Each day thereafter, I’ve read that advice. Some days twice. From Brent’s interviews, tweets, and articles, I have over a dozen pages of notes.
What follows are ten lessons I’ve taken from Brent. My commentary is minimal. It’s mostly his comments from interviews, podcasts, and Twitter. Thank you, Brent, for the lesson’s you’ve taught me. Recalling one of your favorite mental models — opportunity cost— thank you for the content I’ve avoided because I was learning from you.
1. His favorite advice
“A new acquaintance asked, ‘What core ideas helped you over the course of your career?’ My reply follows:
- Long Time Horizon: Our natural inclination is to be short-term oriented, and almost everyone is. By doing a thing that will pay off in 5 years, you’ll compete against far fewer people. Stretch it to 20 years, and there’s virtually no competition. As Jean-Jacques Rousseau said, ‘Patience is bitter, but its fruit is sweet.’
- Inefficient Markets: The more opportunity for gain/loss, the more skill matters. This is dangerous when you’re a novice, but flips to a major advantage as you approach competence, and yields incredible results upon mastery.
- Intellectual Honesty: I’ve learned that I’m almost always wrong, or at the very least not fully correct. Be willing to change your mind when the facts change. Welcome and encourage disconfirming evidence, as well as criticism. You aren’t your ideas, so never take it personally.
- Boring is Beautiful: If something seems interesting from afar, it will attract a magnitude order more and higher-quality competition, as well as participants who are disinterested in the economics. Success is a lot easier to achieve if you’re not battling the world’s smartest, most driven, or deepest pocketed people.
- Win-Win: The only long-term sustainable relationships must be win-wins. Everyone must be and feel better off. If you “pull one over” on someone, it almost always will be to your detriment.”
I’ll reproduce below what Brent’s advice was to me. It applies to all of us,
- “Be willing to grind, for a long time. Success NEVER comes overnight and most people don’t have the patience necessary. [The] grass is almost never actually greener.
- Be humble. You’re clearly intelligent and you’ll learn a ton quickly. Don’t confuse that initial burst of knowledge for anything close to mastery.
- Be kind. Business is often referred to as a ‘full contact sport.’ It doesn’t have to be, and you’ll be a lot happier if you sidestep that game.
- Continually learn. Wake up every day and try to get a little better. Knowledge compounds.
- Take notes — in all meetings, about your thoughts, about what you admire and despise, about things you would change. They’ll be gold.”
Emblazon these ten ideas on the fleshy tablets of your memory. Add in some luck, and you will be happier and more successful.
Here’s another tweet storm turned life lesson: “Asked yesterday, ‘What was the most important lesson of your 20s?’ Me: ‘Learning to assume it’s all my fault, always.’ Munger explains: ‘Whenever you think that some situation or some person is ruining your life, it’s actually you who are ruining your life. It’s such a simple idea. Feeling like a victim is a perfectly disastrous way to go through life. If you just take the attitude that however bad it is in anyway, it’s always your fault and you just fix it as best you can … I think that really works.’ It’s about acknowledging weakness (not God, or smart), cultivating self-awareness, and learning from mistakes. It’s a locus of control issue. In virtually every situation that “happens” to someone, there are feedback loops waiting to be discovered. It’s extremely rare that there’s nothing to learn, in which case you triple-check, take the lump, and move on.”
We judge ourselves by our intentions and by others by their actions. — Stephen Covey
2. A few favorite mental models
Brent references statistician George Box’s phrase often, “all models are wrong but some are useful.” Those he admires often have a checklist of big ideas they run through in important situations such as investment or partnership opportunities. Often we make mistakes of trying to keep too many mental models at the front of the fold. Instead, he’s learned three to four models usually govern a situation. The challenge is in identifying those. For beginners (and also experts), a checklist helps. Below are some of the mental models he has highlighted:
Anytime you see a system you want to ask what incentives are at play. — Brent Beshore
On culture: “Culture is probably the biggest non-financial indicator. As Peter Drucker once wrote, ‘Culture eats strategy for breakfast.’ We like to say that culture is nothing more than what you reward and punish. We’re looking for cultures that respect employees as valuable partners, and not merely as faceless cogs in a system. We love to see how conflict is handled, how decisions are made, and how new ideas get treated. Ultimately, the tone is set at the top, and so we spend considerable time trying to understand company leadership.”
In various interviews, Brent equity-like compensation schemes, arguing management should share in the upside. If you’re asking, “what is unique about his firm adventur.es?” Equity stakes allow them to take cash flow when earned in excess or if there is an exit.
On the incentive to act: Nothing is awarded in society for doing nothing. There is inherent pressure ego wise to act. Plus, there is added from the desire to show your LPs you are doing something. In private markets investing such as VC or PE, it is important to remember the long feedback loop for returns. They often take 5–10 years to generate.
- Opportunity Cost
A top five or ten mental model of his is opportunity cost. Without understanding the various forms of opportunity cost, we have dramatically suboptimal allocations of resources. Extensions of this model include competitive advantage and comparative advantage. If you can earn $100 an hour and you can pay someone $10 an hour to do something, you should pay that person 100 times out of 100 unless you enjoy that task. In practice, an opportunity cost calculation is imperfect yet necessary. It results from us having finite resources and not being able to run Monte Carlo simulations on our decisions.
The idea of opportunity cost leads Brent to conclude that you want to allocate your resources to their highest and best use at all times. In there, he finds a contradiction. You must say no at all times (an investment may outside our circle of competence, the hurdle rate may be too high, etc.) but we always want optionality by saying yes. Thus it’s a balancing act.
The truth is that making money almost always requires having money, but some business models are more capital efficient than others. I’ve watched a bootstrapped company go from zero to almost 2000 employees and hundreds of millions of dollars of revenue. That was fun. I’ve also witnessed successful companies that could only exist with huge, on-going fundraising. Neither model is correct. It’s all about opportunity costs, or what you’re giving up, and capital intensity, or how much cash the company requires to scale. — Brent Beshore
- Time horizon
The universe of people is large, and Brent finds that many look at business from a one time gain perspective. However, sustained trusts — i.e. the long term — has more true value if you study history and the game theoretical concept of tit for tat play. A logical conclusion of the time horizon mental model is where adventur.es finds their value add. He does not buy and flip or slash and burn nor does he change much. He chooses to hold indefinitely because of how seldom the stars align for the right investment.
He calls those at his fund nice and diverse in thought, yet all share in the belief that short term, one-time gains are bad.
On those he admires: “The people I admire most think long-term, see nuances, and ask questions. They consistently sacrifice immediate pleasure for delayed gratification. They don’t try to reinforce their prejudices, or world-view, but instead are intellectually curious and genuinely interested in the truth. They’re also learning machines, constantly reading, listening to podcasts, or exploring new subjects. They understand the world is complicated and rarely fits a simple narrative, leading to a comfortable humility about their own viewpoints. My favorite people struggle with life’s big questions and work hard to have an opinion, seeking to understand and appreciate the other side’s argument inside-out. They’re slow to give advice and frequently say, ‘I don’t know,’ because they’re not an expert on a given topic. But when they do offer commentary, it is reasoned, authoritative, and rightfully confident. They consistently try to gain perspective by lowering expectations, putting themselves in others’ shoes, and practicing gratitude for what they have. They don’t try to hide their unique oddities and are comfortable being themselves. They’re a little weird, and proud of it.”
3. The adventur.es opportunity set
The adventur.es Investment Criteria page offers an overview of what they seek [no emphasis added],
“We look for North American-based private companies with consistent annual pre-tax net earnings between $1 million and $10 million, and two or more of the following characteristics:
- Stable & Diversified Client Base
- Healthy Layer of Non-Owner Management
- Closely Held Ownership Looking to Retire
- Quality Brand Name/Strong Reputation
- Established Niche Expertise”
What seems simple is not easy. Here is their investment opportunity set as told through tweets,
4. Think about the customer.
To apply inversion to business, he considers the position of the customer. There is the value a customer obtains,
There is the customer’s lifetime journey,
There is the customer’s set of choices,
Invest in companies whose products or services are so relied upon that if they didn’t exist it would cause their customers a lot of pain. — Ian Cassell
And have very few substitutes — Brent Beshore
Finally, there is the mechanism for capturing value.
A good business is one where the surplus accrues to the owner. Contrary to the opinion of most, this is often not the case. It is a rarity. The takeaway is to study the capture mechanism. One of his favorite examples is the experience of Warren Buffett in textiles. As referenced in his 1985 Chairman’s Letter, Berkshire Hathaway ran faster and faster — that is they invested in new technologies — yet stayed in place — that is they earned no excess profits. This is commonly known as the Red Queen Effect. As a textile manufacturer, Berkshire Hathaway’s investment in new technology was a race to the bottom. Each textile manufacturer paid for the same new technology, which drove prices drown. The customers won. The textile manufacturers lost because they reinvested capital and saw their margins compress.
Often the lesson from consumer surplus is value creation benefits customers the most. — Brent Beshore
He cites Amazon as a modern day example. It generates massive free cash flow, chooses to reinvest all of it in growth, and returns much of the surplus value back to the consumer.
5. A simple graph is powerful.
6. Focus on what’s boring.
Early on in his career, Brent realized it’s hard to outcompete smart people, and competition matters. Therefore, he seeks the least efficient markets in the world with the lowest bar of professionalism. He “searches for the smallest hurdle out there and learns to pole vault.” Whereas comparative advantage governs which areas to look at, pole vaulting is an extension of competitive advantage. He aims to be the best in whatever area he operates in because a business captures more profits when there is a lot of value created. Little competition, lots of value created, and value available to capture is the adventur.es sweet spot.
He believes attention attracts competition. As a result, he typically avoids music, film, advertising, food, and other “attractive” businesses. That is not to say a business’s customers cannot operate in these industries. The attractive parts of the restaurant industry, for instance, are highly competitive and experience dissipations of value. He’s found many self-made, wealthy individuals earned their fortunes in mundane areas.
7. Study the past more. Forecast the future less.
When I think I’ve discovered something new I remember Goethe, ‘Ignorant men raise questions that wise men answered thousands of years ago’ — Brent Beshore
The study of history underlies his self-improvement journey. He says history is the only reliable indicator of future performance. It is 100 times the value of promises, aspirations, and dreams. So given a set of future projections or a record of historical performance, you can guess what Brent prefers.
When Brent receives information about a company for sale (typically prepared by an investment banker), he first pulls out all of the sell-side research and all of the projections. I am not exaggerating. He wants historical figures. Projections carry the risk that confirmation bias creeps in. In addition, projections often have poor assumptions. They somehow assume more growth despite the fact that a perfectly aligned owner who knows the ins and outs is selling to someone who knows less about the business.
While history doesn’t necessarily repeat itself, it sets a much firmer foundation for understanding future potential. — Brent Beshore
From an interview with Morgan Housel of the Collaborative Fund,
- “What’s a piece of commonly accepted business wisdom that you totally disagree with? Have a plan. — It’s commonly accepted wisdom that serious business endeavors are backed up by thick strategy documents and intricate financial models. My experience is that plans create tunnel vision and false confidence, reduce creativity, and encourage rigidity. At adventur.es, we’re constantly planning, but we don’t have a plan. We never model out an investment because if the math isn’t good enough on the back of a napkin, it doesn’t get better in a fancy spreadsheet.
- What do businesses put in their pitch decks that they think you’ll be impressed by but you actually shake your head at? That’s an easy one — projections. There’s an obvious and understandable bias any seller, or seller’s helper, would have towards optimism. But come on, most of the projections we see are absurd. The business has been growing at 5–8% with deeply experienced leadership that is perfectly aligned with ownership (owner-operator). But because there’s new ownership and a disruption in leadership, the business is going to start growing 12–20%? When looking at an opportunity packet, I usually just rip out the projections and throw it in the trash.”
On projections: “It’s been our experience that, generally, the bigger the opportunity pitch (hear: “Our $10 million company should be a $100 million company in five years!”), the greater the likelihood that a growth plan has been hastily assembled in an effort to get to market quickly. We listen intently to the story presented. If we hear emphasis being placed on R&D, we know to dig in on past successful product launches and projected CAPEX. If we hear emphasis on specific team members’ involvement in future success, we like to explore team dynamics. If we hear lots of references to competitors and large economic trends, we know to challenge why the presented plan will make them a differentiated competitor in the marketplace. If we hear dollar amounts assigned to growth plans and little consideration of alternatives, we know that we either need to be on board, or politely decline. We also look for inconsistencies in the story. As an example, we recently talked with an organization whose CIM said that they could easily increase revenue by further client diversification. In response to another question, they explained that they have several major clients with exclusivity clauses in place that would conflict them out of the proposed growth plan. You can market something other than reality, but the truth will generally find its way out [emphasis added].”
On financial models: Brent notes, “99% of financial models are to cover someone’s ass. The other 1% are false precision…. If I can’t do the math on the back of a napkin, the deal is a “pass.”
8. What’s risk?
In an interview with the newsletter Safal Niveshak, Brent offers his thoughts on risk, “I think about risk all the time and far more than returns. If you take care of risk, the returns will take care of themselves. Here’s an excerpt of what I wrote for Forbes on the subject:
Risk is tricky. It’s always in the background and underneath the surface, lurking and waiting. Ignore it and you’ll probably be fine — until you’re not. And when that happens, watch out, you’re likely in a world of trouble. Embrace risk mitigation and your upside will necessarily suffer. Eliminate risk and you will get between almost nothing and literally nothing, especially in today’s low-inflation, low-rate environment.
Risk is not uncertainty. It is not volatility. At its core, risk is the likelihood and magnitude of permanent loss. It is the probability of a collision between a detrimental event and a lack of planning, resulting in a permanently negative outcome of some potential size. Howard Marks said, ‘Loss is what happens when risk meets adversity.’
We look at buckets of risk for each investment and try to mitigate them to the level that makes sense based on the probability of expression and the magnitude of the potential result.”
On David Perell’s North Star Podcast, Brent says he tries to get in situations with lots of upside optionality and little downside optionality. Again, we have a simple yet challenging task (Two by two matrix forthcoming).
He proposes people are a variable one must always consider. If those who are excellent operators stay in place, continue to run the business — you trust them, and they trust you — that’s a huge downside hedge protection. That non-consensus belief opposes how he believes many view business. The lesson here is people can be a natural downside hedge protection.
Using inversion, we discover his return expectations. He looks for situations where they can “make gobs of money.” “If a 3x isn’t even possible,” he says, “what are you doing?” Combine that with Buffett’s first and second rule of investing — not losing money — there is significant, positive expected value.
You never want to lose all your chips and start again from go. — Brent Beshore
What are some forms of risk adventur.es considers? Here are a few pulled from different sources,
- “Technology Risk: What could disrupt us and what would cause our technology stack to fail?
- Competition Risk: Does the industry attract skilled and well-funded competition?
- Financial Risk: How levered is the business in terms of long-term debt, working capital, and cash flows?
- Concentration Debt: The special sauce that allows most companies to prosper is a form of human equity. It’s specialized knowledge about how a system works, or some hard-to-gain expertise, or a handful of high-value relationships. People leave, die, or get addicted to something unfortunate and go off the rails. The more concentrated this human equity, the higher the risk.
- Expectations Debt: When it comes to bringing on outside investors, or high-level employees, expectations matter. If you raise money with high expectations, very bad things happen when you don’t perform. The higher the expectations, the less your margin of error. The same goes for employee promises. Stock options can be extremely attractive, or utterly worthless. It just depends on expectations.
- Specialist Risk: Attaining fluency in one phase of contribution creates the illusion that one can do the entire process/job well.”
Ultimately, Brent notes risk is time horizon dependent. What decreases risk in the short-term likely increases risk in the long-term and vice versa. He uses cash as an example. Cash decreased in value 97% of the last 100 years. Holding cash seems risk-free over the next six months yet is prone to major risk over the next 10 years.
Take one more risk Brent is cognizant of: appearance risk — that is, “the avoidance of probabilistically wise decisions out of fear for the appearance of stupidity, and resulting consequences.” One such “subset” he dives into is “career risk, or the appearance to organizational superiors, which drives more corporate behavior than we’d like to admit.” On the downside, it prevents us from doing something we ought to do. On the upside, it keeps us acting with the herd, “regardless of sanity.”
9. The bladder problem of cash
In One Up On Wall Street, Peter Lynch explains, “the more cash that builds up in the [company’s] treasury, the greater the pressure to piss it away.” What some call the bladder theory of corporate finance, Brent calls the bladder problem of cash. It applies to individuals, colleges, charities, and beyond. This is to say the more money you have, the more likely you are to piss it away. He calls cash “the ultimate call option with no expiration date or strike price.” Could the bladder problem be true of any resource in excess? Perhaps.
On capital allocation: “Once money has been made, there’s a decision around what to do with it. That’s investing and almost all businesses, especially smaller ones, are terrible at capital allocation. I call it the bladder problem: the more money you have sitting around, the more likely you’ll piss it away. Disciplined thinking in terms of ROIC and IRR is rare, and operators need to be optimistic which harms them in allocating capital.”
Brent’s response is timeless.
The checklist concept is alive and well in Columbia, Missouri. These are filters the adventur.es team runs through prior to any investment. Few businesses pass all the way through. As noted in their 2016 annual letter, adventur.es “reviewed over 2500 opportunities, deep-dived into 330 deals, and conducted due diligence on 15 companies, of which we made 7 site visits. Two deals got close to the finish line, with one getting temporarily delayed until Q1 2017.” Through my studies, I’ve identified a few of Brent’s checklist items.
The first filter is, do we see something sustainable beyond management? How sustainable is it? — Brent Beshore
In an April 2017 interview, Brent mentioned another checklist item: strong marketing and sales. “I’ll go back to Presidential Pools. One of the areas we like to examine closely in opportunities is marketing and sales. It’s the lifeblood of any organization. Presidential had already done very well in building their brand and had experimented with a wide variety of marketing techniques, especially mass media. We were able to come alongside their team and really hone their digital presence, making it easier for customers to get in touch in whatever way was most comfortable for them. It has given the business a nice bump as customers seem to appreciate it.”
Another checklist item is “if you’re presented with a deal, ask how many smarter people have passed on it.”
In assessing management, Brent asks, what are their motivations? What is the culture — that is, what is rewarded and what is punished?
A friend of Brent — Patrick O’Shaughnessy — taught me about the concept negative screens. These are anti-checklist items — i.e. what to avoid.
We don’t compete well in auctions. — Brent Beshore
The longer Brent lives, the more he’s convinced everything’s been said before. The big concepts aren’t new. Most are in the old works. It’s the Lindy effect — that is, the longer something has been in print, the longer it will remain in print and the higher value it is. Take the Buffett letters for instance. Brent has read them four or five times in full. Each time the takeaway is different. My hope is you can read this article over and over again across many years with new lessons learned each and every time.
- Podcast appearances: Tropical MBA, North Star Podcast, Digital Exits, Invest Like the Best (1, 2, and 3), and Live Different Podcast.
- Adventur.es 2015 annual letter, 2016 annual letter, and the adventur.es FAQ.
- Brent’s writings.
- Interviews with Brent: Collaborative Fund, Axial Forum, Investment Bank, Safal Niveshak, Mixergy, and Under30CEO.
- His Twitter. It’s a treasure trove.