Workshop Note: Lehrgeld
"There’s nothing I like so much as learning, and I had never met anyone who thought about business in such a clear way." Bill Gates about Buffett
There is an old story that Buffett was once offered a bet during a golf game: risk $10 to make $20,000 if he scored a hole-in-one. Buffett declined.
Why? He explained that the odds for a hole-in-one were worse than the odds offered, making it a bad bet. Still, the amount to wager was tiny. Why not have a bit of fun? Former Geico Chairman Jack Byrne recalled Buffett’s response: “If you let yourself be undisciplined on the small things, you’d probably be undisciplined on the large things, too.”
It’s a neat little anecdote that can teach us two things. Discipline in decision-making matters. We want to be in the habit of making good decisions (taking bets with attractive expected returns). But more importantly, it tells us something about Buffett. He optimized his decisions to maximize his wealth. The excitement of a fun little bet interfered with his goal. But who among us lives to maximize their net worth?
Fellow writer Liberty discussed his investing philosophy as “lifestyle design.” He wants to beat the market, but also to spend his days learning about “stuff that's interesting.”
“I'm not trying to optimize for the best returns. … I am trying to optimize for happiness. … I invest in the things I want to learn about. To me, I get so much value from investing that's not monetary that I feel like even if I was underperforming the market, it may still be worth it for me. I'm having a great time, I'm meeting great people, to me, that's worth millions, right?”
Last week, I received some ETH back from the Constitution DAO. Perhaps unsurprisingly, the DAO lost out on its bid for a copy of the constitution. It’s a bad idea to signal your spending power ahead of an auction. Ken Griffin took advantage of that.
There was a lot Schadenfreude on Twitter about the failure at auction and the high gas fees that made refunds of smaller donations uneconomic. Those are undoubtedly flaws. Perhaps future improvements will fix Ethereum’s high gas fees. Or a more efficient chain will be used. And public auctions might not be an area where DAOs excel. But the fact remains that a group of enthusiasts raised $40 million within a week and had a chance of succeeding. This was fascinating to me and I’ve spent more time learning about DAOs, which Vitalik Buterin described as:
“an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automaton itself cannot do. … a DAO contains some kind of internal property that is valuable in some way, and it has the ability to use that property as a mechanism for rewarding certain activities.”
I used to think about crypto like Paul Krugman who wrote that, after more than a decade, “cryptocurrencies play almost no role in normal economic activity.”
“By the time a technology gets as old as cryptocurrency, we expect it either to have become part of the fabric of everyday life or to have been given up as a nonstarter.” Technobabble, Libertarian Derp and Bitcoin
Is web3 all just self-indulgent hype and speculation? While there is a lot of that, I’m increasingly convinced that the “lack of real world applications” argument misses the point.
The internet started out as a way to access and share information and create marketplaces (think Yahoo, Google, Craigslist, ebay). With the advent of social media, more of our communication, connection, and status games shifted online. I like to think of entering the metaverse not as the adoption virtual reality but as an extended period in which our digital and physical lives and identities blend and shift in relative importance. It’s a gradual change and may never happen for older generations. But it seems almost inevitable for those who grow up with - or in - the internet.
“Now that we have internet native money, we could start creating true internet native corporations, internet native collectives, internet native projects, internet native platforms that are owned by the users.” Naval on the Tim Ferriss podcast
This is the extreme end of web3 optimism. But doesn’t it make sense that eventually the internet untethers from the legacy infrastructure to have its own layer of financial services, property rights, and collaboration? Is that not enough of a “real world” use case?
If NFTs can unlock more digital creativity, can DAOs enable people to coordinate and allocate capital around a shared mission? Let’s turn the question on its head: Why shouldn’t there to be a way to team up with your internet friends globally to pool resources and pursue a specific goal? Why wouldn’t we turn our internet lives into a multiplayer game with real stakes?
Which does not give me confidence that any specific DAOs will succeed. But it’s an interesting question to explore and I’m excited to work on a Q&A with a sharp mind who is actively building in the space. Stay tuned.
So, what about the Constitution DAO? I spent more than $200 in gas fees to contribute an redeem. That money is gone. (Also, joke’s on me: people are trading the worthless and now meaningless PEOPLE token and it looks like I could have sold for multiples of what I contributed. Just goes to show that this is NOT investment advice😂)
Buffett would not have done that. But I’m not Buffett and I’m not optimizing for my net worth.
I contributed to the DAO because it was interesting and a low stakes way to learn about something new. It’s easy to be a skeptic and point out the speculation, the scams, the wild-eyed promises that we’ll all be living in the metaverse and work for dog coins. But “there’s something happening here” and I want to cultivate a beginner’s mind and investigate new ideas (without falling into a trap of blind enthusiasm). And that means I have to learn to “invest” time and money. In German I would call this Lehrgeld, an amount of tuition paid by an apprentice’s parent to a master craftsman to pay for education as well as board and lodging. In this case the teacher is abstract: it’s a community of people, a wild swirl of ideas, and “the market.” But I still hope that my investments will eventually accumulate and form a valuable education.
I recorded an audio version of my latest piece. You can access it here: Spotify, Apple, Google, RSS, anchor. It’s just me reading it, if you enjoy that kind of thing. I plan on doing it for all non-premium, non-workshop pieces going forward.
Also, I will test short (maybe 10-20 minutes) audio versions of the premium profiles. I won’t be reading the pieces but rather explain why I picked the story, share some highlights, and discuss some lessons that stood out to me.
Bill Gates on what he learned from Buffett (1996).
A good piece except for this ridiculous comment: “I think his dietary practices—lots of burgers and Cokes—are excellent. In short, I’m a fan.” I’m not going to rant about this part of Buffett’s mythology. Perhaps his true superpower is to remained healthy despite an unhealthy diet (but who knows what he really eats at home).
Gates was reluctant to meet with Buffett:
“Whenever somebody says to me, “Meet so-and-so; he’s the smartest guy ever” or “You’ve got to meet my friend so-and-so; he’s the best at such and such,” my defenses go up. … Everybody wants to know someone or something superlative. As a result, people overestimate the merit of that to which they’ve been exposed. So the fact that people called Warren Buffett unique didn’t impress me much.”
“What were he and I supposed to talk about, P/E ratios?”
What won him over? Buffett’s curiosity and ability to teach and tell stories.
“When I arrived, Warren and I began talking about how the newspaper business was being changed by the arrival of retailers who did less advertising. Then he started asking me about IBM: “If you were building IBM from scratch, how would it look different? What are the growth businesses for IBM? What has changed for them?”
He asked good questions and told educational stories. There’s nothing I like so much as learning, and I had never met anyone who thought about business in such a clear way
When you are with Warren, you can tell how much he loves his work. It comes across in many ways. When he explains stuff, it’s never “Hey, I’m smart about this and I’m going to impress you.” It’s more like “This is so interesting and it’s actually very simple. I’ll just explain it to you and you’ll realize how dumb it was that it took me a long time to figure it out.” And when he shares it with you, using his keen sense of humor to help make the point, it does seem simple.”
Perhaps I was wrong about the Reading Obsession😂
“One habit of Warren’s that I admire is that he keeps his schedule free of meetings. He’s good at saying no to things. He knows what he likes to do—and what he does, he does unbelievably well. He likes to sit in his office and read and think. There are a few things he’ll do beyond that, but not many.”
The last quote reminded me of the time Gates explained to Buffett and his friends that “Kodak is toast,” long before digital photography took off.
“Warren stays away from technology companies because he likes investments in which he can predict winners a decade in advance—an almost impossible feat when it comes to technology. Unfortunately for Warren, the world of technology knows no boundaries.”
“Everything in finance is data within the context of expectations. One of the biggest shifts of the last century happened when the economic winds began blowing in a different, uneven direction, but people’s expectations were still rooted in a post-war culture of equality. Not necessarily equality of income, although there was that. But equality in lifestyle and consumption expectations."
“Sharp inequality became a force over the last 35 years, and it happened when, culturally, Americans held onto two ideas rooted in the post-WW2 economy: That you should live a lifestyle similar to most other Americans, and that taking on debt to finance that lifestyle is acceptable."
“Rising incomes among a small group of Americans led to that group breaking away in lifestyle. And everyone else was watching – fueled by Madison Avenue and the internet. The lifestyles of a small portion of legitimately rich Americans inflated the aspirations of the majority of Americans, whose incomes weren’t rising."
An excellent interview with Mauboussin who just published an updated version of Expectations Investing, the book he had written with his mentor Al Rappaport. It’s amazing to see how, decades later, Mauboussin’s work still rests on foundational insights by Rappaport.
“Al spoke about three things that have become central to my work. First: it’s all about cash — not accounting numbers. This resonated with me because I saw how my father worked. Second: though they tend to be treated separately, valuation and competitive strategy have to be considered together. One can’t do a thoughtful valuation without understanding a company’s competitive positioning within its industry, and the litmus test of a successful strategy is that it creates value. Third: the stock market provides a useful signal for managers. As an executive, it’s important to know what expectations are priced into your stock to allow you to make better capital allocation decisions.
“In the 1990s, venerable value investor Bill Miller introduced me to the Santa Fe Institute … This place has had a huge impact on the way I think about markets and company performance.”
“When you look at really good forecasters and try to understand what they’re doing that makes them good, there are three possibilities. They’re less biased, they have better information, or they’re less susceptible to noise. … The relative importance of noise versus bias was an eye opener. There are typically just two or three things that are extremely important to get right for an investment to work well. The key is to figure out, and focus on, what really drives value.”
This piece is overly broad, lumping “SPACs, crypto, penny stocks, NFTs, overpriced growth stocks” together. But it makes two valid points: enthusiasm is driving prices of many assets. And owners of those assets compete for continued enthusiasm and attention with the shiny new things. And, as I wrote in Squid Game, investing / speculation and entertainment / gaming are blending together. And much like speculative assets, few games enjoy enduring popularity.
“Someone bought something early. Word spreads about that thing on the internet. Despite no change in the underlying asset, its price skyrockets as interest increases. Price is now fully dependent on this interest. People with a massive stake in these assets know that their net worth is tied to the hype behind their investment. No wonder “seller bullying” has become so popular online. Parabolic price increases are followed by parabolic decreases, and the parabola is fueled by hype. If interest dissipates, that parabola inverts.”
“The cool thing about decentralization is that there’s no one to protect you from getting wrecked. How are regulators supposed to keep track of this Pandora’s Box of alternative investments? They can’t.”
“Markets used to be open 9:30 AM to 4:00 PM, Monday to Friday. Now you can trade 24/7. And even if you do step away from the markets themselves, you can’t avoid the commentary. Thanks to Twitter, Reddit, and Discord, the divide between entertainment and investment no longer exists. Speculation has always been part of human nature, but financial speculation has never been so accessible.”
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