Delayed Gratification, Multibaggers, and Daniel Ek
"I wish I hadn’t worked so hard"
Howdy! Welcome to issue #8. Different week, similar deal (although a tad shorter as I’m working on something big!) Keen to share what I’ve been reading, learning, and compressing. But a quick quote to start:
I'm the best player in the world, I hit some of the worst shots you've ever seen. But I go find it and hit it again. Obviously not all of them are bad but I do hit bad shots. It's managing those shots and not letting it bother you and going and hitting the next one good.
- Dustin Johnson, #1 Ranked Golfer [Source]
Here’s the format of today’s email:
Part 1: Delayed Gratification
Part 2: Makings of a Multibagger
Part 3: Under the Spotlight: Daniel Ek
Part 4: Bonus Quirky Content - Something to Read, Watch, and Listen.
A common thread among successful people is their willingness to play the long. Charlie Munger on his delayed gratification
The first 13 years I practiced law, my income [from practicing law] was $300,000 total. At the end of that 13 years, what did I have? A house. Two cars. And $300,000 of liquid assets. Everyone else’d have spent that slender income, not invested it shrewdly, and so forth.
I just think it was, to me, it was as natural as breathing, and of course I knew how compound interest worked! I knew when I saved $10 I was really saving $100 or $1,000 [because of the future growth of the $10], and it just took a little wait. And when I quit law practice it was because I wanted to work for myself instead of my clients, because I knew I could do better than they did.
You only get a few opportunities, and you have to grab them aggressively when they come because even in the most favored life, they’re really rare. My mother listened to all this stuff, and it meant nothing to her. She was never interested in money or worldly success, but she just appropriated the stories to me because they’d amused her.
I always feel that the opportunities are rare. I only get a few and then I have to seize them aggressively.
Now that lesson I just talked about, it is taught in no business school I know of. But…everybody who has any sense ought to know [that] at the start of life, and practically nobody does.
Maybe there will only be one Mr. Right or Mrs. Right. You missed that one and your life is not going to be the same. You’ve blown it—big time. But why wouldn’t they teach that in every business school? The answer is the professors don’t know it!
I just described reality the way it really is. How many, if I took the 30 biggest transactions out of Berkshire [in the past] 60 years, what would Berkshire be? Not much. I mean we wouldn’t be poor, but we wouldn’t be rich either. Maybe once every two years we had a major opportunity. Not very many.
Well, it’s obvious that deferred gratifiers do better over the long pull than these impulsive children that have to spend money on Rolex watches and other folly. And not that I’m picking Rolex is any worse than Patek Philippe or something.
But I think everybody should – save and not be stupid at spending money and defer gratification to get more later. All those good things that we were taught, you know, by Benjamin Franklin, thrift and so forth.
And the odd thing about it is that people were kind of born deferred gratifiers or not. They’ve done recent psychological work on that subject. Lots of luck if you’re an impulsive person that has to be gratified immediately, you’re probably not going to have a very good life and we can’t fix you. But if you have a slight tendency to defer gratification, and you can feed that tendency, you’re on the way to prosperity and happiness. It’s that demand for immediate gratification, that’s the way to ruin. It may also give you a syphilis.
Alta Fox Capital Makings of a Multibagger [Link]
A report that studies the best performing small-cap stocks over the last 5 years. Even better, it was done by 3 remote interns! Over one summer! Bloody good effort.
1) Look for businesses with advantageous positioning: 80% of businesses who outperformed had moderate-to-high barriers to entry and 91% had moderate-to-high competitive advantages.
2) Spend time on financially healthy companies: 88% of outperformers came from a position of financial health in June 2015 and grew faster than the market might have anticipated. Looking for financially healthy companies, rather than turnarounds, is also less risky.
3) Acquisitions can create value: While many acquisitions fail to create value , the highest performing stocks often leverage acquisitions to bolster their returns. If you are looking for phenomenal returns, finding companies that make strong acquisitions will increase your odds of success.
4) Don’t rely on multiples: While it is always better to buy a great business at a low multiple rather than a high one, many of the top-performing stocks began with already healthy multiples – those multiples often expanded even further. Insert Munger quote “A great business at a fair price is superior to a fair business at a great price.”
5) Be open to international companies: Many of the best performing were American (32%); however, the USA was underrepresented in the set, meaning it is less likely that a company in America would achieve > 350% returns compared to some other countries such as Sweden, Australia, and Germany.
Companies in the UK, Sweden, Germany, Norway, and Australia were over-represented in the set likely because of their strong rule of law, quality educational institutions, and favorable economic conditions. There also tends to be less initial coverage of smaller stocks in these countries than in the U.S., which may be due to lower populations of small-cap focused analysts and investors
The industries of technology and healthcare were over-represented in the set likely because of often low unit costs, high gross margins, high operational leverage, and growth opportunities. The aging population and an increased reliance on tech/software for everyday life have and will continue to be strong tailwinds for the growth of these industries
Companies below $2B market caps represented 84% of the set, often because of low analyst coverage and institutional ownership. Smaller companies often have more room to increase their share of their target markets relative to larger companies, which often have larger market penetration
82% of companies from the set traded below 3x NTM Sales, 20x NTM EBITDA, and 30x NTM PE and/or those without forward multiples. These leave room for multiple expansion, which drove a substantial amount of the total shareholder return.
Under the Spotlight: Daniel Ek
Each week I provide a little spotlight on an investor or operator I admire.
Daniel Ek is this weeks focus, in a nutshell:
Born in Stockholm, Sweden. His mother working at a daycare and his step-dad at a mechanic.
At 13, he was making websites for clients from home. Apparently racking up $50k+ per month by the time he was 18.
Later on, for a brief period of time, he was the CEO of μTorrent!
Spotify was born (in part) from the idea that “you can never legislate away from piracy. Laws can definitely help, but it doesn't take away the problem. The only way to solve the problem was to create a service that was better than piracy and at the same time compensates the music industry – that gave us Spotify."
Daniel Ek on The Observer Effect [Link]
On learning and making new connections:
When I set out to tackle something – to solve some problem or create something new – in the beginning, it just seems insurmountable. When you enter a new field, you don't know anything; you don't even know what people are talking about! It sounds like it's a foreign language that people are speaking. But, I know from my experiences – going back to my five year-old self – that if I just persevere, if I keep going in this direction, eventually I'll start seeing what resembles a branch or a trunk, and then a leaf or two, and then I can start putting them together. Eventually, I'll see the whole tree. I just know that's the process. I try to repeat it often enough so it becomes a habit.
Today, I don't think so much about the process of learning. What I do think about is spending time thinking about what is important for me to try to learn in the first place: What are things that could be helpful skills for myself to understand better, to be more empathetic? What are things that could be just tangential, interesting areas that have no bearing on what I'm doing today, but, over time, [will] make me a more interesting person, make me a better husband, make me a better father?
Daniel Ek on Invest Like the Best [Link] [Apple Link]
Daniel has a great point on people underestimating exponential outcomes. To be fair, it’s gotta be hard either way. Plan for exponential outcomes and you might miss the problems at hand now. Don’t plan for exponential outcomes and you risk screwing yourself over in the future. I’m all for playing the long game
You can see very clearly you have to build all the processes, you have to build all the systems in anticipation of that growth because it's so hard for people to comprehend what exponential growth looks like or even see around corners and see where something three times the size of what it is today, what are some of the issues that you're going to run into at that point? And so it was probably one of the most important management lessons I've ever learned
Bonus Quirky Content
Something to read: Regrets of the Dying [Link]
I’ll be honest, I’m terrified of dying. Like, pain in my stomach terrified. So I consciously try to live as much as possible. Anyhow, *spoiler alert*, the regrets of the dying are:
I wish I’d had the courage to live a life true to myself, not the life others expected of me.
I wish I hadn’t worked so hard.
I wish I’d had the courage to express my feelings.
I wish I had stayed in touch with my friends.
I wish that I had let myself be happier. Happiness is a choice.
Something to watch: How to Ask Questions Better [Link]
Last week in my Something to Read section [Link], I suggested Interviewing Principles. This weeks video is a nice follow-up.
Study other great interviewers and the questions. Listen to great interview podcasts,
Can the question be answered quickly? E.g. “What is your favourite book” is too broad. “What book have you gifted most?” is clearly definable and easy to remember.
Think about your sequence of questions. If asking a heavy question, ask a few questions that are easier and lead up to. Get them flowing and engaged.
Use examples in your questions. Help your interviewer by giving them examples. Gives them more time to think about their answer.
DON’T ASK THEM QUESTIONS YOU CAN FIND ON GOOGLE. ‘Nuff said.
Don’t ask really broad questions that can’t answer quickly. E.g. “What should I do” or “What advice would you give me for succeeding?”.
Conversations are the best way to learn. Conversations (with people who know their field) are alive, efficient and engaging.
Preparation and careful listening are everything. “The role of the person asking the questions is to create and sustain momentum.”
Finding the next guest is all about the quality of the other guests and your questions. Conversations with interesting people lead to other interesting conversations.
Give the audience credit. “The beauty of the internet is the power of the niche, just find one and own it.”
Avoid colonized topics. If you’re bored of a certain topic, chances are others too.
Consider the user experience. Guests are the customer just as much as the listener. Make it fun and easy for them.
Find great partners. Partners drive a lot of the podcast and can help in parts where you might lack.
A generalist mindset can be a huge advantage. “If you know a little bit about many different fields, it makes that task much easier and increases the odds that you'll get the goods from whoever you're talking to.”
Amplify what works. Double down on your wins. “Andy Rachleff told me that one of his best business lessons is that he learned far more from success than from failure, and that you should use success as a compass.”
Don't expect anything in return. “When the process itself is the goal, magical things tend to happen.”
Been doing a tonne of research for starting my own podcast soonish so bear with me on the interviewing and podcast related resources!
I’d love to hear, what have you read this week?
Until next week, have a good one!
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