The Unrepentant Recalcitrant

Lessons for an accidental entrepreneur

Archive for the category “Allegory”

Charlie Munger on Inverting: The Rose and it’s Thorn

Back in the last ice age, when I was an intern at my hospital, green both in experience and complexion (it was my first night on call…and I was, lets say a little nauseous with fear!), I asked my resident “ Are you sure you should be leaving me alone with sick people who might die?”

 

Yeah, confidence was my middle name as you can tell.

 

My resident gave me some of the best advice I have ever got.

 

“ Worry about whats going to kill them and take care of it urgently. Keep them alive at all costs. Everything else will take care of itself.”

 

Fear and good advice concentrated my mind like nothing else, and I learned to worry about “The Dreaded Downside” (in this case, death).

 

Fast forward to today and my behavior has been modeled this way:

 

1. Imagine a scenario that requires action.

2. Imagine what is the worst possible outcome(s) of this scenario.

3. Ask yourself how you can prevent/mitigate/evaluate and control such a situation.

4. Put plans in place for this.

5. Initiate said plans if the scenario materializes.

6. Watch how the alternative best case scenarios take care of themselves.

 

Its been an unpleasant surprise to me just how few people understand this concept.

 

People think rosy thoughts and don’t want to consider the thorns that come with the roses.

 

Big mistake!

 

Charlie Munger and Warren Buffet have spoken about this thought process when evaluating investments.

 

They call it “inversion”

 

Lets say you are looking at company A (or starting a company called A!)

 

Something about this has attracted you and you believe there is a reason to invest, right?

 

This is the “Rose”

 

What could happen to your thesis that would make this all come crumbling down?

 

These are the “Thorns”

 

Play out these scenarios. Understand their likelihood, understand how you would recognize them and take corrective action.

 

Once you have this information, you are better equipped to make decisions and more likely to get the desired outcome or to at least limit downside loss.

 

If they don’t materialize, and your thesis becomes correct, nothing more is required!

 

Munger does this each time when looking at an investment to fully understand his risk and whether the investment should be made.

 

Its the same for managers in companies and for entrepreneurs from a decisions perspective.

 

How do I know this works?

 

How successful are Munger’s stock picks?

 

I thought that would persuade you!

 

What I find most interesting in the preceding discussion is how universal and singular the truth is. 

 

It cuts across disciplines and scenarios and is always axiomatic*.

 

This is the universal thread that I attempt to point out in my blog. It’s all connected.

 

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*Axiom: That which does not require a demonstration of proof. Contrast with a “theorem” which has been proven or a “hypothesis” which awaits proof.

 

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Arjuna and The Eye of the Sparrow: Without Focus, There is No Success

Arjuna and the Eye of the Sparrow (From boloji.com)

Arjuna and the Eye of the Sparrow (From boloji.com)

Another story from the Mahabharata.

Today my story is even older than the story of Abhimanyu (https://unrepentantlyrecalcitrant.wordpress.com/2013/10/02/the-story-of-abhimanyu-why-you-must-have-an-exit-strategy/).

It’s a story from the childhood of Arjuna, Abhimanyu’s father.

Arjuna, a warrior prince, and his brothers and cousins are being trained in archery and warcraft by the great teacher Drona.

Drona assembles the young princes together, places a wooden sparrow on the branch of a tree and asks the princes to aim for the eye of the bird.

He asks one of the princes to come forward, draw his bow and then asks, “Tell me what you see?”

The prince responds, “I see the bird, the branches and the tree.”

“What else do you see?” asks the venerable teacher. “Tell me everything you see”.

“I see the sky, the clouds, the sun..Oh Drona” responds the prince.

Drona then asks the next prince in line the same question.

“What do you see?”

“I see the bird, the tree, the sun and the skies..Oh Drona.”

One by one the princes are asked the same question and they describe everything they see.

Then its Arjuna’s turn.

“What do you see boy?” asks Drona.

“Blackness, my teacher. I see blackness”.

“What else do you see?”

“Nothing but blackness, my teacher. That is all I can see.”

Drona presses Arjuna. “What is this blackness Arjuna?”

“It is the blackness in the center of the eye of the sparrow, my lord. I can see nothing else.”

“Shoot” says Drona. “You will be a Master Archer someday.”

And he was. The best archer in the world. A warrior without equal.

Look for this in your lives my dear readers.

Look for the blackness in the eye of the sparrow.

See nothing else, do nothing else, dream nothing else.

Perfect this and you will be perfect at what you do.

A Master without peer.

The Emperor is Naked: Eugene Fama’s Nobel Prize

I was going to write about valuation this week but the events of last week caught my attention.

Oh the irony!

In the story “The Emperor’s New Clothes”, the only person to challenge the Emperor and point out that his new fashionable outfit was nakedness, was a little boy on the side of the street.

Not that Professor Shiller of Yale University is a hapless little boy.

The irony here is that both the Emperor and the little boy were awarded the Nobel (and are having to share it!).

The buffoons here are the Nobel committee (I know..there are no Nobel prizes for economics…but its close enough).

If you are so afraid to offend (alternatively if you are too simple minded to realize that these economists disagree on fundamental issues…fundamental issues) that you take the path of awarding them BOTH the prize (helped us understand how markets work…rubbish!), the only analogy this doctor can think of would be to award both creationists and evolutionary biologists the Nobel prize in Biology together “for clarifying the origins of man!”

I gag at the thought.

Eugene Fama believes the markets are efficient.

If you question him closely, he coyly adds/edits that he believes they are “informationally” efficient.

In other words, if you invoke human psychology (as Shiller does), Fama will tell you he is thinking about the dissemination of information being efficient.

The fact that informational efficiency in and of itself is a completely useless factoid is left unsaid.

Its the market’s actions that mean something.

I give a hill of beans that all of us have access to the same stupid analysts report.

It matters how you process that information and what you decide to do with it.

It matters whether it encourages the fear in you or the greed in you.

That’s what I want to know.

There is a silver lining here though for all of us who want to live in the real world (Fama has also said..there are no such things as financial bubbles..oy vey!).

The fixed false belief in efficient markets (in psychiatry, a fixed false belief is the definition of delusion..a belief that is unchanged in the face of contradictory evidence) has created substantial inefficiencies in the market.

The more people behave as if the markets are efficient, the more there are value anomalies that a savvy investor can exploit.

As Buffet said and I paraphrase ” If the competition goes to work every day thinking its useless to even try (to beat the market), it makes my job easier!”

I can hear Buffet and Munger as they fall off their chairs laughing at this turn of events.

Short term price movements, the kind likely to be impacted by Fama’s theory are irrelevant or should be irrelevant to all investors. I plan to discuss the (non) impact of short term price movements in a future post.

In the meantime, I hope and pray(!) that the creationists are not in line for a Nobel prize as well.

Are you listening Nobel Committee?

If You are not out in front of the Herd, the View never changes

You will spend your life looking at someone’s ass.

And thats ok, if you are content. Who am I to judge?

I speak for all of us that want to strive for something that does not yet exist in our lives.

This is not just about entrepreneurship. No sir.

All the difference made in this world bar none has been made at the margins of the common, the accepted and the ‘norm”.

You will never make a dent, and never shake things up if you follow the herd.

To use a scientific turn of phrase, you need to embrace a paradigm shift.

A paradigm in science (or elsewhere for that matter) is a framework to think about things.

(See below for a reference to Thomas Kuhn’s famous book on paradigms)

Each paradigm is a temple of sorts for those who wrap themselves in its teachings.

If everybody (or more correctly the majority) believes something to be true, two things necessarily follow:

One: There is little to be discovered within its folds..it has been exploited and understood.

Two: The territory outside the paradigm has not been well explored and is ripe for new, innovative, ground shaking ideas and development. Also, the competition here is slim compared to the paradigm where the sweaty masses are spending their time.

Every body knew the sun revolved around the Earth until they didn’t. People lost their lives trying to change that paradigm.

Everybody knew that man could not fly until that paradigm shifted.

Ok, but you and I are not the Wright Brothers! (at least not I!).

If you are an entrepreneur, everybody knows your idea is crazy. Of course! If they did not, the competition to get your idea to market would destroy your chances!

If you are a value investor, everybody knows your stock picks are all wrong. Heck everybody knows value investing doesn’t even work “anymore”!! (Ha!, now thats a paradigm for you to bust). This is a good thing…trust me. Your stock picks are safe. It will be like taking candy from a baby.

(Note to the moms out there..I am not advocating stealing from infants).

Ok, maybe not that easy. But you get my drift.

A Nobel prize winning scientist I had the good fortune to speak with briefly once told me “When they think you are crazy and shun you, you should know you are on to something.”

This guy discovered/described a new form of life and almost lost his career and reputation doing it.

The takeaway for those of us that are far away from winning Nobel Prizes is really about conviction in your thought process.

It matters a hoot what others think. Listen to them, dissect their arguments but for heavens sake learn to think for yourself. It will serve you well over a lifetime.

And when everyone (sic) thinks a certain way, there is likely money to be made by taking a bet against them.

The House does not always win.

 

 

Bibliography:

Kuhn TS. “The Structure of Scientific Revolutions” 1962. University of Chicago Press. ISBN 9780226458113

Rudyard Kipling was a Value Investor

Those of you reading my blog for the last several columns have figured out by now that I believe that the traits and character required for an entrepreneur are very similar to those a good value investor should have.

I am going to add to that.

As you think deeply about the kinds of behavior, instincts and thought process that result in success in these areas, you will no doubt find that many of those ideas are transferable to life itself. This is something I have termed “Right Thinking” in prior posts (not my term, but one I think is appropriate).

Understanding this and applying this thinking to your project(s), you may find you are “doing better” in other parts of your life. (Oh the horror! I have become my mother!)

Think of this as a welcome side effect (As a doctor, I think in these terms…what can I tell ya!)

By no means am I a fan of Rudyard Kipling (I can tell you where he should stick his “White Man’s Burden”!).

But credit where credit is due. I believe his poem IF, reproduced below is a graphic and exact description of what you need to succeed as an investor, as an entrepreneur and at life.

I will discuss aspects of what he says in this column over time, but I am unable to summarize the whole as elegantly as he has done.

You can do much worse than read it carefully, ponder and apply to your situation! Rinse and repeat!

 
If

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or, being lied about, don’t deal in lies,
Or, being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise;

If you can dream – and not make dreams your master;
If you can think – and not make thoughts your aim;
If you can meet with triumph and disaster
And treat those two imposters just the same;
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to broken,
And stoop and build ’em up with wornout tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: “Hold on”;

If you can talk with crowds and keep your virtue,
Or walk with kings – nor lose the common touch;
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run –
Yours is the Earth and everything that’s in it,
And – which is more – you’ll be a Man my son!

 
Now tell me thats not the most amazing advice you ever got!

Charlie Munger on Wrestling with Pigs

Charlie Munger is the long time associate and friend of Warren Buffet and an investing legend in his own right.

I hope to be talking about him a lot on this blog, not just because I believe he is a great investor but also because I believe he is one of the foremost proponents of what I like to call “Right Thinking”.

Right Thinking is not about how to pick stocks or how to startup companies or take your profits. Right Thinking is about how to go about thinking about all of these things and so much more.

It’s the framework of your thoughts and actions that will determine your satisfaction with the end result and your success.

I am going to adapt his quote on Pigs but I keep the meaning in all seriousness.

Charlie says, “Don’t wrestle with Pigs. You will both get very dirty. Trouble is, the Pig will enjoy it”

Be careful whom you associate with. It may be expeditious, it may even seem like you have no choice at the time.

You may believe you can get out of the relationship any time you choose.

But you are going to get very dirty.

It never ends well.

Each of you reading this know who these pigs are, and which of you are considering wrestling with some.

That shit will not come off easy.

The Story of Abhimanyu: Why You Must Have an Exit Strategy

Let me tell you the story of Abhimanyu.

Long long ago in a kingdom far far away, an epic battle was fought.

The battle and its larger story were immortalized in an epic Sanskrit poem called “The Mahabharata”.

The war was between two families of cousins battling for control of their kingdom.

Abhimanyu, a warrior prince learnt the strategies of war while in his mothers womb. His overheard his father Arjuna telling his mother Subhadra how to enter, exit and destroy various battle formations.

The most complex of these  battle formations was the “Chakravyuh”, a formation resembling a rotating spiral that moved forward and expanded at the same time.

Here is where the story gets interesting (and relevant, so pay attention!).

Subhadra, listening to her husband teach, fell asleep before he finished. Abhimanyu, learnt the method of entry into the Chakravyuh, the way to fight once inside, but did not hear how he should exit.

Fast forward to the battle, many years later. The bad guys (sic) are winning. Things look grim. The Chakravyuh is advancing on Abhimnayu and his forces. It seems unstoppable.

Abhimanyu, hero that he is, rushes forward and uses his knowledge to penetrate the spiral. He breaks his way in and fights the enemy from the inside.

Alas, he does not know how to get out of the spiral, once he is in. He lacks an exit strategy.

He is surrounded and killed by the enemy forces, and dies a bloody death on the battlefield.

 

I think I’ve made my point to all of you here (and It isn’t that you shouldn’t fall asleep in class!).

Whatever you do, entrepreneurship or investing or anything else with meaning to you, consider your exit strategy.

Not an exit strategy, not even a couple. You should be devising a decision tree of exits based on your view of multiple different outcomes for your task.

While your life may not depend on it as it did for our hero, you should behave as if it does.

Your outcome(s) will thank you.

 

As a coda for readers interested in the Mahabharata, it is the longest Indian poem (the title means Great Indian Story), is available in English translation and is one of the most gripping tales ever told. The Bhagavad Gita, a discourse by Lord Krishna is a story within this story and probably better known. In the Gita, Krishna speaks to Arjuna (Abhimanyu’s father) and explains right living and the concept of “Karma”. Try it. You will love it.

 

 

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