Welcome to the 40 new subscribers since last week! Issue #28 from lockdown. As always, I’m keen to share what I’ve been reading, learning, and compressing. But first, a quick quote from Rick Sanchez:
When I don't like something about the world I change it.
To live is to risk it all. Otherwise, you're just an inert chunk of randomly assembled molecules drifting wherever the universe blows you.
Under 21 and reading this? Louis and Tejas won a book thanks to their detailed and helpful feedback in issue #25 but have kindly decided to pay it forward! So for the first two people under 21 who flick a reply to this email, I’ll sort something out for ya :)
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Here’s the format of today’s email:
Part 1: Incentives
Part 2: Decision Making
Part 3: Under the Spotlight: Kerry Packer
Part 4: Bonus Quirky Content - Something to Read, Watch, and Listen
Incentives
As Munger would say “Show me the incentives and I will show you the outcome”. Thought it’d be worthwhile looking at the topic of incentives. How it affects investors, management teams, or even Slimy Sam the Real Estate Agent.
I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it.
Seriously, you should probably just view the whole original source. One of the best hours I’ve ever invested. Recommend downloading it as an MP3 and putting it onto your phone for mobile listening.
One of my favorite cases about the power of incentives is the Federal Express case. The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can't be done fast. And Federal Express had one hell of a time getting the thing to work. And they tried moral suasion, they tried everything in the world, and finally somebody got the happy thought that they were paying the night shift by the hour, and that maybe if they paid them by the shift, the system would work better. And lo and behold, that solution worked.
The Impact of Misaligned Incentives [Link]
GOAT post on misaligned incentives in relation to investing. One point that made me stop and think was this:
Misaligned incentives can be a two-way street and investor-specific incentives can cause misalignment by pushing companies to adopt rigid “investor friendly” incentives that diverge from long-term business priorities. This can be an especially material issue when a business and/or the underlying industry is undergoing a meaningful pivot/inflection and investors are reluctant to embrace the necessary changes.
Does this count as a paradox? In a perfect world, you probably want one person with tonnes of control. But that opens the possibility of problems relating to power corrupting. But then give power to too many, and things will struggle to get done, and get caught up in bureaucracy. Anyway, here are some misalignment flags to lookout for:
Board practices corporate governance “dark arts”
Payouts consistently outperforms (lagging) stock performance
Performance targets are set meaningfully below guidance or key benchmarks
More subtle “flags” (which requires judgement to determine if it’s a “flag”) include:
Using overly broad/easy-to-achieve financial metrics
Lack of capital returns as a compensation metric
Not tying a component of compensation to a multi-year operating plan
Incentive structure requires too much year-to-year micromanagement by the compensation committee to “work”
Brent Beshore on Executive Compensations [Link]
Title explains it all.
We take a very straightforward approach, which is, look, we want you to be comfortable, based on your salary. And beyond that, we want to share in the upside of the company. It depends on the situation, but it's some form of base bonus and then some sort of equity base or equity-like arrangement. And that can vary pretty greatly, depending on the situation.
I mean, there are organizations where most of the compensation for the executive is in their base salary, and it's a company where that makes a lot of sense. They're not trying to strive for something big. They're trying to kind of steady hand, keep things on the rails. And then there's other organizations with a comp that's variable, huge variable on the upside, and largely tied to the profitability of the firm. I would say we're typically more in the style of high variability. We like incentivizing people based on cashflow and based on cashflow sort of aligning the executives of the firm with us, with our investors. So that look, if there's a reason why we should reinvest that cash back into the business, fantastic, that's great, we want to do that. That means, we're going to get a high rate of return on it with high probability. If there's not a high probability, high rate of return, then we want them to send the cash up and out. This is kind of a thing that we want to incentivize.
Brent talks further in the podcast which is essentially “If it ain’t broke, don’t fix it”. Sometimes people do too much. Try to be fancy. Make changes to justify their job. KISS! Keep It Simple Stupid.
the worst possible thing you can do is come into a situation where everyone's fine with their comp, everyone's good with their comp. [and you] say, “Hey, we've got this new spangled awesome thing, we want to throw your way”. And they're like, "Can you just not do that, please? I just want to live my life." […]
You have to ask yourself, "Okay. Based on the people we currently have, based on the current state of the company and based on the trajectory of the company, what do we think that a change in comp would stop people from doing that we don't want them to do? Or what would encourage somebody to do that they're not currently doing?"And when you put it through those two filters, it's actually quite often we say, "No, the comp is fine."
CEO Incentives—It’s Not How Much You Pay, But How [Link]
It’s a HBR article. So this is some gourmet shit. First point, CEO’s shouldn’t just have stock. But a meaningful perentage of stock.
when trying to understand the incentive consequences of stock ownership, neither of these measures counts for much. What really matters is the percentage of the company’s outstanding shares the CEO owns. By controlling a meaningful percentage of total corporate equity, senior managers experience a direct and powerful “feedback effect” from changes in market value.
In regards to cash compo:
Cash compensation should be structured to provide big rewards for outstanding performance and meaningful penalties for poor performance. A two-year cash reward of less than 7 cents for each $1,000 increase in corporate value (or, conversely, a two-year penalty of less than 7 cents for each $1,000 decline in corporate value) does not create effective managerial incentives to maximize value. In most large companies, cash compensation for CEOs is treated like an entitlement program.
and wield that axe!
Make real the threat of dismissal. The prospect of being fired as a result of poor performance can provide powerful monetary and nonmonetary incentives for CEOs to maximize company value. Because much of an executive’s “human capital” (and thus his or her value in the job market) is specific to the company, CEOs who are fired from their jobs are unlikely to find new jobs that pay as well. In addition, the public humiliation associated with a high-visibility dismissal should cause managers to carefully weigh the consequences of taking actions that increase the probability of being dismissed.
Snowflake
Understanding Incentives: An Often Overlooked Part of the Investment Decision Making Process [Link]
Incentives through the lens of distressed debt investing. Super illuminating for me!
In addition, I think board compensation and make up is something that is often overlooked by the analyst community. Let's talk about the economics of being a board member: I'd say the average S&P 500 board member is making between 100k-200k/year for attending 5-8 meetings a year where all their expenses are paid, they are put up in a 5-star, and are wined and dined by management teams that they either have a related business with, or have been friends for a number of years.
These board members have the clout of being on a big-name company board of directors. They can brag to their friends about that. People DO NOT give that up easily. If there is a hostile offer for a company and the target's board will be replaced, AND that same board will not make a windfall on acceleration of stock options, then I doubt that hostile will work out. Tender offers can work, but a highly incentivized board of directors will pay a highly incentivized law firm to work out defenses that will keep the pay checks coming.
Jeff Bezos’ Decision Making
Regret Minimization Framework [Link]
The framework I found, which made the decision incredibly easy, was what I called — which only a nerd would call — a “regret minimization framework.” So I wanted to project myself forward to age 80 and say, “Okay, now I’m looking back on my life. I want to have minimized the number of regrets I have.” I knew that when I was 80 I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the Internet that I thought was going to be a really big deal. I knew that if I failed I wouldn’t regret that, but I knew the one thing I might regret is not ever having tried. I knew that that would haunt me every day, and so, when I thought about it that way it was an incredibly easy decision.
Also found this from HBR:
Bezos shows a remarkable ability to disregard Wall Street when making decisions. How is he able to do this when so many CEOs can’t?
This wasn’t always the case—really, it’s the payoff for being right. In the late 1990s the Street trusted Bezos, then for five years it didn’t [after he’d grown Amazon too quickly]. But during this time Amazon called its shots predictably and consistently. Bezos ended up basically recruiting a base of shareholders who trusted him and believed his story—people like Bill Miller of Legg Mason. They saw him operating the company with discipline, and they recognized that Amazon was a profitable business but that there were phases where they’d be investing in a new capability [that would hurt profits]. So it’s the credibility of the founder that made the difference. Once you’ve proven that you have the right mix of visionary insight and operating capabilities, Wall Street lets you get away with a lot.
Here’s how I make Amazon’s highest-stakes decisions [Link]
Jeff wrote this, and is a neat little insight. Essentially goes like:
Rise early, sleep early. 8 hours of sleep too.
First meeting at 10AM. High IQ meetings before lunch.
There are two types of decisions. Decisions that are irreversible and highly consequential are one-way doors. They need to be made slowly and carefully. The problem is that most decisions aren’t like that. Most decisions are two-way doors.
When there’s a decision that needs to be made, you need to ask, “Is it a one-way door or a two-way door?” If it’s a two-way door, make the decision with a small team or even one high-judgment individual. Make the decision. If it’s wrong, it’s wrong. You’ll change it. But if it’s a one-way door, analyze it five different ways.
Beware of the war of attrition. Because whoever has the most stamina will win. Eventually the other party, with the opposite opinion, will be too exhausted to argue anymore. That is the worst decision-making process in the world.
When your team is really at loggerheads, escalate—and escalate fast. And then you, as the more senior person, hear the various points of view, and you say, “Look, none of us knows what the right decision is here, but I want you to gamble with me. I want you to disagree and commit. We’re going to do it this way. But I really want you to disagree and commit.”
And a great parting thought (which certainly applies to investing):
think about it: As a senior executive, what do you really get paid to do? You get paid to make a small number of high-quality decisions. Your job is not to make thousands of decisions every day.
Under the Spotlight: Kerry Packer
Each week I provide a little spotlight on an investor or operator I admire.
Kerry Packer is this weeks focus, in a nutshell:
Born in 1973 to Sir Frank Packer and Gretel Bullmore. Kerry being the youngest son, brother Clyde the oldest.
I believe I was a pretty lucky child. I was born with all the advantages – all the good things that could happen to me did happen. […] I was lucky enough to have fantastic parents. Not in the run-of-the-mill interpretation of “fantastic,” but parents who, I think, had qualities which one was very lucky to see. […]
If I have one unhappy memory of childhood it was the loneliness. The opportunity to make friends wasn’t there. I was continually moving, […] I don’t have friendships from school that go right back, because I was never there long enough, and that’s a hard part of my recollections.At school, he was more athletically gifted than academically. “Regarded as the idiot son, dubbed "boofhead" by his father.”
Being an academic failure was very painful and this was a very tough period for a kid. It was probably the hardening of the shell, because kids are pretty unkind to kids.Interestingly, Kerry wasn’t meant to inherit his father’s company. His brother was. But Clyde was unable to deal with Sir Frank's incessant bullying and interference. And in 1972, Clyde quit the company and turned his back on the family.
Packer’s influence on cricket has been ernomous too! Responsible for World Series Cricket, which I won’t go in depth here, but the legacy is huge.
In 1987, Packer made a fortune at the expense of Alan Bond. Sold the Nine Network to Bond for ~$1billion in 1987, and then buys it back three years later for $250 million. Packer later said, "You only get one Alan Bond in your lifetime, and I've had mine"
I can’t do Packer’s bio justice!
Fun Fact: Malcolm Turnbull (Australia’s 29th Prime Minister) was general counsel and secretary for Consolidated Press Holdings from 1983 to 1985, and defended Packer against the "Goanna" allegations made by the Costigan Commission.
1978 Interview [Link]
Kerry on his father is interesting. He wasn’t born in hard circumstances. But he certainly made the most of his start on 3rd base.
my father was a great man. The best way I can describe such men is to say that there are any number of people who can go out and fly a jumbo jet, but there’s a very elite group of people who can design it and make it work, and my father was a designer and a person who could make things work. If I’ve had any success it’s because I was able to fly the plane he built, but I couldn’t have built it.
Kerry Packer on risks is interesting. A notorious gambler, but seems to honest view on risk:
My father was a gambler. Every man who ever created anything was a gambler. […] What my father did was to take everything he had, all the prospects of everything he ever had and put it on one roll of the dice. And what happens with great men and creators is that they work so hard with so little. They’re always undercapitalised at the beginning and they take the most outrageous risks. Against all the odds, and with luck, they survive. Then eventually they get to an age where they’ve built something and they sit back and say: “I’ve done it!” And the next risk comes along that thirty years ago they would have pounced on, and they say, “I don’t want to put everything on another roll of the dice”; and they get conservative. Maybe they feel they’re not young enough to do it again. They don’t want to play the game any longer, but to sit down and consolidate. Then, in their offspring is the same type of conservatism. They too don’t want to risk everything. Now I might risk more than the next guy, but I’ve never risked the lot. I’ve never risked anything that’s going to put Consolidated Press at risk; might knock it around for a year or two, but we don’t take the sort of risks where everything depends on it going right.
Packer Wackers
My favourite story of is how defibs in Australia are often called Packer wackers. The reason? Packer had a heart attack while playing Polo in 1990 that left him clinically dead for seven minutes. By pure chance, the passing ambulance was one of the few equipped with a portable defibrillator. After being revived and recovering, he called the NSW premier Nick Greiner from his hospital bed, and Greiner recounts:
He said, in his inimitable fashion, “I'll make you a deal, I'm told it costs about $5 million to put one in every ambulance, I'll go you halves"
Further Links:
The Rise And Rise Of Kerry Packer by Paul Barry [Book] I read it years ago and is a great read. Hard to summarise here though!
Gerald Stone recounts [Packer’s] final moments as they were described to him. "My understanding was that he seemed to be going asleep with everybody around him, just sort of fading away. And then he suddenly perked up again and said, 'Am I still here? How f***ing long is this going to take?' That was Kerry Packer right to the end."
Bonus Quirky Content
Something to read: Rick and Morty and the Meaning of Life [Link]
Feel free to lemme know if I needa chill on the life meaning bullshit. Buuuuuut,
The search for ultimate meaning is not about meditation and doing nothing and staying right where you were all along. It’s about going somewhere, exploring everything and going through profound and painful self-exploration, where you strip away what’s not real layer by layer, like eating yourself alive.
and,
At the heart of “Rick and Morty” is a choice:
Will you crumple in despair knowing the terrifying truth that life is totally meaningless or will you saddle up the universe and strike out for a life of fun and adventure?
I choose fun.
Something to watch: The Search For Meaning | Rick and Morty [3 mins]
Dan Harmon (co-creator of Rick and Morty) on the search for meaning:
Do I agree with Rick that nothing means anything? No I do not because the knowledge that nothing matters, while accurate, gets you nowhere. The planet is dying. The sun is exploding. The universe is cooling. Nothing is going to matter. The further back you pull the more that truth will endure. But when you zoom in on Earth, when you zoom in a family, when you zoom into a human brain and a childhood and human experience, you see all these things that matter. We have this fleeting chance to participate in an illusion called I love my girlfriend and I love my dog. How is that not better?
Knowing the truth, that nothing matters, can actually save you in those moments. Once you get through the terrifying threshold of accepting that, then every place is the center of the universe and every moment is most important moment and everything is the meaning of life.
Something to listen to: Layne Norton on Peter Attia’s Drive [Link] [Apple Link]
They go pretty deep in the weeds. I’m talking Amazon rainforest deep. I got a little lost at times not gonna lie but overall a great convo on bodybuilding, powerlifting, nutrition and personal health. Health is wealth, people!
I always tell people, I don't think I would've had the success I did in business or social media or academia if I hadn't done weightlifting because that taught me so much about other things in life.
Rabbit hole/resource to dive into: Paul Graham’s Essays [Link]
Read those first couple of essays he recommends at the top. Then read whatever appeals to you. Incredible resource and you’ll learn a tonne.
Curated by Kalani Discord Server [Link]
I’ve set up a server on Discord for this newsletter [join using this link]. Using the server to share interesting resources as I find them, and to connect with CbK readers. I won’t be sharing this link outside the newsletter, in order to keep it high quality.
Final thought for the week:
Pack 'er up boys and have a good one!
- Ksizzle
You can find previous issues of Curated by Kalani here. I’m on the web at kscarrott.com and on Twitter @scarrottkalani.
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