This thread reminded me that it is now 10 years since I stopped drinking alcohol. I haven’t had one drop since.
Sometimes people ask me: Why not just one glass? Why stop completely? Why not enjoy life?
The simple answer is: It simplified my life.
It’s easier to quit something 100% than 98%. It eliminates the decision. There is no internal debate ever again.
Other benefits include: I save money; I sleep better; no hangovers; I can drive anywhere without worrying about driving back; and potential health benefits of course.
Also, I completely removed one vector that could possibly ruin my life.
I just learned that a new industry of non-alcoholic social beverages is emerging. Examples are Kin and Three Spirit. Similar to non-meat meat.
In 10 years, I experienced no social awkwardness or negative reactions. I did experience that my non-drinking often unconsciously reduces the drinking of the people I hang out with. An effect I did not expect.
How did I do it? I went cold turkey. One day I got rid of all alcohol in the house, and never bought anything again. Done.
You’ve inherited some money, or sold a business. What now?
Most people don’t have the skill, time, or willingness to manage their own investments.
One option is to entrust your funds to a professional money manager. But how to choose one?
I would recommend the following checklist:
1. Skin in the game The first question I would ask: “What percentage of your net worth have you invested in the way you are recommending?” If it’s not a significant portion, I would quit the meeting right here and walk out.
Some years ago, I helped a friend get his finances in order. He owned some products that the private banker had recommended. “A great opportunity”, the banker said. I asked him: “Do you own any of these funds and certificates?” He smiled and said: “No, I’m saving to buy a rental property.” A prime example of “Don’t listen to what people say. Watch what they do.“
2. Aligned incentives Make sure that the incentives between the manager and yourself are aligned. How does the manager get paid? Does he charge a high management fee? Does he get paid when the performance is negative?
Personally, I prefer and recommend the old Warren Buffett Partnership model: 0% management fee, an annual hurdle, and then a 25% performance fee. A high water mark ensures that a negative performance needs to be made up before the manager is paid. Simply said: the manager should only make money when you make money. Here’s a clip of Charlie Munger commenting on this topic.
3. Aligned investing philosophy How does the manager choose investments? Which criteria are applied? What is the minimum time horizon? The approach needs to make sense to you, and you need to understand the basic concept. The manager should also be able to show a track record of the applied approach. Ideally his own, or at least of the people/organizations that inspired him to use this approach.
Applying this checklist does not guarantee investment success. But it might help you prevent painful mistakes, and stacking the odds in your favor for finding a good manager.
This was the topic at the recent MOI Global Zurich chapter dinner I attended. Here I summarize my notes and thoughts on this topic.
I understand capital allocation as follows:
How do companies spend their limited resources, be it capital, time, or mental resources, so that they create the maximum amount of value per invested unit of capital?
So it’s all about value creation, efficiency and high returns on invested capital, however you want to define it.
So how to identify a great capital allocator? First, try to find people with a solid record of value creation. Growth in earnings per share or free cash flow per share could be useful metrics. Exceptional customer loyalty, products that solve real problems, or a full R&D pipeline with promising improvements could be qualitative factors to look for.
One shortcut is to look for owner-operators. People who own a large stake of their company and are the driving force. Especially if those people already have a strong track record.
Then we discussed a number of topics and companies.
Amazon Jeff Bezos was mentioned as a great capital allocator. Because he is obsessed with creating customer value, and takes a very long-term view. He has a deep understanding of capital allocation from his 8 years working on Wall Street (including working at a hedge fund). Plus, he is the owner-operator.
Disruption / Innovator’s Dilemma Disruption is a real challenge. Many companies are faced with the Innovator’s Dilemma, being stuck with path-dependancy and an inability to cannibalize their still profitable, but increasingly obsolete, business units. Steve Jobs was a master of breaking this dilemma. Mark Zuckerberg seems to be pretty good at it as well.
BMW vs. Tesla So what should a company like BWM do, faced with the disruption created by electrification and autonomy, or more generally speaking, by software and data? Should they compete with the Google’s and Tesla’s of the world on software, and potentially lose a lot of money, or would it be better to milk the current cow and slowly decline?
Warren Buffett and his textile business Warren Buffett was faced with the same situation in his early textile business. He did a very sensible thing. He did not try to save the business at all cost. He took the profits, and reinvested them more productively. In his case, buying great and profitable companies like banks and insurance companies. And when his textile business started to lose money, he shut it down completely. He faced the facts and acted accordingly. He wasn’t romantic about it.
Mergers & Acquisitions Acquisitions only make sense when done sensibly. Buy great assets, and don’t overpay. A lot of times, mediocre acquisitions are made, for way too much money.
Stock buybacks & Dividends If its own stock is undervalued, it creates value for a company to buy back shares. If buybacks don’t make sense, paying a divided is better than acquiring a mediocre business, or starting a mediocre project.
Apple What should a company like Apple do? So far they have been heavily buying back shares and paying out dividends. So it seems that the current management can’t find better opportunities internally or externally to deploy the cash.
To summarize, there seems not to be a single way to identify great capital allocators. It all depends on the specific circumstances. Personally, I like the owner-operator approach. This might be a great shortcut to find, and then partner with, great allocators. In fact, when I look at my personal portfolio, this is exactly what I ended up doing in a lot of cases.
We live in a time where the default is to use your real name for writing. This was not always the case, as I learned in Benjamin Franklin’s biography. 300 years ago the default was to use a pen name. For good reason, as speaking your mind could be dangerous.
This got me thinking. Why don’t we use pen names more often today?
There are clear benefits: You can create a completely different persona. You can speak your mind even more vocally. And it overall feels lighter as the personal downside is smaller, which could especially be helpful for introverts.
Here are some famous pen names I wasn’t aware of:
Mark Twain (Samuel Clemens)
George Orwell (Eric Arthur Blair)
Have you always wanted to start a blog, write a book or create YouTube videos?
So here’s today’s idea: Why not start with a pen name?
I enjoy taking occasional power naps after lunch or in the afternoon. I rarely fall asleep, but when I do, it really is refreshing.
One tool I discovered are Binaural Beats:
A binaural beat is an auditory illusion perceived when two different pure-tone sine waves, both with frequencies lower than 1500 Hz, with less than a 40 Hz difference between them, are presented to a listener dichotically (one through each ear).
For example, if a 530 Hz pure tone is presented to a subject’s right ear, while a 520 Hz pure tone is presented to the subject’s left ear, the listener will perceive the auditory illusion of a third tone, in addition to the two pure-tones presented to each ear. The third sound is called a binaural beat.
I love having strong habits. At the same time, I find myself breaking those habits all the time. I used to feel bad about it. Not anymore.
When falling off the bandwagon, I usually try to “fake it until I make it”. Just going through the motions without really being present, just to keep the streak going. It doesn’t work.
Then, I discovered that it’s okay to break my habits. I am human. Life can get in the way. Nothing is set in stone.
I have learned to confidently break my habits, because I know that I can get back into the flow very fast, thanks to having a solid foundation. It also feels more refreshing than rigidly trying to “fake it until I make it”.
I now do this more consciously and it works.
1. Set a solid foundation by building strong habits and keeping them going as long as possible.
2. Accept that you are human and that life can get in the way.
3. Confidently break your habits.
4. Get back up and simply continue where you left off.
Recently, I got addicted to Universal Paperclips, a clicker game with unexpected philosophical implications.
The user plays the role of an AI programmed to only want one thing: paperclips.
It’s based on a famous thought experiment by Swedish philosopher Nick Bostrom.
It begs the question: where does our technological progress and constant optimization lead?
In the game everything feels natural. You make progress, you have success. Everything feels right, until everything is different. Try it yourself. It takes about 4 hours to complete the game (Web / iOS / Android).
(I tried it a second time to see whether I can complete it faster. Result: Not by much. I don’t recommend to play more than once. It features an odd combination of being addicting and frustrating. I have now deleted it and to be totally honest, I’m am happy to never touch it again.)