18 | Investing as a Business, Creative Research, and Nadiem Makarim

if you don't enjoy the game it's gonna eat you

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Heya, CbK #18 here. As always, I’m keen to share what I’ve been reading, learning, and compressing. But first, a quick section from Rework:

Start making something

We all have that one friend who says, ‘I had the idea for eBay. If only I had acted on it, I'd be a billionaire!’ That logic is pathetic and delusional. Having the idea for eBay has nothing to do with actually creating eBay. What you do is what matters, not what you think or say or plan.

Think your idea's that valuable? Then go try to sell it and see what you get for it. Not much is probably the answer. Until you actually start making something, your brilliant idea is just that, an idea. And everyone's got one of those. Stanley Kubrick gave this advice to aspiring filmmakers: ‘Get hold of a camera and some film and make a movie of any kind at all.’ Kubrick knew that when you're new at something, you need to start creating. The most important thing is to begin. So get a camera, hit Record, and start shooting.

Ideas are cheap and plentiful. The original pitch idea is such a small part of a business that it's almost negligible. The real question is how well you execute.


Here’s the format of today’s email:

  • Part 1: Investing as a Business

  • Part 2: Creative Research

  • Part 3: Under the Spotlight: Nadiem Makarim

  • Part 4: Bonus Quirky Content - Something to Read, Watch, and Listen.


Investing as a Business

In a previous life, I worked at a quant fund (legit employee #2), and my boss always echoed eerily similar thoughts to a few of the sources that’ll get mentioned below. The fund had the returns and the track record, but it was just pushing shit uphill to get money in the door. Investing personally is fun. Investing as a business can still be fun, but has a lot of baggage.

How I Started My Hedge Fund by Dan McMurtrie [22 mins]

This video is a gem for anyone thinking of starting a hedge fund. Doesn’t detail specifics and minute details, but gives a great overview. I could honestly quote this whole video almost, but had to stop myself!

Going into launching a fund you need to understand that for the first few years at least, at least three or four years you're in business building mode, you're taking no money home, and even if you have a lot of carry in depending on how much capital you start with you should be reinvesting all of that into the business, and you need to be building out redundancies upon redundancies upon redundancies. […] Hedge fund guys think about hedging the downside but when you're running a business you have to hedge the upside. What if you have a good year or you get featured somewhere something and you have 50 or a hundred inbounds and you have to field all those? People take it personally if you don't respond or you don’t follow up.

Interesting tidbit that the hedge fund business is kind of is a situation where you probably should care what other people think of you…

Once you start launching, your ability to raise assets and also to have durability during volatility is really based on what people think of you. It's not a quantitative process

If they think you're really smart and you're gonna bounce back, they're gonna stick with you generally speaking. And so if you have not shown the social ability prior to launching your fund, to build a network where you could raise over ten (million), you are not just gonna develop that immediately.

Again, the below quote is a similar experience to what I saw. People promise the world and deliver peanuts.

When you reach out to people, maybe 10% of them are interested in what you're doing, maybe. But other people they actually talk to you of the people who say they're gonna give you money maybe 10 percent are gonna give you money.

So we had 10 million that said they were gonna invest when we launched we launched with 3. And some of the people who didn't invest were the people that I had the closest personal relationships with and who I'd already made money for.

His thoughts on potential clients gave me a good laugh. Insert Morgan Freeman ItsTrueYouKnow.jpeg

I've actually never had a problem with the client but potential clients can be the worst human beings on the planet and you got to be prepared for some really odd and bad behavior

As Naval would say, play long term games with long term people.

If you're an actual long-term player, being a nice person and being a helpful person in connecting people and doing so, favors cost you nothing and being nice cost you nothing. It is the dominant long-term strategy and so many people worried about getting ahead they don't realize they're just selling puts on themselves

Weekly pro-tip: don’t be a dick and don’t do unethical shit! Yada-yada, common sense ain’t so common!

The number of people who stay in this business for any extended period of time is very low, most people leave and also if the world becomes really small. everyone knows each other and if somebody says you're a dick you or you have a big problem. Being a dick is one thing, but if anybody ever you know even if it was your first day of being a banker if you ever do anything unethical it is going to be an insurmountable issue for your career, I really don't know how (you overcome that.)

Last quote from the video, and a great point to finish on:

I don't think I've had like a day I didn't think about work since a year before launch and if you don't enjoy the game it's gonna eat you there's just no way around that

Attempting the Impossible [Link]

This article was what inspired the topic (and I think kicked off all the chatter on Twitter?). It’s such a great, realistic, and down to earth breakdown of what’s involved and what to expect. No B.S, just to the point. It’s a slog and it ain’t all models and bottles.

The business solves the customer’s problem and maximizes wealth creation for the owner. The practice serves the customer in a way that reflects the uniqueness of the practitioner, their process and personality. The business’s natural drive is to grow and generate cash. For the practice, it is to allow the owners to practice their craft in service of the client.

Neckar’s Advice?

  • Have clear motivation and goals: Why are you doing this? What’s your definition of success?

  • Seek advice and listen: Don’t be a hero. Seek out those who have navigated the path before you and listen.

  • Understand your customers: Figure out the process of how allocations really get made. You should understand the different types of investors and their internal constituents and processes if you intend on selling to them.

  • Figure out your strategy: What is your (business) edge? How can you get endorsements and referrals? Your network is probably your most important edge.

  • Manage expectations: Mentally prepare yourself for a lot of rejection. Build support mechanisms to pick you back up when it happens.

  • Maximise shots on goal: Survive. Don’t count on unpredictable factors such as near-term performance or that one big check to bail you out. “To finish first, you have to first finish.”

Final thoughts on running a fund…


Creative Research

Assuming you don’t just buy ETF’s on autopilot, everyone has a research process. And the more creative the better I reckon. So thought it may be worthwhile to show some weird, wacky and wonderful research processes. It highlights what I love most about investing, that there’s no single ‘correct’ way of doing it. Play to ya strengths. Do obscure shit. If it’s stupid and it works, it ain’t stupid.

Reddit [Link]

This Reddit thread is a goldmine.

Company #2 - a semiconductor business doing ~$800m of sales told their investors they were going to do additional $150m of new revenue based on the release of the new Microsoft Hololens. The stock quickly doubled on this bullish guidance.

Company's math was that Hololens would sell ~1m units in the first year, and they have $150 of content in each device. That's ignoring the fact that if they sold 1m units, that Microsoft would demand volume discounts on their chips/content.

So what did I do? I signed up for the Hololens purchase waitlist to see what my place in line would be to get one. Best part was I didn't even need to put money down to join the waitlist. I was part of the 3rd wave of orders (i.e. pretty late in early release phase), and I was probably order #10,000 or 20,000? My mouth dropped as we were already halfway through the year and it would take months just for these orders to fill.

I realized there was no way they were going to meet their estimates - and shorted the stock. Went down ~40% or so from there and they missed REVENUE guidance by ~20%.

And some good old fashioned, nitty-gritty research. What I love about the below method is that honestly, anyone can try it. You don’t need to be a super genius with great intuition, just a bit of gumption and you’re on your way.

One company which was trading at all time lows , had a significant chunk of real estate on its books. I dug up the values assessed up county office for all the properties , spoke to few realtor and did a very basic back of envelope math to come up with a starting number. Adding up cash reported on balance plus estimated real estate value, stock was trading at 60% of that estimate. Went long and stock went up 130% in less than 5 months.

Cottoning on to Retailers’ Apparel Prices [Link]

Not crazy creative, but just some solid research and work!

The retail team at Wells Fargo looked to determine the impact of a 20% drop in cotton prices over the past six months on apparel companies. For that, it used an ordinary kitchen scale.

Wells Fargo weighed a short-sleeved graphic T-shirt, a hoodie and a pair of denim jeans […] to figure out the value of the cotton in each. A pair of American Eagle jeans, for example, weighs 1.4 pounds and sells for $34.30.
At 63-cents-a-pound, the value of the cotton is 86 cents, versus $1.04 a year ago when cotton cost 76 cents a pound -- a savings of 18 cents.

Cheaper cotton should generate an average benefit to gross margin, across all three clothing items, of about 0.58 percentage points, the bank found. But the bottom-line gain wouldn’t be as large. The retailers sell non-cotton items. They face rising costs for labor, transportation and safety standards. And many companies buy fabric, not raw cotton. Any of these factors could easily wipe out the benefit.

Reddit (again) [Link]

Another case of the sequel not being as good as the original, but still worth a quick geez.

Not sure I’d call this creative vs just laboriously reading a bunch of SEC filings, but about a year or so back there was this random little Asian business called eHi Car Services that I stumbled upon when reading through some take-private filings. What caught my attention was that it was a fairly old filing (filed like 6 months prior) but the company was still public, whereas most other deals would have typically closed by then. I read some more and turned out that the founder and major shareholder had tried to take the company private but a group of major shareholders blocked the proposal. The spread on the take private was like 15% (reflecting failed attempt one) so I was pretty interested at this point. I read every document filed subsequent to the failed take-private and came across a voting agreement btw the 2 shareholder groups that stipulated that both groups would vote in favor of the next take-private proposal. I then found out the total ownership interests of each of the 2 groups of shareholders and determined the combined ownership (+ ownership by index funds, which I figured would vote the same as mgmt since that is pretty typical) was high enough that the proposal could not be blocked and put basically all my liquid assets into the stock (it still traded @ a 15-20% implied spread to the offer price). The offer went through without a hitch about 3 days later so my annualized return was something like 1800%. It was definitely the closest thing I’ve ever had to a free lunch.

This one would be my favourite personally. And so easy to do now with Google Street View!

Visit the home office to see if they're blowing money on extravagances

The dumpier the better.

But then, a comment explains that the inverse may be true for tech companies. The better the facilities, the better the cash flow and funding. 🤷


Under the Spotlight: Nadiem Makarim

Each week I provide a little spotlight on an investor or operator I admire. Nadiem Makarim is this weeks focus, in a nutshell:

  • Born in 1984 in Singapore, his father a well-known lawyer in Indonesia, who was also an activist in his youth. Meanwhile, Nadiem's ​​mother, Atika Algadri is the son of Hamid Algadri, one of Indonesia's independence activists.

  • Early education was in Indonesia, high school in Singapore, then BA at Brown University in the US. After graduating from Brown he worked at McKinsey for a few years back in Indonesia.

  • Started Gojek in 2011. Which basically started as a call centre for booking scooter rides. Nowadays Gojek is a super-app and Indonesia's first decacorn. What is Gojek? See my below BizCard.

  • Nadiem is now the Minister of Education in Indonesia and is the youngest minister in Indonesian history.

one of the biggest learnings for me personally was that engineering is not a production center. It is not a cost center. It is in fact of value generative center, which means that harnessing the creative, the collective creativity of an engineering department is one of the most powerful forces that, to be honest, we did not harness in the beginning because we had that mindset [that engineering is a factory] 

Gojek’s ride to the stock market [Link]

Gives a great overview of Gojek’s early days and what inspired Nadiem to launch it. Interesting thoughts on how different consumer segments play in spurring growth in the digital economy

Higher-income groups, despite making up a smaller proportion of the population than lower-income consumers, are set to spur growth in the digital economy through their use of mobile apps. In turn, the middle-income group – which consists primarily of consumers, merchants and providers of services – are able to capitalise on increased smartphone penetration rates and growing interest in apps, particularly as household incomes rise. Lower-income consumers, meanwhile, are likely to benefit from widened financial inclusion as a result of the services provided by financial technology (fintech) players, particularly for those who are excluded from the formal banking system. It is within this particular consumer group that the fastest growth has been experienced in the past few years.

Nadiem Makarim on High Flyers [Link]

Speaks about how the first challenge was getting their first 20 drivers. Getting the next 200 drivers was easy because they already had those drivers. Like this newsletter really, getty my first 100 was extremely difficult and took a while. And now it’s up to a smidge under 600 and growing like I can’t believe! #humblebrag

What consumer technology does is that it basically takes idle capacity and makes it productive. Now not only have we kind of transformed the industry in Indonesia, we've reduced the price by like one third to half of what it was before. But still earn drivers double of what they earned before. So that's a very fascinating dynamic. That's that's a typical positive effect of efficiency.

Drivers can earn more because you're utilizing more of their time. But at the same time, the price of the consumer drops which in turn increases the market size of the product again. Which is this kind of positive cycle increasing the market size. So the market size for Ojek rides since Gojek came has like exponentially increased.

Nadiem Makarim on Managing Asia

I can’t actually find the full episode to this one? Can only find the transcript. So if anyone can point me in the right direction,

We love to be either counter-intuitive or slightly counter to prevailing beliefs and when we began everyone told us that you have to be only good at 1 thing, because if you’re not super good then no one will use your product or other people will come and circumvent you with better technology, more money etcetera.

But I think the mindset that we had in the beginning is that a customer is not a ride-hailing customer, a customer is not a food delivery customer, a customer is not an e-payment or an e-wallet customer, a customer is just a customer. He or she is a human being with day-to-day problems, and we built a product around the frictions that an average person experiences in their day to day life. We are a platform that fixes things, we make things more efficient

Always admire successful people that attribute some of their success to luck.

We cannot ignore the role of luck [in Go-Jek’s success], because if you constantly attribute all of your success and everything to yourself that’s when people start going downhill and failing at a lot of things because of hubris. You have to be constantly grateful that there are serendipitous forces that just led you to where you are.
- Source: SCMP


Bonus Quirky Content

Something to read: When You Don’t Feel Like It, You Often Produce Your Greatest Work [Link]

Not much commentary from me on this one. Just super relatable. Re: the first section of the below quote, pretty much sums up my whole experience when doing Twitter Compilations.

The work that readers found most helpful was written on days when I absolutely did not give two fucks and felt demotivated, tired, and uninspired. […]

A Severe Lack of Motivation Removes Expectations

When you don’t feel like doing the work, your dominant thoughts are the opposite of the ones you have when your brain is laser-focused on the addictive habit of chasing outcomes.

The “I don’t give a fuck” attitude to your work that occurs on the days you don’t feel like working is the exact attitude you need to get out of your own way and create the best work you never thought you could create in this lifetime.

Something to watch: Stoicism & The Art of Not Caring [8 mins]

We must strive towards an acceptance and indifference towards everything that happens and instead, focus our attention on controlling our reactions to the things that happen.

Something to listen to: Derek Sivers on The Knowledge Project [Apple Link]

Confession time. I have basically zero prior experience with Derek Sivers. So I thought this conversation was a great beginners insight into his thoughts.

Also, that quote I used at the start of this newsletter? Sivers has similar thoughts.

And I gotta say, I freaking love this quote on feeling pain and accepting it. Don’t sugarcoat if you don’t have to. Screw up. Accept it. Feel the pain. Learn and move on.

The thing that friends do to each other is they say like, “oh, dude, it's all right.” “You know, I'm sure, you know, it's for the best.” “I'm sure something inside you probably knew that this wouldn't have worked out anyway.”

Like, no, no, no, no, no, no. Hold on. We should not sugarcoat everything because we really learn best from pain, like pain teaches us like nothing else. I think I need to feel the pain of this mistake and not write it off. […] I need to feel that pain so that the next time something like that comes into my life, that I don't make the same mistake.

Rabbit hole/resource to dive into: Kevin Gao’s Compilations [Link]

I’ve shared links to specific compilations of Kevin’s in previous issues. So if you didn’t already know about his awesome compilations, now you do. I love the internet.


Final thought for the week:

Until next week, have a good one!
- K


You can find previous issues of Curated by Kalani here. I’m on the web at kscarrott.com and on Twitter @scarrottkalani.

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