Today’s Chapter is based on the book “Dream Big (Sonho Grande): How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira Acquired Anheuser-Busch, Burger King and Heinz” by Cristiane Correa.

3G Capital is a global private equity and investment firm founded in 2004 that evolved from the Brazilian investment office of Jorge Paulo Lemann, Marcel Telles, and Carlos Alberto Sicupira. It is known for an owner-operator, cost-focused approach and for high-profile, long-term investments in consumer brands such as Anheuser-Busch InBev, Restaurant Brands International (Burger King, Tim Hortons, Popeyes), and Kraft Heinz.

Buy it on Amazon here.

Here’s what I learned:

Invest in People

“Employees are a company’s greatest asset – they’re your competitive advantage. You want to attract and retain the best; provide them with encouragement, stimulus and make them feel that they are an integral part of the company’s mission.”
— Anne M. Mulcahy

The story of Jorge Paulo Lemann, Marcel Telles and Beto Sicupira at Banco Garantia and later at 3G Capital is a proof that prioritizing human is the key to success in business. From their early days at Banco Garantia to orchestrating massive acquisitions like Anheuser-Buschc, Burger King, and Heinz, the trio had an unwavering commitment to their employees. This approach wasn’t just about hiring great talents, it was also about nurturing them, challenging them and sharing the rewards in a way that encouraged corporate loyalty and exceptional performance.

In fact, one of the core insights from 3G Capital is how they viewed people as their primary asset, even when unproven. They believed in giving young leaders opportunities and accepting occasional setbacks as part of the growth process. Similarly to Alan Greenberg at Bear Stearns, the trio loved to hire PSDs, where “PSD stands for poor, smart and a deep desire to become rich.” This criteria prioritized hunger, intellect, and ambition over pedigree.

Jim Collins writes in the Foreword that, “The founders certainly have a strong dose of financial genius, but that is not the primary source of their success. From the very beginning, their primary investments have been in people, especially young and talented leaders.”

“Their philosophy: Better to give talented (if unproven) people a chance, and endure a few disappointments along the way, than to not believe in people. The number one ingredient in their secret sauce is an obsession with getting the right people, investing in those people, challenging those people, building around those people and watching those people experience the sheer joy and exhilaration of achieving a big dream together.”
— Jim Collins

Furthermore, Lemann, learned from his experience working at Invesco: you need to pay your employees well. More importantly, he was eager to set a company culture where merit, not hierarchy reigns supreme. Lemann, Telles and Sicupira cultivated a meritocratic environment that rewarded performance and aligned incentives so that everyone shared in the upside. This meritocracy wasn’t soft, it was rigorous and demanding. As Jim Collins mentions, “The founders built a consistent culture that gave people the opportunity to share in the rewards of the big dream. The culture valued performance, not status; achievement, not age; contribution, not position; talent, not credentials. By mixing these three ingredients–Dream + People + Culture–into a powerful concoction, they created a recipe for sustained success.”

However, meritocracy also had its ruthlessness. Once inside the organization, there was no room for complacency for the employees. Performance was the sole currency for advancement and reward. Correa writes, “Those who were good rose. Those who were not inevitably turned up as a subject of discussion at the partners’ annual meeting, known as the “smoke signal,” which decided who would be fired. The practice was to get rid of around 10% of the headcount annually. Garantia worked with a team of just over 200 people for more than a decade. This was a rule created by Lemann to prevent the firm from expanding too much. This meant that getting rid of the worst performers was the only way to open room for new, talented young people.”

Nonetheless, those that survived were rewarded generously. As a matter of fact, Lemann, Telles and Sicupira cultivated a culture of ownership, allowing top talent to buy into the partnership, aligning their personal wealth directly with the firm’s success. This created a powerful flywheel: great people were attracted to the chance for outsized rewards, their efforts drove extraordinary results, and their resulting wealth reinforced the culture’s credibility, attracting the next generation of talent. The results are incredible: “It has been estimated that since Banco Garantia was founded in 1971, between 200 and 300 people who worked in the three partners’ various businesses have each earned more than US$ 10 million. Forbes magazine reported in March 2013 that Lemann was the 33rd richest man in the world, with a fortune of almost US$ 18 billion (Telles and Sicupira were ranked in the 119th and 150th positions, with US$ 9.1 billion and US$ 7.9 billion, respectively). The three are among the 10 richest people in Brazil. Those who know Lemann well have no doubt that he only became a top-level billionaire because he enriched dozens of people on the way.”

“For Lemann, Telles and Sicupira, culture is not in support of strategy; culture is strategy. The three partners have always held to their core values and distinctive culture, while continually growing into new industries, expanding across geographies, and pointing towards ever bigger goals–a beautiful example of the underlying dynamic, “Preserve the Core and Stimulate Progress” exemplified by any enduring great company.”
— Jim Collins

This reminds me of Ken Iverson’s egalitarian culture at Nucor. As a matter of fact, considering Iverson pushed for a decentralization model, it is not surprising that Nucor thrived by dismantling traditional hierarchies and creating an egalitarian culture where every employee was treated as an equal, regardless of title. This wasn’t mere rhetoric; it was embedded in policies that eliminated perks for executives, promoted open communication, and ensured transparency. Iverson believed that motivation stems from feeling valued and respected, and an egalitarian environment sustains that over time, leading to higher productivity and loyalty. By rejecting symbols of status and sharing information freely, Nucor built trust that differentiated it from union-heavy competitors in the steel industry.

“The term that comes closest to describing Nucor’s culture, I think, is “egalitarian.”
— Ken Iverson

One example of Iverson’s disdain for hierarchical symbols was evident in his decision to standardize hard hats, a small but powerful move to erase visible distinctions. Iverson explained, “In Nucor plants, like most hard hat environments, workers, supervisors, department managers, and the general manager of the facility all wore different color hard hats, signifying their place in the hierarchy. And a high-ranking executive visiting from headquarters might be given a gold hard hat to wear, as a symbol of his lofty status. This was in keeping with industry tradition, but it seemed so contrary to our goal of maintaining an egalitarian culture, I decided right then and there, without consulting anyone, that all Nucor personnel would wear green hard hats, and all visitors would wear white, from then on, no exceptions.“

Nucor’s egalitarianism extended to benefits and amenities with all executives forgoing luxuries to align with frontline workers. Iverson noted that “executives get the same group insurance, same holidays, and same vacations as everybody else. They eat lunch in the same cafeterias. They fly economy class on regular commercial flights (although we do allow the use of frequent flyer upgrades). We have no executive suites and no executive cars.“

Furthermore, Iverson believed in sharing information with his employees, as a tool to build trust and to promote an egalitarian working culture.

“Sharing information is another key to treating people as equals, building trust, and destroying the hierarchy. I think there are really just two ways to go on the question of information-sharing: Tell employees everything or tell them nothing. Otherwise, each time you choose to withhold information, they have reason to think you’re up to something. We prefer to tell employees everything. We hold back nothing.“
— Ken Iverson

Finally, by living as part of the company rather than above it, Iverson showed that egalitarianism isn’t just fair, it is a strategic advantage for motivation and performance. When asked how he could explain Nucor’s success, Iverson mentions that “It is 70% culture and 30% technology.”

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Learn from Others

“If I have seen further [than others], it is by standing on the shoulders of giants.”
— Isaac Newton

One of the most surprising aspects of Lemann, Telles and Sicupira’s success is their humility. They do not claim to have invented anything, instead, they believe that they are shameless proponents of copying what works. They view the business world as a vast laboratory where others have already run the experiments. Their genius lies in identifying the best practices from around the globe and implementing them with superior discipline. This explains why they were able to acquire and run successful businesses in different industries.

Their humility can be demonstrated from this quote from Warren Buffett who got to know Jorge Paulo Lemann when they were both on the board of directors of Gillette: “I knew absolutely nothing about him and had never even heard of him. We used to meet every two or three months and it took some time before we really got to know each other. However, you learn a lot of about people on a board of directors. What I noted right from the beginning was that he said things that made sense. He didn’t pretend to know things he didn’t or talk just to hear the sound of his own voice. He had a tremendous view of business and was articulate, which cannot be said for all board members.”

As a matter of fact, Jim Collins explains that “From early in his career, Jorge Paulo Lemann actively sought people he could learn from, and he would make pilgrimages to visit them: the great Japanese industrialist Matsushita, the visionary retailer Sam Walton, the great financial genius Warren Buffett. Not only that, he found ways to connect great people with other great people; he wasnʼt “making connections” in the traditional way, but facilitating interactions among exceptional people and thereby stimulating an exponential level of learning for everyone. Interestingly, as he moved into his fifth, sixth and seventh decades of life, he continued this learning quest, often seeking mentors and teachers younger than himself. The three founders remain always students, learning from the best and then teaching the next generation.”

For example, when Sicupira was tasked with turning around Lojas Americanas after its acquisitions, he did not waste any time to seek help from the giants of retail which lead him to a pivotal relationship with Sam Walton. Their relationship with Walton was vital as they could not have met a better teacher to show them how to operate in the retail business.

“Shortly before assuming command of Lojas Americanas, and when he was still on the executive board, Sicupira sent 10 letters to some of the worldʼs biggest retailers. He introduced himself and asked if he could learn how each company operated at firsthand. His aim was to learn from the leaders and then adopt the best ideas. Why waste time reinventing the wheel if he could copy from the most advanced companies in the world? Two never replied while another two politely declined. Five companies, including Kmart and Bloomingdaleʼs, replied and invited him to visit their head offices. The CEO of one of the companies Sicupira contacted went further and phoned him directly. He said he would be happy to receive him and show him the operations of his company, a chain he had founded in Arkansas in 1962. His name was Sam Walton and the company he ran was called Walmart.”
— Christiane Correa

Similarly, when running Banco Garantia, Lemann pretty much copied the Goldman Sachs’ model in terms of remuneration. Correa writes, “Garantia paid salaries that were below the market average but the bonus could amount to four or five extra salaries, a potentially huge amount of money at that time. Of course, this was conditional on the employees beating their targets. It was a clear and simple rule that was valid even for the office boys: work well and you will be rewarded. Lemann believed it was essential that everybody, even those at the very bottom, felt like “owners” of the business. Lemann decided that was the only way they would give their best and make the institution grow. To encourage people even more, the bonus was paid twice a year.“

Even their concept of “ruthless meritocracy” is copied from the management strategies of General Electric under Jack Welch. The trio saw the “20-70-10” rule which rewards the top 20%, keep the middle 70% and fire the bottom 10% and applied it to the beer industry in Brazil while running Brahma. Correa mentions, “Of course, this was not exactly an original idea. Tellesʼ thinking resembled what Jack Welch, the legendary CEO of GE, had adopted in the long-standing company founded by Thomas Edison. The similarity was not unwarranted. Telles and his partners never had any experience with GE, as they did with Goldman Sachs and Walmart, but the companyʼs annual reports were a Bible for the Brazilians who, once again, copied the best from them. Welch, regarded as the CEO of the 20th century, led GE from 1981 to 2001. During this period, GE adopted what became known as the 20-70-10 rule. It laid down that employees in a meritocratic environment should be split into three ranges: the 20% top performers should be rewarded, the 70% average performers retained and the 10% underperformers shown the door. By adapting the GE rule to its own situation, Brahma renovated its workforce.”

“I don’t know if I am going to learn to eat hamburger, but I will learn how to make it…I reached the conclusion that the brand [Burger King] is much stronger than people thought.”
— Beto Sicupira

This reminds me of Mohnish Pabrai who believed in investing in companies that are copycats. He mentions that investors should favor investing in businesses that copy and scale proven models rather than those that innovate from scratch. Innovation, while celebrated, is inherently risky, whereas copying successful models reduces uncertainty. As Pabrai explains, “Innovation is a crapshoot, but investing in businesses that are simply good copycats and adopting innovations created elsewhere rules the world.”

He uses the example of Microsoft as a case study to illustrate this principle. In Pabrai’s opinion, Microsoft’s success lies in its ability to adopt and scale innovations pioneered by others, effectively neutralizing competitive threats. He mentions that “Microsoft repeatedly has reacted to innovation outside its walls by acting quickly and intensely to nullify the threats. They have looked for customer validation of someone else’s innovation before embarking on their own. It is a very powerful strategy.”

“Microsoft is an excellent lifter and scaler. It has had 90 + percent success in annihilating the “enemy product” it has gone after. It is an open question how the battle of Google versus Microsoft will finally play out. With over sixty thousand employees, Microsoft is now, unfortunately, the bureaucracy it has always despised. If I were given just two investment choices of Google or Microsoft at present prices, it is a no-brainer decision for me. I’d pick Microsoft all day long. It is a battle between an innovator versus a cloner. Good cloners are great businesses. Innovation is a crapshoot, but cloning is for sure.”
— Mohnish Pabrai

As a matter of fact, Pabrai argues that copycat businesses, when run by capable managers, often outperform innovators because they avoid the pitfalls of untested ideas. He once said that “In seeking to make investments in the public equity markets, ignore the innovators. Always seek out businesses run by people who have demonstrated their ability to repeatedly lift and scale. It is the Dhandho way.”

However, this approach is not about stealing ideas, but about recognizing and scaling proven concepts. Pabrai points to Sam Walton’s Wal-Mart as an example. He mentions that “Sam Walton was a lifelong student (and lifter) of other retailers’ models. Most of Walmart’s business model was lifted from Kmart. If you carefully study the most successful businesses around, you’ll notice that much of it has been lifted and scaled by great executers.”

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Simplicity

“Take a simple idea and take it seriously.”
— Charlie Munger

In an era where corporate success often led by expensive offices and corporate jets, the trio at 3G Capital adopted a different approach: aggressive simplicity. This was not merely a choice of style, but a business strategy to survive. They viewed every dollar spent on non-essential items as a dollar stolen from the shareholders’ returns. Their philosophy believes that complexity is the enemy of execution. By keeping the operation simple and the environment austere, they ensured that focus remained entirely on the work. This approach often came as a shock to the companies they acquired, as the austerity was not common among big corporations.

Jim Collins writes, “Simplicity has genius and magic in it. On almost every dimension, the three founders exemplified simplicity. They have very simple dress; you would not notice them in a crowd. They kept simple offices, never walling themselves off from their people in an executive suite. They used their increasing wealth not for opulence, but to simplify their lives, so they could focus on continuing to build the company. (I learned that the best sign of true wealth is an uncluttered calendar, with time available to focus on the most important priorities.) And their entire strategy is so simple: Get great people, give them big things to do and sustain a meritocratic ownership culture.”

When Lemann started Banco Garantia, he tore down closed offices and preferred open-plan offices to facilitate communication and destroy hierarchy. They believed that physical barriers created psychological barriers and were against their culture of meritocracy. As such, this was a common technique that was used when acquiring new companies. When Telles took over Brahma, the removal of walls was often one of the first action of the new management team.

“To speed up the changes, Telles and his men adopted more or less the same approach used in Garantia and Lojas Americanas. The walls of the directorsʼ offices were torn down and gave way to a big table they all shared. The number of secretaries shrank and the executives had to get used to sharing them with their colleagues. Reserved parking places for directors were abolished and those who arrived first got the best spots, a rule that applied to Telles himself. The executive restaurants were closed and the segregated bathrooms for executives and “others” were also scrapped.”
— Christiane Correa

Furthermore, the trio were relentless in terms of cost-cutting. High costs among the company were regarded as a sin. Correa writes that “Executives flew coach class and stayed in three-star hotels, sometimes even sharing the same room. Meals in restaurants were modest affairs, washed down with a beer, at most.” As a matter of fact, the corporate culture built by Lemann was quickly spread to all the companies in which they invested: “meritocracy, relentless cost control, hard work and a lot of pressure that not everyone could endure.” As Sicupira once said, “Costs are like nails; they always need to be cut.”

Nonetheless, it is important to note that the trio’s obsession on cost-cutting was based on their focus on building a simple business and not on “managing money”. Instead, they believed wealth is a byproduct of building something great. As Lemann once said, “When everyone else was spending their time managing their money, we invested our time in building our company. If we built our company, then that would be the very best way in the long run to generate wealth. Managing money, by itself, never creates something great and lasting, but building something great can lead to substantial results.”

As such, when they acquired new companies, they kept things simple, mainly because they bought great companies and they did not want to mess it up. As such, sharing cost-cutting policies and sharing corporate culture were the only things they needed to accomplish. Their entire strategic playbook is elegantly simple, a recurring loop: Get great people, give them big dreams to pursue, and sustain a meritocratic ownership culture.

“You and your team should do absolutely nothing in the first year that has to do with the business. Only do sensible things while you learn how the company works. If you start doing things related to the way the business operates as such, there is a good chance of making a mess of it.”
— Beto Sicupira

This relentless focus on cutting costs reminds me of Capital Cities. Murphy and Burke at Capital Cities understood a fundamental truth: while revenues in an advertising-based business could be unpredictable, costs were almost entirely within their control. They instilled a culture where every dollar spent was scrutinized, not for the sake of being cheap, but to build a resilient and highly profitable enterprise. This frugality was a defensive moat against economic downturns and a competitive weapon. As Thorndike explains, “Frugality was also central to the ethos. Murphy and Burke realized early on that while you couldn’t control your revenues at a TV station, you could control your costs. They believed that the best defense against the revenue lumpiness inherent in advertising-supported businesses was a constant vigilance on costs, which became deeply embedded in the company’s culture.”

“The best defense against revenue uncertainties are constant, tight cost controls.”
— Tom Murphy

In fact, the most legendary story about Tom Murphy was how he scrutinizes every expenses, even for paint. Thorndike writes, “Shortly after Murphy arrived in Albany, Smith asked him to paint the dilapidated former convent that housed the studio to project a more professional image to advertisers. Murphy’s immediate response was to paint the two sides facing the road leaving the other sides untouched (“forever cost conscious”). ”

More importantly, this cost control culture was passed down from the executives to the operating managers. As Phil Beuth mentions, “Now, 30 years later, the company is no longer small, and if you wonder how it happened, well, there is no mystery; we just did it day to day. The bankrupt stations lost $ 360,000 the first year, and we did not turn the corner until our third year, after going back to our stockholders twice for $ 150,000 each time. There were 39 employees running radio and TV, and we learned one important thing—we needed only a few people to keep things going. That experience was worth a great deal to Capital Cities over the years. It helped us avoid building up huge staffs. We believed we should hire the best people, pay them well, and never have more people than necessary. Even to this day, we have no corporate counsel, no vice president of personnel, no public relations department.”

“The goal is not to have the longest train, but to arrive at the station first using the least fuel.”
— Tom Murphy

Furthermore, Murphy and Burke’s success in building Capital Cities was often by acquiring companies and incorporating Capital Cities’ culture of being cost efficient. Often, this would allow the newly acquired subsidiary to run leaner and to boost margins significantly.

A great example of this was how they transformed ABC’s culture from extravagance to efficiency. Thorndike mentions that “Burke and Murphy wasted little time in implementing Capital Cities’ lean, decentralized approach—immediately cutting unnecessary perks, such as the executive elevator and the private dining room, and moving quickly to eliminate redundant positions, laying off fifteen hundred employees in the first several months after the transaction closed. They also consolidated offices and sold off unnecessary real estate, collecting $175 million for the headquarters building in midtown Manhattan.”

“ABC, in fact the whole broadcasting industry, was a limousine culture—one of the most cherished perks for an industry executive was the ability to take a limo for even a few blocks to lunch. Murphy, however, was a cab man and from very early on showed up to all ABC meetings in cabs. Before long, this practice rippled through the ABC executive ranks, and the broader Capital Cities ethos slowly began to permeate the ABC culture. When asked whether this was a case of leading by example, Murphy responded, “Is there any other way?””
— William Thorndike

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Today’s Chapter is based on the book “DTV” by Michael Moritz on Don Valentine and the beginning of Sequoia Capital.

Don Valentine was an American venture capitalist who founded Sequoia Capital in 1972 and became one of the central architects of Silicon Valley’s venture industry. A former semiconductor salesman at Fairchild and National Semiconductor, he led early investments in companies such as Apple, Atari, Cisco, Oracle and many others, earning a reputation for a blunt, market‑driven style that focused above all on backing companies in very large markets.

Read it for free here.

Here’s what I learned:

Asking Why?

“It is very important for young people keep their sense of wonder and keep asking why.”
— Stephen Hawking

Don Valentine, the founder of Sequoia Capital, approached business and investing with an unwavering commitment to questioning everything, a habit that was rooted in his early education and experiences. By having a skeptical mindset, he was able to cut through noise, identify opportunities and avoid pitfalls. Valentine questioned everything in order to foster a deeper understanding through persistent inquiry.

As a matter of fact, Michael Moritz writes that Valentine “went on to study at Fordham University, where his professors were Jesuits and whose teaching approach was based on the restless, open-ended questioning style of Socrates. It was this style of inquiry, aimed at rooting out answers to intractable topics from a collection of people with different points of view and experiences that, more than the details of his studies, influenced Don throughout his life. It made him doubt everything—particularly conventional thinking—and was the source of some of his favorite, terse ways of ferreting out answers. ‘Why?’ ‘Who cares?’, ‘Who needs it?’ ‘Why does it matter?’, ‘What does it do?’, and ‘So what?’ were the plain verbal thrusts he came to employ to gauge whether prices could be raised, a product made sense, a new market should be attacked or the significance of a milestone.“

The Socratic method became one of Valentine’s core reasoning when evaluating ideas, markets, and people at Sequoia Capital. In fact, this constant approach of questioning everything made Valentine dislike any policies and procedures, as he believed that rigid structures stifled creativity. Moritz mentions that Valentine ”was no fan of policies or procedures since he was convinced that they stifled creativity and were promulgated by mediocrities.” An example to illustrate this was the fact that Valentine always used to wear his nametag on his right breast at functions while the convention was to wear it over the left.

“It’s disobedience that gets you innovation.”
— Don Valentine

Furthermore, Valentine’s approach to hiring was also against conventional thinking. In fact, Valentine disliked hiring experts as he believed that they would have difficulty admitting being ignorant on a subject. Valentine had little patience for self-importance or assumed expertise, valuing intellectual honesty above all.

Moritz writes, ”Among the many things I did not know in 1985 was that Don was not seeking what the leaders of other firms sought. He had seen plenty of people deeply versed in the intricacies of an arcane technology, who were incapable of expressing themselves clearly, let alone tell a story. He knew these types would not flourish at Sequoia. He did not like pontificators or poseurs, people who were full of themselves or thought they had many of the answers, particularly those who made the cardinal error of pretending to know something about which they didn’t have a clue. ‘There is nothing wrong,’ he would remark, ‘in saying “I don’t know.”’“ As such, when hiring, Moritz reiterates that “In his mind, this ruled out consultants, business school graduates, lawyers, investment bankers, anyone with an HR background, people with hyphenated names or roman numerals after their last name, direct descendants of immigrants who arrived on The Mayflower, people who had enjoyed living on the East Coast, and those who wore Hermes ties, suspenders, cuff- links, signet rings, and monogrammed shirts.”

For Valentine, the ability to admit ignorance was a sign of strength, creating space for genuine learning and discovery. He sought this humility in others, famously filtering out candidates who overused “I” instead of “we.” This foundational habit of mind to constantly ask “why” and to have the courage to say “I don’t know” protected him from the herd mentality and allowed him to see potential where others saw only implausibility.

Similarly, Valentine hired people based on attributes rather than credentials. He believed in imagination, observation and creativity and disliked “hiring industry executives with name recognition and large reputations who by the time they gravitated to the venture industry had been too successful, had lost some spring in their step, were not hungry enough, had too many outside commitments and, most of all, were not prepared to become rookies again.”

“For Don, the most important attributes of a venture investor were the power of observation, a lively imagination and a good dose of creativity. (To which I would add raw hunger and street smarts.) Don had a much easier time answering the other two questions. He said the road to success at Sequoia would be determined by two things: ‘chemistry’ and ‘when we trust you.’”
— Michael Mortiz

This reminds me of Edwin Land’s “an education without a degree” motto which influenced his way of hiring employees. Land often did not require them to have any technical experience. Since his company’s office was located nearby, he frequently hired fresh graduates or students from Harvard or MIT. Furthermore, Land preferred to hire bright young liberal students over applicants with technical experience. As a matter of fact, he believed that they could learn the routines of the laboratory and the structure of scientific discipline as rapidly and, more importantly, they had little to unlearn.

While Land did not expect his new hires to have technical knowledge, he expected his employees to continue their education as an integral part of their working career. He fully believed that individuals in the industry would be better qualified to increase their technical competence and at the same time make their job fully satisfying through continuous learning.

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Frugality

“The way to wealth is as plain as the way to market. It depends chiefly on two words, industry and frugality: that is, waste neither time nor money, but make the best use of both. Without industry and frugality nothing will do, and with them everything.”
— Benjamin Franklin

Other than the Socratic approach, I believe another core reason for Valentine’s success at Sequoia Capital was his frugality. Valentine had a no-waste mentality all about maximizing resources. However, this wasn’t only about penny-pinching, he was also focused on efficiency to avoid time wasting. This mentality was instilled in him at a young age. As Moritz writes, “From his Danish grandfather, who only spoke partial English and had fought in the Spanish-American War, Don learned that he should never waste any food—a lesson he came to apply to most things in life.”

As such, when Valentine was running Sequoia, all unnecessary expenses were systematically removed. Moritz mentions, “For some reason he considered semi-colons and parentheses pretentious, broke out in hives when a management ever contemplated the construction of a ‘campus,’ saved paper-clips, was wary about subscribing for a second copy of The Wall Street Journal, and banned filing cabinets because he thought the amount of energy spent storing and retrieving documents was a colossal waste of time.”

Similarly, when he first established Sequoia he outsourced all of the non-core functions to maintain a lean operations. Mortiz mentions that “Our paychecks, healthcare benefits and business expenses were all administered from the Capital Group’s offices on South Hope Street in Los Angeles. We had no chief financial officer, accountant, book-keeper or lawyer—for Don had outsourced all financial administration to the Capital and all legal matters to Wilson Sonsini. No surprise, that in 1985 the nameplate on the front door still read Capital Management Services and Don often chuckled at the idea that until the early 1990s Capital was still footing Sequoia’s telephone bill.”

A great example of Valentine’s frugality came from a meeting he had with the principals of Burr, Egan Deleage & Company who were seeking his advice on how to establish and organize their business. They asked Valentine how much room they should dedicate to filing cabinets. Valentine’s answer was zero. He believed that if a document was important, someone else would have a copy.

By consequence, it is not surprising that Valentine was a big fan of other leaders who embodied frugality. Notably, he was an admirer of John Morgridge of Cisco.

“He was a big fan of the way Cisco’s CEO, John Morgridge, described at an all-hands meeting how he always traveled first class–by sitting in a row in economy with an eyeshade over his brow and pretending to enjoy the amenities of a more expensive cabin.”
— Michael Mortiz

This reminds me of the importance of what we have learned from Alan Greenberg, the ex-chairman of Bear Sterns who was known for being frugal. As a matter of fact, Greenberg believed that a business’ success should be evaluated on its Return on Equity (”ROE”). And the secret to improve its ROE is simple: to increase revenues while cutting expenses. However, considering that sales are quite dependent on various external factors, Greenberg prefers to focus on what he can control: cutting expenses. As he once said, “The only statistic I care about is return on equity. After many sessions with some of our business school graduates (yes, we do have some), I think they have helped me understand the secret to improving our R.O.E. It seems that if we increase revenues and cut expenses, return on equity goes up and that is what makes me happy. Please make me happy! I can be very unpleasant when I’m not.”

As such, Alan Greenberg was an expert at cutting cost and he made sure to remind his employees to do so in his various memos. One way he did this was by asking his staff to save up on office supplies such as paperclips, rubber bands and scotch tapes. While these may seems excessive, there is no need remind you that even a small expenses can compound into a big ones at a large scale.

Greenberg mentions, “I have just informed the purchasing department that they should no longer purchase paper clips. All of us receive documents every day with paper clips on them. If we save these paper clips, not only will we have enough for our own use, but we will also, in a short time, be awash in the little critters. Periodically, we will collect excess paper clips and sell them (since the cost to us is zero, the Arbitrage Department tells me the return on capital will be above average). This action may seem a little petty, but anything we can do to make our people conscious of expenses is worthwhile.”

“Because of your cooperation, I would like to extend our cost-cutting efforts to a larger matter. Bear Stearns will no longer purchase rubber bands. If we can save paper clips from incoming mail, we can save rubber bands, and my hope is that we can become awash in those little stretchies also.”
— Alan Greenberg

And it didn’t stop there, Greenberg was also on the lookout for new ways of cutting costs and to improve the company’s bottom line. For example, after realizing that the company’s electricity bills was over five million a year, he required his staff to turn off the lights when they leave a room or call it a day to save on electricity bills. He also requested them to use U.S. Mail over Federal Express as he considered the latter a luxury after being charged an invoice of $68.32. He explains, “I have never enjoyed the smell of money burning, particularly when it is my money. The careless wasting of electricity is burning money. (Our electrical bill is running at the rate of five million a year.) From this day on we have two revolutionary new rules. Turn off lights when you leave a room and turn off equipment when you call it a day.“

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Large Markets

“And when these new businesses come in, there are huge advantages for the early birds. And when you’re an early bird, there’s a model that I call “surfing” – when a surfer gets up and catches the wave and just stays there, he can go a long, long time. But if he gets off the wave, he becomes mired in shallows….

But people get long runs when they’re right on the edge of the wave – whether it’s Microsoft or Intel or all kinds of people.”
— Charlie Munger

Sequoia Capital’s success can be stemmed from Valentine’s laser focus on identifying businesses in large, expanding markets and on essential business metrics like high gross margins and cash flow. He understood that groundbreaking technology alone wasn’t enough, it needs to address massive opportunities to yield extraordinary returns. This principle that guided Sequoia’s investments was built from Valentine’s experience working at Fairchild Semiconductor. Moritz mentions that “Fairchild Semiconductor taught Don about the importance of large markets, technology, hiring, speed, aggression, frugality, outsourcing, marketing, and, as he used to say, ‘The two things in business that matter: high gross margins and cash flow.’ It also gave him an education in how to achieve business success and the sort of people required to pull it off.”

As such, Moritz summarize Valentine’s investment approach to fixating on “large markets—sometimes asking how many large companies have been built in small markets. He relished high gross margins believing that they provided lots of cushion for management mistakes and, in well-run businesses, would lead to large amounts of free cash flow and high valuations. He did not bother himself with financial projections since he was convinced they might as well have been published by Marvel Comics.”

A perfect example of a company that Sequoia Capital invested in was Cisco. Moritz mentions that the investment in Cisco taught him two lessons. First, the decline in computing cost would continue to expand the size of markets that Sequoia-backed companies could pursue. And second, that a leading company in a rapidly growing market can flourish for years if not decade. Moritz writes, “As Cisco’s revenues and profits continued to grow, the value of the company followed suit. By 1993 Cisco’s market cap reached $7 billion and by 1994 (the year in which Cisco first appeared on the Fortune 500) it exceeded $10 billion. At the end of 1998, before the world was completely swept up in the dotcom hurricane, Cisco had a market value of $176 billion. “

Furthermore, Moritz mentions that Fairchild Semiconductor also taught Valentine on what not to do as a company. In fact, it is often for large corporations to stagnate and to stop innovating.

“Finally, and perhaps most importantly, if you ever wonder why large companies fail you have to look no further than Fairchild Semiconductor. The East Coast management of Fairchild Camera and Instruments, instead of feeding the business needs of the thriving semiconductor division and rewarding its employees with stock options, used the cash generated by its west coast semiconductor division to invest in sleepier and more traditional areas such as graphic arts, office equipment, home movie cameras, and printing presses. When business at Fairchild Semiconductor started to slow in the late 1960s, competitors picked off its key employees with option packages and an exodus began.”
— Michael Moritz

This reminds me of Andy Grove’s unrelenting focus on staying ahead of the competition and anticipating the next big shift in the technology landscape. At the heart of the former CEO of Intel’s philosophy is the idea that healthy paranoia is an essential quality for business success. As he once said, “I believe in the value of paranoia. Business success contains the seeds of its own destruction.” This notion may sound extreme, but Grove’s logic is hard to refute. In fast-moving, hyper competitive markets, complacency is the main reason for the downfall for even the largest companies.

This risk comes from the fact that when companies are doing well, the leadership teams can become complacent as they fail to recognize the warning signs that the industry is slowly changing beneath their feet. Grove saw this dynamic play out time and again, as once-dominant players in the tech sector found their fortunes suddenly in free fall.

Grove illustrates this point by recounting the experiences of his own company, Intel, as it navigated a strategic inflection point in the computer industry, where there are often changes to the rules of the game. He observes that “sometimes these rules change—often in very significant ways. Yet there is no flashing sign that heralds these rule changes. They creep up on you as they crept up on us, without warning.”

His solution was to encourage a guardian attitude among his management team, where vigilance against potential threats was the default mindset.

“I believe that the prime responsibility of a manager is to guard constantly against other people’s attacks and to inculcate this guardian attitude in the people under his or her management.”
— Andy Grove

This is especially true considering middle management are often the first to sense the shifting winds of change. He explains that “middle managers—especially those who deal with the outside world, like people in sales—are often the first to realize that what worked before doesn’t quite work anymore; that the rules are changing.” Heeding the insights of these frontline employees can be instrumental in anticipating and adapting to the new realities of the market.

The lesson here is that business leaders cannot afford to be passive observers, waiting for the next crisis to emerge. Instead, they must be actively scanning the horizon, stress-testing their assumptions, and empowering their teams to voice concerns without fear of repercussion.

Similarly, this constant need of healthy paranoia is also useful when talking about one’s career. In fact, Grove mentions that an individual’s career should be treated like one’s personal business. He states that “It is your responsibility to protect this personal business of yours from harm and to position it to benefit from the changes in the environment. Nobody else can do that for you.”

“It is fear that makes me scan my e-mail at the end of a long day, searching for problems: news of disgruntled customers, potential slippages in the development of a new product, rumors of unhappiness on the part of key employees. It is fear that every evening makes me read the trade press reports on competitors’ new developments and leads me to tear out particularly ominous articles to take to work for follow-up the next day. It is fear that gives me the will to listen to Cassandras when all I want to do is cry out, “Enough already, the sky isn’t falling,” and go home.”
— Andy Grove

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Today’s Chapter is based on the book “The Fairfax Way: Inside Prem Watsa’s Secret to Lasting Success” by David Thomas.

Prem Watsa is an Indian-Canadian billionaire businessman who is the founder, chairman, and CEO of Fairfax Financial Holdings, a major Toronto-based property and casualty insurance and investment company. Often described as “Canada’s Warren Buffett,” he is known for a conservative, long-term value investing style that has built Fairfax into a global financial group since the mid-1980s.

Buy it on Amazon here.

Here’s what I learned:

Hard Work

“I am a believer in luck, and I find the harder I work, the more I have it.”
— Thomas Jefferson

One of the most inspiring aspects of Prem Watsa’s story that we can learn form is his work ethic and discipline which he forged in his formative years in India and later through his experience as a new immigrant in Canada. His life story teaches us that success often comes from relentless effort and an ability to be resilient towards life challenges. Watsa’s father instilled in him an exemplary work ethic by being a great role model. As Watsa mentions, “My dad’s work ethic was an inspiration—he went where he could help out. He always wanted to better himself as a teacher and also create more opportunities for his children.”

As such, through this paternal guidance, Watsa had a rigorous routine during his school years, where academic excellence was non-negotiable. As Thomas writes, “ So life was classes and homework with some sports in between. Prem had no problem with that. It suited him, since he wasn’t big on going out to parties.”

“I remember my father as a no-nonsense kind of guy—really disciplined, ambitious, and tough. He pushed me. He expected us to study hard and work hard. If I got marks of 90 percent, he would ask what happened to the other ten.”
— Prem Watsa

Furthermore, Watsa totally embrace the hustle as a new immigrant in Canada viewing hardships as opportunities for growth. As a matter of fact, Watsa started an MBA program in Canada with a purpose. As Thomas mentions, “He had set himself a three-point plan on arriving: get his MBA, get established in Canada, and save up enough money in two years to bring Nalini over from India and get married. With a strong work ethic and discipline with money, he managed to hit goal number three a full year ahead of schedule.”

While other students at the MBA programs were mostly from well-to-do families, Watsa did not see this as a disavantaged. He only saw opportunities because he was confident that hard work and a little luck would pay off well for him in the future. As Watsa explains, “The biggest factor in India might be who you knew, but in Canada the biggest factor was just you. Anything was possible.”

“I had never seen snow before. When winter came, it was cold and I learned to wear long johns to stay warm. It was an experience—a real immigrant experience—and I always thought that was a good thing. A lot was new and in the years that followed, I picked up skills that I never thought I would have. As an immigrant, you have to do that: You’re at the bottom. My kids were born here in Canada. I tell them they have one major negative in their upbringing—they weren’t immigrants.”
— Prem Watsa

As a matter of fact, business school was extremely difficult for Watsa who was often frustrated due to his engineering-trained mind. He explains that “it was really tough. It was a different way of thinking. In engineering, there is one right answer: You take your formulas, plug in the numbers, and there is your answer. In business school, you come with these sets of assumptions and you find this here is the answer if you do it this way, but that there might be another answer too. For the longest time, it drove me crazy. How can you have two right answers? That first year was especially tough. You have the case method, which is fantastic, where you break into small groups and there is lots of discussion. It was very tough to get used to. And to later have to stand up and make your argument to sixty other students, you learn you really had to be prepared.”

Nonetheless, business school was a blessing for Watsa as he obtained a job at an insurance company called Confederation Life upon completion of his MBA. There, he had great influences such as John Watson who taught him the teachings of Benjamin Graham and of value investing. This was his “road to Damacus moment”. Thomas explains that “It was only a few days into his new job that Watsa got a surprise bonus in his orientation. The new recruit had received his pencils, erasers, foolscap, and IBM typewriter. Then Watson did a walk-by and dropped a fat book on his desk with a thud and a terse command: “Read this!” The book was Security Analysis by Benjamin Graham and his professor colleague at Columbia Business School in New York, David Dodd. “The first thing he said to me was ‘Forget what you learned at business school.’ I read it fifty times if I read it once.””

“I read that book from John Watson and I had my ‘road to Damascus’ moment. All of a sudden, things were obvious. The light clicked on—long-term value investing, downside protection, margin of safety, all of the things we take for granted were right there. I could see the approach really clearly and how the market works. I was so excited—so much so that I said to my wife, ‘If we have a son, let’s name him Ben.’ She agreed, and now Ben is a value guy too. It’s in our blood.”
— Prem Watsa

To conclude, Prem Watsa’s story is perfect example of a Horatio Alger’s rags to riches story. A young immigrant that started with only eight bucks in his pocket when he first arrived to Canada ended up launching his own value investment first on Bay Street. As Thomas writes, “Watsa likes to tell that eight-dollars-in-my-pocket story. It grounds him, and he hopes it inspires others, just like Horatio Alger. The same goes for the story of getting his first big job when no one else turned up for the final interview. Ditto how that fateful move brought him to John Watson who brought him to Ben Graham. It’s important to count one’s blessings. Another story of inspiration and gratitude comes up often. In it he is twenty years old, still in India, and catching the train back to Hyderabad from school in Chennai. Crouched on the steps of the jam-packed third-class carriage, he is holding on for dear life and some guy sits down next to him and says, “Have you ever read Napoleon Hill’s book Think and Grow Rich? You have to read it.””

This rags to riches story reminds me of how Chung Ju-Yung built Hyundai from practically nothing. Chung was always focused on working hard, as he often said, “Do it until nothing more can be done. Give it your all ‘til the very end.” which can be defined as his essence as a person and his fundamental principle of life. Chung explains that even for the most simple and most mundane tasks in life, it is important to put your best effort to achieve the best result possible.

“I realized that even simple tasks require practice. With the skills I acquired during those three nights, I soon became one of the best delivery boys in the city. Now, I was able to deliver two big bags of rice at a time. (…) My monthly pay increased to two bags and then to three. No matter how small the task, such as delivering rice on a bicycle, I pour all my energy into achieving the best possible result. Half measures, compromises, cutting corners, or “being realistic” do not exist in my world.”
— Chung Ju-Yung

This motto of his to “Do your best till there is nothing more to do” comes from his observation of bedbugs. In fact, he explains that “Even bedbugs think long and hard, and use every bit of energy they have to achieve their goal, and ultimately they succeed. I’m no bedbug, I’m a man. These bedbugs can surely teach a man a few lessons. If these bedbugs can do it, why can’t we men do it? We just need to stick to it and not quit. We need to emulate these bedbugs.”

Chung Ju-Yung believes that giving it your all and working diligently can make up for any shortfalls you may have. For example, while Chung Ju-Yung stopped his formal education after the sixth grade, he more than made up for it by reading books diligently. In fact, he once said that “if my first mentors were my parents, then my second mentors were books.”

“The story of my life demonstrates that one does not need great wealth and education to become successful. Even though I was poor and had little education, I am running one of the world’s most successful businesses. For those people who are in a difficult situation but continue to have big dreams, I hope my life can be an example that inspires them to push forward toward a better life through honest, hard work.”
— Chung Ju-Yung

Furthermore, Chung believes that one must work diligently every day in order to have steady improvement in life which can lead to success. In fact, he once said that “unless your life goal is wasting time, then the first thing I recommend is to be diligent. Being diligent forces you to move a lot, think a lot, and work a lot. Diligence mirrors your sincerity about living a full life. So I don’t trust anyone who is lazy. If you are diligent in attending to your daily needs, then over time you will become credible and reap the benefits of your diligence.”

“If you are diligent for a day, you will sleep comfortably for a night. If you are diligent for a month, the quality of your life will noticeably improve. If you are diligent for a year, two years, 10 years, your whole life... your accomplishments will be recognized by all. The diligent lead lives a 100 times more productive than the lazy. Their lives are thus more fulfilling. If you work 10 times more than a lazy person, then you are in fact shouldering the lives of hundreds.”
— Chung Ju-Yung

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Think Long-Term

“Our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.”
— Warren Buffett

Prem Watsa’s journey as an investor at Fairfax Financial Holdings demonstrates how adopting a patient, disciplined approach to investing can yield extraordinary results over decades. As mentioned previously, Watsa is an avid follower of Benjamin Graham’s value investing. Thomas mentions that “Fairfax lives for the long term. The company has taken a meandering path, but it has been true to its strategy from day one. It’s all laid out in Watsa’s first letter to shareholders, and you can track it over forty years to learn that when Watsa talks about future plans, he’s looking further out than you might expect a company to be looking.”

For Watsa, Graham’s value investing wasn’t just an investment philosophy, it was a religion. In fact, Watsa mentions that “for Roger, Brian Bradstreet, me, and a few others, we just had to read Graham and we concluded: ‘This is our religion; this is our way of thinking. We are not going to go any other way.’ It either grabs you immediately; or it never grabs you at all.”

“Our investment philosophy is based on the value approach as laid out by Ben Graham and practiced by his famous disciple, Warren Buffett. This means we buy stocks of financially sound companies at prices below their underlying long-term values. We expect to make money over time, not in the next month or two. In fact, in the short term, stock prices could go well below our cost. In our purchases, we are always trying to first protect your capital from long-term losses before attempting to make money.”
— Prem Watsa

Central to value investing is the understanding that the market is a voting machine in the short run but a weighting machine in the long run. This perspective allows investors to ignore the daily fluctuations of stock prices and focus on the company’s fundamentals such as the growth of the company in terms of book value. In fact, the goal at Fairfax was to “continue to compound book value per share at rates in excess of 20 percent over the long term.” On this, Watsa was extremely transparent to his shareholders. He says, “it is really important to not just have targets but to put them down in writing and make them transparent. It shapes how you make decisions and priorities year to year. I think it’s unlikely that we would have been successful as we were with our performance if we hadn’t enshrined them as targets.”

Furthermore, Watsa writes in one of his shareholders letter that “Our major objective will be to run the company for the long-term benefit of all shareholders. As shareholders ourselves, we plan on providing you with the type of information that we ourselves would find useful. This annual report is our first stab at more complete disclosure.”

“How should you judge our performance? We think all companies should be measured on their after-tax return on common shareholders’ equity. In Canada, the average company has earned about 13% on shareholders’ equity over many decades. Our objective is to earn a long-term return averaging 20%, while maintaining the financial strength of the company.”
— Prem Watsa

This is a perfect moment to remind ourselves of Graham’s approach to investing which is perhaps his most enduring legacy. He pioneered the concept of value investing, advocating for a disciplined and analytical approach to the stock market. His insights reveal a foundational principle: investing should be grounded in thorough analysis and a clear understanding of the intrinsic value of assets.

As a matter of fact, Graham’s career on Wall Street coincided with a period of rapid change and unprecedented speculation. He witnessed firsthand the irrational exuberance of the roaring twenties and the devastating consequences of the 1929 crash. These experiences solidified his conviction that market prices often deviate significantly from the intrinsic value of a security. As he once said, “If you speculate, you’ll lose your money. Always remember that.”

As such, Benjamin Graham encouraged a more systematic approach to investing comparatively to his peers. His contrarian approach focused on identifying undervalued companies and exploiting market inefficiencies. He meticulously analyzed financial statements, seeking companies with strong fundamentals trading at a discount of their book value. He once said, “My operations consisted largely of buying common stocks that were selling well below their true value as determined by dependable analysis.”

“I concluded that money could be made both conservatively and plentifully by buying common stock which analysis showed to be selling too low and selling against the other common stocks which a similar analysis indicated to be overpriced.”
— Benjamin Graham

However, despite being quite successful as a value investor himself, Graham believes that investing is quite complex for the common individual. As he once said, “I have little confidence even in the ability of analysts, let alone untrained investors, to select common stocks that will give better than average results... Consequently, I feel that the standard portfolio policy should be to duplicate, more or less, the Dow Jones Industrial Average.” This is eerily similar to Warren Buffett’s point of view. Buffett once said, “In my view, for most people, the best thing to do is to own the S&P 500 index fund.”

As we have learned previously, Benjamin Graham is one of the biggest influences on Warren Buffett’s investment philosophy. As a matter of fact, according to Buffett, he took three main principles from Ben Graham’s investment philosophy:

1. A stock is the right to own a little piece of a business. A stock is worth a certain fraction of what you would be willing to pay for the whole business.

2. Use a margin of safety . Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors. The way to advance, above all, is by not retreating.

3. Mr. Market is your servant, not your master . Graham postulated a moody character called Mr. Market, who offers to buy and sell stocks every day, often at prices that don’t make sense. Mr. Market’s moods should not influence your view of price. However, from time to time he does offer the chance to buy low and sell high.

Firstly, Buffett recognises that stocks should be seen as a piece of business rather than a bunch of numbers on a screen. While the majority of people are speculators who are trading stocks as if they were chips in a casino, value investors such as Buffett try to identify the total value of the chips.

Secondly, Benjamin Graham mentions that value investors must have a margin of safety when investing, meaning that they must leave plenty of room for error. Buffett illustrates this concept of margin of safety with the following saying: “Buy one dollar for fifty cents.”

“You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses. But you do not cut it close. That is what Ben Graham meant by having a margin of safety.You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin.”
— Warren Buffett

Finally, on the concept of “Mr. Market”, I’ll allow Buffett to explain it in his own words. In his 1987 Berkshire Hathaway letter to shareholders, he wrote the following:

“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?

The value of market esoterica to the consumer of investment advice is a different story. In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.

Following Ben’s teachings, Charlie and I let our marketable equities tell us by their operating results – not by their daily, or even yearly, price quotations – whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.”
— Warren Buffett

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Corporate Culture

“Corporate culture is the only sustainable competitive advantage that is completely within the control of the entrepreneur.”
— David Cummings

Prem Watsa and his team at Fairfax understood that a strong corporate culture can be a durable competitive advantage, a moat that cannot be easily replicated. At Fairfax, the company is built on the concept of being fair and friendly in all dealings, a principle that guides acquisitions, management and daily operations.

This ethos is actually embedded in the company’s name and is defined not solely as a marketing slogan but as a non-negotiable standard of behavior. Watsa mentions, “Fair, because in all our dealings we try not to take advantage of anyone. Friendly, because we try to go the extra step to treat everyone with more than just professional courtesy, and because we don’t engage in hostile acquisitions. That’s our culture.”

As a matter of fact, Watsa’s upbringing in India shaped how he “developed a sensitivity to people, and I think that was what influenced me to come up with the idea that you can build a company that was good for everybody,” explains Watsa. “I don’t know precisely where it came from, but when we launched the company, it just seemed like the obvious thing to do. Our company’s motto, fair and friendly, is a reflection of that kind of thinking, and family values.”

This culture allows Fairfax to attract and retain the right people and partners. It builds a reputation of trust that opens doors and sustains relationships even through difficult periods. Watsa believed that treating every single people well was both the right way to live and a superior business strategy.

“We have found it odd, but business tends to be considered a jungle and a war zone. And many people do not treat people well but just treat them as bodies. We have found just the opposite. Treating people well has been a major plus for us. When we say treating people well, we mean every single person you come across. This just happens to be the way we want to live, but the advantage in a business sense over time is that inside your company, you see ordinary people do extraordinary things. And outside your company, people trust you.”
— Prem Watsa

This cultural moat was rigorously protected. Arrogance, rudeness and self-interest were antithetical to the team-oriented, humble environment they fostered. As such, people who didn’t match the culture at Fairfax were quickly disposed. As Watsa explains, “Anyone who’s rude, arrogant, proud, foul-mouthed or not team-oriented has never managed to last long here. We are very open about our culture being one where you treat others well, so that should discourage anyone who thinks otherwise. We want people who are smart, hard-working, humble and honest. That means no put-downs, no personal agendas and the best ideas win, no matter who they come from.”

“We have found it odd, but business tends to be considered a jungle and a war zone. And many people do not treat people well but just treat them as bodies. We have found just the opposite. Treating people well has been a major plus for us. When we say treating people well, we mean every single person you come across. This just happens to be the way we want to live, but the advantage in a business sense over time is that inside your company, you see ordinary people do extraordinary things. And outside your company, people trust you.”
— Prem Watsa

Similarly, we have learned that Richard Farmer built Cintas with corporate culture as their ultimate competitive advantage. He explains that “Our culture is rare, invisible, and difficult—if not impossible—to replicate.Competitors can copy our sales material, our products and even some of our systems, but they cannot copy our culture.”

“I swore that I would do whatever it took to develop obvious and authentic competitive advantages. Today, we recognize that our most significant competitive advantage is very rare, intangible, and impossible to replicate. I’m talking—again—about our corporate culture.”
— Richard Farmer

However, in order to implement a great corporate culture at Cintas, it was primordial for Farmer to create a vision for the company to lead his employees. Cintas’s vision was the following:

1. To be known as a company that insists on absolute honesty and integrity in everything we do.

2. To have a highly talented and diverse workforce which is harmonious and compatible with our corporate culture.

3. To have a uniform rental presence in every city in the United States.

4. To leverage that field presence to provide our customers with additional products and services.

5. To expand our uniform business into segments of industry we don’t normally service (such as hospitality, transportation, restaurants, and so forth).

Farmer explains that it is important for a company to have a vision and to share it to its employees. In fact, he explains that “employees are not just doing a job. They’re sharing a vision. If they share a vision, a job is more than a job.”

He uses the following anecdote to explain the importance of having a common vision among a company:

“I used to tell the story about a man walking down the street in the middle of a big city and how he came upon a construction site. Bulldozers and earthmoving machines were busy on the site. People were working hard. He came across three men in a ditch. He asked the first man, “What are you doing?”

“I’m digging a ditch,” the first man said.

Our protagonist asked the second man, “What are you doing?”

“We’re digging a ditch for the water line for that building going up over there, the second man said.

Our protagonist asked the third man, “What are you doing?”

The man looked up and replied, “We’re building a cathedral. It will be a big beautiful cathedral with five big tall spires and beautiful stained glass windows. It will seat 500 people. It will be the most beautiful church in this city. That’s what we’re doing.”

Every time I’d tell that story, I’d ask my audience which of those men do you think is most motivated. Obviously the man building a beautiful church will be more committed than the others because he shares a vision. He may be in a ditch, but he is proud of what he is doing. That simple story demonstrates why it’s important to have a vision and share it with everyone.”
— Richard Farmer

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Today’s Chapter is based on the book “My Early Life: 1874-1904” by Winston Churchill.

Winston Churchill was a British statesman, orator, and writer who served twice as Prime Minister of the United Kingdom, most famously leading the country to victory in the Second World War (1940–1945, 1951–1955). Born in 1874 and dying in 1965, he became renowned for his wartime speeches, his role in shaping Allied strategy against Nazi Germany, and later received the Nobel Prize in Literature in 1953 for his historical and biographical writings.

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Here’s what I learned:

Self-Education

“I never let my schooling interfere with my education.“
— Mark Twain

Winston Churchill’s formal academic record was, by his own admission, horrible. He was often at the bottom of his class and seemed destined for mediocrity. As a matter of fact, he detested the fact that he was forced to learn dead languages such as Latin and Greek. He hated learning the classics because it wasn’t interesting to him. Churchill explains, “Where my reason, imagination or interest were not engaged, I would not or I could not learn. In all the twelve years I was at school no one ever succeeded in making me write a Latin verse or learn any Greek except the alphabet. I do not at all excuse myself for this foolish neglect of opportunities procured at so much expense by my parents and brought so forcibly to my attention by my Preceptors. Perhaps if I had been introduced to the ancients through their history and customs, instead of through their grammar and syntax, I might have had a better record.”

However, this very failure led him to focus on studying English, and luckily for Churchill, he was great at it. This early focus on English gave him a masterful command of the English language that was primordial for his success as a writer and as a politician. As he mentions, “However, by being so long in the lowest form I gained an immense advantage over the cleverer boys. They all went on to learn Latin and Greek and splendid things like that. But I was taught English. We were considered such dances that we could learn only English.”

“Thus I got into my bones the essential structure of the ordinary British sentence–which is a noble thing. And when in after years my schoolfellows who had won prizes and distinction for writing such beautiful Latin poetry and pithy Greek epigrams had to come down again to common English, to earn their living or make their way, I did not feel myself at any disadvantage.”
— Winston Churchill

Furthermore, Churchill believes that his education truly began when he developed a personal hunger for knowledge while he was stationed in India as a soldier. There, free from formal education, he embarked on a disciplined program of reading that was entirely self-directed by his interest. In fact, while Churchill’s passion for reading started early when he was nine and a half years old when he was reading books beyond his years, he truly went through a self-made education at twenty-two. He requested crates of books from his mother and embarked on a rigorous schedule of reading that included Plato, Aristotle, Schopenhauer, Malthus, Macaulay, Gibbon and Darwin.

Churchill writes, “IT was not until this winter of 1896, when I had almost completed my twenty-second year, that the desire for learning came upon me. I began to feel myself wanting in even the vaguest knowledge about many large spheres of thought. I had picked up a wide vocabulary and had a liking for words and for the feel of words fitting and falling into their places like pennies in the slot. I caught myself using a good many words the meaning of which I could not define precisely. I admired these words, but was afraid to use them for fear of being absurd.”

“From November to May I read for four or five hours every day history and philosophy. Plato’s Republic–it appeared he was for all practical purposes the same as Socrates; the Politics of Aristotle, edited by Mr Welldon himself; Schopenhauer on Pessimism; Malthus on Population; Darwin’s Origin of Species: all interspersed with other books of lesser standing. It was a curious education. First because I approached it with an empty, hungry mind, and with fairly strong jaws; and what I got I bit; secondly because I had no one to tell me: ‘This is discredited’. ‘You should read the answer to that by so and so; the two together will give you the gist of the argument’. ‘There is a much better book on that subject’, and so forth.”
— Winston Churchill

Finally, one key element that helped with his learning that Churchill picked up during this time was the “Socratic method”. He explains that it is “a way of giving your friend his head in an argument and progging him into a pit by cunning questions. Who was Socrates, anyhow? A very argumentative Greek who had a nagging wife and was finally compelled to commit suicide because he was a nuisance! Still, he was beyond doubt a considerable person. He counted for a lot in the minds of learned people. I wanted ‘the Socrates story’. ”

As we have previously learned, the socratic approach is great way to dissect problems into first principles. A great example of a first principles thinker is Elon Musk. When he faced against a complex problem, he always tried to reframe it by using first-principles thinking. His work at Space X is a great example of this. Considering that rockets are absurdly expensive, Musk knew that he had to find a way to build cheaper rockets to send people to Mars.

As such, he implemented an “idiot index”, which calculated how much more costly a finished product was compared to the cost of its basic materials. By consequence, he realized that a rocket, which has a high idiot index, was around two percent of the typical material price. This was often due to inefficient manufacturing. As Musk would put it, “If the ratio is high, you’re an idiot.”

By consequence, Musk knew that the solution for cheaper rockets was for Musk to build them himself. If he could device a more efficient rocket manufacturing technique, he would be able to make rockets at a fraction of the cost.

“I think people’s thinking process is too bound by convention or analogy to prior experiences. It’s rare that people try to think of something on a first principles basis. They’ll say, “We’ll do that because it’s always been done that way.” Or they’ll not do it because “Well, nobody’s ever done that, so it must not be good. But that’s just a ridiculous way to think. You have to build up the reasoning from the ground up—“from the first principles” is the phrase that’s used in physics. You look at the fundamentals and construct your reasoning from that, and then you see if you have a conclusion that works or doesn’t work, and it may or may not be different from what people have done in the past.”
— Elon Musk

Furthermore, Musk loved to question every requirements, especially when it came from regulators. In fact, a big reason why rocket components were expensive is due to the fact that they are subject to hundreds of specifications and requirements mandated by the military and NASA. Elon Musk would often asks his engineers, both at Tesla and at SpaceX, to always question these “requirements” through first-principle thinking. By doing so, one realises that more often than not, these requirements are not necessary.

As Musk would say, “Step one should be to question the requirements, make them less wrong and dumb, because all requirements are somewhat wrong and dumb. And then delete, delete, delete.”

By questioning requirements and seeing them as mere recommendations, Musk was not only able to save money, but he was also able to make his manufacturing of rockets and cars much more efficient.

“The only rules are the ones dictated by the laws of physics. Everything else is a recommendation.”
— Elon Musk

Elon Musk was so serious about this concept of questioning all requirements that he implemented a five-point checklist that was dubbed “the algorithm”. Here’s a summary of it:

“1. Question every requirement. Each should come with the name of the person who made it. You should never accept that a requirement came from a department, such as from “the legal department” or “the safety department.” You need to know the name of the real person who made that requirement. Then you should question it, no matter how smart that person is. Requirements from smart people are the most dangerous, because people are less likely to question them. Always do so, even if the requirement came from me. Then make the requirements less dumb.

2. Delete any part or process you can. You may have to add them back later. In fact, if you do not end up adding back at least 10% of them, then you didn’t delete enough.

3. Simplify and optimize. This should come after step two. A common mistake is to simplify and optimize a part or a process that should not exist.

4. Accelerate cycle time. Every process can be speeded up. But only do this after you have followed the first three steps. In the Tesla factory, I mistakenly spent a lot of time accelerating processes that I later realized should have been deleted.

5. Automate. That comes last. The big mistake in Nevada and at Fremont was that I began by trying to automate every step. We should have waited until all the requirements had been questioned, parts and processes deleted, and the bugs were shaken out.”

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Master of English

“He [Winston Churchill] mobilized the English language and sent it into battle.“
— Edward R. Murrow

After studying great English writers like Thomas Macaulay and Edward Gibbon, Churchill became a great writer in his own right and he even won the Nobel Prize in Literature in 1953. As such, it is fair to say that we have much to learn from Churchill both in writing and in communicating in the English language.

In short, Churchill believed in the importance of structure in writing. As a matter of fact, he compared writing to many different kind of things such as architecture where structure is important. He explains, “Writing a book is not unlike building a house or planning a battle or painting a picture. The technique is different, the materials are different, but the principle is the same. The foundations have to be laid, the data assembled, and the premises must bear the weight of their conclusions. Ornaments or refinements may then be added. The whole when finished is only the successful presentation of a theme.“

As such, Churchill believed that to master writing in English, you need to know how to use paragraphs and sentences to your advantage. He mentions, “I began to see that writing, especially narrative, was not only an affair of sentences, but of paragraphs. Indeed I thought the paragraph no less important than the sentence. Macaulay is a master of paragraphing. Just as the sentence contains one idea in all its fullness, so the paragraph should embrace a distinct episode; and as sentences should follow one another in harmonious sequence, so the paragraphs must fit on to one another like the automatic couplings of railway carriages.”

Similarly, he understood that separating things into chapters was also an art. He explains that “Each chapter must be self-contained. All the chapters should be of equal value and more or less of equal length. Some chapters define themselves naturally and obviously; but much more difficulty arises when a number of heterogeneous incidents none of which can be omitted have to be woven together into what looks like an integral theme.”

“Finally the work must be surveyed as a whole and due proportion and strict order established from beginning to end. I already knew that chronology is the key to easy narrative. I already realised that ‘good sense is the foundation of good writing’. I warned myself against the fault of beginning my story as some poor people do ‘Four thousand years before the Deluge’, and I repeated earnestly one of my best French quotations, ‘L’art d’être ennuyeux c’est de tout dire.’ I think I will repeat it again now.”
— Winston Churchill

This is a great opportunity to review what we have learned from Stephen King, who was kind enough to share with us a few concepts to help us improve as writers in his memoir. And, the most important tenet is to keep things simple. As a matter of fact, he provides us a list of things we must avoid in order to write better:

1. Avoid passive verbs: King believes that “With an active verb, the subject of the sentence is doing something. With a passive verb, something is being done to the subject of the sentence. The subject is just letting it happen. You should avoid the passive tense.”

2. Avoid the overuse of adverbs: King explains that “The adverb is not your friend. Adverbs, he said sternly. With adverbs, the writer usually tells us he or she is afraid he/ she isn’t expressing himself/ herself clearly, that he or she is not getting the point or the picture across.” Or as Mark Twain once said, “Substitute ‘damn’ every time you’re inclined to write ‘very’; your editor will delete it and the writing will be just as it should be.”

3. Avoid the use of other verbs outside of “say” in a dialogue attribution: King mentions that “The best form of dialogue attribution is said, as in he said, she said, Bill said, Monica said.”

Furthermore, King believes that the root of most bad writing comes from fear. As a matter of fact, a bad writer usually thinks he or she needs to use adverbs or complex words because they are fearful that he or she isn’t expressing himself or herself clearly, that he or she is not getting the point or the picture across. However, King believes that these actions tend to lead to opposite effects.

King mentions that “Good writing is often about letting go of fear and affectation. (…) Good writing is also about making good choices when it comes to picking the tools you plan to work with.” According to King, if you don’t have a good toolbox, an easy way to write better is to strictly use noun-verb sentences; once again, a proof of the power of keeping things simple.

“Take any noun, put it with any verb, and you have a sentence. It never fails. Rocks explode. Jane transmits. Mountains float. These are all perfect sentences. Many such thoughts make little rational sense, but even the stranger ones (Plums deify!) have a kind of poetic weight that’s nice. The simplicity of noun-verb construction is useful—at the very least it can provide a safety net for your writing.”
— Stephen King

Finally, King mentions the necessity to rewrite in order to keep your writing as simple as possible. King explains that the best lesson he received in terms of writing came from his English literature teacher, John Gould, who once told him, “When you write a story, you’re telling yourself the story. When you rewrite, your main job is taking out all the things that are not the story.”

As a matter of fact, King’s approach to writing involves a structured process that begins with the first draft. Once that is done, he recommends a period of rest before beginning the rewriting process. As he explains, “If you’ve never done it before, you’ll find reading your book over after a six- week layoff to be a strange, often exhilarating experience. It’s yours, you’ll recognize it as yours, even be able to remember what tune was on the stereo when you wrote certain lines, and yet it will also be like reading the work of someone else, a soul-twin, perhaps. This is the way it should be, the reason you waited. It’s always easier to kill someone else’s darlings than it is to kill your own.”

King mentions that in his rewriting process, or the second draft, he will try to remove all unnecessary words in order to speed up the story. His formula is simple: “2nd Draft = 1st Draft minus 10%.” A formula to works every time.

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Destiny

“There is no immortality but the memory that is left in the minds of men.”
— Napoleon

For Napoleon Bonaparte, nothing was more humiliating than for one to not achieve his destiny. For him, it was all a bout making a name for himself to be remembered throughout history. In fact, he once said that to have lived without glory, without leaving a trace of one’s existence is to not have lived at all. Napoleon once said, “Everything on earth is soon forgotten, except the opinion we leave imprinted on history.”

Napoleon believed that destiny can be fulfilled by the exploitation of every opportunities or accidents that are presented in front of you. This can only be done with exact calculation of all the chances, and by precise determination of the decisive moment for action. A clever man is one who understands this principle.

“All great events hang by a single thread. The clever man takes advantage of everything, neglects nothing that may give him some added opportunity; the less clever man, by neglecting one thing, sometimes misses everything.”
— Napoleon

In a similar way, Winston Churchill believed he was destined for glory. As a descendant of John Churchill, 1st Lord of Marlborough and of Lord Randolph Churchill, little Winston believed he was to become a successful politician. However, he understood that to reach this goal, he had to obtain fame and glory and, in the Victorian era, this was done by military success.

Unfortunately for Churchill, wars were scarce during his times. He writes, “In the closing decade of the Victorian era the Empire had enjoyed so long a spell of almost unbroken peace, that medals and all they represented in experience and adventure were becoming extremely scarce in the British Army.”

“It did seem such a pity that it all had to be make-believe, and that the age of wars between civilised nations had come to an end for ever. If it had only been 100 years earlier what splendid times we should have had! Fancy being nineteen in 1793 with more than twenty years of war against Napoleon in front of one! However, all that was finished.”
— Winston Churchill

As such, it is not surprising that Churchill jumped at the first opportunity for him to participate in combat. He even went as far to use his personal connection to be transferred to zones of combat. He mentions that he “first met Sir Bindon Blood. This general was one of the most trusted and experienced commanders on the Indian frontier. He was my host’s lifelong friend. He had come home fresh from his successful storming of the Malakand Pass in the autumn of 1895. If future trouble broke out on the Indian frontier, he was sure to have a high command. He thus held the key to future delights. I made good friends with him. One Sunday morning on the sunny lawns of Deepdene I extracted from the General a promise that if ever he commanded another expedition on the Indian frontier, he would let me come with him.”

Luckily for Churchill, he was able to see combat first in Cuba and later on during the Second Boer War, where he became famous for being a captive of the Boers and making a great escape. As a matter of fact, Churchill was captured by the enemy after an armoured train ambush. He faced indefinite imprisonment due to his background as a Lord. For a man of his ambition, however, this was a fate worse than death. His escape from the Boer prison in Pretoria is the stuff of legend and he quickly became a war hero. The escape made him a global celebrity and paved his way into Parliament. For Churchill, this was all planned as his destiny, but it is important to note that he succeeded by creating these opportunities. Similarly, he offers advices to young people, urging them to reject passivity. He views the twenties as the golden years of action, where one has the energy to fail, to recover, and to make a mark. His philosophy is one of aggressive optimism, a refusal to take “no” for an answer, and a determination to impose one’s will upon the world.

“When I look back upon them I cannot but return my sincere thanks to the high gods for the gift of existence. All the days were good and each day better than the other. Ups and downs, risks and journeys, but always the sense of motion, and the illusion of hope. Come on now all you young men, all over the world. You are needed more than ever now to fill the gap of a generation shorn by the War. You have not an hour to lose. You must take your places in life’s fighting line. Twenty to twenty-five! These are the years! Don’t be content with things as they are. ‘The earth is yours and the fulness thereof.’ Enter upon your inheritance, accept your responsibilities. Raise the glorious flags again, advance them upon the new enemies, who constantly gather upon the front of the human army, and have only to be assaulted to be overthrown. Don’t take No for an answer. Never submit to failure. Do not be fobbed off with mere personal success or acceptance. You will make all kinds of mistakes; but as long as you are generous and true, and also fierce, you cannot hurt the world or even seriously distress her. She was made to be wooed and won by youth. She has lived and thrived only by repeated subjugations.”
— Winston Churchill

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Beyond the Book

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Today’s Chapter is based on the book “The Davis Dynasty: Fifty Years of Successful Investing on Wall Street“ by John Rothchild.

The Davis family refers to three generations of American investors and asset managers who built a long-running Wall Street investing dynasty. Starting with value investor Shelby Cullom Davis, who turned about $100,000 into hundreds of millions through concentrated, long-term stock picking, his son Shelby M. C. Davis and grandsons Christopher and Andrew expanded the legacy by founding and running Davis Selected Advisers (Davis Advisors), a major equity-focused mutual fund firm managing tens of billions of dollars over time.

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Here’s what I learned:

Frugality

“A penny saved is a penny earned.”
— Benjamin Franklin

The Davis family’s story is a great example of how relentless frugality can serve as the foundation for extraordinary financial success. Shelby Cullom Davis, the patriarch, exemplified a lifestyle where every penny saved was redirected into investments with the goal of accumulating wealth over multiple generations. This wasn’t mere penny-pinching for its own sake; it was a deliberate strategy to maximize capital for compounding in the stock market. Davis’s habits, often seen as quirky or even annoying by outsiders, instilled in his family a profound understanding that wealth isn’t just about earning more but about spending far less and letting the savings work tirelessly through investments.

One striking example of Davis Sr.’s frugality comes from his everyday choices, like his tennis habits. Rothchild reports that he continued to play with ratty, old tennis balls even though he could of easily afforded new ones. Similarly, this frugal mindset also extended to major life decisions such as housing. He avoided unnecessary expenses, preferring to rent rather than own until circumstances forced a purchase, and even then, he sought a bargain.

“Kathryn had saved $ 30,000-her father had provided all his children the same amount so each of them could buy a house. Davis and Kathryn had continued to rent because Davis thought houses were too expensive to maintain.”
— John Rothchild

While Davis Sr. was known as “the stingy man” among the family as a long-standing family joke, his frugality was instilled at a very young age to his children and later grandchildren. In fact, Rothchild mentions that “the wallet hugging impressed his children and his grandchildren that the surest way to build wealth is to spend less than you make and put the balance to work in stocks.”

As such, frugality was, in Davis Sr.’s household, a deliberate training tool. He wanted children to earn, to respect the value of money, and to avoid the entitlement traps that often accompany sudden wealth. Davis explained his rationale bluntly: “You’re getting nothing from me. That way, you won’t be robbed of the pleasure of earning it yourself.” By consequence, his two children were not entitled to the wealth gained by Davis Sr. Instead, he gave them “a gift that kept on giving: an understanding of the basics of compounding and a primer on how to pick stocks. This was a Wall Street version of teaching a hungry person to fish instead of giving him a filet. Davis decided to ship his filets to the universities, foundations, and think tanks he supported, while teaching his offspring to be a fisherman.“

“Davis passed along his conviction that frugality was more than idle virtue. In his view, a dollar spent was a dollar wasted; a dollar unspent could be sent off to compound. He taught the children not to squander pecuniary resources. At home or on the road, they treated money the way desert tribes treat water—using as little as possible for any given task. Inside an investment account, which was where it belonged, money was a joyous and nourishing substance. Outside an investment account, in the hands of spenders, money was worrisome and potentially toxic. It sapped self-reliance and subverted the work urge of its possessors.”
— John Rothchild

Similarly to his own children, Davis Sr. ensured that frugality was also instilled in his grandchildren. In fact, he once refused to buy his grandson a $1 hot dog and told him: “Do you realize if you invest that dollar wisely it will double every five years? By the time you reach my age, in 50 years, your dollar will be worth $ 1,024. Are you so hungry you need to eat a $ 1,000 hot dog?“ This is eerily similar to Warren Buffett who once told his wife “Do you realize how much that is if you compound it over 20 years?” after she spent $15,000 worth of furniture.

This importance put into frugality reminds me of Benjamin Franklin who had “frugality” as one of his thirteen virtues. In fact, Franklin’s upbringing instilled in him a deep respect for hard work and thriftiness, values that shaped his success and remained central to his philosophy throughout his life. As a matter of fact, Franklin explains that his habits of frugality came from his father who often repeated to him this proverb of Solomon, “Seest thou a man diligent in his calling, he shall stand before kings, he shall not stand before mean men.”

As such, when he first started his career as a printer, his frugal approach was already evident. As Franklin once wrote, “I dressed plainly; I was seen at no places of idle diversion. I never went out a fishing or shooting; a book, indeed, sometimes debauched me from my work, but that was seldom, snug, and gave no scandal; and, to show that I was not above my business, I sometimes brought home the paper I purchased at the stores thro’ the streets on a wheelbarrow.”

Similarly, Franklin was also frugal in the way he managed his household. He explained, “We kept no idle servants, our table was plain and simple, our furniture of the cheapest. For instance, my breakfast was a long time bread and milk (no tea), and I ate it out of a twopenny earthen porringer, with a pewter spoon.”

“In order to secure my credit and character as a tradesman, I took care not only to be in reality industrious and frugal, but to avoid all appearances to the contrary.”
— Benjamin Franklin

Furthermore, his frugality even influenced Benjamin Franklin’s eating habit. As a matter of fact, in order to save money, when he was 16, Franklin started following a vegetable diet as he could end up saving half of what his brother paid him to board himself. This would not only allow himself more money to spend on books but more time to read.

As Franklin mentioned, “I made myself acquainted with Tryon’s manner of preparing some of his dishes, such as boiling potatoes or rice, making hasty pudding, and a few others, and then proposed to my brother, that if he would give me, weekly, half the money he paid for my board, I would board myself. He instantly agreed to it, and I presently found that I could save half what he paid me. This was an additional fund for buying books. But I had another advantage in it. My brother and the rest going from the printing-house to their meals, I remained there alone, and, dispatching presently my light repast, which often was no more than a biscuit or a slice of bread, a handful of raisins or a tart from the pastry-cook’s, and a glass of water, had the rest of the time till their return for study, in which I made the greater progress, from that greater clearness of head and quicker apprehension which usually attend temperance in eating and drinking.

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Rule of 72

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
— Albert Einstein

As mentioned previously, after teaching frugality, Davis Sr. ensured his children and grandchildren learned how to invest. In fact, central to the Davis family’s success was an unwavering belief in the power of compounding, where money grows exponentially over time through reinvestment. The Davis didn’t just invest, they viewed stocks as compounding machines that, if chosen carefully and held long-term, could multiply wealth far beyond initial expectations.

This philosophy was passed down at an early age. As a matter of fact, from a very young age, Davis Sr.’s children were immersed in the family business. They did clerical work, listened to dinner-table discussions about companies and were taken on field trips to corporate headquarters. Investing was part of the family trade and it was taught through constant practical engagement. Rothchild mentions that “Shelby’s childhood was his MBA. He’d grown up on dinnertable stock talk, fact-finding missions to Hartford, and annual reports strewn about the house. He absorbed finance the way a musician’s child absorbs syncopation or the diatonic scale.” Similarly, Shelby taught his two sons Chris and Andrew in a similar fashion.

“The most important thing I taught them about the investment business is how I loved being in it, even in the lean years of the 1970s. I was convinced picking stocks was something any kid could do, and I tried to make it fun and keep it simple. The math part-accounting and spreadsheets—I figured they could learn later. I got them involved in the detective work, sniffing out clues about a company’s prospects. Sometimes, I took them along on company visits, just like my father had taken me.”
— Shelby Cullom Davis

One important lesson that was passed down among the Davis was the Rule of 72, a simple forumula to estimate how long it takes for money to double at a given interest rate. The Davis didn’t just understand compounding mathematically; they lived and breathed it as an article of faith, a force that could turn modest, consistent savings into staggering wealth over generations.

For one, Davis Sr.’s entire career was a testament to compounding. Starting at age 38 with no formal finance training, he focused on buying shares in insurance companies and held them through every imaginable market condition, allowing time to work its exponential magic. He managed to turn $50,000 into 900 million. Rothchild writes, “Over the next four and a half decades, Davis skillfully chauffeured his portfolio into one of the great Wall Street fortunes. Basically, he stuck with insurance stocks through booms, busts, bebop, beatniks, and the Beatles. When U.S. insurers got too pricey, he bought Japanese insurance stocks. In the 1960s, his Japanese holdings took off like pigeons near a firecracker. By the time he died, in 1994, he’d multiplied his original stake 18,000 times.”

The family used the Rule of 72 to make the abstract concept tangible and exciting, especially for the younger generation. They understood that an extra percentage point of return, sustained over decades, made a monumental difference. As Rothchild explained, “Through difficult times, the Davis family has found solace in the Rule of 72, realizing that if you can manage to compound your money at 10 percent per year, you’ll be well rewarded, and if you can compound at 15 percent or better (as Davis did with his own portfolio and as Shelby did with the Venture portfolio), you’ll enjoy an enormous return that will make the recent setback seem as a trivial feint.”

“The more wisely you invest, the faster your bankroll will expand. If you know the rate of return on your investment, the Rule of 72 tells you how long it will take to double your money. The greater the return, the faster the compounding, which is why an extra percent or two makes a huge difference. A 10 percent return over 21 1/2 years turns $ 100,000 into $ 400,000. At 12 percent, the payoff is $ 595,509.”
— John Rothchild

As Charlie Munger once said that the first rule of compounding is to never interrupt it unnecessarily, the Davis were long-term investors. As a matter of fact, Davis Sr. was a student of history and a believer in cycles. When he first started investing, after the end of the worst decade in modern history, he “never lost faith in Edgar Lawrence Smith’s credo that, stocks pay off in the long run. He looked beyond the breadlines, the gloomy headlines, the ravages of deflation, and the national disgust with Wall Street brokers and bankers. He focused on America’s lucrative knack for innovation.”

This reminds me of what we have learned previously from Warren Buffett, who understood compounding at a very young age. He believed that a dollar he spent today could be worth ten some years from now. As such, he “wasn’t going to hand over a dollar more than he needed to spend. Every penny was another snowflake for his snowball.” With his knowledge of this powerful knowledge, he announced to his friend Stu Erickson that he would be a millionaire by the time he would be thirty-five.

One of Buffett’s first business endeavours that shows the power of compounding was to buy a pinball machine and to place them in barbershops around time. He would then use profits he earned from his pinball machine to buy other pinball machines. He also did something similar with weighting machines:

“The weighing machine was easy to understand. I’d buy a weighing machine and use the profits to buy more weighing machines. Pretty soon I’d have twenty weighing machines, and everybody would weigh themselves fifty times a day. I thought—that’s where the money is. The compounding of it—what could be better than that?”
— Warren Buffett

However, the power of compounding is a mental model that shouldn’t be only used in investing. Compounding also works in terms of seeking wisdom or obtaining good habits. As a matter of fact, a one percent improvement every day leads to 37x improvement in a year.

Alternatively, Buffett also uses it to think about his mind and body’s health. As a matter of fact, bad habits can also compound negatively. Even more concerning is the fact that you only get one mind and one body to last a lifetime. As Buffett once said, “It’s what you do right now, today, that determines how your mind and body will operate ten, twenty, and thirty years from now.”

Buffett often mentions snowball as an analogy to understand compounding. Here’s a few of his quotes:

“I packed my little snowball very early, and if I had packed it ten years later, it would have been way different than where it stands on the hill right now. So I recommend to students that if you start out a little ahead of the game—it doesn’t have to be a lot, but it’s so much better than starting out behind the game. And credit cards really get you behind the game.”
— Warren Buffett

“The snowball just happens if you’re in the right kind of snow, and that’s what happened with me. I don’t just mean compounding money either. It’s in terms of understanding the world and what kind of friends you accumulate. You get to select over time, and you’ve got to be the kind of person that the snow wants to attach itself to. You’ve got to be your own wet snow, in effect. You’d better be picking up snow as you go along, because you’re not going to be getting back up to the top of the hill again. That’s the way life works.”
— Warren Buffett

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Davis’ Double Play

“In the book, I talk about the twin engines of 100-baggers. One engine is to have underlying earnings (or cash flow or book value or whatever the relevant metric is for the business) grow at a high rate for a long time. The second engine is to get that valuation lift.

The ideal candidate would have both of these twin engines working for you. But we live in a world that is less than ideal. And so if you get a great business that can compound for a very long time at a high rate, I wouldn’t chafe too much at paying up a bit.”
— Chris Mayer

Finally, another key element for the Davis family’s success is what they called the “Davis Double Play”. They sought companies whose earnings would grow over time, and which would also command a higher price-to-earnings ratio as the world recognized their quality. The synergy of these two factors, held over many years, produced extraordinary returns. Rothchild writes, “His $ 4,000 was now worth $ 144,000 in Mr. Market’s estimation. In terms of profit, he made 36 times his initial outlay, plus whatever dividend checks had landed in his mailbox during the waiting period. Davis called this sort of lucrative transformation ‘Davis Double Play.’ As a company’s earnings advanced, giving the stock an initial boost, investors put a higher price tag on the earnings, giving the stock a second boost.”

“The math was inspirational. In 1950, insurance companies sold for four times earnings. Ten years later, they sold for 15 to 20 times earnings, and their earnings had quadrupled. Let’s say Davis acquired 1,000 shares of Insurance USA (a fictitious example) for $ 4,000 when the company earned $ 1 a share. He held on until the company earned $ 8 a share and a crowd of camp followers pounced on the opportunity. What he’d bought for four times $ 1, they bought for 18 times $ 8. His $ 4,000 was now worth $ 144,000 in Mr. Market’s estimation. In terms of profit, he made 36 times his initial outlay, plus whatever dividend checks had landed in his mailbox during the waiting period. Davis called this sort of lucrative transformation “Davis Double Play.” As a company’s earnings advanced, giving the stock an initial boost, investors put a higher price tag on the earnings, giving the stock a second boost. Davis got a third boost from his margin loans.”
— John Rothchild

Similarly, the son, Shelby Cullom Davis Jr., was burned by paying expensive fast growers in the 1970s market and decided to shift his strategy to acquire moderately growing companies at deeply discounted prices, following the “Davis Double Play” system. Rothchild mentions, “From this point forward, he would shun high-priced fast growers and embrace lower-priced moderate growers. Companies that were nobody’s darlings when stock prices rose, he decided, were less likely to disappoint when the market fell. Why risk a pole vault when you could take the stairs?”

This lesson also reminds us that the “Davis Double Play” can also lead to disaster in the downside. If a company valued at a high P/E suddenly stops growing, the stock price can get a major haircut.

“Memorex was a fast grower with a fancy price tag-a fatal combination when the profits disappear and investors fall out of love. Then, the Davis Double Play goes into reverse. Let’s say a beloved faster grower sells at 30 times earnings and earns $ 1 a share, creating a $ 30 stock. If the earnings drop by half and disenchanted investors decide to pay only 15 times earnings, the $ 30 stock suddenly becomes a $ 7.50 stock. When further disenchantment drops the price to 10 times earnings, a $ 30 investment is whittled to $ 5.”
— John Rothchild

The proof of the success of this philosophy was in the portfolio Davis Sr. held at his death. It wasn’t a collection of thousands of frantic trades that built his wealth, but profound patience with a select few extraordinary investments. Rothchild mentions that “The printout left no doubt what had put Davis on the Forbes list. It wasn’t his phone book of stocks; it was a few names in the phone book. These were oldies from the 1960s that he had faithfully held-his financial Wyeths, Rauschen-bergs, Warhols. With the typical mutual fund turning over 100 percent of its inventory every year, and the public trading in and out of stocks and funds just as readily, Davis remained loyal. Names he owned in 1950 still occupied his portfolio in 1990.”

The “Davis Double Play” obviously reminds me of Chris Mayer’s concept of twin engines:

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Beyond the Book

Listen to "Chris Davis: Three Generations of Wealth [The Knowledge Project Ep. #189]" by The Knowledge Project

Read "Ben Franklin: The Thirteen Necessary Virtues" by Farnam Street

Read "The Rule of 72" by Mohnish Pabrai

Read "Chris Mayer on Stocks that Return 100-to-1, and How to Find Them" by MOI Global

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Today’s Chapter is based on the book “One Buck at a Time: An Insider’s Account of How Dollar Tree Remade American Retail” by Macon Brock.

Macon F. Brock Jr. was an American businessman best known as the co-founder of Dollar Tree, a single-price-point discount retail chain that grew from a handful of stores into a Fortune 500 company with thousands of locations in the United States and Canada.

Buy it on Amazon here.

Here’s what I learned:

Teamwork

“Four Seasons is the sum of its people—many, many good people.”
— Isadore Sharp

Macon Brock’s journey in building Dollar Tree is a perfect example of the fundamental truth in business that a company’s success is achieved by the people. From his humble beginnings in retail to scaling Dollar Tree into a national Chain, Brock repeatedly emphasizes that all triumps were the result of a collaborative efforts rather than individual brilliance.

As he explains, “I’m no genius. I didn’t come up with the dollar-store idea and can’t claim any flashes of brilliance that transformed one tiny store into a national chain. I worked hard—hell, I worked my ass off—but so did the people around me. Trite though it sounds, I was part of a team. It was a small team early on, and a bigger one later, but always a real team. Every member was essential to what we created, and everyone lived and worked by principles that we came to value together. Do your best. Do the right thing. When in doubt, choose the solution that works best for the long term.”

As such, Brock believes that everyone working at Dollar Tree is part of the collective effort that built Dollar Tree into what it is today, whether they are working as buyers, warehouse workers, store managers or accountants. They are all creators of Dollar Tree according to Brock. This was especially important to concept to understand especially when Dollar Tree rapidly expanded.

“The biggest key to this rapid expansion, far bigger than any other factor, was our people.”
— Macon Brock

Furthermore, Brock understood that to retain his employees at Dollar Tree, it was important to empower his employees, starting from his management philosophy to fully trust his staff. As he once said, “Like I said, ordinary people doing extraordinary things. Regarding management style, I believe you should hire people who are smart and driven to succeed, then empower those people. Trust them to achieve. Trust that they’re honest. They’re usually worth it, and if they’re not, you’ll figure it out soon enough.”

Similarly, sharing the success of the company with the employees is primordial, as such, it was common sense for Brock to provide his employees an opportunity to own shares in the business. Brock mentions, “We’ve always tried to give our people a way to share in our success. Early on, when we were running K&K and still a private company, we made it possible for our rank-and-file folks to obtain stock. Some of them made out very well when we sold the toy company. We tried to deal them into the dollar company when we were private, too. And when we went public, we had forklift drivers who pocketed a lot of money—and by that I mean anybody’s idea of a lot of money.”

“To a large extent, those people in the field are the real story behind Dollar Tree’s success. We try to treat them respectfully and honestly. We try to pay them decently and to provide them with good benefits so they’ll choose to grow with the company. We try to catch people doing something right, and to praise it.”
— Macon Brock

To conclude, Brock was huge believer in teamwork. His experience at Dollar Tree reinforced the concept that to scale a business, entrepreneurs need to foster an environment where people feel valued and integral to the corporate mission. And more importantly, employees need to feel like they are part of the success of the company and sharing the fruits of their hard work. As Brock once said, “If lessons are to be gleaned from this tale, I think it’s these: First, nobody achieves anything worthwhile on his own. We need each other. The whole is almost always greater than the sum of its parts.”

This reminds me of how Paul Orfalea also had a great incentive structure in place at Kinko’s which lead to the success of his company. In fact, Orfalea realized that the workers behind the counter at Kinko’s were the true heroes of the company. As a matter of fact, being in the retail copy centers business, Orfalea had plenty of competitors considering it is an industry with no barriers to entry.

As such, if he wanted to beat his competitors, he would have to make Kinko’s a great place to work; he would have to create an incredible corporate culture and make it a competitive advantage. This starts by setting the right incentives in place. In fact, Orfalea mentions that it is a lot easier to manage the work environment than the people in a store. He once said that “when people are properly motivated, they will essentially manage themselves.”

First, he started calling his employees as coworkers to remind himself that he didn’t want to “use” people, but to work with “empowered entrepreneurs”. To instill this sense of entrepreneurship among Kinko’s workers, the company gave a share of the profits of the store to everyone — partners, managers, and even workers behind the counter.

Orfalea mentions that initially, Kinko’s “gave each manager 25 percent of his or her store’s profits. Later, we expanded the system of profit sharing when we started giving each manager 15 percent of the store’s profits and earmarking the remaining 10 percent to be split among that store’s coworkers.”

“At Kinko’s, we were building a family together at the same time we were building a business.”
— Paul Orfalea

Second, Orfalea mentions that “people want to know they are contributing to society.” As such, other than monetary incentives, Kinko’s had to give a sense of mission to keep their workers both happy and motivated.

To do so, Orfalea set a flat organization at Kinko’s. Without having any hierarchy, every single member of the company were treated equally in the company and were part of the decision process. In fact, Orfalea mentions that the head office’s main purpose is to serve the stores. He implemented the “80/20” policy where managers were encouraged to spend 80 percent of their time on the floor of the stores with coworkers and only 20 percent of their time in their offices.

As such, Kinko’s empowered coworkers behind the counter to become autonomous thinkers. They would not be required to ask for permission for implementing new ideas for taking care of customers. As Paul Orfalea once said, “our original store was a hothouse of experimentation.”

“As we grew, we designed a structure for our company that would be as democratic as the services we were providing. For me, this was the true brilliance of the Kinko’s we created.”
— Paul Orfalea

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Customer-Centric

“There is only one boss: the customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”
— Sam Walton

Macon Brock’s story is quite interesting. He first started in the retail industry by building a toys store. However, he and his business partners quickly realized that the dollar store model was a much more advantageous one due to being customer-centric. As such, they decided to give up on K&K and to build Dollar Tree, especially since they believed they had the expertise in retail to beat the other competitors.

Here’s how Brock explains his justification to go into the dollar store business:

“The idea appealed for several reasons beyond the fact that Everything’s A Dollar was hot. First, we’d be able to bring to bear our expertise in the variety-store business because, done right, a dollar store would be just that—a variant on the old Woolworth model, with a wide range of goods sold at a fixed price point. Second, we had a ready supply chain. We had relationships with variety-store suppliers in New York, as well as vendors in Hong Kong. We knew how to buy. Third, thanks to K&K, we had infrastructure in place: a fleet of leased tractors and company-owned trailers providing a link between our warehouse and a far-flung network of toy stores. That gave us the ability to locate dollar stores wherever we wanted, so long as they were inside the area we already traveled. Fourth, we’d completely control our destiny. We’d never have to beg for our lives to a Nintendo or Mattel. We’d buy what we wanted, based solely on whether or not we achieved a price we liked. If we didn’t get that price, we could walk away and find something else. Next to the toy business, it promised to be an almost stress-free enterprise. All of this added up to a single overarching thought: we could operate a chain of dollar stores better than the people already doing it. That is, our stores would be better, and we’d be better at running them. We had the experience, the knowledge, and (most importantly) the discipline to outperform Everything’s A Dollar.”
— Macon Brock

A main reason why Dollar Tree works is because it focuses on surprising and delighting customers with the value they can get from a dollar product. Many assume that a discount store succeeds solely because of the cheap price. However, Brock understood that retail is emotional. Even at the one-dollar price point, the shopping experience had to be engaging. He coined the philosophy of “Surprise and Delight.” He wanted customers to walk into a Dollar Tree and be genuinely shocked by the value they found. It wasn’t enough for the item to be worth a dollar; it had to feel like it was worth more than a dollar.

This philosophy was rooted in his earlier days in the toy business. He learned that successful retail isn’t just about stocking shelves; it’s about understanding the psychology of the buyer. He writes that “The toy business had taught us a handful of other guiding principles: One, make shopping convenient and easy. Two, run clean, bright, inviting stores that exceeded customers’ expectations. Three, choose our locations wisely. And four, strive for quality and high value in everything we sold, in hopes of pleasing and occasionally dumbfounding our customers. If we did all that right, we’d get their business and their loyalty. Surprise them. Delight them. Change the inventory to keep them coming back. Make the experience impulsive. If we hewed to that approach, we’d shove aside any competition. If that sounds cutthroat, so be it. Retail isn’t for the faint of heart.”

This can be done because Brock’s team are extremely diligent and innovative at keeping cost low. As he explains, “That’s the key to the company’s success. We can absolutely floor our customers with the prices we offer and still generate a tremendous income. We don’t have to make a killing on each item, just a healthy margin. Which is another way of saying we didn’t get here by being greedy. We got here by being smart.”

One way of keeping cost low was by sourcing their products from overseas. As a matter of fact, Brock only became convinced that they could run a one dollar-based store after visiting Hong Kong. As he explains, “If I had any doubts about the dollar business beforehand, my first few trips back to Hong Kong cured me of them. Look what was out there, waiting for us! Look what we could do if we got Dollar Tree up to top speed! I came home and talked to Doug and Ray about what I’d seen, convinced them we could have everything we wanted by dealing directly with the Chinese. We could control our product lines and slash what we paid for them. We’d have no further worries about supply. We could buy in any quantity we wanted, pay very little for it, mark it up to just a dollar, and still make a tidy profit. A few trips per year would keep us fat with merchandise.”

As such, Brock had a clear and strict criteria of what merchandises would be acceptable to be sold at Dollar Tree. Here’s how he explains it:

“From early on, we had three tests for merchandise. First, and most obviously, it had to sell for a dollar, so it had to have a “first cost” of considerably less—meaning sixty-five cents or so, tops, and as a rule considerably less than that, before tax, shipping, and such. Second, it had to have a perceived value of higher than a dollar, so anyone encountering it in our stores would be surprised it was priced so low. They’d reasonably expect to pay more. The third test was that it had to be of some quality, some value. It had to be something people would want. It couldn’t be junk. Otherwise, we observed few rules. Random, serendipitous, whatever, we’d buy it, whatever it was, in any quantities we could: two dozen, a gross, five gross.“
— Macon Brock

To conclude, it is clear that being customer-centric is part of the core philosophy at Dollar Tree and is the reason why the dollar-only concept remains sacred. As Brock says, “You can go on Dollar Tree’s website today and find that statement pretty much as we wrote it then: “Dollar Tree, Inc. is a customer-oriented, value-driven variety store operating at a one dollar price point. We will operate profitably, empower our associates to share in its opportunities, rewards and successes, and deal with others in an honest and considerate way. The company’s mission will be consistent with measured and profitable growth.””

This story reminds me of what we have learned from the Turners at Dollar General. At the beginning of Dollar General, ****Cal Turner Sr. was initially much more focused on beating their competition rather than on filling their customers’ needs. He believed that the key for the survival of the business was to control the company’s expenses better than the competition. To prove this point even further, the company’s first mission statement was “To serve better than anyone else does our customer’s need for quality basic merchandise at everyday low prices.”

“As Larry looked over the company, his eye lit on our mission statement: “To serve better than anyone else does our customer’s need for quality basic merchandise at everyday low prices.” He had real problems with that, recognizing it as the long, unwieldy, and off-base statement it was. He said, “It’s not a mission statement when you compare yourself to the competition. A mission statement is about you, your unique situation, and the opportunities you want to strive for.””
— Cal Turner Jr.

Considering this, Cal Turner Sr. & Jr. often purchased merchandises without thinking too much of their customers’ need and would rather focus on obtaining as many items as cheap as possible. As a matter of fact, they would often follow Luther’s concept of “If it’s bought right, it’s half sold.” However, this often led the company being stuck with half-sold inventory in their hands. This only changed after Cal Turner Jr. listened to one of his employees that convinced him that “If we’re going to have this business grow, we’re going to have to stock what the customers want, so that they come in more often and we can serve them better. We now have buyer push. What we need is customer pull.” From then on, Dollar General started to only stock items based on a customer driven approach.

“We took a look at it strictly from our customers’ point of view. They were the same as they’d been since the beginning they didn’t have much money and they needed a retailer who could help them make what they did have go further. To make our approach truly customer driven, we were going to have to do that not just with great buys, but also with the things they needed day to day.”
— Cal Turner Jr.

Furthermore, Turner Jr., by focusing on the customers’ need, realized that low-price trumped everything. As a matter of fact, he learned that, once a certain quality threshold was passed, customers would always purchase the cheaper version of two items even if the higher-priced item offered some higher quality. By consequence, the company, unlike other retailers, did not fall in the trap of trying to upgrade their products to higher-quality products and stuck with their concept of serving the low-income customers. This only helped the company as Dollar General would only stock “core” products that would never not be in-demand as they were basic products that are needed in anyone’s every day life. Sometimes, keeping it simple is the way to grow revenues. As Charlie Munger once said, “We have a passion for keeping things simple.”

“We were fortunate in our stubborn determination to stay at the low end and serve the low-income customer. There would be no French perfume, designer dresses, or diamond-studded dog collars. My father had always kept it simple.”
— Cal Turner Jr.

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Leadership

“Always do everything you ask of those you command.”
— George S. Patton

Macon Brock mentions that his military background deeply shaped his leadership style, teaching him to trust subordinates and to avoid micromanagement. This approach to leadership he learned from the Marine Corps was translated seamlessly to business where he empowered employees to make decisions and take ownership. For modern leaders, Brock’s tenure at Dollar Tree highlights the efficiency of delegation and the importance of fostering independence, leading to innovation and loyalty.

In fact, Brock mentions that most of what he learned from leadership comes from his career with the Marine Corps. He says, “We learned the philosophies that guided the movement of marines under arms, the decision-making processes and tactics that might spell the difference between life and death on a battlefield. We were inculcated with Marine Corps culture—the service’s history, its jargon, the measures by which all of us new officers would be judged. We took up marksmanship. I was a good shot, felt easy around weapons, and enjoyed that quite a bit. At the time, I probably didn’t appreciate the effect this training had on me, but I certainly do now. It remade me—how I related to people, how I made decisions, how I handled the unexpected, both good and bad. My style as a leader is based on the principles I learned there. Many of today’s top American business executives are Basic School graduates. That’s no accident. It changes you. You come out of Quantico with conviction. You know what you have to do, and you know how to get it done. Looking back, it occurs to me that college didn’t teach me anything about life, just how to learn. Basic School taught me how to live.“

Therefore, it is clear that it mainly taught him discipline, decision-making under pressure and most importantly, the value of trusting competent people to execute their duties. He learned that micromanagement is a corrosive waste of time and talent, a lesson he carried directly into business.

“Among the important lessons I learned was that effective leaders knew when to get out of the way. I trusted my sergeants to do their jobs, and they didn’t let me down. In the marines, as in the business world, micromanagement is a waste of time and talent.”
— Macon Brock

Furthermore, Brock’s leadership style was to hire smart, driven people, to provide clear principles and objectives, and then to get out of their way. This empowerment allowed initiative, accountability and a sense of ownership to grow at all levels of Dollar Tree. He genuinely believed that people who are treated with respect and trust rise to the occasion and often exceed all expectations.

This trust-based leadership was evident even in the company’s most uncertain growth phases. Instead of presenting himself as an omniscient founder, Brock fostered a culture of collaborative problem-solving, where the best ideas could come from anywhere. He explains, “We were building this company, Doug and I, with no firmer idea of how to succeed than most of the people we hired to help us. They’d ask me questions, and I’d tell them, “Don’t ask me how to do it. I’ve never done it either. Just go do it, and I have your back. We’ll figure it out.” And we did—mostly because we hired well.”

“We try to encourage ideas from our associates on just about any topic. When we improve some aspect of our stores, the idea almost always comes from someone with an up-close view of our day-to-day habits. We try to promote independent thought and initiative in our people, to impress upon them that whatever their decision is—and of course they have to make decisions, everybody does—if they do it for the right reasons, with honesty and integrity, they’ll generally come out okay.”
— Macon Brock

Brock’s leadership style reminds me of Tom Murphy’s tenure at Capital Cities which exemplifies how granting extreme autonomy to managers can foster a corporate culture of responsibility, innovation and efficiency. Unlike traditional large companies that often stifles innovation with layers of bureaucracy, Tom Murphy believed in hiring capable individuals and then stepping back, allowing them to own their decisions fully. This decentralized approach motivated employees by instilling a sense of ownership that made them reluctant to leave. As Murphy once said, “Hire as few of the best people available, pay them well, give them equity and autonomy in an ethical company and leave them alone.”

This decentralized approach was inspired by the founder of Capital Cities, Frank Smith who once said, “Some of you fellows may think I tie you to Capital Cities by corrupting you with compensation and stock options. But I’ve decided the reason you are afraid to leave this company is more because our system naturally corrupts you with autonomy and authority. And I suspect that after living that way for a time, you’re fearful that someplace else might not operate in the same manner.”

As such, it is not surprising to see that extreme autonomy for its operating managers is a core philosophy at Capital Cities. In fact, it is mentioned so on the inside cover of every Capital Cities annual report:

“Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can and give them the responsibility and authority they need to perform their jobs. All decisions are made at the local level. . . . We expect our managers . . . to be forever cost conscious and to recognize and exploit sales potential.”
— Tom Murphy

A great example of the success of full autonomy can be seen in Dan Burke’s early experiences, where he learned that silence from headquarters signaled trust, allowing him to prioritize operations over reporting. In fact, Burke famously said, “Murphy delegates to the point of anarchy.”

As William Thorndike explained, “The guinea pig in the development of this philosophy was Dan Burke himself. In 1961, after he took over as general manager at WTEN, Burke began sending weekly memos to Murphy as he had been trained to do at General Foods. After several months of receiving no response, he stopped sending them, realizing his time was better spent on local operations than on reporting to headquarters. “

This was similar to Phil Beuth’s experience working with Murphy. Beuth echoes Murphy’s hands-off style, where often a brief conversation sufficed for assigning new responsibilities, trusting employees to deliver without micromanagement. As Don Polec, a manager from a competing company once said, “My parent company in Cincinnati, tells me, the manager, what I am going to do. The difference, is you tell New York what you are going to do.” That is just pure Capital Cities at its best.

By consequence, by providing so much autonomy to its employees, there was an extremely low turnover among employees. As Robert Price, a rival broadcaster once said, “We always see lots of résumés but we never see any from Capital Cities.” Similarly, Frank Smith once said, “The system in place corrupts you with so much autonomy and authority that you can’t imagine leaving.”

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Beyond the Book

Read “ The Power of Incentives: The Hidden Forces That Shape Behavior” by Farnam Street

Read “ 16 Leadership Lessons from a Four Star General“ by Farnam Street

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Today’s Chapter is based on “Constellation Software Inc.’s President’s Letters” by Mark Leonard.

Mark Leonard is the founder and long-time executive of Constellation Software, a Canadian company that acquires and operates niche vertical market software businesses. He is known for a highly decentralized operating model, disciplined capital allocation, and an exceptional long-term track record that has made Constellation one of Canada’s most admired compounders.

Read it for free here.

Here’s what I learned:

Capital Allocation

“Capital allocation is the CEO’s most important job.”
— William Thorndike

Mark Leonard, the founder and long-time CEO of Constellation Software was a tremendous capital allocator and his insistence on disciplined capital allocation can be clearly shown in his shareholders letters. He repeatedly emphasizes IRR and ROIC as central metrics and explains how Constellation applies hurdles rates, scenario-weighted modeling, and post-acquisition reviews to keep investment decisions rigorous and repeatable. Leonard’s view is quite simple, he understands that his role as a CEO is to measure the returns that matter to shareholders and design incentives and processes so that managers behave accordingly.

As he once wrote, “We use very little capital to grow our business organically. Most of our businesses actually operate with negative tangible net assets. This means that as we grow organically, those businesses consume little or no incremental capital, and may even produce capital in excess of earnings.” By consequence, it is a CEO’s primary job to ensure that this excess capital is put to good use. Leonard mentions that he uses Average Invested Capital metric to evaluate his capital allocation decisions and is quite transparent about it with his shareholders.

“This quarter we would like to begin to explain how we think about capital allocation at Constellation. In the table, we have noted Average Invested Capital. This is a non-GAAP measure that began as an estimate of the amount of money that our shareholders had invested in Constellation. Subsequent to that estimate, each period we have kept a running tally, adding Adjusted Net Income, subtracting any dividends, adding any amounts related to share issuances, and making some small adjustments relating to our use of certain incentive programs, the amortization of impaired intangibles, etc. If you follow the math in the table above, you’ll see that adding the quarterly Adjusted Net Income and subtracting dividends accounts for the vast bulk of the quarter to quarter changes in Average Invested Capital.”
— Mark Leonard

By being transparent on the Average Invested Capital, Leonard holds himself accountable to effectively deploy capital. As such, he doesn’t chase growth for growth’s sake but filters opportunities through hurdle rates set by the board, namely after-tax IRRs for both organic initiatives and acquisitions. He explains that “In practice, the way we actually measure this is on a project by project basis using conventional after tax internal rates of return (IRR’s). Periodically our board sets a hurdle rate, and we filter both prospective organic growth opportunities and acquisitions based upon those hurdle rates.”

However, Leonard recognizes the limits of forecasts and the subjectivity in IRR, as he mentions that “IRR by its very nature requires forecasts, and hence is going to have subjectivity. Nevertheless, we try to beat the unwarranted optimism out of the forecasts, and as time passes, we can increasingly cross-reference history with forecasts.“ As such, he ensures to augments his due diligence with post-acquisition reviews and scenario analysis. He asks teams to use four mutually exclusive, collectively exhaustive scenarios (MECE) and probability-weight the cash flows, allowing a single hurdle rate to be applied fairly across different risk profiles.

“We use a weighted four-scenario approach to assess investment prospects. Academics call this mutually exclusive collectively exhaustive scenario modelling or ‘MECE’. The cash flows of each of the four scenarios are probability weighted, allowing us to use a single hurdle rate across all investment prospects, even if the investments have very different risk profiles.”
— Mark Leonard

Finally, Leonard also recommends us to maintain hurdle rates high among a company and avoid lowering them. In fact, he mentions, that “When we dropped our hurdle rate, it dragged down the expected IRR’s for all the opportunities that we subsequently pursued, not just those at the margin. We try to capture this idea by saying “hurdle rates are magnetic”. It now takes a very brave soul to propose a hurdle rate drop at CSI.“

The lesson for leaders and investors from Mark Leonard is straightforward. You need to establish a disciplined capital allocation rules and judge each decision via their IRR. Furthermore, you need to guard against the temptation to lower standards when capital accumulates. More importantly, use scenario weighting and post-mortems to temper optimism and improve forecasting. If you do that, over a long period of time, you may join the ranks of the great ones at Singletonville.

“We update the IRR forecasts for our acquisitions every quarter. The more “history”, and the less “forecast” that we have for each acquisition IRR, the better a measure it becomes of a manager’s investment performance. It takes years to figure out who are the great capital allocators.”
— Mark Leonard

As we have learned previously from REQ’s team research, for the compounding effect to work via acquisitions, it is clear that reinvested capital must generate high returns. As such, CEOs of compounders are, first and foremost, masters of capital allocation with a fanatical focus on metrics like Return on Invested Capital (ROIC) and Return on Total Invested Capital (ROTIC). They must be extremely disciplined when it comes to valuation as overpaying for an acquisition is a cardinal sin.

REQ explains that “Avoiding overpaying for acquisitions is crucial. Paying a 10x multiple for a private company, compared to 5x, is the difference between 10% ROIC and 20% ROIC assuming 100% cash conversion. The higher the price paid, the greater the need for cash conversion to support self-financing growth. If you overpay, the deal has to work a lot harder to pay for itself.” As a matter of fact, the key for a compounder is to have the newly subsidiary quickly repay itself and to generate free cash flow back to the main company.

This can be perfectly illustrated by the success of Bergman & Beving, whose founders always had a distinct focus on profitability. They invented a profitability benchmark which involved maintaining profits divided by working capital (P/WC) at levels exceeding 45%. REQ explains that “According to the Superinvestors of Bergman & Bevingsville, a business is considered self-financed when the return on working capital (P/ WC) is higher than 45%. By achieving P/ WC > 45%, the business can generate the necessary cash to cover taxes, interest, and dividends, and make required investments in existing businesses through capital expenditures, working capital, and financing acquisitions. The goal of being self-financed means that growth, whether organic or through acquisitions, will not dilute current shareholders through equity raises or rely heavily on debt financing. It highlights the importance of capital efficiency in generating cash.”

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Perpetual Ownership

“If we think long term, we can accomplish things that we couldn’t otherwise.”
— Jeff Bezos

Another thing to note from the shareholders letters is how Mark Leonard embodies a long-term orientation, positioning Constellation as a perpetual owner of software businesses rather than a short-term holder. This mindset influences everything from the way they approach acquisitions to management incentives, to prioritizing enduring value over quarterly results.

In one of his letters, Leonard writes, “Constellation’s objective is to be a perpetual owner of inherently attractive software businesses. Part of a perpetual owner’s job, is to make sure that energetic, intelligent and ethical general managers (“GM”) are running their businesses and that the GM’s are incented to enhance shareholder value over the very long term. It is trivial for an experienced GM to run a software company to generate high profitability and shrinking revenues. Far more challenging, is generating reasonable short term profits while continuing to grow revenues, in an industry where investment cycles often exceed 10 years. Understanding a GM’s performance as they make these long term trade-offs is the most difficult part of a perpetual owner’s job.” And, this is true whether Constellation acquires 100% of a private company or a minority ownership in a public company.

“We have the same objective when we buy a piece of a business as when we buy 100%, i.e. we want to be a great perpetual owner of an inherently attractive asset. If we are allowed to join a public company’s board, we offer to sign an agreement that will limit our ability to make an unsolicited take-over bid. This allows existing long-term shareholders of our public investees to continue to enjoy the benefits of ownership. For shareholders with similar objectives to ours, we believe that we are an exceptional co-investor.”
— Mark Leonard

Therefore, Leonard understood that he had to align this long-term vision with everyone involved in Constellation Software. As he once mentioned, “In previous letters (for instance, the 2008 letter to shareholders), I’ve talked about how important longterm oriented employees, customers and shareholders are to both our strategy and organisational design. A long-term orientation requires a high degree of mutual trust between the company and all of its constituents.”

For example, to ensure alignment between the companies’ long-term approach with those of his employees, Leonard set up a great incentive structure at Constellation. A significant portion of employee and manager pay, especially for seniors, is in Constellation stock, with long escrow periods. This ensures that those running the business think and feel like owners, their fortunes tied directly to long-term value creation.

“We incentivize managers and employees with shares (escrowed for 3-5 years) so that they are economically aligned with shareholders. In return we need and want loyal employees… if they aren’t planning to be around for 5 years, then they aren’t going to care much about the outcome of multi-year initiatives, and they certainly aren’t going to forego short-term bonuses for long-term profits.”
— Mark Leonard

This owner mindset also extended to how Leonard viewed his shareholders. He actively seeks “partners” rather than traders, expressing a desire for a stable, understanding shareholder base that supports the company’s multi-year initiatives. He is acutely aware of the dangers when a company’s stock price deviates wildly from its intrinsic value, as it can disrupt these crucial relationships. He writes, “I’m coming around to the belief that if our stock price strays too far (either high or low) from intrinsic value, then the business may suffer: Too low, and we may end up with the barbarians at the gate; too high, and we may lose previously loyal shareholders and shareholder-employees to more attractive opportunities.”

What is even more impressive about Leonard is that, in order to align himself better with this shareholders, Leonard decided to reduce his salary to C$0 in 2015! As he explains, “One of the results of this compensation change is that I get to side-step the agent-principal problem. My compensation for being president is now tied solely to my current ownership of CSI shares. In essence, I’m your partner in CSI, not your employee. I like the feel of the partner relationship a whole lot better.”

This long-term focus reminds me of Jeff Bezos’ tenure at Amazon. He ****understood the importance of long-term thinking as an owner. In fact, as a majority shareholder of Amazon, he understood that in the short-term, the stock price is not reflective of the value of the company, but it would be in the long-run if the company continues to increase its future cash flows. As he once explained, “Why focus on cash flows? Because a share of stock is a share of a company’s future cash flows, and, as a result, cash flows more than any other single variable seem to do the best job of explaining a company’s stock price over the long term.”

Furthermore, Jeff Bezos believes that he can correctly align the interests of the customers with the interests of the shareholders by taking a long-term approach. In fact, long-term thinking shareholders can allow the company to make constant innovations, despite having failures from time to time. As such, Bezos was not timid in making investment decisions where he had an opportunity in gaining market leadership advantages even when he knew that some of his investments would not pay off. As he once said, “We like to invent and do new things, and I know for sure that long-term orientation is essential for invention because you’re going to have a lot of failures along the way.”

“Long term thinking is both a requirement and an outcome of true ownership. Owners are different from tenants. I know of a couple who rented out their house, and the family who moved in nailed their Christmas tree to the hardwood floors instead of using a tree stand. Expedient, I suppose, and admittedly these were particularly bad tenants, but no owner would be so short-sighted.”
— Jeff Bezos

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Autonomy

“Some of you fellows may think I tie you to Capital Cities by corrupting you with compensation and stock options. But I’ve decided the reason you are afraid to leave this company is more because our system naturally corrupts you with autonomy and authority. And I suspect that after living that way for a time, you’re fearful that someplace else might not operate in the same manner.”
— Frank Smith

Perhaps one of Mark Leonard’s valuable insight we can learn from is his organizational philosophy. Similar to other serial acquirers, Constellation is structured as a collection of autonomous business units. Leonard believes deeply that bureaucracy suffocates performance, whereas full autonomy empowers general managers to lead small teams efficiently.

As such, the goal at Constellation Software was never to integrate acquisitions into a huge conglomerate, but to preserve their entrepreneurial spirit and expertise under a supportive umbrella. This delegation to the point of abdication allows the company to scale without needing to build a massive headquarters. Leonard explains that, “We’ve handled our geometric growth to date by largely abdicating management to the general managers of each of our vertical businesses. We have a very thin overlay of infrastructure at CSI. We count on the fact that with each new acquisition will come general managers who are steeped in their verticals… veterans who have built industry leading (albeit small) vertical market software businesses with great economics. Having owned more than a hundred vertical market software businesses, we also have some best practices that we can share. We coach the managers of our newly acquired businesses in how to grow their businesses and make them even better. As long as we compensate these managers appropriately, and are not tempted to meddle too much, then I think we can scale up Constellation for many years to come.”

This model creates an environment where trust, clarity, and purpose can flourish. Nonetheless, Leonard admits that there is always a constant battle to fight off centralization the larger the company gets. However, when Leonard studied other high performing conglomerates (”HPC”), it is clear that decentralization is the way to go.

“Only one other HPC has followed a strategy of buying hundreds of small businesses and managing them autonomously. They eventually caved in to increased centralisation. My hunch is that it takes an unusually trusting culture and a long investment horizon to support a multitude of small businesses and their entrepreneurial leaders. If trust falters the BU’s can be choked by bureaucracy.”
— Mark Leonard

By consequence, Leonard understands that the role of headquarters is deliberately minimal. It is to allocate capital, share best practices and handle the essential corporate functions. It should not be controlling or commanding. As Leonard once said, “One of the fundamental beliefs at CSI, is that autonomy motivates people, and bureaucracy does the opposite, so we try to do as many of the important monitoring tasks with as light a touch as possible.” Nonetheless, even without centralization, Leonard believes that Constellation Software has a huge competitive advantage due to its sheer size.

“While there are terrific moats around our individual business units, the barrier to starting a “conglomerate of vertical market software businesses” is pretty much a cheque book and a telephone. Nevertheless, CSI does have a compelling asset that is difficult to both replicate and maintain: We have 199 separately tracked business units and an open, collegial, and analytical culture. This provides us with a large group of businesses on which to test hypotheses, a ready source of ideas to test, and a receptive audience who can benefit from their application.”
— Mark Leonard

This reminds me of what we have learned from Ken Iverson at Nucor, where he structured the company around decentralization, granting divisions near-complete autonomy to make decisions locally, which fostered innovation and responsiveness. This model contrasted with centralized bureaucracies, allowing Nucor to adapt quickly to market changes while holding managers accountable for results. By keeping divisions small and pushing authority downward, Iverson ensured that those closest to the work drove the business, rather than distant executives.

As a matter of fact, Iverson mentions that “Each division operates its one or two plants as an independent enterprise. They procure their own raw materials; craft their own marketing strategies; find their own customers; set their own production quotas; hire, train, and manage their own work force; create and administer their own safety programs…. In short, all the important decisions are made right there at the division. And the general manager of the division is accountable for those decisions. That’s where the buck stops at Nucor.“

For Iverson, this autonomy was non-negotiable and managers at Nucor enjoyed this decision-making responsibility and accountability. However, to maintain this autonomy, managers were expected to deliver a 25% return on assets and follow the ethical standards of the company.

“At Nucor, we chose long ago to build our company on a decentralized model in which each operating division enjoys true autonomy. We have told our managers to “trust your instincts”—and we have meant what we said. We’ve urged them to confer the same kind of decision-making autonomy to their people—to make their own decisions based on what they think is best for the business—and we have never backed off our commitment.“
— Ken Iverson

The main reason why Iverson believed in decentralization was because he believed that the frontline employees were the one that were closest to the problems and by consequence, have the best innovative ideas. He once said, “That is, by the people closest to where the work actually gets done. Those businesses must tell people on the front lines to “trust your instincts.” And businesses that tell their people to “trust your instincts” generally should be decentralized. A decentralized structure pushes the power to set strategy, spend money, make decisions, and create policies out toward the marketplace. It promotes local autonomy.“

As such, he believed it was primordial for managers to be maintain close contact with their employees. As he explained, “Managers are supposed to do what’s best for the business. And what’s best is to remember we’re all just people. Managers don’t need or deserve special treatment. We’re not more important than other employees. And we aren’t better than anyone else. We just have a different job to do. Mainly, that job is to help the people you manage to accomplish extraordinary things.”

“That’s the main reason we’ve tried to keep our divisions small. When a business grows beyond 400 or 500 people, it’s hard for management and employees to stay connected. I don’t order our managers to keep in close contact with their employees. But I do nag them. I say, “Andrew Carnegie was a financier. He could afford to treat people like peasants. We’re managers. We can’t.” They may not appreciate my nagging, but I do it with their interests in mind.“
— Ken Iverson

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Today’s Chapter is based on the book “Ernest Hemingway on Writing” by Larry W. Phillips.

Ernest Hemingway was an American novelist, short-story writer, and journalist, famous for his terse, economical prose style and for works such as The Sun Also Rises, A Farewell to Arms, and The Old Man and the Sea. He became an international literary figure, winning the Pulitzer Prize for The Old Man and the Sea in 1953 and the Nobel Prize in Literature in 1954, and his adventurous, highly public life helped cement his status as one of the most influential writers of the 20th century.

Buy it on Amazon here.

Here’s what I learned:

Qualities of a Writer

“Description begins in the writer’s imagination, but should finish in the reader’s.”
— Stephen King

Ernest Hemingway, one of the most influential figures in modern literature, offers timeless insights into the craft of writing through his reflections compiled in Larry W. Phillips’ book. At the heart of Hemingway’s philosophy lies the belief that a great writer must possess certain indispensable qualities, notably honesty and imagination. He argues that imagination, when rooted in genuine experience, allows a writer to create worlds so vivid that readers mistake fiction for reality. This isn’t about fabricating wild tales out of thin air but about drawing from life’s truths to infuse stories with authenticity.

“…whatever success I have had has been through writing what I know about.”
— Ernest Hemingway

As a matter of fact, Hemingway mentions that “It is the one thing [imagination] beside honesty that a good writer must have. The more he learns from experience the more truly he can imagine. If he gets so he can imagine truly enough people will think that the things he relates all really happened and that he is just reporting.” This passage reveals that a writer who has lived through adventures, heartbreaks and observations can channel these experiences into narratives that resonate profoundly. Without honesty, imagination becomes hollow, a mere exercise in deception that fails to connect with readers.

In the same line of thought, Hemingway was not a big fan of using big words. He believed that a writer must be truthful to the story’s needs, avoiding the temptation to showcase cleverness at the expense of narrative integrity. This quality demands self-awareness: recognizing when one’s ego interferes with the work’s purity. As Hemingway once said, “Actually if a writer needs a dictionary he should not write. He should have read the dictionary at least three times from beginning to end and then have loaned it to someone who needs it. There are only certain words which are valid and similies (bring me my dictionary) are like defective ammunition (the lowest thing I can think of at this time).”

Hemingway’s sparse style, often called the “iceberg theory,” where much is left unsaid, stems from this principle. By omitting the obvious, he trusts the reader’s imagination to fill in the gaps, creating a more engaging experience.

“No matter how good a phrase or a simile he may have if he puts it in where it is not absolutely necessary and irreplaceable he is spoiling his work for egotism. Prose is architecture, not interior decoration, and the Baroque is over. For a writer to put his own intellectual musings, which he might sell for a low price as essays, into the mouths of artificially constructed characters which are more remunerative when issued as people in a novel is good economics, perhaps, but does not make literature.”
— Ernest Hemingway

This reminds me of what we have learned from Richard Feynman. According to him, the secret of learning lays in understanding the true essence of a concept rather than learning names through memorisation. As a matter of fact, Feynman believed that to truly understand a concept, one must be able to explain it to a child with simple words rather than by using complex words. As Mortimer Adler once said, “The person who says he knows what he thinks but cannot express it usually does not know what he thinks.”

This illusion of knowledge is extremely dangerous as going beyond your circle of competence and not knowing it can cause serious issues. And, to make it worse, Feynman mentions that this fragility of knowledge is also susceptible among experts. As he once said, “I don’t know what’s the matter with people: they don’t learn by understanding; they learn by some other way-by rote, or something. Their knowledge is so fragile!”

“The first principle is that you must not fool yourself-and you are the easiest person to fool. So you have to be very careful about that. After you’ve not fooled yourself, it’s easy not to fool other scientists. You just have to be honest in a conventional way after that.”
— Richard Feynman

Furthermore, for Hemingway, it was important for a writer to be fit physically due to the emotional drain of the creative process. As he explains, “When I was writing, it was necessary for me to read after I had written. If you kept thinking about it, you would lose the thing that you were writing before you could go on with it the next day. It was necessary to get exercise, to be tired in the body, and it was very good to make love with whom you loved. That was better than anything. But afterwards, when you were empty, it was necessary to read in order not to think or worry about your work until you could do it again. I had learned already never to empty the well of my writing, but always to stop when there was still something there in the deep part of the well, and let it refill at night from the springs that fed it.”

Finally, Hemingway understood that to be a writer, one needs to be okay with being lonely, mainly due to the fact that you must be able to ignore the noise. As Stephen King once said, “Writing is a lonely job. Having someone who believes in you makes a lot if difference. They don’t have to makes speeches. Just believing is usually enough.”

“For Christ sake write and don’t worry about what the boys will say nor whether it will be a masterpiece nor what. I write one page of masterpiece to ninety one pages of shit. I try to put the shit in the wastebasket. You feel you have to publish crap to make money to live and let live. All write [right] but if you write enough and as well as you can there will be the same amount of masterpiece material (as we say at Yale). You can’t think well enough to sit down and write a deliberate masterpiece and if you could get rid of [Gilbert] Seldes and those guys that nearly ruined you and turn them out as well as you can and let the spectators yell when it is good and hoot when it is not you would be all right.”
— Ernest Hemingway

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Habits of a Writer

“Amateurs sit and wait for inspiration, the rest of us just get up and go to work.”
— Stephen King

Ernest Hemingway’s working habits reveal a disciplined approach to creativity, emphasizing rhythym, restraint and renewal to avoid burnout. He viewed writing as a marathon, requiring strategies to maintain momentum over time. In fact, central to his method is to never stop writing unless you know what to write next. He explains, “The best way is always to stop when you are going good and when you know what will happen next. If you do that every day when you are writing a novel you will never be stuck. That is the most valuable thing I can tell you so try to remember it.”

This method not only prevented exhaustion, but allowed your subconscious to work on your ideas overnight. He argues to “Always stop while you are going good and don’t think about it or worry about it until you start to write the next day. That way your subconscious will work on it all the time. But if you think about it consciously or worry about it you will kill it and your brain will be tired before you start. Once you are into the novel it is as cowardly to worry about whether you can go on the next day as to worry about having to go into inevitable action. You have to go on. So there is no sense to worry. You have to learn that to write a novel. The hard part about a novel is to finish it.”

“I learned not to think about anything that I was writing from the time I stopped writing until I started again the next day. That way my subconscious would be working on it and at the same time I would be listening to other people and noticing everything, I hoped; learning, I hoped; and I would read so that I would not think about my work and make myself impotent to do it. Going down the stairs when I had worked well, and that needed luck as well as discipline, was a wonderful feeling and I was free then to walk anywhere in Paris.”
— Ernest Hemingway

In terms of writing, Hemingway is a huge fan of writing in pencils over using a typewriter because it gave you three opportunities to revise your text. This multi-stage process ensures a better polished product. He mentions, “When you start to write you get all the kick and the reader gets none. So you might as well use a typewriter because it is that much easier and you enjoy it that much more. After you learn to write your whole object is to convey everything, every sensation, sight, feeling, place and emotion to the reader. To do this you have to work over what you write. If you write with a pencil you get three different sights at it to see if the reader is getting what you want him to. First when you read it over; then when it is typed you get another chance to improve it, and again in the proof. Writing it first in pencil gives you one-third more chance to improve it. That is .333 which is a damned good average for a hitter. It also keeps it fluid longer so that you can better it easier.“

This reminds me of what we have learned from Stephen King on how to write and, the most important tenet is to keep things simple. As a matter of fact, he provides us a list of things we must avoid in order to write better:

1. Avoid passive verbs: King believes that “With an active verb, the subject of the sentence is doing something. With a passive verb, something is being done to the subject of the sentence. The subject is just letting it happen. You should avoid the passive tense.”

2. Avoid the overuse of adverbs: King explains that “The adverb is not your friend. Adverbs, he said sternly. With adverbs, the writer usually tells us he or she is afraid he/ she isn’t expressing himself/ herself clearly, that he or she is not getting the point or the picture across.” Or as Mark Twain once said, “Substitute ‘damn’ every time you’re inclined to write ‘very’; your editor will delete it and the writing will be just as it should be.”

3. Avoid the use of other verbs outside of “say” in a dialogue attribution: King mentions that “The best form of dialogue attribution is said, as in he said, she said, Bill said, Monica said.”

Furthermore, King believes that the root of most bad writing comes from fear. As a matter of fact, a bad writer usually thinks he or she needs to use adverbs or complex words because they are fearful that he or she isn’t expressing himself or herself clearly, that he or she is not getting the point or the picture across. However, King believes that these actions tend to lead to opposite effects.

King mentions that “Good writing is often about letting go of fear and affectation. (…) Good writing is also about making good choices when it comes to picking the tools you plan to work with.” According to King, if you don’t have a good toolbox, an easy way to write better is to strictly use noun-verb sentences; once again, a proof of the power of keeping things simple.

“Take any noun, put it with any verb, and you have a sentence. It never fails. Rocks explode. Jane transmits. Mountains float. These are all perfect sentences. Many such thoughts make little rational sense, but even the stranger ones (Plums deify!) have a kind of poetic weight that’s nice. The simplicity of noun-verb construction is useful—at the very least it can provide a safety net for your writing.”
— Stephen King

Finally, King mentions the necessity to rewrite in order to keep your writing as simple as possible. King explains that the best lesson he received in terms of writing came from his English literature teacher, John Gould, who once told him, “When you write a story, you’re telling yourself the story. When you rewrite, your main job is taking out all the things that are not the story.”

As a matter of fact, King’s approach to writing involves a structured process that begins with the first draft. Once that is done, he recommends a period of rest before beginning the rewriting process. As he explains, “If you’ve never done it before, you’ll find reading your book over after a six- week layoff to be a strange, often exhilarating experience. It’s yours, you’ll recognize it as yours, even be able to remember what tune was on the stereo when you wrote certain lines, and yet it will also be like reading the work of someone else, a soul-twin, perhaps. This is the way it should be, the reason you waited. It’s always easier to kill someone else’s darlings than it is to kill your own.”

King mentions that in his rewriting process, or the second draft, he will try to remove all unnecessary words in order to speed up the story. His formula is simple: “2nd Draft = 1st Draft minus 10%.” A formula to works every time.

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Competing Against the Best

“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, no shortcut.”
— Stephen King

As we have previously learned, Stephen King mentions that to become a proficient writer, one must immerse themselves in both reading and writing. He emphasizes the importance of consuming a wide variety of literature to develop a keen sense of what constitutes good and bad writing. This practice not only helps in refining one’s own style but also serves as a wellspring of inspiration.

As a matter of fact, his biggest advice for aspiring writers is to “strip your television’s electric plug-wire, wrap a spike around it, and then stick it back into the wall. See what blows, and how far. Just an idea.” King mentions this because he believes that television and most likely social media nowadays are a distraction and make people forget the importance of reading and immersing oneself into the written world.

“But TV came relatively late to the King household, and I’m glad. I am, when you stop to think of it, a member of a fairly select group: the final handful of American novelists who learned to read and write before they learned to eat a daily helping of video bullshit.”
—Stephen King

King’s own journey as a writer began with imitation, a common starting point for many aspiring authors. He recalls that when he was younger, he would spent a lot time either in bed or at home reading through comic books, Tom Swift and Dawson and Jack London’s bloodcurdling animal tales. This certainly helped him to improve as a writer as he would start writing his own stories based on what he read. As King once said, “Imitation preceded creation.”

Furthermore, King believes that reading is a great way to build your vocabulary. In fact, he firmly believes that building one’s vocabulary should not be done through conscious effort, but through the natural process of reading widely. As he once said, “Put your vocabulary on the top shelf of your toolbox, and don’t make any conscious effort to improve it. (You’ll be doing that as you read, of course ... but that comes later.)”

Similarly to King, Ernest Hemingway believed it was primordial for a good writer to read a lot. But more importantly, rather than reading recent works, he believed in reading the works of the great authors of the past, as those are your true competitors. As he once said, “you shouldn’t read the shit about liveing writers. You should always write your best against dead writers.”

In fact, he explains, “I think you should learn about writing from everybody who has ever written that has anything to teach you.” As such, he recommends any new writers to read some Mark Twain. He writes, “All modern American literature comes from one book by Mark Twain called Huckleberry Finn. If you read it you must stop where the Nigger Jim is stolen from the boys. That is the real end. The rest is just cheating. But it’s the best book we’ve had.”

Hemingway lists out authors that he was greatly inspired by and those who he had to compete against on a daily basis. He mentions, “Turgenieff to me is the greatest writer there ever was. Didn’t write the greatest books, but was the greatest writer… Chekov wrote about 6 good stories. But he was an amateur writer. Tolstoi was a prophet. Maupassant was a professional writer, Balzac was a professional writer, Turgenieff was an artist.”

Finally, he believed that if you do decide to become a writer, be ready to complete against the best of the best. As he mentions, “You should always write your best against dead writers that we know what stature (not stature: evocative power) that they have and beat them one by one.”

“There is no use writing anything that has been written before unless you can beat it. What a writer in our time has to do is write what hasn’t been written before or beat dead men at what they have done.”
— Ernest Hemingway

In Hemingway’s mind, masterpieces only appear from the sheer act of writing “as well as you can” against the highest standards history had to offer. In his view, the writer’s life is a solitary, long-distance race against the immortals, with the reader’s honest reaction as the only meaningful finish line. Personally, I believe there is some truth in Hemingway’s philosophy. There is a reason why classics are still read to this day: they pass the test of time. He may be setting the bar extremely high, but successful people tend to compete in field where they believe they can be the best of the best.

For example, when Bill Gates was at Harvard University, he had the intention to become a mathematician, as he believe that math was the purest area of intellect. As he explains, “In my emerging worldview, the logic and rational thinking demanded by math were skills that could be used to master any subject. There was a hierarchy of intelligence: however good you were at math, that’s how good you could be at other subjects—biology, chemistry, history, even languages. My model, as simplistic as it was, seemed to be borne out at school, where I felt I could map a student’s math ability to their broader academic achievement.”

However, after a few classes at Harvard, he quickly realized that if he pursued mathematics, he would never reach the top as some of his classmates were way better than him. That’s when he decided to move on to work fully on becoming a computer programmer and which led to Gates starting Microsoft with Paul Allen.

“My inability to do better in that class forced me to reconsider how I thought of myself. I so deeply identified with being the smartest, the best. That status was a shield behind which I hid my insecurities. Up until then, I had experienced only a few situations in which I felt someone was hands-down better than I was in some intellectual endeavor that mattered to me, and in those cases I soaked up what they could teach me. This time was different. I was recognizing that while I had an excellent math brain, I didn’t have the gift of insight that sets apart the best mathematicians. I had talent but not the ability to make fundamental discoveries. I saw a vision of myself in ten years: teaching in a university but not good enough to do groundbreaking work. I wasn’t going to be a John Mather, operating in the zone where math touches the deep secrets of the universe.”
— Bill Gates

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Beyond the Book

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Today’s Chapter is based on the book “Nick and Zak’s Adventures in Capitalism: Words of Wisdom from the Nomad Partnership Letters” by The Rational Cloner.

Nick Sleep started Nomad in 2001 with Qais Zakaria after careers as value analysts, and together they compounded partner capital at roughly 20–21% annually over about 13 years, vastly outperforming the MSCI World Index. Their philosophy focused on owning a small number of exceptional “scale-economics-shared” businesses such as Amazon and Costco for very long periods, with an unusual emphasis on patience, alignment with investors, and minimal portfolio turnover.

Buy it on Amazon here.

Here’s what I learned:

Patience

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett

At the heart of the Nomad Partnership’s investment philosophy was a simple, yet radical idea: their primary competitive advantage was the collective patience of their investors. In a market that focused on quarterly results and daily price fluctuations, Nick Sleep and Qais Zakaria deliberately positioned themselves as long-term thinkers and attracted investors that believed and behaved similarly.

They understood that the most significant business outcomes are the result of capital allocations decisions whose fruits may not be visible for years, and that only by looking further out than the crowd could they hope to outperform them. As such, it was primordial for them to invest in companies whose management are also thinking long-term. In fact, this approach was the bedrock of their investment strategy. As Sleep explains, “One of Nomad’s key advantages will be the aggregate patience of its investor base. We are genuinely investing for the long term (few are!), in modestly valued firms run by management teams who may be making decisions the fruits of which may not be apparent for several years to come. The near term results are likely to be as bad as they may be good, but we are confident that in the long run they will prove satisfactory.”

For example, Sleep and Zakaria were heavily invested in Amazon as they believed that Bezos was exceptional at making decisions with a longer time horizon which aligned with their philosophy at Nomad. As Bezos once said, “Our first shareholder letter, in 1997, was entitled, “It’s all about the long-term”. If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you are willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavours that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We’re willing to plant seeds, let them grow–and we’re very stubborn. We say we are stubborn on the vision and flexible on the details”.

“We are investing for the long term in modestly valued firms run by management teams who may be making decisions the fruits of which may not be apparent for several years to come. The near term results are likely to be as bad as they may be good, but we are confident that in the long run they will prove satisfactory. Nomad’s competitive advantage over its peers will come from the capital allocation skills of your manager (if any) and the patience of our investor base. Only by looking further out than the short term crowd can we expect to beat them. It is for this reason we named Nomad an Investment Partnership and not a fund. The relationship we seek is quite different. One of Nomad’s key advantages will be the aggregate patience of its investor base.”
— Nick Sleep

This long-term perspective fundamentally changed their relationship with volatility and underperformance. They knew that stock prices bounce around all over the place after the release of any quarterly results, but that this was irrelevant if the ultimate destination was secure. Sleep famously told his investors that he was aiming to turn one dollar into sixteen over twenty years and, as such, he was never bothered by the short-term results of his fund.

Similarly, he did not care how his fund performed compared to the indexes on a yearly basis. He was confident that in the long run, the returns from indexes would be insignificant compared to his. As a matter of fact, just like Warren Buffett, Sleep believed a business’ outcomes (assuming the business economics are well understood) are much more predictable on a long-term basis compared to the short-term, as demonstrated by the equity yield curve. As he mentions, “It is interesting to us that Nomad’s performance by vintage bears evidence of the equity yield curve. Take the current portfolio: stocks held for over four years have superior annualized returns compared to those held for between three and four years, which have higher annualized returns compared to those held for two to three years and so on down to stocks purchased last year, which are a pretty mixed affair and contain several losses!“

As such, it is not surprising that, in average, Nomad held shares in companies for over 10 years! As Sleep once said, “Whilst we may only write twice a year, we own shares for such long periods (if the current rate of portfolio activity should persist) that we write around twenty letters during the life of the average investment–that’s a huge amount!”

“Our preference is for results to be measured over a five-year time frame, and even this may be a little short compared to the average holding period of the underlying investments which is presently around ten years (inflated by a dearth of sales). In this context the short-term results remain just that, short-term, and you should be as indifferent toward results so far as the annual sequence in which they have occurred. A stoical disposition to short-term results is both the right way to think (never mark emotions to market) but it also prepares one for results that may be reasonable, but are unlikely to be an extrapolation of the last two years.”
— Nick Sleep

By consequence, Nick Sleep built the partnership under strict operational rules in order to preserve patience such as closing the fund when ideas are scarce and avoiding features that incentive short-term asset gathering. On this, he explains that “Job one, two and three for your manager is investment performance, not asset gathering. Few practice this approach. We work under the assumption that if performance is reasonable then the level of interest in what we are doing will increase and, if appropriate, the Partnership will grow in time.”

This obviously reminds me of Jeff Bezos at Amazon, who believed that he can correctly align the interests of the customers with the interests of the shareholders by taking a long-term approach. In fact, long-term thinking shareholders can allow the company to make constant innovations, despite having failures from time to time. As such, Bezos was not timid in making investment decisions where he had an opportunity in gaining market leadership advantages even when he knew that some of his investments would not pay off.

“We like to invent and do new things, and I know for sure that long-term orientation is essential for invention because you’re going to have a lot of failures along the way.”
— Jeff Bezos

As a pioneer in the technology industry, it is in the company’s DNA to be committed to constant improvement, experimentation and innovation. This can be done by investing into new businesses. However, Bezos mentions that it is also his responsibility to make sure that any opportunities they invest in must generate the same return on capital that investors expected when they invested in Amazon. This can only be done by taking a long-term and true ownership approach.

“Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.”
— Jeff Bezos

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Inactivity

“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
— Blaise Pascal

Charlie Munger is famous for saying, “Investing is where you find a few great companies and then sit on your ass.” In my opinion, Nick Sleep’s record at Nomad is a perfect example of sit-on-your-ass investing done properly. For Sleep, a successful year was often one in which they made no new investments and sold very little. This inactivity was not laziness; it was the deliberate outcome of a highly rigorous process. They believed that once you had identified a handful of exceptional businesses trading at a reasonable price, the best course of action was usually to do nothing and let those businesses compound value over many years.

Similarly to Munger, Sleep embraced a highly concentrated portfolio. This was a logical extension of his belief that truly exceptional investment opportunities are rare and that deep conviction should be rewarded with significant allocation. If one genuinely understands a business and its long-term prospects, then owning more of it, rather than less, makes eminent sense. Sleep argued that conventional diversification often comes from a lack of conviction or a fear of being wrong, rather than an abundance of insights.

“In our opinion, just a few big things in life are knowable. And it is because just a few things are knowable that Nomad has just a few investments. The church of diversification, in whose pews the professional fund management industry sits, proposes many holdings. They do this not because managers have so many insights, but so few! Diversity, in this context, is seen as insurance against any one idea being wrong. Like Darwin, we find ourselves disagreeing with the theocracy. We would propose that if knowledge is a source of value added, and few things can be known for sure, then it logically follows that owning more stocks does not lower risk but raises it! Real diversification is offered by index funds at a fraction of the price of active management. Sam Walton did not make his money through diversifying his holdings. Nor did Gates, Carnegie, McMurtry, Rockefeller, Slim, Li Ka-shing or Buffett. Great businesses are not built that way. Indeed, the portfolios of these men were, more or less, one hundred percent in one company and they did not consider it risky!”
— Nick Sleep

However, it is important to mention that inactivity is not easy as it requires immense psychological fortitude. Each day, the decision to not sell a stock in the face of market fluctuations or tempting alternatives was an active, rational choice, even if accountants didn’t record it. Sleep highlighted that this inaction was a series of daily decisions not to sell, a discipline that few possess. In fact, Sleep mentions that “Our portfolio inaction continues and we are delighted to report that purchase and sale transactions have all but ground to a halt. Our expectation is that this is a considerable source of value added!”

Similarly, Sleep explains that “Regardless of how it may appear, Zak and I are drifting toward inactivity, at least as judged by our industry. As we have set out in earlier letters, in part this is because we realise through vicarious, and not so vicarious (!), experience that we do not know that much. We certainly do not have an opinion on many hundred shares, at least, not an opinion in which we would invest money.“

By consequence, Sleep understood that it was his responsibility for his partners at Nomad to build a “terminal” portfolio of wonderful companies that he could own for decades. As he humbly said, “Even though it may be tempting to flatter oneself, it is the businesses we invest in that do almost all the heavy lifting in the wealth creating process. If Zak and I bring something to the investment party, and I may be stretching things a little here, it is to be more rational than other investors.” To do so, Sleep studied various business models in order to identify the best ones which he wrote down on a white board in his office. Notably, we can think of “Scale Economics Shared”, “Super High Quality Thinkers” and “Deep discount to replacement cost”.

“The “super high quality thinkers” are our best guess of those firms whose shareholders could abdicate their right to trade stock (allocate capital themselves) sure in the knowledge that their capital will be well allocated for years to come within the businesses. This list is a group of wonderful, honestly run compounding machines. We call this the “terminal portfolio”.”
— Nick Sleep

As a matter of fact, Sleep is famous for coining the so-called “Scale Economics Shared” model. In short, he explains that “Scale economics shared operations are quite different. As the firm grows in size, scale savings are given back to the customer in the form of lower prices. The customer then reciprocates by purchasing more goods, which provides greater scale for the retailer who passes on the new savings as well.”

The perfect example of a company following this model is Costco. In one of his shareholders letter, Sleep writes, “Take Costco Wholesale: Costco’s advantage is its very low-cost base, but where does that come from? Not from low-cost land, or cheap wages or any one big thing but from a thousand daily decisions to save money where it need not be spent. This saving is then returned to customers in the form of lower prices, the customer reciprocates and purchases more goods and so begins a virtuous feedback loop.”

Another great example of how powerful this model of “Scale Economics Shared is Wal-Mart. As we have previously learned, Sam Walton understood the principle of frugality. In fact, he believed that to succeed in the retail industry, it was essential to offer customers the best possible value. As he once said, “If we can save a little money here and there, we can pass those savings on to our customers.”

Frugality was rooted in his own life experiences which instilled in him a deep appreciation for every dollar. This belief in frugality was not simply a cost-cutting measure; it was a core aspect of Wal-Mart’s identity. Walton demonstrated that maintaining a lean operation could lead to significant savings for both the company and its customers. He encouraged everyone in the organization to think creatively about cost reductions, whether through operational efficiencies or strategic negotiations with suppliers.

Walton’s commitment to low prices became legendary, and he frequently reminded his team that every small saving counted. He explains that “We made a rule that if we were going to spend a dollar, we better have a good reason for it. Every penny was important.” He truly believed that every penny saved was a penny that could be passed on to the customer, reinforcing the value proposition that became synonymous with the Walmart brand. He even cautioned future generations against extravagant spending, emphasizing the importance of maintaining this core value.

This philosophy created a culture of accountability and resourcefulness among employees at Wal-Mart. Walton’s emphasis on frugality was further reflected in his personal lifestyle; despite his immense wealth, he remained humble and lived a lifestyle that aligned with his principles. He often drove an old pickup truck and was known for seeking out the best deals, which resonated with the company values he instilled.

“Our customers are always looking for bargains, and if we can find a way to save money, we owe it to them to do just that.”
— Sam Walton

Through Walton’s leadership, Wal-Mart established a reputation for offering low prices without compromising quality. This approach to value not only attracted customers but also fostered loyalty. The company’s ability to deliver consistent savings set it apart from competitors, amplifying its growth and expansion across the nation and beyond.

As a matter of fact, despite Wal-Mart’s exponential growth and success, Sam Walton remained steadfast in his commitment to frugality and providing value for money for his customers. He believed in the importance of saving every dollar, not just for the company’s benefit but also for the customers. As he once said, “Sometimes I’m asked why today, when Wal-Mart has been so successful, when we’re a $50 billion-plus company, should we stay so cheap? That’s simple: because we believe in the value of the dollar.” This commitment to frugality wasn’t about being cheap; it was about respecting the value of money and recognizing that every dollar spent by the company ultimately came from the customer’s pocket. It was a principle that guided his decisions and shaped the culture of Walmart.

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Human Misjudgment

“I am very interested in the subject of human misjudgment, and Lord knows I’ve created a good bit of it. I don’t think I’ve created my full statistical share, and I think that one of the reasons was I tried to do something about this terrible ignorance I left the Harvard Law School with. When I saw this patterned irrationality, which was so extreme, and I had no theory or anything to deal with it, but I could see that it was extreme, and I could see that it was patterned, I just started to create my own system of psychology, partly by casual reading, but largely from personal experience, and I used that pattern to help me get through life.”
— Charlie Munger

Nick Sleep understood that the greatest barriers to investment success were inside our own heads. In fact, by reading his shareholders letters, it is clear that he was a devoted student of Charlie Munger’s Psychology of Misjudgement. He knew that our brains are wired with biases like denial, anchoring and social proof, that systematically lead us toward making poor decisions. This is especially true when under stress. In fact, he believes that there are three major recurring psychological pitfalls that leads to people making mistakes. He says, “What follows are three mistakes that, in our opinion, contribute to more unhappy outcomes than most. These are: denial, that is the reinvention of reality in the mind because the truth is too painful to bear; anchoring, that is a static, historic vision of a problem; and drift, that is how small, incremental changes in thinking build into a big mistake.”

As such, a key part of Sleep’s process was to develop tools to combat these tendencies. One of his tool was the concept of inversion. As we have mentioned previously, Sleep believed in destination analysis. For example, he was able to avoid being concerned by short-term stock price fluctuation and short-term performance by structuring his goal into transforming 1 dollar into 16 dollars without setting himself a timeline or the need to outperform an index.

Similarly, he often used probability-based thinking, which he learned by studying how world-champion bridge player Richard Zeckhauser approached the game. This involved thinking in decision trees, attaching probabilities to various outcomes, and updating those probabilities as new information emerged, rather than latching onto a single, static narrative.

“In one of Charlie Munger’s talks he makes the statement “the right way to think is the way Zeckhauser plays bridge, it’s just that simple”. Well, to a young man in London that is a very infuriating statement as it took me about a year to track down Richard Zeckhauser. He was world bridge champion in ’66 and, amongst other things, now runs a brilliant Behavioural Finance course at the Kennedy School of Government at Harvard. So, how does he play bridge? He thinks via decision trees and attaches probabilities to the various branches. And as the facts change, change the probabilities. And when you are comfortable dealing with probabilities, and the vast expanse of opportunities such as the global stock and bond markets, you don’t have to be too conservative with your bets.”
— Nick Sleep

Another way to avoid human misjudgement was the importance of having the time and mental space to think deeply. As such, Sleep warns us against busy schedule that doesn’t allow us to think. For Nomad and Nick Sleep, a patient approach to investing wasn’t just about great return, it was also about allowing time for him and Zakaria to think! As he once said, “All this busy behaviour looks short term efficient (ten meetings a day!) but, in our opinion, the cost is that things are not being thought through; the end result of a thousand small steps in the current direction not assessed and long-term bad habits creep in.”

This reminds me of the concept of labour of thinking by Harvey Firestone, who believed that it is quite difficult in business to have some time to yourself to think as numerous things come up every day that will need your attention. However, Firestone mentions that thinking is primordial in making good decisions and to run a successful business in the long run. In his book, he provides the example of Henry Ford, the founder of Ford Motor Corporation. While Ford is known for making business decisions quickly, but in reality, “He reaches his decisions slowly and alone; he does not jump at anything, and so, when the time comes for execution, everything moves with marvelous rapidity because everything has been previously thought through and planned.“

As a matter of fact, Ford was a master of delegating executive duties to others and made sure to have enough time on his own to think, and to plan and to watch. He would make sure to never assign any executive duties to himself and to have no social obligations.

“He has had the time to do this thinking and planning because he has used his time himself instead of permitting others to use it for him. And he is certain that plans will be executed for him, because he knows how to let men go when they grow too rich and lazy to execute.”
— Harvey Firestone

This reminds me of the importance of saying no. It is often mentioned that the difference between average results and exceptional results is what you avoid. In fact, there is an exact amount of hours per week and saying yes consumes time while saying no saves time. The famous Daniel Kahneman has a rule that he never says yes on the phone and will only reply later by email after thinking about it, which he rarely does. By saying no, you are able to save more time to spend thinking or to focus on better opportunities.

“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying ‘no’ to 1,000 things.”
— Steve Jobs

Furthermore, Firestone hated working with people that made quick decisions without having a long train of thought behind them. He once said, “I do not want to have around me the kind of man who can give me an instant decision on anything I may bring up, for, if he has not had the opportunity to give the question serious thought, then he is only guessing. And I can do my own guessing!” In fact, unless he was under an emergency, Firestone much preferred taking his time and to only make decisions after serious thinking and he was known for taking things one at a time. He once said, “One thing at a time is a pretty good rule—a rule that I never break.”

Similarly, he always made sure that his companies had enough money on the balance sheet. This would avoid being forced to make quick decisions due to financial pressure. This lesson was taught to him by his father who would often tell him “Never rush in on a deal. Let it come to you.”

“That is the course he followed, and by the time he was ready to trade, he knew the whole market. If his survey convinced him that the market was not a good one either to buy or to sell in, he simply went home again. He often held his stock a year to get better prices, and he was so good a judge of conditions that I do not recall that he ever made a mistake by holding. If the market were high and seemed to be going higher, he would seldom wait long to sell, and he never held back in the hope that the prices would soar to some impossible figure. Although he probably had never heard of Baron Rothschild’s advice never to buy at the top or sell at the bottom, he literally followed it. He never wanted to get more than his stock was worth or to buy stock for less than it was worth, which is probably the reason why everyone in the market respected him and dealt with him fairly.”
— Harvey Firestone

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Beyond the Book

Read "The Full Collection of the Nomad Partnership Letters" by the Igy Foundation

Read "The Surprising Power of The Long Game" by Farnam Street

Read "The Art and Science of Doing Nothing" by Farnam Street

Listen to "#365 Nick Sleep's Letters: The Full Collection of the Nomad Investment Partnership Letters to Partners" by Founders Podcast

Read "Sit On Your Ass" by Investment Masters Class

Read "Learning from Nick Sleep" by Investment Masters Class

Read "The Psychology of Human Misjudgment, by Charlie Munger" by Farnam Street

Read "The Focus to Say No" by Farnam Street

If you are interested in having conversations with the eminent dead, consider trying my AI Chatbox prompted with highlights from over 100+ biographies I have read. Try it here.

If you enjoy reading my newsletter, please consider becoming a paid subscriber. You’ll be able to keep this newsletter going! Here’s what you get when you upgrade:

• Voting on polls: you’ll get to vote on who I should write about next.

• Requesting biographies: you can request a biography for me to read and write about next.

• Supporting my next book purchase: all payments received will be used to purchase a new biography.

Today’s Chapter is based on the book “Limping on Water: My 40-year adventure with one of America’s outstanding communications companies” by Phil Beuth. The book is an excellent biography that goes over Phil Beuth’s experience at Capital Cities working along the legendary Tom Murphy and Dan Burke.

“Tom Murphy and Dan Burke were probably the greatest two-person combination in management that the world has ever seen or maybe ever will see.”
—Warren Buffett

In this Chapter, I will also refer to the book “The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success” by William Thorndike, which has a specific chapter on Tom Murphy and Capital Cities.

Buy it on Amazon here.

Here’s what I learned:

Decentralization

“It doesn’t make sense to hire smart people and then tell them what to do, we hire smart people so they can tell us what to do.”
— Steve Jobs

Tom Murphy’s tenure at Capital Cities exemplifies how granting extreme autonomy to managers can foster a corporate culture of responsibility, innovation and efficiency. Unlike traditional large companies that often stifles innovation with layers of bureaucracy, Tom Murphy believed in hiring capable individuals and then stepping back, allowing them to own their decisions fully. This decentralized approach motivated employees by instilling a sense of ownership that made them reluctant to leave. As Murphy once said, “Hire as few of the best people available, pay them well, give them equity and autonomy in an ethical company and leave them alone.”

This decentralized approach was inspired by the founder of Capital Cities, Frank Smith who once said, “Some of you fellows may think I tie you to Capital Cities by corrupting you with compensation and stock options. But I’ve decided the reason you are afraid to leave this company is more because our system naturally corrupts you with autonomy and authority. And I suspect that after living that way for a time, you’re fearful that someplace else might not operate in the same manner.”

As such, it is not surprising to see that extreme autonomy for its operating managers is a core philosophy at Capital Cities. In fact, it is mentioned so on the inside cover of every Capital Cities annual report:

“Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can and give them the responsibility and authority they need to perform their jobs. All decisions are made at the local level. . . . We expect our managers . . . to be forever cost conscious and to recognize and exploit sales potential.”
— Tom Murphy

A great example of the success of full autonomy can be seen in Dan Burke’s early experiences, where he learned that silence from headquarters signaled trust, allowing him to prioritize operations over reporting. In fact, Burke famously said, “Murphy delegates to the point of anarchy.”

As William Thorndike explained, “The guinea pig in the development of this philosophy was Dan Burke himself. In 1961, after he took over as general manager at WTEN, Burke began sending weekly memos to Murphy as he had been trained to do at General Foods. After several months of receiving no response, he stopped sending them, realizing his time was better spent on local operations than on reporting to headquarters. “

This was similar to Phil Beuth’s experience working with Murphy. Beuth echoes Murphy’s hands-off style, where often a brief conversation sufficed for assigning new responsibilities, trusting employees to deliver without micromanagement. As Don Polec, a manager from a competing company once said, “My parent company in Cincinnati, tells me, the manager, what I am going to do. The difference, is you tell New York what you are going to do.” That is just pure Capital Cities at its best.

By consequence, by providing so much autonomy to its employees, there was an extremely low turnover among employees. As Robert Price, a rival broadcaster once said, “We always see lots of résumés but we never see any from Capital Cities.” Similarly, Frank Smith once said, “The system in place corrupts you with so much autonomy and authority that you can’t imagine leaving.”

This concept of extreme autonomy reminds me of how Ken Iverson structured Nucor around decentralization, granting divisions near-complete autonomy to make decisions locally, which fostered innovation and responsiveness. This model contrasted with centralized bureaucracies, allowing Nucor to adapt quickly to market changes while holding managers accountable for results. By keeping divisions small and pushing authority downward, Iverson ensured that those closest to the work drove the business, rather than distant executives.

As a matter of fact, Iverson mentions that “Each division operates its one or two plants as an independent enterprise. They procure their own raw materials; craft their own marketing strategies; find their own customers; set their own production quotas; hire, train, and manage their own work force; create and administer their own safety programs…. In short, all the important decisions are made right there at the division. And the general manager of the division is accountable for those decisions. That’s where the buck stops at Nucor.“

For Iverson, this autonomy was non-negotiable and managers at Nucor enjoyed this decision-making responsibility and accountability. However, to maintain this autonomy, managers were expected to deliver a 25% return on assets and follow the ethical standards of the company.

“At Nucor, we chose long ago to build our company on a decentralized model in which each operating division enjoys true autonomy. We have told our managers to “trust your instincts”—and we have meant what we said. We’ve urged them to confer the same kind of decision-making autonomy to their people—to make their own decisions based on what they think is best for the business—and we have never backed off our commitment.“
— Ken Iverson

The main reason why Iverson believed in decentralization was because he believed that the frontline employees were the one that were closest to the problems and by consequence, have the best innovative ideas. He once said, “That is, by the people closest to where the work actually gets done. Those businesses must tell people on the front lines to “trust your instincts.” And businesses that tell their people to “trust your instincts” generally should be decentralized. A decentralized structure pushes the power to set strategy, spend money, make decisions, and create policies out toward the marketplace. It promotes local autonomy.“

As such, he believed it was primordial for managers to be maintain close contact with their employees. As he explained, “Managers are supposed to do what’s best for the business. And what’s best is to remember we’re all just people. Managers don’t need or deserve special treatment. We’re not more important than other employees. And we aren’t better than anyone else. We just have a different job to do. Mainly, that job is to help the people you manage to accomplish extraordinary things.”

“That’s the main reason we’ve tried to keep our divisions small. When a business grows beyond 400 or 500 people, it’s hard for management and employees to stay connected. I don’t order our managers to keep in close contact with their employees. But I do nag them. I say, “Andrew Carnegie was a financier. He could afford to treat people like peasants. We’re managers. We can’t.” They may not appreciate my nagging, but I do it with their interests in mind.“
— Ken Iverson

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Frugality

“When we cut expenses we have a direct, equal and positive impact on our bottom line. If we forget this fact we will be a member of the “Losers Club” and stupid. That is one club that we are not joining.”
— Alan Greenberg

If autonomy was the engine of Capital Cities, then a relentless focus on costs was the fuel. Murphy and Burke understood a fundamental truth: while revenues in an advertising-based business could be unpredictable, costs were almost entirely within their control. They instilled a culture where every dollar spent was scrutinized, not for the sake of being cheap, but to build a resilient and highly profitable enterprise. This frugality was a defensive moat against economic downturns and a competitive weapon. As Thorndike explains, “Frugality was also central to the ethos. Murphy and Burke realized early on that while you couldn’t control your revenues at a TV station, you could control your costs. They believed that the best defense against the revenue lumpiness inherent in advertising-supported businesses was a constant vigilance on costs, which became deeply embedded in the company’s culture.”

“The best defense against revenue uncertainties are constant, tight cost controls.”
— Tom Murphy

In fact, the most legendary story about Tom Murphy was how he scrutinizes every expenses, even for paint. Thorndike writes, “Shortly after Murphy arrived in Albany, Smith asked him to paint the dilapidated former convent that housed the studio to project a more professional image to advertisers. Murphy’s immediate response was to paint the two sides facing the road leaving the other sides untouched (“forever cost conscious”). ”

More importantly, this cost control culture was passed down from the executives to the operating managers. As Phil Beuth mentions, “Now, 30 years later, the company is no longer small, and if you wonder how it happened, well, there is no mystery; we just did it day to day. The bankrupt stations lost $ 360,000 the first year, and we did not turn the corner until our third year, after going back to our stockholders twice for $ 150,000 each time. There were 39 employees running radio and TV, and we learned one important thing—we needed only a few people to keep things going. That experience was worth a great deal to Capital Cities over the years. It helped us avoid building up huge staffs. We believed we should hire the best people, pay them well, and never have more people than necessary. Even to this day, we have no corporate counsel, no vice president of personnel, no public relations department.”

“The goal is not to have the longest train, but to arrive at the station first using the least fuel.”
— Tom Murphy

Furthermore, Murphy and Burke’s success in building Capital Cities was often by acquiring companies and incorporating Capital Cities’ culture of being cost efficient. Often, this would allow the newly acquired subsidiary to run leaner and to boost margins significantly.

A great example of this was how they transformed ABC’s culture from extravagance to efficiency. Thorndike mentions that “Burke and Murphy wasted little time in implementing Capital Cities’ lean, decentralized approach—immediately cutting unnecessary perks, such as the executive elevator and the private dining room, and moving quickly to eliminate redundant positions, laying off fifteen hundred employees in the first several months after the transaction closed. They also consolidated offices and sold off unnecessary real estate, collecting $175 million for the headquarters building in midtown Manhattan.”

“ABC, in fact the whole broadcasting industry, was a limousine culture—one of the most cherished perks for an industry executive was the ability to take a limo for even a few blocks to lunch. Murphy, however, was a cab man and from very early on showed up to all ABC meetings in cabs. Before long, this practice rippled through the ABC executive ranks, and the broader Capital Cities ethos slowly began to permeate the ABC culture. When asked whether this was a case of leading by example, Murphy responded, “Is there any other way?””
— William Thorndike

Tom Murphy’s fanatical approach to cutting costs reminds me of Alan Greenberg at Bear Sterns, who believed that a company’s success should be evaluated on its Return on Equity (”ROE”). And the secret to improve its ROE is simple: to increase revenues while cutting expenses. However, considering that sales are quite dependent on various external factors, Greenberg prefers to focus on what he can control: cutting expenses. As he once said, “The only statistic I care about is return on equity. After many sessions with some of our business school graduates (yes, we do have some), I think they have helped me understand the secret to improving our R.O.E. It seems that if we increase revenues and cut expenses, return on equity goes up and that is what makes me happy. Please make me happy! I can be very unpleasant when I’m not.

As such, Alan Greenberg was an expert at cutting cost and he made sure to remind his employees to do so in his various memos. One way he did this was by asking his staff to save up on office supplies such as paperclips, rubber bands and scotch tapes. While these may seems excessive, there is no need remind you that even a small expenses can compound into a big ones at a large scale.

“I have just informed the purchasing department that they should no longer purchase paper clips. All of us receive documents every day with paper clips on them. If we save these paper clips, not only will we have enough for our own use, but we will also, in a short time, be awash in the little critters. Periodically, we will collect excess paper clips and sell them (since the cost to us is zero, the Arbitrage Department tells me the return on capital will be above average). This action may seem a little petty, but anything we can do to make our people conscious of expenses is worthwhile.”
(…)
“Because of your cooperation, I would like to extend our cost-cutting efforts to a larger matter. Bear Stearns will no longer purchase rubber bands. If we can save paper clips from incoming mail, we can save rubber bands, and my hope is that we can become awash in those little stretchies also.”
(…)
“All of us use blue envelopes for sending written material around the office. Our team has done a great job of saving these envelopes and reusing them, but our scotch tape expense has gone up. From this day on, instruct your secretary to lick only the left side of the flap when sending the envelope. The reason for this will amaze you, and make you wonder why you did not think of this yourself. If the envelope is gently opened by the recipient, it can be used again and sealed, without using scotch tape, by your secretary licking the right side of the flap and then sealing it. After all of us have become accustomed to accurate and precise licking, a further extension of this will be to lick only the left third, and then the middle for the next trip, and the right side for the penultimate voyage. If one has a small tongue and good coordination, an envelope could be opened and resealed ten times.”
— Alan Greenberg

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Integrity

“Our goal still remains—a high return on equity with integrity.”
— Alan Greenberg

The final, and perhaps most important, lesson we can learn from Tom Murphy’s career at Capital Cities is that high performance and high integrity are not mutually exclusive. In fact, Murphy would argue that they are interdependent as he built Capital Cities on a foundation of absolute honesty.

This wasn’t merely a morale stance but a practical business requirement. Decentralization relies entirely on trust. If you are going to give a manager total autonomy, you must be able to trust their word implicitly. If that trust is broken, the system collapses. Therefore, Murphy had zero tolerance for dishonesty. Mistakes were acceptable, but a lack of integrity was not. As Murphy once said, “I can accept mistakes, but do not ever lie to me or anyone else in the company. There is no second chance here.”

This concept of integrity was important in every interaction, from how the company treated vendors, partners and the public. As such, it was primordial for Murphy to recruit employees who shared this ethical framework. It suggests that character assessment was a big part of their due diligence when hiring. As Warren Buffett once said, “You’re looking for three things, generally in a person: intelligence, energy, and integrity. And if they don’t have the last one, don’t even bother with the first two.”

“Over the decades, as someone who had an intimate working relationship with Tom Murphy, I have often been asked to explain what made Tom tick. If one simply measured the man by his intelligence, person-to-person skills and business smarts, he would already rank among the best. But those who know Tom recognize that his brilliant operational acumen and business philosophy were always rooted in the highest degree of integrity. Tom built a company based upon certain honorable principles and only recruited partners who shared those principles and considered them gospel.”
— Phil Beuth

Furthermore, this ethical code forbade employees to receive gifts, which was a common practice in the entertainment industry. He understood that small compromises lead to larger ones. As Beuth explains, “Almost overnight, I was bombarded with interview requests from agents and actors. That was fine, but on a half-dozen occasions, those requests were accompanied by lavish gifts and personal, handwritten notes, as though they’d come from old friends. I was sent a Rolex watch by a producer I hardly knew, and a fine leather wallet and briefcase from others. We did not accept such generosity at Capcities. With thankful explanations, the gifts were returned.”

Based on this story, it is clear to me that Tom Murphy understood the power of reciprocation. Reciprocation bias refers to the strong human tendency to feel obligated to return favors, gifts, or actions received from others, whether they are positive or negative. This bias fosters cooperation and social harmony but can also lead people to make decisions against their best interests due to a sense of social debt or obligation. This is the reason why Sam Walton wouldn’t let Walmart’s purchasing agents accept even a hot dog from a vendor.

Furthermore, Murphy and Burke’s hiring preferences were often in odd compared to other companies. In fact, at Capital Cities, leaders were chosen for intelligence and drive over rote industry credentials. As Beuth once said, “The company’s hiring practices were equally unconventional. With no prior broadcasting experience themselves before joining Capital Cities, Murphy and Burke shared a clear preference for intelligence, ability, and drive over direct industry experience. They were looking for talented, younger foxes with fresh perspectives. When the company made an acquisition or entered a new industry, it inevitably designated a top Capital Cities executive, often from an unrelated division, to oversee the new property.”

This reminds me of Edwin Land, the founder of Polaroid who had this motto of “an education without a degree”. Land hired his employees but did not require them to have any technical experience. Since his company’s office was located nearby, he frequently hired fresh graduates or students from Harvard or MIT. Furthermore, Land preferred to hire bright young liberal students over applicants with technical experience. As a matter of fact, he believed that they could learn the routines of the laboratory and the structure of scientific discipline as rapidly and, more importantly, they had little to unlearn.

While Land did not expect his new hires to have technical knowledge, he expected his employees to continue their education as an integral part of their working career. He fully believed that individuals in the industry would be better qualified to increase their technical competence and at the same time make their job fully satisfying through continuous learning.

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Today’s Chapter is based on the book “How to Make a Few Billion Dollars” by Brad Jacobs.

Brad Jacobs is an American entrepreneur renowned for founding and leading multiple billion-dollar companies, including QXO, Inc., XPO Logistics, United Rentals, and United Waste Systems. His career spans industries from oil trading to logistics and building products, with a record of over 500 acquisitions and transforming fragmented sectors through consolidation and innovation. Jacobs is recognized as one of the most successful business leaders of his era, having created outsized value for shareholders and authored the book “How to Make a Few Billion Dollars” in 2024.

Buy it on Amazon here.

Here’s what I learned:

Embrace Problems

“Problems are only opportunities in work clothes.“
— Henry Kaiser

Brad Jacobs makes it clear that that the habits of thought we bring to business are as important as any spreadsheet or market analysis. He believes that having an optimistic mindset is primordial in producing better business decisions and by consequence, having a more resilient business. As such, Jacobs encourage us to practice how to reframe our mindset by borrowing practices from positive psychology and cognitive behavioral techniques.

For example, he explains that “My wife and I learned this lesson firsthand while raising our children. When we put our kids to bed at night, we’d ask them the same question many parents do: How was your day? Sometimes, we’d hear the good, sometimes the bad, and sometimes the ugly. Then we met Martin Seligman, and he suggested asking children a slightly different question: What was the happiest moment of your day? We tried it. The change was dramatic—no bad, no ugly, just the good. And maybe because our kids knew the question was coming, they kept their antennas up all day with the expectation that the happiest moment could happen at any time. What an easy way to create an optimistic frame of mind!”

As such, Jacobs argues that if you change the question, you can change the scanning pattern of the brain. This skill or habit is primordial in a business settings, as a business can simply be defined as a company that helps its customers to solve problems. Jacobs says, “In that moment, I learned something invaluable: Problems are an asset—not something to avoid but something to run toward. Big ambitions often beget even bigger problems. If your initial reaction to a major setback is overwhelming frustration, that’s understandable, but it’s also counterproductive. Once you’re over that moment, pivot toward success: “Great! This is an opportunity for me to create a lot of value. If I can just figure out how to solve this problem, I’ll be much closer to my goal.””

The morale of the story is simple: don’t be afraid of problems, they are opportunities for you to create value. Train yourself and your team to feel excitement when facing large problems.

“A fellow CEO laid this out for me graphically once when we were talking about M&A deals. “Think of M&A as having four quadrants defined by size and risk,” he said. “Big, low-risk deals are the ones everyone wants, but they don’t exist. Small, low-risk deals do exist, but you can’t make much money from them because of their size. Small, hairy deals are the worst quadrant, because the reward is limited and the odds are stacked against you, so why bother? The bingo quadrant is the big, hairy deals. If you can find a big, hairy deal with solvable problems, that’s where the real money is.””
— Brad Jacobs

Furthermore, Jacobs mentions that it is in human nature to fear big problems especially when they have a large downside risk. As such, it is very difficult to project the positive outcomes or opportunities that come with these problems due to this bias. He advises us to question ourselves with a basic cognitive behavioral therapy (CBT) question to prevent anxiety from hijacking our decisions.

Here’s how Jacobs describes it: “Inevitably, the process of running a business will test your bias toward hope or fear. Are you being too conservative about your projections? Is your fear keeping you from jumping into an opportunity? Is your anxiety fact-based, or are your biases spurring negative emotions? By keeping any biases at arm’s length from your decision-making, you’ll have a far better chance of success. When I notice I’m feeling anxious about something, I ask myself a basic CBT question: ‘What’s the worst that can happen, and how would I cope with that?’ Or, ‘If a friend had a similar worry, how would I advise them to handle it?’ By putting distance between myself personally and the source of the anxiety, I can think more objectively about positive outcomes.“

Similarly, Jacobs suggests using meditation and thought experiments to expand our mind positively which has helped him in making better creative long-term decisions. In fact, he mentions the concept of “gedankenexperiments”, german word for thought experiments, which Einstein used for some of his greatest discoveries.

“I usually spend about half an hour a day meditating—15 minutes in the morning, 15 minutes at night—and much of that time is spent in gedankenexperiments. For me, this creates a feeling of profound calmness, which is when many of my best decisions materialize. Some gedankenexperiments fill me with awe at the sheer magnificence of the universe. Or I think about how it felt to see a beautiful work of art, watch a sunrise, connect with a piece of music, or hold my child in my arms. Daydreaming exercises remind me that positive emotions matter, especially in chaotic business environments.”
— Brad Jacobs

As we have previously learned, Einstein preferred the use of thought experiments over discoveries through trial and error. A thought experiment is an easy tool in order to use one’s imagination in order to investigate the nature of things. This allows us to make experiments at a low cost. For example, if you were asked who would win in a basketball game between Warren Buffett and Michael Jordan, you wouldn’t need to call both of them in order to have them play a game of pick-up to know who would win. You’d easily deduce the results by simulating the game in your mind.

“Our own ideas are more easily and readily at our disposal than physical facts. We experiment with thought, so as to say, at little expense. It shouldn’t surprise us that, oftentime, the thought experiment precedes the physical experiment and prepares the way for it… A thought experiment is also a necessary precondition for a physical experiment. Every inventor and every experimenter must have in his mind the detailed order before he actualizes it.”
— Ernst Mach

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Power of Scale

“Every company that intends to grow, should directly address the barriers to scaling.”
— Hendrith Vanlon Smith Jr.

What makes Brad Jacobs’ entrepreneurship career impressive is the fact that he was able to create multi-billion dollar companies in various industries ranging from oil trading to logistics. He often achieved this by scaling these businesses through a roll-up strategy, which is the process of acquiring and merging multiple smaller companies in the same industry and consolidating them into a large company. As such, understanding his thought process on how he identifies an industry to do business in is quite fascinating.

In fact, Jacobs, on this subject, explains that “One of the first things I look for in an industry is scalability. I want to be able to envision how I’ll take a business from a few million dollars to tens of billions of dollars. What will be the path to do that, and how fast can we move along that path? Is the industry growing much faster than GDP so that we’ll probably generate top-line growth each year just by showing up and can build from there? What’s the base price/volume combination we need to be profitable, and how realistic is it to significantly increase our profit margin over time? What could prevent us from doing that?“

His analysis then goes deeper as he examines the structural advantages of size, economies of scale, and the potential for growth both organically and through mergers and acquisitions (M&A). He is particularly focused on the “arbitrage” between the cost of acquiring companies and the value they can create within his larger entity. He says, “Structurally, is it an industry where companies have advantages of size and economies of scale? Are there ways to grow the business organically or through M&A? What multiples will I likely have to pay for companies I acquire, and is that number a large enough discount from the multiple I’d expect my company to trade at? This is important because the arbitrage between our cost of capital and what multiple we’re able to buy companies at is the biggest value-creation lever in a roll-up.”

“When it comes to making a few billion dollars, I’ve got a bias toward industries that are ripe for consolidation. Acquisitions are the best way I know of to scale up fast and gain the advantages that come from a large number of locations and greater market share. With scale, I can professionalize the operations by integrating best practices, spread my cost base over a larger revenue base, and attract desirable customers and management talent.”
— Brad Jacobs

Once he identifies an industry with scalability, Jacobs explains that the next step is to understand everything about the industry. Therefore, he must invest heavily in research and to seek input from experts before jumping into a new venture. As a matter of fact, he mentions that “The most time-consuming task in my methodology is processing all the digital information that I accumulate; it’s a far cry from 44 years ago, when I physically went to the library to start researching industries. But I’ve got a team of super smart people who are good at distilling tons of source information. As I go through the material, I note my observations in preparation for the next step—my interviews with experts. After absorbing a lot of data and arming myself with questions, I seek out people who live and breathe the industry I’m considering. Some of this can be done with video chats, but this phase is more about getting face-to-face and listening intently.”

Finally, as we have mentioned previously, a company gains value by solving its customers’ problems. Therefore, it is not surprising that Jacobs often gets his next big money idea by talking to his customers.

“One effective way to spot new trends is to ask your customers what their dream tech would look like, assuming anything is feasible and cost isn’t a factor. That removes any psychological blocks. I want to know what my customers would go ga-ga over, no matter how fantastical it sounds. What capabilities would it have, what data would they want to push or pull, how would it help them succeed? This produces an avalanche of ideas, which we evaluate for impact, cost, and returns. The ones that make it to the short list are the projects with the greatest value and highest potential return. We stack rank them and then set a budget that’s affordable.”
— Brad Jacobs

This focus on scalability and on customers’ needs reminds me of what we have learned from Sam Walton’s success at Wal-Mart. In fact, in my opinion, at the heart of Wal-Mart’s success lies in Sam Walton’s obsession with providing value to his customers. He mentions, “I learned this early on in our business: the secret of successful retailing is to give your customers what they want. And really, if you think about it from the point of view of the customer, you want everything: a wide assortment of quality merchandise; the lowest possible prices; guaranteed satisfaction; friendly, knowledgeable service; convenient hours; free parking; a pleasant shopping experience.”

This customer-first mentality wasn’t just a slogan, it was deeply embedded in how he approached every aspect of his business. He believed that if you served customers better than anyone else, success would naturally follow. This philosophy led him to implement a practice that was revolutionary at the time: discounting.

Sam Walton’s understanding of the power of discounting wasn’t a stroke of genius; it was a lesson learned early on, a simple principle with profound implications. He discovered that by lowering prices, even slightly, he could dramatically increase sales volume, resulting in greater overall profit. This wasn’t about sacrificing margins; it was about understanding customer behavior and recognizing the allure of a good deal.

Here’s how he explains it, “Say I bought an item for 80 cents. I found that by pricing it at $1.00 I could sell three times more of it than by pricing it at $1.20. I might make only half the profit per item, but because I was selling three times as many, the overall profit was much greater.”

This focus on low prices was a core element of Walmart’s customer-centric philosophy. Walton believed that providing value to the customer was paramount, and that meant offering quality goods at the lowest possible price. He instilled this belief in his employees, emphasizing the importance of passing savings on to the customer whenever possible. This dedication to low prices and customer satisfaction became the driving force behind Walmart’s growth. It resonated with customers, who flocked to the stores for the unbeatable deals and the guarantee of satisfaction. Walton mentions that “The idea was simple: when customers thought of Wal-Mart, they should think of low prices and satisfaction guaranteed.”

“We exist to provide value to our customers, which means that in addition to quality and service, we have to save them money.”
— Sam Walton

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Hire Well

“If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But if each of us hires people who are bigger than we are, we shall become a company of giants.”
— David Ogilvy

If you are going to make a billion dollar business through acquisitions like Brad Jacobs, it is important for you to have quality people in place as you scale. As such, it is with no surprise that Jacobs emphasizes in hiring well. In fact, Jacobs is explicit: a CEO’s most important job is recruiting. He explains that “CEOs tend to get credit for the accomplishments of the teams they lead, but in reality, the most important thing a CEO does is recruit superlative people who have a combination of impressive traits. Talent is a must of course, but it’s equally important to hire quality people who are capable of constructive interactions with others.”

So what are traits that Jacobs look for when hiring? He believes in four non-negotiable traits: intelligence, hunger, integrity and collegiality. Miss any one of these characteristics and the candidate is out. As he once said, “Make your hiring choices as perfect as they can be because there are few mistakes costlier than hiring the wrong person.”

Personally, I believe integrity to be the most important of these traits. As Warren Buffett once said, “Intelligence, energy, and integrity. And if they don’t have the last one, don’t even bother with the first two. I tell them, ‘Everyone here has the intelligence and energy—you wouldn’t be here otherwise. But the integrity is up to you. You weren’t born with it, you can’t learn it in school.” Here’s what Jacobs has to say about integrity: “I’ve learned three important lessons about integrity over the course of my career. First, if someone’s willing to lie about small things, they’re usually willing to lie about big things. It’s a lot of work to communicate with someone you don’t trust to speak truthfully, where you have to constantly wonder whether they’re lying, and why. And more critically, trustworthy employees are leadership’s eys and ears in business operations. Dishonest employees blind management to the reality of what’s going on. The second thing I’ve learned is that, sooner or later, liars get caught. That’s why I believe honest people are more successful in the long term than dishonest people. I’m chasing success on a massive scale, so I can’t afford to have liars on the team. They pose an existential threat to the entire company, and the team can sense that, even if they don’t know anything specific. Honest employees make it easier for everyone to relax. And third, honest people don’t have to tell you how honest they are. Instead, they show integrity through their actions. Most reputations for integrity come from the cumulative effect of someone doing what they say they’ll do, and being straightforward in how they speak. These are the kinds of cues we look for as someone moves through the hiring process.”

“While there’s little about these three leaders that seems to connect them on the surface, they’re nearly identical in possessing the four qualities I seek in every hire: intelligence, hunger, integrity, and collegiality. If a candidate is deficient in any one of these four, that’s a risk I don’t take. If I find someone who scores high in all four qualities, and has the skills for the role, I snap them up.”
— Brad Jacobs

Furthermore, Jacobs is a believer in hiring people who are motivated to make a lot of money. He explains that “CEOs can give their employees experience and advice, but you can’t pay the mortgage with advice. Compensation is the most effective tool I have to motivate employees. If a candidate says to me, “I’m not motivated by money,” I suspect either they’re not being candid or they lack the hunger that’s necessary to succeed in what is, after all, a profit-driven enterprise.“

It is clear that Jacobs fully understands the power of incentives. Once you have great employees working for you, it is important to set a compensation system in place in order to retain these great talents. Bonus point if the incentive structure is aligned with the company’s goals. As Jacobs once said, “That’s why I’ve “overpaid” almost every direct report I’ve ever had to ensure I had top-tier people in place. When I pay someone a big bonus or see the value of their equity keep rising, I have the satisfaction of knowing it’s a twofer, because I’ve been careful to align that person’s incentive structure with the company’s goals. The only way to earn windfall money in my companies is to make outsized contributions to value creation.“

This philosophy creates a virtuous cycle where motivated employees drive company success, which in turn leads to greater rewards for them. It is the ultimate alignment of interests, making a good compensation system one of the smartest investments a leader can make.

“And that’s the bottom line of a compensation structure that aligns the interests of the people in your organization with the interests of your company and its shareholders. Employees are happier and have more reason to work hard. Managers are more motivated to devise creative solutions to challenges. The company is better positioned to make gains in operational excellence, market share, and profitability.”
— Brad Jacobs

This reminds me of what we have learned from Steve Jobs and on the importance of hiring A-players. As a matter of fact, Jobs was also a master at recognizing talent and surrounding himself with exceptional people. He had an almost uncanny ability to locate and convince talented individuals into joining his team, often convincing them to take on roles they might otherwise have avoided. Steve Jobs was well known for working with only A-Players.

“So I’ve built a lot of my success on finding these truly gifted people, and not settling for “B” and “C” players, but really going for the “A” players. And I found something… I found that when you get enough “A” players together, when you go through the incredible work to find these “A” players, they really like working with each other. Because most have never had the chance to do that before. And they don’t work with “B” and “C” players, so it’s self-policing. They only want to hire “A” players. So you build these pockets of “A” players and it just propagates.”
— Steve Jobs

Furthermore, one of Steve Jobs’ biggest quality as a leader is his ability to connect with people who had the skills he lacked. As a matter of fact, when Jobs first started Apple, it was his partner Steve Wozniak, often referred to as the technical genius behind Apple, who was responsible for designing the hardware that made the company famous. Jobs, on the other hand, took care of the business aspects, from securing funding to negotiating deals. Together, they formed a partnership that would change the world.

Jobs’ ability to recognize Wozniak’s genius and harness it for the company’s benefit was one of his greatest strengths. He understood that Wozniak’s designs were not just technically impressive—they were revolutionary. This realization helped Jobs see the potential for turning Wozniak’s creations into profitable products.

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Listen to "Brad Jacobs, QXO, XPO, United Rentals & United Waste" by David Senra

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Today’s Chapter is based on the book “How to Lose $100,000,000 and Other Valuable Advice” by Royal Little.

Royal Little was an American business executive known as the founder of Textron and the originator of the modern corporate conglomerate concept. He pioneered diversification by acquiring companies in unrelated industries, setting a pattern for many future corporations and earning the title “the father of conglomerates”. Little led Textron from a small textile firm to a major multi-industry corporation before retiring in 1960.

Buy it on Amazon here.

Here’s what I learned:

Avoid Bad Businesses

“The textile industry illustrates in textbook style how producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage. As long as excess productive capacity exists, prices tend to reflect direct operating costs rather than capital employed. Such a supply-excess condition appears likely to prevail most of the time in the textile industry, and our expectations are for profits of relatively modest amounts in relation to capital.”
— Warren Buffett

Royal Little’s journey in business is a reminder of how important it is to avoid investing in the pitfalls of seemingly golden opportunities. In fact, early in his career, he learned the hard way that unusual extraordinary profits and high return on capital often signals impending competition. This lesson stems from his experience in investing in the textile industry, where he observed the importance of having an economic moat. He emphasizes that in a competitive market, capital flows to profitable sectors, inevitably driving down returns.

Little tells the story of how he invested $2,500 from his army pay into Lustron, a textile company believing that the company would maintain its 100% Return on Equity. He mentions that “when an opportunity came along to buy a few shares of Lustron common stock I invested my entire savings in the company for which I was working, believing that I was going to make a great fortune investing in a company making such a high return on its capital. Unfortunately, the earnings were caused by the material shortages of fibers for the textile industry, which were caused by the enormous consumer demand for textile products after the government had taken so much of these products out of the market during the war.” As such, Little warns us against investing in companies with a high return on capital which doesn’t have any competitive advantages.

“In our free enterprise system that high rate of return will not last. Capital will pour into that industry from other sources, and ultimately the rate of return even in the best of companies will decline to 15 to 20 percent. You will almost certainly take a loss on the investment that you made when the rate of return was too high.”
— Royal Little

Unfortunately for Little, he had to make this mistake a few times before truly learning from this trap. As a matter of fact, Royal Little is well known for being the founder of Textron, a large conglomerate, that first started as a small textile company that made synthetic yarn. He quickly realized his mistake, as he once said, “In the textile business, it is dangerous to count on high profits continuing in any phase of this business. Invariably, capital pours into the production of any product that is unusually profitable, and within a couple of years there is overproduction and no longer high profit.”

In fact, to explain how awful of a business Textron was in, Little wrote the following in the 1939 report:

“To indicate how capital intensive the synthetic yarn industry is, the 1939 report stated: One dollar of capital is needed to make one pound of yarn per year. With an average selling price of 54¢ per pound it would require nearly two years of steady operation for the total sales dollars to equal the capital investment. Approximately $500,000,000 of new capital would be needed to duplicate the country’s present manufacturing facilities.”
— Royal Little

Royal Little is not the only one who made a mistake investing in the textile industry. In fact, the Oracle of Omaha himself has also invested in a textile company, Berkshire Hathaway. However, he quickly realized his mistake and started divesting into other industries, similarly to Royal Little at Textron.

This reminds me of the importance of solving your own moat. As we have previously learned from Jim Weber, it is primordial to focus on a specific niche if you are in a competitive industry. As a matter of fact, when Weber took over as CEO in 2001, Brooks was struggling to compete with industry giants like Nike and Adidas. The company was spread too thin, trying to cater to too many categories. Weber made a bold decision: Brooks would focus solely on performance running. This pivot became the foundation of its success.

Weber’s philosophy was clear: you don’t have to be everything to everyone. Instead, you can dominate a smaller, more focused market. Brooks narrowed its focus to performance running, developing products that catered specifically to serious runners. This decision was a game-changer. As he explained, “Going forward, I told them, we would pivot to a running-only brand. Real performance for real runners. Our product would perform for the most discerning runners, earning their trust mile after mile, and our brand would embody the spirit and soul of all who run.”

“In footwear, many believe the conventional wisdom that says brands must play in all categories, across myriad price points. They believe that a company can’t survive by playing a narrow game. Our contrarian philosophy was to focus only on premium running, turning a narrow focus into a strength.”
— Jim Weber

Weber was inspired by Warren Buffett’s investment philosophy, particularly Buffett’s emphasis on building moats around businesses, as a matter of fact, the concept of a “moat” was central to his strategy. A moat, in business terms, refers to a company’s ability to maintain a competitive advantage over its rivals. Weber explains that “In business, a moat leverages the medieval castle metaphor, describing a business’s competitive advantages that allow it to successfully grow and defend its position with customers profitably against any would-be competitor.”

Weber believed that, “If you are entering a new business with serious competition, you need to prioritize solving for your moat.” For Brooks, the moat problem was solved once they focused on delivering premium products for performance running only. Weber’s decision to focus on a niche market also allowed Brooks to create a distinctive brand identity. Rather than trying to compete with larger, more diversified brands, Brooks leaned toward areas where competitors weren’t focusing on in order to create a brand that stood out in the croweded sportswear market.

“The goal for a brand is not to emulate the competition but to find unaddressed opportunity in between the strengths that your competitors already own.”
— Jim Weber

This focus on a niche not only helped Brooks survive but thrive. By 2010, Brooks had become the fastest-growing brand in running, surpassing Asics in market share in the specialty run channel. As Weber reflects, “I was convinced that Brooks’s opportunity in premium performance run was big. Plus, our Run Happy positioning was novel and unique. Given the size of the category, we had a billion-dollar idea.”

But more importantly, Weber understood that a moat isn’t a static defense; it’s a dynamic, evolving entity that requires constant reinforcement and innovation. He was consistently trying to find ways to protect Brooks’ moat. This reminds me of the following saying:

“So we think in terms of that moat and the ability to keep its width and its impossibility of being crossed as the primary criterion of a great business. And we tell our managers we want the moat widened every year. That doesn’t necessarily mean the profit will be more this year than it was last year because it won’t be sometimes. However, if the moat is widened every year, the business will do very well. When we see a moat that’s tenuous in any way - it’s just too risky. We don’t know how to evaluate that. And, therefore, we leave it alone. We think that all of our businesses-or virtually all of our businesses-have pretty darned good moats.”
— Warren Buffett

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Avoid Sunk Cost Fallacy

“The sunk cost fallacy is most dangerous when we have invested a lot of time, money, energy, or love in something. This investment becomes a reason to carry on, even if we are dealing with a lost cause. The more we invest, the greater the sunk costs are, and the greater the urge to continue becomes.“
— Rolf Dobelli

One the greatest lesson we can learn from Royal Little is the concept of avoiding the sunk cost fallacy and to continue investing our time and our money in a lost cause. In the case of Little, he was frustrated with the cyclical nature of textile businesses, as such, he pioneered the concept of conglomerates through unrelated diversification, transforming Textron from a textile firm into a multi-industry giant.

By doing so, Little solved two of his problems: first, it would avoid him continuing to invest in a low-margin industry with plenty of competitors and second, he would be much better protected against economic downturns. As he once said, “after having tried desperately in the past to make a success of (1) yarn processing, (2) parachute manufacturing, (3) the completely integrated Textron brand operation, and (4) low-cost southern mills, I decided that there must be some better medium than the textile business in which to use the stockholders’ capital to their advantage. “

“In addition, as you have seen, the highly cyclical nature of the textile business and its relatively low margin of profit even in good times had convinced us that we must find some better way of making a fair return on our stockholders’ equity capital.”
— Royal Little

This idea of creating a conglomerate, a company composed of completely unrelated businesses was introduced to Little by Eliot Farley who believed that there was potential in putting completely unrelated businesses in one corporation.

Here’s how Little explains the objectives of building a conglomerate at Textron:

1. Eliminate the effect of business cycles on the parent company by having many divisions in unrelated fields.

2. Eliminate any Justice Department monopoly problems by avoiding acquisitions in related businesses.

3. Eliminate single industry’s temptation to overexpand at the wrong time. Finance the growth of only those divisions which show the greatest return on capital at risk. Rather than overexpand any division, use surplus funds to buy another business.

4. Confine acquisitions to leading companies in relatively small industries. Never buy a small company in a $5 to $10 billion industry. One of my particular “No-No’s”—never buy a company that manufactures a product with an electric wire attached—no radios, televisions, washing machines, driers, electric stoves, or refrigerators.

5. Having made a complete analysis of all major manufacturing companies’ return on net worth and found that only about twenty-five in 1952 earned over 20 percent on common stock equity, I set that rate of return in 1953 as Textron’s goal for the future.

There’s a few key takeaways here. First, because of Little’s experience in manufacturing, it is understandable for him to be focusing on acquiring companies that were manufacturers compared to companies in retailing or service industries. Second, it was primordial to invest in companies that are leaders in a small niche industry rather than a company in a big but competitive market.

“We also felt that it would be advisable not to buy any businesses that were in huge industries doing $5 or $10 billion in sales, where the company we might purchase would be a tiny part of such an industry. It appeared to us that if we could buy a leader in a relatively small industry we would be far better off.”
— Royal Little

This reminds of what we have previously learned on compounders companies who have a strategy of relentlessly acquiring small private companies by using their free cash flow. As explained by the REQ team, most of the time, these acquired companies are usually not constrained by industry or geography. The entire global market of small and medium-sized enterprises tend to be their playground. As Lifco’s CEO once said, “if we were forced to only buy companies in our dental division, we would not been able to grow as much or profitably as we have done.”

This relentless acquisition of companies creates a virtuous cycle: the cash flows from existing businesses fund new acquisitions, which in turn generate more cash flow. This self-sustaining cycle is the mechanical heart of the compounding machine, ensuring that growth is not a sporadic event but a predictable, repeatable process.

“With the money we earn we buy quality companies that generate more money, which enables us to buy more quality companies—it’s that simple.”
— Johnny Alvarsson, ex-CEO of Indutrade

However, for the compounding effect to work, it is clear that reinvested capital must generate high returns. As such, CEOs of compounders are, first and foremost, masters of capital allocation with a fanatical focus on metrics like Return on Invested Capital (ROIC) and Return on Total Invested Capital (ROTIC). They must be extremely disciplined when it comes to valuation as overpaying for an acquisition is a cardinal sin.

REQ explains that “Avoiding overpaying for acquisitions is crucial. Paying a 10 × multiple for a private company, compared to 5 ×, is the difference between 10% ROIC and 20% ROIC assuming 100% cash conversion. The higher the price paid, the greater the need for cash conversion to support self-financing growth. If you overpay, the deal has to work a lot harder to pay for itself.” As a matter of fact, the key for a compounder is to have the newly subsidiary quickly repay itself and to generate free cash flow back to the main company.

This can be perfectly illustrated by the success of Bergman & Beving, whose founders always had a distinct focus on profitability. They invented a profitability benchmark which involved maintaining profits divided by working capital (P/WC) at levels exceeding 45%. REQ explains that “According to the Superinvestors of Bergman & Bevingsville, a business is considered self-financed when the return on working capital (P/ WC) is higher than 45%. By achieving P/ WC > 45%, the business can generate the necessary cash to cover taxes, interest, and dividends, and make required investments in existing businesses through capital expenditures, working capital, and financing acquisitions. The goal of being self-financed means that growth, whether organic or through acquisitions, will not dilute current shareholders through equity raises or rely heavily on debt financing. It highlights the importance of capital efficiency in generating cash.”

This reminds me of an episode of The Knowledge Project where **Palihapitiya explains that he would be livid for a company to declare dividends if it could reinvest and generate superior returns.

“If you, as a CEO Shane, if I was an investor in your company, and you said, “Chamath, I generate 30% free cashflow, and I’m going to give you a dividend.” I would say, “Shane, f*ck you.” I don’t want that money. What am I supposed to do with it? Reinvest it. Grow faster, please.”
— Chamath Palihapitiya

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Avoid Bad Managers

“I think management is incredibly important. I’ve been burned many times when I didn’t pay enough attention to that. Businesses, as I already told you, are very fragile. Most of them don’t survive very long. Leadership, both depth of leadership as well as quality of leadership, matters a huge amount.”
— Mohnish Pabrai

At the heart of Royal Little’s success in acquiring so many companies was his belief in people. He learned that no business strategy succeeds without capable leaders and with a proper incentives structure in place. As he explains, “No business, however promising, is worth backing unless the management is capable. This situation illustrates dramatically how one man can be a failure in a new business and another man can turn it around and be successful in two years. If you are smart enough—or lucky enough—always to back competent people, you will never lose money.“

This was especially true when Little investing was investing in early stages companies as a venture capitalist. He mentions, “I must stress the importance of backing the right people. If it had been possible for us to have spotted those who had inherent management capabilities, and if we had limited our investments to those people, our results would have been far superior. There is no question that the most important thing in venture capital financ ing is people! people! people! just as the most important thing in real estate financing is location! location! location!”

Oddly enough, Little warns us to not invest in companies where the inventor is the president of the company, fearing that “The inventor will constantly be experimenting with possible improvements of the product rather than settling upon a formula and producing big tonnage for an established market.“ He does mention one exception though, Edwin Land. As we have seen previously, Land was the founder of Polaroid and while he was the inventor and the founder of the company, he was extremely successful in business. In fact, Land is often mentioned as one of Steve Jobs’ hero.

“Industry is best at the intersection of science and art”
— Edwin Land

Furthermore, once Little had competent people in place, it was primordial for him to set a proper incentives structure in order to keep them within the company. This was especially true since most of the great managers were obtained through acquisitions. As he once said, “When you make the owners of a small business you purchase wealthy, try to have some meaningful incentive so that they will continue to work hard for you in building up the business.“

While it was the norm to have bonuses tied to profits, he pioneered a compensation plan at Textron that was revolutionary, one that tied bonuses directly to return on assets, ensuring that managers were rewarded for efficient use of capital.

Therefore, Little “adopted a basic plan that involved incentive being tied to the return that the company earned on the divisional net worth. Our plan required that there would be no bonus unless the management made at least 10 percent pretax on the divisional net worth and that the maximum bonuses could be reached if an unusually high rate of return was made. Under the maximum bonus, the divisional president could earn 100 percent of his base salary, the second group could earn 75 percent; the third group 50 percent; and the next group 25 percent. It was our feeling that these plans should go far enough down in the organization so that everyone who had an opportunity to make or lose money for the company as a result of their decisions should be included“

“For many years in the past the directors of the company had made awards in current earnings to a large number of key people as additional compensation. The directors have recently adopted an incentive compensation plan, based upon engineering studies, which will be directly related to the return which management makes on capital used in operations.”
— Royal Little

This approach to incentive reminds me of the incentive structure at Berkshire Hathaway, a fellow conglomerate: compensation should align the management’s interest with those of the shareholders. Warren Buffett and Charlie Munger want their managers to think like an owner. As Munger once said, “The basic rule on incentives is you get what you reward for. So, if you have a dumb incentive system, you will get dumb outcomes.”

As we have previously learned, Munger explains how important incentives are in running a business. My favourite example on the power of incentives from Munger come from Federal Express:

“The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can’t be done fast. And Federal Express had one hell of a time getting the thing to work.

And they tried moral suasion, they tried everything in the world, and finally somebody got the happy thought that they were paying the night shift by the hour, and that maybe if they paid them by the shift, the system would work better. And lo and behold, that solution worked.”
— Charlie Munger

Charlie Munger also provided an interesting case study on how Les Schwab tire store was able to come out ahead despite competing with the bigger tire companies such as Goodyears and later on, with huge price discounters like Costco and Sam’s Club. How did he do so? Munger believes that a big part of this is due to the fact that he “must have a very clever incentive structure driving his people. And a clever personnel selection system, etc.”

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Beyond the Book

Read "Moats - Competitive Advantage" by Investment Masters Class

Read "The Art of Thinking Clearly" by Farnam Street

Read "A Deep Dive into Shareholder Value Creation by Acquisition-Driven Compounders" by REQ

Read "THINKING ABOUT MANAGEMENT?" by Investment Masters Class

Read "The Power of Incentives: The Hidden Forces That Shape Behavior" by Farnam Street

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Today’s Chapter is based on the book “Letters to a Young Athlete” by Chris Bosh.

Chris Bosh is a retired American professional basketball player, born March 24, 1984, who starred in the NBA for the Toronto Raptors and Miami Heat over 13 seasons. He was an 11-time NBA All-Star, a two-time NBA champion with the Miami Heat, and an Olympic gold medalist with Team USA in 2008.

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Here’s What I Learned:

Push Your Limits

“If you always put limits on everything you do, physical or anything else, it will spread into your work and into your life. There are no limits. There are only plateaus, and you must not stay there, you must go beyond them.”
— Bruce Lee

The first lesson we learn from Chris Bosh is the idea that true competitors shine the brightest when they push beyond their limits. He mentions that exhaustion isn’t a barrier but a test of character, urging us to push beyond your perceived physical limits. This mindset isn’t solely about athletic endurance, it can be used as a concept to face life’s adversities, where resilience determines success.

To explain his point, Bosh explains that, “How an athlete plays when they’re exhausted tells you everything about who they are as a competitor. The successful ones don’t even think about being exhausted. They’re so used to it that all they think about is performing. In fact, maybe that’s what being an athlete really is—enduring and transcending the limits you feel when, as The Boss once sang, you “ain’t nothing but tired.”

Bosh draws inspiration from David Goggins, an ex-Navy SEAL who runs ultra marathons (135 miles in 24 hours). Goggins once said that the reason to his success in running comes from learning how to distrust his limits. Bosh explains that “When you think you’ve hit your limit, you’re only at about 40 percent of your capacity. Your mind is telling you that your body needs to stop—but it’s lying. Your body can keep going well beyond that point. Realizing this should empower you.”

In the game of basketball, Bosh mentions that it is quite common for big men to quit on a rebound opportunities due to exhaustion. While this may be a norm in the sport, Bosh hated it.

“You think Kobe Bryant just said all of a sudden, “Man I’m just really, really in shape, and now I can score 30 points a night without getting tired”? No way. You get that way by never quitting, by pushing through precisely when you are tired. That’s the irony of this game: You become capable of the grind by surviving the grind.”
— Chris Bosh

Bosh extends this ability to push your limits when exhausted to the inevitability of pain in pursuit of glory. As a matter of fact, he believes that to succeed, one must be able to endure pain. He once said, “Pain is temporary; glory is forever. If you want to excel, you have to get used to the pain. You have to get used to exhaustion. I can’t promise you that it will ever be a comfortable feeling, but I can guarantee you that you can become familiar enough with it that you can visit that mental and physical space on your path to getting better and not have to worry that you’ll crumple under the pressure.”

Furthermore, Bosh believes that this concept of pushing oneself’s limits is also a primordial skill beyond the athletic life as it is the key in order to face life’s adversities. He explains that “And in life, it’s the same. Life doesn’t wait to see if you’re rested and ready before throwing the biggest tests at you. It throws those tests at you whenever it feels like it—you lose your job, or you fail at something that mattered deeply to you, or someone you love gets really sick.”

“The difference between people who crumple in the face of adversity and the people who come through it stronger and wiser is the ability to reach down for that extra endurance even when you’re exhausted, even when it’s not fair, even when you want to curl up in a hole somewhere. When times are hard, your mind may be telling you that you’ve hit your limit. Remember: It’s lying.”
— Chris Bosh

This lesson from Chris Bosh reminds me of what we have learned from Konosuke Matsushita who believed that there is an inextricable link between facing adversity and achieving success both in business and in life. As Matsushita once said, “the great figures of history are those who have been buffeted by adversity and whose dauntless spirit has helped them overcome countless difficulties.”

This belief stands in contrast to the common perception that success is a linear journey free from setbacks. In reality however, adversity is key to progress and innovation. Matsushita believes that challenges are great opportunities to gain wisdom and to improve. As he once said, “We should strive to be the kind of person who learns something with every fall.”

However, it takes resiliency and perseverance in order to face adversities as you may need to fall seven times before you can reach success. Matsushita compares this process to mountain climbing as he believes that life is a series of mountains that we must climb in other to prosper both in business and in life. As he once said, “Just as you have reached the summit of one mountain in your journey and caught your breath, there lies before you another mountain. You trudge upward, and when you gain the next peak, there lies yet another ridge, and then another, endlessly along the path. This is one of the truths of our lives as well.”

As such, Matsushita mentions that it is important to cultivate a strong mindset in order to have the will to continue fighting despite so many adversities. In his opinion, this can be achieved by approaching life as if one was constantly in a sword fight. It is only with this sort of approach that we may have the mental fortitude to survive and thrive when facing challenges that end up in our path toward success.

“Life itself is essentially a fight with a real sword: you take your life in your hands whatever you do. No matter how small the matter, you have to undertake it as if your life depended on it.”
— Konosuke Matsushita

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Find Your Why?

“He who has a why to live can bear almost any how.”
— Friedrich Nietzsche

In a world and culture obsessed with wealth, status, and external validation, Bosh warns us to not be motivated from the wrong reasons such as money or fame. Instead, he urges us to find purpose in what we do by finding a profound “why” that sustains long-term drive. He argues that true purpose fuels continuous improvement, even beyond initial successes, drawing from examples of elite athletes who persist despite having made it.

As a matter of fact, Bosh believes that money and fame and popularity, while they can be good short-term motivators, are not the reason why elite athletes keep performing at a high level. For example, he mentions that “Serena Williams will never have to work another minute in her life, and yet she is working every day; not just on her game, not just on her body, but on multiple companies she owns. Serena had more money than she could ever need, plus twenty-three Grand Slam titles, second most of all time. She then came back after her pregnancy to continue being one of the top players in tennis. Why? Because she has a much bigger why than living that life.”

How often do you hear about athletes that get satisfied by making varsity, with signing their first contract, or their first start, or their first shoe deal and just lose their hunger and stop performing at a high level? Probably too many to name. They get surpassed by others who are hungrier. Bosh explains that, “It’s fine to celebrate. There’s nothing like celebrating a win or a big moment. But some people just get stuck there. And meanwhile, life keeps going—other players are hitting the gym, new kids are coming up to the league from college, you’re getting older, and your body is just a fraction less capable than it was the day before. Without hunger, life leaves you behind.”

“What keeps a guy like Tom Brady coming back? The same thing that keeps James Harden working on new shots in the off-season. What keeps a team like the Heat pushing for a second title when they could just sit back and enjoy the first one? The same thing that keeps writers writing, even after they’ve got a classic to their name. What keeps Elon Musk at it, starting new companies? It’s not the financial rewards. It’s just the joy of getting better, of wanting to beat your own personal best every time you lace up your shoes or step into your office. And it’s purpose. For someone like Musk, it’s about building technology that can keep human life sustainable on this planet, and someday on other planets, too. For someone like Brady, it’s being remembered as the best to ever play the game. And that’s something all of the greats have in common. They come in all kinds of body types, with all kinds of skill sets—but where the good ones stop, the great ones keep going. They’re never satisfied. They’re never full.”
— Chris Bosh

This reminds me of what we have learned from Michael Jordan. He believed that the most challenging thing about keeping a good work ethic is to do it for a long period of time. As Jordan would say, “commitment cannot be compromised by rewards.” In fact, while it is challenging to not give up and to persist with our good habits and efforts when things go wrong, it is even more mentally difficult to be consistent once we have a taste of success.

“Excellence isn’t a one-week or one-year ideal. It’s a constant. There will be days when you don’t feel on top of your game, meetings in which you aren’t at your best, but your commitment remains constant. No compromises.”
— Michael Jordan

In Jordan’s opinion, this sense of commitment can be seen with just about anyone achieving at a high level; he gives the example of Tiger Woods who was back in the gym by 6:30 to work out the morning after he beat Phil Mickelson at the Ford Championship in 2005. Similarly, businesses must also stay focus and committed to what worked for it to continue to grow. Too many businesses have failed by resting on their laurels or by diversifying into worse businesses. As we have learned from Tom Monaghan, too many successful businessmen go into other worse businesses and completely forgets about the details that made them successful in the first place.

“The Jordan brand has continued to grow because we have remained uncompromised. It’s easy to go the other way, though. It’s easy to rest on your laurels, or to get fat on success. I don’t ever want to get fat that way.”
— Michael Jordan

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Cultivate Your Mind

“Strength does not come from physical capacity. It comes from an indomitable will.”
— Mahatma Gandhi

Chris Bosh is also an advocate for young athletes to dedicate significant time to mental development, arguing that intellectual growth complements physical prowess. He draws parallels from athletes who succeeded through strategy and knowledge, such as Greg Maddux, a legendary professional baseball pitcher, widely regarded as one of the greatest in Major League Baseball (MLB) history.

Bosh writes that Maddux was “one of the most dominant pitchers when I was growing up. If you ever saw him pitch, you know he was pretty much untouchable in his prime. You also know that the dude looked like an accountant or a middle school teacher. He didn’t have the dominating physical presence of a Randy Johnson or Roger Clemens. His fastball rarely got above 90 miles per hour. But he ended his career in the top ten all-time for strikeouts and wins—and he played right through baseball’s steroid era and home-run explosion. It wasn’t physical prowess that gave Maddux his edge. It was his mental advantage. He knew every single hitter’s tendencies and weaknesses, he knew how they hit against him and even how he’d pitched them the last time they faced each other. Like a chess grand master, he’d played out at-bats before the game even started. He’d beaten 80 percent of the hitters he faced with his mind—with his focus and preparation and understanding of the game—before they’d even stepped into the batter’s box.“

As such, Bosh argues that we should cultivate our mind. He explains that the word cultivate comes from the Latin word meaning “to grow”, similarly to how you cultivate a garden or a piece of farmland. By consequence, he believes that cultivating one’s mind isn’t something that happens overnight and requires a long and patient methodical process.

“You have to plant the seeds—that’s learning the basics, figuring out what you’re passionate about outside of your sport, paying attention in class. You have to water the seeds—that’s coming back to the thing you’re passionate about almost every day, putting in the time, developing your mastery. And then you get to collect the fruit, your reward for all of that work. In this case, the reward is that you get to be an interesting person—to others, sure, but mainly to yourself.”
— Chris Bosh

Furthermore, he mentions in his book how modern basketball has changed purely by the recognition of the use of analytics, demonstrating that even a physical sport can be revolutionised by cultivating the mind. He talks about how James Harden and the Houston Rockets’ succeeded by setting themselves the goal of scoring 1.16 points per possession, leading them to be the most efficient offense in NBA history.

Bosh writes, “In the old NBA, if you were open for a midrange jumper, you took it. In today’s analytically minded sport, that’s the worst shot you can take—because the probability of connecting isn’t much better than the probability on a three-point shot, except the shot is worth a point less. Multiply that difference over the course of a game, and over the course of a season, and it turns into the difference between a playoff team and a lottery team. That’s the kind of math that’s going on in nearly every practice facility right now. And if you can’t keep up with it, the coach will find someone else who can. Think about that. For decades, basketball was essentially the same game—see open shot, take open shot—until some of the brightest minds in the game figured out that it wasn’t that simple. They revolutionized the game by thinking about it more creatively. That was the insight that gave us Damian Lillard and Steph and Kevin Durant. That came from somebody studying the game, not playing it with brute force.”

Finally, Chris Bosh is also a practitioner of multi-disciplinary thinking. As a matter of fact, he believes that a lot of successful athletes get value from exposure to ideas outside of their field of expertise. He explains that “The book Candace Parker credits for her mental toughness is Chop Wood, Carry Water. Tom Brady likes The Inner Game of Tennis, which obviously isn’t about football at all. I’ve gotten real athletic benefits from books about ancient philosophy, martial arts, science, psychology, and so many other topics.“

This makes me think of Herbert Simon, who was also a real polymath due to his interest in various different fields. As he once said, “I have been interested in many different things—economics (especially industrial organization), political science (especially public administration), psychology (especially cognition), philosophy (especially epistemology), computer science.”

Simon’s career is a testament to the power of innovation and interdisciplinary collaboration. He believed that breakthroughs often occur at the intersection of disciplines and that the most significant problems require integrating knowledge from multiple fields. In order to encourage interdisciplinary activity, Simon created the Social Science Research Council at the Carnegie Mellon University where he was a professor. However, he was “was appalled at how often I heard such phrases as, “as a historian, I . . . ,” “as an economist, I . . . ,” “as a sociologist, I . . . ,” and so on. I challenged these phrases each time I heard them, but it was like trying to purge ainnuh (“ Isn’t it so?”) from the lexicon of a native of Milwaukee.”

“The problem is less one of bringing unlike social scientists together than one of bringing unlike social sciences together in one man. There has been failure after failure of interdisciplinary “teams” to integrate anything . . . except to the extent that individual team members became interdisciplinary. I would not give a dollar to assist a typical political scientist to collaborate with a typical economist unless each one of them gave me a sworn statement that he would study seriously and not in a dilettante’s way the discipline of the other for at least a year.”
— Herbert A. Simon

Charlie Munger also believed that people who have a broad mind and who understand many different models from many different disciplines make better decisions. This is mainly because it allows one to have a different box of tools when facing a problem. Peter Kaufman, one of Munger’s most vivid followers of his multidisciplinary approach, mentions the reason why it is important to be a multidisciplinary thinker in his speech to the California Polytechnic State University Pomona Economics Club:

“The answer comes from the Austrian philosopher Ludwig Wittgenstein, who said, “To understand is to know what to do.” Could there be anything that sounds simpler than that? And yet it’s a genius line—”to understand is to know what to do.” How many mistakes do you make when you understand something? You don’t make any mistakes. Where do mistakes come from? They come from blind spots, a lack of understanding. Why do you need to be multidisciplinary in your thinking? Because as the Japanese proverb says, “The frog in the well knows nothing of the mighty ocean.” You may know everything there is to know about your specialty, your silo, your “well,” but how are you going to make any good decisions in life—the complex systems of life, the dynamic system of life—if all you know is one well?”
— Peter Kaufman

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Beyond the Book

Read "Turning Adversity Into Advantage" by Farnam Street

Read "What You Don’t See" by Farnam Street

Read "The Multidisciplinary Approach to Thinking" by Farnam Street

Read "Using Multidisciplinary Thinking to Approach Problems in a Complex World" by Farnam Street

Listen to "#120 Chris Bosh: Hunger and Greatness" by The Knowledge Project

If you are interested in having conversations with the eminent dead, consider trying my AI Chatbox prompted with highlights from over 100+ biographies I have read. Try it here.

If you enjoy reading my newsletter, please consider becoming a paid subscriber. You’ll be able to keep this newsletter going! Here’s what you get when you upgrade:

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Today’s Chapter is based on the book “The Compounders: From Small Acquisitions to Giant Shareholder Returns” by Oddbjorn Dybvad, Kjetil Nyland and Adrian Hadziefendic.

Dybvad, Nyland and Hadziefendic are part of REQ, an equity fund that focuses on investing in companies with strong free cash flow, outstanding capital allocation, and a proven track record of shareholder value creation. Their portfolios are built around acquisition-driven compounders, companies that have the acquisition of smaller private firms at the heart of their strategy. In this book, the REQ team goes over nine high-performing conglomerates, led by exceptional capital allocators and describes the common traits among them.

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Here’s What I Learned:

Power of Decentralization

“There are two main reasons Berkshire has succeeded. One is its decentralization. Decentralization almost to the point of abdication. There are only 28 people at headquarters in Omaha. The other reason is our extreme centralization of capital deployment. Our centralization is just as extreme as our decentralization.”
— Charlie Munger

The REQ team mentions that a common trait among successful compounders according to their research is the heavy-use of decentralization in decision-making. This philosophy shifts daily operations and strategic choices closer to the customer, fostering agility and empowerment. This idea is rooted in the belief that those nearest to the action, such as employees and local managers, are the ones that are the most informed and effective in making decisions.

In fact, they explain that “These acquisition-driven compounders operate with a simple and profoundly effective philosophy: decentralization. Push daily decision-making as close to the customer as possible, give extraordinary customer service, empower people with responsibility, accountability, and shareholder-friendly incentives, and give them ample room to grow.”

One clear example of success through decentralization can be illustrated by Lifco, a Swedish compounder where this decentralized approach became a cornerstone of Lifco’s growth and success. They mention that “Between 2006 and Lifco’s IPO in 2014, Fredrik Karlsson led the company through a period of strong growth, completing 23 acquisitions across its three business areas. The acquisitions and organic improvements helped Lifco achieve an impressive 13% annual sales growth and an EBITA CAGR of 17%. During this time, EBITA margins expanded from 10% in 2006 to 14% by 2014.” As a matter of fact, Lifco’s culture can be summarized to “strip away everything that does not create shareholder value, and focus on accountability through managerial ownership.”

“At Lifco, managers aren’t just encouraged to specialize and improve profitability—they’re only rewarded when they grow profits organically. No bonuses are tied to acquired growth. This sharpens the focus across the organization, and ensures consistently high performance among its companies. It also encourages discipline in the acquisition process and incentivizes group managers to propose acquisitions of high quality. If they don’t manage to improve performance of the companies they acquire, it will in turn impact their bonuses.“
— Oddbjorn Dybvad, Kjetil Nyland and Adrian Hadziefendic

Furthermore, it is clear that decentralization is not merely a structural preference, but a prerequisite for scaling businesses while retaining the nimbleness of smaller entities. In fact, REQ explains that “decentralized decision-making isn’t merely a preference for conglomerates; it’s a prerequisite for scaling and retaining the agility of a speedboat within a tankship-sized group. Without this, for instance, Constellation Software would not have been able to scale its organization to conduct over 100 acquisitions annually.”

This can be explained by the simple fact that by granting autonomy to its acquired companies, it creates a culture of ownership. Managers are not just employees; they are treated as true owners of their businesses. When people feel and act like owners, their focus shifts from short-term metrics to long-term value creation, fostering a resilience and ingenuity that a centralized command structure could never replicate.

“If you have companies that are led by capable management and you give them autonomy to run their operations, they will also act like true owners of the businesses.”
— Oddbjorn Dybvad, Kjetil Nyland and Adrian Hadziefendic

This reminds me of what we have learned from Ken Iverson at Nucor, a company structured around decentralization, granting divisions near-complete autonomy to make decisions locally, which fostered innovation and responsiveness. This model contrasted with centralized bureaucracies, allowing Nucor to adapt quickly to market changes while holding managers accountable for results. By keeping divisions small and pushing authority downward, Iverson ensured that those closest to the work drove the business, rather than distant executives.

As a matter of fact, Iverson mentions that “Each division operates its one or two plants as an independent enterprise. They procure their own raw materials; craft their own marketing strategies; find their own customers; set their own production quotas; hire, train, and manage their own work force; create and administer their own safety programs…. In short, all the important decisions are made right there at the division. And the general manager of the division is accountable for those decisions. That’s where the buck stops at Nucor.“

For Iverson, this autonomy was non-negotiable and managers at Nucor enjoyed this decision-making responsibility and accountability. However, to maintain this autonomy, managers were expected to deliver a 25% return on assets and follow the ethical standards of the company.

“At Nucor, we chose long ago to build our company on a decentralized model in which each operating division enjoys true autonomy. We have told our managers to “trust your instincts”—and we have meant what we said. We’ve urged them to confer the same kind of decision-making autonomy to their people—to make their own decisions based on what they think is best for the business—and we have never backed off our commitment.“
— Ken Iverson

The main reason why Iverson believed in decentralization was because he believed that the frontline employees were the one that were closest to the problems and by consequence, have the best innovative ideas. He once said, “That is, by the people closest to where the work actually gets done. Those businesses must tell people on the front lines to “trust your instincts.” And businesses that tell their people to “trust your instincts” generally should be decentralized. A decentralized structure pushes the power to set strategy, spend money, make decisions, and create policies out toward the marketplace. It promotes local autonomy.“

As such, he believed it was primordial for managers to be maintain close contact with their employees. As he explained, “Managers are supposed to do what’s best for the business. And what’s best is to remember we’re all just people. Managers don’t need or deserve special treatment. We’re not more important than other employees. And we aren’t better than anyone else. We just have a different job to do. Mainly, that job is to help the people you manage to accomplish extraordinary things.”

“That’s the main reason we’ve tried to keep our divisions small. When a business grows beyond 400 or 500 people, it’s hard for management and employees to stay connected. I don’t order our managers to keep in close contact with their employees. But I do nag them. I say, “Andrew Carnegie was a financier. He could afford to treat people like peasants. We’re managers. We can’t.” They may not appreciate my nagging, but I do it with their interests in mind.“
— Ken Iverson

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Capital Allocation

“Capital allocation is the CEO’s most important job.”
— William Thorndike

One key takeaway from the book is that compounders do not rely on a single growth lever. Their unique power lies in having two complementary engines: organic growth from their existing businesses and a programmatic, relentless acquisition of small, private companies by using their free cash flow. The REQ team mentions that “Their power lies in their ability to perfect two engines of growth: organic reinvestments and programmatic acquisitions of small private companies. These dual engines provide a unique level of capital deployment that single-engine companies, relying only on organic growth, can rarely match.”

They note, furthermore, that these acquired companies are usually not constrained by industry or geography. The entire global market of small and medium-sized enterprises tend to be their playground. As Lifco’s CEO once said, “if we were forced to only buy companies in our dental division, we would not been able to grow as much or profitably as we have done.”

This relentless acquisition of companies creates a virtuous cycle: the cash flows from existing businesses fund new acquisitions, which in turn generate more cash flow. This self-sustaining cycle is the mechanical heart of the compounding machine, ensuring that growth is not a sporadic event but a predictable, repeatable process.

“With the money we earn we buy quality companies that generate more money, which enables us to buy more quality companies—it’s that simple.”
— Johnny Alvarsson, ex-CEO of Indutrade

However, for the compounding effect to work, it is clear that reinvested capital must generate high returns. As such, CEOs of compounders are, first and foremost, masters of capital allocation with a fanatical focus on metrics like Return on Invested Capital (ROIC) and Return on Total Invested Capital (ROTIC). They must be extremely disciplined when it comes to valuation as overpaying for an acquisition is a cardinal sin.

REQ explains that “Avoiding overpaying for acquisitions is crucial. Paying a 10 × multiple for a private company, compared to 5 ×, is the difference between 10% ROIC and 20% ROIC assuming 100% cash conversion. The higher the price paid, the greater the need for cash conversion to support self-financing growth. If you overpay, the deal has to work a lot harder to pay for itself.” As a matter of fact, the key for a compounder is to have the newly subsidiary quickly repay itself and to generate free cash flow back to the main company.

This can be perfectly illustrated by the success of Bergman & Beving, whose founders always had a distinct focus on profitability. They invented a profitability benchmark which involved maintaining profits divided by working capital (P/WC) at levels exceeding 45%. REQ explains that “According to the Superinvestors of Bergman & Bevingsville, a business is considered self-financed when the return on working capital (P/ WC) is higher than 45%. By achieving P/ WC > 45%, the business can generate the necessary cash to cover taxes, interest, and dividends, and make required investments in existing businesses through capital expenditures, working capital, and financing acquisitions. The goal of being self-financed means that growth, whether organic or through acquisitions, will not dilute current shareholders through equity raises or rely heavily on debt financing. It highlights the importance of capital efficiency in generating cash.”

This reminds me of an episode of The Knowledge Project where **Palihapitiya explains that he would be livid for a company to declare dividends if it could reinvest and generate superior returns.

“If you, as a CEO Shane, if I was an investor in your company, and you said, “Chamath, I generate 30% free cashflow, and I’m going to give you a dividend.” I would say, “Shane, f*ck you.” I don’t want that money. What am I supposed to do with it? Reinvest it. Grow faster, please.”
— Chamath Palihapitiya

Similarly, this reminds me of what we have learned from Terry Smith, the founder and CEO of Fundsmith. He argues that true value creation occurs when a company earns returns above its cost of capital. As such, he believes that the key metric to identify when evaluating investment opportunities is the return on capital employed (“ROCE”). For example, a company that earns a 10% annual ROCE, pale in comparison to companies that can achieve 20% or 30% ROCE. Smith explains that “A good company is one that regularly makes a high return in cash terms on capital employed, and can reinvest at least part of that cash flow in order to grow its business and compound the value of your investment. Bad companies do not do this. They make inadequate returns on the capital they employ.”

As Charlie Munger once said, “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive-looking price, you’ll end up with one hell of a result.”

“Return on capital employed is one of the most important measures of corporate performance—it is the profit return which the management earns on the capital shareholders provide.”
— Terry Smith

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Inside Ownership

“Show me the incentives and I will show you the outcome.”
— Charlie Munger

The REQ team reveals that long-term ownership combined with a strong, enduring culture are pivotal to generating giant shareholder returns. In fact, they argue that companies led by founders or insiders with a vested interest usually outperform their peers, as their commitment extends beyond quarterly results to decades of value creation. This ownership mentality fosters a culture that prioritizes sustainability over short-term profitability, a trait shared by many of the featured companies in the book.

This long-term approach can be exemplified by Fredrik Lundberg, the founder of L E Lundbergsföretagen who once said, “Our commitment to the portfolio companies is long-term. It is simply not possible to pursue active ownership successfully without taking a long-term view. Time is an important factor for an investor.” This patient approach allows the compounding effect to amplify returns over decades rather than years.

As such, it is not uncommon, according to REQ, to have “Forever CEOs” at the helm of these successful compounders. And, more likely than not, these CEOs owns a lot of shares in the company they are running. As they mention, “This heightened ownership mentality makes them prioritize long-term value creation over short-term profitability. This focus, in turn, safeguards against management decisions driven by empire-building ambitions or short-term financial strategies that might prove suboptimal. Therefore, high insider ownership is a vital investment criterion that bolsters the assurance of sustained value creation over time.”

They also reiterate that “CEOs who align with a company’s core values and share a unified strategic vision tend to generate more value for shareholders than those who perceive the position merely as a stepping stone in their career.”

“Substantial evidence supports the notion that companies with founders actively involved in key roles—such as CEO, chairman, board member, or owner—tend to outperform their peers. Notably, the founder-led decentralized approach is a recurring feature among the companies highlighted in this book. Owners, with their vested interests, tend to behave differently from employees. If you own your car, you treat it differently than a rental.”
— Oddbjorn Dybvad, Kjetil Nyland and Adrian Hadziefendic

This is eerily similar to the concept of investing with owner operators that we have learned from Lawrence J. Goldstein. In his Santa Monica Partners’ shareholder letters, Goldstein mentions that his most successful investments have been in companies led by owner-operators, individuals who manage and hold significant stakes in their businesses. This insight of his was inspired by the research done by Murray Stahl who suggested that owner-operators bring a level of dedication, alignment of interests, and strategic foresight that drive exceptional long-term compounding, making them a key ingredient in wealth creation.

In fact, Goldstein explains that “Over the last 53 years we have invested in many closely held companies which until now I never thought to categorize as owner-operator companies, investments or stocks. But that is exactly what most of our closely held and inactively traded successes have been. I’m going to go back and examine all of them one of these days. Intuitively I can tell you such companies have been our biggest winners compounding at very high double digits and earning us thousands of percent in profit over long periods of time.”

Furthermore, Goldstein also studied previous companies that performed extremely well on the stock market such as Wal-Mart, Microsoft and Teledyne. He believed that the main common theme of these companies are that they are led by owner-operators. In fact, Goldstein believes that investing in owner-operators lead to better returns than the S&P 500.

“I began looking at companies like Wal-Mart at the time when Sam Walton ran the company and he owned most of the stock, or Hewlett-Packard, in the days when Mr. Hewlett and Mr. Packard ran the company or Microsoft in its Bill Gates era or Teledyne in its Henry Singleton era or Apple Computer in its two Steve Jobs incarnations. I absolutely promise you, if you did that calculation, you would never buy the S&P. What I’m telling you is that the bulk of the return of the indices—and not just in the United States, but in all nations—the bulk of the return was earned by these owner-operators.”
— Lawrence J. Goldstein

As such, it is not surprising that investing in owner-operators is a key requirement in Santa Monica Partners’ investment philosophy. In fact, Goldstein writes that the ingredients for long-term compounding and wealth creation are straight forward:

1. Competitive advantages that allow for superior margins, predictable market shares and high returns on capital.

2. Continuous capital reinvestment (paying a dividend goes against the goal of wealth creation).

3. An attractive price/value relationship at the outset.

4. Executives who manage the business aggressively and conservatively with the incentives of ownership.

This reasoning can be explained by the fact that owner-operators are more likely to make decisions that are in the best long-term interests of the company, even if those decisions are unpopular in the short term. They also tend to be more focused on building long-term value rather than maximizing short-term profits. This is, in my opinion, a perfect example of the power of incentives.

As we have previously learned from Charlie Munger, the most important mental model to understand comes from psychology: the power of incentives. And yet, he believes that not many people understand how powerful incentives are.

“For instance, I think I’ve been in the top 5 percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower.”
— Charlie Munger

As investors, it is often advised to invest in companies where management have skin in the game and Lawrence J. Goldstein confirms this thought process. In fact, as shareholders, it is important to invest your money with management teams that also have most of their assets invested in the company, as you can be sure that their interests are aligned with you.

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Beyond the Book

Read "A Deep Dive into Shareholder Value Creation by Acquisition-Driven Compounders" by REQ Capital

Listen to "Chamath Palihapitiya: Understanding Yourself" on The Knowledge Project

Read "The Surprising Power of The Long Game" by Farnam Street

Read "The Power of Incentives: The Hidden Forces That Shape Behavior" by Farnam Street

Watch "Winners Keep Winning w/ Billionaire Terry Smith (RWH054)" on YouTube

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Today’s Chapter is based on the book “Born to Be Wired: Lessons from a Lifetime Transforming Television, Wiring America for the Internet, and Growing Formula One, Discovery, Sirius XM, and the Atlanta Braves” by John Malone.

John C. Malone is an American billionaire businessman, philanthropist, and media mogul known primarily for his influential role in the cable television and media industries. He served as CEO of Tele-Communications Inc. (TCI) for over two decades, growing it into the second-largest cable company in the U.S., and later became chairman of Liberty Media, Liberty Broadband, and Liberty Global. He is often nicknamed the “Cable Cowboy”.

Buy it on Amazon here.

Here’s What I Learned:

People Matters

“The reason for our success is no secret. It comes down to one single principle that transcends time and geography, religion and culture. It’s the Golden Rule – the simple idea that if you treat people well, the way you would like to be treated, they will do the same.”
— Isadore Sharp

One of the most profound takeaways from John Malone’s reflections as a CEO of TCI is the irreplaceable value of people and relationships in business. Despite his reputations as a numbers-driven dealmaker, Malone repeatedly emphasizes that the most important assets are human elements. He credits his success not to financial wizardry alone but to the bonds he formed with people, from mentors to team members.

Malone explains, “I have spent my career negotiating deals in telecommunications, music, sports, horses, land, media, and more. I have been a buyer and a seller, depending on the deal and the moment. Altogether, over a lifetime, I figure I have had a hand in hundreds of transactions, maybe thousands. Now, in a lot of those deals, we focused hard on one measure: cash flow, or specifically, EBITDA (earnings before interest, taxes, depreciation, and amortization). It gives a clearer picture of operating performance and a firm’s ability to borrow or invest. Some people say I all but invented the term. I can’t swear to it, though it is true that I helped make it a whole new form of currency on Wall Street. But it turns out that cash flow is the wrong answer, too, in placing a value on a company, or any deal for that matter. The most valuable assets in any business are people and relationships.“

As such, Malone always made sure to focus on evaluating the people in place when acquiring a new company. In fact, this revelation came to him even before he was operating his own business. When he was working as a consultant at McKinsey, he worked on the reogarnization of General Electric. He mentions that “We looked at all sorts of corporate problems, but the thorniest case I worked on was a reorganization of General Electric. One of the biggest companies in America, it was also the same company that had employed my father for most of his career. Connecting with people, understanding their biggest concerns, and mapping their universe proved far more valuable than reading GE annual reports. You have to go in and talk to people to understand why something’s not working. And again, you listen.“

“What I learned, though, as we did more deals, was that an equally important factor was people. The people who had built the business we were buying. And the people who would be working with us after we made them part owners.”
— John Malone

By consequence, Malone understood that he had to surround himself with great people to help him run TCI. And, it is clear that Malone had a preference for “cowboys” which weren’t your typical employees working at big corporations. He explains, “And I liked the team of Western cowboys Bob had assembled. Straight shooters and plain talkers. No fancy suits, no MBAs, and no elaborate business jargon. And no New Yorkers. There is such a thing as a Cowboy Code, and they had it: you finish what you start, stand up for what’s right, and take pride in your work. It appealed to me.“

Similarly, Malone understood his own limitation and was not afraid to delegate responsibilities. He writes, “I have learned that no matter how brilliant you are, there will be other people who are better than you are at executing your ideas. And if you are smart, you will politely step out of the way and leave them to it.”

“For me, winning is the gratification of creating a successful system of long-term involvement that yields cascading benefits as we move forward. If you have created good job opportunities for people and watched them prosper or forged business deals that helped your partners retire comfortably, that is winning.”
— John Malone

This reminds me of what we have learned from Steve Jobs and on the importance of hiring A-players. As a matter of fact, Jobs was also a master at recognizing talent and surrounding himself with exceptional people. He had an almost uncanny ability to locate and convince talented individuals into joining his team, often convincing them to take on roles they might otherwise have avoided. Steve Jobs was well known for working with only A-Players.

“So I’ve built a lot of my success on finding these truly gifted people, and not settling for “B” and “C” players, but really going for the “A” players. And I found something… I found that when you get enough “A” players together, when you go through the incredible work to find these “A” players, they really like working with each other. Because most have never had the chance to do that before. And they don’t work with “B” and “C” players, so it’s self-policing. They only want to hire “A” players. So you build these pockets of “A” players and it just propagates.”
— Steve Jobs

Furthermore, one of Steve Jobs’ biggest quality as a leader is his ability to connect with people who had the skills he lacked. As a matter of fact, when Jobs first started Apple, it was his partner Steve Wozniak, often referred to as the technical genius behind Apple, who was responsible for designing the hardware that made the company famous. Jobs, on the other hand, took care of the business aspects, from securing funding to negotiating deals. Together, they formed a partnership that would change the world.

Jobs’ ability to recognize Wozniak’s genius and harness it for the company’s benefit was one of his greatest strengths. He understood that Wozniak’s designs were not just technically impressive—they were revolutionary. This realization helped Jobs see the potential for turning Wozniak’s creations into profitable products.

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Shareholder Value

“Shareholder value is the result of you doing a great job.”
— Jack Welch

John Malone’s career is a masterclass in prioritizing shareholder returns above all else. Every decision he’s done as the CEO of TCI was made with the main core value of maximizing shareholders’ value. As a matter of fact, his tenure at TCI is “Contrary to the clichéd image of a rapacious business titan, I never sought to build a conglomerate, or family empire, and I can just as easily be a seller or a buyer. I believe in creating value while you own the assets you build or buy, and doing it in the most efficient way. All the stakes that I have owned in a wide array of cable channels, overseas cable systems, and other assets are less an empire than a mutual fund with a desirable portfolio of properties. I built this portfolio with one clear goal—the same one that I believe anyone who is an active member of the management of a public company should share: to maximize the value of the shares of the company over a medium term. Because that is why you were hired—to maximize shareholder returns.”

In order to increase shareholder value, Malone believed in focusing on one very important metric: cash flow. He understood earlier than most that measures such as net income could be misleading, especially for capital-intensive industries like cable television, where massive upfront investments were depreciated over the years.

“I started to rely on a single powerful metric, almost like blood pressure in a human, that I thought could instantly, accurately reflect the health of a cable operator: cash flow.”
— John Malone

But more importantly, what separates Malone’s success at TCI from other CEOs was his exceptional capital allocation skills with the cash flow generated from his company. As a matter of fact, he got early lessons on capital allocation through his experience at AT&T. There, he was able to work on projects that allowed him to make significant improvements not just in operations but also in terms of finance. Notably, he presented a mathematical model to the entire AT&T board of directors to justify loaning money in order to buy back its own shares.

Malone reiterates that “This buyback program proposed to reduce the total number of shares of AT& T stock on the market and available to the public since more shares would be owned by the company. That, in turn, would increase the company’s earnings per share, a key metric on Wall Street. The downside was that a higher debt load might result in a modestly lower credit rating for AT& T and increase its interest costs. We dismissed that worry, arguing any impact would be minimal because interest payments are tax-deductible. So AT&T essentially would boost earnings and fund the carrying costs of its stock buybacks with money that it otherwise would pay to the tax collector. This was a more efficient use of AT&T’s cash.”

“ AT&T was underleveraged, and undervalued, so I urged the board to shift its debt-equity ratio, borrowing billions of dollars to invest in buying back its own stock on the open market.”
— John Malone

Similarly, Malone often used tracking stocks and spin-offs in order to increase value of his companies. Here’s how Malone explains the utility of tracking stocks and spin-offs:

“I am often asked why we use tracking stocks and spin-offs, which, to the casual observer, might seem to complicate our value and create a shadow stock that trades below the price of the stock that inspired it. But we believe the tracking stocks actually provide more transparency and diversity for the investor, while giving Liberty enormous flexibility, tax advantages, and greater access to capital. A tracking stock tracks the performance of a specific business inside a company, as a way to highlight how that business is faring and trade up or down accordingly. Yet the specific assets of a business remain on the balance sheet of the parent company. Shareholders can choose which part of the company to invest in. It is typically a transitional structure while you are trying to grow an asset to a point where it can be spun out and stand on its own.”
— John Malone

This reminds me of the story of Henry Singleton at Teledyne who was considered as one of the greatest CEO ever due to his capital allocation skills. As a matter of fact, Buffett once said that “Henry Singleton has the best operating and capital deployment record in American business . . . if one took the 100 top business school graduates and made a composite of their triumphs, their record would not be as good as Singleton’s.”

Singleton’s capital allocation skills truly shined when by 1970, Singleton realised that direct acquisitions of private companies were no longer attractive in terms of return due to the inflated prices, the size of Teledyne and competitions. By consequence, he realised it would be much better to use Teledyne’s cash flow into purchasing public companies via the organisation of financial companies, by buying back Teledyne’s shares and by spinning offs subsidiaries.

Firstly, Singleton decided to purchase insurance companies into his Teledyne empire, yet, the main purpose of this was to use the “float” in order to purchase public companies. Because of the nature of the public market, Singleton was able to purchase profitable companies that were well-managed at valuation that was much more reasonable compared to the private market.

Singleton, in an interview with Forbes magazine in 1978, explains why he preferred purchasing part of companies’ stocks in the public market instead of an entire company on the private market:

“There are tremendous values in the stock market, but in buying stocks, not entire companies. Buying companies tends to raise the purchase price too high. Don’t be misled by the few shares trading at a low multiple of 6 or 7. If you try to acquire those companies the multiple is more like 12 or 14. And their management will say, ‘If you don’t pay it, someone else will.’ And they are right. Someone else does. So it’s no acquisitions for us while they are overpriced. I won’t pay 15 times earnings. That would mean I’d only be making a return of 6 or 7 percent. I can do that in T-bills. We don’t have to make any major acquisitions. We have other things we are busy doing.”
— Henry Singleton

Secondly, Henry Singleton was an early pioneer in repurchasing stocks in his own company in order to improve shareholder value. As a matter of fact, during the bear market of the early 1970s, Teledyne was suddenly trading at a P/E ratio if around 9 or 10 compared to the highs of P/E 30 to 70 in the 1960s. Knowing that his own company was trading at a bargain, Singleton went on to use Teledyne’s cash reserve to repurchase its own shares.

Stock buybacks is a great way to increase shareholder value as it reduces the number of shares and by consequence, increases the company’s earnings per share (”EPS”):

Unlike other large corporations who were paying cash dividends to their shareholders, Teledyne never paid any dividends for a large portion of its existence. The reason being that Singleton had a strong conviction that the cash was better employed in growing Teledyne’s business through acquisitions or through stock buybacks rather than returning the cash to shareholders.

It is fair to say that Singleton’s results are unmatched in terms of value creation to his shareholders; “An investor who invested in Teledyne stock in 1966 was rewarded with an annual return of 17.9 percent over 25 years, or a return of 53 times his invested capital. That compares to 6.7 times for the S&P 500, 9.0 times for General Electric, and 7.1 times for other comparable conglomerates.”

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Understanding Risk

“Risk comes from not knowing what you’re doing.”
— Warren Buffett

Throughout his career, John Malone shined in terms of risk assessment. As a matter of fact, he learned a great lesson early on from his mentor, Monty Shapiro on how to evaluate risk while pursuing opportunities.

The key to this was to ask a simple question: What if not? He mentions that “One lesson I learned from Monty that would save me time and again in the future, even to this day, was to ask on every big deal, a simple three-word question: What if not? What if this doesn’t work? What if this venture or idea falls apart completely? I started seeing risk through a different lens: When you focus on the opportunity and genuinely deconstruct the hazards ahead, the fear of taking a leap begins to fade. Knowing with certainty that the risk won’t kill you is what liberates you to take it.“ As such, Malone understood that it is okay to take risk when the downside is limited.

“But in my constitution, if the financial numbers fail to support the big bet, it is time to make a smaller one instead. This cautious, but calculated mindset would define my dealmaking for the next thirty years or more.”
— John Malone

This reminds me of the concept of Dhandho Investing we have previously learned from Mohnish Pabrai, who believed in the concept that high returns do not necessitate high risks. Instead, he advocates for a mindset that seeks asymmetric bets, those with significant upside potential but minimal downside risk. This principle, encapsulated in the phrase “Heads, I win; tails, I don’t lose much”, is a cornerstone of the Dhandho framework and reflects his belief that disciplined investors can achieve extraordinary results by carefully selecting opportunities with favorable odds.

As a matter of fact, Pabrai explains that “We have all been taught that earning high rates of return requires taking on greater risks. Dhandho flips this concept around. Dhandho is all about the minimization of risk while maximizing the reward. The stereotypical Patel naturally approaches all business endeavors with this deeply ingrained riskless Dhandho framework—for him it’s like breathing. Dhandho is thus best described as endeavors that create wealth while taking virtually no risk.”

To demonstrate the power of Dhandho, he mentions the story of how Richard Branson built Virgin Atlantic with zero capital. In fact, although the airlines businesses is known to be capital-intensive and highly regulated, Branson was able to identify a service gap and exploited it with minimal initial capital outlay, leveraging creativity over cash. The potential upside was building a global brand; the downside was limited because so little equity was risked upfront.

“My take on Virgin Atlantic is simply this: if you can start a business that requires a $200 million 747 jumbo jet and a boatload of employees in a tightly regulated industry for virtually no capital, then virtually any business that you want to start can be gotten off the ground with minimal capital. All you need to do is replace capital with creative thinking and solutions. Branson found a service gap and went after it. By the time that gap narrowed and British Airways and his other competitors woke up, he had already built a strong brand. Even today, Virgin Atlantic offers a very unique product in a very tough industry. The Virgin Atlantic business model is pure Dhandho. Heads, I win; tails, I don’t lose much!”
— Mohnish Pabrai

Pabrai explains that the reason why the Dhandho approach works is due to the fact that investors often confuse risk with uncertainty. He mentions that “Low risk and high uncertainty is a wonderful combination. It leads to severely depressed prices for businesses—especially in the pari-mutuel system-based stock market. Dhandho entrepreneurs first focus on minimizing downside risk. Low-risk situations, by definition, have low downsides. The high uncertainty can be dealt with by conservatively handicapping the range of possible outcomes. You end with the classic Dhandho tagline: Heads, I win; tails, I don’t lose much!”

As a matter of fact, Pabrai loves comparing investing in the stock market to the pari-mutuel system. As such, he encourages investors to adopt a probabilistic mindset, akin to Charlie Munger’s approach to betting at the race track. Pabrai mentions that “If you went to a horse race track and you were offered 90 percent odds of a 20 times return and a 10 percent chance of losing your money, would you take that bet? Heck Yes! You’d make that bet all day long, and it would make sense to bet a very large portion of your net worth with those spectacular odds. This is not a risk-free bet, but it is a very low-risk, high-return bet. Heads, I win, tails, I don’t lose much!”

The lesson here is clear: investors should seek opportunities where the downside is limited, and the upside is substantial, and be willing to act decisively when such opportunities arise. This approach requires a deep understanding of probabilities and a willingness to wait for the right moment, much like a seasoned gambler at the pari-mutuel betting system.

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Today’s Chapter is based on the book “Buffett and Munger Unscripted: Three Decades of Investment and Business Insights from the Berkshire Hathaway Shareholder Meetings” by Alex Morris.

Warren Buffett and Charlie Munger are well-known to be best friends and business partners at Berkshire Hathaway. During their tenure, they built one of the largest corporations in America and they are known for being incredibly successful value investors.

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Here’s what I learned:

Becoming Learning Machines

“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time—none, zero.”
— Charlie Munger

Warren Buffett and Charlie Munger are perhaps the most public examples of learning machines. In fact, they both attribute a significant portion of their success not to innate genius, but to a relentless, lifelong commitment to reading, thinking, and expanding their knowledge of how the world works. This continuous learning is what allowed them to recognize investment opportunities, and more importantly, to avoid areas where they are likely to make mistakes.

In fact, Munger believes that what success he and Buffett have comes from the fact that they read a lot. He once said, “I think Warren, who was reading everything he could when he was ten years old, became a learning machine, and then he had a very long run when he kept learning. If Warren had not been learning all the while, I’m telling you, having watched the process closely, the record would be a pale shadow of what it is.”

“I’ve watched Warren through all these decades, and he has learned a hell of a lot, even in the last twenty or thirty years... It’s a lifelong game, and if you don’t keep learning, other people will pass you by.”
— Charlie Munger

But Munger mentions that reading alone won’t do it, “you have to have a temperament which grabs the correct ideas and does something with those ideas.” As such, one crucial concept that emerged from their self-education is the circle of competence. This is the mental model of knowing what you truly understand and, more critically, having the intellectual honesty to acknowledge the boundaries of your understanding. The size of the circle is less important than knowing its perimeter. Success comes from operating well within your circle and avoiding the “too hard” pile.

Warren Buffett warns us that “The biggest thing is not how big your circle of competence is, but knowing where the perimeter is. You don’t have to be an expert on 90% of businesses, or 80%, 70%, or even 50%. But you do have to know something about the ones that you actually put your money into—and if that’s a very small part of the universe, that still is not a killer.”

This learning process is what allowed Berkshire Hathaway to increase their circle of competence and to evolve. If they had remained frozen in the knowledge of their youth, the company would be a pale shadow of itself. For example, Buffett first started with a Graham approach to investing, but quickly changed his investing strategy after learning from Charlie Munger about investing in high quality businesses. He explains, “I owe a great deal to Ben Graham in terms of learning about investing. And I owe a great deal to Charlie, in terms of learning a lot about business. I’ve also spent a lifetime looking at businesses, seeing why some work and why some don’t. As Yogi Berra said, ‘You can see a lot just by observing.’ That’s pretty much what Charlie and I have been doing for a long time.”

“I think the one thing that we did that’s worked best of all is we were always dissatisfied with what we already knew and we always wanted to know more. Berkshire—if Warren and I had stayed frozen in time, particularly Warren—would have been a terrible place. It’s what we kept learning that made it work, and I don’t think that will ever stop.”
— Charlie Munger

Another valuable lesson we can learn from Charlie Munger and Warren Buffett is the concept of avoiding mistakes. As Buffett explains, “The record of Berkshire Hathaway, to the extent it’s been good, has not been because we’ve done brilliant things, but because we’ve done fewer dumb things than most. Why smart people do things that are against their self-interest is really puzzling.”

This reminds me of the power of inversion which we have previously learned from Charlie Munger. In fact, Munger is well-known for promoting the concept of keeping things simple. He once said that “If something is too hard, we move on to something else. What could be simpler than that?” In fact, when it comes to investing, Munger explains that at Berkshire Hathaway, they have three baskets(in, out and too tough) in which they classify new investment ideas. And most often then not, ideas tend to go into the too tough pile. As Buffett once said, “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”

As a matter of fact, I believe that this concept of Munger of keeping things simple comes from the power of inversion that was inspired by the famous mathematician Jacobi, who often solved complex issues by inverting the problem. Similarly, Munger came up with the concept that one can succeed in life by avoiding stupidity by using the power of inversion. Munger gives the example of a professional tightrope walker for 20 years. He is successful in his art because he knows what he cannot do, because he knows that if he gets it wrong, he won’t survive.

Similarly, Munger understands that to succeed in life, one must avoid taking stupid paths. For one, Charlie Munger mentions that “three things ruin people: drugs, liquor and leverage.”

“We all know talented people who have ruined their lives abusing either alcohol or drugs—and often both.”
— Charlie Munger

“So we’ve had to learn a different game. And that’s a lesson for all the young people in the room. If you’re going to live a long time, you have to keep learning. What you formerly knew is never enough. If you don’t learn to constantly revise your earlier conclusions and get better, you’re like a one-legged man in an ass-kicking contest.”
— Charlie Munger

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Thinking Long-Term

“If we think long term, we can accomplish things that we wouldn’t otherwise accomplish. Time horizons matter. They matter a lot.”
— Jeff Bezos

In a world overwhelmingly focused on the short term, Buffett and Munger stand as monuments to patience. In fact, they repeatedly advocate for a long-term horizon, viewing investing as a marathon where patience compounds money. They criticize short-term thinking and favour investing in businesses with a durable moat that can thrive for decades.

Buffett explains that “The world is overwhelmingly short-term-focused. If you go to a quarterly call, they’re all trying to figure out how to fill out a sheet to show earnings for the current year, and the management team is interested in feeding them expectations that will be slightly beaten. That is a world that is made to order for anybody just trying to think about what you can do that should work over five, ten, or twenty years. I would love to be born today, to go out with not too much money and—hopefully—turn it into a lot of money. Charlie would, too, actually. He would find something to do, I guarantee you. It wouldn’t be exactly the same as before, but he would end up with a big, big, big pile.”

In fact, Munger and Buffett believes that most investing opportunities happen because of the market’s tendency to focus on the short-term. As Benjamin Graham once said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” On this note, Buffett mentions that “What gives you opportunities is other people doing dumb things. And I’d say that in the fifty-eight years that we’ve been running Berkshire, there’s been a great increase in the number of people doing dumb things.”

By consequence, Buffett and Munger understands the importance of staying invested in wonderful companies despite short-term troubles or irrational movement to the stock price. Buffett says that “If you get into a wonderful business, the best thing to do is usually to stick with it. Coca-Cola and Gillette both experienced disappointments, below what they anticipated twelve to eighteen months ago and below what we anticipated. But that will happen. It happens with some of our wholly-owned businesses from time to time. Sometimes they do better than we anticipate, too.”

“Generally speaking, trying to dance in and out of the companies that you really love on a long-term basis has not been a good idea for most investors. We’re quite content to sit with our best holdings.”
— Warren Buffett

Similarly, their patient approach extends on how they decide to invest in companies. Rather than having a diversified portfolio, Munger and Buffett suggests to wait patiently in order to invest in no-brainer opportunities. As Buffett explains, “You wait for the fat pitch. Ted Williams wrote about it in a book called The Science of Hitting. The most important thing in being a good hitter is to wait for a pitch in the sweet spot.” Similarly, Munger mentions that “I would say that the chief lesson would be that you’re unlikely to find very many great investments in a whole lifetime. And when you find one in which you really have thought it out and have confidence, for God’s sakes, don’t do it in a niggardly fashion. The idea that very smart people with investment skills should have hugely diversified portfolios is madness. It’s a very conventional madness. It’s taught in all of the business schools. But they’re wrong.”

This reminds me of what we have learned from Ted Williams on the importance of discipline and selectiveness. As a baseball hitter, Williams was known for his exceptional ability to wait for the right pitch, the one in his “happy zone” where he could maximize his chances of success. He believed that even the greatest hitters couldn’t be successful if they swung at bad pitches.

As a matter of fact, Williams notes that “a good hitter can hit a pitch that is over the plate three times better than a great hitter with a questionable ball in a tough spot. Pitchers still make enough mistakes to give you some in your happy zone. But the greatest hitter living can’t hit bad balls good.“

“The first rule in the book... is to get a good ball to hit.”
— Ted Williams

Similarly, this concept of waiting for the right pitch is directly applicable to investing. In the world of finance, there are countless opportunities to invest, but not all of them are worth swinging at. Investors often make the mistake of chasing every market trend or jumping on every stock that seems to be rising. However, like Williams, successful investors know the value of being selective. They don’t invest in every opportunity that comes their way; rather, they wait for the right opportunity.

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Finding Young Elephants

“Within the spectrum of value investing we prefer investing in great businesses, that can grow for a long time. We call these candidates young elephants.”
— Matthias Riechert

Finally, Buffett and Munger’s ultimate goal is to find compounding machines, businesses that not only earn high returns on its existing capital but can also continuously reinvest large amounts of incremental capital at those same high rates. These businesses are exceedingly rare, but they are the holy grail of long-term investing, especially if you can find them small. As Munger once said, “Small-cap investing doesn’t work for Berkshire because we’ve got too much money. But I regard finding them small as a perfectly intelligent approach for somebody to try with discipline.”

Buffett explains that finding a good investment opportunity starts by finding a great business. He mentions that “The criteria for selecting a stock is really the criteria for looking at a business. We are looking for a business we can understand. They sell a product that we think we understand, or we understand the nature of the competition and what could go wrong with it over time. And then we try to figure out whether the economics, the earnings power, over the next five, ten, or fifteen years is likely to be good and getting better, or poor and getting worse. Then we try to decide whether we’re getting in with people that we feel comfortable being in with. And then we try to decide what’s an appropriate price for what we’ve seen up to that point in the business.”

In Buffett and Munger’s philosophy, the best businesses are those that earn a high returns on capital and a high reinvestment opportunity due to their strong competitive advantages. A great example of such company is NCR, the National Cash Register. Munger mentions, “I always cite the early history of National Cash Register (NCR); it was created by a fanatic who bought all the patents, had the best salesforce, and had the best production plants. He was a very intelligent man and passionately dedicated to the cash register business. And it was a godsend to retailing when cash registers were invented. Cash registers were the pharmaceuticals of a former age. If you read an early annual report prepared by John Henry Patterson, who was CEO of National Cash Register, any idiot could see this was a talented fanatic who was very favorably located-and, therefore, the investment decision was easy.“

“The ideal business is one that earns very high returns on capital and can keep using lots of capital at those high returns. That becomes a compounding machine. If you can put $100 million into a business that earns 20% on capital, ideally it would be able to earn 20% on $120 million the following year, $144 million the following year, and so on. You could keep redeploying capital at these same returns over time. But there are very, very, very few businesses like that.”
— Warren Buffett

What makes Berkshire Hathaway great, in my opinion, is their ability to allocate capital at a high return for a very long time. In fact, since such perfect compounding machines are scarce, most great businesses, while highly profitable, eventually hit a ceiling on how much capital they can profitably absorb in their core operations. This is where Berkshire Hathaway’s unique structure provides a massive advantage. They can acquire businesses that generate huge amounts of cash but have limited internal reinvestment opportunities (like See’s Candies or The Buffalo News) and then allocate that excess capital elsewhere.

However, by serving as a central capital allocator, Berkshire ensures that the high returns generated by its subsidiaries are not wasted on low-return internal projects but are instead moved to the best available external or internal opportunities. This ability to move cash freely is the engine of Berkshire’s long-term growth. Buffett explains that “Most of the great businesses generate a lot of money; they do not generate lots of opportunities to earn high returns on incremental capital. We can deploy X at See’s and earn a lot of money, but if we put 5x in we don’t earn any more money to speak of. We can earn high returns on X at The Buffalo News, but if we try to make it 5× we don’t earn any more money. They just don’t have the opportunities to use incremental capital. We look for them, but they don’t exist…”

“The best business is one that gives you more and more money every year without putting up anything to get it, or putting up very little to get it. The second‐best business is one that takes more money [required reinvestment to grow], but the rate at which you reinvest for that growth is a very satisfactory rate. The worst business of all is the one that grows a lot, and where you’re forced, in effect, to grow to stay in the game at all, and where you’re reinvesting the capital at a very low rate of return. Sometimes people are in those businesses without knowing it.”
— Warren Buffett

Furthermore, another key aspect of Berkshire Hathaway is their concept of investing along intelligent fanatics. In fact, they place enormous weight on investing along management with integrity and with the right incentives in place.

In their experience, intelligence and energy are valuable, but without integrity they can destroy value. Conversely, a high-quality business can survive mediocre management, whereas great managers cannot always rescue structurally poor businesses. Buffett once said, “What we’re looking for beyond this passion is intelligence, energy, and integrity—and if they don’t have the last one, the first two will kill you. If you hire somebody without integrity, you really want them to be dumb and lazy, don’t you? The last thing in the world you want from someone who lacks integrity is for them to be smart and energetic…”

Their approach to incentive is quite simple to understand: compensation should align the management’s interest with those of the shareholders. They want their managers to think like an owner. As Munger once said, “The basic rule on incentives is you get what you reward for. So, if you have a dumb incentive system, you will get dumb outcomes.”

As we have previously learned, Munger explains how important incentives are in running a business. My favourite example on the power of incentives from Munger come from Federal Express:

“The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can’t be done fast. And Federal Express had one hell of a time getting the thing to work.

And they tried moral suasion, they tried everything in the world, and finally somebody got the happy thought that they were paying the night shift by the hour, and that maybe if they paid them by the shift, the system would work better. And lo and behold, that solution worked.”
— Charlie Munger

Charlie Munger also provided an interesting case study on how Les Schwab tire store was able to come out ahead despite competing with the bigger tire companies such as Goodyears and later on, with huge price discounters like Costco and Sam’s Club. How did he do so? Munger believes that a big part of this is due to the fact that he “must have a very clever incentive structure driving his people. And a clever personnel selection system, etc.”

Similarly, we have also learned from Paul Orfalea, the founder of Kinko’s how a great incentive structure led this company to success. In fact, Orfalea realized that the workers behind the counter at Kinko’s were the true heroes of the company.

As a matter of fact, being in the retail copy centers business, Orfalea had plenty of competitors considering it is an industry with no barriers to entry. As such, if he wanted to beat his competitors, he would have to make Kinko’s a great place to work; he would have to create an incredible corporate culture and make it a competitive advantage. This starts by setting the right incentives in place. In fact, Orfalea mentions that it is a lot easier to manage the work environment than the people in a store. He once said that “when people are properly motivated, they will essentially manage themselves.”

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Beyond the Book

Read "Become A Learning Machine" by Farnam Street

Read "Mastering Success: Navigating Within Your Circle of Competence" by Farnam Street

Read "Inversion and The Power of Avoiding Stupidity" by Farnam Street

Read "The Hidden Edge: What Baseball’s Greatest Hitter Can Teach Us About Decision-Making" by Farnam Street

Read "The Power of Incentives: The Hidden Forces That Shape Behavior" by Farnam Street

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Today’s Chapter is based on the book “The Game” by Ken Dryden.

Ken Dryden was a Canadian professional ice hockey goaltender who played for the Montreal Canadiens in the 1970s, leading the team to six Stanley Cup victories. He won numerous awards including the Conn Smythe Trophy, Calder Memorial Trophy, and five Vezina Trophies, and was inducted into the Hockey Hall of Fame in 1983. After retiring, Dryden pursued a multifaceted career as an author, lawyer, university professor, team executive, and member of the Canadian Parliament, serving as Minister of Social Development from 2004 to 2006.

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The Art of Goaltending

“Only a goalie can appreciate what a goalie goes through.”
— Ken Dryden

One of Ken Dryden’s biggest lesson in his autobiography is his deep dive into the unique psychology of a goaltender. As a matter of fact, being the goaltender of the Montreal Canadiens, the most historic franchise in the NHL, is often mentioned as the toughest job in hockey. Yet Dryden excelled at it winning six Stanley Cups in his eight years career. He strips away the glamour and reveals the position for what it is: a solitary, reactive and mentally gruelling endeavour. He argues that a goalie’s primary opponent is never the shooter, but the chaos within his own mind.

He explains that “Playing goal is not fun. Behind a mask, there are no smiling faces, no timely sweaty grins of satisfaction. It is a grim, humorless position, largely uncreative, requiring little physical movement, giving little physical pleasure in return. A goalie is simply there, tied to a net and to a game; the game acts, a goalie reacts. How he reacts, how often, a hundred shots or no shots, is not up to him. Unable to initiate a game’s action, unable to focus its direction, he can only do what he’s given to do, what the game demands of him, and that he must do. It is his job, a job that cannot be done one minute in every three, one that will not await rare moments of genius, one that ends when the game ends, and only then. For while a goal goes up in lights, a permanent record for the goal-scorer and the game, a save is ephemeral, important at the time, occasionally when a game is over, but able to be wiped away, undone, with the next shot. It is only when a game ends and the mask comes off, when the immense challenge of the job turns abruptly to immense satisfaction or despair, that the unsmiling grimness lifts and goes away.”

“If you were to ask a coach or a player what he would most like to see in a goalie, he would, after some rambling out-loud thoughts, probably settle on something like: consistency, dependability, and the ability to make the big save. Only in the latter, and then only in part, is the physical element present. Instead, what these qualities suggest is a certain character of mind, a mind that need not be nimble or dextrous, for the demands of the job are not complex, but a mind emotionally disciplined, one able to be focussed and directed, a mind under control. Because the demands on a goalie are mostly mental, it means that for a goalie the biggest enemy is himself. Not a puck, not an opponent, not a quirk of size or style. Him. The stress and anxiety he feels when he plays, the fear of failing, the fear of being embarrassed, the fear of being physically hurt, all are symptoms of his position, in constant ebb and flow, but never disappearing. The successful goalie understands these neuroses, accepts them, and puts them under control. The unsuccessful goalie is distracted by them, his mind in knots, his body quickly following.”
— Ken Dryden

In my opinion, the reason why goalie’s biggest opponent is themselves, is because of how reactionary it is. This internal battle necessitates a state of hyper-focused flow, where conscious thought recedes and instinct, built on thousands of hours of practice, takes over. Dryden describes this state beautifully: “Once, as I was told I should, I kept a ‘book’ on all the players I knew, with notes about wrist shots, slap shots, backhands, quick releases or slow, glove side or stick side, high or low; about forehand dekes or backhand dekes, and before a game, I would memorize and rehearse all that was there. But when my body prepared for Thompson’s backhand before I knew it was Thompson, I realized that what was in my book, and more, was stored away in my mind and muscles as nerve impulses, ready, able to move my body before I could. And once when I couldn’t see a shot, yet felt my body move, I resisted its move, unwilling to move foolishly for something I couldn’t see. Then, as I noticed pucks I couldn’t see go by me where I was about to move, but didn’t, I let myself go and stopped them. It’s what others call anticipation or instinct, and while both may be accurate, to me neither suggests the mysterious certitude I feel. It’s the feeling I get when I use a pocket calculator—pushing buttons, given no trail of figures, no hints to let me know how I got to where I did; no handwriting I can recognize as mine to let me know it was me who did it. I get only the right answer. It’s why I work all day to blank my mind. It’s why I want a game to get close enough to absorb me. I don’t want my eyes distracted by clocks and out-of-town scores. I don’t want my mind divided by fear, my body interrupted with instructions telling it what it should do. I want eyes, mind, body, and puck to make their quickest, surest connection.”

Furthermore, what makes goaltending even more challenging is the fact that you are under your coach’s control on when you get to play. Being ready mentally on a short notice is incredibly difficult.

“As a goalie, I am in Bowman’s hands. I play when he says I play; I don’t play when he says I don’t. Much of my happiness, much of the mood I carry with me away from the rink, come from when and how often and against whom I play, and that depends on Bowman.”
— Ken Dryden

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The Art of Coaching

“There are no true leaders in sports, business, or life who are not excellent communicators.”
— Nick Saban

As mentioned previously, Scotty Bowman was an important figure in the success of Ken Dryden. In fact, Dryden’s portrayal of coach Bowman reveals that effective leadership isn’t about rigid systems but about understanding people and adapting to their strengths. In a word obsessed with formulas for success, Dryden believes that true leaders prioritize flexibility, trust and pragmatic decision-making.

Dryden mentions that “Not long ago, I asked him [Bowman]his most important job as coach. He sat quiet for a moment, his face unfurrowed and blank, thinking, then said simply, “To get the right players on the ice.” In an age of “systems” and “concepts” and fervid self-promotion, his answer may seem a little unsatisfying; but though misleadingly simple, it is how he coaches. No one has ever heard of a “Bowman system” as they have a “Shero system.” Fred Shero’s Flyers, a good but limited team, needed a system. To be effective, they needed to play just one way, and to play that way so well they could overcome any team. Bowman’s team is different. Immensely talented, immensely varied, it is a team literally good enough to play, and win, any style of game. For it, a system would be too confining, robbing the team of its unique feature—its flexibility. Further, Bowman understands, as Shero did, that the flip side of winning with a system is losing by that system. So Bowman, a pragmatist with the tools any pragmatist would envy, coaches with what he calls a “plan.””

As such, Bowman often built his team in a way to balance out skill with toughness.

“Quick players are often small, and in smaller rinks against bigger teams, are frequently subject to intimidating attack. Bowman knows that Lafleur, Lemaire, and Lapointe, players whose skills turn the Canadiens from a good team to a special one, must be made “comfortable,” as he puts it; they must be allowed to play without fear. So never farther than the players’ bench away, to balance and neutralize that fear, Bowman has Lupien and Chartraw, sometimes Cam Connor, in other years Pierre Bouchard, and of course, Larry Robinson. With a game-to-game core of fourteen or fifteen players, Bowman fine-tunes his line-up, choosing two or three from among the six or more available to find the “right mix,” as he calls it, for every game we play. He believes that a championship team needs all kinds of players, and that too many players of the same type, no matter how good, make any team vulnerable.”
— Ken Dryden

Furthermore, Dryden mentions that one of the reason for Bowman’s success as a coach is his ability to understand his players. He explains that “He knows each of us too well; he leaves us no place to hide. He knows that we are strong, and are weak; that we can be selfish and lazy, that we can eat too much and drink too much, that we will always look for the easy way out, and when we find it, that we will use it. He knows that each of us comes with a stable of excuses, “crutches” he calls them, ready to use whenever we need them. The team with the fewest crutches will win, Bowman believes. So he inserts himself into our minds, and anticipates these crutches—practice times, travel schedule, hotel, the menu for our team meal—then systematically kicks them away, leaving us with no way out if we lose. And when we don’t lose, we get our revenge, we pretend that we did it ourselves. We want him to have no part of it; and he lets us. He never challenges the integrity of the team. Just as he will allow no player to stand above the team, he will not stand above it either. The team must believe in itself.”

And more importantly, Bowman vows for meritocracy among his players, where everyone is held accountable.

“Being a nice guy doesn’t count; going to optional practices, coming early, staying late, doesn’t count. As Pete Mahovlich, Cournoyer, and Henri Richard have discovered, what you have done before counts only until you can’t do it again. No politics, no favors, it is how you measure up to what you can do, how you help the team, how you perform—they are what count. It is thin comfort.”
— Ken Dryden

This reminds me of Alex Ferguson, considered one of the greatest football managers of all-time. Ferguson believed that football management is not only about football tactics but “a study in the frailty of human beings.” This makes sense considering that at a club like Manchester United, you have players of various backgrounds; big players, wealthy players and even world-famous players. And, it is the manager’s responsibility is to rule over them and to lead them to become a successful football team. As Ferguson once said, “There is only one boss of Manchester United, and that’s the manager.”

As a matter of fact, Ferguson explains that “The minute a Manchester United player thought he was bigger than the manager, he had to go. I used to say, ‘The moment the manager loses his authority, you don’t have a club. The players will be running it, and then you’re in trouble.’” Ferguson reiterates that the authority is what counts and a manager cannot have a player taking over the dressing room.

“The most important thing in my job is control. The minute they threaten your control, you have to get rid of them.”
— Alex Ferguson

While one can see a football manager being in a position of power, Ferguson explains that to be a successful gaffer, one must be in control of the situation rather than to just use brute power. He explains that “Power is useful if you want to use it, but I don’t think it resonates with footballers, who are mostly working-class men. But control was my aim. I could use my power if I wished, and I did, but when you reach the station I attained at United, power came with it naturally. The big decisions you make in those jobs are usually seen by outsiders as exercises in power, when control is really what it’s about.”

By consequence, Ferguson mentions that it is important for the manager to stand up for himself. He gives examples of his days at St Mirren where the captain made a gesture behind his back in a team photo that was published in the local newspaper. The next Monday, Ferguson called him into his office and informed him that he was going on a free transfer. He explained to the player that “For a start, doing a V-sign behind a manager doesn’t tell me you’re an experienced player, or that you’re a mature person. If I’m looking for a captain I’m looking for maturity. That was a childish schoolboy trick. You have to go.”

Furthermore, to be able to control his players, it was important for Ferguson to build a strong manager-player relationship with all of his players. He explains that the core component of this relationship is to make players accountable for their own actions and mistakes, without discouraging them. Football is a results based industry and a winning culture could only be maintained if every players play their part.

If a player was not performing at the level he is required, Ferguson explains that it is the manager’s role to confront the player. But to do so, it was important to balance criticism with encouragement. As mentioned above, criticisms, fines or punishments should remain inside the locker room and not to be made public to the media.

“I would have felt I had betrayed the one constant principle of my time as a manager: to defend. No, not to defend, but to protect them from outside judgments.”
— Alex Ferguson

A good way to do this is to try to look for a moment through the players eyes. Ferguson elaborates that “You were young once, so put yourself in their position. You do something wrong, you’re waiting to be punished. ‘What’s he going to say?’ you think. Or, ‘What’s my dad going to say?’ The aim is to make the biggest possible impact. What would have made the deepest imprint on me at that stage of life?”

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The Art of Excellence

“If you don’t have time to do it right, when will you have time to do it again?”
— John Wooden

For many, winning the Stanley Cup is the ultimate goal. But for Ken Dryden’s Canadiens, winning was the baseline and this created a psychological landscape entirely different from that of other teams. Excellence, he discovered, is not a destination of pure joy but a continuous, often burdensome, state of being. The unrelenting pressure to be the best transforms the emotional texture of success. The thrill of victory is replaced by the relief of not having lost; the joy of play becomes an obligation to perform.

“I’m as good as my last game and no one can forget it.”
— Ken Dryden

This team was not just good; it was historically great, and in setting such a high standard, it created a trap for itself. Dryden explains that “Sated by success, we have different expectations, and the motivation and feelings we get from a game have changed with them. Joy becomes obligation, satisfaction turns to relief, and the purpose of winning becomes less to win, and more not to lose. Even the games we played with ourselves, when there seemed no other games to play, have changed. For three years, too good for the league, we competed against ourselves—most wins in a season, most points, fewest losses. We chased records and broke them, then chased our own records and broke them again. Then two years ago, we won sixty of our eighty games, lost eight and earned one hundred and thirty-two points. Last year, we won one fewer game, lost two more, and earned three fewer points. This year we will do worse. Like long-jumper Bob Beamon, proud of our records, we have a feeling that we have gone too far. We have set a standard we cannot match, so, competing against ourselves, we lose. It would seem enough to win, to compete against the rest of the league as others do, but our cranky feelings tell us otherwise. There is a different quality about this team, a quality we might deny, one that oftentimes we wish we didn’t have, one that in the inflated rhetoric of sports sounds inflated but is not. It is excellence. We are not a “money team” like the Leafs of the 1960s, aided and abetted by a generous playoff system. We must win and play well all the time; we cannot wait for May. So unhappy with ourselves in the best of times, we play through a less than perfect season.”

This burden gets worse considering the immense history of the Canadiens franchise, a legacy literally etched on the dressing room walls for every player to see. Dryden writes “Across the room, there is something else. For journalists, it is la différence, the glimpse that tells the story. Large, photoed heads of former Canadiens players now in the Hall of Fame gaze down at the room from a horizontal row, and beneath them, their words in French and English to each of us below: NOS BRAS MEURTRIS VOUS TENDENT LE FLAMBEAU, A VOUS TOUJOURS DE LE PORTER BIEN HAUT! TO YOU FROM FAILING HANDS WE THROW THE TORCH, BE YOURS TO HOLD IT HIGH!”

“It is part of the Canadiens’ heritage passed from Selke to Pollock, through Dick Irvin, Blake, and Bowman, to the Richards, Béliveau, Lafleur, and the rest. A good season is a Stanley Cup; anything else is not.”
— Ken Dryden

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Today’s Chapter is based on the book “King of the Cowboys: The Life and Times of Jerry Jones” by Jim Dent.

Jerry Jones is an American billionaire businessman and the owner, president, and general manager of the NFL’s Dallas Cowboys since 1989. Under his leadership, the team won three Super Bowls in the 1990s and became one of the most valuable sports franchises in the world.

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Here’s what I learned:

Unyielding Work Ethic

“I never dreamt of success. I worked for it.”
— Estée Lauder

Jerry Jones’s journey from a small-town Arkansas kid to the owner of the Dallas Cowboys, one of the most valuable sports franchises in the world is a great example of the timeless value of a relentless work ethic. Shaped by his father’s lessons during the Great Depression, Jones understood that hard work isn’t just a means to an end but a core part of one’s identity. This mindset propelled him through early failures and into massive successes, showing that consistent effort can turn ordinary opportunities into extraordinary outcomes.

Jones explains that “It was that mentality from that era that drove him [his father]. When I was a kid, it was all he could talk about—the Depression. It scared the hell out of the people who grew up then, especially the ones on the farms. My dad passed that fear along to me. That’s why I always worked when I was a kid.“

As such, Jones first started working in his father’s business called Pat’s Supermarket, where he wasn’t just helping out but mastering every aspect of the business. Hard work wasn’t optional; it was ingrained. Jones mentions that “if I wasn’t down there working at the store every day, I was found guilty of something. I knew that my butt was going to be in trouble.” As a matter of fact, Jones’ father once told him, “I’m going to teach you to work so that you won’t mind working and it’ll be a part of your personality when you grow up.”

“I worked everything. I learned to do everything in the store. I was up at the crack of dawn, or I’d be working until midnight on something. My dad was a driver. But he was also a teacher. He just somehow knew where he was going.”
— Jerry Jones

This work ethic that Jones built through his father’s vigorous training at the family’s business paid off, not only in business but also on the football field. In fact, Jones was an undersized football player in college, but he led Arkansas to a national championship through sheer determination, not superior talent.

One of his head coach, Jimmy Albright, mentions that “Jerry didn’t have a lot of speed. In fact, he didn’t have a whole lot of anything as an athlete. But when he started something, he didn’t quit. Even at that early age, we were starting to see that work ethic that would carry him to his great success. It was already starting to show. This kid just worked his ass off night and day.” His story reminds us that in any field, whether business, sports, or personal growth, showing up every day with grit separates the achievers from the dreamers.

“Believe me, there were times when I failed. There were times when I was down on one knee, so to speak. But I was able to draw upon those times. One of the hardest things, I would learn, would be keeping my head together during those tough times. You just have to buck up and go on to the next decision. If you don’t move with enthusiasm to the next deal, you lose.”
— Jerry Jones

This reminds me of Chung Ju-Yung’s concept of “Do it until nothing more can be done. Give it your all ‘til the very end.” , which can be defined as his essence as a person and his fundamental principle of life. As Chung, the founder of Hyundai, once said, time is a form capital that should be used well. Chung explains that even for the most simple and most mundane tasks in life, it is important to put your best effort to achieve the best result possible.

“I realized that even simple tasks require practice. With the skills I acquired during those three nights, I soon became one of the best delivery boys in the city. Now, I was able to deliver two big bags of rice at a time. (…) My monthly pay increased to two bags and then to three. No matter how small the task, such as delivering rice on a bicycle, I pour all my energy into achieving the best possible result. Half measures, compromises, cutting corners, or “being realistic” do not exist in my world.”
— Chung Ju-Yung

This motto of his to “Do your best till there is nothing more to do” comes from his observation of bedbugs. In fact, he explains that “Even bedbugs think long and hard, and use every bit of energy they have to achieve their goal, and ultimately they succeed. I’m no bedbug, I’m a man. These bedbugs can surely teach a man a few lessons. If these bedbugs can do it, why can’t we men do it? We just need to stick to it and not quit. We need to emulate these bedbugs.”

Chung Ju-Yung believes that giving it your all and working diligently can make up for any shortfalls you may have. For example, while Chung Ju-Yung stopped his formal education after the sixth grade, he more than made up for it by reading books diligently. In fact, he once said that “if my first mentors were my parents, then my second mentors were books.”

“The story of my life demonstrates that one does not need great wealth and education to become successful. Even though I was poor and had little education, I am running one of the world’s most successful businesses. For those people who are in a difficult situation but continue to have big dreams, I hope my life can be an example that inspires them to push forward toward a better life through honest, hard work.”
— Chung Ju-Yung

Furthermore, Chung believes that one must work diligently every day in order to have steady improvement in life which can lead to success. In fact, he once said that “unless your life goal is wasting time, then the first thing I recommend is to be diligent. Being diligent forces you to move a lot, think a lot, and work a lot. Diligence mirrors your sincerity about living a full life. So I don’t trust anyone who is lazy. If you are diligent in attending to your daily needs, then over time you will become credible and reap the benefits of your diligence.”

“If you are diligent for a day, you will sleep comfortably for a night. If you are diligent for a month, the quality of your life will noticeably improve. If you are diligent for a year, two years, 10 years, your whole life... your accomplishments will be recognized by all. The diligent lead lives a 100 times more productive than the lazy. Their lives are thus more fulfilling. If you work 10 times more than a lazy person, then you are in fact shouldering the lives of hundreds.”
— Chung Ju-Yung

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Embrace Risk

“No man is worth his salt who is not ready at all times to risk his well-being, to risk his body, to risk his life in a great cause.”
– Theodore Roosevelt

One of the most striking lessons from Jerry Jones is the power of calculated risk-taking, drawn from his experience in the oil industry. In fact, he treats business like wildcatting—drilling in unproven spots, defying conventions, and betting big on hunches. Jones operated on what Dent describes as an “oil patch mentality.” This philosophy, honed in the unpredictable world of oil wildcatting, is built on a simple premise: roll the dice aggressively, accept that some ventures will fail, and trust that the big wins will more than cover the losses. For Jones, safety and tradition are often the enemy of progress and profit. This approach turned dry holes into gushers in oil and transformed a losing NFL team into a powerful. It shows that playing it safe often leads to stagnation, while bold risks, when informed by instinct and preparation, can yield outsized rewards.

When Jones was into the oil business, he was an independent, searching for oil without any powerful financial support from companies like Shell or Exxon. As such, he “operated without a team of engineers and without their sophisticated computers and tracking devices.” But that did not bother Jones, he was always determined to succeed on his own terms and in his own way. Jim Dent mentions that Jones and his partner Bill Sparks’ plan “was to drill between the dry holes. It’s hardly surprising that other oil men thought they were crazy. In this case, though, Jones’s faith in Bill Sparks paid off. The group hit their first well, which was worth more than $4 million.” This first success led to more funding that would be used to drill more oil. As Bill Sparks once said, “Hitting that first one meant that we could go to the bank and borrow money and keep drilling. It meant everything in the world to us.”

“Some of your risks are bound to be busts. The more risks you take, the better the chance of one of them hitting.”
— Jerry Jones

This unorthodox way of drilling oils was similar to the way he ran his NFL team. He would defy all norms in order to succeed in his own terms, even if it meant firing two of the most popular and successful coaches in the history of the National Football League (Tom Landry and later Jimmy Johnson). Dent writes that “In the next century, NFL historians will review Jones’s blueprint for reconstructing the Cowboys and shake their heads. His plan was a total departure from all of the formulas NFL teams had tried in the past. Granted, teams had tried to improve themselves through trades throughout the seventy-odd years of the league’s history. But Jones and Johnson went at the trading process like kids in a candy store. The NFL had never seen anything like it.”

“I made the decision to run this football team without NFL football experience. I didn’t know that some of the things we would try couldn’t be done. No one sat down with me and told me, ‘There’s no way you can have this organization put together the way you want it if you don’t get some longtime NFL experience.’ I thought the way we were doing it was the only way we could do it.”
— Jerry Jones

To conclude, risk isn’t reckless for Jones; it’s about volume and recovery. He takes multiple shots, knowing some fail, but the wins compound. This mindset encourages us to challenge status quos in our careers or investments, calculating odds but acting decisively.

This reminds me of what we have learned from Donald Keough who served as president and COO of Coca-Cola. In his book, Keough offers profound insights into what makes a company thrive in a competitive landscape. One of the most critical lessons from his tenure is the necessity of embracing risk rather than shying away from it. Keough’s experiences highlight how stagnation can lead to downfall, and how calculated risks propelled Coca-Cola to global dominance.

As a matter of fact, Keough recognized that success often makes companies complacent, causing them to shy away from new challenges and innovations, a posture that inevitably leads to decline. He explains that “It’s reasonable to think that because when you achieve something, even very little, there is the great temptation to quit taking risks. It’s human nature. I’ve got something. Why risk it? Who knows what’s on the other side of the mountain? Don’t go there!”

In his book, Keough illustrates various examples of companies that succumbed to “the major diseases of success”: complacency, arrogance, and the paralysis that comes from avoiding risk. Notably, he talks about the story of Xerox who “had a least a five-year head start over its future rivals. But the box guys at headquarters failed to take a risk. That, as I said, is one of the major diseases of success. Two others are complacency and arrogance.“

“Over time, many, many successful companies have failed to take important risks at critical points, and they have paid a price. Some have merely stumbled and found later redemption, but quite a few have not only fallen but disappeared. In the 1980s alone, 230 companies disappeared from the Fortune 500. In fact, only 16 of the 100 largest companies that were around in the early 1900s are still with us. Who knows how many of the tombstones in the graveyard of capitalism should bear the epitaph “Here lies a company that died risk free.””
— Donald R. Keough

At Coca‑Cola, Keough cultivated the sense that success didn’t mean safety but instead required vigilance and a willingness to explore new things. He accepted mistakes and failures as part of the innovation process, arguing that the capacity to try, while knowing that many experiments will fail, is critical to long‑term vitality.

He points to creative environments like Apple’s where ambitious efforts produced both high‑profile missteps and transformative innovations; the failures were the price of continued relevance. In fact, he explains that “In business, you can make a good argument for mistakes like Steve Jobs’s Lisa or Power MacCube because the highly creative Apple environment that spawned them also produced big winners like iPod and iPhone. You can even justify those mistakes that have become the folkloric case studies in how-not-to-do-it courses in business schools all over the country, such as the Edsel or 45 rpm records or even New Coke. These failures, for all the valuable lessons that they teach us in hindsight about management blunders, are simply risks that just didn’t work out. Such miscalculations, costly though they might be at the time, are part of the price of staying in business.”

“In fact, if a company never has a failure, I submit that their management is probably not discontented enough to justify their salaries.”
— Donald R. Keough

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Sports Management

“To me sports is a rental business and it’s an entertainment business.”
— Wayne Huizenga

Jerry Jones is, above all else, a businessman. While he loves football, his primary metric for success for the Dallas Cowboys is unequivocally financial. This singular focus on the bottom line has been the driving force behind his decisions as the owner of the team. He sees every asset, from players to a stadium seat, as a potential revenue stream, and, more importantly, he possesses a genius for unlocking value where others do not.

“From the first day he walked into the Cowboys complex, Jones has proven that he can sell, sell, sell. Of course, his selling skills and his deal-making abilities shouldn’t be surprising, given his background.”
— Jim Dent

When Jones purchased the Cowboys, the team was losing millions. He immediately set to transform it into a “lean, mean money machine”. His schemes were as innovative as they were bold. One of the first thing he did as the owner was to recall thousand of season tickets from former players and associates to resell them at a premium. In fact, Dent explains that “To obtain these tickets, the new purchasers also had to put money down for “seat options.” The options alone cost from $1,500 to $15,000 per seat, depending on their location, even though they don’t include the actual price of the tickets—they just give the option-holder the right to buy the tickets for that seat.“

Furthermore, he started to find innovative ways to add additional seats in the stadium in order to increase ticket revenues. In fact, while he was evaluating the stadium’s potential for generating revenue, Jones asked himself, “Where did the previous owners go wrong? Why did they lose so much money?”

His monetisation strategies seemed endless. He broke tradition by selling advertising signage inside Texas Stadium. He lobbied the city council to allow beer and wine sales, wining and dining officials to get his way. In fact, Dent explains that he set out to “convince the Irving City Council to grant the stadium a license to sell beer and wine. Like a good politician, Jones began wining and dining members of the council. He gave them free seats in the luxury suites. He brought some of them into the locker room after games. When the Cowboys reached the Super Bowl in 1993, five council members flew to Pasadena free on one of Jones’s chartered jets—and received free tickets to the game.“ He even moved the team’s training camp to save money and gain control over merchandise sales. Every decision was filtered through a lens of profitability.

“I’m not worried about the Super Bowl as I am about getting the damn luxury boxes sold.”
— Jerry Jones

His priority to focus on increasing revenues paid off spectacularly. Under Jones’ ownership, the Cowboys’ value skyrocketed from $60 million to over $200 million, and the franchise has became the most profitable in all of sports.

The lesson here is the power of an uncompromising focus on value creation. Jones teaches us to constantly question existing revenue models, to look for untapped opportunities, and to understand that sentimentality can be the enemy of solvency. For him, money is the scoreboard: “Money is how businessmen measure success. In a way, accumulating money is a way of keeping score.”

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Beyond the Book

Read "Talent Is Persistence" by Farnam Street

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Today’s Chapter is based on the book “THE GALLAGHER WAY: A Corporate History of Arthur J. Gallagher & Co.” by Alison Kittrell.

Arthur J. Gallagher was a Chicago-based insurance agent who founded Arthur J. Gallagher & Co. in 1927. He built the company into one of the largest global insurance brokerage and risk management firms by innovating in insurance products and expanding services, with leadership passing to his sons in the mid-20th century. The company went public in 1984 and has since grown through acquisitions and international expansion, becoming a major player in insurance and benefits consulting worldwide.

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People First Approach

“Four Seasons is the sum of its people—many, many good people.”
— Isadore Sharp

Since the inception of the Arthur J. Gallagher & co., the company operated on a radical principle for its time: that the value of a company is carried by its employees. This wasn’t a hollow slogan but a deeply ingrained belief that shaped every decision, from hiring and training to compensation and leadership. In fact, the company’s founder, Arthur Gallagher, learned early on that talent and drive could be found anywhere, but they must be nurtured and rewarded fairly. His own experience of being underpaid as a top employee at a previous agency instilled this fierce determination to build a company of his own.

Arthur Gallagher and his three sons understood that to unlock potential, they had to invest in their people. By investing in employee training, promoting from within, and creating an environment where everyone feels valued, Gallagher has built a resilient workforce that contributes directly to its competitive edge. This approach challenges the traditional view of employees as mere cogs in a machine, instead treating them as partners in the company’s journey. As Kittrell explains, “The story of Arthur J. Gallagher & Co. is, in a very real sense, the story of its people. The people are the engine that drives this company, and each of them is an important part of this story.”

By consequence, long before going public, the Gallagher brothers began distributing shares to key employees, creating a powerful sense of shared destiny. This was driven by a philosophical commitment, as Bob Gallagher explained, wanting to create a mechanism that would allow employees to share in the success they were creating. As Rich McKenna, an executive vice-president of Gallagher Bassett once said, “With the stock program, your job stops being a paycheck, and starts being the equity you are building into your family’s future.”

The result was a level of loyalty that became a competitive advantage, with remarkably low turnover among managers, many of whom spent their entire careers with the company. In fact, Kittrell mentions that “Loyalty to employees is a hallmark of AJGCo., and it is returned many times. There is remarkably little turnover among the company’s managers.”

“This company is about more than the Gallaghers, and I want everyone who contributed to the company to benefit as well.”
— Bob Gallagher

Not only that, the Gallaghers designed a program that transitioned recruits from salaried positions to commission-based roles in order to ensure that new hires could learn without financial pressure while being incentivized to build the business. Kittrell writes that “The payment plan for the trainees was designed to ease them into a compensation formula the Gallaghers developed based on production. The Gallaghers believed that, although the production-based formula offered the best opportunity to make a lot of money in insurance, it could be tough for young producers to have to rely on it immediately. So Gallagher recruits were paid a base salary and given some business to work with.”

Furthermore, considering the importance of the employees in building the success of the Arthur J. Gallagher & Co., it was primordial to hire the right people to represent the company. As Art Gallagher once said, “Our most important assets go up and down the elevators every day.” To do so, the Gallaghers believed that it was important to recruit and train salespeople to embody the dual expertise of technical knowledge and sales acumen.

In terms of recruiting and hiring, Kittrell mentions that “The first step was determining what kind of salesman would be best for the company. The Gallaghers decided that the way they had developed as producers—learning both the technical and the sales sides of the business—was an important factor in their success as a company. The fact that they had achieved this dual expertise was an accident of circumstance, but they seized the opportunity to make circumstance work for them.”

“We clearly identified what we wanted our salesmen to do. We wanted them to become exactly what we were.”
— Jim Gallagher

This reminds me of what we have learned from Paul Orfalea at Kinko’s. Similarly to the Gallaghers, Orfalea also had a great incentive structure in place at Kinko’s which lead to the success of his company. In fact, Orfalea realized that the workers behind the counter at Kinko’s were the true heroes of the company. As a matter of fact, being in the retail copy centers business, Orfalea had plenty of competitors considering it is an industry with no barriers to entry.

As such, if he wanted to beat his competitors, he would have to make Kinko’s a great place to work; he would have to create an incredible corporate culture and make it a competitive advantage. This starts by setting the right incentives in place. In fact, Orfalea mentions that it is a lot easier to manage the work environment than the people in a store. He once said that “when people are properly motivated, they will essentially manage themselves.”

First, he started calling his employees as coworkers to remind himself that he didn’t want to “use” people, but to work with “empowered entrepreneurs”. To instill this sense of entrepreneurship among Kinko’s workers, the company gave a share of the profits of the store to everyone — partners, managers, and even workers behind the counter.

Orfalea mentions that initially, Kinko’s “gave each manager 25 percent of his or her store’s profits. Later, we expanded the system of profit sharing when we started giving each manager 15 percent of the store’s profits and earmarking the remaining 10 percent to be split among that store’s coworkers.”

“At Kinko’s, we were building a family together at the same time we were building a business.”
— Paul Orfalea

Second, Orfalea mentions that “people want to know they are contributing to society.” As such, other than monetary incentives, Kinko’s had to give a sense of mission to keep their workers both happy and motivated.

To do so, Orfalea set a flat organization at Kinko’s. Without having any hierarchy, every single member of the company were treated equally in the company and were part of the decision process. In fact, Orfalea mentions that the head office’s main purpose is to serve the stores. He implemented the “80/20” policy where managers were encouraged to spend 80 percent of their time on the floor of the stores with coworkers and only 20 percent of their time in their offices.

As such, Kinko’s empowered coworkers behind the counter to become autonomous thinkers. They would not be required to ask for permission for implementing new ideas for taking care of customers. As Paul Orfalea once said, “our original store was a hothouse of experimentation.”

“As we grew, we designed a structure for our company that would be as democratic as the services we were providing. For me, this was the true brilliance of the Kinko’s we created.”
— Paul Orfalea

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Customer Centric Innovation

“We’re not competitor-obsessed; we’re customer-obsessed. We start with what the customer needs and we work backwards”
— Jeff Bezos

Arthur J. Gallagher & Co. never settled for being a mere intermediary in the insurance market. Instead, it consistently looked for ways to provide greater value and control to its clients, even when it meant they had to innovate and to challenge the entire industry. This was due to Arthur Gallagher’s believe that “there were lots of insurance agents, and businesses could buy coverage anywhere. They even could buy comparable coverage at a comparable price. So he determined that he would provide the kind of service that would keep his customers happy, and keep them coming back.”

An example of this was its pioneering embrace of self-insurance. At a time when the traditional insurance industry was hostile to the concept, the Gallaghers saw it as a huge opportunity. As a matter of fact, the company realized that traditional insurance models often failed to incentivize loss prevention. By helping clients to create self-insured plans, the Gallagher empowered them to take control of their risk. This was a revolutionary shift. Under self-insurance, clients retained their money until claims were settled, creating a direct financial incentive to invest in safety and loss control. Gallagher didn’t just sell a policy; it built a comprehensive risk management partnership. As Kittrell explains, “Self-insurance gave a client much greater control over its money. Under traditional insurance, the client paid its premiums before there were claims. But with self‑insurance, no money was paid until a claim was settled.”

Self-insurance is just one example of Arthur Gallagher’s original dedication for the company to work with clients in order to reduce their risks. Over the years, the company developed various new concepts focusing on solving clients’ problems by saving them money, time, productivity and even lives. Another example of this is the idea of including replacement costs in self-insured policies, addressing risks that traditional insurers avoided. Kittrell explains that “The Gallaghers also designed the type of coverage to be provided—in essence, creating an insurance policy. In the process, they made some very important decisions. For example, they designed coverage that included replacement costs. Up until that time, few insurers were willing to cover property replacement costs, because they felt replacement coverage presented too great a temptation for arson and fraud. However, self-insured clients had no such temptation, because they, rather than the insurance company, had to pay the retained losses.”

This client-centric problem-solving was a core concept in the success of the Arthur J. Gallagher & Co. and later on, the Gallaghers saw Bassett company. As Durkin, a high executive of Arthur J. Gallagher & Co. once said, “We try to figure out what clients need to solve their problems.”

“Arthur J. Gallagher & Co. always has been a leader rather than a follower, believing in the rule that, ‘It is better to shift than to be shifted.’ With the establishment of Gallagher Bassett, AuGCo. shifted in a big way, and took the industry with it.”
— Alison Kittrell

Furthermore, it is important to note that the success of this approach was rooted in deep client relationships. As a matter of fact, the Gallaghers insisted on personal contact, often sending executives to client locations to build trust and to tailor solutions. This hands-on service became a hallmark of the Gallagher brand, ensuring that innovation was always tied to the clients’ benefits. As Kittrell once said, “Continuing Art Gallagher’s tradition of being close to the client, Gallagher Bassett came to rely heavily on personal contact.”

This reminds me of what we have learned from Kemmons Wilson who created Holiday Inn based on customers’ needs. In fact, Wilson’s approach at Holiday Inn was also catered around his unwavering commitment to customer satisfaction. He understood that happy customers were key to sustainable business success and that listening to their needs was primordial in order to innovate.

In the early 1950s, there were plenty of motels across the United States, but they were often dirty, cramped, and overpriced. Wilson saw an opportunity to build something better—a chain of motels that offered clean, reliable, family-friendly accommodations at a reasonable price. His vision wasn’t just about building one motel; it was about creating a national network that would be consistent in quality and service. This was groundbreaking at the time.

This “snap judgment” was the birth of what would become one of the most iconic hotel chains in the world, the Holiday Inn. But Wilson didn’t stop there. He understood that families wouldn’t just want a clean room—they wanted amenities that made travel easier and more enjoyable. He made sure every Holiday Inn had a swimming pool, family restaurant, and vending machines. Importantly, he also ensured that children could stay for free, a policy that remains a standard in the industry to this day. This was his most proudest policy change as he once said, “If I never did anything else in the world, I changed everybody on that.”

As such, Wilson’s success wasn’t just about being a risk-taker; it was all about his ability to innovate by seeing opportunities where others did not. Not only did he identify a customers’ need, he was able to come up with a solution that changed the entire industry. Wilson didn’t just build motels; he built an experience.

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Sales Culture

“I have never worked a day in my life without selling. If I believe in something, I sell it, and I sell it hard.”
— Estee Lauder

Finally, Arthur Gallagher teaches us the enduring power of a robust sales culture, where persistence, customer knowledge and ethical selling drive revenue and customer loyalty. Since Arthur Gallagher’s cold-calling days, the company has maintained a “peddler” mindset that prioritizes value over transactions. This culture not only fuels organic growth but also differentiates Arthur J. Gallagher & Co. in a competitive market, proving that sales excellence comes from genuine service and relentless effort.

Kittrell explained that “Most of the business of Arthur J. Gallagher & Co. resulted from Art’s persistent knocking on doors.” and that he “Art was a tremendous cold caller. One of his friends said years later that, “He had a thick pair of soles and a ball-bearing tongue.” “He was an exceptionally persuasive salesman once he got his foot in the door, and he was extremely persistent.”

This tradition on focusing on sales continued through generations with the company viewing itself as salespeople first.

“From the very beginning, AJGCo. had a strong sales orientation. Art Gallagher had been a consummate salesman—a friend once said that, “He had a thick pair of soles and a ball-bearing tongue.” As his sons Jim, Bob and John entered the business, they continued to refer proudly to themselves as “peddlers.””
— Alison Kittrell

Furthermore, throughout the years, Bob Gallagher wrote a document to outline the defining principles of Arthur J. Gallagher & co. It explains what makes the company unique and the qualities from which the company draw its strength. By writing it, Bob Gallagher hopes it will guide the company decades from now. It is simply called The Gallagher Way:

1. We are a Sales & Marketing Company dedicated to providing excellence in Risk Management Services to our clients.

2. We support one another. We believe in one another. We acknowledge and respect the ability of one another.

3. We push for professional excellence.

4. We can all improve and learn from one another.

5. There are no second-class citizenseveryone is important and everyone’s job is important.

6. We’re an open society.

7. Empathy for the other guy is not a weakness.

8. Suspicion breeds more suspicion. To trust and be trusted is vital.

9. Leaders need followers. How leaders treat followers has a direct impact on the effectiveness of the leader.

10. Interpersonal business relationships should be built.

11. We all need one another. We are all cogs in a wheel.

12. No department or person is an island.

13. Professional courtesy is expected.

14. Never ask someone to do something you wouldn’t do yourself.

15. I consider myself support for our Sales &Marketing. We can’t make things happen without each other. We are a team.

16. Loyalty and respect are earned—not dictated.

17. Fear is a turnoff.

18. People skills are very important at AJGCo.

19. We’re a very competitive and aggressive Company.

20. We run to problems—not away from them.

21. We adhere to the highest standards of moral and ethical behavior.

22. People work harder and are more effective when they’re turned on—not turned off.

23. We are a warm, close Company. This is a strength—not a weakness

24. We must continue building a professional Company—together—as a team.

25. Shared values can be altered with circumstances—but carefully and with tact and consideration for one another’s needs.

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Today’s Chapter is based on the book “Doing the Doing: The Incredible, Improbable Business Journey of Alan McKim and Clean Harbors” by Alan McKim.

Alan McKim is an American businessman best known as the founder, chairman, and former CEO of Clean Harbors Environmental Services, Inc., which is North America’s leading provider of environmental, energy, and industrial services. He founded the company in 1980 starting with one truck and four employees and grew it into a global, multi-billion-dollar enterprise with over 20,000 employees and numerous locations worldwide.

Buy it on Amazon here.

Here’s what I learned:

Cash is King

“Never take your eyes off the cash flow because it’s the lifeblood of business.“
— Richard Branson

Alan McKim’s tenure at Clean Harbors teaches the indispensable lesson of financial discipline, particularly the mantra that “cash is king”. Throughout his career, he prioritized cash flow over profitability, understanding that liquidity is what fuels operations and enables growth. This prudence helped McKim navigate through Clean Harbors’ crises.

McKim mentions that when he started his company, he “knew very little about the business side of things. I was great on the oil operations side—I must have personally cleaned the inside of over a thousand oil tanks during my young career—but I did not have any real understanding of a financial statement. Balance sheets? P&Ls? Pre-tax profits? Depreciation? Cost of goods? Sure, I’d heard the words bandied about time and again, but I did not really know what they were all about. I was a tried-and-true, hands-on operations guy, not an accountant. Honestly, I let the accountants tell me if we were making money or not, though I did watch the cash like a hawk, because that was the lifeblood of the company. Without cash, it didn’t matter if you were profitable or not. Cash is always King!”

“At the birth of any business, cash is always tight. It is essential to have money at hand to pay your employees, vendors, and operating costs. No matter how well your company is doing, even if you’re showing a profit on your books, you’re out of business if you run out of cash and can’t borrow it fast enough to fuel the engines. It’s why they always say, “cash is king.””
— Alan McKim

This principle was tested during the company’s most difficult times. When Clean Harbors faced a dire cash crunch and couldn’t make payroll, McKim made a move that defies conventional business wisdom but underscored his profound commitment: he personally borrowed against his own stock to fund the company’s payroll. McKim explains that he had “a crazy belief that we would succeed, as did plenty of my colleagues in the company. So, many of us took pay cuts and sacrificed to keep the ship afloat. Moreover, when it got to the point where we couldn’t make payroll anymore, I did what every business book tells you never to do; I borrowed on my own stock holdings and then lent the company money from my borrowed funds to make payroll. Remember, we were a public company at this point, thus making this kind of move was unheard of; but I did it anyway.”

Through this example, it is fair to understand why McKim is so focused on cash flow as he wanted to make sure that he could take care of the company’s payroll. In fact, due to his humble beginnings, he wanted to make sure that all of his employees were paid in time even during market downturns. He mentions that “Throughout my career, I have never forgotten how most people live and how important it is they can rely on us to be paid on time and accurately.”

Furthermore, another reason why McKim believes in having a good cashflow is because he understood that cash is necessary for a company to grow. Without cash, it doesn’t matter how many opportunity for growth as you cannot invest into it.

“One thing I hope I’ve adequately emphasized in this book is a guiding and enduring principle of mine, to remember the simple mantra that “cash is king.” No matter how great the opportunity for growth may be, the most important aspect of a business is to have the money to keep operating and moving forward. In this world of tech startups, the focus seems to be on market share alone, with no income model in mind. Sometimes I think the people who get involved with these businesses don’t understand cash flow and how vital it is to the lifeblood of a company.”
— Alan McKim

This reminds me of the importance of having a cash reserve and patience to succeed in business and in investing. As we have previously learned from Seymour Schulich, taking a delayed gratification approach helps in this matter. He challenges us to adopt a long-term mindset, focusing on sustainable growth rather than quick wins. And in business, Schulich recommends in having a big cash reserve since you’ll never know when you have an opportunity to strike gold. As he states, “One other very important aspect of patience in business is maintaining a cash reserve, so you have the money on hand to exploit those opportunities when they occur.” This advice is particularly relevant in times of economic uncertainty, where having liquid assets can provide the flexibility needed to seize advantageous opportunities.

“The best opportunities come to those with patience, courage, and a cash reserve.”
— Seymour Schulich

Similarly, Charlie Munger is also a prominent figure that has always been a big proponent of delayed gratification. He believes in the importance of patience and being prepared to act at scale when a great opportunities arise. As he once said, “If you’re glued together and honorable and get up every morning and keep learning every day and you’re willing to go in for a lot of deferred gratification all your life, you’re going to succeed.”

Munger gave a great example of delayed gratification: How he earned $400 million from reading Barron’s magazine. Munger had been reading Barron’s magazine for more than fifty years, but found only one actionable idea in it. He bought a cheaply valued auto parts company at $1 per share and sold a few years later at $15 per share, earning him $80 million in profits. Munger then gave this $80 million to Li Lu who turned it into $400 million. This story is a great example of the significance of extreme patience, deferred gratification, and the display of strong decisiveness at the right moment.

“People who arbitrage time will almost always outperform. The first order thought of instant gratification is a crowded path, ensuring mediocre results at best. Delayed gratification, which requires second order thinking, is less crowded and more likely to get results.”
— Shane Parrish

Finally Warren Buffett is also another prominent investor who encourages having a large enough cash stack in order to be well prepared when opportunities come around. As Parrish explains, “Right now, as of today, I think as of last quarter, he’s got 150 billion dollars on the balance sheet. And so what he’s always doing is everybody thinks he’s out of touch and he looks like an idiot. But he always wins because no matter what the outcome is, he wins. If the stock market goes up, he wins. If the stock market crashes, he wins because he’s put himself in a position where no matter what happens, he can take advantage of circumstances rather than having circumstances take advantage of him. And I think that that’s a key element we don’t realize. If you put Warren Buffett in a bad position where all of his options are bad, it doesn’t matter how smart he is, it doesn’t matter how Warren Buffett he is.”

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Prioritize People

“A company’s employees are its greatest asset and your people are your product.”
— Richard Branson

Alan McKim’s success story also reminds us of a vital lesson of prioritizing people and building a strong company culture. McKim views employees not as mere resources but as the heart of Clear Harbors, emphasizing safety, loyalty and shared purpose. This human-centric approach built a loyal workforce that propelled the company through challenges, teaching us that investing in people yields dividends in the long run.

McKim explains that “All companies have a culture that defines how they do business. Our culture has certainly evolved through the years. In the beginning, when we were a small company and our employees were young and perhaps a little rambunctious, I would say our company culture was “work hard and play hard.” If you can’t come to work and enjoy what you are doing, then what in the hell are you coming in to work for?”

This “work hard and play hard” mantra allowed for employees in the company to built a strong bond together. As McKim mentions, “During the working day, everyone had each other’s back, working hard but also having fun. We were professional, and that was very important, but we were not stiff. We razzed each other mercilessly, heckled, scolded, and laughed loudly. And then, after a long week, we’d go out together and have a beer and pizza, joined by spouses or significant others. A true team spirit.”

“My philosophy is that we are all in this together. We are building Clean Harbors collectively, and the long hours involved naturally developed a tight bond between us and within the company. Working for Clean Harbors should be energizing and exciting, I always reasoned, since we were all building our careers and dreams together.”
— Alan McKim

Furthermore, considering the company was in waste management industry, the employees’ safety was primordial, as they are the company’s most important asset. McKim believes that as a CEO, the safety of his employees is his own personal responsibility. He explains that “Protecting our employees has always been at the top of the Clean Harbors agenda, and the few serious incidents that have occurred during our 40 years in business serve as a continual reminder that we take our responsibilities very seriously when it comes to workplace safety. In other words, at Clean Harbors, the actionable oversight for safety comes from the top.”

Similarly, McKim reiterates that “on every work site in every plant and at every office, in all of our 750 locations, we have safety meetings each morning with all the employees at work, no matter what job we’re performing. This includes senior management. If ever there is a specific safety issue, we fix it or shut down the work site until it is addressed. Indeed, any employee can pull out the Stop Work Authority Card at any time, day or night.”

“Our employees are our most valuable assets. I’ve always believed that cultivating the best workforce possible, investing in them, training them, keeping them safe and fit, and inspiring them to be committed to Clean Harbors, is a win-win for us as well as our employees.”
— Alan McKim

This reminds me of what we have learned from Richard Farmer, who believed that Cintas’ ultimate competitive advantage is their corporate culture. He explains that “Our culture is rare, invisible, and difficult—if not impossible—to replicate.Competitors can copy our sales material, our products and even some of our systems, but they cannot copy our culture.”

“I swore that I would do whatever it took to develop obvious and authentic competitive advantages. Today, we recognize that our most significant competitive advantage is very rare, intangible, and impossible to replicate. I’m talking—again—about our corporate culture.”
— Richard Farmer

However, in order to implement a great corporate culture at Cintas, it was primordial for Farmer to create a vision for the company to lead his employees. Cintas’s vision was the following:

1. To be known as a company that insists on absolute honesty and integrity in everything we do.

2. To have a highly talented and diverse workforce which is harmonious and compatible with our corporate culture.

3. To have a uniform rental presence in every city in the United States.

4. To leverage that field presence to provide our customers with additional products and services.

5. To expand our uniform business into segments of industry we don’t normally service (such as hospitality, transportation, restaurants, and so forth).

Farmer explains that it is important for a company to have a vision and to share it to its employees. In fact, he explains that “employees are not just doing a job. They’re sharing a vision. If they share a vision, a job is more than a job.”

He uses the following anecdote to explain the importance of having a common vision among a company:

“I used to tell the story about a man walking down the street in the middle of a big city and how he came upon a construction site. Bulldozers and earthmoving machines were busy on the site. People were working hard. He came across three men in a ditch. He asked the first man, “What are you doing?”

“I’m digging a ditch,” the first man said.

Our protagonist asked the second man, “What are you doing?”

“We’re digging a ditch for the water line for that building going up over there, the second man said.

Our protagonist asked the third man, “What are you doing?”

The man looked up and replied, “We’re building a cathedral. It will be a big beautiful cathedral with five big tall spires and beautiful stained glass windows. It will seat 500 people. It will be the most beautiful church in this city. That’s what we’re doing.”

Every time I’d tell that story, I’d ask my audience which of those men do you think is most motivated. Obviously the man building a beautiful church will be more committed than the others because he shares a vision. He may be in a ditch, but he is proud of what he is doing. That simple story demonstrates why it’s important to have a vision and share it with everyone.”
— Richard Farmer

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Doing the Doing

“Ideas are worth nothing unless executed.“
— Steve Jobs

Finally, Alan McKim’s story cannot be understood without knowing about his rough childhood. As a matter of fact, his entire business philosophy is built on a foundation of tangible action and a resourceful mindset that sees potential where others see only waste. This “doer” mentality, the very namesake of his book, was forged in his youth, where he learned the value of hard work and the art of making something from nothing. McKim mentions that “Ever since I was a young boy, I possessed a keen curiosity and desire to tinker with anything I could get my hands on. Always mechanically inclined, I felt an innate urge to take things apart and hopefully put them back together again.”

But, this innate curiosity was also paired with an indefatigable work ethic. McKim was never afraid of getting his hands dirty, a trait that would become a hallmark of his leadership style. He didn’t just manage his business; he understood it from the ground up, literally from the bottom of an oil tank. Before starting Clear Harbors, McKim worked as an employee at a waste management company where he “learned about cleaning oil tanks, I experienced the emergency response business, and I got lessons on how to turn dirty oil into recycled oil that could be resold for a profit.”

This hands-on experience was crucial. When he started Clean Harbors, he wasn’t a financier or a theorist; he was an operator. For example, his undercapitalized start-up couldn’t afford a new vacuum truck, so he built one himself, relying on the skills honed in his father’s garage. This resourcefulness is a powerful lesson. It teaches us that deep, practical knowledge and a willingness to “do the doing” yourself are often the most significant competitive advantages a founder can have. McKim didn’t just build a company; he built the very equipment that would power its early growth, embodying the principle that true understanding comes from action.

Another important skill of McKim is his ability to see potential value where others couldn’t. His early experiences taught him a fundamental truth that would define his company’s strategy: one person’s trash is another’s treasure.

“The real lesson was that, throughout my whole career, I have made a business out of taking other people’s trash and making it into something of value. Whether it was at the car junkyard, the landfill, or digging for waste brass from waste foundry sand, in a roundabout way, this is what led me to where I am today.”
— Alan McKim

For example, this ability of his was extremely important when Clear Harbors started making acquisitions. He had a great insight in identifying hidden value in distressed companies or assets that large corporations were discarding. McKim explains that “I observed that big companies and investors were buying companies willy-nilly and then selling off the seemingly unprofitable parts of their acquisitions. But, where they saw failing parts or pieces of businesses they did not want, I saw assets that could be rehabilitated with relatively little investment and attention.”

This reminds me of Lawrence J. Goldstein’s investment philosophy of finding opportunities that are overlooked or ignored by others. As a matter of fact, Goldstein believes that great returns can be done by investing in small, closely held companies trading on the pink sheets, lacking analyst coverage, or characterized by low liquidity; all attributes that would scare away institutional investors. By targeting these types of neglected securities, Goldstein can take advantage of market inefficiencies and is able to purchase companies at a significant discount.

His strategy is often contrary to the common behaviour among institutional investors, which is why it is so successful. He explains that “Contrary to popular belief, institutional investors are not interested in making money, earning income, protecting purchasing power or preserving capital. Rather they are more interested in being in the pack of other similar institutional investors. If everyone loses money it is fine for the institution to lose money; they just do not want to lose the most and be alone at the bottom of the list of their peers.”

“As usual, you can look for us to march to the beat of our own drummer and not in lockstep with the band that is so attune to the market averages.”
— Lawrence J. Goldstein

This herd mentality creates opportunities in the less visible segments of the market, where Goldstein finds stocks that others overlook. This advantage also stems from the lack of competition in these markets, allowing Santa Monica Partners to acquire positions below their intrinsic value. Goldstein mentions that “We feel we have a large advantage because those neglected areas of the market are where we hunt. This allows us to find and buy into companies when they have been overlooked by others. When those companies are discovered by others, significant multiple expansion can occur.”

This philosophy of looking for overlooked companies off the beaten path quickly became one of Santa Monica Partners’ trademark approach to investing. As Goldstein mentioned, “Since we have used this phrase to describe our investment philosophy for so long, over 30 years, you may have noticed starting this past July we began to display the phrase overlooked or ignored by otherwise intelligent investors as our trademark wherever the name of our partnership appears.”

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Beyond the Book

Read "The Cookie Monster Knows More About Willpower Than You" by Farnam Street

Read "The Tim Ferriss Show Transcripts: Shane Parrish on Wisdom from Warren Buffett, Rules for Better Thinking, How to Reduce Blind Spots, The Dangers of Mental Models, and More (#695)" by The Tim Ferriss Show

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