Something Old, Something New: What I Enjoyed Reading (and Re-Reading) in 2020

One silver lining of a homebound 2020 was having more time to read. We also moved this year, across town in Austin, which forced me to sort through my shelves and decide which books to bring to the new house and which to give away. In the process, I found myself turning over some old favorites I had not touched in many years. I opened one dusty cover and was surprised to find I still enjoyed it—even beyond the inevitable nostalgia. It seems that the added perspective I’ve earned through age and time, plus a keener understanding of today’s technological and financial disruptions, meant each re-read revealed a few previously unseen gems.

Nobody wants to read a review of old books alone, so I’ve paired three classics with some of their more modern counterparts on the same topic and provided my thoughts below. Of course, my discussion centers on what I found to be the most prevalent common themes between these pairs. No doubt there are additional lines of thinking that can be strung together on each thread—so feel free to share your take in the comments. 

Pairing #1:

The Intelligent Investor, Benjamin Graham (1972)

and

“Tomorrow’s Advance Man,” Tad Friend, The New Yorker (2015)

Reading the defining value-oriented investment text while growth stocks are soaring evokes a natural cognitive dissonance. Nevertheless, the intellectual surprise in re-reading this book 20 years later was the salience of Graham’s commentary for growth investing, and in particular, his personal experience as a venture capitalist.

Graham is famous for his role as Warren Buffett’s mentor, his concept of a margin of safety, and his allegory of Mr. Market. Of course, we all know that Graham stuck to discount stocks of asset-intensive businesses. Or do we? Here’s something you may not know about Ben Graham: He put 25% of his fund into a venture capital investment in 1948 that earned more profits for his investors than all the rest of his investing combined[1]. That venture capital investment was the purchase of a 50% stake in GEICO right around the time he was finishing the writing of The Intelligent Investor. Yes, that GEICO—with the football commercial gecko, still saving people money on car insurance.

“Ironically enough, the aggregate profits accruing from this single investment decision far exceeded the sum of all others through 20 years of wide-ranging operations in the partners’ specialized fields, involving much investigation, endless pondering, and countless individual decisions…. But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplined capacity. One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door. One must have the means, the judgment, and the courage to take advantage of them.”

The modern venture capital investment credo now recognizes the power-law nature of early-stage investing. Many have written on this topic, and while more a novella than a book, a profile of Marc Andreessen written by Tad Friend in The New Yorker several years ago makes the point succinctly:

“Over twenty years,” [Marc] continued, “our returns are going to come down to two or three or four investments, and the rest of this”—his gesture took in the building full of art, the devotions of more than a hundred eager souls, even the faux-Moorish rooftops of his competitors down the road—“is the cost of getting the chance at those investments. There’s a sense in which all of this is math—you just don’t know which Tuesday Mark Zuckerberg is going to walk in.”

So, Marc Andreesen would heartily agree with Ben Graham—and has worked hard to make a16z “sufficiently established and recognized so that these opportunities will knock at his particular door.”

Graham only discloses this huge GEICO gain at the very end of the book, and his discussion of it sounds almost confessional to me. It feels as though the GEICO experience is outside his framework, even though the book discusses growth investing, especially opportunities due to the “rapid and pervasive growth of technology.” He hits this point exactly earlier in the book:

The investor cannot have it both ways. He can be imaginative and play for the big profits that are the reward for vision proved sound by the event; but then he must run a substantial risk of major or minor miscalculation. Or he can be conservative, and refuse to pay more than a minor premium for possibilities as yet unproven; but in that case he must be prepared for the later contemplation of golden opportunities foregone.

Did Ben Graham perhaps learn how to “have it both ways”? I think he did.

 Pairing #2:

Competitive Strategy, Michael Porter (1980)

and

Zero to One, Peter Thiel with Blake Masters (2014)

Frankly, it feels like bragging to say you’ve read all of Competitive Strategy once, let alone twice. The ambition of the book and the author is to provide a universal framework and then demonstrate its application across virtually every possible business situation. As a result, it can at times read like a 40-year-old textbook, but Chapters 9 and 10, on Fragmented & Emerging Industries, are more than worth the price of admission.

In technology, reviewing pitches for new products and market entry are a frequent part of the job. Many of the pitches justify themselves along these lines: This is a rapidly growing, huge, addressable market where the established players are making a ton of money – Q.E.D. Well, not so fast.

Porter writes:

“Too often firms enter emerging industries because they are growing rapidly, because incumbents are currently very profitable, or because the ultimate industry size promises to be very large.”

Those are not sufficient, and he explains why.

Roll-up strategies and add-on acquisitions are also a critical part of our investment practice. Again, too often the argument is made that, because this industry is fragmented, it will consolidate. Porter points out conclusively why some fragmented markets will remain forever so, and why some which should consolidate are “stuck” in a non-optimal equilibrium and can remain there for a lot longer than any PE Fund investor can stomach.

It is bracing to read Thiel’s Zero to One on the heels of Porter—especially Chapter 4, “The Ideology of Competition.” Porter’s claim is that “every firm competing in an industry has a competitive strategy, whether explicit or implicit.” For Peter Thiel, however, competition is just a concept, or “the ideology – that pervades our society and distorts our thinking.” For Porter, qualitatively understanding the competitive environment enlightens managers and allows them to respond intelligently to preserve and guide their businesses. Conversely, Thiel looks for that which does not exist in Porter’s world: areas without competition. Why? Because for Theil, in any area with competition, “the more we compete, the less we gain.”

Thiel’s book is a terrific read, and his start-up examples demonstrate the binary nature of success, a refreshingly modern contrast to the linear/analog examples from Porter’s 1970’s examples. I found lessons in each for the established businesses we work with, all of which are adapting to the new opportunities created by the disruptions of 2020.

 Pairing #3:

The New Economics, W. Edward Deming (1993)

and

Measure What Matters, John Doerr (2017)

As one of the most remarkable thinkers of his time, W. Edwards Deming was once a household name. His writing and teaching on quality led him to Japan in 1950, where his approach is widely credited with spurring the Japanese economic miracle of the 1950s and ‘60s. In fact, his influence was so great that leading Japanese scientists and engineers named their premier industrial award the Deming Prize, which is still awarded today as the Nobel equivalent in the field of Total Quality Management.

Deming wrote The New Economics at the age of 93; it was his last work, published in 1993. The book begins: “A new world: Information flows.” He wrote about being a knowledge worker, and to my reading, he was a student of systems design and system thinking. One of his most insightful statements reads: “Best efforts and hard work, not guided by knowledge, only dig deeper the pit that we are in.” In that sense, the book poses more questions than answers for me, but they are the right questions.

I find it particularly intriguing how Deming’s ideas flow through subsequent leaders. Intel CEO Andy Grove, for example, was definitively influenced by Deming, as reflected in his book High Output Management. I had the incredible good fortune to have Andy Grove as a professor at business school, and his book is one I now give to everyone at our firm. We adopted our 1:1 practices directly from him. At that same time, I was interning for a company called LoudCloud, whose CEO Ben Horowitz, now famously co-founder of a16z, was also part of this intellectual thread, evidenced by his writing the introduction to the most recent edition of Grove’s book.

More recently, John Doerr wrote Measure What Matters, detailing extensively the origin of the OKR framework in Grove’s Intel experience. OKRs went on to be used as the organizing management principle of Google (per the book’s forward by Larry Page), the Bill & Melinda Gates Foundation, and many others. On a personal note, we adopted the OKR within our firm this year, and have also introduced it to our portfolio companies, with about half having adopted the process already.

The transmission and adaptation of Deming’s ideas would look something like the chart above. It’s a bit strange to sequence this way, since there are contemporaries who overlapped in similar circles. (Bill Gates writes that he had watched both Andy Grove and Japanese management examples, but did not introduce OKRs until after John Doerr’s recommendation.) To me it is a fascinating history of an idea, connecting an enormous number of leaders across different fields, and—to put my cards completely on the table—an approach where I, too, am a believer and (though with much improvement still needed) a practitioner.

 As mentioned above, these are just some of my thoughts on these works; much can still be extrapolated by others or in future re-readings. And as always, I welcome your insight, too.

[1] Graham, Benjamin. The Intelligent Investor, p. 533.