“The Last, Best Order”

There is a neat post on Redfin’s blog. It is the CEO’s “IPO diary.” Read the whole thing for a fascinating look at the process from the inside. A couple of sections really resonated with me:

Masters of the Universe
In other ways too, the roadshow had the feel of a bygone era. For example, almost everyone on the buy-side we met that week was a man: in one group lunch, all 24 of the portfolio managers in attendance were male. We may have met more portfolio managers who were Israeli special forces veterans than women. I asked our bankers how long it would take the first one to kill me with his bare hands.

Almost all of them took notes on tablets. Some of them tried to look up as you spoke, but with their eyes focused on nothing except the numbers in their head. They weren’t just capturing the highlights of a meeting; it was a nearly verbatim transcription of what we’d said, so we could be held accountable for it later. Information in every form is the currency of Wall Street, and drops of it never seem to fall on the floor.

Chess with Bobby Fischer
Most of the fund managers were exotically, obviously smart. Except for one person who fell asleep in a meeting, none of the fund managers we met was anyone I’d want to be on the other side of a trade with, buying what he sold, or selling what he bought. This is what I realized I had been doing my whole life as an E-Trade stock-picker; it had been like challenging Bobby Fischer to a game of chess. I spent a long time that first week trying to judge whether it made sense to have so many brilliant people decide where our society allocates capital, as opposed to making cars or software or hospitals.

The Last Ideology-Free Realm
What impressed me most about these people was their willingness to change their minds. No one in our society seems to change her mind about Donald Trump or Hillary Clinton based on a new fact, but a fund manager on the wrong side of a bad trade has to change her mind in a moment or lose her job. This is why investing is the world’s last ideology-free realm. It would be easier to accept the premise that our society can’t agree on one version of the truth anymore, about whether temperatures are rising or the economy is growing, except that’s exactly what happens when every public company reports its earnings every quarter. You can believe what you want to believe, but not with a million dollars on the line.

And, perhaps most interesting to me:

The Last, Best Order
One of my favorite meetings was with a Scottish fund manager in San Francisco. His firm was known for buying only a few stocks, and holding each for as long as a decade. In a hotel meeting room with enough prospectuses, pitchbooks, cookies, fruit, cheeses, crackers and popcorn for 30 people, he came in alone. And rather than rattling through twenty or thirty questions about our metrics, he just asked me why I ran the company.

I found myself talking about my older brother, who had died just before I became Redfin’s CEO, and the feeling I had then that my life so far hadn’t made the world a much better place. He asked me about whether Redfin’s sense of mission would survive our public offering. He didn’t write much down. His order was one of the last, and the best, to come in.

My aspiration as an investor is to be that “last, best order.” There’s a reason I classified this post under Finance, Investing, Learning and Values. There is some real insight here.

Practicing Objectivity

They say there is nothing new under the sun and so when I started thinking more deeply about philosophy, The Meaning of Life, etc. a few years ago I should not have been surprised to find myself drawn to a philosophy developed over 2000 years ago!

I am of course talking about stoicism. I encourage everyone to at least read up on stoicism. The Daily Stoic is a good starting point. The site provides quite a bit of content that is useful for introspection or reflection.

Today I encountered this quote from the philosopher Epictetus:

Don’t let the force of an impression when it first hit you knock you off your feet; just say to it: hold on a moment; let me see who you are and what you represent. Let me put you to the test.

This is something to meditate on as an investor as well as an individual. As you go about your day, think of all the people and ideas you dismiss out of hand.

Are you dismissive about these people and ideas based on reasoned thinking? Or are you just making snap decisions for convenience?

How many people and ideas do you write off each day for no reason other than that they offend your preconceived notions of how the world works?

When you think about things this way, you will quickly discover surprisingly little of what you believe is reasoned from first principles. This isn’t something to be ashamed of! In fact it is intensely liberating. It means that life is not a test you pass or fail. Rather it is unknown territory for exploration. Life is an adventure, and you are the hero! What is more exciting than that?

Three Quotes To Live By


I am a fan of parsimony, in both financial modeling and life. In the spirit of parsimony, I think I can distill my core values down to three quotes from Marcus Aurelius’s Meditations:

Quote #1

Be like a rocky promontory against which the restless surf continually pounds; it stands fast while the churning sea is lulled to sleep at its feet. I hear you say, “How unlucky that this should happen to me!” Not at all! Say instead, “How lucky that I am not broken by what has happened and am not afraid of what is about to happen. The same blow might have struck anyone, but not many would have absorbed it without capitulation or complaint.”

Quote #2

When you wake up in the morning, tell yourself: The people I deal with today will be meddling, ungrateful, arrogant, dishonest, jealous, and surly. They are like this because they can’t tell good from evil. But I have seen the beauty of good, and the ugliness of evil, and have recognized that the wrongdoer has a nature related to my own—not of the same blood or birth, but the same mind, and possessing a share of the divine.

Quote #3

Words that everyone once used are now obsolete, and so are the men whose names were once on everyone’s lips: Camillus, Caeso, Volesus, Dentatus, and to a lesser degree Scipio and Cato, and yes, even Augustus, Hadrian, and Antoninus are less spoken of now than they were in their own days. For all things fade away, become the stuff of legend, and are soon buried in oblivion. Mind you, this is true only for those who blazed once like bright stars in the firmament, but for the rest, as soon as a few clods of earth cover their corpses, they are ‘out of sight, out of mind.’ In the end, what would you gain from everlasting remembrance? Absolutely nothing. So what is left worth living for? This alone: justice in thought, goodness in action, speech that cannot deceive, and a disposition glad of whatever comes, welcoming it as necessary, as familiar, as flowing from the same source and fountain as yourself.

Here is how I read and apply these as core principles for living:

Quote #1: Strive to stand strong in the face of the chaos and tumult life inevitably brings. This striving creates meaning, and allows you to shape your sense of self.

Quote #2: All human beings are worthy of dignity and respect. At the extreme, even those who seem “bad” or “evil” share many of our traits. On a less extreme level, those we disagree with generally have good reasons for believing the things they do. Strive to empathize and understand a person’s reasoning before rushing to judgement. In doing so you will develop a richer understanding of the world and the people around you.

Quote #3: Wealth, power and status are at best impermanent. It is nice to have them, but they do not create meaning in and of themselves. Wealth, power and status are all subject to the wheel of fortune. They are impermanent. Ask yourself: in a post-apocalyptic hellscape, where wealth and status are irrelevant, how would I create meaning? (see also: The Road by Corman McCarthy)

These are not the only principles to live by, but they are a solid, parsimonious foundation. To a large extent, everything else is commentary.

The Game of Life


I have come to look at life as a game. Not that game. More like Settlers of Catan. In life, as in Catan, everyone starts in a certain position. That position is partly determined by chance. As a result, initially everyone has access to different resources.* Strong players do not use their starting position as a crutch. They find creative ways of gaining access to resources over time. Trade and relationship building are key.

In my experience, the majority of players in life are weak ones. That’s not to say they are weak people. Just weak players. There are lots of ways to explore this distinction but because of this blog’s theme, let’s start with money.

I have met many individuals who are slaves to their money. For these people money is always a limiting factor. There is never “enough” money for X, Y, or Z. Note that this is independent of income. You would be surprised how many hedge fund managers are slaves to their money, even with net worth figures in the hundreds of millions of dollars. Weak players do not realize that income and spending are not external forces acting on otherwise hapless human beings. Money is a resource. It is a raw material you use to design and build a meaningful life.

The use of the indefinite article “a” versus the definite article “the” is quite intentional here. Money is hardly the only raw material required to build a meaningful life. Other materials include empathy, creativity, compassion–the amount of each required to build out a meaningful life will vary with the individual.

The key to becoming a strong player in The Game of Life is to locate control within yourself. You are the architect and head contractor on the project of living. Yes, external forces can have a dramatic impact. But a surprising amount of the game lies within your locus of control.

Thus, strong players tend to do the following:

  • Make investments with convex return profiles. I am not just talking about money here. This can be any decision to improve your education, skills, or health. When you invest in yourself, the benefits tend to compound over time. If you are interested in a deeper discussion of this, listen to this interview with Chris Cole: http://investorfieldguide.com/cole/.
  • Selflessly invest in others. Again, I am not talking about financial investments. Doing simple things like taking a few minutes to do an informational interview with a job seeker, or helping a co-worker with a project in an area of your expertise, also has a convex return profile. Not only does it feel good to help other people, but it also helps build a stronger relationships and a solid reputation. You never know who someone else might know, and it is relationships that make the world go round. And for the umpteenth time, I am not just talking business! John Wathen is a powerful example.
  • Practice optimism. It is difficult to build anything, let alone a worthwhile life, if you only ever see the worst in everything. A moderate dose of cynicism will not put you down. However, chronic pessimism is an incredibly destructive thought pattern. Pessimists tend to focus on external forces they can’t control, versus aspects of their daily lives they control completely. You have definitely met chronic pessimists. These are the people who spend their lives hurtling from one crisis to the next. They are chronically ill. They are constantly distracted by relationship problems. There is never enough money and it is always someone else’s fault.
  • Minimize/eliminate the role of chronic pessimists in life. As a natural consequence of their unpleasant disposition, chronic pessimists are not enjoyable people to spend time around. They drain your energy. If you have the misfortune to work on a team with one you will quickly realize they are shirkers, ever-reluctant to pull their weight. Unless you have a special gift for coaching and leadership, the most efficient way to deal with chronic pessimists is to cut them out of your personal life and workplace.

Above all else, however, strong players in the game of life act with intention. They think through the consequences of their actions ahead of time. They think strategically about how they should deploy their time and financial resources in pursuit of their goals. They are mindful of their thoughts and emotions and how those may influence perception and behavior. They understand that to a great extent, people create their own realities. There is probably plenty more to be added to this list, but the way I see it these are the essentials.

* If you are curious, I believe the role of government in society is to promote equality of access to opportunities.

Book Review: The Tao of Wu

The Tao of Wu by The RZA

If you haven’t picked up on it in other posts, I have a moderate interest in eastern philosophy and religion (Taoism, Buddhism, etc.). I also enjoy listening to Wu-Tang Clan. So when my girlfriend bought me The Tao of Wu by the RZA for Christmas I read it in about two hours.

The RZA’s life journey has been truly extraordinary, taking him from the projects of Staten Island to Manhattan sound studios and even Hollywood (among his producer credits is the soundtrack for Kill Bill: Vol. 1). The Tao of Wu describes his spiritual journey.


The Tao of Wu is structured as an autobiography, with occasional digressions into areas as diverse as the theology of the Nation of Islam and its various derivatives, the interpretation of Buddhist koans and chess strategy. To the casual observer this might seem like a gimmick, but I found many of the anecdotes to be thought provoking and evocative of the cyclicality emphasized in Buddhism and Taoism.

Early on there is an anecdote about how, when RZA was young, his family moved into a new home and was almost immediately robbed. The robbery was devastating. However, there was some consolation in that the move allowed RZA to make a great friend–an older neighbor boy. After a couple of years of friendship came a surprising revelation:

‘When y’all first moved in, I robbed your house maaan. I never knew you was going to be a cool family.’ When he told me, there wasn’t much I could do about it, and by then he was my best friend–or as they say in the hood nowadays, my big homie–so in a way it was cool.

That’s just one lesson: Your allies can arrive as enemies, blessings as a curse.

Each chapter of the memoir is devoted to a particular “pillar of wisdom.” These are followed by brief meditations or words of wisdom. At the end of the first chapter, for example, comes a passage discussing the importance of solitude.

“I advise everyone to find an island in this life,” RZA writes. “Find a place where this culture can’t take energy from you, sap your will and originality.”

Who Should Read This Book

Literally everyone. Obviously Wu-Tang fans should read it, and it’s worth a look by anyone interested in eastern philosophy and religion. But beyond those obvious audiences the subject matter is accessible to everyone. If you read fast, you can take a first pass through the book in two or three hours. Given its meditative tone, The Tao of Wu is also worth keeping on the shelf to revisit from time to time.

Thou Shalt Not Covet Thy Neighbor’s Returns

Source: Wikipedia

The most important investing commandment is this: thou shalt not covet thy neighbor’s returns. If there is one thing you absolutely do not do in investing under any circumstances, it is make decisions based on whether other people are making more money than you. This is akin to playing poker on a tilt and should be viewed as a cardinal sin. For those unfamiliar with poker terminology:

Tilt is a poker term for a state of mental or emotional confusion or frustration in which a player adopts a less than optimal strategy, usually resulting in the player becoming over-aggressive. This term is closely associated with “steam” and some consider the terms equivalent, although steam typically carries more anger and intensity.

Placing an opponent on tilt or dealing with being on tilt oneself is an important aspect of poker. It is a relatively frequent occurrence due to frustration, animosity against other players, or simply bad luck. Experienced players recommend learning to recognize that one is experiencing tilt and avoid allowing it to influence one’s play.

People invest on tilts all the time. Most commonly this happens when a particular asset or asset class prints an extraordinary return in a short period of time (*ahem* cryptocurrency). Investors see all the people who made money in that asset or asset class lionized in the media. These people are lauded as geniuses. Some join the pantheon of “legendary investors.”

Meanwhile, the people who didn’t make money are frustrated. They are jealous. They missed out on monster gains and are afraid of missing out on further gains. Their  emotions are further addled by the fact that some of the newly minted “legendary investors” are invariably young and/or unsophisticated. So instead of thinking critically about valuations or the timeless truth of mean reversion new investors pile into the hot asset.

If they are good at timing momentum (or just lucky) these investors might make a decent chunk of money. But often they pile in at exactly the wrong time—at the peak of enthusiasm for the hot asset. Beyond them there is no marginal buyer and so there is nothing left for the price to do except gap down. Left unchecked this behavior can wreak real havoc on a person’s net worth over time.

Another, far less common manifestation of an investing tilt is the fanatical short bet. This has killed Bill Ackman in Herbalife (I will not recount that saga here). It has also afflicted David Einhorn in Tesla. Dealbreaker writes:

Pitting Einhorn’s frigidly data-driven and Alpha-focused brain against the Church of Elon that is Tesla is inherently hilarious. Tesla stock is essentially impervious to the company’s failures. Neither analysts nor investors hold Elon Musk to his own guidance, Tesla doesn’t deliver on anything its promised, the stock doesn’t drop, and then Einhorn points his fingers and goes apeshit wondering how this isn’t working out as the greatest short position in the history of trading.

See, we’ve been warning everyone that Tesla should be valued as a religion and not as a car company. You can’t look at Tesla’s balance sheet and discern meaning anymore than you can consult The Book of Leviticus for mortgage advice. But this has not yet fully dawned on poor, numbers addict David Einhorn. And it is growing clear that his trade against Tesla is entering a dangerous early stage of what we call “Ackmania.”

As we’ve seen play out over an agonizingly long time with Bill Ackman and Herbalife, hedge fund managers can sometimes fall into a dark corner of their own souls where a short position metastasizes into a true hatred, and the stock becomes a reliquary for all that is wrong with not just the market, but the world at large. It is a form of self-harm that saps you of your energy and steals your reputation. It also allows rivals to torture you from afar.

Of course, there are also holistic benefits to not coveting others’ returns. Life is short. Why waste time and energy resenting people who have had success in the markets?


“Fail Well”

A while ago I put up a post that may have gone a little off the deep end. It likened investing to a spiritual journey and drew heavily on the example of Bridgewater Associates.

Barry Ritholtz has a neat Bloomberg View piece up summarizing some takeaways from a recent interview with Bridgewater founder Ray Dalio. I love this thinking and it is why I keep an investing journal:

Throughout the book, and in a recent conversation we had, Dalio insists the key to his turnaround was revisiting failure and learning from it. He is enamored of the framework described in Joseph Campbell’s “The Hero with a Thousand Faces.” Campbell’s book examined the evolution of mythological figures, whose failure leads to discovering new wisdom that they use to achieve their goals. Dalio wanted his failures to have the same results, so he created a broad set of rules to do so:

  • View mistakes as opportunities to improve. He calls this “mistake-based learning.”
  • Own your errors. Never hide them, but bring them forward to create a learning opportunity. His advice is to “fail well.”
  • Pain + reflection = progress. The “pain of failure” should lead to reflection, from which your wisdom derives.
  • Track what you do; keep systemizing what you learn from your mistakes.
  • There are many more principles, but this gives you an idea of some of the basics.

Dalio does things that most ordinary people don’t do. Set aside for a minute his remarkable track record as an investor and note the following unusual business behavior: He writes down and reflects on everything he does. Then he systemizes it, eventually turning these into algorithms that his firm’s computer systems help backtest against earlier eras. The end result of this is a hybrid of human creativity and machine learning that produces results better than either could separately.