Quote of the week:

“The theory of increasing returns does not destroy the standard theory—it complements it.” (Source)

The five-year valuation question Buffett likes to ask

“During one of Todd Combs and Warren Buffett’s famed Saturday afternoon living room chats, the two posed the following question as a means of valuation: If you take a business, what is your level of confidence in predicting what it looks like in five years?”

This excerpt comes from a recent conversation between Todd Combs and Michael Mauboussin. The dialog offers several insights—some quite new to me—about how Warren and Charlie create mental models for their valuation approaches, how they think about structuring corporative incentives, and much more. 

“Combs recalled the first question Charlie Munger ever asked him was what percentage of S&P 500 businesses would be a ‘better business’ in five years. Combs believed that it was less than 5% of S&P businesses, whereas Munger stated that it was less than 2%. You can have a great business, but it doesn’t mean it will be better in five years. The rate of change in the world is significant, which makes this exercise difficult, but this is something that Charlie, Warren and Todd think about.”


How writing (and re-writing) leads to smarter ideas

This week, a friend sent me this 1973 Harvard Business Review article that presents an illuminating idea: “Rewriting is the key to improved thinking,” writes author Marvin Swift. “It demands a real openmindedness and objectivity.”

Swift was talking about writing in the context of managerial approaches—e.g. the type of mental clarity on display in Jeff Bezos’ (in)famous long-form memo approach. But I think the idea is more broadly applicable… writing and re-writing around important decisions forces the individual (whether they are an investor, entrepreneur, executive, etc.) to concentrate on their best ideas.

Rewriting, Swift says, “demands a willingness to cull verbiage so that ideas stand out clearly. And it demands a willingness to meet logical contradictions head on and trace them to the premises that have created them.” He continues:  

“In short, it forces a writer to get up his courage and expose his thinking process to his own intelligence. Obviously, revising is hard work. It demands that you put yourself through the wringer, intellectually and emotionally, to squeeze out the best you can offer. Is it worth the effort? Yes, it is—if you believe you have a responsibility to think and communicate effectively.”

A few more links I enjoyed: 

“Over the past decade, Cloudflare has built a global network that has the potential to become the fourth U.S.-based hyperscale-class cloud. In our view, the company is building a durable revenue model with hooks into many important markets. These include the more mature DDoS protection space, but also extend to growth sectors such as zero trust, a serverless platform for application development and an increasing number of services such as database and object storage.”
“In some fields our knowledge is seamlessly passed down across generations. In others, it’s fleeting. To paraphrase investor Jim Grant: Knowledge in some fields is cumulative. In other fields it’s cyclical (at best). There are occasional periods when society learns that debt can be dangerous, greed backfires, and more money won’t solve all your problems. But it quickly forgets and moves on. Again and again. Generation after generation.”
“The religion scholar James P. Carse wrote that there are two kinds of games in life: finite and infinite. A finite game is played to win; there are clear victors and losers. An infinite game is played to keep playing; the goal is to maximize winning across all participants. Debate is a finite game. Marriage is an infinite game. The midterm elections are finite games. American democracy is an infinite game. A great deal of unnecessary suffering in the world comes from not knowing the difference.”

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