January 27, 2017 - Comments Off on Commonplace #0046

Commonplace #0046

Write the book you want to read.

The brain works in mysterious ways. By stepping aside, finding other projects and actively ignoring something, our subconscious creates space for ideas to grow.

Diversity is insurance of the mind.

While regular practice might include mindless repetitions, deliberate practice requires focused attention and is conducted with the specific goal of improving performance.

Mindless activity is the enemy of deliberate practice.

Deliberate practice always follows the same pattern: break the overall process down into parts, identify your weaknesses, test new strategies for each section, and then integrate your learning into the overall process.

You are not beaten until you admit it.

Do your duty as you see it, and damn the consequences.

The object of war is not to die for your country but to make the other bastard die for his.

Never stop being ambitious. You have but one life, live it to the fullest of glory and be willing to pay any price.

Always do more than is required of you.

By perseverance, and study, and eternal desire, any man can become great.

January 15, 2017 - Comments Off on Commonplace #0045

Commonplace #0045

Don’t invest too much time engaging with the wrong people. When approaching someone, begin with a litmus test. Similar to those color-changing strips from science class, these social tests quickly tell you about a person’s personality. Organizational psychologist and famed Wharton professor Adam Grant suggests asking people, “How much does the average employee steal from a crash register in a year?” The higher the number the more likely they are to be dishonest. The reason, Grant explains, is that people assume others are like them, and will act as they would. This is of course not definitive but suggestive. If you want to find out if a person is adventurous, ask them: “What’s the wildest thing that you have done on a dare?” If you wave at someone from across the room and they wave back, they’re friendly, you can approach. One way to tell if someone’s self-centered is to ask them to draw an E on their forehead. According to Harvard Business School professor Francesca Gino, author of Sidetracked, if the E faces you, they focus on others, if it faces them, they’re probably self-centered.

January 1, 2017 - Comments Off on Commonplace #0044

Commonplace #0044

Is that a dream or a goal? Because there’s a difference.

A writer’s brain is like a magician’s hat. If you’re going to get anything out of it, you have to put something in first.

Curiosity is anti-fragile, like an addiction it is magnified by attempts to satisfy it.

Our libraries are not cloisters for an elite. They are for the people, and if they are not used, the fault belongs to those who do not take advantage of their wealth. If one does not move on from what merely amuses to what interests, the fault lies in the reader, for everything is there.

Personally, I do not believe the human mind has any limits but those we impose ourselves. I believe that creativity and inventiveness are there for anybody willing to apply himself. I do not believe that man has even begun to realize who he is or what he can become. So far he has been playing it by ear, following paths of least resistance, getting by — because most others were just getting by too. I believe that man has been living in a Neanderthal state of mind. Mentally, we are still flaking rocks for scraping stones or chipping them for arrowheads. We simply must free the mind from its fetters and permit it to function without restraint. Many of us have learned to supply ourselves with the raw materials and then allow the subconscious to take over. This is what creativity is. One must condition oneself for the process and then let it proceed.

Imagine how our coffee situation might change if there was a public list where each person wrote their name when they took a cup of coffee, and maybe put a star next to it when they made a pot of coffee. Then you would know who left this last bit of black goo (and think a bit less of them) or who made that gleaming new potful (and think a bit better of them). The solution lies in aligning self-interest a little more closely with the community interest.

The leaders who make the biggest difference in office, and change millions of lives for the better, are the ones who collaborate, delegate, and negotiate—the ones who recognize that no one person can or should have all the answers.

Redefining leaders radically change the political landscape, not by seeking centre ground but by moving the centre in their direction.

Transformational leaders go a step further by fundamentally transforming the political or economic system itself. They are the ones who leave their country a completely different place than they found it.

Tell me something I don’t know.

December 18, 2016 - Comments Off on Commonplace #0043

Commonplace #0043

perception is power.

form follows function, and geometry dictates the layout of the product.

your faith has got to be greater than your fear.

the first impression of a company is made when people walk through the door.

master fear.

the brand is a narrative — it’s an idea that people both inside and outside the company have to buy into. my role is to shape the narrative: ‘what do we stand for? why are we here? how do we think and feel and act?

December 3, 2016 - Comments Off on Commonplace #0042

Commonplace #0042

A CEO’s first job is to build a product users love; the second job is to build a company to maximize the opportunity that the product has surfaced; and the third is to harvest the profits of the core business to invest in transformative new product ideas. Your First Creation is a Product, Your Second Creation is a Company.

CEOs who are most effective in developing and communicating strategy take the time to write their strategy out, in long form.

Do not compromise creatively and take care of people.

When I’m at my best, 50% of my time is unscheduled. That’s the time I use to think, drop in on the people I want to speak with, and let my curiosity roam. It’s my time to be creative. Without this free time, I would never be able to stay ahead of the company. To lead a company, you’ve always got to be two steps ahead. There’s no way to lead a company from behind.

That's how you fight monsters. You lure them in close to you, you look them in the eye, you smack them down.

December 3, 2016 - Comments Off on Commonplace #0041

Commonplace #0041

Two general principles about relations between human group size and innovation or creativity: First, in any society except a totally isolated society, most innovations come in from the outside, rather than being conceived within that society. And secondly, any society undergoes local fads. By fads I mean a custom that does not make economic sense. Societies either adopt practices that are not profitable or for whatever reasons abandon practices that are profitable. But usually those fads are reversed, as a result of the societies next door without the fads out-competing the society with the fad, or else as a result of the society with the fad. In short, competition between human societies that are in contact with each other is what drives the invention of new technology and the continued availability of technology. Only in an isolated society, where there's no competition and no source of reintroduction, can one of these fads result in the permanent loss of a valuable technology.

Innovation proceeds most rapidly in a society with some intermediate degree of fragmentation.

The ways you think and operate must involve time-tested values.

Good judgment comes from experience, and a lot of that comes from bad judgment.

See’s Candies was acquired at a premium over book (value) and it worked. Hochschild, Kohn, the department store chain (in Baltimore), was bought at a discount from book and liquidating value. It didn’t work. Those two things together helped shift our thinking to the idea of paying higher prices for better businesses.

Grahamites realized that some company that was selling at 2 or 3 times book value could still be a hell of a bargain because of momentum implicit in its position, sometimes combined with an unusual managerial skill plainly present in some individual or other, or some system or other. And once we’d gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses.

The investment game always involves considering both quality and price, and the trick is to get more quality than you pay for in price. It’s just that simple.

Businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return.

Leaving the question of price aside, the best business to own is one that, over an extended period, can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return. See’s sold 16 million pounds of candy in 1972. In 2007, it sold 31 million pounds. That’s a growth rate of about 2% annually. Yet the business created tremendous value. How? Because it generated high returns on invested capital and required little incremental investment. Growth creates value only when a business can invest at incremental returns higher than its cost of capital. The higher return a business can earn on its capital, the more cash it can produce, the more Value is created. Over time, it is hard for investors to earn returns that are much higher than the underlying business’ return on invested capital.

There are actually businesses, that you will find a few times in a lifetime, where any manager could raise the return enormously just by raising prices—and yet they haven’t done it. So they have huge untapped pricing power that they’re not using. That is the ultimate no-brainer. Disney found that it could raise those prices a lot and the attendance stayed right up. So a lot of the great record of Eisner and Wells came from just raising prices at Disneyland and Disneyworld and through video cassette sales of classic animated movies. At Berkshire Hathaway, Warren and I raised the prices of See’s Candy a little faster than others might have. We bought See’s Candy in 1972, See’s Candy was then selling 16 million pounds of candy at a $1.95 a pound and it was making 2 bits a pound or $4 million pre-tax. We paid $25 million for it—6.25 x pretax or about 10x after tax. It took no capital to speak of. When we looked at that business—basically, my partner, Charlie, and I—we needed to decide if there was some untapped pricing power there. Where that $1.95 box of candy could sell for $2 to $2.25. If it could sell for $2.25 or another $0.30 per pound that was $4.8 on 16 million pounds. Which on a $25 million purchase price was fine.

The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.

Buy commodities, sell brands.

When we bought See’s Candies, we didn’t know the power of a good brand. Over time we just discovered that we could raise prices 10% a year and no one cared. I bought it in 1972, and every year I have raised prices on Dec. 26th, the day after Christmas, because we sell a lot on Christmas. In fact, we will make $60 million this year. We will make $2 per pound on 30 million pounds. Same business, same formulas, same everything–$60 million bucks and it still doesn‘t take any capital. And we make more money 10 years from now. But of that $60 million, we make $55 million in the three weeks before Christmas.

The informational advantage of brands is hard to beat.  And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotz’s chewing gum. Well, I know that Wrigley is a satisfactory product, whereas I don’t know anything about Glotz’s. So if one is $.40 and the other is $.30, am I going to take something I don’t know and put it in my mouth – which is a pretty personal place, after all – for a lousy dime? So, in effect, Wrigley, simply by being so well-known, has advantages of scale – what you might call an informational advantage. Everyone is influenced by what others do and approve.  Another advantage of scale comes from psychology. The psychologists use the term ‘social proof’. We are all influenced – subconsciously and to some extent consciously – by what we see others do and approve. Therefore, if everybody’s buying something, we think it’s better. We don’t like to be the one guy who’s out of step. Again, some of this is at a subconscious level and some of it isn’t. Sometimes, we consciously and rationally think, ‘Gee, I don’t know much about this. They know more than I do. Therefore, why shouldn’t I follow them?’ All told, your advantages can add up to one tough moat.

Over the years the power of a brand when combined with commodity inputs has created a powerful combination.

In 1972, See’s sold 16 million pounds of candy, and 35 years later, it stood at 32 million, meaning it gained just 2% a year, but it’s profit rose by 9% a year.

The ideal business is one that takes no capital, and yet grows. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

If you are willing to buy a business that has volatile profits from quarter you may find the purchase price to be a bargain since others may be frightened by what they deem as “risk.” Munger has said this is a considerable willingness to accept volatile results from quarter to quarter is a considerable advantage in investing.

The most important task in capital allocation for Buffett and Munger is to take cash generated by a company like See’s Candies and deploy it to the very best opportunity at Berkshire. Charles T. Munger, Berkshire Hathaway’s vice-chairman, and I really have only two jobs… One is to attract and keep outstanding managers to run our various operations. The other is capital allocation.

Advice shouldn't come with expectations.

In a world of hyper-competition and nonstop disruption, playing it safe is the riskiest course of all.

Risk means more things can happen than will happen.

In order to win, you must first survive.

Uncertainty about the future does not necessarily equate with risk, because risk has another component: Consequences. In the real world, risk = probability of failure x consequences. Knowing the outcome does not teach you about the risk of the decision, even after you know the outcome. All we can do is make intelligent estimations, work to get the rough order of magnitude right, understand the consequences if we’re wrong, and always be sure to never fool ourselves after the fact.

November 25, 2016 - Comments Off on Commonplace #0040

Commonplace #0040

The people who stand before kings may look like they did it all by themselves. But in fact they are invariably the beneficiaries of hidden advantages and extraordinary opportunities and cultural legacies that allow them to learn and work hard and make sense of the world in ways others cannot.

First mover advantage is exacerbated by the fact that technology companies enjoy compounded growth. Building organizations takes time. Incorporating, fundraising, recruiting, and shipping and marketing a product can easily add up to many months of work. If you’re second to market, your competitor will have been scaling their user acquisition machine while you’re still scrambling to ship your product. They’ll acquire resources at an exponential rate that allow them to reach even more customers before you do, and you’ll be stuck trying to explain to users how your product is different from theirs. Most of the time, that means the death of your company.

I need thy presence every passing hour.

Each of us human beings, for example, is the product of an enormously long
sequence of accidents, any of which could have turned out differently.

The self is a relation that relates itself to itself.

Self-forgiveness is a misconception. The only people who can forgive us are those we have sinned against, those we have harmed.

Kierkegaard observed that you don’t change God when you pray, you change yourself.

Make the most of your regrets; never smother your sorrow, but tend and cherish it till it comes to have a separate and integral interest. To regret deeply is to live afresh.

This idea of fundamental laws plus accidents, and the non-linear second order effects they produce, became the science of complexity and chaos theory.

We own our business, and it is ours to lose.

The rule for decision making in life and business goes like this: The fewest blind spots wins.

“If one would give me six lines written by the hand of the most honest man, I would find something in them to have him hanged.” — Cardinal Richelieu in 1641

How we perceive the world and how we act in it are products of how and what we remember. We’re all just a bundle of habits shaped by our memories. And to the extent that we control our lives, we do so by gradually altering those habits, which is to say the networks of our memory… Our ability to find humor in the world, to make connections between previously unconnected notions, to create new ideas, to share in a common culture: All these essentially human acts depend on memory. Now more than ever, as the role of memory in our culture erodes at a faster pace than ever before, we need to cultivate our ability to remember. Our memories make us who we are.

In the late 1800s, “Buffalo Bill” Cody created a show called Buffalo Bill’s Wild West Show, which toured the United States, putting on exhibitions of gun fighting, horsemanship, and other cowboy skills. One of the show’s most popular acts was a woman named Phoebe Moses, nicknamed Annie Oakley. Annie was reputed to have been able to shoot the head off of a running quail by age twelve, and in Buffalo Bill’s show, she put on a demonstration of marksmanship that included shooting flames off candles, and corks out of bottles. For her grand finale, Annie would announce that she would shoot the end off a lit cigarette held in a man’s mouth, and ask for a brave volunteer from the audience. Since no one was ever courageous enough to come forward, Annie hid her husband, Frank, in the audience. He would “volunteer,” and they would complete the trick together. In 1980, when the Wild West Show was touring Europe, a young crown prince (and later, kaiser), Wilhelm, was in the audience. When the grand finale came, much to Annie’s surprise, the macho crown prince stood up and volunteered. The future German kaiser strode into the ring, placed the cigarette in his mouth, and stood ready. Annie, who had been up late the night before in the local beer garden, was unnerved by this unexpected development. She lined the cigarette up in her sights, squeezed…and hit it right on the target.

Many people have speculated that if at that moment, there had been a slight tremor in Annie’s hand, then World War I might never have happened. If World War I had not happened, 8.5 million soldiers and 13 million civilian lives would have been saved. Furthermore, if Annie’s hand had trembled and World War I had not happened, Hitler would not have risen from the ashes of a defeated Germany, and Lenin would not have overthrown a demoralized Russian government. The entire course of twentieth-century history might have been changed by the merest quiver of a hand at a critical moment. Yet, at the time, there was no way anyone could have known the momentous nature of the event.

Managers can grow and retain top talent by helping their employees articulate long-term vision for their careers.

Investing is about owning a partial stake in a real business. You must understand whether the actual businesses in which you own stock earns a return on capital to be a successful investor. The more different types of businesses you understand in this way, the more skill you will acquire in understanding another new business.

The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.

We have to have a business with some inherent characteristics that give it a durable competitive advantage.

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.

Risk comes from not knowing what you are doing.

If there are no barriers to entry, you won’t be very profitable.

If customers have all the power, and if rivalry is based on price, you won’t be very profitable. Producing the highest-quality products at the lowest cost or consolidating their industry is trying to improve on best practices. That’s not a strategy.

All human activities can be described by five high-level components: data, prediction, judgment, action, and outcomes. For example, a visit to the doctor in response to pain leads to: 1) x-rays, blood tests, monitoring (data), 2) diagnosis of the problem, such as “if we administer treatment A, then we predict outcome X, but if we administer treatment B, then we predict outcome Y” (prediction), 3) weighing options: “given your age, lifestyle, and family status, I think you might be best with treatment A; let’s discuss how you feel about the risks and side effects” (judgment); 4) administering treatment A (action), and 5) full recovery with minor side effects (outcome).

Being able to cross-pollinate the flow of ­information is amazing

Entrepreneurs and risk takers succeed or fail not so much on their ability to talk, explain, and rationalize as their ability to get things done.

People who are good “doers” and people who are good “talkers” are often selected for different traits. Be careful not to mix them up.

I write to dream; to connect with other human beings; to record; to clarify; to visit the dead. I have a kind of primitive need to leave a mark on the world. Also, I have a need for money.
I’m almost always anxious when I’m writing. There are those great moments when you forget where you are, when you get your hands on the keys, and you don’t feel anything because you’re somewhere else. But that very rarely happens. Mostly I’m pounding my hands on the corpse’s chest.

I write entirely to find out what I’m thinking.

November 8, 2016 - Comments Off on Commonplace #0039

Commonplace #0039

A good plan violently executed now is better than a perfect plan next week.

Always remember you are braver than you believe, stronger than you seem, and smarter than you think.

Having users make the rules confers several advantages. First, they are closest to the facts on the ground and best positioned to codify experience into usable rules. Because they will make decisions based on the rules, they can strike the right balance between guidance and discretion, avoiding rules that are overly vague or restrictive. User can also phrase the rules in language that resonates for them, rather than relying on business jargon. By actively participating in the process, users are more likely to buy into the final rules and therefore apply them in practice. Firsthand knowledge also makes it easier to explain the rules, and their underlying rationale, to colleagues who did not participate in the process.

Giving is an act of worship.

be greedy when others are fearful and fearful when others are greedy. One of the best times to invest is when uncertainty is the greatest and fear is the highest. I want fear. I want to buy things when people are afraid of it, not when they think it’s a gift being handed down to them.

To make money, you must find something that nobody else knows, or do something that others won’t do because they have rigid mind-sets.

Successful investing is the search for the mistakes of other people that may create a mispriced asset. In other words, one person’s mistake about the value of an asset is what can create an opportunity for another investor to outperform the market. This search is best done by people who are curious and hard working. Great investors hustle, have a huge scuttlebutt network and read constantly.

Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a 10% chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs.” “In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

If something is already consensus then money will have already flooded in and the profit opportunity is gone. And so by definition in venture capital, if you are doing it right, you are continuously investing in things that are non-consensus at the time of investment.  And let me translate ‘non-consensus’: in sort of practical terms, it translates to crazy. You are investing in things that look like they are just nuts.” “The entire art of venture capital in our view is the big breakthrough for ideas. The nature of the big idea is that they are not that predictable.” “Most of the big breakthrough technologies/companies seem crazy at first: PCs, the internet, Bitcoin, Airbnb, Uber, 140 characters. It has to be a radical product. It has to be something where, when people look at it, at first they say, ‘I don’t get it, I don’t understand it. I think it’s too weird, I think it’s too unusual.

Don't settle for the little dream. Go for the big one.

What we call following our gut, is really us being subconsciously guided by every piece of information we’ve ever consumed, shaping our instincts and ideas and forming us.

The power which has always started the greatest religious and political avalanches in history has been, from time immemorial, none but the magic power of the word, and that alone. Particularly the broad masses of the people can be moved only by the power of speech… Only a storm of hot passion can turn the destinies of peoples, and he alone can arouse passion who hears it within himself.

In the morning and during the day it seems that the power of the human will rebel with its strongest energy against any attempt to impose upon it the will or opinion of another. On the other hand, in the evening it easily succumbs to the domination of a stronger will.

The person who says he knows what he thinks but cannot express it usually does not know what he thinks.

Don’t start a company unless it’s an obsession and something you love. If you have an exit strategy, it’s not an obsession.

All else being equal, the fastest company in any market will win.

October 26, 2016 - Comments Off on Commonplace #0038

Commonplace #0038

The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function. One should, for example, be able to see that things are hopeless yet be determined to make them otherwise.

Thinking – especially thinking in words and sentences – is a form of internal communication. In thinking, you-in-the-present communicates with you-in-the-future. But though thinking is a private and covert activity, it is influenced by external interactions – in particular, by how you communicate with others. Communicative patterns become mental habits. The implication is that counterproductive – closed, oblivious, disconnected, narrow, hermetic, rigid – ways of communicating are thereby internalized and become counterproductive ways of thinking.

If you want to think differently, first learn to act differently.

I’m always looking for some kind of competitive advantage, like some type of unfair ability to compete in the marketplace.

The fact is, few business school professors have ever managed anything, and their lack of hands-on experience shows in their students. Medical school faculties, in contrast, are comprised of the best and most respected practicing physicians.

We take other men’s knowledge and opinions upon trust; which is an idle and superficial learning. We must make them our own. We are just like a man who, needing fire, went to a neighbor’s house to fetch it, and finding a very good one there, sat down to warm himself without remembering to carry any back home. What good does it do us to have our belly full of meat if it is not digested, if it is not transformed into us, if it does not nourish and support us? — Montaigne in The Complete Essays (“Of Pedantry”).

Why, within Eurasia, was it Europeans who conquered the world and colonized other people, rather than the Chinese or the people of India or the Middle East? Why was China chronically unified, and why was Europe chronically disunified? Why is Europe disunified to this day? The answer is geography. Just picture a map of China and a map of Europe. China has a smooth coastline. Europe has an indented coastline, and each big indentation is a peninsula that became an independent country, independent ethnic group, and independent experiment in building a society: notably, the Greek peninsula, Italy, the Iberian peninsula, Denmark, and Norway/Sweden. Europe had two big islands that became important independent societies, Britain and Ireland, while China had no island big enough to become an independent society until the modern emergence of Taiwan. Europe is transected by mountain ranges that split up Europe into different principalities: the Alps, the Pyrenees, Carpathians — China does not have mountain ranges that transect China. In Europe big rivers flow radially — the Rhine, the Rhone, the Danube, and the Elbe — and they don't unify Europe. In China the two big rivers flow parallel to each other, are separated by low-lying land, and were quickly connected by canals. For those geographic reasons, China was unified in 221 B.C. and has stayed unified most of the time since then, whereas for geographic reasons Europe was never unified. Augustus couldn't do it, Charlemagne couldn't do it, and Napoleon and Hitler couldn't unify Europe. To this day, the Europe Union is having difficulties bringing any unity to Europe. Europe's fragmentation was a great advantage to Europe as far as technological and scientific innovation is concerned. Innovation proceeds most rapidly in a society with some intermediate degree of fragmentation.

October 26, 2016 - Comments Off on Commonplace #0037

Commonplace #0037

Boil things down to their fundamental truths and reason up from there as opposed to reasoning by analogy.

The CEO who misleads others in public may eventually mislead himself in private.

The world is much more interesting than any one discipline.

The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action. The guiding policy specifies the approach to dealing with the obstacles called out in the diagnosis. It is like a signpost, marking the direction forward but not defining the details of the trip. Coherent actions are feasible coordinated policies, resource commitments, and actions designed to carry out the guiding policy.

Culture eats strategy.

Something not worth doing well is often not worth doing at all.

If you would persuade, appeal to interest and not to reason. The man changed his view when his incentives made him change it, and not before.

To the man with only a hammer, every problem looks pretty much like a nail.

I specialize in simple problems.

It’s not bringing in the new ideas that’s so hard. It’s getting rid of the old ones.

Curiosity. Concentration. Perseverance and self-criticism.

Better roughly right than precisely wrong.

You can get in way more trouble with a good idea than a bad idea, because you forget that the good idea has limits.

The Feynman Technique:

  1. Choose a Concept
  2. Teach it to a Toddler
  3. Identify Gaps and Go Back to The Source Material
  4. Review and Simplify