Author: Collaborative Fund

Good Enough

Spare a thought for the poor guppy fish, who lives a miserable existence but teaches us something important about forecasting.

Small, brightly colored, and terrible at defense, the guppy faces an unusually high rate of predator attacks. Birds eat guppies. Small fish eat guppies. Big fish eat guppies. Crabs eat guppies. It’s everyone’s favorite lunch.

How does a species under so much threat avoid extinction?

In short, guppies get busy as soon as they’re born. They can reproduce at seven weeks old, and deliver new offspring every 30 days. By the time a six-month-old guppy is eaten by a bird it might be a great-great-grandmother. The family lives on.

But this evolutionary trick has a nasty flip side.

Knowing how much danger they’re in, guppies expend nearly all their energy on reproducing from the moment they’re born. They grow as fast as possible, then devote a huge portion of their resources to nourishing their young.

That leaves little energy left to care for themselves. Their bodies are thrown together slipshod, like cheap plastic toys, and few resources are available for cell repair and maintenance. By the age of a year or two old it’s a crusty senior citizen, crippled by disease and decline, soon to go belly up. That’s how it should be: No use investing in the future when you’re likely to be eaten anyway.

Now compare the guppy with the Greenland shark, whose life is nearly a mirror image.

The Greenland shark has no natural predator. It (Read more...)

Three Big Things: The Most Important Forces Shaping the World

An irony of studying history is that we often know exactly how a story ends, but have no idea where it began.

Here’s an example. What caused the financial crisis?

Well, you have to understand the mortgage market.

What shaped the mortgage market? Well, you have to understand the 30-year decline in interest rates that preceded it.

What caused falling interest rates? Well, you have to understand the inflation of the 1970s.

What caused that inflation? Well, you have to understand the monetary system of the 1970s and the hangover effects from the Vietnam War.

What caused the Vietnam War? Well, you have to understand the West’s fear of communism after World War II …

And so on endlessly.

Every current event – big or small – has parents, grandparents, great grandparents, siblings, and cousins. Ignoring that family tree can muddy your understanding of events, giving a false impression of why things happened, how long they might last, and under what circumstances they might happen again. Viewing events in isolation, without an appreciation for their long roots, helps explain everything from why forecasting is hard to why politics is nasty.

Those roots can snake back infinitely. But the deeper you dig, the closer you get to the Big Things: the handful of events that are so powerful they influence a range of seemingly unrelated topics.

The ultimate of those great-grandmother events was World War II.

It’s hard to overstate how much the world reset from 1939 to 1945, and how (Read more...)

Big Beliefs

A trick to learning a complicated topic is realizing how many complex details are a cousin of something simple. John Reed writes in his book Succeeding:

When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles – generally three to twelve of them – that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.

Most fields are a hierarchy of truths with big ideas at the top and laws, rules, and finer details branching off below them. Viewing ideas in isolation, without recognizing the family free of where they came from, gives a distorted view of how a field works and can overcomplicate what are often simple answers.

Beliefs are the same. How many business and investing beliefs do I have – opinions, ideas, models, etc? I don’t know, thousands probably. It’s a complex topic. But most of them derive from a few core beliefs.

A few big things I believe:

The inability to forecast the past has no impact on our desire to forecast the future. Certainty is so valuable that we’ll never give up the quest for it, and most people couldn’t get out of bed in the morning if they were honest about how uncertain the future is.

No one’s success is proven until they’ve survived a calamity. Serendipity often masquerades as skill, and (Read more...)

Five Lessons from History

The most important lessons from history are the takeaways that are so broad they can apply to other fields, other eras, and other people. That’s where lessons have leverage and are most likely to apply to your own life.

But those things take some digging to find, often sitting layers below the main story.

The Great Depression began with a stock market crash. October 24th, 1929. That’s the story, at least.

It makes for a good story because it’s a specific event on a specific day. But if you were to go back to October 1929, during the crash, the average American might seem unfazed. Only 2.5% of Americans owned stocks in 1929.

The huge majority of Americans watched in amazement as the market collapsed, and perhaps lost a sense of hope that they, too, might someday cash in on Wall Street. But that was all they lost: a dream. They did not lose any money because they had no money invested.

The real pain came nearly two years later, when the banks started to fail.

Just over 500 U.S. banks failed in 1929. Twenty-three hundred failed in 1931.

When banks fail, people lose their savings. When they lose their savings they stop spending. When they stop spending businesses fail. When businesses fail, banks fail. When banks fail people lose their savings. And so on endlessly.

The stock market crash wasn’t a relevant lesson to the vast majority of Americans who didn’t own stocks in 1929 and likely never would. (Read more...)

Rare Skills

Three rare and powerful skills:

1. Understanding why people believe things in a way that makes you respect their delusions.

A rare and useful skill is understanding that people you find to be deluded likely suffer from the same shortcomings you do.

Historian Will Durant wrote in his book The Lessons of History that we should learn enough from history to respect each other’s delusions. He explained:

Our knowledge of any past event is always incomplete, probably inaccurate, beclouded by ambivalent evidence and biased historians, and perhaps distorted by our own patriotic or religious partisanship. Most history is guessing, and the rest is prejudice.

I think this boils down to three points:

  • Everyone is heavily influenced by what they’ve experienced firsthand, because what you’ve experienced is more persuasive than something you read about.

  • Even our understanding of firsthand experience is sketchy, because we oversimplify what happened and self-justify our involvement.

  • Those who didn’t experience an event firsthand have an even weaker grasp on reality because they can cherry pick the oversimplified, self-justified arguments and data from people with firsthand experience.

So everyone has delusions about how the world works. You, me, everyone.

We are all prisoners to our past, products of our generation, and influenced by who we’ve met and what we’ve experienced, most of which has been out of our control. Some are worse than others, and some are more aware of their blindspots. But everyone has a firmly held belief that an equally smart and informed person disagrees (Read more...)

Reality Catches Up

An asset you don’t deserve can quickly become a liability.

Maybe your portfolio surged during a bubble, your company hit a monster valuation, or you negotiated a salary that exceeds your ability. It feels great at the time. But reality eventually catches up, and demands repayment in equal proportion to your delusions – plus interest.

These debts are easy to ignore because they are often repaid in the form of self-doubt and crushed morale. But they are very real, and when you understand their power you become careful what you wish for.

Companies should want the valuation they deserve, and not a penny more.

Workers should want a salary that matches their skill, and nothing more.

Families should want a lifestyle they can sustain, and nothing higher.

None of those are about settling or giving up. It’s about avoiding a certain kind of psychological debt that comes due when reality catches up.

WeWork is currently worth $3.5 billion, which is a monster success for a 12-year-old company – it’s probably in the top 0.0001% of business successes. But of course no one feels that way. The company was worth $47 billion a few years ago, and it was trying to go public at a $100 billion valuation, which no one could justify but felt fun because those were the times we were living in. So by comparison today’s valuation feels like a corporate bellyflop – embarrassment, employees whose stock options expired worthless, and morale shattered as it laid off thousands (Read more...)

Breaking Points

Two weeks ago, Mitt Romney wrote an opinion piece in The Atlantic titled, “America Is in Denial”. The piece highlights numerous potentially “cataclysmic events” facing the nation, namely droughts out west, inflation, rising debt levels, profligate government spending, melting ice caps, illegal immigration, and the events of January 6th. Interestingly though, Romney argues that the most significant threat is actually not the events themselves, but rather Americans’ refusal to address them.

The question is why?

Romney believes it is due to our “powerful impulse to believe what we hope to be the case — We don’t need to cut back on watering, because the drought is just part of a cycle that will reverse. With economic growth, the debt will take care of itself. January 6th was a false-flag operation.”

You may or may not agree with Romney’s causes for concern, but for the moment let’s assume that at least a few have merit. If so, why do people so rarely act before a crisis occurs? Why do we instead choose to bury our heads in the sand and hope for the best?

The answer is actually quite simple — no one knows when something will break. It could be imminent or many years away. No. One. Knows. As a result, people tend to push the throttle until it does.

History is full of examples. It’s why governments don’t reform until it’s too late, real estate developers believe there is always room for one more building….theirs (Read more...)

Breaking Down A Tesla

Tesla has single-handedly transformed the landscape of the automobile industry worldwide in less than two decades. Before it, almost no car companies were seriously invested in developing all-electric vehicles (EVs).

Now, automakers around the world are racing to catch up to Tesla, completely overhauling their R&D to prioritize EVs.

And we think Tesla and the cars it makes are good.

Yes, it’s had its fair share of controversy and drama over the years, from accusations of sexual harrasment at the company to CEO Elon Musk’s infamously mercurial behavior on Twitter (and his efforts both to outright buy it and then get out of buying it). Tesla was also recently de-listed from the S&P 500 Environmental, Social and Governance (ESG) index, which struck many people as odd for a company whose raison d’être is to eliminate fossil fuel emissions.

Setting aside all that recent news to look at Tesla’s cars themselves, the Models S, 3, X, and Y are truly groundbreaking in the EV space because they were the first cars to do everything that a gas-powered car can do without asking drivers to sacrifice style and luxury. And people have been lining up in droves to buy them. So, despite the controversies, the company seems to be doing an admirable job of hewing to its mission to “accelerate the world’s transition to sustainable energy.”

We’ve recently gotten really interested in the materials that make up our world, and so we started to wonder: what are Tesla’s cars actually (Read more...)

Tails, You Win

Steamboat Willie put Walt Disney on the map as an animator. Business success was another story. Disney’s first studio went bankrupt. Later cartoons were monstrously expensive to produce, and financed at onerous terms. By the mid-1930s Disney had produced more than 400 cartoons – most of them short, most of them liked, and most of them losing money. Disney and his studio were nearly broke.

Snow White and the Seven Dwarfs changed everything. The $8 million it earned in the first six months of 1938 was an order of magnitude higher than anything the studio earned previously. It transformed Disney Studios. All company debts were paid off. Key employees got retention bonuses. The company purchased a new state-of-the-art studio in Burbank, where it remains today. By 1938 Walt had produced several hundred hours of film. But in business terms, the 83 minutes of Snow White was pretty much all that mattered.

Long tails drive everything. They dominate business, investing, sports, politics, products, careers, everything. Rule of thumb: Anything that is huge, profitable, famous, or influential is the result of a tail event. Another rule of thumb: Most of our attention goes to things that are huge, profitable, famous, or influential. And when most of what you pay attention to is the result of a tail, you underestimate how rare and powerful they really are.

Venture capital is a tail-driven business. You’ve likely heard that. Make 100 investments, and almost all of your return will come from five of them; most (Read more...)

Little Ways The World Works

If you find something that is true in more than one field, you’ve probably uncovered something particularly important. The more fields it shows up in, the more likely it is to be a fundamental and recurring driver of how the world works.

Take two topics that seemingly have nothing to do with each other: goldfish and tech companies.

Take two groups of identical baby fish. Put one in abnormally cold water; the other in abnormally warm water. The fish living in cold water will grow slower than normal, while those in warm water will grow faster than normal.

Put both groups back in regular temperature water and they’ll eventually converge to become normal, full-sized adults.

Then the magic happens.

Fish with slowed-down growth in their early days go on to live 30% longer than average. Those with artificial super-charged growth early on die 15% earlier than average.

That’s what biologists from University of Glasgow found.

The cause isn’t complicated. Super-charged growth can cause permanent tissue damage and “may only be achieved by diversion of resources away from maintenance and repair of damaged biomolecules.” Slowed-down growth does the opposite, “allowing an increased allocation to maintenance and repair.”

“You might well expect a machine built in haste to fail quicker than one put together carefully and methodically, and our study suggests that this may be true for bodies too,” one of the researchers wrote.

The same thing has been found in humans. And in birds. And in rats.

And (Read more...)