Frederik's Labyrinth

You can find the full essay on Julian Robertson at: neckar.substack.com/p/the-tiger-that-was-a-wolf-lessons This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.enterlabyrinth.com/subscribe

You can listen to this conversation on Spotify, Apple, anchor (and via RSS) or find a full transcript at Compound.“This is the nature of what we do. It's the intersection of business and people and psychology and sociology and numbers. There's a lot of stuff that's always going on that makes sure you never have the game beat, never.”This past June I had the opportunity to interview Michael Mauboussin. I tremendously enjoyed this conversation and I believe it captures Michael’s deep curiosity and passion about investing, business, the research process, and being a multi-disciplinary learner.At the time I published a full transcript at Compound. I am happy that I can now share the audio version.I assume many of you are familiar with his work. For an easy introduction check out this 2021 profile. Another excellent piece is his Reflections on the Ten Attributes of Great Investors which incorporates many of his key frameworks. And be sure to check out his new website with a library of his collected writings.If you’re looking for an all-in-one solution to manage your personal finances, Compound can help. The firm can help diversify concentrated stock positions, optimize company equity, plan asset allocation, and more. You can sign up for access here.For more information, please check out further disclosures here.“Most investors act as if their task is to figure out a stock’s value and then to compare that value to the price. Our approach reverses this mindset. We start with the only thing we know for sure — the price — and then assess what has to happen to realize an attractive return. … The most important question in investing is what is discounted, or put slightly differently, what are the expectations embedded in the valuation?”The below are some of my favorite highlights.You can listen to the conversation on Spotify, Apple, at anchor, and via RSS or find a full transcript at Compound.Druckenmiller, Soros, and position sizing* “When you observe very successful people over very long periods of time in these probabilistic fields, they tend to have certain attributes that are worth all of us paying attention to.”* “Here we have George Soros and Stanley Druckenmiller, two legendary investors, who say that [position sizing] is the main thing that drives their returns and results over a long period of time. Whereas we look at the real world, we find that most people don't create a lot of value from sizing and it's all security selection. The question is can we bring those things together to some degree?”Analysts and portfolio managers:* “A very good portfolio manager will be able to focus on the two or three issues that matter most for a particular company. And they're very good at identifying those and honing in on those.”* “There was a letter from Seth Klarman at Baupost to his shareholders. He said, we aspire to the idea that if you lifted the roof off our organization and peered in and saw our investors operating, that they would be doing precisely what you thought they would be doing, given what we've said, we're going to do. It's this idea of congruence.”Holding Amazon for two decades* “I first learned about this company from Bill Gurley who at the time was part of the underwriting team at Deutsche Bank who did the IPO. Bill just said, you should meet these guys because the way they think about things, even though this is a completely nascent industry doing, completely different stuff, the language they're using is the language you're going to be familiar with.* “In the late 1990s, I met Jeff Bezos and Joy Covy, the CFO. … Joy would just say to me, we’re big fans of Warren Buffett and Charlie Munger. We think about return on capital. We think long term. We're making investments that appear to be bad, but when you pencil out the numbers, we think we're going to generate really attractive returns. I bought into that.”* “I was very influenced by a wonderful book by Carlota Perez that came out probably in the early 2000s where she talks about the interplay between technological revolutions and financial capital, one of the points she made was, it's often the case that the hard work happened after the financial bust.”On feedback, learning, and teams of superforecaster (aka investors)* “In every domain elite performers tend to practice. Every sports team practices, every musician practices, every comedian practices. What is practice in investment management? How much time should we be allocating to that?”* “The investment management industry is an industry that draws a lot of really smart people. It's a very competitive, interesting field. It's remarkable in the sense that feedback is very difficult to attain. In the long run it's portfolio performance and so on. But in the short run it's very, very difficult to do.”* “There's a distinction between intelligence quotient and rationality quotient, which is the ability to make good decisions. Along with some of his colleagues he developed a specific test to measure rationality. And if you look at the subcomponents of that test, it seems really consistent with what we would care about as investors. “* “When I say elite teams, or when Tetlock talked about elite teams, this elite teams in superforecasting. So these are the best of the forecasters working together. There are three important things. How big should it be? How do we compose the team? The third and final piece is how you manage the group. And this is usually where the mistakes happen.”Lessons for operators from his book Expectations Investing.* “Executives of public companies in particular should absolutely understand the expectations priced into their stock. The first reason is that if they believe something that the market doesn't seem to be pricing in, they have a communication opportunity.”* “Very few executives really understand how capital markets work. This is almost like our analyst portfolio manager conversation. When you get to that seat, all of a sudden you have responsibilities and skills that become important that you may not have ever dealt with before.”* “Understanding what has to happen for today's price to make sense is just such a fundamentally attractive proposition. And then evaluating whether you think that those growth rates in sales and profit margins and capital intensity and return on in capital that's implied, whether those things are plausible or not, it just makes enormous sense as an approach.”Thank you, Michael!“To be a great teacher, an effective teacher, it's about being a great student, a great learner yourself. I think that comes through if you're doing it well.” This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.enterlabyrinth.com/subscribe

This conversation was recorded in June 2022. You can find a full transcript at manual.withcompound.com. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.enterlabyrinth.com/subscribe

Alix Pasquet III is the Managing Partner and portfolio manager at Prime Macaya Capital. Notes on substack. Presentation on youtube.Disclaimer: The information contained in this summary has been prepared solely for informational purposes and is not an offer to sell or purchase or a solicitation of an offer to sell or purchase any interests or shares in any of the funds managed by Prime Macaya Capital Management LP.  Any such offer will be made only pursuant to an offering memorandum and the documents relating thereto describing such securities (the “Offering Documents”) and to which prospective investors are referred.  This summary is subject to and qualified in its entirety by reference to the Offering Documents.  An investment in those funds carries certain risks, including the risk of loss of principal.    While all the information prepared in this presentation is believed to be accurate, Prime Macaya Capital Management LP makes no express warranty as to the completeness or accuracy nor can it accept responsibility for errors, appearing in the presentation.  Other events which were not taken into account may occur and may significantly affect the returns or performance of the fund.  Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur.  This summary is provided to you on a confidential basis and is intended solely for the use of the person to whom it is provided.  It may not be modified, reproduced or redistributed in whole or in part without the prior written consent of Prime Macaya Capital Management LP. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.enterlabyrinth.com/subscribe

You can listen to the conversation on: Spotify, Apple, at anchor, and via RSS.Hi everyone,I am a big fan Marc Rubinstein and his Net Interest substack and was very excited to finally record a conversation with him. Marc previously covered financials and fintech as a research analyst and hedge fund investor and now shares his takes on the sector with his readers on a weekly basis. It’s a very well written and insightful lens on a fascinating corner of the market.I spent the first couple of years of my career as an analyst at Macquarie Group dealing with financials - with leasing and lending companies which we acquired for my employer’s balance sheet. My view has been shaped by this early period of bargain hunting and I later struggled with fintech companies and their valuations. As Marc explains, financials are a unique sector with its own rules and heuristics where growth can be treacherous and the balance sheet is of supreme importance.It can be especially tricky to tell apart secular change from the credit cycle. As Jim Chanos said last week on Odd Lots, “every down cycle since ‘98 has seen those companies blow up, because it turns out they didn't have a better mousetrap. They just had the credit cycle at their back.”Marc and I talked about banks, fintech, the importance of incentives and culture, payments, the need to watch regulators, private equity and how alternative asset managers have been picking up business from investment banks, and the danger of relying on the view of CEOs too far removed from the risk.I’m going to share a few of my favorite writings by Marc followed by show notes. I hope you enjoy the conversation.Disclaimer: I write and podcast for entertainment purposes only. This commentary reflects a personal opinion, is not investment advice, and should not be relied on to make investment decisions. The views reflected in this commentary are subject to change at any time without notice. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.Why learn about financials?For a start, there’s something exclusive about them. There are some industries on which everyone has a view. Supermarkets for example, or consumer tech. Financials isn’t one of those industries…Second, financials are everywhere. Even companies that on the face of it aren’t, can be financial companies in disguise.The third aspect of financials that makes them especially compelling is they’re a great metaphor for the world around us. The financial system operates as a complex adaptive system. It consists of a network of banks and other financial institutions each of which operate according to their own incentives.Dotcom 2.0 (online brokers, asset managers, Silicon Valley Bank):I actually remember where I was the day the dot-com bubble burst. It was March 2000 and I was sitting in a newly-opened branch of Starbucks near my home in London, reading a copy of the Financial Times. …Commodities trading. In commodity trading, there are three ways to make money:Geographic arbitrage. Unlike financial markets, where pricing relationships are normally stable across regions, proximity to a product in the physical trading world can have a big impact on pricing. Commodity trading firms can leverage logistical capabilities to source product in one location and deliver in another, taking advantage of pricing differences between the two.Product arbitrage. Pricing differences exist between different blends, grades or types of the same commodity. There are over 160 tradable crude oil products with many different refined products and numerous end-users with highly specific requirements. By changing the form of the commodity, traders can lock in a profit. Time arbitrage. Over the long term, supply and demand tend to find a balance but, on shorter term horizons, they can remain out of sync. Trading firms can take advantage by storing commodities when supply is unusually high and drawing down inventories when demand is unusually high.What Sort of a Business is Investment Banking?For investment banks, risk management is their business. If they take risk, match risk and source risk, they can’t outsource the management of that to a chief risk officer; it’s the job of the frontline staff. How that all hangs together – how the incentives of staff are reconciled with the health of the firm comes down to the culture of the firm. And culture takes a long time to build, longer than most participants in fast-moving markets have the energy to invest.Buffett’s BanksFinancial companies have a tradition of courting disaster, and Buffett’s names are no exceptionThis is not by Marc but a related idea worth keeping in the back of our head: Aswath Damodaran recently discussed how in countries with sustained high inflation “every company becomes a financial service company, because they discover it's easier to run a bank on the side and lend money out short term than it is to build factories or toll roads.”Show notes* Marc’s experience during the dotcom crash, when being a stock analyst “was kind of the coolest job you could have”* “These cycles are a feature of history, financial services companies sit at the heart of that. One way of thinking about a financial company is like a platform that is an intermediary. It intermediates supply and demand. But because incentives are such that the financial services company makes more money through volume, be that credit volume, be that trading volume, they're incentivized to create additional supply.”* Institutions adapting to the last down cycle:* (Druckenmiller talked about this at the Ira Sohn conference.)* [11] “That's a really good heuristic. Regulators and all market participants have a tendency to fight the last battle. They'll create a framework which will make the last battle less likely, but such is the nature of markets problems will emerge elsewhere. Looking at financials you can see that. 2000, 2001, 2002, we saw a corporate credit downturn triggered by fallen angels in credit markets and a number of banks, JP Morgan being one, suffered materially from corporate credit losses. The banks that suffered the most in that cycle, rough rule of thumb, suffered the least in the financial crisis. JP Morgan outperformed in that crisis.”* Parallels to the 1994 bond market massacre:* [14] “One precedent for what's going on in markets right now, really sharp hikes in interest rates, was February 1994 when Allen Greenspan hiked rates. It was a complete surprise to the markets and brokers, dealers, and banks weren't able to position for it. It's a reason why the Fed, highly topical, is very anxious not to deliver surprises".”* The growth conundrum:* [17] “I'm not a fan of growth. Any finance analyst is rightly wary of growth. Growth can be very, very cheaply manufactured, you're giving away money. What's more important than the volume of that is the pricing. And you don't have visibility on the pricing of that until further down the line.”* Hidden financials:* [25] “I talk about various reasons why financials are interesting. One of them is that many companies are financials in disguise. There's the famous Enron conference call back in 2001, Jeff Skilling calls the analyst an a*****e for asking, he says, ‘you're the only financial institution that doesn't publish its balance sheets.’ And the focal point of that in the market is oh, wow. Jeff Skilling called the analyst names. To me it’s, hang on a sec, no one actually realized that Enron was a financial company.”* GE Capital, growth, and private equity:* [31] “The yardstick for success at GE parent company was EPS growth. And GE Capital was a huge contributor towards that. Growth at a financial services company is not the way to track it. The model hasn't gone away, it's gone into private hands. Apollo is trying to recreate GE capital in its own terms.”* “They've filled a vacuum that was left when investment banks … they're not as powerful anymore. Private equity is a small part of what they do, the alternative managers, they now fill that vacuum … and they do a lot of the activities that investment banks historically used to do.”* Measuring success and competition: * “Like all sectors, you're looking ultimately for a return on invested capital that exceeds a certain hurdle rate, that reflects a willingness to return capital to shareholders.”* [36] “Competition is really damaging in financial services marketplace. Unlike antitrust policy makers, financial regulators don't promote competition. Some of the most successful banking systems globally, from a regulator’s perspective, that have not suffered a financial crisis, have been some of the most concentrated banking systems. Canada is a very good example. In Ireland today, there are only two banks as a response to the financial crisis.”* “When looking at risk at banks and in financial services, you are looking for banks that aren't trying to over compete.”* Looking at financials as an investor:* [40] “One of the reasons why I think the finance sector is so attractive is that you have all the characteristics in there. There's growth, there is value, here's momentum. All kind of factors that apply elsewhere apply within financial services.”* “It's not a complex sector and we haven't talked about that yet, but something worth mentioning is that complexity is a feature to run away from.”* “There's no intellectual property, there is a commodity component really to it. Therefore banks often layer on complexity. Run away from that.”* “Look first and foremost at the balance sheet. Understand the balance sheet. Because of that it's helps to be quite close to credit markets.”* [45] “We had a global mandate and I think that's hugely powerful to be able to see patterns across borders. Banks and financials are quite local because they are regulated on a local basis. The products themselves culturally tend to be quite local. A mortgage in the US is nothing like a mortgage in Germany. The products are quite different, but market cycles and human behavior and competitive dynamics being the same, seeing patterns across countries is hugely powerful.”* “The lesson from China with Alipay is that when non-bank, financials get to a certain size, regulators will come in. Another tool of the financial analyst is to stay close, to watch what regulators are doing hugely. That’s hugely important.”* Payments* [53] “Historically payments were almost a byproduct of banking. Banking was deposit taking fundamentally and because the liquidity sat at the bank, banks offered payments mechanisms. Increasingly, we're seeing that turned on its head and payments is becoming kind of the X of the relationship because of the data it throws off and the frequency.”* Fintech and customer engagement;* Robin hood is that actually* [54] “One of the reasons why I'm a bit cautious on business models like Robinhood is that to do finance well, engagement is a negative. You don't want your customer, objectively an investor, shouldn't be looking two hours a day on their portfolio. And yet they're incentivized to, to create that. There's a massive misalignment here between good investment practice and what these companies are aligned to do.”* “The problem with insurtech, a lot of insurance companies went public in 2020-2021, and they've performed very badly because it's a product customers only buy once a year. The inverse happens. There's no way really to create engagement. Payments is the sweet spot payments. There is a frequency of use that's not in conflict with good practice from the consumer's perspective. Companies offering payments are able to pick up data and that's hugely powerful when it then comes to credit underwriting.”* Which CEOs does he follow closely?* [59] “Jamie Dimon is very good. He's been around for a long time. Blackstone, whether it's Schwartzman or John Gray. Very insightful. And Marc Rowan at Apollo has a great understanding of financial services.”* The concept of the L6:* “I'm halfway through Michael Lewis's book on the pandemic, Premonition. I wasn't going to because in my view any book written about the pandemic was too soon. But I saw him being interviewed and it was pretty compelling.He makes this really interesting point about what he calls L6, stands for level six in an organization. He says, if you want to understand anything, then go six levels down in an organization. At that level you'll find the person who understands what it is you're looking at. And he said it was true in finance in particular … So I think a lot of CEOs don't necessarily know what's going on.” This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.enterlabyrinth.com/subscribe

I am a big fan Marc Rubinstein and his Net Interest substack and was very excited to finally record a conversation with him. Marc previously covered financials and fintech as a research analyst and hedge fund investor and now shares his takes on the sector with his readers on a weekly basis. It’s a very well written and insightful lens on a fascinating corner of the market.We talked about banks, fintech, the importance of incentives and culture, payments, the need to watch regulators, how alternative asset managers have been picking up business from investment banks, and the danger of relying on the view of CEOs too far removed from the risk.You can find show notes on the substack. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.enterlabyrinth.com/subscribe

Hello everyone,I’m happy to share my conversation with my friend Nick Maggiulli who writes the excellent personal finance blog Of Dollars and Data. Nick just came out with his first book: Just Keep Buying: Proven Ways To Save Money And Build Your Wealth. Nick combines his empirical research with a personal perspective and I really like that he distills the work down into rules that are effective yet pragmatic. His advice is free from some of the guilt-driven personal finance drivel (save on avocado toast to get wealthy..).We talked about the book, his writing process, the optimal level of fame, and why he thinks people should not pick stocks themselves.You can listen to the conversation on your podcast player of choice: Spotify, Apple, at anchor, and via RSS.“Fear has a far greater grasp on human action than the impressive weight of historical evidence.” Jeremy Siegel“You have to keep reminding yourself of that quote. It's my favorite investment quote because it's the only thing that keeps me from letting my behavior take over from my logic.” Nick MaggiulliSome highlights from the conversation:Nick’s argument against stock picking: how do you know whether you’re good at it? It takes too long to establish a track record that is meaningful:“Imagine you're trying to get in shape. … You go to the gym for three months, see no difference. Go to the gym for six months, one year, no difference. Then, all of a sudden, you lose 10 pounds. .. No one would do it. With diet and exercise, you start seeing results within a few months. But with stock picking … after one year, no way. … I think it can take a decade or longer. And this is obviously debated in the literature. … How do you know when a factor is dead? It can take you 20 years. It takes roughly the same amount of time to figure up a manager's really good … Let's just say you did it for 10 years. … My whole life's changed. Five years ago, I just started blogging. I didn't have a book. Imagine I have to do this again and only then would I know if I have skill. After 10 years, oh, actually I shouldn't be doing this.”Income vs. expenses and guilt-free saving and investing:“I do these like simulations and say, Hey, if this person is on a steady state of retirement and they get this raise, if they save at least half of it, they're usually good to go. It's about reducing guilt. It's okay to spend a little bit of money. … Cutting spending is not a way to raise wealth in the long run. You can do it in the short term, but the only sustainable path out is I've seen based on the data is raising our income.Everyone was like, you got to cut your lattes. You're just gonna feel miserable and hate it and guilt yourself. And you're going to end up giving up or you're gonna feel like s**t. I'm saying that the way out is raising her income and there's a way to do it. It just takes a lot of work, but it's the only sustainable path out.”Nick’s writing process:“I used to have a bunch of drafts which you can imagine as different pots sitting on the stove. Some have just ingredients, there's no heat on them. Some are kind of just simmering. Some are ready to take off, ready to serve. Sometimes I have nothing going and I just have to come up with something. It varies every week. Last week I wrote about inflation, why I think people are thinking about inflation incorrectly. I had this epiphany where I thought about it like, is that true?I said, oh, that's actually not true. Let's just write about that and see how it does. I like to reframe common things. A lot of stuff logically makes sense and then you run the numbers and you go, ah, that doesn't make sense as much as I thought it would have. A lot of things we just assume to be true and you ask, is that actually true?”Intuition backed by data:“I think there's a lot of people that have really good intuition, but they can't explain why it's true. So I ran the numbers and was like, Hey, this person who everyone is saying is dumb … yes, some of the things he said were a little silly, but I think his intuition was a lot stronger and more intelligent.” This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.enterlabyrinth.com/subscribe

“We begin our lives as growth stocks and end our lives as value stocks.”I’m happy to share my conversation with my friend Nick Maggiulli who writes the excellent personal finance blog Of Dollars and Data. Nick just came out with his first book: Just Keep Buying: Proven Ways To Save Money And Build Your Wealth. He uniquely combines his data-driven research with a personal perspective and I really like that he distills the work down into rules that are effective yet pragmatic. His advice is free from some of the guilt-driven personal finance drivel (save on avocado toast to get wealthy..). We talked about the book, his writing process, the optimal level of fame, and why he thinks people should not pick stocks themselves.“Fear has a far greater grasp on human action than the impressive weight of historical evidence.” Jeremy Siegel “You have to keep reminding yourself of that quote. It's my favorite investment quote, because it's the only thing that keeps me from letting my behavior take over from my logic.” Nick Maggiulli This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.enterlabyrinth.com/subscribe

Hello everyone,I’m excited to share my second conversation with Sebastian Mallaby. Last time, we discussed his book More Money Than God. A quote from that conversation stuck with me:“The key was to do an unreasonable amount of preparation work. It shows you're serious and not wasting people's time by asking the obvious questions.”This time, we discussed The Power Law (see my write-up) in which he tackled the history of venture capital. The two worlds make for an interesting contrast: venture capitalists, networkers by nature, are more willing to meet and chat. But they’re also natural storytellers which presents a challenge in the search for truth.In his book, Mallaby tried to disentangle luck and skill in venture investing, how to build winning and lasting cultures, and the importance of VCs for Silicon Valley. I had a lot of fun digging into these questions with him. I hope you enjoy the conversation. You can listen to it on your podcast player of choice: Spotify, Apple, at anchor, and via RSS.You can also add the Substack podcast feed to your podcasting player with the link on the bottom-right of the player.While individually “the story of every bet can seem to hinge on serendipity,” he argues that over the long run, “the best venture capitalists consciously create their luck.” The best “work systematically to boost the odds that serendipity will strike repeatedly.” A History of Systematic Serendipity and Grand Slams“The great challenge at venture partnerships is that the principals must refrain from killing each other.” Michael Moritz“When people write about the venture business, they’re always writing about the startups we back. They never write about the most important investment we make, which is in the business.” Michael Moritz."The fast moving of ideas, people and money until they reached their optimal use, that’s what made Silicon Valley worked. That’s what made innovation turbocharged. "But where did that fast circulation come from, and my argument is it comes from venture capitalists."Some highlights from the conversation:* Sequoia:* “It took a year or two of networking to break into the cathedral. But once I was in they are very thoughtful people. … They explained to me how they thought about behavioral biases in decision-making. … For example, we know that we anchor on past decisions. When a VC decides not to invest in a startup at the Series A stage, it's quite difficult to change your mind at the Series B. … it's painful to pay much more … because we were wrong the first time. They kind put that on the table and said, we’re probably anchoring, we're probably turning things down at Series B. From now on anybody who argues against the Series B investment is going to be subjected to cross examination - are you sure you're not anchoring?”* Strategy buckets in venture vs. hedge funds:* “Having written More Money Than God I was keen to put these different companies in buckets. I would see two different venture investors who had invested in the same company. I would try to find out … the contrasting mindsets. … People tend to have a few different stories going on in their head at once when they invest. It's not like you go with one chain of logic but not the other one. In venture capital, the distinctions people make are more around stage. Are you a seed investor, a series A investor, a growth investor. They might make distinctions by geography and they might make distinctions by sector.* But the mental approach, they say things like, some people want to bet on the size of the market and other people really want to bet on the type of founder they are backing. When I stress tested that kind of theory, I found it was normally not true.* Google had a strong position at series A because it had a working product which already had better search results than rivals. [Sequoia and Kleiner Perkins shared the round.] You had a natural experiment. The two were doing the same investment: did they have a different logic? And I came to the view that they had a subtly different logic. Kleiner Perkins was more a believer in technical breakthroughs, a product that was 10x better. I think that reflected the fact that both the dominant partners, John Doerr and Vinod Khosla were engineers by training. When they backed Google, I think they really believed the fact that the product was better was a huge deal. And therefore it justified a high valuation. I think Michael Moritz, who invested for Sequoia, came at it with a slightly different mindset. He also could see the product was much better. But I think he also thought of the Google investment in terms of the media side that he came out of himself. He said he made he invested in Google to look after Yahoo. He'd already invested in Yahoo. Yahoo had a popular web portal at the time. Part of him thought that Google could be the search engine in the top right-hand corner of the Yahoo site, a very valuable utility.”* Identifying founders:* “[At Accel] the idea was that when you saw a new technological wave coming, you would prepare your mind for what was going to happen. You would think through the potential businesses that would logically have to be created. … different types of business would logically have different types of founders.When you were building capital-intensive hardware you wanted somebody who was really responsible and deliberate and a good engineer and was not going to make the mistake of spending large amounts of capital on a manufacturing operation until they really got the design.* But when you were doing software, 10 or 20 years later … much more cheaply than a hardware product. The right approach is to move fast and break things. When Mark said that about Facebook, it wasn't some sort of t-shirt slogan.It was the logical implication of a world where software businesses were dominant. At software you do A/B testing. You put things in the market and … see which one goes better. The barrier to putting it into the market is so low, that's the best way to figure out product market fit. Therefore in a software world, a young founder who is brash and moves quickly and doesn't care about being responsible is perfectly fine.”* Asset manager franchise value:* “If you can create a machine, a system that can survive a change of staff and pretty much function the same way, then you've got something with franchise value. Also if you've got predictable revenue streams. … Private equity is so large that simply the management fee is attractive for the public markets. And there are fairly formulaic things that you do both in evaluating the deal and then adding value afterwards. Um, not to say they're simple because they could involve quite complex, say data science around improving the pricing strategy of the portfolio company after you've bought it. It's not simple, but it's formulaic.Hedge funds, when it comes to discretionary trading are simply not like that. There's a funny story in More Money than God about Paul Tudor Jones who tried to systematize this macro trading, had somebody to sit right next to him and watch his moves and … and take those insights and put them into an algorithm and do systematic trading. It just didn't work at all. … The exception in hedge fund space is algorithmic trading, where … concentrating market share in a few hands, those guys possibly could go public one day.”* Are VCs important?* “When I looked carefully and in detail at the history of Silicon Valley, I came away with a view that they were extremely important. People would say it's about Stanford. … But it just is wrong. MIT was a stronger engineering school in the sixties and seventies when this whole story began. … Then there was another story about defense contracts being the explanation for the origin of Silicon Valley. And yes, there were defense dollars being spent on semiconductors … but there were more defense dollars being spent on the military industrial complex centered on MIT and the Boston area. …* Another more persuasive story is about non-compete contracts. California has a special provision in the law that says you can't prevent your employee from quitting your company and joining a startup. And that's important to the startup ecosystem. I take that seriously. … When you look through these different variables, it turns out that venture capital really was the key thing that made Northern California special. That particular sort of risk friendly version of venture capital that was very hands-on and willing to back entrepreneurs even if they didn't necessarily have all the pieces they needed to make a startup function. …. * And so in this way, the act of entrepreneurship, which is scary and risky, is a bit de-risked by venture capital. Venture capital is a machine for manufacturing courage. That's extremely important to understanding how Silicon Valley grew up.”Disclaimer: I write and podcast for entertainment purposes only. This is not investment advice. I am not your fiduciary or advisor. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.enterlabyrinth.com/subscribe

Hello everyone,I’m excited to share my second conversation with Sebastian Mallaby. Last time, we discussed his book More Money Than God. A quote from that conversation stuck with me:“The key was to do an unreasonable amount of preparation work. It shows you're serious and not wasting people's time by asking the obvious questions."This time, we discussed The Power Law (see my write-up) in which he tackled the history of venture capital. The two worlds make for an interesting contrast: venture capitalists, networkers by nature, are more willing to meet and chat. But they’re also natural storytellers which presents a challenge in the search for truth. In his book, Mallaby tried to disentangle luck and skill in venture investing, how to build winning and lasting cultures, and the importance of VCs for silicon valley.And while he admits that individually “the story of every bet can seem to hinge on serendipity,” he argues that over the long run, “the best venture capitalists consciously create their luck.” Individual venture capitalists can “can stumble sideways into fortunes” and at times it seems like luck beats diligence and foresight. The best however, “work systematically to boost the odds that serendipity will strike repeatedly.”“The great challenge at venture partnerships is that the principals must refrain from killing each other.” Michael Moritz“When people write about the venture business, they’re always writing about the startups we back. They never write about the most important investment we make, which is in the business.” Michael Moritz."The fast moving of ideas, people and money until they reached their optimal use, that’s what made Silicon Valley worked. That’s what made innovation turbocharged. "But where did that fast circulation come from, and my argument is it comes from venture capitalists."I had a lot of fun digging into these questions with him. I hope you enjoy the conversation. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.enterlabyrinth.com/subscribe