Today I listened to an investor describe how he prepares mentally for investing. It’s a process of continual learning by being focused and intentional with his reading. He reads with an intent to acquire knowledge on a specific subject. After picking a topic he wants to understand better, he finds books written by people who understand the topic better than he does. He focuses on identifying and understanding the main argument of each book, not consuming every supporting detail. This allows him to consume the most important parts of the books at the rate he deems appropriate (instead of consuming the books—with every detail and example that supports the main argument—at the pace the authors intended). This approach also allows him to compare what he’s reading in various books on the same subject and uncover valuable insights more easily.

There’s more to his approach, but that’s the gist of it. It really got me thinking. I’m going to learn more about it.

I’m a fan of evaluating people by how far they’ve traveled in addition to what they’ve accomplished. Two people may start at the same time and end up accomplishing the same thing, but one may have traveled twice as far because his starting position was much farther back. For example, if you’re evaluating two runners who finished a race in 10 minutes, you surmise they’re equally talented. Now consider that one runner’s starting position was twice as far back: he ran 2 miles while the other ran 1 mile. They both finished in an amazing time, but one runner outworked the other by traveling twice as far in the same amount of time.

My dad is the runner who traveled twice as far. He was born into a great but extremely poor family, in a place with limited economic opportunities, in a less-than-equitable period in America’s history. Through thirty-plus years of hard and consistent effort, he accomplished more than many of his peers, elevated his family’s economic well-being, and gave his children access to opportunities he couldn’t even imagine. All without a college degree.

From him I learned the following:

• The improbable is possible if you consistently work hard.
• You can win the game of life even if you’re dealt a bad hand. Focus on playing the hand you’ve been dealt as best you can—don’t dwell on your hand being bad.
• Don’t let yourself be defined by your starting position in life. You’re in control of your destiny.
• You can’t do what everyone else is doing if your situation is different than theirs. Make decisions and act based on your situation, not what others are doing.

Happy Father’s Day, Pops! Thanks for being a great example and putting in the effort to win even though you had to travel twice as far as everyone else.

Tiger Global is an investment firm founded over twenty years ago by Chase Coleman. Tiger has been investing in public and private technology companies for many years and has tens of billions of dollars’ worth of assets under management. It made waves in the venture capital industry for its investment pace in 2021.

Tiger closed a fund in 2021 that was reportedly $6.65 billion. And it closed on a $12.7 billion fund a year later (including $1.5 billion from firm employees, so $11.2 billion from outside investors) that took less than six months to raise. Read more about these funds and the firm here.

Last fall it was reported that Tiger was raising a new fund targeted at $6 billion. As of now, it has reportedly raised $2.7 billion, according to regulatory filings. (It’s still raising, and this figure could change.) Tiger’s ability to raise capital for technology investments has declined, and it’s not alone. Insight Global is a venture capital firm that reportedly has cut the target size of its latest $20 billion fund because of the challenging fundraising environment.

I don’t have inside information, and I haven’t talked to anyone at any of these firms or their LPs. But given rates paid on US Treasuries, returns required by LPs to justify illiquid venture capital investments are likely higher than they’ve been for ten years. Translation: LPs probably want venture capital funds to produce higher returns to compensate them for the risk of capital loss and the inability to access their capital for a decade. Combine that with the compressed multiples that technology companies experienced in 2022 (i.e., falling valuations), and fund managers are in a tough spot. They’re being asked to produce higher returns when exit valuations have come down (though this could go back the other way during the fund’s life).

This dynamic will likely have an impact on the venture capital industry if it continues. I’m curious to watch this and see how it plays out.

This is my one-hundred-sixty-eighth weekly reflection. Here are my takeaways from this week:

• Valuation methods – I’ve learned about another evaluation method. It’s interesting to listen to investors look at the same company and, using different valuation methods, arrive at different values. Sometimes great investments are in plain sight, but no one sees them. Investors just need to adjust the lens they’re looking through to see their true value.
• Wisdom – A friend shared a quote from Benjamin Graham. The publication of one of his books was delayed, but the book included better material because the delay allowed him to include “wisdom is acquired at the cost of much suffering.”
• Odds – I’ve been learning about how successful investors think about odds and risk. Sometimes you can reduce the risk materially by waiting until the odds of the investment having success tilt more in your favor.

Week one hundred sixty-eight was an enlightening week. Looking forward to next week!

I chatted with a friend who’s in the process of acquiring a business. Instead of using a bank to finance the debt portion of the purchase price, he’s using seller financing. That is, instead of taking out a bank loan and paying the full purchase price in cash, he’s accepting a loan from the seller. The seller gets paid part of the purchase price in cash at closing, with the remainder repaid over time with interest.

This is common, but I hadn’t heard about it being used as much in the last few years because interest rates have been so low. I was curious how the seller felt about it, so I asked my friend.

He said the seller envisioned selling the business, getting cash in a lump sum, and riding off into the sunset. Seller financing, which prevents a clean break from the business, wasn’t part of his vision. It took a bit of convincing by my friend, but in the end, they made a deal after a detailed walkthrough of the math.

Riding off into the sunset is every founder’s dream scenario if they want to sell, but it doesn’t often play out that way. Things like earnouts and seller financing are common and can mean the seller will get delayed payments over a period of time.

Listening to a group discuss interest rates, I noticed something interesting. A gentleman in his 70s said that he’d paid an interest rate of ~20% on his home mortgage in the early 1980s. He views current rates as normal, while younger people in the same conversation think today’s rates are abnormally high.

It was interesting to see two groups of people who are experiencing the same reality view it differently because their life experiences have given them different baselines.

This conversation reminded me that there can be value in understanding the history of a topic instead of just what’s happened in my lifetime. It can affect how I perceive the present.

I’ve been evaluating a potential investment and researching the industry. Today, I spent time with someone in my network who’s worked in that industry for over a decade. It took only an hour’s conversation for me to gain a much better understanding of the industry and its incumbents and get feedback on the value proposition of the company I’m evaluating.

Today was a reminder that you can’t know everything, and it’s helpful to have a network of people who can fill your gaps in various areas. Especially if you’re a generalist investor.

I was chatting with some people about thinking in probabilities when a friend quoted Jeff Bezos, Amazon’s founder. What Bezos said is well known, and people reference it all the time:

Given a ten percent chance of a 100 times payoff, you should take that bet every time.

This statement didn’t sit well with me. I decided to get more context. I found the original shareholder letter in which Bezos said this. Here’s the entire paragraph:

One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

Given the full context, we can see that Bezos is talking about experimentation and the resulting outsize value it can create. He’s thinking about the probability of success and the potential value created when deciding whether to do something experimental.

This isn’t a concept that everyone can grasp. I think his comparison of baseball to business is powerful. The comparison communicates the potential to create value by solving problems in a way everyone can understand.

Creating value for others by solving their problems isn’t easy. It’s a journey of trial and error until you hit upon a solution that will get you a thousand runs.

Howard Marks is a successful billionaire investor who cofounded Oaktree Capital in 1995. As of today, Oaktree has over $170 billion in assets under management, more than 1,000 employees, and offices worldwide.

Marks is known as a shrewd investor and for sharing his insights on financial matters in widely read memos since 1990. It’s said that many notable investors, including Warren Buffett, look forward to reading these memos.

I recently watched an interview in which Marks shared an interesting fact. Between 1990 and 2000, he didn’t receive a single response when he sent out his memos. Utter silence. People didn’t even acknowledge receiving them. But Marks continued to write them. After more than a decade, people began paying attention. Thirty years later, his memos are highly anticipated and widely read.

Marks’s memos are a great reminder that good things don’t always happen overnight. Marks put in consistent work for over a decade before his writing efforts began to pay off.

As an early founder, I thought about when (not whether) things would stop going well at my company. It was a bit of founder paranoia, which sounds crazy but is healthy and common (only the paranoid survive). It didn’t mean my behavior changed. It meant I was aware that continued success was not a given and had to be earned.

As I’ve reflected on this more, I’ve realized that there was something deeper in the back of my mind that was more personal. Since high school, my trajectory had been mostly up and to the right. Most of the things I tried, I succeeded at—some minor hurdles, but no material failures. I was appreciative of but also concerned by this trajectory. I couldn’t put my finger on why, but I can now.

Success isn’t indefinite. It’s cyclical. Anyone who has achieved outsize success has also experienced a setback or major failure. Said differently, they’ve experienced highs and lows, or a cyclical journey.

At CCAW I was pushing for more success, but subconsciously I was bracing for an inevitable setback. As crazy as it sounds, that mindset ended up being helpful.

I didn’t know when failure would happen, but I knew it would happen. So, when I encountered a setback, I wasn’t surprised. Instead, I looked at it as a necessary part of the cyclical journey to success. I wasn’t thrilled by the setback but made sure to look for the positives in the situation. I focused on identifying what I could learn. I tried to figure out how what had happened could position me for a bigger win. That mindset helped me navigate the setback and come out on the other side better positioned for bigger things.

My big takeaway from this is that I can be a serial entrepreneur, but my success will be cyclical. Said differently, serial entrepreneurs have cyclical success. I will try things, and some of them will fail miserably. Instead of thinking I’m winning or losing, I now view it as winning or learning.