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Book Review: On Grand Strategy

I am not opposed to optimism, but I am fearful of the kind that comes from self-delusion.

— Marvin Davis, in the New England Journal of Medicine, on the “cure” for cancer

When I started talking to people about this book, I felt like a palm reader – it did not matter how they answered my question, I had a prepared response.

Are you a big fan of history?

No? In that case, you would love this book.

Yes? In that case, you would love this book.

I never liked history class because I knew that memorizing in 1492 Columbus sailed the ocean blue would never be USEFUL in the real world, beyond possibly a trivia night twenty years later. John Lewis Gaddis, in his latest book, On Grand Strategy, demonstrates he understands this and what seemingly 96% of history teachers do not: We do not just want names and dates. Google does that. We want to know why we need to know this.

Gaddis borrows from, of all places, history, the idea that people can be thought of as foxes (who know many things) or hedgehogs (who know one big thing). Leo in Wolf of Wall Street is a hedgehog. Sherlock Holmes is a fox. You are probably deciding right now which one you are or want to be; don’t worry, we will get to that.

It is hard to think of a more epic beginning to the book. Xerxes (the bad guy in the movie 300 with all the jewelry) and his uncle, Artabanus, are deliberating whether 250,000 people should be sent to war with Greece, which back then was pretty much everyone.

I am paraphrasing their conversation a little here because you really should read the book.

Xerxes: Here are all these thousands, and not one of them will be alive a hundred years from now.

Artabanus: That’s deep. Is that one of the motivational quotes on the wall at Gold’s Gym? But seriously, have you thought through this? My girlfriend gets grumpy if she hasn’t eaten in an hour. How are we going to feed 250,000 people on the way to Greece? Also, do we get a bulk discount from Charmin?

Xerxes: If you were to take account of everything…you would never do anything. It is better to have a brave heart and endure one half of the terrors we dread than to calculate all of the terrors and suffer nothing at all…Big things are won by big dangers.

All that happens by PAGE THREE. Artabanus and all the foxes reading feel like colossal wimps, while hedgehogs are nodding their head confidently ready to go to war.

However, like any good drama, there is a twist. Less than six pages later, you might be convinced that the world is a little more complex. You are also introduced to one of the key takeaways of the book: Ends and means have to connect if anything is to happen. Aspirations must be balanced with capabilities.

Using the tell me why I need to know this criteria, let’s pick an emotionally charged current event¹ we can apply Gaddis’s lessons to: Elon Musk of Tesla. I have read his biography, I admire his ambition, and I think he is deeply intelligent. But, his means and ends are NOT connected. His aspirations and capabilities are as balanced as the 1927 Liberian general election.

4 years back, Musk said in 2 years, 98% of US will be covered by Tesla Supercharging stations; in 2015, he claimed Tesla cars would reach 620 miles on a single charge, they will be “fully autonomous” in 3 years. And, so on and so forth.
— Shikha Chaudry, NewsBytes (5/24/2018)

Musk has consistently and emphatically broken his promises, colloquially known as lying, or more charitably, as bullshitting. Suppose you were a prospective stakeholder in Tesla and had read On Grand Strategy before meeting with Musk. You would probably think to yourself, “He sounds like a hedgehog. His aspirations seem compelling, but what about his capabilities?” An honest appraisal of the situation using this reasoning might be worth millions, or in Dr. Evil-esque fashion, billions, of dollars.

Nobody has enough time to read all of the important books one should read in a lifetime, so you must prioritize. Like anything you do, you are looking for the highest return on your time. This is difficult to determine in advance, but the more you read, the better your filter gets. A non-fiction book should have actionable takeaways or enrich your worldview. If it doesn’t, you might as well turn on the evening news. There are more important books out there (Gaddis makes heavy use of two of them), but its return-on-time is hard to beat.

A critic could argue that he is simply repackaging the familiar idea that the secret to strategy and life is balance. Gaddis would agree with his critic and would likely emphasize that when the stakes are high, simple truths bear repeating. He spends most of the book highlighting how the theory applies in practice throughout history and what happens when it is ignored. If the Tesla example seems blasé, each chapter of the book will provide a real case study of someone who failed to think in those terms with much more serious consequences than too few charging stations and a slap on the hand from the Securities & Exchange Commission.

Given the scope of the book, Gaddis necessarily omits quite a bit. For instance, your author was disappointed at how little attention China, Japan, and India received. However, he provides the curious reader with footnotes to explore each thread independently. You might not be a research-the-footnote type of person until Gaddis fearlessly tosses literary grenades in front of you like, “By now the Pope was routinely encouraging assassination [of Queen Elizabeth],” or describing how Thomas Jefferson didn’t want slavery to look bad, so he took it out of his elevator pitch in declaring independence.

For those of us who have a vague understanding about many things we take for granted, Gaddis helps sharpen the focus. For example, how did the United States and Britain get divorced and somehow become close friends? In 1907, Marquess of Salisbury in England realized that Germany’s kaiser William II was unpredictable, “And so he and his successors began methodically and unilaterally eliminating all sources of friction with the US.”

The biggest strength of this book is the author’s ability to synthesize what is important and weave encyclopedic knowledge into a readable narrative. Aspiring historians should note the strategy. The sentences are efficient, maybe too efficient for controversial or nuanced situations.

Overall, Gaddis is an effective historian whose means are as impressive as his ends.

Just before publishing this post, your author finished Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou — another example of Gaddis’s lessons being worth hundreds of millions of dollars. Deserving of a separate book review, this is as good of a story highlighting the disconnect between aspirations and capabilities as you will likely find.

See also:

The Landscape of History: How Historians Map the Past (John Lewis Gaddis)
The Hedgehog and the Fox: An Essay on Tolstoy’s View of History (Isaiah Berlin)
War & Peace (Leo Tolstoy)
On War (Carl von Clausewitz)

The Basics

Posted on January 6 by extra guac

If we too simple, then y’all don’t get the basics.

— Lil’ Wayne, Shooter (The Carter II)

A combination of successful marketing efforts and psychological conditioning has distracted us from focusing on some of the most important, yet simple, things we can control.

In Three Things Matter in Your Twenties, I referenced Charlie Munger’s quote on rationality and avoiding problems: It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. When I first read that eight years ago, I thought it was a humble joke. By reflecting on dumb things I have done over the years and watching the mistakes of others, I realized it is not a joke. In fact, it has become one of the prominent ideas in my life.

Another thing I realized is that most activity boils down to knowing what to do and having the discipline to do it.

Now, there is a lot to unpack these ideas.

Let’s start by thinking of someone you know that has failed at being consistently not stupid. It is likely the person that comes to mind could have avoided being in that situation, and further, you might even consider it to have been easily avoidable. My favorite example illustrating this point of easily avoidable problems is a professional athlete getting caught doing (recreational) drugs. If you want more examples, just look around. If pressed for time, open your high school yearbook.

When my friend and I see these types of situations, or are in them ourselves, we frequently say, “All he had to do was not mess up.” A more general way of saying this is, focus on the basics.

This sounds easy. Why doesn’t everyone do it?

We could spend years talking about this, including what qualifies as basic (which we are about to get to). One of the most salient reasons is painfully obvious to us humans: THE BASICS ARE BORING. This fact, like the basics themselves, is too important to ignore. So basic-ally we have a problem. The fundamentals are critical, but life would become empty if all we did was focus on them.

What are the basics?
~~A group of girls drinking Starbucks lattes.~~

Of course, it depends on what we are talking about. For every category of life there are different basics — Charlie Munger, a professional athlete, and someone from your high school are different types of people. Then there are some that apply to everyone.

The items below are important, but also think of the idea more conceptually, like building a house. There are infinite possible designs for a quality house, but a quality house must have a strong foundation. A strong foundation in a person’s life is equally important.

Sleep
Nutrition & Physical Fitness
Personal Hygiene
Avoiding Stupidity (Rationality)
Money

Meatball, underwhelmed after reading the list

Notice how you probably felt a little underwhelmed, like Meatball, reading the list. This is understandable and my entire point. People would rather pay (with money or their attention) for tips and secrets than eat salads and sleep eight hours each night. The former makes you feel better about your life and the latter makes your life better.

Let’s briefly look at each category from our list above.

Sleep: My friend, and founder of Askeladden Capital, Samir recommended Why We Sleep (his book review) by Dr. Matthew Walker, saying it was one of three life-changing books he has read. That endorsement is the only reason I read it, because I already thought sleep was important, so I was skeptical that it would simply reinforce what I already believe and thus be a waste of time. I went from thinking it was merely important to believing that if you are not getting enough, there is almost no better use of your time than sleeping. Our culture admires people who pride themselves on getting by on six hours of sleep a night. This book may leave us feeling sorry for them. “There does not seem to be one major organ within the body, or process within the brain, that isn’t optimally enhanced by sleep (and detrimentally impaired when we don’t get enough).”
Nutrition & Physical Fitness: 700 million people are obese.¹ Recent reports project that by 2030, half of all adults (115 million adults) in the United States will be obese.²Fresh vegetables are one of, if not the cheapest things at a grocery store. Amidst hundreds of thousands of free online resources, this falls into the discipline category.
Personal Hygiene: I had to include this because it was the origin of the idea for this post. About six months ago, my boss and I were only half-joking about the topic when I said, “It is amazing how far someone can rise in a corporate environment if he just shows up on time, replies to emails, and wears clothes that fit. If he can do those without smelling he is destined for upper management.” Vanity has a bad reputation, yet we all know that the world makes judgments about you based on your outward appearance, so you will be at a severe disadvantage if you choose to ignore this.
Avoiding Stupidity (Rationality): As Naval Ravikant says, “Free education is abundant, all over the Internet. It is the desire to learn that’s scarce.”
- A great place to start is Farnam Street, one of the best blogs on the internet. While finalizing this post, coincidentally Farnam Street posted How Not to Be Stupid.
Money: Spend less than you make. All personal finance starts there. According to the Federal Reserve³, about 40% of adults said that they would be unable to pay for a $400 unexpected expense without selling something or borrowing money. If this is remotely accurate, it is sad and scary.

These all interact together. For instance, it is hard to be rational and think clearly when we are tired. This increases the likelihood we do something dumb, like spend money we don’t have or overeat. We make better decisions when we are well-rested. The key is doing this consistently over a long period of time. One full night of sleep and one good decision is not going to do much. However, one thousand nights of good sleep and one thousand good decisions can be life-changing.

Executing on fundamentals consistently, which may seem boring or uncomfortable, will eventually yield significant benefits (which may be unpredictable in advance) that far outweigh the effort and time dedicated to them.

This Salad Tastes Too Good

Posted on October 23 by extra guac

Truth never damages a cause that is just.

— Mahatma Gandhi

It is a fact of life that the healthier a salad is, the worse it tastes.

You already know how the majority of people cope with this. They dump cheese and dressing on it until it tastes good. Uninterested with a detailed consideration of the ingredients, they have relieved themselves of the painful notion that they are eating something unhealthy because it is called a SALAD instead of a CHEESEBURGER.

If we are willing to hide an unpleasant truth to ourselves, what might people without our best interests in mind do?

As readers of my Kim Kardashian post might have suspected, we are not here to talk about salads. We are here to talk about a way for you to determine how someone could be trying to take advantage of you and think more independently. (The main concept in the KK post, focusing on mechanisms, is related to the topic here).

Think of the salad as any system and the ingredients as anything in that system.

For our purposes, we care about:
1. The ingredients, their activity, and quality
2. When and why we might want to know the ingredients or hide them

In any salad (system), it is important to pay attention to the ingredients (components). This framework can be useful in solving a particular problem or when someone is trying to persuade you to do something. We will look at a common problem to get us going. If someone says, “I don’t have enough time in the day,” then the day is his salad. The ways in which he spends his time are the ingredients. Watching TV might be his “dressing,” one of the essential factors causing his problem of not enough time. If he chooses to continue watching TV, that is fine, as long as we can at least get him to stop complaining about lack of time.

If he is still complaining once he examines how each hour of his day is spent, then there is a problem. If he decides that is still the best way to spend his time, then he values that more than whatever else he would have done with the additional time, so there is no problem. Many people resist closure and responsibility for their decisions. For the rest, closure means they can move on to more valuable uses of their time.

What we are really talking about is transparency. You get all the ingredients on the table and you must decide which ones you want. Do you want the dressing or not? It is better to acknowledge difficult trade-offs than pretend they do not exist. This is usually disagreeable. After Apple’s latest iOS update, I almost spit my salad out when they showed me my dressing: average Screen Time per day.

Making decisions is stressful (because what if we make the wrong one — we don’t want to feel guilty), so sometimes we end up complaining or feeling like a victim (“I want both!” or “There should be more hours in the day!”).

In multi-disciplinary fashion, we can get better at #1 (the ingredients) by thinking like a bookkeeper. They are the ones who track where the money in a company goes. Sticking with the salad metaphor, a bookkeeper would watch the chef prepare the salad and note the activities. Anyone who has checked a bank account after a wild vacation knows how enlightening playing bookkeeper can be. Finance might be one of the most useful applications of the salad heuristic. We are the chef, we control the ingredients, and we all have some areas where we could use a little less “dressing.”

If we have transparency with our ingredients, we can analyze each one. Our salad becomes a straightforward continuum of trade-offs, with health at one end and taste at the other. I emphasize bookkeeping because if you pay careful attention to the inputs, you have a better chance of understanding the outputs.

We can see this is hard enough when we are in control. When someone else is the chef, however, a conflict of interest will inevitably emerge. External pressures create an incentive for people to obscure the ingredients. Someone will try to tell you the salad is healthy even though you can barely see the iceberg lettuce under the Kraft Velveeta Cheesy Jalapeño Ranch®.

Suppose the chef is a politician and there are two policies (salads): free healthcare and lower taxes. If we are honest with ourselves, we know that neither can be good for everyone because if we look through to the ingredients, we know that there are costs and trade-offs. For the first policy, ask a nurse what a Code Brown is, and let me know how long you would do that for free. On the second, lower taxes means there is less money available to pay for public things, like roads. Readers who know me might know my intimate experience with potholes and replacement tires (7 to-date). I can assure you tax reductions are not free money. It sounds so simple (and it is oversimplified), but many people would prefer to believe something impossible if they felt it benefited them immediately than to acknowledge each decision is a trade-off and that those trade-offs have real consequences.

Politicians lie because they need to make a lot of voters happy and if the truth was always pleasant, we wouldn’t call it hard and ugly. Businesses have to deal with the same thing except their voters are the shareholders. Both politicians and businesses are under constant pressure, largely because of expectations from the stakeholders. When pressure increases enough, something must give — the salad must change. Either the price will change (potentially impacting revenue) or the ingredients will change (affecting profitability). As a voter and customer, this changes the deal you signed up for, which creates tension. But, the salad maker is like everyone else — she desperately wants to avoid conflict. However, conflict and accountability are inseparable, which is, for better or worse, up to us to enforce. Of course, this is hopeless if we ignore the recipe.

Take Chipotle (I promise I will get more creative with my examples). They started with fresh, responsibly sourced ingredients (whatever that means) and good portions for a reasonable price. I liked it so much I was effectively an unpaid salesperson for them (unbeknownst to Costco, I have the same position there).

Time passed.

Now, I rarely go to Chipotle because it makes my stomach feel like someone threw a grenade in it. The last time I went, the thimble-sized scoop of chicken they gave me was so small Stuart Little would have left hungry. This is on top of price hikes. This changes the deal! Whether it was all of the above or that endearing E. coli situation, others seemed to feel similarly because Chipotle’s revenue has yet to recover since 2015.

This is frustrating because it feels wrong. We always have to be on the lookout, which is exhausting, which means we need energy. And where do we get energy? Cheeseburgers, I mean salads.

Whether it is politics, business, or anything else, it can be hard to figure out what is in the salad.

The next time you hear someone complaining or something that sounds too good to be true, try listing off the ingredients in your head.

See also:

Three Things Matter in Your Twenties

Posted on August 14, 2018 by extra guac

[Instead of telling kids they can be anything they want to be]
Tell the kids the truth. You can be anything you’re good at…as long as they’re hiring.

And even then it helps to know somebody.

— Chris Rock, Tamborine (2018)

How irritating would it be if you clicked something suggesting only three things matter in the formative time of your adult life and you had to scroll far to find them? So, here they are:

getting good at something that people will want (expertise)
relationships
organization (two types)

By focusing on these (and saying no a lot) for a decade, you will likely have more options available to you on how you live the rest of your life than you would otherwise.

Characteristically, this post sat in the virtual garage for a while because I wanted the list to be concise. Travel, for instance, is valuable to personal development, but it feels awkward saying that it is one of the only things that matters. Your author has meal-prepped spinach smoothies (much to the aesthetic dismay of his coworkers) almost every week for 6 years, so I wanted to include health and fitness. I also wanted to remain unbiased. Some people sacrifice health and fitness in their twenties to work, and those people may soon have the choice to eat wild salmon and ride bicycles from their 30th birthday on.

As the post gathered electronic dust, it occurred to me that if someone forced me to present this to a group of people beyond their twenties, these suggestions would only shift slightly (and I would have to add health). The two diagrams below show the suggestions for the two age groups (capital means wealth). The distinction is made between them because thinking about money is energy-consuming. Once you start thinking about it, and especially if you have to think about it, it is difficult to think about other things (like becoming a doctor). Further, organic (i.e. earned, non-inherited) wealth creation takes time, usually decades. If you want apples, planting apple trees is more fruitful (had to do it) than thinking about apples.

If you are in your twenties and you are not building relationships or getting good at something, you are likely wasting valuable time. Organization is a broad term. My original intent was to suggest that we organize our thoughts — clearly labeling ideas and feelings in a structured way, equipping us to see gaps in our understanding and our motivations. Then I realized that being organized generally (i.e. having your shit together) is beneficial in obvious and non-obvious ways. In fact, it is hard to focus on important things like relationships and developing expertise if you are disorganized.

Let’s look at each of these individually.

Expertise
An eternal tension exists between being a generalist and a specialist. I think about it directly or indirectly every day.

You do not want your dentist and your proctologist to be the same person. This is easy to say from the outside view, yet when it comes to ourselves, we generally like trying out different jobs and having other interests. Otherwise, life would be painfully dull. Plus, there are penalties for staying in our own narrow focus. Without a basic understanding of psychology, we are likely to get taken advantage of by advertisements and the major news outlets. Without a basic understanding of finance, we will have a hard time holding onto money. Without a basic understanding of math, we might play the lottery.

There are some notable examples of well-paid generalists (e.g. the best CEOs are by definition generalists). Having said that, nobody wants to pay extra for average. We pay premiums for expertise.

What do we do then?

My favorite solution to this intractable problem comes from British biologist Thomas Huxley. He suggests we try to learn something about everything and everything about something.

If you want to test whether you have gotten good at something, see if you can write a primer for beginners.

Above, I said getting good at something that people will want because eventually you will need to be financially independent. How would you like to work your for ten years to become the best floppy disk repairman and find out no one values the set of skills you worked so hard for?

As long as there are people, there will always be wants. And as long as there are wants, there will always be problems. Fortunately for you, if you can give people what they want and solve their problems, they will often give you money. Remember in high school when they taught you how to do that? Me neither. That’s why I respect trade schools.

In high school, it seemed like an unspoken challenge to be able to barely study for tests and get good grades. It made sense as a strategy if you thought there was no point in learning the material because most tests in school involve rote memorization. Memorization is a low-value skill. Why? First, we have a million ways to document things that are better than human memory (e.g. pen and paper). But more importantly, you don’t solve new problems by memorizing facts and spitting them back up. You solve problems by understanding cause-and-effect relationships. When I was 23, my roommate doubted that I could memorize all of the presidents in one night. Naturally, that was the motivation I needed to memorize the presidents that night. That might have been cool for 10 minutes, but that told me nothing useful about presidents or politics.

If you do not have knowledge in a readily accessible or usable format, what do you have? You might have resourcefulness, but the further you get in any field, it might not be enough. Consider the difference between a quarterback who has memorized all the plays compared to one who also knows when to call an audible. The quarterback most famous for this ability to anticipate what a defense is going to do, then change the play accordingly, is of course Peyton Manning. At that level, most quarterbacks are experts at throwing the ball and as far as speed goes, it isn’t guaranteed that Manning could beat Jonah Hill in a 40-yard dash, so his physique is unlikely responsible for him being one of the best of all time. It is his judgment, derived from a deep understanding of the game. There are no shortcuts to cultivating understanding, expertise, or good judgment. These are worthy pursuits in anything we choose to get good at.

Speaking of quarterbacks, regardless of expertise, they cannot do their jobs without other people. Which leads us into…

Relationships
Certain words trigger contempt when you hear them in an advice context. Relationships is one of those for me, up there with positive thinking. The reason these get used too much is because they are true and they are open for interpretation. The reason for the contempt is because words alone are useless and people cannot do much with abstract concepts. Be a good friend and have a good attitude are meaningless, whereas, always return texts and calls and talk to your coworkers as respectfully as you would talk to your grandmother are actionable.

If everyone already talks about relationships, why am I? Because they are that important. When I left my first job, I realized what I cared about was who I could call if I needed them in the future, not what I learned. Wait, didn’t I just say that expertise is one of the only three things that matters? Yes. That’s how important relationships are.

We can put relationships into four categories:

Romantic
Family
Friendships
Professional network

On a snowboarding trip to Snowshoe in college, an embroidered list of life tips was hanging in the kitchen of our rental house. At the top it said 95% of your life’s happiness will depend on who you marry. I have been around a lot of married couples since then and I doubt any of them would argue with the embroidery. We went in-depth on that topic in The Millennial Marriage Manifesto.

Other than the relationship with your grandparents, the rest of your familial relationships will transition from necessary to optional. For instance, once they no longer have a say in what you do, your parents in a way stop being your parents and become more like an equal or friend. In some circumstances, at least one of them might become your best friend.

Romantic relationships are unique because you don’t get to pick who you fall in love with and attraction is complex. However, with friends, family, and your professional network, one question can take you a long way for the rest of your life: Are you reliable?

Are you there to pick your friend up from the airport? Can your customers rely on you to solve their problems?

The line between friends and “network” should be gray at worst. Borrowing a thought from Naval Ravikant, if you would not do business with someone for the rest of your life, do not ever do business with them. For many of us, that decision is outside of our control in the short term, but it can be a Northern Star, something to head towards in our career.

According to The Atlantic, it takes about 50 hours of socializing to go from acquaintance to casual friend, an additional 40 hours to become a ‘real’ friend, and a total of 200 hours to become a close friend. It takes about one week in the real world to realize how hard it is to find that much time for anything. That is one reason friends made after school will reflect more of your own traits & characteristics than theirs. This can serve as a perpetual personality mirror.

My high school football coach may or may not have known who Ralph Waldo Emerson was, but both men said, “What you do speaks so loudly I cannot hear what you are saying.” In all of your relationships, pay the most attention to actions.

Organization (Two Types)
More things are competing for our time and attention than ever. Focusing is harder than ever, too. This is why you must be organized and it is one reason why I choose to look at life as a design problem¹.

Type I (Getting Squared Away)
If you want to get technical, what we are talking about here is fighting entropy.

What is entropy? Your kitchen gets messy and disorganized which requires energy to clean it – that’s entropy. Everything in the world (and apparently universe!) is fighting this same battle, right now.

One of the wealthiest men in the United States (Munger) says, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

I would add simply being organized. I have watched business owners, who have expertise and good relationships, lose millions of dollars by being disorganized.

How is that possible?

Many businesses rely on banks for loans. In turn, the banks need reliable information about those businesses to make the loans. If the business owner makes plungers, she thinks everyone in the world already knows about plungers because without them, the world would be a crappy place to live. But everyone doesn’t know about plungers; she knows. She needs to be able to explain in a few sentences how the business makes money. She needs to be able to provide three years of accurate financial statements, tax returns, and her personal financial information in an electronic format. She needs to be able to explain why sales are plunging (okay I’ll stop).

The point is businesses have an enormous incentive to get these things right and have this type of information, which is seemingly obvious, yet they often do not. If businesses fail at doing this, individuals are at least as likely to make the same mistake.

You are going to want a lot of things, like an apartment or home. You are going to need to have check stubs, rental history, references, et cetera. Further, these things are going to depend on someone you don’t know saying yes to your request. If you want someone to say yes to anything, then you should make it as easy as possible for them to do so. They are not going to be able to say yes if you do not have the information they need to make the decision.

I am always looking for practical takeaways, so here are a few:

Pick a file-sharing site (e.g. Dropbox), create folders for the categories of your life (Auto, Medical, Housing, etc.), and keep everything important so you can easily access it. Bonus points if you have a system for naming files.
Create and maintain a personal budget with monthly cash flows in Excel.
Never pay a late fee for anything.
Get a whiteboard (it will help with Type I and Type II).

Type II (Waking Up)
You might have heard people say, “You don’t know anything when you come out of school.” How can they say that when you have spent your entire life presumably learning? One interpretation is that we are relatively unconscious of the workings of the world at that age because many of us have been insulated from parts of reality (e.g. growing up in the suburbs, the massive amount of raw information to process, etc.). A metaphor for gaining consciousness is waking up. I think of it as a combination of intellectual and emotional maturity and an existential ah-ha moment. From what I can tell, this is not inevitable, so it must be deliberately sought out, by paying attention and thinking.

If you do not organize your thoughts, you do not know what you really think or why you feel a certain way. There are many ways to do this. One of my favorites is writing because we don’t think in paragraphs and essays, we think in words and sentences. Without writing those thoughts down, they can disappear or trail off without cohesion. Putting them together in a way that makes sense takes work. That is why good writers are good thinkers.

Take superstition. If people say their superstitions aloud, they often get embarrassed because they sound ridiculous under scrutiny (e.g. Your team wins because of your lucky underwear? How?). You can do this with anything. If you are willing to go through this process, you will not only get to know yourself better and form more accurate perspectives, you will become more persuasive and be able to get more things done.

These two types of organization will help you think clearly and clear thinking is priceless.

As you can see, expertise, relationships and organization take time. You will find that habits are more important than motivation.

There are 521 weekends in any decade of your life, which may sound like a lot, but if you trust me on anything, trust me that this particular one goes by fast.

Don’t forget to have fun.

Designing Your Life

The Most Important Question

Posted on August 1, 2018 by extra guac

So there’s an iron rule that just as you want to start getting worldly wisdom by asking why, why, why, in communicating with other people about everything, you want to include why, why, why. Even if it’s obvious, it’s wise to stick in the why.

— Charlie Munger

The most important question we can ask is Why?

Why?

Because answering it is how you figure stuff out and at the extreme, if we don’t figure stuff out we might die.

Okay that sounds awfully dramatic¹…Why?

Because everything humans have observed so far is governed by cause-and-effect relationships. For instance, we figured out very quickly that our bodies need food. All it takes is a few people dying of starvation to figure out that we better eat something; then a little trial-and-error (oops, not those berries).

Why?

Well, we want to stay alive.

Why?

To have babies that pass our genes along.

Why?

Boom. In five one-word questions we have hit the limit of the author’s understanding. We could have taken different routes, but would have likely ended up in the same place. What word or sentiment is more efficient and effective at doing that? The question does not guarantee the truth, but it at least illuminates the respondent’s logic, premises, and drives. If it does that, you are well on your way to the truth in any domain.

If this question is so powerful, why doesn’t everyone² ask it all the time?

I have an answer, but like anything else, go ahead and see for yourself*. My guess is you will find that people do not want to answer it. The truth about the truth is that it can get uncomfortable and people deeply dislike being uncomfortable. It is much easier to watch Jerry Springer than to ask To be or not to be?

In this light, it becomes painfully clear why at the exact same time it is both the best and worst question! It is extremely important, but no one wants to answer it.

This stuff sounds hard. Life would be sooooooooo much easier if we could pick something we can all agree on, like Winning! Everyone wants to win, right? Yes, but…

Y tho?

* If you end up being brave enough to ask someone why a few times, share your experience here.

Lightening it up a bit, per Munger’s quote, if you want to be a better communicator, boss, or parent, begin including the why when you say things. You might discover people are more willing to do what you ask them to do.
Wait, what about kids! They ask it all the time. Why does that change? Generally, because of a combination of fear, social penalties and power. Big questions can be scary, no one likes a killjoy, and eventually an authority figure gets tired of having to answer it and finally uses power to shut down the dialogue (e.g. “Go to your room because I said so.”). These conditioned responses influence behavior over time.

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

Posted on July 16, 2018 by extra guac

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 the 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 obligations in (like your rent or mortgage payment). 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. 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 is the same feeling a manager gets when his team fails to meet its sales goals. It is 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)

Posted on June 29, 2018 by extra guac

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:

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. Without it, as in the first equation, 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 is 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.

Therefore, the more realistic and complete present value formula is shown below. Before you get intimidated, take comfort knowing that you already solved it two paragraphs ago!

m = number of payments per period (e.g. 1, 12, 365)
n = number of periods over which the amount is being discounted

Cash flow: $110
Discount Rate: 10%
Number of payment periods (m): 1
Number of years (n): 1

Therefore, this simplifies to $110 / 1.10 = $100.

It is 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.

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 are 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

Posted on February 5, 2018 by extra guac

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 complex. The 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 are 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

Posted on December 29, 2017 by extra guac

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 are 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 are 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 am going to do tomorrow than what I think I am 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 are still enjoying the holidays, you are 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.

Physical
We will 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 are 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.

Family
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?

Work
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 am 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?

Mental/Emotional
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 are right, you can afford to keep your temper, and when you are 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.

Educational
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 from NYE. 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?

Financial
This one is easy. Take all the money you can get your hands on and buy Bitcoin! I am 100% kidding. Do not 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 am 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 are 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.

Relationships
Since we covered relationships earlier in the year with The Millennial Marriage Manifesto, we will 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 are 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 are 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 am 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 will have to read his wild stories for yourself, but viewing your decisions over the year through this lens will be illuminating.

Fun
What did you do to have fun?
This category reminds me of Kanye West’s lyrics from his song Paranoid, “You worry bout the wrong things, the wrong things,” because people who are not 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 are like me, you will 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 Future by Martin Ford

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

Posted on November 9, 2017 by extra guac

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 (mek–uh-niz-uh m)

noun
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 are going to use something boring to introduce something interesting. I have 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 do not. 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 am thinking “Okay, I stopped checking my newsfeed to read about mechanisms?” BUT stay with me because I think we are 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, in which case they will not tell you) and if they do not know, they will be unable to answer the question or the answer will not 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 are 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 does not. 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 is this intersection of why & how that I have 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 did not 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 will 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 would 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. Can you imagine me sitting in my office thinking “My desk is clean, so the deals should start rolling in.”? When seen from this perspective, unless you are part of a cleaning crew, it is clear that being organized is not the mechanism. When we acknowledge what generates the final service or product we provide, we will avoid potentially misleading ourselves about our productivity. I have pointed this out to coworkers by saying: “On our earnings call, why don’t we report 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 is evident he is 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 (You cannot have traffic if you never use your brakes! Although this is impractical, it is a useful framework for thinking about how to drive, which would be at a speed that requires everyone to use their brakes as little as possible. Obviously, traffic is complex and it is influenced by several factors like number of drivers, wrecks, construction, traffic lights, etc. Notwithstanding, brakes are one of the purest examples of a mechanism because the other factors ultimately result in the use of brakes to slow the flow. 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 do not want you to know the mechanisms of many things (e.g. Coke recipe). Therefore, the ability to figure them out for yourself is a valuable skill. Now that we have 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 will 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