Notes from The Rebel Allocator

The Rebel Allocator
by Jacob L. Taylor

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Summary

Using a Socratic device, the author creates a Buffet/Munger composite doppelganger named Mr X to help guide Nick, a young left-leaning journalist turned investor. Nick is disillusioned by the business world from his seat at Big Rock, a cartoon of a private equity firm whose short-term, scorched earth practices give capitalism a bad name. Through his regular lessons, Nick learns the principles of sound capital allocation and sees them applied within billionaire Mr X’s nationwide burger chain. The book covers a broad array of ideas that underpin business and strategy, while its narrative structure makes the lessons more enjoyable and practical than the dry texts that typically teach these topics.

The Profit Constraint

Apply this: revenue – profit = expenses aka pay yourself first.

• Yarak: “hungry but not weakened”
  • A bird in this state is the purest expression of its genetic capabilities.

3 Key qualities in employees

Integrity, intelligent, energy

• 2 out of 3 will do so long as you have integrity!

A compass for what to focus on

4 hours a day spent on something that will make other things easier or unnecessary

Zero-based budgeting

Every year budget items are subject to a ‘delight’ test. If the expense doesn’t delight the customer it’s non-strategic and subject to trimming. Don’t paint the (unseen) fourth wall.

Effect of compounding improvement

365 days of 1% improvement is 37x return

Iron Law of Economic Survival

Cost, price, value triangle (straws model introduced in ch 19)

1. Cost is true economic cost not accounting cost.
2. Price can be based on lifetime revenue.
3. Value is subjective,context dependent, and variable.

• Trade-off between profit (price minus cost) and brand (value minus price).
• By flying under the radar with lower profits you may be able to store brand in your customer’s mind.
  • Profit would alert competitors and regulators! Brand is poorly measured.
  • Me: Interesting to think of underpriced companies as those storing economic value in their brand which exists in the customer mind.
  • Net promoter score surveys compare the percent of people who are superfans vs those who are ambivalent or detractors

Customers don’t want a quarter-inch drill bit they want a quarter-inch hole

A business should consider its competition broadly with the criteria of who else fills the need. (ie Southwest airlines early on was competing with Greyhound for short trips).

Understand your edge

​Franchise model allows parent company to do what it does best: source ingredients, craft customer experience, marketing. The franchisee is really in the real estate business. (in the 4 seasons model this is same). Real estate unlevered returns are close to inflation while the fictional McDonald’s is closer to 12%

Effective capital allocation requires evaluating all options

Mr X looking at an empty plot poses the question, how many ways could we build a restaurant?

Student answers buy a plot, hire a construction crew and build one. But there are more strategies:

1. Buy land and erect building later
2. Buy land and wait
3. Buy competitors store and convert
4. Buy public stock
5. Buyback your own stock
6. Just waiting

• Your next best option is your opportunity cost. Important to not define menu too narrowly
• If you were trying to improve the experience of traveling across the country one option is to fly faster. This will cost substantial additional fuel and maintenance. Installing TVs on the planes may provide a better ratio of benefit to cost to the consumer.

2 kidneys for a reason

Tradeoff between efficiency and survival: virtue of cash and less leverage

Trees don’t grow to the sky

There are feedback loops which lead to mean reversion

The virtues of efficient capital allocation

“Good capital allocation means doing more with less to create happier customers. The pressure to continually deliver value is one of the wonders of the free market. Roll up all of those customers into society at large. When you are able to provide value for the least required cost, you free up resources that can go toward adding value somewhere else.

Imagine that inside you are all of these different locks. Each lock represents one of your wants or desires. You have a lock for food, a lock for shelter, a lock for water, a lock for the opposite sex. Now imagine that each capital allocation project creates one key. Ideally, the entrepreneur knows the lock their key will fit beforehand. A restaurant provides you food, a hotel gives you shelter, shoes protect your feet. The role of business is to use the least amount Of resources to create the key that fits a certain lock. Doing a proper job spares resources to create more keys for other locks. In this sense, profit should be celebrated as a signal that an entrepreneur provided value while consuming the least amount of resources to do so. When all of society’s businesses are properly allocating capital, more locks get keys, and we’re all better off.

That’s all technology really is: the means for us to turn more locks using fewer and cheaper keys.”

When simple models outperform experts

Simple models thrive when:

• Problem is ill-structured and complex.
• The information is incomplete, ambiguous, and changing.
• The goals are ill-defined, shifting, or competing.
• The stress is high, due to time constraints and/or high stakes.

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