Today’s Chapter is based on the book “Runnin’ Down a Dream: How to Thrive in a Career You Actually Love” by Bill Gurley.

Bill Gurley is an American venture capitalist and longtime general partner at Benchmark, a prominent Silicon Valley firm, known for early investments in companies like Uber, Zillow, OpenTable, Grubhub, Stitch Fix, and Nextdoor.

Buy it on Amazon here.

Here’s what I learned:

Find Your Fascination

“The best job is the one you’d do even if you didn’t need the money— the one that makes you tap dance to work every day.”
— Warren Buffett

Bill Gurley has studied many successful people from different industries and have found a common pattern among all of them. Among them, he believes in the importance of pursuing what genuinely fascinates you. He argues that true success often stems from an obsessive interest that drives people to learn and work without feeling a burden. Curiosity and a perpetual desire to learn should lead you toward working in a career that energizes you.

Gurley believes that the term “Follow your passion” has become a bit of a cliche, but that “Fascination might be a better word because it suggests giving real, substantial thought to something, rather than relying on surface-level vibes. And it invokes an equally important word—curiosity. If you are fascinated with something, you yearn to understand every bit of detail about it. And that desire to know more will be endless.”

One example Gurley provides is Magnus Carlsen, the chess champion who didn’t just practice but lived and breathed the game from a young age. Unlike other kids who treated chess practices as homework, Carlsen found it enjoyable which set him apart. This intrinsic motivation is what separates thriving professionals from those who burn out. Gurley explains that “Most of the top chess players in the world study the game for several hours a day. Magnus Carlsen, often considered the greatest chess player of the modern era, has said that from a young age, his preparation has been more focused on the joy he gets from the game.”

“I would still spend a bunch of time reading books, playing—the things I still do, but I do them for fun. That was the difference between me and the other kids. They would go to chess practice. They would maybe even do their homework. But they weren’t living and breathing the game in the way that I was.”
— Magnus Carlsen

Based on this premise, Gurley stresses that a college major is not a life sentence, it is more than acceptable to pivot away from it. The key is to view your formal education as a starting point rather than a dead-end. He writes, “It is important to realize that most people will end up doing something outside their college major. And that is perfectly fine. Said another way, the “major” decision need not be as daunting as it seems. I would think of it as one of the first stops of many on the path to finding your eventual career. If you love it, great. If not, there will be ample opportunity in the future to expand your career horizons. And you will still benefit from the journey.”

And so, how does one know if you have found a deep fascination that’s worth pursing as a career? Gurley believes that the best test comes from what he learned from the legendary college basketball coach Bobby Knight who once said, “The will to win is not nearly as important as the will to prepare to win. Everyone wants to win, but not everyone wants to prepare to win.”

“When you are thinking about what fascinates you, run through this in your mind. Does the idea of doing whatever your chosen field requires for an indefinite amount of time sound tedious—or does it sound like fun? To be truly successful, your work needs to feel joyful—the way chess feels to Magnus Carlsen. It must be fulfilling all on its own, not just because of the potential outside rewards.”
— Bill Gurley

Finally, Gurley suggests trying the Compass Exercise designed by Bill Burnett and Dave Evans from their book “Designing Your Life” to find out what you are curious about. He elaborates that the Compass Exercise “is similar to “loves and strengths” but is more focused on alignment with your own values—what you define as happiness and success. They recommend you write two short 250-word essays. The first is titled “What is work for?” and the second is titled “What is a good life?” As above, the goal is then to search for careers that create coherence between the two. This exercise is more about identifying your core values and making sure there is alignment with your actual career direction.”

This reminds me of what we have previously learned from Kazuo Inamori, the founder of Kyocera who believed that the purpose of life is to elevate our minds and to refine our souls. He elaborates that refining one’s soul can only be done through hard work. As a matter of fact, he explains that “Working diligently does much more than fulfill us. It also builds and refines our character and helps us hone our philosophy for living.”

As such, he believes that it is one’s duty to be persistently striving to make each day better than the one before. This is the key in finding purpose and value in life. And you only achieve this, if you are working in a career that you have a fascination for. This reminds me of this following quote from Charlie Munger: “Spend each day trying to be a little wiser than you were when you woke up. Day by day, and at the end of the day-if you live long enough-like most people, you will get out of life what you deserve.”

Furthermore, Inamori explains that “the path to refining one’s character can be found in one’s daily work.” As such, no matter role or job is in front of you, make sure you do your best. Similarly, whether you are a carpenter, a tailor or a fisher, you need to work hard in order to refine your soul and to elevate your character.

This reminds me of the important lesson Lee Iacocca learned from his father. Once at a restaurant, Iacocca recalls that the waitress was being rude and his father gave her the following speech:

““I’m going to give you a real tip,” he’d say. “Why are you so unhappy in this job? Is anyone forcing you to be a waitress? When you act surly, you’re telling everybody you don’t like what you’re doing. We’re out for a nice time and you’re wrecking it. If you really want to be a waitress, then you should work at being the best damn waitress in the world. Otherwise, find yourself another line of work.””
— Lee Iaccoca

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Learning Machine

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up, and boy does that help, particularly when you have a long run ahead of you.”
— Charlie Munger

Once you have identified your deep fascination, Bill Gurley mentions that the next step is to commit to a lifetime of learning. He emphasizes that the titans of any industry, whether it is Danny Meyer in the restaurant business or Stephen King in literature, they never stop being students of their craft. They do not rest on their laurels or assume that their past successes guarantee future victories. Instead, they continuously consume information, study their predecessors, and look for new edges to sharpen their skills.

Gurley writes, “You can see this pattern of deep and continuous learning repeated in the titans of almost every industry. Danny Meyer studied every element of the restaurant business—and continues his studies of the field, even after all his success. Lorrie Bartlett, the Hollywood agent, consumed as many stories as she could as a kid and still reads every script she can. Jerry Seinfeld studied the best comics in the world.”

The beauty of this continuous learning process is that, if you have truly found your fascination, it will not feel like a chore at all. The pursuit of knowledge becomes an engaging and almost playful endeavor. You find yourself going down rabbit holes of information simply because you want to know the answer, not because it was assigned to you as a task.

“You want learning to be fun. You need it to feel like play. We’ve all been drawn down a rabbit hole of knowledge trying to answer some question or understand something that happened—knowing even in the moment that the entire endeavor might be a waste of time. But sometimes you really want to know something. Studying your field needs to feel like that. You would do it even if it weren’t your job. The knowledge is its own reward. Your curiosity and drive have to come naturally. You cannot force it.”
— Bill Gurley

Furthermore, to structure this lifelong educational journey, Gurley outlines a comprehensive framework for how you could approach your intellectual development. It is not enough to simply read, you must be intentional and multifaceted in your learning strategy. He mentions that there are four learning types: industry history for credibility, continuous updates for edge, specialization for uniqueness, and outside fields for breakthroughs. He elaborates that “First, you should learn the history of your chosen field. Then you need to commit to learning continuously, in a self-propelled way, throughout your career. What’s evolving? Who else in your field has big new ideas that you should know about? Third, you need to go deep in some specialized, unique way. In other words, you will develop unique insights and skills in your field that separate you from the rest. And, finally, you need to learn outside your chosen field—following other fascinations—because that type of far-away learning is actually the most likely to spark novel and truly impactful breakthroughs.”

By understanding the history of your field, you avoid repeating past mistakes and gain an appreciation for the foundational principles of your work. By learning continuously about current trends, you stay relevant and adaptable. By developing a specialized niche, you make yourself indispensable and create a unique value proposition.

Finally, by exploring entirely unrelated fields, you allow your brain to make novel connections, leading to the kind of innovative thinking that can redefine an entire industry. This relentless, multi-pronged approach to honing your craft ensures that you are always growing, always improving, and always moving forward.

“The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn.”
— Alvin Toffler

If you want to become a learning machine, you must be reminded of the principle of compounding as we have learned previously from Warren Buffett. As a matter of fact, 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 to investing, 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.

“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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Find Mentors

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

Bill Gurley views mentorship as a supower, allowing you to accelerate your learning by borrowing from others’ experiences. He cites notably the example of Warren Buffett who learned about value investing through his mentor, Benjamin Graham. Great mentors can share with you hard-earned lessons so that you can avoid the pitfalls. Gurley writes, “Good judgment comes from experience, which comes from bad judgment. Why relearn things others already learned the hard way? A good mentor will share hard-earned lessons and industry insights, helping you learn in weeks or months what might otherwise take years. No matter how successful you become, it never hurts to ask for advice from people you trust when you are making hard decisions.”

Another example of the importance of mentorship is Mark Zuckerberg, who used to take long walks with Steve Jobs during the early days of Facebook. The two would discuss about everything from management approaches to Facebook’s overall company mission. In the current day and age, you don’t even need to be in direct contact with your mentors. Everyone can be studied remotely through books, interviews and social media.

“Start today by studying the greats in your field. Read their books, listen to their interviews, watch their videos on YouTube. If they are on social media, you can follow them and comment on their posts. If they ever follow you back, you can direct-message them—which is an incredibly powerful means to contact someone you idolize directly. If you charm someone, they might just respond.”
— Bill Gurley

This approach also works by having great relationship with senior colleagues at your current company. Gurley writes, “If you are early in your career at a company, you might approach a more experienced colleague for advice over coffee. If you are shifting careers, reach out to people in your new industry. Many mentorships start through informal conversations.”

The key is taking initiative. Mentors are busy people. They’re unlikely to chase you. But if you show up prepared, demonstrate that you value their time, and let your ambition show, many will be genuinely happy to help. As Tim Ferriss once said, “To learn and grow quickly, identify who inspires you, then reach out. The best mentors respond to ambition.”

Gurley elaborates that “This is a critical insight. Make sure your own ambition is on display during this process. If you are at this point in your journey, where you are searching for mentors, you have nothing to lose and everything to gain. Later in life, many of these people will be your co-workers and peers. But if you are just starting out, put your curiosity, your earnest (and ambitious) desire to learn, on display.”

Finally, Gurley believes in having multiple mentors or what former Facebook COO Sheryl Sandberg calls a “personal board of advisors.” It is often important to find different successful people to mentor you on different aspects. One can teach you about leadership while another can teach you about communication. Different people may have different areas of expertise and have different views on things which is extremely useful.

This reminds me of Shane Parrish’s concept of creating a board of directors in his head in order to help him with decision-making. Even better, he believes that this fictional board can include people from the present and the past. What better way of thinking about a problem than to do so under the lenses and advices of great ones like Charlie Munger.

Here’s what my personal board of directors would look like:

• Warren Buffett

• Charlie Munger

• David Ogilvy

• Henry Singleton

• Thomas Mellon

• Naval Ravikant

• Benjamin Franklin

• Thomas J. Watson

What about you?

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Beyond the Book

Listen to "#413 How To Run Down A Dream" by Founders Podcast

Read "“Runnin’ Down a Dream: How to Succeed and Thrive in a Career You Love”" by Bill Gurley

Read "Become A Learning Machine" by Farnam Street

Read "Standing on the Shoulders of Giants" by Farnam Street

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Today’s Chapter is based on the book “Rework” by Jason Fried.

Jason Fried is an entrepreneur, author, and software designer best known as the co-founder and CEO of 37signals, the company behind Basecamp and the email service HEY. He advocates for simple, focused software and calm, sustainable ways of working.

Buy it on Amazon here.

Here’s what I learned:

Don’t Wait, Just Start

“To me, ideas are worth nothing unless executed. They are just a multiplier. Execution is worth millions.”
— Steve Jobs

Jason Fried challenges the traditional notion of entrepreneurship by emphasizing that starting a business today a lot more accessible than ever before. He insists that with technology, there is a lower barrier of entry for people to launch ventures without the risks and resources it once required. This technological shift democratizes opportunity, making it possible for anyone with an idea to enter entrepreneurship.

On this, he writes, “There’s a new reality. Today anyone can be in business. Tools that used to be out of reach are now easily accessible. Technology that cost thousands is now just a few bucks or even free. One person can do the job of two or three or, in some cases, an entire department. Stuff that was impossible just a few years ago is simple today. You don’t have to work miserable 60/80/100-hour weeks to make it work. 10-40 hours a week is plenty. You don’t have to deplete your life savings or take on a boatload of risk. Starting a business on the side while keeping your day job can provide all the cash flow you need. You don’t even need an office. Today you can work from home or collaborate with people you’ve never met who live thousands of miles away.”

Fried’s own experience in entrepreneurship with 37signals (now Basecamp) exemplifies this. He started small, sharing office space and handling customer support himself. He argues against the misconception that you need a ton of capital to start your own business is false and this is especially true in service businesses such as consultants, software companies, wedding planers, graphic designers, etc. In fact, he writes that “If you’re running a business like that, avoid outside funding. In fact, no matter what kind of business you’re starting, take on as little outside cash as you can. Spending other people’s money may sound great, but there’s a noose attached.”

This is especially true considering that obtaining outside money often leads to unnecessary complexity. By staying lean, businesses retain control and avoid making decisions that are not cost controlled.

Furthermore, Jason Fried mentions that the easiest way to start is to make something you need and that you would want to use. He elaborates that if you believe a product is useful, there is certainly other people out there that think the same. Sure, the target addressable market may not be large, but if you are running on a low-cost, it doesn’t really matter.

“The easiest, most straightforward way to create a great product or service is to make something you want to use. That lets you design what you know—and you’ll figure out immediately whether or not what you’re making is any good.”
— Jason Fried

Plus, building what you want to use gives you an intuitive understanding of customers’ needs and makes the steady work of iteration more meaningful. As he once said, “Best of all, this “solve your own problem” approach lets you fall in love with what you’re making. You know the problem and the value of its solution intimately. There’s no substitute for that. After all, you’ll (hopefully) be working on this for years to come. Maybe even the rest of your life. It better be something you really care about.”

Finally, Fried stresses the concept that ideas alone are worthless without execution. He urges immediate action, even if imperfect, over endless planning. And so, he encourages us to start making our ideas into a product, but iterate and refine it along the way.

“Ideas are cheap and plentiful. The original pitch idea is such a small part of a business that it’s almost negligible. The real question is how well you execute.”
— Jason Fried

This reminds me of what we have learned from Michael Bloomberg who believed in the concept of “doers”, the lean and hungry ones are the ones that usually go the furthest and that achieve the most. As a matter of fact, Bloomberg mentions that while it is important to have a vision, it is dangerous to start second-guessing yourself by worrying too much about the details.

At Bloomberg, the strategy has always been to build the product first and the rest would take care of themselves. Of course, Bloomberg made mistakes along the way and the product would have to be improved on with the feedbacks received from their customers. However, while their competition were still planning on perfecting their product, they were already through rounds of testing and were about to release their tenth version.

“ It gets back to planning versus acting. We act from day one; others plan how to plan—for months.”
— Michael Bloomberg

This is exactly how Bloomberg obtained their first customer. While Merrill Lynch were in the planning to develop a similar product, Bloomberg was able to obtain the contract by guaranteeing that they would deliver a workable product before the estimated time of delivery provided by Merrill Lynch’s internal tech team. Furthermore, he promised that Bloomberg would only be paid until they were truly satisfied with their product.

While it does not seem like it on the surface, this agreement was extremely beneficial for Bloomberg as it would allow them to receive direct feedbacks from Merrill Lynch on how to improve their product. As Bloomberg would say, “At Bloomberg, a problem spurs a solution. That’s what makes us successful.”

If you ever had a business idea that you would like to execute, here’s Michael Bloomberg’s advice on how you should proceed:

Think and Write A Plan!

“Think logically and dispassionately about what you’d like to do. Work out all steps of the process—the entire what, when, where, why, and how. Then, sit down after you are absolutely positive you know it cold, and write it out. There’s an old saying, “If you can’t write it, you don’t know it.” Try it. The first paragraph invariably stops you short. “Now why did we want this particular thing?” you’ll find yourself asking. “Where did we think the resources would come from?” “And what makes us think others—the suppliers, the customers, the potential rivals—are going to cooperate?” On and on, you’ll find yourself asking the most basic questions you hadn’t focused on before taking pen to paper. As you discover you don’t know it all, force yourself to address the things you forgot, ignored, underestimated, or glossed over. Write them out for a doubting stranger who doesn’t come with unquestioned confidence in the project’s utility—and who, unlike your spouse, parent, sibling, or child, doesn’t have a vested interest in keeping you happy. Make sure your written description follows, from beginning to end, in a logical, complete, doable path.”

Tear It Down and Take Action!

“Then tear up the paper. That’s right, rip it up. You’ve done the analysis. You’ve found enough holes in the plan to drive your hoped-for Bentley automobile through repeatedly. You’ve planned for myriad what-if scenarios. You’ve presented your ideas to others. You’ve even mapped out the first few steps. But the real world throws curveballs and sliders every day, as well as the fastballs you practice against. You’ll inevitably face problems different from the ones you anticipated. Sometimes you’ll have to “zig” when the blueprint says “zag.” You don’t want a detailed, inflexible plan getting in the way when you have to respond instantly. By now, you either know what you can know—or you don’t and never will. As to the rest, take it as it comes.”

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Sometimes Less Is More

“Given the choice of being the earliest, the largest or the best, always aims to be the best.”
— Lui Che-woo

Another big misconception Fried tries to break is the cultural obsession with bigness. He mentions that we have this tendency to believe that a successful business means more employees, more office space, more funding, and more hours. However, Fried argues that “Maybe the right size for your company is five people. Maybe it’s forty. Maybe it’s two hundred. Or maybe it’s just you and a laptop. Don’t make assumptions about how big you should be ahead of time. Grow slow and see what feels right —premature hiring is the death of many companies. And avoid huge growth spurts too—they can cause you to skip right over your appropriate size.”

As such, he mentions that it is not a must for a business to grow in size, but rather a choice. In fact, Fried argues that there are many reasons why a company should not be upsizing. One of these reasons is that a larger company creates bureaucracy which slows things down. Small companies are better at pivoting. Small companies can experiment. Small companies can actually get things done instead of holding meetings about holding meetings. When you’re small, you’re agile. When you’re small, every employee matters.

“Embrace the idea of having less mass. Right now, you’re the smallest, the leanest, and the fastest you’ll ever be. From here on out, you’ll start accumulating mass. And the more massive an object, the more energy required to change its direction. It’s as true in the business world as it is in the physical world.”
— Jason Fried

Furthermore, this concept of “Sometimes Less is More” can also be applied in product building. It is a lot easier to build a successful product by keeping it simple. Fried argues that it is better to build a half-product that works well than a full-product that doesn’t. He mentions that “You can turn a bunch of great ideas into a crappy product real fast by trying to do them all at once. You just can’t do everything you want to do and do it well. You have limited time, resources, ability, and focus. It’s hard enough to do one thing right. Trying to do ten things well at the same time? Forget about it. So sacrifice some of your darlings for the greater good. Cut your ambition in half. You’re better off with a kick-ass half than a half-assed whole.”

As such, he mentions that when we start anything new, we need to identify the epicenter. He writes that “There’s the stuff you could do, the stuff you want to do, and the stuff you have to do. The stuff you have to do is where you should begin. Start at the epicenter.” To identify the epicenter, he believes in asking the question “If I took this away, would what I’m selling still exist?” Always think about the big picture first, then you can work out on the details.

“When we start designing something, we sketch out ideas with a big, thick Sharpie marker, instead of a ballpoint pen. Why? Pen points are too fine. They’re too high-resolution. They encourage you to worry about things that you shouldn’t worry about yet, like perfecting the shading or whether to use a dotted or dashed line. You end up focusing on things that should still be out of focus. A Sharpie makes it impossible to drill down that deep. You can only draw shapes, lines, and boxes. That’s good. The big picture is all you should be worrying about in the beginning.”
— Jason Fried

Similarly, if you are facing a problem, often the solution is to trim things out rather than adding more things. Fried writes, “When things aren’t working, the natural inclination is to throw more at the problem. More people, time, and money. All that ends up doing is making the problem bigger. The right way to go is the opposite direction: Cut back. So do less. Your project won’t suffer nearly as much as you fear. In fact, there’s a good chance it’ll end up even better. You’ll be forced to make tough calls and sort out what truly matters.”

This principle can be illustrated beautifully through the lens of failing restaurants. Fried writes, “Watch chef Gordon Ramsay’s Kitchen Nightmares and you’ll see a pattern. The menus at failing restaurants offer too many dishes. The owners think making every dish under the sun will broaden the appeal of the restaurant. Instead it makes for crappy food (and creates inventory headaches). That’s why Ramsay’s first step is nearly always to trim the menu, usually from thirty- plus dishes to around ten. Think about that. Improving the current menu doesn’t come first. Trimming it down comes first. Then he polishes what’s left.”

This also works in terms of working hours. Fried’s experience at Basecamp in terms of working hours is extremely different compared to other start-up companies. He believes that workaholism is not only unnecessary but stupid. He explains that “Working more doesn’t mean you care more or get more done. It just means you work more. Workaholics wind up creating more problems than they solve. First off, working like that just isn’t sustainable over time. When the burnout crash comes—and it will—it’ll hit that much harder. Workaholics miss the point, too. They try to fix problems by throwing sheer hours at them. They try to make up for intellectual laziness with brute force. This results in inelegant solutions.”

We’ve all been conditioned to equate long hours with dedication. But Fried exposes this as intellectual laziness. The real genius isn’t grinding through the night; it’s finding the solution that requires one-tenth the effort. As a matter of fact, Fried argues that workaholism actually deters creativity as lack of sleep prevents thinking. He explains that “Creativity is one of the first things to go when you lose sleep. What distinguishes people who are ten times more effective than the norm is not that they work ten times as hard; it’s that they use their creativity to come up with solutions that require one- tenth of the effort. Without sleep, you stop coming up with those one- tenth solutions.”

“If all you do is work, you’re unlikely to have sound judgments. Your values and decision making wind up skewed. You stop being able to decide what’s worth extra effort and what’s not. And you wind up just plain tired. No one makes sharp decisions when tired. In the end, workaholics don’t actually accomplish more than nonworkaholics. They may claim to be perfectionists, but that just means they’re wasting time fixating on inconsequential details instead of moving on to the next task.”
— Jason Fried

As such, more hours doesn’t mean more results. More employees doesn’t mean more progress. More features doesn’t mean more value. Sometimes, the most powerful move is to embrace constraints and let them force you to be creative.

This reminds me of the Pareto Principle we have learned from Tom Monaghan, the founder of Domino’s who believed in the two following core business tenets:

1. Prepare pizzas with the freshest ingredients possible

2. Deliver pizzas to the customers within thirty minutes

To make sure to run a profitable business while still satisfying its promises to the customers, Tom Monaghan used the Pareto Principle, also known as the 80/20 rule. This principle explains that 80% of outcomes are the result of 20% of inputs. In Domino’s case, Monaghan quickly realized that even though he sold three different sizes of pizzas 80% of his sales came from 12-inches pizzas. Similarly, 90% of beverage sold were either Coke or Pepsi. He explains “In Ypsilanti, at least 80 percent of the orders from dorms were for twelve-inch pizzas. So why have any other size?“

This was a major revelation and breakthrough in Domino’s Pizza history. By doing so, the company was able to leverage its profits even further. It may seems counter intuitive that simplifying a business may increase its revenue, but here’s how Monaghan explains it:

“The main argument for having only twelve-inch pizzas was faster service. But quality would be improved, too. A pizza maker has to learn how to make each size pie. The twelve-incher is easier and larger ones are much harder. There would be fewer mistakes too both in taking orders and boxing them. With three sizes of pies and just two inches difference between them, it sometimes happened during a rush that a worker would ruin a large pie by trying to jam it into a medium size box. Then there were the saving we would make in purchasing. Having one size would cut our box inventory requirements by two-thirds.”
— Tom Monaghan

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Learn From Successes, not Failures

“Success is not final, failure is not fatal: it is the courage to continue that counts.”
— Winston Churchill

One of Jason Fried’s most counterintuitive lessons is to prioritize learning from successes rather than from failures. Conventional wisdom believes that you can learn more from your mistakes than from your successes, but Fried argues that it often teaches only what to avoid, leaving you without any insights on what is needed to succeed. Successes, however, provide actionable blueprints, repeatable strategies that can build momentum and confidence.

Fried writes, “Another common misconception: You need to learn from your mistakes. What do you really learn from mistakes? You might learn what not to do again, but how valuable is that? You still don’t know what you should do next. Contrast that with learning from your successes. Success gives you real ammunition. When something succeeds, you know what worked—and you can do it again. And the next time, you’ll probably do it even better.”

He further explains that studies show clearly that repeat entrepreneurs who succeeded before have a higher odds of future wins whereas failed entrepreneurs don’t have a higher odds of success. He mentions that “A Harvard Business School study found already-successful entrepreneurs are far more likely to succeed again (the success rate for their future companies is 34 percent). But entrepreneurs whose companies failed the first time had almost the same follow-on success rate as people starting a company for the first time: just 23 percent.”

“That shouldn’t be a surprise: It’s exactly how nature works. Evolution doesn’t linger on past failures, it’s always building upon what worked. So should you.”|— Jason Fried

In Fried’s opinion, a common theme among successful entrepreneurs is that they are building something durable by focusing on what doesn’t change. He mentions that “The core of your business should be built around things that won’t change. Things that people are going to want today and ten years from now. Those are the things you should invest in. Amazon.com focuses on fast (or free) shipping, great selection, friendly return policies, and affordable prices. These things will always be in high demand.”

As such, Fried believes in ignoring the external noise and to keep focusing things that are permanent, things that will never go out of style. Similarly, he warns us to avoid focusing on the competition too much. If you focus too much on competitors, you don’t spend the time needed to improve on yourself.

“Your chances of coming up with something fresh go way down when you keep feeding your brain other people’s ideas. You become reactionary instead of visionary. You wind up offering your competitor’s products with a different coat of paint.”
— Jason Fried

This reminds me of Jeff Bezos’ concept of obsessing over the customers. As a matter of fact, rather than focusing on competitors, Bezos founded Amazon with the idea of making it Earth’s most customer-centric company in the world. This concept came to him through the mental model of inversion. As a matter of fact, he realised that: “under all kinds of regulatory frameworks that I can imagine, customers are still going to want low prices. They’re still going to want fast delivery. They’re still going to want big selection. These are so fundamental and what we do.” As such, by working backward, similar to Jason Fried, Bezos always required Amazon to acquire new competencies to fulfil these never-changing and permanent customers’ needs:

“In our retail business, we have strong conviction that customers value low prices, vast selection, and fast, convenient delivery and that these needs will remain stable over time. It is difficult for us to imagine that ten years from now, customers will want higher prices, less selection, or slower delivery. Our belief in the durability of these pillars is what gives us the confidence required to invest in strengthening them. We know that the energy we put in now will continue to pay dividends well into the future.”
— Jeff Bezos

To do so, Bezos mentions in his 1997 Letter to Shareholders that the company must focus relentlessly and passionately on the customers in what he calls “Obsess over Customers”. As such, Amazon has been primarily built on three pillars of customer experience:

1. Large Selection of Products

2. Convenience

3. Low Price

As such, it is important for the company to keep a consistent high standard and to be always looking for ways to strengthen the three pillars of customer experience. And, sometimes, this can be solved by thinking backward, instead of forward. For example, rather than thinking on ways to improve convenience and experience for customers, Bezos decided to eliminate the root causes of errors which led to the same effect he wanted. This is the power of inversion! As Charlie Munger once said, “all I want to know is where I’m going to die, so I’ll never go there.”

Finally, Bezos truly believes that a business model based on obsessive customer focus is one of the best ways of running a business. The main advantage of being customer focused is that instead of focusing on what competitors are doing, Amazon are purely focused on satisfying customers who are always dissatisfied. As such, they cannot rest on their laurels and need to perform consistently. As he once said, “you cannot rest on your laurels in this world. Customers won’t have it.”

“I constantly remind our employees to be afraid, to wake up every morning terrified. Not of our competition, but of our customers. Our customers have made our business what it is, they are the ones with whom we have a relationship, and they are the ones to whom we owe a great obligation. And we consider them to be loyal to us—right up until the second that someone else offers them a better service.”
— Jeff Bezos

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Today’s Chapter is based on the book “The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor ” by Howard Marks.

Howard Marks is an American investor, author, and co-founder and co-chairman of Oaktree Capital Management, the world’s largest investor in distressed securities. Renowned for his investor memos, Marks emphasizes risk control, second-level thinking, and market cycles over chasing returns.

Buy it on Amazon here.

Here’s what I learned:

Second-Level Thinking

“Failing to consider second- and third-order consequences is the cause of a lot of painfully bad decisions, and it is especially deadly when the first inferior option confirms your own biases. Never seize on the first available option, no matter how good it seems, before you’ve asked questions and explored.”
— Ray Dalio

Howard Marks believes that successful investing is far more demanding than most people realize. It requires seeing beyond the obvious surface-level analysis that everyone else is doing. Marks argues that merely matching the market is easy, but outperforming it requires superior insight, which he calls second-level thinking. He writes, “Anyone can achieve average investment performance—just invest in an index fund that buys a little of everything. That will give you what is known as “market returns”—merely matching whatever the market does. But successful investors want more. They want to beat the market.”

As such, in Marks’ opinion, the definition of successful investing is to do better than the market and other investors. He adheres to the fact that “To accomplish that, you need either good luck or superior insight. Counting on luck isn’t much of a plan, so you’d better concentrate on insight.”

The core challenge is that not only do you need to have a contrarian approach, but your thinking must surpass the collective intelligence of the market. Other participants are smart, informed, and equipped with powerful tools, so you need an edge they lack.

“Remember, your goal in investing isn’t to earn average returns; you want to do better than average. Thus, your thinking has to be better than that of others—both more powerful and at a higher level. Since other investors may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others … which by definition means your thinking has to be different.”
— Howard Marks

Marks mentions that second-level thinking is not linear or simple. It involves weighting probabilities and comparing your view to the consensus. A second-level thinker must take many things into account such as:

• What is the range of likely future outcomes?

• Which outcome do I think will occur?

• What’s the probability I’m right?

• What does the consensus think?

• How does my expectation differ from the consensus?

• How does the current price for the asset comport with the consensus view of the future, and with mine?

• Is the consensus psychology that’s incorporated in the price too bullish or bearish?

• What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?

Howard Marks reminds us that investing is a competitive endeavor. To win consistently, you cannot follow the crowd. You must train yourself to question assumptions, probe deeper, and stay disciplined when your view diverges from the majority. Marks makes it clear that this higher-level cognition is the foundation of lasting outperformance. He writes, “Before trying to compete in the zero-sum world of investing, you must ask yourself whether you have good reason to expect to be in the top half. To outperform the average investor, you have to be able to outthink the consensus. Are you capable of doing so? What makes you think so?”

“If your behavior is conventional, you’re likely to get conventional results—either good or bad. Only if your behavior is unconventional is your performance likely to be unconventional, and only if your judgments are superior is your performance likely to be above average.”
— Howard Marks

This contrarian approach to investing reminds me of what we have learned from Alan Greenberg from Bear Sterns who had a contrarian approach to business. As a matter of fact, he was famous for hiring talented people, whom he called number one draft picks, when other companies were having hiring freeze during recessions. Greenberg explains that “We are not panicking; we are not laying off people, but we are making a real effort to cut expenses. The other side of the coin is we have hired a large number of number one draft picks in the last few months. This is the time to hire good people. We have followed this policy in the past, and I am convinced that we will be proven correct once again.”

Furthermore, while other companies focused on hiring individuals with MBA degrees, Greenberg enjoyed hiring people with PSD degrees — poor, smart and a deep desire to become rich. A great example of how Greenberg was a contrarian. He writes, “Our first desire is to promote from within. If somebody with an MBA degree applies for a job, we will certainly not hold it against them, but we are really looking for people with PSD degrees. They built this firm and there are plenty around because our competition seems to be restricting themselves to MBA’s. If we are smart, we will end up with the future Cy Lewises, Gus Levys and Bunny Laskers. These men made their mark with a high school degree and a PSD. * PSD stands for poor, smart and a deep desire to become rich.”*

Being a contrarian in business is certainly a great way of finding a competitive edge over the competition. This is equally right in investing as from the famous saying of Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful.” However, while being a contrarian in itself isn’t hard — anyone can say the opposite of what crowd believes, you must also be right to have an advantageous divergence in investing and in business. This can be extremely hard. Not only that, timing is also an important factor for a successful contrarian approach.

“Here we go again. Business is tough. The Dow Jones index dropped almost 200 points a month ago. Firms are announcing major layoffs. What is our posture at this time? Your executive committee feels we should be hiring, not firing. This is the time to pick up great people. This position may amaze some newer associates, but those of you who have been exposed to our culture will not be surprised by this move. Being a contrarian has worked for us in the past and it will work again. Spread the word—we are hiring, not firing. The flip side is that our associates should be relieved and maybe the people who work here will even appreciate what a great place this is to build a career.”
— Alan Greenberg

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Understanding Risk

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

Howard Marks believes that one of the most important trait of a great investor is the ability to understand risk. In fact, outstanding investors are defined as much by how well they manage risk as by the returns they generate. Marks teaches that risk is not primarily volatility but the permanent loss of capital which is often born from being overly optimistic or paying too much for an asset. Success in investing also requires attentiveness to cycles and understanding the pendulum-like swings of sentiment in stock prices. Marks writes, “The possibility of permanent loss is the risk I worry about, Oaktree worries about and every practical investor I know worries about.”

As such, Marks argues that risk often comes from excessive enthusiasm. He explains that “The most dangerous investment conditions generally stem from psychology that’s too positive. For this reason, fundamentals don’t have to deteriorate in order for losses to occur; a downgrading of investor opinion will suffice. High prices often collapse of their own weight.” While we often hear that high return is correlated to taking high returns, Marks genuinely believes that both can be done simultaneously if we buy things at a lower valuation than they’re worth.

“Theory says high return is associated with high risk because the former exists to compensate for the latter. But pragmatic value investors feel just the opposite: They believe high return and low risk can be achieved simultaneously by buying things for less than they’re worth. In the same way, overpaying implies both low return and high risk.”
— Howard Marks

Furthermore, Marks believes that cycles are inevitable in the stock market and that ignoring them is perilous. As a matter of fact, he argues that successful investors need to identify what is the sentiment of the market towards the company and where in the cycle is the company’s stock price trading at. He explains that there are two concepts that he hold with complete confidence: Rule #1: Most things will prove to be cyclical; Rule #2: Some of the greatest opportunities for gain and loss come when other people forget rule number one.

He compares market moods swing to a pendulum. Eventually, things regress back to the norm in an upward or downward fashion. He writes, “The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum “on average,” it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc. But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward an extreme itself that supplies the energy for the swing back.”

“The road to long-term investment success runs through risk control more than through aggressiveness. Over a full career, most investors’ results will be determined more by how many losers they have, and how bad they are, than by the greatness of their winners. Skillful risk control is the mark of the superior investor.”
— Howard Marks

Finally, Marks believes it is necessary to clarify that risks need to be taken to obtain superior return. Recognizing risk is one thing and controlling it is another. A good investor does not avoid risk but control it. He writes, “I want to make clear the important distinction between risk control and risk avoidance. Risk control is the best route to loss avoidance. Risk avoidance, on the other hand, is likely to lead to return avoidance as well. Once in a while I hear someone talk about Oaktree’s desire to avoid investment risk and I take great issue. Clearly, Oaktree doesn’t run from risk. We welcome it at the right time, in the right instances, and at the right price.”

This reminds me of Mohnish Pabrai’s concept of Dhandho investing, the idea that high returns do not necessitate high risks. Instead, Pabrai 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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Intrinsic Value

“We define value investing as buying dollars for 50 cents.”
— Seth Klarman

If second-level thinking is the engine of superior investing, then value is the compass that guides it. Marks is unapologetically a value investor, and he makes clear that without a reliable estimate of intrinsic value, an investor is simply guessing. Marks writes, “For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point. Without it, any hope for consistent success as an investor is just that: hope.”

This emphasis on intrinsic value is not about finding companies with strong brands or impressive growth trajectories. It is about understanding what an asset is truly worth and then comparing that to the price at which it is available. As a value investor, Marks elaborates that “an asset isn’t an ephemeral concept you invest in because you think it’s attractive (or think others will find it attractive). It’s a tangible object that should have an intrinsic value capable of being ascertained, and if it can be bought below its intrinsic value, you might consider doing so. Thus, intelligent investing has to be built on estimates of intrinsic value. Those estimates must be derived rigorously, based on all of the available information.”

Nonetheless, Marks warns that while value investing is a path to consistently produce favourable results in investing, it is not easy. For one, you need to be able to provide an accurate estimate of value, if not, you are likely to overpay for a company. And, Marks mentions that if you overpay, “it takes a surprising improvement in value, a strong market or an even less discriminating buyer (what we used to call a “greater fool”) to bail you out.”

To make it even harder, Marks mentions that even if you are right in your valuation, you need to be patient enough to be proven right by the market. As he once said, “An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse. This one statement shows how hard it is to get it all right.”

“If you’ve settled on the value approach to investing and come up with an intrinsic value for a security or asset, the next important thing is to hold it firmly. That’s because in the world of investing, being correct about something isn’t at all synonymous with being proved correct right away.”
— Howard Marks

Finally, Marks mentions that price should be the ultimate starting point for any value investors. Often, investors are ready to overpay for higher quality assets, but Marks who has experienced the Nifty-Fifty warns us that “It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.”

This was a liberating insight for Howard Marks. By understanding that a wonderful company can be a terrible investment if you overpay, and a mediocre company can be a fantastic investment if you buy it cheap enough, Marks operates Oaktree Capital with a simple philosophy: “Well bought is half sold.” He explains that at Oaktree, “we mean we don’t spend a lot of time thinking about what price we’re going to be able to sell a holding for, or when, or to whom, or through what mechanism. If you’ve bought it cheap, eventually those questions will answer themselves.”

“The relationship between price and value holds the ultimate key to investment success. Buying below value is the most dependable route to profit. Paying above value rarely works out as well.”
— Howard Marks

This reminds me of what we have learned from Lawrence Goldstein at Santa Monica Partners, who believes that investing in overlooked companies requires patience in order for their value to unlock. In fact, Goldstein once said “I believe that neglected stocks win hands down over longer periods of time and with less risk. Clearly, patience is the key to investing successfully in our kinds of securities.” As such, he frequently advocates for a long-term perspective, emphasizing to his partners in his shareholder letters that true value creation takes time. As he once wrote, “My belief of course is that patience is a virtue to be rewarded.”

By having a long-term perspective, Goldstein is able to ride out market volatility without panicking. He recognizes that short-term price fluctuations are inevitable but he doesn’t let them distract him from his long-term goals. Similarly, he reiterates to his partners that “Riding out the volatility and noise is essential to successful long-term investing. Put another way, we must keep control of our stomachs (though others around us may not) when sailing through stormy seas.”

By consequence, Goldstein practices an investment methodology that prefers holding investments for the long haul and allowing them to compound over time. By consequence, Santa Monica Partners have an “extremely low turnover [of companies in the portfolio] is the norm for us, of course, as ‘buy and hold’ is not just my preference and practice, but something that permeates my very being.” This low turnover not only reduces transaction costs but also allows him to defer capital gain taxes, further enhancing returns.

“For all we are concerned with is the long-term beyond the horizon. When we invest we like to think in terms of forever. We can care less about a quarter or a year and rather focus on the far away pot of gold on the distant horizon. Sometimes we reach it sooner because of the occurrence of a value-creating catalyst. Most of the time it is because the company over time just grows like a weed or like topsy and in the fullness of time we reach the horizon and the great value realization outs.”
— Lawrence J. Goldstein

For Goldstein, patience is not about idleness but about allowing compounding to work its magic. He cites examples like Balchem, a stock that became a “92-bagger in 20 years,” and Compass Knowledge, which quintupled in value in just two years. These gains were only possible because Santa Monica Partners held these investments through periods of stagnation and volatility, trusting that their underlying value would eventually surface. As Goldstein once said, “Patience and courage too is also important so as to be able to look across the investment valleys and beyond the peaks in order to make and be willing to hold on long-term to achieve what may be very successful and at times extraordinary investments.”

“Once in a blue moon you find one which is really a great one but to the ignorers ‘too small’ or ‘too closely held’ or its variations ‘doesn’t trade enough’ or is ‘illiquid’ or too this or too that. In almost all cases these companies don’t deserve their undervaluation. How do we as investors profit? Value will out in time. It always does.”
— Lawrence J. Goldstein

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Beyond the Book

Read "Second-Order Thinking: What Smart People Use to Outperform" by Farnam Street

Read "Memos to Oaktree Clients: The Complete Collection" by Howard Marks

Listen to "#53 Howard Marks: Luck, Risk and Avoiding Losers" by The Knowledge Project

Today’s Chapter is based on the book “The Duolingo Handbook”.

Luis von Ahn co-invented CAPTCHA to distinguish humans from bots online, later developed reCAPTCHA—which digitized books via user input and sold it to Google in 2009—and co-founded Duolingo, the world’s most popular free language-learning platform where he serves as CEO.

Read it for free here.

Here’s what I learned:

Long-Term Vision

“If it helps in the short-term, but hurts Duolingo in the long-term, it’s not right.”
— Luis von Ahn

Luis von Ahn founded Duolingo with one concept in mind: to stand out as a company that thinks long-term. His journey at Duolingo exemplifies how committing to the long-term can yield extraordinary results. As a matter of fact, von Ahn created Duolingo with the purpose of democratizing education, by making long-term decisions from product development to hiring. As he explains, “Our mission is to develop the best education in the world and make it universally available.” By avoiding short-term thinking, Duolingo has built a sustainable empire that serves hundreds of millions of users worldwide today.

At the heart of this approach is the recognition that languages need time to be learned. As such, it was important for von Ahn to develop Duolingo with this in mind. As von Ahn explains “Learning—particularly language learning—requires regular practice over extended periods of time. That’s why we prioritize user retention, and have spent years perfecting the Streak feature. The more we can do to keep our learners committed for the long haul, the more value they’ll get from Duolingo.”

Similarly, von Ahn understood that innovation requires time. Von Ahn and his co-founder Severin Hacker understood early on that building an effective language-learning app wasn’t a sprint but a marathon. They bet on emerging technologies, even when they were imperfect, trusting that advancements would catch up.

“From the beginning, we’ve believed that technology will advance enough to make our most ambitious ideas possible. And betting on that has been crucial to how we operate. For example, we invested in early text-to-speech systems instead of recording human voices: even though our audio sounded robotic at first, we knew the technology would improve with time.”
— Luis von Ahn

This also extended with the way Duolingo monetized itself. Rather than locking core features behind paywalls, Duolingo offers a robust free version, betting that satisfied users will upgrade. This tension between accessibility and revenue could have derailed lesser companies, but von Ahn’s patience and long-term vision paid off with Duolingo. He writes, “It became clear that introducing a freemium subscription product was the best opportunity to scale the business. The hard part was doing so while still offering an excellent product for those who couldn’t pay. We landed on a subscription package that eliminated ads and gave learners unlimited hearts. Both of these features remove friction from the app. Over the years, we’ve continued to tweak this model, but the core dynamic is the same: the paid product gives us the resources to pursue our mission at the greatest scale, and the free product is largely how that mission is achieved.”

In the same line of thought, Duolingo avoided having too many ads in their application. Von Ahn mentions, “Take advertising. We could increase revenue tomorrow by showing more ads in the app. But we know that too many ads can annoy users and stifle long-term growth, potentially compromising our goal of making the best education universally available. This is a real trade-off. But over and over, we’ve taken the long view. We have to: our goals are too big to think any other way.”

Furthermore, the hiring process at Duolingo also reflects a long-term approach. The company insists on waiting for the right people, prioritizing long-term fit over immediate needs. This has resulted in a team with unusually low turnover, fostering institutional knowledge that compounds over years. Von Ahn mentions that “Hiring decisions are some of the most important decisions we make. That’s why we take time to find the right person—even if it means waiting. Each new hire needs to meet our bar. Is this person exceptional? Are they willing to get their hands dirty? Are they a clear communicator? Will they prioritize what’s best for the company over their personal goals?”

“The temptation of short-term wins can be powerful. We had a simple mantra in the early days: “Don’t do dumb s**t.” Looking back, this was the first version of “Take the Long View.” We knew that to have any shot at meaningful success, we had to steer clear of gimmicks and tricks that might seem helpful in the short-term but hurt us down the road.”
— Luis von Ahn

This reminds me of how Jeff Bezos ran Amazon with the same mentality: that long-term vision is required for innovation. As a matter of fact Bezos once said that 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. He explains, “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.”

As a pioneer in the technology industry, it is in the Amazon’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.

“Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a one hundred times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score one thousand runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”
— Jeff Bezos

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Expect Excellence

“If you don’t have time to do it right, when will you have the time to do it over?”
— John Wooden

Luis von Ahn’s leadership at Duolingo can be simplified as a relentless pursuit of excellence, not as an aspiration but as a non-negotiable foundation. He once said, “Excellence isn’t some lofty goal—it’s our baseline.” As a person with a detail-oriented mindset, von Ahn wanted to build a culture at Duolingo that rejects mediocrity to ensure that Duolingo wasn’t just a functional app but the world’s leading language-learning platform. As von Ahn mentions, “To change how the world leans, we must do work-class work.”

As per usual, this culture of excellence must be rooted into the people working at Duolingo. As such, when hiring, Duolingo ensures to hire individuals who are great both in their skills but also in their characters. As von Ahn explains, “Our people set the bar for everything else we do. So, we insist on bringing in exceptional talent—individuals who stand out not just in their skills but in their character. That might mean someone who was at the top of their class, or the first from their family to graduate from college—but also is genuinely kind. To maintain this standard, Luis and Severin still approve every new hire.”

It is also important for employees at Duolingo to love their work and to have high standards. This can be achieved by assigning them clear mandates that ensure accountability. Von Ahn writes, “One key to maintaining high standards is assigning ownership. That means putting a person or team on a task, providing a clear mandate and saying, “You are responsible.” We’ve seen it again and again: only things that are owned become excellent.”

“Another key way we maintain excellence is by using the app daily. This ensures that we ourselves love the product and that bugs are spotted and resolved quickly. To make this process even more effective, we built Shake to Report, a simple tool that lets anyone in the company snapshot and report an issue instantly by shaking their device. Over the years, Shake to Report has become a vital part of our development process, making excellence in the app a shared responsibility.”
— Luis von Ahn

But more importantly, von Ahn explains that employees need to be able to take on constructive criticism in order to maintain a high standard of excellency. He believes in the motto of “Hard on the work, easy on the people.” He writes, “That means giving constructive, clear feedback that sharpens ideas without undermining relationships. (We stick to the “what,” not the “who.”) It also means being open to receiving feedback and not taking it personally. This candid, constructive approach allows us to hold each other to high standards while fostering trust and collaboration.”

Finally, excellence is also codified in terms of product design. There are four guiding elements that influences the way Duolingo is built: Useful, Intuitive, Delightful and Polished. Here’s how von Ahn explains them:

Useful: Learners need to get utility out of whatever we’ve built. Otherwise, we’ve made something that adds more complexity to the app and distracts learners from what they’re here to do.

Intuitive: Learners should be learning, not figuring out how to use the app. Every feature must be easy to use for everyone—it doesn’t matter whether they’re a 75-year-old in India using an Android or a 16-year-old in New York City on an iPhone. If a feature or screen requires explanation or additional context, it’s not right.

Delightful: Every new feature needs to have some amount of fun and delight. We might not need the most elaborate animations in the first iteration of a feature, but there should always be a hint of the magic that learners love.

Polished: This is what makes a feature feel complete. Tight visual design, perfect copy, and seamless interactions are the baseline. Nothing should feel clunky or inconsistent. For instance, we shouldn’t have both a Back button and an X button that do the same thing.

This focus on excellence and in the details reminds me of what we have learned from John Wooden who believed that excellence comes from one’s character. In fact, he believes in building one’s character over one’s reputation. He encourages us to focus on who we are rather than how others perceive us. He writes, “Be more concerned with your character than your reputation. Character is what you really are. Reputation is what people say you are. Reputation is often based on character—but not always.”

For Wooden, character is revealed not in grand gestures but in small, consistent actions. He once said, “I believe in the basics: attention to, and perfection of, tiny details that might commonly be overlooked. They may seem trivial, perhaps even laughable to those who don’t understand, but they aren’t. They are fundamental to your progress in basketball, business, and life. They are the difference between champions and near champions.” This focus on the little things—whether it’s keeping your word, showing up on time, or treating others with respect—demonstrates the depth of Wooden’s commitment to integrity.

Furthermore, Wooden recognized that character is about actively cultivating one’s positive qualities. He encouraged individuals to focus on developing their inner strengths emphasizing that these are within everyone’s reach. He once said, “Take a moment and draw a circle around the following personal characteristics that you possess: confidence, poise, imagination, initiative, tolerance, humility, love, cheerfulness, faith, enthusiasm, courage, honesty, serenity. I hope you circled them all because all are within each of us. It is simply up to us to bring them out.”

“There’s nothing wrong with having faults so long as you work conscientiously to correct them. How hard you work at correcting your faults reveals your character.”
— John Wooden

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Ship it Fast!

“Sometimes, making the wrong choice is better than making no choice. You have the courage to go forward, that is rare. A person who stands at the fork, unable to pick, will never get anywhere.”
— Terry Goodkind

Duolingo’s success under Luis von Ahn also hinges on a culture of speed and experimentation, where ideas are tested swiftly and only the winners are scaled. Von Ahn created a framework to encourage innovation through constant evolution and where experimentation was encouraged. He writes, “We were also fast as hell. And the pace of our experimentation allowed us to quickly figure out what was working, and ditch what wasn’t. This applied across everything: product, hiring, engineering, and our business as a whole. We were testing and learning at warp speed.”

As a matter of fact, even today, Duolingo releases new versions of the application on iOS and Android every week while running hundreds of experiments simultaneously. Von Ahn truly believed that the principle of ““Ship It” keeps us ahead of our competitors; “Ship It” makes Duolingo a fun place to work; “Ship It” ensures that our product never sits still.”

“Duolingo is the sum of thousands of experiments. The faster we can run experiments—successful or not—the faster we can improve the app and advance our mission. Over time, each of these changes builds on one another, creating a cycle of compounding growth.”
— Luis von Ahn

And while speed was important, Duolingo was also ruthless in terms of focusing their experimentations effort into things that would improve the company’s offering to the customers. Any features that do not deliver value are quickly removed as unnecessary complexity. As von Ahn writes, “As much as we want to move fast and increase clock speed, we always need to make sure we’re working on the right thing. At Duolingo, prioritization is sometimes described as “ruthless:” we are decisive about what we focus on as a company, based on what will have the largest impact on our learners.”

He also mentions that “Deciding what to prioritize starts with clearly defined goals. For every initiative, we ask: How does this contribute to our mission? What measurable outcomes will it drive? And if something doesn’t move the needle in a meaningful way, it’s cut—no matter how much effort has already gone into it. One high-impact win always outweighs a handful of small scattered efforts.”

This led to Von Ahn to create what he calls the Green Machine which outlines the six steps for Duolingo’s success which can be summarized by gathering excellent people, giving them space to experiment and to double down on what works.

1. Staff It with Great People

2. Define Success

3. Set Guardrails and Think Long-Term

4. Build the Thing and Set Up Feedback Loops

5. Execute with Urgency and Excellence

6. Double Down on What Works, Stop What Doesn’t

“For a good idea to become reality, we need to move with a sense of urgency. So Go, Go, Go!”
— Luis von Ahn

This reminds me of how Michael Bloomberg first created his own company. He noticed that in life, it is the “doers”, the lean and hungry ones that usually go the furthest and that achieve the most. As a matter of fact, Bloomberg mentions that while it is important to have a vision, it is dangerous to start second-guessing yourself by worrying too much about the details.

At Bloomberg, the strategy has always been to build the product first and the rest would take care of themselves. Of course, Bloomberg made mistakes along the way and the product would have to be improved on with the feedbacks received from their customers. However, while their competition were still planning on perfecting their product, they were already through rounds of testing and were about to release their tenth version.

“ It gets back to planning versus acting. We act from day one; others plan how to plan—for months.”
— Michael Bloomberg

This is exactly how Bloomberg obtained their first customer. While Merrill Lynch were in the planning to develop a similar product, Bloomberg was able to obtain the contract by guaranteeing that they would deliver a workable product before the estimated time of delivery provided by Merrill Lynch’s internal tech team. Furthermore, he promised that Bloomberg would only be paid until they were truly satisfied with their product.

While it does not seem like it on the surface, this agreement was extremely beneficial for Bloomberg as it would allow them to receive direct feedbacks from Merrill Lynch on how to improve their product. As Bloomberg would say, “At Bloomberg, a problem spurs a solution. That’s what makes us successful.”

“Every day, our system got better as we fixed each problem they pointed out. I’d always rather have a smart, fair, honest, demanding client than a nasty dummy or an “I don’t care” user.”
— Michael Bloomberg

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Today’s Chapter is based on the book “Montaigne” by Stefan Zweig.

Michel de Montaigne was a French Renaissance writer and philosopher whose Essais practically invented the modern essay form and offered an intimate self-portrait through skeptical, personal reflection on everyday life and human nature. A key figure of Renaissance humanism, he used candid autobiographical anecdotes and probing questions to explore themes like morality, education, and the limits of human knowledge, influencing later thinkers from Bacon and Pascal to Nietzsche.

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Learn to Read

“Books are a uniquely portable magic.”
— Stephen King

How do we read? Do we read to impress others or to check books off a list? Do we suffer through dense texts because we feel like we ought to? Montaigne does not believe in the necessity to finish books. For him, books are not sacred tablets to be worshipped, but companions to be enjoyed. If a book bored him, he dropped it. If he didn’t like a philosopher, he would move on. He sought reading for pleasure and conversation, not labor.

Stefan Zweig highlights this delightful relationship that Montaigne has with literature. He explains that in Montaigne’s tower, he was surrounded by books he inherited from his friend Étienne de La Boétie. He writes, “For him books are not like men, who impose themselves and burden him with their chatter, and of whom it is hard to be rid. When you don’t call for them they stay put; you can just pick up this one or that, according to your whim: ‘Books are my kingdom. And here I seek to reign as absolute lord.’ Books offer him their opinion and he responds with his own.”

“He wants to read and learn, but only so far as he can savour the experience. As a young man he had read, he states “ostentatiously”, merely to show off his knowledge; later, to acquire a measure of wisdom, and now only for pleasure, never to gain an advantage. If a book bores him, he opens another, if a book seems heavy going: I don’t wear down my nails over some difficult passage in a book; I’ll make one or two forays, then if that fails I’ll give up. My mind is only really made for leapfrogging. What I don’t make out at the first attempt, I strain to see through an even deeper murk at every renewed effort.”
— Stefan Zweig

As such, it is fair to say that Montaigne argues that reading should not be a passive intake of information but an active dialogue with the author. Montaigne would scribble in the margins, argue with the authors and used their thoughts to spark his own. He did not read to become a walking encyclopedia, but to better understand himself. He looked to improve himself by reading the lives of the ancients, using their stories as lessons.

As Zweig wrote on Montaigne, “It was a beautiful thing to read books, to spend an idle hour in Greece with Plato, to savour an hour of Seneca’s wisdom, it was restful and calming to live alongside these companions from previous centuries, with the greatest minds of history. But one lives in one’s own century, for better or worse, and the air of the time penetrates into even the most cloistered space.”

“He explores ‘the rich souls of times past’ to correlate them with his own. He studies virtues, vices, flaws and merits, the wisdom and puerility of others. History is his great instruction manual, for, as he says, it is in his actions that man reveals himself.”
— Stefan Zweig

Montaigne’s approach is demonstration that it is okay to read for our own entertainment. It also encourages us to engage with texts personally, to take what resonates and leave the rest. Montaigne’s library was a place of comfort for him. Zweig reports that Montaigne personally valued poetry and especially history as it thought him the psychology behind human motives. He writes, “The great lesson Montaigne receives from books is that reading, in its rich diversity, sharpens his faculty of judgement. It impels him to respond, to lend his own counsel.”

This idea of reading the lives of the ancients in order to learn from them reminds me of what we have previously learned from Charlie Munger. Munger, like many great people before him, believed that the fastest way to earn wisdom is to learn from the success and failure of others. As a matter of fact, life is way too short to learn everything on your own, and that’s without saying how much pain we can avoid by learning from mistakes of others instead of committing them ourselves.

As Munger once said, “I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.”

In the case of Munger, he loved to read biographies as it is a great way to learn from the masters of each disciplines. Here’s how he explains it:

“I am a biography nut myself. And I think when you’re trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the “eminent dead,” but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better for you in life and work better in education. It’s way better than just giving the basic concepts.”
— Charlie Munger

Charlie Munger, who was Warren Buffett’s partner at Berkshire Hathaway, is considered one of the greatest investor of all-time. Buffett and Munger’s track record at Berkshire is exceptional, returning over 19.8% compounded annual gain from 1965 to 2022 compared to only 9.9% for the S&P 500 Index. What’s the secret to their success? Well, I believe that part of the reason is because both Munger and Buffett are compounding learning machine. As a matter of fact, Munger mentions that he doesn’t know any single successful investor who do not read voraciously.

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.”
— Charlie Munger

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Learn to be Skeptical

“Skepticism is a virtue in history as well as in philosophy.”
— Napoleon Bonaparte

Michel de Montaine was known to be a skeptic and always refused to believe that he knew everything. He was also a man who abhorred all rigid thought and dogma and preferred discovering things on his own. His scepticism was a method for Montaigne to interrogate everything around him, refusing to make permanent any truth that his lived experience might later contradict. Zweig mentions that Montaigne cherished uncertainty and treated his life as an ongoing experiment. He writes, “Montaigne’s greatest pleasure is in the search, not the discovery. He is not one of those philosophers who seek the philosopher’s stone, the convenient formula. He cares not for dogma, precepts, and has a horror of definitive assertions: ‘Assert nothing audaciously, deny nothing frivolously.’”

While Montaigne’s habit to always changing his mind might seem like a weakness, Zweig argues that it is in fact his strength. He says, “An inability to remain fixed at a certain point allows him always to go further. With him nothing is ever set in stone.” As such, when Montaigne writes his essays, he does not intend to lecture us but uses it as a way to track his own difficulties and confusions.

In fact, Zweig explains that when Montaigne writes ”posed this question: “How should I live?” he did not insist on following it up with: “This is how you should live!” The man who had engraved on a medallion the chosen maxim “Que sais-je?” had always detested fixed assertions. He had never sought to counsel others on anything he did not know intimately himself. (…) If someone wants to draw advantage from this, then he has no objection. As he says, his folly and error can hardly damage anyone else. “If I make a fool of myself then it’s at my own expense and cannot prejudice others, because it is a folly that abides within me and cannot be followed.”

“This is not my doctrine; it is my study, and no one else’s lesson but my own.”
— Michel de Montaigne

By consequence, from Montaigne, we can learn how to practice sceptical self-inquiry and to keep a record of thoughts and experiences. The modern adaptation of Montaigne’s essays is straightforward: maintain a private journal, test cherished assumptions against new experiences, and allow your beliefs to evolve.

This method of learning from skepticism reminds me of the Socratic approach that we have learned from Don Valentine from Sequoia Capital who 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.

This also reminds me of how Charlie Munger warned us to avoid intense ideologies:

“Another thing I think should be avoided is extremely intense ideology, because it cabbages up one’s mind. You’ve seen that. You see a lot of it on TV, you know preachers for instance, they’ve all got different ideas about theology and a lot of them have minds that are made of cabbage.

But that can happen with political ideology. And if you’re young it’s easy to drift into loyalties and when you announce that you’re a loyal member and you start shouting the orthodox ideology out what you’re doing is pounding it in, pounding it in, and you’re gradually ruining your mind. So you want to be very careful with this ideology. It’s a big danger.

In my mind I have a little example I use whenever I think about ideology, and it’s these Scandinavian canoeists who succeeded in taming all the rapids of Scandinavia and they thought they would tackle the whirlpools in the Grand Rapids here in the United States. The death rate was 100%. A big whirlpool is not something you want to go into and I think the same is true about a really deep ideology.

I have what I call an iron prescription that helps me keep sane when I naturally drift toward preferring one ideology over another. And that is I say “I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people do who are supporting it. I think that only when I reach that stage am I qualified to speak.” Now you can say that’s too much of an iron discipline..it’s not too much of an iron discipline. It’s not even that hard to do.”
— Charlie Munger

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Learn to be Yourself

“Be yourself; everyone else is already taken.”
— Oscar Wilde

One of the biggest lessons we can learn from Montaigne, according to Stefan Zweig is to be oneself. Zweig mentions that Montaigne dedicated his life and his strength to the question of remaining free. As he explains, “It is to this question and this question alone that Montaigne dedicated his life and his strength. It is for this love of liberty that he observes himself, watches over, experiences and criticizes every movement and every sensation.”

As such, when Montaigne withdrew from political spectacle and public vanity to remain in his tower to read, Zweig argues that he does it purely to cultivate a disciplined internal freedom. Montaigne’s withdrawal is a deliberate principled stance: a conscious discipline of solitude and self-mastery, a refusal to be persuaded by external factors. In his tower, he set himself to the quest of preserving himself and to ask himself, “Que sais-je?” (What do I know?).

“The outside world can take nothing from you and cannot unhinge you, as long as you do not allow yourself to be disturbed. The events of your time remain impotent before you, as long as you refuse to take part in them, and the madness of the epoch does not constitute a real danger, as long as you conserve in yourself a purity of spirit.”
— Stefan Zweig

This lesson from Montaigne is quite fitting in today’s world. As we live in an era of constant connectivity due to the internet. We are expected to have an opinion on everything, to be constantly available and to define ourselves with our external affiliations. Montaigne, who lived through the social unrest in France, chose not to participate but to retreat into his own citadel. As he once said, “La plus grande chose du monde c’est de savoir être à soi.” (The most important thing in the world is to know how to be yourself.)

This reminds me of what we have learned from Michael Jordan who believed that one of the most important things he learned at an early age is to follow his own instincts. As such, he was the one creating his own standard and never tried to be like somebody else or to live up to the expectations of others. ****In fact, Jordan is a true believer that part of his success comes from his authenticity. He explains that “Authenticity is about being true to who you are, even when everyone else wants you to be someone else.”

“I’ve never been worried about anyone’s perception one way or another. I’ve never allowed anyone’s opinion to define me. I’m comfortable with who I am. I trust myself.”
— Michael Jordan

As a matter of fact, Jordan believes that it is difficult to become the best you can be when you are focused on trying to be the best version of someone else. Without authenticity, you are not going to last long. He explains that “the products, companies and people who stay true to who they are usually end up being around for a long time.” Furthermore, he elaborates that companies that jump into trends or try to be something other than what or who they are, generally, don’t last very long.

He writes, “If you are trying to make your way through a maze, and your decisions come from the inside, from your gut, nine times out of ten you won’t find yourself running into a wall. But if you rush into something, make decisions to appease somebody else, or chase the easy dollar, then you are going to find that wall.” Following one’s instinct may seems scary at first, but if you follow your instincts and put in the work necessary, you are bound to encounter success. It is only a a question of when. As Naval Ravikant would say, “great people have great outcomes. You just have to be patient.”

“All you should do is what you want to do. If you stop trying to figure out how to do things the way other people want you to do them, then you get to listen to that little voice inside of your head that wants to do things a certain way and then you get to be you.

No one in the world is going to beat you at being you. You’re never going to be as good at being me as I am. I’m never going to be as good at being you as you are.”
— Naval Ravikant

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Beyond the Book

Read "Why Read? Advice From Harold Bloom" by Farnam Street

Read "Use These Simple Strategies to Retain Everything You Read" by Farnam Street

Read "The Munger Operating System: How to Live a Life That Really Works" by Farnam Street

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Today’s Chapter is based on the book “The Way of the Champion: Pain, Persistence, and the Path Forward“ by Paul Rabil.

Paul Rabil is an American sports executive, retired professional lacrosse player, and entrepreneur, widely nicknamed “the LeBron of lacrosse” for his dominance in the sport. He starred at Johns Hopkins University, became a multi-time MVP and champion professionally, then co-founded the Premier Lacrosse League in 2018 and now serves in a leadership role growing the league and the sport globally.

Buy it on Amazon here.

Here’s what I learned:

Consistency

“The first rule of compounding: Never interrupt it unnecessarily.”
— Charlie Munger

A core reason for Paul Rabil’s success in becoming the greatest lacrosse player of all time is the simple but brutal truth that mastery is built through one small action at a time. Tony Seaman, a lacrosse coaching legend once addressed a room of aspiring young players with a winning formula for earning a full Division I scholarship. He said, “There’s one thing you have to do. From this day forward, through your senior year of high school,” Seaman told us, “you have to shoot a hundred shots a day. That’s it. You shoot a hundred shots a day from now through your senior year of high school, I guarantee you will get a full scholarship to the Division 1 college of your choice.”

But there’s a catch, Seaman mentions that “You can’t miss a day. Not a holiday. You can’t miss when it’s pouring down rain. You can’t miss because you had a game the night before—or the day of. You can’t miss a day because you’re on vacation. And if you can’t find a goal, make one up. You have to find a way.” The lesson from Seaman is clear. Consistency is the key to success. This mindset separates those who dream from those who deliver. Missing one day may feel inconsequential, but it breaks the rhythm and erodes the identity of someone who shows up no matter what. Rabil’s own career, and the careers of countless champions he studies, prove that sustained daily effort is the foundation of extraordinary results. Whether you are writing code, building a business, or refining a craft, the discipline of never skipping a day creates momentum that eventually becomes unstoppable.

“It doesn’t matter how ambitious or speculative the goal, you get there by taking one small step after one small step. Thirty minutes a day. One hundred shots on net, two hundred words on the page, three hundred push-ups, conditioning. Whatever reps are in your sport, in your business, in your chosen field, you do them. One after another until you hit the magic number. And there is only one caveat: You can’t miss a day.”
— Paul Rabil

As a matter of fact, Rabil understands that his success comes from compounding. He borrows this term from Warren Buffett when he mentions that his “life has been a product of compound interest.” He believes that it is simple math: experts refers to the fact that often thousands of hours of practice are required for mastery and you can only get there little by little. Rabil writes, “Work hard. Take care of your body—nutrition, sleep, training, recovery, and so forth. Pay attention to the details—the little things that will add up to make a big difference. Show up every day—whether it’s a Sunday game day, a Wednesday practice day, or a Tuesday in the offseason. Fall in love with what you do.”

Furthermore, Rabil argues that true success never comes suddenly but is a lagging indicator of a thousand of invisible choices we have made without others knowing. It is the accumulation of hours of practice. Rabil emphasizes that that the difference between good and great often lies in the details that others deem irrelevant. It is easy to work hard when the stadium is packed or when the boss is watching, but the champion’s character is forged in solitude. As Coach Pietramala once told him, “character is what you do when nobody is watching.” The ability to be consistent in making the “grunt work” is primordial. In fact, Rabil mentions that this obsession with detail provides a competitive advantage in a world where most people are looking for shortcuts. Rabil notes that many people are talented, but few are willing to endure the boredom of consistency. The little things are the mathematical variables that, when compounded over time, create the massive separation between the elite and the average.

“The professional knows that the work doesn’t stop with success. They know that success is a by-product of the work. So they keep doing the work. They don’t miss a day.”
— Paul Rabil

This reminds me of what we have learned from Michael Jordan who mentioned that people rarely pay attention to the effort that it took for people successful. Success comes from all the little efforts that were made to improve one step at the time, and people tend to forget that. When he moved to the world of business, he realised that great companies have a lot in common with basketball teams. Through reverse engineering, he figured out that players who practice hard when no one is paying attention are the ones that will play well when everyone is watching. He mentions, “They don’t understand the foundation I had to create to support everything that came afterward. They don’t know about lifting weights at 7 A.M., practicing hard every day, finding ways to motivate myself for every game, sitting up half the night with an ankle in a bucket of ice, or hooked up to an electronic stimulation machine. They don’t know anything about those things.”

Furthermore, 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. Jordan writes, “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.”

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.

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Focus

“The thing you do obsessively between age 13 and 18, that’s the thing you have the most chance of being world class at.”
— Bill Gates

The second lesson we can learn from Paul Rabil’s success is the ability to “putting on your blinkers”, a metaphor he uses to encourage us to block out everything that does not serve the mission you are trying to achieve. As he explains, “In the pursuit of becoming a champion, there exists a profound yet often overlooked skill: the ability to give your undivided attention. We live in an age of constant distraction, making focus a rare gem—one that will separate you from the ordinary.”

In fact, in an age of infinite distraction, the ability to focus is a superpower. We are constantly bombarded with social media notifications, opinions and distractions, but we need to ignore the noise and focus on what we can control: practice, practice, practice. And yet, even in terms of practices, Rabil believes in being focused in what we calls deliberate practice. It is not enough to simply show up and go through the motions. Many people spend hours in the gym or the office without actually improving because they are not mentally engaged. They are present in body but absent in spirit. Rabil distinguishes between “practice” and “smart practice.” Smart practice involves a level of intensity and specificity that mimics the pressure of the actual game. It also requires stripping away the ego and working on the things we are bad at, rather than just showing off the things we are good at. A perfect example of someone who practices smartly is Stephen Curry.

“Watch a Steph Curry shooting workout. After he’s done in the paint, he doesn’t set up beside a rack of basketballs and shoot from one spot on the floor. No. He runs off a pick, catches a pass, and shoots. He dribbles, drives, passes, runs to the corner, gets the ball back, and shoots. He dribbles between the legs, around the back, head fake, step back, and shoots. This wasn’t always the way he practiced, Steph told me. “I practice smart now,” he said. “I’m not just in the gym just to be in there. There’s a particular approach and mentality when I’m in the gym that I have to have every time. And that’s a game speed mentality. Every hour, every minute I’m on the floor, I approach practice with that game speed mentality.””
— Paul Rabil

Furthermore, Rabils mentions the importance of narrowing our focus on factors in which we can influence. He recounts the lessons from John Wooden who learned “at a young age, he recognized the importance of distinguishing between two categories: “things over which I had no control” and “things over which I had some control.” On the latter category, Wooden devoted immense intensity and effort. He dedicated himself to improving his conditioning, ball handling, and shooting skills.”

Finally, Rabil mentions that the premise of focus also means saying “no”. He mentions that the “MIT Sloane’s Neurological Science Department demonstrated that the human brain is incapable of focusing on two things at once. Multitasking is a myth. Walking and chewing gum isn’t in the same stratosphere as having the desire to become a champion in sport and in business.” He also cites the wisdom of Jony Ive and Steve Jobs to highlight that focus is fundamentally an act of exclusion.

““What focus means,” Ive says, “is saying no to something that you—with every bone in your body—think is a phenomenal idea, and you wake up thinking about it, but you say no to it because you’re focusing on something else.” It’s about sacrifice. When Ive first started working at Apple, Steve Jobs told him, “Jony, you have to understand: there are measures of focus, and one of them is how often you say no.” Routinely, Jobs would ask, “Jony, how many things have you said no to today?” This kind of focus, Ive admits, “takes so much effort . . . But all of the good things we’ve done have required that sort of focus.””
— Paul Rabil

This reminds me of what we have previously learned from Harvey Firestone, who was also keen on focusing on what was important in business: thinking. As a matter of fact, he explains 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 it is important to set aside some time to think as thinking is primordial in making good decisions and to run a successful business in the long run. 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. Hence the importance of being able to say 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.

“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

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Make Mistakes

“I’ve failed over and over and over again in my life. And that is why I succeed.”
— Michael Jordan

Fear of failure is a perhaps one of the greatest inhibitor of human potential. We are often terrified of looking stupid, of wasting time, or of confirming our own insecurities. We tend to view failure as a verdict on our worth. If we try and fail, we tell ourselves that we are failures. Paul Rabil challenges this narrative aggressively. Throughout his journey, he learned that failure is not the opposite of success but a necessary ingredient of it. He once said, “The path to success, the path you are on—it’s going to be riddled with failures and rejections and mistakes and losses and bad games and bad seasons. All the greats—athletes, actors, entrepreneurs, all of them—have their own long list of failures.”

In fact, he argues that a champion does not avoid failure, but embraces it. Champions use failures as data as they are valuable feedbacks that can be used to improve. Rabil points to the Stoic philosophy and the mindset of elite coaches to illustrate that dwelling on a mistake is actually more damaging than the mistake itself. If you are stuck thinking about the error you made ten seconds ago, you are not present for the opportunity happening right now.

“If we can’t admit to our mistake, we can’t learn. If we can’t learn, we can’t forget. And if we can’t forget, we can’t make the next best play.”
— Paul Rabil

This concept of the “next best play” is crucial. It acknowledges that the past cannot be changed. You cannot un-throw an interception or un-say a regretful comment. However, you have the power to control what happens next. This requires a level of emotional detachment that allows high performers to separate the fruit of their effort from the outcome. They do not take a loss personally but rather professionally. Rabil explains, “A dividing line between success and failure is simply the ability to bounce back quickly. To accept that failure is part of this process. And never mope just because you messed up, never take a week off. Because it’s really two.”

Rabil illustrates this with the concept of the “pendulum.” Life moves in swings. Highs are followed by lows, and lows are followed by highs. The mistake many people make is believing that the low point is permanent. They stop swinging. They retreat. But the champion understands the physics of success: the downward swing provides the kinetic energy necessary to rise again. Rabil writes, “When you are at an extreme—when things are going well or unwell—remind yourself that the swing in the other direction is just a matter of time. That you can’t have the swing up without the swing down. And you can’t swing back up without experiencing the pain of the downswing. Just commit to the experience and trust that you’ll come around.”

This perspective transforms how we should view adversity. Rabil shares stories from legends like Bill Belichick and Michael Jordan, noting that their resumes are filled with important losses along with their success. Yet, they are defined by their wins because they refused to let the losses define them. They understood that losing is simply a by-product of being in the arena. As Michael Jordan once said, “I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

“This is both a philosophical point and simple math: To win a lot, you have to risk losing a lot. If you stick around, those losses are going to add up—that can’t scare or scar you. Losing is a by-product of being good enough and not quitting.”
— Paul Rabil

This reminds me of Sir Alex Ferguson, the legendary manager of Manchester United, whose family motto is “Dulcius ex asperis”, meaning “Sweeter after difficulties”. A saying that marked his 39 years in football management. As a matter of fact, Ferguson mentions that the recovery after losses is an important part of Manchester United’s success.

The famous Class of ‘92, a group of young players that would end up bringing major success to the Club such as David Beckham, Paul Scholes and Ryan Giggs, came up after a series of defeats. Notably, Ferguson mentions that “I lost three FA Cup finals, to Everton, Arsenal and Chelsea. I lost League Cup finals to Sheffield Wednesday, Aston Villa and Liverpool. And two European Cup finals to Barcelona. (…) When we lost the FA Cup final to Everton in 1995 I said: ‘That’s it, I’m making changes here.’ And we made them.“

Ferguson mentions that after a loss, his first thought was always to “think quickly about what you should be doing.” Rather than being upset about the defeat, his mind would go straight into thinking about improvement and recovery.

“Sometimes defeats are the best outcomes. To react to adversity is a quality. Even in your lowest periods you are showing strength. There was a great saying: It’s just another day in the history of Manchester United. In other words fighting back was part of our existence. If you are lackadaisical about defeats you can be sure there will be more to come.”
— Alex Ferguson

Similarly, Ferguson realised that this ability to face adversity can also applied in finding potential players for Manchester United. He explains that while he was examining successful people, he realised that “a modest start in life can be a help more than a hindrance.” In fact, he explains that many of his greatest players excelled partly due to their working-class background.

This is extremely helpful, especially for Manchester United players who are playing in front of fans with high demands and with short patience span. As a matter of fact, the main thing Ferguson looks for in players is temperance. He would ask himself the following “Would they grow or shrink in a United shirt?”

Ferguson mentions that he has coached only one player who was totally unaffected by his mistakes, and that was David Beckham:

“You had to admire that. In a way it was a great quality. No matter how many mistakes he would make (in my eyes, not his), he would always want the ball. His confidence never suffered. Otherwise, dips of that kind are innate to all footballers, and plenty of managers. Public scrutiny penetrates the body armour, whether from the public, press or fans.”
— Alex Ferguson on David Beckham

Generally, even the best players can lose confidence. And, it is the manager’s responsibility to create an environment where players can thrive under external pressure and through success and adversity. Ferguson believes in building a culture around the training ground so that players can fall back on in cases of adversity.

Ferguson explains that “What we did at all times, in success and adversity, was make sure the training ground was sacrosanct. The work there, the concentration, and the standards we maintained never dropped. Eventually that consistency of effort will show itself on a Saturday.”

More importantly, Ferguson had the tendency to treat his players like he would treat his family. No matter their performance, he would always have their back. Even after terrible losses, while he could criticise the performance of the team in general, he would never criticise a specific individual after the game to the media. As Warren Buffett once said, “Criticise by Category — Praise by name.”

“At my end of it, I had a formula for defeat. After saying my bit in the dressing room, always, before going through that door to face the press, to face the television, to speak to the other manager, I said to myself, ‘Forget it. The game’s gone.’ I always did that. Whenever people came to my room at the ground after a game, I always made sure there was a good atmosphere. There was no gloom, no frostiness. No blaming the referee.”
— Alex Ferguson

Furthermore, Ferguson explains that after a defeat his feeling was always: “I don’t like this, but we’ll have to meet the challenge. We’ll have to step up a mark.” In fact, he enjoyed challenge and took defeats as a motivation to improve as a team.

He mentions that “Every time those moments poked us in the eye, we accepted the invitation to regroup and advance again. Those were motivating passages. They forced me on. I’ll go further: I can’t be sure that without those provocations I would have enjoyed the job so much.”

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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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Beyond the Book

Read "Even in an idea meritocracy, merit cannot be the only determining factor in assigning responsibility and authority." by Ray Dalio

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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.

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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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Beyond the Book

Read "Socrates and the Search For Wisdom" by Farnam Street

Read "What is First Principles Thinking?" by Farnam Street

Read "Latticework of Mental Models: Surfing" by Safal Niveshak

Watch "Don Valentine, Sequoia Capital: "Target Big Markets"" on YouTube

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.

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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.

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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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Beyond the Book

Watch "How Prem Watsa Built the "Berkshire Hathaway Of Canada" | The Fairfax Way w/ Kyle Grieve (TIP783)" on YouTube

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Read "Prem Watsa: Surviving Losses and Playing the Long Game" by The Acquirer's Multiple

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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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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

Read "What is First Principles Thinking?" by Farnam Street

Read "Elon Musk: A Framework for Thinking" by Farnam Street

Listen to "#319 The Making of Winston Churchill Part 1" by Founders Podcast

Listen to "#320 The Making of Winston Churchill Part 2" by Founders Podcast

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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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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

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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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Beyond the Book

Read "CAPITAL ALLOCATION & BUYBACKS" by Investment Masters Class

Listen to "#246 Mark Leonard's Shareholder Letters" by Founders Podcast

Listen to "Mark Leonard: The Best Capital Allocator You've Never Heard of" by We Study Billionaires

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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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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

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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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Beyond the Book

Listen to "#328 Tom Murphy (Buffett's favorite manager)" by Founders Podcast

Read "Interview with Tom Murphy" by Harvard Business School

Read "Warren Buffett: The Three Things I Look For in a Person" by Farnam Street

Read "Reciprocation Bias" by Farnam Street

Watch "Lessons from the World's GREATEST Capital Allocators | The Outsiders by William Thorndike (TIP555)" by We Study Billionaires

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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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Beyond the Book

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

Listen to "Brad Jacobs: How To Build a Billion Dollar Company" by The Knowledge Project

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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.

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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.

Buy it on Amazon here.

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.

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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.

Buy it on Amazon here.

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

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.