WeWork Was An Inevitable Response to Incentives

In a matter of weeks, WeWork went from being a $50b unicorn to being mentioned in the same breath as the “b” word. I won’t rehash the We saga, but a recent interview with Scott Galloway who has been spitting acid on them for 2 years is one of the best things I’ve read this year. His colorful metaphors and ruthless candor need to be enjoyed in their full glory. Enjoy.

As I mentioned above, overvaluation has a peace dividend, but that doesn’t mean it was correctly allocated capital. Some say if you hit every pitch you swing at, you are probably taking a suboptimal level of risk. That’s a smart observation. But investors in We look like they took a smart idea too far. When a pitcher notices a batter is willing to swing too far out of the strike zone, he’ll try to get away with less honest pitches. Here’s Matt Levine on We founder Adam Neumman:

If you want, you can imagine him as a diabolical genius who explicitly set out to short the unicorn bubble and then walked away barefoot with a jaunty whistle and $700 million of SoftBank’s money, but that does not strike me as necessary or accurate. My model doesn’t require you to think that your startup is dumb! You don’t need to worry about Neumann’s personal beliefs and motivations at all, really. You can just think of him as a product of the invisible hand of the market. A lot of money was pouring into startups, there was a lot of demand, and the demand called forth supply, and the people who supplied the supply got rich; it is elemental and straightforward and has very little to do with questions like “is this a good business model?”

The Peace Dividend of Overvaluation

I started paying the 6-year-old interest on his piggy bank. I figure it will be a neat way to get him to engage with numbers while teaching him about money in the process. Computing percentages is above his pay grade so instead, we created an interest schedule. For example, on Saturdays, he’ll report his savings and if he has between $0 and $200 he’ll receive $.50 interest. If he has between $200 and $400 he’ll receive $1.00, and so forth.

If you produce evidence that you a) share 50% of my genes and b) are not my sister then you too can open a Moontower Savings Account.

The fact that you are drooling at the implied APR tells us so much about financial environment we live in today. Let’s explore.

Your money has nowhere to go

Interest rates are historically low, basically in line or even less than the low inflation rates we are experiencing. In other words, keeping your money in savings accounts means the value of your savings is slowly eroding. This is by design as global monetary policy is meant to encourage you to invest in risky assets or spend your cash. Whether or not the policy is justified, it has certainly affected markets.

Interest rates are low, meaning bond prices are high. Annuities are historically expensive. Real estate is expensive. Stocks are expensive. We are awash in liquidity and attractive investment opportunities are scarce. Another way to say investments are expensive is to say that implied forward returns are much lower. People are willing to pay a lot today for a dollar of cash flow in the future. In reference to the purchasing power of your savings, I regretfully say “your money has nowhere to hide”.

Now what?

Buying assets near all-time high valuations feels like chasing a ball into the middle of a busy street. How do you take the other side of the trade? If the market is supplying infinite cash for investment today, ask yourself: “What is the market begging me to do?”

A sensible thing to do is refinance and you should, but this feels like you’re taking an inch when a mile is on the offer. Another option is to take a low-interest rate loan. But what do you do with the money? Buy an expensive house? That’s like staging an intervention only to find yourself getting drunk with the person you are trying to help.

How hustlers respond to loose capital conditions

Entrepreneurs

While investors are crying over the lack of attractive investments at reasonable valuations, entrepreneurs focus on the opportunity. The investors are the customers. Investments are the product. So give them what they want. “You need to put a billion dollars to work and the SP500 ain’t doing it for you? Here invest in my scooter company.”

Funds

In the reach for yield, investors want access to riskier bets to have a chance at more meaningful returns. While traditional stocks and bonds have a mature fund industry bridging the gap between capital and companies, hordes of angel syndicates and venture funds have set up shop to raise money for these start-ups. But the funds who were smart enough to recognize this demand also recognize a market truism — the amount of capital that goes into a sector is inversely correlated with its future returns. The funds are like drug dealers who need to assure their clientele that the drugs (the supply of start-ups) are safe to smoke. So what story do they tell? (I have noticed the VC world is especially obsessed with comedian’s craft, improv, the ability to write, present, influence, convince, sell, promote. This is worthy of its own discussion as a microcosm of what is feeling like an increasingly postmodern world to me. Sorry to be a tease, but that’s a story for another time.)

To understand the pitch is to understand that the story’s most important feature isn’t its feasibility, it’s the scalability. Fake meat. Scooters. Office rental space. Ride-sharing. All of these stories are low margin, low probability of success but…they address humanity’s biggest needs. Food, transportation, occupancy. They have the capacity to absorb oceans of capital. If you need to raise $1mm, nobody cares. Need a billion, just call Softbank. In the equation for expected value, EV = P(X) * X, all eyes are on the magnitude of the payoff, X. The probability is more of an impression than something to inspect with a microscope.

This isn’t irrational. Venture funds need to hit massive home runs on their winners to make up for the many losers since they are investing when companies are very young and extremely speculative. But if we jam more money into venture, they aren’t going to be able to generate the returns by marginal increases in their ability to choose better investments. Instead, the size of the home runs will be the largest factor in the fund’s returns. Play venture capitalist for a moment — would you rather improve your hit rate from 10% to 20%, or maintain a 10% hit rate and increase your payoff from x to 10x?

While the mood in the traditional finance labor markets is besieged by automation and disintermediation, there are growing segments such as fintech and crypto. These are areas where one can find opportunity and a tailwind to reap the benefit of loose capital.

The peace dividend of overvaluation

For investors, these bidding wars will lead to buyer’s remorse. Their loss will be many others’ gain. Entrepreneurs will be paid in opportunity. Matchmakers in fees. But guess who else? Consumers.

You get the ability to hail a ride from your phone and the sum of the world’s knowledge at your fingertips. The fiber optic bubble of the late 1990s wiped out investors but successfully laid the undersea cable that billions of 0s and 1s travel across every second. In fact, the consumer surplus resulting from the overinvestment may be the biggest bounty of all.

Simply:

overvalued companies —> low cost of capital —> funding for crazy ideas

If you wanted a shortcut for identifying the most speculative themes in markets you can browse the highest-valued ideas on Motif, take note of what themed ETFs are coming to market, or check out platforms for angel and pre-IPO investments (see under Private Investing).

Communism has been described as a system where the intentions are good and the outcomes bad. Well, capitalism is the demonstration of greed leading to good outcomes. The investors, without intention, subsidize innovation and by extension humanity.

Opportunities lie in the inversions

It’s useful to remember that the flipside of overvaluation is a low cost of capital. By funding speculative companies aggressively, the market is signaling a desire for big payoffs and big dreams. Entrepreneurs and funds organize around this incentive to provide the market what it wants.

Instead of crying about the Fed, lack of fiscal discipline, the lack of reasonable investment opportunities, remember that overvaluation cannot exist independently of a low cost of capital. It’s your job to find it then use it for what it begs for…enterprise and creativity.

The Zeroth Commandment

The culture war stuff is complicated. You’d need to be willfully ignorant to be wholly unconflicted. As I wrestle with it, I try to salvage something small that is purely positive even if it is not comprehensive. Sort of a let’s not make coherent an enemy of the good idea. Just a takeaway that can be used as a north star in day to day life.

As a broad rule, many macro things break down when you get to the micro. Crowds don’t act like individuals. If we all eat fish than nobody will have fish. So in the aggregate, we may accept that talent is evenly distributed while the opportunity is not. But trying to democratize that opportunity in the macro, is not an excuse to tell an individual child to “check his privilege” in the micro.

To highlight this difference consider this example from HotelConcierge:

Intentionally misgendering someone is an aggressive act. This is true even if transgenderism is attention whoring or special snowflakism or whatever—misgendering violates the Zeroth Commandment of “Thou shalt call others by their chosen name.” You can argue that misgendering is justified, that it’s impractical to cater to every pronoun, that you shouldn’t encourage a society-wide “mental illness”—we can duke that out elsewhere—but don’t pretend it isn’t an act of aggression.

Contrast with [outrage over] posting offensive memes in a private group chat. [That] is not an act of aggression. It may suggest poor character, it certainly suggests weak judgment…, but don’t pretend the dichotomy is between victim and victimizer when there was no victim.

Discussions of political correctness go nowhere because one team is hurt by the first example and retaliates with the second, the other is hurt by the second and retaliates with the first.

When you tell that child to “check your privilege” you are calling that child by their parent’s name, not their own. You are violating the Zeroth Commandment. What about telling the parent to check their privilege? If you trace that logic up it starts to feel like you are peeling a hundred nested bananas. There might be some flesh somewhere in there but I’m not sure the fruit justifies what it took to get there.

I don’t know how to reconcile many of the tradeoffs we face, but I try to do at least one thing faithfully — adhere to the Zeroth Commandment. Every individual gets a little barrier of their own making. They can’t extend it to others. They can’t force everyone to honor it. But they can ask. And I can try. And in the order of operations, it’s called Zeroth for a reason.

Equality vs Meritocracy

What do windmills and highrises have in common? I’ll wait.


True, they are both tall. What else?


What are things I don’t want in my backyard, Alex.

Ding, ding. That’s the money answer.

Nimby. The proof that you were called on a bluff.

You want clean energy and you want lower rents. But the moment you become a homeowner you change teams. You are now balls long a housing crisis. Your outward embrace of high-density housing is like a private unicorn stock. It sounds great but nobody really knows what your untested sentiment is worth. The moment Avalon buys a plot of land in your town, your virtuous stance has to go public and it gets immediately “marked-to-market”. If you don’t want that building in your lovely, bucolic town, then you can write that stance down to zero. Abstract ideals, that was a cute ride you took us on but its time to step aside. Concrete self-interest is gonna drive, we’ve got places to be.

That was a morality warmup.

Going from renter to homeowner is one thing. Now try urban DINKs to parents. The Atlantic’s George Packer is an esteemed journalist, part of the white privileged class. His children were guinea pigs in a prisoner’s dilemma where democracy and meritocracy are on trial. But he at least had a choice. For those less fortunate, there is no shelter from the prevailing winds of current school politics. His story will make you wonder what you will do when the culture war comes to your kids. When your egalitarian values go on trial.

The article is controversial if not poignant. You should read the whole thing because the dilemmas live in the details. At his family’s supper table. At the school board meetings. In the “N-word” passes, and the bathroom crisis. The details are what our kids have to deal with day-to-day while their parents battle over idealogy.

The article is here.

I said you should read the whole thing. Some of you won’t. So I refactored it’s 10,000 words into 1,000 words. You can find that version here.

Artisanal Social Media

Mass market trends always give birth to their own backlashes. Farm-to-table and localvore movements glorify bottoms-up artisans over top-down algorithms. Well, if Facebook is the McDonald’s of social media, be aware there is a back-to-the-land movement towards what Cal Newport calls the “long tail of social media”:

The mass audience strategy is starting to fray. As users become more familiar with both the joys and depredations of the attention economy, they’re increasingly shifting toward a long tail model for the social internet.

In this new model, users don’t want to connect with everyone they already know, but instead, want to connect with small groups they find really interesting. Similarly, they don’t need access to massive libraries of low-quality content, but instead, want access to curated collections covering topics they really care about.

Part of the quality control mechanism is permissions. Unlike Twitter and Instagram, you can’t just share anywhere you want. There are gatekeepers and moderators which act as a form of government within these new and not-so-new platforms. Examples of these platforms include:

  • Your iMessage and WhatsApp groups
  • Slack memberships
  • Nextdoor (requires address verification)
  • Email chats

The interactions in these smaller groups are, on average, more rewarding and useful than the mass-market platforms. Even Twitter which is mass market can be narrowed into a much tighter conversation if you curate and segment your groups as I’ve explained here and here.

If you are interested in meeting an awesome Slack community to see what I mean, my favorite one is Khe’s Rad Reads. A number of Moontower readers are actually in it. The interactions are much richer than what you will find in any permissionless forum. And it’s worth noting that the caliber of people across many dimensions is very impressive. It’s like when you wish Yelp reviewers were “more like you”. This is that place. You can subscribe here.

*I met Khe after being a long-time subscriber to his newsletter. It’s still my favorite one (out of about 20 letters I read — I don’t read the news if you wonder what gets displaced). Sign up to RadReads here.

How Do You Encourage Your Kids to Read?

So I left Osaka this evening and arrived in SF this morning. An amazing trip but I’m in decompress mode so today I’m going to continue with the change of pace. Like last week, I will share a response to another friend’s question and in the process also ask for your help.

My buddy Khe in the #parenting channel of the RadReads Slack posed the following:

We’re entering kindergarten and it’s all about reading. My 5 year old loves it and I’m wondering how you all encouraged and helped them learn. I’m doing the obvious, i.e. reading together A LOT and learning letters, sounds, and sight words — but it feels like I’m making it up on the fly. I don’t want to helicopter this set of tasks, but feel like a few simple principles could go a long way. (fwiw, haven’t googled this q as I’d find the results too overwhelming).

My full response:

I tried an incentive [to my older kid]: when you start trying to read books on your own I’ll let you get a headlamp and you can read a little extra after you get put to bed. This so far hasn’t moved anything along faster. A friend of mine thinks it did help. We are pretty relaxed about it otherwise. Try to read with the boys every nite. We go to the library so they (and I) can take books out. The library is a nice place, we like just being there.

Some nites we don’t read and instead play a game. I constantly talk to the 6 yr old about the benefits of reading pointing out that it’s like a superpower that lets you solve mysteries. I point out his older cousins reading habits etc. It’s all soft suggestion and keeping them surrounded by books. I don’t force anything. He’ll come around when he comes around. He is into Pokemon so the reference book is constantly in his hands. He even made his own book. And he copies the names of the characters into it. But he doesn’t really read on his own and isn’t super eager about doing so. He’s more of a cataloguer or something. With math problems, I’ll pose a word problem and leave him alone. “Just get back to me whenever you want” That actually makes him more aggressive about wanting to solve it.

In general, I find forcing things to be counterproductive and I have some deep-seated concern about associating learning with competition or timetables (there’s a therapy session in there somewhere). Also, I’m in no rush about reading. Waldorf Schools start much later. And the world is probably more mystical before you can read. I see no harm in letting that be.

Your children won a genetic lotto as far as smarts almost certainly and you can probably see they are bright. While I, like you, feel like I should be doing “more” sometimes, I’m actively trying to be super chill about it at least at these ages. More into encouraging projects, creativity, awareness (his teacher wants the first graders to be able to “read the room”. Recognize emotion, impatience, etc). I basically agree with this. I might be overcompensating for immigrant grindstone upbringing. So consider this all disclaimed.

I’d love to hear Moontower reader perspectives and if you feel comfortable may share some back into this letter.

And for those of you who have kids a bit older that are exposed to the internet and social media, this convo between some smart folk I follow on Twitter might help you think about internet policies in your own home.

Do You Feel Crappy About Your Finance Career?

After sending some advice to a friend that referenced my own career in finance I thought it deserved further comment.

A post-script for finance people

For fellow finance people, this deserves a few more words. Whether or not the field has been very lucrative for you, I’ve noticed finance folk often struggle with dissonance. Maybe you think every time a private equity suit quits to start a lifestyle biz in a LCOL state an angel gets its wings. It’s true, finance as a matter of daily agendas can be soulless. And making lots of money may just delay the questions that those with unlucky careers would have faced earlier. Compounding matters more, finance attracts its share of grifters. The Wolf of Wall Street is a great movie but a bad boss. Stir in a heap of leverage and finance collides with the physical world in numerically unnatural ways. Glistening wealth. Nation-state sized corporations. It can look a bit disfigured.

That said, I would push back strongly against judging finance by its worst. If it’s dry and brutal it’s because finance thinking ultimately boils down to efficiency. On a macro aggregate level it is nothing more than reducing transaction costs. Transaction costs between the present and future. Transaction costs between people who do not know each other. Matching lenders with borrowers. Savers with risk-takers.

Its cold bean-counter logic is a feature. Viewed over decades, the rent it extracts is a sliver of the value it facilitates. If it looks large it’s because the value is large. Every incremental squeeze in margins boosts consumer surplus whether or not a journalist thinks that’s a story that will get clicks. Yes the progress is uneven and there are unsightly moments (cough Goldman Sachs basically being made whole by US taxpayers after 2008).  But when people in finance start talking about missions and visions well that’s when you should reach for your wallet. I mean just imagine if a Wall Street brokerage were named Robinhood. For most of finance folk the job says “look I’m just here for the money”. It may not exude cool but it is honest. The dissonance only creeps in when you dress up the job or need it to be cool.

My email’s implied dissatisfaction with finance has nothing to do with finance as a villain or its perceived societal value. It has to do with how I personally absorbed its cold logic. Working in finance requires mental lenses. These lenses are not just effective but useful in so many contexts. Being somewhat prone to getting carried away, the seduction of optimization crowded out some of my pre-existing lenses many which had still not matured. As we always discover in these letters, every strength has a trade-off. If you lift but forget to stretch you get tight. The histamines you detect in my email, are a reaction to some personal Randian remorse.

So if you are going to be a relentless optimizer, make sure you check in every now and then on what you are optimizing for. The friend I wrote to knows to get anything done he’s gotta put his head down and grind. But in the moment he paused for a breath, I hope he found my email to be fresh air.

Personal Career Advice to a Younger Friend

I want to share a recent conversation with a millennial friend whose young career intersects with many possible paths since he writes, invests, and sells. He asked how I thought about my own endeavors. It’s not something you’re asked every day. It’s like being asked how a thermostat works.

My full response:

A meandering thought here…Writing and communicating better are explicit goals [of mine]. They self reinforce firstly. But also the writing part also serves as a test and a mirror for your thinking. I want to always be tightening that since reasoning better is important to improving decisions and bets. Which means it’s the highest leverage channel for improvement of your personal or professional investing process. But it’s also its own reward. The way learning an instrument makes you appreciate listening to music more. You become an active listener. You try to reverse engineer what the artist was doing. I personally find that this makes life richer because you can find stimulation everywhere.

If you can get your kicks from art, you are richer because you are intrinsically over-stimulated. Take that to its extreme. A person who is intrinsically overstimulated could be content living in a log cabin with a pile of books. That person is more free from material trappings. Hence being richer. You can probably think of people who are understimulated. They can’t sit in a room by themselves. They are always chasing some high. They usually spend all their money. I’m painting a picture of extremes but all of this lies on a spectrum.

I’ve heard of the concept of stimulation in the context of introversion. As in introverts are naturally overstimulated. Introversion/extraversion is probably thought of in far too binary terms. I think I’m pretty middle of the road. I’m using the model of introversion/extraversion defined by “where you get your energy from”.

I’m trying to be aware of where my social, intellectual axes intersect because that will be the foundation of where I am the most useful. If you can be useful in ways which are in commercial demand even better. I happened into my field when I was young and survived. But today I’m more concerned with questions as to where I can be the most useful and having faith that commercial opportunity will fall out of that. My smarter friends realized the value of that introspection earlier so that they can put themselves on long term rewarding paths. This allows you to compound cycles for longer. Rather than compromising for money, only to find yourself on a less personally aligned path later. Especially since there was no guarantee you were going to make money. Either way, you are likely best off going where your alignment is earlier.

Again this is all meandering and I think there’s some oblique advice (or warning) in there somewhere that is hopefully not didactic but just a byproduct of my actual experience.

In short

1. Understand what type of work allows you to be the best version of yourself. This makes you useful
2. Hunt down the matching opportunity that needs your form of usefulness

From there you are traveling downhill which means progress comes easier which means you go farther. And if you were thus aligned, the people around you will all be lifted and that will fulfill you more than anything. And you will feel rich regardless of whether your numbers get called in the game of capitalist bingo.

You Better Understand The Difference Between Contracts and Power

If you want to incite a war give one of your kids an Otter pop but not the other. You’d think I shot Franz Ferdinand in my kitchen. The inevitable refrain “it’s not fair!” is coming faster than you cut the plastic off the top of the frozen treat. We try to maintain a rough sense of fairness around here. You can earn a treat but your brother will deserve at least a chance to earn his own. The whole equality-of-opportunity not equality-of-outcome thing.

It sounds good, but it is one of those fake realities we build around our children to keep the peace.

The first-grader notices the dissonance. He thinks we are hypocrites when we later tell him the world is not fair so he should ignore what other kids have or get to do. I don’t blame him. His thinking isn’t gray enough to appreciate the difference between a local and global variable or the notion of scale dependence (ie it’s reasonable to be a capitalist who practices socialism in your own home).  Why teach a child that life isn’t fair when they are so young?

The earlier you can rid yourself of the “Just World Delusion”, the better. You can’t control whether you are born on third base or in a gutter. You can be destined for diabetes or densely packed with fast-twitch muscle fiber. Nothing has been fair since you were a zygote. Once you internalize this, your empathy reflex starts to fire faster. Your victim-blaming impulse shrinks away. But there’s a flipside. You must pair this compassion with the toughness that an unjust world requires. A compassionate person without toughness is a doormat and a sucker. And worse of all, ineffective.

There’s a good chance that if you are reading this you are compassionate. This is a list of friends after all. So if I can offer an angle to boost your toughness in this unjust world, I have a better chance of helping, so here’s some tips:

1. Heed the words of negotiation guru Chester Karrass: It’s not what you deserve, it’s what you negotiate.

  • Beyond what reasonable people agree are inalienable rights, the word “deserve” holds no meaning to me. I won’t go into it here, but one of the biggest arguments I can remember having with a loved one was over this word. It makes me cringe.

2. Do not mistake a contract for power.

  • A non-compete’s bite doesn’t necessarily come from its letter. It comes from the threat of litigation. A deep-pocketed organization can outlast you in court whether or not the contract can be legally upheld.
  • NFL stars are known to “holdout” of their contracts. The keyword is “stars”. The underlying power dynamic may be more predictive of the outcome than the writing of the contract.
  • If you include a “do not exceed” clause in a deal with a contractor, do you actually get peace of mind? When you enter a renovation, you have little power. A “do not exceed” clause may simply incentivize the contractor to ditch your project if it risks cost overruns. And if you shop for a new contractor for an unfinished job, you are asking for a broomstick without lube.
  • To understand power, you must consider what is scarce. You may have a great product to sell, but nothing is more scarce than screen real estate on top of an Amazon search. Amazon has aggregated all the eyeballs in the western world which is a more scarce feat than Duracell creating a great battery. At the end of the day, there’s still Energizer. The power dynamic is so stark that Amazon actually competes with its sellers by white-labeling commodity products like batteries. This is not new. Costco and Walgreens know the value of their scarce shelf space and sell their own generics.
  • Another example of power is what is known as “owning the relationship”. In the investing world, mutual funds are losing AUM to index funds which passively mimic the SP500. One of the reasons for this trend is that investors are becoming justifiably very fee conscious. Faced with a stingier client, financial advisors are selling their clients’ mutual funds and buying index funds which have almost no fee. The clients now only pay the advisor fee, say 1%, versus the advisor fee plus mutual fund fee. The advisors have been able to defend their own businesses by disintermediating mutual fund managers. So why did the mutual fund managers lose to the financial advisor in this battle? The advisor owns the relationship with you, the client. In the process of giving you a customized plan, they take you to lunch or hold your hand on a phone call. Mutual funds’ performance has not justified their use over passive index funds, but more crucially, the advisors no longer had an incentive to push them since selling them didn’t offer the fat loads or commissions they did a generation ago. If you find this specific dynamic interesting, check this interview.

3. Law of Rent: land rent is equal to the economic advantage of using a site in its most productive way

  • In other words, if you lease space to sell your amazing dumplings or abuela’s tacos, you are competing with the most valuable business that could have rented the space. Not just other restaurants. You are competing with Starbucks and Chase. Landlords will charge the rent that the most profitable business that could occupy the space could make. That’s why there are so many coffee shops while other storefronts remain vacant. The law of rent acts as a constraint on the profitability of a brick and mortar store since the landlord can encroach on excess profitability by raising rents so that the tenants’ margins revert back to fair market rates.
  • A digital example of this has been making waves recently. By scraping a popular site, Google is able to display the result of the most popular search directly rather than forcing you to click through. Google’s monopoly on search has let it go beyond just intercepting, but on to what many entrepreneurs are calling a shakedown.

4.  Wholesale transfer pricing: Tren Griffin shows how the law of rent is an instance of this broader economic concept.

  • When negotiating in this unfair world, you need to understand what kind of cards you are holding. Griffin’s discussion of wholesale transfer pricing will give you a powerful model for understanding your bargaining position. Read it here to see Anthony Bourdain demonstrate the Law of Rent in Manhattan and so much more.
  • For extra credit, check out Griffin’s related discussion on the Free Parking business model. This explains how large businesses which generate network effects can outcompete smaller competitors. It’s especially powerful when marginal distribution costs are close to zero. For double extra credit see if you can recognize this dynamic in the music streaming business, in the ‘net interest margin’ game played by the large asset managers (ie Fidelity), and for those of us in trading, how banks use this model when ‘holistically’ pricing clients’ business. It must be discouraging when a small business finds its entire profit margin being given away as a “throw-in” by a broader business that loss-leads in one vertical to cross-sell in a more lucrative one.

Having a good hand

Since we know the world is unfair, we cannot be naive about power and our own bargaining positions. My favorite advice for ensuring you have a strong hand can be extracted from Naval Ravikant’s algorithm for getting rich. His 3 steps are specific knowledge, accountability, and leverage. The first 2 steps ensure your value, the 3rd step is about amplifying that value.

  1. Specific knowledge is knowledge that you cannot be trained for. If society can train you, it can train someone else, and replace you. Specific knowledge is found by pursuing your genuine curiosity and passion rather than whatever is hot right now. Building specific knowledge will feel like play to you but will look like work to others. When specific knowledge is taught, it’s through apprenticeships, not schools. Specific knowledge is often highly technical or creative. It cannot be outsourced or automated.
  2. Accountability. Take business risks under your own name. Society will reward you with responsibility, equity, and leverage. The most accountable people have singular, public, and risky brands: Oprah, Trump, Kanye, Elon.

The full summary is here if you want to dig deeper and understand different forms of leverage.

By being very accountable in this context your reputation becomes a source of both upside and risk. To get a sense of how great the upside can be in owning your own work in a world which technology makes creation and transmission so cheap, check out this case for how much Howard Stern might be shortchanging himself if he renews his deal with Sirius.

Sociopaths and the Gervais Principle

Several people I have showed the following essays to are haunted. For those of you who work with others in anything even resembling an office setting, reading them is like taking the “red pill”. You will analyze your own language and that of others with labels like powertalk, babytalk, and posturetalk. You will view every person in your work environment as a sociopath, clueless, or loser. Another of my favorite authors, Venkat Rao, unpacks Ricky Gervais’ The Office with rigor and insight that will never let you see an office interaction the same way. I’m not kidding when I say that a few of the people that have read these are now reviewing their professional relationships through a lens that reframes meetings, hallway conversations, and negotiations. I certainly did.

Some tips if you dare. 

  • Read parts I and II fully. After that, it starts to get very strenuous. Let me know if you make it.
  • You don’t need to have seen much of the Office to appreciate this. I have seen a few episodes here and there. 
  • He redefines sociopath, clueless, and loser. Don’t let the baggage of those words misdirect you.
  • See if you can identify yourself.

As they say, caveat emptor.

With my highlights:

Gervais Principle, Part I
Gervais Principle, Part II

Or

Original source at Ribbonfarm.com