Conviction and Randomness.

Today I thought about…..Conviction and Randomness.

Continuing down the train of Peter Thiel talks, I highly recommend this particular one he gave at SXSW. The big takeaway for me was on a 2x2 matrix he drew with optimism/pessimism on one axis and determinate/indeterminate on the other. As an optimist, my attention was primarily focused on the difference between a determinate and indeterminate optimist. 

After the video, I sat thinking…and was a bit confused as I tried to interlock it with teachings from Munger and Taleb. As I write this….in some ways….Taleb, Munger, Thiel, Sivers, and Ravikant may be the philosophers of the 21st century. At the very least, they have unique thoughts that make me wonder if any of my thoughts are truly independent.

Let’s see what I think. 

Simply, a determinate optimist will invest with conviction. The indeterminate optimist will invest in a portfolio-approach due to a belief in randomness. Thiel refers to this difference as the determinate believing in calculus while the indeterminate relying on statistics. 

This reminds me of what Ben Horowitz said about entrepreneurship, how an entrepreneur needs to see things as a calculus problem. Why? Because if one viewed things statistically…you would not be an entrepreneur since you’d have a <10% chance of success. Hence, entrepreneurship is more akin to calculus where you need to be determined in solving the problem. 

This brings into question the lean startup model. I’ve never read the book but I understand the basic premise from Eric Reis is that it’s carving a path forward with many A/B testing iterations. Some say this A/B testing model was pioneered at Facebook’s Growth team by Chamath Palihapitiya. Does that make the overall approach credible? I don’t know…maybe it doesn’t matter. 

Most startup CEOs I’ve spoken to have been big proponents of the lean startup model. Then, I heard Keith Rabois say he thinks it won’t work for VC-backed startups. Another inkling of a contrarian view that tied into this questioning of whether the lean startup model really worked if one was not deterministic.

In many ways, the future is random. 

You can’t predict how the world and its many factors will change/evolve over the next month, year, etc… I agree with this outlook on forecasting. Accuracy falters the longer you lookout. 

But it seems that one needs to have a view. Of course, you can’t chart out exactly how your life/plans will go. I threw out my life plans I set out at ages 14, 19, and 22. I think I eventually learned set paths really don’t pan out once you enter the real world. 

Conversely, I’ve met many who like to take life as is. Take things as they come and let it happen to them. There is no thought on what they want to do….it masquerades as a sense of being ‘present’ but I think it showcases a shallowness of thought. Such actions may represent the indeterminate optimist. But I digress….it’s just a quadrant I seem to not relate with. 

The indeterminate optimist highly values chance/luck as the belief is you can’t control the external factors. But you will invest (time, money etc….) because you are optimistic but you believe everything is random so you’ll just let the world take you along the ride. It’s the index investing approach. In the realm of investing, if one doesn’t have a view but is optimistic about the future…then yes this makes sense. 

So, as a picker of companies…this would mean I would need to have the conviction to be an optimist who has a determinate view on the future. Now, I believe it’s sensible to never think I can predict the future. However, I also think it’s stupid to pick individual companies without any view on the future of these companies. Of course, you can be wrong but you are very aware of that by picking stocks. 

This is when Munger’s advocation for three stocks being the only diversification you need rings loud in my head. I can’t just take this as gospel but do I dare disagree with the master investor? 

I think the ‘compass’ view is applicable here. Yes, I cannot set out the exact course for my future but I can set a goal. Some kind of vision for what I’m aiming to achieve. I don’t know what it specifically looks like but there is an opinion there. So I set a compass and set course to that approximate direction. 

I imagine this is what Bezos, Jobs, and Zuckerberg had in mind. 

I don’t think Bezos planned for AWS to be the cash machine funding his e-commerce domination. I don’t think Jobs planned for Apple to make ~70% of its money from selling phones. But I do believe they all had determined views on happening to the world rather than the other way around.

So, by default, they could not have searched blindly for randomness….like those who say they want to be entrepreneurs and seek out random problems. It might work for a while but I don’t think it’s a sustainable approach. 

But when making decisions to start/kill new projects, I think an element of A/B testing is required. Now, the question of when to stop and kill the project is another hard question. Because I think when Tencent had a team work on WeChat…it was not working for a while and they had to constantly pivot around and some didn’t believe in the project. It only worked because they had a champion who pushed through with a determinate view. I’m blanking on his name…..

A simple view on 'speed and killing things that don’t work immediately" may not be the answer. The project needs to have a believer with a determined view to keep it going. Much like an entrepreneur to the whole company. 

This makes me believe the ‘fail fast’ idea is quite flawed and it won’t lead to building anything worthwhile and/or something that will last. Possibly, the time to give up might be when external circumstances force you or you no longer believe in the original view you had.

So….it’s not about random testing for ideas, it’s not about failing fast. Rather, one needs to have a determinate view in order to materialize anything that may have some inference to luck/chance/randomness. But, it truly isn’t random or blind luck if it can be tailored to a view. 

If Bezos wanted to run an ice cream truck but some guy randomly gave him an e-commerce company to run and sell books.. that would be luck.

Now, tying this to investing….. 

Whether it’s investing time or money, I don’t believe anything material can be achieved without a determinate view. Tilting this to stocks, a common view is that Munger can invest in only three stocks because he is Charlie Munger and that most of us aren’t. That is true. 

However, if one is not seeking to obtain an absolute return of some 20%+ per year (or some other high number)… then what is the point of picking individual stocks? It’s not like some scientific research where you are pushing the bounds of humanity and a lack of financial reward is secondary to the value you’ve given to the human race. 

So, to achieve material returns…would holding a handful of investments make sense? Well, it does if they are not only the ones you have a determinate view on but also if that aligns with what happens to the world. I previously wrote about how I think an investing truth is that a handful of companies will provide most of the outperformance. 

My thought then was to take the VC approach of having a tail portfolio of possible ideas I didn’t have strong views on and slow make the possible 1 out ~20 into a major position. The idea is that by holding it in my portfolio, I would be incentivized to think about it more often…to have it take-up mindshare. The goal would be to have 3-5 positions amount to some 80% of my portfolio while having a tail of some 20 make up 20%. 

This might be the iterative process that is embedded in the determinate view. I think this makes sense…..until it doesn’t anymore. 

The prudent thing…at least for me….. would be to continue down the line of having conviction. Knowing fully well that I can be wrong but….also bearing in mind that I will most likely have to ignore the statistics that I will be wrong if I am to have such a view on the world…. Because outsized results don’t seem to happen when the odds are stacked in my favour (at least when all things are equal).