Tailwinds Edition #8

My Thoughts (So Far) On Building Permanent Capital

September 14, 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.


This newsletter, and associated podcast, represents my drive to learn as much as I can about acquiring small companies and permanent capital as this is something I want to do professionally long term. Most of the guests I’ve had on the podcast, and mentioned in the newsletter, are at a point in their careers where they can invest in larger, more mature companies. (greater than $1 million in owner earnings, roughly) To put it lightly, this is not where I am at the moment. So what can you do to build permanent capital early in your career?

There’s two ways to do this. 1) Get a high paying job out of college or within a few years (engineering, investment banking, software, etc) and save like crazy; 2) Develop a side business whether that’s freelancing or finding a small local business to acquire and building a portfolio. These could be tiny landscaping companies, vending machine routes, laundromats, or trade services companies. I have been thinking over these two ways and I don’t think one is necessarily better, or more desirable, than the other.

If you get the chance to work in a high paying job early in your career, it presumes that you’re going to get extremely valuable experience, and a lot of it. 22 year olds making $130-140,000 out of college don’t work 40 hours and they aren’t bean counters. You work long hours and get real learning experience very quickly, and that is incredibly valuable. Jobs like that may set you up with the skills and relationships to build your own permanent capital down the road in a way that is subjectively superior to option #2. You might be introduced to people you never would have met otherwise who might help you buy your first company, introduce you to mentors, your first employees, managers, co-founders.

But others may not find that path as entrepreneurial as starting immediately and thinking small before moving up. Just yesterday I found a Reddit post of a high schooler who had acquired 10 vending machines and was making pretty good money at it too. While starting early and small doesn’t have the same career progression option #1 does, it starts the compounding process sooner and gives you as the entrepreneur a lot of practice buying and running businesses. You think Warren Buffett benefitted tremendously from being an entrepreneurial kid buying pin ball machines and selling newspapers? I sure do.

This is the topic I’ve been thinking more about and I don’t have great analysis into either side, but I’d be curious to know what you as the reader think, always feel free to reply to this email to chat!

Capital Notes

Askeladden Capital: Five Counterintuitive Lessons from Five Years of Professional Investing

“Yes. Managers should be aligned with their clients. They should care about results. But investment CAGR shouldn’t define their identity. In fact, I believe it’s important that it doesn’t: strong emotions (both positive and negative) affect decision making. Overconfidence and arrogance during good times are as dangerous as desperation (or tail-tucking) during bad times. 

To avoid emotions - and, consequently, portfolio decisions - being inappropriately driven by market whims, it’s important for an investor to have enough detachment to actively dampen the emotional vol rather than getting sucked into a feedback-driven vortex of bad decisions compounding bad ones.”

On dogs…

“One of [the fund managers I know] devotes a lot of time to exercise, and liked to take his dogs for a walk when he got home from work - ‘they don’t care if you had a bad day at the office. They don’t care if your clients are leaving, if the market’s down. They don’t remember the last walk and they aren’t worried about the next walk. This walk, right now, is the best thing that’s ever happened to them.’”

Alex Danco: Positional Scarcity

“What these challenges all have in common is that they’re symptoms of abundance. In environments of real scarcity, these problems don’t exist. But in environments of abundance, when some new technology or paradigm has created a huge bounty and variety of new stuff that we enjoy, positional scarcity inevitably emerges, creating new bottlenecks and new opportunities.”

Social Capital 2018 Annual Letter

“What is the antidote here? The antidote is two-fold. First, we need to return to the roots of venture investing. The real expense in a startup shouldn’t be their bill from Big Tech but, rather, the cost of real innovation and R&D. The second is to break away from the multilevel marketing scheme that the VC-LP-user growth game has become. At Social Capital, we did this by actively shifting away from funds and LPs to rely only on our own permanent capital moving forward. Are we crazy to reject tens of millions of dollars a year in fees? We think not, and we believe it’s time to wait patiently as the air is slowly let out of this bizarre Ponzi balloon created by the venture capital industry. In the meantime, we find comfort in the teaching of Andy Grove that only the paranoid survive.”

Jay Kim Show: Interview with Real Vision Founder Raoul Pal

“We fail endlessly every single day. So another thing you hear from startup entrepreneurs is failure is part of it all. We fail endlessly every single day. But the point being is every time you fail, you have to pick yourself up, figure out why you failed, and then jump over that hurdle and keep going. You can’t see hurdles as brick walls. You have to see everything as a small speed bump. Just keep your eye on the horizon. Keep moving forwards but without leaving a trail of destruction behind you. And so you need to have the right staff and the right infrastructure.”

Sidewalk Labs: We ran traffic simulations on our people-first street designs. Here’s what we found

“In contrast to cars, transit vehicles are the most efficient way to move people through dense urban areas. The problem is, in a typical street design, these vehicles have to share street space with cars, leading to delays and frustration that can push people toward driving.

In our street networks, buses and trams use dedicated lanes on both Boulevards and Transitways, enabling them to keep up a reliable pace and thus compete more effectively with driving. As you can see below, transit vehicles in the typical scenario get caught in light after light. But with a dedicated lane, they zip through whole streets in much less time.”

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