Today’s Chapter is based on the book “Buffett: The Making of an American Capitalist” by Roger Lowenstein.

Warren Buffett is an American investor and philanthropist, long known as the “Oracle of Omaha” and regarded as one of the most successful investors in history. He served for decades as chairman and CEO of the conglomerate Berkshire Hathaway and has pledged to give away nearly all of his vast fortune to charitable causes.

Buy it on Amazon here.

Here’s what I learned:

Patience

“Patience is not passive, on the contrary, it is concentrated strength.”
— Bruce Lee

Perhaps one of the greatest lesson we can take from Warren Buffett’s life is his understanding of patience. From a young age, Buffett understood the importance of allowing time to make compounding work. As a matter of fact, Buffett was great with numbers and purchased his first stock at age eleven. It was a great lesson of patience as he bought three shares of Cities Service at $38 a share, but the stock plunged to $27. When the stock recovered at $40, he sold quickly, which was a great mistake as the it continued to climb to $200 shortly after.

As such, it is not surprising that Warren Buffett became a discipline of Benjamin Graham, the father of value investing. His understanding of patience allowed him to truly master the concept of “Mr. Market”, coined by Graham. He understood that the stock market is not a weighting machine, but a voting machine and that stocks should be seen for the businesses beneath their stock certificates rather than to their stock price.

Buffett, an avid baseball fan, often compared investing to baseball, but with a crucial difference.

“I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”
— Warren Buffett

This baseball metaphor captures the importance of patience in Buffett’s investment philosophy perfectly. While most investors feel compelled to act constantly, swinging at every pitch, terrified of missing an opportunity, Warren Buffett vouched for discipline, waiting sometimes for years for the right opportunity at the right price. As he once said, “You would be better off if you got a punch card with 20 punches on it—and every financial decision you made you used up a punch.“

Furthermore, Buffett’ patience extended beyond waiting for buying opportunities, he was a long-term investor. Once he owned a business, he rarely sold. This idea comes back to his concept that investments are not pieces of paper to be traded but as businesses to be owned. As he once explained, “to turn around and sell because someone offered 2x or 3x was kind of crazy.”

However, it would be wrong to believe that Warren Buffett was passive. In fact, I’d argue that his patience was active and disciplined. While he may not be taking decisions to buy or sell a stock on a daily basis, he spent his days reading, analyzing, and waiting. He was compounding his knowledge to become better a identifying the intrinsic value of a company.

“If you buy a bond, you know exactly what’s going to happen, assuming it’s a good bond, a U.S. Government bond. If it says 9 percent, you know what the coupons are going to be for maybe thirty years.... Now, when you buy a business, you’re buying something with coupons on it, too, except, the only problem is, they don’t print in the amount. And it’s my job to print in [to figure out] the amount on the coupon.”
— Warren Buffett

This reminds me how patience and compounding is not only important for investing, but also in accumulating knowledge. As we have learned from Edward Thorp, the understanding of compounding interest is the first and most important mathematical concept to learn. Not only is it important in investing, but it is also useful in terms of seeking wisdom and obtaining good habits.

As a matter of fact, a one percent improvement every day leads to 37x improvement in a year. Similarly, it is very possible to become wealthy even if our investments grow at a small rate as long as it happens on a long period of time. Edward Thorp once said that “Over a sufficiently long time, compound growth at a small rate will vastly exceed any rate of arithmetic growth, no matter how large!”

The rules of compounding are very simple once you get the concept: start early and do not ever interrupt it. As Charlie Munger famously said, “The first rule of compounding: Never interrupt it unnecessarily.” Thorp understood the importance of compounding beyond the stock market. As a matter of fact, it is this principle that encouraged him to lead a healthier lifestyle. For every hour he spent on fitness was one less day he would spend in a hospital.

“Americans supposedly spend an average of forty or more hours a week watching television. Those who do have plenty of “junk time,” which they can use instead for an exercise or fitness program. Five hours a week for this can add five years of healthy life.”
— Edward Thorp

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Circle of Competence

“I want to think about things where I have an advantage over other people. I don’t want to play a game where people have an advantage over me. I don’t play in a game where other people are wise and I am stupid. I look for a game where I am wise and they are stupid. And believe me it works better. God bless our stupid competitors. They make us rich.”
— Charlie Munger

Warren Buffett genuinely believed that successful investing begins with knowledge and understanding the limits of his own circle of competence. He didn’t speculate on technologies he couldn’t grasp or businesses he couldn’t explain to a child. This discipline became one of his investment philosophy’s most defining characteristics.

In terms of investing, Buffett’s believed in simplicity. He argues that if you can’t understand a business, you can’t value it, as the key concept of investing is to figure out how much cash flow you can return from such investment. Therefore, Buffett had the tendency to avoid investing in sectors that was out of his circle of competence. During the Go-go era, Buffett once said, “We will not go into businesses where technology which is away [sic] over my head is crucial to the investment decision. I know about as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszez.”

“Everybody’s got a different circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle.”
— Warren Buffett

While this self-awareness may be seen as a limitation, it was actually one of his superpower. By knowing precisely what he didn’t know, Buffett could focus his considerable intellect on areas where he had genuine expertise. More importantly, it would allow him to make less mistakes. As he once said, in investing, the rule number one is to not lose money and that investing outside your circle of competence is a direct path to permanent capital loss.

Nonetheless, Buffett mentions that one didn’t need a big circle of competence to succeed in investing, but it was primordial to know the limit of it. As Lowenstein mentions, Buffett “explained that he evaluated stocks exactly as he would an entire business: he looked for companies he understood, run by honest and competent managers, with favorable long-term prospects, and available at a decent price. He made no attempt to anticipate the short-term price action.”

This, however, didn’t mean that Buffett was satisfied with the limit of his circle of competence. On a daily basis, he was always trying to widen it through reading annual reports and business publications. He would often spend hours reading over Moody’s manuals studying every single companies appearing on them, similar to a small boy reading comics.

“By now, Buffett was familiar with virtually every stock and bond in existence. Line for line, he had soaked up the financial pages and the Moody’s books; day after day, he had built up a mental portrait of Wall Street. He could measure each stone against the skyline, and there was no one else whose analysis he trusted better than his own.”
— Roger Lowenstein

The concept of circle of competence is another one that can be compared to baseball, especially to the legendary hitter Ted Williams who understood the importance of discipline and selectiveness. As a hitter, Williams was known for his exceptional ability to wait for the right pitch, the one in his “happy zone” where he could maximize his chances of success. He believed that even the greatest hitters couldn’t be successful if they swung at bad pitches.

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

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

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

Legendary investors like Warren Buffett and Charlie Munger have long advocated for this approach. Munger, in 1994, delivered a talk to the USC Business School called “A Lesson on Elementary Wordly Wisdom” where he explained how Buffett succeeded in investing by being extremely selective in his bets.

“When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”

He says, “Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

Again, this is a concept that seems perfectly obvious to me. And to Warren it seems perfectly obvious. But this is one of the very few business classes in the U.S. where anybody will be saying so. It just isn’t the conventional wisdom.

To me, it’s obvious that the winner has to bet very selectively. It’s been obvious to me since very early in life. I don’t know why it’s not obvious to very many other people.”
— Charlie Munger

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Reputation

“Character is much easier kept than recovered.”
— Thomas Paine

Another lesson we can learn from Warren Buffett’s career is that reputation is your most important asset. Whether he was managing money through his partnerships in his early career or acting on behalf of Berkshire Hathaway’s shareholders as the CEO, Buffett did not merely try to make money, he tried tried to build trust. He understood that trust was the key to making a long-term partnership possible.

For example, when he first started his partnership, it was important for Buffett to invest alongside of his partners. Having skin in the game made him that much more trustworthy. As Lowenstein writes, “It was enormously important to Buffett that his partners see him as trustworthy. He and Susie put more than 90 percent of their personal money in with the partners’, as did Bill Scott, Buffett’s assistant. “So we are all eating our own cooking,” Buffett assured them.”

Similarly, one of my favourite quotes from Warren Buffett is “It takes twenty years to build a reputation and five minutes to ruin it. If you think about that you’ll do things differently.” This line of Buffett is one of his most famous because it genuinely applies to everyone. No matter what profession you are working in, a career can be damaged quickly by dishonesty, carelessness, or vanity, while trust often grows slowly through repeated proof. And, in the case of Buffett, his character has as much to do with his success as an investor than his intelligence.

“Buffett’s genius was largely a genius of character—of patience, discipline, and rationality. These were common enough virtues, but they were rare in the heat of financial passions, and indispensable to anyone who would test his mettle in the stock market.”
— Roger Lowenstein

Furthermore, what makes Buffett truly impressive is that his character did not change even after he became wealthy. As a matter of fact, his private habits shows that he was not interested in wealth for the wrong reasons. He treated money as a scorecard, but not as a substitute for character. As Lowenstein mentions, “Buffett was a billionaire who drove his own car, did his own taxes, and still lived in a home he had bought in 1958 for $ 31,500. He seemed to answer to a deeply rooted, distinctly American mythology, in which decency and common sense triumphed over cosmopolitan guile, and in which an idealized past held firm against a rootless and too hurriedly changing present.” Similarly, Buffett never sold a single share of Berkshire Hathaway and was content with giving himself a salary of only $50,000.

In fact, while Buffett’s drive to become rich was evident from childhood, it was clear that it wasn’t because he wanted Ferraris or material comforts, but rather because he enjoyed making money compound over time. As Buffett once said, “It’s not that I wanted money. It’s the fun of making money and watching it grow.”

This was also made evident when he was seven and hospitalized due to appendicitis. While he was ill, Buffett refused to eat, but left alone, he took a pencil and filed a page with his numbers. He then explained to the nurse that these numbers represented his future capital and said, “I don’t have much money now, but someday I will and I’ll have my picture in the paper.”

This reminds me of Chung Ju-Yung’s experience at Hyundai which is a perfect example of how important reputation is for a businessman. He once mentioned that “a man’s trustworthiness, sincerity and honest are his capital.” In fact, he explains that while it would be ideal for a company to have enough internal capital to run on its own, it is still possible to run a business without any capital, as long as it has a good reputation.

As a matter of fact, Chung first success started when he was running a rice shop which he was entrusted by his boss due to his diligence and honesty. He was also able to get capital to start his business because of his reputation for being trustworthy.

“In my life, many business people claiming to have the next “big thing” have asked me for money. They professed that they didn’t have anyone else to ask. In those situations, I always said, “What you lack is credibility, not capital. It’s not because your character is flawed. It’s just that you haven’t established trust that would allow a stranger or a third person to lend you money. That’s why it’s so hard for you to get it. If you can convince the other person that you are trustworthy, money will naturally flow in.”
— Chung Ju-Yung

By consequence, whenever he ran Hyundai, Chung always made sure that his credibility would remain intact. In fact, even whenever he got into a project that would certainly amount to significant loss, he made sure to complete the project in time to make sure that his company held their words. He fully understood the meaning behind’s Warren Buffett’s saying that “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

When he was once advised his brother to give up on a project, he responded with: “Trust is everything to a businessman. The moment you lose trust, it’s all over. It’s my dream to create the best construction company in the Republic of Korea, and you’re telling me to abandon it all? Whatever happens, we’re going to finish this job. We have to.” More importantly, Chung Ju-Yung’s understood that in international projects, it wasn’t just his reputation on the line, but the credibility of the entire country that laid on his shoulders. He once mentioned that “if Hyundai were to have quit after becoming the first Korean company to take an overseas project, we would have been kicking away the ladder for other Korean construction companies trying to enter foreign markets.”

“A contract is a contract. Even if we are in dire monetary straits, we have to build Thailand the high-quality expressway they are expecting within the time we have. That’s why we are here. We cannot and will not just cut and run. We have to finish what we started for the good of the Hyundai brand and for the good of the country.“
— Chung Ju-Yung

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Beyond the Book

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

Read "Active Patience" by Farnam Street

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

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Today’s Chapter is based on the book “Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts” by Annie Duke.

Annie Duke is a former professional poker champion who has became an author, speaker, and consultant focused on decision-making under uncertainty. She has won over $4 million in tournament poker and now writes bestselling books like “Thinking in Bets,” “How to Decide,” and “Quit” on applying cognitive psychology and poker-informed thinking to better decisions in business and life.

Buy it on Amazon here.

Here’s what I learned:

Think in Bets

“If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest.”
— Charlie Munger

One key lesson we can learn from Annie Duke is the principle of reframing how we think about decisions. While we tend to view choices as either right or wrong based on their outcomes, Duke argues that it is a dangerous oversimplification that ignores the role of uncertainty and luck in the results of each decisions we take.

As such, Duke believes that every decision we make is essentially a bet on an uncertain future. She writes, “Over time, those world-class poker players taught me to understand what a bet really is: a decision about an uncertain future. The implications of treating decisions as bets made it possible for me to find learning opportunities in uncertain environments. Treating decisions as bets, I discovered, helped me avoid common decision traps, learn from results in a more rational way, and keep emotions out of the process as much as possible.”

When we recognize that every choice commits us to a particular path while foreclosing others, we begin to appreciate the true nature of decision-making. Whether we are choosing a career, investing money, or deciding how to parent, we are, in a way, betting our resources such as our time, money, reputation and happiness, on one possible future over others. Duke explains that “Choosing to go to the movies means that we are choosing to not do all the other things with our time that we might do during that two hours. If we accept a job offer, we are also choosing to foreclose all other alternatives: we aren’t sticking with our current job, or negotiating to get a better deal in our current job, or getting or taking other offers, or changing careers, or taking some time away from work. There is always opportunity cost in choosing one path over others.”

“We routinely decide among alternatives, put resources at risk, assess the likelihood of different outcomes, and consider what it is that we value. Every decision commits us to some course of action that, by definition, eliminates acting on other alternatives. Not placing a bet on something is, itself, a bet.”
— Annie Duke

This perspective, as we will see later, helps us to identify good decisions from bad results and poor decisions that produced a favorable outcome. This ability is important as the quality of our lives isn’t determined by any single result but by the cumulative quality of our decision-making processes over time. By treating decisions as bets, we become more thoughtful about probabilities and we embrace uncertainties and their importance in each decisions that we take.

In fact, Annie Duke mentions that we need to recognize that “here are exactly two things that determine how our lives turn out: the quality of our decisions and luck. Learning to recognize the difference between the two is what thinking in bets is all about.” But more importantly, the big difference between decision-making in life compared to in poker is that “In most of our decisions, we are not betting against another person. Rather, we are betting against all the future versions of ourselves that we are not choosing. We are constantly deciding among alternative futures: one where we go to the movies, one where we go bowling, one where we stay home.”

With this in mind, how can we improve our bets? How can we make better decisions? Duke argues that our bets will only be as good as our beliefs. However, this is good news. She mentions that “part of the skill in life comes from learning to be a better belief calibrator, using experience and information to more objectively update our beliefs to more accurately represent the world. The more accurate our beliefs, the better the foundation of the bets we make.”

This reminds me of Charlie Munger, who once said, “Opportunity cost is a superpower, to be used by all people who have any hope of getting the right answer.” As a matter of fact, in investing, the biggest mistake usually isn’t what you choose to invest in, but what you did not invest in as a trade-off. The principle of “opportunity cost” is well explained in Gregory Mankiw’s textbook “Principles of Economics”. Here’s what he said:

“Making decisions requires trading off one goal against another.

Consider a student who must decide how to allocate her most valuable resource—her time. She can spend all of her time studying economics, spend all of it studying psychology, or divide it between the two fields. For every hour she studies one subject, she gives up an hour she could have used studying the other. And for every hour she spends studying, she gives up an hour that she could have spent napping, bike riding, watching TV, or working at her part-time job for some extra spending money.

Or consider parents deciding how to spend their family income. They can buy food, clothing, or a family vacation. Or they can save some of the family income for retirement or for children’s college education. When they choose to spend an extra dollar on one of these goods, they have one less dollar to spend on some other good.”
— Gregory Mankiw

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Avoid Resulting

“The more one emphasizes winning, the less he or she is able to concentrate on what actually causes success.”
— Nick Saban

Annie Duke mentions that one of the best way to improve our decision-making process is to go over our past decisions and to learn from them. Similar to a feedback loop, we can refine our thought process based on the outputs we receive from our past decisions. However, Duke warns us against the cognitive trap of “resulting”, meaning that we have a tendency to equate a decision quality with the outcome. This leads to poor learning because we ignore the role of luck.

A perfect example of the resulting fallacy is described in Duke’s book as Pete Carroll infamous decision to pass the football only a yard from the goal line during Super Bowl 49 which led his team to lose the game. Duke explains that “Carroll got unlucky. He had control over the quality of the play-call decision, but not over how it turned out. It was exactly because he didn’t get a favorable result that he took the heat. He called a play that had a high percentage of ending in a game-winning touchdown or an incomplete pass (which would have allowed two more plays for the Seahawks to hand off the ball to Marshawn Lynch). He made a good-quality decision that got a bad result.“

Duke mentions that resulting comes from the fact that our brains aren’t built for rationality. As a matter of fact, our brains have this tendency for quick pattern recognition which helped us survive danger in the wilderness. However, in today’s day and age, it often obstructs us from making great decisions due to human biases. Duke writes, that “When our ancestors heard rustling on the savanna and a lion jumped out, making a connection between “rustling” and “lions” could save their lives on later occasions. Finding predictable connections is, literally, how our species survived.”

Outside of resulting, Duke also lists out other human biases that affects our decision-making:

Hindsight Bias:

“Hindsight bias is the tendency, after an outcome is known, to see the outcome as having been inevitable. When we say, “I should have known that would happen,” or, “I should have seen it coming,” we are succumbing to hindsight bias. Those beliefs develop from an overly tight connection between outcomes and decisions. That is typical of how we evaluate our past decisions.“
— Annie Duke

Self-serving bias:

“Self-serving bias has immediate and obvious consequences for our ability to learn from experience. Blaming the bulk of our bad outcomes on luck means we miss opportunities to examine our decisions to see where we can do better. Taking credit for the good stuff means we will often reinforce decisions that shouldn’t be reinforced and miss opportunities to see where we could have done better.”
— Annie Duke

To combat resulting and other human biases, Duke mentions that we must evaluate decisions based on the information available at the time they were made, not with the benefit of hindsight. A decision is “good” if it was the best choice given what we knew (or could reasonably have known) and the probabilities we assessed, regardless of how it turned out on any particular occasion. This shift in perspective allows us to learn from outcomes without being misled by them.

Once again, Charlie Munger was an avid believer in the importance of understanding human psychology in decision making. This is, in my opinion, a perfect moment to review Charlie Munger’s legendary speech on the psychology of human misjudgment:

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Saying ‘I Don’t Know’

“I know that I know nothing.”
— Socrates

Annie Duke mentions that it is very challenging for some to admit uncertainty. As a matter of fact, we are trained from childhood that saying “I don’t know” is a sign of failure and we are often trained to project confidence even when we are unsure. Duke writes, “We are trained in school that saying “I don’t know” is a bad thing. Not knowing in school is considered a failure of learning. Write “I don’t know” as an answer on a test and your answer will be marked wrong.”

However, she argues that this is precisely backwards as we should be acknowledging uncertainty. She explains that while, “We are discouraged from saying ‘I don’t know’ or ‘I’m not sure.’ We regard those expressions as vague, unhelpful, and even evasive. But getting comfortable with ‘I’m not sure’ is a vital step to being a better decision-maker.”

Since we cannot eliminate uncertainty, as it would be impossible to only make decisions when we have all information at hand, we should strive to calibrate our decisions based on what we have. This approach requires us to think in probabilities rather than certainties. Instead of asking “Will this work?”, we ask ourselves, “What’s the probability this will work, and what are the factors that could change that probability?”

“What good poker players and good decision-makers have in common is their comfort with the world being an uncertain and unpredictable place. They understand that they can almost never know exactly how something will turn out. They embrace that uncertainty and, instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the chances that different outcomes will occur. The accuracy of those guesses will depend on how much information they have and how experienced they are at making such guesses. This is part of the basis of all bets.”
— Annie Duke

As such, it is important to calibrate ourselves to understand that “What makes a decision great is not that it has a great outcome. A great decision is the result of a good process, and that process must include an attempt to accurately represent our own state of knowledge. That state of knowledge, in turn, is some variation of “I’m not sure.”

It is only by doing so that we can accept uncertainty in the results of our decisions and to not be bothered when things don’t go our way. Duke writes, “When we move away from a world where there are only two opposing and discrete boxes that decisions can be put in—right or wrong—we start living in the continuum between the extremes. Making better decisions stops being about wrong or right but about calibrating among all the shades of grey.”

This reminds me of the importance of focusing on the process over the results as we have learned from Bill Walsh. He understood that focusing solely on winning can create undue pressure and lead to suboptimal performance. Instead, Walsh advocated for a concentration on the processes that drive success. Especially at the beginning of his reign as the coach of the San Francisco 49ers, Walsh insisted “to channel the concentration of the 49ers toward improving performance on the field and throughout the organization.”

As a matter of fact, he believed that when teams obsess over their execution and the quality of their thinking, success will inevitably follow. He once said, “I directed our focus less to the prize of victory than to the process of improving—obsessing, perhaps, about the quality of our execution and the content of our thinking.” This approach allows for a sustainable path to achievement, where improved performance becomes the primary goal rather than fleeting victories.

Walsh admits that this is difficult to execute especially due to external pressures, such as media scrutiny or fan expectations which can distract from this focus. Instead, Walsh prioritize the development of skills and fostering a growth mindset; he cultivated an atmosphere where individuals could thrive without the paralyzing fear of failure. His philosophy encourages leaders to cultivate patience and persistence by emphasizing that that the true measure of success lies in continuous improvement rather than immediate results. He believed that when individuals are committed to their processes, the outcomes—both on and off the field—will take care of themselves.

“Consequently, the score wasn’t the crushing issue that overrode everything else; the record didn’t mean as much as the season progressed, because we were immersed in building the inventory of skills, both attitudinal and physical, that would lead to improved execution. That was the key.”
— Bill Walsh

This mentality of focusing on the process rather than the outcome allowed the 49ers to weather temporary setbacks and maintain a long-term perspective. Walsh knew that even in defeat, there were valuable lessons to be learned and opportunities for growth. He mentions the fact that “a resolute and resourceful leader understands that there are a multitude of means to increase the probability of success. And that’s what it all comes down to, namely, intelligently and relentlessly seeking solutions that will increase your chance of prevailing in a competitive environment. When you do that, the score will take care of itself.”

In fact, according to Bill Walsh, failure is not merely a setback but a critical component of success. He mentions that *“When the inevitable setback, loss, failure, or defeat comes crashing down on you—allow yourself the ‘grieving time,’ but then recognize that the road to recovery and victory lies in having the strength to get up off the mat and start planning your next move.”*Ultimately, the capacity to learn and adapt defines a champion’s journey. The lessons learned from failure foster a unique strength.

“When you stand and overcome a significant setback, you’ll find an increasing inner confidence and self-assurance that has been created by conquering defeat.”
— Bill Walsh

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Beyond the Book

Read "Tradeoffs: The Currency of Decision Making" by Farnam Street

Watch "Making Smarter Decisions & Why Great Investors Are Great Quitters w/ Annie Duke (TIP623)" on Youtube

Listen to "#37 Annie Duke: Getting Better by Being Wrong" by The Knowledge Project

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

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

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

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Today’s Chapter is based on the book “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor” by Seth Klarman.

Seth Klarman is an American billionaire investor and CEO of The Baupost Group, a Boston-based value-oriented investment firm he has managed since its founding in 1982. He is best known for his disciplined, risk-averse value investing philosophy.

Buy it on Amazon here.

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Avoid Capital Loss

“My goal was to keep losses down, and if I could catch a few stocks going up, compound returns would work their magic.”
— Walter Schloss

Seth Klarman believes that good returns don’t come from by pursuing high returns but by avoid permanent capital loss at all cost. While this may sounds counterintuitive, mathematically speaking, it does make sense considering it would take a 100% return to recover from a stock that lost 50% of his value.

As a matter of fact, Klarman explains that “In other words, an investor is more likely to do well by achieving consistently good returns with limited downside risk than by achieving volatile and sometimes even spectacular gains but with considerable risk of principal. An investor who earns 16 percent annual returns over a decade, for example, will, perhaps surprisingly, end up with more money than an investor who earns 20 percent a year for nine years and then loses 15 percent the tenth year.”

As such, it is not surprising that Warren Buffett once said that the first rule of investing is ‘Don’t lose money’ and that the second rule of investing is to ‘Never forget the first rule.’ Similarly, Klarman writes that “avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather ‘don’t lose money’ means that over several years an investment portfolio should not be exposed to appreciable loss of principal.”

“A corollary to the importance of compounding is that it is very difficult to recover from even one large loss, which could literally destroy all at once the beneficial effects of many years of investment success.“
— Seth Klarman

Furthermore, Klarman challenges the notion that the risk from investing comes from volatility. In his opinion, if you are confident in your assessment of value, short-term price drops should be considered as opportunities, not risks. He writes, “Many investors consider price fluctuations to be a significant risk: if the price goes down, the investment is seen as risky regardless of the fundamentals. But are temporary price fluctuations really a risk? Not in the way that permanent value impairments are and then only for certain investors in specific situations.” Therefore, the true risk the permanent loss of capital, which is why the primary goal of an investor must always be the avoidance of loss. By avoiding high-risk and speculative bets, the investor protects his ability to compound wealth over time.

As mentioned, this insight challenges the conventional wisdom that dominates Wall Street, where higher risk is often equated with higher potential reward. Klarman elaborates that “greater risk does not guarantee greater return. To the contrary, risk erodes return by causing losses. It is only when investors shun high-risk investments, thereby depressing their prices, that an incremental return can be earned which more than fully compensates for the risk incurred. By itself risk does not create incremental return; only price can accomplish that.”

This reminds me of what Mohnish Pabrai calls Dhandho investing which is based on the concept 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

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Margin of Safety

“The idea of a margin of safety, a Graham precept, will never be obsolete.”
— Charlie Munger

Seth Klarman defines value investing as acquiring companies that are trading below their intrinsic value. However, he is also aware with the fact that calculating the intrinsic value of a company is difficult and imprecise. Therefore, a smart investor must only invest in a company when he has a sufficient margin of safety which provides a buffer against errors in valuation, unforeseen events and human fallibility. Klarman writes, “A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others, who are not as concerned about loss.”

An example of having a sufficient margin of safety is, for example, to purchase a dollar for fifty cents. Klarman mentions that the concept of margin of safety comes from the father of value investing, Benjamin Graham, famously known as the mentor of Warren Buffett. Klarman mentions that “Benjamin Graham understood that an asset or business worth $1 today could be worth 75 cents or $1.25 in the near future. He also understood that he might even be wrong about today’s value. Therefore Graham had no interest in paying $1 for $1 of value. There was no advantage in doing so, and losses could result. Graham was only interested in buying at a substantial discount from underlying value. By investing at a discount, he knew that he was unlikely to experience losses. The discount provided a margin of safety.”

Similarly, Buffett had this saying that “When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing.“

“The margin of safety is always dependent on the price paid. For any security, it will be large at one price, small at some higher price, nonexistent at some still higher price.”
— Benjamin Graham

By consequence, in his book, Seth Klarman provides a practical framework on how investors can invest with a sufficient margin of safety. He writes, “How can investors be certain of achieving a margin of safety? By always buying at a significant discount to underlying business value and giving preference to tangible assets over intangibles. (This does not mean that there are not excellent investment opportunities in businesses with valuable intangible assets.) By replacing current holdings as better bargains come along. By selling when the market price of any investment comes to reflect its underlying value and by holding cash, if necessary, until other attractive investments become available.”

A great example of a value investor who understood the importance of investing with a large margin of safety is Peter Cundill who was also deeply rooted in the principles of value investing. His method wasn’t just about picking cheap stocks; it was about ensuring a margin of safety that protected against downside risks while positioning for substantial upside potential.

Cundill’s early experiences shaped this view, as he veered toward solid companies in unfashionable industries that had seen sharp price declines without corresponding negative fundamentals. His first major investment in Bethlehem Copper exemplified this: the shares were trading at the price of the company’s cash on the balance sheet, with no debt and a profitable mine backed by long-term contracts. This kind of exhaustive analysis revealed opportunities hidden from the casual observer, turning apparent bargains into profound value plays.

“The essential concept is to buy under-valued, unrecognized, neglected, out of fashion, or misunderstood situations where inherent value, a margin of safety, and the possibility of sharply changing conditions created new and favourable investment opportunities.”
— Peter Cundill

Cundill quickly formalized his own investment philosophy which can be summarized with the following:

1. The share price must be less than book value. Preferably, it will be less than net working capital less long term debt.

2. The price must be less than one half of the former high and preferably at or near its all time low.

3. The price must be less than one half of the former high and preferably at or near its all time low.

4. The price earning multiple must be less than ten or the inverse of the long term corporate bond rate, whichever is the less.

5. The company must be profitable. Preferably it will have increased its earnings for the past five years and there will have been no deficits over that period.

6. The company must be paying dividends. Preferably the dividend will have been increasing and have been paid for some time.

7. Long term debt and bank debt (including off-balance sheet financing) must be judiciously employed. There must be room to expand the debt position if required.

Furthermore, Cundill’s willingness to concentrate holdings in a few undervalued securities, even in a single market, reflected not only his confidence in this value investing approach, but is a perfect example of how focus can reduce risks. As Cundill explains, “The portfolio has been concentrated. The number of holdings has been decreased by approximately one-third and the average size of position increased by 20%. Our focus, but especially my own, has consequently been considerably sharpened. My father was a very good birdshot and he always said “never shoot into the brown.” In other words, never shoot into a flock of birds without first choosing a single bird—at least in your mind.”

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Patience

“The big money is not in the buying and the selling, but in the waiting.”
— Charlie Munger

Based on Seth Klarman’s teaching, if loss avoidance is the destination for value investors, patience is the vehicle that can get you there. Klarman mentions that value investing demands extraordinary discipline that few possess. The market presents countless pitches, but the successful investor recognizes that most are not worth hitting. He writes, “Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.”

To illustrate the importance of patience, he refers to the baseball analogy that is frequently used by Warren Buffett. Klarman explains that “A long-term-oriented value investor is a batter in a game where no balls or strikes are called, allowing dozens, even hundreds, of pitches to go by, including many at which other batters would swing. Value investors are students of the game; they learn from every pitch, those at which they swing and those they let pass by. They are not influenced by the way others are performing; they are motivated only by their own results. They have infinite patience and are willing to wait until they are thrown a pitch they can handle—an undervalued investment opportunity.”

“For a value investor a pitch must not only be in the strike zone, it must be in his ‘sweet spot.’ Results will be best when the investor is not pressured to invest prematurely. There may be times when the investor does not lift the bat from his shoulder; the cheapest security in an overvalued market may still be overvalued.”
— Seth Klarman

The baseball analogy from Warren Buffett is actually based on Ted Williams who, as a hitter, was known for his exceptional ability to wait for the right pitch, the one in his “happy zone” where he could maximize his chances of success. He believed that even the greatest hitters couldn’t be successful if they swung at bad pitches.

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

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

As such, to be a value investor, not only do you need to wait for the right opportunity, you must also be disciplined enough to hold cash when nothing attractive is available, a decision that can be especially excruciating during rising markets. As Klarman says, “Above all, investors must always avoid swinging at bad pitches.”

This is extremely difficult, as it often leads value investors needing to be contrarians and to go against the herd. As a matter of fact, Klarman argues that value investors must avoid the temptation to outperform the market in the short run. Owning securities should be because they are undervalued, not because they are popular among other investors. He mentions that one should chase absolute performance rather than chasing relative results. He writes, “Good relative performance, especially short-term relative performance, is commonly sought either by imitating what others are doing or by attempting to outguess what others will do. Value investors, by contrast, are absolute-performance oriented; they are interested in returns only insofar as they relate to the achievement of their own investment goals, not how they compare with the way the overall market or other investors are faring.”

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Beyond the Book

Read "Seth Klarman: The Forgotten Lessons of 2008" by Farnam Street

Read "PRESERVE CAPITAL" by Investment Masters Class

Read "MARGIN OF SAFETY" by Investment Masters Class

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

Watch " Seth Klarman on Finding Value and Maintaining Discipline" on YouTube

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Today’s Chapter is based on the book “Living Value Investing: the Story of Cheah Cheng Hye“ by Tony Tsoi.

Cheah Cheng Hye is a Hong Kong-based investor and entrepreneur best known as the co-founder of Value Partners Group, one of the city’s leading asset managers. He started out as a financial journalist before becoming a prominent advocate of value investing in Asia.

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Outsider Advantage

“You can’t do the same things others do and expect to outperform.”
— Howard Marks

Cheah Cheng Hye’s career as an investor is quite interesting considering he came from an unconventional background. As an immigrant without an university degree, Cheah first started working as a beat reporter before starting work in the investment industry. Rather than viewing his circumstances as liabilities, Cheah was able to leverage them into distinctive advantages.

As a matter of fact, Cheah was born into poverty in Malaysia. His father passed away when he was just nine years old. His childhood had no such concept as leisure, there was no time stop as he was struggling to survive. Cheah writes, “When I was a kid, my family was really poor. I spent my days on the streets. I had no idea what it was to be rich I never even had any contact with anyone wealthy before. I thought the whole world was just like my world.”

Nonetheless, this situation instilled in him a hunger and resilience that no formal education could replicate. At twenty, Cheah found work as a reporter for The Star, a small local newspaper. This allowed him to establish his self-learning process that would become primordial to his career as an investor. As Cheah once said, “Working as a reporter was the ideal self- learning platform. There’s always someone answering questions I posed. The whole world was my tutor.”

As such, it is clear that Cheah’s outsider’s background is not a disadvantage but a potential source of insight. While insiders become trapped into conventional thinking and following the crowd, outsiders are not bound by the same assumptions and group-thinking.

“Outsiders don’t often succeed in changing the rules of the insiders’ game. Most either give up and leave, or resign themselves to following the method of the insiders, becoming one with the crowd. Few outsiders can maintain their determination on their own, and gradually narrow the gap with the insider by patience and earning results. The biggest weapon of the outsider is their view of what is lacking with the insider. The insider can never see his own blind spot, and will always deny it at first when pointed out to him.”
— Cheah Cheng Hye

In the case of Cheah, due to his outsider’s approach, he was able to find opportunities in Asia where others weren’t. He was one of the first investors in Asia to use the value investing approach, especially in non-blue chips stocks. Tony Tsoi writes that “The investment value of non-blue chips then was too obvious. The biggest problem was that no one was interested; what was cheap would continue being cheap, people thought. Cheah saw the opportunity with the insight of an outsider, committing to work in a new way where everyone thought there was only one way to work.”

As a matter of fact, Cheah also loved to invest out of the beaten path. His firm Value Partners thrived in in investing in industrial stocks. Tsoi mentions that “Value Partners, on the other hand, started out avoiding the heavyweights, while looking for new terrain to invest in. At the time, one type of stock was often left unattended to by most investors and that was industrial stocks. Value Partners was so active in industrial stocks that it grew to become recognized as an expert firm in the field.”

Finally, what made Cheah special was his ability to adapt value investing to Asian contexts. He explains that “To me, the core definition of value investing has never changed. But we must adapt. One of our best adaptations: to understand how Asian companies are different from Western companies. The human factor is critical—way more important than other objective standards. Western companies are more institutionalized, and the impact of individuals is not as great. Investing in Asian securities, though, is virtually an investment in the management of the firm. Our edge is our knowledge in using an Asian perspective to analyze Asian companies.”

“Asian companies have a unique style of management. The market is full of family operations that Americans would, prima facie, be unable to accept given the management standards practiced. Our edge is our understanding of Asia, of Asian culture. Cultural differences mean that many Asian companies are undervalued, and these are our opportunities. Asia is the perfect seedbed for value investing.”
— Cheah Cheng Hye

This reminds me of how Howard Marks mentions that 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

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Self-Learning

‘I have never let my schooling interfere with my education.”
— Mark Twain

As mentioned, Cheah Cheng Hye’s life is a perfect example of how self-learning can overcome any limitations from the lack of formal education. His approach to learning shows that knowledge accumulation is done through compounding over time.

In fact, Cheah was a huge bookworm and was known as such among his friends and colleagues. A friend of his once said, “The one that has stuck with me the most is his bookworm image. Wherever we saw him, we were sure to find him behind a pile of books. Whenever we talked with him, our conversation was sure to revolve around books. His office is not unlike that of a university professor’s, filled with books from floor to ceiling.”

Similarly, Tsoi mentions that “There are really plenty of tidbits about Cheah and his addiction to books. Every person I interviewed brought it up. Some report hearing rumours that at no time is Cheah not reading something. One particularly amusing anecdote came from someone who had heard that Cheah reads even in the shower.”

As such, it is not surprising that Cheah was able to transition from a beat reporter to become one of the greatest investors in Asia, as he was studying on his own. In fact, it is fair to say that Cheah mastered accounting and valuation principles by himself.

“As his shelves seemed to be filling up with books on financial matters, Cheah was being pulled into the field, almost without even being aware it was happening to him. Still an outsider, Cheah quietly studied on his own. Like the apprentice monk who fetches and carries water up the mountain every day without realizing that the routine activities were making up the training to be a master, Cheah’s study as an amateur outsider, and his 17 years as a journalist, was the simple training that was enabling him to grow into a master of the field.”
— Tony Tsoi

However, Cheah also warns us that true self-learners must be able to master various skills from different disciplines. He explains that “There are many people who learn some skills, and then actually become limited by these skills, because they think that is what they are good at. I think we often underestimate ourselves. Humans are always breaking past their limits. I’m an expert in self-learning. I never formally studied accounting, for example, but I’ve learned enough to have knowledge at what might be considered a professional level.”

This reminds us of the importance of being multidisciplinary. Charlie Munger once said 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. Tren Griffin writes that “Munger has adopted an approach to business and life that he refers to as worldly wisdom. Munger believes that by using a range of different models from many different disciplines—psychology, history, mathematics, physics, philosophy, biology, and so on—a person can use the combined output of the synthesis to produce something that has more value than the sum of its parts.”

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

Kaufman continues by saying that he was able to learn the big ideas of science, biology and etc. through reading interviews with experts on the subject. He was able to understand because the interviews were done in a clear language and by using good examples. As we have learned previously with the Feynman Technique, learning can be easy if you keep things simple.

“So I tried to learn what Munger calls “the big ideas” from all the different disciplines. Right up front I want to tell you what my trick was, because if you try to do it the way he did it, you don’t have enough time in your life to do it. It’s impossible. Because the fields are too big, and the books are too thick. So my trick to learn the big ideas of science, biology, et cetera, was I found this science magazine called Discover magazine. Show of hands, anybody here ever heard of Discover magazine? A few people. Okay. And I found that this magazine every month had a really good interview with somebody from some aspect of science. Every month. And it was six or seven pages long. It was all in layperson’s terms. The person who was trying to get their ideas across would do so using good stories, clear language, and they would never fail to get all their big ideas into the interview. I mean, if you’re given the chance to be interviewed by Discover magazine and your field is nanoparticles or something, aren’t you going to try your very best to get all the good ideas into the interview with the best stories? Okay.”
— Peter Kaufman

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Killer’s Instinct

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
— Warren Buffett

One of the qualities that distinguishes Cheah Cheng Hye from the average investors is his profound capacity for patience. He compares investing to the waiting for the process of medicine taking effect, this cannot be rushed, yet many patients are impatient. He once said, “Medicine takes time to work. Sadly, most patients can’t even wait till the next day to go to another doctor, and so demand the fastest, strongest antibiotics.”

As a matter of fact, value investing requires patience as it often takes time before a cheap stock is re-rated, unless there is a catalyst. Tsoi writes, “It’s not good enough for a stock to be cheap. It needs a catalyst, which is usually not something anticipated by the market. Buying into a company with high potential for growth in profitability and regular dividend payouts is the first step. The next step is to wait, patiently, for rerating to occur.“

As such, it is not surprising that Cheah is great at tolerating boredom, a skill in value investing that is necessary. As he once said, “Boredom is good.”

“Investors who know and are willing to ‘hold’ share a common belief. They know the reasons for what they are doing, where they stand, and how to make the next moves.”
— Tony Tsoi

Yet, despite his reputation for patience, Cheah is also known for what he coins as the “killer instinct”, defined as the ability to recognize an opportunity and to seize it with full force without any hesitation. In terms of investing, the killer instinct is about striking decisively when you find a no brainer opportunity. Cheah believes he has an ability to identify people with a “killer instinct”. He mentions that “These people are more reserved. Maybe even introverted. They are not huge personalities in school. On the other hand, people who are used to being stars, who are concerned with their own popularity, are always very cautious in making decisions. They are always in two minds about things.”

This killer instinct is part of the reason why Value Partners was able to invest in BYD long before Warren Buffett discovered the company. Tsoi mentions that “In 2006, BYD announced a drop in profits, but what was more damning was their announcement that they were entering the automobile market. The market and analysts widely condemned BYD for a lack of focus on their core business, which was a huge red flag in the investment world. BYD’s stock went into a freefall. Cheah sniffed a golden chance. He personally visited their Shenzhen factory to understand BYD’s plan for an automobile business, and he concluded that the market was not being fair to BYD. As usual, Value Partners took what others discarded. It kept taking on BYD stocks until its holdings exceeded 10% , with Value Partners becoming the second largest shareholder of the company.“

Furthermore, Cheah believes that the killer instinct is necessary since he acknowledges that investing is a game of probabilities; no matter how good of an investor he is, he will make mistakes. As a matter of fact, he has coined the term ‘Onethirds’ theory. Tsoi explains that Cheah is “not an invincible general: one- third of the time, he wins; one- third of the time, he loses; and the final third, it is a draw. He might not be intentionally humble. If one calculates his performance, Cheah might really have won only one- third of the time. But his victory could be very different from the victories of ordinary people. This is an important technique of fund managers called position sizing: when one wins, one wins an entire business; when one loses, one loses just a piece of candy.”

Cheah draws a parallel to poker, one of his favorite games. He mentions, “This is what I mean by the ‘Killer Instinct.’ Take poker- one of my favorite games—for example. I think throughout a person’s life, he gets dealt with about the same number of good and bad hands. No one gets only good hands or bad hands throughout the game. The key is that when a good hand comes along, one must win to the fullest.”

“When there is food on the table, I must eat, because I don’t know if there will be food tomorrow. When opportunity comes my way, I must take it, and take it to the fullest, because I don’t know if there will ever be an opportunity again.”
— Cheah Cheng Hye

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Beyond the Book

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

Read "The Multidisciplinary Approach to Thinking" by Farnam Street

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

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Today’s Chapter is based on the book “Philip A. Fisher Collected Works: Common Stocks and Uncommon Profits, Paths to Wealth through Common Stocks, Conservative Investors ... and Developing an Investment Philosophy” by Philip Fisher.

Philip Fisher was an influential American investor and author best known for Common Stocks and Uncommon Profits. He pioneered growth investing, emphasizing long-term ownership of high-quality companies and deep research into management, products, and competitive advantage. Warren Buffett once said that he is 85% Ben Graham, but also 15% Philip Fisher.

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Long-Term

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

Philip Fisher mentions in his book that the greatest investment rewards come from identifying companies that are capable of sustained growth in sales and profits, especially those far exceeding the industry average, and to remain invested through market fluctuations. He argues against frequent trading or chasing short-term bargains, believing that patience with quality businesses compounds substantially.

This insight of Fisher reminds me of the famous saying that time in the market beats timing the market. Fisher mentions that “within the lifetime of most investors and within the period in which their parents could have acted for nearly all of them, there were available scores of opportunities to lay the groundwork for substantial fortunes for oneself or one’s children. These opportunities did not require purchasing on a particular day at the bottom of a great panic. The shares of these companies were available year after year at prices that were to make this kind of profit possible. What was required was the ability to distinguish these relatively few companies with outstanding investment possibilities from the much greater number whose future would vary all the way from the moderately successful to the complete failure.”

“Even in those earlier times, finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear.”
— Philip Fisher

As such, Fisher’s remarks is a proof that thinking long-term is necessary to compound wealth. As a matter of fact, he explains that sound investors should not sell shares in outstanding companies even during market downturns. He argues that it is impossible for one to time the market. He writes, “If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.”

Fisher elaborates that there are only three reasons for which an investor should sell shares in a company. The first is when the original purchase was a mistake and the facts reveal that the company was less attractive than initially believed. Fisher also mentions that a lot of investors often have the urge to wait for a stock to recoup its losses before selling, but that this is always a mistake.

“More money has probably been lost by investors holding a stock they really did not want until they could ‘at least come out even’ than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.”
— Phil Fisher

The second reason for selling is when the company’s fundamentals has deteriorated. For example, this can happen when the management team has lost its edge or the company’s competitive position has weakened. As such, it is primordial for investors to remain alert to changes in the companies they own. He writes, “Sales should always be made of the stock of a company which, because of changes resulting from the passage of time, no longer qualifies in regard to the fifteen points outlined in Chapter Three to about the same degree it qualified at the time of purchase. This is why investors should be constantly on their guard. It explains why it is of such importance to keep at all times in close contact with the affairs of companies whose shares are held.”

Finally, the third reason to sell is when an investor discovers an even more compelling opportunity and needs to reallocate capital. However, Fisher cautions that this situation should seldomly arise and should only be acted upon with great confidence.

“The company that can show an average annual increase of 12 per cent for a long period of years should be a source of considerable financial satisfaction to its owners. However, the difference between these results and those that could occur from a company showing a 20 per cent average annual gain would be well worth the additional trouble and capital gains taxes that might be involved.”
— Phil Fisher

This reminds me of what we have learned from Charlie Munger who has always been a big proponent of delayed gratification. He believes in the importance of patience and being prepared to act at scale when a great opportunities arise. As he once said, “If you’re glued together and honorable and get up every morning and keep learning every day and you’re willing to go in for a lot of deferred gratification all your life, you’re going to succeed.”

Munger gave a great example of delayed gratification: How he earned $400 million from reading Barron’s magazine. Munger had been reading Barron’s magazine for more than fifty years, but found only one actionable idea in it. He bought a cheaply valued auto parts company at $1 per share and sold a few years later at $15 per share, earning him $80 million in profits. Munger then gave this $80 million to Li Lu who turned it into $400 million. This story is a great example of the significance of extreme patience, deferred gratification, and the display of strong decisiveness at the right moment.

“People who arbitrage time will almost always outperform. The first order thought of instant gratification is a crowded path, ensuring mediocre results at best. Delayed gratification, which requires second order thinking, is less crowded and more likely to get results.”
—Shane Parrish

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The Scuttlebutt Method

“But when I started out, and for a long time I used to do a lot of what Phil Fisher described — I followed his scuttlebutt method. And I don’t think you can do too much of it.”
— Warren Buffett

One of Phil Fisher’s most innovative contribution to investment practice was his emphasis on what he called the “scuttlebutt” method. Rather than relying solely on the numbers on the financial statements, he believes that to truly understand a company requires talking to everyone connected to it, such as the competitors, suppliers, customers, former employees, and industry experts. This deep research would reveal the qualitative factors that financial statements could never capture.

As such, Fisher advices that the first step while analyzing a company is to read their financial statements and the second step is to conduct a scuttlebutt on it. However, before doing so, Fisher recommends reading analyst reports that are recently written on the company. He writes that “There are two benefits from doing this. It will enable any experienced financial man to sharpen his perception of exactly what comprises the current financial image of the company so that he may be that much more alert for deviations. Also the better of these reports may furnish him valuable leads as to particular aspects of the business on which he should focus special attention.”

As for the second step, Fisher mentions that the scuttlebutt method is aimed at investigating the company through individuals who are not officers or employees of the company but who know a great deal about it, especially details that cannot be learned from reading readily available materials. He elaborates that “One of these groups is vendors or suppliers to a company. Another is customers, particularly large customers. However, perhaps the most important of all is competitors. It has been said that if anyone went to the top sales people in each of six competitive companies, seeking the comparative strengths and weaknesses of each of the other five, the consensus views that would emerge would provide a remarkably accurate picture of the good and bad points of all six.”

“It is my opinion that in almost any field nothing is worth doing unless it is worth doing right. When it comes to selecting growth stocks, the rewards for proper action are so huge and the penalty for poor judgment is so great that it is hard to see why anyone would want to select a growth stock on the basis of superficial knowledge. If an investor or financial man wants to go about finding a growth stock properly, I believe one rule he should always follow is this: he should never visit the management of any company he is considering for investment until he has first gathered together at least 50 per cent of all the knowledge he would need to make the investment. If he contacts the management without having done this first, he is in the highly dangerous position of knowing so little of what he should seek that his chance of coming up with the right answer is largely a matter of luck.”
— Phil Fisher

To conclude, Phil Fisher’s method is definitely not for the lazy or impatient. It demands intellectual curiosity, social skills and persistence. But for those who are willing to do the work, it offers a possibility of gaining insights that others miss. On this, Fisher writes, “In what other line of activity could you put $10,000 in one year and ten years later (with only occasional checking in the meantime to be sure management continues of high caliber) be able to have an asset worth from $40,000 to $150,000? This is the kind of reward gained from selecting growth stocks successfully. Is it either logical or reasonable that anyone could do this with an effort no harder than reading a few simply worded brokers’ free circulars in the comfort of an armchair one evening a week?”

The “Scuttlebutt” method reminds me of Howard Marks who 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

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Quality of Management

“The greatest leader is not necessarily the one who does the greatest things. He is the one that gets the people to do the greatest things.”
— Ronald Reagan

Throughout his writings, it is clear that Philip Fisher understands that the quality of management is the single most important factor in determining whether a company will be successful long-term investment or not. As a matter of fact, he believes that management quality can be manifested in many ways. For example, it can be shown through the company’s profit margins relative to competitors, in its research and development productivity, in its labor relations, or in its treatment of customers and suppliers. As he explains, “No company grows for a long period of years just because it is lucky. It must have and continue to keep a high order of business skill, otherwise it will not be able to capitalize on its good fortune and to defend its competitive position from the inroads of others.”

To identify a good management team, Fisher first prioritizes integrity. He insists on finding companies where managers do not prioritize their own interests over those of shareholders, and those that have a genuine sense of trusteeship.

“Regardless of how high the rating may be in all other matters, however, if there is a serious question of the lack of a strong management sense of trusteeship for stockholders, the investor should never seriously consider participating in such an enterprise.”
— Phil Fisher

Furthermore, a second thing that Fisher emphasizes is the depth of the company’s management team and its ability to train successors. He explains that no matter how brilliant a manager is, the company is extremely vulnerable if talent isn’t developed at every level. He writes, “One of these goals, which is absolutely essential if an investment is to be a truly successful one, is that top management take the time to identify and train qualified and motivated juniors to succeed senior management whenever a replacement is necessary.”

To do, it is important for management team to be able to delegate authorities to those below them.

“No large company ever built up an outstanding management team which did not delegate authority to those who were performing well. Otherwise, junior executives could have no opportunity to perfect themselves from actual experience, to mature, and to grow.”
— Phil Fisher

This is eerily similar to Warren Buffett’s philosophy, who believes that management quality is paramount when evaluating potential investments. A skilled and trustworthy management team can significantly influence a company’s success or failure. He once said, “After some other mistakes, I learned to go into business only with people whom I like, trust, and admire.”

As a matter of fact, for Buffett, integrity is the most important trait he’s looking for in a manager. He explains, “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. 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.’”

Furthermore, Buffett explains that talented managers aren’t necessarily those that are highly qualified in terms of education or those that have an MBA degree. As a matter of fact, Alan Greenberg once said, “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 (PSD stands for poor, smart and a deep desire to become rich.)”*

“Berkshire’s CEOs come in many forms. Some have MBAs; others never finished college... Our team resembles a baseball squad composed of all-stars having vastly different batting styles.”
— Warren Buffett

Finally, Buffett explains that once you have identified a superb manager, you have to make sure that you do everything in your power to retain them even if they are getting old. As he once said, “We do not remove superstars from our line-up merely because they have attained a specified age... Superb managers are too scarce a resource to be discarded simply because a cake gets crowded with candles.”

And as we have previously seen, Warren Buffett is well-known for his decentralised management system at Berkshire Hathaway. Charlie Munger, the ex-Vice Chairman of Berkshire Hathaway once described the system as “delegation just short of abdication.” While the capital allocation decisions are taken care of by Munger and Buffett, all operation decisions are left to managers in the company who are left alone to run their businesses.

As Buffett mentions, “At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment... Our trust is in people rather than process. A “hire well, manage little” code suits both them and me.”

*“Our managers are totally in charge of their personal schedules. Second, we give each a simple mission: Just run your business as if:

• You own 100% of it;

• It is the only asset in the world that you and your family have or will ever have; and

• You can’t sell or merge it for at least a century. As a corollary, we tell them they should not let any of their decisions be affected even slightly by accounting considerations. We want our managers to think about what counts, not how it will be counted.”*
  — Warren Buffett

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Today’s Chapter is based on the book “Dirtbag Billionaire: How Yvon Chouinard Built Patagonia, Made a Fortune, and Gave It All Away” by David Gelles.

Yvon Chouinard is an American rock climber, environmentalist, and businessman best known for founding the outdoor clothing and gear company Patagonia in 1973. As a leading climber, he started as a craftsman making climbing gear for himself and friends before expanding into apparel.

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Here’s what I learned:

Focus on Quality

“Quality means doing it right when no one is looking.”
— Henry Ford

Yvon Chouinard’s obsession with excellence in terms of products which defines Patagonia’s products began at an early age when he was working as a blacksmith. In fact, he understood that producing superior gear, such as pitons, was a moral and practical necessity considering he was making items used by climbers in life or death situations. Gelles writes that “Chouinard learned an important lesson that would inform his whole career: if he made the very best product, consumers would pay a premium. Initially, this was true with an extremely specialized crowd, a small band of extreme climbers. They needed the best gear; their lives depended on it.”

This ethos of his was inherited from his father. Chouinard mentions, “He taught me that when you buy a tool, you buy the absolute best tool you can get and keep it for the rest of your life. That’s much better than buying a cheap tool and having it break, buying another one, having that break.” And, this focus on quality was extended to mainstream clothing when Chouinard started Patagonia. He understood that even though high quality jackets and sweaters cost more to make, the customers didn’t mind paying a premium if the craftsmanship is there due to better functionality and durability. As such, he was consistently improving on Patagonia’s product lines always pursuing better materials and designs. For example, he slowly transitioned away from successful synthetics products when superior options emerged. He was never afraid to choose progress over complacency.

“Going all in on polyester was a risk. At the time, 70 percent of Patagonia’s sales came from items made from polypropylene and bunting fleece. But Chouinard wasn’t afraid to turn his back on a successful product. Years earlier, he had phased out pitons when they made up the lion’s share of his business. Now he was doing the same thing, reinventing his go-to insulation layers and introducing Synchilla and Capilene.”
— David Gelles

Chouinard was never satisfied with the quality of Patagonia’s products. Even when his business was booming, Chouinard always believed in experimenting with new textiles in order to improve on the current standard gear for outdoor activities and sports. That’s how Patagonia introduced the first long underwear made of polypropylene to help adventurers to stay warm in the backcountry or how it introduced Baggies, a lightweight multi-sport shorts that had enough pocket space to accommodate two tennis balls.

Furthermore, it is important to note that Chouinard was not always an inventor; he preferred to improve on an existing design. This philosophy of his started even when he first started smithing climbing tools such as the ice axe.

“The ice axe was a breakthrough not only as a product but also as a model for how Chouinard would make his mark in the years ahead. He hadn’t invented an entirely new tool. Rather, by identifying opportunities for improvements and focusing on design, he had turned an ordinary object into something extraordinary. And in doing that, he had made a profit.”
— David Gelles

This reminds me of how David Packard’s commitment to customers at HP was unwavering, viewing their satisfaction as the foundation of the company’s success. He believed that products should not only meet technical standards but also address genuine customer needs effectively and economically. This customer-centric approach guided HP’s product development and ensured that innovation was both practical and impactful.

Packard emphasized the importance of aligning products with customer needs. He mentions that “The fundamental basis for success in the operation of Hewlett-Packard is the job we do in satisfying the needs of our customers. We encourage every person in our organization to think continually about how his or her activities relate to the central purpose of serving our customers.”

This directive meant that customer needs were not just the concern of the sales department but a guiding principle for everyone in the company. Salespeople were expected to work closely with customers to recommend the most appropriate and effective solutions, ensuring that products fulfilled the customer’s overall, long-term needs.

“At HP we offer many different products to many different customers, and it’s imperative that the products recommended to a specific customer are those that will best fulfill the customer’s overall, long-term needs. This requires that our field salespeople-operating individually, in teams, or with other companies that add value to HP products and services-work closely with customers to determine the most appropriate, effective solutions to their problems.”
— David Packard

Packard understood that customer loyalty and repeat business were earned through consistent delivery of high-value products and services. This dedication to understanding and serving the customer, coupled with a focus on innovation and quality, created a virtuous cycle. Products that truly met customer needs generated profit, which in turn could be reinvested into further research and development, leading to even better products and continued customer satisfaction. This deep understanding of the customer relationship, viewing it as a partnership built on trust and value, was a critical factor in HP’s sustained growth and leadership in its chosen fields.

“The essence of customer satisfaction at Hewlett-Packard is our commitment to quality, a commitment that begins in our laboratories and extends into every phase of our operations.”
— David Packard

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Environmental Responsibility

“Use business to inspire and implement solutions to the environmental crisis.”
— Yvon Chouinard

Yvon Chouinard’s love for nature was also a pivotal philosophy that he set at Patagonia. While he understood that he was impossible for his company to be fully environmental friendly, he wanted to make sure that he held his company responsible. As a matter of fact, he understands that everyone on Earth is playing a role in the destruction of nature, but he believes that everyone has the responsibility to make things better. As Chouinard once said, “Early on, we recognized that we humans were destroying our home planet, and that each of us, in our own way, was responsible to protect and restore the wild nature that we loved.”

This philosophy of his also started during his early career as a rock climber and as a blacksmith. He realized that the pitons that he was selling was slowly desecrating the granite when used during climbing. As such, he started to shift from pitons to chocks and made sure to promote and pioneer the term “clean climbing” to encourage other climbers to also make the switch. Gelles explains that “With hundreds of dirtbags trying to replicate Chouinard’s exploits by attempting the same routes that he had made famous, the rock was getting ruined. Piton by piton and pitch by pitch, America’s growing legion of climbers was chipping away at the granite. Ancient geological formations were being permanently scarred in a matter of years.“

“I always thought of rock climbing as a completely harmless sport—one that didn’t hurt anyone. But I came to realize it could do great harm to the rocks.”
— Yvon Chouinard

Furthermore, Chouinard was never afraid of business risk. Once he finds out that his product is not eco-friendly, he is fully committed to look for an alternative without much second-guessing even if it threatens profitability. An example of this is how he quickly changed Patagonia’s clothes from being made of conventional cotton to organic cotton. When he witnessed firsthand the ecocide it caused, he gave the company an ultimatum: it had to stop using conventional cotton within 18 months or else it would stop making t-shirts. Chouinard mentions, “I don’t want to be in business if I’ve gotta use this stuff [conventional cotton].”

Not only was Chouinard decisive in switching to organic cotton, once it had its operation up and running, he did not hesitate to share his newly acquired understanding of this supply chain with any competitor who wanted it. He truly believed it was his mission and responsibility to make the world a more ecological place. This worked well for Chouinard as it would help him instil trust to his vendors as they would be doing organic cotton for more than just one customer in Patagonia.

“If we continue to make clothes with conventionally grown cotton, knowing what we know now, we’re toast. Let’s do it. Let’s go organic. (…) We have realized for years that every product we make involves some level of pollution. There is no going back on this decision, regardless of its impact on the company’s sales or profits.”
— Yvon Chouinard

Chouinard understood that a single company couldn’t save the planet. But a single company could show others the way. By proving that responsible business was profitable business, Patagonia became a beacon for an entire generation of purpose-driven companies. This reminds me of what we have learned from Henry Ford who believes that it is wrong to assume that businesses only exist for profit. In his opinion, business exists to provide services. In fact, after working in business for so many years, he came to these three conclusions:

(1) That finance is given a place ahead of work and therefore tends to kill the work and destroy the fundamental of service.

(2) That thinking first of money instead of work brings on fear of failure and this fear blocks every avenue of business—it makes a man afraid of competition, of changing his methods, or of doing anything which might change his condition.

(3) That the way is clear for any one who thinks first of service—of doing the work in the best possible way.

As such, Ford reminds us to not be too greedy for money when running a business, as that is the surest way to not get any. He believes that when one focuses on providing great services, then money will abundantly takes care of itself. As he once said, “For the only foundation of real business is service.”

He explains that “The most surprising feature of business as it was conducted was the large attention given to finance and the small attention to service. That seemed to me to be reversing the natural process which is that the money should come as the result of work and not before the work. The second feature was the general indifference to better methods of manufacture as long as whatever was done got by and took the money.”

“ It is the function of business to produce for consumption and not for money or speculation.”
— Henry Ford

In Ford’s opinion, a business’s responsibilities to his customers do not stop once a sale is completed. As a matter of fact, that is only the start of it. For example, “In the case of an automobile the sale of the machine is only something in the nature of an introduction. If the machine does not give service, then it is better for the manufacturer if he never had the introduction, for he will have the worst of all advertisements—a dissatisfied customer.”

As such, when being a businessman, we must make sure to identify great products by the great services it provides to customers rather than by how much money we can earn by selling it.

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Corporate 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

Yvon Chouinard was always committed in building a company’s corporate culture that rejected corporate norms and that mirrored the adventurous spirit of his climbing community. As a matter of fact, Gelles writes, “No longer was he just a climber and a surfer and blacksmith. It was dawning on him that, like it or not, he was the leader of a company with an expanding set of responsibilities. He had payroll to make, people to look after, orders to fulfill. At the same time, he understood that he wasn’t going to adhere to the normal rules of business. His employees would not wear suits and ties. The office would not be covered in drab gray carpet and carved into cubicles. He sneered at the ‘pasty-faced corpses’ he saw shuffling through their days in corporate America. If he had to be a businessman, he was going to do it on his own terms.”

Considering most of his first employees were mainly friends and family, it makes sense that Chouinard prioritizes fun and flexibility when building the company’s corporate culture. Considering that a sense of adventure was at the heart of rock climbing, he wanted his employees to not take work too seriously. Gelles explains that “Colleagues would ideally be friends. He also was clear about what he didn’t care about—shoes were optional. Perhaps most importantly, employees needed to have the freedom to do the things that really mattered to them, like surf.”

“We just invented our own way of doing business. It was a bit unusual, but it worked.”
— Yvon Chouinard

Malinda, Yvon Chouinard’s wife, was also keen on providing great benefits to Patagonia’s employees. Notably, she quickly realized that by providing childcare on site to new mothers, it would help out the company as it would allow their female employees to stay in the workforce without sacrificing their career. The results were clear, Gelles writes that “Virtually every mother at Patagonia returns to her job after maternity leave, compared with about 70 percent at most companies. Employee engagement also significantly improved thanks to the childcare program. And Patagonia has for years had an unusually large number of women in senior leadership roles.””

This approach built deep loyalty among Patagonia’s employees. By treating them well, Chouinard created an environment where employees loved their work and flourished. This reminds me of Paul Orfalea who had to make Kinko’s a great place to work if he wanted to beat his competitors in a low barrier of entry industry. Orfalea understood that 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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Today’s Chapter is based on the book “Arnold: The Education of a Bodybuilder” by Arnold Schwarzenegger.

Arnold Schwarzenegger is an Austrian-born American actor, businessman, film producer, politician, and former professional bodybuilder who became one of the world’s greatest bodybuilders, winning Mr. Olympia seven times. He rose to international fame as a Hollywood action star, starring in blockbuster films like The Terminator, Conan the Barbarian, Total Recall, and True Lies, and was once the highest-paid actor in Hollywood.

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Here’s what I learned:

Have A Clear Vision

“If you can dream it, you can do it.”
— Walt Disney

Long before Arnold Schwarzernegger ever held a Mr. Universe trophy, he visualized himself winning it. Even at a young age, he believed this goal of his wasn’t a childhood fantasy. It was a conviction so strong that it shaped every decision he made. Schwarzenegger makes it clear that knowing exactly what you want is the foundation of all success.

As a matter of fact, he explains that “It was the summer I turned fifteen, a magical season for me because that year I’d discovered exactly what I wanted to do with my life. It was more than a young boy’s mere pipe dream of a distant, hazy future—confused fantasies of being a fireman, detective, sailor, test pilot, or spy. I knew I was going to be a bodybuilder. It wasn’t simply that either. I would be the best bodybuilder in the world, the greatest, the best-built man.”

While most people drift through their early life without knowing what they truly want, Arnold Schwarzenegger was lucky as he was locked in his goal and never wavered. He was able to do so because he found good role models when he was young. He knew he didn’t want to be “normal” or to live a regular life. He wanted to more than that. His first inspiration was Reg Park who was a bodybuilder that played the role of Hercules in a movie. After watching a movie of Reg Park, Schwarzernegger decided that he wanted to become a bodybuilder and eventually go to America to become an actor. He writes, “Reg Park looked so magnificent in the role of Hercules I was transfixed. And, sitting there in the theater, I knew that was going to be me. I would look like Reg Park. I studied every move he made, every gesture.”

“With my desire and my drive, I definitely wasn’t normal. Normal people can be happy with a regular life. I was different. I felt there was more to life than just plodding through an average existence. I’d always been impressed by stories of greatness and power. Caesar, Charlemagne, Napoleon were names I knew and remembered. I wanted to do something special, to be recognized as the best. I saw bodybuilding as the vehicle that would take me to the top, and I put all my energy into it.”
— Arnold Schwarzenegger

Furthermore, Schwarzenegger believes that visualizing what you want is a good method to push yourself to succeed. When he was working out at a younger age, he always had the image of Reg Park in his mind as a mental reminder to himself to keep pushing even through pain. But more importantly, Schwarzernegger believes that visualization is important for self-belief. While he was doubted by many people, even his own parents, he never lost faith. He writes, “I knew I was a winner. I knew I was destined for great things. People will say that kind of thinking is totally immodest. I agree. Modesty is not a word that applies to me in any way—I hope it never will.”

As such, it is clear that to having a mental picture keeps you hungry and focused towards your goal even amid setbacks. While vision alone isn’t enough if it is not paired with action, Schwarzenegger’s story is a perfect example of how ordinary people can achieve extraordinary results by visualization and by refusing to be average.

“At that point my own thinking was tuned in to only one thing: becoming Mr. Universe. In my own mind, I was Mr. Universe; I had this absolutely clear vision of myself up on the dais with the trophy. It was only a matter of time before the whole world would be able to see it too. And it made no difference to me how much I had to struggle to get there.”
— Arnold Schwarzenegger

This reminds me of what we have learned from Joe Montana who believed that achieving great things requires knowing what you are pursuing. He mentions, “it is impossible to strive for something until we know what it is we are pursuing. You have to know what you want.”

If we do not know what are specific goals are, it is very difficult to have the drive, discipline or imagination to achieve them. As such, the first thing to do is to identify what we want to accomplish. Not only that, I believe it is primordial to choose which goals we need to focus on in order to manage our time better.

One way of doing this is by writing down the goals we want to achieve and to circle the top three we want to achieve. The rest should be eliminated.

“This first principle, knowing what we want, is the beginning of achieving performance excellence.”
— Joe Montana

Once we have a goal in mind, Montana explains that visualization is a great mental tool in obtaining the positive results that we desire. He elaborates that “By concentrating on the image or outcome we desire, we can step into an “as if” reality, experiencing something as if it is really happening.”

He explains that the most important aspect of the visualization process is imagination. The greater the imagination, the more effective the visualization process will be. This idea reminds me of the importance of having imagination to succeed in business.

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Work on the Mind

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

One of the key takeaways from Arnold Schwarzenegger is the idea that bodybuilding is not solely about the muscles, it is also about the mind. In fact, he believes that the qualities that separate champions from everyone else are disciple, self-confidence and mental control. Schwarzenegger learned early on that it is, fundamentally, a psychological endeavor. He realized that the body will only go where the mind commands it. By treating training as a form of meditation, he developed a level of control that allowed him to isolate and grow muscles that others neglected.

He writes that “The point is, I was learning more and more about the mind, about the power it has over the body. It meant having complete communication with the muscles, always feeling what was happening to my muscles the day after a workout. The most important thing is that my mind was always in touch with my body; I felt my muscles continuously; I always took an inventory before working out. I flexed my muscles and got in touch. That not only helped me train; it was like meditating. I locked my mind into my muscle during training, as if I’d transplanted my mind into the tissue itself. By just thinking about it, I could actually send blood into a muscle.”

As such, in his book, Schwarzenegger mentions a three-part formula which is the secret to working out efficiently:

“The secret is contained in a three-part formula I learned in the gym: self-confidence, a positive mental attitude, and honest hard work. Many people are aware of these principles, but very few can put them into practice. Every day I hear someone say, “I’m too fat. I need to lose twenty-five pounds, but I can’t. I never seem to improve.” I’d hate myself if I had that kind of attitude, if I were that weak. I can lose ten to forty pounds rapidly, easily, painlessly, by simply setting my mind to it.”
— Arnold Schwarzenegger

Obviously the mind and the body are linked together. Schwarzenegger discovered early that by transforming his body, he earned things far more valuable than solely having a better physique, such as building better habits and better self-confidence. He explains that, “I believe I benefited in other ways that finally brought everything into balance. One of these was my self-confidence, which grew as I saw how much control I was gaining over my body. In two or three years I had actually been able to change my body entirely. That told me something. If I had been able to change my body that much, I could also, through the same discipline and determination, change anything else I wanted. I could change my habits, my whole outlook on life.”

By consequence, Schwarzenegger understood that mental concentration was everything in working out. He didn’t just go through the motions but he connected his mind directly to his muscles. This takeaway is crucial. Most people fail not because they lack talent or opportunity, but because they lack mental fortitude. Schwarzenegger teaches us that the battle is first won or lost in the mind.

“Bodybuilders hung on to me like fleas, because they thought if they did the same exercises I did they would get the same kind of muscles. But I watched them fall away with absolutely no results except exhaustion. They weren’t mentally prepared for intensive championship training; they weren’t thinking about it. I knew the secret: Concentrate while you’re training. Do not allow other thoughts to enter your mind.”
— Arnold Schwarzenegger

Similarly, we have learned previously that 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, 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.“

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Work on your Weaknesses

“Build up your weaknesses until they become your strong points.”
— Knute Rockne

A big reason of what makes Arnold Schwarzenegger special is his willingness to face his weaknesses heads-on. He doesn’t make any excuses when he losses, and instead, he analyzed, learned and came back stronger from his failures.

For example, when he placed second at his first ever Mr. Universe contest, instead of feeling sorry for himself, he analyzed his weaknesses and promised himself to work on them for the next year. He explains that, “As always, once I was over the initial disappointment of losing, I began trying to understand exactly why I had lost. I tried to be honest, to analyze it fairly. Aside from my total lack of finish, I still had some serious weaknesses. I had come to the contest with something good, but not good enough to win. I had a lot of mass, a great rough cut. My weak points were calves and thighs. I needed to work on posing, on diet, and all the finer points of bodybuilding. For me, that was a real turning point. I decided I had to go back and spend a year on things I had never really given any time to at all.”

While this may seem obvious, many bodybuilders make the critical mistake of solely working on their strengths because it is the easy thing to do. Schwarzenegger mentions that “Many bodybuilders refuse to do this; they keep working on their strong points, which is more gratifying. But I didn’t want the best arms or legs or chest. I wanted to be the best-built man in the world.”

As others avoid their weaknesses, Schwarzenegger ran toward his, as it was a way for him to grow from them. Real progress happens when you stare at your weaknesses and decide to turn them into strengths.

“I was honest with myself about what my body looked like and where I’d have to improve. As soon as I became aware of a weak point I went all out to eliminate it.”
— Arnold Schwarzenegger

Similarly, Schwarzenegger was not afraid of pain, but embraced it. At a early age, he discovered that pain is not a sign to stop, but a sign that you’re breaking through to a new level. This concept hit him when he took a training partner into the forest with 250 pounds and did squats for three hours straight. He narrates, “We ended up doing something like fifty-five sets of squats each. The last hour seemed endless. But it worked. Our thighs pumped up like balloons. That first day we gave our thigh muscles such a shock that we couldn’t walk right for a week. We barely could crawl. Our legs had never experienced anything as tough as those fifty-five sets. And each of us put something like an eighth or a quarter of an inch on our thighs; they just blew up, they had no chance to survive except to grow.”

He concluded that experience by mentioning that “That was the first time I knew pain could become pleasure. We were benefiting from pain. We were breaking through the pain barrier and shocking the muscle. We looked at this pain as a positive thing, because we grew.”

“The theory was this: surprise the body. Don’t always do what it expects. This was a new way of promoting muscle growth. I saw it having amazing results on me and I started to preach this as a method for bodybuilding.”
— Arnold Schwarzenegger

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Today’s Chapter is based on the book “The Nvidia Way: Jensen Huang and the Making of a Tech Giant” by Tae Kim.

Jensen Huang is a Taiwanese-born American entrepreneur who co-founded NVIDIA Corporation in 1993 and serves as its founder, president, and CEO. Under his leadership, NVIDIA became a leading provider of graphics processing units (GPUs) and emerged as the central engine behind the artificial intelligence (AI) boom.

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Here’s what I learned:

Whiteboarding

“Clear writing gives poor thinking nowhere to hide.”
— Shane Parrish

One of the key concept we can learn from Jensen Huang is his obsessive use of the whiteboard. While most companies use Powerpoint decks to prepare presentations, Huang prefers using a whiteboard so that he can jump in mid-meeting with a marker in hand to sketch, erase and sketch again. This isn’t just a preference, but a philosophy on how most ideas come to life at Nvidia. Tae Kim writes that “At Nvidia, the whiteboard is more than the primary form of communication at meetings. It represents both possibility and ephemerality—the belief that a successful idea, no matter how brilliant, must eventually be erased, and a new one must take its place.”

This concept is an important part of the Nvidia’s corporate culture. By using a whiteboard to present at meetings, every employees cannot hide behind prepared slides; they need to think out loud, in real time, in front of everyone. This can easily expose those that do not truly understand the topic at hand.

“Whiteboarding also requires active thinking and inevitably reveals how well (or not) any employee, including an executive, knows the material. Employees must demonstrate their thought process in real time, in front of an audience; there’s no hiding behind neatly formatted slides or slick marketing videos.”
— Tae Kim

This concept of whiteboarding comes from the fact that Jensen Huang loves teaching and the whiteboard is his chalkboard. As Tae Kim explains, “In another life, Jensen Huang might have been a teacher. His preferred medium is the whiteboard: at many of the meetings he attends at Nvidia, where he has been the CEO since he cofounded the company in 1993, he will leap up, his favorite chisel-tip, dry-erase marker in hand, and diagram a problem or sketch out an idea—even if someone else is speaking or whiteboarding themselves at the same time. In fact, he alternates between teacher and student, fostering a collaborative ethos among his employees to develop their thinking and solve the issues they face.”

Similarly, the whiteboard is an analogy often used at Nvidia to represent Nvidia’s way of handling mistakes. As a matter of fact, in the company, the past, whether it was a glorious success or a humiliating failure, is simply material to be erased. By doing so, employees don’t become complacent on their recent success and do not have decision paralysis due to previous failures.

“I found this to be a pervasive attitude within Nvidia: that the culture of the place discourages looking back, whether at errors or successes, in favor of focusing on the future—the blank whiteboard of opportunity.“
— Tae Kim

This reminds me of what we have learned from Bejamin Franklin who once said, “Drawing is a kind of universal language, understood by all nations. A man may often express his ideas, even to his own countrymen, mòre clearly with a lead pencil or bit of chalk than with his tongue.” As a matter of fact, Franklin understood that writing is an important part of learning. By writing about a topic at hand, you must be able to compress your ideas into words which requires both understanding and thinking. As such, writing is a great process to understand things better yourself and to identify the topics that you understand from those that you do not know what you are talking about. The reason I started this blog is precisely for this purpose of forcing myself to think and to understand deeply what I learn from these books that I read.

“A good writer doesn’t just think, and then write down what he thought, as a sort of transcript. A good writer will almost always discover new things in the process of writing.”
— Paul Graham

Finally, writing is a great tool for better decision making. In fact, by keeping a decision journal at hand, you will be able to collect feedbacks from your previous decisions in the hope of making better decisions in the future. Writing it down on a journal is crucial as it allows you to review all the circumstances and accessible knowledge you had at the time of your decision and to truly evaluate it without being obstructed by hindsight bias.

“Go down to a local drugstore and buy a very cheap notebook and start keeping track of your decisions. And the specific idea is whenever you’re making a consequential decision, something going in or out of the portfolio, just take a moment to think, write down what you expect to happen, why you expect it to happen and then actually, and this is optional, but probably a great idea, is write down how you feel about the situation, both physically and even emotionally. Just, how do you feel? I feel tired. I feel good, or this stock is really draining me. Whatever you think.

The key to doing this is that it prevents something called hindsight bias, which is no matter what happens in the world, we tend to look back on our decision-making process, and we tilt it in a way that looks more favorable to us, right? So we have a bias to explain what has happened.”
— Daniel Kahneman

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Speed of Light

“A maniacal sense of urgency is our operating principle.”
— Elon Musk

Jensen Huang does not believe in what most people would call a worklife balance. In fact, he believes in obsession. One of the core philosophy at Nvidia is the concept of “Speed of Light”, which means measuring your performance not against what the competitors are doing or what you’ve done previously, but against the absolute limits of what if physically possible. Kim mentions that “Since Nvidia’s founding, Jensen has insisted that all Nvidia employees work at the “Speed of Light.” He wants their work to be constrained only by the laws of physics—not by internal politics or financial concerns. Each project must be broken down into its component tasks, and each task must have a target time-to-completion that assumes no delays, queues, or downtime. This sets the theoretical maximum: the “Speed of Light” that it is physically impossible to exceed.“

This core belief most likely comes from Jensen Huang’s work ethic. Born in a family of immigrants, Huang was extremely hard working, often working from 9AM to midnight, and he expected his team at Nvidia to match his own intensity.

“There may be people smarter than me, but no one is ever going to work harder than me.”
— Jensen Huang

It is important to note that this philosophy of “Speed of Light” was actually born from necessity, especially in the early days of the company. Nvidia was often in lack of capital and Huang often told his employees at every monthly company that “We’re thirty days from going out of business.” While this may not be the case anymore, to avoid complacency, Huang kept the culture of working at the speed of life so that every staff continue to feel the urgency of a startup even when the company was worth hundreds of of billions. Fear and anxiety became Huang’s favourite motivational tools.

Similarly, employees knew they had to keep working at the speed of light and to not become complacent as Huang was extremely competitive and he needed Nvidia to win at everything even against itself. Tae Kim writes, “Andrew Logan, Nvidia’s director of corporate marketing, remembers how one of Nvidia’s chips came in second place for a computer magazine awards feature. In his prior job at S3, executives would be happy if their products finished in the top three. Not at Nvidia. “The first time we came in second place, Jensen sternly told me: Second place is the first loser,” Logan said. “I never forgot it. I realized I’m working for a boss who believes we have to win at everything. It was a lot of pressure.””

“Jensen runs the company in the way he does because he believes that Nvidia’s worst enemy is not the competition, but itself—more specifically, the complacency that grips any successful company, particularly one with a long and impressive track record such as Nvidia.”
— Tae Kim

This obviously reminds me of Elon Musk who once said, “You must be extremely tenacious. Work like hell. You have to put in eighty-to one-hundred-hour weeks every week. This will improve your odds of success.” As such, it is not surprising that Musk, similar to Jensen Huang, isn’t too found of the idea of a balanced work week. He mentions that “Nobody ever changed the world on forty hours a week.”, and he clearly puts this principle to the test. As a matter of fact, Musk was well known for setting aggressive timelines using it as a motivation for his employees to work harder and more efficiently.

“You need to work. Work hard. Like every waking hour. Particularly if you’re starting a company, you need to work super hard. Do the simple math: Somebody else is working fifty hours a week and you’re working one hundred. You’ll get twice as much done in a year. 54 If other people are putting in forty-hour workweeks and you’re putting in one hundred, what takes them a year, you will achieve in four months.”
— Elon Musk

Furthermore, in order for his companies to achieve the deadlines set by his maniacal approach, Musk had to implement a system for them to work fast and efficiently. To do so, he elaborated an Algorithm inspired from engineering in order to speed things up. He mentions, “I have everyone at my companies rigorously implement a five-step process for engineering. I call it The Algorithm. I’ll list the steps, then explain. The order is very important. Make your requirements less dumb. Try very hard to delete the part or process. Simplify or optimize. Accelerate. Automate.”

First, he believes that most of the requirements are dumb and that it is primordial to question them and see why they were set in the first place. He explains, “Whatever requirements or constraints you do have must come from a person, not a department. You can’t actually ask a department. You have to be able to ask a person, and the person putting forth the requirement must take responsibility for that requirement. Otherwise, you could have a requirement made up by an intern two years ago off the cuff, or someone who isn’t even at the company anymore. You must know the name of the real person who made every requirement. Many times we’ve had dumb requirements, dug into them, and discovered no one currently working in that department agrees with the requirement. These things are often way more silly than you think. So step one is make your requirements less dumb.”

Second, you often need to eliminate some steps to make things faster. As a matter of fact, Musk was well-known among his employees to often go through a rampage of deleting things. He was never conservative about these things as he believed that “If you’re not adding deleted things back in 10 percent of the time, you’re clearly not deleting enough.”

Third, you need to optimize every single steps that are essential. And once that is done, you can start on step four and five which are to accelerate and automate. Musk warns to not skip over the steps. As he explains, “do not go faster until you have worked on the other three things first. I mistakenly spent a lot of time accelerating processes that I later realized should have been deleted. Speeding up something that shouldn’t exist is absurd. If you’re digging your grave, don’t dig it faster. Stop digging.”

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Focus on the Mission

“Mercenaries think opportunistically; missionaries think strategically. Mercenaries go for the sprint; missionaries go for the marathon. Mercenaries focus on their competitors and financial statements; missionaries focus on their customers and value statements. Mercenaries are bosses of wolf packs; missionaries are mentors or coaches of teams. Mercenaries worry about entitlements; missionaries are obsessed with making a contribution. Mercenaries are motivated by the lust for making money; missionaries, while recognizing the importance of money, are fundamentally driven by the desire to make meaning.”
— John Doerr

A final lesson we can learn from Jensen Huang is about organizational design. First of all, while most companies are build like a pyramid with layers of management, Huang prefers a flat model. He deliberately built Nvidia as a flat organization where the mission is the ultimate authority. He explains that “Over the years, I realized what was happening, how people protect their turf and they protect their ideas. I created a much flatter organization.” As a matter of fact, Huang believes this structure avoids backstabbing and political infighting within the company.

To make this work, it is primordial to encourage transparency within the company. To do so, Huang has established a few unusual practices. One of these practices is called “Top 5 Email”, where employees at every level must send weekly updates on their priorities. This isn’t about micromanagement, but for Huang to detect corporate weaknesses before they become crises directly from the source.

“The “Top 5” emails became a crucial feedback channel for Jensen. They enabled him to get ahead of changes in the market that were obvious to junior employees but not yet to him or his e-staff. “I’m looking to detect the weak signals,” he would tell his employees when asked why he liked the Top 5 process. “It’s easy to pick up the strong signals, but I want to intercept them when they are weak.””
— Tae Kim

Second of all, an important key phrase at Nvidia is “The Mission is the Boss.”, meaning that decisions aren’t made to please a senior executive or to meet a short-term goal. They are made to serve the customer and to advance the company’s core objectives. As such Jensen Huang often told his employees “ that their ultimate boss was the mission itself. The idea was to make decisions for the good of the customer, not to boost the career of the executive above them.“

Huang elaborates that “The concept of the mission is the boss makes a lot of sense because ultimately we’re here to realize a particular mission, not in service of some organization. It got people thinking about the work and not the organization. The work, not the hierarchy.”

Finally, you need to hire missionaries not mercenaries. As a matter of fact, hiring raw talent is one of the key component of Nvidia’s success. This is crucial because as Huang explains, “Good programmers want to work with other good programmers. So once the quality of programmers at your company starts to drop, you enter a death spiral from which there is no recovery. In technology, once you have bad programmers, you’re doomed.”

“In a sense, that is the Nvidia Way in its purest form. It is the unwavering belief that there is tremendous reward in doing your job the best you can. It is the drive to persevere amid adversity. Or, as Jensen put it when looking directly into my eyes: the secret to his company’s success is nothing more than ‘sheer will.’”
— Tae Kim

This reminds me of Brac Jacobs who once said that 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

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Listen to "#403 How Jensen Works" by Founders Podcast

Read "The Surprising Reason Writing Remains Essential in an AI-Driven World" by Farnam Street

Read "Decision Journal: Template and Example Included" by Farnam Street

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Today’s Chapter is based on the book “Grinding It Out: The Making of McDonald’s” by Ray Kroc.

Ray Kroc was an American entrepreneur who transformed McDonald’s from a single California drive-in into the world’s largest and most profitable fast-food franchise. After discovering the McDonald brothers’ efficient restaurant in 1954, he founded McDonald’s System, Inc. in 1955, bought out the brothers in 1961 for $2.7 million, and revolutionized the industry through strict standardization and franchising.

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Here’s what I learned:

Keep Grinding

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

Ray Kroc rejected the notion that success or failure is caused by external forces or luck. Instead, he operated under the firm conviction that individuals are the sole architects of their destinies. For Kroc, he believed that happiness was not stumbled upon, but actively constructed through hard labor and the courage to seize opportunities when they come up. As he explains, “I have always believed that each man makes his own happiness and is responsible for his own problems.”

As a matter of fact, Ray Kroc is a perfect example of how entrepreneurs can succeed even if they start at a later age. Kroc was 52 years old when he partnered with the McDonald brothers. Nonetheless, his story is not one of overnight success but of relentless effort over a lifetime. Kroc started his career working over seventeen years at the Lily Tulip Cup Company climbing the sales ladder. Yet, when he encountered a multi-splinded milkshake machine known as the Multimixer, he was not afraid to abandon everything to focus on it. He writes, “It follows, obviously, that a man must take advantage of any opportunity that comes along, and I have always done that, too. After seventeen years of selling paper cups for Lily Tulip Cup Company and climbing to the top of the organization’s sales ladder, I saw opportunity appear in the form of an ugly, six-spindled milk shake machine called a Multimixer, and I grabbed it.”

Furthermore, when he saw the spectacular high-volume operation of the McDonald brothers, his instinct was not to merely sell them more mixers, but to envision a national chain and offer himself to work with them for that expansion. He was ready to jump onto this opportunity despite his illness setbacks. He mentions, “I was a battle-scarred veteran of the business wars, but I was still eager to go into action. I was 52 years old. I had diabetes and incipient arthritis. I had lost my gall bladder and most of my thyroid gland in earlier campaigns. But I was convinced that the best was ahead of me. I was still green and growing, and I was flying along at an altitude slightly higher than the plane.”

“For me, this was the first phase of grinding it out—building my personal monument to capitalism. I paid tribute, in the feudal sense, for many years before I was able to rise with McDonald’s on the foundation I had laid. Perhaps without that adversity I might not have been able to persevere later on when my financial burdens were redoubled. I learned then how to keep problems from crushing me. I refused to worry about more than one thing at a time, and I would not let useless fretting about a problem, no matter how important, keep me from sleeping. This is easier said than done. I did it through my own brand of self-hypnosis.”
— Ray Kroc

Finally, it is clear from reading his story that Ray Kroc was extremely hard working. He would often worked for 12-14 hours per day. He writes, “Others marveled that I could work twelve or fourteen hours a day at a busy convention, then entertain potential customers until two or three o’clock in the morning, and still be out of bed early, ready to collar my next client. My secret was in getting the most out of every minute of rest. I guess I couldn’t have averaged more than six hours of sleep a night. Many times I got four hours or less. But I slept as hard as I worked.”

To recap, Kroc’s life philosophy can be summarized with the idea that one should become a perpetual learner and to work hard in order to seize all opportunities that come to you. As he once said, “As long as you’re green you’re growing, as soon as you’re ripe you start to rot.”

This reminds me of Chung Ju-Yung’s mentality who once said that “timing and action are the keys to success or failure.” In fact, in Hyundai’s founder’s opinion, luck is all about understand when to seize the right moment and that good or bad luck depends on how one manages time. He also believes that everyone, poor or rich, all have roughly the same amount of time to develop themselves to be prepared to take full advantage of a great opportunity.

The difference is that people who work hard are better apt to take advantage of good timing in contrast to lazy people. As a matter of fact, diligent workers, even during bad times, understand that they still need to make continuous effort in order to minimize or avoid adverse consequences. Whereas, lazy individuals will miss the opportunities presented to them during good times and are oblivious to dangers during bad times. Thus, hard working people are deemed to be always lucky compared to others.

“And within our lifespans, I believe each person also undergoes roughly equal amounts of good times and bad times. Self-development is contingent on one’s ability to make the most of the good times through hard work and diligence. When times are bad, all we can do is assess our situation and carry on. By doing so, we can overcome the bad times without needing to rely on luck. The course of one’s life is not determined by the timing of one’s birth, but by the choices he or she makes in both good times and bad.”
— Chung Ju-Yung

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Focus on Details

“It’s the little details that are vital. Little things make big things happen.”
— John Wooden

When Ray Kroc first visited the McDonald brothers’ restaurant in San Bernardino, he was impressed with the restaurant’s radical simplicity, standardization, and process mechanical efficiency. The brothers stripped their menu down to hamburgers, cheeseburgers, french fries and basic beverages and executed each step like if it was an assembly line. This level of operational focused allowed for absolute control over quality, speed and consistency.

In fact, even the layout of the restaurant at the first McDonald’s location was set up in a way to improve speed and consistency. Kroc explains, “Mac and Dick had a tennis court behind their house, and they got Art Bender and a couple of other operations people up there to draw out the whole floor plan with chalk, actual size, like a giant hopscotch. It must have looked funny as hell—those grown men pacing about and going through the motions of preparing hamburgers, french fries, and milk shakes. Anyhow, they got it all drawn, just so, and the architect was to come up the next day and copy the layout to scale for his plans.”

As such, Kroc recognized that McDonalds’ success is based on the system behind it which focused on details, particularly in elements that other restaurants treated as afterthought at the time. For example, he observed firsthand how the brothers handled their french fries operations, treating a simple side dish as a highly precise science. He writes, “The McDonald’s french fry was in an entirely different league. They lavished attention on it. I didn’t know it then, but one day I would, too. The french fry would become almost sacrosanct for me, its preparation a ritual to be followed religiously.”

Similarly, Kroc mentions that “It requires a certain kind of mind to see beauty in a hamburger bun. Yet, is it any more unusual to find grace in the texture and softly curved silhouette of a bun than to reflect lovingly on the hackles of a favorite fishing fly? Or the arrangement of textures and colors in a butterfly’s wing? Not if you are a McDonald’s man. Not if you view the bun as an essential material in the art of serving a great many meals fast. Then this plump yeasty mass becomes an object worthy of sober study.”

“We agreed that we wanted McDonald’s to be more than just a name used by many different people. We wanted to build a restaurant system that would be known for food of consistently high quality and uniform methods of preparation.”
— Ray Kroc

By consequence, when Kroc obtained control of the licensing rights and opened his first experimental McDonald unit in Illinois, his primary focus was to replicate and to preserve the operational uniformity across hundreds of locations around the world. He understood that the key to maintain a national brand was for customers to receive the exact same hamburger, cooked to the exact same specifications, whether they are in Chicago, California or a small town in the Midwest.

This eventually led to the implementation of McDonald’s four core values: Quality, Service, Cleanliness, and Value. These values were rigorously drilled into every crew members working at the company. Kroc used to say that “If I had a brick for every time I’ve repeated the phrase QSC and V (Quality, Service, Cleanliness, and Value), I think I’d probably be able to bridge the Atlantic Ocean with them.”

This focus on excellence in the details reminds me of what we have learned from John Wooden who believed that excellence comes from one’s character through the little details. In fact, 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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Delegate

“No person will make a great business who wants to do it all himself or get
all the credit.”
— Andrew Carnegie

While Kroc was quite obsessive in terms of his employees following the company’s standards, he was surprisingly generous with autonomy. In fact, Kroc understood that the best executives were the ones who hired well and got out of the way. He explains that “if you hire a man to do a job, you ought to get out of the way and let him do it. If you doubt his ability, you shouldn’t have hired him in the first place.“

This philosophy also extended to the way Kroc treated McDonald’s franchisees. He famously refused for the company to become the supplier to his own operators, even though that would have been enormously profitable in the short term. Rather than to treat his franchisees as customers, he made sure to make himself aligned with them as partners. He writes, “One of the basic decisions I made in this period affected the heart of my franchise system and how it would develop. It was that the corporation was not going to get involved in being a supplier for its operators. My belief was that I had to help the individual operator succeed in every way I could. His success would insure my success. But I couldn’t do that and, at the same time, treat him as a customer. There is a basic conflict in trying to treat a man as a partner on the one hand while selling him something at a profit on the other.”

“I was not in the hamburger business. I was in the people business.”
— Ray Kroc

Similarly, he understood that all franchisees were small business owners whose collective energy made McDonalds’ a valuable brand and, by consequence, it would only be fair for them to be rewarded properly. As such, Kroc mentions, “We recognize that it would be unwieldy and counterproductive for the corporation to own more than about thirty percent of all stores. Our slogan for McDonald’s operators is “In business for yourself, but not by yourself,” and it is one of the secrets of our success.”

As such, it is not surprising that McDonalds’ had created more millionaires out of franchisees than any other company in history. While Kroc takes a genuine pride in the wealth his company has created for others, he believes that the success lays not on him but on the individuals who were courageous enough to take up on the opportunity given. On the subject, he mentions, “ I’d rather say I gave a lot of men the opportunity to become millionaires. They did it themselves. I merely provided the means. But I certainly do know a powerful number of success stories.”

“McDonald’s doesn’t confer success on anyone. It takes guts and staying power to make it with one of our restaurants. At the same time, it doesn’t require any unusual aptitude or intellect. Any man with common sense, dedication to principles, and a love of hard work can do it.”
— Ray Kroc

This reminds me of how Les Schwab succeeded in business based on the belief in profit sharing as a mean to empower employees. In fact, Schwab firmly believed right from the beginning that when employees are treated as partners, they become more invested in their work. As such, Les Schwab first started by sharing 50 percent of the profits of each new store with its manager, and later on, they changed their profit sharing structure to share over 49.51% of their profits with employees working in the stores. The logic is simple; when workers see a direct link between their efforts and the company’s success, they are more likely to go above and beyond in their roles.

Les Schwab once said, “I never could understand why more business people don’t share with their employees. What nicer thing can they do with their profits? You can’t take it with you. Naturally you should look out for your family, but you can always come out better for your family if you look out for your employees first.”

This approach not only fosters loyalty but it also creates a culture of accountability and motivation. By sharing profits with his employees Schwab cultivates an environment where employees feel valued and recognized for their contributions. This sense of ownership translates into higher productivity and morale, which ultimately benefits the entire organization. As he once said, “I encourage you to share profits with your employees. I encourage you in every way possible to ‘Build People.’ This is good for America, it is good for you, and it is good for your employees.”

“If you make people under you successful, what happens to you? Aren’t you also then successful?”
— Les Schwab

Furthermore, while money is a strong incentive in itself, Les Schwab also made sure to build an environment where his employees could enjoy individual empowerment. As a matter of fact, he advocated for treating employees like partners, fostering an environment of open communication, and providing them with the tools and knowledge to make impactful decisions.

Les Schwab explains that “I really do think that young men who work for the Les Schwab Company for three or four years is almost as good as taking three or four years of business schooling. The reason for this is the complete openness of the company. Every employee in every store is encouraged to read and study the Profit and Loss Statement of his store. Each store has a monthly meeting around the P&L Statement. They are encouraged to ask questions.“

This complete transparency on the company’s profits fostered a sense of ownership among employees. They were fully invested in the success of their store, their team, and the company as a whole.

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Beyond the Book

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

Listen to "[Outliers] How McDonald’s Took Over America | Ray Kroc" by The Knowledge Project

Listen to " The Making of McDonald's: The Biography of Ray Kroc" by Founders Podcast

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Today’s Chapter is based on “The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers―Straight Talk on the Challenges of Entrepreneurship” by Ben Horowitz.

Ben Horowitz is a Silicon Valley entrepreneur, investor, and author best known as the co-founder of the venture capital firm Andreessen Horowitz (a16z). He previously co-founded Opsware, which Hewlett-Packard acquired in 2007.

Buy it on Amazon here.

Here’s what I learned:

The Struggle

“If you’re going through hell, keep going.”
— Winston Churchill

One of the key lessons from Ben Horowitz’s book is that building a company inevitably involves facing difficulties and avoiding or sugarcoating this reality is the main reason for most companies’ failures. As a matter of fact, Horowitz believes that entrepreneurship is not an easy path, and that “the Struggle” is necessary for a company to succeed. He writes, “Every great entrepreneur from Steve Jobs to Mark Zuckerberg went through the Struggle and struggle they did, so you are not alone. But that does not mean that you will make it. You may not make it. That is why it is the Struggle. The Struggle is where greatness comes from.”

Horowitz believes that every entrepreneur will eventually face periods where nothing feels right and every path seems blocked. However, it is by overcoming these challenges that entrepreneurs build the foundation for future success. These times of adversities came often during Horowitz’s career as the founder of a tech company, especially at Opsware. During these moments, it is important for entrepreneurs to be creative in their solutions to overcome challenges. Horowitz recounts that he would often ask himself “what’s the worst thing that could happen?” By doing so, he believed it helped him overcome fear of hopelessness and to keep moving forward, often with a creative solution to the problem at hand.

“I tried to make myself feel better by asking, ‘What’s the worst thing that could happen?’ The answer always came back the same: ‘We’ll go bankrupt, I’ll lose everybody’s money including my mother’s, I’ll have to lay off all the people who have been working so hard in a very bad economy, all of the customers who trusted me will be screwed, and my reputation will be ruined.’ Funny, asking that question never made me feel any better. Then one day I asked myself a different question: ‘What would I do if we went bankrupt?’ The answer that I came up with surprised me: ‘I’d buy our software, Opsware, which runs in Loudcloud, out of bankruptcy and start a software company.’”
— Ben Horowitz

Horowitz, now a venture capitalist, has met various successful CEOs and often asked them how they faced “the struggle”. He mentions that all the great CEOs tend to be remarkably consistent in their answers. They all say, “I didn’t quit.” While facing “the struggle” doesn’t necessarily guarantee success, it does separate those who eventually make it from those who do not.

Nonetheless, Horowitz warns that this often leads to founders needing to make decisions against conventional wisdom. In fact, he believes that there is always a move for the issue at hand, but a founder needs to have the guts to make it. For example, when Horowitz was facing a lack of funds during the tech crash in the early 2000s at Loudcloud, instead of giving in, he decided to bring the company public. He writes, “As a result, like playing three‑dimensional chess on Star Trek, there is always a move. You think you have no moves? How about taking your company public with $2 million in trailing revenue and 340 employees, with a plan to do $75 million in revenue the next year? I made that move. I made it in 2001, widely regarded as the worst time ever for a technology company to go public. I made it with six weeks of cash left. There is always a move.”

Finally, when facing “the struggle”, Horowitz warns that you cannot play the odds. If you calculate your chances of survival at one in a thousand, your task remains exactly the same: find the answer.

“Startup CEOs should not play the odds. When you are building a company, you must believe there is an answer and you cannot pay attention to your odds of finding it. You just have to find it. It matters not whether your chances are nine in ten or one in a thousand; your task is the same.”
— Ben Horowitz

This reminds me of Hyundai’s founder Chung Ju-Yung. Whenever someone said that a proposed project was impossible, his favourite response was “Did you try?” In fact, when Hyundai first got into the car industry, they knew that they had to partner with an American company who had superior technology. When Chung heard of Ford’s visit in South Korea, he immediately asked his younger brother to negotiate an automobile assembly technology contract with Ford. His brother was taken back as it seemed improbable to reach an agreement this quickly with a major foreign car company. Chung responded with the following saying: “Have you even tried?”

For Chung, the first rule to become a successful person is to have the mentality of thinking that anything is possible. As he explains, “If you doubt yourself, then you will only be able to accomplish as much as your doubts let you. If you think you can’t do something, then you won’t be able to do it.”

“I am someone who believes that if a person limits themselves to the fixed ideas inherent in common sense, they will not be very creative.”
— Chung Ju-Yung

In the case of Chung, he knew that for him to beat his competitors, he had to finish projects in a shorter amount of time than other people. In fact, he mentions that he succeeded because while others were still hesitating, he had already begun working. This is the reason why his motto is “shorten the time”. In his opinion, that is the surest way to encourage innovation and improvement. As a matter of fact, he would often take tours of his projects and would always seek to find ways to shorten construction times in unconventional ways.

Chung believed that finding clever solutions would never come from people with conventional thinking. As a matter of fact, he mentions that “if you only think in accordance with what you learned through books, your imagination will be limited to that.”

“When we worked on the Jubail project, we had to make 160,000 drill bits to build the breakwater and shore protection structures. If we built 200 every day, it would take us 800 days to make 160,000. But at the site, the workers were making them one at a time instead of using a mold to mass produce them. Their sorry excuse for this wasteful effort was that the molds weren’t the right height to fix onto the end of the cement trucks.

When I saw this, I was furious. Why did these people have brains if they weren’t going to use them? It didn’t take a genius to realize that the outflow ramp for the concrete on the trucks needed to be raised to fit the molds. If they just followed this simple solution, they wouldn’t need a crane, and they wouldn’t waste time and energy. They couldn’t think to adjust the concrete mixer truck, thinking it was unchangeable. Would the gods punish them for making some small adjustments? After I made the changes, we went from 200 per day to 350 per day.”
— Chung Ju-Yung

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Take Care of Your People

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

Ben Horowitz learned a core business philosophy from his old boss Jim Barksdale who was fond of the saying, “We take care of the people, the products, and the profits—in that order.” While other CEOs may instinctively reverse the sequence, Horowitz argues that it is a colossal mistake. He explains that “‘Taking care of the people’ is the most difficult of the three by far and if you don’t do it, the other two won’t matter. Taking care of the people means that your company is a good place to work.”

For Horowitz, one of the most overlooked way to take care of your employees is to invest in their training. While he used to neglected this entirely, Horowitz quickly changed his mind after reading Andy Grove’s High Output Management. He writes, “Andy Grove does the math and shows that the opposite is true: Training is, quite simply, one of the highest‑leverage activities a manager can perform. Consider for a moment the possibility of your putting on a series of four lectures for members of your department. Let’s count on three hours preparation for each hour of course time—twelve hours of work in total. Say that you have ten students in your class. Next year they will work a total of about twenty thousand hours for your organization. If your training efforts result in a 1 percent improvement in your subordinates’ performance, your company will gain the equivalent of two hundred hours of work as the result of the expenditure of your twelve hours.”

Horowitz notes that the biggest obstacle to training in startup companies is due to the perception that it takes too much time. Founders often skip training because they believe they need to move fast and assume that everyone can learn on the job. However, this can lead to inconsistent execution, frustrated employees and unnecessary turnover.

“Ironically, the biggest obstacle to putting a training program in place is the perception that it will take too much time. Keep in mind that there is no investment that you can make that will do more to improve productivity in your company. Therefore, being too busy to train is the moral equivalent of being too hungry to eat.”
— Ben Horowitz

Furthermore, Horowitz also emphasizes on the importance for founders to have one-on-one meetings with their employees. He mentions that this exercise is a great way for them to learn about best ideas and the struggles that his staff is facing on a daily basis. The goal of the meeting is to ensure that employee life issues and critical feedback reach the people who can actually do something about them. When that system works, employees feel heard, and the company gains an early warning system for trouble. He writes, “In the end, the most important thing is that the best ideas, the biggest problems, and the most intense employee life issues make their way to the people who can deal with them. One‑on‑ones are a time‑tested way to do that, but if you have a better one, go ahead with your bad self.”

This reminds me of Elon Musk’s view on leadership. He believed that creating a culture of excellence requires more than just hiring well. It also requires leaders who are willing to lead by example and who are willing to get their hands dirty. Elon Musk is often seen sleeping on factory floors and working alongside his teams during crises. He understood that his employees would work harder if they saw him working alongside of them. He mentions, “Think about war. Do you want the general in some ivory tower or on the front lines? The troops fight harder if they see the general on the front lines. Nobody bleeds for the prince in the palace. Get out there on the front line. Show them that you care and that you’re not in some plush office somewhere.”

Similarly, Musk believed in removing any barriers that may separate senior executives from employees. As a matter of fact, he expects his managers to have hands-on experience in the work they oversee. For example, software managers must be able to code and solar roof managers must be able to install roofs. If you cannot do the work yourself, you have no business telling others how to do it. He elaborates that, “All technical managers must have hands- on experience. For example, managers of software teams must spend at least 20 percent of their time coding. Solar roof managers must spend time on the roofs doing installations. Otherwise, they are like a cavalry leader who can’t ride a horse or a general who can’t use a sword.”

“When the team is being asked to work super hard, I have to be right there with them and they have to see it. If I fall asleep in the middle of the factory floor at four in the morning and wake up four hours later, they see that. They are like, “If the CEO is willing to take that level of pain, I can do it too.””
— Elon Musk

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Tell The Truth

“At Berkshire, we believe in Charlie’s dictum—‘Just tell me the bad news; the good news will take care of itself’—and that is the behavior we expect of our managers when they are reporting to us.”
— Warren Buffett

Ben Horowitz believes that his single biggest improvement as a CEO came on the day he stopped being too positive. This goes against the popular image that a leader must be an eternal optimist who never lets his employees see doubt. In fact, Horowitz argues that false positivity destroys trust and that when employees sense that a CEO is sugarcoating reality, they stop believing anything that comes out of his or her mouth. He writes, “One of the most important management lessons for a founder/CEO is totally unintuitive. My single biggest personal improvement as CEO occurred on the day when I stopped being too positive.”

This is especially true considering that as a company grows, communication becomes its biggest challenge. If employees fundamentally trust the CEO, communication becomes vastly more efficient. However, trust cannot be built on a foundation of half‑truths or selective optimism. When things are going badly, the CEO must say so clearly. Horowitz learned this during the Opsware turnaround, when he called an all‑engineering meeting and told the team the truth: they were getting their asses kicked, and if things did not change, he would have to sell the company for cheap.

“I need you to go home tonight and have a serious conversation with your wife, husband, significant other, or whoever cares most about you and tell them, ‘Ben needs me for the next six months.’ I need you to come in early and stay late. I will buy you dinner, and I will stay here with you. Make no mistake, we have one bullet left in the gun and we must hit the target.”
— Ben Horowitz

While you may believe that such a speech may be risky because it may scare away employees, only two employees left the company. The remaining staff were willing to make the sacrifice required to save the business. As such, through this experience, Horowitz discovered that when you treat people like adults and share the real stakes, they rise to the occasion. Hiding problems only delays the inevitable and robs your team of the chance to help solve them.

Furthermore, Horowitz writes, “If you investigate companies that have failed, you will find that many employees knew about the fatal issues long before those issues killed the company. If the employees knew about the deadly problems, why didn’t they say something? Too often the answer is that the company culture discouraged the spread of bad news, so the knowledge lay dormant until it was too late to act.”

By consequence, it is clear that a good company culture encourages people to share bad news and that a company that is able to discuss its problems freely and openly can quickly solve them. In contrast, a company that covers up its problems will only frustrate everyone involved. This lesson also extends to how founders should handle layoffs. Based on a piece of advise from his mentor Bill Campbell, Horowitz believes in treating the people who are leaving fairly, because the people who stay are watching. If you are dishonest or cruel with the departing, the survivors will never trust you again.

This reminds me of how Sam Zell used to love to be challenged by his employees and more than welcomed debates. For him, it was important for him to create a work environment where his employee’s voice can be heard. As a risk taker, Zell’s greatest fear was to not have information that could of protected him from making a mistake due to the lack of communication with his staff. As such, he made sure to implement a meritocracy culture in his company to allow all his employees to be part of the decision making process.

“At our core, we are a meritocracy—an environment that Bob and I cultivated in the early days. A meritocracy gives you the freedom to be yourself by eliminating superficial markers, so you are measured only by what you produce. In essence, it is an equalizer that focuses everybody on what’s important so you have the opportunity to reveal your best. Once you’ve worked in a true meritocracy, it’s very hard to settle for anything else.”
— Sam Zell

This is eerily similar to Ray Dalio’s idea meritocracy, a system hat allows the best ideas to win regardless of who or where they come from. According to Dalio, the founder of Bridgewater, the world’s largest hedge fund, this is the best way to produce the best possible decision by enabling the best thinking of all team members.

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Beyond the Book

Read "Ben Horowitz: The Struggle" by Farnam Street

Read "The Peter Principle and the Law of Crappy People" by Farnam Street

Read "Ben Horowitz On What Makes a Great Founder" by Sequoia Capital

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

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

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

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

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

Today’s Chapter is based on the book “How to Fail at Almost Everything and Still Win Big: Kind of the Story of My Life” by Scott Adams.

Scott Adams was an American cartoonist and author best known as the creator of the Dilbert comic strip, a satirical take on white‑collar office life that became widely popular worldwide starting in 1989.

Buy it on Amazon here.

Here’s what I learned:

Systems not Goals

“How you climb a mountain is more important than reaching the top.”
— Yvon Chouinard

One concept that is often reiterated by Scott Adams in his book is the distinction between having a goal and having a system. He explains that a goal is a future event that you either achieve or not, leaving you in a state of constant pre-success failure. On the other hand, a system is a daily practice that increases your odds of success in the long run, regardless of the immediate outcome. Adams argues that people who rely on systems consistently outperform those who are solely focused on goals. He writes, “Throughout my career, I’ve had my antennae up looking for examples of people who use systems versus goals. In most cases, as far as I can tell, the people who use systems do better. The systems-driven people have found a way to look at the familiar in new and more useful ways.”

Furthermore, Adams believes that this reframing allows individuals to become happier. Instead of waiting for a distant achievement to feel successful, you can feel successful every time you apply your system. More importantly, by following a system-based approach over a goal-oriented approach, you will never be sitting on your laurels as you will always be consistently finding ways to improve.

This can be perfectly explained through a story Adams learned early in his career from an encounter with a CEO on an airplane who said, “every time he got a new job, he started immediately looking for a better one. For him, job-seeking was not something one did when necessary. It was an ongoing process. This makes perfect sense if you do the math. Chances are, the best job for you won’t become available at precisely the time you declare yourself ready. Your best bet, he explained, was to always be looking for the better deal. The better deal has its own schedule. I believe the way he explained it is that your job is not your job; your job is to find a better job. This was my first exposure to the idea that one should have a system instead of a goal.”

“All I’m suggesting is that thinking of goals and systems as very different concepts has power. Goal-oriented people exist in a state of continuous pre-success failure at best and permanent failure at worst, if things never work out. Systems people succeed every time they apply their systems in the sense that they did what they intended to do. The ‘goals’ people are fighting the feeling of discouragement at each turn. The systems people feel good every time they apply their system. That’s a big difference in terms of maintaining your personal energy in the right direction.”
— Scott Adams

Similarly, this thinking can only be used in terms of maintaining good habits. By focusing on having a good system in place rather than achieving a specific goal, it is a lot easier to maintain habits consistently. Adams experienced this with his own workout routine. Rather than focusing on expecting himself to work out for an x amount of time every day, he focused on building the habit of going to the gym on a daily basis. As such, he didn’t feel any guilt whenever he went to the gym and didn’t feel like working out.

In fact, he writes, “As I drive home from the gym—a seemingly wasted trip—I never feel defeated. Instead, I feel I’m using a system that I know works overall. I win if I exercise, and I win (albeit less) if I use my system and decide not to work out.” By focusing on the system itself rather than a specific outcome, he eliminates the feeling of failure.

By focusing on systems, Adams positioned himself to capitalize on opportunities. He didn’t chase a single big break but built habits that increased his surface area for luck. This reminds me of what we have learned from Bill Walsh’s leadership philosophy that puts emphasis on process over results. He understood that focusing solely on winning can create undue pressure and lead to suboptimal performance. Instead, Walsh advocated for a concentration on the processes that drive success. Especially at the beginning of his reign as the coach of the San Francisco 49ers, Walsh insisted “to channel the concentration of the 49ers toward improving performance on the field and throughout the organization.”

As a matter of fact, he believed that when teams obsess over their execution and the quality of their thinking, success will inevitably follow. He once said, “I directed our focus less to the prize of victory than to the process of improving—obsessing, perhaps, about the quality of our execution and the content of our thinking.” This approach allows for a sustainable path to achievement, where improved performance becomes the primary goal rather than fleeting victories.

Walsh admits that this is difficult to execute especially due to external pressures, such as media scrutiny or fan expectations which can distract from this focus. Instead, Walsh prioritize the development of skills and fostering a growth mindset; he cultivated an atmosphere where individuals could thrive without the paralyzing fear of failure. His philosophy encourages leaders to cultivate patience and persistence by emphasizing that that the true measure of success lies in continuous improvement rather than immediate results. He believed that when individuals are committed to their processes, the outcomes—both on and off the field—will take care of themselves.

“Consequently, the score wasn’t the crushing issue that overrode everything else; the record didn’t mean as much as the season progressed, because we were immersed in building the inventory of skills, both attitudinal and physical, that would lead to improved execution. That was the key.”
— Bill Walsh

This mentality of focusing on the process rather than the outcome allowed the 49ers to weather temporary setbacks and maintain a long-term perspective. Walsh knew that even in defeat, there were valuable lessons to be learned and opportunities for growth. He mentions the fact that “a resolute and resourceful leader understands that there are a multitude of means to increase the probability of success. And that’s what it all comes down to, namely, intelligently and relentlessly seeking solutions that will increase your chance of prevailing in a competitive environment. When you do that, the score will take care of itself.”

In fact, according to Bill Walsh, failure is not merely a setback but a critical component of success. He mentions that *“When the inevitable setback, loss, failure, or defeat comes crashing down on you—allow yourself the ‘grieving time,’ but then recognize that the road to recovery and victory lies in having the strength to get up off the mat and start planning your next move.”*Ultimately, the capacity to learn and adapt defines a champion’s journey. The lessons learned from failure foster a unique strength.

“When you stand and overcome a significant setback, you’ll find an increasing inner confidence and self-assurance that has been created by conquering defeat.”
— Bill Walsh

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Failure as a Tool

“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.”
— Michael Jordan

Scott Adams’s career is a perfect example of how failures can lead to success stories. As a matter of fact, Adams doesn’t just tolerate failure, he invites it and most importantly, extracts value from it. He genuinely believes that failure is a fertilizer for growth. He writes, “Failure always brings something valuable with it. I don’t let it leave until I extract that value. I have a long history of profiting from failure. My cartooning career, for example, is a direct result of failing to succeed in the corporate environment.”

Adams doesn’t believe that one shouldn’t just forget about his failures, but to repurpose them for future growth. Through a metaphor, he explains that, “If I find a cow turd on my front steps, I’m not satisfied knowing that I’ll be mentally prepared to find some future cow turd. I want to shovel that turd onto my garden and hope the cow returns every week so I never have to buy fertilizer again. Failure is a resource that can be managed.”

“I’ve long seen failure as a tool, not an outcome. I believe that viewing the world in that way can be useful for you, too.”
— Scott Adams

Before becoming the author of the famous comic Dilbert, Adams mentions that he had many failed business ideas, but that all of these adventures provided him with fundamental lessons that allowed him to become a successful cartoonist. For example, although he failed to release any of his computer game projects, it gave him a technical knowledge that would prove invaluable for his career. He writes, “All my computer game ideas failed, but in the process I learned enough about personal computers to look like a technical genius in those early days of computing—the eighties. That knowledge transferred to my day job at the bank and later to my cartooning career as well.”

As such, it is clear that for Scott Adams failure isn’t something to fear or to avoid, it should be used as a valuable input that can be used to increase your skills and insights. He writes, “I do want my failures to make me stronger, of course, but I also want to become smarter, more talented, better networked, healthier, and more energized.“ This mentality of his can be perfectly described by his desire to continue doing public speaking even when he was diagnosed with spasmodic dysphonia, a condition that caused him to be unable to speak normally, just so that he could an experiment. He needed to understand the pattern of his own voice under pressure, and failure was simply a possible data point.

“I needed to know why I could speak normally in some situations and not in others. Why does context matter? Is it something about my adrenaline level, or the tone of my voice, or the region of my brain that I access for memorization? If I could find the pattern, I thought it might reveal a solution to my voice problem.”
— Scott Adams

This reminds me of Michael Dell who believes that failure is not something to be avoided at all costs, but something that can be embraced and learned from. At his own company, he has experienced plenty of stumbles, from product flops to inventory crises, and each one of these mistakes made the business stronger. He explicitly rejects the concept that success is linear.

Dell writes, “But for every company, Dell included, kaizen is an ideal rather than a reality. Success is not a straight line up. It’s fail, learn, try again, then (you hope) succeeded. How successful you are is really a function of how well you deal with failure—and how much you learn from it. Many people don’t reach their greatest potential because they fear failure. In avoiding failure, they deprive themselves of a great teacher.”

However, Dell warns that business leaders must actively remember their failures, and not conveniently forget about them. This is often the case during periods of success where you convince yourself to believe that everything is fine. Success can be dangerously seductive while failure, by contrast, forces genuine reflection and adaption. This is why Dell believes that success can be a horrible teacher as it leads to complacency.

“The low points matter a lot: though it’s nice to remember successes, it’s important to remember failures too.”
— Michael Dell

As we have learned, Dell was able to succeed because his company’s greatest competitive advantage, the build-to-order model, was born through necessity as he didn’t have the capital to mass produce computers and hold inventory. He emphasizes that moments of friction are what built the company’s engineering muscle. He argues that many people fail to reach their potential because they are too afraid of making a mistake, thereby depriving themselves of the greatest teacher they will ever have.

The lesson here is clear, constraints and failures often force innovation. Leaders who fear failure will never take the risks required for meaningful growth. As Dell puts it daring to fail is the only path to meaningful growth, and every failure and setback made him and his company stronger and more resilient. Dell quotes Eleanor Roosevelt who once said, “You must do the thing you think you cannot do.”

“Success is a horrible teacher. Setbacks and failures make you stronger over time-if you let yourself learn from them.”
— Michael Dell

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Know A Little Bit Of Everything

“The more high-quality mental models you have in your mental toolbox, the more likely you will have the ones needed to understand the problem. And understanding is everything. The better you understand, the better the potential actions you can take. The better the potential actions, the fewer problems you’ll encounter down the road. Better models make better decisions.“
— Shane Parrish

In a world that encourages specialization, Scott Adams offers a contrarian view and argues that you don’t need to be world-class at any single skill to achieve extraordinary success. Instead, he argues that you can combine several merely good skills together to create a unique and powerful package. He calls this talent staking and it is the core formula for his own unlikely career as a famous cartoonist despite being a bad drawer. He writes, “To put the Success Formula into its simplest form: Good + Good > Excellent”

The logic is simple but profound. Being in the top 1% of a single skill, like drawing or comedy, is incredibly difficult and requires immense talent and luck. However, being in the top 25% of two or three complementary skills is far more achievable and the combination of those skills makes you uniquely valuable. Adams himself is the perfect case study.

“I’m a perfect example of the power of leveraging multiple mediocre skills. I’m a rich and famous cartoonist who doesn’t draw well. At social gatherings, I’m usually not the funniest person in the room. My writing skills are good, not great. But what I have that most artists and cartoonists do not have is years of corporate business experience plus an MBA from Berkeley’s Haas School of Business.”
— Scott Adams

As a matter of fact, Adam’s corporate experience gave him authentic material, and his business education gave him the strategic sense to navigate the industry. Neither skill alone would have made him a successful cartoonist, but together, they created a powerful niche that no pure artist or pure businessperson could easily occupy. He further explains, “When I combined my meager business skills with my bad art skills and my fairly ordinary writing talent, the mixture was powerful. With each new skill, my odds of success increased substantially. But there was still one more skill I acquired in my day job at Pacific Bell that ended up mattering a lot: I knew how to use the Internet before most people had even heard of it.”

As such, Adams encourages us to be multidisciplinary and to learn various skills and knowledge. The idea is not to master them all but to become proficient enough in several to create an unique competitive advantage. He writes, “The great thing about reading diverse perspectives from the fields of business, health, science, technology, politics, and more is that you automatically see patterns in the world and develop mental hooks upon which you can hang future knowledge.”

In his book, Adams lists out skills he believes everyone should be familiar with at a competent level:

• Public speaking

• Business writing

• A working understanding of the psychology of persuasion

• Basic technolgy concepts

• Social skills

• Proper voice technique

• Good grammar

• Fundamental of accounting

This reminds me of the concept of multidisciplinary learning that we have learned from Charlie Munger who also believed that people with 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 "How to Fail at Almost Everything and Still Win Big" by Farnam Street

Read "Forget About Setting Goals. Focus on This Instead." by James Clear

Read "Improving Your Luck" by Farnam Street

Read "The Multidisciplinary Approach to Thinking" by Farnam Street

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Today’s Chapter is based on the book “Zero to One: Notes on Startups, or How to Build the Future” by Peter Thiel.

Peter Thiel is a billionaire entrepreneur, and venture capitalist. He co-founded PayPal in 1998, serving as its CEO until eBay acquired it for $1.5 billion in 2002, and later became Facebook’s first outside investor with a $500,000 stake in 2004.

Buy it on Amazon here.

Here’s what I learned:

Zero to One

“If you want something new, you have to stop doing something old”
— Peter Drucker

Peter Thiel believes there’s two types of progress that shapes how we should approach innovation and business strategy: horizontal or vertical progress. He coins the terms “1 to n” to describe horizontal or extensive progress meaning copying things that work and “zero to one” to describe vertical or intensive progress meaning doing new things. Thiel argues that the latter is what truly advances civilization and creates outsized value.

He writes, “Of course, it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. The act of creation is singular, as is the moment of creation, and the result is something fresh and strange.”

This idea reflects the reality that in today’s world, globalization and technology has made copying easier than ever. Hence, it is a lot easier for companies to go from 1 to n by expanding into new markets by replicating successful models. However, this also leads to commoditization and limited returns. Therefore, only true technology breakthroughs create entirely new progress. He reiterates that “When we think about the future, we hope for a future of progress. That progress can take one of two forms. Horizontal or extensive progress means copying things that work—going from 1 to n. Horizontal progress is easy to imagine because we already know what it looks like. Vertical or intensive progress means doing new things—going from 0 to 1. Vertical progress is harder to imagine because it requires doing something nobody else has ever done.”

“The single word for vertical, 0 to 1 progress is technology.”
— Peter Thiel

Furthermore, Peter Thiel believes that startup companies are the ones that mainly thrive on original thinking due to their small size. He argues that because these companies are lean, it is much easier for them to innovate. In contrast, larger corporations have a more difficult to innovate since they are sitting on their past successes and have much more difficulty changing things.

As a matter of fact, it is far less risky for them to improve an existing product rather than to invent an entirely new category. He writes, “All companies must be “lean,” which is code for “unplanned.” You should not know what your business will do; planning is arrogant and inflexible. Instead you should try things out, “iterate,” and treat entrepreneurship as agnostic experimentation.”

“Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.”
— Peter Thiel

This reminds me of Andy Grove at Intel who was known for his unrelenting focus on staying ahead of the competition and anticipating the next big shift in the technology landscape. At the heart of Grove’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.

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Uncover Secrets

“If conventional thinking makes your mission impossible, then unconventional thinking is necessary.”
— Elon Musk

Peter Thiel believes that innovation comes from uncovering secrets. However, he observes that most people have convinced themselves that all the important discoveries have already been made. They assume that anything truly valuable must already be known and that the only remaining opportunities lie in marginal improvements. In Thiel’s opinion, this mentality is a mistake. He writes, “The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers. There is more to do in science, medicine, engineering, and in technology of all kinds. We are within reach not just of marginal goals set at the competitive edge of today’s conventional disciplines, but of ambitions so great that even the boldest minds of the Scientific Revolution hesitated to announce them directly.”

In fact, Thiel believes that most people stop looking for secrets because they are afraid of being wrong, or because they have the internal idea that if something was truly possible, someone would already be doing it. As such, great companies are built on secrets that are hidden in plain sight. Thiel lists out examples from Silicon Valley such as Airbnb and Uber.

“Great companies can be built on open but unsuspected secrets about how the world works. Consider the Silicon Valley startups that have harnessed the spare capacity that is all around us but often ignored. Before Airbnb, travelers had little choice but to pay high prices for a hotel room, and property owners couldn’t easily and reliably rent out their unoccupied space. Airbnb saw untapped supply and unaddressed demand where others saw nothing at all.”
— Peter Thiel

Peter Thiel mentions that there are two kind of secrets: secrets of nature and secrets about people. Thiel explains, “There are two kinds of secrets: secrets of nature and secrets about people. Natural secrets exist all around us; to find them, one must study some undiscovered aspect of the physical world. Secrets about people are different: they are things that people don’t know about themselves or things they hide because they don’t want others to know. So when thinking about what kind of company to build, there are two distinct questions to ask: What secrets is nature not telling you? What secrets are people not telling you?”

As such, Thiel encourages founders to actively look where nobody else is looking. Ignore conventional wisdom and the herd mentality. The most important is for founders to think for themselves, as that is the only reliable way to uncover a secret that can become the foundation of a great company. He writes, “Recall the business version of our contrarian question: what valuable company is nobody building? Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable. If there are many secrets left in the world, there are probably many world-changing companies yet to be started.”

This reminds me of Chung Ju-Yung (founder of Hyundai)’s favourite question of “Did you Try?”. In fact, when Hyundai first got into the car industry, they knew that they had to partner with an American company who had superior technology. When Chung heard of Ford’s visit in South Korea, he immediately asked his younger brother to negotiate an automobile assembly technology contract with Ford. His brother was taken back as it seemed improbable to reach an agreement this quickly with a major foreign car company. Chung responded with the following saying: “Have you even tried?”

For Chung, the first rule to become a successful person is to have the mentality of thinking that anything is possible. As he explains, “If you doubt yourself, then you will only be able to accomplish as much as your doubts let you. If you think you can’t do something, then you won’t be able to do it.”

As a matter of fact, Chung Ju-Yung mentions the importance for a company to innovate, especially when there are competitors. In fact, he believes that running a company without competition will slow you down, because if there is no competition, “you don’t need to improve the quality of your product, and there’s also no pressure to shorten production times.” In business, being complacent is the same as falling behind and if you are not leading, you’re losing. By consequence, it is essential for one to think unconventionally to succeed in business.

“I am someone who believes that if a person limits themselves to the fixed ideas inherent in common sense, they will not be very creative.”
— Chung Ju-Yung

In the case of Chung, he knew that for him to beat his competitors, he had to finish projects in a shorter amount of time than other people. In fact, he mentions that he succeeded because while others were still hesitating, he had already begun working. This is the reason why his motto is “shorten the time”. In his opinion, that is the surest way to encourage innovation and improvement. As a matter of fact, he would often take tours of his projects and would always seek to find ways to shorten construction times in unconventional ways.

“When we worked on the Jubail project, we had to make 160,000 drill bits to build the breakwater and shore protection structures. If we built 200 every day, it would take us 800 days to make 160,000. But at the site, the workers were making them one at a time instead of using a mold to mass produce them. Their sorry excuse for this wasteful effort was that the molds weren’t the right height to fix onto the end of the cement trucks.

When I saw this, I was furious. Why did these people have brains if they weren’t going to use them? It didn’t take a genius to realize that the outflow ramp for the concrete on the trucks needed to be raised to fit the molds. If they just followed this simple solution, they wouldn’t need a crane, and they wouldn’t waste time and energy. They couldn’t think to adjust the concrete mixer truck, thinking it was unchangeable. Would the gods punish them for making some small adjustments? After I made the changes, we went from 200 per day to 350 per day.”
— Chung Ju-Yung

Chung believed that finding clever solutions would never come from people with conventional thinking. As a matter of fact, he mentions that “if you only think in accordance with what you learned through books, your imagination will be limited to that.”

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80/20

“80% of the results come from 20% of the effort. The key is knowing which 20%.”
— Richard Koch

Peter Thiel is also a big believer of the power law especially in terms of venture capital investing. In fact, while most people intuitively believe in normal distributions: a few terrible outcomes, a few excellent outcomes, and a larger cluster of average outcomes, Thiel argues that this is completely wrong when it comes to startups investing. He mentions that the power law rules everything, meaning that a tiny number of outcomes will produce almost all of the value.

Thiel writes about the Pareto principle by mentioning that “In 1906, economist Vilfredo Pareto discovered what became the “Pareto principle,” or the 80‑20 rule, when he noticed that 20% of the people owned 80% of the land in Italy—a phenomenon that he found just as natural as the fact that 20% of the peapods in his garden produced 80% of the peas. This extraordinarily stark pattern, in which a small few radically outstrip all rivals, surrounds us everywhere in the natural and social world.”

In terms of venture capitalist investing, the Pareto principle explains that more often than not a single successful investment will return more than the entire rest of the fund combined. This is the biggest secret in venture capital according to Thiel. As such, rather than investing in many names, he recommends only investing in five to seven companies, each of which has the potential to become a multibillion-dollar business.

“The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.”
— Peter Thiel

Similarly, the Pareto principle and the power law is also valuable in terms of entrepreneurship. Thiel advises against spraying effort across many projects or pursuing a diversified portfolio of ideas. Instead, identify the single most promising opportunity and pursue it with singular focus.

Furthermore, Thiel believes that many people in Silicon Valley are too eager to start their own startups when they would be far better off joining a fast-growing company. He explains, “People who understand the power law will hesitate more than others when it comes to founding a new venture: they know how tremendously successful they could become by joining the very best company while it’s growing fast. The power law means that differences between companies will dwarf the differences in roles inside companies. You could have 100% of the equity if you fully fund your own venture, but if it fails you’ll have 100% of nothing. Owning just 0.01% of Google, by contrast, is incredibly valuable (more than $35 million as of this writing).”

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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Beyond the Book

Read "Summary: Peter Thiel’s Zero To One" by Farnam Street

Watch "Zero to One by Peter Thiel | Why Competition is for Losers (TIP786)" on YouTube

Read "Leverage: Gaining Disproportionate Strength" by Farnam Street

Listen to "#424 Peter Thiel on How to Build a Creative Monopoly" by Founders Podcast

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

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

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

Today’s Chapter is based on the book “Play Nice But Win: A CEO’s Journey from Founder to Leader” by Michael Dell.

Michael Dell is an American billionaire entrepreneur best known as the founder, chairman, and CEO of Dell Technologies, one of the world’s largest technology infrastructure companies. He started the business in 1984 from his college dorm, pioneered direct‑to‑customer PC sales, and became the youngest CEO ever of a Fortune 500 company at age 27.

Buy it on Amazon here.

Here’s what I learned:

Be Curious

“Curiosity is, in great and generous minds, the first passion and the last.”
— Samuel Johnson

A key trait that drove Michael Dell to success in business was his curiosity. He was simply a curious kid who wanted to know how things worked. While other children might have been content to simply use their toys, Dell was the one taking them apart. This relentless curiosity became the engine of his entrepreneurial journey. Dell writes, “I was extremely curious, maybe the most so in the family. It was a trait my parents really encouraged in all of us. A lot of exploits other kids might’ve gotten punished for, they just smiled at. My brothers and I were always taking things apart around the house to see how they worked. My specialty was anything with electronics in it—telephones, televisions, radios. Most of the time I put them back together.”

Dell’s curiosity wasn’t limited to hardware. He absorbed business and economic knowledge the way other kids absorbed comic books. His family’s dinner table conversations revolved around the Federal Reserve, oil prices, and stock markets. By the time he was a teenager, he was reading The Wall Street Journal at summer camp and following the stocks he had invested in. This intellectual hunger never left him. He explains, “When my mom and dad talked, it wasn’t gossip or chitchat. They were constantly discussing the economy: What was the Federal Reserve doing? Where were oil prices and interest rates and currencies and the stock market? We had Forbes and Fortune and Barron’s in the house; we used to love watching Louis Rukeyser’s Wall Street Week. Even before my mom started working as a stockbroker, she had these huge Value Line books, with pages and pages of information on individual companies. I soaked it all in.”

“I don’t know why people aren’t more curious, and why curiosity isn’t considered a more important leadership trait. A journalist once asked me if I was ever bored as a kid. I only had to think about it for a second: I never was, not even for a minute, because I was so curious. Every day I’d wake up excited by all the new things there were to learn about.”
— Michael Dell

As such, it is not surprising that Michael Dell argues that curiosity is an undervalued leadership quality. As a matter of fact, when he was running Dell, he was constantly asking himself “how” and “why” questions. He started his company mainly because he was wondering why customers couldn’t get exactly the computer they wanted without retail markups.

And more importantly, Dell explains that leaders who stay curious avoid complacency. They surround themselves with people who know more than they do and constantly seek to understand new developments in technology and business. He mentions, “Change, true transformation, is a race with no finish line. Which means there’s so much more out there for me—for all of us—to learn about. How cool is that?” The lesson is clear: the moment you stop asking questions is the moment your organization stops growing.

“Curiosity. Have I mentioned curiosity already? It’s so important, I’ll say it again: Always be learning. You want to have big ears. To listen, to learn, and to always be curious. To be open to ambiguity. Design your company from the customer back.”
— Michael Dell

This reminds me of how innovation can come from being curious and asking the right questions. Similar to Dell, Ingvar Kamprad’s leadership at IKEA is a perfect example of how challenges can turn into opportunities through innovative problem solving. As a matter of fact, many of IKEA’s innovations did not come through a deliberate strategy from the outset but evolved as a response to practical difficulties. Kamprad’s willingness to rethink traditional methods allowed IKEA to carve out a unique niche, demonstrating that innovation often arises from necessity.

One example of this is the development of the self-assembling furnitures and of flat-packing which became an industry standard but first started as a solution born out of logistical woes. Kamprad explains that “Perhaps it could be said that reality forced the innovation upon us. We had begun to experience a worrisomely high percentage of damaged furniture in transport—broken table legs and that kind of thing, and the European insurance companies were beginning to grumble. The more “knockdown” we could produce, the less damage occurred during transport and the lower the freight costs were; that was the logic of it.“

This forced adaptation not only solved the immediate problem of damaged goods but also revolutionized the furniture industry, reducing shipping costs, storage space, production costs and ultimately, the price for consumers. As Kamprad mentions, “It was not difficult for me to see the advantages of self-assemble furniture and the superiority of flat parcels. Flat parcels saved enormously on storage and freight, and in the long run they were to be the prerequisites for the next step: customers taking home parcels of large furniture themselves.”

As a matter of fact, this issue with logistics led to the introduction of “Max”, the first self-assembly table that marked the beginning of a design philosophy called “democratic design” which is functional, affordable, and adaptable to mass production. Kamprad mentions that “A design that was not just good but also from the start adapted to machine production and thus cheap to produce. With a design of that kind, and the innovation of self-assembly, we could save a great deal of money in the factories and on transport, as well as keep down the price to the customer.”

“In IKEA’s business philosophy, the whole matter should be inscribed as a golden rule: regard every problem as a possibility. New problems created a dizzying chance. When we were not allowed to buy the same furniture that others were, we were forced to design our own, and that came to provide us with a style of our own, a design of our own.”
— Ingvar Kamprad

This lesson is invaluable for modern businesses. By embracing challenges as catalysts for innovation, whether through new product designs or process improvements, companies can stay ahead of the curve. Kamprad’s story teaches that the most groundbreaking ideas often emerge when leaders are willing to question the status quo and adapt creatively to their circumstances.

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Execute!

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

One of the strongest lessons we can learn from Michael Dell is that ideas matter, but execution matters more. He was not the only person in the industry to see PCs as the future, but he was the only one to imagine and execute on his idea of direct-to-consumer sales. What separated Dell from other players was the discipline to turn those ideas into a working operating model. Dell writes, “Ideas are a commodity. Execution of them is not. Coming up with a great idea or strategy is necessary but not sufficient for success. You must execute. This requires detailed operational discipline and understanding.”

Dell mentions that executing on an idea is not easy, especially when you are just starting. You really need to make sacrifices to succeed. He mentions, “Iʼd been happily working sixteen-hour days, eating at the office, sleeping at the office. My work was my life; my company was my second family. Anyone who says you can start a company and have work-life balance is lying.”

In Dell’s situation, his execution of his idea is even more impressive because he did it at such a young age and without any capital. He made up for it through hard work. He explains, “In the few hours when I wasnʼt working, I was devouring books about leadership and management, learning about all the things I didnʼt know. I was twenty-one— a curious and ambitious twenty-one, to be sure, but there was a lot I didnʼt know.”

“Did we know what we were doing? Yes and no. My entrepreneurial boyhood notwithstanding, I had never run a business before, so there was that learning curve to climb. But it wasn’t just learning to run a business; it was learning to run a business that wasn’t like other businesses—even though on the surface, PC’s Limited looked like many other computer businesses.”
— Michael Dell

Luckily for Dell, the lack of capital actually became an advantage for him. He explains, “And yet of all the many companies trying to imitate us by making build-to-order PCs and getting them out the same day, plus offering free technical support by phone, we were the only one that thrived and succeeded. We didn’t start building to the customer’s order because we saw some massive paradigm in the future. We started that way because we didn’t have the capital to mass-produce. It turned out to be a pretty lucky handicap. And many of the biggest lessons we learned in the company’s formative years came about in the same seat-of-the-pants way. We experimented and improvised our way to success.”

Michael Dell’s story reminds me of Jason Fried’s belief that starting a business today a lot more accessible than ever before. Fried 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

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Embrace Failure

“I have not failed. I’ve just found 10,000 ways that won’t work.”
— Thomas Edison

Through his experience at Dell Computer, Michael Dell believes that failure is not something to be avoided at all costs, but something that can be embraced and learned from. At his own company, he has experienced plenty of stumbles, from product flops to inventory crises, and each one of these mistakes made the business stronger. He explicitly rejects the concept that success is linear.

Dell writes, “But for every company, Dell included, kaizen is an ideal rather than a reality. Success is not a straight line up. It’s fail, learn, try again, then (you hope) succeeded. How successful you are is really a function of how well you deal with failure—and how much you learn from it. Many people don’t reach their greatest potential because they fear failure. In avoiding failure, they deprive themselves of a great teacher.”

However, Dell warns that business leaders must actively remember their failures, and not conveniently forget about them. This is often the case during periods of success where you convince yourself to believe that everything is fine. Success can be dangerously seductive while failure, by contrast, forces genuine reflection and adaption. This is why Dell believes that success can be a horrible teacher as it leads to complacency.

“The low points matter a lot: though it’s nice to remember successes, it’s important to remember failures too.”
— Michael Dell

As we have learned, Dell was able to succeed because his company’s greatest competitive advantage, the build-to-order model, was born through necessity as he didn’t have the capital to mass produce computers and hold inventory. He emphasizes that moments of friction are what built the company’s engineering muscle. He argues that many people fail to reach their potential because they are too afraid of making a mistake, thereby depriving themselves of the greatest teacher they will ever have.

The lesson here is clear, constraints and failures often force innovation. Leaders who fear failure will never take the risks required for meaningful growth. As Dell puts it daring to fail is the only path to meaningful growth, and every failure and setback made him and his company stronger and more resilient. Dell quotes Eleanor Roosevelt who once said, “You must do the thing you think you cannot do.”

“Success is a horrible teacher. Setbacks and failures make you stronger over time-if you let yourself learn from them.”
— Michael Dell

Leaders can learn a lot about embracing failures from professional athletes like Stephen Curry. As we have learned previously, Curry views challenges not as obstacles but as stepping stones to success. He embraced what he calls the J-curve of progress, where a dip is often needed before seeing massive progress. This once again demonstrates why we should favour Curry’s process focused approach rather than taking a results-based focus. Curry writes, “I’ve learned over the years that challenges are the most efficient teachers, so I don’t run from them. You need to get used to doing difficult things, so you’re not living in fear of things going wrong.”

A perfect example of this in basketball comes from Michael Jordan who once said, “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty‑six 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.” Similarly, Curry writes, “While missing shots is a great way to learn, obsessing over failure is just a distraction from the work of improvement.”

“This is trouble if you’re motivated solely by the validation of quick results. You’ll give up if you are results-focused instead of process-focused, because working harder doesn’t make that curve go up faster.”
— Stephen Curry

Furthermore, Curry explains that it is often common for persistent practice to not showing results immediately. He draws a parallel to the J-curve in investing. He writes, “Imagine a big J on a page: The dip at the start of the letter is when you’re investing in something but haven’t gotten any returns yet, and then the line rises, and fast. Whatever the investment is, you’re going to get feedback on the loss quicker than you get any positive returns—it takes longer for the trajectory to start shooting up. When you’re in that down phase, you have no idea how far it’s going to go until it starts to go the other way.”

Similarly, Curry had a similar experience during a summer in High School, where he had to re-learn how to shoot in order to improve his mechanic that would allow him to succeed at the next level. He explains, “I would acknowledge to young me that this summer will be one of the hardest tasks I’d ever face in my basketball life: breaking down the one thing I thought I did well to try to do it better, while feeling so far away from what I hoped the end result would be. And this is the advice I would give myself: This may seem like it’s as hard as it gets, but you’re going to have to do variations of this same work a hundred more times in your life. Different scenarios and settings. Different challenges. But the same hard work with the same distant and uncertain outcome.”

What he learned from that summer wasn’t just an improved shot, but the fact that if something is handed to you easily, you won’t get the chance to develop the drive you need to sustain excellence. This also happened to him when he was about to play in College. He was only able to play at Davidson a smaller Division I team, but this helped him to “work harder, maximizing my skill set as a sharpshooter who could tire out any opponent by racing all over the court.”

“The times when you’re most uncomfortable are the inflection points in your life. The discomfort is how you know you are changing.”
— Stephen Curry

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Beyond the Book

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Today’s Chapter is based on the book “Junk to Gold: From Salvage to the World’s Largest Online Auto Auction” by Willis Johnson.

Willis J. Johnson (born 1947) is an American billionaire businessman best known as the founder of Copart, a global leader in online auctions for salvage and totaled vehicles. A Vietnam War veteran who earned a Purple Heart, he later took Copart public in 1994, pioneered online car auctions in the late 1990s, and served as CEO until 2010 before stepping back into an executive chairman role and other ventures.

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Here’s what I learned:

Hard Work

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

Willis Johnson, the founder of Copart had a relentless work ethic which he inherited from his father who had a life where nothing came easy and opportunities had to be chased. Growing up, Johnson watched his dad work extreme hours and seize every chances he had, whether it was through metal scrapping or finding bargains at auctions. As Johnson writes, “When I was growing up, my dad would often work fifteen hours a day, seven days a week. It was always that way for my dad. When he was a kid, he would fill a small wagon with ice and bottles of Coke. He’d take that wagon to construction sites and sell cold drinks to the workers. He learned the value of hard work, and it gave him a taste for starting up businesses that could help support the family.”

Similarly, the children in the Johnson family were quickly put to work when the family moved to a family ranch in Arkansas. This experience at the farm built Johnson’s grit that he later applied in his career. Throughout his father’s businesses, he also noticed that the world wasn’t always fair. As he explains, “While hard work became second nature, I learned it wasn’t always a guarantee of success, and people aren’t always treated equally for equal work. The world was unfair, and this bothered me.”

Nonetheless, his father’s approach taught him that success can be built on the accumulation of small disciplined actions rather than a single stroke of luck. It allowed Johnson to build a character of resourcefulness in spotting value where others saw scrap, whether it was by scanning newspapers for deals or learning from auctions. Johnson didn’t just work hard, he worked smart.

“My dad was the smartest man I ever knew in business, and I soaked up everything I could from him. We not only shared the same name but also a belief that nothing was impossible with hard work and determination.”
— Willis Johnson

Furthermore, Willis Johnson also learned from his father to be relentless in terms of frugality. His father once said, “Take care of your pennies and your dollars will take care of themselves. As such, it isn’t surprising to know that Willis Johnson was a very hands-on owner throughout his different business ventures. As a matter of fact, his approach to business remained grounded even after he became a wealthy executive. He was never a leader who stood on a pedestal and was always working in the yard alongside his employees.

For example, in the early days of Mather, he worked alongside his employees, dismantling cars and was known for having grease under his nails. He believed that if he wouldn’t do a job, he couldn’t expect anyone else to do it either. This willingness to get dirty was often the competitive advantage that allowed him to see value where others saw only scrap. At auctions, he and his father were often the only ones who truly knew the value of what they were bidding on because they had done the manual homework that others found too beneath them.

This reminds me of what we learned from Elon Musk who believed that creating a culture of excellence requires more than just hiring well. It also requires leaders who are willing to lead by example and who are willing to get their hands dirty. Elon Musk is often seen sleeping on factory floors and working alongside his teams during crises. He understood that his employees would work harder if they saw him working alongside of them. He mentions, “Think about war. Do you want the general in some ivory tower or on the front lines? The troops fight harder if they see the general on the front lines. Nobody bleeds for the prince in the palace. Get out there on the front line. Show them that you care and that you’re not in some plush office somewhere.”

Similarly, Musk believed in removing any barriers that may separate senior executives from employees. As a matter of fact, he expects his managers to have hands-on experience in the work they oversee. For example, software managers must be able to code and solar roof managers must be able to install roofs. If you cannot do the work yourself, you have no business telling others how to do it. He elaborates that, “All technical managers must have hands- on experience. For example, managers of software teams must spend at least 20 percent of their time coding. Solar roof managers must spend time on the roofs doing installations. Otherwise, they are like a cavalry leader who can’t ride a horse or a general who can’t use a sword.”

“When the team is being asked to work super hard, I have to be right there with them and they have to see it. If I fall asleep in the middle of the factory floor at four in the morning and wake up four hours later, they see that. They are like, “If the CEO is willing to take that level of pain, I can do it too.””
— Elon Musk

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Integrity

“If it is not right do not do it; if it is not true do not say it.”
— Marcus Aurelius

Willis Johnson’s father also helped him cultivate a sense of integrity. For him, deals were either right or they weren’t and cheating, even over some pennies, eroded trust permanently. As such, Johnson, following the steps of his father’s frugal, built a reputation for standing by his commitments and always walked away from questionable opportunities. Johnson writes, “Both my dad and I also built reputations in the business world of always standing by our word and never doing business if a deal felt wrong. We both walked away from opportunities that may have helped our businesses but would have crossed a moral or ethical line. To us, the business world was black and white, and a deal you aren’t sure about isn’t really a deal at all.”

As such, Johnson believed in the importance of never breaking his words, even at personal cost. He explains that “I was raised to believe that cheating is the same whether you are taking ten cents or $10,000. And if you could do it once, there was a good chance you would do it again.” This principle guided everything from how Johnson treated employees to how he dealt with customers.

“I told myself I would never do that, even if it meant I would lose money. I never promised something to someone that I didn’t do, and I never made promises I couldn’t keep. My word is gold. You don’t have to get me to sign something for me to take my commitment seriously.”
— Willis Johnson

By consequence, it is not surprising to learn that he paid above average wages and benefits to his employees in order to retain talents but to also build loyalty among his staff. Johnson explains that, “We learned it wasn’t just enough to treat your employees nice, give them good benefits, and hope they got it. That wasn’t enough to keep the unions out. We treated the employee nice, gave them as many benefits as we could, and treated them like we didn’t want them to leave—because we didn’t. But we didn’t tell them we loved them; we didn’t show them how much they meant to the company.”

When Johnson’s son-in-law Jay joined the company, he understood right away that one of the key reasons for Copart’s success was due to its corporate culture. The company believed in the philosophy that if you take care of your people, they will take care of the company. In fact, the company’s ethos was eventually distilled into a set of values whose first letters spelled out the company’s name COPART: Committed, Ownership, Profitability, Adaptable, Relationships, and Trust.

“Copart was going to be a company that didn’t just hire on skill sets or IQ (intelligent quotient); it was going to hire based on attitude—EQ (emotional quotient). We were going to be a company in which people liked their coworkers and had fun at what they did. If that happens, we knew they would probably be more efficient and productive and capable of delivering legendary service.”
— Willis Johnson

Furthermore, Copart’s success can also be explained by the way the company treated their customers, or what they called legendary services which became the standard. They believed in providing services that would leave customers saying “Wow, how did they do that?”.

Copart’s focus on treating their employees and their customers fairly reminds me of the importance of hiring employees who have integrity. 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.”

Similarly, Brad Jacobs believes in four non-negotiable traits when hiring: 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.”

“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

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Specializing

“Ignore the conventional wisdom. If everybody else is doing it one way, there’s a good chance you can find your niche by going in exactly the opposite direction.”
— Sam Walton

Willis Johnson didn’t succeed in business by doing what everyone else did. He didn’t just participate in the auto dismantling industry, he reinvented it by looking at the business through different lens.

One of his most significant innovations was the realization that he could make more money by dismantling parts and selling them individually than to sell them as a whole. While others forced customers to buy a used engine bundled with all its attached parts, Johnson dismantled them and only sold to the customers what they really wanted. He writes, “I would sell them just the motor, undressed, for $275—a deal if that’s all they needed. Then I’d sell the other parts separately—the distributor for $50, the alternator for $25, the carburetor for $100. By the time I was done, I could get $700 for the same parts sold separately that were sold together by my competitor for $400. And the customer was happier.”

Willis Johnson also understood the value of finding a niche that others ignored. When he was facing stiff competition, he decided to specialize in auto parts that other dismantlers did not want to carry, such as parts from Chrysler, Dodge and Plymouth, due to their unpopularity. While his competitors were chasing popular components from General Motors and Ford, they were more than willing to sell their slow-moving inventory to Johnson, even at a discounted price. The results were immediately amazing. Johnson mentions that “Before we specialized, Curtis and I were running between $3,500 and $5,000 worth of parts a month at Mather. After specializing, we were running around $3,500 worth of parts a day.”

“At the time Chrysler, Dodge, and Plymouth were not cars dismantlers wanted to have because they weren’t hot-selling items. So we made a decision to specialize in Chrysler, Dodge, and Plymouth. All the other dismantlers thought I was crazy. But they were more than willing to sell us their Chrysler parts that weren’t moving and send business our way.”
— Willis Johnson

Finally, Johnson was never afraid to invest into technology, despite being from a generation that did not grow up with computers. With the help of his son-in-law, Jay, he was able to embrace the internet before most of the industry even understood what it was. They developed a system that allowed to move all of Copart’s auctions entirely online and expanded their buyer base from local yards to bidders internationally like Mexico and Canada. As Johnson writes, “Copart was no longer just a salvage company; it was also a technology company.”

This was extremely controversial as customers and employees were skeptical of online auctions. In fact, “All the buyers told Jay it was a dumb idea; no one would bid on a car they didn’t look at first, they said. Jay told them, “I’m not asking you to not see the car. I’m asking you to come look at the car the day before the sale, and for thirty-five dollars you can submit a bid on our website and not have to stand in the auction all day or pay a contract buyer one hundred and fifty dollars to stand there for you.” Once buyers understood the concept, it took off, and Copart had more than $ 1 million in online sales the first quarter.”

The success of Copart and Willis Johnson through specializing and finding a niche 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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Beyond the Book

Read "Learning From Copart’s Willis Johnson" by Investment Masters Class

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

Read "Leverage: Gaining Disproportionate Strength" by Farnam Street

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Today’s Chapter is based on the “Letters to Giverny Capital Partners (2001-2025)” by Francois Rochon.

François Rochon is a Canadian value investor and the founder, president, and portfolio manager of Giverny Capital in Montreal. Over several decades he has compounded portfolios at roughly 14–15% per year by focusing on owning a concentrated basket of outstanding, high return on capital businesses for the long term.

Read them for free here.

Here’s what I learned:

Patience is a Virtue

“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”
— Warren Buffett

Francois Rochon repeatedly presents the idea that superior long-term returns are impossible without genuine patience. In his annual letters, he reminds his Giverny partners that the stock market rewards those who can wait through the inevitable storms rather than those that overreact over every headline or quarterly results. In his opinion, patience is not solely to wait but the discipline of refusing to sell your winners and to chase hot trends. He illustrates the importance of patience by referring to Philip Carret, the legendary investor, who was once asked what was the most important lesson of his 75 years of experience during an interview. He answered with just one word: “Patience”.

As such, Rochon’s experience managing Giverny Capital is a perfect example of how patience pays off in the stock market. Giverny Capital has earned an average return of around fifteen percent per year and the firm held companies for six to seven years on average, roughly twelve times longer than the typical investor. Rochon sees this low turnover as a direct result from his investment philosophy of investing in exceptional companies that deserve to be owned for a long period of time. As such, it is not surprising that Rochon argues that trying to predict short-term market direction is futile. Instead, he believes in being always invested in the market.

“Since no one really knows what the market will do in the short run, the best strategy, I believe, is to simply stay invested (at least as long as we find businesses that meet our criteria). And one thing that 2003 showed us again is that the first ingredient to make money in the stock market is to be present.”
— Francois Rochon

As a matter of fact, Francois Rochon is brutally honest in the fact that he cannot predict the market. He freely admits that he does not know where the market is going next month or next year. He acknowledges that some of his purchases will disappoint and that his portfolio will underperform the index roughly one year out of three, in what he coins as The Rule of Three. He writes, “In fact, I believe that there are stock market realities that should be accepted when we decide to become equity holders. I named those ‘The Rule of Three’: One year out of three, the market will go down (by more than 10%). One stock out of three that we will buy will be somewhat disappointing. And one year out of three, we will under perform the indexes. I don’t have scientific facts to offer you to explain this rule. That is why it is an empirical conclusion: it can be observed, it can’t be explained. But it can be psychologically useful as knowing this rule will help us navigate through market storms.”

As Rochon explains, after three decades of investing in the stock market, he is convinced that the biggest mistake that investors can make is to try to predict the financial markets and to try to wait for a better time to buy or sell stocks. He tells the story of a money manager who was an outstanding stock picker but that has been pessimistic about the stock market for 18 years who could have done more than 20% a year for more than three decades if he had just invested 100% of his portfolio in his favorites stocks and just forgot about the market.

“I would like to emphasize the most important lesson of the last twenty years: It is futile to try to predict the stock market over the short run. All previous lessons are useless if you try to predict the stock market over the short run. I have heard people say hundreds of times that they were waiting to buy great companies because they had negative views on the short-term direction of the stock market. Owning great businesses, managed by great people and acquired at reasonable prices is the winning recipe. The rest is just noise.”
— Francois Rochon

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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Focus on Intrinsic Value

“The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.”
— Warren Buffett

A second lesson that can taken from Francois Rochon’s letters to partners is the concept that investing should be seen as purchasing a company rather than stocks. As such, he focused relentlessly on the intrinsic performance of the companies themselves rather than the changes in stock price. He believed that the market’s daily price is a noisy proxy and that true returns are driven by the underlying company’s ability to grow owner earnings and to create a durable competitive advantage. He writes that when assessing any company, he examines the following five pillars:

• The business model (market share, product innovation, etc.)

• The financial (balance sheet and profit margin) structure

• Quality of management

• Long-term growth perspectives (which are linked to the first three)

• Market valuation compared to intrinsic value

You will see that the last pillar draws on Warren Buffett’s concept of focusing on owner earnings to track how much economic value the companies are truly creating. Since the beginning of his letters, Francois Rochon has published charts showing that the intrinsic value of Giverny’s portfolio companies do not grow at the same rate as their stock prices. However, in the long run, they should grow at the same rate. He writes, “In the long run, stock market performance will follow hand in hand the intrinsic performance of the underlying companies. But in the short term, there can be huge gaps between the two. You can notice that some years, the market performance was bellow intrinsic performance (1999, 2000 and 2002). This is 3 years out of 8 (40% of the time).”

“As you know by now, Giverny Capital is not like other money management firms. We evaluate the quality of an investment by focusing on the growth in intrinsic value instead on market price.”
— Francois Rochon

Concerning management quality, after studying and learning from Philip Fisher, Rochon concluded that the quality of the people running the business accounts for more than 90% of the company’s long-term success. Therefore, he often looks for leaders who love their business more than they love money and who treat shareholders as true partners.

As such, it is not surprising that Francois Rochon the daily changes in stock prices not as a reliable guide but as a servant that occasionally offers extraordinary opportunities precisely because most participants behave irrationally. He writes in his letters that downturns, corrections and periods of pessimism are the best times to invest into high-quality businesses as they can be purchased at a discount from their intrinsic value. As he explains, “The steep decline that followed the September 11 attacks and the subsequent rise of stocks remind us that, in the universe of stock markets, it is better to buy in rainy days than in sunny days. Because when the sky is all blue, stocks are often changing hands at prices that reflect the fact that a majority of investors (I) believe that the sky will stay blue forever. In recessions and other crisis, it’s the opposite: many will sell their stocks at any price thinking that never again will the blue sky return. To be able to keep in perspective stock market’s sunny days from rainy days is a quality that is quite useful to develop.”

This reminds me of the importance of understanding Mr. Market, a term coined by Benjamin Graham. Here’s how the legendary Warren Buffett explains in his own word in his 1987 Berkshire Hathaway letter to shareholders:

“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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Be a Contrarian

“Be fearful when others are greedy and greedy when others are fearful.”
— Warren Buffett

One final lesson that can be learned from Francois Rochon’s letters to his Giverny partners is the importance of having an investment philosophy that is rational and independent. As a matter of fact, he acknowledges that his approach in investing in a small number of high-quality businesses and having low turnover is greatly different from conventional wisdom in money management.

This approach of his was greatly influenced by the great John Templeton who once said, “It is impossible to obtain a performance superior to the average unless you do something different from the average”. Rochon explains further that, “Our investment philosophy doesn’t reflect the conventional approach toward portfolio management. To own few stocks, to avoid some industries that we know nothing about and to ignore market fluctuations is a sensible approach but that is far from being widely used in the industry. But that doesn’t disturb us a bit: since our beginning we have known that “being different” is the first ingredient of success (although there are many other ingredients needed!).”

Rochon’s contrarian approach is also apparent in his refusal to follow the crowd and to invest in industries that he does not understand. He prefers investing in companies that are within his circle of competence. Similarly, what differentiates him from other money managers is his emphasis on continuous learning and humility. Even after more than decades into the business, Rochon understands the limits of his circle of competences and is eager to study his past mistakes in his letters to partners in a dedicated section called “Mistake du jour”, where he lists out mistakes he has made over the years.

“There is a lot to learn from our mistake but it is a little less painful to learn from other’s mistakes.”
— Francois Rochon

This reminds me of what we have learned from Hetty Green, whose greatest edge as an investor was her willingness to go against the crowd. She always kept a stack of cash ready to take on opportunities created by prices going down due to fear. As a matter of fact, in an era where speculative frenzies regularly swept through Wall Street, ruining countless of investors who bought at the top of the market crazy and who panicked at the bottom, Green understood that following the herd was a certain way to lose capital. Instead, she built a contrarian investment philosophy and she possessed the discipline to execute it to perfection.

Her contrarian strategy in investing was honed early on, particularly during the economic turmoil following the Civil War. Wallach writes that “The devastation of the South, the high debt caused by the war, and the disarray of the Union created a stormy picture. Many people viewed the country’s economy as doubtful. Seeing chaos around the corner, they worried about the stability of the government and refused to pay face value for its greenbacks. Instead, they rushed to gold. The rules of the marketplace state that for every seller there must be a buyer. The more the public discounted paper money, pushing it down as low as fifty cents on the dollar, the more Hetty bought.“

“I buy when things are low and nobody wants them. I keep them until they go up and people are crazy to get them. That is, I believe, the secret of all successful business.”
— Hetty Green

There are three reasons why Hetty Green was able to implement this contrarian investing approach successfully. Firstly, she always had cash on hand. As Shane Parrish once said in an interview with Tim Ferriss, the reason why Warren Buffett is so successful is because he has a large stack of cash in the balance sheet, “and so, what he’s always doing is everybody thinks he’s out of touch and he looks like an idiot. But he always wins because no matter what the outcome is, he wins. If the stock market goes up, he wins. If the stock market crashes, he wins because he’s put himself in a position where no matter what happens, he can take advantage of circumstances rather than having circumstances take advantage of him.“

Secondly, Hetty Green only invested in things that were within her circle of competence. Notably, she mainly invested in railroads, bonds or real estate. She used her research skills to identify bargains others missed, but it was also a lot easier for her to buy things that are depressed when she knows what she is buying. As Wallach writes, “Whether it was a horse and buggy or stocks and bonds, her canny habit of investigating every possible facet before she bought helped make her successful. “

Green explains that to determine when stocks are cheap demands a thorough knowledge of “their history, their dividend-paying possibilities, and what they have sold for in the past. If one can buy a good thing at a lower cost than it has ever sold for before, he may be fairly sure of getting it cheap.”

“Before deciding on an investment, I seek out every kind of information about it.”
— Hetty Green

Thirdly, Hetty Green was extremely patient once she invested in an asset. She would often buy assets and tuck them away for years, sometimes waiting decades for investments to finally pay off. As she once said, “I keep them just as I keep a considerable number of diamonds on hand until they go up and people are anxious to buy.”

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Today’s Chapter is based on the book “Shot Ready” by Stephen Curry.

Stephen Curry is an American professional basketball player for the Golden State Warriors in the NBA, widely regarded as the greatest shooter in history. He revolutionized the game by popularizing the three-point shot, leading the Warriors to four championships (2015, 2017, 2018, 2022) and earning two MVP awards while setting the all-time record for three-pointers made.

Buy it on Amazon here.

Here’s what I learned:

Embrace the Grind

“The hardest thing to do is work hard when no one is watching.”
— Ray Lewis

The most famous image of Stephen Curry is him jogging backward after releasing a three-pointer, the ball still in the air, his eyes already looking away before the ball goes through the net. However, what we don’t see are the thousands of repetitions that made that moment possible. The same shot, over and over, when there is no crowd, no defender, no applause.

As a matter of fact, Curry’s success began long before the bright lights of the NBA. It started in local gyms where he learned to love the unseen work that separates the good players from the great ones. He understood that greatness isn’t accidental but forged by hours of practice when no one is watching. He believed that the key to success is to work on the fundamentals. As he once said, “We practice not until I get the shot right, but until I can’t get it wrong.”

From the get go, Steph Curry understood that for him to succeed as a basketball player, he had to work harder than anyone else. As he explains, “I was never the most gifted athlete—not the highest jumper or the fastest runner or the tallest player on the court. In college, I looked like a middle-schooler trying to age himself up with a mustache so thin it seemed drawn on. Depending on my haircut, I’m still only 6’3” in a league where the average is 6’6”.”

As such, it is not surprising that Steph Curry believed in waking up earlier than others to work on his craft. He writes, “The key to these summer workouts, as in most things in life, is getting started before everyone else’s day begins.” Furthermore, he understood that he had to approach practice deliberately focusing on the details. As he mentions, “I give the ball a hard dribble, because even here in the practice gym, intensity and intention are important.”

“I fell in love with the grind. You have to. With the sacrifices that it takes to be great, you have to find joy in the work you do when no one else is around.”
— Stephen Curry

Curry defines the grind as the most important hours in any pursuit. For him as a basketball player, it is the work he does at the gym in isolation, where there is no defence and no live action. And yet, even when practicing alone, he practiced with a shot-ready mentality, as if the stakes were high and the clock is low. This allowed Curry to ensure that in-game performance felt easier than in practices.

Furthermore, Curry believes that focusing on the fundamentals are key to growth especially when you reach a plateau. He writes, “Grounding means returning to the fundamentals of the game, which is important whatever your game is. If you don’t master and remaster the basics, you’ll always be wasting time compensating for fundamental flaws.” As such, if you feel stuck, Curry advises you to “Slow down to examine what you’re doing, starting from the smallest variable—whatever your equivalent of the fifth metatarsal is—because being disciplined about small details, and taking joy in the work of getting them right until they’re second nature, is how you build consistent success.”

“Growth is the ultimate objective, but it emerges from grounding. Without mastering the fundamental principles of success, you can still struggle through, but at best you’ll be meeting your challenges instead of growing from them.”
— Stephen Curry

This reminds me of what we have learned previously from Kobe Bryant’s “Mamba Mentality”. Although Bryant first started it as a catchy hashtag, it became to symbolize his work ethic and his way of life. As Kobe once said, “The mindset isn’t about seeking a result—it’s more about the process of getting to that result. It’s about the journey and the approach. It’s a way of life. I do think that it’s important, in all endeavors, to have that [Mamba] mentality.”

As we have seen from others, obsession to one’s craft is primordial to reach success. In fact, Kobe believes that one must be willing to make sacrifices to obtain the level of success he had. He explains that “If you really want to be great at something, you have to truly care about it. If you want to be great in a particular area, you have to obsess over it. A lot of people say they want to be great, but they’re not willing to make the sacrifices necessary to achieve greatness.”

“What I’m saying is greatness isn’t easy to achieve. It requires a lot of time, a lot of sacrifices. It requires a lot of tough choices. It requires your loved ones to sacrifice, too, so you have to have an understanding circle of family and friends. People don’t always understand just how much effort from how many people goes into one person chasing a dream to be great.”
— Kobe Bryant

In Kobe’s case, he was obsessed in becoming the best and he “had a constant craving, a yearning, to improve and be the best.” As he once said, “If you want to be a better player, you have to prepare, prepare, and prepare some more.”

One way he did this was by watching game tapes of other players in order to figure out their weakness. His mentality was to dominate his opponents. He reiterates that “Whether it was AI, Tracy, Vince—or, if I were coming up today, LeBron, Russ, Steph—my goal was to figure you out. And to do that, to figure those puzzles out, I was willing to do way more than anyone else.”

Furthermore, Kobe understood that if he wanted to be the best, he had to take a contrarian approach compared to everyone else. As Albert Einstein once said, “The one who follows the crowd will usually get no further than the crowd. The one who walks alone is likely to find themselves in places no one has ever been before.”

Therefore, Kobe had a particular workout routines compared to his peers. Here’s how he describes it:

“I always felt like if I started my day early, I could train more each day. If I started at 11, I’d get in a few hours, rest for four hours, and then get back to the gym around 5 to 7. But if I started at 5 AM and went until 7, I could go again from 11 until 2 and 6 until 8. By starting earlier, I set myself up for an extra workout each day. Over the course of a summer, that’s a lot of extra hours in the gym.”
— Kobe Bryant

Furthermore, Kobe believes that part of the reason to his success is due to the fact that he was never satisfied even when he reached the top. He always had that desire to be better even when he was winning championships. As he once said, “I’m at the gym at the same time after losing 50 games as I am after winning a championship. It doesn’t change for me.”

In fact, this continuous obsession to improve and to become better cannot change if one is to reach the top. Kobe reiterates that “The only aspect that can’t change, though, is that obsession. You have to enter every activity, every single time, with a want and need to do it to the best of your ability.”

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Embrace The Shot Ready Mentality

“Opportunity comes to the prepared mind.”
— Charlie Munger

Stephen Curry didn’t just practice shots, he was mainly training his mind to perform under pressure. He coins the term “Shot Ready” to defines this mentality of being able to execute things automatically even when nerves strike. He explains, “I spend so much time practicing in this feeling so that even under the bright lights and crushing pressure of a real game, I can easily fall into an unconscious flow and execute my training. Of course, I’ll still feel all the nerves, but I don’t let them linger. Instead, they pass right through me. What is left behind is a calm that allows my training to kick in. And then I deliver.”

As a matter of fact, Curry is well-known for being the best shooter of all-time and he shares that the secret to being a great shooter is to be consistent. He writes that “Consistency is sometimes more powerful than technical perfection. Whether it’s from two feet or twenty feet, your shot position should always look exactly the same. When you have mastered the right form—the technically correct way to shoot—then you can relax into your own specific way to do it. And then you need to stick with it.” As such, having a “Shot Ready” mentality allows Curry to be in perfect balance and to simply let his muscle memory and practiced mechanics to take over. He doesn’t even need to think during a game and just follows his instincts completely.

“Being shot ready requires practice, training, and repetition, but it rewards that work with an unmatchable feeling of transcendence.”
— Stephen Curry

A big part of being “Shot Ready” is trained through visualization. Curry believes that visualization can be practiced. He writes, “You can practice visualization. Do it with me now. Think of yourself taking a shot. At first, you might see yourself from behind, facing a basket. But you have to get closer. Home in. Don’t picture yourself on the court. No, get inside your imagined self, see through your eyes, and feel through your hands. Notice every detail of your mechanics as you go into a shot. Feel the ball spinning off the leave finger of your hand, feel your hand follow through in a gooseneck. Do it again. Make it perfect. Watch the arc of the ball as it goes exactly where you targeted it, as if the gooseneck of your shooting hand just dropped the ball right in.”

Another part of being “Shot Ready” is to have confidence in your abilities. He believes that to be a great shooter, you need to be right in between of confidence and cockiness. However, you need to have the work ethic that earns you this confidence as it won’t mean a thing if you haven’t done the work. As he reiterates, “What’s the one key ingredient that the greatest shooters have in common? They all think they’re the greatest shooter ever.“ Confidence isn’t about making every shots, but about not letting any missed shots affect you. It is about trusting that your preparation has given you everything you need and to not have any hesitation for your next shot.

“As a shooter, what I need is confidence that the next shot is going to go in. To maintain that confidence—and to stay in the calm flow state I work so hard to achieve—my job is to not overanalyze. That applies to so much of life. You let a little bit of doubt creep in while you’re performing, and soon it infects your whole process. Doubt and worry will sap you of the juice and energy you need to perform in the moment.”
— Stephen Curry

This reminds me of what we have learned from Joe Montana who once said, “it is impossible to strive for something until we know what it is we are pursuing. You have to know what you want.”

If we do not know what are specific goals are, it is very difficult to have the drive, discipline or imagination to achieve them. As such, the first thing to do is to identify what we want to accomplish. Not only that, I believe it is primordial to choose which goals we need to focus on in order to manage our time better. One way of doing this is by writing down the goals we want to achieve and to circle the top three we want to achieve. The rest should be eliminated.

“This first principle, knowing what we want, is the beginning of achieving performance excellence.”
— Joe Montana

Once we have a goal in mind, Montana explains that visualization is a great mental tool in obtaining the positive results that we desire. He elaborates that “By concentrating on the image or outcome we desire, we can step into an “as if” reality, experiencing something as if it is really happening.”

He explains that the most important aspect of the visualization process is imagination. The greater the imagination, the more effective the visualization process will be. This idea reminds me of the importance of having imagination to succeed in business.

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Embrace Failures

“Failure isn’t fatal, but failure to change might be.”
— John Wooden

Stephen Curry views challenges not as obstacles but as stepping stones to success. He embraced what he calls the J-curve of progress, where a dip is often needed before seeing massive progress. This once again demonstrates why we should favour Curry’s process focused approach rather than taking a results-based focus. Curry writes, “I’ve learned over the years that challenges are the most efficient teachers, so I don’t run from them. You need to get used to doing difficult things, so you’re not living in fear of things going wrong.”

A perfect example of this in basketball comes from Michael Jordan who once said, “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty‑six 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.” Similarly, Curry writes, “While missing shots is a great way to learn, obsessing over failure is just a distraction from the work of improvement.”

“This is trouble if you’re motivated solely by the validation of quick results. You’ll give up if you are results-focused instead of process-focused, because working harder doesn’t make that curve go up faster.”
— Stephen Curry

Furthermore, Curry explains that it is often common for persistent practice to not showing results immediately. He draws a parallel to the J-curve in investing. He writes, “Imagine a big J on a page: The dip at the start of the letter is when you’re investing in something but haven’t gotten any returns yet, and then the line rises, and fast. Whatever the investment is, you’re going to get feedback on the loss quicker than you get any positive returns—it takes longer for the trajectory to start shooting up. When you’re in that down phase, you have no idea how far it’s going to go until it starts to go the other way.”

Similarly, Curry had a similar experience during a summer in High School, where he had to re-learn how to shoot in order to improve his mechanic that would allow him to succeed at the next level. He explains, “I would acknowledge to young me that this summer will be one of the hardest tasks I’d ever face in my basketball life: breaking down the one thing I thought I did well to try to do it better, while feeling so far away from what I hoped the end result would be. And this is the advice I would give myself: This may seem like it’s as hard as it gets, but you’re going to have to do variations of this same work a hundred more times in your life. Different scenarios and settings. Different challenges. But the same hard work with the same distant and uncertain outcome.”

What he learned from that summer wasn’t just an improved shot, but the fact that if something is handed to you easily, you won’t get the chance to develop the drive you need to sustain excellence. This also happened to him when he was about to play in College. He was only able to play at Davidson a smaller Division I team, but this helped him to “work harder, maximizing my skill set as a sharpshooter who could tire out any opponent by racing all over the court.”

“The times when you’re most uncomfortable are the inflection points in your life. The discomfort is how you know you are changing.”
— Stephen Curry

Similarly, Michael Jordan also faced various failure during his career in basketball. However, he was able to move on and succeed by understanding that some things are outside of his control. In fact, he learned to focus on things he could control which was to give it his best and to make all the work necessary to put himself in a position to succeed. Furthermore, Jordan mentions that if you give it your best, all the other things will come to you.

“I had put in all the work, not only in that particular game, but in practice every day. If I missed, then it wasn’t meant to be. That simple. It wasn’t because the effort wasn’t there. It wasn’t because I couldn’t make the shot, because I had taken the same shot many times in every situation. As soon as the ball went up, there weren’t any nerves because I had trained myself for that situation.

I was as prepared as I could possibly have been for that moment. I couldn’t go back and practice a little harder. I knew I had done the right things to prepare myself for that situation. One way or another, I knew I was prepared to be successful. Now, if you know you haven’t prepared correctly, or you know you haven’t worked hard enough, that’s when other thoughts and emotions creep into your mind. That’s stress. That’s fear.

It’s the same process for doing anything, anywhere in life no matter how big or small the stage. Whether it’s running a corporation, taking a test in second grade or taking a shot to win a game, at that moment you are the sum total of all the work you have put in, nothing more and nothing less. If you are confident you have done everything possible to prepare yourself, then there is nothing to fear.”
— Michael Jordan

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Beyond the Book

Read "Turning Adversity Into Advantage" by Farnam Street

Read "Why You Should Practice Failure" by Farnam Street

Watch " Stephen Curry: Shot Ready" 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:

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Today’s Chapter is based on the book “The Book of Elon: A Guide to Purpose and Success” by Eric Jorgenson.

Elon Musk is an entrepreneur renowned for leading major tech companies, such as Tesla, Space X and xAI. He is well-known for thinking in first principles and for his success as an intelligent fanatic. He is considered as one of the greatest entrepreneurs of our time and is one of the wealthiest person alive.

Read it for free here.

Here’s what I learned:

First Principles Thinking

“As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble.”
— Harrington Emerson

Elon Musk is a perfect example of how innovation comes from thinking like a physicist. He mentions that “When you want to do something new, you have to apply the physics approach. Physicists discover counterintuitive new things, like quantum mechanics. They do that by thinking from “first principles”: building their reasoning from the ground up.” By using first principles thinking, he can break down problems to their most fundamental truths which helps in solving complex issues. He believes that if an idea aligns with the laws of physics and does not violate core principles, it is worth pursuing even if the chances of success are low. As he once said, “If the reasoning fits, and you’re not violating the laws of physics, that’s the thing you should try to do.”

As a matter of fact, first-principles thinking comes from physics and Elon Musk urges everyone to adopt it when thinking about complex problems. He mentions, “Break something down to the most fundamental principles. Start by asking: What am I most confident is true at a foundational level? That sets your axiomatic base. Then you reason up from there. Then you check your conclusions against the axiomatic truths.”

Tesla’s success in commoditizing EV vehicles comes from Elon Musk’s first principles thinking. He was able to overcome the conventional thinking that batteries would remain expensive forever based on historical costs. By dismantling batteries into its raw materials, Musk was able to find a way to make them cheaper.

“Here’s an example from early in building Tesla. People said battery packs were too expensive to make cheap electric cars. They assumed they would always be expensive, because they had been in the past. That’s pretty dumb. … The first-principles approach to battery costs is this: What are the batteries made of? What are the materials that make up the batteries? What is the market value of those material constituents? It’s got cobalt, nickel, aluminum, carbon, some polymers for separation, and a steel can. Okay, what if we bought that amount of material at the London Metal Exchange? What would each of those things cost? Oh, geez, it’s only $80 per kilowatt hour. So clearly, we just need to think of clever ways to take those materials and combine them into the shape of a battery cell. That’s how I knew it was possible to build batteries much much cheaper than anyone else realized.”
— Elon Musk

First principles thinking was also used at SpaceX in order to make rocket prices cheaper. Musk explains that, “First-principles thinking built SpaceX. Most people think, “Historically, all rockets have been expensive. Therefore, in the future, all rockets will be expensive.” But that’s not true.” He first understood that a rocket was made from aluminium, titanium, copper and carbon fiber and researched on what was the cost of all these raw components. The conclusion was telling, the price of raw materials to build a rocket was relatively small, well under 5% of the current cost of rockets. Musk decided that it would be much cheaper for him to build rockets himself, as he believed that “The manufacturing must be very inefficient if the raw material cost is only 1 or 2 percent of the finished product.”

As a matter of fact, Musk coined the term “The Idiot Index”. The higher a finished product cost compared to the cost of its materials, the higher the Idiot Index. When faced with a part or a product with a high Idiot Index, Musk would cut cost with more efficient manufacturing techniques, often doing it internally. On the Idiot Index, he once said, “If the ratio is high, you’re an idiot.”

First-principles thinking is uncomfortable because it forces you to question assumptions that everyone else has accepted. But that discomfort is precisely the point. If you want to achieve what others cannot, you must think in ways that others will not.

“I would encourage people to use the mental tools of physics and apply them broadly in life. They are the best tools.”
— Elon Musk

This reminds me of Sam Zell’s concept of keeping things simple. Whenever he faced a complex deal, he made sure to understand all the risks involved and to focus on solving the one that would make or break the deal. He explains, “I realized that the basics of business are straightforward. It’s largely about risk. If you’ve got a big downside and a small upside, run the other way. If you’ve got a big upside and a small downside, do the deal. Always make sure you’re getting paid for the risk you take, and never risk what you cannot afford to lose. Keep it simple. A scenario that takes four steps instead of one means there are three additional opportunities to fail.”

As such, he understood that by simplifying the problems into simple goals and steps, it is much more likely to be successful. He learned this from his mentor Jay Pritzker who taught him how to look at real estate deals.

“Jay taught me to use simplicity as a strategy. He had an uncanny ability to grasp an extremely complex situation and immediately locate the weakness. He always said that if there were twelve steps in a deal, the whole thing depended on just one of them. The others would either work themselves out or were less important. He had a laser focus on risk. I like to say my father taught me how to be, law school taught me how to think, Jay taught me how to understand risk.”
— Sam Zell

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Maniacal Urgency

“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

Ideas are cheap. Execution is what is worth millions. Musk mentions that he has “more ideas than I could possibly execute. Innovation is not the problem. Execution is the problem.” What separates successful people from dreams is not the quality of their ideas but their ability to turn those ideas into reality. And turning ideas into reality requires a level of intensity that most people find uncomfortable. Elon Musk once said, “A maniacal sense of urgency is our operating principle.” In fact, from reflecting on how Musk ran his companies, it is clear that real progress demands extreme effort, focus and a sense of urgency that borders on the obsessive side. He believes that “You must be extremely tenacious. Work like hell. You have to put in eighty-to one-hundred-hour weeks every week. This will improve your odds of success.”

As such, it is not surprising that Musk isn’t too found of the idea of a balanced work week. He mentions that “Nobody ever changed the world on forty hours a week.”, and he clearly puts this principle to the test. As a matter of fact, Musk was well known for setting aggressive timelines using it as a motivation for his employees to work harder and more efficiently.

“You need to work. Work hard. Like every waking hour. Particularly if you’re starting a company, you need to work super hard. Do the simple math: Somebody else is working fifty hours a week and you’re working one hundred. You’ll get twice as much done in a year. 54 If other people are putting in forty-hour workweeks and you’re putting in one hundred, what takes them a year, you will achieve in four months.”
— Elon Musk

Furthermore, in order for his companies to achieve the deadlines set by his maniacal approach, Musk had to implement a system for them to work fast and efficiently. To do so, he elaborated an Algorithm inspired from engineering in order to speed things up. He mentions, “I have everyone at my companies rigorously implement a five-step process for engineering. I call it The Algorithm. I’ll list the steps, then explain. The order is very important. Make your requirements less dumb. Try very hard to delete the part or process. Simplify or optimize. Accelerate. Automate.”

First, he believes that most of the requirements are dumb and that it is primordial to question them and see why they were set in the first place. He explains, “Whatever requirements or constraints you do have must come from a person, not a department. You can’t actually ask a department. You have to be able to ask a person, and the person putting forth the requirement must take responsibility for that requirement. Otherwise, you could have a requirement made up by an intern two years ago off the cuff, or someone who isn’t even at the company anymore. You must know the name of the real person who made every requirement. Many times we’ve had dumb requirements, dug into them, and discovered no one currently working in that department agrees with the requirement. These things are often way more silly than you think. So step one is make your requirements less dumb.”

Second, you often need to eliminate some steps to make things faster. As a matter of fact, Musk was well-known among his employees to often go through a rampage of deleting things. He was never conservative about these things as he believed that “If you’re not adding deleted things back in 10 percent of the time, you’re clearly not deleting enough.”

Third, you need to optimize every single steps that are essential. And once that is done, you can start on step four and five which are to accelerate and automate. Musk warns to not skip over the steps. As he explains, “do not go faster until you have worked on the other three things first. I mistakenly spent a lot of time accelerating processes that I later realized should have been deleted. Speeding up something that shouldn’t exist is absurd. If you’re digging your grave, don’t dig it faster. Stop digging.”

Elon Musk’s approach is eerily similar to Chung Ju-Yung’s motto of “shorten the time”. The founder of Hyundai believed that this is the surest way to encourage innovation and improvement among the company. He would often take tours of his projects and would always seek to find ways to shorten construction times in unconventional ways. He once said, “I am someone who believes that if a person limits themselves to the fixed ideas inherent in common sense, they will not be very creative.”

Chung believed that finding clever solutions would never come from people with conventional thinking. As a matter of fact, he mentions that “if you only think in accordance with what you learned through books, your imagination will be limited to that.”

“When we worked on the Jubail project, we had to make 160,000 drill bits to build the breakwater and shore protection structures. If we built 200 every day, it would take us 800 days to make 160,000. But at the site, the workers were making them one at a time instead of using a mold to mass produce them. Their sorry excuse for this wasteful effort was that the molds weren’t the right height to fix onto the end of the cement trucks.

When I saw this, I was furious. Why did these people have brains if they weren’t going to use them? It didn’t take a genius to realize that the outflow ramp for the concrete on the trucks needed to be raised to fit the molds. If they just followed this simple solution, they wouldn’t need a crane, and they wouldn’t waste time and energy. They couldn’t think to adjust the concrete mixer truck, thinking it was unchangeable. Would the gods punish them for making some small adjustments? After I made the changes, we went from 200 per day to 350 per day.”
— Chung Ju-Yung

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Attract Great Talent

“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

No one builds a rocket or a car company alone. Elon Musk would be the first to admit this. His job as the CEO is not to take credit but to create an environment where his employees can do their best work. That means recruiting well, removing bureaucratic barriers, and leading by example. As he once said, “I want to emphasize that sometimes—in fact, most of the time—I get way too much credit or attention for what I do. I’m just the visible element. The reason these companies are successful is because we have extremely talented people at all levels making it happen.”

Moreover, he advocates for a “Special Forces” culture where only excellent performers are welcomed. In fact, he is ruthless about quality. He explains that only exceptional performance constitutes a passing grade. Mediocrity is not acceptable, not because he is cruel, but because the problems he is trying to solve are genuinely hard. A company that tolerates average work will produce average results, and average results will not get humanity to Mars or transition the world to sustainable energy. He says, “When hiring, I look for evidence of exceptional ability, or at least exceptional aspiration.”

“Wherever the smartest, most driven people are choosing to work, that company is going to win.”
— Elon Musk

Furthermore, creating a culture of excellence requires more than just hiring well. It also requires leaders who are willing to lead by example and who are willing to get their hands dirty. Elon Musk is often seen sleeping on factory floors and working alongside his teams during crises. He understood that his employees would work harder if they saw him working alongside of them. He mentions, “Think about war. Do you want the general in some ivory tower or on the front lines? The troops fight harder if they see the general on the front lines. Nobody bleeds for the prince in the palace. Get out there on the front line. Show them that you care and that you’re not in some plush office somewhere.”

Similarly, Musk believed in removing any barriers that may separate senior executives from employees. As a matter of fact, he expects his managers to have hands-on experience in the work they oversee. For example, software managers must be able to code and solar roof managers must be able to install roofs. If you cannot do the work yourself, you have no business telling others how to do it. He elaborates that, “All technical managers must have hands- on experience. For example, managers of software teams must spend at least 20 percent of their time coding. Solar roof managers must spend time on the roofs doing installations. Otherwise, they are like a cavalry leader who can’t ride a horse or a general who can’t use a sword.”

“When the team is being asked to work super hard, I have to be right there with them and they have to see it. If I fall asleep in the middle of the factory floor at four in the morning and wake up four hours later, they see that. They are like, “If the CEO is willing to take that level of pain, I can do it too.””
— Elon Musk

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 "The Book of Elon with Eric Jorgenson" by David Senra

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

Listen to "#415 How Elon Thinks" by Founders Podcast

Today’s Chapter is based on the book “Becoming Trader Joe: How I Did Business My Way and Still Beat the Big Guys” by Joe Coulombe.

Joe Coulombe was the founder of Trader Joe’s in 1967 and led it as CEO until 1988. He built the chain around a specific customer niche (underpaid professionals), emphasizing unusual products, strong value, and a quirky brand identity that helped Trader Joe’s stand out in grocery retail.

Buy it on Amazon here.

Here’s what I learned:

Pay People Well

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

A big reason for Joe Coulombe’s success at Trader Joe’s was his decision to pay employees far above industry norms. He refused to treat labor as an expense to be minimized. Instead, he viewed high wages as a necessity and an investment that delivered higher productivity and a lower turnover of employees. As he once said, “This is the most important single business decision I ever made: to pay people well. First Pronto Markets and then Trader Joe’s had the highest‑paid, highest benefited people in retailing.”

Coulombe explains that “Time and again I am asked why no one has successfully replicated Trader Joe’s. The answer is that no one has been willing to pay the wages and benefits, and thereby attract—and keep—the quality of people who work at Trader Joe’s. My standard was simple: the average full-time employee in the stores would make the median family income for California.”

As a matter of fact, Coulombe argues that turnover is the most expensive form of labor expense and that high wages would attract and retain the highest talent within the company. As such, this wasn’t a scheme based on generosity, but an economics decision. He understood that good people would repay his investment through higher output and loyalty. This commitment to compensation creates a virtuous cycle. While competitors struggled with high costs of employee turnover and training, Trader Joe’s enjoyed a stable and dedicated workforce. Coulombe argues that “You can’t afford to have cheap employees.”

“Productivity in part is the product of tenure. That’s why I believe that turnover is the most expensive form of labor expense. I am proud that, during my thirty years at Pronto and Trader Joe’s, we had virtually no turnover of full‑time employees, except for the ordinary human problems of too, too solid flesh.”
— Joe Coulombe

And equally as important, Coulombe understood that money alone wasn’t enough to retain talents. Majority of employees leave due to un-listened grievances. He mentions that “At Stanford I’d been taught that employees never organize because of money: they organize because of un-listened-to grievances. We set up a program under which each employee (including some part-timers) was interviewed, not by the immediate superior, the store manager, but by the manager’s superior. The principal purpose of this program was to vent grievances and address them where possible. And I think this program was as important as pay in keeping employees with us.”

Simply said, Coulombe understood that if you treat people as interchangeable parts, they will act like them. However, if you provide them with security and a sense of belonging, they become the differentiator that a larger, more faceless competitor cannot replicate. When asked how he could afford such highly paid employees, his response was always rooted in terms of productivity: a highly competent, well-paid person produces more value per hour than two underpaid, unmotivated ones.

“The answer, of course, is that good people pay by their extra productivity.”
— Joe Coulombe

This reminds me of the power of incentives that we have learned from Paul Orfalea at Kinko’s who also had a great incentive structure in place 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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Find Undervalued Opportunities

“There are different ways to hunt, just like different places to fish. And that’s investing. And knowing that, of course, one of the tricks is knowing where to fish.”
— Charlie Munger

Being a successful retailer in America is extremely difficult. And this is especially true as a small player. Coulombe mentions that being a retailer in the grocery business, it is very difficult to differentiate yourself and to have a competitive advantage. This all changed once Joe Coulombe had the insight of hunting for discontinued products that he could purchase at large quantities for a discount. This was the core belief that made Trader Joe’s into what it is today.

He writes, “To this day, the promotion of Extra Large AA eggs is one of the foundations of Trader Joe’s merchandising, not just because of the program per se, but because it set me to wondering whether there weren’t other discontinuities out there in the supplies of merchandise. Eight years later, we built Trader Joe’s on the principle of discontinuity.”

As such, rather than to compete with other retailers that sold branded merchandise that customers already knew, Trader Joe’s turned into selling unique products that the customers may not be as familiar with such as discontinued products or private labels. This required, however, that the company cultivate its customers to these products. Hence why Coulombe believed that Trader Joe’s “fundamentally changed the point of view of the business from customer oriented to buyer-oriented. I put our buyers in charge of the company.”

“As we evolved Trader Joe’s, its greatest departure from the norm wasn’t its size or its decor. It was our commitment to product knowledge, something which was totally foreign to the mass-merchant culture, and our turning our backs to branded merchandise.”
— Joe Coulombe

Trader Joe’s developed a strict test for any new category of products: high value per cubic inch, high rates of consumption, ease of handling, and some way to be outstanding in either price or assortment. One example of this is hard liquor. Coulombe writes that “The advantage of hard liquor merchandise was that it met three tests: A high value per cubic inch, essential to a small store format. A high rate of consumption. It had to be easily handled. If we could have added a fourth test, it would be that we had to be outstanding in the field. That would be an ideal category.”

This relentless focus on finding products with differentiation was a core idea of Coulombe’s merchandising philosophy which became a true competitive advantage at Trader Joe’s. As Coulombe once said, “The fundamental job of a retailer is to buy goods whole, cut them into pieces, and sell the pieces to the ultimate consumers. This is the most important mental construct I can impart to those of you who want to enter retailing. Most ‘retailers’ have no idea of the formal meaning of the word. Time and again I had to remind myself just what my role in society was supposed to be.”

This concept of Joe Coulombe reminds me of what we have learned from Jim Weber’s journey at Brooks on the importance of focusing on a specific niche. 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.”

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Build A Cult

“If you do build a great experience, customers tell each other about that. Word of mouth is very powerful.”
— Jeff Bezos

Another key reasons for Trader Joe’s success was Coulombe’s ability to build a cult-like following among his customers. As a matter of fact, as education levels rose, a new group of demographic emerged in the United States, those who were well-traveled and well-educated but didn’t necessarily have the income to match their sophisticated taste. Coulombe identified them as his preferred customers as they would appreciate a store that would prioritize product knowledge over flashy advertising.

Coulombe understood that by leaning into the interests of this demographic, such as fine wines and healthy foods, he could create a level of loyalty and build a cult-like following. He writes, “Trader Joe’s became a cult of the overeducated and underpaid, partly because we deliberately tried to make it a cult once we got a handle on what we were actually doing, and partly because we kept the implicit promises with our customers.”

“We became the best place in the world to buy a good bottle of wine for less than $ 2.00. That’s a position we held for the rest of my days at Trader Joe’s. It absolutely addressed our prime market, the overeducated and underpaid people of California.”
— Joe Coulombe

This focus on the overeducated and underpaid also drove the way Trader Joe’s expanded its locations. Coulombe looked for areas near major institutions of learning, hospitals and high-tech offices. He sought out the density of intelligence rather than just the density of wealth. He knew that a neighborhood with more PhDs than a typical college would be the perfect fertile ground for a store that sold obscure Bordeaux blanc and almond butter.

Coulombe explains that “We looked for our demographics: there are lots of overeducated and underpaid people in Southern California. That’s why most Trader Joe’s were located near a major institution of learning: Long Beach State, UC San Diego, UCLA, and hospitals like The Huntington in Pasadena or Long Beach Veterans’ and high tech corporate offices like TRW in Manhattan Beach, which probably has more PhDs than most colleges.”

Furthermore, this principle also differentiated Trader Joe’s approach to marketing compared to other retailers. The company treated marketing as a strategic weapon to educate its customers on the products rather than selling them. For example, Coulombe writes that “Most supermarket radio spots are paid for by cooperative advertising allowances from manufacturers. The supermarkets jam as many brands into sixty seconds as possible, because it maximizes their revenue. Information be damned! In sharp contrast, each Trader Joe’s spot was devoted to a single product, about which we tried to develop a story. And we refused to accept any advertising revenue from any manufacturer.”

Similarly, Trader Joe’s created the Fearless Flyer, which was an educational medium on products offered by the company. It quickly became a collectible educational tool for customers who often “ kept three-ring notebook collections of the issues so they could refer back to the articles.” And, Coulombe proved that when you educate customers, treat them as intelligent adults, and keep every promise, loyalty becomes almost religious.

“As everyone knows, word of mouth is the most effective advertising of all. Or, when in my cups, I have been known to say that there’s no better business to run than a cult. Trader Joe’s became a cult of the overeducated and underpaid, partly because we deliberately tried to make it a cult once we got a handle on what we were actually doing, and partly because we kept the implicit promises with our clientele.”
— Joe Coulombe

This reminds me of David Ogilvy’s principles of advertising. David Ogilvy once asked Sir Hugh Rigby, the surgeon to King George, what it takes to be a great surgeon. His response? “What distinguishes the great surgeon is that he knows more than other surgeons.” Similarly, Ogilvy believes this is true both in advertising and life in general. Those who succeed tend to have superior knowledge.

As Ogilvy, once said, “You don’t stand a tinker’s chance of producing successful advertising unless you start by doing your homework.” In terms of advertising, Ogilvy recommends a few steps one should take in order to succeed:

1. Learn everything about the product that is to be advertised. It is only by knowing all about it that one can find a great idea on how to sell it.

2. Find out how similar products are being advertised and how successful their advertising are.

3. Identify who the customers are and find out what they think about the product you are advertising (i.e: what attributes are important to them and what promise would be most likely to make them buy your brand again)

4. And finally, consider how you want to “position” your product. Ogilvy defines positioning as asking yourself “what the product does, and who is it for?”

As we have previously learned from Ogilvy, “every advertisement is part of the long-term in the personality of the brand.” He mentions that the company “who dedicates his advertising to building the most favourable image, the most sharply defined personality, is the one who will get the largest share of the market at the highest profit—in the long run.” For this reason, it is primordial to decide what “image” you want for the brand.

Furthermore, Ogilvy is a keen believer of using researches as a tool to improve his advertising. As he once said, “Advertising people who ignore research are as dangerous as generals who ignore decodes of enemy signals.” He mentions that while there aren’t any rules in advertising, it would be foolish to ignore the results of researches. Yet, it happens more often than you would think. Here’s a few advertising advices Ogilvy provides based on researches:

• “Research suggests that if you set the copy in black type on a white background, more people will read it than if you set it in white type on a black background.”

• On the average, five times as many people read the headlines as read the body copy. It follows that unless your headline sells your product, you have wasted 90 per cent of your money.

• Advertisements in four colors cost 50 per cent more than black-and-white, but, on the average, they are 100 per cent more memorable. A good bargain.

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Beyond the Book

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

Read "Moats - Competitive Advantage" by Investment Masters Class

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Today’s Chapter is based on the book “The Richest Woman in America: Hetty Green in the Gilded Age” by Janet Wallach.

Hetty Green was an American businesswoman and financier known as the Witch of Wall Street. She built a vast fortune by investing in government bonds, railroads and real estate, often helping stabilize New York City and Wall Street during financial panics by providing loans when banks were unwilling to extend credit. Despite her wealth, she lived frugally which fed to her reputation as an eccentric woman in the Gilded Age.

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Here’s what I learned:

Be Financial Literate

“Financial freedom is available to those who learn about it and work for it.”
— Robert Kiyosaki

In some ways, Hetty Green lived in a world in which she did not belong. She was a businesswoman in a world dominated by men. She was born and raised in a family of Quaker in the Gilded Age, an era of excess. And yet, she succeeded because she educated herself thoroughly, thought independently and lived beyond her means. In fact, from her earliest years, Hetty Green absorbed financial knowledge in ways that most children, particularly girls of her era, never experienced. Her grandfather, recognizing her quick mind, enlisted her help with his business correspondence.

Wallach writes that “The girl was quick with numbers and good at reading, and she caught her grandfather’s notice. With his eyesight failing, he snapped open the evening newspapers, handed them to Hetty, and asked her to read aloud. In her child’s voice she called out the stock quotations and commerce reports, warming her grandfather’s heart. And sometimes when he needed help with his correspondence, he called on her. That was how she absorbed some of his business methods, she later said.”

Similarly, Hetty’s father continued her financial education by bringing her along his business meetings. Wallach mentions that “She watched him closely as he assessed the inventory, inspected the ships, dealt with the captains, and heard the rough talk of the crews. She listened to him bargain with merchants and berate them when he thought they were charging too much. She followed along when he took her to the countinghouse and showed her how to read the ledgers, or brought her to the brokers and taught her how to trade commodities. She paid attention when he repeated again and again that property was a trust to be taken care of and enlarged for future generations.”

“There is nothing better than this sort of training. A girl acquires the habit of keeping track of every cent and gets the most value for every dollar she spends.”
— Hetty Green

As such, it is not surprising that throughout her life, Green advocated for women to take control of their own finances, believing that ignorance made them vulnerable. Wallach mentions that Green “encouraged girls to educate themselves about business; she urged women to manage their own money and take control of their finances.”

By consequence, on the day that her son was born, Green only had one goal, to see him become the richest man in America. And, to do so, he had to be financial literate. Similarly to the financial education she received from her father, Green sent her son Ned to Chicago to oversee her mortgages at an early age. He was charged to collect payments due and she required him to memorize the amount of principle and interest owed on each mortgage, as she once warned him that “Whatever someone owed, don’t take a penny less. And not a penny more. It would only mess up his books”

She also brought Ned along to train him in real estate investing. She fully believed that a hands-on experience was the best way to learn. It was important for him to understand what it involved in terms of materials and labor and not just the financial aspect of it. But more importantly, Green gave him important responsibilities in terms of buying and selling new properties and mortgages. Ned was held fully accountable for his every decision. Of course, Green gave him plenty of advices on how to make a deal. As she once said, “If anyone is fool enough to offer you the full amount, take it. If you are offered less, tell the man you will give him the answer in the morning. Think the matter over carefully in the evening. If you decide that it will be to our advantage to accept the offer, say so the next day.”

“In business generally, don’y close a bargain until you have reflected on it overnight.”
— Hetty Green

For parents today, Hetty Green’s example offers a powerful reminder that financial education cannot be left to chance. Children learn attitudes toward money from watching their parents, and they need intentional teaching about saving, investing, and the values that should guide financial decisions. Hetty understood that wealth without wisdom is a burden, and she worked to ensure her son would be prepared for the responsibility she was placing in his hands.

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Be Frugal

“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

Hetty Green was most famous for being heavily criticized for her extreme frugality during the Gilded Age. As a matter of fact, when her cleaning lady gave birth to a son, Green gave her a gold piece and advised her to keep it in the bank until he turns twenty-one. Instead of appreciating the lesson on compound interest, the cleaning lady scorned Green for saving instead of spending.

Green possessed a fortune that could have bought her palaces, yet she chose to live in modest boarding houses, wearing the same black dresses until they wore out, and haggling over the price of everyday goods. While her thriftiness often bordered eccentricity, her underlying philosophy was incredibly sound. She understood that wealth is not measured by what you spend but by what you keep.

Green rejected the spending habits that were rapidly taking hold in America during the Gilded Age among the wealthiest. she saw no value in displaying wealth through expensive clothes and jewelry, viewing them as wasteful and foolish. She recognized from an early age that every dollar spent on luxury was a dollar that could no longer be put to work and earning compounding interest. As Green once said, “Watch your pennies and the dollars will take care of themselves.”

As such, it is not surprising that frugality was a governing principle in her household. She believed that the modern American culture was creating a dangerous lack of financial discipline and she wanted to make sure that her children would not be accustomed to easy credit and instant gratification. As such, while she gave her son Ned a larger allowance than other boys, she still dressed him in hand-me-down clothes and taught him to watch his pennies.

“There’s one reason why we have hard times: money easy coming and easy going! American children are not taught how to save money but how to spend it. Everything they want—give it to them so long as you know the price of the credit. That’s the policy of the modern mother and she is raising a nation of spendthrifts whose one thought is to get what they want when they want it.”
— Hetty Green

During an interview with a reporter, she explained that her clothes weren’t in style, but “I’ve worn it for nearly ten years and it’s going to do ten more years’ service. I’m too old a lady to care about clothes.” She elaborates that “when it comes to spending your life, there have to be some things neglected. If you try to do too much, you can never get anywhere. As I was naturally made for work, I just as naturally wasn’t made for a fashion plate. I have never bothered about what to wear.”

It can be said that Hetty Green’s thriftiness started at a young age. She first created her first bank account at the mere age of eight, where she would gather all the precious coins she had saved from her weekly allowance. This was the start of Hetty’s frugality and became the foundation that turned modest capital into billions. In an age of instant gratification and consumer debt, what Hetty Green can teach us is clear: live below your means and earn compound growth.

This importance put into frugality reminds me of what we have learned from 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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Be Contrarian

“Be fearful when others are greedy and greedy when others are fearful.”
— Warren Buffett

In my opinion, Hetty Green’s greatest edge as an investor was her willingness to go against the crowd. She always kept a stack of cash ready to take on opportunities created by prices going down due to fear. As a matter of fact, in an era where speculative frenzies regularly swept through Wall Street, ruining countless of investors who bought at the top of the market crazy and who panicked at the bottom, Green understood that following the herd was a certain way to lose capital. Instead, she built a contrarian investment philosophy and she possessed the discipline to execute it to perfection.

Her contrarian strategy in investing was honed early on, particularly during the economic turmoil following the Civil War. Wallach writes that “The devastation of the South, the high debt caused by the war, and the disarray of the Union created a stormy picture. Many people viewed the country’s economy as doubtful. Seeing chaos around the corner, they worried about the stability of the government and refused to pay face value for its greenbacks. Instead, they rushed to gold. The rules of the marketplace state that for every seller there must be a buyer. The more the public discounted paper money, pushing it down as low as fifty cents on the dollar, the more Hetty bought.“

“I buy when things are low and nobody wants them. I keep them until they go up and people are crazy to get them. That is, I believe, the secret of all successful business.”
— Hetty Green

There are three reasons why Hetty Green was able to implement this contrarian investing approach successfully. Firstly, she always had cash on hand. As Shane Parrish once said in an interview with Tim Ferriss, the reason why Warren Buffett is so successful is because he has a large stack of cash in the balance sheet, “and so, what he’s always doing is everybody thinks he’s out of touch and he looks like an idiot. But he always wins because no matter what the outcome is, he wins. If the stock market goes up, he wins. If the stock market crashes, he wins because he’s put himself in a position where no matter what happens, he can take advantage of circumstances rather than having circumstances take advantage of him.“

Secondly, Hetty Green only invested in things that were within her circle of competence. Notably, she mainly invested in railroads, bonds or real estate. She used her research skills to identify bargains others missed, but it was also a lot easier for her to buy things that are depressed when she knows what she is buying. As Wallach writes, “Whether it was a horse and buggy or stocks and bonds, her canny habit of investigating every possible facet before she bought helped make her successful. “

Green explains that to determine when stocks are cheap demands a thorough knowledge of “their history, their dividend-paying possibilities, and what they have sold for in the past. If one can buy a good thing at a lower cost than it has ever sold for before, he may be fairly sure of getting it cheap.”

“Before deciding on an investment, I seek out every kind of information about it.”
— Hetty Green

Thirdly, Hetty Green was extremely patient once she invested in an asset. She would often buy assets and tuck them away for years, sometimes waiting decades for investments to finally pay off. As she once said, “I keep them just as I keep a considerable number of diamonds on hand until they go up and people are anxious to buy.”

This reminds me of the concept of Second-Level Thinking from Howard Marks, who 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

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Beyond the Book

Listen to "Hetty Green: The Witch of Wall Street [Outliers]" by The Knowledge Project

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

Read "The Tim Ferriss Show Transcripts: Shane Parrish on Wisdom from Warren Buffett, Rules for Better Thinking, How to Reduce Blind Spots, The Dangers of Mental Models, and More (#695)" by Tim Ferriss

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.

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

Today’s Chapter is based on the book “Delivering Happiness: A Path to Profits, Passion, and Purpose” by Tony Hsieh.

Tony Hsieh was an American internet entrepreneur best known as the longtime CEO of Zappos, where he built a billion‑dollar online shoe retailer famed for its customer service driven culture. Before Zappos, he co‑founded the online ad network LinkExchange, sold it to Microsoft for about 265 million dollars.

Buy it on Amazon here.

Here’s what I learned:

Culture

“Your culture is your most valuable asset. Guard it with your life.”
— Brian Chesky

Tony Hsieh understood that culture is the foundation upon which everything else in a company is built. It determines who you hire, how you treat your customers, and ultimately what your brand becomes in the world. Hsieh learned this lesson the hard way. After selling his first company LinkExchange to Microsoft for $265 million, Hsieh realized that he neglected the company culture which led him to this unhappiness that forced him to exit the business.

Hsieh writes, “The short story is that we simply didn’t know we should have paid more attention to our company culture. During the first year, we’d hired our friends and people who wanted to be part of building something fun and exciting. Without realizing it, we had together created a company culture that we all enjoyed being a part of. Then, as we grew beyond twenty-five people, we made the mistake of hiring people who were joining the company for other reasons. ”

By consequence, Hsieh ensured that corporate culture would be the cornerstone of everything he would build at Zappos. He understood that when people a company for the wrong reasons, it changes the entire dynamic within. As such, at Zappos, Hsieh made culture the number one priority, and he backed that priority with concrete actions.

“Our employees know that our number one priority at Zappos is our company culture.”
— Tony Hsieh

Learning from his mistakes at LinkExchange, Hsieh deliberated changed the layout of the office to only have one entrance in and out of the building forcing people to interact with each other. He also created “The Face Game”, where employees had to identify colleagues by their photos before they could log into their computers. This game reflects the reality that culture isn’t built through mission statements, but by the thousand of small interactions between people who know and care about each other.

Hsieh explains, “At Zappos, an additional step is required: a photo of a randomly selected employee is displayed, and the user is given a multiple-choice test to name that employee. Afterward, the profile and bio of that employee are shown, so that everyone can learn more about each other. Although there is no penalty for giving the wrong answer, we do keep a record of everyone’s score. Internally, we refer to this as ‘The Face Game.’”

Furthermore, Hsieh quickly realized that a corporate culture and brand are inseparate. While many companies spend millions on branding campaigns, trying to project an image to the world, while internally their culture tells a completely different story, Hsieh understood that you can’t fake a brand. What your customers experience is ultimately a reflection of what your employees experience every day. If you want to be known for exceptional service, you must first create an environment where people genuinely care about each other. He mentions that “Over time, as we focused more and more on our culture, we ultimately came to the realization that a company’s culture and a company’s brand are really just two sides of the same coin. The brand is just a lagging indicator of a company’s culture.”

As such, Hsieh defined Zappos culture in terms of 10 core values:

1. Deliver WOW Through Service

2. Embrace and Drive Change

3. Create Fun and a Little Weirdness

4. Be Adventurous, Creative, and Open-Minded

5. Pursue Growth and Learning

6. Build Open and Honest Relationships with Communication

7. Build a Positive Team and Family Spirit

8. Do More with Less

9. Be Passionate and Determined

10. Be Humble.

Nonetheless Hsieh mentions that a company’s specific values matter less to a company’s success compared to their commitment to them. He explains, “As it turns out, it doesn’t actually matter what your company’s core values are. What matters is that you have them and that you commit to them. What’s important is the alignment that you get from them when they become the default way of thinking for the entire organization.”

“At Zappos, our belief is that if you get the culture right, most of the other stuff—like great customer service, or building a great long-term brand, or passionate employees and customers—will happen naturally on its own.”
— Tony Hsieh

This reminds me of Richard Farmer, the founder of Cintas who believed that Cintas’ ultimate competitive advantage is their corporate culture. He explains that “Our culture is rare, invisible, and difficult—if not impossible—to replicate.Competitors can copy our sales material, our products and even some of our systems, but they cannot copy our culture.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Long-Term

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

Tony Hsieh was a long-term thinker. He understood that the decisions that create lasting value are often the ones that look foolish in the short run. This philosophy permeated every aspect of how he ran Zappos, from customer service to inventory management to the eventual sale of the company to Amazon. His understanding of long-term thinking was shaped partly by an unexpected teacher: poker. As a matter of fact, Hsieh became an avid poker player and he recognized commonality between both the card game and business.

He writes, “One of the most interesting things about playing poker was learning the discipline of not confusing the right decision with the individual outcome of any single hand, but that’s what a lot of poker players do. If they win a hand, they assume they made the right bet, and if they lose a hand, they often assume they made the wrong bet.” He explains that in the short-run, in poker, good decisions don’t necessarily provide a good outcome due to factors beyond your control. However, in the long run, poker players with a good decision-making process will win a majority of the time.

This philosophy of taking decisions for the long-term was tested repeatedly at Zappos and the most dramatic expression of long-term thinking came in how Hsieh approached customer service. While most companies view customer service as a cost to be minimized, Hsieh viewed it as an investment for the future.

“In the United States, we offer free shipping both ways to make the transaction as easy as possible and risk-free for our customers. A lot of customers will order five different pairs of shoes, try them on with five different outfits in the comfort of their living rooms, and then send back the ones that don’t fit or they simply don’t like—free of charge. The additional shipping costs are expensive for us, but we really view those costs as a marketing expense.”
— Tony Hsieh

While free online returns may be the norm nowadays, it was not always the case. Hsieh was an early adapter of this policy as it built trust. Customers who knew they could order with zero risk became loyal customers for life. They told their friends. They came back again and again. Over time, the marketing expense of free shipping generated returns that no advertising campaign could match.

This long-term perspective also shaped how Zappos handled its call center. While most companies outsource customer service to the lowest bidder, Hsieh insisted on keeping it in-house and investing heavily in it. He writes, “We receive thousands and thousands of phone calls and e-mails every single day, and we really view each contact as an opportunity to build the Zappos brand into being about the very best customer service and customer experience. Seeing every interaction through a branding lens instead of an expense-minimization lens means we run our call center very differently from most call centers.”

The math here is simple but counterintuitive. If you view each call as a cost to minimize, you train your employees to get off the phone as quickly as possible. If you view each call as a branding opportunity, you train them to build relationships. One approach saves money today. The other builds loyalty that pays dividends for years.

As such, when Hsieh was considering selling Zappos, it was an easy decision to sell it to Amazon. Yet, he insisted on an all-stock transaction instead of taking cash which turned out to be an amazing decision for those that remained invested in the long-term success of Amazon. Hsieh mentions, “In our minds, that felt too much like we were selling the company. Selling our company wasn’t our goal. We wanted to continue building the Zappos brand, business, and culture. And we wanted to continue to feel like owners of the company. So we pushed hard for an all-stock transaction, meaning that Zappos shareholders would simply trade in their stock in exchange for Amazon shares. In our minds, this was much more in the spirit of the marriage that we were envisioning, analogous to when married couples get a joint bank account.”

“If we spend our money carefully and continue to constantly improve the customer experience, we will reach over $1 billion in shoe sales a year in the not too distant future. I know $1 billion sounds impossible at first—but so did our current sales volume 3 years ago. But the reality is, it’s actually not that crazy a number, and it’s a very achievable goal: By 2010, total footwear sales in the US will be over $50 billion a year. Online footwear sales will be 10% of that—$5 billion a year. If we continue to be the leader in our space because of our relentless focus on improving the customer experience, then there is no reason why we won’t be doing at least 20% of all online footwear sales by then.”
— Tony Hsieh

This reminds me of how Jeff Bezos ran Amazon with the same mentality: that long-term vision is necessary. As a matter of fact Bezos once said that long-term thinking shareholders can allow Amazon 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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Happiness

“Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful.”
— Albert Schweitzer

Tony Hsieh genuinely believed that a company’s core ethos is to deliver happiness, for the customers, the employees and for the founder himself. This belief shaped everything from Zappos’ customer service philosophy to its approach to employees development. This idea came to Hsieh after he became wealthy via the sale of LinkExchange. He writes, “I made a list of the happiest periods in my life, and I realized that none of them involved money. I realized that building stuff and being creative and inventive made me happy.”

As such, when he took over the CEO position at Zappos, the focus on happiness manifested in the goal of helping employees find meaning in their work. He writes, “Our goal at Zappos is for our employees to think of their work not as a job or career, but as a calling.” To achieve this, Zappos also heavily invested in employee development and to create clear paths for growth for its employees.

“Our vision is for almost all of our hires to be entry level, but for the company to provide all the training and mentorship necessary so that any employee has the opportunity to become a senior leader within the company within five to seven years.”
— Tony Hsieh

Furthermore, Hsieh understood that people who feel they are growing and have a future are happier at a company, and happier employees create better customer experiences. It was a virtuous cycle that reinforced itself. In fact, the ultimate expression of happiness as a business model came in how Zappos thought about its customers. He explains that “At Zappos, an example of the customer hierarchy at work would be: Receives correct item (meets expectations). Free shipping (meets desires). Surprise upgrade to overnight shipping (meets unrecognized needs).”

This framework of exceeding a customer’s expectations creating happiness is the essence of Zappos’ first core value: to deliver WOW through services. Meeting expectations is only the baseline. You don’t get credit for it, you just avoid being punished. Meeting desires is good, but it’s still within the realm of what customers already know they want. The magic happens when you meet unrecognized needs and when you deliver something customers didn’t even know to ask for. That’s when you create WOW.

Hsieh writes, “WOW is such a short, simple word, but it really encompasses a lot of things. To WOW, you must differentiate yourself, which means do something a little unconventional and innovative. You must do something that’s above and beyond what’s expected. And whatever you do must have an emotional impact on the receiver.”

And creating WOW wasn’t just about making customers happy. It was about making employees happy too. When employees have the power to create emotional impact, work becomes meaningful. It stops being a series of transactions and becomes a series of human connections. That’s the essence of delivering happiness.

“What’s interesting is that if you keep asking yourself “Why?” enough times, you’ll find yourself arriving at the same answer that most people do when they repeatedly ask themselves why they are doing what they are doing: They believe that whatever they are pursuing in life will ultimately make them happier. In the end, it turns out that we’re all taking different paths in pursuit of the same goal: happiness.”
— Tony Hsieh

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