Ten Commandments From 1.5 Centuries of American Retail Dominance (And Failure)

Over the past 1.5 centuries, what has led to dominance or failure in American retail, and what takeaways should investors and managers draw from that history?  Here are the ten lessons I learned.

This paper is based primarily on my analysis of five books, four of which I’ve read twice, about four category-killer retailers that have functionally dominated their category for a cumulative total of 150 years or so: The Great A&P by Marc Levinson, Made in America by Sam Walton, The Everything Store by Brad Stone, and Pour Your Heart Into It as well as Onward by Howard Schultz of Starbucks*.  Additional context is drawn from books and information about other successful retailers, listed at the end**.  

Note that one challenge with the sort of methodology I’m using is that stories can often be misleading if read improperly – an issue I address extensively in a companion paper, “Countering Cute Storytelling,” which is probably more useful than this one (if you only have time to read one).  Consider my observations there to be an input as well as a caveat to my commentary here.

Without further ado, here are the loosely organized Ten Commandments of American Retail:

Steal shamelessly.  

Few retail behemoths are founded on unique ideas, and while they do often innovate plenty of things along the way, sometimes their best “edge” is simply doing what other people are already doing – just better.  Amazon wasn’t the first online bookseller.  Starbucks would have languished forever as a local, low-margin roaster of whole coffee beans if Howard Schultz hadn’t fallen in love with the Italian espresso bar experience and decided to port it stateside.  Sam Walton was described by many as a “master of taking the best out of everything and adapting it to his own needs,” borrowing concepts ranging from self-service and metal shelving to ripping off Sol Price’s warehouse club concept.  Costco’s own Jim Sinegal once told Jeff Bezos that “we have shamelessly stolen any good ideas.”  

If you’re not building on the shoulders of giants, you’ll never reach the sky.

You can’t win an arms race – you need something proprietary.  

The phenomenon described above works both ways – just as you can steal other people’s ideas, so too can they steal yours.  Playing the me-too game is necessary but not sufficient for success; you need to offer something unique.  As discussed in Shoe Dog, Nike wouldn’t have become what it is today (or perhaps even existed at all) if it had continued just being a distribution front for Japanese shoes (other people figured out that game pretty quickly, and threatened to disintermediate them).

Sources of moat can include (the more the better):

  • proprietary product (Starbucks Frappuccinos, The Container Store’s ‘elfa’ line, Amazon’s “long tail” and used-good availability via Marketplace, Apple stores)
  • unparalleled customer support (Amazon, Zappos, Container Store)
  • unparalleled convenience (I would argue Amazon wins on this front more than price, especially with Prime)
  • low prices driven by an unbeatable cost structure or different business model, and perhaps vertical integration in some aspect of the business like product or distribution/logistics (Costco, Wal-Mart, Great A&P, IKEA… maybe Amazon?)

The current death of undifferentiated mall-based retailers hawking other people’s commoditized merchandise is not a new story, but merely the next in a long line of retail death: it started with mom-and-pop grocery and variety stores in the late 1800s, and on and on and on…

Customer relationships matter, and therefore so do your front-line employees (probably).  

It’s hard to win customer loyalty and easy to lose it; non-customer-focused retailers uniformly died while all of those that survived focused on the customer (again, it’s necessary but not sufficient for success.)  The corollary to this is that customer interactions are often critical to get right; for businesses with a physical presence, this means that investing a little higher wage to put forth a better, more motivated associate is probably worthwhile (this was the classic Wal-Mart philosophy, and apparently one they are now re-learning.)  Starbucks, The Container Store, Zappos, The Home Depot, and others have all in some way taken this approach.  Moreover, in Schultz’s Onward, one of the core points is that by the mid-2000s, Starbucks was more focused on comps than customers – and they suffered for it.

Amazon is perhaps the notable exception; its “front-line” employees (in the warehouse, shipping packages) may or may not be treated well (it is an open question), but the customer relationship is maintained via algorithms, personalization, and Bezos’s top-down ultimatum that customers not walk away unhappy.

Adapt to your customers; don’t expect them to adapt to you.  

As Arthur Blank puts it on page 237 of Built From Scratch, “[Home Depot] learned that the consumer dictates who we must be, what we must be, what our content must be, and what services we must give them.”  

Retail is not the right industry for purists.  The Starbucks of today is perhaps best known for frilly, ridiculously customized drinks (double-pump hazelnut cappuccino with soy milk and stiff foam, exactly 197 degrees) but there was a time when the company had a bitter internal debate about whether or not to offer non-fat milk because it violated the Italian coffee experience and the purity of their dark roast.  The company eventually realized it needed to be what its customers wanted it to be, not a carbon-copy replica of some mythological Italian ideal, and now adapts to local markets (offering flavors like Black Sesame in China, for example).

Similarly, when Wal-Mart tried to literally copy West-Coast Fed-Mart warehouse clubs into the Midwest, they found out that Midwesterners don’t quite like wine as much as Californians (similarly, they found that Southern treat “Moon Pies” didn’t sell so well in Wisconsin.)  Notably, even the notoriously arrogant Apple was forced to capitulate on the issue of screen sizes, as consumers threatened to vote with their wallets and purchase Android phones that were superior on that dimension – one valued by customers, but not by Apple.

If you don’t cannibalize yourself, somebody else will.  

“There are no annuities in this business.”  – Jim Sinegal

“It’s easier to invent the future than to predict it.”  – Alan Kay, via Jeff Bezos

If you think today’s disruption is bad, try the freaking 1890s – 1940s.  While retailers today can at least define their existential threat with one of two words (i.e. Amazon/e-commerce), retailers in that 50-year period faced an unprecedented deluge of technological innovations, macro circumstances, and shifting consumer preferences that seemed to upend their business faster than they could say “corporate strategy” – think transcontinental railroad, the automobile, suburbanization, refrigeration, the Robinson-Patman Act, and two World Wars, just to start with.  

The Great Atlantic & Pacific Tea Company succeeded under the Hartford brothers’ lead for so long not due to one monolithic strategy (other than focusing on low margins / low price for most of their history), but rather by consistently evolving: from shopping palaces with lavish “trading stamp” premiums to no-frills low-price stores to supermarkets to even bigger supermarkets, everything from the store format to the service format changed.  Often, stores became obsolete within a few years of being built, but the Hartfords displayed unusual willingness to ignore sunk costs and rip them to shreds and rebuild if that was what was required.

While no other retailer has perhaps had to face the breadth of challenges that A&P did, other successful retail magnates took the same tack – Sam Walton made it his personal mission to ensure constant change was part of the Wal-Mart culture, and Jeff Bezos fought hard against the “institutional no” as Amazon scaled, which resulted in the creation of wholly new businesses like AWS.  In particular, Bezos gave the Kindle team not just license, but encouragement, to disrupt their own physical-book business.  In contrast, Borders and Barnes & Noble, wedded to their legacy business models, failed to adapt quickly enough to the new era.  One perished, and the other now faces existential threat and seems unlikely to recover anything resembling its former glory.  Historically, there are so many retailers in this category (Montgomery Ward, J.C. Penney, Woolworth’s, Sears…) that you could spend a day naming them all.

“Founder-led” seems to be the way to go – maintaining culture in the absence of a guiding light is hard.  

In light of the above, principal-agent issues are very real when it comes to retailers – even with the Hartfords as the only meaningful stakeholders of The Great A&P, they faced resistance from local managers for whom tearing up existing stores to build new, unproven ones was a negative.  

Indeed, to surmount this local-vs-global optimization problem – i.e., that agents are usually incentivized, both in terms of status and money, to maintain their position atop the local hill rather than facing the challenging trek down through a valley to reach the mountaintop where you need to get to – it seems to pay to have a strong principal atop the business.  Otherwise, there’s no champion for optically bad / operationally disruptive measures that are critical to long-term success.  Oftentimes, businesses can even become “locked in” to a certain way of doing things, and their business model / “institutional imperatives” constrain them from fully targeting new markets in new ways, as discussed extensively in The Innovator’s Dilemma by Clayton Christensen.

Howard Schultz saw this problem at Starbucks once he left – rather than his bottom-up “one customer, one cup” focus, the organization’s focus shifted to top-down aggregate numbers like comps, number of stores, etc, and Starbucks lost its way, driven by Wall Street comp expectations rather than a focus on the customer and the barista.  John Hartford was in stores and on the road all the time, and A&P quickly fell from grace after he and his brother passed away.

Meanwhile, Jeff Bezos has a public email address and, with the help of his assistants, reads all customer emails sent to him, escalating some to the customer service team with an ominous “?”  Sam Walton liked to sit down with truckers and associates to get a ground-up view of the business.  One wonders if Wal-Mart would have mounted an earlier and more effective e-commerce initiative if Sam Walton had still been alive to watch Amazon grow.

Success in retail seems to require a strong, motivated principal maintaining the culture and focus.  It is notable, I think, that there seem to be few world-class retailers not run by “founders.”  I put that in airquotes because Tony Hsieh, Howard Schultz, and the Hartford Brothers,for example, weren’t technically the founders of their respective businesses… but they were close enough and certainly weren’t free-agent managers.

Fail fast.  

No retail empire is without its share of failures.  Starbucks had plenty of failed products like Sorbetto and Mazagran, as well as a poorly-considered mid-2000s foray into entertainment somewhat reminiscent of what sent Six Flags into bankruptcy.  Amazon’s entry into categories like jewelry yielded far less payoff than originally expected, and its attempt to compete with eBay in auctions essentially failed entirely (though it did sort of transform into the company’s hugely successful Marketplace third-party platform).  

The key seems to be a willingness to try new things and tolerate failure – Sam Walton noted he had a strong expectation that he would win, but also a willingness to shake off mistakes along the way – but to not be stubborn and take a “my way or the highway” approach.  

Buzz buzz.  

Tech titans Peter Thiel and Marc Benioff both point out that marketing matters – you can have a good product, but it isn’t necessarily going to sell itself.  The Great A&P launched itself into the public consciousness with blatantly false ads (we’ll save the ethics lecture for another time).  Far from the staid image it has in present times, Wal-Mart of the ‘50s and ‘60s had entertainment ranging from donkey rides to popcorn/ice cream machines to pie-eating contests, and stunts like literal pyramids of toothpaste or giant displays of womens’ panties at fire-sale prices.  Starbucks often collaborated with Kenny G in the early days, and after a slow opening in Chicago, focused on promoting openings in new markets.  The Container Store similarly created pre-launch buzz at its stores.  Even after two decades, when Starbucks launched VIA instant coffee, it created buzz by getting reporters/analysts to drink what they thought was conventionally-brewed coffee but turned out to be VIA (which grabbed a lot of headlines).

A “land grab” may be necessary… but scaling isn’t trivial.

Many of the retailers seemed to have a Get Big Fast mantra – given the “cloning” issue discussed above, as well as the benefits of scale for cost structure, branding, and supplier negotiating power, it seems like in many cases, growing faster than is advisable is usually advisable.  First mover advantages are limited – indeed, remember that most great retailers were not truly first movers in a category.  The Great A&P, Wal-Mart, Amazon, and Starbucks all expanded at a breakneck pace and managed to outrun imitators.

However, scale brings problems: corporate culture doesn’t work the same way when you don’t know everyone’s name and everyone’s spread out across the country.  These transitions can often prove to be a stumbling block.

You either die a hero, or live long enough to see yourself become the villain. 

We Americans love underdogs – until the underdog puts everyone on the mat and becomes the reigning champion.  Every retailer that grows really large (A&P, Wal-Mart, Amazon, Starbucks all faced this) eventually become a lightning-rod for criticism by populists and politicians alike, whether or not it is deserved – South Park’s “Gnomes” (S02E17) has a witty take on this.  This phenomenon can often result in challenges ranging from employee morale to executive distraction to political pressure (as A&P found out for seemingly two decades).

On the other hand, long-gone small-town mom-and-pop shops are immortalized as Ellie Walker’s drugstore in Mayberry (Andy Griffith, S01E04) – a friendly place with a friendly face where little Opie can get an ice cream, maybe even for free.  Reality is vastly different, of course – the reason small-town shops died is because they had high prices, poor selection, and often poor quality merchandise – but don’t let the facts get in the way of the argument!  (Note: I almost solely patronize indie coffee shops, but only because they’re way better than SBUX.)

Bonus: Everyone has blind spots.

Not strong enough to be a commandment… but the Hartfords didn’t realize for a shockingly long time how real the political threats facing A&P were; Starbucks had woefully underinvested in supply chain and technology because they were so focused on the front-end experience vs. the back-office, and Bezos whiffed on the music category (letting Apple get a big early lead) because he was a big reader and not a big music guy.

Conclusions

I don’t actually invest much in retail, but to the extent that there are other business models that are retail-like in nature, there is obviously some cross-application – or perhaps application for those that invest directly in retail.  Of course, while retail may be a dead sector for investment opportunities at the moment, there are always niches at the corners – even Amazon has seen fit to buy some businesses (though, usually, not before trying to put them out of business first).  As Sam Walton once put it,

“Could a Wal-Mart type story still occur in this day and age?  My answer is of course it could happen again.  Somewhere out there right now there’s someone – probably hundreds of thousands of someones – with good enough ideas to go all the way.  It will be done again, over and over, providing that someone wants it badly enough to do what it takes to get there.  It’s all a matter of attitude and the capacity to constantly study and question the management of business.

* You can argue that Starbucks is more “restaurant” than “retailer,” but I think their business model is more retail than restaurant, and Schultz himself views Starbucks as a retailer.

** Note: in addition to the “big five” books, I also drew on sources such as Stop and Sell The Roses (1-800 Flowers), Built From Scratch (Home Depot), Delivering Happiness (Zappos), Uncontainable (The Container Store), Shoe Dog (Nike), and various other broader-topic books (Different by Youngme Moon, The Innovator’s Dilemma by Clayton Christensen), as well as news articles/etc and my own research on some publicly-traded retailers.  I by no means claim to be an expert – these are just casual observations from my reading.

 

Be A Filter, Not A Sponge

I try very hard to avoid strong ideology; I have, as best I can tell, one core postulate that I have no interest in debating (free will exists), one core universal framework for approaching life (rationality), and everything else is nuanced and up for grabs with only the level of confidence justified by my knowledge base (occasionally moderate to high; usually pretty low).

If I have anything resembling a core credo, though, it’s probably “be a filter, not a sponge.”  This is a line I stole from The Perks Of Being A Wallflower (which I’ve watched… an embarrassing number of times… while consuming an embarrassing amount of ice cream.)  Charlie’s teacher gives him, ironically, The Fountainhead (a great book… in moderation) and advises Charlie, basically, to be open to new ideas, but not to let others do his thinking for him.  He needs to stand between his brain and new information and let the good stuff through while filtering out the chaff.

I’ve talked about this before a little bit (Grit Is Overrated), but the problem with advice, or even ideas more broadly, is that they don’t exist in a vacuum: they exist with certain premises and goals in mind, in a certain environment, and even to the extent that they are valid for those premises and goals in that environment, they will not necessarily stay valid (in whole or in part) when placed into different circumstances.

In other words: it’s important to learn from those who came before you (whether via their writing, or from speaking to them), but you need to be an active listener/learner and calibrate what they’re saying to account for any differences.  Essentially it’s a game of five-whys, dimensionalizing what you learn to find the root/core idea and separate that from its packaging.  For example, that could go something like:

  • entrepreneurs say you have to get up at 5 AM if you want to be successful
  • why? because they need uninterrupted time to work and once the day starts, there are lots of interruptions
  • therefore: there’s nothing magical about getting up at 5 AM, other than it gives you a few hours to work before the distractions start
  • therefore: if 5 AM isn’t your thing and you can find other times of day to do focused work without distractions, that’s perfectly acceptable as well

Altogether too often, both inside and outside of the value investing world, I see people acting as “sponges” – “oh, let me just do what he did/does” – to the extent, sometimes, of cloning investment ideas or strategies (both of which are generally terrible ideas for intuitive reasons).  I suppose to some degree this is marginally better than not being a sponge at all… but it’s certainly not as productive as being a filter.

 

 

 

 

The Struggle of (De)Motivation and Asynchronous Payoffs

I’ve always been a slacker.  This is something that people are either surprised or annoyed to hear, depending respectively on whether they think I’m someone who I’m not, or whether they think I’m humblebragging or doing the false humility thing or whatever.  (Perhaps guilty as charged – I suppose usually you don’t get an MBA and a couple years of professional work experience before you’re 21 with a sloppy work ethic – and I’m certainly not judging myself relative to “average” but rather relative to where I think I should be, which explains at least part of the delta.)

But as I’ve talked about in various places, the truth is that I never really worked all that hard most days, it didn’t feel like.  There were times when I had a lot to do between coursework and real work and I got it all done, but what I’ve never really been good at is doing work that I don’t actually have to do (in the sense of, not having immediate payoff or consequence if it isn’t done.)  i.e. – even when I was working full-time plus going to school full-time, I would still play video games near-addictively many weeks when I should’ve been studying, instead only cramming for exams at the very last minute.  Every semester in school, I told myself that this would finally be the semester when I actually, like, did the whole student thing properly and took notes and kept up with the reading and… every semester, that did not happen past the third class, nope.  I have the spiral-bound notebooks with two pages of dated notes and another page of undated doodles to prove it.

One of the more jarring transitions from college/analyst life to being a portfolio manager was realizing that I could no longer skate by on doing work in a caffeine-and-sugar-aided-spurt at the last minute before the deadline, because there are no deadlines, and because (at least if you invest the way I do), you need to follow a methodical and consistent research process to generate a large-enough pool of potentially actionable investment candidates down the line.

That is to say: if, for whatever reason, you slack off on research today, the detrimental effects usually show up in future periods, creating a challenge because of the meaningful asynchronicity of payoffs with a lack of clear natural interim steps or milestones.  Jim Roumell, who is unusually transparent and thoughtful (both publicly and privately) about his experiences, cleverly and succinctly summarized this in a recent podcast interview with John Mihaljevic (quoted portion starts around 9:20).  Note:  Jim’s comments have been summarized/paraphrased for clarity.

  • [In 2013], we were spending a lot of time (on non-investing activities)… the first year, things were going fine, but that’s really kind of older stuff maturing.  When we really started getting into 2014, a lot of the seeds that normally would have been planted in 2013 – candidly, they weren’t, because there was so much time spent [on marketing] – it happens, it’s very insidious, it just begins to happen slowly, and in retrospect, [I didn’t notice it] – so ’14 was a wake-up call, and I think by mid-’15… [we] decided we had to get back to our knitting and we had made a mistake… things have gone very well [in the 18 months] since that decision, [although] we’re cognizant that the game’s not over.

This sort of thing takes a lot of courage to admit because it’s just not said in a public domain,  just like it’s not said (in front of HR / your boss) that you probably work 30% of the time and mess around on the internet the rest of the time.

The thing though is that, I think, it’s true for many of us, whether in the field of investing or elsewhere, whether the bogey-man is too much time spent on marketing, or too much time spent on consuming content that has the sheen of work (say, reading the news or watching stock prices) but has no payoff whatsoever, or simple god-I-don’t-want-to-wake-up-and-spend-all-day-working-on-yet-another-company-that’s-30-percent-frickin’-overvalued.

That latter bucket, that’s my on-and-off problem: midway through 2017, even moreso than during a 2016 most value investors found challenging, ideas are hard to come by.  Most things that are metrics-cheap have way too much obvious hair on them (what no I don’t want a 5x levered balance sheet in a cyclical commodity industry with massive customer concentration, thank you very much).  Most things that are interesting qualitatively seem like they’re about three market corrections away from being actionable – and as much fun as it can sometimes be to learn about interesting little niches, a lot of the joy is taken away when the briefest possible look at the financials suggests that there’s fairly low real near-term likelihood of the stock hitting my required discount to “fair value” without some sort of meaningful fundamental degradation.

The reason I really liked Jim’s phrasing is his usage of “insidious” and “slow” because they describe, totally exactly, how I feel.  It’s usually not a bright-line on/off switch from “I am gonna get lots of work done today” to “huh, I wonder if my tomatoes have grown any bigger since I checked on them five minutes ago… or if there’s any new articles about the Cowboys’ voluntary OTAs.”  It’s more a gradual progression from research firing on all cylinders to a project that should take one day dragging out into two or three because… what’s the hurry, it’s not like the stock is going to run away from me if I don’t figure this out by Tuesday.  Why not just put it on the burner until next week?  And do I really need to set up an IR call this month?  I might as well do it in February.  Of 2037.  Because we all know the stock won’t get cheap enough until a few decades after that.

Exaggeration aside, the challenge, of course, is that with the sort of research process that I have, the first dopamine hit (i.e. getting to buy the stock at an attractive valuation) usually occurs so long after the work that led to it, that it’s wholly useless for motivational purposes.  And when things actually hit the fan (ex. Feb 2016 or pre-election 2016) and there are a lot of opportunities, you can’t possibly do enough “cramming” then to make up for time lost.  So, what can I do to make sure I stay on track?

Tangible Action Items (Or, At Least, Things That Have Helped Me)

1. Focus on “lead measures” vs. “lag measures” and gamify them

yes yes, this post is mostly a shameless Franklin Covey (FC) plug (disclosure: long, in case you had forgotten).  No but seriously, part of my attraction to the company is that this stuff works.  To summarize The Four Disciplines of Execution (4DX) in such a traumatically botched way that mgmt will stop taking my calls if they ever notice this blog post, you can think about your business (or your life) in terms of “lead measures” or “lag measures.”  Lag measures have more direct correlation to what you actually want, but are usually too late to modify directly – i.e., revenues or profits could be viewed as a lag measure, and if you want more of them today, you are gonna need a time machine to go back to a few months ago, or maybe even farther.  The “lead measure” might be something like warm leads, or new product development, or whatever, but basically it’s something that will lead directly to your desired lag measure, but is actually modifiable in real time

So for productivity purposes, it’s important to determine quantitative, trackable, measurable “lead measures.”  In my case, I’ve settled on a pretty simple one: “pages of research.”  I target 20 pages per week, which is really just a psychological gambit for a true goal of 25 pages per week, but I tend to do better personally when I feel like I’m on top of things than when I feel like I’m behind (with a lower goal, I get to feel like I’m winning more of the time.)

Research pages are defined as anything ranging from my own written research on new companies, to earnings reviews of portfolio companies or updates on other companies I follow, to notes from IR or management calls that I make.  This would not be a robust goal with a large team because there are plenty of ways to game this – I could do a lot of “research” that’s useless and unproductive, or I could just stuff research reports with lots of block quotes and charts and graphs and such.  However, since it’s just me and I trust my ability to not do stupid stuff like that for the sake of “winning the game,” it works.

What is the correlation?  Well, my investment process is, vaguely, A) research companies, B) follow them over time, C) eventually, statistics dictate that some of them will become cheap enough to buy, and I’ll know a lot about them already, making the go/no-go decision easier/faster and leaving more time for thought and further due diligence.  (I’ve discussed previously why I shy away from the quantitative-heavy, screener/metrics-focused, cheap-now approach that many investors utilize – briefly, behavioral bias.)

Given this process, if I (arbitrarily) assume that half of my work is on new companies and half is on existing companies, and the average report is 10 pages, and that in any given year, 5% of companies on my list will be actionable at my 20% IRR hurdle, then adding 40-50 to my database should result in two or three brand spanking new ideas per year, with the existing database of course hopefully adding more (I don’t need many given concentration – 4-5-6/yr should theoretically be sufficient).  In practice these numbers are probably B.S., but I tried to at least make them reasonably directional B.S. – to the extent that if I hit the guidelines, I should be “planting enough seeds” so to speak.

Are these guidelines perfect?  No, of course not – but they are certainly, directionally speaking, a helluva lot better than what I was doing previously (no specific goal, just doing what I felt like).  My next step is to extend this beyond research to big-picture reading / personal development stuff as well – which even moreso than research is one of those “payoff isn’t always immediate” things that is easy to put on the backburner when you have other stuff going on.

2. Pacing?  Screw pacing.

alright so I’m gonna go ahead and blow up everything I just said – yes, it’s great to have something to keep you on track; it helps me a lot and I swear by it.  but at the same time, I think one of the core advantages to being on your own vs. working for someone else is you don’t have to conform to the stupid social norm of sitting at your desk for a fixed number of hours regardless of the actual amount of work to be done (or whether you are working).

I don’t think my experiences quite rise to the rigorousness of precisely-tracked, sensor-driven A/B testing that some people employ, but in the ~18 months I’ve been solo, I’ve tried a lot of things – sitting desks, standing desks; working 7 days a week, working 4 days a week; going at a blistering pace for as long as I can, trying to measure my pace; etc.

What I’ve found (and this is really just personal, not intended to be used as a mantra) is that my productivity comes in waves – I will have weeks/months where I slice through my targets like they’re a block of Kerrygold butter that’s been sitting on the counter for hours; there are other days where I feel like I’ve struggled for hours to read a single risk factors section.  I’m a big fan of working for myself rather than against myself, mainly because doing the latter tends to lead to a) burnout and b) emotional guilt for being unproductive, which prolongs the unproductive state and so on.

This is, really, how I’ve always been – I’m an (amateur) novelist and some of the “classic” advice given to aspiring writers is “butt in chair” – which means what you think it does; i.e. sit down every day and write no matter how you’re feeling.

Yeah, that’s not me – I will go months, years even, without writing anything of meaningful heft, then will almost pretty much spontaneously write an entire novel in an unimaginably short period of time (my record is four days for a ~58K word novel, but usually we’re talking more like a few weeks or months).  For some people, slow and steady may win the race – but personally, when I hit the gym and am feeling it, I need to take advantage of it and not worry about spending the extra half hour or hour there to do extra sets, because there will be an equal number of days where things just aren’t going my way.

It’s important to note that this isn’t, or shouldn’t be, an excuse to just chicken out when things aren’t going perfectly.  But at the same time, systems should have some embedded level of flexibility to account for the fact that we’re not perfectly consistent machines.  This is part of the reason I chose a weekly goal – while I certainly still have some weeks that are cake and some that are a struggle, I find that having a daily goal is actually much harder because my productivity varies far more on a day-to-day basis than on a week-to-week basis.

3. Please!!!  You’re my ACCOUNTABILI-BUDDY!!!  How will this make me look???

One of the most powerful but underutilized productivity tools is simply the social-proof element of accountability to a standard (Franklin Covey’s 4DX uses this as well).  Malicious and antiquated (I’m sorry, I meant misinformed and… antiquated) HR managers use this as an excuse to deny work-from-home flexibility, and I would buy the logic if modern offices weren’t a terribly inefficient work environment and people were actually productive at work.

Nonetheless, everyone’s heard the story about the eyes (or vaguely eye-shaped objects) above the communal coffee money pool (which really we need a new anecdote – isn’t free coffee a standard perk now? – I digress).  When you’re being watched, you’re more likely to do what you’re supposed to; this is the whole concept behind Weight Watchers (was the phrasing intentional?)

I think this is a valuable tool not just for solo entrepreneurs like myself, but even for people working in large corporate environments where things can get lost in the shuffle and it’s easy enough to just “coast.”  If there’s no natural oversight mechanism, find someone you trust and become accountabili-buddies.  Sharing research with Zeke has actually, unintentionally, had the side effect of incentivizing me to produce more research – because I don’t want to have to answer “uhhh, nothing” when he asks what I’ve been up to this week.

If personal productivity were easy or automatic, it wouldn’t be a multi-billion dollar industry and the seeming holy grail for smart people (alongside happiness / contentment / enlightenment / whatever you want to call it).  So yeah, it’s hard.  But not impossible.  And I’m not yet wholly where I want to be, but I’m farther along than where I was.

 

 

 

 

Neck Pain, Heuristics, and Mental Models

I’ve previously referenced my belief that heuristics – i.e., any mental shortcuts such as frameworks, mnemonics, or otherwise – are neither inherently bad nor inherently good; they’re just a rational response to a world which has too much information for us to possibly analyze our way to a solution from first principles every time.

Most of the time, heuristics work quite well; situations when they fail to work include:

  1. when circumstances deviate abruptly from what you are used to – for example, when you deplane in a foreign country and your habitual “left right left” traffic checking at crosswalks must reverse to “right left right.”  The good news is that in most instances, the salience of the different circumstances is sufficient to trigger reevaluation of your heuristics.
  2. more insidiously, when circumstances change slowly over time.  examples: career advice from someone who grew up in an era when the path to prosperity was working 30 years straight for one employer, or traditional colocated 9-to-5 work schedules in the era of Slack and Google Hangouts.

Hey, That Hurts!

I was recently reminded of the danger of (2) by an old nemesis of mine: neck pain.  For a few years now, I’ve had on-and-off mostly-psychosomatic pain/tension in the muscles of my left shoulder and left side of my neck, which can range from mildly annoying/uncomfortable to severe enough that it’s hard to focus on anything else.

Over time, via trial and error more than anything else, I figured out causes and solutions.  It turns out that in my case, rubbing and stretching where it hurt only served to make the problem worse; eventually I traced the problem to my tendency to hunch my shoulders (which could be alleviated by positioning my keyboard differently and trying to spend less time sitting at my desk when I’m not working), and my tendency to slouch to one side (which I have to watch for, and can combat via stretching my hip flexors, quads, and adductors of my left leg.)  Weirdly, applying fairly intense pressure to certain spots on my biceps/triceps above my elbow also relieves the tension.

That proved to be a useful heuristic for quite a while: neck hurts?  –> leg stretches and kneading + push on certain points in my left arm until my fingers are sore .  Feel better in 30 minutes.  Being able to identify (and preempt) the symptoms made things a lot easier.

But over the past few weeks, the pain had been returning with increasing intensity and duration despite a relatively low level of stress and desk hours (the normal causal/proportionate predictors of neck pain).  My usual heuristics were failing me – the muscles from my left knee to my left hip have actually gotten to the point where they’re pretty loose/pliable – and while they hurt when I worked on them, my miracle cure for neck pain was no longer working.  An online recommendation of using a tennis ball as a targeted foamroller did help, but I could tell it was more of a palliative than a cure – a bit like popping an Advil, it made it hurt less for a while, but wasn’t solving whatever the underlying issue was.

As with many problems, the solution was born of desperation – if every muscle in my body is as loose as it can be, then there shouldn’t be any cause for this pain.

In the process of attempting to loosen every muscle in my body, I discovered that my calf was tight beyond all belief.  This was a surprise to me because I’ve never really had calf pain – I’ve had shin pain sometimes while running, but other than typical post-workout soreness, my calves have never been a pain point.  But my left calf took almost a week of stretching, foamrolling, and vigorous massage to untense.  I started feeling better almost immediately – clearly, even though they weren’t explicitly hurting, the tightness in my calves was pulling the rest of my muscle chain out of alignment.

When Circumstances Change, Heuristics Fail

So what changed?  After thinking about it, I realized that a couple months ago, I finally decided to get a little more serious about cardio and have been doing (lamesauce and unremarkable) intervals on the treadmill.  Quick Googling revealed that a lot of runners suffer from tight calves.  I haven’t exactly been doing a lot of running in the absolute sense ($100 to anyone who ever sees me in a marathon – ain’t gonna happen), but it’s definitely a lot more than I ever have done (i.e., nothing meaningful.)

How are my mundane faulty biomechanics relevant to investing and mental models?  Well, the idea is that I developed a heuristic to solve a problem, and then the underlying cause of that problem shifted somewhat, and my heuristic broke.  This was a relatively trivial problem (tight calves) with clear feedback as to whether the old/new heuristics were still working (neck pain or lack thereof), but: in the context of currently reading Thomas Kuhn’s The Structure of Scientific Revolutions, it got me thinking: in the whole process of building up mental models and heuristics, how do you ensure that the world hasn’t shifted under your feet?  And how do you deal with it if it has?  What happens when you’re forced to pull out a foundational Jenga block supporting the pillars of your intellectual life?

It’s a question with meaningful implications even beyond investing; I’m at the age where a lot of my friends are finding or losing (mostly losing) the religion or ideology they grew up with, and the process of rebuilding a sense of identity or self around a missing pillar that’s supported you forever… well, let’s just say it’s non-trivial.

Investing Application: Value Investing Is Dead… Long Live Value Investing?

In terms of investing, reading two dozen investor biographies as a young beginning investor had the opposite effect on me, I think, than it was supposed to (if the people defining “supposed to” are the in-crowd) – rather than coming away with a sense of awe and veneration for many of the successful investors of past decades, I came away with a belief that while they laid the intellectual foundation, we (i.e. modern value investors) have far surpassed it.  It’s a bit like athletes, really – I imagine an “All-Pro” NFL team from the 1970s would be decimated by today’s Cleveland Browns.  Players today are simply bigger, stronger, faster, and better-coached.  Absolute skill has never been higher… but relative skill has never been lower.

And this is a problem: many investment approaches, for example, succeeded not because of the brilliance of the approach or its proponents, but simply because they were good-enough for an environment with far less competition from both humans and technology, and far less awareness of fundamental investment principles; not all that long ago, compelling investment ideas were as common as raindrops in Seattle.

That isn’t the case today, and while there are certainly cyclical elements, there’s also the undeniable structural element of more people than ever competing in this business with better intellectual frameworks and superior technology.  Out of self-preservation, proponents of strategies that are no longer working, rather than admitting they’re broken and doing the heavy lifting to find something more workable, turn to mystical explanations of why things will “go back to normal” soon – citing the wildly misunderstood concept of “mean reversion” or faulty statistics like CAPE ratios or whatever – i.e., it always has been this way and so it always will – while refusing to acknowledge structural changes in the world.  (Buffett, for his part, continues to buck the trend – having abandoned his long-standing heuristics of “no technology” and “no airlines” – I am not a noted Buffett acolyte but I do have to give him credit for being more adaptable than most…)

Scaffolding: Not Pretty, But Necessary

One clear takeaway is that in the process of building frameworks, it’s important not to assume that once a heuristic is in place, it’s set in stone; the pyramid of knowledge should be viewed more like a constant work in progress, like the skyline of New York City, with scaffolding erected every so often in different parts to allow maintenance to be done on what already exists.

What’s the optimal frequency and depth of such re-checking?  I don’t know.   That’s a hard question to answer. Models built on bedrock principles that are unlikely to change rapidly (gravity, for example, or human nature) probably don’t need to be reevaluated terribly often.  On the other hand, models built on principles that tend to be rather mutable  (technology, or human culture) should likely be reassessed more frequently, in some sort of proportion to the underlying rate of change.

But this process needs to be explicitly incorporated, on some sort of basis, because otherwise you risk the same frameworks that have served you well for so long becoming calcified and hindering rather than assisting you in your path toward excess returns (or world hegemony, or whatever.)  The unfortunate challenge is that in the real world, feedback is not nearly as clear or immediate as neck pain: you don’t always know, moment to moment, whether what you’re doing is (sub-)optimal; when there are multiple confounding factors and payoffs are long-term rather than immediate, it can be hard to notice/know what’s going on.

Maybe this isn’t wholly original.  I dunno.  But I thought to mention it because while I see a dozen and one mentions a month of building mental models, I see very few about reevaluating ones that are already built… and of course, incremental competitive advantage can only be achieved by doing something different than what everyone else is doing.