There Will Be Theory

A Brief Book Review of The Innovator’s Solution by Clayton M. Christensen and Michael E. Raynor

John Stuart Mill famously said, “Sound theory is the only foundation for sound practice.” Another John with a four-syllable name, Maynard Keynes, later quipped: “Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist.” Clayton Christensen and Michael Raynor would probably agree wholeheartedly with both statements. They begin and end this brief but dense book, The Innovator’s Solution (2003), with the idea that whether we are conscious of it or not, all business people, whether the managers of established enterprises or the entrepreneurs and investors of new companies, have mental models and theories guiding their business decisions and actions; and not all of these models and theories are good. The best theories are those which are based on pattern recognition that evolves as the patterns it observes evolve. The worst theories tend to be simple inventories of seemingly fixed attributes. While the best theories are grounded in existing circumstances, they also reflect that circumstances change, and as such, they themselves should change too. The good theory this book hopes to build is around the question of growth, namely why it is so hard for companies to sustain their success. To this end, I would argue its most important chapter is its sixth, which attempts to provide guidance on “How to Avoid Commoditization”.

But let’s back up for a second. To quote the great writer Roger Lowenstein, the trouble begins, “as it often will, in a remote and seemingly minor colony of the corporate empire”. A manager at a large, established company is tasked with finding growth. But not the natural rate of growth the large, established company is used to; she is tasked with finding growth that surprises outside investors by exceeding their expectations. In short, she is searching for innovation. Oh, Wall Street; can’t you ever leave well enough alone?

Enter Christensen and Raynor. They begin their theory-building by reprising a framework from the prequel to this book that Christensen wrote, The Innovator’s Dilemma (1997). The authors hold that there are two types of innovations: There are those that are sustaining in nature to the company’s value network (read: its entire business ecosystem) and its place within it, and there are those that are disruptive in nature. With sustaining innovations, a better product is being introduced to an existing market, and this is done best by established, integrated companies providing greater functionality and reliability to their most profitable customers. However, the disruptive innovations are where the largest future rewards are, and these arise from two different situations.

The first is low-end disruption; here a new company with modular or cobbled-together aspects is able to create a lower-margin cost structure to attract customers from the existing market who have been “overserved” on functionality and reliability and just want better speed and responsiveness. The second is new market disruption; a new company—instead of competing with the Goliaths by eating their low margin businesses and forcing them to flee up-market—competes with “nonconsumption” by finding a new “basis of competition” separate from established value networks. It does this by essentially serving new customers or situations that had previously been ignored. Christensen and Raynor spend ample time making the point that to figure out the latter type of disruption involves not asking customers why they like your product but what they hire it to do (the concept of “jobs-to-be-done”). To quote them later, “Competitiveness is far more about doing what customers value than doing what you think you’re good at.” This is not simple stuff to figure out or implement. Few outside of founder-led companies have done it well repeatedly. But it is imperative to know.

If our hypothetical manager is the right type of manager—as Christensen and Raynor spell out in an enlightened chapter on staff selection—it is not because she is deeply experienced in the new areas of disruptive innovation. Rather, it is because she has shown “the ability to learn what needs to be learned” to succeed here. But she still will face problems. The main problem is that the most exciting opportunities of tomorrow are small today and hard to sell within the traditional operations of a large, established company. Why? Because its resources, processes, and values are inextricably intertwined with benefiting its current value network of customers, distributors, and suppliers so that it can in turn make as much money as possible and sustain and grow its largeness.

I know this pretty well. I have advised several Fortune 500 companies on how to create and scale businesses and business models around sustaining and disruptive innovations. I have also served as the outsourced CFO for startups within several of these larger organizations, helping four promising early-stage startups recently raise $14.3 million from C-suites of their parent companies. The core challenge to overcome exists in what Christensen and Raynor refer to as “asymmetric motivations” within “resource allocation processes”. Essentially, the cost structures and values of large, established companies are geared toward prioritizing and incentivizing activities that raise the company up-market to higher margin business lines and keep their current customers happy; this comes at the opportunity cost of attracting new and (currently) less-lucrative customers who are the bedrock of new markets and future disruptive growth. The authors provide useful guidance for how to overcome these problems that aligns well with my own experiences.

This book is dense with ideas, and in many ways it is several books crammed into one. But it is absolutely worth reading. The section on how companies should be patient for growth but impatient for profit—rather than impatient for growth and patient for profit—is wonderful, as is the admirable employment of so many case studies; from the motorcycle, steel, airline, disk drive, automobile, milkshake, and PC industries, as well as repeated use of a Wayne Gretzky quote that would make businessman-theorist Michael Scott of Dundler Mifflin proud.

If you’d like to know how these theories have been sampled and remixed, head over to Ben Thompson’s blog Stratechery, where he has done an admirable job to challenge, update, and apply Christensen’s and Raynor’s powerful and eloquent theories for the ever-changing circumstances of our present time.

The Education of a Value Investor

A Brief Book Review of The Education of a Value Investor by Guy Spier

There is an unexpectedly touching and humble message at the core of this memoir, which is essentially an extended Prodigal Son parable and thank you letter from Guy Spier, the founder and manager of the Aquamarine Fund, to a few key folks in his life; those folks are Spier’s father and the investors Warren Buffett, Charlie Munger, and Mohnish Pabrai. It is unexpectedly touching and humble because, for one, Guy will admit that he drives a convertible Porsche and has never had to take out mortgages to purchase homes in some of the wealthiest neighborhoods in the world. More importantly, the book starts with Spier fresh out of Harvard Business School and Oxford (where he was top of his class and friends with David Cameron), admittedly arrogant about his intellectual powers.

Spier thought his brainpower was like a parachute that could bail him out of any free-falling situation or like an oxygen tank to help him climb to the top of any environment; sadly, Spier thought wrong. After a stint at a (probably corrupt) Wall Street investment bank, he learned that’s not true; environment is stronger than he appreciates, and often the best move is to switch our environments rather than try to influence them. This is perspective he unfortunately did not find within the ivy-clothed buildings of his adolescence.

From this stark awakening, he begins to model the behaviors of Buffett and Munger, which becomes especially pronounced after he and Pabrai—author of the solid book The Dhandho Investor—successfully win an auction to have lunch with Buffett, which Spier calls “the ultimate capitalist master class”. The memoir then begins to read as an almost uncomfortably rose-tinted hagiography of Buffett before Spier thankfully has another awakening; he realizes that his goal in life and as an investor isn’t to blindly imitate Buffett but to become more authentically himself and embrace and work around his own idiosyncrasies (e.g., his ADD, his need to show how smart he is, etc.). How? I think there are three key ideas at the center of his hard-earned wisdom:

(A) We are significantly more likely to be changed by the environments we are in and the peers we associate with than to change them, so we should be thoughtful and careful about what environments we spend time in and gravitate toward people who are “better than us”. Books help, but real flesh-and-blood people help even more;

(B) Having a lot of intellectual horsepower is less important than understanding and knowing how to manage our inner emotional landscapes. It’s important to be reflective and introspective about who we are, especially if we are fortunate enough to be investors, whether of our own capital or that of others. The financial markets expose our vulnerabilities, which is not to say that we should try to be free of any, but is to say that we should confront our vulnerabilities and structure our lives to minimize the deleterious aspects of them. Often it pays more not to work to increase our rationality but to structure our lives to limit our irrationality so whatever rationality we do have can compound over time. To highlight this, Spier dives into some admirable and honest detail to explain actions such as why he uprooted his family to Zurich from New York; why he goes to therapy; why he eschews debt; and why he, Pabrai, and Buffett all take naps in their offices; and

(C) You can’t do the remarkable by aspiring to be conventional. Moreover, the unconventional doesn’t have to be wild; it can be the simple, “boring”, hard stuff (e.g., Munger, despite being a billionaire, is always one hour early to every meeting; Buffett does not have an email address; Pabrai will not sell anything within two years of buying it; Spier does not publicly discuss his current portfolio holdings, etc.).

Saw this at the NYSIB library in midtown and then ordered my own copy online. Glad I did. Full of lessons; marked this up like a graffiti artist.

How to Become a Rainmaker

A Brief Book Review of How to Become a Rainmaker by Jeffrey J. Fox

Bias is strong, and often hard to recognize and check. I came into this book, Jeffrey J. Fox’s “How to Become a Rainmaker”, with some pretty strong biases. I half expected it to be the book version of one particularly cringeworthy but hilarious 90-second scene from Will Ferrell’s magnum opus “Step Brothers”; in the scene Ferrell tries to convince Adam Scott and Rob Riggle’s characters that he’s the right man for running the Catalina Wine Mixer, “the biggest helicopter leasing event in the Western Hemisphere since 1997.” To sell them on the idea, Ferrell pretends to be a douche, and it works. Would I be a douche after reading a book about rainmakers? In hindsight, no. This book is actually really good and refreshingly brief.

I learned about it after it was mentioned in Chris Voss’s surprisingly good Never Split the Difference, and I’m glad I picked it up. Too often books of this ilk are essentially Business Insider articles that should’ve stayed as Business Insider articles and not be drawn out into 200-page woodblocks on common sense that you could learn from speaking to any high school guidance counselor. This book is actually helpful and not geared toward sales bros, but toward anyone who cares about revenue, fundraising, or customer acquisition and retention, whether at a non-profit or for-profit (read: everyone). And I enjoyed its practical advice and many case studies. There are a couple sections that are maybe overly specific and detailed (such as ‘don’t put pens in your pocket because they could explode, embarrass you, and ruin a meeting’—Hmm, okay), but the advice is useful otherwise.

Some advice is common and could be found in similar books, such as: put yourself in your customers’ shoes; do not talk about yourself but instead ask probing, detailed questions and clarify and summarize what they say; pre-plan every sales call; be flexible in your pitch, and if they say yes, take yes for an answer; do the math of how many calls it takes to land a sale and don’t start a “trip” with a customer without enough “gas in your tank”; dare to be dumb by “onionizing” your customer and continuously asking questions about their business; be polite to everyone; a shot on goal is never a bad play; don’t waste your time trying to convince people of your value who don’t already buy similar products; and ask them what you’re not asking that you should know.

Other advice is unique and I hadn’t come across elsewhere: rainmakers sell money not benefits or products (dollarize the benefits of everything for your client); give yourself the best seat in the house; encourage them to express their free will and decide for themselves; welcome customer objections or roadblocks and turn them into objectives; in the middle of a job ask for the next one; don’t negative sell, but do emphasize points of difference; anytime is a good time to reply; show the chain but sell the first link; and ask them to give it a try.

Glad I read this and will do as the author said and flip to a random page every so often and see if I can use the advice in it. I’m confident I can and you can.

Homo Deus

A Brief Book Review of Homo Deus: A Brief History of Tomorrow by Yuval Noah Harari

It is not until the end of this supremely ambitious, engaging, dense, and ultimately successful book that Yuval Noah Harari comes clean: He is not in the business of making predictions; rather, he is in the business of discussing possibilities. I say this upfront because if you read this book with the perspective of it being a window into how the world could develop rather into how it will, it reads as less frightening and immediate and as more stimulating and useful.

In the course of 400 thick pages (figuratively and literally; the publisher seems to be buying premium wood for printing this best seller), Harari touches upon seemingly every aspect of human history. At one point, he brilliantly and seamlessly employs the Romanian Revolution, Egyptian pharaohs, and the corporation commonly known as Google to urge forward his thesis. That thesis begins with the idea that what has differentiated humans from every other organism on the planet was how we developed the propensity for storytelling.

Unlike other species on this blue-green ball, we learned how to use narratives to flexibly organize large and disparate groups of humans in pursuit of collective goals that otherwise might make little sense to each of us as individuals. Most notably, it has allowed us to create “intersubjective” entities like gods, nations, and money, which became the basis of our “religions”. Because of the technological changes enabled by the scientific and industrial revolutions, we then found a new global religion in Humanism, which combined new technologies with our old skill for spinning yarns to place humans at the center of the universe. Humanism, like other religions, has sects; it has liberal humanism (e.g., capitalism), socialist humanism (e.g., communism), and evolutionary humanism (e.g., fascism), and these sometimes clash. (See World War II and the Cold War.)

What is most intriguing about our transition from believing in a god-centric view of the universe to a human-centric view is how technology made this possible both economically and politically and how the three principal sects of humanism borrowed from what came before them and from each other. Indeed, Russian revolutionary leader Vladimir Lenin claimed that communism couldn’t have come to be were it not for capitalist inventions like electrification, radio, and the railroad, which allowed the centralization of decision-making around resources. Harari claims new technology is again making possible the next sea-change in religion, taking ideas from preceding religions, and in the process, changing economics, politics, and society at large.

As we moved from animism to theism and from theism to humanism, we are now moving from humanism to a data-centric view of the universe; our new Internet-enabled world and the mountains of data it produces are rewiring how we organize our societies to be geared more toward decentralization and the freedom of information rather than the freedom of human expression. Important to this development are three key assumptions: Everything, including us, is an algorithm (a conclusion the life sciences are leading us toward), intelligence has been uncoupled from consciousness, and non-conscious algorithms can know us better than we know ourselves.

Whether the powers-that-be in this new religion, Dataism, will eventually need humans as a whole, as individuals, or as represented by some super-human elite among us, and whether our hitherto social institutions will survive, is not a mere parlor room discussion. When the investor and philanthropist George Soros claims Facebook is ruining democracy, he might actually be on to something, but not because of any nefarious ideas in the minds of Zuckerberg, Sandberg, et al., but because in the networked, algorithmic relationships that companies like the FAANG are heralding, democracy’s place in the world seems increasingly tenuous.

To be clear, each of these three assumptions hinges on recent hypotheses in the life sciences that may prove to be wrong. And Harari is not saying they are what should happen but is simply saying what the consequences of them could be. While the ramifications of each assumption for society as a whole and for each of us is unclear, Harari is happy to discuss the possibilities. And I am happy to listen.

A Dozen Lessons for Entrepreneurs

A Brief Book Review of A Dozen Lessons for Entrepreneurs by Tren Griffin

I have often enjoyed the writing of Tren Griffin. He authored a book called Charlie Munger: The Complete Investor that I liked so much I read it twice in a few months. And his blog, 25iq.com, is a treasure of insightful posts on many aspects of business; his articles on customer acquisition costs are particularly strong, and I’ve shared them with friends and business contacts repeatedly. So I‘m always excited to pick up any writing he puts out. But something felt off in this book. Perhaps it was the format and structure, or perhaps it was the subjects. Griffin has clearly studied Charlie Munger, Warren Buffett, and Howard Marks deeply. And his experiences working beside Bill Gates and Craig McCaw have sharpened his mind in ways I’d love to see him share even more. While his knowledge of these titans of business was incredibly enlightening and charming in the pages of his book on Munger, it felt repetitive and trite here—though I’m not sure it’s Griffin’s fault.

In each chapter, we are introduced to a particular start up coach or venture capitalist; after a few sentences about where they went to school or worked, we learn they either invested in household name-brand companies such as Twitter, Uber, AirBnB, Google, or in tech companies I’ve definitely never heard of (and I would doubt you have either), but we are to assume were smashing successes; we are then shown 12 out of context quotes from each which Griffin tries to add some depth to or to contextualize by comparing to ideas espoused by Munger, Buffett, Marks, et al. I don’t doubt that their ideas relate. Indeed, the term “value investor” is a misnomer; all “investors” hunt for “value”, even if the self-imposed rules of their hunt differ.

The problem is that while Munger, Buffett, Marks, et al. are well-known billionaires with public records of their successes, failures, unique stories, and backgrounds, and lovable foibles, the venture capitalists in this book largely blend into a grey, undifferentiated mass. Despite what seem to be Griffin’s efforts to have a diverse array of subjects, they are largely all of the same demographic. (Yes, that one.) Some come across as especially interesting, but they are the exception that proves the rule. Okay, okay, okay; you went to Stanford undergrad and Harvard Business School and know better than to have too large a venture fund if you want to get 3x over ten years for your limited partners, given the few venture-grade companies you are likely to meet that will have exits large enough to keep your lights on. But what are your returns? What were your worst investments, and why? What did you do to help any of those name-brand companies mentioned in your bio succeed?

We learn some useful things, as will happen in any Griffin work because Griffin is a strong teacher: We learn that missionary entrepreneurs persist longer and build better businesses than mercenary entrepreneurs; we learn that the value of a venture capitalist isn’t the check he or she writes but his or her network and the help provided to entrepreneurs around knotty questions related to fundraising, pricing, distribution, and recruitment; we learn that the only sin in business is running out of cash; we learn that great products lead to great brands, not the other way around; we learn that magnitude of success in investing is more important than frequency of success; we learn that venture capital is more cyclical and more of a crapshoot than most outside the industry realize; we learn it is better to be a learn-it-all than a know-it-all; we learn that “growth-hacking” is possibly a bullshit term for “sales and marketing”; we learn that being a visionary is easier than being an operator; we learn that there is no way to learn how to invest or run a company other than to invest or run a company; and we learn that were it not for power law outcomes, convexity, lock-ups, and strong contractual law and public markets, venture capital wouldn’t impress.

Not a bad book but not Griffin’s best either. Again, Griffin is a great teacher; but often I think the best teachers work hard to show their students that primary sources are usually more valuable than secondary sources. To this end, the book might have been improved were it structured like Jack D. Schwager’s great series of books on investing where he essentially prints the interview transcript with his subjects and works to show how their styles of investing differ from each other. Or perhaps that wouldn’t have helped because the subjects here just aren’t that differentiated.

The Slog

A Brief Book Review of Plunkett’s Almanac of Middle Market Companies 2018 by Jack W. Plunkett

In the early 1950s, Warren Buffett, then in his twenties, would regularly flip through Moody’s Investment Manuals and strike gold. He would find within the thousands of pages of those books companies selling at fractions of their intrinsic values, sometimes just 2x their earning power. After conducting due diligence on a business, he’d put significant chunks of his net-worth into it and within weeks or months make multiples of his invested capital. In his own words: “I went through the Moody’s Manuals page by page. Ten thousand pages in the Moody’s Industrial, Transportation, Banks, and Financial Manuals—twice. I actually looked at every business—although I didn’t look very hard at some.”

It became the stuff of legend, and deservedly so. It was remarkable obviously because it was bold and courageous of him to trust his own judgment and make concentrated investments based on what he had independently uncovered. But I want to focus on something else that I think is equally remarkable and more ignored; I think it was remarkable in large part because Buffett, in his attempt to turn over more stones in pursuit of the glittery stuff at the center of all searches, demonstrated tremendous tenacity.

At the beginning of the Mutoro Group’s 2018 first quarter letter, I quoted former Arsenal F.C. manager Arsène Wenger referring to tenacity as “stamina in your motivation”. Here’s the full quote:

“Tenacity is the most underrated quality. We always speak about talent, intelligence, glamour, but tenacity is the common thing for every successful person in life. Maintain that motivation to go from A to B and to keep your focus on the target without any weakening—that is called tenacity. Stamina in your motivation.”– Arsène­­ Wenger

I love this, and not just because I’m a fan of Arsenal F.C., but because it speaks volumes. Anyone could have picked up the books Buffett did and found what he found, but the difference maker was that he actually did; he actually went page by page through a volume so large and so popularly regarded as dry and cumbersome, and he did not lose focus, and he did not stop. I don’t think we say enough as a society about that part of successful journeys, that is, the slog. It’s easy in our media-rich world to only see the joyous outcome at the end, rather than the monotony of what makes the hard in hard work. So much is a montage and set to music that I think it’s easy to trick ourselves into thinking that being on the hunt should be similarly rapid and entertaining rather than sometimes long and slow. But not always.

In 2017, HBO released a documentary called “The Defiant Ones”, which tracked the careers of music-industry giants Jimmy Iovine and Dr. Dre up until their sale of Beats Music to Apple. It’s hilarious and insightful, and one scene in particular is instructive. Bruce Springsteen recounts his in-studio search for high-quality drum sounds for the album “Born to Run”, which was released in 1975. His team spent three weeks trying to get drum sounds up to his exacting standards. “It was indulgent, but sometimes you need to be indulged,” Springsteen says. When he felt they weren’t getting the drum sounds he needed, he would implore Iovine, who was engineer for the album, to redo the work by saying, “Stick”. Just that word, repeatedly for days, whenever he felt it had to be redone: “Stick… Stick... Stick…” The monotony was so unbearable that Iovine almost walked off the project, describing it as “brutal”. Springsteen saw it as necessary. Whatever your perspective, it worked. What seems to matter is the focus and motivation one brings to the hunt despite it occasionally feeling meandering, whether that hunt is for a drum sound or a discounted stock.

I doubt there is anyone who has read a biography of Buffett that retells his Moody’s Investment Manual episodes who hasn’t herself fantasized about finding an investment gem in the discount bin by combing through the pages of an overlooked book. I certainly have. And this ambition has served me well in my more modern way almost seventy years later; I have made numerous investments that I sourced through learning about a company or situation after running a unique stock screen or digging into the guts of a book or the archives of far afield newspapers and then going through the slog of diving into the companies that came out of those searches. This hasn’t always been a fruitful endeavor for sourcing investment ideas, especially recently. As the valuation of markets has grown substantially this decade, most companies that appear “cheap” on screens aren’t diamonds in the used bin, but junk priced the way it should be. Screening, though, will always find some favor with investors in some capacity, especially if the downward volatility in the markets in the second half of this year continues.

It is with this background that I trekked to the New York Science, Industry, and Business Library in Manhattan one recent weekend after going to my gym in Brooklyn. I have worked at funds that spend millions of dollars a year to have access to the most expensive data sources and subject matter experts and take first class trips to the most obscure sites. But I still think one of the hardest things for humans is picking up a book and independently flipping through its contents; the “drier” the book is, the truer this is. I see advantage in that. To this end, I was happy to look through this book, Jack W. Plunkett’s “Plunkett’s Almanac of Middle Market Companies,” which I randomly picked off the shelves, some bit of that inner Buffett-Moody’s fantasy coursing through my veins.

It has hundreds of profiles of businesses, each with its own page containing summary info on the company’s operations and some key financials over the last six years. If I had not heard of a business I came across (many in this book), I quickly calculated some metric I was interested in or read its financial table for its “operating margin”, “revenue growth rate”, and “free cash flow” to see if that particular business met my initial standards for “a good business”. If it did, I read the description, noted its name and then did more research about it. It took me a few hours to go through. I left with 19 companies I have followed up on. That’s what this book did well.

Here’s what it didn’t do well. The long-and-short of it is this book isn’t very well organized and clearly wasn’t researched beyond depths a beagle or corgi could comfortably splash through. Of the six hundred or so companies within this book, some, while presumably “middle market”, come with no financial data and such scant editorial information that it’s surprising they are even here. The Miami Dolphins? The Chicago Bears? C’mon, Jack. And for those companies that do have more information within their pages (i.e., the publicly traded ones), beyond the financial data provided about them, the editorial descriptions of the businesses are so bare bones and disjointed as to be often largely irrelevant.

I think there is still a lot of utility in books like this even in our digital age. But I would not pay a dime toward the $320 this book sells for retail and am grateful for living near a healthy public library system. As for the 19 companies I took away from this book as being worth further investigations: In time I hope my research of some will make this worth the slog.

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Notes & Letters

Moby-Dick

A Brief Book Review of Moby-Dick; or, The Whale by Herman Melville

Come, all ye good people, come! Step into a world in which the superabundant terror and indifference of the sea are foremost; step into a world in which the whale hunt, that wild Scandinavian activity first broached by old Norse sea-kings along the steep cliffs of Viking fjords, is chronicled at depths as great as the vast, blue ocean itself; step into a world in which antebellum, adolescent America, from Nantucket bluffs to Great Lake canals, from dark Manhattan alleyways to bright New Bedford mansions, built and lit with the profits and fat of the sea, is mapped with as much humor, character, and casual racism as the Bard brought to the ancient cities of Europe; step into a world in which the entire globe is a stage and so very many of its ports, and its straights, and its capes, and so very much of human probability are mythologized with as much drama and poetry as the Bible; step into a world in which the leviathan, Moby Dick, that great white monster himself, never daunted, never moored, rarely seen, preys on the minds and fortunes of old, vengeful Ahab, the colorful crew of the Pequod, brave Queequeg, and our narrator Ishmael. Come! I promise if thou hast the stamina for it, and the $3 a used copy will run ye, your rewards both along the voyage and at the end are massive. Two thumbs up.

Playing the Float

A Brief Book Review of Shoe Dog by Phil Knight

In 1977, five years after its founding, Nike introduced an ad campaign with a simple yet powerful ethos. Next to a picture of a lone runner along a country road was the following: “Beating the competition is relatively easy. Beating yourself is a never-ending commitment”. It captured the relentless, competitive nature of the company at the time and, I would venture, the spirit of this remarkable memoir. In ”Shoe Dog”, notions of victory and defeat loom larger than Olympian gods; they bless or curse the effort, teamwork, reflections, ambitions, preparations, and will power of the mere mortals in this story, of which our narrator Phil Knight, co-founder of the company, is most prominent. But he is hardly the only intriguing one. We follow him, and his very own Penelope, on this hilarious, detail-rich Odyssean narrative, as he meets captivating and cleverly described characters such as workaholic bookworm and first Nike employee Jeff Johnson, Oregon track coach and Nike co-founder Bill Bowerman, American track legend and early company spokesman Steve Prefontaine, and numerous Japanese businessmen (most notably the diabolical Kitami and the wise Hasuro Mayami). The book covers 1962 to 1980, with a tender and heart warming epilogue in the 21st century. Despite being one of the world’s most well known and popular companies, this story is full of surprises. Did you know that until its IPO in 1980, Nike flirted with bankruptcy nearly every year, as it grew like a weed but stretched its thin cash balances to the limit? Did you know that for its first ten years despite being known for its shoe innovations and rebellious advertising, Nike only hired accountants and lawyers? There are heartwarming father and son stories here, lessons on frugality and capital allocation, meditations on burnout and international trade, and a fair bit of poetry. One of the best business memoirs I have read. Two enthusiastic thumbs up.

Friday Black

A Brief Book Review of Friday Black by Nana Kwame Adjei-Brenyah

I enjoy reading most when I have a pencil in my hand and can scribble thoughts in the margins of a page. And in the margins of this book, Nana Kwame Adjei-Brenyah’s collection of short stories titled Friday Black, I kept writing “WOW.” It is rare that a book both feels as though it were a sample of the best of what came before it and starkly new. The reader opens “Friday Black” to a quote from Kendrick Lamar and that introductory connection to rap makes sense. Like the Jackson 5’s “I Want You Back” keeping the beat on Jay-Z’s “H to the Izzo” or The Isley Brothers’ “Between the Sheets” lighting candles on Biggie Smalls’ “Big Poppa”, this book, like the best of hip hop, smoothly samples the past while revealing it in a new light. In the story “The Finkelstein 5” we hear a sample of Guitar and the Seven Days from Toni Morrison’s “Song of Solomon”. In the stories “Zimmer Land” and “How to Sell a Jacket as Told by IceKing”, Ralph Ellison’s “Invisible Man” is chopped and screwed. Topics such as freedom, racism, consumerism, White fragility, safe spaces, Black identity, gene-editing, abortion, nuclear weaponry, and school shootings are explored in profound, highly imaginative, absurdist narratives. This book can be dark and violent, so squeamish readers (me among them) should be mindful. But this book is also at times funny and often hopeful, as a skillful young writer shares stories about America’s past, present, and future I’m not sure I would’ve wanted him to tell in any other way.

Atomic Habits

A Brief Book Review of Atomic Habits by James Clear

Everyone has guilty pleasures. I’ll admit that occasionally one of mine is the pop psychology genre. Every time I pick up one of these books it’s with a pound of eagerness and an ounce of anticipatory regret. You leave feeling motivated to tackle anything but not without consuming a stale diet of if-they-can-do-it-you-can-too success stories of celebrity athletes, outworn lessons on how the human brain was made for the Serengenti not the modern world, watered down ideas borrowed from Kahneman and Tversky, and so forth and so forth. But just as you don’t judge a bird for how it swims or a fish for how it flies, you gotta review a book for how it fits in with its genre. And within its genre I really like “Atomic Habits”. James Clear is long on tangible, practical advice and writes with a clean and breezy writing style that hits his points home without feeling too hokey or new-agey. I thought this book significantly better and more useful than one of the most popular in the field, “The Power of Habit.” Key concepts, such as “systems over goals”, “the two-minute rule”, “action over motion”, “temptation bundling”, “intentional friction”, “favorable environments”, “falling in love with boredom”, “reflection and review”, “the close, the many, and the powerful”, aren’t entirely new but are explained in novel and helpful ways. A very quick read, I found myself nodding along to each page like an enthusiastic audience member listening to a pretty good cypher. Maybe it’s the beat of the genre and not the lyrics of the author-MC that keep me coming back to this literary habit; but that’s a topic for another day.

Becoming

A Brief Book Review of Becoming by Michelle Obama

I’ve always admired and respected Michelle Robinson Obama and thought I knew her story well. Before she was the first Black FLOTUS, she was a girl from the South Side of Chicago who, I thought, sailed through Princeton and Harvard before returning to Chicago to work in law and non-profits. But it wasn’t until I read this beautifully written memoir that I realized how little I knew about her beyond her resumé. I excitedly turned every page awe struck by the remarkable and unique life she has lived. She comes across as intelligent and ambitious, yet grounded and approachable, vulnerable and human, yet strong and resilient. Her love for her daughters, community, and country stand out as does the strength of her partnership and love with Barack—that calm, self-assured bookworm and community activist who became first Black POTUS and who teamed with this once check-list-driven woman on an unpredictable adventure that continues to change the world. An excellent read. Two big thumbs up.

The Signal and the Noise

A Brief Book Review of The Signal and the Noise by Nate Silver

Reading this book I came to understand more profoundly than I likely had before the value of probabilistic thinking and Bayesian reasoning in all walks of life. From areas as diverse and different as hurricane and earthquake forecasting to poker and marital relations, Silver uses vivid examples to support his thesis: Life and learning are not about striving for perfection but about accepting imperfection and striving to be ‘less wrong’ over time through attempting better approximations of reality and how it can change. This approach I think allows curiosity, self-acceptance, flexibility, and open-mindedness to flourish. Nate Silver seems a deep thinker and this was a strong book. Long on my reading list, I’m happy I finally got around to reading it.

30 Years in America

I am an American, Nairobi born. Thirty years ago today as a small child I arrived in the United States of America. I came with my mother and two older brothers to join my father here. As with many who came before us, we didn’t come to America because of its past. We came because of its future. A future teeming with potential, yet still unwritten, which we thought we could have a hand in writing. Though I had no say in the decision, it’s one of the defining moments of my life. Years later, when I graduated high school, as class president I had the honor of delivering a speech to my wonderful classmates and their families; I chose to speak about our voyage to America and some lessons it taught me that I thought broadly helpful. Today I’d like to share those words and the gratitude and love in them as I celebrate my American birthday because all these years later they still ring true:

June 13, 2003
Amherst Regional High School Graduation
Mullins Center at the University of Massachusetts

My name is Godfrey Bakuli, and I’m the class president and the boy voted Most Likely to Succeed—meaning that I’m the unlucky soul who the class thought would be fine with loads of pressure to be successful. Yikes. But what does this all mean, all my nifty little nametags.

Do I know something about life that others in the class don’t? No, definitely not. I am no guru, I have no crystal ball. And when I need advice, I look to the same divine source of counsel that you and millions in this devout nation certainly all call upon: I watch Oprah.

Nevertheless, we are experiencing this glorious time in our lives in similar ways, feeling the same anxiety, eagerness, and doubt.

I can only tell you about what I have learned in my life because it is the only life I can speak most candidly about. Hopefully, this will resonate with you, but if it does not then that is alright, because you can sit tight. Our graduation speaker tonight will inspire you, make you laugh, make you cry, and at times make you wonder how a woman of her age could be so shockingly hip.

But back to my speech.

Recently, a friend of mine told me explicitly and rather harshly that she would never speak to me again if my speech was melodramatic. My teachers have implied that they would disavow any knowledge of my formal education at Amherst Regional High School if I came across as pretentious. My mother told me that I should make sure to thank the audience when I was done speaking. She said, “Don’t make them think I’ve raised you with a foot in the gutters.”

And just recently, coming to understand that those closest to me see me as a flashy, overdramatic, and ungrateful person, I laid down, rolled up into the fetal position, and willed myself into a midlife crisis at the unripe age of 17 and started to think about my life.

I’ve had a lot of free time the past few months, and I’ve been thinking about a lot of choice subjects. Well, I haven’t really had much free time, but there’s this thing called senioritis and it makes you think you have a lot of free time to sit and stare at the wall or play with a ball of yarn somewhere in the corner of a room when you’ve got a term paper due the next day.

And so I thought about a lot of things.

In my youth—OK, fine, two weeks ago—I was reclined in my bedroom, and thought about a situation that happened many years ago.

I remember one dark autumn night, when I witnessed first-hand a little boy, walking with his family in tow, trip over a curb and skin his knee. By the parents’ thick foreign accents, I assumed that they were an immigrant family and probably new to the United States.

The boy cried long and hard about returning to where he and his family had come from. The boy’s parents implored the boy to stop crying. Well, they didn’t actually say anything, but in their silent actions it seemed that they implied that with a lot of passion, a little inspiration, and a lot of dedication that little boys like him could leap over the troublesome curbs in American life.

I can relate to the boy because I too am an immigrant, hailing from Kenya, having touched down in the United States on August 22, 1988. However, there is something outside of the immigrant aspect of the story that interests me all the more in this time of our lives.

Ruminating on the experience made me realize something I had gradually and then suddenly realized.

On many occasions in my life, I had in times of great passion and anger told my parents that everything I had or would accomplish in life was because of my self-motivation and feelings that I was the only person concerned with my life. Wow.

My parents made sacrifices when they came here. They sacrificed the comfort of their familiar, native environment and intimacy of their relationships with family and friends so that their kids could attain something far more important and magnificent than any clichéd, popular notions of the American dream. 

But enough of my confessional. This is not a speech intended to teach you about loving your family.

It is intended to show you that the storyline that is one’s life has no beginning, no middle, and no end. The decisions we make, big and small, resound forever in the storylines of others. They made a decision and a sacrifice fifteen years ago and it resonates to this day and beyond.

They have never belated me with stories of their sacrifices to bring our family here, but what they have done, and what I now realize is, they inspired me to do great things.

And in all this pensive procrastination senior year, I learned of a beautiful truth: We too can inspire others to do great things.

In their moving of a family, I saw them moving a mountain—laying the foundation for something that with the right attitude, a lot of passion, a little inspiration, and a lot of dedication, I could construct to reach glorious heights.

We must relish life. We must enjoy every moment for its inconsequentiality or its fatefulness. It can be cruel, it can be unfair, but it can also be joyous and magnificent. We have only one life to live, so we must live it right. We must engage and pursue the life we want because every moment of our lives is important to us individually, to the people we come into contact with, and to the society we live in.

Do you remember that young immigrant boy that skinned his knee tripping over a curb? I was that young boy. That’s my first memory of the United States.

And so, mom, I won’t come across as ungrateful. Thank you both for picking me up that evening, and thank you for inspiring me to see that my classmates and I, with the little things, like curbs and a helping hand, and the big things, like leaving our homes, Are Moving Mountains Every Moment of OUR Lives.

Thank you.

Now I’d like you to welcome to the podium this year’s graduation speaker, storyteller, grandmother, and Dean of Students at Amherst College—the admirable Onawumi Jean Moss.

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Notes & Letters

A Country Road

I spent one hour today walking solo along a country road. Three trips down, three trips up; it made 3 miles. At 280 feet in elevation per ascent, that was 840 feet total in elevation. I can count those stats, the physical, visible, and directly-measurable ones, accounted for by, and filed away within, the tiny powerful computers on my wrist and in my pocket. But I can’t directly measure what really mattered: The time away from the city, surrounded by trees and dust and fog and dew and clouds. Nature. Not just surrounded by it but within it. At 2,260 feet above sea level, I was in the clouds. As I broke a sweat that turned into a stream and soaked my workout clothing, all-black from years spent wearing the anonymous dark uniform of my New York, I actively thought and considered and reflected. I reflected on what I wanted with my business and my personal passions. And it felt great. To have nothing to interrupt me but me and the mountain stream nearby rushing downhill constantly, washing away the night rain toward the Hudson, eagerly awaiting its newest brood. And I loved it. That hour. Alone, but in the company of an honest, loving, encouraging nature and myself.

The Science of Hitting

"I think you will find as we go along that much of what I have to say about hitting is self-education—thinking it out, learning the situations, knowing your opponent, and most important, knowing yourself. Lefty O'Doul was a great hitter, one of the prettiest I ever saw, and he always said that most hitting faults came from a lack of knowledge, uncertainty, and fear—and that boils down to knowing yourself. You, the hitter, are the greatest variable in this game, because to know yourself takes dedication." - Ted Williams

A strange thing happens sometimes when you release your writing into the world. You might summon what feels to you like this immense force of cerebral energy to create it. It can feel as though its influence should bend steel or rattle the highest, darkest rafters of the universe. Instead, in the immediate aftermath, you might receive a dozen “likes” digitally or “good jobs” in-person or several hundred “impressions” on social media; but you don't get a real sense of whether your writing fundamentally changed the thing you were trying to alter. 

If you’re like me, you try to remember that sometimes the best and truest feedback is delayed. And you also remember Warren Buffett’s advice: When playing the game of life, it’s better to prioritize your inner scorecard over outer ones. So you pat yourself on the back for what felt like a good swing of the bat and the contact you made, and you set up for the next good ball to come your way; you promise yourself to swing with more intent and to hit harder, unaware the echo might be taking its time to reach you and you might have just hit the rafters.

Language Lessons

“All living is listening for a throat to open. The length of its silence shaping lives.” - Claudia Rankine

Five days after my older brother George passed away in spring 2014, my dad and I drove to New York from our family home in Massachusetts to collect George’s belongings from his apartment. It was not my first time in his apartment but it was my first time looking through his personal stuff since maybe we were kids. I noticed something surprising. I noticed how organized he was. His suits and dress shirts on the same type of hangars, all in the same direction. His other clothes folded neatly and put away tightly in drawers. In his many books, the notes he wrote on the margins of the pages were so clean and so legible. And then I realized something. I was only surprised to see this because society had lied to me. And it lied to you. And it continues to lie to us. And that lie matters. We are often told to believe that someone who is mentally ill is someone who appears in shambles and by appearances “Doesn’t have their life together”. Yet here was the opposite.

There is an invisible tapestry we all have a role in sowing that describes what mental illness looks like. You see it in jokes that make light of mental illness or death by suicide, or the way in which almost everyone uses words like “crazy”, “batshit”, or “insane” to describe a negative person or situation. We think we’re being colorful. We think we’re describing something accurately. I’ve seen my smartest friends and acquaintances do it. I too have done it. But all it does is quietly but firmly make someone who questions how they’re feeling, feel like they can’t talk about it, like they can’t seek help. We think nothing of it, but all the while sow another thread into that invisible tapestry. And if you haven’t been paying attention, you should because that tapestry might be invisible but it is not light. And it doesn’t discriminate. It can weigh as heavy as a sheet of steel, and it doesn’t care what your gender, race, or age is. That you’re a beloved chef, a loving and loyal brother, a devoted mother and fashion icon, or a favorite boss. It doesn’t care how much money you have, how good you look, or how easily you cross international borders. Yet we add to it when we fail to consider what we do to make it stronger and continue to stigmatize mental health.

I love George and think about him every single day; I am eternally thankful for him and for the positive influence he continues to have in my life. He taught me to love myself without reservations. He taught me to speak up, to apologize, to laugh, and to heal. And he taught me to fight for my life, tooth and nail if I had to—which he did too, first by seeking therapy. He would be 34 years old today. Every ounce of me wishes he were still alive. And I know had he not fallen into the altered state of mind that sadly took him from us, he would too. 

The Emperor of Water Clocks

A Brief Book Review of The Emperor of Water Clocks by Yusef Komunyakaa

When I was young, a popular rap song came out called “Mad Flava in Your Ear” by the artist Craig Mack. Mack was an artist on the Bad Boy label founded by the hip-hop impresario Sean Puffy Combs, which most famously featured that late titan of rap Biggie Smalls. Over a slow, tugboat-like, see-saw beat, Craig Mack, as rap artists do, boasted about how much better he was at rapping than the competition by saying, “Your album couldn’t fuck with one line.” I remember hearing that and having to step back and unpack it, thinking it one of the greatest boasts of self-confidence I’d ever heard. Here was Craig Mack saying one line of my lyrics is better than your whole album. He didn’t have many other (if any) hits after that, but the boast remained pinned to the walls of my memory. I have happily in a life of literary and artistic consumption encountered artists who could truly make that boast. I had that feeling finishing one of Yusef Komunyakaa’s collection of poems, “The Emperor of Water Clocks”. Toward the end of the collection is a poem titled “Monolith” where Komunyakaa writes “tomorrow hides inside of yesterday.” I dropped the book I was so impressed. The sentiment was not new but the phrasing and the simple beauty of it floored me. That’s the sort of feeling you come across reading Komunyakaa’s poems, which mix past, present, and future mythologies to create images as varied as lion’s on a savannah, New York cafes, and imperial drawing rooms.

Good Ideas Gone Bad

A Brief Book Review of Common Stocks as Long Term Investments by Edgar Lawrence Smith

Toward the end of Chapter 27 of their 1940 edition of Security Analysis, Benjamin Graham and David Dodd discuss Edgar Lawrence Smith's 1924 book Common Stocks as Long Term Investments, which they deride as a "small and rather sketchy volume." Writing after the Great Depression, you can't blame them. With hindsight, we know that Smith's book was used by many at the time of its publication to justify what became the Coolidge-era stock market bubble of the late 1920s. From one man's sound premise came a nonsense conclusion on a massive scale: While it is true that stocks are advantaged over bonds in the long-run because of (a) the positive effects of retained earnings on the growth of businesses and (b) the negative effect of inflation on debt holdings, these two ideas unfortunately were used to justify paying any price at all for a stock if it had an attractive trend in earnings. As Graham and Dodd note:

"This example illustrates one of the paradoxes of financial history, viz., that at the very period when the increasing instability of individual companies had made the purchase of common stocks far more precarious than before, the gospel of common stocks as safe and satisfactory investments was preached to and avidly accepted by the American public."

That all aside, this small book is still worth reading, especially as a historical document on evolving theories related to portfolio construction and investment management; but only if, as soon as you finish this book, you remember that reality is more complex than theory and price still matters.

Long View: ADT

Security: ADT JAN 16 2016 40.00 CALL
Date of first purchase: March 24, 2014

I am buying call options on ADT expiring in 2016 because I think the business is significantly undervalued and the expected value of its LEAPS is attractive. Each option is $1.34 at a strike price of $40. I estimate the business is actually worth $44 to $60 per share. This implies that at ADT’s current market capitalization of $5.3 billion it is being priced at a 36% to 53% discount to its intrinsic value of $8.2 billion to $11.2 billion. This margin of safety should allow generous room for error if in the long run I have incorrectly assessed the true value of ownership.

ADT is North America’s leading provider of home and small business monitored security services. At 139 years old, it is also the largest and most well-known brand in this fragmented and growing industry. It serves roughly 6.5 million customers, which is 22% total market share, roughly six times the size of its next largest competitor. Its residential customers are typically owners of single-family homes, while its small business customers include retailers and small-sale commercial facilities. With 92% of its revenue recurring in nature, it has attractive earnings and operating stability. This is because its new accounts typically have an initial term of three years with automatic renewals for successive 30-day periods. Moreover, ADT’s average customer relationship is seven years, longer than many of its newest competitors have been in the industry. The perceived threat of these new competitors led to a 30% drop in the price of ADT shares since the beginning of 2014.

America’s telecom giants are expanding into the home automation segment of the monitored security alarm industry, bundling new services in this field with existing offerings of broadband, television, and phone connectivity. And in some instances, they are significantly underpricing the automation component of such bundles. Comparing ADT’s results with its competitors’ efforts reveals the threat to be overstated so far. For example, in calendar 2013, cable industry behemoth Time Warner Cable added 32,000 subscribers to its IntelligentHome offering that competes with ADT’s similar Pulse home automation service. In the last three months of 2013, ADT added 231,000 customers overall, 36.5% of whom purchased Pulse. In other words, roughly 84,000 people in three months chose ADT over the 32,000 who chose IntelligentHome in an entire year. Yes, ADT’s new competitors bring with them hefty balance sheets and strong cash flow production. And ADT has recently increased its leverage to repurchase shares, limiting its financial flexibility. However, ADT has no maturities of debt until 2017 and over 75% of its total debt does not mature until after 2021; and with $300 million to $400 million in average free cash flow, ADT has the funds necessary to meet its fixed obligations and competitive capital needs. And management is putting its money where its mouth is. After the company retired 20%of its outstanding stock over the past year, eight different ADT officers and board directors have in aggregate purchased more than $700,000 of stock with their own funds at current prices.

I am thus purchasing ADT’s LEAPS because the margin of safety in the company’s equity greatly favors the probability of gains versus the potential for loss at expiration. The pricing and expiration date of the options should allow ample room for error or adversity if I have wrongly appraised the true worth of owning ADT or if the business’ brand strength and cash generation do not soon outshine recent fears of new competitive threats in its marketplace.

Long View: AIG

Security: AIG JAN 17 2015 40.00 CALL
Date of first purchase: December 4, 2012 

I am buying call options on American International Group (AIG) expiring January 17, 2015, because I think the business is substantially undervalued and the expected value of its LEAPS is very attractive. Each option is $4.26 and the strike price is $40. In my estimation, the intrinsic business value of AIG is likely $60 to $70 per share, or approximately $89 billion to $103 billion for the whole company. This compares to a current stock price of $33.32, or a market capitalization of $49 billion. So with around $100 billion of tangible book value, the entire company is on sale for half its net tangible assets, significantly below its peers and long-term historical levels. This sale price is a 45% discount to the bottom range of its true value. 

It is almost impossible to overstate the extreme terror that gripped securities markets in the fall of 2008 because of the known and unknown dangers lurking in AIG’s balance sheet. After an ill-judged expansion into insuring the most toxic areas of the mortgage and derivatives markets, AIG received a $180 billion bailout from the Federal Reserve and U.S. Treasury. The Treasury has gone from owning 92% of AIG at the time of the bailouts to 77% at the beginning of this year. Through additional share sales this year, the Treasury currently owns 16% and is on the cusp of selling its remaining stake in the next few months. In the time since the bailouts, senior management and directors have been replaced and AIG’s shareholders have suffered substantial losses. The company shed major assets to help repay the government and divested international operations. It floated AIA, the Asian life insurer, and sold its non-U.S. life insurance subsidiary Alico to U.S. rival MetLife. Its businesses have been de-risked and downsized, headcount globally shrinking to 57,000 from 116,000 in 2008. And its balance sheet has been deleveraged, the derivatives book of AIG Financial Products, over $1.8 trillion on a net basis four years ago, shrinking to about $157 billion by June of this year. It is still a substantial player in its core end-markets, though, and about to be the first non-bank designated in the U.S. as a systematically important financial institution. It is similarly difficult to overstate how improbable it was to conventional wisdom on Wall Street that AIG would ever repay the government, let alone earn both the Federal Reserve and U.S. Treasury a profit.

The company’s shares have risen over 40% YTD, spurred on by successively improving quarterly results and the company repurchasing over $13 billion of its shares. Those repurchases increase share price through raising book value per share, a multiple at which insurance companies trade. But what matters to an insurance company, a complex organization even in the most normal of times, is ultimately not the excess value of its assets over its liabilities. It is its ability to earn more on its assets than it must pay on its liabilities, as reflected in its return on equity. And AIG’s mid-single-digit ROE is well below that of peers. The company will refocus on improving its debt coverage ratios in the next year, putting repurchases on the backburner. And it must improve the earning power of its core property casualty and life insurance businesses. It has a substantial surplus of equity and the operational scale to do so, making it likely to achieve average earning power of at least $5 billion per year going forward.

I am thus purchasing AIG’s LEAPS because the significant margin of safety in the company’s equity greatly favors the probability of gains versus the potential for loss at expiration. The pricing and expiration date of the options should allow ample room for error or adversity if I have wrongly appraised the true worth of owning AIG or if the business’s strengths do not soon outshine recollections of a considerably troubling period in its history.