Journal: Beal, Infinite Loops, and Asymmetry in Work and Life

Boulders, Snowballs, Waves, and Avalanches

Aug 29, 2023

Hi everyone,

August is coming to an end and New York’s muggy summer is starting to make way for those perfectly crisp early autumn days. I’ve reflected a lot on how to change the Substack and am starting to reorganize the sections.

The Alchemy of Money will contain everything money and markets except for Buffett and Munger who have their own section. Books and articles will remain in the Investor’s Library.
The Maze will be the corner for everything related to the inner game, metaphors for life, and the occasional meditation on my own journey.
This section, The Journal, will be a shorter and less structured way to stay in touch and keep up with everything related to the Substack. Writing about the Maze triggered deep reflection among some readers. Perhaps this section can become a space for introspection, journaling prompts, accountability, and motivation to change mindsets and habits for those who are interested.

I will tag the Maze and Journal sections in the email header, so you know what kind of content to expect.

Beal & Infinite Loops Podcast

After publishing my piece on Andy Beal, my friend Jim O’Shaughnessy spontaneously invited me back on the Infinite Loops podcast (my first appearance was Learning (And Failing?) in Public). Jim and I talked about Beal, Buffett, agility in investing, the Maze, the business of investing, and ‘man in the arena’ memes. This will be released in a couple of days so stay tuned!

One reader noted that Beal taught himself how to code and wrote programs to evaluate loan portfolios in the 1980s and 1990s. On a related note, The Professor, The Banker, and the Suicide King noted that Beal coded his own poker simulator:

It was very simple, dealing out combinations of the fifty-two cards in the deck and running large numbers of trials to determine the likelihood of different hands prevailing. In addition, he could set up situations and run them a million times to see the likelihood of different results.
Andy Beal spent hour after hour at his desk, whenever he had some time, running his poker program … He knew he would never have the pros’ faculty for reading opponents, but he would pit himself against any of them for knowing the percentages.

Beal created a program to visualize and practice estimating the odds of any given situation. It was a way to ingrain the base rates of poker into his mind (Mauboussin has written about the importance of base rates in investing). This was classic Beal: creatively work to improve your edge, pay attention to the odds, work hard, and be patient.

During the next massive default cycle, he did it all over again:

Then came the summer of 2007, and Wall Street's securitization machine began to break down. Prices on pools of mortgages were falling. Beal was tempted but insisted on inspecting individual loan files. Wall Street refused.
Still, he knew his time was coming. To prepare bids he locked himself in his office to write a computer program with 50 variables (now 250), ranging from home price changes by neighborhood to interest rates to origination dates.

Jim and I also discussed mental agility (or flexibility) among great investors. Beal’s recent bet on TIPS seems like a good example. It was not a classic Beal investment but rather an asymmetric bet in public markets. Great investors stick to their core principles but recognize that the opportunity set inevitably changes. They can pivot between asset classes and public and private markets when appropriate.

The Professor, The Banker, and the Suicide King had more examples:

Beal Bank looked for situations where the market overreacted. The bank had stepped in during the foreign debt crises and Long-Term Capital Management collapse in 1998 when government bond prices plummeted, buying at a discount and collecting full interest and/or reselling when the panic ended and prices climbed.

The threat of bankruptcy by California energy companies, and the actual bankruptcy of Pacific Gas & Electric on April 6, 2001, caused bond prices of California energy companies to drop precipitously. Other utilities and energy companies in other states reacted, often causing their bond prices to drop. Beal Bank was … looking for discounted prices on debt where the danger of bankruptcy … was remote. Still other times, there was some likelihood of default, but certain bondholders were well protected ... Too often, the market was not efficient in making such distinctions.

Asymmetric work, asymmetric life

I think a lot about the work that I do and how to best invest my time and energy.

What kind of work lets us climb the slope of wealth? One could argue I should spend less time thinking and more time doing, but we’re not going to open that can of worms today.

Before Jim started to record the conversation, I shared a framework with him. Think about your work in terms of timeframe, probability of payoff, and the relationship between input and output (linear vs. exponential). You could:

Push rocks
Roll snowballs
Wait for waves
Plant and harvest
Or try to trigger avalanches

Pushing rocks: you’re Sisyphus. The day starts, you push the rock. Next day, same thing. It's linear work. You may get paid well, but you better love the work. Because that damn rock is waiting for you every morning. If you don’t show up, if you don’t push, nothing moves.

Rolling snowballs: you find a spot with sticky snow, you form a ball, you get going. In the beginning, people scratch their heads. It’s so small. Why bother? But you keep at it. The ball expands. It reaches a scale you could never have imagined. Your work compounds. You keep going. You build an empire.

Planting and harvesting: you're sweating today in the hope it will pay off next season. All you can do is pick good soil, tend to your field, plan, and fight pests and rodents. You don't control the weather. You don't control market conditions when you harvest. A big payoff is possible, but it's not guaranteed. You have to trust the process and hope for the best. If you get it right, you buy more land and enjoy some rest.

Waiting for waves: you’re standing at the beach, watching the endless ocean, filled with opportunity, offering treasure and deadly depths. You wait. You wait for a great wave, a massive trend, an opportunity. Until you spot it, you have to practice. You spend days, months, even years trying to catch small waves. You fall off the board. People say you’re wasting your time. But when you finally spot your wave, you're ready. You let it carry you, in perfect flow, and never look back.

Triggering an avalanche: the strangest and least predictable way to leverage your work. You rely on the built-up potential of your surroundings. You create things in the hope they will resonate with the world. You hope that one day, one of your ideas will connect and spread like a virus. But most of the time, nothing happens. You are a lone wanderer on a snowy mountain while everyone is comfortably sitting at the stove. But when you hit the right spot, an avalanche will roar down the slope and reshape the mountain. Your initial spark will take on a life of its own and, for better or worse, transform everything in its path.

Why does this matter?

What you do — and how you frame it — matters a great deal. Do you work to get paid today or to compound far into the future? Are you prepared to jump on an opportunity when it presents itself? Do you spend enough time practicing? If you are caught in a daily grind, are you possibly rolling boulders right over any seeds you planted?

Most likely, your work is some mix of the above. Think about someone like Beal.

Looking at possible investments every day? Can feel like pushing boulders.
Reinvesting profits and compounding the value of your portfolio and bank? Definitely a rolling snowball.
Preparing your capital structure for the next credit cycle? More akin to planting seeds.
Trying to revolutionize space launches? It feels almost like he was trying to ride a wave that wasn’t quite ready yet. Interestingly, once solved it can spawn an entire industry making it more avalanche-like.
Offering a price to solve a mathematical problem? Following curiosity for its own sake and contributing to the whole of human knowledge… one of many people kicking around for a possible avalanche.

The right kind of work depends on who you are, what feels interesting to you, what opportunities are available to you, and what responsibilities you have.

Some pushing of rocks may be required, but don't let that define your life. Keep looking for opportunities to form a snowball, for fertile soil, or for beaches with promising waves. Pay attention. Maybe the ground around you is just waiting for someone to trigger an avalanche?

You can apply the same framework to life. For more inspiration and food for thought, watch or read the transcript of this excellent recent talk by Graham Weaver: ‘how to live an asymmetric life.’ “Yes, it is possible to reduce one’s downside,” Weaver reflected on his investing career, “but it is not possible to eliminate it.”

The better strategy is to seek opportunities where the possibility of gains wildly outweighs what you can lose. Further, there are criteria, which, when you stack them on top of each other, don’t stack linearly; they become logarithmic — or asymmetric. For example, if you have an incredible management team who builds a great team to support them, moves at a fast pace, operates in a large industry, can redeploy large amounts of capital at high returns, and is willing to do so over a long time – then you’re not playing for a 1.5x or 2.0x outcome, you could be playing for a 10x, 20x, or even 100x outcome.

Weaver applied the same logic to life and came up with the following principles:

Do hard things. “Everything you want is on the other side of ‘worse first.’ When you can get comfortable being uncomfortable, you can have nearly anything you want.”
Do your thing. “Life is suffering. So, figure out something worth suffering for.”
Do it for decades. “There is almost no obstacle that won’t yield to you at full power for a decade.”
Write your story. “No matter where you are in your life right now, you can write a new story.”
These principles are the antidote to fear ... ways to look fear in the face and make a decision based not on fear, but on what is possible, asymmetric upside.

Take inventory of how you spend your time — at work and more generally — and what kinds of outcomes you can expect. Is it time to write a new story?

Have a great week,

Frederik

Reading & Listening

Base Hit Investing: Buffett's 44% CAGR and Various Types of High Quality Investments: “Most value gets created in companies that see increasing returns on capital (i.e. high incremental returns on capital; e.g. a company where returns rise from 12% to 18%, etc...). I've spent a lot of time thinking about Buffett's investments in Japan (which is now a top 5 investment) and also in energy (which is his largest equity investment behind Apple). The common theme … both groups have rising returns on capital.”

“A good business isn't one that has an interesting or exciting narrative, it's one that makes a lot of money relative to the money invested into it.”

Tom Morgan

: How To Be Lucky: “Single-minded pursuit of narrow goals blinds us to unintended negative consequences and superior alternatives.”

Pritzker’s LBO of Conwood by (Turtle Bay): “Buffett called it "one of the best businesses I ever saw." Munger called it "the best deal I ever saw." Pritzker bought it and made ~260X.”

Podcast: Rory Sutherland and Rick Rubin (Tom’s notes): I loved Rubin’s book The Creative Act and this conversation is a fun exploration of everything creative and counterintuitive.

“To me, anecdotes are data, because they’re outliers. The fact that we find them interesting suggests that in evolutionary terms they’re important, and therefore you shouldn’t discount anything as being anecdotal.”

“Once you understand the evolutionary modality, which is trying to avoid catastrophe rather than attain perfection, then habits and social copying make a lot of sense... even really good ideas sometimes take a hell of a long time to actually make it to that critical mass.”

“We’ve created this world where left brained people are free to act on their fairly narrow, rational behaviors without being policed. Whereas the burden of proof demanded of a creative act is literally 20 times greater.”

The Alchemy of Money