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

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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.

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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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Read "Master Series: Francois Rochon" by Investment Masters Class

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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.

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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

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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.

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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

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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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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.

Buy it on Amazon here.

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

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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

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

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

Buy it on Amazon here.

Here’s what I learned:

Find Your Fascination

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Learning Machine

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

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

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

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

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

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

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

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

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

If you want to become a learning machine, you must be reminded of the principle of compounding as we have learned previously from Warren Buffett. As a matter of fact, the power of compounding is a mental model that shouldn’t be only used in investing. Compounding also works in terms of seeking wisdom or obtaining good habits. As a matter of fact, a one percent improvement every day leads to 37x improvement in a year.

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

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

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

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Find Mentors

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

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

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

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

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

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

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

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

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

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

• Warren Buffett

• Charlie Munger

• David Ogilvy

• Henry Singleton

• Thomas Mellon

• Naval Ravikant

• Benjamin Franklin

• Thomas J. Watson

What about you?

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Beyond the Book

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

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

Read "Become A Learning Machine" by Farnam Street

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

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

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

Buy it on Amazon here.

Here’s what I learned:

Don’t Wait, Just Start

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Think and Write A Plan!

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

Tear It Down and Take Action!

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

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Sometimes Less Is More

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Prepare pizzas with the freshest ingredients possible

2. Deliver pizzas to the customers within thirty minutes

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

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

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

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Learn From Successes, not Failures

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

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

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

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

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

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

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

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

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

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

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

1. Large Selection of Products

2. Convenience

3. Low Price

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

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

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

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Beyond the Book

Listen to "#54 Jason Fried: Doing the Enough Thing" by The Knowledge Project

Listen to "Jason Fried, 37signals (makers of Basecamp, HEY and ONCE)" by David Senra

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

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

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

Buy it on Amazon here.

Here’s what I learned:

Second-Level Thinking

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

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

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

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

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

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

• What is the range of likely future outcomes?

• Which outcome do I think will occur?

• What’s the probability I’m right?

• What does the consensus think?

• How does my expectation differ from the consensus?

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

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

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

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

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

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

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

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

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

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Understanding Risk

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Intrinsic Value

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Beyond the Book

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

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

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

Read it for free here.

Here’s what I learned:

Long-Term Vision

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

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

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

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

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

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

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

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

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

This reminds me of how Jeff Bezos ran Amazon with the same mentality: that long-term vision is required for innovation. As a matter of fact Bezos once said that long-term thinking shareholders can allow the company to make constant innovations, despite having failures from time to time. As such, Bezos was not timid in making investment decisions where he had an opportunity in gaining market leadership advantages even when he knew that some of his investments would not pay off. He explains, “We like to invent and do new things, and I know for sure that long-term orientation is essential for invention because you’re going to have a lot of failures along the way.”

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

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

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Expect Excellence

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Ship it Fast!

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

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

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

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

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

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

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

1. Staff It with Great People

2. Define Success

3. Set Guardrails and Think Long-Term

4. Build the Thing and Set Up Feedback Loops

5. Execute with Urgency and Excellence

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

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

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

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

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

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

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

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

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

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

Buy it on Amazon here.

Here’s what I learned:

Learn to Read

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Learn to be Skeptical

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

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

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

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

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

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

This method of learning from skepticism reminds me of the Socratic approach that we have learned from Don Valentine from Sequoia Capital who approached business and investing with an unwavering commitment to questioning everything, a habit that was rooted in his early education and experiences. By having a skeptical mindset, he was able to cut through noise, identify opportunities and avoid pitfalls. Valentine questioned everything in order to foster a deeper understanding through persistent inquiry.

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

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

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

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

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

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

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

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Learn to be Yourself

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

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

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

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

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

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

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

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

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

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

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

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

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

Buy it on Amazon here.

Here’s what I learned:

Consistency

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

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

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

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

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

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

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

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

Furthermore, the most challenging thing about keeping a good work ethic is to do it for a long period of time. As Jordan would say, “commitment cannot be compromised by rewards.” In fact, while it is challenging to not give up and to persist with our good habits and efforts when things go wrong, it is even more mentally difficult to be consistent once we have a taste of success. Jordan writes, “Excellence isn’t a one-week or one-year ideal. It’s a constant. There will be days when you don’t feel on top of your game, meetings in which you aren’t at your best, but your commitment remains constant. No compromises.”

In Jordan’s opinion, this sense of commitment can be seen with just about anyone achieving at a high level; he gives the example of Tiger Woods who was back in the gym by 6:30 to work out the morning after he beat Phil Mickelson at the Ford Championship in 2005.

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Focus

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

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

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

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

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

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

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

This reminds me of what we have previously learned from Harvey Firestone, who was also keen on focusing on what was important in business: thinking. As a matter of fact, he explains that it is quite difficult in business to have some time to yourself to think as numerous things come up every day that will need your attention. However, Firestone mentions that it is important to set aside some time to think as thinking is primordial in making good decisions and to run a successful business in the long run. He provides the example of Henry Ford, the founder of Ford Motor Corporation. While Ford is known for making business decisions quickly, but in reality, “He reaches his decisions slowly and alone; he does not jump at anything, and so, when the time comes for execution, everything moves with marvelous rapidity because everything has been previously thought through and planned.“

As a matter of fact, Ford was a master of delegating executive duties to others and made sure to have enough time on his own to think, and to plan and to watch. He would make sure to never assign any executive duties to himself and to have no social obligations. Hence the importance of being able to say no. It is often mentioned that the difference between average results and exceptional results is what you avoid. In fact, there is an exact amount of hours per week and saying yes consumes time while saying no saves time. The famous Daniel Kahneman has a rule that he never says yes on the phone and will only reply later by email after thinking about it, which he rarely does. By saying no, you are able to save more time to spend thinking or to focus on better opportunities.

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

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Make Mistakes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Beyond the Book

Read "Tiny Gains. Massive Results." by Farnam Street

Read "The Focus to Say No" by Farnam Street

Watch ""One word that accounted for Bill Gates' and my success: Focus" — Warren Buffett" on YouTube

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

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

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

Buy it on Amazon here.

Here’s what I learned:

Invest in People

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Learn from Others

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Simplicity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Beyond the Book

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

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

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

Read it for free here.

Here’s what I learned:

Asking Why?

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

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

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

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

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

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

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

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

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

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

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

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

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Frugality

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

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

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

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

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

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

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

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

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

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

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

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

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Large Markets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Beyond the Book

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

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

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

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

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

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Hard Work

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Think Long-Term

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Corporate Culture

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Beyond the Book

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

Listen to "The Fairfax Way with David Thomas $FFH.TO" by Yet Another Value Podcast

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

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

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

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Self-Education

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Master of English

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Destiny

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

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

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

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

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

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

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

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

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

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

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

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

Buy it on Amazon here.

Here’s what I learned:

Frugality

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Rule of 72

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Davis’ Double Play

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

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

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

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

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

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

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

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

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

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Beyond the Book

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

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

Read "The Rule of 72" by Mohnish Pabrai

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

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

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

Buy it on Amazon here.

Here’s what I learned:

Teamwork

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Customer-Centric

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Leadership

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Beyond the Book

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

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

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

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

Read it for free here.

Here’s what I learned:

Capital Allocation

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

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

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

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

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

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

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

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

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

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

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

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

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

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Perpetual Ownership

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

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

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

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

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

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

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

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

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

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

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

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

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Autonomy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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