2024-12-16 18:27:00
They’re relevant to everyone, and apply to lots of things:
Who has the right answers but I ignore because they’re not articulate?
What haven’t I experienced firsthand that leaves me naive to how something works? As Jeff Immelt said, “Every job looks easy when you’re not the one doing it.”
Which of my current views would I disagree with if I were born in a different country or generation?
What do I desperately want to be true, so much that I think it’s true when it’s clearly not?
What is a problem that I think only applies to other countries/industries/careers that will eventually hit me?
What do I think is true but is actually just good marketing?
What looks unsustainable but is actually a new trend we haven’t accepted yet?
What has been true for decades that will stop working, but will drag along stubborn adherents because it had such a long track record of success?
Who do I think is smart but is actually full of it?
What do I ignore because it’s too painful to accept?
How would my views change if I had 10,000 years of good, apples-to-apples data on things I only have recent history to study?
Which of my current views would change if my incentives were different?
What are we ignoring today that will seem shockingly obvious in a year?
What events very nearly happened that would have fundamentally changed the world I know if they had occurred?
How much have things outside of my control contributed to things I take credit for?
How do I know if I’m being patient (a skill) or stubborn (a flaw)? They’re hard to tell apart without hindsight.
Who do I look up to that is secretly miserable?
2024-11-27 05:33:00
“Our political leaders will know our priorities only if we tell them, again and again, and if those priorities begin to show up in the polls.”
— Peggy Noonan
Ahead of Thanksgiving, I thought it would be timely to write about something every American should be thankful for, so here it goes.
The United States just concluded its 60th presidential election and every American should be thankful.
Now, before everyone who voted for Kamala Harris starts to fume, hear me out.
The reality is that every American should be thankful after every election, regardless of the outcome.
You heard that right.
Every American should be thankful after every election. In fact, every American should also be thankful that these elections are often determined by razor thin margins.
Why?
Because these elections highlight one of America’s greatest superpowers – its “optionality”.
Let me explain.
Optionality is defined as, “The ability, but not the obligation, to choose a specific path.”
America’s optionality stems from the fact that its citizens have the ability, but not the obligation, to change the country’s direction every four years. If things are going well, Americans can choose to “stay the course”. However, if they believe the party occupying the White House has swung too far in one direction, they can vote to move the country in a different one.
Don’t get me wrong. America has a lot else going for it, including being protected by two massive oceans on its coasts and two friendly nations to its north and south, vast resources (energy, farmland, and navigable waterways), a diverse population, an educated workforce and entrepreneurial ethos, and the world’s strongest military, economy, and financial markets. However, Americans’ ability to choose how to leverage these assets most effectively is what makes it the most dynamic country and economy in the world.
As to why Americans should be thankful that their elections are determined by razor thin margins, the fact is that if America had one dominant political party (i.e. “one party rule”), it would be much more difficult to enact change. Thankfully though, American swing voters play an instrumental part in how the country is run, as evidenced by the most recent election.
Now, a logical response would be,
“But don’t these razor-thin margins lead to elevated tension, friction, and division, especially in the lead up to and after elections?”
Of course, but that is because optionality isn’t free. In fact, it always comes with a cost. Yet, the tension and division associated with optionality is almost always cheaper than the alternative.
Look no further than Argentina.
A century ago, Argentina was one of the strongest and wealthiest countries in the world. With endless resources, a diverse and literate population, and a diversified industrial base, Argentina was positioned for an incredibly bright future. European nations had started investing heavily, while countless multinational companies were opening offices or plants throughout the country (including manufacturing, retail, advertising, construction, and finance companies, as well as law firms). Some even declared its capital, Buenos Aires, “The Next Paris”.
Then, everything began to change.
In 1913 Argentina suffered a coup d’état, which was followed by a series of government overthrows that resulted in alternating periods of democracy and military rule. Then, with the rise of Peronism in the mid-1940’s, the country embarked in what amounted to more than 75 years of “one-party rule”.
The result?
Argentina went from being one of the world’s wealthiest countries in the world as measured on a GDP-per-capita basis to one ravaged by inflation (regularly north of 20% and over 100% in 2023), corruption, poverty (currently over 40%), and a rolling series of debt defaults.
So, how did this happen?
It happened because Argentinians lost their optionality. They lost their ability to institute change. To shape their destiny. As a result, a country many thought would be one of the next great global powers instead suffered a historic decline.
Sound familiar to something we are witnessing today?
It should, because after Xi Jinping removed term limits and instilled himself as “president for life” in 2018, the Chinese people were stripped of their optionality (while the Chinese do not have democratic elections, its leaders in the years prior to Xi typically responded to the needs/wants of the Chinese people and were chosen by consensus every ten years).
In doing so, Xi appears to have put China on a path similar to Argentina, or for that matter Russia, Turkey, Iran, and many Middle Eastern countries that are currently one-party or autocratic states. Unsurprisingly, these are the countries saddled with corruption, unbalanced economies, and on poor terms with the “West”.
Meanwhile nations with the most vibrant democracies, and therefore optionality (e.g., countries like Australia, Denmark, Finland, The Netherlands, New Zealand, Norway, Sweden, Switzerland, and the UK) are also the least corrupt, have the most balanced and resilient economies, and are some of the United States’ strongest allies. Unsurprisingly, these nations have also historically had some of the strongest equity markets.
Funny how that works.
The fact is, optionality is one of the most underappreciated things in life. It is what enables you to be nimble, change course, adjust on the fly, and self-correct. It is also what allows you to get through difficult moments, while simultaneously participating in the good ones.
While Americans may fight over the country’s path forward, be vicious with one another at times, and either get upset when their candidate loses or thrilled when they win, we should cherish our elections because it means we have the ability (but not the obligation) to change the path we are on. To choose our destiny.
As it relates to China, so long as optionality is absent, consumer confidence will remain depressed (has fallen more than 30% since Xi removed term limits), net capital outflows will continue, economic conditions will likely deteriorate further, and its equity markets will languish.
Frankly, this is what makes the country feel un-investable to me right now.
That said, if China reverts to a system of term limits, things could change quickly and dramatically.
After all, this is precisely what has happened in Argentina after its citizens elected libertarian Javier Milei last year. The results so far have been astounding as Argentina has experienced a material drop in inflation, green shoots in economic growth, and world leading equity returns as a result of his sweeping changes.
Often times the things we should be most thankful for aren’t obvious because they come with a cost. In the case of our elections, the cost is more than well worth it.
2024-10-15 06:28:00
After college, my wife (who was then my girlfriend) and I got an apartment in the Seattle suburbs. It was amazing – a perfect location, a beautiful apartment, even had a view of the lake. The economy was such a wreck at the time that we paid almost nothing for it.
A few months ago I reminisced to my wife about how awesome that time was. We were 23, gainfully employed, living in our version of the Taj Mahal. This was before kids, so we slept in until 10am on the weekends, went for a walk, had brunch, took a nap, and went out for dinner. That was our life. For years.
“That was peak living, as good as it gets,” I told her.
“What are you talking about?” she said. “You were more anxious, scared, and probably depressed then than you’ve ever been.”
Of course, she was right.
If I think deeper than the initial knee-jerk memory, I remember being miserable. I was overwhelmed with career anxieties, terrified that I wouldn’t make it, worried I was about to be fired. For good reason: I was bad at my job. I was insecure. I was nervous about relationships being fragile.
In my head, today, I look back and think, “I must have been so happy then. Those were my best years.” But in reality, at the time, I was thinking, “I can’t wait for these years to end.”
There’s a Russian saying about nostalgia: “The past is more unpredictable than the future.” It’s so common for people’s memories about a time to become disconnected from how they actually felt at the time.
I have a theory for why this happens: When studying history, you know how the story ends, which makes it impossible to imagine what people were thinking or feeling in the past.
When thinking about our own lives, we don’t remember how we actually felt in the past; We remember how we think we should have felt, given what we know today.
I remember myself as being happier than I was because today, looking back, I know that most of the things I was worried about never happened. I didn’t get laid off, the career turned out fine, the relationships endured. I slayed some demons. Even the things that were hard and didn’t end up like I wanted, I got over.
I know that now.
But I didn’t know that at the time.
So when I look back, I see a kid who had nothing to worry about. Even if, at the time, all I did was worry.
It’s hard to remember how you felt when you know how the story ends.
I was recently asked at a conference how investors should feel about the stock market given that it’s basically gone straight up over the last 15 years.
My first thought was: you’re right. If you started investing 15 years ago and checked your account for the first time, you would gasp. You’ve made a fortune.
Then I thought, wait a minute. Straight up for the last 15 years? To echo my wife: What are you talking about?
Are we going to pretend like the 22% crash in the summer of 2011 never happened?
Are we supposed to forget that stocks plunged more than 20% in 2016, and again in 2018?
Are we – hello? – now pretending that the worst economic calamity since the Great Depression didn’t happen in 2020?
That Europe’s banking system nearly collapsed?
That wages were stagnant?
That America’s national debt was downgraded?
Are we now forgetting that at virtually every moment of the last 15 years, smart people argued that the market was overvalued, recession was near, hyperinflation was around the corner, the country was bankrupt, the numbers were manipulated, the dollar was worthless, on and on?
I think we forget these things because we now know how the story ends: the stock market went up a lot. If you held on tight, none of those past events mattered. So it’s easy to discount – even ignore – how they felt at the time. You think back and say, “That was so easy, money was free, the market went straight up.” Even if few people actually felt that way during the last 15 years.
So much of what matters in investing – this is true for a lot of things in life – is how you manage the psychology of uncertainty. The problem with looking back with hindsight is that nothing is uncertain. You think no one had anything to worry about, because most of what they were worrying about eventually came to pass.
“You should have been happy and calm, given where things ended up,” you say to your past self. But your past self had no idea where things would end up. Uncertainty dictates nearly everything in the current moment, but looking back we pretend it never existed.
My wife and I recently bought a new house. Like most of the country, it cost – let me put this mildly – a shitload more than it would have a few years ago.
We started talking about how cheap homes were in 2009. In our region they literally cost four to five times more today than they did then – plus, interest rates were low in 2009, and there was an endless supply of homes on the market to choose from. We said something to the effect of, “People were so lucky back then.”
Then we caught ourselves, shaking off delusion, and thinking, “Wait, do we really have nostalgia for the economy of 2009?” That was literally the worst economy in 80 years. All anyone talked about was how terrible everything was. Homes were cheap because unemployment was 10% and the stock market was down 50%.
Looking back, we know 2009 was not only the bottom but the beginning of a new boom (albeit with volatility). But we didn’t know that back then, and it gave us plenty to worry about that’s easy to forget today. What felt like risks then now look like opportunities. What felt like dangers then now look like adventures.
In a similar way, Americans are still nostalgic about life in the 1950s. White picket fences, middle-class prosperity, happy families, a booming economy. There was also the ever-present risk of nuclear annihilation. Today, we know the missile was never launched. But the 5th-grader doing nuclear attack drills by ducking under her school desk? She had no idea, and had plenty to worry about that is impossible to contextualize today, since we know how the story ends. So of course she wasn’t as happy as we think she should have been.
I subscribe to a few Instagram accounts devoted to 1990s nostalgia. I was a kid then, so I’m a sucker for this stuff. The comments on those posts inevitably say some version of, “Those were the best years. The late ‘90s and early 2000s was the best time to be alive.” Maybe it was pretty good. But we also had: A bad recession in 2001, a contested presidential election, 9-11 – which utterly reshaped culture – two wars, a slow economic recovery, on and on. It’s easy to forget all of those because we know the economy recovered, the wars ended, and there wasn’t another major terrorist attack. Everything looks certain in hindsight, but at the time uncertainty ruled the day.
Of course, things could have turned out differently. And for many people – those who were laid off, or did lose their home, or did die in war – the happy nostalgia of remembering what life was like before might well be valid.
But as Thomas Jefferson said, “How much pain have cost us the evils which have never happened.”
Part of the reason nostalgia exists is because, knowing what we do today, we often look back at the past and say, “you really didn’t have much to worry about.” You adapted and moved on. Isn’t that an important lesson as we look ahead?
Understanding why economic nostalgia is so powerful – why it’s almost impossible to remember how uncertain things were in the past when you know how the story ends – helps explain what I think is the most important lesson in economic history, that’s true for most people most of the time:
The past wasn’t as good as you remember. The present isn’t as bad as you think. The future will be better than you anticipate.
2024-09-24 04:51:00
The ultimate success metric is whether you get what you want out of life. But that’s harder than it sounds because it’s easy to try to copy someone who wants something you don’t.
I’ve seen this play out twice: An incredibly talented young writer with a big blog following joins a major media company where they quickly fizzled into irrelevance.
It was the same story each time: When the writer was young and independent they could write with their own voice, their own style, their own flair. They could run with their own intuition.
They were artists, which was what made them great.
Then they joined a big media company, which said, “That’s not how we do things here. Here’s our style book, you must follow it to a T. And meet Gordon, he’s your new editor. He will tell you what to write and when to write it. Good day, sir.”
They became employees, which was their downfall.
And these were very successful media companies. They knew what kind of writing worked and what their readers wanted. But of course it didn’t work out. What was right for the company was wrong for the writer. A talented person can quickly become mediocre when you force them to be someone they aren’t.
Even if you’re not an entrepreneur, there’s so much to learn from that.
It’s so common to on one hand recognize how much variety there is among people – different personalities, backgrounds, goals, skills – but on the other hand ask, “What’s the best way to do this thing?” as if there can be one universal answer for vastly different people.
One area this impacts people is with money, where more damage is caused not by dumb financial plans but by reasonable ones that just aren’t right for you.
How you invest might cause me to lose sleep, and how I invest might prevent you from looking at yourself in the mirror tomorrow. Isn’t that OK? Isn’t it far better to just accept that we’re different rather than arguing over which one of us is right or wrong? And wouldn’t it be dangerous if you became persuaded to invest like me even if it’s wrong for your personality and skill set?
Or take how we spend money. You like this, I like that. Who cares? It gets dangerous when you assume that if someone else is spending their money differently they either must be doing it better than you or doing it wrong. And that’s actually very common, because it’s easy to interpret someone spending money differently than you as an attack on what you’ve chosen to spend money on.
It’s possible to be humble and learn from other people while also recognizing that the best strategy for you is the one closest aligned with your unique personality and skills.
A few things happen when you do.
You do your best work and have the most fun when you’re not burdened by fear that someone else thinks you’re doing it wrong.
You measure how you’re doing against your personal benchmarks, which can both push you to your potential and prevent you from chasing someone else’s.
You have a much better shot of getting what you want out of life. Which, again, is all that really matters.
2024-09-19 01:52:00
Ryan McFarland came from a long line of motorsports junkies given that his grandfather had been a race car engineer and his father ran a motorbike store. As a result, it shouldn’t come as a surprise that McFarland grew up riding dirt bikes and stockcars, or that he eventually went into the family business as well. It also shouldn’t come as a surprise that he was eager to pass on the McFarland “love of wheels” to his own son.
As any parent knows, getting a young child to ride a bike is a significant challenge. McFarland’s experience was no different. So, like many of us, he purchased an endless number of things to help his son get riding — toddler tricycles, trainer bikes, and even a training wheel equipped motorcycle.
Nothing worked. More importantly, each failed to teach his son the most important part of riding a bike — learning how to balance.
Think about it. While training wheels or a tricycle might stabilize a rider, neither allow a kid to equalize their weight on a bike.
The reason?
The extra wheels do all the balancing. They simply serve as a crutch.
So what did McFarland do?
He decided to engineer a very different type of bike, but rather than adding something to the bike, he chose to take something away — in this case the pedals.
The result was the Strider Bike, which enabled kids to focus exclusively on their balance and has since become one of the best-selling bikes of all-time, as well as a godsend for parents everywhere.
Within a few days, McFarland’s son was riding the Strider Bike. Within a couple weeks, he was riding a real bike. Within a few years, his company had sold millions of bikes. In short, McFarland had solved a significant challenge with a simple (and far less expensive) solution.
This story is far from the only case where the best solution came from using less of something rather than more. In fact, I have dealt with this dynamic personally over the past two years.
See, I grew up with eczema as a child, which I thankfully outgrew when I was about eight years old. Unfortunately, it reappeared in patches back in early 2021, so I went to see numerous doctors, dermatologists, and allergists. Each recommended a new cream, pill, and eventually a shot, which led to very mixed results. Finally it dawned on me to ask an allergist for a patch test, which is essentially a way to test to see if you are allergic to any specific chemicals that are commonly found in various soaps, shampoos, creams, and countless other products. I took the test and found out I was very allergic to two of the 150 things they tested for, one of which is prevalent in something called Aquaphor, which is a Vaseline-like ointment that we had been using on my both of my sons’ skin.
Care to guess when we had started using it?
You guessed it, early 2021. Precisely the same time that I started having a recurrence of my eczema.
So, what did we do?
We removed Aquaphor from daily use in our house, I stopped taking the various medications I was using, and my skin problems have slowly improved.
Whether it applies to training wheels or skin medication, this begs the question — why are we so inclined to add things rather than take them away when searching for solutions?
The answer is simple — human nature and incentives.
The fact is, people are biased towards solving problems through addition rather than subtraction.
The reason?
Because adding something makes you feel like you are advancing, while taking something away makes you feel like you are retreating. Couple this with the fact that most companies are incentivized to sell us endless “solutions”, and it should come as no surprise that the desire take something away is practically non-existent.
We see this dynamic across all parts of the economy, and society at large.
In healthcare, nearly every condition people face is addressed by adding something. Have a skin issue? Try this cream. Having trouble sleeping? Take this pill. Can’t lose weight? Take this new injectable called Ozempic (ironically a drug that aims to *take away *our appetites). Casey Means wrote extensively about this in her new book — Good Energy — that is now #1 on the Amazon charts. In short, she makes the case that instead of jumping immediately to medications that almost always have side effects, we should instead start by identifying what is causing the problem and trying to eliminate it. For example, if you have a skin issue, start by cutting out soaps with countless active ingredients. Can’t sleep? Cut back the amount of alcohol you drink and/or TV you watch before bed. Dealing with a stomach or weight issue? Try reducing the amount of processed food and sugar you eat.
In software, this concept of favoring less over more is known as the “Mythical Man Month” (or more simply, “Brooks’ Law”), which was discussed at length on a recent podcast Patrick O’Shaughnessy did with Bret Taylor (Co-Founder of Sierra, former Co-CEO of Salesforce, and a current board member at Open AI). Taylor pointed out that,
“If you want to make a software project take longer, add more people to it. This is based on the premise that when you are developing a complex system, smaller teams who complete each others’ sentences, each own part of the system, truly understand it, and work in unison create a magical, yet fragile, dynamic. This is the case because adding more people means more bureaucracy, which risks disempowering some of your best people and slowing things down. Just look at Healthcare.gov as a perfect example.”
Retail is another obvious example. Look no further than Starbucks’ recent troubles. One of the main culprits? The decision to add countless options to their mobile app. In short, by designing its app to enable customers to hyper-customize their favorite drinks (according to one report there are over 170,000 ways to customize a Starbucks order), it led to orders like the one below:
Instead of increasing revenues and customer retention, this hyper customization led to poor customer service, employee turnover, longer wait times, and often incorrect drink orders. Eventually, it even led to Starbucks firing its CEO and replacing him with Brian Niccol, who made a name for himself running a company that has nearly perfected the concept of “taking things away” — Chipotle.
In short, by having far fewer options and ingredients, Chipotle created a juggernaut in the fast casual category by maximizing efficiency, throughput, and quality, which is a very different business model than a company like McDonalds, which has an endless number of options on its menu and is constantly adding new ones.
As a result, last year Chipotle’s restaurants collectively generated more than $10 billion in annual revenues and close to $2 billion in annual operating profits (up from $900 million and $250 million respectively fifteen years ago). This model has resulted in a stock that has compounded at more than 25% annually over the past decade-and-a-half, which means that $1,000 invested in 2009 would be worth more than $40,000 today.
Unfortunately, too many investors manage their portfolios like McDonalds or Starbucks instead of Chipotle. In an attempt to improve or upgrade them, they almost always look to layer on new investments, commitments, asset classes, and securities, often shooting well past an appropriate level of complexity:
Worried about a market crash? Layer on expensive hedges.
Concerned about volatility? Buy complicated options.
Want to generate higher returns in a low interest rate environment? Add leverage.
Trying to keep up with other investors? Chase a hot buyout or venture capital fund.
The trouble is that when they do this, the more vulnerable their portfolios become. It causes them to lose track of what they own, reduces their portfolio’s liquidity and transparency, and forces them to pay higher fees in the process. It also often leads to investors being forced to make decisions they swore they never would, typically at the worst possible moments.
We saw this first hand in the lead up to, and during, the Covid crazed market of 2020-2021. “One man band” venture capitalists were able to raise money with ease, firms like Tiger Global sprayed money in every direction with little diligence, term sheets from unknown investors landed on general partners’ desks, “extension funds” were waved into portfolios without even the slightest objection from limited partners, leverage was easy to come by, and investors happily traded daily liquidity for decade liquidity. Yet this is just the tip of the iceberg, as there were countless other examples of investments and structures being added to portfolios in pursuit of higher returns.
However, in 2022 and 2023, this dynamic changed materially as “one man VCs” started to disappear, the Tigers of the world were humbled and retrenched, those blind term sheets stopped coming, extension funds were tabled, limited partners starting guarding liquidity with their lives, and investors more broadly started pulling in the reins as they attempted to determine what lay ahead.
So, experiences like this beg a few questions:
Is increased complexity the path to better performance, or would investors be better off if they simply removed a few things?
Should investors hold one hundred 1% positions in their portfolio (i.e., be overly diversified), or should they concentrate their bets in their highest conviction positions, watch them closely, and add to them when they get dislocated?
Should investors deploy capital at a torrid pace during bull markets, or would they benefit from slowing down a bit?
The answer in each case is very likely an emphatic “yes” to the latter.
In fact, this probably goes for most things in life.
Think about it this way. What would happen if you reduced the number of things you focus on in your daily life by 20%? How about 30%?? Say 50%???
What are the chances you wouldn’t miss the things you cut out?
Would you possibly become more focused on the things you decided to keep?
Would you end up being a happier person? A better colleague? Parent? Spouse?
My guess is the answer would be a “yes” across the board here too.
But you might say, my life or portfolio is already SO complicated, how can I possibly uncomplicate it?
My response?
Just because things have gotten complicated doesn’t mean you can’t reverse it. Afterall, if Elon Musk can do it with his Raptor rocket engines, you can too.
In this day and age the case can be made that we live in an era of too much. Too much information, too much stuff, too many choices, and too many distractions. As a result, there is a good chance that the path to happier lives, and yes, better portfolio performance, might start by taking things away.
2024-09-02 22:11:00
I recently sat down with legendary investor Howard Marks, co-founder of Oaktree Capital Management.
We talked about investing, debt, endurance, and what really makes a difference in lifetime investment results.
