Tailwinds Edition #4

August 17, 2019


The name “Tailwinds” has a threefold meaning; 1) If you’re looking to build something special, like a business or permanent capital, you should position yourself where there is a tailwind at your back taking the form of changes in the economy, culture, cities, demographics, or some other factor. 2) Buying an existing company, rather than starting your own, gives you momentum and a head start, a proverbial tailwind. 3) The concept of positioning yourself in front of a tailwind relates to a Charlie Munger quote about fishing where the fish are, rather than a crowded shore or dock. Private company investing is a space with opportunity that most investors and institutions cannot touch, and that leaves the door open for smaller investors to build portfolios.


Prelude

I want to be a better writer. And all the writers I’ve read about have said the best way is just practice and make it a daily habit. This is one of the main reasons I started the Tailwinds newsletter, to force me to write at least weekly (daily at this point) and get that practice. In my 2018 Annual Letter, one of the goals for 2019 I wrote about was writing at least one blog article per month. I’ve so far failed to accomplish that goal, and I hope the newsletter eases me into writing more and more, individual blog articles included. I think I have enough interesting topics to write about, I just need to feel confident that I have something to add to those topics, even without being a practiced expert in the field. What writing tips to do you have for me? What topics might you be interested in reading about?

Capital Notes

Zack Kanter on Invest Like the Best

“Most advice that you hear about is all backward looking.”

“You want to do things in way that makes you certain to win.”

During my conversation with David Krock, Zack Kanter’s article about Amazon came up as they have made internal functions into customer facing companies, and David has been executing this strategy in his portfolio of companies through Sunset Coast Capital. The benefit to having your internal functions exist as separate businesses that service customers besides yourself is that they improve and iterate faster because they need to stay competitive. In addition to diving deeper into this concept and Amazon, Zack talks about how most advice you hear is backward looking and you should be aware of the historical environment that advice is coming from.

Chenmark Capital: People Like Us Do Things Like This, Part 1

“We have realized that our status as a preferred counterparty will always be an outcome of our behavior rather than a cause of it. We can’t wake up one morning and say ‘today is the day people will want to do business with us’. We can, however, make deliberate decisions about how we want to define success, what we want to stand for, and most crucially, who we want to stand with us. As a result, we now think about the mission of Chenmark less in terms of an entity to be built and more in terms of a culture and community to define. So, what is Chenmark? Put simply, we are a team of small businesses committed to each other and to the constant pursuit of better.”

When I think of permanent capital firms, Chenmark is the first one that comes to mind because of the unique way they think about acquiring small companies. They view themselves as wanting to be the buyer of choice for small company owners transitioning, but, as they talk about here, they also want to build a community and culture around Chenmark. That is a value that resonates with me and this podcast, which I’m trying to build a community around as well. If you’re a dedicated Chenmark follower like me, you’ll like this Weekly Update from them.

A Framework for Big Problem Solving

“When you’re in your daily life, it’s probably fine to be an optimist or pessimist. But not when you face big problems. When you face big challenges, both of those are a trap. Pessimism, it’s hard to try when you think you’re going to fail. Optimism helps you try, but you’re invested in the idea that you’re going to succeed, and so when you fail it can be crushing. The problem I see with both of these is that they require you to deicide what’s going to happen, and emotionally invest in that, before you’ve even tried.”

Doug Lindsay was sick for 14 years and discovered his own cure from a 1920s surgery performed on dogs, and in the process he developed a fascinating framework for solving big problems. There are so many parallels between Doug’s story and drive and that of entrepreneurs and investors. Success in starting or buying companies takes consistent effort, hope, and a very long time. Josh Wolfe describes the necessary attributes of these people perfectly in this quote:

“In a founder, we love when there’s something to prove. The best founders that we have have an inextinguishable flame that usually came from some sort of adversity. They might have been picked on,. they might have had a lisp, they might be dyslexic, they could’ve come from a broken family - there’s something that made them feel like an outsider. And there’s this inextinguishable drive that they want to prove other people wrong.

It’s interesting because success, achievement, and wealth never put that fire out. I think it’s this broader secret to societal progress if you can spot these rebels and outsiders who are fueled by the passion that comes from some dysfunction that happened early.”

Doug now runs his own company helping consult other companies on solving some of their big problems, and I have no doubt he’ll be successful in whatever he does because of his unbelievable drive to succeed.

Making Uncommon Knowledge Common

“Barton’s companies take industries that are low frequency and use their Data Content Loops and SEO to acquire users for free and engage them more frequently. While most companies in real estate have super high customer acquisition costs, Zillow is able to get potential sellers even before they are ready to sell, so Zillow is already there when the sellers are ready.

Owning demand ultimately becomes its own compounding loop since becoming a trusted brand builds its own network effects. Consistently building this reputation increases people’s trust in them and makes them a go to destination.”

This article, forwarded to me by Nick Hashka, talks about Rich Barton’s strategy of growing start-ups with Data Content Loops, which occur when users add content, which makes the site more trust worthy, which encourages more users to add even more content. Rich Barton founded Expedia, Zillow, and Glassdoor using this framework for attracting users through search and direct means, giving him cheap customer acquisition. Aside from these loops, the concept of making previously difficult to access information (uncommon) and making it widely available for very low cost/free (common) is fascinating to think about as a business model.

Other Notes

Ben Thompson (Stratechery) on Blogging’s Bright Future

“I am, of course, acutely aware that there is a tradeoff when it comes to the subscription business model: by making something scarce, and worth paying for, you are by definition limiting your number of readers. Stratechery, though, serves a niche, and niches are best served by making more from customers who really care than from milking pennies from everyone.”

I originally had this linked to Ben Thompson’s interview with Shane Parrish on The Knowledge Project podcast, but then went down a rabbit hole and found links like this and this. Single person internet businesses have become a recent obsession and what Ben Thompson has built at Stratechery is probably the best example out there; subscription model, virtually no costs (other than credit card transactions and hosting), can be located anywhere, infinitely scalable, and the writer is paid to learn about the subject matter. I want to start developing a list of these kinds of businesses and continue studying them.

PowerPoint is Worse Than Useless

“A study conducted at the University of New South Wales in 2007 by John Sweller (the psychologist who invented Cognitive Load Theory) found that showing audiences the same words that are being spoken reduces, rather than increases, audience comprehension.

In other words, when you throw up bullet points and then run through them, you're guaranteeing that whatever you say will be quickly forgotten. Not because you're bloody boring, but because people can't read and listen at the same time.”

It was interesting to read that PowerPoints might not be effective means of communicating to audiences at all, but my bigger question is how do those who reject PowerPoints present to audiences? The article indicates at the end that a more effective means than slides is to pass around a single sheet of notes following the presentation. What do you do for presentations?

If you found an interesting article, podcast, or interview that I missed, please let me know, I’m always looking for interesting stuff!

Photo courtesy of Brenda Stonehouse