Old School Value Nugget Fest (September 19th Edition)

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With the kids back in school, the nightly struggle to ask creative questions about their day begins anew. Obviously, you can’t just ask, “how was your day?” because all you hear back is “good.” We ask things like, “what made you laugh?” or “what made your teacher smile?,” etc.

Another question I’ve started to ask is, “what’s the best question you asked today?” They’re young enough now that the idea is to get them thinking about asking questions instead of just sitting passively in class. The longer-term goal is to help make them more curious and inquisitive.

So it struck me when I read Farnam Street’s The Power of Questions this week. In particular, this story he shared really resonated with me: 

“Let me share a story that took place in my second-year history class in university. We started discussing the assigned reading. I didn’t really understand it, but I figured I’d get it just sitting there. Then this guy raised his hand and said, “Hey Professor, could you explain [technical term]? It wasn’t clear to me from the article.”

“Boom. I had this startling insight. Up until then, I had always been afraid to ask questions like that for fear of looking stupid. But this guy didn’t appear stupid. At that moment, he seemed like the smartest guy in the class.

“Asking questions means you want to learn. You want to understand and know” [Emph. added].

I was the same way. I did well in school but rarely asked questions. Partly, I always trusted that I could “go figure it out later” on my own with the textbooks. Maybe I was also afraid of looking dumb. In any case, I had a similar epiphany, but for me it was a few years after college when I was at McKinsey.

There, the pace and the long hours made it impossible to “figure it out later.” The expectation to quickly deliver high quality, clearly-communicated thinking was ubiquitous. You’re also surrounded by super smart people, so take the fear of looking dumb in front of your classmates up a notch.

At first, I struggled to meet those expectations. The only way for me to succeed was to get over myself. Ask questions. Make sure I really understood. It turns out, it’s not that hard to ask a question. It may not come out perfectly at first, and it’s definitely a skill you can improve upon, but you’ll usually get the gist of it out.

The real work is in answering questions. At McKinsey, I had to answer questions even if my thinking was still half-baked. In doing so, I saw where I needed to be more robust and the whole process moved faster as a result.

I didn’t just learn the answers to difficult business problems, I learned how to structure and solve complex, ambiguous problems. The Farnam Street article comes to a similar conclusion: “We can learn a lot, often more, from the work involved in answering a question than from the answer itself.”

Then there was this Collaborative Fund article, Immutable Truths and Arguing Fools, which also hits on how we answer questions. In this piece, they discuss how the big questions in finance don’t have “right” answers because there are none. They depend on context, like timelines, risk tolerances, incentives, values, needs, etc.

“Learning from others is a huge part of investing – every mistake has already been made and you can add years to your life learning from them vicariously. But most investment debates can and should be replaced by acknowledging that reasonable people can disagree because we’re all different and driven by things that are hard to quantify.”

Case in point, from the EBITDA article referenced below:

“So, which earnings measure is the right measure?

• Is comprehensive income a better measure than net income?
• Is EBITDA really “bulls**t earnings” the way Charlie Munger says it is?
• And: does gross profit tell you more about a business’s competitive position than net profit?

There is no “right” measure of earnings for all purposes.”

I hope you all go out and ask some good questions today, or better yet, try to answer some.

Enjoy!
Mike

Gurus

Pat Dorsey Interview (Outlook Business)

A great overview of Dorsey’s thinking on moats applied to current companies. If you haven’t read his books, this is about as quick an overview as you can get, or a great refresher.

Mohnish Pabrai: One Doesn’t Need To Have A Swiss Army Knife Approach To Investing (The Acquirer’s Multiple)

“There are entire industries you can take a pass on. It’s not a problem. You can build plenty of wealth while just understanding one or two industries. One doesn’t need to have a Swiss Army knife approach to investing. If you look at most entrepreneurs, they’ve created their wealth with an extremely narrow skillset that they’ve capitalized on.”

Markets & Investing

EBITDA and Gross Profits: Learn to Move Up the Income Statement (Focused Compounding)

I am not an EBITDA hater like Charlie Munger. It’s all useful information.
“The further up the income statement you go, the more you learn about the inherent economics of a business. The further down the income statement you go, the more you learn about the people who run the business.”

Why Value’s Long Slog May Finally Have Ended (The Felder Report)

“However, another important inference can be drawn from the shift away from growth and momentum into value (and a steepening yield curve): this sort of widespread risk aversion is usually characteristic of a bear market for equities (as is a steepening yield curve driven by steady rate cuts).”

Your Parents’ Financial Advice Is (Kind Of) Wrong (WSJ)

“So it’s time to kill the idea that student-loan debt is always ‘good debt,’ to admit that buying a house isn’t always the right move, and to refashion these old expectations. It’s time for a new playbook.”

Company & Strategy

Platforms vs Verticals and the Next Great Unbundling (Andreessen Horowitz)

“In all but a few circumstances, the broad horizontal verticals eventually break. They become a victim of their own success. As the platforms grow, their submarkets grow too; their product gets pulled in a million different directions. Users get annoyed with an experience and business that caters to the lowest common denominator.”

Search Your Feelings (Scott Galloway)

“They started out benign, a group committed to peace and prosperity in the galaxy. Slowly, they aggregated power and, wanting to maintain that power, turned to the dark side.”

Day Two to One Day (Stratechery)

“Bezos went on to give advice about how to avoid Day 2, including ‘True Customer Obsession’, ‘Resist Proxies’, ‘Embrace External Trends’, and ‘High-Velocity Decision Making’. The company he manages then spent the next several years looking like it was in fact Day 2.”

SoftBank’s Earnings Need Another IPO After WeWork Is Delayed – Bloomberg

“There is a pattern to how the Vision Fund keeps returns climbing. With WeWork, however, the merry-go-round risks turning into musical chairs. The game needs IPOs on the floor or the music stops.”

Podcast of the Week

The Biggest Valuation Spread in 40 Years? (Meb Faber #175 – 8 min short)

“Meb explains why it is important to study history before assuming the U.S. deserves a valuation premium to the rest of the world, what global equity valuations look like, and the reality of investor home-bias.”