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What’s Next?
Filmmaker Quentin Tarantino’s retirement plan has been in the news lately because he’s long said that his tenth movie would be his last, he’s up to nine, and he’s shooting a new one this year. His reasoning for this is that “Directors don’t get better as they get older. Usually the worst films in their filmography are those last four at the end. I am all about my filmography, and one bad film [effs] up three good ones.”
In other words, the man wants his professional legacy to be one high quality, completed, coherent thought, and I respect that. I mention that here because Tarantino’s plan is relevant to a question we get a lot at Permanent Equity, which is what happens at the end of 27 years (i.e., our fund life)?
Candidly, it’s a good question that we don’t know the answer to, and the reason we don’t know the answer yet is because there is a lot of time between now and then and therefore a wide range of potential answers. The endpoints of that endgame interval are (1) Permanent Equity ceases to exist to (2) Permanent Equity goes on forever.
The interesting thing about endgames is that to be thoughtful about one, you have to start preparing for it long in advance, but you can also prepare for more than one at once. Here at Permanent Equity we are trying to get and stay prepared for a lot of possibilities. After all, if you’re in the business of creating variance (which is what I think we are), you have to be able to take advantage of it when it’s created.
The challenge is that preparing to take the Tarantino approach (i.e., end it) looks very different from preparing Permanent for permanence in terms of what we do and how we spend our time. To do the former, we should be heads down on our core business, with tight quality controls, while syncing everything up to pay off around the same time. The latter, on the other hand, would have us spending more time on talent recruitment and development and risking mistakes in the name of learning so that the practice can evolve and outlive the practitioners.
Tarantino has chosen the former, and in doing so, has assured himself of an incredible legacy. But what he’ll never know is if his 11th or 12th or 13th film might have been best and enhanced his legacy, or if he started a studio and let someone else make Pulp Fiction 2, if that would have been fantastic.
After all, that’s the value of open-endedness.
The risk, though, is that you or someone else tarnishes a legacy that should have been left alone to stand on its merits. For example, what would Goldman Sachs look like today if it hadn’t gone public? And is Giorgio Armani still a high-end brand?
So what in your life and work are you preparing for? You don’t have to know the answer now (again, we don’t either). The key, though, if you don’t, is to make sure you’re not doing or not doing things (like ignoring talent recruitment and development) that would make it impossible to accomplish one of your possibilities in the future.
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Permanent Equity’s Super Bowl Ad
What if Permanent Equity bought a Super Bowl ad? Would it be a good use of capital? How might we pay for it? What would we advertise?
I thought about this the other day after I read and agreed with my own opinion that problems that can be solved with money aren’t really problems if you can get the money. If we had unlimited capital, in other words, we would absolutely buy a Super Bowl ad, which would garner far more exposure than this humble daily, and that would help us become the world’s greatest private equity firm.
The catch-22 is if you have access to unlimited capital and spend it profligately then you will lose your access to unlimited capital and therefore not be the world’s greatest private equity firm (our LPs are nodding…and I assure them that this humble daily costs far less to produce than a Super Bowl ad). In other words, your greatest competitive advantage, if pressed, becomes your greatest weakness (hat tip, Sun Tzu).
Around the same time I was thinking about this, Johnny forwarded me something he read in Money Stuff (yes, I have gotten everyone around the office to read Money Stuff). It was a quote about Adam Neumann and WeWork and how he/it had incinerated many billions of other people’s – but mostly Softbank’s – money.
Johnny’s point was that no capital had been “incinerated.” Rather, it had been “redistributed” to WeWork employees, Neumann, startups that benefited from subsidized rents, and, of course, the guys that flew Neumann around the world on a really fast private jet to go surfing.
I’m not jealous, but more importantly, Johnny’s not wrong (nor a communist)!
Johnny’s question, though, was interesting. If you agree with the premise that this capital was merely “redistributed,” then why do people say that it was “incinerated”?
I think this goes back to the idea that having capital is a privilege and that funding something is one of the most meaningful things you can do for someone else. And if you agree with that, then the reciprocal is true. Receiving capital is a privilege and earning a return for someone else is one of the most important things you can do.
Was Adam Neumann trying to build something interesting? Maybe. But he incinerated capital in the sense that he prevented it from being provided to someone who might have done a better job investing it in something meaningful. Does that mean the capital is gone forever? Of course not.
But hopefully the next steward will do better. Better for others, that is. It’s hard to do better for yourself than by flying around the world on a really fast private jet to go surfing.
– By Tim Hanson
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Why We Eat Well
I’ve made the joke before (and I will absolutely make it again) that one of the biggest risks facing Permanent Equity is our cholesterol. This is in recognition of the fact that if you come to visit us or we come to visit you, no one will go home hungry.
What’s no joke, however, is how much actual credence we put in the practice of sharing a great meal with past, present, and future partners. But why?
Providing a substantive answer to this simple question is more difficult than it might seem on its face. What does one get out of a meal that one can’t get out of a phone call, Zoom, meeting, or coffee?
First, it’s inclusive. Everybody eats.
Second, there’s no agenda. You’re there to have a meal. Other topics might come up and if they are germane, great, but if they’re not, that’s great too. We’re there first and foremost for the food, and we can get to business later.
Third, it’s a shared experience. That’s important because those are all we have to fall back on when circumstances inevitably get difficult. If you’ve shared a great meal with someone, you will always have that in common.
Fourth, it’s revealing. What and where people eat and drink tell you a lot about what they value and where they’re coming from. And if the meal doesn’t go well, it’s a red flag. If you can’t engage in conversation or treat people well while dining on delicious food, what’s going to happen when the stakes are higher than steaks?
None of this is to cast any aspersions at any type of eating or drinking. A meal doesn’t have to be fancy or expensive or long to be great. We get called heroes, for example, when we show up with donuts for everyone in the warehouse. And we don’t go to California and not get a Double-Double animal style. But, yes, there are some fancy meals that we’ve enjoyed too.
The point is that it’s through food that we have been able to build our most meaningful relationships both personally and professionally. Which is why being well-fed is a competitive advantage (and why meals should go back to being 100% deductible).
Have a great weekend.
– By Tim Hanson
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About the Benjamins
We hear it all of the time in our line of work. That something – a deal, a contract, a decision – is “not about the money.” Sometimes that’s ironic because in the context of it not being “about the money,” someone is asking us to solve a problem with money (ours, not theirs). In the past, I’ve called money an interesting way of keeping score. And it is. But money can also be a tool or a weapon because with enough money, anything can be about the money.
The latest outfit to learn this lesson was the PGA Tour, which found itself forced into a merger with Saudi-backed LIV Golf despite shouting on high that it would never do so. The reason, commissioner Jay Monahan finally conceded, was that the PGA could not compete with “unlimited money.”
The plain truth is that you can have every other advantage on your side, but if the other side has unlimited money, there is no way to win. It’s like that old up up down down left right left right b a start Konami cheat code that would give you unlimited video game lives. If you have that, you’re going to beat the game no matter how many mistakes you make along the way because your ability to keep playing the game can never be exhausted.
There’s a saying in investing that the stock market can stay irrational longer than one can stay solvent. This is a nod to the reality that unless you have unlimited resources, betting against momentum is a dangerous game. And it is, which is among the reasons why I’d buy put options before I’d ever short a stock. The latter strategy puts you in a position of open-ended liability, whereas in the former you can only lose what you staked.
Facing LIV, the PGA found itself in a position of open-ended liability against an adversary with a balance sheet that was orders of magnitude bigger. That’s an unwinnable game. And if you agree with that, then it leads to a very interesting conclusion. Namely, that the greatest competitive advantage of them all, is the ability to raise money. Here’s what I mean…
Tesla went public on June 29, 2010, at a split-adjusted price of a little more than $1 per share and finished that year with about $170 million on its balance sheet. Over the next 10 years the company burned through almost $7 billion of cash and should have been long since bankrupt when 2020 rolled around.
Instead, the stock had increased over 70 times in value. The reason? People couldn’t stop giving the company money. In fact, over that decade, the company put more than $25 billion into its coffers
As someone who at one point owned Tesla puts on the belief that the company would run out of money, I under-appreciated Elon Musk’s showmanship. This ability to get people to stroke him a check meant that Tesla could never go out of business. And for a long time it was a better capital raising vehicle than it was a carmaker (and might still be).
So if the ability to raise capital is the ultimate competitive advantage, why don’t more people press it? The US government, for example, is resisting calls to mint “the coin.” Institutional investors shudder when GPs raise too much. And companies that are constantly selling stock are viewed as dilutive and shareholder unfriendly.
I’m not sure of the answer here, but I think it has to do with a general feeling that money is a crass advantage to play. That it’s somehow not fair to be better resourced than your competitor. Or that having money might make you reckless in other aspects of your life and business. And perhaps that’s all true. But it’s worth remembering that if you ever have a problem money can solve, you don’t really have a problem, unless you can’t or won’t get the money.
– By Tim Hanson
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The Four Important Roles
At the end of Season One, when I was running out of ideas, I shamelessly asked you to send me some. And you did!
So thanks for that. Now I’ve got fodder to keep this train on the rails.
One interesting request was from @loadlinefinance and @fortworthchris who sent me this piece and asked me to react to the idea that a CFO’s role should be redefined to distinguish between strategic and administrative functions. The reason being that it takes a very different person to be strategic versus administrative, so if you ask the same person to do both you will end up being subpar in one area.
As you may know, I used to be a CFO and if you asked me where I was good and where I wasn’t, I was probably better at being strategic than I was at being administrative. Thankfully, we have others (shoutout Lori) on staff who are great at making sure that we survive things like our 401(k) audit and that no one goes to jail!
But now we also have a qualified CFO and I’ve shed many of those responsibilities, and I think that’s been better for both me and the organization.
That said, I think there’s an opportunity here to be even less specific about roles, but more helpful about achievement. For me, every endeavor, whether it be a project, team, or organization, needs four important roles:
A person who generates opportunities to create variance;
A person who decides which opportunities to pursue (i.e., how much risk to take);
A person who oversees the execution of those opportunities;
A person who measures the results and confirms that the opportunity is as risky (or not) as anticipated.
If you wanted to put organizational titles against these roles, (1) is roughly a Chief Executive Officer, (2) is a Chief Investment Officer or could be a Chief Financial Officer, but could also be a Head of Strategy, (3) is a Chief Operating Officer or maybe a Chief Technology Officer, and (4) is a Chief Financial Officer or Controller.
But I’ve never really liked or understood titles, and also appreciate that many organizations can’t have four or more senior executives, so my advice is if you’re doing anything make sure you’re covering all those bases. And if you’re doing all four yourself, make sure you compartmentalize and don’t let one area dominate another.
– By Tim Hanson
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Be Ambitious
You may not know this, but I took a pay cut and moved my family to mid-Missouri from Washington, DC, to work for Permanent Equity. By any standard measure of success, that wasn’t a good career move. In fact, more than one person thought I was crazy. But I did it because I was pretty sure it was a great career move. I believed in myself, I believed in the organization, and I believed in what I might bring to the organization and what the organization might bring out of me.
People ask me, “How’s it going?” My answer? “Better than expected.”
Our friend David Perell recently wrote this about ambition: “Ambition isn't about climbing the career ladder faster than your peers — no, that's complacency. An inability to think for yourself. True ambition comes from conviction and the courage to see a grand vision through to completion.”
Before I say what I’m going to say I’m going to say this: Success is not a base state. Things are hard, and I begrudge no one for working hard to make linear progression.
But!
Linear progression is not interesting. It’s satisfying, but not interesting. What’s interesting is variance.
And look, I don’t have a grand vision; I just don’t want to be bored. I think of myself as being in the business of creating upside, both personally and professionally. The catch-22 of that is that the optionality of upside comes with the risk of downside. There’s a world where I got out here and Brent and I didn’t get along and I ended up jobless in Rocheport living in a van down by the river. Thankfully, that didn’t happen or at least hasn’t happened yet. And I think this is also more nuanced than Jeff Bezos’ regret minimization framework.
See, it’s not about doing things you might regret not doing. Rather, it’s about not doing things you wouldn’t regret doing.
We would have been fine in D.C. And the reason that’s sad is because we wouldn’t have known the difference between what we did and what we might have done.
Along the same lines, I had an interesting conversation with an entrepreneur we know who has ended up being quite wealthy. He took me aside at dinner and said, “Hey, I want you to know that I will never invest with you guys.”
I said, “Oh, why is that?”
He said, “I think what y’all are trying to do is great, but if I am going to give my money to other people then it means that I am out my own ideas, and I have plenty of ideas.”
On the one hand, I thought, “Hell yeah!” On the other hand, I thought, “That’s not a thoughtful approach to diversification.” But as David said, “True ambition comes from conviction and the courage to see a grand vision through to completion.”
We’ve offered people jobs and been turned down because someone didn’t want to move to Missouri or because the base salary we were offering wasn’t high enough. We’ve thought about going back to these people with different offers, but never did. Or at least never really did.
The reason? We’re ambitious. And I think that’s ok.
– By Tim Hanson
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The Value of Patient Capital
I’ve been thinking a lot about how Permanent Equity might find, invest alongside, and nurture consumer brands that might benefit from being aligned with unlevered, multi-decade ownership rather than risk brand impairment via oversaturation in the pursuit of short-term sales growth. So it was serendipitous that Tapestry, the fashion conglomerate behind Coach and Kate Spade, recently announced that it was acquiring Capri Holdings, the fashion conglomerate behind Michael Kors and Versace.
Analyzing the deal, The Wall Street Journal said this:
Crucially, there is one thing that scale won’t be able to bring for Tapestry: Patient capital. European giants such as LVMH, Kering, Hermes, and Richemont are all family controlled, which means they tend to be conservative on debt and have the luxury of making decisions that preserve brand cachet–even at the expense of slower near-term growth. By contrast, Tapestry’s executives are subject to the shorter-term whims of shareholders that place more importance on quarterly results.
That got me to thinking: How valuable is patient capital? So I ran the numbers…
For context, the broader stock market was +179% over the same time period. In other words, I would call this a victory for patient capital…and it’s not close!
Now is this a small sample size? Sure. And is stock market return the right way to measure success? Perhaps not. But it’s still an interesting A/B test of the results of different approaches to brand stewardship, and the results over the past decade speak for themselves.
In other words, I hope we find some brands to help steward.
– By Tim Hanson
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Unqualified Opinions Season 2
Permanent Equity’s Unqualified Opinions is back from summer vacation with Season 2 launching last Tuesday when my kids went back to school. In case you missed it, here’s what happened in week one…
Tuesday: I talked about what it means to love rebounds and set others up for success.
Wednesday: We shared Dan’s new take on our “No asshole” policy. (Spoiler: Never try to out-asshole an asshole.)
Thursday: I wrote about how weever fish and pine nuts conspired to spoil my family vacation.
Friday: Emily shared her 10 Deal Commandments.
If you’re not subscribed to receive Unqualified Opinions (do so by clicking here), you can expect a daily missive that aims to make you think and/or laugh and hopefully mostly succeeds (even my wife has only unsubscribed once). You’ll also learn a little bit about how Permanent Equity thinks about the world and what we’re talking about around the office. If you’ve ever wanted to make the pilgrimage to Columbia, Missouri, well, subscribing is the next best thing you can do other than actually getting on I-70.
Plus, dots in hats.
– By Tim Hanson
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The 10 Deal Commandments
We recently hired a new Business Development Associate (Welcome, Holly!) onto the Investing team. In advance of that, Emily did some great work documenting a lot of our thinking and processes to make Holly’s transition as smooth as possible and set us up to scale the team in the future.
One of my favorite things that came out of that work were her 10 Deal Commandments, an abridged version of which is presented below. Enjoy!
Thou shalt protect and promote trust in every interaction.
Reputation is the hardest thing to build in investing (yes, harder than raising capital), and the easiest thing to lose. If sellers won’t trust us, we can’t win deals (or we’ll have to significantly overpay).Thou shalt be responsive.
Responsiveness is an expression of interest. And if we’re not interested, we should respectfully communicate that.Thou shalt be on the lookout.
Always be selling, right? Well, we don’t want to be obnoxiously pitching all the time, but we do want to be curious about companies and people, inviting questions in return. Encourage curiosity by being curious of others.Thou shalt be high empathy, low judgment.
There is no perfect business, so judge not lest thee be judged.Thou shalt not give answers prematurely or make promises you can’t keep.
As a potential investor, we always have less information than a business owner or operator. Don’t commit to anything, unless you know.Thou shalt avoid formality and promote practicality and authenticity.
Formality can be effective in intimidating others, establishing hierarchy, and keeping exchanges sterile. None of those things are helpful to anyone.Thou shalt be a helper in service to others.
If someone reaches out for advice or input on a situation, respond as best you can. Thoughtful requests deserve thoughtful replies.Thou shalt consider and communicate on all the pieces of a deal puzzle – people, situation, operations, market, and numbers.
When you are getting to know a company, do not lead with or purely focus on the quantitative attributes. Yes, financial performance and scale matters. But other elements matter just as much.Thou shalt not force us as the only answer, and should encourage broad understanding of marketplace options.
A great offering doesn’t have to be oversold. Permanent Equity offers a great solution for certain situations, but it’s dependent on the business model and owners being a good fit. Sometimes we’re a good fit, but not the best fit, and that’s fine.Thou shalt not hesitate to communicate.
Situations materialize and disappear all the time. Coordination is critical to ensuring our team is never the reason something goes MIA, so don’t hesitate to signal to the team when a deal may be on your radar. Investing is a team sport, and you won’t waste anyone’s time.
Have a great weekend.
– By Tim Hanson
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So This Was Terrifying
I love to travel and when my wife and I knew we were going to have our first child, we made it a goal of ours to leave the country at least once each year. Our reasoning was that the first time would be the hardest, but we were relatively young and could handle it, and that it would only get easier as our kid (now kids) got used to it. And we had a pretty impressive streak going until Covid intervened with our kiddos getting their passports stamped in places such as Switzerland and Nicaragua.
Travel is not without risk, though, and there was the one time in Norway a train left an isolated station in the mountains with my wife on it and my newborn son and I not. Or when we ended up in an emergency room in rural Catalonia thinking we were just going to a party to build some human pyramids.
That lesson was relearned (I both love and hate relearning things) again this year when we ventured back abroad to Ireland. The trip felt snakebit from the start. Our flight over was delayed hours because some dudes headed to Ibiza dropped acid before boarding the plane, started freaking out during taxi, and had to be escorted off (and their checked baggage too) by police. Then within minutes of driving a rental car on the “wrong side” (hastily because we were hours behind schedule) I rubbed a curb and had the “Check Tire” light go on (but it never went flat). And a few days after that my daughter got stung by a weever while boogie boarding and had to be carried up a steep cliff from the beach to have her foot soaked in near boiling water to avoid unconsciousness.
But the piece de resistance came on the last day. Driving back to Dublin from West Cork, we stopped at Avoca, a fantastic Irish woolen mill that also serves great food, for lunch and shopping. We parked and went in to eat and in the modern tradition, the restaurant listed the ingredients and allergens in each dish on its menu.
The important information here is that none of us are allergic to anything except for my son who is allergic to pine nuts. But because encountering pine nuts is relatively infrequent and we have no other allergies, we (or just me) are perhaps not as vigilant about this situation as we should be. That said, my son wanted to get the prosciutto and brie sandwich (don’t judge us) and as far as we could tell from the allergens listed, pine nuts were not an ingredient. Then we got the sandwich and looked at it and there was some red stuff on it that looked like sundried tomatoes. Again, all good. But then he took a few bites…
“Does this sandwich have pine nuts?” he asked forebodingly.
Again, we checked the menu. No pine nuts.
“My throat is closing.”
“Maybe we should ask.”
Long story short, the red stuff turned out to be red pepper pesto with pine nuts and my wife had to stab my son in the thigh with the epipen we were carrying to keep him from going into anaphylactic shock. Even better, we were just hours from boarding the flight home so had the stress and tension of trying to decide if we should even get on that flight over the Atlantic.
Everything worked out fine, but still!
The point is that risk is everywhere, but that one of the most dangerous risks is a false sense of security. What I told the restaurant is either put all of the ingredients on the menu or none because putting just some made the situation the worst it could possibly be. Absent any information, I think I would have scrutinized that red stuff more.
We had a similar situation at one of our businesses, which was performing poorly and running tight on cash. We had cash flow forecasts, but found that they were always wrong. But because we were deciding things based on inaccurate forecasts, we realized that we were making worse decisions than if we had no forecasts at all.
It’s terrifying to think that there are situations that are made better by having no information rather than some information, but I’m now terrified by incomplete information. I guess “All or nothing” is a saying for a reason.
– By Tim Hanson
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More on A@*holes
A sign that you’ve had a good idea is that other people take it for their own. So it’s been with our “No Asshole” policy. We hear from people all of the time that they’ve adopted it in their life and work and have also been introduced at meetings as the “No Asshole” people (hey, we’ll take it, anatomical discomfort be damned!).
One of the more flattering adaptations, however, was when we learned that Dan, the CEO of our commercial waterproofing contractor down in Dallas, was using it (as well as Aaron James’ Assholes: A Theory) as the inspiration for a “How to Manage an Asshole” helpercard that he was adding to his field manual.
If you’re not familiar with our policy, Permanent Equity takes a proactive, zero tolerance approach to unabashed assholism. We have no tolerance for consistently dishonest, manipulative, belittling, or megalomaniacal behavior. No tolerance for those who believe being rude and obnoxious is a strategy. No tolerance for employees or partners who play politics or cut-corners as well-honed techniques. No tolerance for those who focus on how to get the most, the quickest.
Dan’s twist was that a zero tolerance policy was great and all, but in the world of commercial construction, projects involve up to 40 different trades competing to be in the same place at the same time. Inevitably those circumstances can lead to someone (a vendor, bystander, customer, fellow employee, etc.) either being or acting like an asshole. What then?
Dan’s tips:
Do not engage an asshole if he/she is angry.
Do not try to out-asshole an asshole.
If you feel unsafe, leave the premises.
But his insight was that every now and then his people would find out someone is a real asshole. Yet when they did some digging, most of the time they would find out that they were to blame for the circumstances that created the asshole because they did not communicate, plan, or execute properly. So the first step in resolving an issue with someone who might be acting like an asshole, Dan says, is to look in the mirror.
Look, none of this excuses someone for being an asshole. But it’s one thing to call a person out for being an asshole and a better, more constructive thing to help them stop.
– By Tim Hanson
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Love Rebounds
I said we’d be back when the kids started school again and my kids started school today, so here we go…
I got the opportunity to coach my daughter’s soccer team at a recent tournament because none of the other more qualified coaches could make it. Yet I jumped at the opportunity to do so because it’s a good group and they had a chance to win it all.
The team’s core value, which they break their huddles with, is “Work Hard Have Fun” (comma intentionally omitted). I like this because it’s recognition of the idea that you need to work hard to succeed but that you also need to have fun while doing so in order to be able to sustainably work hard.
Yet as we prepared for the tournament together, we adopted two more:
Set others up for success.
Love rebounds.
“Set others up for success” came about because our shooters during drills were struggling to finish chances. As I watched, it occurred to me that this wasn’t happening because they were bad shooters (they finished the passes I played to them), but because our other players weren’t making great passes. The balls the shooters got were bouncing or inaccurate and so the outcome was not their best.
We stopped the drill and talked about how one of the most important things you can do in sports or anywhere really is to set someone else up to succeed. In this context, and even though this was ostensibly a shooting drill, this meant being thoughtful about your pass in order to make it as easy as possible on the shooter. In business, it means removing blockers for people so they are unimpeded in their ability to add value to an organization.
We adopted “Love rebounds” for a similar reason. When our players took shots, they seemed to assume they would either go in, get saved, or go out of bounds and therefore thought the shot was the conclusion of the opportunity. But the most frequent outcome was that shots bounced off of the keeper or the post.
In other words, rebounds!
Rebounds are great. They are a missed opportunity that immediately results in a new opportunity that’s likely even better than the original opportunity. So we talked about loving that and being in position to take advantage of that new and unexpected opportunity when it presented itself.
This all paid off in the championship when a midfielder played a nice pass to a forward who got a good shot on goal. The other team’s keeper saved it, but it deflected to the far post where a wing ran onto the ball to score. “Love rebounds!” the bench yelled.
The world is an interesting place because it is full of opportunities, but opportunities come in all shapes and sizes. There are those you create for yourself, while others fall at your feet. What’s ironic, though, is that taking advantage of the first type requires structured planning, while the latter requires being unstructured so you can react fast.
So plan but don’t, work hard have fun, set others up for success, and love rebounds.
Welcome to Season 2.
– By Tim Hanson
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Base Rates and You
It’s summer, but that doesn’t mean that I have stopped working altogether. In fact, our bankers invited me to lunch the other day and so I went on their dime to have tacos and talk about the world (relationship banking!).
It was at the end of the meal that the topic of the stock market, and more specifically NVIDIA, and the recent gains in both came up. They know my background as a public equities guy and were curious what I thought about the whole thing.
I told them the same thing I tell everyone who asks about investing in public stocks. Personally, I put a little in at the beginning of each month sometimes in specific names but mostly in indexes, knowing I can’t time the market, but that entrepreneurship will ultimately carry the day.
That said, when it comes to NVIDIA (the stock is up a lot), it’s hard not to think that maybe this AI hype cycle has gotten a little out of hand. After all, base rates, but also base rates.
If you don’t bother to click through to the links the learning is that the vast majority of companies don’t grow that fast and end up justifying high valuations and also that almost no projects, let alone complicated ones, come in on time, at budget, and with the projected benefits.
And that’s fine. Just keep it in mind.
Have a great weekend.
– By Tim Hanson
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The Best Opinions
Since I told everyone about “My Worst Opinion,” I thought it might be fun while we’re on summer break to look back at some of the better ones. These were four that got some of the best feedback from readers, so in case you weren’t subscribed when they were published, I hope you enjoy. And if you were, well, read them again!
In February, we wondered “Why is Insurance Legal?”
Then explained how and “Why We Negotiate for Worthless Terms.”
Eventually opining on “The Cause of and Solution to Life’s Problems.”
Before exploring what we could learn from “James Joyce and Joey Ramone.”
If there are things you want to hear about when we light this candle back up in the fall, please don’t be shy about replying or sending in ideas. And thanks for being a subscriber; we’re working on hats!
– By Tim Hanson
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Have an Unqualified Summer
If you’ve enjoyed reading Unqualified Opinions, the person you have to thank is Nikki Galloway. That’s because it was only as a result of her joining Permanent Equity as CFO that I was able to shed some of the hats I was wearing and loved to wear (underqualified as I was to wear them) as CFO and think about other interesting and potentially valuable ways to spend my time as whatever it is I do now (CIO).
When I thought about that, I remembered a time I listened to John Mackey, the founder of Whole Foods, speak. He said something then along the lines of “Keep giving up the things you love to do because the reason you love them is you’re good at them. Instead, always find something different to do that’s valuable to you and the business.” This was specifically in reference to an anecdote he told about the day he stopped selecting store locations, and his point was that other people need to know how to do things and you need to know how to do other things.
Point taken.
We have a lot of interesting conversations at Permanent Equity. In fact, at the risk of sounding egotistical, I think we’re way undervalued based on our influence to interestingness ratio (i.e., we are significantly less influential than we are interesting). I think that should change, and I wanted to do something about it, and I thought that would be valuable to me and the business, and so here we are.
Unqualified Opinions was born out of a challenge I gave myself. Could I/we (and yes I have appropriated a lot of material from others) have something interesting to say every day (well, every weekday, except that bonus Opinion where I owned Mark for questioning how I spend my time)?
Mostly, I think that’s been achieved.
But more gratifying has been the conversations these emails have kicked off. You may not know this but every Unqualified Opinion goes out internally to Permanent Equity before it ever goes public. And those guys are not shy about giving feedback (we wouldn’t have it any other way). While the point of doing that was to make sure I didn’t send out publicly anything that made us look stupid, the real value has been in sending everyone at our firm an email every morning. The learning is communicate with people. It turns out we’re social creatures.
Now extend that learning to the dozens of subscribers Unqualified Opinions now has (I appropriated that joke from Chris Hill). It’s exciting to get responses. It feels like I get to have a conversation with the world. It turns out we’re social creatures.
Where am I going with this?
If you’ve followed the programming of this daily email, then you know I like to send our four solid Opinions per week and then something flippant on Friday. This is this Friday’s flippant Opinion. It doesn’t really have a point other than to explain what we’ve been doing and thank you for participating.
Also, we’re past Memorial Day. Summer has begun, and I expect readership to drop off and may also be running low on ideas. So call this the end of Season One of Unqualified Opinions.
We are going to keep publishing and try some interesting stuff (and let’s face it, very few people read the first two months so we may republish a few of those with some value adds), but it may not be a daily new written piece again until the kids are back in school. That said, I hope you’ll stick around for Season Two. And if you have anything you think there should be an Opinion on, send it in. Again, I/we are not shy about appropriating ideas.
Have an Unqualified summer.
– By Tim Hanson
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Investing, Not Masochism
I ended yesterday by promising to tell you how to become an investor without becoming a masochist. And I will, but before I do, I am going to yield the floor…
The Milwaukee Bucks were the number one seed in the NBA Playoffs this year but got knocked out in the first round by the Miami Heat. After that defeat their star player Giannis Antetokounmpo faced the press and was asked if that made their season a failure. He was visibly frustrated when he responded (in a video that has since gone viral), “Michael Jordan played 15 years…won 6 championships. The other 9 years were failure?”
“It’s the wrong question,” he continued. “There’s no failure in sports. There’s good days and bad days…some days it’s your turn, some days it’s not your turn…it is steps to it.”
By “it,” he meant success.
Back to masochism…
My dad’s a scientist so compares a lot of things to real world laws. The law of conservation of energy states that energy cannot be created or destroyed, but can be changed from one form to another i.e., potential (the energy of an object due to its position) and kinetic (the energy of an object due to its motion). This is a very interesting way to think about the value of putting effort into a trade with nonlinear outcomes such as sports or investing.
I said yesterday that when it comes to becoming a successful investor, there will be many days where you make no visible progress towards achieving your goals. And that’s true. But if you have good habits, put in the effort, and get reps and feedback you are making progress, even if it’s not visible.
I’ve started calling these days “potential energy days.” In other words, these are days when the work you put in improves your position, even if it doesn’t manifest itself in motion. And recognizing that you are going to have a lot of those days and celebrate them too in addition to your visible successes is how you can become an investor without becoming a masochist.
— By Tim Hanson
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Sledgehammers and Railroad Ties
Before I was an investor, I was a landscaper, and I loved that job. It felt great every day to do a bunch of hard work and see at the end that it had made the world a more beautiful place.
Investing is nothing like that. In investing, effort does not equal outcomes and you spend most of your time thinking about how much better you could be doing. What’s more, investing done well is a game of magnitude, not frequency. The feedback loops are long and the payoffs, while potentially significant, are unpredictable and nonlinear. In other words, even if you’re a great investor you can spend most of your days making no visible progress.
Running a business can feel a lot like that too, but it has the benefit of being a bit more tangible.
None of this is meant to turn this into a woe is me piece. I have an incredible job and I love what I do as well as the people I get to do it with. Rather, it’s to say that if you want to become an investor, you have to become a person who can tolerate long periods where it seems like you are making no progress and be okay with that.
My high school baseball coach was a crazy dude. As part of our mandatory offseason conditioning he erected five railroad ties near the field and gave us five sledgehammers. He said we wouldn’t start practice in the spring until we’d hammered through all five railroad ties.
Have you ever tried to cut a railroad tie in half using a sledgehammer?
It sucked, but we did it. We were out there before school, after school, during lunch hammering away. But I kid you not that until those ties actually buckled, it didn’t seem like we were ever getting any closer to completing the task.
That’s investing. You analyze hundreds of opportunities to find one. It’s not clear that you’re right until you are. And until you actually bank a win, it can seem like nothing good ever happens. Because when it comes to upside and capital and risk, it can always be better.
So how do you become that person without becoming a masochist? More on that tomorrow…
— By Tim Hanson
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Your Stock Price Matters and You Don’t Know It
Stock market volatility gets a bad rap.
Hear me out. It’s a feature, not a bug, that public stock prices move up and down every day. While that’s not because those movements are any reliable indicator of a businesses’ long-term value, it is because they are useful real-time indicators of how well millions of people (and admittedly some number of computer algorithms) perceive a business to be performing.
Alas, this is not a luxury available to most small private companies. They have no public stock. They have no stock price.
But free from the tyranny of short-term market swings are these companies liberated to make decisions that optimize for the long-term? Perhaps…
People want to work for a business whose value is going up, not down. If you can’t show people that together you are creating value, good luck holding onto them…the good ones anyway. In that sense a stock price can function like a scoreboard. It can help employees understand if you all are winning together or not and that can be an important detail to know.
The title of this Opinion is a deliberate double entendre. If you own or work at a business that is not a listed public company you probably (1) don’t know your stock price and (2) don’t realize that it matters. But you should and it does.
Our experience is that most business owners punt on trying to value their own business. Given that this is likely their biggest asset, that seems crazy, but valuation is esoteric and hard so we get it.
But do it. It’s worth it.
If you want help doing it, Permanent Equity has a calculator online called Instant Appraisal. You could also hire an independent investment bank or accounting firm. Or see if some business school nerds at your local university might take on the project for fun.
Neither our nor their answers will be precise, but they should all provide a roughly right range. From there, if you keep the methodology consistent, you can at least figure out how much incremental value your business gains going forward by updating your valuation and comparing it to the previous version.
This exercise should also help identify the factors that drive valuation gains – and it’s not always top or bottom line growth. For example, being more efficient with working capital can free up cash and cause a business to increase in value.
Then once you know what your business is worth and how much more it is worth now than it was worth before, you can start allocating to the sources of that value creation whether they be people, processes, or assets, which hopefully becomes a virtuous cycle. And then you can compensate people based on how much value they are creating, which is hugely aligning. This is why your stock price matters and you should know it. We are all just looking for a way to know if we’re succeeding and then share in that success.
— By Tim Hanson
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Where Returns Come From
When it comes to making an investment, there are three ways to earn your return:
What you pay for it;
How well you operate it;
How big you scale it.
But not all three of these areas are applicable to every investment.
For example, if you’re not an activist investor with a lot of capital behind you, you’re likely not going to be able to influence a public company as to how it operates or how it scales. So your return almost entirely depends on what you pay. This, I think, explains why “value investing,” where you buy stocks for cheap, has historically been the best-performing approach in this area even as venture investing, where investors seemingly overpay for growth but have lots of influence on the companies they fund, has done so well in the private space.
But if you’re outside of the asset allocation world and doing something tangible in the operating world like buying a new piece of production equipment or making a hire, you should arguably always overpay…particularly when it comes to people. That’s because paying more generally correlates with quality and quality tools typically last longer, perform better, and, in the case of people, level up over time. After all, isn’t the best free advice that you get what you pay for?
This is important because rarely is the payback period on any investment less than a year or two (if it is, do it!). This means that your returns are going to be generated well out in the future and then compound…the longer the better. As Einstein apocryphally pointed out, compounding is the most powerful force in the universe.
This is also why I will never purchase IKEA outdoor furniture again (and because of the allen wrenches and instructions that mock you by having no words).
So if it’s a passive investment like a stock, buy it cheap and ignore it. That’s the best route there for a good, tax-efficient return. But if you’re buying a business or expanding your production line or bringing on a teammate, pay up for quality and give it lots of TLC because the return there will not be generated by what you pay today but by how significantly that asset can improve your operations and scale into the future.
— By Tim Hanson
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To the Nerds!
When I catch myself droning on for too long following a short question I’ll stop and say “Sorry, that’s a long winded way of saying…” and then try to give my more succinct answer. But sometimes I can’t help it because I’m a nerd.
We meet a lot of nerds in our line of work. These are people who all have a “thing” – the topic you can go on and on about for days. But like me most people will stop themselves after a few minutes and apologize for going on for too long or getting too into the weeds.
The truth is no one should apologize for being a nerd. For example, Joe, who runs Ad Advance, got his start selling chemistry sets on Amazon. Of course that makes him nerdy on its face, but what’s even nerdier is that he started Ad Advance because he couldn’t find a digital marketing firm that could explain how to market on Amazon better than anything he had figured out himself through relentless tinkering. And if you ask him today about what’s going on on the platform, well, take a seat because you are going to be there for a while.
We love founders like Joe. His business is his passion and his passion is his business and that shows up both in the numbers and in Ad Advance’s culture, which is precisely what needs to be the case if you are going to be in partnership with someone for 27 years. But founders aren’t the only nerds in the business world.
Our CFO Nikki was working on her computer late one night looking at spreadsheets when her husband Jon saw her and said, “Sorry you have to work late.” Her answer? “I’m not. This is fun for me.” She’s a nerd and nerds make great employees when you hire and empower them to do what they nerd out on.
And if you want to encounter some other nerds, just check out the Warhammer community on reddit. These people are incredibly passionate and detail-oriented when it comes to painting miniature orcs and elves, which is why publicly-traded Games Workshop has been such a successful business. The lesson? Nerds also make good customers!
So what do you nerd out about? And do you get to do it every day in service of others and ideally for a profit? If so, double down. If not, how might you? Have a great weekend.
– By Tim Hanson