The Chomp #035

Avoiding stupidity, the rise of SPACs, and more...

Hey Everyone,

Welcome back to The Chomp—your weekly dose of the best content from the internet and beyond, designed to expand your mind and get you thinking. Let’s dive into it.

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Quick Bite

• Avoiding Stupidity: This is a new piece I put out on Friday. You can read it on a separate page by clicking the link.

  Back in high school, I was a pretty good tennis player. During my sophomore year, my team won the NJ Group II State Championship and advanced to the Tournament of Champions. In our bid to run it back the next year, we lost a nailbiter one round earlier in Central Jersey Group II Championship.

  At that point in my tennis career, I was able to go out on the court and consistently win points. To beat the best opponents I faced, I had to actively beat them—I couldn’t rely on just trying to keep the ball in play. The final outcome of each point was typically determined by someone winning the point, not losing it.

  Nowadays, I play a lot less tennis. While I’m not quite washed up, I’m a long way off from my glory days. Yet, when I go out on the court, my brain likes to think I’m as good as I used to be. I still try to control the point and am always looking to hit winners. Sadly, I don’t have the same success that I once had. My game is now riddled with unforced errors.

  Rather than winning points, I’m losing them. My opponent isn’t beating me—I’m beating myself. Any wise opponent who faces me these days should realize this. If they do, it becomes clear that to beat me they just need to avoid losing. If they adopt a strategy of keeping the ball in play and avoid making stupid mistakes, I’ll likely be too aggressive and will end up making my own.

  

  While I can’t seem to adopt this strategy in my own tennis game, it’s one that I’ve found immensely helpful in other areas I don't have expertise in. This strategy of playing not to lose is derived from one of my favorite mental models. It’s a relatively simple model, but one that’s incredibly effective—especially in situations where you’re not a professional. Avoid stupidity rather than seeking brilliance. Put another way, rather than trying to win, avoid losing.

  Following this model, I’ve found that I’m much more likely to be successful in most aspects of life if I just avoid making stupid mistakes. Unless you're operating at an elite level, playing not to lose can often be the best path to winning. This is true in business, sports, politics, and even war. There is a great quote from a military general who once said, “it's not that good soldiers become veterans. It's that lucky soldiers become veterans, and veterans are good soldiers.”

  Putting It to the Test

  Charlie Munger, Warren Buffet’s longtime business partner, has long advocated the usefulness of this model. Many years ago, when Munger was the Chairman at Wesco Financial, he wrote the following in a letter to shareholders:

  "Wesco continues to try more to profit from always remembering the obvious than from grasping the esoteric. … It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, `It’s the strong swimmers who drown.’

  In the startup world, the most successful executives are often those who have managed to survive long enough to become good leaders. They focus on just staying alive and figuring things out along the way. By avoiding stupid mistakes, they increase their chances of eluding a final resting place in the startup graveyard.

  Back when Paul Graham was running Y Combinator, he once said YC expected about a third of the companies they funded to succeed. Maybe 50% on the optimistic side. With this in mind, PG told a group of founders in a new YC cohort one summer the following:

  “If you just avoid dying, you get rich. That sounds like a joke, but it's actually a pretty good description of what happens in a typical startup. It certainly describes what happened in [his startup] Viaweb. We avoided dying till we got rich.”

  Charlie Songhurt had another great way of saying this in a recent interview he did on Invest Like the Best. When describing how companies can succeed, he said:

  "If you're sort of thinking of history, trying to be as good an Emperor as Augustus would be really difficult, but not being as incompetent as Caligula seems really easy. And so as a practical advice, not making the catastrophic mistakes and just surviving long enough feels like a good strategy."

  The more you look, the more examples you'll find of successful founders and companies that follow this approach. If you look back on the career of Jeff Bezos and Bill Gates, they didn't always have an aura of greatness around them. In 1999, Jeff Bezos was working out of a single room office with an Amazon.com logo spray-painted on the wall. Through staying alive, and avoiding stupid mistakes along the way, he was able to set himself up for greatness.

  

  Putting It to Use

  While avoiding stupidity sounds pretty straightforward on paper, it’s not always easy to do in the real world. Oftentimes, we don’t realize something is stupid until after we do it. As humans, our stupidity filters get clouded pretty easily. Keeping them clean can be a challenge. To make it easier, you can bring in the mental model of inversion for backup.

  Simply put, the model of inversion is thinking about something backward. Rather than thinking about why something will work, you think about what might make it fail. By using inversion you're forced to consider different perspectives. This almost always leads to a better understanding of the situation or problem at hand. Used in tandem, these mental models forge a great weapon to have in your arsenal.

  Whenever you find yourself in a situation where you’re not an expert, remember that it’s much easier to avoid stupidity than it is to seek brilliance. Playing not to lose can often set you up to win. Maybe someday I’ll accept that with my tennis game.

  H/T to Farnam Street for introducing me to this mental model a few years back

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Deeper Dive

• SPAC Attack: Everything a Founder or Investor Should Know: “Between direct listings and SPACs, banks will no longer be the sole gatekeepers of what goes public. And the SPAC sponsors may shift from structure-oriented PE firms to tech-forward VCs – there are natural synergies given late-stage VCs’ synergies with their existing portfolio companies and access to the best companies. I view this as an inevitability as VC firms build out an array of products to support companies throughout their entire lifecycle – a critical leap towards building Sand Hill Sachs.”

  In the world of investing, summer 2020 will go down as the summer of SPAC. Everywhere you look it’s SPAC this and SPAC that. To date in 2020, according to SPACInsider, a total of 50 SPACs have IPO’d and raised over $19B. At the current pace, we’ll see more capital raised via SPACs in 2020 than 2017, 2018, and 2019 combined.

  If you’ve been following the headlines and are a little lost in all this SPAC hysteria, you’re not alone. At its core, a SPAC (Special Purpose Acquisition Company) is an alternate route to taking a company public. Stripped down, a SPAC works like this:

  1. A shell company is formed

  2. Shell company raises money from investors and immediately IPOs

  3. This now public shell company finds a late-stage private company and merges with them at an agreed-upon price

  4. The late-stage private company is now public

  SPACs have been around since the ‘90s, but they’ve traditionally been the black sheep of financing vehicles. So why are they suddenly all the rage?

  In this primer on SPACs, John Luttig of Founders Fund gives the clearest overview and breakdown I’ve seen to date. He explores how SPACs function, why they’ve become so popular, and what their future might look like. I highly recommend giving this a read if you’re not yet well acquainted with them.

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Tweet of the Week

Steve Magness @stevemagness

If you could bottle up sleep and sell it as a performance-enhancing drug it would be a billion-dollar blockbuster.

Song of the Week

Apple Music Link

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Books

Currently Reading

Recently Read

• In The Decadent Society, Ross Douthat drills deep into a topic I’ve spent a lot of time thinking about and commenting on over the past year. He pulls back the curtain on the current state of our society, which in many regards has hit a plateau. Due to a combination of wealth and technological proficiency, tied with political stalemates and economic stagnation, our pace of advancement has slowed to a trickle. Douthat offers an excellent diagnosis of how we got here and why we’re stuck at a standstill. While he doesn’t offer a perfect solution for leaving our age decadence behind, he does offer a range of explanations for how it might end. This is a worthwhile read for anyone interested in the driving forces behind societal change. (4/5)

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Parting Thoughts

This Week in History

• On July 20, 1969, the Apollo 11 Lunar Module, Eagle, landed on the moon. Upon landing, Neil Armstrong muttered the now-famous phrase, “The Eagle has landed.” He followed that up a few hours later with the even more famous phrase, “That’s one small step for man. One giant leap for mankind.” (Source)

“Live for others if you want to live for yourself.”

—  Seneca

If you found something that piqued your interest this week, please help me out in expanding the reach of The Chomp by forwarding it along to a friend or sharing it with others in your network. Until next week.

-CM