Michael Mauboussin Master Class — Moats, Skill, Luck, Decision Making and a Whole Lot More
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Yet, did we should see if the any listeners want to create some cool like animation for the interview, music for the youtube channel?

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to the fans? easy. You viz, you viz, you who get. Let me down story. On the .

welcome to this special episode, acquire the podcast about great technology companies and the stories and playbooks behind them i'm bang gilbert and on the cofounder and managing director of seattle based e pioneer square labs and our venture fund, psl ventures.

And i'm David rosen tall, and I am an Angel investor based in cisco.

and we are your hosts. Well, today we interview one of our heroes, Michael mobland. We've refections his work on many epo des before he's given talks that have been my car fouts.

And as many of you know, Michael is the head of conciliate research at counterpoint global, which is part of Morgan standing investment management. At mid year twenty twenty one, counterpoint global had assets undermanning ever of approximately one hundred and eighty billion dollars. And for those who don't know, Michael, work boy, are you in for a treat, David, I think it's fair to say he's your favorite investors, favorite investor.

I love that.

Yeah, he's done mind expanding research on a ton of topics. And today show, of course, has a lens on how to interpret all of Michael work over the years in the context of today's unprecedented macro economic environment.

I like that.

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It's advice about investing, but not any specific investment.

Yes, no doubt that it'll be educational, entertaining and Michael's an absolute riot. So without further .

do we will get into IT. Well, Michael, when we all met at capital camp, a hosted by Patrick and break the other week, we knew we needed to find some excuse to get you on the show and discuss all the big ideas that you've had over your career, untangling skilled log, measuring most decision making complexity theory.

But we thought maybe the best place to start would actually be expectations investing one because you in your coauthor l rapper, published a revised edition of the book. But also two, you think about expectations. Pretty good frame for the current market. So let's dive in on that. Well, thank you.

Both David and bent. Great to see you guys. The story is very quickly.

As I was a liberal arts major in college, I went the wall street. I no I Q was going on. I took no business classes, by the way.

I, my father, I, I take that back. My father made me take accounting for non business majors. And I get like a sea in the class out of the generosity the professor or is heart.

But I was they're just the wall street. And I think even the venture world and even corporate world filled with sort of rules of them and sort of old wives tales of how things work. Can I was sort of swimming all this.

And one of the guys of my training program handed me a copy of l rap ports book called creating shoulder value. That book in one thousand nine hundred eighty six, I read IT shortly after came out. And for me is a professional epiphany.

And i'll just say, almost everything i've done since then has been patterned on that work. There are three things he said, I think mean, bedrock of everything I think about. One is it's not about earnings that matters is really about cash flow.

So the ultimate driver value of business is cash, not accounting earnings. And we can come back and deepen on that thought. The second is, and also the really important is that we tend to think about strategy.

So what is our strategy and how do we position ourselves and so forth. And we think about valuation as two separate things. And he made the point, I think, very correctly, that do you have to combine these two things to understand a business and to do evaluation properly?

In other words, the limits us of a strategies that IT create value. And you really can understand the value business to you understand the competitive situation, the competence said, the growth of the market and so on so forth. And then the third final thing was in chapter seven. He is called stock market signals to managers.

And the argument was, hi, executive Price refit of expections about the future financial performance of your company and the bees you to understand what Price and if you want to do really well from the point of you, the stock market, you have to not only meet but exceed expectations. I, of course, had been made him. He was like some awesome big guy.

I had the opportunity. I started using his work in my work as an analyst, and then in nineteen ninety one, they have nineteen ninety one had the opportunity meet with them. IT was absolutely phenomenal. So for me, a real great experience as someone who was trying to learn from the master, we maintain a relationship through the nineteen nineties, and then told the end of the nineties, one thousand and ninety eight or one thousand ninety nine, he said, you know, IT might be fun for us to write a book using the same principles, but aimed at investors. So that was the birth .

of expectations. Investing that former one was sort of aimed at executives that CEO.

yeah, ban IT was in that particular idea of expectations was clearly useful for everybody. And so we read the book in that way. We sign IT in the late nineteen nineties, right? The words, you know, the worlds ripping and the start of doing grade in everything.

And a boy that sounds like familiar.

do you may just drinks me their David. The book came out september ten, two thousand and one. Oh, so you can imagine a worst time proceeding, obviously a national tragedy.

But really in the middle three year of brutal three year bear markets, we're coming off the dot com mom into the dot. M, B, at the time, and he was not great. So I was very old, received.

And we got, no, there's a lot of people are still have used some of the techniques, but the timing could have been worse. So we put this back the other, but I went to all said, let's would you like to work on that? He he agreed.

He's now as late. He's amazing to talk to. I still find IT every day I talk to exhilarating and awesome intellectual journey.

So super fund working on IT. And then other interest thing is how much the world is change in one years, of course. So a lot of news stuff has come along. So anyway, that's the story of the expectations of my thing.

Well, we want to ask you for a spoiler in case people haven't read the book from the first time around, in case this sort slip through the cracks and anything else. They were doing two thousand and one, and they haven't picked IT up yet. What's kind of the big seminar .

idea I don't want discourages body from my so the ideas say a stock Price or could really be any asset Price, a Price of an asset. But to say a stock Price reflects a set of expectations about future financial performance. So the first step is to say, what do I have to believe for this to make sense and you can apply that broadly.

The second step is to say, let's introduce strategic and financial analysis to judge whether that set of expectations is too optimistic, too pessimistic or about right. And by the way, more time to not. You're not going to have a view that that's different, different.

But a few views are more optimistic than you should buy the stock. If you use more pessimistic, you should sell the stock. And then the third final thing is, as a result of those things, take action, right, to buy seller holder doing nothing. But the core idea is just basically say, what do I have to believe is the company going to do what the market believes is going to do and then let me make decisions as a consequence.

This concept is really interesting. And one that we ended up talking about in our conversation, a capital camp. You know, you brought up the point that most of the time, the way people come up with a valuation or a Price target or a sure Price that they're willing to buy the company yet is they make their own model with sort of the bottoms up back in all the assumptions and then say, okay, here's what I am willing to pay.

And you're sort of making the argument here that you know the market has set a Price. And actually what you should do is reverse engineer that and say, what of the assumptions that I need to believe to make that a good thing to purchase right now? Make this a buy instead of a cellar or ignore and basically trying to come up with a probability distribution for each of those assumptions.

I try that and i'll nerd out for just a second that through the original framework for discount cash for models laid up by the john wins in one thousand thirty eight. So very long time ago. So he's laying out A D, C, F model and you know will be complicated.

So he's got a chapter, chapter fifteen called the chapter for skeptics so he's like, okay, you guys you know you guys do not a certain way and i'm shown you something new you're going to be skeptic about to here. He's tries to dress head on over skepticism. And actually john wyman says, hey, you know, if you think it's too complicated to forecasts what you think the value is, use the tools to go backwards.

So he actually talked about reverse engineering in one thousand nine hundred thirty eight, which are exactly right. And I I was trying to get my finger, put my finger on why is that people feel so compelled to project value and compare that to Price. Versus reverse engineering Price and what that means.

And i'm not sure I have a good answer for that, but I think maybe you feel like you're more in control if you were dicing what the value is versus going backwards. So I don't know what IT is, but IT seems to be a much more reasonable task, right, to say, what do I have to believe and by the way, again, like an investing lot, you're going to pass on a lot of things. Study just not can have a differential view.

So you're like, IT makes me think so much a little, just like wrote out of my notebook, it's the famous charly monger. Quote, invert. Always invert, right? I know what would chartly do?

The buffer quote is Prices, what you pay, values what you get. There are pair for a reason.

one on a percent. And thing i'll just mentioned you to to but I just want to also amplify IT, which is expectations resting I should have bit more explicit about is very problem ballistic, right? So what we're really trying to do to think through scenario, the if then kind of scenario.

So we're getting knowledge at the Price today is just one of many potential outcomes is actually a Price reflecting in the distribution of potential outcomes. We want to really understand the rich distribution. And you know, again, this all lends itself to good analysis that lends itself to good strategic analysis and financial analysis. But is not here is an answer. It's really trying to think about the world, probably tics, which is also very much a sort of buffet in monger type of thing.

Okay, so this is great because thinking about today's world, consult, even this was changing when you read the book the first time with technology. But in buffett monger's original world, the expectations seem to me like they would have been so much more simple. This company is gonna perform in x way, catch flows gonna a be. Why now, even if we're just talking about companies that are traded on public stock markets, the expectations built in seem to media there a lot more complex. Then just like facebook or amazon's cash flow next year will be z how should folks think about that?

Yeah and David, i'll just build on this. And you know this sort of now verses is an interesting way to frame IT if you go back way to bend gram so forth. And they focus a lot on things like book value, which was know where the accounting was actually probably a reasonable representation because most of your assets were things that truly showed up on your baLance sheet.

But as you pointed out correctly, the world has changed the town. And now more of our investments are tangible versus tangible. So as a consequence, what's going on the income statement in the baLanced and so forth is getting a little bit mixed up.

So let me just give you one little stat. I found interesting that we just recently ran back in two thousand and one. So the year the first book came out, capital pennicut and intangible investments.

And this is for I called the Russell three thousands of basically U. S. Public companies was about the same amount, six hundred and thirty, six hundred and forty billion, something like that. So just think of a starting line for a race and their standing there the same behind fast four to twenty twenty one. Obviously, we don't have all the full numbers, but if the projection sort of hold out, IT will be the case that intangible investments now are two trillion dollars in cap backs is one trillion dollars. So going from the same starting point in tangible investment or two x, the tangible investment.

And can you tell everybody, just explain what you mean by intangible?

yeah. So in a tangible, tangible basic distinction, exactly what sounds like. So tangible things you touch, feeling, kick and south and more things that are not physical. Obvious ical examples would be software code, but IT could be anything to be marketing, branding, all that kind stuff, train your employees.

And so for so what accounts try to do now is to look at the income statement to say which of those items spent on on selling, general administrative expenses, which are necessary to maintain the current business and which are discretionary investments right in investment, defined as an outlet today with the expectation for a future return that are, in this case, that are intangible. So the big buckets, classically research and development branding. But today you think a lot about the recognition costs.

We know all that kind of stuff. And so it's been a watershed change. And and this has been a called even maybe not even a generation of investors. And so a lot of those tools that were developed incredible, useful and thoughtful at the time.

But just because the accounting change means that they are much less relevant today than they used to be patrico shani did a really interesting podcast little over year ago was john calls and from stripe and you know, just such a thoughtful guy. But spending a lot times like I don't understand why the accounting works is right, right? Because we're spending tons of money at strike to try to build our business. But most the intentional investments and they shown up on our income statement right for expanding our income doesn't look that great.

Look on profit ah.

you can prove. But this is in building incredible value, right, incredible wealth. And that's why this original message from rapport of cash flows, not earnings, is so in my mind, all the time, right? This is a really big change. And what's exciting for me, and I think it's executives or even investors should be thinking about this is that we're a little bit in the wild west of this. No one really knows how to think about and grapple these intangible from an accounting point of view.

But if you're really try to understand a business, what I always recommend doing is getting down to the basic unitive analysis and know how does this company make money and really focusing on that and really refining laser focus on that to understand IT. And again, that the numbers are becoming less insightful for giving us guide and sights to think about that. And then the other thing that's been interesting, I think the last twenty years has been true for a long time.

But increasingly, software base companies can be much more global. They can grow much faster and they can be much more global than businesses in the past. And that's another thing, another feature of other way.

IT helps some businesses. But when you have a lot of intangible lasses you built on an intangible advice, IT also makes you vulnerable. Rights of your product service does not work. There's not much there left, right.

right. You'd going to sell for a book value.

And so if you think about you know for the tails pushing out the tails relative to traditional businesses, that the added way I think about there, there more extreme good things and more extreme bad things than and what we had witnessed in .

the best maybe to go back and repartition late something the way I understand that venture capital investors have not had a financial investing fundamentals background. They often come from being entrepreneurs. And so you have people that don't have a robust or certainly as robust as the people you work with, Michael, and understanding of financial statements.

And so the idea that intangibles, our investments is sort of like inherent, it's like duh. And that IT just feels weird that IT doesn't show up in the right place in your financial statements. So it's almost like this, uh, hard headed view that VS have had is now being forced to be adopted by the broader investment community because as mark countries and puts its software eating the world. And so more and more of the very valuable companies in the world sort of think about their investing internally the same way that the nonfinancial sector of venture capital, uh, has not about them for thirty, forty years.

Yeah mean, I agree with all that. And um I do think that the market has sort of this out to some degree in public companies, right? So I think we have we're close to a record number, if not a record number of public companies today that in quotes lose money so you can lose money in fashion of bigger than your revenues.

But but you can lose money the way we're talking about, which is you're actually making very productive investments. And and by the way, is just to take one step back, is the the number when I talk about cash flow, the number we really care about, so called free cash flow, which is earnings minus investments. And you know some people they got you want positive casual.

Well, the answer is not really. I mean, what you want is if you can invest at a high return, you want to invest as much as you humanly possibly can, right, that you have access to. I was like to point out that walmart, for the first fifteen years that I was public, had negative free casual for each of those years.

Walmart was profitable on the income statement, but they're investing like crazy. 你 玩 good because their stores had great economics。 So like knock yourself out. And so that's a little bit .

of the same mindset. So much easier for a walmart to untangle because you can just look at the cash flow statement and be like, oh, I see your Operating cash flow is then you're investing in capex on the was that on the investing cash flow port of the cash for statement? So you can disentangle that.

But with these software companies, IT all gets tied up in apex, right? So like you're investing in acquiring customers, in hiring engineers. That said, that gets muddy is only like you can just look at one number and feel like, oh, I see your Operating cash flow is excel ent. So you're doing the right thing.

I wants to talk about company analysis. So Michael e, you publish the awesome measuring the mote paper a few years back that has become basically the bible for how to do this. And we thought maybe the right way to dissect this.

Um I think you teach ben grams legendary security analysis course at columbia business school. So like do you think about this concept in the course? And how is the core structured?

Yes, the course structured and we can do well on the competitive strategy. But I I usually like to think about in four parts. The first is just thinking about markets.

And you know, the fundamental question is our markets efficient or the inefficient, whether a venture capital or public market investor, if I have hopes to generate sort of attractive returns, how do I go about that? So how do I differently myself, to do that? And then the last compete, which Better way is the news part of the course is our decision making.

And when I came to realize, no, probably fifteen or twenty years ago, was what differentiates good to great investors has little to do with their sort of technical skills like they are built, built brand cheese or whatever, and much more about their temperate and in particular, their ability to make decisions under some sort of stress or tension. so. Come back to decision making a real quick.

I gotta ask, what's the story of how you came to teach this? Legendary, of course, because this .

was so awesome. I mean, all the luck, right? So I joined what the time was. The first boston corporations now credit swiss as a food industry analyst in nineteen ninety two.

So liberal's major gone food industry so .

so big general mills and kilograms and cambell soup and all I kind of shot. That was my industry. So i'm i'm a new guy and i'm like plugin away and but well, just say that from the very beginning, I love to hang out with the technology guys.

So I just thought they were the cool guys and they get work at all the cool stuff, right? That's how i've got to know like build girly early bills career when he was Nancyis and use is like a cool guy working on cool stuff. So there is a guy there, a named charlie wolf, who just the greatest guy, and charlie was actually a tender professor.

Colombia business school, who decided had a sabba tico year, decided want to do equity research of all things and and every firm turned them down, except for the first place. And they game a. This is like now the light night, late seventies, early eighties.

And they said, what industry is like to follow is like all, there's this new thing called personal computers. Maybe I could do that. There are like personal computers.

Yeah, and nobody cares about that. truly. Was the P.

C. Anl son. Like, no, so is like apple coming.

I D, and he was an academic y an egg omics .

is a train economy mics. Yeah, train economic ics. So he walks in my house on you say, you know, i'm working on A P C.

Stocks and I won, taking about brands you like so dEllen compact. And like what do you know about brand? You know your food guys sounds like I really know that much about brands actually. But my here some step i've done and you know you can check IT out.

And of course, just to be clear, this is me coming right off working on the rapper port stuff, right? So i'm using an approach that no, you would could argue a little bit more academic than that was traditional multi to time. So IT comes back the next day and goes, yeah, there is not that much about brand here, but you should teach columbia business school what so honey, make this connection. And I I think at the time, you know, he had at a connection to the school school and they were looking for people to teach security analysts, which is.

I mean, this is the course that weren't buffet. The whole reason he went to columbia was to take this course.

Mean, I don't want to state all this. I mean, that is called security. Alsace and gram did teach a version of all, but many people have taught IT or were alonger, you know? So not know there is is not there's nothing.

I'm not unique in any way in this way. But so then he asked me a teacher, and, uh, I went up there and and you could also win here in new york. You can bring in great gas.

And so it's a fun experience for the students. So I started doing that the summer of nineteen ninety three. So this year twenty twenty two will be my thirty eight years of doing this and row, which is actually really good. So that's the story and how how I got there. And so let me now delve to bands question about computer strategy.

And i'll just say the annual people really recognizes, but the very first version of measuring the most amount, two thousand and two, so nearly twenty years ago, and i'll just say that, that was among probably the top three hardest things i've ever done professionally. And the reason was not so much that any the ideas were that difficult. But IT was an incredible exercise and synthesizing, right? So like many other people, i'd read Michael porter, i'd read clay Christians, i'd read all the, I knew the brian after little turn, increasing returns and so forth. But the question is, how do you bring this together in a way that sort of cohesive that allows an investor or an executive for somebody to understand?

Not to mention these were abstract concepts. I mean, you read them in a click and you're, oh, petition strategy port. This totally initially makes sense. But then that next level of literally measure.

you can start with basic things like competitive vantage. Interestingly bother. And I have all the porter books, and I read many of them, and I was very Young and they're really rich.

But they're difficult. They're not fun. They're not easy books to read. And in fact, I usually recommend the people who are interested in understanding read a book by a woman named john, a Greta called understanding Michael porter.

You, because she's a journal he worked out about to elbow with him for many years. And SHE actually explains the ideas, I think, more clearly than he does with a lot of examples. So here's an interesting question.

What is the definition of a competitive vantage? P. C. A. mote? And turns out the porter himself never really defined IT. And so we argue that a competitive antares have two features. One is an absolute one.

One is a relative one, the episode te one is you should have returns today, or returns that are promise to be above your cost to have, right? So in other words, cost a capable, simply an opportunity cost concept. So if i'm taking a door here, IT should earn above what that dollar could earn somewhere else in terms of opportunity cost.

And then the relative one is you should be Better than your competitor. So right? If we can define a competitor, said you should be Better, that's a competitor.

So and your pots, exactly, right, we want to start with something a little bit quantity in the sense you could hang your head on IT. And we tried to measure that by things like returns on the capital. So we basically broke the strain into three pieces.

One is I called lay of the land, but basically one am I dealing with here, right? So we do things like entering exit in the industry, market share changes, pricing flexibility. So these are all sort of brothers to get a sense of the field you're dealing with, right?

So for instance, if you have an industry where the market cheers are wiping around all the time, it's really hard to be king of the hill for a long time. If market cheers are really transitioning a lot, by contrast, you will get like soft drinks, these guys slug IT out for one market share point, right? So that's a really stable industry.

Then we talk about industry dynamics. So this would be the classic porter stuff for this really old user value chains in the five forces. Um I also put the Christians and stuff on disruptive innovation there, rather way disruptive innovations.

I think a very helpful theory. I think most people don't really understand exactly what he's talking about. It's worth understanding like going back in his basic principles. And then the third pieces, what is the source of this companies, is competitive vantage. If IT has won in the simple as way to say you usually low cost producer or some sort of differentiation, and we also need about the low cost producer differentiations, we can tie that back to return on capital, right? So basically, the simple model is low cost producers tend to have low margins and high capital velocity.

And what's capital velocity.

the capital city to be margins are going to be profits divided by sales and capable of be sales divided by invested capital, right? So low margins, high velocity that me you turning a couple fast, that's, uh, low cost producer, high margins and low capital city. That's a differentiation.

So you think about here's a way to make more concrete. Think about a supermarket. They don't make a lot of money on all the items. They all, but they sell tony stuff, right?

You think that versus Tiffany SE? Don't really know Tiffany SE business, but Tiffany Price make a lot of money when they sell stuff and they don't sell that frequent a jewelry store generally, right? So what happens immediately?

You show me the income statement or even adjust to state financial statements. And I can tell you right away, like if they're going to have a competitive e and start how they going after IT, right? Which is interesting.

yes. So measuring the mode, I think this was an attempt to try to be structured and thinking through the stuff. And I was very specific about putting a checklist at the end.

And checkers are interesting just because they force you to think about all the different issues. Not all the issues are going relevant for all the companies, but just make sure that you're being systematic and thinking through the various issues. And IT sounds a little bit tried to talk about like you know like like dave the same before sort of these markets are little bit crazy. But so that sounds a little bit try to do this kind of work. But I just feel so much Better trying to really understand the economics of a business right before I get involved a day.

But he started this is that involves you out a beat. I first discovered your work through bill early talking about IT what I was a super Young lipper snapp er VC a decade ago. And I read measure in the boat.

I actually pull up my copy of IT. I had to this literally like the whole thing is highlighted, like like why did I have but even bother highlighting this? Because it's only the words that art highlighting. But I took your checklist at the end and I was like, i'm to make this part of my early stage investing process and try to break up by then. I was like, well, well.

you much work.

I flying this to a seed stage investment is IT requires a little bit of a mental leap.

But I was so fun, David, that is a great bridge to complexity investing. The future is so freaking unknown for early stage companies. Michael, i'm curious, how do you apply this in an early stage type company where the world could change so much between what the vacant company is now and what IT will become? I mean, these are really hard .

questions in there. Sort of two pieces. One is, know, how would you value IT? And then how do you just think about the business itself and how the world might unfold?

When I think of complex adaptive systems, I think about a certain features. I mean, to break that term down, complex just means the interactions of lots of agents, right? Adaptive means those agents learn.

They try to anticipate their environment in reactive. But the environment changing itself changes how they learn and changes their behaviors, right? So the system that percys down, and the system is the hole l is grater than some of the part. So when you think about the world that way, there is a very big evolutionary components. To IT, which means that's why we can, I think, have a difficult time anticipating where the world's gonna go.

That said, um and I think that one thing that I often think about Young companies is really options more than you know like a sort of bond or something boring like that and an option theories been around for a very long time. Obviously, black holes in the nineteen and seventies sort of define mathematically from the key principles is not a perfect mapping to the real world, but not too bad. And then in the late one nine hundred and seventy early eighties, academic start take well, these ideas option for financial options, but we can apply them to real businesses as well.

And so how do we think about that? So where real options tend to be valuables when you have sort of three or four characteristics in place, first is is good to have volatility in the market, right? So this interesting thought is a little bit backward.

So typically, if you say for financial asset, your discount right is some sort of cost of capital lower is Better for value, right? So flower decorative have a higher value, right, all things being equal. So I think everybody sort of gets the math .

of the current market where the discount rate is zero and negative.

yeah look at the current market. But options are actually interesting because the option is the ripe, but not the obligation to do something, right. So you take out the downside to in an option, what you want is a lots of volatility.

You want lots of volatility, right? Which is sort of counter. So the more voluntary the world is, the more valuable the option is.

And so that's, I think, an interesting thought for their you also want this is where there becomes a big premium on management. So management ability to understand options and exercise and intelligently, extremely viable. And you can think about the history of corporate executives, some of whom have been amazing, and identifying and exercising options. You know, too easy example would be, of course, jeff bases, but he has been to say he's been great added.

And then the other thing is interesting is the feature is uh access to capital, right? Because if you even if you decide x to exercise an option, you need someone to have do things I have to pay for them, right? And, uh, I think that there was a lot of really interesting stuff intellectually going on the early two thousands of twenty years ago, right? But there was a huge air market, a huge hang over from the dot com, and there was just limited access to capital. The consequence, there are probably a lot of really interesting things .

that didn't happen. Just look at with them and petta com and look at inter carton tui today. You know, like these weren't bad ideas. That's just the access to capital one away.

Yeah so that's all really interesting too. But even just strategically, I think that the key is still to go back to the basic formula, which is the basic unitive analysis is what we're doing, make sense dealing. Other thing I add is that in doing this work over the years, one thing that i've always found is underappreciated, this sort of the role of entry and exit and industries, and I recommend my students spend time understanding entry and exit.

I think very few people are, but where are familiar with these statistics typically but I think that one thing is important to recognize is that as an industry starts um and by way the guide that the main work on this and its beautiful work is are getting Stephen clever from chronic milan cluppy died a few years ago but this is really cool stuff. And so what clubs showed was that almost every idea is that it's going there's a huge absolutely the number of competitors, again, think evolution right in the market, sorting out what IT likes. And then once it's figured out kind of what IT likes or what IT works, then there's a huge downward, right? So that's consult dating or business is going out of business bankrupt, whatever IT is.

And so you get this pattern of up and down. And uh, that's another really interesting thing to think about when you're looking at early stage, of which you say are right, where are we in this whole cycle? And by the way, when IT rolls over, you know, in other words, the number of companies is declining, it's actually really interesting time to invest because usually the industry itself is continuing to grow and it's a fewer number of companies that are capturing this oils, right?

So it's like a really interesting dynamic. Um we were a little bit about the club. I would see the guy, but you can do this for industry after industry.

Certain automobile bills be classic example radio, lot of IT, the internet for sure, this drive. So are lots of cool examples of this pattern playing out over time. So just some thoughts might be fun to think about and play with.

One thing to drill in on is so you mentioned with the early stage investing the idea as you'd think about IT more as optionality versus the same way you would think about investing in the late stage company. Are you sort of making the argument that and you can deploy a little bit of capital and it's effectively buying an option on the potential that the way the world shifts, that company becomes big, that, that sort of the way to think about an early stage investment?

I think that's right then. I think the other interesting thing is, you know, we wrote a big piece on public to private equity, probably a year a little a year ago. And one thing that I was really cool, that report was an analysis done by a few academics on the return profiles for three sets of investments, asset classes.

The first were venture, right? So I think they looked at thirty thousand venture deals, some gargantuan number of venture deals, and then they looked at fifteen thousand BIOS, and then we looked at thirty thousand periods for public companies. And so what you're looking at is the distribution of payoff s right? Of i'm going to say what everybody ready knows, right, which is the median venture deal earns nothing, right in many venture deals lose money, but the tales are super extreme.

So that's a really interesting way to think about essentially an option pay off, right? And then BIOS were a little bit is a bunt, like twenty five percent lost money, but most kind of did OK. But a little bit more right, you right? More student than the public markets.

And then the public markets look much more like a bell shape distribution. So and IT says, the interesting question is like, what is the best set of framework to map what we actually know imperially the payout s look like. And that's why even adventure, it's like you think about especially really stage venture.

I mean, whether the things worth fifty million or hundred million, it's going to be more ten billion, ten years and three years like IT doesn't really matter that much what you pay for today. So that's why these sort of extreme outcomes obscure the sort of first day. No, that's why you know these funny stories about people like we pass on amazon because I was too expensive. You know, IT made sense of the time, but in retrospect, CT obviously things don't makes sense, but they do makes sense. yeah.

I mean, to the extent that something is in the pool where I could be the next game is on, if it's truly early stage, that it's worth kind of any Price at that early stage. But the trick is determining if IT is of the set of companies that truly could be the exam is on.

That's why you're also building a portfolio, these things, right? So you I mean some obviously, if your, for example, founder, whatever you're going to have most year in in that one game, but if your adventure person, you're onna, spread out your battle bit and hope that in these are very familiar patterns that you just hope a couple things in your and your funder, the ones that hit and sort of pull .

the wagon along for everything .

yeah think the reason why I had a tough time as a Young B. C. Applying your measuring the mote checklist to early stage investments is I didn't realize the paradise of what the asset was that I was buying. IT was an option. And see, you should think of IT as an option, this framework which is talking about versus if you're buying a public security, you should think I don't even know what the right word is of that type of asset that you're buying of an option verses yeah.

IT is more of a cash loan business that's clear and and more almost like a fixed income, you know where we have a visible and predictable to some degree cash lows. yeah. No, exactly. I think that's not a bad way to think about IT.

okay. So before we move on from your class and since we're evaluation and and a little bit here and we are and as they say, unprecedented, let's take the most extreme example of having to work backwards from Price. So for fun, let's look at tesla and say, like with the margin of safety is, as was IT ever been in making an investment in any asset because multiples based on any aspect of a business or at all time highs, how are you sort of walking through an exercise with your students of working backwards from some on godless valuations of companies and where IT still may make sense to invest in both way?

Not surprisingly, text has been the company we've analyzed in our class a bunch of times. Usually, by the way, the end of the class, I bring in porfolio managers who assigned stocks for the students to work on. And tesla has been one that's been sort of a perennial one for many.

The reason you just describe, and i'm sort of the head scratching component, well, you know, you just have to sit down and pencil IT out and think to yourself and bottle another example of sort of this optionality. You know, other things that they are doing that are not visible, that could be a value in the future. So you have to pencil all that stuff out.

Other thing i'll say about tesla, which is, you know, we have a bit about this in the book, but the idea has been around for very long time, this concept of reflexivity. So we tend to think that there is a thing called the value of the firm. And i'm sort of the observed the values higher than the Price.

I'm going to buy IT and make money, so on so forth. And we forget that IT goes back to complex systems, that there's an area interaction between the observer and the actual a thing itself. And that reflexivity basically says the very act of building up a stock changes the fundamental outlook for that company.

so on so forth, especially if they can raise gobs of money at that new valuation.

Precisely, I think that IT was not too many years ago. Tesla a was sort of skating on the ice in terms of finances and so forth. And then as a stock took on a life of its own stock up a lot, that the capital get themselves much stronger footing.

And that buys them time, buys them way to do other stuff. So I think this idea of reflex x ivy is really big one now. And about with the idea.

I mean, the idea has been wrong for very long time. But the term reflexivity, I think, was coined by tord sorrow. So just to be clear where that intellect comes from ah I .

didn't know that that's also .

again a very old idea. But reflexivity now the key is like when you get office saying right, because reflexivity works in two directions and you can think about one another area where reflexivity been historically a very big deal is in mergers and acquisitions and sort of conclusion roll up. So think about businesses buying other businesses and their stock as well.

And the users stuck to buy another business and keep doing this in toronto to fourth. And you know, often where the gig ends up is that they have to do deals that are so large to perpetuate their growth rate, to perpetuate to fulfilled the expectations that IT just becomes like essentially interminable task. So I think that's one way to think about some of these businesses now.

You know the mean stocks, we've had flavors of this new people think is all new who had flavors of all the stuff for really long time. So there's really not that much new to that. I think maybe perhaps people can organize themselves more efficiently because they can use online tools and that they can transact to actually free or very low cost.

That allows that takes frictions out of the system that allows you to be perhaps, but easier. But there are there have been basically versions of this for long time now. Again, some these mean companies have been pretty smart about raising capital as well. So again, they've bought runway and maybe bought some opportunity through that. But you know most of these movies don't tend and well, just to be clear, so i'll see how this unfolds and finishes, but they tend not to be good endings.

And how do you reconcile most of these movies don't end well with bill girl's common of the only way to a get through the downside is to enjoy every last minute of the upside. In general, people should be fully invested. So what do we buy? yeah.

And I think that the context may be slightly different, and I want to put words in anybody's mouth, but I think bills attitude was bills take is a bit more to me, like the idea of market timing. You think yourself your i'm really clever in the market is really expensive, something to sell IT want to get cheap on to buy back and so on. So then what history tells us that is none of us for that clever, we just don't know.

And I think that's a little bit with built saying when the venture thing is that things feel a little bit rich and g, we should be throwing back a little bit, but we, in retrospect, have a hard time ping good at doing that. So that would be my context there. But I think the idea the movie doesn't end well that that preparing to document right, we can receive that point of cases.

I just love him. Mat living and a blue gas is a genius. And you know, he's got to think of the boring market hypotheses, which I always look.

I think there's something to that right, which is eighteen months ago. We sort a lot people up. They had nothing to do ah, they had no sports to bet on.

We put a electra money in their pocket to stimulate N I guy. Now here is here, something we can do to keep ourselves entertained and in some cases makes some money in. So that's what a Spark thing but will .

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You said a minute ago that the difference that you've found between great investors, average investors, is the quality and temperaments of their decision making. How should people think about that?

This is binary. Have been fascinated by. And I think as a world, we avi ourselves of these tools too infrequently, right? We should be doing more. This, you know, bend brought up a point early on, which I just wanted, reera, which is sort of thinking about different scenario for how the world might done fold.

And I think that one of the biggest mistakes we tend to make is that we tend to think we know the future Better than we actually do that, right? So the idea is to maintain sort of an open ended understanding of how things might unfold. So there are a number of tools now rattle them off fairy quickly. Most of them are about opening up your mind, and one of them is about feedback. So the first one and opening up your mind is idea base rates.

And for those that are not familiar with this, you know, when we are facebook problems, the typical way we solve a problem is to gather a bunch of information, right? Combining that with your own analysis, in in your experience, in your own import and your project into the future, right? That feels very natural because you gather the information in your you're obscene using your own devices to figure things out.

Base rates are actually very different exercise, which is he says he just think about this problem is an instance of a larger reference cause. So just basically asked what happened when other people in the situation before us. And it's a very unnatural to think about the world, right? Because you have to leave your own views, you have the least side all stuck, you're gathered and so on so forth.

I mean, psychologists to demonstrate this is a very, very robust component to your decision making. So understanding and thinking about base rates, I think, is a really powerful thing. And if you ask me if I could go back to my twenty year old self and say whispers er in the year and say, there is one mental model to sort of put into your life, I would say based another ideas pre morum same idea.

And there is an interesting psychological piece to this. But premium just is let's pretend we make an investment today, pretend then we launch ourselves into future. So now you a year from now, twenty, twenty two, whatever.

And this investment turned out showers been really bad. And then each of us, independently, this is important. Each of us independently write down why this turned out Better.

So other words, each of us is going to write two in the world wills regional article dated twenty two as to why this turned out badly. And IT turns out that, again, you don't have the intellectual baggage of having navy investment and your mind is opened. And there's some interesting reasons why future to present is Better than present the future.

But again, a mind exercise. The third thing is this idea of red teaming. So again, people very familiar with this, probably the most, uh, cyber security.

Good example now, right? So the blue team defends red team attacks and you say we're going to we think we're secure, but we're going to hire hackers to try hacker on system. You know that the red teamers just see how vulnerable we are.

So red teamers of people that are organized to chAllenge thinking, chAllenge the prevAiling views of things. And it's really hard, right, because even organization ally, we fall into these mindsets. We all start to believe the same thing and you need someone to sort of to jar you into reality. And then the last one is journal, and that's the idea feedback. And I think it's just brush hard in our world, whether it's venture, even as an executive public market doesn't matter.

It's brutally hard to give yourself honest feedback about what's happened, right? So even something turns out great, did turn out great for the reason you thought I would, right? Or are you just so lucky you just come up lucky or maybe sometimes you did all the right things and I turned up poorly, but I was the right decision right at the time giving the information you had.

So sad of journey is just keeping a decision log in, reviewing a periodical to make sure that you're thinking about things properly and then you're giving yourself on the feedback and the ideals to do IT probable political ally you can write down. I think there's an x percent probably this is gonna en by why day and give you the apparatus for a scoring system that can be super helpful. And again, it's not a ton extra work because you're doing IT already, right? You just been no vert about IT writing IT down. And so that's another thing that I think people can do in terms of their decision making to improve takes a little bit of disable, not like a top lot ton of time, but IT takes discipline to do that. And I think those that do IT well certainly benefit from massively.

For sure, just because you are relatively quick in your moment, they are on base rates. I want to take a quick break and freed this passage from of universe because for anyone who hasn't studied base rates and is like how I should google this, after Michael talks about IT, this one little quip will be like the beginning of the rabid hall for you. So the quoted an individual has been described by a nights or as follows.

Steve is very shy and withdrawn, invariably helpful, but with little interest in people or in the world of reality, mek and tidy soul. Steve has a need for order and structure and a passion for detail. Is Steve more likely to be a librarian or a farmer? okay. So everyone has some. And there .

might at this point, I I saying they're now.

of course, your intuition says a library, but in fact there's something like ten x or twenty x, the number of farmers in the world. So you should really just look at the base rate and go, i'm going to ignore everything you just told me and say farmer but of course, our brains trick us. And we all say library.

One of things we might want to talk about a little bit of the stuff on, luck and skills. So can we dive into .

that a little? This is one of my favorite books.

So look, I just think that one of most fascinating topics out there is this idea of untangling skill looks. So I was able to write a book about IT about eight or nine years ago.

And what inspired you to write the book? By the way.

it's so good. It's funny. I love the day when you ask, like where these ideas come from because i'm a big you sports fan.

I played the cross and college actually. But I was kind of an anti baseball guys. I I didn't mind baseball, but didn't really like baseball much.

But then I read money ball and I was like, this is also, so this is like, so interesting, right? And I think I was the first person on wall street to write about money box. I wrote a piece about IT.

Like within a week or two, the book coming out, I was so fired up. And you know, part of what they're trying to do is figure out like forget about what the person looks like, whatever. Let's figure out what wins.

And so these are things that are still contribution. So that got me talking a lot about this terms of and then got me focus on the analytics community where this thing is really important. And then I wrote a book called think twice in two thousand and nine.

And think twice about decision making is really an image to economy, actually, like the kinds of stuff that bend just read about. And I had a chapter on luck and skill, and I like, this is a cool staying at, right? I made a chapter too, right? So I goes, people going to get this.

The first was on base rates actually, right? This is not going in my other reasons. And he comes right now, the skies that was too complicated, you know, put IT you if you want to keep IT put IT IT right right.

It's last is. And so I get friends that read in, my friends, we go, oh, you know, like your book, but that chair on, still luck. Now that was cool.

I like, I knew. I knew I should put. And that is like, so this is like a spin off.

Like those T, V shows like that. You know, like, more can vini spin off from happy days, whatever. Like, this is like a spin off.

I like, okay, this luck sculling. There is a lot more here. I also read full by randomness ist by teller, obviously in two thousand and one, as many people did.

And obviously the basic point each genre had, like a two by four, that there's more rhymers in the world than you anticipate. But I felt that I was lucky in the sense that didn't really give you the tools to buy any that stuff, right. So I was like, O, K, M, i'm loaded up.

Now i've got this idea that this is really important. moderate. The subtotal book is locking business, sport and investing, right, all stuff I find interesting. So i'm that encouraged me to go down the path.

And so IT actually may make sense, just a very quickly defines some terms rice, the skill worker says the the ability to play ones knowledge readily and execution performance, right? So you know how to do something. And when you're call on to do IT, you can do IT.

So you have to go play violent like snap your fingers, you're gona crank, right? You can be awesome. Luck is much more difficult to define, and but way gets into flow very quickly.

You have to put a pull down to figure out where you want to stay. But so IT has three key attributes. One is that happens to an individual organization.

So what that happens to you or your company or your favorite part team? Second is that can be good or bad. And I not mean to suggest that is a metrical because it's not, but there's a good positive side and negative.

And third is this is the squeeze ous. One is, is reasonable to expect a different outcome could have occurred. S, so we review the type of time and we played IT again, you'll be reasonable to see a different outcome, right?

So that's how to say is luck. And so when you have in your mind a couple of things to come out of, really, really interesting one is what we call the luck skill continuing. So you can think about activities along a continuum on the one extreme would be all still no luck, nothing really over there.

But you think about chess matches or running races, right? Is the fastest person using going to win, right? Then you think about the other extreme, which be all lock, no skills, so will let wheels lotteries, right? There's so there's no element of killers .

but market investing yeah .

so that actually interesting. Hold onto that topics. We want to come back then just a moment. And so then you have everything arrayed between those two extremes.

Ms, and the way we did did the book we did for fun, which was professional sports leagues based on a season. And you can see, for example, that basketball is a sport that further away from random. So the most essentially scheduled to dictates the outcomes. So then you're sort of joking little bit about that, about where public market investing is. But I want to I wise you want to build on this because this actually proved the most popular concept came on the bookings called the paradoxes skill OK.

This is so my blowing. yeah.

I this again, none of these ideas are new with me. I got this idea for Steve j. School in his book called four house from the middle nineties. And so the idea is that when .

you think about a the biologist.

yeah, a lusia ary biogas. Exactly good call. yeah. So the paradigm says, and activities were both skill and not contribute to outcomes, which is most stuff. As skill increases, luck becomes more important.

You're like, why is second? How does this work? Exactly right? So we can think about skill in two dimensions. The first is absolute, in the second is relative. So the first is absolute skill. And I think that we agree, we look around the world, whether sports or business or investing, the level of absolute skills never been higher, right?

If I gave you, what is that your fingertips today, and put you back to the hundred and sixty as an investor, for instance, you could run circles around your competition, right, because you just have Better tools available to you. And certainly sports, we can see that specially sports measure versus a clock, right? Things are people, or just faster.

And sons over the second dimension knows the really important one, which is relative skill. And what we seen in domain after domain is relative skill gaps have narrow. The difference between the very best in the average is less today than IT was in the.

And you could think about all sorts of tons of reasons. For example, sport takes are super easy, right? Because you think about, like the N, B, A used to be certain types of players from certain part of the country, and now a completely global market. The best players anywhere the world will be found.

T chamblin could just like totally dominate back in the day. But if what we're playing in the M. B. A today, like he would have a lot more.

In fact, this is how the whole thing about going with Steven j. Go go about ted who hit four, six and thousand and forty one, that very magical year. And by the way, ted lives and he was almost exactly a three standard deviation event, what the twenty twenty numbers will prove to be but fear three state vision event. And in the most recent full season, you hit like three ty five or three ninety, so it's away.

But that's the two one and a half percent or something.

everyone. Yeah top one half percent right? You're not breaching at four hundred level, which is super interesting.

So the point is if you now think about two people, absolutely wickedly high skill levels, but they're completely equal than the outcomes can be. A coin. us.

IT appears to be random, even though they're incredibly skillful. So this funny, because I still play like barely hockey. So the hockey guys on the hockey players are the most skillful guys and IT shows up as a very random work in our system.

And i'm like you're missing the point is not that they are not skillful players, they're amazing players is just that they're all equally skillful, right? And so as a consequence, differently you said moment go day with differently yourself is extremely difficult to do. There is a consequence to that.

All feels like a big coin, us. And so benders have come back on investing. I think that's what we see in investing, which is in public market investing. The numbers appeared to be random or partially random, in large part because markets are so good. It's not because market Better, market actually really good.

Now the other thing i'll say about venture in particular is that there is persistent to performance, one of them at ways we measure ongoing skills, this notion of persistence, if you do well in period one, you well, period, right? If you really good math test, you math test today, you one way, well, right, to indicate skill. And by way, there is almost always as concept of regression toward the mean.

If you do really well, you go, okay. So I want to come back to progression just a second. So persistence is an indication of skill, right? And so IT turns out if you look at venture capital, particular following public equity markets, very limited persistence, right? So if you did really well last year, you're expected by us closer to the average the following year BIOS.

They used to be persistent. Now that seems to be much more closer, not so much persistent adventure. We still see a lot of persistence, and that's the top ten percent, maybe top twenty percent. Do really well over time. So if you can get access to one of those funds and invest with them, you tend to do very well.

So the interesting question is, why is that you guys might have Better views on that? I have a pet theory as to why that is, but there is persistence in venture in particular, and that stands out relative to a lot of other asset classes. And then here's the last thing I want to say about this slut and skill thing, which is and this goes back to base rates, right.

which is where we can, we get away with that. We want to pet theory.

But yeah, yeah, yeah, this is my pet theory. So you guys can tell me, you can chew me down. But IT actually came out of network theory, but is the idea of called preferential attachment to website.

For example, website traffic tends to file power war, and their power laws are over the place. Rapper, we don't always know what the caul mechanisms are. Now we can build mathematical models that generate parallels, but they may not be representative of the real world.

But power laws and websites might be something like, you know, if you're building a website, what you want to do is point to other ones that are popular, right? And if everybody's doing that, and that leads to this phenomenon of some becoming super, super popular, right? So the theory would be something like preferential test for adventure, right? And there's there's a little bit of about this.

This is a very economical way to say they get the best deal flow.

They get the best deal flow, exactly. But there is a big covey here, which is if you're a great start up, you have to know that you're great, right? And then you have to know to call skoal benchmark or are you interest or whatever IT is, right? There has to be identification on both sides.

And then, by the way, going to one, these leading firms, premature and so far, that gives you like a stamp of approval that that also helps your future, that goes back to like a reflexivity thing, right? So there is a sort of like you said, best deal there helps best terms, but it's a reinforcing mechanism. And by the way, the process can be bootstrap by something randa, right? IT could be just, you know, we happened to three lucky deals, and we did well.

So now we really think for smart, right? One of the most tested hypotheses, and I really, really seen really robust work on this. But one of testable hypotheses would be something like if a partner leaves a leading venture firm, starts his her own own shop, if it's like the persons genius and skill, the nat imports and if it's the preference al attachment, that would not port, right? So that's an interesting way to test that.

My feeling without having looking at the data, IT does not port or does not port nearly as well as, right? The individuals might hope that would right?

exactly. So let me talk a little bit about regression toward the mean. This is interesting.

I will just try to close out this thought, which is base rates, right? Is this idea like this statistic, you know, base foundation, and then the inside view, which would be lucious. Look at my own analysis and what I know about the world, right?

So IT turns out that on the all skill side, all you need is the inside you. So if you're running, you might be a good chess player right in your local club. But if you're playing magness carlsson, IT doesn't matter you, your win loss record does not matter, right?

So magnet is going to beat you every single time he plays you by contrast of so there's there's no regression, right? There's no regression. And then if you go to the complete luck IDE that continue, there's complete regression. So you want the lottery yesterday, that's awesome. But they are expect probably when lovely today is the same as IT was yesterday, which is my new ways that goes back to a complete randomness.

So you can actually figure out, not just we all know that regression for the mean happens, but you can actually figure out the rate of which IT happens by understanding sort of where you follow is continue, which is super cool, a very powerful mental model. And blow, if your sports fan, I mean, you can go on all day about this stuff, right? Because almost every sports statistics has these features. And you can figure out how fast players will regress based on these statistic concepts.

This is interesting. This leads us to, uh, there is a question that David and I have been like bickering about since the end of our burger hathaway ten hour travesia. And h David was sort of asserting that in this world where investment returns happens so much faster than ever before with tech and especially in crypto, yes, war in buffet was very impressive, but the next war in buffer t will be even more impressive. And my push back to David is, well, no, everyone is competing on this global playing field now. And so it's so much harder to get the type of returns, especially at the amount of capital that warn was investing.

The paradox of skill has gotten so extreme.

yes. So my my question for you is, will we ever see someone who has the sixty plus year track record that were in did ever again, or will no one ever be able to match?

That is a fascinating question. And this is another Steve j. Gold from the same book where he says extradition streets or accommodation of skill and luck, right?

If you think about IT, you can't have a street without having a lot of skill and a lot of luck. You need both components to him. So what we're arguing here is the luck.

Peace doesn't changed, right? That the world maybe, maybe from the outcomes are more string. But luck is basically the same thing, although we can talk about their sort of independent event lock, like rolling dies or whatever.

And then there is sort of social phenomenon where we could these power law l comes. But basically that whole thing is is of the same. And then I think for arguing that skill has become more uniform than I would say they'd be very difficult for people to replicate that.

So there are certain statistical streets that I think are gonna be very difficult for people to matter. Exceed jode mo fifty six game hitting street and the bunch of boks about the matter, some people over there. And there are a couple kind things by scores.

At the scores table, there are a couple random players, you know, so he, there is a lot luck, but again, amazing, still right? He was a three, twenty five years that he is amazing play, really. How about ted Wilson s on bill Miller be the S P five hundred for fifteen years and row? I think that's going to be very difficult for anyone to do, again, for the same reason we talked about.

So there are certain streets, I think they're gna stand eventually make IT broken, but they're going to stand the test for a long time. So it's gonna. But IT is amazing is for you, obviously, when you're moving as much capital around as they are today, just a much tar task. If you know, think about the buffet partnership from late nineteen fifties to the late one thousand and sixty at the lights out, just shot the lights up. But again, much smaller found and much more nimble and sort little under the right .

are skill was much lower.

Then again, i'll nerd out for just a second one. The ways we can measure that is to look at the standard deviation of excess return rates of alpha right access return. So if you're an active manager, what you want to a big fat belt shape distribution, right? So lots of positive alpha that's on the right and negative welf.

So you're going to be a the winner and you going a lot of people losing next to year, of course. I so you want that to be fat because that means there's lots together. And then what has happened consistently, the bells shape distributions done skinnier and skinner and skinner, right, which is exactly what you expect to the products skill.

And that's how I picked up on good things. The gold show that the reason there been no four hundred hitters is precise because the standard deviation of betting average has gone down over time, right? Which is all these are all the things that are symptomatic of what this idea, uh, would predict.

We just call. So anyway, you just think about if you bought an automobile in one thousand nine seventy or something, there was a huge variation in the quality automobile iles today. They're all really good, right? You know something Better another, but they're all really good and you can go by it's and they are really say, right? And there you know all things being equal.

So obviously, their status stuff related to and terms actually performance get around like pretty they're all pretty good, right? And part of IT, this is is your stuff on, you know, again, this is why this happens, is best practices. You really got athletes and best practices, best training, nutrition, all these techniques. So in in the corporate world, you know, the best ideas get transferred from one organization to another very fast. And so what so IT extends to some reason that that would be there being formally and of excEllence.

even interest in our world. In inventor, you know, when we do our sort of classic episodes talk about what things were like, the level of skill among venture capitalists, like back in the day was laugh hable. And today, IT is extremely competitive. See you seeing .

this happen that we yeah .

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Yeah, fanta is the perfect example of the quote that we talk about all the time here and acquired jeff basis, this idea that the company should only focus on what actually makes your beer taste Better. I E spend your time and resources only on what's actually gone to move the needle figure product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. IT plays a major role enabling revenue because customers and partners demand IT, but yet IT add zero flavor to your actual product that IT takes .

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And David sent you, and thanks to friend of the show, Christina anta, CEO all acquired listeners get a thousand dollars of free credit venta com slash acquired. Well, that's a great lead into a discussion on Michael career path. So the world of investing today is so much more competitive in every asset class than IT was even in the middle is David, especially as you're eluting and start up investing.

I mean, IT was a shooting fishing a barrel at that point. And now it's you need to do a lot of things to be the best. And Michael, i'm curious if you were eighteen years old today, what do you think you would do with your career?

Yeah, I don't know that that's of a too hard answer. But if you're talking about investing, the first thing I should just say is that at any point, IT doesn't seem like it's easy, right? Like IT only seems easy when you think back on IT.

You know, so when I started, I mentioned when I started teaching a column, a business school. I just want people to condone p in their mind, there was no internet, right? When I want to do financial statement analysis, I would request from our library a mimeograph of the ten k, you know, so like this is just a different world than what we're used to today, right? So just in a way to facts are reported, male reports to client mail them. So if you are actually so you want to see my report on kellock.

you would come in the mail, wasn't this a this is one of bill grill is like big distribution innovations. When he and I tried to see, he would fact.

I like newsletter, right? Do you know the story on that is a great story. Because the great story, yeah, there is a great analyst at golden sex named dan benton who ended up in a great investor, and he had a hedge fund of great investor as well.

And super tees, a guy probably top ing I sector, had a really loyal flowing and decide one data to go to the bystanders. He was leaving his job, and he had a very popular newsletter that was sent out a very specific time slot. And a girl is a Young guy, and he's obviously also very marketing oriented and very alert.

And he realizes, well, this guy is leaving, but everyone is used to getting this facts, you know like A P M. On tuesday or whatever is so is like government launch above the crowd. And it's going to come at the exact same time that pends things used to come. And that was completely brilliant.

And I mean, obviously great marketing, but is also a great content, right? He had great stuff. So accommodation is two things really help help catapult him.

They know against content, but content good distribution. So yes, that's the point I do. You want to make IT. IT doesn't seem that easy at the time we're going back to your question. I'm slightly digging your question, but now go back to your question.

因为 就像 as a broad concept， if I were going to investing, the one thing you want to think about is the idea of looking for easy games, right? So the metaphor is poker, right? Which is, if you like to play poker in front, so I fight, call you guys up and go, hey David band, i'm having a power gain my house friday I would to come over and to me like to make money you be like her yeah yes, cool. I could also be.

this is played and I should be like.

very much impressed by the list.

I got really rich guys. We're really bad at poker. Like, okay, all be over.

That's by caters. If I said, oh no, I got these really good players. There's good, Better than you are. You be like, okay, I think i've got Better things to do, right?

So part of IT is like thinking about who's gonna a play the game and, you know, and pokers in nutrient metaphor, zero summer sense that, you know, hundred dollars walks into the room, hundred dollars walk out. But who has IT? We will change in the course of the of the game.

And so as a little bit true about investing as well. So part of IT is taking a lot about the game you're playing. And so are there opportunities, whether those are nature part of the market, whether they're different geography or something like that, where you feel like you can be the smart st.

Person poker table? Now the chAllenge is often that is difficult to scale those kinds things. It's often easy to do that is for a nachi way, but it's hard to do IT in a very big, big way. But that would be the first thing I would say yeah then i'll just say is just an broadly speaking is that I ve a throw my kids or at college. I've got two in college, one to see.

So they're going into the world, right? And I always been ambivalent about finance because on the one hand, I think it's IT is an amazing likely if you guys do super fun and you never sees learning and interesting. On the other hand, there a lot of big problems that need to be solved in this world.

And I would love to see our best and brightest Young people try to get after those problems, or at least allocate some time and energy to doing those kinds. So we've always been a little more ambivalent. So part of that might be if I were a Younger person, I I by the way, I should have study computer signs and had i've been born five years or ten years later, I am most certainly have been a computer science major instead of a government mager.

Um because I was I was in actually did a little bit of tiny bit of programme back you in the day. But so I think those kinds of skills and the C S thing is less the skills actually programing skills that I find so attractive. What I really find attractive is sort of a way of thinking about the world, which I think a pretty good way of talking about the world, the for the most part.

And you know, so the question is, is a really big issue out there that i'm passionate about. Could be climate, could be some sort of health mitigation, whatever is in other ways. I can sort uh, make a end of that problem, that is the kind of fight and also think about but but if it's investing, the answer is try to find a again where you think you can be a smart person. How about opportunities? Mart person.

do you have any inklings about in a OK, if you don't, right now? But I think everyone listening can sort of use for themselves. Where do I feel like there's not enough smart people writing? And I can go be a king of the hill over here. Do you any inkling about where that might exist in the world?

no. I mean, investing. I I don't feel like I would just try to stick to investing where I I think it's the most clear. There are couple of things that are interesting.

One, certainly I just I would go geographically, right? So are there markets where I can land on the ground? You know whether the frontier markets are what we call smaller merging markets were really the due diligence. Should leather will get you ahead of the game in the U.

S, you might be, uh, for example, in private equity lot people talk about this, but if you are doing BIOS other other segments of the markets or geography of the country, for example, or you think you can do something that interesting, the other thing in public markets, more of the interesting ideas is that most public companies are now in index funds or etf for something like that. And so they're fairly well traffic and studied. The question is, can you develop a list of companies that are not followed by animals that are not in indexes that are not in T, F.

strait? That may be a little bit neglected. So that might be an area where, again, you show up near the only person point at that poker table like that. So so there might be some creative ways to think about that. And the other area, of course, which is now very much in its infancy, is decently finance or crypto or something to for so theyll be many fortunes made in, many fortunes lost in that area. But the question is, can you set yourself up in such a way to be, again, doing something ethically good and profitable?

Are one last question. Our little fun wrap up round here. IT took us all of human history to see the first trillion dollar market cap company.

And then in like eighteen months, we had a couple more totally. And of our companies, do you think we will see attentuation and dollar company? And how soon do you think we'll see that?

Like the first one is your answer in the same. So at some point, that seems very likely.

I'll give you an infinite time frame for something that .

generally increases what good table repay in.

whether that's in my lifetimes. Another question. So you know part of IT is um I think the David related to this before, I mean, it's hard to get your head wrapped around the impact on valuation of declining interest rates, right?

So aware that the ten year treasury note today, around one point four, one point three percent of me like that. If you told me ten years ago, twenty years ago, twenty years ago, at some point we're going to have a one, thirty, ten years. I would thought I would say your Bakers and I want to bet a lot of my money that, that would not come to pass.

And those things are real drivers of value, especially if you have some component of growth. We rode a report later called the Matthew on growth, and we just show how just therefore ally, the mathematics really are crazy. If you have real to y rapid growth and high returns and a low discount rated just really, uh, cranks value substantially.

And I think part of the one to two trillion dollar sprint was the function of this sort of backdrop, right, is not just equity courses across the board. Me guys were talking about credit bond spreads are lot down in venture, a lot of money flowing and valuation drop across the board. Um that's come.

So the answer, but I don't know. The other thing i'll just say that I found fascinating is as part of the ticket about the new version of expectations, investing what back and look at the top ten companies today by market capozzi. And the top ten in two thousand, one right to twenty years ago.

Oh, I don't know if you guys wanted guess this. This is actually pretty interesting. So how many companies that were top ten and two thousand and one or top ten and two thousand and twenty one, what would you out of the ten to see?

Was saudi a RAM co. In in two thousand?

One wasn't public, right?

IT was microsoft in there? Yes, IT was. So I bet one yeah.

guess one yeah, is very good. So microsoft is the only company that made us both times and the estimate is something like excluding microsoft. So if you take just look at the other .

nine and microsoft is two different companies.

that's right. So he took microsoft is so you you bought the other nine, turns out their market capitalization down four hundred and sixty billion dollars in the twenty year period, right? It's just an amazing and then of course, the wealth creation, apple, by the way, apple's market cap am not going to get this right.

But apple's market cap is less than ten million, I believe. And that was two point four trillion, right? And amazon was also, you know, six and half seven, true, a billion dollars now there, one point six million or whatever is so.

So there is just huge amount of of wealth sloshing around. interesting. Ly, by the way. Three, the top ten companies today were not public in two thousand and one, and two of the top ten were not founded, had not been founded.

Facebook hadn't been founded. And I mean, I see you driving a car. Is tesla one of the top ten most valuable companies .

in the world states?

Oh, wow, my god.

So that's interesting. So part of the answer band, I think, is I don't know how long will take. I I think that we should have relatively muted expectations for returns and all asset classes I know we have can have work up for another great twenty twenty one. But because where we are with risk rates and credit rates and so, so people should have fairly muted, I think, expectations going for us. So it's going to take you could take a long time.

But the other interesting question is if the next twenty years, or like the past twenty years, is a conceivable that only one of the companies we see toy's our leaders is can be on the leader board in twenty years? Is a conceivable that twenty percent will become is that have yet to be founded? Is a conceivable that thirty percent will become visitor yet to be public, right? Super interesting, right. And so defensive .

if you consider egypt to companies public and yeah right.

yeah. Well, that's interesting. So the answer is that, no, we don't know. But it's when you take a twenty year snapshot of things, the change seems pretty extraordinary, right?

Yeah.

that is a good point. Like did we think if you reflect back to two thousand and one, that the top ten companies, you know banks and oil companies had as many defensible business model characteristic tics as the big five tech companies today, like everyone is obsessed with these network effects and the value that they derive from being platforms and they're staying powers. Just unbelievable. Did we think that twenty years ago, I think about I mean.

the number one company is general electric. General electric was considered to be sort of the k study and everything about innovation and management. And if you could draw manager from, just consider the best managment training program in the world, right?

On the banks, interestingly, look, most of these banks have been around for decades, if not centuries, right? You think about these leading banks. So you know whether they were considered to have google ask type a mote is a different question.

But you know there had decent returns on equity insano. So yeah, I mean, I know that was quite as a excited as IT is today. But yeah, I mean, I and by the way, you can go back in time in our general motors seem like IT untouchable and nineteen seventy, right? untouchable. And so it's just the band mind the world's change and things show open.

You know, interestingly, one area that seems to be substantially unrepresented but a huge sector is health care, right? So you you get a couple of marginal guys and health care, but might there be some sort of digital technology oriented health care company that becomes one of top? Comes in the next ten to dangers? Interesting questions.

Anyway, certainly possible.

yeah. Well, Michael, we can't thank you enough. Just such a fascinating last hour and a half. A couple things to point people too. If you wants to dive deeper on any of these topics, of course, will link to tell the papers that Michael has written the books that he's written. The first time I was intact ced your work, Michael, was the tokyo gave at google in two thousand twelve.

Fish is basically in our long talk, taking the untangling skill and luck into slide form and walking through that visually totally blew my mind. So highly recommend that will link to in the show notes. Where would you want to point people to? And and if folks want to get in touch with you, what's the best way?

yes. So my email dresses drag on a report, my email address on there, my twitter handles, M, J, mobiles. So that at M G mob, that's not too hard.

So you can, D M, if something interest and pretty y to find, generally you can go to come by business website. You can find my school email. There I get to find .

all right listeners. That is all we have for you today, except we have announcement. Some of you who are in the slack at acquired dot F M slash slack already know this. Or if you follow us on twitter at acquired FM, you know this as well. But we just launched the acquired job board.

Wu.

this is big news. Shut out to super intern sydney kim for, uh, putting this together and quarter back in the whole project. But as many of you know, we have a jobs channel on the slack.

It's been a great way for a listeners to share opportunities with each other forever. And h, now we've made a job board to basically start curating some of the opportunities were super excited about out there in the startup system. And for those of you out there thinking I kind of onder what i'll do next, we got a great set of jobs for you at acquired dot F M slash jobs.

If you're like, I love listening to the show, and I wish I could work with like minded people who also listen to the show. That is now possible, required dot F M flash jobs. David.

anything else? IT really is cool. A you, thank you to anny.

Sanny is so awesome if you're in slacks. Y pretty, no, and too like, and so cool. Like, we can do this now on the infrastructure exist.

We use pallet like these are the companies in the community and the companies we care about. This isn't like monster 点 com， like it's now then against monster. But uh, probably not where most of you would go to look for your next career.

no. And speaking of the community, if you want to become an L P. And dive deeper into the topics we cover here.

You can do that at acquire data FM slash lp. There are over fifty episodes in the back catalog plus new episodes coming out as well. Got a few in the pipeline. We are super excited about both crypto stuff and non cyp to stuff.

And uh, you can join acquired df m slash lp, and we encourage you if you like this episode, and you were like someone else out there, should really here the gospel that Michael mobiles is preaching. You should share this episode with them as well. And of course, what we love, all the social media staff, we really value the one to one relationship.

So send IT to a friend, send IT to a coal worker. And thank you so much for listings. Hi listeners. I'll see you next time.

next time.

Easy you, lazy you, easy you who got the true.