If I disappeared… would you notice I’m not here? (Mental Models Memo, September 2018)

Let’s talk about sex.  

Or, more specifically, whether or not it sells as well as its cliche.

David Ogilvy, often lauded as the “father of advertising,” created possibly the first American advertisement to feature a naked woman.

Unfortunately for Ogilvy, the advertisement was terrible.  It wasn’t worth the paper it was printed on.

Why?  Well… not because it wasn’t sexy.  Ogilvy, for one, thinks it was. (He admits he’s a little biased.)

But the naked woman had nothing to do with the Aga cooker Ogilvy was trying to sell.  The lady was salient.  The kitchen appliance, sadly, was not.

As Poor Ash’s Almanack readers know if they’ve read the mental model, memory works via association.  The advertisement created no memorable association between naked women and cooking appliances, nor were readers likely to have a pre-existing one (unless they had some weird, weird hobbies).  

So people remembered the lady, and forgot the Aga Cooker.  At least in this case, sex didn’t sell.

At the other end of the spectrum, but sticking with the theme of selling cooking appliances, it’s hard to get less sexy than a blender.  

So how did a clever marketer get a blender to go viral on a miniscule budget – transforming the company behind it into a household name?

It sounds impossible.  Blenders are profoundly unsexy.  I mean, just think about it. Directionally, blenders are about as good at conversation as a dead doornail.  Curves usually mean something has gone horribly wrong in your culinary endeavors.  And – to paraphrase Warren Buffett – you can fondle your blender, but it won’t respond.  

Blenders, then: the epitome of function over form. They’re the twenty-two year old Honda Accord of kitchen appliances.  No points for style, but they’ll get you from point A to point B in one piece… or, I guess, in many very small blended pieces.  The metaphor sort of breaks down here, just like the kale I’m pureeing. (No, really, kale puree’s amazing.  Try it.)

So anyway: a blender, not usually primo Instagram selfie material, would probably rank dead last among its graduating class in voting for “most likely to become a YouTube star.”

Yet one did just that: turns out some blenders aren’t as dull as their blades.  Blendtec’s “Will It Blend” advertising campaign, featuring their nifty blenders pulverizing everything from two-by-fours to iPhones, helped launch the brand into hundreds of thousands of kitchen cabinets – including mine.

A scene from BlendTec's "Will It Blend" ad campaign.

Ogilvy would’ve been proud.  One of his catchphrases, which we’ll come back to: you can’t bore people into buying your product.  So if your product is boring, add a few pieces of flair – but in a way that keeps attention on the product.

Advertising for the… intellectual?

Advertising may seem like a weird topic du jour for me to suggest you dive into.  It’s not a field typically associated with, well, intellectualism. Madison Avenue has a similar reputation to sales desks on Wall Street: the domain of former jocks, not nerds.

Indeed, many intelligent people I know fall into one of two camps as it regards advertising:

1. They disdain advertising – believing that it may be effective in convincing other people, but not us.  We’re smarter than that.

2. They dislike advertising – believing that good products sell themselves, and advertising ranks on the moral scale somewhere between “multilevel marketing” and “billboard lawyers.”  (I’ll leave it up to readers to determine which end of the scale is which.)

I prefer to view advertising as simply a force, akin to gravity.  And what a force it is: as contrarian serial entrepreneur Peter Thiel sagely observes in Zero to One (Z21 review + notes):

“In Silicon Valley, nerds are skeptical of advertising, marketing, and sales because they seem superficial and irrational.  

But advertising matters because it works. It works on nerds, and it works on you.  You may think that you’re an exception; that your preferences are authentic, and advertising only works on other people.

[…] but advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later.  

Anyone who can’t acknowledge its likely effect on himself is doubly deceived.

It’s important to understand forces that may affect us.  We have to respect them, even if we don’t like them.

Forces don’t inherently have moral dimensions: the current that sucks a swimmer out to sea, or foils a naval invasion, isn’t good or bad.  It just is: a force of nature we can choose to succumb to, avoid, or harness.

And as we discussed in last month’s memo – Resilience from Xerxes to Taylor Swift – successful execution of any strategy requires identifying these forces, and either harnessing them to our advantage, or at the very least finding ways to skirt around them so we’re not swept out to sea.

It turns out advertising can be intellectual, too.  Opining on the culture of his eponymous advertising agency Ogilvy & Mather – which had industry-leading profitability, I might add – David Ogilvy put it in a way that I think Poor Ash’s Almanack readers very much agree with (and should share on Twitter):

We pursue knowledge the way a pig pursues truffles. - David Ogilvy Click To Tweet

I confess that I had never heard of Ogilvy until my friend Jon Glatfelter – a marketing professional – highlighted Ogilvy’s books in the same monthly Reading List book recommendation that brought me (and thus you) the delightful The Genius of Birds (GoB review + notes) by Jennifer Ackerman.

Jon’s prose (which Ogilvy would admire) convinced me that the books were worth a look.  The first few paragraphs of The Unpublished David Ogilvy (Oglvy review + notes) did the rest: Ogilvy’s outsider, multidisciplinary, principles (i.e. mental models) based approach to advertising is well worth learning from.

Between that, Ogilvy’s eponymous Ogilvy on Advertising (OnA review + notes), and the more modern, research-driven Contagious: Why Things Catch On by Wharton professor Jonah Berger (vrl review + notes), we have a lot to talk about this month.

Without further ado, here are three of the highlights of the mental model latticework interactions I took away from studying American advertising through the ages.  For the rest, you’ll have to read the books (and my notes thereon).

Disaggregation x Utility

One of my best friends, Clayton Young, discovered why Buzzfeed exists.  Clayton runs a Japanese small-cap research newsletter called Kenkyo Investing, and focuses on creating valuable content to help investors learn about under-the-radar Japanese investment candidates.

The problem is, no matter how awesome Clayton’s content is, his content has a gatekeeper.  That gatekeeper is called the headline. If it’s interesting, people will click it. If it’s not, people won’t click it.  The headline has a vastly disproportionate influence on whether or not anyone discovers Clayton’s insightful research.

Clayton is the sort of person who prefers to focus on research rather than brainstorming snappy headlines – but he’s, grudgingly, had to make the business decision to spend a little time on the latter.

Clayton’s discovery, of course, is not new – it’s a rediscovery of something generations of copywriters have known.  And, in a sense, like much of advertising theory, it’s merely a repurposing of the lessons collected by Dale Carnegie in How To Win Friends and Influence People (HWFIP review + notes)

Carnegie, in turn, was probably not wholly new, either.  But that’s the power of learning timeless principles like mental models.

Most readers are probably aware of the importance of headlines and introductions; we all remember being taught how to do the “elevator pitch” when we were in college.  

But David Ogilvy offers an unusual and important insight: while the headline has to be carefully tailored to get people to read the body copy, and thus must not waste a word, one can take a different approach to the back end of the body copy.

Many (including Ogilvy himself) stress concision.  But there’s also a danger in being too concise: Ogilvy, smartly, notes that people who are reading deep into your body copy have self-selected as people who are interested enough in what you’re selling to want lots of information on it.  

So give them more!  Ogilvy’s research found, counterintuitively, that longer, more informational advertisements sold better than shorter, more information-poor ones.  So did research by famous direct-mail copywriter John Caples.

This is a phenomenal example of using disaggregation to maximize your utility: breaking a problem (how to write the most effective copy) down into its constituent parts.

Ogilvy similarly applied disaggregation and utility to asking whether or not advertising firms should praise “creativity.”  He notes that “creative” advertising may win awards… but “good” advertising rings the cash register.

So be careful what KPIs you’re tracking: you get what you measure.

Salience x Memory x Incentives x Base Rates

“Don’t let’s be dull bores. We can’t save souls in an empty church.” - David Ogilvy Click To Tweet

Among Ogilvy’s many loves in life, perhaps none exceeded that of what he called “factors.”  In another analogy involving truffles (hey, he had a thing for France), Ogilvy quips:

“As a copywriter, what I want from the researchers is to be told what kind of advertising will make the cash register ring… plus and minus factors…

a blind pig may sometimes find truffles, but it helps to know that they grow under oak trees.”

It’s subtle, but brilliant: you can search as hard as you want for truffles in an aspen grove, but you ain’t gonna find them.  Ogilvy’s “plus and minus factors” are, in other words, base rates – they won’t guarantee that you’ll find a truffle, but they’ll give you the highest starting probability of doing so.  

Ogilvy documented dozens of them.  Black type on white background is easier to read than white type on black background.  Headlines that include a promise sell better. And so on and so forth. 

There are tangible demonstrations of these factors at use in Ogilvy on Advertising (OnA review + notes) – I found it really engaging / educational to work through the pictured ads looking for factors.  Both the ones that Ogilvy mentioned… and the ones he didn’t.  (Where would the fun be if I told you everything?)

One of these factors may not matter; three may start to.  When you amass 90-plus, as Ogilvy did, you’re starting to talk about a meaningful advantage right out of the gate.  It’s the ad-agency equivalent of a latticework of mental models. No wonder Ogilvy & Mather was so successful.

Are these factors hard and fast rules?  No, of course not – Ogilvy observes:

“I am sometimes attacked for imposing ‘rules.’  Nothing could be further from the truth. I hate rules.  

All I do is report on how consumers react to different stimuli… a hint, perhaps, but barely a rule.”

It’s like Dr. Atul Gawande states about checklists in The Checklist Manifesto (TCM review + notes): they’re supposed to turn our brains on, rather than off.  Base rates clue us in to the starting point that’s statistically most likely to succeed – but it’s up to our judgment to refine the exact approach from there.

The concept of “factors” flows through into the much more modern Contagious: Why Things Catch On (vrl review + notes).  Wharton professor Jonah Berger brings Ogilvy’s concepts into the modern era: in the era of “sharing” and social media, what causes some products or advertisements to “go viral” – while others languish unviewed in the dusty corners of the internet?

I love Berger’s approach – he’s cognizant of survivorship bias and seems to have set up his research to make sure he’s not falling prey to “connecting the winning dots,” as Phil Rosenzweig of “The Halo Effect” (Halo review + notes) might put it.  But he does come away with some useful base rates on what makes things more likely to be shared.

Reductionistically, since the details are beyond the scope of this memo, we’ll summarize a few key items – all of which Ogilvy seemed to have predicted, by the way.

First, to loop back to the intro, salience – things that stand out as unique, interesting, or unusual are more shareable.  As Ogilvy said, you can’t bore people into buying your product – so make it interesting.  Have some flair.

For example: a blender making a smoothie isn’t that exciting.  No flair. But a BlendTec making, from scratch, piping-hot tortilla soup in front of an appreciative crowd at Costco – now that’s exciting.

It’s so exciting that even a moody, hard-to-impress tween clad in a sulk and all black (yours truly!) begged his parents for years thereafter to buy that blender.  

(Which they eventually did; I promptly informed them that – screw property rights – it was mine and I was taking it with me whenever I moved out.  A decade later, the friendly family disagreement is still ongoing.)

Clearly, that blender has way more than the minimum required flair.  In fact, I’d estimate it has at least 37 pieces of flair.

But the critical thing here is that the salience / flair / sexiness has to relate to or, better yet, critically involve the product.  BlendTec accomplished this: you can’t really tell the story of the tortilla soup (or the two-by-four, or the iPhone) without mentioning the blender.

This isn’t always the case, though.  Berger points out that many “viral” advertising hits – like Evian’s “Roller Babies” commercial or one casino’s sponsorship of a guy crashing Olympic diving with a belly flop – fail to generate any impact at all, because, as with Ogilvy’s naked lady, consumers remember the funny/cute/shocking commercial, and completely forget what it was selling.

Conversely, consider good examples of “stunt marketing” from our latticework of mental models: Sam Walton’s panty sales in the early days of Wal-Mart, which drew all the ladies of town into the store, and Marc Benioff’s wild stunts at Siebel conferences, which launched Salesforce into the limelight.  

Go read about them in Made in America (WMT review + notes) and Behind the Cloud (BtC review + notes) respectively – and reflect on the relationship to what Berger/Ogilvy have to say here.

Second after salience in my mind: utility and incentives.  Give consumers something useful, and they have an incentive to share it with friends and family.  Self-explanatory.

Finally, last but not least, storytelling: it’s the human operating system.  As Berger puts it:

“Stories provide a quick and easy way for people to acquire lots of knowledge in a vivid and engaging fashion.”

This more than makes up for any nuance that may be lost in the process; Ogilvy consistently highlights “story appeal” as important.  

In fact, in The Unpublished David Ogilvy (Oglvy review + notes), he admits to making up a certain story to prove a broader (true) point.  

Poetic license, he calls it, the king of honest and factual advertising – so no wonder it turned out to be one of Berger’s six factors.

See Contagious: Why Things Catch On (vrl review + notes) to learn about the rest of them.

Tradeoffs / Opportunity Costs x N-Order Impacts x Local vs. Global Optimization

One of the fun things about Ogilvy is that he’s clearly a long-term thinker.  Much as Ogilvy delighted in portraying himself as a mercenary ringing the cash register with wild abandon, he was also very thoughtful about walking the tightrope between stimulating short-term sales and protecting the long-term interests of his clients.

Ogilvy frequently approached this local vs. global optimization problem by taking the long-term view:

“I find that most manufacturers are reluctant to accept any… limitation on the image and personality of their brands.  They want to be all things to all people…

And in their greed they almost always end up with a brand which has no personality of any kind – a wishy-washy neuter brand.”

He focused on similar tradeoffs elsewhere: I mentioned, for example, how Ogilvy & Mather wasn’t the biggest agency, but it was unusually profitable in a notoriously thin-margin industry.  Ogilvy was keenly aware of his opportunity costs: using the analogy of scraping barnacles off a ship to keep it moving forward, he noted that not every client was worth pursuing, and not every service line worth offering.

Why spend time, energy, and resources inflating the top line if it doesn’t lead to bottom-line profitability?  

Finally, Ogilvy was thoughtful about thinking about long-run effects in another way: he well understood the n-order impacts of certain behaviors.  Continuing to rail on the shortsightedness of manufacturers trying to boost short-term sales, Ogilvy discusses the dangers of discounting:

“Manufacturers are buying volume by price discounting… they are training consumers to buy on price instead of brand.

… there used to be a prosperous brand of coffee called Chase & Sanborn… They became addicted to price-offs.  Where is Chase & Sanborn today? … dead as a doornail.”

I discuss a modern iteration of this phenomenon in more depth in the zero-sum games mental model.

So… would you notice?

It felt like I had my very own lake in Minnesota.
Weight’s at a premium when I’m backpacking… but I’ll always make room for a book. Or three.

Whether or not you’re interested in advertising yourself – or your company – there are tons of lessons to learn from studying this often overlooked field.  

Ultimately, the waves of time wash away all but the strongest imprints on the beach.  Successful advertising aims to make as deep an imprint as possible – so you stand out from the crowd, and so your legacy lasts well beyond your ad campaign.

To return to the title: I think the song stuck in my head as I read these books sums up the challenge particularly well.

You only hear what you want…

I can’t see you; you can’t see me.

We’ll be lost in here together.

If I disappeared… would you notice I’m not here?

Would you notice I’m not here?

– “Hear What You Want” by Real Friends

Resilience from Xerxes to Taylor Swift: Hedgehogs, Conditioning, and Trait Adaptivity (Mental Models Memo, August 2018)

Theory extracts lessons from infinite variety. It sketches, informed by what you need to know, without trying to tell you too much. For in classrooms, as on battlefields, you don't have unlimited time to listen. - John Lewis Gaddis Click To Tweet

Isn’t that a great quote?  It represents what we’re trying to do around here by building a latticework of mental models.

Welcome to Mental Models Memos, a recap of the most important lessons learned by Askeladden each month, overviewing what we’ve added to the ever-expanding encyclopedia of mental models that is Poor Ash’s Almanack.  In the vein of Howard Marks’ famous memos, I hope these will be as entertaining as they are educational.

Conditioning x Correlation vs. Causation x Trait Adaptivity: Hedgehogs, Swamps, and Overlearning Generals from Particulars

Why do we fall, Master Wayne? So that we can learn to pick ourselves up. - Alfred Pennyworth Click To Tweet

In very different contexts, the two best books I read this month are tied together by the concept of resilience.  [If you’re impatient, the books are “On Grand Strategy by Pulitzer Prize winning historian John Lewis Gaddis (OGS review + notes), and Surviving Survival” by Laurence Gonzales (SvSv review + notes). ]

Bouncing back from adversity can be challenging.  Shortly after the launch of PAA, one reader emailed me seeking advice on a thorny career challenge.  After experiencing a professional setback that, as far as I could tell, was in no way their fault, they felt like a shipwrecked survivor lost at sea, clinging to a tenuous fragment of driftwood – not sure where they were or what to do next.  In their words:

“I feel overwhelmingly underachieving and lost. The past [year] has been especially hard for me… I sometimes no longer recognize myself. I know I experience [negative emotions], but I didn’t know I could be affected as much as I did in the past [year].”

They’re not alone – turns out that feeling lost is a recurring condition of being human.  One purpose of history, says Gaddis, is to make us feel less lonely,” and the same can be said for other types of reading.

Feeling lost can be terrifying, as explored in Laurence Gonzales’s fantastic Deep Survival (DpSv review + notes) – an amazing book about cognition / intuition / habit / stress, among other mental models in the latticework.x It analyzes(via well-told stories) the fascinating neuroscience of why some people live – and some die – when faced with real-life shipwrecks, and other impossibly awful situations.

Gonzales’s follow-up book – Surviving Survival (SvSv review + notes) – covers how to find your way back from being existentially rather than physically lost, and honestly, it might be even better than his first (very high praise, coming from me).

Again with the phenomenal juxtaposition of storytelling and neuroscience, Gonzales examines how surviving is merely half the battle – getting through a traumatic event is one thing; getting over it, unfortunately, is a completely different beast.  As Gonzales puts it poetically about a lady who survived a crocodile attack, she never really escaped the crocodile: after the attack, it took up residence in her head, even when she was inside a locked house on very dry land.

Resilience, Gonzales explains, is both an art and a science.  What makes it so difficult is the interaction of the conditioning and trait adaptivity mental models: our brains are hardwired to encode what Gonzales calls “emotional bookmarks.”

I walked away from the book with a much better understanding of the physical, neurological basis of our tendency to mix up correlation with causation.  Our brain’s auto-associative tendency is generally adaptive – it helps us rediscover pleasures, and avoid losses.

Especially the latter, thanks to loss aversion – better safe than sorry.  We’ve all heard the Twainism about the cat that once sat on a hot stove and never again sat on a cold one.

But of course, like any adaptive trait, its adaptivity is context-dependent; put differently, drop the greatest land predator in the middle of the Atlantic Ocean, and they’ll become fish food.  Just as learning too little from experiences can be dangerous, so too can learning too much.

Gonzales explains, in reference to people trying to recover (both physically and emotionally) from animal attacks or domestic violence:

“In the brain, the cardinal rule is: future equals past.  What has happened before will happen again.  

In response to trauma, the brain encodes protective memories that force you to behave in the future the way you behaved in the past.  

The trouble was that in all likelihood, [you] would never again face a similar hazard.”

To borrow terminology from Gaddis’s On Grand Strategy, Gonzales is describing our emotional system as, unfortunately, a natural hedgehog – it knows one big thing, which is to keep us away from what it thinks is bad, and steer us toward what it thinks is good.  Parts of our brain are hedgehogs-with-a-hammer; parts of our brain do not have a latticework of mental models: they operate on just one premise.

Using our cognition to make the other parts of our brain more fox-like to outsmart our natural hedgehog – and thereby getting the single-minded hedgehog focused on a different goal, since it can’t hold two competing ideas in its mind at once – turns out to be key.

Half a world and several millennia away from victims of brutal animal attacks or domestic violence, John Lewis Gaddis explores, in the amazingly concise On Grand Strategy (OGS review + notes), very similar underlying mental models.

Gaddis extends the zooming-in, zooming-out, building-understanding-through-metaphor approach that he extols so beautifully in The Landscape of History (LandH review + notes), deftly taking notes from  Leo Tolstoy and Isaiah Berlin (the latter of fox and hedgehog fame) and applying them, in a very multidisciplinary way, to understanding the grand strategies of historical figures – and why they succeeded (or failed).

Gaddis notes, similarly to Gonzales, that humans have more than one system for approaching the world, and benefit from this because sometimes one is adaptive while the other isn’t:

“Foxes were better equipped to survive in rapidly changing environments in which those who abandoned bad ideas quickly held the advantage.  Hedgehogs were better equipped to survive in static environments that rewarded persisting with tried-and-true formulas. Our species – homo sapiens – is better off for having both temperaments.”

Indeed, Gaddis, like Gonzales, is nothing if not multidisciplinary.  He advocates using different perspectives (i.e., schemas) to discern patterns across time, space, and scale and build richer understandings of the world around us.  He would, I think, agree with one line from Surviving Survival – perhaps the single best piece of advice I’ve ever seen – where Gonzales, discussing multicausality, advocates:

“blanketing a problem with overlapping solutions.”

Of course, the flip side is that resources aren’t infinite, which engenders the need for leaders to make utility-focused tradeoffs: walls, as Gaddis puts it,

“buffer what’s important from what’s not.”

It’s important to not get the two confused – and, problematically, they can often conflict in the short term.  What does it mean to head towards your goal?

Gaddis highlights the tension between a long-term sense of direction and near-term obstacles.  He quotes Spielberg’s 2012 drama Lincoln to illustrate. Fictitious (as opposed to Honest) Abe explains:

“A compass, I learned when I was surveying… it’ll point you true north from where you’re standing, but it’s got no advice about the swamps, deserts and chasms that you’ll encounter along the way.

If in pursuit of your destination, you plunge ahead heedless of obstacles, and achieve nothing more than to sink in a swamp… what’s the use of knowing true north?”

So many of the mental models in the latticework show up here – local vs. global optimizationopportunity costsstructural problem solving, and many others.  Resilience requires bridging the gap between the two poles of fox and hedgehog.  Distilling lessons from millennia of major historical events, Gaddis observes:

“Assuming stability is one of the ways ruins get made. Resilience accommodates the unexpected.”

The problem, of course, goes back to what Gonzales was talking about: over-learning from short-term conditions in a dynamic environment that can and will change – perhaps dramatically – making those lessons neutral at best and counterproductive at worst. 

And Gaddis highlights how even for world leaders, emotions and short-term pressures can get in the way of clear thinking: he’d probably appreciate how Laurence Gonzales put it in Surviving Survival (SvSv review + notes), talking about cognition and intuition:

“The brain can seem at times like a confounding bureaucracy with different departments arguing with one another.  The amygdala is not in the Rational Department. It doesn’t care that, at times, its responses might make no sense.  The emotional system can’t allow you to think about your reactions.

That takes too much time. If you stop to think, you’ll be eaten.  So it’s tuned for instant reaction… Under stress, you don’t invent new strategies.  You revert to automatic behaviors.”  

Gonzales doesn’t know it – he’s talking about recovering from a crocodile mauling – but, zooming out and in as Gaddis is wont to do, Gonzales accidentally does a pretty good job, there, of summarizing why King Philip – and Napoleon – managed to lose on a spectacular scale despite commanding massive armies with nearly infinite resources compared to their opponents.

Gaddis explores how we, whether as individuals, businesses, or nation-states, can most effectively design and implement strategies to get us to our desired destinations while avoiding those swamps in the middle.  (It has a lot of investment implications, as will be discussed in my upcoming Q3 letter in a few months.)   

One important takeaway: successful leaders from Octavian of Rome to Queen Elizabeth of England to President Lincoln of America used structural problem solving to their advantage, just like Richard Thaler did to help people save far more for retirement without ever noticing a lifestyle haircut.

Gaddis observes that sage leaders:

“find flows you can go with… avoid shoals and rocks… and expend finite energy efficiently.”  

Sun Tzu states that generals “should act expediently in accordance with what is advantageous.”  Going back to his earlier analogy, Gaddis notes that “wise leaders… sail with the winds, not against them.  They’ll skirt swamps, not slog through them.”

In contrast, immature, unsuccessful leaders – like Marc Antony, King Philip, Alexander the Great, and so on – confused aspirations with capabilities” and “learned limits only through failures,” such as when King Philip’s Spanish Armada was massacred.

They tried, in other words, to win through grit.  Grit is neither an effective nor sustainable grand strategy.  Gaddis formally defines the term as: “The alignment of potentially unlimited aspirations with necessarily limited capabilities.”  Opportunity costs and bottlenecks are key models here.  

This is merely the tip of the iceberg in terms of lessons from these two books.

Loss Aversion x Overconfidence x Status Quo Bias x Commitment Bias x Agency: What King Philip Could’ve Learned About Resilience From Taylor Swift

Both Gaddis and Gonzales use the extraordinary to better illustrate the ordinary.  The truth – thankfully – is that most of us will never be a President tasked with abolishing slavery while keeping the Union together.  Most of us will never have to recover from the physical and mental aftereffects of a shark attack or an IED.

And, indeed, many of the practices that are adaptive in those situations may not be adaptive in our less-critical situations.  But the underlying principles remain equally adaptive.  Gaddis, like Stephen Covey in 7 Habits, differentiates between timeless (universal) principles and specific (situational) practices.  The goal of mental models learning is to find the former, our “true north” (by reading broadly) and then apply the latter, on a situation-by-situation basis (avoiding swamps along the way).

So let’s examine a more “everyday,” relatable example.  As often happens, both myself and one of my best friends, in the past six months, were faced with the unfortunate (and emotionally difficult) need to get over some Stockholm Syndrome and extricate ourselves from abusive, toxic relationships – in my case from a close friend whose constant deceit, massive ego, and profound lack of empathy all represented directionally sociopathic behavior; in my best friend’s case from a significant other who was controlling, demanding, hypocritical, and unappreciative.

I would like to pretend that I’m above listening to Taylor Swift on occasion.  But… I’m not.  I’ll blame it on social proof, i.e. my friends’ tastes in music.  (Lookin’ at you, Todd… we all see your heartfelt appreciation for Tay-Tay, no matter how much you try to hide it.)

Once upon a time, a few mistakes ago…

When I fell hard, you took a step back, without me. You never loved me, or her, or anyone. or anything.

Yeah, I knew you were trouble when you walked in.

So shame on me. Now I’m lying on the cold hard ground.

Oh, oh, trouble, trouble, trouble.

Now, our perpetually boy-challenged Ms. Swift might be succumbing to just a touch of hindsight bias here… and I might be stretching the limits of being multidisciplinary.

But there are surprising parallels between breakups and Napoleon’s follies.  To go back to On Grand Strategy, fundamentally all strategy failures, in Gaddis’s reckoning, result from confusing unlimited aspirations with necessarily limited capabilities.”

Aspirations, Gaddis stresses, must be proportioned to capabilities.  In one sense, wanting to rule an empire on which the sun never sets is really no different than wanting to have a relationship with a specific person: there is a tangible end (true north on your compass) that, for whatever reason, is desirable to you.

And that’s fine.  It’s a free country.  But that aspiration will be bottlenecked by your necessarily limited capabilities – if a bunch of swamps lie between you and your always-sunny empire (or someone you care about), then your capabilities had better be up to the task of swamp-crossing.  If they aren’t, well, either you need to find better capabilities, or you need to lower your aspirations.

Of course, lowering your aspirations is never easy.  Loss aversion kicks in: the aspirations have become part of our endowment, and we’re loath to give them up.  There were, perhaps, few objective senses in which King Philip needed to conquer more territory than he already controlled; the same could go for Alexander and Napoleon.

But as a friend of mine put it (eloquently, I thought): many of us are moths flying toward a flame.  The flame is probably terrible for us in a very clear and non-negotiable objective sense, but we still keep chasing it anyway.

The world, as it tends to do, singes our wings when we fly too close, offering us tangible evidence that we should take another path.  But, thanks to overconfidence, we often dismiss that evidence, like King Philip did – or, worse, thanks to commitment bias, we point to all the investment we’ve made as a justification for staying the course (like Napoleon did), even if our path leads us directly into the flame… or Russian winter.

Or maybe it’s simple status quo bias: as Gonzales puts it in Surviving Survival, (SvSv review + notes):

“most people simply continue on an unconscious course throughout life without ever stopping to consider whether a different approach might be more effective.  When something really bad happens, it presents an opportunity to wake up from our life on autopilot, our state of mental models and behavioral scripts, and deliberately choose a new strategy.”

So we keep on keepin’ on.  The solution, of course, according to Gaddis, Gonzales, and the late, great Stephen Covey, is simply to CHOOSE another course of action – to use our agencyThis is the bigger half of resilience: to look at the flame and say no thanks, I don’t want to get burned again.  Gonzales, again:

“You create the world by your belief in it, so it’s important to believe this: there really is a path.  It takes you not back to your old life but onward to the new one.”

Neither Xerxes, nor Philip, nor Napoleon needed to meet the ends they did: they created the conditions that led to their own demise.  Simple (albeit difficult) choices could have led elsewhere – to more prosperity.

And this is what our boy-challenged Ms. Swift finally managed to do, unlike Xerxes and Napoleon and the rest of them: take Alfred Pennyworth’s advice to pick ourselves up, and then, critically, to stop falling into the same well over and over again.

Kind of offhand and in passing, Gaddis quotes a colonial governor who found out something that Buffett and Munger have found out too: the base rate of changing people’s behavior is… well, it’s not very good:

“I imagined, like most young beginners, that… I should be able to make a mighty change in the face of affairs, but a little experience of the people… has absolutely cur[e]d me of this mistake.”

And yet that is the trap that many people in relationships fall into, even if it’s a mistake we’ve made before: me, my friend, and our dear friend Taylor.  Thinking that this time, our capabilities (or those of others) will finally match our aspirations…

They won’t, though; there’s only one appropriate solution:

I remember when we broke up, the first time.

Saying this is it, I’ve had enough.

Then you come around again and say, baby, I miss you and I swear I’m gonna change, trust me. 

Remember how that lasted for a day?

And I’m like, I just, I mean, this is exhausting, you know? Like, we are never getting back together.  Ever.

Now, my knowledge of Ms. Swift’s discography is… limited.  Any more and I’d fall below what Gonzales calls, in Surviving Survival, the “Personal Scum Line” – the line below which you can no longer have self-respect.  It is entirely possible that Ms. Swift subsequently reverted back to old, maladaptive behaviors.  I do not wish to investigate.  For the sake of a nice clean story, we’ll leave it here.

In any event, my friend and I took a page out of Tay-Tay’s book: clearly, neither our capabilities to change others, or our respective someones’ capabilities to be fundamentally decent human beings, were well-matched to our aspirations of having a functional relationship with that person – so, since the capabilities couldn’t change, our aspirations needed to.

At some point, as Covey puts it in The 7 Habits of Highly Effective People (7H review + notes), the problem isn’t out there – it’s in here.

It is our willing permission, our consent to what happens to us, that hurts us far more than what happens to us in the first place. I admit this is very hard to accept emotionally…

But until a person can say deeply and honestly, “I am what I am today because of the choices I made yesterday,” that person cannot say, “I choose otherwise.”

 

And those are, it seems, some of the keys to resilience, whether as a kid or as a country, along with some other tools on the keychain.  Surviving Survival, (SvSv review + notes) and On Grand Strategy (OGS review + notes) are both great books that enriched my understanding of numerous mental models; takeaways have been incorporated in a dozen or so mental models around the site.  Enjoy!


Askeladden Capital Q2 2018 Letter: Poor Ash’s Almanack – A Learning Journey

Here is the Q2 2018 letter, formally announcing the launch of Poor Ash’s Almanack – a website with ~half a million words of content that is the best free mental models resource on the internet by a wide margin.  I’ve been working on it in one manner or another since the launch of ACM, and work accelerated through Q1 and Q2.

The letter discusses the rationale behind taking the time to build such a resource; in short, I’m following the playbook that Charlie Munger – Warren Buffett’s billionaire business partner – has laid out for improving judgment and cognition.

If You See CA-PE/Shiller, Please Tell It To Go Away

Usually I’m not interested enough in “macro” topics to view them as worthy of much commentary; moreover, in most cases, I’m hardly qualified.  I also usually don’t get on a high horse… but I’ll break from tradition for once.

Here’s something I’m getting tired of seeing all over the place: if you are an investor, and you write things, and those things you write occasionally concern the valuation level of the overall market, please stop referencing the Shiller P/E (also known as the cyclically-adjusted price to earnings ratio, or, cutely, “CAPE.”)

A few reasons: first, it just doesn’t work.  As Blooomberg View writer Charles Lieberman put it in October 2017:

The only time the CAPE suggested stocks have not been overvalued in the last 25 years was in 2009, when it implied that stocks were fairly valued. Stocks have tripled since then.

Lieberman goes on to make the obvious conclusion (that something that’s been wrong for 25 years can’t be taken seriously as a useful indicator), and also makes the important observation that the CAPE:

“is inherently backward-looking, notably very far back, instead of forward-looking.”

Unfortunately, he doesn’t drill this point home.  It’s obvious but overlooked.  Plenty of investors lead with the CAPE, then proceed to hedge with statements that go, directionally “but interest rates” or “but tax cut” or something to that effect.

While these arguments all have their merits, they ignore the single biggest flaw with the CAPE that is extraordinarily rarely pointed out for reasons I can’t comprehend: it’s based on an incredibly flawed, cynical, and unrealistic premise, i.e. the idea that the way the world looked five or ten years ago should be the major driver of current valuation.

This makes any occasional successes of the Shiller P/E’s predictive value artifacts of luck rather than good methodology (similar to the famous “Super Bowl Indicator.”)  The CAPE essentially rests on the assumption that the world is cyclical; the problem is that outside of certain industries, secular factors matter far more than cyclical ones.

To start with, over the past 10 years, the U.S. population has probably grown (in round numbers) from ~300 million to ~325 million; meanwhile, China’s GDP has more than doubled from ~$4.5 trillion to over ~$11 trillion today.  Technology, meanwhile, has made everyone’s lives more efficient and productive, massively increasing wealth in real (lived) terms.  Obviously, factors like that means more business for everyone.

Perhaps more importantly, though, the way the world looked in 2008 (smartphones merely a novelty, Amazon not yet dominant, “the cloud” let alone “apps” not something that many people were thinking about) is completely different than the way the world looks today.  When you think about major index components like Google and Apple and look at a historical revenue chart, their revenues today are up 6-8x over 2008; in the case of Apple, EBITDA’s up over 12x.

On a bottom-up basis, using a “cyclically-adjusted” P/E to value these companies would make absolutely no sense – if you think that their go-forward earnings should somehow be modeled by an average of the past 10 years, you’re basically saying (in as many words) that we’re going to go back to a pre-mobile world and stay there, which I don’t think any reasonable analyst would view as a base case forecast.  Whether or not you’re an Alphabet bull (I have no horse in the race), is there anyone who credibly expects search volume to fall back to 2012-2013 levels?

Similar stories could be constructed about plenty of other companies – for example, let’s take Fogo de Chao (FOGO), a restaurant stock which I’ve owned twice now (including currently).  10 years ago, FOGO had ~10 restaurants in the U.S.; today, it operates 38 with another four or five in the works.   FOGO obviously isn’t in the S&P 500, but the CAPE should work as well in theory for other market valuation indicators, and similar stories could apply to many bigger restaurant stocks as well – are you telling me that FOGO or CMG or PNRA’s contribution to some market valuation should be “cyclically-adjusted” back to an average of 20 restaurants or something?

Obviously, there are puts and takes; I’m sure there are plenty of index components whose businesses today are structurally worse (bricks and mortar retail, newspapers?) than they were 10 years ago.  Unfortunately, the CAPE wouldn’t work well for them either on a bottom-up basis – I pity anyone who tries to value a generic mall-based retailer based on its metrics from 2007 or 2012.

Therefore, using the CAPE at a high level is basically hand-waving and hoping that progress in company A is fully offset by declines in company B… which isn’t generally the case: since the Industrial Revolution, at least from a purely economic point of view, the world has been in a steady up and to the right trend.

Being aware of potential cyclical impacts is certainly important (as energy and mining investors learned), but most industries aren’t that cyclical.  Perhaps fewer people would click on Google ads or buy Apple smartphones in a recession, but that number, and consequently the earnings of the respective company, is still going to be up a ton from 2008.

From a broader economic perspective, the long-term trend is something like X + some small sin(x)-looking component.  Here is a Wolfram Alpha chart to show what I mean:

As you can see, when you zoom out, cycles are the little sin(x) fluctuation on the broader trend, but progress marches on notwithstanding – and this is what CAPE fails to capture.  It, contrarily, assumes the world looks like this: 

Obviously, that isn’t true, and if you think it is, market valuation multiples are probably besides the point (because you’d never be able to invest in anything for the long-term).

One of the things I’ve tried to do over the years is become more open-minded and less intellectually prescriptive; i.e., just because I hold a certain view or do things a certain way, I don’t automatically assume that it’s the always-and-everywhere optimal approach for everyone.

Spending a lot of time thinking about macroeconomics never has been and never will be part of my process, other than the really obvious bits, but I’m willing to at least entertain the thought that perhaps there are others smarter and more ambitious than me who could have the kinds of usable, actionable insights that I don’t.

However, seeing the Shiller P/E referenced so widely by otherwise-thoughtful investors,  as if it’s some sort of useful or interesting data point, is annoying because it’s not only empirically indefensible, but conceptually worthless.

I certainly have no disagreement with the general conception that valuations are elevated based on my bottom-up view that attractive stocks are hard to find at scale and that, the way I value companies, far more companies are overvalued than undervalued, and those that are overvalued are typically overvalued by a much higher degree than those that are undervalued.  

So if you want to make that argument, I’m totally willing to get on board with it.  Just don’t use the Shiller P/E to do it, because while it may sound smart, it has no basis in or bearing on objective reality…

… thus ends my rare high-horse, soapbox-style rant.  We now return to normal, understated, less-headdesk programming.