This is my two-hundred-sixteenth weekly reflection. Here are my takeaways from this week:

• Routine – This week, I was forced to change my morning routine. I thought the change served me well. But today, I reflected on my week and realized that it felt good because it was different. However, it played a significant role in my output decreasing. Next week, I’m going back to my normal morning routine. This week was a reminder to think hard before changing a routine that’s working well.
• Audio blog – I made no recordings this week. I’m disappointed in myself for letting this slip so much. I can’t let it happen going forward. I’ll work on catching up and making this a daily habit.
• Gaps – I had the chance to be part of a fireside chat. The audience was small business owners. These entrepreneurs are smart and work hard. The experience was a reminder that early-stage entrepreneurs in traditional businesses have large gaps around strategies for obtaining growth capital, as well as other areas.

Week two hundred sixteen was another week of learning. Looking forward to next week!

I finished reading Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It. The book didn’t give me as much detail about Henry Singleton’s struggles as a founder as a biography would have. But it did provide details of strategies that made him a great master capital allocator and entrepreneur and that made Teledyne successful during his tenure as CEO.

Here are a few things about Singleton that stood out to me:

• Age – Singleton didn’t found Teledyne until he was 43.
• Missionary founder – From the start, Singleton was very clear about what he wanted to build. When asked, he replied, “I’m trying to create another GE.” Singleton was solely focused on creating a conglomerate that rivaled General Electric. That mission informed his decision-making over the next thirty years.
• Growing market – Singleton recognized the importance of semiconductors when the technology was still new and unknown. Because of the growth potential of the semiconductor market, he made it the base of Teledyne. In Teledyne’s early days, he bought small companies with growth potential in the semiconductor space. As the semiconductor market grew, Teledyne’s market grew rapidly, too.
• Cloning – Singleton knew that a lot could be learned from others. He was open to borrowing ideas. His foray into insurance was borrowed from a book written by GM’s chairman. The chairman learned, through a painful experience involving failed financing, that a growing public company with a strong financial base needs an internal finance company. Singleton borrowed this idea and expanded by building a massive insurance operation. Years later, Warren Buffett apparently borrowed from Singleton’s insurance playbook for Berkshire Hathaway.
• Zigzagging – Singleton was a first-principles, independent thinker. He was flexible in his thinking and execution. As market conditions changed, so did his thinking and strategy. He quickly adapted to new realities and often took actions others considered abnormal. For example, when the P/E multiple of Teledyne’s stock went from a range of thirty to seventy times earnings (overvalued) in the 1960s to roughly nine times earnings (undervalued) in the ’70s and ’80s, he stopped acquiring companies with Teledyne stock beginning in 1969. He began aggressively repurchasing shares in the ’70s and ’80s. This was unheard of at the time, but eventually it was mimicked.
• Twin tailwinds – Singleton recognized and took advantage of two simultaneous forces. More details on this here.
• Cash flow and profits – Singleton focused on making sure revenue was profitable and that customers were paying promptly. He created a metric to measure this consistently across Teledyne’s hundreds of operating companies. More detail on this here.

I enjoyed learning about Singleton and Teledyne. I’m glad I was able to locate a copy of this hard-to-find book.

I’m finishing Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It. The book details Teledyne’s rise from inception to conglomerate with billions in revenue and hundreds of operating companies. This book interested me because I was curious to learn the specifics of how Henry Singleton developed and executed his capital allocation strategy—the same strategy Warren Buffett likely borrowed from to build Berkshire Hathaway.

The book details how Teledyne managed its sprawling operations and evaluated the performance of each operating company. I assumed that Singleton used free cash flow or something similar to measure each operating company’s financial performance. I was wrong. Singleton created his own metric, the Teledyne return, which measured profitability and net cash flow in a single number.

The Teledyne return was an average of net cash flow and profit. The book gives the following example:

• Reported profit: $1,000,000
• Reported cash flow: $500,000
• Teledyne return: $750,000 = ($1,000,000 + $500,000)/2

The company’s thinking was this: Your profit was $1,000,000, but you received only $500,000 in cash. We’ll credit you fully for profits booked and received as cash. We’ll give you credit for some of the profit booked but not yet collected.

This single metric forced company presidents to focus on profit and cash flow simultaneously. It also allowed Teledyne corporate to standardize its comparison of operating company results.

I’ve seen profits or cash flow used to evaluate financial performance, but I never thought a singular focus on either made sense. When I ran my company, I kept a close eye on free cash flow and net income. By looking at both, I was ensuring that we were generating profitable revenue and that we collected revenue faster than we had to pay our expenses.

Singleton’s Teledyne return is a creative way to force managers to focus on what matters most. For entrepreneurs it’s a financial metric worth considering if it makes sense for their specific business.

After reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, I wanted to learn more about the CEOs profiled in the book. I was especially interested in Henry Singleton, given that Warren Buffett likely borrowed from Singleton’s playbook when building Berkshire Hathaway.

Singleton didn’t do many interviews, and no one has written a biography about him. I managed to dig up Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It. It’s hard to find, but I got lucky and started reading it.

Singleton went on an acquisition spree during Teledyne’s early years in the 1960s. Two things likely led to Singleton embracing this strategy and making it so effective:

• The stock market valued Teledyne richly in the 1960s, and Singleton shrewdly took advantage. He used Teledyne’s stock as currency. Teledyne traded at a double-digit P/E multiple ranging between thirty to seventy times earnings (i.e., high valuation) as a public company, while smaller, private companies were valued at single-digit P/E multiples of roughly nine times earnings (i.e., lower valuations). Singleton recognized this arbitrage and paid for his acquisitions using overvalued Teledyne stock.
• World War II took place mostly in the 1940s. New technologies were created, and many small companies were founded to help the war effort. After the war, veterans benefited from the G.I. Bill, receiving tuition-free college educations, from which they learned new technologies and methods. This combination of newly educated and tech-savvy veterans and a wave of new technology led to a boom in entrepreneurship in the 1940s and 1950s. By the 1960s, many of these small companies had matured, and the founders were ready to sell or needed growth capital to reach the next level.

Singleton’s genius was in recognizing that he was positioned to benefit from twin tailwinds. Two forces were occurring simultaneously, and he crafted a strategy to take full advantage of both. There was a large supply of entrepreneurs interested in being acquired, and he could fund acquisitions using richly valued Teledyne stock instead of cash. His strategy led to over one hundred companies being acquired in a decade and Teledyne growing from $4.5 million in revenue and $58,000 in profit to $1.3 billion in revenue and $60 millions in profit annually by the end of the acquisition spree.

Today, I finished reading The Almanack of Naval Ravikant by Eric Jorgenson. The section on wisdom and judgment caught my attention. He starts by defining the two:

• Wisdom – Knowing the long-term consequences of your actions
• Judgment – Wisdom applied to external problems

Then he says they’re tightly linked. You need to know the long-term consequences of your actions and then capitalize on that understanding by making the right decision to get the desired outcome.

Naval says judgment is underrated but most important in the modern leverage age. One correct decision can lead to a massive win.

Entrepreneurs learn from experience—their own or others’. Experience gives them the wisdom to understand what actions are available and the likely outcomes of each.

Wisdom is helpful in itself, but as Naval says, applying it is most important. How to apply wisdom to your situation isn’t always obvious or easy, but the most successful entrepreneurs I know have mastered applying wisdom to get the outcome they want.

Your ability to apply wisdom—what Naval calls judgment—is the key to outsize entrepreneurial success.

In every entrepreneurial story I’ve heard, luck played a role to one degree or another. I’m a big believer in luck, and I think it’s possible to manufacture your own luck.

I’m finishing reading The Almanack of Naval Ravikant by Eric Jorgenson. This book shares Naval’s thinking around several types of luck:

• Blind luck – Something completely out of your control happened, and it benefited you.
• Persistence luck – You’re taking actions that set things in motion and result in something happening to you. Think working hard, hustling, or shaking a bunch of trees to see what happens. You’re creating forces that could generate a lucky break.
• Spotting luck – You’re knowledgeable in a field and able to spot a lucky break in that field. Your specific knowledge allows you to see and understand what’s happening before others do.
• Magnetic luck (my wording, not his) – You’ve built something that attracts others, who’ve gotten lucky, to you. You might have a unique brand or specific skill. People want to be associated with that brand or need your skill set to help them capitalize on an opportunity.

The first three types of luck are straightforward. The fourth is the “hardest kind of luck” to get.

I’m a fan of persistence luck and magnetic luck. Both are good ways to manufacture luck that anyone can take advantage of. A big difference between the two is the time frame. Persistence luck often optimizes for luck in the short term. You can take action tomorrow, and you might get lucky tomorrow. But magnetic luck is the “hardest kind of luck”—a long-term game. You’re building something, maybe a reputation or skills, over time. This requires commitment. But when this work is done, luck goes from being something that happens by chance to, as Naval says, “your destiny.”

If you’re interested in this book, it’s available for free. You can download the e-book file or PDF here.

Leverage is the ability to multiply the output of your efforts. You achieve more with the same level of effort. Leverage allows you to 10x or more your outcome.

Today I started reading The Almanack of Naval Ravikant by Eric Jorgenson. You can download the e-book file or PDF for free here. Naval thinks about leverage in three classes:

• Labor – Having other humans work for you. You can get more accomplished if others are working on something than you could by yourself. This is the oldest form of leverage and likely the hardest to use. Managing people isn’t easy.
• Capital – Having money work for you. You can magnify your decisions with money. Entrepreneurs use capital leverage by borrowing money to help their company grow, while investors borrow money to purchase investments. More on this type of leverage here. This is likely the most dominant form of leverage used to accumulate wealth over the last century.
• Products with zero cost of marginal replication – Having your product work for you. Duplication of these products costs little or nothing. Think software or media. You write the code once (assuming you don’t update it) or record the video once. Your cost is the same whether one person or one million people buy the software or watch the video. This is the newest form of leverage and has been used by the new billionaires.

Naval also shares why the last of these forms of leverage is so powerful and the most democratic, accessible by all.

Labor and capital leverage require someone else’s permission before you can use them. People must agree to work for you or agree to give you capital. This limits who can take advantage of these forms of leverage. You can have the best business idea, but if people won’t work for you or give you money, the size of the business is capped.

Products with zero cost of marginal replication are permissionless. You can write software, create a video game, write a book, or record a YouTube video and share it anytime. If your product resonates with others, they can buy or consume it without your incurring additional costs. The upside potential of these types of products is hypothetically unlimited.

The book says we now live in an age of limitless leverage where the economic rewards have never been higher.

Naval’s thinking about leverage is simple and thought-provoking, especially for entrepreneurs.

If you're interested in hearing Naval discuss leverage in more detail, you can listen here.

I’m looking forward to finishing this book and sharing my takeaways.

This is my two-hundred-fifteenth weekly reflection. Here are my takeaways from this week:

• Struggle – This week, I heard from a few people in response to my post about Sheila Johnson’s struggles. Entrepreneurs enjoy hearing about the struggles of other entrepreneurs—not because they wish bad things on others, but because during struggle is when entrepreneurs learn and acquire wisdom that they apply to become successful. Entrepreneurs enjoy hearing about that entire process because it helps give them a better idea of what to do in similar situations.
• Audio blog – I’m still not where I want to be with consistently recording and publishing audio versions of my blog posts. This week I realized a few things that could help me improve this. Planning on testing them next week.  

Week two hundred fifteen was another week of learning. Looking forward to next week!

Over the last two or three weeks, I’ve learned about mercenary builders like John Malone, Robert “Bob” Johnson, and Willis Johnson by reading books about their journeys. I’ve also spent time thinking about my own journey and the journeys of friends who are entrepreneurs. I’m starting to adjust my thinking on mercenary builders.

I used to give more weight to missionary founders, likely because they have a clear idea about what problem they’re solving and what the end game looks like (they have a vision). How they’ll get there isn’t known, but where they want to go is.

My criteria for evaluating mercenary and missionary founders were the same. I was dinging mercenary founders because they hadn’t figured “it” out. I was subconsciously saying, I want to know where the ride’s going before I agree to get on. That was a mistake and ignored my own experience and that of others around me who were wildly successful mercenaries.

Going forward, my criteria will be different. I’ll spend time developing a framework to evaluate mercenaries, but one thing is crystal clear: working with mercenaries with questionable values or ethics isn’t something I want to do.

Where mercenaries end up can be unpredictable, and that’s okay. They’re shaking trees, seeing what falls, and picking up and running with the best opportunity until they find “the one.” How mercenaries go about this journey matters—they’ll often be presented with questionable paths or choices that could be lucrative. Strong values and ethics will guide mercenaries and stop them from engaging in questionable behavior that could be financially rewarding. I’m happy to be part of the ride, but not if by-any-means-necessary methods power it. I want to win the right way, not any way, and I want to work with people who think that way. The end never justifies questionable means.

Many years ago, I heard this statistic: only four percent of businesses in the United States have annual revenue of more than $1 million. If true, that means that most businesses are truly small businesses. I remember when my company had less than $1 million in revenue (it was painful) and when we were larger, with $10 million in revenue. From a resource perspective, $10 million was better, but still inadequate. I was always looking for ways to do more with less.

I regularly think about how many entrepreneurs run small businesses in the U.S. and the tough position they’re in. With their limited resources, they need all the help they can get. Anything that helps them do something they couldn’t do before or more of what they were already doing with the same resources is valuable.

My experience as one of these entrepreneurs informs my investment thesis about enabling small and midsize businesses (SMBs). The thesis is broad, but so are the types of business SMB entrepreneurs run.

Lately, I’ve gotten more excited about this thesis. I think some people overlook something when they’re evaluating the market of SMB entrepreneurs: A rapidly growing number of people want more control over their lives. They view owning a business as the path to getting it and the path to economic freedom. They don’t have a specific problem in mind; rather, they’re open to entrepreneurial opportunities that check this box. I think that in turn, this group of entrepreneurs present an opportunity for others. Entrepreneurs who remove friction and make it easier for these aspiring founders to start and run businesses will create massive value for this group—and in the process, build large businesses with big, loyal customer bases.

I think the SMB market is bigger than some realize and likely poised for growth. From my reading of history, helping other people build businesses and achieve economic freedom has been a great playbook for building one’s own rapidly growing and massive business with passionate, loyal customers.