that I want to buy it, buy it.
0:25:20 And so it’s interesting to get that feedback objectively, because I have this kind of like
0:25:24 working heuristic, but it turns out it’s not right. And the data tells you that really clearly.
0:25:29 One of the things that we’ve done with that is then we create these nudges, what we call nudges.
0:25:34 And so this is coded into our system. It’s watching your behavior real time. And then if
0:25:37 you’re demonstrating one of these, it’ll send you an email. And I’m never that excited when I get
0:25:44 them to be clear. And it’ll say, remember the data, you’re demonstrating this right now in this
0:25:48 position. It doesn’t dictate that you do it, but just encourages you to think about it.
0:25:54 And so all of that, that whole mosaic is kind of like, how do you create a rigorous process
0:26:03 that’s repeatable, that really leans on the factors that can really help reinforce making
0:26:08 the best decisions in a way that can be most constructive to you as an individual? Is there
0:26:14 a correlation between the clarity of people’s writing and their performance? I haven’t studied
0:26:21 the data to specifically support that, but my, I believe so. When you’re able to clarify your
0:26:27 thinking and writing is a very strong representation that you’ve clarified the thinking, right?
0:26:32 And it’s just one of the reasons why writing is so important is helping to distill it to what’s
0:26:38 really key. We do a lot of work. We’re really fundamental. We can spend months working an idea,
0:26:43 and then you get this 50 page report. I don’t want a 50 page report. I want a few pages that
0:26:49 really distill. That’s the hard part, is to do all the work, but then distill it down to the few
0:26:55 things, the two or three really key points. And in particular, where we see this differently than
0:27:01 others, capturing that and knowing those fulcrum issues, that’s the sauce. Coaching to how do you
0:27:07 go through that process of do that really fundamental bottoms of work, but then be able to really
0:27:13 distill it. It’s also manifestation, I think, which you’re pulling on that you’ve gotten to that.
0:27:19 It’s like there’s simplicity on the other side of complexity, but you can only get to that
0:27:25 simplicity if you’ve gone through the complexity. But I feel like everybody wants the simplicity.
0:27:30 They want to consume the simplicity. They don’t want to do the work. They don’t want to go through
0:27:35 the raw material. When we were talking about this last night, listening to book summaries in a way,
0:27:39 it’s like they sound great, and you listen to them in your ear, and you’re like, oh, that’s
0:27:43 amazing. But then you go to the source, and you’re like, how do they miss this? And it contextualizes
0:27:48 differently in your head. And the degree of filters between you and the information also matters.
0:27:52 If you’re reading an author talking about a subject that they have no experience with directly,
0:27:57 it’s going to be very different than reading direct from the source somebody who touched the
0:28:02 problem and had the direct experience, so indirect versus direct experience. And then you talk about
0:28:06 sort of distillations, two different people are going to come up with two different distillations.
0:28:10 But if everybody just wants to consume the distillations, they’re not going to be in a
0:28:15 position to know this is a good distillation and this is a bad distillation. There’s a couple
0:28:22 really good threads in there to pull on. One is the filter. It’s a really important thing to think
0:28:29 about when you get that distillation back of what’s not in there. You really do want to source it.
0:28:35 So a lot of times for me, I’ll see something and it’s like, well, I want to either talk to the
0:28:39 management team or listen to them directly. I just want to hear it for myself because I’m going to
0:28:44 process it differently, and I’m going to pick up on different threads, and you’ve got to be
0:28:48 authentic to that. There’s a tendency to want to convince somebody or persuade somebody to buy
0:28:55 a stock. And so when you’re persuading, you’re persuading, and you may not as equally kind of
0:29:01 pull out the potential risks or other factors to weigh against that. Creating that objectivity and
0:29:06 that honesty in it, I think is an important part in the process. And sometimes people over time will
0:29:12 develop a skill at doing that, but sometimes not. And so you really want to remove the filter so that
0:29:18 you can get to that kind of direct read. And then the other aspect of that is just really doing it
0:29:22 on a primary basis. I like to say the magic’s in the last 5%. You know, all of the standard stuff
0:29:27 you know, you’ve got to do and looking at the balance sheet and understanding the core strategies
0:29:33 and the key drivers, the P&L, et cetera, et cetera. But really getting to that last 5% where you
0:29:39 understand the business in a way that you do make that breakthrough, that synthesis, that’s where
0:29:45 the magic’s at. Don’t stop short of that. Keep pushing until you get to that point that you can
0:29:50 distill it. What is the essence of this? One of the things we talk about in the team is what’s the
0:29:55 essence statement for this company? Meaning what’s the thing that really drives it? It can take you
0:30:00 a long time to get to that. When you’ve grinded on it enough and you get to that point, if you’ve
0:30:05 really been able to dial into that thing that is the driver, that can be a real ballast to help you
0:30:10 through as an owner and a holder of it. I like this notion of the magic being in the last 5%
0:30:15 or other examples from other domains that come to mind where it makes a difference. Going back,
0:30:20 this is probably a decade, we had built a position in a company called Motorola Solutions.
0:30:24 You’d think of the Motorola flip phone. And that was the original business, but
0:30:29 they ended up splitting it to the handset business. And then what was their public safety business?
0:30:37 They make devices and they manage networks for first responders. So police officers and firemen
0:30:41 and whatnot. They run these networks over what’s called a proprietary network. In the US, it’s
0:30:47 called LMR. The big bare thesis at the time is fiber rolls out and you have broadband networks like
0:30:52 these proprietary networks are not going to be necessary in the way that they were. I’m not
0:30:58 a technologist, but we spend a lot of time understanding LMR networks for first responders.
0:31:04 And it turns out that the really, really strong reasons why having standalone proprietary LMR
0:31:08 networks are really important. One, they’re backward compatible. That’s a big deal because
0:31:14 you have really big infrastructure and install base out there. Two, the redundancy is way higher.
0:31:19 They can go several days, which we saw during 9/11. The networks went out, but the first responder
0:31:24 LMR networks were still operable. The common narrative out there, and when you talk to most
0:31:28 people, they would quickly riff of like, oh, they’re going to be disintermediated as
0:31:34 broadband networks are more commonly adopted. Really getting into that last five to understand
0:31:40 it and build conviction about it was the difference for us. Ended up taking pretty sizable position
0:31:45 and ended up being really rewarding for us. But to grind at it and really understand that
0:31:50 bottoms up was a difference maker. And it also ties to some of my favorite investment situations
0:31:55 are the bare cases, the bull case. So there’s this common bare narrative. And if you don’t
0:32:00 kind of do it on your own, your own work, if I were bringing up this name and I was talking to
0:32:04 someone, they would have told me all of the reasons why I was going to get disintermediated.
0:32:07 And that would have sounded really sensible. And I was like, yeah, I’m not touching that.
0:32:10 I’m not going to spend any time on it. But if you build it up yourself and you really spend enough
0:32:18 time to get into that, that last five to understand it, it’s like, not only is that wrong, but actually,
0:32:22 this is the bull case for why this is going to be a great company because they’ve got a very
0:32:26 formidable mode in a way that you don’t understand. Are there other examples that come to mind?
0:32:32 I really like this thread of the bare cases, the bull case. You’ve had Brad Jacobs on your podcast.
0:32:37 We first invested with Brad in 2013. There’ve been more than a few occasions through that journey
0:32:44 where the kind of being able to get into that last five to understand in a way that wasn’t
0:32:49 commonly appreciated, I think allowed us to be a holder and an owner in a way that would have been
0:32:54 difficult for a lot of folks that were only approaching that on the surface. So the first
0:32:59 one, 2015, you made a big acquisition. It was a big pivot. Probably one of the best capital
0:33:04 allocation decisions I’ve seen in my investment career. You had a company called Conway. It was
0:33:08 a complete pivot from the state of strategy at the time. His frame was where asset light,
0:33:16 brokerage, truck brokerage business, he pivoted to go into the LTL industry, which was capital
0:33:22 intensive. When the deal was announced, even I was taken back. But when we made the initial
0:33:28 investment, we spent a lot of time on Brad as a CEO, as a capital allocator. He’s a serial
0:33:33 entrepreneur and one of the things that’s very clear in his track record is he’s a capital
0:33:38 allocator and he’s opportunistic. When we pushed on this and the strategic logic of it,
0:33:45 he framed it from the perspective of an opportunistic situation to create something
0:33:51 special that wasn’t in the original plan, but was uniquely attractive. And if you understood
0:33:56 him and his history and you’d seen that in his demonstrated track record, it reframed how you
0:34:01 thought about that capital allocation decision. And so building up that prior track record of
0:34:06 understanding how he makes decisions, trader mentality, and by the way, one of his first
0:34:11 businesses that he started was an oil trading business. So that DNA is in him and that track
0:34:18 record was demonstrated. And then the second time was, and I’ll never forget, I mean, we were
0:34:24 actually sitting, we went to see Brad in December. In the midst of the conversation, his assistant
0:34:32 came in and said, “A short report has been filed.” And she had printed it out and she said it on
0:34:38 the table and I can still distinctly remember the thud of this report. It was like a 75 page report.
0:34:45 And so we continued to chat about 15 minutes later as the assistant came back in to the office and
0:34:53 said, “I think at that point the stock was down more than 20%.” And he said, “Sorry, guys. I think
0:34:57 we need to cut this short. I need to attend to this.” My colleague and I went and we got in the car
0:35:03 and we’re trying to read this short report. I’ll never forget the feeling of anxiety in my stomach.
0:35:12 And we had done a lot of work on it. It was intimidating to hear these claims on the surface.
0:35:18 In the next three weeks, we went into that. We hired a forensic accountant to go through
0:35:23 all of the statements, every one of the claims that were in there. I hired a private investigator.
0:35:30 We knew what cars they drove, whether they had loans or not, whether there were any disputes.
0:35:36 The people on the short side, no, in the company, to understand Brad, his CFO, chief operating officer.
0:35:43 There were certain aspects in there that were claimed on dealing really to go into that last
0:35:49 5%, maybe the last 1%. That’s how I spent my Christmas in New Year’s. It’s going down this
0:35:55 route. But the beauty of it on the other side is it built a deep conviction and we probably put
0:36:01 a billion dollars into it on the back of that. And the stock was extremely dislocated. I think Brad
0:36:05 and the company bought back 2 billion, like unprecedented magnitude of company buyback.
0:36:10 He borrowed money to buy back and bought back huge. It was a gut check.
0:36:17 But on the back of extremely, extremely deep, rigorous conviction building, the easy thing
0:36:24 would be to go the other way. Oh, this is messy. This is noisy. The common trope is roll-ups never
0:36:29 work. And it’s true. The base rate on roll-ups is not good. It doesn’t mean all roll-ups don’t work.
0:36:36 What are the factors and common hallmarks of roll-ups that are successful and are those conditions
0:36:41 precedent here? And those are the things that we found as we went deeper and deeper and peeled
0:36:45 back the onion. That’s what it takes. And again, kind of turned it like the bear case is actually
0:36:48 a bull case and you’re thinking about what’s happening here. We’ve sort of talked about
0:36:52 knowing ourselves. We’ve talked about game selection. We’ve talked about having a blueprint
0:36:57 or model to sort of follow and imitate before you innovate. Consider this a map.
0:37:04 Now what? Now what do we do with this? How do we apply this to create an unfair advantage?
0:37:11 So now it’s about accelerating that learning curve and those feedback loops. Try to put yourself in
0:37:16 a place that’s good game selection for you based on who you are and what your strengths are.
0:37:22 You got a clear blueprint about how to go after that. And now you just want to turn the rocks and
0:37:26 you want to accelerate the learning curve. And a big part of that, creating those case studies of
0:37:31 writing it down, like why am I doing this? Showing your work. Part of showing your work is distilling
0:37:37 for you why you’re doing it. Tracking that over time and measuring yourself to it and improving
0:37:43 your algorithm. How strong is the learning machine? Are you seeing them take in new inputs based on
0:37:48 the feedback that they’re getting? Adapt that and employ that as they go forward into how they
0:37:54 thinking about stocks, how they’re making decisions. And it’s really hard for us the way in our game
0:38:00 selection because we’re making these four or five year decisions. So it’s very easy to say, well,
0:38:07 it’s about this and let’s check in in five years. No, there are many incremental steps between now
0:38:11 and then that you want to track to and hold yourself accountable to. It doesn’t mean you’re
0:38:16 trading every day or every quarter, but you want to be really thoughtful on this is why I bought it.
0:38:20 These are the things I’m going to be looking for. And then holding yourself accountable during those
0:38:26 interim steps and identifying those situations where it’s worked well and when it has it and then
0:38:31 adapting for that. And just being really obsessive about that. It seems like one of the key skills
0:38:36 is sort of being able to sift what’s important from what’s irrelevant. And a lot of people get
0:38:41 confused. How do we get to the point where we can actually sift what’s important from what’s
0:38:47 irrelevant? I think it’s just learning from the feedback, right? We took it in 2018, we took a
0:38:52 position in Symantec. So Symantec did use software like and A virus software, like on the retail side,
0:38:57 it’s to protect your laptop and desktop. It was a mature business, very high, free casual yield
0:39:05 for a software business. They had hired a new CEO who was a real technologist. And so I spent a lot
0:39:12 of time on him as a technologist, because they needed to infuse that in the business in order
0:39:16 to be able to grow and adapt. Most all of my work was around that. I thought that was the
0:39:21 important question. In the very later stages of the work, we started to get some reads that yeah,
0:39:29 he was genuinely a very savvy technologist, but had a reputation for playing fast and loose,
0:39:34 a little aggressive, very aggressive sales culture. And just as we started to get that read,
0:39:39 the company came out, the board came out and announced the audit committee was going to undertake
0:39:48 a review of the financial statements. Stock gap down 35%. Covered somewhat, but not fully, right?
0:39:56 And so there was a layer there. And part of what goes in the mosaic of two things. One is if you’re
0:40:00 over myopically focused on one thing that you think is the important thing, you need to keep your
0:40:06 mind open that there may be other things in the mosaic that are critical. And that when you do
0:40:11 see those threads and we started to get a little bit of the flags, you got to go after that and go
0:40:15 after it really aggressively. Time back to your question is you’re writing it down, you’re showing
0:40:20 your work. What are the things that you think are important, but then you’re measuring yourself back
0:40:26 to that and seeing the degree to which you’ve been demonstrating a good success ratio of zeroing in
0:40:31 on the thing that is the thing? When I talk to entrepreneurs, it’s so interesting to me because
0:40:37 compliments and this is a generalizations. It doesn’t apply in all cases, but compliments,
0:40:42 they tend to shut down. They don’t tend to listen. They’re already like a minute they anticipate a
0:40:45 compliment out of you. They stop listening and you can kind of see it in their faces if you pay
0:40:51 attention really closely. But if you say something that’s a threat to their business, then there’s
0:40:57 almost like a predatory instinct that they have to be like, “I want to know all about this. I’m
0:41:00 curious about this. Why do you think this? Where did this information come from? How does this
0:41:05 affect me? How do we validate this?” I feel like a lot of people are almost the opposite, right?
0:41:11 Where it’s like compliments are great, things that might be criticisms or things that we might not
0:41:16 be great at. They sort of go in one ear and out the other or you stop listening to them. I’ve heard
0:41:22 that before. I think that it’s really interesting when it comes to running a business or getting
0:41:29 better at things is almost being like Darwin, who kept this journal of things that didn’t conform
0:41:33 to his beliefs and then he had to go through and like, “How do I integrate this or just prove it?
0:41:38 Or how do I think about this in lieu of dismissing it? I don’t want to dismiss it. I want to
0:41:43 incorporate this. How do you go about doing that and sort of like having, we’ll call it a predatory
0:41:51 instinct to listen to criticism?” Three ways. One is, we were talking about questions and it can
0:41:55 be a really valuable way when you sit down with a CEO is to frame a question in a way that they
0:42:00 have to respond. You might sit down and say, “We’ve been hearing that you’re having a lot of turnover
0:42:07 in your sales department. Why is that?” It puts it in a position where they kind of have to respond
0:42:12 because to your point, a lot of times when you will frame something in the negative or as a
0:42:16 threat or challenging, CEOs are very skilled. They’ll shift it to something else, but if you
0:42:22 frame it in a way that they have to respond, so that’s one. I think two is to your point of when
0:42:30 I use the Symantec example, it was disconfirming not to the big point, but in terms of the broader
0:42:34 narrative of what I was thinking about the company and anytime that comes up, you’ve got to really
0:42:39 focus on it. That’s the most valuable information in the situation and that can be really valuable
0:42:43 also when you’re working with an analyst and they’re filtering, you’re not getting it directly.
0:42:46 When you hear that kind of stuff, that’s what you want to go to and really pull on it because they
0:42:51 may not be that excited to put that first and foremost because they want to persuade, but when
0:42:56 you hear it, you’ve got to really pull on that. Then the third way, going back to the blueprint,
0:43:02 we didn’t talk about but probably the most meaningful blueprint for me is the founder of my
0:43:10 firm Alan Gray. Genius is dissonance, the ability to hold to competing. On the one hand, he was
0:43:15 super long term, but he was always obsessing also in the short term. The long term is just building
0:43:20 up those short term things. He was a person that was very convicted about things, like tremendous
0:43:26 conviction, but it was always loosely held. If he heard anything that was counter threat,
0:43:34 he would really grab that. He was never ashamed, embarrassed, shy to then grab onto that and
0:43:40 then totally flip his view. That ability to be very convicted, but then constantly in search of,
0:43:46 he never wanted to talk to somebody that agreed with him about a position. If he’s got the opposite
0:43:51 view on that, that’s the person that I want to wrestle with intellectually and hear about that
0:43:56 because he was seeking it. If he thought that whatever they were putting forward was good in
0:44:03 that, then he was off. That ability to go both ways I think is really powerful.
0:44:08 It’s like intellectual ambidextrousness. Are there other lessons that stand out that you learned
0:44:15 from him? There’s so many. He’s a special person. The first thing that comes to mind is just his
0:44:20 enthusiasm, his love of the game. It’s just infectious. He used to say there’s nothing
0:44:25 more perishable than a great idea. He was always turning rocks. The secret to a good idea is
0:44:29 a lot of ideas, always turning rocks. But then when he saw something he thought was really
0:44:38 interesting, it was just all in. There was this dissonance where he was incredibly convicted,
0:44:42 but at the same time, he was always actively seeking the opposite side of the view. To your
0:44:48 Darwin reference, it’s survival and adaptability. You want to be looking for the things that don’t
0:44:55 conform to the construct. He always liked to talk to folks that were younger. I think for a couple
0:45:05 reasons. One was it’s less filtered, that it’s closer to the source. It’s probably more contemporary
0:45:13 in its view. I was reading earlier this year, I was reading a biography on Andy Grove. It talked
0:45:18 about you rise to the level in the company that you’re a manager, a more senior engineer like you.
0:45:24 You lose your connection to the cutting-edge engineering. It was a very clear part of their
0:45:28 culture. It was non-hierarchical, quite flat. They would interact directly and they’re like,
0:45:33 why do you do this? It was like, it’s survival. I need to be close to the source of the people
0:45:38 that know the problem the closest. When I read that, I was like, wow, that’s the same thing that
0:45:42 Allen did in a different way, different industry, different business, but it’s the same concept.
0:45:48 I never called it survival, but I know that that was underneath it of getting directly to unfiltered
0:45:55 the best information. I had a friend who was the chief of staff to a CEO of
0:46:03 a billion-dollar company. Before he assumed this role, he said, I think by and large,
0:46:08 I know I’m paraphrasing here, so these aren’t his exact words, but these guys make incredibly
0:46:14 stupid decisions. I want to help change that. Then he got up there and he’s like, actually,
0:46:19 they make really good decisions with the information they have. They just have completely
0:46:23 terrible information because it’s been so filtered by the time it got up to the CEO’s
0:46:30 office. He started this thing where he just started calling the person that he could get
0:46:35 in touch with closest to the problem, to understand the problem and having briefs from that person
0:46:40 and skipping five layers or six layers of management. He got in so much trouble for this.
0:46:45 I just think that’s a fascinating thing when you think about how do we sift what’s important
0:46:50 from what’s not. Some of the variables you mentioned are getting closer to the information,
0:46:55 getting unfiltered information, going direct to people who have experience. If you think about
0:47:00 this in the context of learning, I also think it’s fascinating because I think of learning as a loop.
0:47:05 There’s like, you have an experience. Consider that like the 12-hand on the clock. You reflect on
0:47:11 that experience, which is the three-hand. You create a compression or abstraction, which you
0:47:17 can think of as the distillation, as the six. Then you have an action. You have this loop that
0:47:23 constantly feeds back into itself. Often what we’re consuming is other people’s compressions.
0:47:29 When we do the book summary, it’s a great example of that. You’re consuming somebody else’s.
0:47:33 You don’t know what’s missing. You don’t know how they formulated it. Often they don’t have direct
0:47:38 experience in the thing that they’re even summarizing. They’re not able to capture
0:47:43 the essence of something. Their distillation works for them because they did the work on the
0:47:48 raw end. You feel like it works for you as a person, but when you go to put it in practice,
0:47:54 it doesn’t work. The experience is like this thing that’s like four gigabytes of memory occupying in
0:48:00 your brain. Your brain, we’re going to compress this into something much smaller. That’s the
0:48:06 reflection angle. You’re sorting what matters from what doesn’t. You’re decompressing the
0:48:10 emotions from things. You’re determining what are the variables that govern the situation going
0:48:16 forward? How do they interact across time? What are the models that carry the weight here? Then
0:48:20 you come to this compression, but you can go back from that compression to the experience,
0:48:26 whereas somebody who consumed just that compression can’t go back to the experience. The way that I
0:48:32 try to explain this to my kids, as imperfect as this is, is every Sunday, we have this cookie
0:48:38 recipe. I make them make cookies before they can have the wifi password. I leave the recipe on the
0:48:47 counter. When they follow the recipe, the cookies turn out amazing. When they don’t follow it exactly,
0:48:53 they have no idea what went wrong. Now, the chef or the baker who created that recipe would instantly
0:48:59 be able to look at a photo probably or take a bite of the cookie, and they would know instantly what
0:49:03 went wrong. Did they heat the butter too much? Did they not melt it enough? Did they compact the
0:49:10 sugar too much? Was the oven running a little hot? Even though it said 360 degrees was a 375,
0:49:15 but the baker, they would know that. You want to surround yourself when you’re trying to acquire
0:49:21 information with bakers. You want to be the baker, but you can’t be the baker in everything. You
0:49:25 have to pick your discipline going back to what game are you playing? Where am I going to be a
0:49:31 master and working to borrow and just crib from other people? By borrowing and cribbing the compressions,
0:49:37 I’m going to get to average really quickly. I love that. Two thoughts on that. One is,
0:49:43 if they were making the cookies and following the recipe, if they wrote it down at each step,
0:49:47 what they were actually doing, that gives you something to look back at. Let’s say the cookies
0:49:55 didn’t turn out well. It gives you something to look back at, go and track and see where they might
0:50:01 have been off. The second part of that, just to the point of having a blueprint and the importance
0:50:07 of that is you start with the recipe and you do it exactly, but then you adapt it. You’re like,
0:50:13 well, maybe if I put, I really like walnuts or whatever, chocolate chips. I’m going to put some
0:50:17 chocolate chips in this and then you try that. The first time you do it, it may not work that well,
0:50:21 but I still really like chocolate chips. That’s authentic to me. You adapt it a little bit and
0:50:27 then in the end, you end up with something that’s uniquely you and really special. Totally, and now
0:50:35 I want cookies. Fry me for cookies. Talk to me about the will to win versus the will to practice.
0:50:40 It’s nice to have that goal, that aspiration. It’s very different to have the will to practice,
0:50:46 to grind, to make the cookies every day and to write it out and then look back at yourself
0:50:53 and look at the steps and measure yourself and showing up in that. That’s why I also tie it just
0:50:59 to the concept of it is the journey that gets you to that place. One of the questions that I
0:51:06 really love, I think about and I’m still evolving on is music. If you’re a concert pianist,
0:51:11 even though you’re one of the best musicians in the world, you practice your scales every day.
0:51:16 For us as investors, what’s the equivalent of practicing scales every day? It’s an interesting
0:51:20 question. I think there’s some parts of it that are temperament-related, like just practicing
0:51:27 deferred gratification. There’s elements of it that are thinking about the world probabilistically,
0:51:34 everything, just continuing to practice that every day or the uncertainty of a situation,
0:51:39 but not taking that for granted and really practicing that day after day, essentially
0:51:45 inoculate yourself to prepare yourself for that. It’s interesting because as you were saying that
0:51:52 part of what popped in my head was if we go back and we look at the grids in sports because that’s
0:51:58 an easier reference, but I talked to somebody who played with Tom Brady and they basically said
0:52:03 practice was a game. If you talk to somebody who played with MJ, it’s like practice was a game.
0:52:11 You’re not coasting and if you are, he’s calling you out and Kobe was the same way where they
0:52:16 treat the practice like they would treat a game with the same respect, the same effort, the same
0:52:21 dedication, the same frustration if they don’t make a play. They don’t like half-asset and expect
0:52:26 to win on game day when they don’t do it in the practice. How do you instill that mindset in your
0:52:34 kids? Where the will to practice, the will to grind, the consistency, the routine or ritual of it
0:52:39 and taking pleasure in that and not the outcome? If I just draw my own example and I go back with
0:52:45 my grandfather was just the example that he set. I think just the first layer of that with my own
0:52:53 kids is just them seeing me grind every day. They make fun of me like, “I want to do what you do.
0:52:56 I want to be an investor. You don’t really have to do anything. You just sit around and read all
0:53:02 the time.” They don’t necessarily see those difficult moments or getting up at four o’clock
0:53:05 in the morning. I don’t think you’re going to get a lot of sympathy from our audience here.
0:53:16 But setting the example is the first layer I think and the craftsmanship of it no matter what
0:53:23 you’re doing from a janitor to a soccer player to whatever. Then the second dimension I try to
0:53:27 think more about with my kids is just trying to help them get in the way of the things that they
0:53:34 really love. I have three kids from age 21 to 12 and they’re so different, right? But for each one
0:53:38 of them, to help them get in the space of, it goes back like, “What can you be obsessed about?
0:53:44 It doesn’t matter what it is, but what is that for you?” Be deliberate about it. Be intentional
0:53:49 about it. The concept of deliberate practice of really having that blueprint, grinding on it,
0:53:54 leaning into it, measuring yourself relative to it. That’s the thing.
0:54:00 What have you learned about time management? As investors, we allocate capital. You could
0:54:05 argue that’s our most important job. You say that a lot of CEOs, ironically, most important
0:54:10 job is allocate capital. I think there’s something on top of that, which is more important is how
0:54:16 you allocate your time. People just don’t think about it enough. They fall into these patterns
0:54:21 without really thinking about the most important question because you can get more capital,
0:54:26 but you can’t get more time. As an investor, one of the things that comes up a lot is,
0:54:31 “Okay, we’re going to go deep on this company. We’re going to spend the next three months
0:54:36 really grinding on it to understand it.” But if we do that for three months, will we be in a
0:54:41 better position to move the odds on a better outcome? That’s the question. There are some
0:54:49 situations where absolutely you would be able to do that. A big question is how they might adapt or
0:54:56 modify their distribution networks. On the other side, it might be something like TSMC,
0:55:00 the semiconductor company, one of the best companies in the world. The big question
0:55:06 there is a geopolitical question. I could spend three months on that. I’m not sure that that would
0:55:11 move my probabilities in terms of making a better decision on that thing that is the big driver.
0:55:15 Every time I’m making a decision about where I want to focus and where I want to spend my time,
0:55:21 it’s like, will doing that result in the highest return on time as opposed to capital and just
0:55:25 being really rigorous with yourself and your team about that question? I think it’s something that
0:55:31 is often overlooked or not really challenged to the degree that it should be. I like the notion
0:55:37 of time allocation and capital allocation. Does that carry to your personal life as well?
0:55:45 I can fall in the trap of, is this useful right now? That’s a horrible question to ask with your
0:55:52 kids. Just to give yourself the space for play to just be in that moment with them on whatever it
0:56:00 may be. On Fridays and Saturdays, we have family dinners together. It’ll start, call it at six
0:56:06 o’clock, and everybody’s got a role in doing something. Everybody’s in the kitchen and you’re
0:56:12 just mixing it up. You’re just totally in that moment. The next thing you know, it’s 10 or 10
0:56:18 30. It’s the end to dinner. That’s been a four, four and a half hour journey and just totally
0:56:23 lost in the moment of it. Those are some of the times that I value the most. There was nothing
0:56:29 intentional in that except that you were going to be in that space. Going back to TSMC for a second,
0:56:36 I think one of Buffett’s filters is, is it knowable? If the answer is no, he doesn’t want to hear
0:56:41 your opinion on it or your facts or anything. He just doesn’t waste any time on it. I don’t know
0:56:46 if that’s true, but I find that is a good filter. It’s a great filter for when you’re in an argument
0:56:52 with somebody or you’re at a family dinner, big family reunion or Thanksgiving or something,
0:56:57 people are arguing about very subjective things. If you just have this filter in your head, which
0:57:02 is like, is this knowable? If the answer is no, you just say, you’re probably right. You might be
0:57:08 right and just move on, but it’s just not worth spending time on. I think it’s an area to keep
0:57:13 reminding yourself and have a discipline. I was recently in Australia seeing a number of clients
0:57:18 and a big topic is the election, the US election in their mind and obviously for us, it’s a big
0:57:24 deal. But the best answer is like it’s 50. It’s kind of 50-50. I’m not going to position until the
0:57:29 portfolio for a particular outcome one, because I wouldn’t be well-served to do that, but two,
0:57:34 to this point, it’s unknowable. I just want to be resilient as opposed to spend all this time obsessing
0:57:40 on, is there going to be a particular candidate that wins and position the portfolio in that way?
0:57:43 Much better to just focus on it from a position of resilience.
0:57:48 Talk to me about that a little bit, because I think one of Buffett’s earned secrets that most
0:57:54 people don’t recognize is that he’s always in a position for success. He’s very rarely put himself
0:58:00 in a situation where circumstances dictate any action that he takes and the optionality and
0:58:05 adaptability that that provides makes him look like a genius, because he can always take advantage
0:58:10 of whatever the world’s offering him. If you think about it now, it’s like they have 300 billionish
0:58:17 in cash. It’s like, well, if the stock market crashes and the economy goes to shed, who wins?
0:58:25 Buffett wins. If it stays the same, who wins? Buffett wins. If it skyrockets, who wins? Buffett
0:58:31 wins. He’s just set up this scenario where he’s not predicting. He’s positioning.
0:58:42 He wrote a book on this through your eye. Positioning is everything in the sense of
0:58:49 you can think about it in the portfolio. Do you have the resilience to absorb what may come?
0:58:55 We have these situations where you wouldn’t have anticipated it, and then it can be quite devastating.
0:59:02 If I go back to, I mentioned Symantec, but 2018, I really one of the most difficult
0:59:11 years of my professional life. Symantec hit about a month later. It was in November, and I’ll
0:59:14 never forget because it was on my birthday. We had a position in a company called PG&E,
0:59:20 which is a California utility at the wildfires. We went into it after they had had their wildfires,
0:59:24 thinking that legislation had passed, but there’s this little loophole if anything happened for
0:59:29 the end of the year. We were already through the main part of the heavy wildfire season
0:59:35 within another fire hit. We’re in San Francisco. I’m literally in my office looking out to Marine
0:59:39 County, and I see the flames and the smoke billowing, and I’m thinking that’s my position
0:59:45 billowing. That’s my portfolio. That’s my investing track record, just devastating.
0:59:53 I sized it at a level that I could take in impairment. I thought it was lower probability
0:59:58 than the actual probability, but I wanted to try to position for that to weather it.
1:00:06 Then, a month later, the story I told you about XPO and the short report hit. Three hits.
1:00:14 Pretty devastating. It’s part of the concept of going back to this journey that you’re on of
1:00:20 knowing yourself, thinking about game selection, accelerating your learning feedback. Know that
1:00:23 you’re on this hero’s journey, and there’s going to be these setbacks. I think one of the things
1:00:29 that really was helpful for me was inverting it and just thinking, this is part of it. This is
1:00:33 part of the struggle. You know you’re going to be in these moments and how you handle it.
1:00:37 Part of it is the positioning going in, but part of it is also how you embrace it when you’re in
1:00:43 the moment. It’s another form of positioning. Do you have the balance sheet when you go into
1:00:47 things that are unexpected, but do you also have the mindset for how you
1:00:53 embrace things like that when you’re in the moment? Because you could just suffer, woe is me,
1:00:57 or you could say, okay, this is the hand that I have now. How am I going to play that? If you
1:01:01 embrace it in that way, I find that it puts you in a very different position. I didn’t get there
1:01:05 immediately. It took me a little bit while, a little bit of a time period to get there, but
1:01:12 I think that’s less discussed, but in another element of positioning. I really think that that’s
1:01:19 key, right? It’s like you can’t live 100 years and not go through all of the things that life has
1:01:26 to offer from heartbreak to losing money in an investment and how you respond and your approach
1:01:32 to those things. It’s usually not now and the people who try to push it away or why me, that
1:01:39 causes you to start reacting versus reasoning your way through. It’s like, no, this is where I’m at.
1:01:45 How do I deal with this? Which I think is a very helpful mindset, right? I maybe not have created
1:01:49 this. I might not have anticipated it. My contribution to this might be really low. There
1:01:54 doesn’t change the fact that I’m here and where do I go next and what do I do next? We talked about
1:01:59 time allocation as capital management. There’s another parallel, I think, between business and
1:02:06 life, which is personal life and overhead. Talk to me about that. This is much less discussed,
1:02:17 but I think is squarely in your positioning frame is how you run your personal life very much
1:02:22 impacts your ability to make good decisions, particularly if they go sideways, right? You
1:02:29 see people in the industry who then adopt a certain lifestyle, a certain fixed cost base,
1:02:38 and then you need the investment to work as opposed to making what you think are good risk
1:02:45 adjusted decisions. I think once you cross over into needing to work, you’ve changed the dimensions
1:02:52 of your temperament and your emotions. Once you do that, put yourself in a bad position to make
1:02:56 great decisions. Companies do that. That’s something to be very mindful of. It’s something to
1:03:01 think about as a firm and investment teams. You’re looking for a certain type of individual,
1:03:04 but you’re trying to create a certain culture within the team. You’re trying to have a certain
1:03:10 relationship with your clients. Those are all part of enabling you to try to make the best
1:03:14 decisions in the way that work for you. If you break any one of those components of the flywheel,
1:03:20 if you will, then you really got grit in the flywheel. It could be dangerous in its worst case.
1:03:26 Will you invest with attention-seeking CEOs or high-life style CEOs?
1:03:36 Generally not. It’s a part of the mosaic of what will be the driver. It’s an interesting thing with
1:03:44 CEOs. What are the characteristics that allow one to be in that seat? They’re not always correlated
1:03:52 with the skills that are best to allocate capital, to make certain strategic decisions, to make
1:03:57 decisions that are independent of what might be popular. Tell me about the role of focus.
1:04:06 We don’t have infinite time. What you choose to allocate it to is really a critical decision.
1:04:10 It’s really underestimated how important that is over and over and over again. It’s part of the
1:04:14 journey because you’re going to be in the rabbit holes, but that’s part of seeing the algo improve
1:04:21 over time. It’s an area that you can help as a coach, give some feedback on that. Just asking
1:04:25 your question, when you’re spending the time, to what we were just saying, is this a question that
1:04:32 I can answer? Very simple, but take a simple idea. Take it seriously. Are there particular
1:04:36 lessons from Munger and Buffett that you try to remember every day that have made more of an
1:04:42 impact for you? Take the simple idea, take it seriously, and really lean into it. Focus on a
1:04:48 few things where you can really make a difference, a place to you. The discipline to actually do it,
1:04:53 do it consistently, and really lean into it. I’m really a believer that the magic in the
1:05:00 sauce is in the extremes. If you think it’s worthwhile, push on it. Really push on it.
1:05:04 Really go deep in the company in terms of how you size positions when they’re ones that you really
1:05:11 see. You see the matrix clearly. Just take that and really lean into it. What would you say are
1:05:18 the three simple ideas that you take seriously? Alignment is really an important one. Give me
1:05:23 an example. You profess to be a long-term investor, and that’s really part of you, and you have the
1:05:29 temperament to do it. You need to manifest that in every way. That starts with the kind of people
1:05:34 that you hire. What I’m hiring and interviewing people, everybody likes to say they’re contrarian,
1:05:38 but are you really contrarian? Let’s talk through some examples when you’ve done something that’s
1:05:43 different to the crowd in a way that had consequences and was difficult to do. Create an
1:05:48 environment. It turns out if you hire people that are really independent-minded, they like to be
1:05:55 given a lot of space. You have to create an environment that gives them the space to do that,
1:05:58 and you have to create a culture in the way that you interact, the way that you talk,
1:06:02 the way you structure your meetings that focus around independent thinking and
1:06:08 taking a longer-term time horizon. On the other side, it means that you need clients that are
1:06:13 actually willing to absorb the volatility that might come from taking a long-term position
1:06:20 that are not going to be the first to redeem when you’re out of sync with the market. They don’t
1:06:23 just profess that, but that when they’re in that situation, that’s something that they actually
1:06:28 do. By the way, maybe you put a fee structure around it, so all of our fees are performance-based,
1:06:32 but they’re refundable. When we go through these periods that we’re underperforming,
1:06:38 we refunding fees back to them in the same ratio. We do that because it tends to be,
1:06:45 when you’re in that period, a way to cushion for the client being in that period which elongates
1:06:49 their time frame, but that reinforces us to be in a position to take long-term decisions.
1:06:56 It’s one idea, simple idea, alignment and having a long-term, but it permeates everything that you
1:07:01 do from type of people that you hire, the culture you have, to having paper portfolios that allow
1:07:06 them to express themselves to the clients that you have, to the fee structures you have. It’s
1:07:12 everywhere. What’s the next one? Alignment was number one. What’s another one? First principles
1:07:21 thinking and having an independent view, not filtering. I first met Alan, our founder,
1:07:29 in the mid-90s. At that very first meeting, he said to me, he was like, “If you want to get a 10
1:07:33 in alpha, you’ve got to come at the problem completely differently. You’ve got to turn it on
1:07:38 its head.” When I was young and I was very new in my investing journey, I don’t think I fully
1:07:46 appreciate it, but 30 years later, I’ve internalized it. Just that first principles independent
1:07:53 thinking and really just trying to get to the truth of an answer and then being rigorous around
1:07:58 pulling on the threads that are opposing to it and grinding on that to get to the right answer
1:08:04 and being okay, being different from everyone else, that’s the saying. If you’re with the crowd
1:08:08 and with everyone else, you’re going to look just like everyone else. Just prioritizing first and
1:08:14 foremost always, what do I think is the right answer regardless of whether or not somebody
1:08:20 else says it? The way I encapsulate that idea in my head often is through creating positive
1:08:26 deviation or advantageous divergence. It’s not enough to diverge from the crowd. You actually
1:08:32 have to be correct if you want to create results towards the tail. It’s no fun being a contrarian
1:08:37 just to be a contrarian, but a lot of people are. When I used to work at the three letter agency,
1:08:41 there’s a lot of people who were a contrarian just to be contrarian. You’re a contrarian all
1:08:45 the time and then people just start to dismiss you and nobody listens to you. Then the odd time
1:08:49 you’re right, but you’re no better than a lottery ticket at that point. You have to be thoughtful
1:08:54 about how you do it. You do want to create advantageous divergence from the crowd.
1:08:57 It’s just truth. What is the real truth here?
1:09:02 We always end with the same question, which is, what is success for you?
1:09:07 What’s interesting to me about this question is how it’s changed for me over time. When I was in
1:09:11 high school, if you have asked me that, I would have said, it’s just to get out. When I was in my
1:09:18 20s, it was a number. Then as I got into my 30s, it was more about certain career aspirations and
1:09:26 relationships, my wife, my kids. Today, I get a lot of meaning in using my
1:09:36 strengths and skills to help other people. I call it being a dream builder. That’s in my firm,
1:09:41 but it’s outside of the firm too. Success to me is having something that’s meaningful to you
1:09:45 that you’re really going after and helping other people. I know what it feels like to be in that
1:09:53 position where you don’t know how to do it, but it’s in you. It’s a hunger that you have,
1:09:56 and when I see that in others and I’m able to help them do that, they’re just tremendous
1:09:59 satisfaction enough for me. That’s success.
1:10:13 Thanks for listening and learning with us. For a complete list of episodes, show notes, transcripts,
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