Gabriel Leydon’s “Purple Pills” From His Invest Like The Best Interview

Video game designer Gabriele Leydon went on Invest Like The Best and dropped deeply provocative bits about what I might describe as design and gamification as a response to a future that has thus far proved disappointing or alienating. I don’t know how much of it I agree with it though I’ll admit I have had similar thoughts (and a few essays sitting in my drafts on the topic) with respect to financialization. I’d describe listening to this as Patrick interviewing the Ben Hunt of video games. If there’s something I’d probably disagree with most it’s the pastoral sense that the frontier seemed somehow more accessible to the common man 100 years ago beckoning people to go West for opportunity. There are frontiers, and they are always crushing by the standards of their time. I think a lot about the stories of cab-driving immigrants and have a sense that they are deeply courageous and today’s modern day pioneers, leaving all that is familiar behind (and probably why the success of immigrants in the US shouldn’t be surprising. They are built different). The definition of frontier is context-dependent. Still, I really enjoyed listening to this interview and any disagreement I’d have is well worth the brain food Gabriele serves. Patrick does a great job as usual asking questions.

episode link

These notes are just pulled from the transcript and a (lightly edited) snippet of what I wanted to refer back to. It’s not a summary. All emphasis is mine.


A Dark Interpretation of Our Obsession With Stories and Design

Patrick: I know you’re going to restrain yourself, but we’ll do our best. The first red pill of the discussion is around the topic of design. There’s a huge emphasis on design right now, and I think you’ve got an interesting take on what an emphasis on design means about where we are in capitalism. What are your thoughts on the importance of design or what it might mean?

Gabriel: There’s this pattern where when things are innovative, nobody really cares what they look like. If I made up a teleport machine and it was the size of an arena and it was covered in slime and smelled really bad or something nobody would care. There’d be a line around the block. Everybody would just jump in and they would think it’s the greatest thing ever. But over time we kind of would make it smaller, and then the artists would come in and try to make it look nicer and feel better. And once you kind of get to that design phase, where Silicon Valley’s been for about 10 years, there’s only so much you can do to make something look better.

If you remember 5 years ago, everybody was talking about delighting their users, and delighting is “We don’t have any more ideas. So we’re just going to feel a little bit better because we’re out of ideas. So now we’re going to just delight you.” The game design stuff is, “we don’t know how to make this look better, so now we’re just going to tap into your human condition of biology and psychology to make our products better. Because we don’t know how to make them more innovative, we don’t know how to make them better looking, but we can add levels and achievements.”

How that presents itself is all of a sudden you’re getting achievements for buying erectile dysfunction pills from Hims. You buy extra orders of minoxidil to max out your Hims account. That’s what we’re seeing…You see this kind of talk about everything becoming a video game, but I actually see it as a bad sign. We’re basically running out of new ideas. The economy is just becoming more and more psychological and it’s less about innovation and more about understanding your condition as a person and then building a product around biological and psychological reflexes rather than a teleport machine that can move you around the world.

Patrick: It reminds me of that Neil Postman book, Amusing Ourselves to Death [Kris: I’m coincidentally about to start this book], that Huxley’s version of the future was more accurate than Orwell’s.

Gabriel: I think it’s because when people think about capitalism, they think about the early 1900s. They think about cars and radios and TVs and microwaves and it almost never ends. And I think it peaks in the ’60s and the ’70s with all that futurism. The futuristic art, flying cars, and skyscrapers. And that’s the same time we go off the gold standard and there was this infinite optimism around money printing and innovation basically. And we could just print as much as we want because we’re going to be immortal space beings, zapping around the galaxy. So who cares?

That didn’t happen. So when the innovation growth didn’t really match the expectation, it’s just like things just start getting designed, they start moving towards the design phase, and then eventually a gamification phase, like what you’re seeing in the financial markets and software and pretty much everything.

I’m not a big person on late-stage capitalism. Capitalism is just a human condition. What does that even mean? I think it’s more like we just don’t know what to do anymore. So we’re just going to add levels to the stuff that we already know how to do. And there’s a lot of margin in it too. So it’d be, it’s like a big gravity well where it’s like, “Well, we can just take the existing stuff and add achievements to it and we’ll sell more pills.”

There’s also another part of it in Silicon Valley where … And you’re a VC, so has anybody ever tried to pitch you a video game? Do you understand it at all?

Patrick: What did you learn about the reasons why people will pay? Famously in free to play there’s this crazy power law of who pays and how much. And the 0.1% of the players, I don’t know what it is. Some crazy high percentage of the revenue. So maybe a better way of asking the question is like, what have you learned about what characterizes that willingness to spend?

Gabriel: We’re tribal people by nature. And when I say tribe, I don’t just mean your culture. I also mean the size. Tribes tend to be pretty small. If you look at early America and people say, go West and land of opportunities. What does land of opportunity mean? It means if I’m a blacksmith and I’m the only blacksmith around for 100 miles, it doesn’t matter if I’m the world’s best at making horseshoes or not. I’m the only one around. So, that’s my land of opportunity. I could just keep going West essentially, and there’ll be less and less people, and I’ll have more and more of an opportunity to become important to the community that I’m in.

And we’re in this age of hyper-competition. We have these social networks, forums, and chat rooms, clubhouses, whatever, where we have essentially this real-time leaderboard of who matters and who doesn’t. So when you say that 1% of spenders, that group is even smaller with who matters online.

So the answer is that the world has become so soul-crushingly competitive. Being good at something doesn’t matter anymore — you have to be the best. If you make horseshoes, doesn’t matter if you’re good at it, I’ll just order it for someone else and it’ll arrive in two days. And you better be cheap, because if not I’ll wait a week and get it from China.

So we’re in this hyper state of competition, that makes people feel like they don’t matter. Because they don’t. They actually really don’t, and everybody knows it. That’s the honest truth. So you end up with these online communities with a seductive and simple way to belong to something, where these things actually reward time spent, rather than skill. So if I just spend more time, I’ll be more important. You see that a lot on social networking, they’re all designed that way. Spend more time, you’ll matter more. You see so much like online activism, for example. Online activism that you would never see in person because all I got to do is post something, or whatever. And they matter because they’ll get lots of likes, they’ll get lots of retweets.

You get the culture and then the counterculture. And they’re both essentially the same thing, like one side saying thing because that’s the thing to say. The other side is saying the opposite because that’s the opposite to say. And both sides get a lot of likes. Video games give more structure to that than Twitter does. A lot more structure. They could have levels, and Kings, and Queens, and weapons, and kingdoms, and whatever you want, you just make it up. So you get more structure. And the video games become a place to get lost in because they have so much structure. That’s what I did. And I loved it. And for me it was really important to me, because before that I was just like, what’s the point? I don’t even know what the point of my life was basically. It’s like, you’re working at Target, and Dave & Buster’s, and whatever, and you’re not going to college, what else do you have? That’s what I had. And I think that’s what made me understand it. There’s just too much competition, and people need environments to excel in. This whole hyper-globalization thing just crushes souls because they can’t excel. And they know it. Everybody’s like, robots are going to replace you. And AI is going to replace you, and you got to go eat bugs and go live in a box. It’s so funny, I talk to these AI guys in Silicon Valley. They’re all trying to make God versions of themselves. They always say to the game developers “We need you.” Because what are people going to do when my God AI thing works?

It’s so sick. It really is sick, like they know what they’re doing. They know exactly what is going to happen. And they’re looking at the game designers like, well maybe you’ll distract everybody. Maybe everybody will just be distracted as the whole world collapses around them. Like every person in AI, every single person in AI, every single one. They’re all, “We’re going to need VR.”

I wish they would be more honest in public about it. Because they all say it. I think this game design worldwide takeover is partly because the innovators think that’s what should happen. And also because they don’t know what else to do.

Patrick: Give me one more thing at least. One more what I would call purple pill. Something not too inflammatory. Something you think that is true about the world that people wouldn’t like to hear.

Gabriel: I think we need AI more than we think. I think that we’re at an IQ limit and the reason why innovation feels like it’s slowing down is because we can’t do it. We just literally, physically can’t do it. And there may be an exit ramp through AI, but it’s not exactly clear that we can do that either.

I really think that the 60s and 70s futurism is the reason why we’re suffering so much today. Because there was no reason to not print money, to not full-on inflationary mindset and everything because we were going to live in paradise. We were going to be on the moon. We’ll be able to pay all this back, there’s no problem. And then financialization happened, and gamification of financialization happened because that was easier and it worked. But it’s not better. Innovation is better. It’s clearly better. If I make a teleport machine, I don’t need to make a video game, I don’t need to have levels and achievements. It doesn’t need to look nice. It doesn’t need any of those things. It’s just is what it is and everybody wants one. That is better. That’s the only way to really have prosperity. And this design/now gamification is a symptom of the limits of our minds. So instead of doing things in the physical world, we’re doing things in the psychological world now, and that may be permanent. And I hope that’s not true, but more and more of the economy is going into this exploit, automation, high-frequency trading, that kind of thinking. And it’s not rockets to Mars.

We’ve gotten to the point where we look at the two richest men… Like we used to have the Wright brothers, these two guys trying to make an airplane, they’re in the middle of nowhere, who are these guys like? Now we look to the two richest men in the world to solve our most difficult problems. The regular person has no chance in participating in the future of the economy now. The only people who have the chance [appear to be these rich people], “I hope Bill Gates figures out solar panels.” And the regular people are just kind of looking up to them saying, “Well, I don’t know what to do.” And I think the reality is the rich guys don’t know what to do either. We got the rockets going. Those are cool. And we’re making some incremental innovations. There’s been some really important things like crypto. So it’s not hopeless. It’s just not what we thought was going to happen. The dislocation between the economy and the reality of innovation is that the economy moved way ahead of innovation, under false expectations that we would be able to keep innovating at an exponential rate.

I think there’s a fear that we know that we can’t. So then you’re staring at deflation, like a reset, essentially. We’ve got too much of everything and there’s not enough innovation to pay this back. It doesn’t exist so we got to abandon ship basically. That’s pretty bad. But from my lens, from my point of view, it’s why gaming is becoming so important. It’s because we don’t have the teleport machine and we need one. And if we had teleport machines, nobody would be playing games.


Something More Uplifting: A Qualitative Screen For A Promising Investment

Patrick: Does the idea, I’ll call it the gooey teleportation principle or something, is this also an investing principle? You should look for stuff that has terrible design or is breaking?

Gabriel: NFTs are important the same way the App Store was important. Meaning that at the beginning of the App Store, everything was broken. It took like three months to get an app approved. Just crazy stuff. It was a real nightmare. And it was growing like crazy. That’s what you want. You want environment that’s completely broken. There’s like a couple spaces still in the innovation phase and crypto is clearly one of them.

You always hear these VCs who don’t know what they’re talking about. They go, “You know what crypto needs, it needs a good UI.” I’m like, “Oh my God, just stop. Like stop it.” It’s innovative, it doesn’t need that. It’s still growing despite that. If we get to the phase where all crypto can do is add UI, it’s over. That’s it. Right? Then it’s just a matter of who’s got more DAU at that point, and it’s over.

So crypto is a good example of something that’s still really deep in the innovation phase. It’s not everything, but crypto will eventually turn into a game too. It’s obvious. It’s kind of got elements like that. But my favorite stuff is you go to the websites, they look terrible. You ever noticed that? If you look at this DeFi projects, it’s like the worst looking website you’ve ever seen. That’s a good thing. That’s what I want. I want it to look terrible like it’s crashing all the time, and it’s just growing. That’s the sign. Because when you clean it up, when you do put the good UI in, and you do gamify it, it will be 100x bigger. If you’re 10 years deep and still looks terrible and still growing like crazy, that’s all you need to know.

VC is right that when it does get cleaned up, it’s going to be bigger. But that’s not what you’re looking for. You’re actually looking for it being a mess and it’s still growing.

Put all your money there. Anything that’s just growing like crazy and totally broken, just put all your money there because obviously when it gets fixed, it’s going to be better. And there are tons of examples of this. There’s like the MySpace/Facebook example, right? They both had the broken but working thing, but MySpace couldn’t fix itself fast enough. So that’s kind of the bet. But if I didn’t know the future, I’d go, “Yeah, put all your money in MySpace.” I mean it’s growing and it’s like totally broken all the time. That’s where I would look at the risk. I think you kind of have to be an entrepreneur to even understand that. But that’s how I look at it, where’s the space that’s just totally screwed up and it’s still working? That’s what you want to be involved in.

Sal Khan On The Finding Mastery Podcast

My personal notes from Sal Khan’s interview with Michael Gervais on the Finding Mastery podcast.

Link: https://findingmastery.net/sal-khan/


How did Sal mentally manage the risk of non-venture backed entrepreneurship?

Early on in the Khan Academy journey, even when, let’s go back to 2004 2005, I started tutoring my cousin’s 2005, I started writing software for them. That’s when I got the domain name Khan Academy. And I started writing software for my cousins. And I said, “Hey, if it’s just my cousins who are using it, it’s worth doing this, it’s helping them”. But obviously, as you start writing software you’re like, but maybe people who are not my cousins could use it. But I kept trying to keep myself from getting too attached to the big ambition, just saying, hey, just put one foot in front of the other, but keep the door open to the big ambition. I didn’t want to close that door either…

Even before I had quit my job, I would show my friends, “Hey, I’ve got this hobby. I’m tutoring my cousins.” My friends, out here in Silicon Valley, their natural inclination is “why are you doing this?” And I’m like, “oh, because it’s helping my cousins.” They’d ask, “How are you going to monetize this? I don’t see the business plan. Someone else’s is doing what you’re doing.”

I’m like, no, no, no, this isn’t a business. This isn’t anything. I’m doing it because it’s helping my cousins. And hey, if it helps other people, great. So that was one form of protection.

Dealing with cynics — who do you need to convince and what evidence do you hold?

Even today, when I encounter cynics, the first thing I say is, “Sal, don’t be defensive, there might be something in what they’re saying”. You don’t want to be delusional and ignore good feedback. But at the same time, you also have to remind yourself: you don’t have to convince this person.

We always want to impress our friends and convince them that what we’re doing is a good idea. But I don’t have to convince them. That’s the first somewhat liberating thing. And then what made me not question myself too much, I said, “Okay, so what evidence do you have?” This is a friend who’s smart, I respect their opinion, but what evidence do I have?

Well, I did transform several of my cousins’ lives. I was already getting letters from people who I didn’t know around the world about how it had transformed them in some way, shape, or form or their children.

Look, my well-intentioned friend is probably trying to save me from “wasting time” or getting distracted, but they haven’t even tried it out. They just did classic MBA-type thinking of “Well, I heard some other companies are making educational videos and doing software that creates questions. You’re like the 10th person to do this, so what makes you think…”. That’s their natural, competitive analysis type of thing.

I think there’s probably a lot of people who want to do entrepreneurial things. And when they meet a friend who’s doing something entrepreneurial, part of their brain wants to help the friend and wants to be constructive for the friend, part of their brain wants to help their friend. If they think their friend is going down the wrong angle, maybe protecting them from that a little bit. But some of it is also protecting their choices. “I’ve always wanted to be an entrepreneur, but I’ve been afraid to and now my friend is doing it…maybe it’s comfortable if I convince him to stop doing it, and do what I’m doing.”

The main thing is just what just keep reminding yourself, “Why are you doing it? What gives you confidence?” And remembering “Who do you really need to convince? And who do you not really have to convince?”

Where did Sal learn to focus on evidence and focusing on who he needed to convince?

He lightly responds: Probably is a coping mechanism for a bunch of things that happen in life…I’ve been described by even some of our early board members as a “pleaser”. Like I want people to say, “Good job.” [Me: Oh man, this hits hard]

I think I realized in my life you’re never going to win trying to please everybody. Trying to convince people, getting defensive about things, you just don’t feel good about yourself. 

I’m still working on it. I have a lot of ideas. I do try to share them with people who I really respect. And when they immediately get in the devil’s advocate position or the cynical side, I do get a little defensive if I’m honest. But I I’ve been working on myself.  “Okay, I don’t have to convince them, there’s probably some truth in what they’re saying, I should process it.”

And you know, also some of it’s on me. I realized that when I get excited about an idea, I go into “sell mode” almost immediately, like “this is all the reasons why it’s good, isn’t this exciting?…” And that almost automatically puts people into that devil’s advocate position. “But what about this? What about that?” And so now when I introduce ideas, I’m going against my stereotype, where I’m showing that I’m also looking at the risks and how this could go wrong.

Half the time, the next morning, I wake up, I’m like, “Yeah, they were kind of right.” But sometimes I’m like, “No, I still have evidence that this was worth this is worth pursuing.”

How did Sal frame the decision to leave the hedge fund path to start Khan Academy?

There were some basic mechanical, left-brain considerations.

Did I save up enough money?  I was an analyst at a hedge fund, I wasn’t a hedge fund manager. So I was able to save up some money, essentially a healthy downpayment for our house in Silicon Valley. We were saving up for, you know, several hundreds of thousands of dollars not like independently wealthy money. We don’t have big expenses. My wife and I grew up quite poor so we know how to economize.  That was a mechanical thing.

Even more was the opportunity cost of the [hedge fund] career. Every year your income is accelerating. In five or six years, I could be making what my boss was making,  what could have been in the millions of dollars every year. And that’s a real big opportunity cost to give up for something that’s unproven. That’s where a little bit of the heart came in. I just told myself “Well, what is the life that you want? And the life that I want is a healthy, happy family. But I really told myself, if I had a nice 2000 square foot house, which was the house that we were renting, and we later were able to buy — a four bedroom house with you know two cars in the driveway. We’re able to go on vacations, go to restaurants every now and I’m able to support my kids through college. That’s all I want, financially, really. And if I’m able to do that then also get to work on something that, every morning, I wake up and I’m inspired to work on, I get to work on an interesting problem, and I feel like I have a sense of purpose then I consider myself the luckiest person on the planet. I’m not saying this now just to sound you know anything, that’s literally what I told myself. I’m like, if you are able to have that lifestyle, that’s a really good life. And so that liberated me a little bit from the golden handcuffs.

A lot of times when I’m making some of these decisions like even “what Khan Academy should be” I do go a little bit into what inspires me. We have one life to live. If you have a shot of being able to live your life as a protagonist in a movie, live your life as a protagonist in a science fiction book, go for it! [Me: this is the type of thinking that doesn’t show up in a spreadsheet. This is an example of how “accounting” fails us…not everything that matters can be measured and vice versa]

He fills in the details:

Even in the early days, there were a lot of VCs who reached out who wanted to write a check and Khan Academy be a for-profit, and it was tempting. But then when we start talking about monetization, and how you’re going to exit and all that I was like, “Oh, this isn’t what I want to do I want to”

Then I thought about what is the homerun is for a for-profit. And then what’s a homerun for a non-profit. A homerun for a for-profit, we all know those stories quite well. But I was also thinking, “How’s it going to change the world? And how’s that going to change me?”

And then I thought about a home run as a non-profit. I’m like, “What if Khan Academy can be the next Smithsonian, the next Oxford, or the next, whatever. In some ways, it’s bigger than all of those because even in 2009, when I was thinking about these things, it had bigger reach than some of these hundreds-of-year-old institutions. And we were, there’s no reason why we couldn’t grow another 100 fold or not 1000 fold from there. So for me, it was like, “Wow, maybe it’s worth swinging for the even higher fence.” That’s a hard thing. The head kicks in and says, “Okay, is that at all reasonable?” And as ridiculous as it sounds, it isn’t unreasonable. If you just extrapolate the growth, if you just look at what Internet technologies allow us to do, if you just think about the scale of other people on the internet, for the most part for-profits…Google scale would have seemed like science fiction 30 years ago for what it does. But it’s not. And so couldn’t Khan Academy be that same thing, but as a social institution?

Did he share this thinking with others?

Going back to our earlier, I’ve realized that there’s certain contexts where you’re this type of conversation is going to be welcome. But the conversations where I’m talking to my friend who’s talking about how you’re going to monetize this, he’s not going to be in a headspace where I’m like, Well, what do you really want out of your life? And what do I really want in my life?

And do I need his approval for me to be able to do it? Now, I did talk about this with my wife, and I kind of do need her approval because this is “how do we want to live our life”.

Healthy and unhealthy “imposter syndrome”

I think some of that impostor syndrome, I actually want to retain. I never want to forget how, like, there, there was a time not too long ago that I would pass on the organic produce. I think it lets you just appreciate the world a little bit. And we all know about hedonic adaptation and the hedonic treadmill. I don’t claim that I’m immune so I don’t want to sound like I’m some guru here. I live in Silicon Valley. We live in that same house, and a lot of our friends have now moved into houses that are multiple of the size of our house. Every now and then it’s “maybe it would be nice to have two saunas.” But I always remind myself, “well imagine their electricity bill, or like, the gardening bill or the water bill or whatever.” But, yeah, I think it’s healthy imposter syndrome.

A healthy one keeps you grounded, allows you to enjoy it a little bit. Like every now and then I get invited to meetings with people or conferences with people, where both healthy and unhealthy impostor syndrome could be at play. The healthy imposter syndrome says  “Wow, you get to meet your childhood hero, or someone that you thought you could only read books about, and you’re meeting this person, and they are interested in what you have to say, and they’re supporting Khan Academy.” That’s kind of fun. I don’t know if that’s impostor syndrome, or that’s just remembering yourself when you’re younger. And you’re like, “Wow, how is little Sal in this meeting right now? That’s kind of wild.”

The little less healthy imposter syndrome is that if that goes to an extreme, where like there’s a discussion and I’m like “Who am I to say something?”

There, I try to remind myself that everyone here is literally just a person, like everyone here. And that’s another, I guess, coping mechanism. I just treat everyone as if they’re my childhood friend. And there’s something of a self-fulfilling prophecy there as long you’re respectful. Some people who have been great supporters of Khan Academy are household names — I’m gonna treat them as my friend. And I think they appreciate that too, because so many other people treat them with such reverence, and I respect them a ton, but I get to joke around with them a little bit. And that’s how I deal with that other potential imposter syndrome.

A resonant story: college can give you a safe space to explore things you have suppressed because you grew up perhaps in a narrow place

MIT was like heaven for me. I think when you are in high school in a fairly mainstream high school, you have to suppress certain instincts. You have to suppress how much you get excited about learning certain things so you don’t get beat up, you don’t get ostracized.

Why Sal wanted to dedicate himself to education

  1. First, I’ve always enjoyed teaching. Multiple times in my life, either informally, even when I was very young, I found that I had a knack for it. In a lot of cases where a classmate might be struggling to understand what’s in a textbook or a teacher,  and I’m like, “Oh, this is how I think about it”. And my friend was like, “Oh, man, that’s so cool. Yeah, that makes all the sense in the world”. I guess I have a knack for this thing. So that kind of built confidence in my ability to do that. [Me: importance of knowing yourself in helping determine what you should be doing!]I was the president of the math club and one of the things we did was math tutoring.  We created such a legitimate program that the school then made it a formal part of the school. It made anyone who had below a certain grade in any of their math classes go to this math tutoring, that I was essentially running with a bunch of other students who are in this club. And I saw time and time again, a lot of students who were struggling, barely passing a course, or thought they hated math, if they just had the opportunity, the incentive to fill in gaps, had things explained to them the right way, a chance to practice, they were off to the races. Some of them joined the math Honor Society. A month ago, they were about to fail their algebra class, and now they’re going to math competitions with us, because they started to get excited about it. So that also gave me confidence.And that’s all about mastery learning. The opportunity, incentive to fill in any gaps to finish any unfinished learning.
  2. The other thread is I think every young person who’s even vaguely idealistic, and I think this is all young people, look at the world and say, “Oh, there’s so many problems in the world. How do you solve it?” You think about climate, you think about inequality, think about whatever you pick, you pick the issue. Conflicts, when you really keep peeling the onion, it’s just what’s going on in people’s heads. Everything else is almost just a side effect of what’s going on in people’s heads. Okay, so then we got to change what goes on inside people’s heads or improve or remodeler? Well, what does that? Education. Education is the single highest leverage point.

A quote pulled from Sal’s writing:

If you believe in trying to make the best of the finite number of years we have on this planet, while not making anyone worse think that pride and self righteousness are the cause of most conflict and negativity, and are humbled by the vastness and mystery of the universe, then I’m the same religion as you.

What is the state of education today?

The good news

If I compare the State of the Union of education to what it was 250 years ago, it’s awesome. 250 years ago, even in more literate countries, 30-40% of the of the population was functionally illiterate. Free public school, or at least a high-quality public school was not a mainstream thing as recent as even 30, 40 or 50 years ago. Because of things like segregation even in places like the US, you did not have respectable access to education. I think it’s still not perfect, and there’s still a lot of inequality but for the most literacy rates are much, much better than they were for most of human history. Even in the last 10 years, as I’ve been on this journey, things like access to technology, to the internet, to high-quality instructional materials, etc. That’s all actually gotten better, even in the last 15 years.

The bad news

Even in affluent neighborhoods or fancy prep schools, you still have a model where a lot of kids are still falling through the cracks. And those are the places where they’re not resource-constrained. Imagine in the places where they are resource constrained. I mean, there are still schools, my school in fact, which is a suburb of New Orleans which was pretty mainstream, it wasn’t a gold-plated school by any stretch of the imagination. It was a normal Louisiana public school. But I remember even when I was growing up, there were schools in New Orleans and kind of urban corridors that didn’t have air conditioning. Can you imagine not having air conditioning in New Orleans?

The disappointing news

Let’s just assume that you have all the resources…the model of education is not mastery-based. Kids are moved ahead at a fixed pace. They cover some material, they get a test, some kids get 100 on it, some kids get a 90, some kids get a 70 on it, even though that student didn’t know 30% of the material that happened to be on the test, the whole class will move on to the next concept, and then build on those gaps. And then the next concepts are going to be that much harder to learn. And then those gaps just keep accumulating. [Me: In my own tutoring I see this at the elementary level. Kids that are 2 to 3 grades behind. There’s no concept of being left back. Just push them through the system]
At some point, kids hit a wall. It hits their self-esteem, they’re not able to move any further. And this isn’t theoretical, you just look at the graduates of a fancy prep school, it’s happening. It’s definitely happening on a nationwide basis. So I think that is the biggest problem.

60% of kids who to 2-year colleges and about 30% of the kids who go to 4-year colleges (and college-bound kids are in the top half of already) exhibit giant gaps in learning, many unable to learn algebra yet — a 9th grade course. The majority of kids attending college would need to go back to middle school-level learning to fill in gaps.

On American universities

American higher education is the envy of the world. Our research is the best in the world.  American universities have very nice facilities, and they have very nice programs. So what are the problems?

  1. They’re very expensive. Partially because of the landscaping and the facilities and the programs that they have.
  2. They can be very rigid. What’s magical about four years, whether you’re gonna be a software engineer, or art historian? It’s always 4 years. Clearly no one has said “Let me just work on the stuff that you need to learn. And not just to learn to be that career, but like learn to be a human being or participate in democracy.” The opportunity cost isn’t just in dollars, although those are significant. It’s also in lost time, the fact that in the US to become a working doctor, and I observed this with my wife, and she’s not even a surgeon,  You have to keep going even as a rheumatologist. She was 32 before she was really a rheumatologist and she never took a break since kindergarten. You’re losing a lot of talent that could help serve a more diverse community because they were the ones that said, “Hey, I gotta get a job fast. I can’t sit in school until I’m 32 years old, or 35 years old to become a surgeon or a professor or whatever else.” Those are the problems that I think we need to address.

On the stress of college admissions

I actually think our system is culturally broken in a lot of ways. There’s always been a Lord of the Flies aspect. I remember reading that book in middle school, I’m like, okay, yeah, you just described the locker room or the playground — bully or be bullied. Unfortunately, it’s part of the culture and in many cases, it happens more in some of the more affluent neighborhoods, the stress and anxiety. Here in Silicon Valley, Palo Alto, I can’t afford to live in those neighborhoods that go into those high schools — they have the highest suicide rates in the country. I talk to educators there. The stress, the anxiety, the depression, there is off the charts. So that’s another thing. Talk to anyone in higher education. Roughly a third of all students are in some way dealing with some of these things. 

What is the university tuition actually buying?

Universities study everything, except some very obvious questions, like what you just asked, “What are you paying for?”You can conduct a very simple study here. Go to the upcoming Harvard graduation, and go to some kids who have some debt, “Hey, graduate, I will pay your $200,000 right now, whatever, however much debt you have, you get to keep all the knowledge you got from Harvard and all of the experiences, but you can never tell anyone that you went to Harvard University, will you take it?” I’m guessing very few people will.

On the other hand, if I were to go to a lot of people, and say, “You can pay $200,000 right now and the whole world will think that you have gone to Harvard for the rest of your life. There’s no way of proving it. You get no new knowledge.” A lot of people will take you up on that. So I think that tells you something about what people might be paying for.

I do think there are other things. Like if I offer you $200,000 but all your memories of the great conversations and friendships go away. That also would be hard for people to take. And look, I think the knowledge matters as well. But I do think the credential and the brand and the halo is a big, big, big piece of it. You absolutely can learn some of the more tangible skills at a lower cost alternative or even online.

And for the experiential, maybe the less tangible skills. You also could learn in other ways.  Some people say, “Oh, well, it’s just an important coming-of-age experience, you learn how to learn.” I don’t disagree with that. That happened to me in college. I had a great college experience. I met some of the best friends in my life, I met my wife in college. But I could imagine other coming-of-age experiences that are just as powerful. The military is one. I could imagine traveling through Europe with a cohort of students while we get jobs while we do online learning at the same time. I imagine doing internships and co-ops I’m learning, whether it’s in person or online, and getting work experience. And if I’m able to have a cohort of people my own age, that could be a great coming-of-age experience.

A not-so-great coming-of-age experience that I’ve seen happen, including people in my own family, is you have this great experience, and then you hit reality. You’re 21 years old, you’re no longer living on the well-groomed Country Club of a fancy university you attended. You have $200,000 of debt or more. You realize that in that economic seminar at the Ivy League school they treat you like you’re going to be the Federal Reserve Chairman but that’s not how the world is treating you now. You’re having trouble getting that job in economics. And if you do, it’s not paying you enough to pontificate about interest rates. We have to think a little bit more holistically outside of even just those four years.

Sal’s desire for Khan Academy

We have all the components for school in the cloud so to speak (via Khan, sister orgs and partners, through schoolhouse.world, a free online tutoring initiative) but I don’t think we’re going to be a mainstream use-case. 

I’m doing what I’m doing because I want the whole world to change. I want the people who have access to school for that school to be that much better and personalized. I want for kids not to fall through the cracks and all the associated stress and mental health issues and self-esteem issues. I also want Khan Academy and the related organizations to be like the shadow school system, the strategic education reserve, the shadow safety net, for the world, where if you don’t have school, if your school is crappy, you have, you have a safety net.


Personal resonance and reflection on Sal’s takes

  • When you take risks, cynics will be constant. Sometimes they will be right and sometimes not. But you need to focus on 2 things:
    1. Who do I actually need to convince?
    2. What evidence do I possess that says the risk is worthwhile?
  • When making a decision separate what you need from what you think you want. Then don’t be afraid to chase what inspires you (”a protagonist in your own movie”). I think of it as shedding to build.
  • Imposter syndrome can keep you grounded
  • Sal’s north star is personalized mastery learning because it increases self-esteem and well-being. It’s the maximum leverage point because our largest problems and conflicts stem from what’s in our minds. This is highly adjacent to my own “agency” argument.
  • Sal is courageous because he is trying to demonstrate that there can be a better way. He is consciously trying to be a role model through his actions and while I understand that many believe this is nudgy or righteous thinking I have argued the same point. We are suffering from a lack of healthy models and have settled into a forest of Molochian equilibriums. The “lord of the flies” broken culture around college admissions Sal uses is but a metaphor for what I see everywhere — the type of competition that is unhealthy and eats its own competitors. The people who feel on top now cannot outrun it. If it doesn’t eat them, it will eat their children.

Founders Podcast Reads Stephen King’s On Writing

On the Founders podcast, host David Senra distills stories and lessons from Stephen King’s memoir On Writing. 

Link (with transcript): https://www.joincolossus.com/episodes/24173074/senra-stephen-king-a-memoir-of-the-craft

The following are my notes. They are bits that stand out to me and not a summary. They are for my future reference and of course, shared for anyone else who cares.


Encouragement at the right time

When King was 6, true to his belief that imitation precedes creation, he creates a comic book that’s mostly a copy of one of his favorites. His mother praises him and when he admits it was mostly a copy, somewhat disappointed, she encourages him “Write one of your own. I bet you could do better.”

The feeling this unlocked for him remains to this day:

“I remember an immense feeling of possibility at the idea as if I had been ushered into a vast building filled with closed doors and had been given leave to open any I liked. There were more doors than one person could ever open in a lifetime, I thought, and I still think that.”

No Speed Limits

Capra taught Dr. Seuss to cut all non-essential words. John Gould did the same for Stephen King. All of these people could tell a big story in a single paragraph. But what is especially interesting is that despite formal writing education, they learned this skill from Capra and Gould respectively directly and quickly.

This is my favorite part of the episode because of how he ties this to Derek Sivers’ revelation that there are “no speed limits”. When Sivers was at Berklee College of Music, he meets an alumni, Kimo Williams, who accomplishes what Sivers thinks is impossible — he teaches him 2 years of theory in a few lessons! Some people aren’t used to an environment where excellence is expected:

“Kimo’s high expectations set a new pace for me. He taught me that the standard pace is for chumps, that the system is designed so anyone can keep up. If you’re more driven than most people, you can do way more than anyone expects. And this principle applies to all of life, not just school. Before I met Kimo, I was just a kid who wanted to be a musician doing it casually. Ever since our five lessons, I’ve had no speed limit. I owe every great thing that’s happened in my life to Kimo’s raised expectations. A random meeting and five music lessons showed me that I can do way more than the norm.”

Your job is to recognize when ideas meet

“There is no idea dump, no story central, no island of the buried best sellers. Good story ideas seem to come quite literally from nowhere, sailing at you right out of the empty sky. Two previously unrelated ideas come together and make something new under the sun. Your job isn’t to find these ideas, but to recognize them when they show up.”

On criticism

“If you write or paint or dance or sculpt or sing, someone will try to make you feel lousy about it. That’s all. I’m not editorializing. I’m just trying to give you the facts as I see them.”

Senra: This is going to echo this thing you and I have talked about over and over again, just sometimes critics are right, sometimes they’re wrong. It doesn’t matter. They’re constant.

Good storytelling

“When you write a story, you’re telling yourself the story, he said. When you rewrite, your main job is taking out all the things that are not the story.”

Work precedes inspiration

We get the causation backwards. [This echoes what Jack White says]. I’m going to show up every day. And if I show up every day and I put in the work, the inspiration comes. Akon learned the same lesson from Eminem who works on a schedule. He punches the clock at 5pm even if he’s in the middle of a verse! His approach to creativity was to treat it like a job and to show up every day.

Consistency Over Intensity

How does King write so many books?

“Well, the first thing I do in the morning, I set aside, I’m uninterrupted for many hours at times and I write six pages a day. And I do that every day. And in 60 days, I have 360 pages and that’s about — that’s another book…”It might take me five, six hours whatever time it is, but I do it every day, seven days a week, then in the afternoon”

He has a very set schedule. He writes in the morning. Then he takes a nap. He has lunch, takes a nap. I think he answers letters, stuff like that in the afternoons. Has dinner with his wife, spends time with his family, watches a baseball game, that kind of thing. That’s Stephen King’s schedule.

“Writing — the act of writing poems, stories, essays has a lot more in common with sweeping the floor than you think it does.”

Writing Tips

  • “Put your desk in the corner and every time you sit down there to write, remind yourself why it isn’t in the middle of the room. Life isn’t a support system for art. It’s the other way around.”

  • If you want to be a writer, you must do two things above all others: read a lot and write a lot. There’s no way around these two things that I’m aware of. There’s no shortcut. I’m a slow reader, but I usually get through 70 or 80 books a year, mostly fiction. I don’t read in order to study the craft. I read because I like to read, yet there is a learning process going on… If you don’t have time to read, you don’t have the time or the tools to write. It’s simple as that.”

  • Just because it’s the right work for you doesn’t mean it’s easy but you have to want to do it.
    “For me, not working is the real work….ust because I like doing it, it doesn’t mean it comes easily to me.” He gives us advice, “If you’re stuck, take a break, go get bored…When I’m stuck, I have long periods where I do nothing. I go ride a bike. I listen to music, I go for walks, I don’t work. And then I get this flood from my subconscious that actually helps me solve the problem I’m stuck on.

    “Boredom can be a very good thing for someone in a creative jam. For weeks, I got exactly nowhere in my thinking. It all seemed too hard, too fucking complex. I had run out of too many plotlines and they were in danger of becoming snarled. I circled the problem, again and again, beat my fists on it, knocking my head against it and then one day when I was thinking of nothing, the answer came to me.”

  • Being a writer is a lonely job. Any time you’re doing something difficult, it’s to some degree lonely. You have to be a little off to want to do this. Like, why don’t you just go get a normal job? Like, you’re kind of crazy to want to do something different. “It’s like crossing the Atlantic Ocean in a bathtub. There’s plenty of opportunity for self-doubt.”

    Senra: Formidable are people built in solitude.

    Reminds me of Paul Millerd:

    You’re doing the thing everyone does at the beginning of a solo path — you’re looking to be saved. No company, no other person’s playbook, or metric of success will save you. The only thing that matters is coming back to the thing you are meant to do. You must do it on your terms. Men waste years trying to avoid this.

A closing thought

“Writing isn’t about making money, getting famous, getting dates, getting laid or making friends. In the end, it’s about enriching the lives of those who will read your work and enriching your own life as well. It’s about getting up, getting well, and getting over. Getting happy, okay? Getting happy. Some of this book, perhaps too much, has been about how I learned to do it. Much of it has been about how you can do it better. The rest of it and perhaps the best of it is a permission slip. You can, you should. And if you’re brave enough to start, you will.”

Notes from Kai Wu on Flirting With Models

From Flirting With Models host Corey Hoffstein:

My guest in this episode is Kai Wu, CEO and founder of Sparkline Capital. Kai is a pioneer in the measurement of intangible value.  Using machine learning, he tackles unstructured data sources like patent filings, earnings transcripts, LinkedIn network connections, and GitHub code repositories to try to measure value across the four key pillars of Brand, Intellectual Property, Network, and Human Capital.

We discuss why intangibles are important, how they differ from the traditional factor zoo, the opportunities and risks of unstructured data, and how even big data can have small data problems within it.

Finally, we discuss Kai’s most recent applications of his research to the world of crypto.

Link: https://podcasts.apple.com/us/podcast/kai-wu-mining-unstructured-data-for-the-intangible-s5e6/id1402620531?i=1000568607975

A word on my notes:

These are just interesting bits that stood out to me, not a comprehensive summary. Kai and Corey pick over many nuanced questions related to unstructured data, meta-problems in data analysis, distinctions between Kai’s “4 pillars”, and techniques. I encourage you to listen to the whole episode to appreciate the depth that both of them are able to bring to the discussion. Kai has thought about these problems deeply and Corey, despite being an outsider, asks extremely poignant questions reflecting his own deep appreciation for the pitfalls of number-crunching.


Challenge of Machine Learning In Investing:

To take advantage of machine learning truly requires rather large investments, alternative data and the infrastructure required to support it can be very expensive. And even worse is that you know, the prohibitive item here really is getting the right people to run it. Machine learning is complicated and has many pitfalls. And it’s also a relatively new field so that the pool of experienced folks is pretty small.

I actually wrote a paper in May 2019, called machine learning in the Investment Management age. And so in this paper, I outlined three ways to apply machine learning to the industry:

  1. Use of machine learning to transform unstructured data into the investment process
  2. Data mining. And this is the idea of taking hundreds if not 1000s of features or signals and allocate capital across them deciding which ones you want to invest in and what you want to ignore.
  3. Risk models.
  • In the quant world, we’ve seen the most effort applied to the second use case, in other words, trying to figure out how to allocate capital across these 1000s of futures. And this has had actually significant success, but mostly at higher frequencies. For capacity reasons, most capital is managed on lower frequencies. So of course it doesn’t matter as much for the average investor. And then the problem is at the lower frequencies, we have sort of like a small data problem. For example,  every decade there are 10 annual filings, and these are often serially correlated. So the true dimensionality is actually quite a bit smaller.
  • I think we haven’t seen as much innovation on the risk model front. This is an underappreciated dimension. Quants use risk factor models such as Barra and US equities. Barra works by identifying industry factors like “tech” and “consumer discretionary”and a few dozen style factors, value growth, etc. The Barra model has been largely unchanged since becoming the industry standard several decades ago. And I think the biggest weakness of the model was actually its reliance on the GICs industry classifications. These are binary definitions, there’s like 11 different sectors. So firms like Tesla can’t be both tech and auto. They’re also very static. So if a company like Amazon starts investing in a new business like AWS, that doesn’t kind of get incorporated into the risk model. We’ve actually shown that natural language processing models can be used to create superior text-based industry definitions that can capture part of the greater richness and nuance of the business landscape. So in this framework, for example, Tesla will be considered similar to both GM and Ford, then also to Apple.
  • The final area which I think has the most room, which has yet been kind of fully realized, but has the most potential is this idea of unstructured data. The best way to define unstructured data is by opposition to structured data. Structured Data is the information you find in Excel spreadsheets and SQL databases. Its price volume, and financial ratios like P E ratios. Unstructured data, on the other hand, is everything else. It’s text, images, audio, video, anything else any visuals, information, and unstructured data is 80% of outstanding data, and it’s growing exponentially. It’s doubling every one to two years. Importantly, it’s also being created faster than it can be structured meaning that 80% of the data is underestimate because as we move forward through time, it’s only set to increase. And of course, it’s not just quantity, right unstructured data can also contain a lot of valuable information about companies. At Sparkline, we look at like LinkedIn to measure human capital. We look at Glassdoor to measure culture patterns for innovation, Twitter, for brand. And for the most part, investors are not using this data at least in a systematic way.  We’ve seen some unstructured data be adopted, such as news sentiment, become popular but I think it’s really only scratching the surface on what this dataset can offer.

“Value is not dead, it just needs to be reformed”

The father of value investing Ben Graham wrote Security Analysis in the 1930s. The world was very different. The big companies were railroads and industrial firms. Buying stocks below book value was a reliable way to make money. Fast forward to today. We have Google and Apple which don’t use tangible capital to generate earnings. They rely on intangibles. We have these four pillars at Sparkline:

  1. intellectual property
  2. brand
  3. human capital
  4. network effects

These are the pillars most firms rely on today. Our research has shown that intangible capital has grown from basically 0% to 60 to 80% of the capital stock of the S&P 500. Meanwhile, the efficacy of traditional value metrics like trailing earnings or book value has declined. So Baruch Lev and Fong Gu in their excellent book, The End of Accounting show that the R squared of using book value and earnings to explain market caps across nationality used to be 90% in 1950, and it’s fallen to around 50% in 2010 and this was 10 years ago. So I’m not the first person to argue that value investors need to incorporate intangible assets into their assessment of corporate value. But as far as I can tell, we are the first firm to use machine learning and unstructured data to measure this value. For example, we use live data to track the flow of human capital from company to company or Twitter to measure the brand perception of firms. These datasets require using machine learning to take the unstructured data and form them into factors which we can then use to trade like each of these four pillars. So basically, we have two big insights at the firm.

  1. The economy is becoming increasingly intangible, but investors and accountants are failing to adapt.
  2. Unstructured data is exploding and it contains valuable insights on the intangible economy that can be unlocked using machine learning.

By combining these two insights, we hope to help investors access the opportunities in these undervalued intangible assets.

The state of research around intangible assets

There are a dozen or so researchers who have written about how to incorporate intangibles into measures of book value. While they each have slightly different approaches, the common theme is that they all rely on accounting data to measure intangible assets. To be more specific, they focus on two particular line items in the accounting statements.

  1. R&D
  2. SG&A (selling, general, administrative expenses.  SG&A is kind of a catch-all idea that captures many things including sales and marketing expenses.)

The idea is that R&D and SG&A are expensed rather than capitalized. For example, if I were to spend $10 million dollars building a factory to manufacture a new drug that I developed, that capex is capitalized, that goes on my balance sheet. On the other hand, $10 million of R&D to develop the drug that will then be manufactured is considered a cost that comes out of the income. This inconsistency means that investments in intangible capital are considered not an asset but an expense. So led by Baruch Lev who we mentioned just a second ago, a lot of different researchers have now decided to treat intangible investments the same way they do tangible investments, in other words, to build balance sheet assets for intellectual property and brand.

If you take price-to-book plus capitalized r&d you end up with this slightly more comprehensive version of a value factor. This adds somewhere between one to four points of excess returns each year to performance. And the problem though, for us, is that value still in a deep drawdown notwithstanding. So, while these are very sensible adjustments, they’re not a panacea. I think the limitations are twofold.

  1. There is a pretty weak relationship between the input costs and then the output value for any intangible investments. The goal of accounting is to capture historic costs, but the exposed value of intangible investment is very uncertain. The $10 million we spent on this new cancer drug could be worth a billion dollars or could be worth zero to market, this new drug could go viral or flop. So that’s the first problem.
  2. Accounting statements basically ignore the other two intangible pillars. All CEOs claim that their people are their greatest assets, but the only disclosure they put into the 10-Ks is headcount, which of course makes no distinction between the quality of employees or what functions they’re hired to do. And then finally, network effects. So when all is said and done, this means that we are forced to go beyond accounting data. And we believe that by using unstructured data, we can actually measure the output as opposed to the inputs of the R&D investment and the quality of human capital and network effects and brand. And this allows us to transcend some of these limitations.

Corey asks a brilliant question addressing the predator/prey dynamic of competitive markets

Corey: As more and more firms adopt NLP tools to rapidly trade news releases and earnings transcripts. How do you outrun the adversarial issue where CEOs may now get coached against using specific words and phrases or coach to use specific words and phrases?

Kai’s answer confirms just how much of an arms-race market communication can be!

I love this question. Look, investing is like poker. It’s a game theoretic endeavor. One of my favorite papers is actually called How To Talk When A Machine Is Listening. And it has a really interesting finding. So there’s this dictionary called the Loughran and McDonald dictionary. It consists of a bunch of lists of words. Like positive and negative keywords. And the key is that it’s adapted to the finance industry. It was created by two finance professors solely for this focus on trying to classify financial jargon. It was published in 2011 and quickly became widely used in natural language processing. The paper How To Talk When A Machine Is Listening found that companies started to avoid using the negative Loughran and McDonald words in their 10-Ks and 10-Qs after this dictionary was published. So yeah, this is a very real thing. As investors watch and try make sense of unstructured data and deceit in general,  CEOs will try to manipulate the narrative to their advantage.

How Kai’s team zeros in on actions not words to defend against CEOs that learn the right things to say

The way we deal with this is we define three buckets of data with varying levels of susceptibility to such a manipulation.

  1. Company communications. So this is your 10k earnings calls, press releases, and anything coming directly from the mouthpiece of the company.
  2. Third-party information. Media blogs, sell-side research, and company reviews (ie Glassdoor)
  3. Ground truth. So I would classify human capital and passions in this category. A good example is to go back to our culture thing. We wrote a paper called Measuring Culture where we started off by showing the famous slide about how Enron its leaders went to jail for fraud. They proudly displayed the values of integrity on their office lobby. Most CEOs invariably just love talking about how great their culture is, but this is no correlation with the true culture of a company. So to get around this problem, we don’t look at the CEO interviews. Instead, we look to the opinion ranking of all employees. These are the opinions that on a day-to-day basis constitute the culture of a firm. Again, we use Glassdoor. The website allows individual employees or former employees to review their employers. We find this data is a much more reliable source in particular. We find that it’s not the quantity of the story that matters, but the information contained in the freeform text associated with each of these reviews. It gives us interesting clues about the facets of each company’s culture. A similar example would be that all CEOs just love talking about how they’re embracing innovation and digital transformation. But talk is cheap. So instead, we look at job postings and LinkedIn to see if companies are truly hiring talent in these areas. It’s easy to say you’re investing in innovation, but do you actually go out and spend the extra money to hire top graduates from  Carnegie Mellon computer vision PhDs? Is it actually going to be the case that your employees have skill sets such as TensorFlow and PyTorch on the resume? Are you really investing in AI?

Because crypto’s value is entirely intangible it’s fertile ground for Sparkine’s methods

Porting our model into crypto was actually pretty seamless. Brand new human capital matters just as much for Web3 as Web2 organizations. So we were really able to just apply the framework wholesale with no modifications. The big difference in crypto is the data sources are different. But because Web3 is being built in the open, in many ways, crypto is actually an even more attractive area to apply this framework. So we focused on three different data sets.

  1. Blockchain data. By definition, we can see the history of a blockchain all the way back through time it is publicly available is immutable. This allows us to form metrics for the adoption of a protocol. For example, we can calculate the number of daily active users or the dollar volume of transactions over any kind of arbitrary time period. And this, of course, maps back to our pillar of network effects.
  2. GitHub. The really cool thing about crypto is that it’s all built on open-source principles, which of course is key for us. We see the source code of 1000s of crypto projects today, as well as yesterday and each point back in time to inception. So this allows us to form metrics for human capital and intellectual property. So for example, we can see the number of repo changes as a proxy for iteration over a period of time or we can look at the growth of the developer community over the years.
  3. Social media data. While social media is of course important for all firms, it is especially important for Web3, which are digitally native and involve the coordination of online communities across the globe. We can look at datasets such as Twitter, Reddit, Telegram, and Discord, to track the growth of these online communities and brands. So now with these measures of fundamental value in place, we then compare them to the price you pay.

I think what makes us confident in this strategy and gets us all excited about it is this is an inefficient frontier asset class, and very few other investors, if any, are approaching it with systematic valuations. So it just stands to reason that there might be some alpha here.

Does the 4 pillars of intangibles approach apply to assets that might never spit off a cash flow?

You’re right that in general, the token economics are a bit different from that of equities… Many of these projects are using tokens as a method of financing their growth, but they want to avoid technically calling them equity securities from like a regulatory standpoint but it doesn’t diminish the actual value in these tokens. Let’s take the example Ethereum.Eth is a utility token. It is required if you want to use the Ethereum network. Therefore, the value of Eth is a function of the demand for the Ethereum network. This logic applies to any other token, whether it’s a video game, a decentralized exchange or a blockchain. The value of tokens will be a function of demand for the underlying project. So our framework attempts to establish what is the fundamental attraction of these underlying projects. So in this way, we’re actually much more similar to venture capitalists. We think about these projects as early stage startups. They may not have monetized their projects or their users or whatever yet, but if we have a lot of users, we have a robust development community and a strong brand, it certainly does bode well for their ability to flourish ultimately, which of course, would somehow filter down to the token investors profiting.

[Kris: This response sparked a thought for me. A casino requires its chips to be able to play. But the chips themselves never increase in value even though they provide utility in the form of “access to entertainment and gambling”. And for poker pros, the chips are literally an on-ramp to their professional “business”. And still the chips do not increase in value. The analogy is weak since the casino can always produce more chips but it’s just a reminder that the value of a “token” is not just a function of its user base, but its supply, the incentive to increase its supply, and the alternatives. If a user can just cash out because there’s a quality competing casino or blockchain it acts as a limitation on any token’s value]

Identifying the 4 pillars in crypto

  1. Brand

    Dogecoin, which is a joke, has its main value on its brand. A lot of people think it’s funny, they like it. It’s kind of fun to play with. So its primary pillar is brand.

  2. IP

    On the infrastructure side, you have things like Filecoin for decentralized storage.

  3. Network Effects

    Decentralized exchanges. Similar to how the NYSE and CME derive value from the fact that you have many buyers and sellers who want to aggregate liquidity on their platform. Same thing for uniswap and sushi.

So yeah, very much the same concept here. What we’re trying to look for, same as with equities, are firms where you have a bit of everything. What we’ve discovered is that simply having one pillar is generally insufficient for success. I always give the example Wozniak & Jobs. You have technology and IP, but you really need marketing as well. So what we’re looking for is crypto organizations, stocks, whatever, asset class doesn’t matter, is strength on all of the advantages, or as you know, as much as possible.

David Senra on Invest Like The Best

Patrick O’Shaughnessey interviewed David Senra, the host of the outstanding Founders Podcast. I love David’s passion and storytelling. This interview was the best one I listened to this year. I listened to it several times and it was the first time I asked my son (now 9) to listen to an interview with me. It felt like one of those chats that could inspire an impressionable mind.

They discuss the premise, motivation, and lessons from David’s podcast. The premise of Founders is David studies famous entrepreneurs, scientists, artists or really any creatives that made a large impact and distills pitfalls and lessons from their stories. It doesn’t sound novel, except David’s personality and enthusiasm make you feel like you are hanging out listening to a friend tell a crazy about another friend (except that last “friend” is a historical figure)

The following notes are what stood out to me.

My son Zak also took notes (we made this an exercise because in 4th grade this year he’s learning to take notes). It was fascinating to discover where he wanted to pause the interview to jot something down that stood out to him. One of the reasons the episode might have been especially fun for him is we just finished watching The Men Who Made America series on the History Channel and Senra discusses many of the “captains of industry” or “robber barons” featured on the TV series.

Link: https://www.joincolossus.com/episodes/85503387/senra-passion-pain?tab=transcript


Books as mentors

Senra came from a challenged family. He wasn’t only the first male to graduate HS, he was the first to not go to jail! When he studied Warren Buffet, he recalled that Buffet said, “One of the best things ever happened to me is I picked the right heroes.” I think that is extremely important. So that is the role that books play for me.  I don’t have access to these people, I didn’t have mentors. I didn’t have anybody.

Senra’s career is the embodiment of what I described as The Engine Model

  • There are four passions in my life, entrepreneurship, reading history and podcasts, so Founders sits in the middle of that.

  • People say “Founders is podcast, Founders is business.” Yeah, but it’s an obsession first. It’s an obsession disguised as a podcast in a business.

  • The reason I’m so obsessed with just studying people that got to the top of their profession is because one third of your life is going to be spent working. Half of your conscious life, half of the time you’re not asleep, is going to be spent working. For a certain personality type, to not excel at that, to not be really good at that means that life is not going to be an enjoyable experience for me. If I had to guess, which comes up a lot, I think there’s some kind of deep-rooted fight against a sense of inferiority that is underneath it.

  • It’s interesting, this comes up a lot, there’s a line in the Francis Ford Coppola biography that I read, because I really love reading biographies of filmmakers, that’s the closest analogy to what I’m trying to do at podcasting. I read their words and I’m like, “That’s how I think about podcasting. That’s fascinating.” And there’s a line in the Francis Ford Coppola biography where, embedded in the story of the son is the story of the father. And his dad was this guy, he wanted to be a musician. He never made it, was super bitter. So he raised Francis Ford Coppola and they would just talk shit, his dad would just talk about anybody that was successful. And Francis is like, “Well, I don’t want to be the person criticizing the successful person, I want to be the successful person.”

  • And I think a lot of that came from how we started the conversation, some people have to say, “Hey, I want to be like that guy.” Other people have, “I don’t want to be like that guy.” And those are equally powerful motivators.

[This reminds me of Ambition As An Anxiety Disorder]

Originality and ego

  • To be an investor, to be an entrepreneur, it doesn’t work if you can’t trust your own judgment. So what kind of person who’s willing to take that risk? I know a ton of entrepreneurs that could even make more money, if they went to go work for Google or something like that. They’d rather make less money in their own business, than work for somebody else. But there is something bizarre that I don’t think you can explain. All you can do is notice it in other people, and then seek those people out like, “Oh, I’m not weird. There’s a ton of people just like me.”

  • But Edwin Land said that there’s no such thing as group originality or group creativity. He goes, “I do believe wholeheartedly in the individual capacity for greatness.” And he says, “Originality are attributes of a single mind, not a group.”

  • I actually don’t think that you build a great company without a giant ego. I don’t think that exists. Sam Walton has a good idea about that. He’s like, “Listen, your ego should use to drive you, but you should not be on public display.” And he’s like, “I hire people at Walmart with big egos, that know how to hide it, because there is some weird thing where it drives you.”

Confusing people liking the work for liking you

We talked a little bit about ego before we started recording, where it’s very prone to let your ego get the best of you. People admire you because the work. What happens is, you usually isolate yourself. You’ll work really hard. You’ll do a lot of work. That work draws the attention of other people because it adds value to their life. And then suddenly, over time, you confuse us. It’s like, “Oh, they don’t like the work. They like me. And then I could just show up without having to do the work and everything will be fine.”

[Reminds me of the Asimov line: Past glories are poor feeding]

On constant learning

The reason I say that Jordan’s biography changed my life is this idea of practice. How many people want to get to the NBA? A ton, millions. How many get? 400 maybe. How many people get to the Dream Team in Barcelona in ’92, which might be the greatest basketball team of all time? 15 people. A subset of a subset of a subset. Michael’s tired. He’d been playing nonstop, back-to-back. He’s like, “Man, I really want to take some time off. I don’t want to spend my summer for the Olympics, but I’m going to go.” He goes, “I want to see their practice habits. We’re all the best of the best, what am I doing that’s different than what they’re doing?” What happened was he goes, he watched the way they practiced compared to the way he practiced. The main theme of Jordan’s book is I believe in practice. I would rather miss a game than miss practice. That’s insane. He said something that gives me chills to this day. He goes, “I watched their practice habits,” and he goes, “they’re deceiving themself about what the game requires.”

Obsession and endurance

“If anything is worth doing, it’s worth doing to excess” – Edwin Land, Inventor

  • On my phone, my lock screen, is a picture of Ernest Shackleton, the famous polar explorer, who looks like hell. He’s got a huge beard covered in ice. He looks like he’s about to die. And his family motto was, “By endurance, we conquer.” Which is why I told you earlier, I’m only interested in people who do things for a long time. Because at every single step, these people are presented with opportunities to quit and they don’t. So he’s like, I don’t have to be the smartest. I don’t have to be the best. I don’t have to be the talented. This is what I believe in myself. I don’t have to be the best. I don’t have be the smartest. I don’t to be the most talented…if you do something for three or four or five hours every day that most people don’t do, you’re going to develop a value for other people in the world, and that’s all a business is. The best description of a business I ever heard came from Richard Branson. He’s like, “All businesses, it’s an idea or service that make somebody else’s life better. If you make other people’s life better, you’ll capture that value in return.”
  • I’m not a fan of moderation. I’m attracted to extremes. What do you want your life experience to be? Do you want to be exceptional? Do you want to push the boundaries of your capabilities? Do you want to walk around in a fog butting up against your potential but never actually realizing it? Then knock yourself out. Be moderate. I’m not interested in that. (Zak loved this!)

Understanding what you want — the soul of a business

I read this great book called Masters of Doom, which is obviously about the video game Doom. There’s John Romero and John Carmack, and John Carmack said something in what causes the rift of their partnership. He’s like, “Romero wants an empire. I just want to make great games.”

Senra relates to Carmack:

Founders is like a handmade product. And I was like, thank you because that’s what I think about. It’s a handmade product at scale because of the miracle of podcasting. I can do everything myself. I don’t have anybody helping me…role of the founder is the guardian of the company’s soul. There’s a cult around In-N-Out because the expression of the founder’s soul is manifest in the product. People have In-N-Out tattoos. Who are your entrepreneurial heroes? Everybody copies somebody, dude. You’re a human. I always have a maxim by saying in my podcast that the mind is a powerful place. What you feed it affects you in a powerful way.

The culture of a company as a reflection of the founder

The quote that comes to mind when I think of the founder as the guardian of the company’s soul is actually a quote about Steve Jobs. It’s in one of the books I read about him and he says he made and remade Apple in his own image. Apple is Steve Jobs with 10,000 lives. That gives me goosebumps because that’s exactly what a founder should be doing. It’s impossible to build a company, to spend all your life energy on it, and not have it imbibed with your personality, with your ethics. Everything that you think about your business and your life is going to seep into it. The good and the bad parts.

Patrick: It reminds me of a conversation I had with Tony Xu who started DoorDash. Tony’s a very mild-mannered, very humble, almost quiet person, which is why this quote from him stands out in my memory so strongly, which is I asked him something about culture.  How do you think about constructing the culture of a company? His answer is basically, “I think a culture of a company should be like 80 or 90% just the personality of the founder. That’s it. It should be the extreme characteristics of the personality of the founder. Because if you try to make it generic, nothing stands out and there’s no progress and inertia dominates.

Process as art (and marketing)

Patrick: It sounds like a common theme in all these stories, is process as art by revealing the process behind the product, because they’re so obsessed with that. That is a common marketing story. Do you see that over and over?

There’s no such thing as a business that is boring. Listen, it’s boring to you because you do it every day. If you explain to the customer the process, they’ll find it interesting. If there’s any part of your product that seems banal or ordinary to you, I promise you, no one is thinking about your business as much as you. The favorite business of mine in the world, you think about it less than probably five minutes a week. Nobody is thinking about it. You have shit in your brain that is interesting to customers, and then you could package that up and use that as marketing to get more customers.

The most recurring theme in Founders stories

  • We may or may not have talked about the most important, and that’s the best maxim in the history of entrepreneurship was said by the founder of Four Seasons, that “excellence is the capacity to take pain.”…Anybody that’s ever done anything difficult, whether it’s a company, anything, knows the euphoria and terror. It’s the entrepreneurial emotional rollercoaster. The reason that I think it’s so important to talk about is because it is supposed to be hard. There’s not a book you’re going to pick up where the guy or woman’s like, “Hey, I had this idea. I started it. Everything went great,” and the end of the book. It doesn’t happen.
  • James Dyson. It’s hard to find, but if you can get a copy, order it. He says, “Listen, it’s easy for me to celebrate my doggedness now. I made $300 million last year, but I’d be lying to you if there wasn’t times where I went inside my house, had my wife look at me in the face like I’m a failure and I’d cry myself to sleep, and I got up and did it again anyways.” [Dyson made over 5,000 prototypes in 14 years before landing on the bagless vacuum that made him a household name]

Because excellence is the capacity to take pain:

  • I apply this to like, “I don’t really feel like working out right now. I don’t feel like doing cardio.” I don’t give a shit, David, how you feel. How you feel is irrelevant. That’s an idea I got from Henry Ford. You read his autobiography, he goes, “I feel sorry for these soft and flabby men that can only do great work when they feel like it.” Essentially, Henry Ford is saying “fuck your feelings.” Henry Ford’s point was a business exists to serve other people. There are going to be days when you get out of bed and you cannot wait to get to work, and that’s great. There are going to be days when you don’t want to go to work, and that is irrelevant because the business is not about you. The business does not exist for your pleasure. The business exists to serve other people. [Kris: this is why you should probably care about the customers]

The kindest thing anyone has ever done for David

The kindest thing anybody’s ever done for me happened a few decades before I was born. My grandfather on my dad’s side was living in Cuba. He was just 38 years old. He had a wife and a newborn baby when the Cuban Revolution happened and Castro took power. He didn’t understand the language, had no money and no education, and yet took the gigantic risk … and the complete correct choice at that time in his life … to flee Cuba to go to America, to give his family a better chance and a better opportunity. That one decision changed the entire trajectory of my life. None of my interests that I happen to be naturally born into, the passions that chose me, that I did not choose, would make a lick of difference if I grew up in Castro’s Cuba as opposed to America. As somebody that studies dead people for a living, it really resonates how our decisions not only affect our loved ones now and our family now and our friends now, but they reverberate through the generations. If you think about it not in the context of what’s going to happen in your life this year or next year, but how the decisions you’re making will affect people that aren’t even born yet, you’ll make your decisions differently.


My 9-year-old Son’s Takeaways

  • David only had books as a kid. NOTHING ELSE
  • David’s extended family is all EVIL
  • “Many people can run a company but not many can create one”
  • In every one of Rockefeller’s biographies, J. Gould always pops up.
  • Jordan joined the Dream Team just to see how other countries practice.
  • ” I’m not a fan of moderation. I’m attracted to extremes. What do you want your life experience to be? Do you want to be exceptional? Do you want to push the boundaries of your capabilities? Do you want to walk around in a fog butting up against your potential but never actually realizing it? Then knock yourself out. Be moderate. I’m not interested in that.”
  • “Nobody can think clearer than Steve Jobs”
  •  “Hey, those are good ideas. Human nature doesn’t change. Let’s use them.”
  • David reads his highlights 5 times.
  • What I like about podcasting is it is completely permissionless.
  • Dyson:  “Listen, it’s easy for me to celebrate my doggedness now. I made $300 million last year, but I’d be lying to you if there wasn’t times where I went inside my house, had my wife look at me in the face like I’m a failure and I’d cry myself to sleep, and I got up and did it again anyways.” Excellence is the capacity to take pain. I apply this to like, “I don’t really feel like working out right now. I don’t feel like doing cardio.” I don’t give a shit, David, how you feel. How you feel is irrelevant. That’s an idea I got from Henry Ford. You read his autobiography, he goes, “I feel sorry for these soft and flabby men that can only do great work when they feel like it.” Essentially, Henry Ford is saying “fuck your feelings.” Henry Ford’s point was a business exists to serve other people. There are going to be days when you get out of bed and you cannot wait to get to work, and that’s great. There are going to be days when you don’t want to go to work, and that is irrelevant because the business is not about you. The business does not exist for your pleasure. The business exists to serve other people.
  • In every episode, Patrick asks “what is the kindest thing anyone has ever done for you?” [I told Zak that fact, I guess he thought it was worth writing down]

Founders Podcast Reads Ed Thorp’s A Man For All Markets

On the Founders podcast, host David Senra distills stories and lessons from Ed Thorp’s biography A Man For All Markets. 

Link (with transcript): https://www.joincolossus.com/episodes/63171342/senra-ed-thorp-my-personal-blueprint?tab=transcript

A thought before I get to my notes:

Senra’s outstanding podcasts are thoughtful Cliff notes to the biographies of successful business founders. It’s a great series because the same themes keep popping up. The repetition is a great way for having the common threads that bind these founders stick. (In fact, “repetition” itself is such a common theme. Most of the founders are extremely focused, taking a small set of ideas to their logical extremes. There is a focus and lack of distraction. Many founders understand the importance of branding which entails “repetition”. Having your product synonymous with quality, or low cost, or prestige, whatever it is. Repetition is a cornerstone to establishing a brand.)

An oft-repeated theme on Founders is that the subjects are deeply flawed, often miserable. You are warned to not glorify them but instead extract their deep but narrow wisdom, instead of copying their lives. This episode is special because Ed Thorp is the one person, Senra uses as his own personal blueprint.

And I agree. Thorp in his entirety (or at least what we can know from his public action and writing) is an admirable and impressive individual.

I strongly recommend listening to the podcast.

The following are my notes. They are bits that stand out to me and not a summary. They are for my future reference and of course, shared for anyone else who cares.


On mediocre people

“I would learn to avoid them when I could and finesse them when I couldn’t”.

That’s one of the most important sentences in the entire book.

“I would learn to avoid them when I could and finesse them when I couldn’t”.

2 simple guiding questions

If I do this what do I want to happen and if I do this what do I think will happen?

Expect corruption

If there’s a way to make money, the larger the stakes, the more corruption you will find

Ed found patterns of corruption from a young age:

He’s in high school, he realizes, “Hey, the student government is corrupt. It’s just a bunch of the popular kids. Popular kids are not doing anything that can actually help”. He is probably the smartest kid in school. I mean, Ed is no doubt a genius. So he figures out a way. He’s the one leading the charge, and he winds up installing people that think like him in like 13 of the 15 positions. So this made him an enemy. He says, “A couple of the candidates realized I must be behind the change, so they’re doing advertising”.

They’re doing basically a bunch of things to remove people he felt were in unjust positions. “A couple of the candidates realized I must be behind it and spent their campaign speech time attacking me personally”. The social click had always run the student government. They were entitled.

When he starts counting cards he realizes that not only are the casino’s all “mobbed” up to keep people like him out. He was poisoned and later after he gets the gaming commission to send an inspector he learns that the inspector is in the casino’s pocket. It totally backfires, as the inspector is able to fiinger Ed out to the casino whose mobsters cut his car’s brakes to kill him!

Senra compares this to the drug trade in Miami in the 1980s:

There’s a great documentary called Cocaine Cowboys, and in it, they talk about how corrupt the ’80s Miami was. You have a cocaine boom. The richest person in the world at that time was considered to be Pablo Escobar. They’re just printing money. The local Federal Reserve branch in Miami was taking in more in cash than all the other Federal Reserve branches in the United States combined.

And so you have this huge economic incentive. If you’re a drug dealer selling a ton of cocaine, these pesky cops keep catching your guys. They wind up pulling them over, taking drugs, money, essentially costing you an expense, like “I’m losing my product, I’m losing money. So what do you do”? You fill the entire police force up with your people. “So from the outside, it looks like all these cops are there against me, and they’re actually on my team”. And in that documentary, he talks about, “There’s at least 1 graduating class in the 80s, if not more, where every single person, every single new graduate from the police academy was eventually tied to the drug dealers, the cartels, whatever you want to call them” They owned every single cop. And why did they do that? Because they were making tons of money, and money corrupts.

Ed finds Wall Street unsurprisingly more corrupt than the casinos. Bigger stakes:

Eventually, his hedge fund, the East Coast offices, gets raided by the IRS. Rudy Giuliani, who is — this is before he was the Mayor of New York City, he is the lead, what is it, the prosecutor of the Southern District of New York. And this had nothing to do with Ed. Every single thing was wind up being dropped against them. “Rudy Giuliani wanted my partner to give him dirt on Goldman Sachs and Michael Milken. My partner wouldn’t cooperate , so Giuliani raided our office. The trial dragged on for years at a great expense. The government ended up dropping prosecution for most — of most people on most counts”

So it says the case against this hedge fund appears to be a federal prosecution of securities violators. It’s on superficial level, right? To understand why it really happened, you need to go back to the 1970s when first-tier companies could routinely meet their financing needs from Wall Street and the banking community, whereas less established companies had to scramble. Seizing an opportunity to finance them, a young financial innovator named Michael Milken built a capital-raising machine for these companies. This is the invention of junk bonds.

“Filling a gaping need and hungry demand in the business community, Milken’s group became the greatest financing engine in Wall Street history”.

“Such innovation outraged the old” — this is the history lesson, “Such innovation outraged the oldline establishment of corporate America who were initially transfixed like deer in the headlights, as a hoard of entrepreneurs funded with seemingly unlimited junk bonds, began a wave of unfriendly takeovers. Many old firms were vulnerable because the officers and directors had done a poor job of investing the shareholders’ equity. With subpar return on capital, the stocks were cheap. A takeover group could restructure, raise the rate of return, and make such a company considerably more valuable”.

But here’s the thing, the people you’re now attacking are the people they have all the money and the power, and they don’t want you to do this. The officers and directors of America’s big corporations were happy with the way things had been. They had enjoyed their hunting lodges and their private jets. They granted themselves generous salaries, retirement plans, bonuses of cash, stock and stock options, and golden parachutes. All these things were designed by and for themselves and paid for with corporate dollars.

The expenses routinely ratified by a scattered and fragmented shareholder base. Economists call this conflict of interest between management and the shareholders who are the real owners, the agency problem. It continues today. The newcomers were knocking the more vulnerable managers off their horses into the mud. Something had to be done. Government ought to be sympathetic. The old corporate establishment had most of the money, and they were the most politically powerful and influential group in the country. Their Wall Street subdivision might sustain some damage, but one could expect the fall of Michael Milken to release, as it did, a huge honey pot of business to be taken over by everyone else.

The old establishment of financiers were lucky in that prosecutors would find numerous violations of security laws within the Milken group. So he’s not saying that Michael didn’t do anything wrong. His point was that the people that he was overthrowing had sway over with the politicians and used their money in power to say, “Hey, go after that guy, even if we’re doing some of the same shady stuff, okay”?

This is where Ed is going to give us his thinking on this with the — like a story, a metaphor. “It’s like the case of a man who’s been cited 3 times in a single year for driving while intoxicated. His neighbor would also drink and drive but was never pulled over. Who’s the greater criminal? Now, suppose I tell you that the man who did it only 3 times and was apprehended every time, whereas his neighbor did it 100 times and was never caught. How could this happen? What if I tell you that the 2 men are bitter business rivals, and the traffic cops’ boss, the police chief, gets large campaign contributions from the man who gets no traffic citations? Now, who is the greatest criminal”?

Madoff

And so this kind of echoes Ed’s experience with Bernie Madoff in the SEC when he discovered there’s a ton of people, Ed just being one of them, that knew Madoff was running a Ponzi scheme had told people about it. So he’s asked the question, “Did you ever think you should go to the authorities with this”? And then this is Ed’s response, “Bernie Madoff had been a Chairman of NASDAQ. He was the third biggest market trader in the U.S. He was on all types of committees. He was the establishment. The SEC checked him every year and gave him a rubber stamp of authenticity”.

Ed’s schooling us not on how we think the world works or how we think it should work. He’s telling us how it does work.

[This section was resonant because I’m currently watching the History Channel’s The Men Who Built America series which is littered with stories of corruption…manipulating stock prices, collusion, Carnegie/Rockefeller/JP Morgan buying the 1896 election by supporting pro-industrialist monopolist McKinley over threatening populist William Jennings Bryan. Teddy Roosevelt’s eventual anti-trust campaigns were a direct retaliation on behalf of downtrodden workers. Even the Edison/Morgan vs Tesla/Westinghouse battle over the electricity standard led to Morgan/Edison muscling out Tesla/Westinghouse whose AC technology triumphed by threatening lawsuits they knew Westinghouse could not afford to fight even though Morgan knew he would lose in court]

Share in public

The importance of like putting your work out there, putting your thoughts out there and sharing them because it leads to all these unexpected opportunities. He winds up being like first LP in Citadel as a result of this.

The people that are interested in learning what you’ve learned also happen to be people that are lifelong learners. And those are the kind of people that get themselves involved in very interesting activities in the future. Many of those interesting activities can have a financial benefit to them.

Status

Acknowledgment, applause and honor are welcome and add zest to life, but they are not ends to be pursued”.

“I felt then, as I do now, that what matters in life is what you do and how you do it, the quality of the time you spend and the people you share with”

“Chance and choice”

“Life is a mixture of chance and choice. Chance can be thought of as the cards you dealt in life. Choice is how you play them. I chose to investigate blackjack. As a result, chance offered me a new set of unexpected opportunities”.

Heraclitus, said, “Character is destiny”

“The path I would take was determined by my character, namely what makes me tick”

Voracious consumer of information

A lot of the stuff you’re going to read is not useful, but it’s all the little bits that you pick up that lay the foundation that are actually useful in the future. “Much of what I read was dross, but like a whale filtering the tiny nutritious krill from huge volumes of seawater, I came away with a foundation of knowledge”

Ed and Warren Buffet meet as Buffet starts Berkshire and Ed starts Newport Princeton

As Warren and I talked, the similarities and differences in our approach to investing became clearer to me. He evaluated businesses with the aim of buying shares of them or even the entire company, so cheaply that he had an ample margin of safety to allow for the unknown and the unanticipated. His objective was to outperform the market in the long run, and so he judged himself largely on the performance relative to the market.

“In contrast, I didn’t judge the worth of various businesses. Instead, I compared different securities of the same company with the object of finding relative mispricing from which I would construct a hedged position. Long, they’re relatively undervalued; short, they’re relatively overvalued, from which I could extract a positive return despite stock market ups and downs”.

So his entire life, he operated a market-neutral hedge fund, and I’ll get to more of his numbers and stuff later on. His goal was to accumulate the most money. Warren began to invest while still a child and spent his life doing it remarkably well. My discovery is fitting with my life path as a mathematician and seemed much easier, leaving me largely for you to enjoy my family and pursue my career in the academic world.

And what’s crazy is he’s going to start the world’s first quantitative hedge fund, it’s called Princeton Newport Partners. He’s still working as a professor, for like the first like 10 — even though he’s rich — or he started — like starts to get really rich, like 10 or — I have to know in the book, it’s like a dozen years into it. He’s like, “All right, I can’t do both. I got to finally give up. I’m sad to give up my academic life, but I’m clearly on to something here”. It’s just amazing how long he stuck with it.

So this is the result of — they wind up spending — I think they meant like 2 or 3 times, and this is where he realizes that Warren Buffett is an intelligent fanatic. And so the crazy thing is not only did Ed Thorp make a ton of money, but like I said, he winds up buying Berkshire, starting investing in Berkshire stock. It was like $900 at the point when Ed Thorp starts building position. And then he tries to get other people to buy and he tells them, don’t ever sell this, this will make your family rich…

Impressed by Warren’s mind and his methods as well as his record as an investor, I told Vivian that I believed he would eventually become the richest man in America”. Buffett was an extraordinarily smart evaluator of underpriced companies, so he could compound money much faster than the average investor. He could also continue to rely mainly on his own talent even as his capital grew to an enormous amount. Warren furthermore understood the power of compound interest and clearly planned to apply it over a long time.

The intelligent fanatic is extremely important, and hopefully, you are one in your own business, and if not or you don’t have a desire to, then find somebody who is and let your money ride with that person.

Hiring and management

4 different ideas – one, management by walking around; two, hire for intelligence and enthusiasm over experience; three, hire on a trial basis; and four, talent is expensive and worth every penny.

“Now, I had to learn how to choose and manage employees. Figuring this out for myself, I evolved into the style later dubbed management by walking around. I talked directly to each employee and asked them to do the same with their colleagues. I explained our general plan and direction and indicated what I wanted done by each person, revising roles and tasks based on their feedback”.

“For this to work, I needed people who could follow up without being led by the hand as management time was in short supply. Since much of what we were doing was being invented as we went along and our investment approach was new, I had to teach a unique set of skills. I chose young, smart people just out of university because they were not set in their ways from previous jobs. It is better to teach a young athlete who comes from his sport fresh than to retrain one who has learned bad form, especially in a small organization”.

“It was important that everyone worked well together. I was unable to tell from an interview how a new hire would mesh with our corporate culture. I told everyone that they were temporary for the first 6 months, as we were for them. Sometime during that period, if we mutually agreed, they would become regular employees”.

“In order to attract and keep superior staff, I paid wages and bonuses well above the market rate. This actually saved money because my employees were far more productive than average. The higher compensation limited turnover, which in turn saved time and money otherwise you used to teach my one-of-a-kind investment methodology”.

First LP in Citadel

“What would have Princeton Newport Partners been worth 25 years later? How could I possibly have any idea? Amazingly enough, a market-neutral hedge fund operation was built on the Princeton Newport model, the Citadel Investment Group”.

“It was started in 1990 in Chicago by a former hedge fund manager named Frank Meyer. When he discovered a young quantitative investment prodigy, Ken Griffin, who was then trading options from his Harvard dorm room. I met with Frank and Ken outlining the workings and profit centers of PNP as well as turning over cartons of documents outlining in detail the terms and conditions of all their outstanding warrants and convertible bonds. These were valuable because they were no longer available”.

“Citadel grew from a humble start in 1990 when I became its first limited partner, that’s insane by the way, with a few million dollars and 1 employee, Griffin — with 1 employee, which is Griffin, to a collection of businesses managing $20 billion in capital and having more than 1,000 employees 25 years later. Ken’s net worth in 2015 was estimated at $5.6 billion”. I think today at the time I’m recording this, his net worth is over $20 billion, if I’m not mistaken.

[Really interesting insight that has implications for markets]

Though the institutions of society have difficulty learning from history, individuals can do so.

Why is lifelong learning so important?

“Education has made all the difference for me. Education builds software for your brain. When you’re born, think of yourself as a computer with a basic operating system and not much else. Learning is like adding programs, big and small to this computer. From drawing a face to riding a bicycle to reading or to mastering calculus, you will use these programs to make your way in the world. Much of what I’ve learned came from schools and teachers. Even more valuable, I learned at an early age to teach myself. This paid off later on because there weren’t any courses in how to beat blackjack, build a computer for roulette, or launch a market-neutral hedge fund”…I found that most people don’t understand the probability calculations needed to figure out gambling games or to solve problems in everyday life. I believe that simple probability and statistics should be taught in grades kindergarten through 12.

The best jobs are neither decreed nor degreed, they are creative expressions of continuous learners in free markets.

Notes From An Interview With Serial Entrepreneur Keith Schacht

Link to Founder’s Mindset Podcast episode: https://pod.co/the-founders-mindset/s2-e4

About Keith Schacht:

What are the psychological building blocks that support a serial founder’s journey from ideation to massive growth to acquisition, to building again—and again?

On this special episode of The Founder’s Mindset, Dr Gena Gorlin is joined by serial Silicon Valley entrepreneur Keith Schacht, who has founded and sold 4 technology companies. His latest, Mystery Science, was being used in over half of American elementary schools at the time of its acquisition by Discovery Education. 

Now, he’s working on world-changing venture number 5.

He joins Gena for a candid discussion of how he stays anchored to reality during that elusive, early search for product-market fit; why and when he made the decision to sell his company; and how he approaches starting all over again. Gena and Alice then debrief to explore what other founders can learn from his experience.


These are some of my favorite insights or inspirations from the interview:

Building companies as an instance of building things

As long as I can remember basically, I’ve been interested in starting companies, although I didn’t initially conceptualize it as starting companies. I just I just thought of it as building things. I like to build things and companies ended up being another kind of thing I like to build and a vehicle, for building more things. So I mean, really, when I was in high school, even I discovered the internet and I’m younger than that I discovered programming. But when I discovered the internet, I discovered that people would pay me real money to build things on the internet.

Me: Note that it has nothing to do with making money. In fact, if one’s goal was to just make money you could make the case that entrepreneurship is one of many, and possibly, inferior paths

Keith’s response to the struggle and curveballs native to entrepreneurship

I think it’s not smooth but I just never expected to be smooth so so you’d I don’t get upset when it’s not. So it’s like when you’re off-roading you expect lots of bumps.

An example

An example from my previous company Mystery. I had a very specific idea about something that I thought would be good and it was basically a line of science kits for kids that would help them explore the world.  I remember very specifically the spark of that idea came when I was walking through a toy store. I like toys as a product category. And I noticed that there was a particular aisle like the science toy aisle, and it struck me how familiar it was. There was like a two-liter bottle tornado and a crystal growing kit etc. “Wow, this is a pretty stale product category.” I had a lot of experience building these kinds of toys myself just for fun so I thought it would be a really interesting business opportunity here.

That led to conversations with a friend of mine,  a science teacher at the time. And so we started this business with this sort of clear idea of maybe we’ll do a lot of science kits, but the broader opportunity was helping kids understand the world. My co-founder and I were both new parents and this is a classic case where I was excited about something particular, but I had a conviction about a broad space. And, you know, we quickly tested this particular idea and it turned out to not be a good idea. We built prototypes and put them in the hands of parents. Multiple parents told us how “we’ll do it this weekend” and then we checked them in with them on Monday. “How was it?”

“Oh, we didn’t get to it.”

And then weeks go by. So we pivoted and was like, maybe we’ll do a different idea. And it was a classic example of having strong conviction about sort of a broad area of opportunity and specific ideas but sort of flexible on whether that particular idea was the right one. It was many iterations later before we finally got something so we ended up building — instead of a line of science kits for kids to do a home, we built a set up for digital resources for elementary teachers to use in the classroom to teach science to kids. We solved the real problem for elementary teachers. [He previously gave some background that before high school, general elementary teachers teach science and many find it daunting.]

Keith, without meaning to probably, reveals how his approach actually looks like science

I think one of the most important things at every step of this discovery process is to be really clear on what you know, and what you don’t know. And not to ever confuse the two.

We prototyped a line of science kits and put them in the hands of a bunch of parents. And it’s very easy, after the moment it didn’t work to conclude “Oh, no one wants a line of science kits” or some broad generalization like that. This is too general.

The right way to hold it is “the particular prototype I built, that I put in the hands of the six parents wasn’t used by any of the parents.”

And when you hold the conclusion that way, it leaves the door open to “maybe it was the wrong set of parents, maybe there’s a different group of customers with the exact same product or maybe the idea of lighter physical science kits was a good idea, but those three that we made were bad for a particular set of reasons.”

And so that’s it’s such an important part of the journey. Be really clear on what you know, what you don’t know what to kind of hold those conclusions in the right way.

And I think that’s what makes the journey feel, you know, bumpy and circuitous but not frustrating. It’s just the process of coming to understand the nature of the world and your customers and your idea.

Product-Market Fit

How did we finally know [when we were on to something]? On prototype number six, we had built something that we tried on parents and a number of parents gave we gave it to their kids’ teacher. We thought that was an interesting clue since didn’t immediately jump on elementary teachers at that point. When we did finally decide to build a prototype for teachers. We initially built one for middle school science teachers because we want to help them teach science. That one didn’t work, either. They didn’t use it. I had a friend of a friend who was an elementary teacher and happened to show her one of these prototypes. And she was excited about it. One of the breakthrough moments was she told us about a set of lessons that she needed to teach soon.

We just offered to help her. “So what’s this particular lesson? Okay, well, what if we prepared the following things for you and sent that over within a couple days? Would that be helpful to you?”. And we sort of followed her lead in a really concrete way, like a specific day a specific lesson, a specific problem, and we helped her and that’s that was sort of like big clue number one. She got really excited about what we gave to her use quickly and asked for more.

You’ll know when you have it

Yes, it’s very abstract to tell someone “make something that people want, and you’ll know when they want it.” But I have built things before that people didn’t want and I built things before that people really wanted. You can really see the difference. People use lots of different analogies like “customers actually wanting something from you and pulling it out of your hands instead of you calling them ‘would you like to try this? Oh, sure. I’ll try it. I sent it over. You don’t hear anything for 48 hours. Did you get a chance to try it? Oh, I haven’t gotten to it yet.’

But you can tell what it feels like when you are the one providing the energy to push this product forward versus your customers bringing the energy and sort of pulling it out of you in those early days. Many times Doug, and I would have the conversation. “Is this one what product market fit feels like?” And I would say to him “Oh no, you’ll know.” You could tell the difference. And when we finally got this first elementary teacher who was excited and asking for more, and then we got a few more elementary teachers, I remember Doug remarking “Wow, this feels so different than those other prototypes we built where no one really seemed to care and we got 200 signups, but then no one would use it.”

There’s a meta-discussion linking back to 2 Y Combinator principles:

  • This was an example of “doing things that don’t scale”
  • This is what it looks like to try to build something people actually want.

    It’s so easy to make something you want people to want, but they just don’t want it. Just the other day I got an email from a friend who has built a prototype and wants to show it to me to see what I think. And just based on the email my first reaction after reading this email was”it doesn’t really matter what I think” because I’m not the customer. I wonder if this person has shown it to five customers by now before building the whole thing. And that was my feedback on this. Because so often people miss that step. And so I really don’t care what anyone thinks except the potential customers that we think we’re going to be serving with these particular ideas.

Excerpts From Benn Eifert on the Odd Lots Podcast

Link: https://www.bloomberg.com/news/articles/2022-08-01/benn-eifert-on-the-mania-that-was-even-bigger-than-meme-stocks?srnd=oddlots-podcast#xj4y7vzkg

About Benn: Founder of QVR Advisors specializing in option-based strategies

I found the transcript here.


The craziest aspect of the investing mania of the last few years was the role of sophisticated instituitions

Benn: I would say actually I found the sizes of the unsecured loans that very large, and you might have thought sophisticated, investors and credit organizations were giving to Three Arrows Capital, two and a half, you know, two and a half billion dollars for Genesis alone with like no collateral. I mean, you come into this just thinking, look, these are big boys. These are wealthy people who’ve created a tremendous amount of money and they wouldn’t just do completely, obviously crazy stuff like that. And then it turns out that the answer is, of course they do…I think retail gets all of the attention and you know, we can talk about that all day and there’s all kinds of interesting stuff there, but I think people forget that the role of institutional investors in this process and the way that institutional investors start to buy into narratives and start to, you know, start to develop this fear that they’re missing some huge technological revolution, and then do incredibly crazy things in huge size, is almost a more interesting story

 I think a big part of the institutional role in that really came from this huge psychology around private assets and private investments being this fantastic place to be, you know, big sources of innovation, stable returns, because, you know, without mark to market volatility, right, you saw just really in the last few years, you see the formation of VC growth funds, right? So you always used to think of venture capital as, you know, these nerdy, weird engineers doing cool science experiments and backing these early stage companies to do really disruptive stuff.  Whereas growth funds were all about raising mega institutional scale capital at full fees with long lock and plowing that into companies that were already valued at $200 billion and just had a completely different asymmetry to the return profile.

And you had corporates like SoftBank and hybrid public private hedge funds like Tiger, you know, coming in to compete for deals, to get those deals with startups, by saying, ‘look, we have bigger checks and we’re not gonna ask you any annoying questions. We’re not gonna do due due diligence. Like, I want you to sign the term sheet in 24 hours that I just sent you.’ And that was really, you know, alot of that came from, I mean, and I think I had a Twitter post about this, but you know, 2019, 2020, I would go to conferences with big institutional investors. And the only thing that you would hear about was how big asset owners were taking money out of liquid alternatives type of investments and moving them into privates because the returns in privates had been so high and there was such a perception of such limited risk in practice.


The role of narratives and how the ability to spin them about the future can become a gray area or market failure

Benn: Just to be clear, technology itself is not the problem, right? I mean disruptive technological innovation is what drives the world forward. And, you know, Silicon Valley and venture capital plays a really important role in that. And that’s great, but that technology inherently has this characteristic, right? That you’re not selling a current set of cash flows or a well-trodden path of how, you know, that can be valued by people with spreadsheets in some kind of relatively formulaic way. It’s about selling a vision of the future and a vision of what could be and how that can play into future economics and trying to relate that to past innovation. And that’s a very nebulous thing in the end. And it’s something that is inherently susceptible to hype and narrative, particularly when the, I think, as you’ve seen in recent years, particularly when financial markets set up ways for people to get actually paid and to monetize that kind of narrative and hype, right? As opposed to, ‘Hey, I finished building this company and then it becomes a big company. And then I get really rich,’ right?

When it becomes, ‘I sell this vision of a future that’s really disruptive. And then I can issue a token and I can sell it to retail and I can make a billion dollars just by doing that without actually building anything.’ Or similarly, you know, in technology, if I can create a startup that gets valued at $300 billion, and then I can go into the secondary market and I can get liquidity as a founder and sell a lot of my shares to like institutional investors that want to get some, right? And I think that’s the inherent trick with technology is that it is inherently by its nature, much more susceptible to narrative-driven, you know, valuation and narrative-driven thinking.

And that is what it is, right? That’s not something that’s gonna go away, but it’s something that investors, you know, have to be really cautious about how to differentiate. And you get, it’s like the early phases of a technology cycle. You get those nerdy engineers building really cool stuff in the garage, but then the MBAs start to show upright? That’s kind of a classic line in Silicon Valley. And you end up with a lot of huckster types coming in to kind of ride along the wave because there’s so much money involved and that’s where you get the trouble.

[Me: There’s a bit at the end of the podcast that ties back to this in which crypto which is intellectually seated in unfettered free market ideology ironically self-skewers that ideology]

Benn: But crypto, I think at the core of it, crypto really owned and brought to the forefront, this idea that financialization is first, right? And the use cases sort of follow and that you’re supposed to have, it’s this very like pure Chicago Department of Economics, efficient markets idea, right? That like, if everything is priced a priori, the market is sort of all knowing and all seeing and people will identify the things that are gonna work and they’re gonna finance those. And like the world is gonna be utopia. And it’s completely ridiculous.

It, you know, what actually happens in practice is that if you can create a narrative and create a hype cycle around your company and you get the right VC backing and whatever it is, and then you can create money by issuing a token and you can sell it to retail n humongous size and you can make hundreds of millions or billions of dollars for doing absolutely nothing. And that happened over and over and over and over again. And it was sort of institutionalized as a business model by certain venture capital firms that, you know, are big backers of this space. And I think that’s the core issue.

Joe: Well, I forget who made this point, but yes, you might say that crypto has attracted the best and the brightest of the last several years, but if they’re the best and the brightest, they might be the best and the brightest at figuring out how to make life-changing amounts of money in six months, which is not necessarily the foundation of a sound new industry.

Benn: Yeah. You give people really strong financial incentives and it’s really hard to resist, right? It’s easy to obviously point fingers at the most egregious people in the space and Do Kwon, and all these guys, but like if you create a world in which it’s really easy for charismatic hustle-type people to get really rich by scamming people, they’re gonna do that. And you have to expect that, like, that’s just how the world is gonna be. And I think that’s what the incentives that we’ve set up in crypto have really done.


The challenge of separating hype from real change is hard but it’s easier to rule out than rule in

Joe: How do you know who’s just a storyteller in real time versus someone who is actually correctly identifying a new trend because, you know, you mentioned Warren Buffett in the beginning, he was wrong. Not all of the curmudgeons in a certain area, get vindicated in the end, he was wrong to dismiss the Googles and the, you know, the Facebooks in 2010…so in real time, investors really are faced with a tough decision because sometimes the world changes and it can be really hard to disambiguate in real time between who is a huckster, trying to, you know, sell their token or whatever, versus someone who’s identifying a real change that’s happening.

Benn: It’s really, really hard in real time — to your point. And I think that the reason it’s really, really hard is because again, we talked about momentum is a real phenomenon and structural change in the world. And technological change is a real thing, right? And so you have to keep an open mind and you can’t take the curmudgeon approach, right? Where anything that’s new or anything that people are excited about or that’s going up in price sort of must be wrong. And you see a lot of that kind of thinking, kind of behavior. That’s the wrong mental frame, right? I think it’s easier to think about identifying and screening out the stuff that has a lot of red flags and is fairly clearly actually a bunch of hucksters, as opposed to on the margin, solving the Warren Buffett question. Was there a path for Warren Buffett to figure out that Google and Amazon were real things back in 2010, 2012? There there might not have been. I think that identifying red flags of very likely problems.  I mean, I think you get into things like, okay, do we have projections of returns that are way, way above historical equity returns or based on, you know, nonsensical statements like the Cathie Wood one that we talked about, right? GDP growth of 50% because of artificial general intelligence. You can fairly quickly say, ‘okay, I don’t know exactly what’s going on in the world, but like, that’s not real.’

I think another one, and this I think is very important and hits institutions more, but claims of returns significantly exceeding, you know, the risk free rate but with little or no risk. And that’s the one I think that ends up leading to much bigger problems in financial markets and much bigger problems in the global economy, right? Because people with nice suits and ties and very big offices look at an 8% or 9% or 10%, relatively low risk return. And they think about how they can put leverage on that. And they think about how they could have a five year run making really good money and get paid a lot. And that’s incredibly appealing. And that’s actually the nature of a lot of the biggest losses that you saw in crypto and so forth. It wasn’t necessarily folks buying, you know, Dogecoin and losing a catastrophic amount of money. It was people saying, wow, this anchor protocol, this thing yields 20% and there’s like a Harvard professor that wrote the white paper and, you know, there’s all these credible VCs talking about it. And if I can get 20% on that, and then if I can borrow $10 billion to do that, like I can get really rich, really fast…

I think that the things that I always come back to are to really look out for people trying to credibly claim these astronomical return profiles or pretty high returns with very little risk, because you just have to think of it as the world is full of a lot of very smart, very competitive sharks who run very big businesses that really like getting rich. And if there was an opportunity to make 10% or 20% risk-free in front of you, they would’ve already taken that away from you and done it first. And what it means if you see something like that is that it’s not real, you know, and there’s either some kind of fraud or there’s some kind of extraordinary risk that you’re not seeing. You have to be really wary of extrapolation.

You have to really be very skeptical of overly complex investments with non-transparent sources of return, right? Where people are trying to tell you, this is really good, because it’s really smart and it’s really complicated. And I know you don’t totally understand it. And you have to also be ready to recognize the psychological tricks that the investment world plays on you. Again, a lot of these things, it seems like it should be so obvious, but it’s not, right? There’s a lot of laundering of credibility, right? Legitimization of investment schemes by the backing of authoritative people or people you feel like you should trust. Because especially at peak cycle, people are very willing to lend their credibility to, you know, things that are gonna get them paid. You know, think of, again, the Harvard business school, professors writing the white papers for Ponzi schemes, like Anchor. Using social consensus and group psychology to normalize ideas and narratives and to pressure people to stop asking questions, you know, big Twitter mobs telling you you’re an idiot and you’re not gonna make it, right? And then very much so kind of scarcity or immediacy, like, ‘look, you’re gonna miss the boat. You don’t get it. And it’s like time to get on board or miss the boat.’ 


Despite the “money printer goes brrr” meme, low rates are not just a “dial that determines the level of speculation”. Although the narrative effect of the meme itself may have been a contributor

Benn: I think there are a lot of different contributing factors. And I think this is usually how things go. So I would say commentators tend to focus very, very heavily on low interest rates and quantitative easing and so forth. I mean, I think there’s a role for cheap money on the margin, especially in areas like real estate. But I think that really the direct role of low interest rates or QE here is very overstated. I mean, you look at the history of interest rates and quantitative easing geographically around the world for the last 20 years. Japan’s been doing QE for a very long time. I mean, we had low interest rates in the US for a long time. Previous manias weren’t necessarily associated with low interest rates. And one way to think about it is like with tech stocks going up a hundred percent a year and crypto tokens paying 20% yield. Like if you have to pay 3% or 4% to get leverage versus 1%, I mean, it just doesn’t matter if you are in the frame of mind, but like you want to do those kind of investments. I mean, the idea, and I joke about this on Twitter a lot, but yeah, the idea that like the Bitcoin folks would’ve just bought a bunch of Treasuries if Treasuries paid 6% or 7% is, on its face, ridiculous. And they would all tell you that.

It’s much more about the collective perception of relative risk and return and the growth of narratives justifying that perception, and then the broad socialization of more and more people into that perception. I do think where rates and QE comes in is perceptions of the role of cheap money coordinating investor expectations or kind of the ‘money printer go brrrr,’ you know, ‘buy everything’ meme. I think that’s actually important. That’s probably much more important than the direct impact of rates being a little bit lower and being able to get leverage, right? Is the contribution to the narrative that like all of this stuff just has to go up.

And I do think, I come back, you know, ultimately, and you pointed out other phenomena, I do think what has been important when you look specifically at retail options trading and a lot of the aggressive market participation that has showed up over the last few years, I do think the pandemic played a real role. I think that there’s a self-reinforcing dynamic to the social internet aspect to it, right? It’s not just people sitting at home in their brokerage account doing stuff by themselves. They’re increasingly in Discords or on Twitter or in some kind of social group or Reddit’s WallStreetBets. That’s like a community that’s fun where people talk about investing and they teach each other stuff and they, you know, they overcome the activation barrier of like, ‘how do you open a brokerage account? And how do you put money in it? And how do you actually click a button to trade?’ and all this stuff. And like once that’s there and once it’s a fun entertaining social thing, and it has a group gambling component to it, it becomes much easier to kind of get out of control and much longer lasting, right? Then, you know, it has all the power of the engagement, you know, clickbait of the internet associated with it. And I think that was really important.


The froth probably isn’t over

Benn: I think there’s plenty of craziness left. So I think both in crypto and in tech, there are many funky crypto tokens that are down 90%… but whose market cap is still billions and billions of dollars. And you know, they’re just jokes, right? So I think, you know, it’s hard to argue that that stuff doesn’t eventually go to zero. And then within what you would think of as like the ARK basket and, you know, the Goldman Sachs index of speculative software stocks, again, there were a lot of companies that experienced valuations in private markets and sometimes eventually in public markets of $30, $40, $50 billion, that just, it’s very hard to see them ever being worth anything. And a lot of those names are down a lot. They’re down 90%, but they’re still worth $5 billion or $3 billion. The things that have gone down the most are not always the cheapest. Right?

Sometimes they are, but in this case, I think that’s not obvious at all. I think there’s a great Kindleberger quote that the period of financial distress is a gradual decline after the peak of a speculative bubble that precedes the final and mass panic and crashing, driven by the insiders having exited, but the suckers/outsiders hanging on and hoping for a revival and then finally giving up. And it feels like that’s where we are. Sort of the insiders have been kind of quietly and steadily getting out. There’s apparently still quite a lot of demand, for example to sell shares in the secondary market of startups that are down 90%, right? You’ve got founders that on paper briefly were worth $20 billion, and now they’re worth $2 billion. And they’re like, you know what? That’s still pretty good. I want to see if I can turn that into cold, hard cash.


Are you optimistic that there will be like a cohort of you know, people who maybe got scarred or burned, but also learned some sophisticated stuff that will have a good combination of skills and knowledge coming out of this period?

Benn: I really hope so. I mean, I’ll tell you 10 or 15 years ago, I remember working with a good friend who’s now a VC on ideas for investor education. And how do you get people to even care about financial markets and investing and pay attention? Because back then it was totally impossible to get the young generation to even think about this stuff. And it’s really good that individual investors have gotten interested in investing. And I feel like, you know, sometimes I hope I don’t give the opposite tone, right? Because it’s so easy for people to get tricked and all this kind of stuff. But I think a lot of times people have to learn from their own experience. It’s just really hard. I mean, you know, Hegel said we learn from history that we just can’t learn from history. People have to one way or another go through their own experiences of mistakes and things not going well to really internalize lessons. And what I really hope is that people are able to take hold of those lessons and, you know, stay interested in financial markets and stay interested in investing and learn how to make good decisions as opposed to feeling so scarred by it that they just walk away.

5 Ideas By Matthew Clifford on the Infinite Loops Podcast

Introduction by Infinite Loops host Jim O’Shaughnessey:

Matt is the Co-founder & CEO at Entrepreneur First, and Co-founder & NED at Code First Girls. We talk with Matt about:

  • Internet in an era of “dampened variance”
  • Increasing democratic participation
  • Bull and Bear case for creativity
  • What Matt looks for in people before investing
  • Role of geography in entrepreneurship
  • And MUCH more!

Episode link

(Bold is mine)


  1. Variance dampening institutions

    Matt flips Jim’s question by explaining that “weird” has been the default until the last few hundred years

    Jim O’Shaughnessy: Why has the world gotten so fucking weird? So, I like weird. I’m an anomaly, I guess, and because I’m 61 and I love weird, but I’m super excited about what’s going on. I think that we are on the cusp of a golden age, not just in one sector, but in many, many sectors. But to get there, you have to go through some turbulence. You basically tell us that we are in the middle of this turbulence. And so what I’d like you to do is explain your thesis for what got us here, what should we expect?

    Matt Clifford: That’s a big question. I think the way I would think about this is if you zoom out, maybe the first question should be, how did the world get to be not weird? Why should we take that the natural state of affairs is non-weirdness? One way of thinking about this is to say that modernity, however you want to define that… let’s say the last 250ish years, is really about the triumph of non-weirdness. It’s about constant or apparently constant, apparently unstoppable motion towards the reduction of variance in our lives. And if you want to get out of that Hobbsian nightmare, you need to find ways to reduce variance. Liberal democracy, incredible reducer of variance. No longer do you hand over power by having a war or an assassination, you have an election. It’s reduced variance. Monetary economics is a way to tame the business cycle over some period of time. Reduced variance, reduced variance… we’ve developed all these institutions, the rule of law, constitutional rights, all these things make life somewhat more predictable. And so for most of, let’s say, the second half of the 20th century post Second World War, anyone who lived in, for one of a better term, the west, had a life of far less variance than say 3, 4, 5, 10 generations before that. You could call that the triumph of modernity. And then something happened in the midst of these fantastic variance dampening institutions, we somewhat accidentally unleashed the mother of all variance amplifying institutions, and it’s called the Internet. And what the Internet does, is it selects the weird and amplifies it. And so I’ll stop talking, but I think the brief history of the last decade is that we suddenly introduced this variance amplifying institution right into the middle of our somewhat peaceful variance dampened lives and chaos has ensued.

  2. The internet as variance amplifier and ambition

    Matt Clifford: One slightly provocative framing would be that the rise of modernity, the rise of variance dampening institutions was really bad for ambitious people. It was really good for the average person and if you’re a utilitarian, maybe on balance, that’s a trade that we want to take. But why is it bad for ambitious people? Because one of the main ways to reduce variance is to stop a Napoleon invading Europe every time they want show you how smart they are. Insert your favorite example here. And so the apotheosis of this, if you like, is the idea of the career. Napoleon, didn’t set out to have a career. He wasn’t looking to impress his boss. And yet if you look at what the 20th century was about from the perspective of work and ambition, it was really about having these more or less formalized tracks for ambitious people to climb. And it doesn’t mean that if you got to the top of that, you couldn’t be wealthy, powerful, insert your favorite adjective here. But what it did mean was that we more or less knew what someone at the top of that hierarchy could do and what they couldn’t do. In the age of variance amplifying institutions, what you see is the Internet selecting for people that are not willing to have careers. Like if you take Donald Trump, Elon Musk, these are people that were not built to have 20th century careers. They were not built to make their boss look good, to fill in the engagement performance review card at the end of every project and climb up the ladder. And so, one of the reasons… it’s a slightly different point, but one of the reasons I think there’s been such an enormous Renaissance of founding entrepreneurship. I mean, it was partly technologically determined. Partly it’s just that if you’re a super ambitious person today, you actually look back historically, I think, and look, well, actually it was possible to do more as an ambitious person. It was possible to find more leverage, to have fewer constrains in the past. It was then a period of about 50 years, like the great moderation, if you’d like, where a lot of that was constrained. And again, I’m not totally against that, despite both being an ambitious person and spending my entire career, trying to amplify the ambitions of ambitious people. I think in some ways it’s a good thing for the world, but we’re now in this new era where Elon Musk can tweet what he likes and send the pigeons flying and several regulatory agencies flying. Or Donald Trump can be the most powerful man in the world and do what he likes. And these are examples of the Internet as sort of a anti-career institution. An institution that breaks a lot of the assumptions of what ambition should look like.

  3. Bull vs Bear view of the internet as a net good

    Matt Clifford: You can make a bull and a bear case for where we are today in terms of how do we think about allowing each human to fully express all aspects of who they are as you were describing in this sort of internet age. I think the bull cases, well, actually, what you’re talking about, you already alluded to this earlier in the conversation you’re talking about. How do you let each person find hierarchies in which they are comfortable in which they can express who they are, but they have a chance to compete and to rise given that in the world at large, it’s very hard to do that. It’s most of us, if we constrained to the physical world, we’re just going to be in state hierarchies where we always feel unhappy. One of the great things about the internet is it allows these extraordinary niches of interests to come together where, I could be working minimum wage in a job that I hate, but maybe I’m in the top three, most celebrated commenters on this sub Reddit for this interest that I have. And I’m not trying to pretend that we don’t need to do something about the material conditions that person’s life, right. That’s clearly a different question, but there is an extraordinary, if you think about almost the equivalent of biodiversity for ecosystems of interest, genuine hierarchy, diversity, you can be someone within a particular group. I think the internet is the greatest force for that, that there has ever been. And you can even extend this idea into this very fashionable idea of the Metaverse. We can imagine and creating world, whole worlds in which people can fulfill their ambitions and like the fullness of who they want to be in a way that is less damaging to others potentially. I mean, again, like you could say, that’s a very bullish case. There’s lots to critique in that, but there is something about the idea of virtualization as a way to enable many more people to achieve what they want to achieve, because we move from scarcity to abundance or potentially to abundance. Again, lots of footnotes on that, whether actually the metaverse as it is to actually emerging will permit that. I think the bear cases well, actually what the internet does is exposes us to, as you’ve already said, like a global competition where previously there was a local one, it sort of amplifies inequalities rather than dampening them. And so, really, I think the question is, can we get to material abundance quickly enough that the sort of satisfaction of people’s holistic needs beyond the material world is enough where actually being, finding your tribe on the internet is enough because we have co selected, successfully created enough material, abundance that people aren’t worried about where the next meal is coming from. I think if we can, I actually feel very optimistic about the internet as a way of providing outlets for exactly what you’re describing.

  4. This bit reminded me of the efficiency vs equality trade-off in economics (see tweet)

    Jim O’Shaughnessy: That’s just the way networks work. It’s not just human beings, it’s any complex adaptive learning system. The nodes that are finding the right answers, get the most connections and the nodes that are not finding the right answers die. And so, I’ve really had to sit and think about that one for a long time, because, so for example, I changed my opinion about universal basic income, because I think for the first time, really in human history, there is going to be a group of people, and the part I underline is through no fault of their own, who have a harder time adjusting and thriving in this new environment. And so your point that you just made, we can’t have them worried about where their next meal is coming from, because that human is a desperate human and desperate humans are destructive humans and violent, and listen, you don’t really even have to know too much about history to understand that [Kris note: notice this is a pragmatic not moral argument]. So there’s a lot of reasons why, universal basic income is not liked by both sides of the political spectrum in person. But I think that the term that I’ve often used is symbol manipulators. So I am a symbol manipulator. I don’t make anything with my hands. And so if you look at the Forbes 400, the list of the wealthiest people, if you look at the original one in 82, it was all physical things. That generated wealth, it was real estate, it was steel. It was, shipping and or inherited. In fact, I think the majority of the list was inherited sort of this dynastic wealth being passed down and down, which creates an aristocracy, whether you have a formal one or not. Look at the list today, there are, there’s virtually no one on that list who is not a symbol manipulator. Right. I personally think that’s great. You know what? I love Amazon. I love the fact that I can get any (beep) thing I want in at most two days. And if I’m in the city in 15 minutes, right. So I like that, but we do have to figure out a way, which, and I guess maybe it’s just like these conversations bleeding into higher conversations, bleeding in, because without that there could be chaos that we don’t come back from.

    Matt Clifford: Totally. Well, I think its worth sort of thinking about what are the objections that we might have to growing economic inequality and I’m not going to be comprehensive because I’m sure there are people who would have others, but I think one is actually political as though with great economic inequality, be kind of calms, great political inequality. And most of us have an instinctive sense that how rich you are, shouldn’t be the measure of political power that you have. And most of us have a pretty intuitive affinity for the idea of one person, one vote. And so, I think there’s like a set of things that we should worry about as people gain wealth, particularly extreme wealth, does it mean too powerful? And there’s then like a sort of almost like aesthetic thing of what do we do about a world where, like Bezos can fly to space and there are people that can’t eat or whatever. I call that aesthetic because I think it’s, you could frame it as justice, but I think it’s just, for most of us, the idea of sort of waste or maybe that’s actually a bad example that, but frivolous consumption versus like people not being able to eat that feels wrong. And then I guess there’s a thing about sort of lock-in, does it get to the point where a sufficient level of economic advantage closes off the ability for others to ever compete. Because I think most of us have an instinct that dynamism is good and mobility is good. Now I think what’s interesting about all those three things is they’re not actually in my view, objections to economic inequality per se. They’re actually to the conditions within which it occurs. So if we can find ways to have our politics less influenced by economic power, if, as you’ve already said, we can get to the point of economic abundance that no one starves however many rockets, Elon and Jeff flying to space, whatever. And if we can figure out what are the rules of the game, that means that however wealthy people become, you don’t have to be them or be related to them to be successful. Now I’m not saying they’re easy problems, but I think that sometimes, you see people default, the idea that we have to break the underlying creators of variance, the underlying economic engine, that’s allowed people to build in Amazon or a Microsoft or an apple or whatever. I think that’s the wrong instinct. I think it comes back to this, how do we make sure error correction actually functions? Well, we can’t have any of these things that are irreversible, we don’t want to have a static society. And so I would, I think people like you and me should be using our energy to think about how can we craft the rules of the game, such that we still allow people to build enormous companies and therefore enormous fortunes, but they don’t break the system. And it’s the second bit that I think we sort of let go of and I think they’re, without getting too political, I think we are missing a trick. If we jump straight to the idea that there’s something intrinsically broken, if someone becomes a billionaire that that’s not what we should care about, what we should care about, or what are the consequences of that. I don’t think every billionaire is a policy failure, but I do think that if only the children of billionaires can become billionaires, as you were saying, if it, then that’s a policy failure. And so I think it’s how do we harness wealth creation in a way that doesn’t violate those things that we kind of, most of us in intrinsically care about.

  5. Moral luck (a parallel to kindness as epistemic humility)

    Matt Clifford: The idea of moral luck, meaning I think it’s very easy to go through life feeling that you deserve kind of various things, although you don’t deserve various things. Most of us have an intuition that we want to live in a world where people get their just desserts one way or another. But I think, we’ve talked a lot in this conversation about sort of epistemic humility, the idea that we don’t really know anything. I also feel there’s a kind of moral luck humility, which is like, we don’t really get to choose who we turn out to be in many, many ways. And I think if that makes us a little bit more humble in the face of the suffering of others, the success of others, the ups and downs, a little more tolerant of like, what are the, you know… Go back to this idea of error correction. What are the systemic things that we need to prevent anyone falling too far off the edge in one direction? I believe in a world where, to my innovation point, anyone should be allowed to try anything. And if they build something phenomenally valuable, they should be allowed to reap the rewards of that in a pretty unconstrained way. And I think the offsetting force of that is the reminder that the fact that they were the person that could do that, that’s nothing they deserved. And it doesn’t mean that they shouldn’t benefit from it, but it should bring with it a humility that allows us to design institutions and systems that mean that none of us can fall too far. [Kris: Super resonant because you know how I feel about the word “deserve”].


The rest of the interview talks about qualities Entrepreneur First looks for when funding founders. The qualities themselves are not surprising but the list is surprising because of how mundane it is. And that is actually uplifting. They have tremendous data on founders and are quite certain it takes at least 6 months of close observation to actually know if a founder will be effective (even after 3 months the data is noisy!). The implication is you should widen the top of the funnel, make low cost bets on many founders which is in direct opposition to overly strict selection criteria. I’ve written about this idea and the math behind it in:

  • There’s Gold In Them Thar Tails: Part 1 (13 min read)
  • There’s Gold In Them Thar Tails: Part 2 (24 min read)

Part of widening the funnel is by expanding geographic search. Matt shares this story of Iranians in Singapore:

It’s an amazing story is that if you look at the list of nationalities by how frequently we’ve invested in people of that nationality, it’s quite surprising. I guess in some places, not that surprising. Like in Bangalore, it’s nearly all people who are Indian. But in Singapore, it’s quite surprising. So, actually in Singapore, the number one nationality we fund is Indian. The number two is Singapore. I think third might be Indonesian. I forget. But in the top four is Iranians, people from Iran. That’s kind of crazy, right? Because how come there are so many Iranians in Singapore? And the answer is there aren’t. I think there’s only about 250 Iranians in Singapore, and we funded about 50 of them. Why is that? Well, basically because if you are an incredibly smart, ambitious Iranian, the single biggest drag on your life outcome, sadly, is that you were born in Iran. And so getting out is very important for a certain type of person. And in particular, if you skew technical, which is a lot of what we do, good luck getting a visa these days to study, I don’t know, nuclear physics in the US or whatever. Maybe slightly facetious, but not very. If you write a list out of the world’s top universities and start to cross off the ones where Iranian grad students will struggle to get a visa, the number one university left in the world is the National University of Singapore, which is actually a very good university anyway. It’s top 20 globally even before you do the crossing out, but it’s the number one that’s very accessible to really smart Iranian science grads. And so there’s this very tight knit community of exceptionally smart graduate students from Iran in Singapore. And we’ve ended up funding as a sort of nontrivial proportion of them. Now, why do I tell that story? Because to me, it points to the ability to overcome geography without remote. Now, actually I’m very bullish on remote as an overall system. Lots of our companies are remote first. I think it’s very possible to do. But I think for the act of building, co-founding teams from strangers, which is the core of our IP, if you like, we really believe in the power of the physical for that, at least for now. So I think watch this space, probably some experimentation to come on that, but we think there are lots of ways to transcend geography while retaining the sort of physicality of what we do.

5 Ideas by Eric Crittenden on the Mutiny Investing Podcast

Mutiny founder and host Jason Buck’s introduction:

In this episode, I talk with Eric Crittenden, Founder and Chief Investment Officer of Standpoint, an investment firm focused on bringing all-weather portfolio solutions to US investors. Eric plays an active role in the firms’ research, portfolio management, product innovation, business strategy, environments and client facing activities. He believes using an all-wealth approach is the most effective way to prepare for a wide rage of market environments, while producing meaningful investment returns with limited downside risk.

Eric has over 20 years experience researching, designing, and managing alternative asset portfolios on behalf of families, individuals, financial advisors, and other institutional investors. Eric and I talk about circuitous paths with multi-year dead-end rabbit holes, simplicity can be the ultimate sophistication, what clients want, what’s wrong with the investing industry, and strategy scaling.

Episode link

All bold emphasis is mine.


  1. Investing opens your mind

    Jason Buck: Well, like you said, you don’t have to be overly prescient to talk about negative oil or negative interest rates. What I’ve always loved about macro trend is that you just follow price, right? And so if price goes negative, you just keep following it negative if that’s the direction of the trend. You don’t have to have any global macro narrative. And that’s the point, is you’re just offsetting narratives and people love narratives, so they didn’t like the idea that you said it could potentially go negative. You weren’t calling for it. You’re like it’s just within the realm of possibility. And I wonder, do you think that following trends for so long just opens up your mind that anything’s possible?

    Eric Crittenden: I think doing the research around it and seeing what actually happened. I mean, you can see with your own eyes what happened historically, like the sugar trade in the 1980s, where the price was below the cost of production. And the price didn’t actually go any lower, but you made a boatload of money being short because of the contango and the futures curve. Right? So today, you fast forward to today, and I talk to emerging CTAs or people that want to start trading their own account, they’ll do the same thing over and over. It’s always the same thing. They come up with all these filters to filter out trades and they say, “Well, if the price is too low, it won’t go short. If the price is too high, it won’t go long.” Well, okay, so one of these days you’re going to experience this phenomenon, and the greatest trade of the decade will be the one that your filter filters out.

  2. Breakouts vs moving averages

    I looked at many, many different ways to measure and identify a developing trend, and what I found, and you know this, is that they all basically pick up on the same thing. They’re just different ways of measuring the same thing. It’s like if there’s a wave coming in and you’re in Santa Barbara and you’ve got a guy from Hawaii and a guy from Oregon and a guy from California, and one guy says it’s four and a half feet, the other one says it’s five feet, and the other one says it’s four, they’re all measuring the same thing, they’re just doing it the Hawaiian style or the Oregon style or whatever.
    So there’s not a lot of benefit from diversifying your entry/exit style, moving average crossover, breakout. There’s a whole bunch of different styles. That being said, you could develop a strategy that uses a moving average crossover that doesn’t have a lot of … in other words, they’re not all created equal.

    I like breakouts. So I’m kind of in the minority there. I like breakouts because they’re pure trigonometry. They’re just triangles, essentially. And you know the price that would force you to get in, and then your stop-loss is some other price, and you know what that is. And you know what both of those prices are every single day. And that means you can calibrate your risk. You can lean on that. We call that the risk range. So I know approximately how much risk I’m taking to market because I know what both of those prices are. When it comes to a moving average crossover, I don’t know what price is going to force those two moving averages to crossover without doing some really advanced, or not advanced but tedious math to come up with a bunch of different scenarios about how they might crossover in the future. So because they all basically pick up on the same thing, but the breakout approach is very clean from a risk management perspective, I gravitate towards that, and I didn’t see a lot of benefit from diversifying meaningfully beyond what I’m already doing when it comes to entries. [Kris: This is resonant with what I saw at a fund that ran a breakout trend strategy.]

  3. Approach to risk management depends on whether you come from the relative vs absolute return crowd

    Jason Buck: Is like CTAs have always been pointing out, or macro trends specialists, have always pointed out that this is what actually matters is your aggregate drawdown risk, not your volatility metric. But that just doesn’t seem to translate well to everybody else, and everybody still seems to care most about sharp ratios versus max drawdown.

    Eric Crittenden: I think in the securities world, stocks, bonds, mutual funds, it’s historically been a relative game rather than an absolute game. In a relative game, anytime you sell, you’re putting yourself into a position to get left behind. If you get left behind, it’s game over for you, everyone loses confidence in you. Futures guys, derivatives guys, live in a very different world or grew up in a very different world where it’s all about survival. Some of these guys are using leverage and quite a bit of it, so it really was essential that they control the amount of risk they’re taking. So, and when CTAs is drone on, and on, and on about risk management, it drives advisors crazy, because they don’t even really know what you mean when you say that.

    [Kris: I’m biased but I agree with this from my life as a derivatives trader. Risk management is the #1 focus, but I had never thought about why the beta world might not think that way]

    It’s not that important in their world, because a balanced portfolio of stocks and bonds, it’s more important to not manage risk, because you don’t want the taxes, you don’t want the turnover, and you don’t want to get left behind. You can look at these psychological studies, and I’ve had people tell me it’s okay to be down 50% once every 10 years, as long as the market’s down 45, or 50, or 55%, I won’t lose my clients. But if I manage my risk along the way, the way you guys do, and I’m up 20 when the market’s up 25, and then the next year I’m up six when the market’s up 11, it’s game over for me. That’s unfortunate, but that’s how it is in the securities industry. So, but when you’re looking at alternatives, and in particular all-weather investments, frame the right way, that all goes away.

  4. “All weather” and uncorrelated risk premia

    Dalio coined that term or made it popular and he sometimes will say, “You need upwards of 16 uncorrelated return streams,” do you think that’s even possible?

    Eric Crittenden: No, it’s not, and I like Dalio, I like his writings, I modeled a lot of what we do off of what their firm did in the ’80s. So, I have a lot of respect for what he achieved, and how he did it, the how is very important. That being said, anyone with a plain vanilla copy of Excel can use a random number generator and realize that three uncorrelated variables are pretty much all you need to be the best money manager out there. So, I don’t know where the 21’s coming from. I’ll tell you hit on something though that there’s only one thing in this world that actually that I’m jealous of right now. There’s one risk premia out there that I can’t source, but it would be so valuable if I could.  So, I’m really just getting three, and I feel like that’s all we need, it’s the best I can do. I think it solves a lot of problems for people, but there’s one more out there that I think is big and sustainable, but you can’t get it from Phoenix, Arizona, and that is the market-making style risk premia. Where you need economies to scale, you need poll position, co-locate your servers, you got to be big, and have a solid network. You got to be basically like Amazon or Costco, where you can just muscle your competitors out of the way. You’re like, “Nope, get out of here, this is my real estate, and I’m doing…” It would be so valuable, but there’s just no way we could pull it off.

    Jason Buck: You said three return sources, so eliminate the three return sources that you believe you have?

    Eric Crittenden: So, I feel like there’s capital formation markets, like stocks and bonds, which are kind of a one-way street, the risk premia is kind of a one-way street. I mean, the bulk of the risk premia is your long stocks. The futures, whether it’s metals, grains, livestock, energy, these are risk transfer markets and risk transfer markets are different than capital formation markets. I feel like risk transfer markets, you need to be symmetrical, you need to be willing to go long or short, because they’re a zero-sum game. They have term structures, so they’re factoring expectations, storage costs, cost of carry, all that stuff. And then there’s the risk-free rate of return, which used to be a great way to kind of recapture inflation, it’s not so much anymore. We can get into that later on, it’s a fascinating time to be managing money, because there’s a huge gap between inflation and risk-free. But, historically speaking, those are the three that I think makes sense, especially in the context of an all-weather portfolio that uses futures to get its commodity and derivative exposure, because it leaves a lot of cash lying around. So, to go source that risk-free rate of return costs you nothing, there’s no opportunity cost, because you were going to be sitting on that cash anyways.

    When I look at all the different risk premium on this computer or the one behind me, historically, I see those three blending together more beautifully, and there’s other ones out there, they just don’t move the needle for me. Things that are related to real estate, credit, they just all have that same trap door risk that the equity market has when the equity market’s going down. So, and then the rest of the time they’re expensive, they’re tax inefficient, they’re illiquid, and then they disappear on… Sometimes they get crowded, I mean, they just cause more problems than they solve. That’s how I feel about corporate bonds, credit, all that stuff. I mean, I wish there was something there, I know other people strongly feel that there is, but I’ve looked at the data until my eyes are blurry, for decades, and I don’t see it.

  5. Capital formation vs risk transfer markets

    This is an important concept to me, because it goes to the point of why I do what I do, or why I think that macro trend oriented approaches expect a positive return over time, because the futures markets are a zero-sum game or actually, a negative-sum game after you pay the brokers, and the NFA fees, and all that stuff. So, in a negative-sum game, you better have a reason for participating. For you to expect to make money, you better be adding something to that ecosystem that someone else is willing to pay for, because somebody else has to mathematically lose money in order for you to make money. So, in studying the futures markets, and I’ve been on both sides, I’ve been on the corporate hedging side, I’ve been on the professional futures trader side.

    I believe I understand who that somebody is, that has deep pockets, and they’re both willing and able to lose money on their future’s position. A trend oriented philosophy that’s liquidity weighted is going to be trading opposite those people on a dollar-weighted basis through time. It does make sense that they would lose money on their hedge positions, I mean, in what world would it make sense for people who hedge, which is the same thing as buying insurance, to make money from that? It makes no sense, that would be an inverted, illogical world. So, anyone who’s providing liquidity to them should expect some form of a risk premia to flow to them. It’s just up to you to manage your risk, to survive the path traveled, and that’s what trend following is. I don’t know why that is so controversial, and more people don’t talk about it, because I couldn’t sleep at night if I didn’t truly believe that what we’re doing deserves the returns that we’re getting.

    Jason Buck: CTA trend followers, or whatever, just they don’t really know how they make money. They’re like, “It’s trending, it’s behavioral, it’s clustering, it’s herd mentality, and that’s how we make money.” You’ve accurately portrayed it as these are risk-transfer services, speculators make money off of corporate hedgers. But the only thing I would push back, and I’m curious your take on this, is like you said, zero-sum game or negative-sum at the individual trade level. But when we look more holistically, those corporate hedgers are hedging their position for a reason, and it’s likely lowering their cost of capital for one of the exogenous effects. So, my question always is, is it really zero-sum or negative-sum, or is it positive-sum kind of all the way around? In a sense that the speculator can make money offering these risk transfer services that the hedgers are looking for that liquidity, and then the hedgers are also… If we look at the rest of their business, they’re hedging out a lot of their risks, which can actually improve their business over time, whether that’s cost of capital, structure, or other exogenous effects.

    Eric Crittenden: Absolutely, I wish I had… You did record this, so I’m going to steal everything you just said. In the future’s market, it’s negative-sum. If you include the 50% of participants that are commercial hedgers, it’s no longer zero-sum. But most CTAs, and futures traders, and futures investors don’t even concern themselves with what’s going on outside the futures market. So, but if you pull that in and look at it, you can see, or at least it’s clear to me, we’re providing liquidity to these hedgers. They’re losing some money to us, and the more money they lose to us, the better off their business is doing, for a variety of reasons. Tighter cash flows, more predictable cash flows results in a higher stock price, typically. But you brought one up that almost no one ever talks about, and that is if they’re hedged, their cost of capital, the interest rate that they have to pay investors on their bonds is considerably lower. Eric Crittenden: Oftentimes, they end up saving more money on their financing than they lose on their hedging, and they protect the business, and they make Wall Street happy at the same time, so who’s really the premium payer in that, it’s their lenders? So, by being a macro trend follower in the future space, the actual source of your profits is some bank that’s lending money to corporations that are hedging these futures. So, it’s the third and fourth order of thinking, and you can never prove any of this, which is great, because if you could prove it, then everyone would do it, and then the margins would get squeezed.

    [Kris: As a commodity options trader, this framing is spot on. I was typically trading with flow that was constrained or price-insensitive. Corporate hedgers must hedge because of the covenants in their loan financing. I had never thought about the edge being spilled in the option market is coming from the lenders ultimately! I guess if we follow that logic even deeper it’s the bank shareholders that are giving up expectancy by requiring less loan defaults and it’s an open question as to whether the hedging activity is worth the lower cost of capital at the bank share level]