Finance: Part 2 (Money, What Did You Expect?)

What’s the answer to 99 questions out of 100? Money. 

— Vanilla Sky (2001)

In Part 1, we used sushi to introduce the fundamentals of finance, namely the time value of money and the related concept of risk vs. reward. We talked about why we would discount expected cash flows from the future to figure out what they are worth to us today and the opposite process of projecting the value of money in the future (compounding).

We also said finance is related to everything, which is a bold claim, especially to those who, let’s just say, outsource their thinking on the subject and get along just fine. Therefore, from here we could go in an infinite number of directions (I will recommend some books and other resources below each post if you want to go down any of the many potential rabbit holes). We will try to build up from where we left off, (which ironically again means backing up), summarize topics that we can expand upon with dedicated posts or entire series later, and keep it easy to follow.

Coconut City 
Here is a grossly oversimplified explanation of what I mean when I say finance is related to everything: It starts with people (how quaint) and economics. For a long time now, people have been trading their goods (e.g. Prozac) and services (e.g. foot massages). People created money because at some point, the way I imagine it, in a place called Coconut City, one caveman wanted some comfortable moccasins and another wanted a cheeseburger (a week before the Original Paleo Diet caught on). The problem became quickly obvious: How many moccasins equal a cow? The cavemen both agreed that they needed an easier way of dividing things of value, because there was no way the bovine caveman was giving up an entire cow for a pair of shoes. We won’t even talk about how offended the cow would be if he was turned into a cheeseburger over one pair of moccasins.

So, the one with the shoes says, “Look, we have 100 coconuts laying around and we are 500 miles from an ocean (meaning I can’t make anymore coconuts). I will give you 100 coconuts for your cow and you give me 5 coconuts for the moccasins. You can use the remaining 95 to pay me to do your laundry, prepare your tax return, paint portraits of you, and so on.”

Discerning readers will want to unpack the above scenario (including the latent control and obligations represented in that coconut, the advantage of owning the cow, and what happens if the moccasin man decides he’s done folding clothes) which we will save for later. As the example hints, the reason you have heard of all sorts of things being used as money is because it is less important what it is and more important what it means (for our purposes here, let’s assume that money is roughly the same thing as currency).

Updating our scenario, the best modern explanation of a currency I have come across is something you would be okay getting paid your wages in and you would be comfortable paying your rent/mortgage/obligations in. The implication is that the people using it have to trust the value of it and the stability of that value. As long as we feel good about those, it doesn’t matter whether we use dollar bills, electronic dollar bills, or coconuts. Imagine if you did a month’s rent worth of work (say $1,500), then went to pay rent, and they said, “Oh sorry the value of the dollar dropped, so we are going to need $3,000.”

Connecting this to the example above, it would be like our caveman going to use his remaining coconuts and finding out someone snuck 100 new coconuts into their system, so as everyone gradually figures this out, they now want 10 coconuts for moccasins and 200 for cows, and our original seller still only has his 95, which buys half as much as he was expecting when he made the trade. This is called inflation.

If you know any Venezuelans, this isn’t a hypothetical nightmare for them, this is happening. Here in the US, not immune to such possibilities and wishing to avoid similar inconveniences, we go to the trouble to make sure the word trust is on every coconut bill (economics meets psychology and sociology). This is not a coincidence. The implicit premise is: Trust us that we won’t “print” too much money and inflate its value away. (They have printed a couple trillion since 2008.)

Odds are, even before the butchered economics lesson above, you understood the theme: Money is important and we don’t want anyone messing with the value of it. The basic reason is because that we need things and it facilitates transactions of those things between people. Without it, we would get bogged down trying to compare values of unrelated things and it would take much longer to get anything done.

So, we have loosely defined money and we know from Part 1 that the recurring inflow of money is called cash flow. And if there is one thing I know, it’s that everyone likes the recurring inflow of money.

If everyone likes this stuff so much, why does it cause so much anxiety?

As it happened, the other people in our fictitious Coconut City liked the coconut-as-money concept¹, so once things were up and running, the cavemen started getting used to their cash flow. This brings us to another fundamental observation: people build their lives around assumptions and expectations. At the extreme, we assume the laws of physics remain the same from day to day — for instance, we take it for granted the sun will be up tomorrow. Although it sounds goofy to talk about it like that, you would not argue against the importance of the sun for very long. In fact, we could spend the rest of the day listing things that depend on the sun, but that’s not what we came here to do. So how does any of this relate to money and finance? All business, and thus finance, is based on expectations. We spend money on our debit or credit card based on expectations of how much money we have or will have. These expectations likely include Wells Fargo storing our electronic money safely and securely on its servers to relying on someone to give you the money they owe you. Businesses do the same thing.

Which leads us straight into one of the central insights of finance, neuroscience, and essentially anything human-related: When something you expect/depend on happening does not, it becomes the most important thing in the world. Have you ever walked into a public restroom expecting to take a normal breath of air when suddenly you were blindsided with a whiff of such a horrid combination of smells that your nose refused to inhale until the rest of your body escaped? That visceral disappointment is the same feeling an analyst somewhere gets when Apple sells 78 million iPhones instead of the 85 million he projected in his (financial) model. That’s the same feeling a manager gets when his team doesn’t meet their sales goals. It’s the feeling Elon Musk has right now with his Tesla Model 3 promises.

Effectively everyone has some form of cash flow that they are expecting and any time that number is less than what they have in mind, they feel like they have walked into that public restroom².

This intuition makes sense, but a surprising number of people do not think in these terms; therefore, if we do, we give ourselves an advantage in an important game.

We could keep going, but as they say, Rome wasn’t built in a two-part blog post. The Get-Rich-Quick type who might have found their way here based on the title might be disappointingly thinking, “WHERE’S THE MONEY LEBOWSKI!?”

We will get there eventually.

¹ You might think that taxing authorities are big fans of improvements in transparency and the ability to count things of value. They are.
² The author is designing his life to avoid both the metaphorical and literal interpretations of this scenario.

See also:
The Mysteries of Money (Venkatesh Rao’s cerebral series on money from his blog, ribbonfarm – the link is to the eBook)
US Debt Clock (interesting resource)

Finance: Part 1 (A Primer)

I’m glad I learned about parallelograms instead of how to do taxes. It’s really come in handy this parallelogram season.

— Sage Boggs, Twitter (2015)

A poet once said, “The whole universe is in a glass of wine.” We will probably never know in what sense he meant that, for poets do not write to be understood. But it is true that if we look at a glass of wine closely enough we see the entire universe. There are the things of physics: the twisting liquid which evaporates depending on the wind and weather, the reflections in the glass, and our imagination adds the atoms. The glass is a distillation of the Earth’s rocks, and in its composition we see the secrets of the universe’s age, and the evolution of stars. What strange arrays of chemicals are in the wine? How did they come to be? There are the ferments, the enzymes, the substrates, and the products. There in wine is found the great generalization: all life is fermentation. Nobody can discover the chemistry of wine without discovering, as did Louis Pasteur, the cause of much disease. How vivid is the claret, pressing its existence into the consciousness that watches it! If our small minds, for some convenience, divide this glass of wine, this universe, into parts — physics, biology, geology, astronomy, psychology, and so on — remember that nature does not know it! So let us put it all back together, not forgetting ultimately what it is for. Let it give us one more final pleasure: drink it and forget it all!

 Richard Feynman, American physicist (The Feynman Lectures on Physics, Vol. 1, Lecture 3, “The Relation of Physics to Other Sciences”)

Guac Loyalists! Thank you for your patience. Newcomers, welcome. Amidst my absence, someone who works in finance recently asked me if I could explain how the stock market works. I was shook. During a haircut later that day, I gripped the armrests nervously hoping my barber wouldn’t ask how scissors worked. Joking aside, if you have ever received (ten million) credit card offers in the mail, heard the word stock or bond, or want to avoid being the person digging food out of a trash can in a San Francisco mall food court wearing a zebra print outfit (true story), this is a topic that is worth your time and energy to at least understand the basics.

I value my readers’ time as much as my own and I want to save anything that is better suited for a Google search for Larry Page, so I kept this one in both my mental & electronic Draft folders for a long time. The parallelogram quote, like many other Tweets and memes, has a deep truth embedded in it, which made me realize that the majority of people bump into finance by necessity or on a one-off basis, instead of have it incorporated into their worldview. Whenever I started writing about the stock market to address the original question, I kept thinking: “Well before we can talk about that, we have to talk about this.” So let’s back up and do that.

Therefore, this post has two aims:

1) briefly explain how finance works in an intuitive and approachable way
2) broadly lay a financial & philosophical foundation to build off and serve as an easy self-contained reference for future discussions that may (realistically, will) involve markets, financial assets, and business

If you are a practitioner, feel free to either skip this one or use it as a refresher. If this is new to you, you can read it at any pace you choose. If you get it on your first try, you are ahead of the game.

The Main Concept

First, we start with some critical definitions. Finance is the management of money, which generally involves assets (things you own/control) and liabilities (things you owe). An asset is something of value that is expected to make money in the future. A few examples:

  • coffee machine (a tangible asset; makes coffee that you can sell in the future)
  • academic degree (an intangible or non-physical asset; signals you allegedly have the capability to do something an employer wants you to do, for which they would pay you)
  • Netflix’s content licenses (they pay someone for the right to show their content (unless they make it themselves), then charge us monthly fees to see it – they are betting that over time you and I pay them more than it costs them to buy it)
  • share of stock (an ownership interest in a business that entitles you to a share of the profits)

The value of every financial asset can ultimately be described by this formula:

Screen Shot 2018-07-06 at 10.57.19 AM

Simple enough right? Well, the first kink in the hose is that the top number, cash flow, is uncertain because it takes place in the future. Cash flow is money coming in and out of an entity. If you make $10,000 a month in cash and spend $9,000 of cash, your cash flow is $1,000 per month. Same goes for a business.

Next, you may be asking “WTF is a discount rate?” I promised we would be quick, but the time value of money is so important in finance that we have to make sure we get it before we move on.

The good news is you already know it, you just might use different words or think about it less formally.

A Dollar Today is Worth More [To You] Than A Dollar Tomorrow

Aesop’s Sushi: A tuna in-hand is worth two in the ocean. 

Suppose you have $100 and someone you know and trust (just enough) asks you for $100. You initially tell them to get lost because you’re going out for sushi tonight. But then, he/she/they sweetens the deal and says, “I’ll give you $110 tomorrow.” Now you’re interested because if you wait until tomorrow and he pays you back, not only can you get sushi, you can also get two coffees before brunch the following morning. The additional $10 is called interest and in this case it worked out to be 10% ($10 / $100). This is the part you know. But what about a reverse scenario, where you know you are going to get $110 tomorrow, but you want to figure out what that is worth to you today? This is called the present value. Essentially, you have to quantify the value of time (hard), the chance that you may not get the money (also hard), and what else you could do with that money (slightly easier and more fun, but still hard). That process is called discounting and the number is the rate at which you do it, hence discount rate. In this case, we may determine that the interest rate is the best discount rate, so we use the same 10% ($110 / 1.10 = $100).

When figuring out the present value we put a 1 in the denominator plus the discount rate to get a smaller number. If we take the one away like in the initial formula, we are assuming that the top number (cash flow) will go on forever and that the bottom number (discount rate) is the right number forever. That’s called a perpetuity, but anyone offering you a perpetuity (money forever) is probably giving you a crummy deal so we’ll skip that for now.

It’s important to point out that there is nothing magical about the 10% number we used. If you get 10 cooks in a kitchen, you are going to get 10 recipes. The same is true in finance. If you ask 10 financiers at what rate they discount their cash flows, they too will give you 10 different answers.

We have mentioned in a previous post that in the publishing world, if you want to sell fewer books, include math in your writing. Unfortunately, if you want to make or keep money, you need to be numerate.

This chart takes the sushi example above, puts it into numbers, and extends it over a period of years instead of one day.

Year 1 Year 2 Year 3 Year 4 Year 5 Total
Cash Flow $100 $100 $100 $100 $100 $500
Discount Rate   10%  10%  10%  10%  10%
Present Value $90.91 $82.64 $75.13 $68.30 $62.09 $379

In words, this table is saying we would feel exactly the same between taking $100 in one year or $90.91 today. If we increase (decrease) our discount rate, the amount we would be okay taking today gets smaller (bigger).

It is also implying that we would be okay taking $100 each year for the next 5 years or $379 today. Above, we mentioned the reasons we might make this trade-off: 5 years is a long time (sushi today is better than sushi tomorrow), what if the person we expect the $100 from can’t or won’t pay us (risk), and/or we may have something else we would rather do or somewhere else we could put the money that makes more than 10% per year (opportunity costs).

In the table above, we use the same discount rate, but obviously two years is twice as long, so you discount it twice, repeating the process as needed.

Screen Shot 2018-07-06 at 10.57.23 AM

Screen Shot 2018-07-06 at 10.57.26 AM

If this is the first time you have seen these calculations in your life, open the iPhone calculator app, turn the phone sideways so you get the expanded functions, and try doing this yourself. If you’re really curious or want to know what your finance friends have been doing for most of their twenties, open up Excel and throw some of these in there.

Repetition for emphasis: This implies we would be indifferent between getting $379 today and $100 every year for 5 years. It is also implying we would pay $379 today to get $100 every year for 5 years.

Regardless of the complexity, whenever I’m scratching my head looking at something financial, I always try to figure out how it comes back to these main concepts above. Whether it’s $100 or $100,000,000, coffee sold or income earned, the formulas still apply.

The key distinction in the formulas we have talked about is whether you are going forward or backward in time – whether you want to see what money today is worth in the future or what money in the future is worth today.

  • $100 x 1.10 = $110 (future)
  • $110 / 1.10 = $100 (present)

I named this Part 1 because it is such an expansive subject we could end up like Idiosyncratic Whisk, whose most recent post is Housing: Part 306.

Whilst this is less exciting on the surface than endurance races, heists, or Kim Kardashian, finance is connected to (nearly) everything in the same way that Feynman’s divisions of scientific disciplines in the opening quote are connected. Finance is versatile – it allows you to do things like assess the validity of a politician’s claims (cough) and figure out if you’re getting screwed on your next loan to making sure you can afford sushi and wine.

Or, in keeping with Feynman’s instruction, it may be time to drink it and forget it all.

Why You Should Plan a Heist

You can plan a pretty picnic, but you can’t predict the weather.

 Outkast, Ms. Jackson (2000)

The operative word in the title is plan. Don’t do a heist. If you need further persuading, watch the ending of Dog Day Afternoon. Besides, you can get much more money from bankers if you give them a colorful PowerPoint presentation.

A famous joke by the (former?) comedian Dane Cook begins: what a guy wants most–even more than sex–is to be in a heist.

This thought has hung around in my mind for over a decade, but for a different reason than the one implied by the joke. It is actually a useful metaphor for three things: trust, temperament & systems thinking. Let’s call this the Heist Heuristic. (Your imagination can determine the details of your custom heist scenario).

1. Trust

We like to give people the benefit of the doubt, but sometimes we end up giving them too much credit. You can figure out the most trustworthy people in your life by asking, “If I just pulled off a heist, who would keep it a secret?” Or, if you are interviewing someone, think to yourself, “Would I trust this person to _____?” Fill in the blank with the job description, but assume that the job is their role in a heist scenario with you and if they mess it up, you spend the next 10-15 years in prison. This started out as a joke, but over the years I have noticed the clarity this deceptively simple question can provide.

2. Temperament

Remaining calm under pressure is, in my mind, one of the ultimate human qualities, because of what it entails, including the preparation required, worldly benefits over time, and the pure authenticity of it. Many things can be faked, but temperament–like wit–isn’t one of them. In the financial markets, it has been said that temperament is more important than IQ. If you have what it takes to stay calm in a heist, you most likely have what it takes to remain rational in stressful situations (e.g. deciding to hold a position while you are losing amounts of money that nearly make you throw up or while patiently watching others make money faster than you). In more prosaic affairs, maybe you will calmly talk through disagreements instead of throwing plates? Now, planning a heist alone won’t make you calm. In fact, beyond having a natural disposition, experience in high-stress situations is usually the primary way to develop this trait, but the more you have thought through potential outcomes in a scenario, they are by definition less likely to surprise you, allowing you to maintain composure. Plus, the world will often find a way to put you in such situations, giving you plenty of practice for increasingly stressful situations in the future. If you never have to use this developed skill, even better.

We will revisit temperament in future posts, especially once we introduce poker as a mental model.

3. Systems Thinking & Complex Adaptive Systems (“CAS”)

System: An organized entity made up of interrelated and interdependent parts

When I first heard the term “Complex Adaptive Systems” I thought a special kind of pretension was required to come up with something that douchey. But, like many things seemingly esoteric, once you understand it, you can never go back. Nor would you want to. This one takes a little more explaining, so you will have an opportunity to use your patience from the temperament section.

Initially, I planned on writing a separate essay on Systems Thinking, but Donella Meadows does such a good job in her book Systems Thinking: A Primer, that I would essentially be paraphrasing all of her thoughts without adding much value. If you incorporate the lessons from her book I guarantee your understanding of the world and decision making will improve. Here, I will simply introduce the concept as a reference for future conversations about CAS and explain why a heist is a convenient metaphor for situations we face.

The idea underlying systems thinking is that there are a lot of factors to consider for any given situation and, with complex adaptive systems, they interact and change. The reason this is important is because humans are necessarily reductionists and want things to be framed in the simplest terms (yes or no, good or bad, Mayweather or McGregor, and so on). Unfortunately, the world generally resists this simplification. As soon as we say something like “Real estate prices always go up!” everyone adapts to this premise by bidding up real estate values and next thing you know it’s 2008 and home prices collapse like a European soccer player after getting grazed by an opponent. The [people, in this case] adapting part is what makes it complex instead of complicated. Let’s pause for a moment to make sure we’re together with the definitions in this context. Getting gasoline to make your car move is complicated, but it’s not complexThe gasoline doesn’t figure out that it’s about to be lit on fire to sacrifice itself for the greater good of your engine, then adapt by teaming up with the other gasoline molecules and finding a way out of your tank (wild if it did though right?). Complicated processes follow a set of (generally) unchanging rules–difficult to learn, but reliable once learned. A football team is complex because the players and coaches have personalities and the way those personalities interact and evolve is inherently unpredictable. We are watching that play out right now with Tom Brady, Bill Belichick, and Robert Kraft.

Many systems take a long time for the symptoms to show up (like the negative ones of the financial crisis or the the positive ones of worldwide internet access), but in a heist the timing is accelerated and the stakes are amplified. This forces intellectual humility because as soon as we starting thinking through our plan, we realize how many factors are involved and how their interactions can drastically change the outcome. Even the simplest (most boring) of heist strategies, a note handed to a bank teller with the instructions “Put the money in the bag” could result in a wide range of outcomes depending on the teller’s mood, whether someone else notices it, and if so, is that someone a cop, and on and on we go. The consequences have consequences.

Next, and equally important, is the idea of feedback loops. Since the heist metaphor has served our purposes so far, let’s keep using it. In the movies (my favorite being The Thomas Crown Affair, followed closely by Bandits), the robbers usually use one particular feedback loop to their advantage: the spread of fear. This is an example of a positive feedback loop, where one person being afraid makes it more likely that someone else panics, which then means it’s even more likely the third person will get scared (a more tame case being more people use Instagram because more people use Instagram). From here, they can take advantage of a negative feedback loop. The classic example for a negative feedback loop is a thermostat keeping your home a certain temperature, but that example is boring, so we’re going to pick up right where we left off. Like any other working professional, random people screaming in our ear prevents us from doing good work, so after an intimidating shotgun blast through the ceiling, the hostages have gone from freaking out to being paralyzed by fear; now we need them to stay quiet. Any time one of them opens their mouth, they’re carted off to another room, never to be seen from again. This promotes stability, which is exactly what we want given that there are so many other things that could go wrong.

Returning to positive feedback loops, be mindful they can go in both directions, which may sound counter-intuitive. Suppose a college–let’s pick a random one like Penn State–had a head coach that let another coach touch boys. When people find this out, they stop wanting to play football there. The team gets worse and now even fewer people want to come play football there because no one wants to play with a bunch of losers and pedophiles (positive feedback loop to the downside). Positive feedback loops: instability (or big returns), negative feedback loops: stability.

There is much more, but as I said, I simply wanted to get you thinking about the topic if you don’t already. While there’s still no way around sounding like a pretentious douche when saying it, adding this framework to your mental toolkit will probably be beneficial in your life, although it is impossible to say exactly how. You will start noticing complex adaptive systems and feedback loops everywhere, which will likely inform your understanding of situations you’re in and how to appropriately respond. Your curiosity from there will carry you the rest of the way.

Now, I don’t want to walk by a television in a few weeks and see there’s been a 20% increase in heist activity. But what would be great is the next time you saw an armored truck, you thought about who you can trust, your ability to manage your mood, and the complexity surrounding us.

See also:

Thinking in Systems: A Primer by Donella Meadows
The Fifth Discipline: The Art & Practice of The Learning Organization by Peter Senge
What Does Charlie Munger Mean When He Says Something is a Lollapalooza? by Tren Griffin
More Than You Know: Finding Financial Wisdom in Unconventional Places by Michael Mauboussin
The Thomas Crown Affair(1999 version is better than the 1968 one, sorry Steve McQueen fans)
Bandits (2001)

An Alternative to New Year’s Resolutions

The world never tells you that you’re wrong; it only gives you outcomes. 

— Shane Parrish, Farnam Street

Kierkegaard, in Either/Or, makes fun of the “busy man” for whom busyness is a way of avoiding an honest self-reckoning. You might wake up in the night and realise that you’re lonely in your marriage, or that you need to think about what your level of consumption is doing to the planet, but the next day you have a million little things to do, and the day after that you have another million things. As long as there’s no end of little things, you never have to stop and confront the bigger questions. Writing or reading an essay isn’t the only way to stop and ask yourself who you really are and what your life might mean, but it is one good way. And if you consider how laughably unbusy Kierkegaard’s Copenhagen was, compared with our own age, those subjective tweets and hasty blog posts don’t seem so essayistic. They seem more like a means of avoiding what a real essay might force on us. We spend our days reading, on screens, stuff we’d never bother reading in a printed book, and bitch about how busy we are.

— Jonathan Franzen, Is It Too Late to Save The World?

It is safe to say the New Year’s Resolution is dead. Gyms will still likely see the customary uptick in new memberships in January, where the lines will be blurred between legs trying to escape yoga pants and a busted can of biscuits. We may eventually get lunch with that person we said we would the past 7 times we bumped into them at the grocery store. We might even “enjoy life to the fullest” (perpetually in the Top 5 most common New Year’s Resolutions)…whatever that means.

Odds are we won’t.

It would be great if The Resolution was dead because people realized that an arbitrary date was unnecessary in making necessary life changes. Instead, I think it died because doing what you say you’re going to do is hard and people get discouraged by the demands of changing their habits. At any rate, all of us are prompted by the New Year to think at least a bit about the upcoming year. Companies do this too, but their process is a little more formal. They look forward, budgeting for the upcoming year, and looking forward is what all of us must ultimately do. But many companies, and all public companies, also look backward and write letters to their respective shareholders (owners) explaining how the year went in an annual report. If you’re a stakeholder in the company or in finance, you may read them. If you have no (financial or intellectual) interest in the company, you would never read them.

Although not entirely necessary for this post, it would be worth reading one (Google your favorite public company’s shareholder letter). Management talks about the company’s financials, risks, competition, etc.–all things that impact the performance of the business.

Most businessmen I respect believe that the most appropriate place for projections is the trashcan. My own experience has certainly reinforced this idea as I have never seen a case of someone projecting that they are going to do badly (because they normally want something from the people they’re showing the projections). Therefore, we look to the past to come up with the best way to move forward. The past doesn’t predict the future, but it’s usually the best we have. Since successful investors and companies think this way I got to thinking, why don’t people do this for themselves? Replace all of the business components with a person’s. In the way that projections are often (though not always) less useful for a business than their historical performance, looking at what I did yesterday is often a better predictor of what I’m going to do tomorrow than what I think I’m going to do. At the end of 2015, I did this and found it useful. I have since shared the idea with a few more people and their reaction influenced me to share it more broadly.

Below, I’ll suggest some categories and questions to get you going, but since this is an individualistic activity, you can ignore mine and come up with your own. The temptation is to quickly skim it over and answer them in your head like a What Kind of Cheeseburger Are You? personality quiz on Facebook, but the idea here is to open up a Word document, put pen finger to paper keyboard, and get the thoughts outside of your head. If you’re still enjoying the holidays, you’re in luck because the real purpose of binge eating at this time of the year is to cause such physical lethargy you have no other option but to allow your brain to confront the bigger questions Franzen alludes to in his quote above.

We’ll start with the most popular New Year’s Resolution category. Two questions can carry a lot of weight here.

  • How did you treat your body this year?
  • Is your body fat percentage higher or lower than it was last year?
    As far as how I treated my body, one area I tried to work on in 2017 was getting enough sleep. I (used to) idolize people who can operate at a high level without much sleep, but after trying that out for a year or two, I realized this is either impossible and/or it simply doesn’t work for me. We have all heard an idiot say, “I’ll sleep when I’m dead.” When have you ever slept 4 hours each night for a week and on Friday felt like you’re performing physically or mentally at the same level as you would have if you were fully rested? Extrapolate that for a meaningful period of time and there’s no way that’s a sustainable game plan. Jeff Bezos, the boss of that online company the retail industry loves, makes getting 8 hours of sleep a top priority. If Jeff can find time to make everything happen that he does in 16 hours, I suppose I have no excuse.

Coming off the holidays, this may be a delicate one. Some people may be crying as they leave their families returning home, while others are getting to the airport 3 hours early to get away from theirs. Assuming you have family and respect them, did you strengthen your relationship with them? Any new additions? Did your roles and responsibilities within your family evolve? Do you want the same things?

There must have been a writers’ conference on New Year’s Day 2017 that determined the theme of the year was tech. Given that I can barely go to a website or read a book these days without seeing a version of how Artificial Intelligence or FANG (Facebook Amazon Netflix Google) is in the process of taking over the world, on one hand I’m convinced a robot is going to take my job and Mark Zuckerberg is going to have me tilling fields in Farmville. On the other, an automated phone system has literally never solved a problem of mine so I’m a little skeptical of impending mass unemployment. So, assuming we still have a few years left, perhaps we should ask ourselves the following: Am I getting better at what I do for work? What skills did I acquire this year? What did I create?

I was trying to order a pizza on the phone the other day from Mellow Mushroom and the guy kept calling back the wrong order to me. As I bit my lip, I was reminded of something the stoic philosopher Epictetus said 1,900 years ago, “If someone succeeds in provoking you, realize that your mind is complicit in the provocation. Which is why it is essential that we not respond impulsively to impressions; take a moment before reacting, and you will find it easier to maintain control.” There’s a related idea that when you’re right, you can afford to keep your temper, and when you’re wrong, you can’t afford to lose it. A distinguishing factor between a child and an adult is the management of our emotions. Children cry when they are hungry, adults (usually) don’t, although they have the same fundamental desire. This is a never-ending tension, as we are emotional creatures and everything that happens causes us to deal with them. The good news is we can train our emotions (think yoga). It takes some work, but over time the more we align them with rationality, the more likely we are to get what we want.

Are we really going to learn Mandarin Chinese? I have Rosetta Stone installed on my computer, but unless I move to China, the odds of me learning Chinese are about as good as Kim Jong-Un beating Dennis Rodman in basketball. There’s nothing wrong with lofty goals, but the whole idea of this post is that many resolutions are sufficiently difficult to the point people give up on many of them before they have even gotten all the glitter off. Instead of coming up with big goals, it’s amazing what can happen over time if we simply try to go to bed smarter than when we woke up. We can ask ourselves the following questions to get a feel for whether this happened or not.

  • What did you actively learn this year?
  • What books did you read?
  • Can you explain the big ideas in them to a six-year-old?

This one is easy. Take all the money you can get your hands on and buy Bitcoin! I’m 100% kidding, don’t do that. The only thing more polarizing than cryptocurrencies in 2017 was Donald Trump, so is an end-of-year blog post culturally relevant without mentioning them? I am not going to talk about them long at all here because I’m unqualified to have an opinion on Bitcoin specifically, but I can tell you that the odds of you having sustainable and repeatable financial success in something you are not an expert in are significantly low. Paraphrasing Charlie Munger from a recent interview at Michigan’s Ross School of Business, you have people being lured into the concept of easy wealth without much insight or work. Whether it’s 2017 or 2017 BC the idea of easy money is seductive. Even though it’s less fun, it pays to be skeptical. Getting rich slowly is a better goal than getting rich quickly.

Moving onto more prosaic matters, we all worked hard this year and maybe we even got paid for our work. Money buys things we want, getting things we want makes us happy, boom! Money buys happiness. If we want to be happy, we’re probably going to have to think about our finances.

  • Is your net worth (value of what you own minus what you owe) larger or smaller than it was last year? By how much? Why?
  • What was the highest and lowest quality financial outflow you had this year?
  • Did you reduce debt or add debt?
    • Most credit cards/bank statements have an Annual Summary that breaks out spending categories.

For more on personal finance, check out The Financial Wisdom of Rap Music.

Since we covered relationships earlier in the year with The Millennial Marriage Manifesto, we’ll stick to friendships here. I increasingly try to only spend time with people I like and admire. That seems obvious, but is it? The older you get the more you ask yourself the types of qualities the people you want to be around would have and realize that your friends are inevitably a reflection of yourself. You may have heard “You’re the average of the 5 people you spend the most time with.”

  • Who are those 5 people? Are they different this year than last year?
  • Did you develop deeper relationships with your existing friends? Make new ones?

While we’re talking about new friends and resolutions, in March I went to Cuba with Garrett Gravesen and a group of guys for what we ended up calling the First Annual Entrepreneurship Summit (going to start formally naming all of my vacations). Since then, he wrote a book called 10 Seconds Of Insane Courage and I had the opportunity to help edit it. Garrett lives the belief that big decisions are made in moments–10 seconds to be exact–and that your courage in those moments will determine the trajectory of your life. I’m such a big proponent of careful evaluation that the seemingly contrasting thought is compelling because regardless of how much thought goes into a decision, ultimately you must make a decision. You’ll have to read his wild stories for yourself, but viewing your decisions over the year through this lens will be illuminating.

What did you do to have fun?
This category reminds me of Kanye West’s song Paranoid “You worry bout the wrong things, the wrong things” because people who aren’t thinking about this are the ones that should and the ones who worry about whether they’re having enough fun are likely already having enough. My disposition is geared more towards delaying gratification because I feel like the payoffs are better, but the future is uncertain so we could get hit by the proverbial bus and never get to the long-term which is why we should try to have fun along the way.

In addition to the ones above, some don’t fit squarely into any particular section, like acknowledging my terrible habit of mindlessly looking at my phone too frequently. I also have started asking myself, “What is the dumbest thing I did this year?”

If you’re like me, you’ll find two things:
1. These are all interrelated.
2. By going through the process of writing these down, any changes to be made will be so glaringly obvious to you that making a formal resolution will be unnecessary. If I looked down and someone had run over my foot with a lawn mower, I hardly need to make a resolution to go to the hospital.

The opening quote from Shane Parrish at Farnam Street about outcomes is one of my favorite ideas I came across in 2017 because it seems there’s so much sensitivity in the world that the idea of someone being wrong or making a bad choice is almost taboo. It’s a subtle nudge that gets us thinking about our choices and what happens because of them while removing the black and white idea of right and wrong. Being mindful of this quote will be helpful as you go through your letter.

What would be interesting is if you made this an annual tradition and in 10 years you looked back through them. You would have a decade of personal development in front of you and a pretty good map of how you got to where you are in your life.

See also:

10 Seconds Of Insane Courage by Garrett Gravesen
Rise of the Robots: Technology and the Threat of a Jobless Futureby Martin Ford

How Kim Kardashian Got Famous: A Way to Think About Almost Everything

Got a truck full of dope, plug on the coke
Renzel done came up, prosecutors want to know
Is everything dope? Is everything dope?
How does everything go?

— Rick Ross, D.O.P.E. (2015)

Mechanism (mekuh-niz-uh m)

1. an assembly of moving parts performing a complete functional motion, often being part of a large machine; linkage
2. the agency or means by which an effect is produced or a purpose accomplished

Today, we’re going to use something boring to introduce something interesting. I’ve been reading a lot of loan documents lately (I know shoot me, right) and thank God I work with smart attorneys (corporate, not criminal, at the time of this writing) because loan agreements and the other legal documents involved when businesses want money are often hundreds of pages long, and unlike the Terms & Conditions in our Verizon contract, you actually have to read them. As important as they are, time often does not allow me to read every word. Like other bankers & businessmen, I find myself needing the information translated from Legalese into English. This is one of the reasons we happily pay lawyers.

Here’s the interesting thing: Although we generally think of legal contracts as jargon-filled and effectively unreadable to a layperson, they are still written in English. When we say, “We just signed our life away,” somewhere buried in the document spells out, in a language we can understand, exactly where we signed our life away and on what terms.

In any situation, we tend to care about what is relevant to us, right? Well, in my case I may care about what actions the bank I work for can take and when. Therefore, I need to know the exact words in the document that allow me to do that. In your phone contract, amidst all those small-print words, there are a few key ones that address the things you ultimately care about: how long it lasts, how much you pay per month, and what happens if you don’t. So if you don’t pay your phone bill, there are two important things at play: 1) The contract that gives Verizon the right to do things, like cut off your service; and 2) The physical signal no longer being sent to your phone.

Let’s call those important things mechanisms, which would fall under the bold definition at the top. If I’m you, I’m thinking “Okay, I stopped checking my newsfeed to read about mechanisms?” BUT stay with me because I think we’re onto something more general as an approach in trying to understanding almost anything. By asking in your own words or way, “What is the mechanism?” you can cut through the fluff to the substance in most situations. The substance is usually built on basics and most situations are ultimately about the basics. If someone knows, they will be able to tell you (now they may have an interest in you not knowing, which is often, in which case they won’t tell you) and if they don’t know, they will be unable to answer the question or the answer won’t make sense. There are similar phrases with a similar goal of getting to the fundamentals quickly: “What’s the point?”, “What’s the bottom-line?”, “How does it work?” Let’s look at an illustration to see the subtle differences between those and what we’re talking about.

Suppose you’re at the mall. You walk into one store and before you know it you practically need a restraining order to keep the salespeople out of your personal space while in another you could get a leg amputated and no one would be there to notice, much less answer a question on some Size 2 leggings. What explains the difference? One gets a commission and one doesn’t. You would normally call that an incentive, and it is. However, I would say that what we are more generally trying to figure out is the explanation & cause of the salesperson’s behavior (“Why they all up on me here but not there?”). In this case it happens to be an incentive (her commission or lack thereof), but it just as easily could have been one being excited after a recent promotion and the other had just gotten E. coli from lunch at Chipotle, and it is because of these different possibilities the term mechanism is more encompassing. We probably think in these terms intuitively quite a bit, like with Rick Ross in the opening quote knowing the value of dope logistics, but the more explicitly we think this way in complex or new situations the better positioned we are to figure out the truth, especially when we need to know it sooner than later. It’s this intersection of why & how that I’ve found so interesting lately.

And like most things I find interesting, someone else much smarter than me has already thought about it more than I have. I found this out when I started reading The Gene: An Intimate History by Siddhartha Mukherjee, which I picked up for two reasons: 1) my best friend is a biochemistry & genetics major getting his PhD, so I figured I better learn a little bit about genetics if I want to talk to him and 2) I liked Mukherjee’s approachable writing style in his Pulitzer-Prize winning book on cancer, The Emperor of All Maladies.

So what are the odds that before finishing the prologue I saw a variation of that engineering term that had been on my mind?

DNA is identified as the source of genetic information. The “action” of a gene is described in mechanistic terms: genes encode chemical messages to build proteins that ultimately enable form and function. 

I didn’t count, but Mukherjee goes on to use the word throughout the book, a lot. His point is that this idea of focusing on the action or mechanics was shared by many of the world’s best scientists & led to the discovery of how heredity works!

No one will ever mistake me for an expert on genetics, but an important takeaway from the book was the reinforcement of this mindset that has already drastically helped me filter what I hear & see. When someone is telling you why something is the way it is, look for the mechanisms that allow it to be that way. A complicated issue like opioid drug addiction in the United States can be better understood by looking to the possible mechanisms. Here are a few:

  • Why does this exist? Drugs make people feel good (shocker right?).
  • Why is this a problem? They have negative side effects that may eventually outweigh the positives.
  • What explains the number of people this affects? The availability of addictive substances.
  • Why are they available? Doctors frequently writing prescriptions to many patients for a variety of different conditions.
  • Why would that happen? A combination of thinking that is the appropriate solution to the patient’s underlying issue and making money by doing it.
  • What allows the businesses & doctors to do that? Their credentials, experience, governing bodies, and so on.

The reason this is worthy of our consideration is because of the time and energy spent addressing symptoms instead of root causes. Sticking with the same example, you’ll see news stories involving drugs that seem to ignore the part about people taking them because they make them feel good or the people providing the drugs making money from it.

The gut reaction that this is all too obvious to talk about is due to something called the illusion of explanatory depth (“IOED”) which is a confident, but mistaken feeling of knowing. If you ask 50 people if they know how a washing machine works, they’d probably say yes. But if you asked them to give detailed step-by-step instructions on how it works, most would look at you like Simple Jack in Tropic Thunder. If we are aware of this IOED, we will instinctively start looking for ways to fill in those gaps.

If you do this for a while, as weird as it sounds at first, a couple of things will start to happen.
1: You will become dissatisfied with things that have vague mechanisms and will push for greater clarity (e.g. “Oh, so you two were just hanging out?”)
2: You will start realizing that many of these hinge on the definition of a single word or phrase. Recall Bill Clinton and his famous “Depends on what your definition of is is.”

Arguably, doing anything other than focusing on the mechanisms is superfluous.

Using that same idea, we can look at our own work. Most of us would like to be organized for various reasons, and we could likely see benefits from it over time, but they are indirect (I use this as an example because I highly value organization, so I’m challenging myself). However, can you imagine me sitting in my office thinking “My desk is clean, so the deals should start rolling in.”? When seen from that perspective, unless you are part of a cleaning crew, it’s clear that being organized isn’t the mechanism. When we acknowledge what generates the final service or product we provide, we will avoid potentially misleading ourselves about our productivity. Emphasizing this point with my coworkers, I’ll say: “Why don’t we report on our earnings call how many hours we spent in our offices?” We all remember from college that there is a big difference between going somewhere to study and actually studying.

Some other simplified examples:

  • Fewer drunk driving accidents
    • The mechanism: Uber & Lyft
  • Why no one says anything contradicting the boss, when it’s evident he’s wrong
    • The mechanism: The threat of the boss firing the person who said it
  • How Apple can charge $1,000 for a phone (at its current volume)
    • The mechanism: Breaking up one big payment into more manageable monthly payments
  • Capitalism:
    • The mechanism: Forceful protection of personal property
  • Traffic
    • The mechanism: brakes (can’t have traffic if you never use your brakes! Although this is impractical, it’s a useful framework for thinking about how people should drive, which would be at a speed that requires everyone to use their brakes as little as possible. Obviously, something like traffic is a complex situation and it is influenced by several factors like number of drivers, wrecks, construction, traffic lights, etc. but this is actually one of the purest examples of a mechanism because all of those other factors ultimately lead to you hitting your brakes. If your goal was to reduce traffic, you would be mindful of this every time you considered adding a new intersection with a traffic light.)

On one hand, this is common sense. On the other, there are structural reasons why people don’t want you to know the mechanisms of many things (e.g. Coke recipe), making it even more important that you are able to figure them out for yourself. Now that we’ve seen how this looks in everything from rap songs & genetics to loan documents & drugs, please remember your humble blogger when thou art upon the podium receiving thy Nobel Prize.

I’ll let you determine the mechanism for Kim’s fame.

See also:
The Gene: An Intimate History by Siddhartha Mukherjee
Thing Explainer: Complicated Stuff in Simple Words by Randall Munroe

Principles by Ray Dalio

The hardest thing of all to see is what is really there.

— J.A. Baker, The Peregrine

For me, there is really only one big choice to make in life: Are you willing to fight to find out what’s true?

— Ray Dalio

Ray Dalio is the founder of Bridgewater Associates (“Bridgewater”), one of the largest & most successful hedge funds of all-time (it manages $160 billion). Bridgewater has a famously unique cult(ure) of radical honesty & transparency with the goal of promoting “open-minded, idea-meritocratic, collective decision making.” If you don’t like someone, you get it out in the open, then together you figure out a way to move forward. Essentially every conversation is recorded (and every employee has access to them) so that nothing is said behind someone’s back. 40% of new hires either leave or get fired. Intense right?

Now that we know what the organization is, let’s knock out the first question.

What is a Principle? 

Principles are fundamental truths that serve as the foundations for behavior that gets you what you want out of life.

In having read Principles: Life and Work now for a third time, I realize how influential it has been and will be in my life. It’s the only book of any meaningful length I’ve read multiple times, so naturally I thought it would be appropriate for my first book review/summary. I say summary because I find his lessons so effectively communicated, it’s tough to reduce them any further.

If I had to pick one book to read this year, this would be fighting for the top spot. Your life will be more painful and better because of it. I have 143 books in my Amazon cart right now, plus some unread ones on my shelves, so in order to have a life, I have to be selective. That often means I come away from each book saying it’s one of the best I’ve ever read. With that in mind, this is one of the best I’ve ever read.

Why is this better or different than the other 25,000 business/self-help books? I’ve (regrettably) read a lot of them over the years and no other book has led to more real-world change in my life than this one. I feel like most books pass through your consciousness like advertisements; they affect you, but subtly and over time. If I had to make a blanket statement about the books in the genre, they are mostly a collection of bromides that provide no deep new understanding, and here is the real commonality: they are all positive (and life is not). Almost none encourage real pain or acknowledge how truly difficult improvement is (because that doesn’t sell books!). Think of it this way, you can read every business book and self-help book, and never manage a business, or help yourself. Said differently, there is place for them, but one can last you a long time.

If you tackle this book with an open mind, pen and paper, it will nearly force you to think and thus act differently, like the next time you hear yourself rationalizing: This is a cheat day. No, it’s Tuesday morning and eating leftover pizza at 10:00am from the night before is not going to get you to #goals.

Dalio opens the book with: Before I begin telling you what I think, I want to establish that I’m a “dumb shit” who doesn’t know much relative to what I need to know.

He probably spent a long time tailoring that sentence because of the levels to it. First level: it’s funny. Second & third levels: He is acknowledging that you should assign a “believability” weighting to him (we’ll talk about it later) and not simply take him at his word, he is relatively humble (he’s calling himself a dumb shit, which he believes, but he also implicitly believes he’s less of a dumb shit than other people because of how much work he’s put in to testing his ideas in the real world), and despite all his success, knowledge & wisdom, he is still acutely aware of how much he doesn’t know.

His sentence-by-sentence delivery is succinct (remember he’s a billionaire, not a writer), but the book is ironically 552 pages (mainly due to repetition). Any one of those pages has the potential to casually shake some readers’ intellectual foundations even between his main points. I tend to be cerebral, but this guy turns the volume knobs to an 11. This isn’t a book you read 30 minutes before you go to the bars or if you need a participation trophy. This is more for when you’ve just polished off your second 16 oz. cold brew coffee and you’re ready to be CEO of Mother Earth, or your life is going off the rails, nothing is going the way you want it to, and you need the schematics for fixing it.

The book has three parts. We’ll spend most of our time on the first half because Work Principles are simply Life Principles applied to groups.

Part 1) Where I’m Coming From (memoir)
Part 2) Life Principles (for individuals)
Part 3) Work Principles (for groups)

“When I ran into situations I hadn’t seen before, I would be painfully surprised. Studying all those painful first-time encounters, I learned that even if they hadn’t happened to me, most of them had happened to other people in other times and places, which gave me a healthy respect for history, a hunger to have a universal understanding of how reality really works, and the desire to build timeless and universal principles for dealing with it.”

Echoing Dalio’s sentiment, it seems like our attitude toward learning should be influenced by the idea that we would prefer to learn the implications of driving off a cliff by watching someone else do it than having to learn the lesson first-hand.

To give you an idea about his level of dedication & credibility, during the financial crisis in 2007, using history books and old newspapers, he and his team went day by day through the Great Depression, comparing what happened then with what was happening in the present. Further, he is admittedly terrible at rote memorization (e.g. people’s names), but he can tell you what happened economically & politically in every year since 1960.

Life Principles

Dalio defines success simply as getting what you want. I’ve been looking for a better definition for 5 years and haven’t found one yet.

“Think for yourself to decide
1) what you want
2) what is true, and
3) what you should do to achieve #1 in light of #2, and do that with humility and open-mindedness so that you consider the best thinking available to you.”

Embrace Reality and Deal With It 

Referring back to the opening quote, you can pretty much put your pencils down if you aren’t committed to finding out what’s true. It’s a waste of time to talk about individual trees if we can’t agree there is a forest. Over the past 5 years, I’ve asked several people how comfortable they are with reality, and initially I expected everyone to say that they were whether they were or not, but what I heard was a wide range of surprising honesty, with a heavier weighting of responses toward “I have a hard time with reality.” That honesty is highly valuable, because that is precisely what you need to deal with it.

The reality is, books with math in them are guaranteed to sell less copies. Dalio is a math guy though so that’s off the table, but he keeps them manageable as long as you’ve learned addition. Here are his two main formulas:

Dreams + Reality + Determination = A Successful Life

Pain + Reflection = Progress

His way of thinking could be misinterpreted as a buzz-kill, but he’s simply saying our ability to send a cell phone signal around the world or fly planes is the result of people dreaming that we could do that, while applying the existing rules of reality–the physical laws or principles that govern the natural world. When you lose your fantasy football league and have to take the SAT with high schoolers (pain), because you picked Ben Roethlisberger as your quarterback (reflection) next time you’ll pick Dak Prescott (progress).

He is ruthless and efficient in the pursuit of this.

Don’t mistake possibilities for probabilities. Anything is possible. It’s the probabilities that matter. Everything must be weighed in terms of its likelihood and prioritized.

In case you already suppose he’s a dispassionate sociopath, he says having meaningful relationships and meaningful work are the ultimate goals (I assume that’s predicated on his computer deciding you’re worth keeping around long enough for him to become your friend). Despite limiting the discussion of his relationship with his wife to slightly beyond how they met to respect her privacy, there are some surprisingly emotional personal stories. He talks about being publicly wrong about the effects of the 1982 Mexican debt crisis and his son’s battles with bipolar disorder, lightening it up with some entertaining drama–he once punched his boss in the face. He was fired for a different reason.

How to use Principles

  1. Slow down your thinking so you can note the criteria you are using to make your decision.
  2. Write the criteria down as a principle.
  3. Think about those criteria when you have an outcome to assess, and refine them before the next “one of those” comes along.

An ex-girlfriend of mine hated whenever I referred to something as a principle, and even more so when I stuck to them.

If Ray Dalio were dating my ex he would have said, “While such decisions might seem too erudite for your taste, you will make them either consciously or subliminally, and they will be very important.” I can’t replay history, but if I’d have said that, I think the relationship would have ended at “erudite”.

“People who have shared values and principles get along. People who don’t will suffer through constant misunderstandings and conflicts.”

Here’s the thing, like the guy who realized he was speaking in prose his whole life, we all have a guiding philosophy whether we know it or not. How much you tip waiters, how you handle disagreements, if you drive slowly in the left lane; these are all reflections of your principles regardless of what you call them. Although principle as a word and decision-making as a term are both abstract and mean nothing, you eventually realize that everything you do is a decision and it’s guided by a blend of conscious & subconscious thoughts and habits. Ultimately, working to improve decision-making is extremely practical.

Therefore, the most important thing is that you develop your own principles because if you accept prepackaged ones without giving them much thought, you risk living inconsistently with how you really feel, which probably won’t work out well. This is like small children espousing political beliefs, obviously regurgitating something they heard from their parents. When a kid does this, it’s cute. When an adult does, it’s dangerous.

He also emphasizes the importance of writing them down and wishes people like Steve Jobs and Leonardo da Vinci wrote theirs down. For those who find writing anything down weird, we’ll dedicate an entire post to the benefits of writing your thoughts down. For those who already write, consider adding a Decision Journal (whenever you make big decisions (new job, to move, making an investment, etc.) write down your thought process during it so you can review it later and see if you got what you wanted from your decision).

I think people allow the underlying reasons for their actions to go unexamined because it is either scary/uncomfortable to think about why we do a lot of things, and it could be viewed as unimportant if things are “just fine” the way they are. Dalio would respond to this by saying the most rewarding life comes from reaching your potential and you aren’t going to get there without reflection and discomfort. Living a comfortable life, as opposed to committing to your own painful goal machine, is neither worse nor better, if it works for you. I had a conversation about this recently. If you saw a friend you cared about sitting on a couch, doing nothing else for an entire week, and he said he was so content he couldn’t imagine anything else that could make him happier, you would be a little skeptical. That skepticism is rooted in you having experienced things that are better than sitting on the couch, and you want him to share in that joy. Without putting words into Dalio’s mouth, I think that’s his underlying belief, and he has simply taken it to the extreme in how he lives his life and operates his company.

“For all those reasons, I cannot say that having an intense life filled with accomplishments is better than having a relaxed life filled with savoring, though I can say that being strong is better than being weak, and that struggling gives one strength.”

“Encountering pains and figuring out the lessons they were trying to give me became sort of a game to me. The more I played it, the better I got at it, the less painful those situations became, and the more rewarding the process of reflecting, developing principles, and then getting rewards for using those principles became.”

Who to Trust?

You should be skeptical when you read anything, and this is no different. It reminded me of famed physicist Richard Feynman’s idea that if it disagrees with experiment, then it’s wrong. Dalio encourages everyone to poke holes in his thinking. He doesn’t care if the right answer comes from someone other than him, but he wants the right answer. I would like to be a fly on the wall at Bridgewater when he acknowledges someone has a better idea than him and watch how graceful that process is.

He even goes so far as to say knowing when not to make your own decisions is one of the most important skills you can develop. This is a balancing act between independent thinking and seeking wise counsel.

The book proposes the best standardized bullshit detector I’ve ever come across, which is applicable in all environments. “Believable parties are those who have repeatedly and successfully accomplished something–and have great explanations for how they did it.” 

It’s impossible to overstate the value of clarity and experience. If you can’t explain it, you don’t fully understand it. He makes this point several times, but my favorite is when he imagines a group getting a lesson in how to play baseball from Babe Ruth, and someone who’d never played the game kept interrupting him to debate how to swing the bat. Would it be helpful or harmful to the group’s progress to ignore their different track records? Treating all people equally is more likely to lead away from truth than toward it. But at the same time, all views should be considered in an open-minded way, though placed in the proper context of the experiences of the people expressing them. In his hypothetical scenario, he suggests having a Q&A after Babe Ruth finished explaining.

How to Argue

  1. Put our honest thoughts out on the table,
  2. Have thoughtful disagreements in which people are willing to shift their opinions as they learn, and
  3. Have agreed-upon ways of deciding (e.g., voting, having clear authorities) if disagreements remain so that we can move beyond them without resentments.

Basically, go find the smartest people you know, tell them your ideas and what you’re thinking and ask them if they disagree with you. If they do, you have an opportunity to learn. You should at least try to understand their reasoning.

This requires you to detach your ego/identity with your ideas. The way to tell you are doing this is if you remain calm when you are debating and/or wrong. Imagine if all debates (e.g. presidential, media, personal) required each party to stand in separate soundproof booths with microphones and they cut off at a certain volume threshold so nothing could be heard until the person lowered their voice to an appropriate volume.

Peter Thiel’s favorite interview question is: What is something that is true that almost nobody agrees with you on? We won’t spend much time on Thiel today, but this section of the book reminded me of my answer to his question: Disagreements are good, if you are open-minded. I argue almost exclusively with people I like. Why? Because I care about their thoughts and want them to challenge mine. Arguing with people in the confrontational sense is a fool’s errand. Arguing with people in the truth-seeking sense is beautiful. The distinction is adopting an attitude of cooperation towards the topic as opposed to demonstrating superiority. Conversation is plainly the real word, but I use argue to acknowledge the reality that it’s impossible to have the same ideas as someone on everything. Handling that in a real way instead of sweeping it under the rug in superficial agreement is the basis for a genuine relationship. Ego detachment opens the door for calmness and the calmness leads to clear thinking and that leads to all sorts of good things.


Dalio’s mindset towards work is: we have the best chance of succeeding if the best idea wins every time. Everything above applies to this goal. If you can do something, that’s great. If you can’t, learn or find someone who can.

Creating this type of company or culture may be unobtainable or unrealistic for many. The prerequisite ingredients alone are rare, much less the execution & maintenance.

If you’ve worked at a big corporation, you may be laughing at the prospect of managers even acknowledging reality within their department, much less them actively looking for ideas better than theirs. It’s equally unusual to find employees openly professing their weaknesses in an effort to get the best possible idea out there, especially if that “best idea” means someone else gets promoted over them or that they are unnecessary to the company. It sounds good on paper, but even if you get past the fact that most people understandably care more about their own well-being than a company’s, you still have big obstacles.

It says a lot about the state of affairs when it’s controversial to be transparent and honest.

“But while almost all of us quickly agreed on the principles intellectually, many still struggled to convert what they had agreed to intellectually into effective action. This was because their habits and emotional barriers remained stronger than their reasoning.”

It’s all too easy to see how difficult Dalio’s concepts are to implement, which is why I think it’s more practical to factor them in while developing your personal principles. In a work context, you need to be the founder/CEO to have any real chance at comprehensively incorporating them. Or go work for Bridgewater.

Here’s a summary of the work tools/apps Bridgewater uses (complementing the book, Dalio is going to release versions for the public):

  • Baseball Cards: Each employee has a card that lists their stats. Spoiler alert, this wasn’t initially well-received.
  • Issue Log: Primary tool for recording mistakes and learning from them
  • Dot Collector: An app used in meetings that allows people to express their thoughts and see others’ in real time. Participants continuously record their assessments of each other by giving them “dots,” positive or negative, on any number of several dozen attirbuts.
  • Pain Button: An app allowing you to record the emotions they’re feeling in real-time, then come back at a later time to reflect on them
  • Dispute Resolver: App that asks a series of questions used to guide people through the resolution process
  • Daily Update Tool: Brief email of what they did that day, issues pertaining to them, and their reflections
  • Contract Tool: App that lets people make and monitor their commitments to each other.

I admire his ability to walk the walk here. Admittedly, I’ve never created, nor particularly desired, this level of accountability for anything. It’s an idea carried to its logical extreme, in the same way that Michael Jordan carried the idea of being good at basketball to a logical extreme.

Oh by the way, he literally takes all of these principles and builds them into algorithms so that computers are making the investment decisions and he’d like to get them making hiring & firing decisions, too. The skeptic in me thinks he is going to use the data from the apps to find top talent and/or use it as a database for Bridgewater.

Final Thoughts

Dalio attributes much of his success to Transcendental Meditation, which he has practiced for 30+ years. Nothing of any substance he advocates for is possible without making time for reflection.

Even though the book is largely about his life and principles, one of my favorite passages is his timely perspective on geopolitics.

“Most people who haven’t had direct contact with the leadership of their own and other countries form their views based on what they learn in the media, and become quite naive and inappropriately opinionated as a result. That’s because dramatic stories and gossip draw more readers and viewers than does clinical objectivity…As a result, most people who see the world through the lens of the media tend to look for who is good and who is evil rather than what the vested interests and relative powers are and how they are being played out.”  

I feel like that quote is going to hang around for a while.

Throughout his life, he found himself at big moments wanting two seemingly incompatible things. As someone who loves nothing more than having his cake and eating it too, I was particularly curious how he goes about such situations: slowly and creatively. This could be considered useless advice, but I’ve seen the power of slow progression. “Slowly” is the answer for a lot of things, including the related topic of circularity (chicken & egg) problems which have been on my mind the past year or so. Since management strategy & circularity is right in Venkatesh Rao’s wheelhouse, I hope he reads the book and provides his own review.

Most visitors to this thought sanctuary already know there’s no such thing as a “life secret”. There is the connecting & executing of ideas that are readily available to those seeking them. That’s the beauty of his advice, if you figure out what the right decision is and you have the courage to make it, your life will be better. It’s all about the execution.

Know that the most constant struggle is between feeling and thinking.

Ultimately, this is a book about tough love. I hope you struggle well.

See Also:
Is Bridgewater a Fraud? (unlikely, but always consider the other side right?)
Ray Dalio’s Ted Talk

Designing Your Life


verb  de·sign \di-ˈzīn\

1: to create, fashion, execute, or construct according to plan
2: to plan and fashion artistically or skillfully
3: to intend for a definite purpose

There is only one success in life — to be able to spend your life in your own way. 

— Christopher Morley 

The chains of habit are too light to be felt until they are too strong to be broken.

— Warren Buffett

When you were in elementary school and your teacher asked you to draw a picture of your life on a blank sheet of paper, your Crayola stick figures probably weren’t on the phone with AT&T asking them in restrained deep breaths to explain how your phone bill is different every single month. Nor were they likely choosing between different door knobs at The Home Depot on a nice little Saturday. 

I was lucky if I was well-behaved enough to even participate in the drawing activity, so now that we’re all adults let’s revisit the idea. One problem with asking young people to draft their futures is they have no idea what possibilities are available. This is the basis for travel, knowledge, and experience. How can you know what you want if you don’t know it exists? If you lived in the US before 1980, there is a good chance you had never eaten sushi. Take my eyes but not the sushi.

The rapid pace of technological developments makes predicting our opportunities even harder. Take virtual reality. Although the foundations were set long ago, the impending widespread use is something relatively few people outside Silicon Valley were aware of five or ten years ago. Whether it’s sushi or VR, the more familiar we make ourselves with the physical, social, and cultural aspects of the world, the more capable we are to label our wants, and thus get them.

When I look around I see that some people have better lives than others (it’s amazing how reluctant people are to explicitly acknowledge this and will inevitably be a topic we explore in-depth later). Of course each person’s genetics, environment, & relative positioning within that environment are critical. If your dad is Shaq, you’re going to be tall. If you were born in the US, you have access to air conditioning and medicine. If your mom is the CEO of the corporation you want to work for, guess who’s getting that summer internship.

Having said that, there’s room for decision making in determining outcomes. The problem is, most people shape their lives without knowing it through the decisions they make every day. I can’t seem to shake this theme. Even people that seem like they don’t have choices do. Nelson Mandela spent 27 years in prison and he still found time to run a country, abolish apartheid, and get Morgan Freeman to play him in a movie.

You make thousands of decisions every day. How many times to hit the snooze button, who to email, call and visit, what websites you go to, number of cartons of Halo Top to eat, and so on. If we have control over these micro-decisions, do they add up over time to something more meaningful, and can we steer them in a direction that leads to only having the people, things and experiences in our life that we want? If so, would it make sense to consciously figure out what we want ahead of time? This is what I mean by designing your life.

It’s like a bucket list, but for while you’re living normally, not just before you die.

Like any idea, this can be carried to extremes. Our actions are rarely insulated to ourselves, so don’t mistake this to be suggesting that you surround yourself with people who enable you to live in your own unchecked fantasy (you know someone who does this and it’s not a good look). Having said that, the people you have in your life profoundly impact the quality of it and I’ve found that I generally want to avoid the type who stand under waterfalls and complain about being wet. We’ll find the right balance.

The only reason this idea justifies an essay is because of the second & third-order effects. It’s quite obvious that everyone wants what they like and they generally make decisions they think will get them those things. However, it gets a little nuanced when 1) we don’t know ourselves and therefore our true wants and/or 2) choosing something we want today means in 5 years we won’t be able to have 10 things we want then. Let’s make sure we’re on the same page with order effects. Take exercising. First-order effects are sweating, exhaustion, and some level of euphoria. A second-order effect would be better posture, or not panting after walking up a flight of stairs. A third-order effect would be lower lifetime healthcare costs due to improved health which frees up time & cash for you to do and buy other things.

People usually start doing something for first-order reasons, but down the road through an accumulation of the small decisions we mentioned earlier, end up somewhere else due to the second- or third-order effects–sometimes undesirable. The opposite is also possible. In our future life drawing, we may have been incapable of imagining a future job as an electrical engineer or sommelier (sign me up), but through continuous iterations of deciding what we like as we go through more experiences, we end up somewhere with a previously unimaginable & desirable result. I suppose if you stand behind every decision & action you ever make then who cares where you end up?

Here’s a hypothetical, but useful, example of things getting away from us. Suppose a guy says, “I want a big house in a good school district because my wife wants one, that would be great for my family, and that’s what people do.” Well, pretend it’s slightly outside the budget, the mortgage payment stresses him out on a daily basis, and he’s at work too long trying to pay for it. Therefore, he never spends time with his wife and kids. Each time something breaks, his face gets a shade more red. Multiply this daily routine by a few years. Gets divorced, sells the house, and the kids become Tennessee Volunteers fans (Go Dawgs). Complete misery.

As a reminder, I have nothing against houses. I use them as examples because they are ubiquitously relatable to most Americans. In fact, your housing and where you live are essential components of designing your life. Winston Churchill nailed the idea mid-cigar when he blew out a contemplative cloud of smoke and said, “First we shape our buildings and then they shape us.”

Two central premises to this are the importance of time and agency over your life. Those who don’t feel the clock of their life ticking or often feel like victims of circumstances will not find this concept compelling.

There are two general approaches to designing your life:
1) being selective about each addition to it (harder on the front-end–try resisting Netflix or french fries)
2) experience as much as possible and cutting out/replacing the ones you don’t want (harder on the back-end–try deleting Facebook, permanently ending a toxic relationship, or even worse, trying to reverse irreversible outcomes). In design, there’s an idea that when you are trying to make something beautiful (for instance a bedroom), first remove everything that is ugly. This is a useful heuristic, especially for older people who are unsatisfied, but don’t know where to start. Ask: What do I dislike the most about my life?

Regarding #1, Warren Buffett says, “The difference between successful people and very successful people is that very successful people say “no” to almost everything.” Don’t go watch Yes Man right after reading this or you’ll be stressed out for the rest of the day. The quote has layers of meaning to it, but the relevant point is there are so many things competing for your attention, if you are always saying yes you’re spreading yourself too thin and you are by definition not focused. I practice what I preach, but this one is difficult for me.

I’ll use an easy example in my own life for #2. When I first started working, I wanted to be Frugal Fred and save money, so I ironed my own shirts. I hate ironing shirts. As one of the world’s worst/most distracted ironers, I can probably iron 5 shirts an hour because I watch stand-up comedy on Netflix while I do it. There’s pathetic and then there’s 5 shirts an hour pathetic. I decided to deploy what economists call comparative advantage and let the professionals do it for $1.25/shirt. If you don’t already do this, you should quantify how much your time is worth (working) per hour and what a reasonable threshold is to outsource chores and routine tasks, because once you’re putting significant amounts of energy into your craft/occupation, saving $6.25 when you could be recharging is simply not worth the energy. Mathew McConaughey’s threshold is higher because in an hour he can make $100,000 shooting a Lincoln commercial. No idea if that number is right, but you get the idea. Star Cleaners is better off pressing my shirts and I’m better off not having interruptions so I can focus on the things I want to focus on. What optimists call a win-win.

Once you pick your approach, it sounds alluringly simple: Imagine your life exactly as you want it. Then make decisions that get you closer to that. However, readers will notice that constraints, trade-offs, and discipline have either been implicit or explicit in every post so far. There will be blood.

It can be as simple as if you hate traffic, get a place close to work. If you hate work, spend time outside of work deserving the job you want. If you want to save money, don’t spend it all on rent, car payments, and going out. But we want it all. The place next to the office may cost more, your social life may be more important than your career, and so on.

This is where the decision-making part comes in and you figure out what you really want. It’s better to do this deliberately. Venkatesh Rao over at Ribbonfarm would caution against “getting trapped in imitative life scripts that may not work for you.” This is similar advice to “You do you” (which could be valid if it wasn’t mostly given at terrible times). In other words, if you try to copy the design of someone else’s life, it will likely disappoint.

We need feedback to determine the quality of our decisions. The feedback from our choices is often received fastest in our physical appearance and mood. Like our life, we can shape our body, getting closer to what we ideally want it to look and feel like. We control this with inputs, rest, exercise, skincare, et cetera. A medium- to long-term approach in these categories gets rewarded. Once you begin to see the cause-effect relationship in such a direct way, it gives you confidence to trust the process in planning longer-term, more abstract goals where the feedback is often delayed and sometimes invisible. For instance, if you want a strong vocabulary (abstract goal), the most effective way to achieve this is by reading the work of great writers. If you read one book, you won’t notice any effects. If you read 100, you will.

In the way I imagine it, designing your life entails taking steps to make each phase or season of your life better (abstract goal) than the one before it, however you define that. I’m sure we can agree that increasing degrees of freedom is better. There is a paradox here. When you were a kid you didn’t have a driver’s license and now that you’re an adult you don’t have to sit in a classroom for 7-8 straight hours like you did in school, so at least spatially, you have much more freedom. However, most adults would laugh at the idea that they have more freedom now. This is because of the way they have designed their life and the responsibilities their choices and circumstances necessitate.

For adults, freedom is almost synonymous with money. Although financially, it’s easier than ever to design your life, this convenience can get slippery. One day you buy something online. Next thing you know you have Amazon packages magically appearing on your doorstep every day. Good for Amazon, bad for your credit card statement.

As you can see from the few examples here, each seemingly compartmentalized part of our lives spills over into another, adding complexity, and there are infinite directions to take this idea. Your life is your canvas.

Occasionally, someone will say, “Not everything has to be so planned out JOSH, just go with the flow,” or something similar. This person either innocently misunderstands what I’m saying or more likely, has just realized how doing some of these things could have prevented pain. It’s crucial to be clear on these two possibilities. One, spontaneity is great. The best day of your life isn’t the day you plan to be the best day of your life. The entire goal of planning is to save time and give you flexibility, not cause stress. Relaxing is not wasted time. It could be argued that the goal of human activity is leisure time. In contrast, wasting time is doing something without a benefit. If you value a ton of time spent on the couch watching football and you can support that lifestyle, structure your life such that you can spend heaps of time on the couch watching football. For the second, mistakes happen. Some are fixable, some unfixable, some in our control, many out of our control.

We’re simply aiming for better-than-random conditions for ourselves. 

See also:
The Design of Everyday Things by Dan Norman

Algorithms to Live By: The Computer Science of Human Decisions
by Brian Christian & Tom Griffiths

Stumbling on Happiness by Daniel Gilbert

Where’s the bag?

Wisdom crieth aloud in the streets.
Proverbs 1:20

Floyd Mayweather, Jr. carries around a bag that has $1 million cash in it. He often has an entourage with him, and if he’s not carrying it, he frequently asks to no one in particular, “Where’s the bag?”

There’s a case to be made that this is dumb, and other reported & rumored things Floyd does are loathsome. But, I look for good ideas wherever I can find them and it reminded me of a piece of advice Warren Buffet received and reprinted in his 1970 Letter to Shareholders.

Dear Fred & Catherine [Buffett’s uncle & aunt]:

Over a period of a good many years I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash. I have known people who have had to sacrifice some of their holdings in order to have money that was necessary at that time.

For a good many years your grandfather kept a certain amount of money where he could put his hands on it in very short notice.

For a number of years I have made it a point to keep a reserve, should some occasion come up where I would need money quickly, without disturbing the money that I have in my business. There have been a couple occasions when I found it very convenient to go to this fund.

Thus, I feel that everyone should have a reserve. I hope it never happens to you, but the chances are that some day you will need money, and need it badly, and with this thought in view, I started a fund by placing $200.00 in an envelope, with your name on it, when you were married. Each year I added something to it, until there is now $1000.00 in the fund.

Ten years have elapsed since you were married, and this fund is now completed.

It is my wish that you place this envelope in your safety deposit box, and keep it for the purpose that it was created for. Should the time come when you need part, I would suggest that you use as little as possible, and replace it as soon as possible.

You might feel that this should be invested and bring you an income. Forget it — the mental satisfaction of having $1000.00 laid away where you can put your hands on it, is worth more than what interest it might bring, especially if you have the investment in something that you could not realize on quickly.

If in after years you feel this has been a good idea, you might repeat it with your own children.

For your information, I might mention that there has never been a Buffett who ever left a very large estate, but there has never been one that did not leave something. They never spent all they made, but always saved part of what they made, and it has all worked out pretty well.

This letter is being written at the expiration of ten years after you were married.


The letter was written in 1940 and Buffett found it in 1970 (with the $1,000 still there haha). To modernize the advice, using an inflation calculator I found on Google, $1,000 in 1940 is equivalent to $17,623 in July 2017. Buffett’s company, Berkshire Hathaway, takes it a step further than Floyd, and keeps $20 billion. We can tailor our number to our individual circumstances. I like the advice (including the safety deposit box) precisely because it feels unnecessary and inconvenient.

Can you imagine one day waking up and getting an email from your bank, “Sorry, we got hacked. We think you had $x in your account. You’re prolly not getting it back. Hopefully the FDIC has you covered. Maybe check out Bitcoin. If the power hasn’t gone out. Peace & Blessings.”?

“Where’s the bag?” -You, next year


Jiro Dreams of Sushi is the best movie about Steve Jobs ever made. 

— Chris Dixon

Take a moment to consider the following: What is quality? When you drive by Wendy’s and see “Quality is Our Recipe” on the sign you know they’re full of shit, but why? This is the paradox: we all have an intuitive sense of what “quality” is, but it’s difficult to define, and if we can’t define what it is, how can we pursue it?

When my best friend told me Robert Pirsig’s book, Zen & the Art of Motorcycle Maintenance: An Inquiry into Values (“ZAMM”), tries to answer that question, my eyes stretched wide open because the theme had been on my mind for a while and I was intrigued that someone had put a book-length effort into thinking about it 15 years before I was born.

The book title initially confused me because it turns out it’s not really about Zen or motorcycle maintenance–it makes more sense to think of Zen as living in the moment and motorcycle maintenance as rational thought. The narrator explores how we can combine artistic free-thinking creativity and the reason & logic of technology through a 17-day motorcycle trip from Minnesota to Northern California with his son. The thought is to be so engaged in what you’re doing that you become one with it. For example, it’s hard to imagine Jimi Hendrix without a guitar. Pirsig’s guitar is a motorcycle and the metaphor for his story.

Since then, I have read the book and later stumbled on Paul Graham’s essay Taste for Makers, in which he tries to answer the question: “how do you make good stuff?” Like when you are buying a new car, you actively notice everything about cars, I couldn’t help being on the lookout for quality.

Quality materials last. Quality people are trustworthy. Quality decisions rely on logic, courage, and intelligence. Regardless of what we’re talking about, there is an insatiable appetite for quality.

I thought about Jiro Dreams of Sushi, a phenomenal documentary available on Netflix about one of the world’s greatest sushi chefs. The parallels were hard to ignore. The opening scene of the film shows Jiro writing in Japanese and he says, “Taste is tough to explain, isn’t it?” The opening quote by Chris Dixon succinctly draws the comparison between Steve Jobs and Jiro in that they obviously have drastically different products (personal electronics & sushi), but the level of passion they have invested in perfecting them is nearly identical.

Pirsig, Graham, Jiro, and Jobs. A philosopher, venture capitalist, chef, and a technologist. They are all pursuing the same thing, just using different means and different words. Graham’s, being a 16-page essay, and Jiro, a movie, are more approachable, while ZAMM is a philosophical text (easier to read than most) thinly disguised as a novel. The underlying idea here deeply resonates with me and I think that a fulfilling life is dependent on the pursuit of quality, taste, or whatever we call it. What’s funny, is I used to think I wanted to be happy. But, what I realized is that satisfaction is actually superior to happiness because you can’t pursue happiness directly. Happiness is what’s left after you’ve done something else. I’d imagine that a NY firefighter on 9/11 would not describe himself as happy, but would feel fulfilled and satisfied by saving lives. There’s a lot here, so we will probably expand on certain ideas in the future. For now, let’s figure out how quality fits into our lives and how it can enhance them.

For better or worse, it’s nearly impossible to talk about quality without getting into epistemology (theory of knowledge) because when you say “good” it is kind of in-between subjective and objective. Your 6-year-old son may be good for his recreational basketball league, but Lebron James is good period.

I think what turns people off from philosophy are two related things:

1) it rarely proves anything (which is ironically interesting)
2) after a few minutes the conversation often drowns in a pool of abstraction and loses application to your day-to-day life. Perhaps we can summarize the sentiment with, “Whether the chair exists or not, we still have to go to work.”

Pirsig tries to maintain the casual reader’s interest by using Chautauquas: old-time series of popular talks intended to edify and entertain, improve the mind and bring culture and enlightenment to the ears and thoughts of the hearer (cough, the entire goal of this blog, cough).

Since Pirsig & Graham did the heavy lifting already, their ideas and quotes are going to serve as the basis for the post and I’m going to chime in with some thoughts along the way. Graham’s writing style is one of the best in the world. He tactfully acknowledges why a politically correct sentiment exists and then gets to the core of an interesting idea in plain language.

Saying that taste is just personal preference is a good way to prevent disputes. The trouble is, it’s not true. You feel this when you start to design things.

Whatever job people do, they naturally want to do better. Football players like to win games. CEOs like to increase earnings. It’s a matter of pride, and a real pleasure, to get better at your job. But if your job is to design things, and there is no such thing as beauty, then there is no way to get better at your job. If taste is just personal preference, then everyone’s is already perfect: you like whatever you like, and that’s it.

As in any job, as you continue to design things, you’ll get better at it. Your tastes will change. And, like anyone who gets better at their job, you’ll know you’re getting better. If so, your old tastes were not merely different, but worse. Poof goes the axiom that taste can’t be wrong. -Paul Graham, Taste for Makers

His delivery is light, but the challenge is real: Be better than you were. He then goes on to describe the principles behind good design.

This theme of self-improvement is natural to us, but it feels more inspiring when coming from people at the top of their field.

I do the same thing over and over, improving bit by bit. There is always a yearning to achieve more. I’ll continue to climb, trying to reach the top, but no one knows where the top is. -Jiro Ono

My favorite scene in Jiro is an interview with one of his tuna vendors, Hiroki Fujita, at the fish market. Fujita says, “I either buy my first choice, or I buy nothing. If ten tuna are for sale, only one can be the best. I buy that one.” In-between the lines is the implication that you need to know tuna well enough to know the difference. To know what you want, to know it when you see it, and to pursue it exclusively. Do you know what you want, would you recognize it if you saw it, and would you say no to almost everything else to get it?

(From here, unless otherwise noted, block quotes are from ZAMM.)

P. 8 “What’s new?” is an interesting and broadening eternal question, but one which, if pursued exclusively, results only in an endless parade of trivia and fashion, the silt of tomorrow. I would like, instead, to be concerned with the question “What is best?,” a question which cuts deeply rather than broadly, a question whose answers tend to move the silt downstream.

What is best is tricky. We all want the best tuna. Realistically, we should qualify it and say: What is best, given a set of constraints? If I required the best every time I had a late-night pizza craving, then I’d need to go to Italy (or Chicago), on a G6, with Chesley “Sully” Sullenberger flying it.

Having said that, “best” does not necessarily mean most popular or most expensive. Twilight sold about 120 million copies and most Pulitzer Prize winning books sell under 1.5 million copies. You can have a quality toothbrush that you spent $4 on and a lemon car that costs $50,000. Now, often the best becomes both popular and expensive because word gets out and if more people want it, the product or service will likely cost more.

Regarding material items, functionality and durability are important elements of quality. If you wear a $1,000 jacket 1,000 times ($1 per use), I’d argue that is less expensive than a $500 jacket that wears out after wearing it 10 times ($50 per use). Filson and Patagonia are good examples of this concept, which reminds me of an old Russian proverb: We’re not rich enough to buy cheap things.

P. 27-28 We were all spectators. And it occurred to me there is no manual that deals with the real business of motorcycle maintenance, the most important aspect of all. Caring about what you are doing is considered either unimportant or taken for granted.

Whether it’s a friendship, a garden, or an Excel spreadsheet, caring about what you are doing is arguably the most important attribute you can have because of how much it encapsulates. With sushi, you could say, “It’s just a piece of fish on top of rice.” That dismissive line of thought is deceptive though. Although the statement is true on the surface, watch the movie and see if you think there is a difference in the level of care between the fish on rice on a conveyor belt compared to the fish on rice at Jiro’s restaurant. Caring is like authenticity, there are no shortcuts and tends to require a significant time investment.

P. 28 I don’t want to hurry it. That itself is a poisonous twentieth century attitude. When you want to hurry something, that means you no longer care about it and want to get on to other things.

Hurrying, and the related concept of being busy, is not just a poisonous twentieth century attitude…it survived Y2K and came right into the 21st. You rarely catch yourself rushing the important things and you always make time for the ones you care about the most. At Jiro’s restaurant, “after about ten years, they let you cook the eggs.”

Pirsig was a creative & technical writing professor for a brief period of time. If you read the book, you get the sense that although he had the best intentions and thoughts as a father and professor, he probably didn’t come across as good at either at the time.

P. 176 And he became convinced that all the writers the students were supposed to mimic wrote without rules, putting down whatever sounded right, then going back to see if it still sounded right and changing it if it didn’t.

Rules are alluring because they provide a step-by-step guide to get what we want and processes are usually helpful. However, I can’t think of a single person who I would consider great who simply followed a set of rules. Instead they worked on their craft until it felt right. Going with your gut is a terrible strategy for accounting, but critical for design and creating. This gut feeling comes from getting the reps in. One of Jiro’s apprentices said, “He gives me advice. But, there is much you can’t learn from words. I have to keep practicing.”

P. 209 What he meant by Quality was obvious. They obviously knew what it was too, and so they lost interest in listening. Their question now was “All right, we know what Quality is. How do we get it?”

He singled out aspects of Quality such as unity, vividness, authority, economy, sensitivity, clarity, emphasis, flow, suspense, brilliance, precision, proportion, depth and so on; kept each of these as poorly defined as Quality itself, but demonstrated them by the same class reading techniques.

It doesn’t make a bit of difference how you do it! Just so it’s good.

It impresses me when someone says something so eloquently I think to myself “Oh that’s exactly how I would have said it,” when in fact I couldn’t say it anywhere close to as well as them. This ties into his “taken for granted” comment above. Dismissing the concept as obvious is precisely why so many people fail at it. Graham goes a bit further in his characteristics, giving us more concrete examples and hints at how we can go about achieving them.

Everything we have talked about so far has been inwardly focused, so we have to be honest with our motives. Graham says the greatest masters go on to achieve a kind of selflessness.

P. 212 Any effort that has self-glorification as its final endpoint is bound to end in disaster. When you try to climb a mountain to prove how big you are, you almost never make it. And even if you do it’s a hollow victory. In order to sustain the victory you have to prove yourself again and again in some other way, and again and again and again, driven forever to fill a false image, haunted by the fear that the image is not true and someone will find out. That’s never the way.

(Insert flushed face emoji)

P. 218 And interestingly [without Quality], comedy would vanish too. No one would understand the jokes, since the difference between humor and no humor is pure Quality.

I’m going to get this quote tattooed in Chinese on my lower back.

P. 310 Of the value traps, the most widespread and pernicious is value rigidity. This is an inability to revalue what one sees because of commitment to previous values. In motorcycle maintenance, you must rediscover what you do as you go. Rigid values makes this impossible.

Robert Pirsig was talking about Confirmation Bias in 1974 long before it was trendy. We talked about this in an entire post here. Graham says Good design is redesign and “it takes confidence to throw work away.”

Suppose we have gotten past Confirmation Bias, we are willing to overturn closely held ideas and previous values, and everything else that goes along with Pirsig’s rediscovery process. No matter how adaptable we may be, somewhere along our journey we will reach a point where there is no readily available solution and there is no good outcome. Pirsig calls this being stuck. I loved this part of the book because we are so often tempted to rationalize away bad circumstances. Sure we can learn from failure, no it’s not the end of the world, but sometimes things are objectively bad at that particular point in time–no silver linings. He offers some guidance for this situation:

P. 311 …well…just stare at the machine. There’s nothing wrong with that. Just live with it for a while.

Of the people I have met and know, several are highly uncomfortable being mentally still. It’s important to distinguish being still from being lazy or boring. I believe the reason for this is that in the absence of distractions, people are confronted with the real issues or questions in their life that need to be addressed. This can be scary. However, I think part of the rise in popularity of yoga and meditation is because putting the body to work on a prosaic task (yoga, chopping wood, cleaning) that requires minimal effort allows the rest of the mind to reflect. We all need this.

P. 325 The real cycle you’re working on is a cycle called yourself. The machine that appears to be “out there” and the person that appears to be “in here” are not two separate things. They grow toward Quality or fall away from Quality together.

P. 164 The ultimate test is always your own serenity. If you don’t have this when you
start and maintain it while you’re working you’re likely to build your personal problems right into the machine itself.

If you’ve ever gotten mad at an inanimate object, you understand this at least to some degree already. Everything you work on is a reflection of yourself. It took me ~25 years to figure this out because I also believe that which isn’t worth doing, isn’t worth doing well. Figuring out what to do is often at least as hard as the actual doing.

P. 386 It is an immortal dialogue, strange and puzzling at first, but then hitting you harder and harder, like truth itself.

When you find out there is something wrong with the cycle called yourself, it tends to make us angry. If it makes us angry enough, we’ll pretend there is nothing wrong with the cycle and you can imagine how that impacts where we are going.

This is something to think about in doses. Pirsig thought about this stuff so much it drove him insane.

By this point, the content of this excerpt from a Playboy interview of Steve Jobs in 1985 will sound familiar:

Playboy: Does it take insane people to make insanely great things?

Steve Jobs: Actually, making an insanely great product has a lot to do with the process of making the product, how you learn things and adopt new ideas and throw out old ideas. But, yeah, the people who made Mac are sort of on the edge.

Playboy: What’s the difference between the people who have insanely great ideas and the people who pull off those insanely great ideas?

Jobs: Let me compare it with IBM. How come the Mac group produced Mac and the people at IBM produced the PCjr? We think the Mac will sell zillions, but we didn’t build Mac for anybody else. We built it for ourselves. We were the group of people who were going to judge whether it was great or not. We weren’t going to go out and do market research. We just wanted to build the best thing we could build. When you’re a carpenter making a beautiful chest of drawers, you’re not going to use a piece of plywood on the back, even though it faces the wall and nobody will ever see it. You’ll know it’s there, so you’re going to use a beautiful piece of wood on the back. For you to sleep well at night, the aesthetic, the quality, has to be carried all the way through.

It’s been several years since I read Steve Jobs’ biography, but it sounds like he read ZAMM.

I wonder how Jiro would respond to the same question about insane people and great products? Jiro and his employees memorize the seating chart of the guests of the restaurant by gender before they arrive, so that the women are served slightly smaller portions than the men in order to keep a harmonic pace to the meal, ensuring everyone finishes at the same time.

Most people like interviews and profiles of successful people because they potentially offer insights into the traits that caused their success. So, let’s say there’s a spectrum of personality traits and on one end is living-in-the-moment and at the opposite end is rational analysis we alluded to above. It is likely that we lean towards one end or the other and have a tendency to at least subconsciously think people who are more of the other type just don’t get it, which can’t be the case. If we can gravitate towards the center over time, I think we’ll have a higher quality of life regardless of whether we maintain motorcycles, create the next iPhone, or make the best sushi.

A focus on quality is an end in itself, but it has additional second-order benefits, too. It will filter your true wants. If the quality of something is not that important to you, you probably don’t need much of it in your life. This reduces the number of things you want, which almost literally means you’ll be happier.

Go for quality.

See also:
Zen and the Art of Motorcycle Maintenance
Paul Graham’s Taste for Makers essay
Playboy Interview with Steve Jobs (1985)
Let My People Go Surfing by Yvon Chouinard (founder of Patagonia)
Satisfaction by Gregory Berns
Man on Wire (documentary)


50+ Shades of Gray: Opinions, Mental Models, & Probability


I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.

— Charlie Munger, Vice Chairman of Berkshire Hathaway


Since no one really talked about this past election, and politics are rarely an emotive topic, let’s use that to introduce the subject of today’s conversation (trust me, we won’t stay long). Whether you voted for the Mad Mango, The Criminal, or Francis Underwood, I am indifferent. What is much more interesting is the step before: our decision making framework, and how it affects what we do and choose. Before the election, across different states, countries, people, and age groups, I heard similar sentiments and shockingly similar sentences used to describe why people were voting for a particular person. Some people talked about rationally-considered pros and cons of the situation. Many more had an opinion on topics that not only appeared to be insignificant in relation to the country’s real issues (if someone starts talking about bathrooms, I start wondering what they are distracting me from thinking about) or seemed to ignore a candidate’s ability to execute on promises (classic), but those opinions seemed to be immovable the moment they left the lungs. The rhetoric & villains were getting all too predictable. The first thing we must acknowledge is that this is a complicated system we are in and it absolutely requires latitude in our thought. An inflexible thinker in life is comparable to an inflexible gymnast in the Olympics.

If stubbornness were wine, ignorance would be the grapes. Have you noticed you cannot reason someone out of something they did not reason themselves into? Given that each of us is more likely to be persuaded by the ideas we discover on our own than from other people, if there is one area where we can hold our proverbial horses, it is in the initial formation of our opinions and ideas. Let’s become comfortable with saying “I don’t know” for a while. Why? First, Munger’s quote above. It should be on the ticker of every news station and inside every fortune cookie (in bed). Second, with 7 billion people on the planet, there are simply too many things happening to have an opinion on each of them. Third, the easy problems have been solved, leaving us with the harder ones with less clear answers. Fourth, once we form an opinion, we hold onto it and the only way we let go is if someone pries it from our dead, lifeless fingers. Finally, I think the truth is often difficult and that any improvement in our appreciation for nuance makes our society better. I’m not talking about a better society in the abstract Let’s Love Everyone sense. I’m suggesting that we have a responsibility to spend adequate time and energy developing our ideas and to effectively commit to lifelong learning, because my guess is that the average reader here is under 30, and we are not going to get very far based on what we already know. If we do this we will each receive a (yuge) personal benefit, sure. But it will generally be a net positive for everyone else, too. We will reduce the number of people who confidently answer questions about which they don’t have any real knowledge.

When I talk about this idea, occasionally I’ll hear the fingernails on the chalkboard: “Everyone is entitled to their opinion.” No. No, they are not. If this is a belief of yours, spend 10 minutes on Facebook and get back to me. Let’s say someone asks you and me what the marginal tax rates should be and you have spent 30 years trying to figure this out and this is the first time I’ve thought about it. Our opinions are not equal and I haven’t earned the right to say much on the topic. “Well that’s just my opinion” requires no further justification when we’re talking about the best burger in Dallas (Maple & Motor), but more serious things require more homework.

As more time is spent on any one thought, serious thinkers start bumping into paradoxes. Have you tried getting a black and white answer on a topic from an expert? It’s harder than convincing your friend not to text their ex. Easy example: Is coffee good for you? The answer is unexciting: it depends (on several things, including the definition of good). Wars don’t get started and magazines don’t get sold over “it depends” though. Of course, many things have objective answers. DNA carries the genetic information of a cell. A balance sheet must balance. La La Land Moonlight won the Oscar for Best Picture. The key, and potentially uncomfortable, realization we have to face is: Many areas outside of the hard sciences do not have “answers” and “facts” in the traditional sense, but instead entail a series of options along a continuum, with tradeoffs (shades of gray). The more objective answers we accumulate, the more equipped we are to assess those tradeoffs.

There are two main risks to walking down this path of deliberation and open-mindedness:
1) We eventually have to do something. We can’t just keep all of this in our heads indefinitely, we want to use it. This one is easier because we’ll often be told we need to do something faster than we do. You don’t just get in the car and drive to Chick-Fil-A. You avoid a lot of pain and agony if you first think about whether it’s Sunday or not.
2) Many people are trying to fool you. This is the bigger one– If we’re too open-minded we’ll end up in a cult with a lot of product warranties, organic pet rocks, and free cruises. So we should be skeptical of experts and marketing (future post), but we also must be mindful that if it’s an area largely unfamiliar to us, we have some old-fashioned work to do. I wish there was another way around this.

You may be thinking: he wasted 900 words (and we’re not done yet) to suggest we should know what we’re talking about and consider the other side of an argument. There’s more to it, and the thing that makes this polite suggestion effectively worthless is Confirmation Bias. We seek out information that (wait for it) confirms what we already believe. You don’t see protesters with signs that read: “EXCELLENT POINT! I HADN’T THOUGHT ABOUT IT THAT WAY BEFORE!!!!!” They’ve pounded the same ideas into their head for so long and only surrounded themselves with people like them that they’ve ruined their mind. I’m not in love with too many ideologies, but I can kind of empathize: if avocado availability were threatened, I’d be doing more than protesting.

The better, yet emphatically less popular, strategy is to seek out information that disconfirms what we believe. Now why in the hell would we do that? Because we want to be rational. How else are we going to figure out the truth if we are only exposed to a partial amount of information? This is a tall order considering new information is usually rejected due to an emotional or financial conflict, the tendency is to hold onto a belief long after it’s proven wrong, and the author F. Scott Fitzgerald’s most famous quote is about the rarity of people being able to function while holding two conflicting ideas in their head at one time. But we’re Generation Snowflake. We’re special.

In a previous post I said the number one book I would recommend is Poor Charlie’s Almanack and I mentioned mental models, but I didn’t define them. In it, Charlie shares how he believes acquiring worldly wisdom through the primary academic disciplines creates a “latticework of mental models.” Now, his principal reason for doing this is to appropriately value the future prospects of businesses better than other people so that he can make billions of dollars, primarily in the stock market. He has been doing this successfully for 50+ years.

Now, I assume many of you are more noble than I am. But, if making money is your cup of Kombucha and primary inspiration for this, we will probably expand on that in the future. Meanwhile, what guys & girls (& even gender-undecided) can get on-board with is the wide application of this concept beyond investing. It is impossible to say exactly what a business is “worth” because there are so many uncertainties, variables, and judgments required about the future, but its intrinsic value can arguably be estimated within a range. In investing, you’d rather be approximately right than precisely wrong. You don’t need to know a guy’s weight to know whether he is fat or not.

How about we apply this same mindset to everything? We may not know exactly what something like the minimum wage should be, but maybe we can understand the consequences and possible implications of it being $5/hour (riots) and the ones when it’s $20/hour ($50 cheeseburgers).

What are the models?

To the man with a hammer, every problem looks like a nail.

— Charlie Munger

A model is a representation of reality, not reality. Every idea in our head is just a model. We cannot at one time imagine the world, everything in it, and the functional relationships between those things. We have perspectives of the way we see it, which are based on a limited number of concepts.

Why should we care? The idea, concisely captured in the quote, is that one-dimensional thinking leads to us “torturing reality” to fit our current worldview (using our hammer on a screw). Developing a mental toolkit allows us to have more than one way of viewing the world, which gets us closer to reality. The latticework implies the concepts must lie on top of one another so that they are being used simultaneously (hard AF). If we have the most fundamental models, we basically create filters for the information we are increasingly flooded with while using the least amount of energy. Someone who spends a couple of months studying the underlying principles of economics is better suited to interpret new economic information than someone who has spent years reading shallow/topical economic news articles.

Here’s a list of the key disciplines and an example of a model from each that has broad applications (most of which can be found in a freshman level college textbook except the one I added at the end—don’t worry, I sold most of my $300 books back to the bookstore for $7 too):

  • physics (critical mass)
  • biology (genetics)
  • psychology (the 28 psychological biases & reasons for misjudgment)
  • economics (information asymmetry)
  • engineering (feedback loops)
  • history (patterns)
  • accounting (cash flow statement)
  • business (Porter’s 5 Forces)
  • chemistry (uncertainty principle)
  • computer science (if-then statements)
  • probability/statistics (normal distribution)
  • math (systems thinking)
  • law (burden of proof)
  • travel (culture & politics)

Now you and I are too busy to dedicate a meaningful portion of our lives studying physics, computer science, and chemistry. We need to be at brunch, checking memes on IG, or doing whatever else it is we want to be doing. So the obvious (only?) downside to this idea is the time commitment. But Rome didn’t learn mental models in a day. If we make a reasonable effort to nail down the most fundamental concepts at first and give ourselves a realistic timeline of maybe 5-10 years, we should be able to plant a pretty good set of intellectual seeds before our mid-thirties that we will reap benefits from for the rest of our lives. We only need to learn how to ride a bike once.

(If this idea is an absolute non-starter for you, you’re reading this at LIV in Miami trying to come down while people are shouting ANOTHER ONE at you in a DJ Khaled voice and you’re more likely to ask for a pay cut than learn about “mental models,” at least do yourself the favor and learn the 28 psychological biases.)


The correctness of a decision can’t be judged from the outcome.

— Howard Marks

You would think I’d stop after coming up with a 5-10 year syllabus for us, but let’s briefly touch on one of the important models relevant to our discussion: probability. Another old rich white guy I like reading is Howard Marks of Oaktree Capital. He influenced one of the biggest changes in the way I perceive the world: thinking about the future as a probability distribution (gray) rather than a fixed outcome that can be knowable in advance (black & white). He says, “Not being able to know the future doesn’t mean we can’t deal with it. It’s one thing to know what’s going to happen and something very different to have a feeling for the range of possible outcomes and the likelihood of each one happening. Saying we can’t do the former doesn’t mean we can’t do the latter.” Take for instance YouTube sensation King Curtis from Wife Swap with his chicken-nugget-heavy diet and “Bacon is good for me!” declaration. We don’t know what will happen to him, but we can safely assume his range of outcomes is unlikely to set any longevity records.

Take any situation that you can think of and how it worked out. Even though only one thing does happen, a lot of other things could have happened and those are important to appreciate. This concept is referred to as alternative histories. Let’s say we play a game where you have a 90% chance of winning and I have a 10% chance of winning. We play the game one time and I win. If a crowd was watching us without understanding the game, they may think I am better than you because I won. This is obviously a mistake. It doesn’t matter whether we play the game 1, 10, or 1,000 times, you are correct in playing against me every time regardless of the outcome. The only time this wouldn’t make sense is if there was a wager offered to me with greater than 9-to-1 odds (9x my money) if I win and/or you are unable to risk the wager (e.g. the bet was for everything you owned, in which case anything less than 100% certainty of winning would be unacceptable).

The process is more important than the outcome. Think about if our boss took our paychecks on pay-day and bought lottery tickets instead of putting them in our bank accounts. Even if we all won $10 million we should have the same reaction as if we survived a skydive and someone didn’t pack our parachute. Imagine if we replay this scenario 1,000 times and we start to think differently. If we borrow this line of thinking, it may shift the way we judge the actions of others in any field and lead to us slowing down the formation of our opinions based solely on the outcome. Further, it may make our own lives less stressful because although we can never guarantee an outcome, our intuition can take us a long way when we’re asking ourselves whether we are doing the right thing that gives us the highest chance of getting what we want. We can ask: if I repeated this 1,000 times, what would likely occur?

We have covered enough ground for one day. Hopefully I’ve demonstrated how mental models, and an example of one, can enhance our cognition and lead to more constructive ideas and opinions. Human nature won’t change, so strong opinions and internet trolls aren’t going anywhere. But knowledge is a tide that raises all rafts, sailboats, yachts & ships.

I want to make it abundantly clear, that while your blogger here believes quite passionately that mental models are likely the best bread crumbs on the path to understanding and insight, I am a comically long way from mastering a single one of them.

Does any of this mean we’re going to change overnight? No, Anastasia it doesn’t.

Firstly, it’s hard. Secondly, there’s a lot more paperwork to do, and thirdly, you don’t know what you’re in for. You could still run for the hills. Come, I want to show you my classroom.

Additional Reading: