Archive for May, 2007

How Steve does it

Thursday, May 24th, 2007

Why is Steve Jobs so good at making products people want? An Apple engineer I know had this to say on September 25, 2005:

“Say what you will about SJ, but he (and/or the people he surrounds himself with) are genius. I feel part of the secret is simply having built a culture where everyone cares about things down to the smallest detail — we sure do that with some of the stuff I’m
working on now — but there’s also the quality of what I’ve always thought of as ‘yummy.’ You make a yummy little morsel of a couple of different kinds of already-existing technology and mash them together, make sure it is (deceptively) simple, and make sure the fit+finish is perfect, and use ultra-clean modern design. Still, it’s that ‘yummy’ quality that’s paramount.”

Can this be copied? Possibly not. Why?

Aesthetics and integration are organizationally thankless. They require heavy up-front investment in things that are not identifiable product features, and thus carry benefits that are hard to communicate. Integration is particularly thankless, because it requires iterative design, causing unpredictable delays and blown budgets, again in return for no specific feature. Middle managers are typically punished for such things, and learn to avoid them.

Most companies are unable to measure the benefit of aesthetics and integration. So even when these ideas can be communicated, their benefit (price premium, increased sales, increased customer satisfaction) cannot be assessed internally before release, and so there is no way to decide how much to invest. So no one else does it.

Simplicity is worth more, but appears less.Ease of use often takes the form of superficial simplicity, creating the appearance of fewer features, and thus is potentially risky to an organization unable to assess its true market impact.

Apple has invested decades in a corporate culture that values aesthetics.This is singular. Apple has been indoctrinating new hires with its aesthetic “rules” for at least twenty years, giving them a big advantage at producing products where such things are valued. Since everyone in a software company imagines himself a creative genius, it’s a huge advantage for Apple to get everyone pointed in the same direction from the very beginning. That said, it’s probably safe to say Apple’s vision is all Steve, and wouldn’t survive his departure. Similar to Akio Morita at Sony: when he passed away in 1999, the company ran down like an old battery.

To the extent Jobs’ Apple enforces a unified, simple, aesthetic design sense, it’s unreasonable to expect any other company to copy. Thus it constitutes a sustainable competitive advantage.

Influence at negative cost

Thursday, May 24th, 2007

Be worthy of imitation.

Self-improvement is intrinsincally worthwhile, but has the side effect of inspiring imitation, which in turn amounts to influence.

Your healthcare dollar

Wednesday, May 23rd, 2007

Where does all the money go in U.S. healthcare? Since 1985, costs have increased at double-digit percentages annually, yet doctors today earn only about one fourth what they did then, per hour, inflation-adjusted.

So where does the money go? Public company net profits tell an interesting story.

Big health insurance companies, often a bogeyman in these discussions, are actually not hugely profitable, earning a respectable but unexciting 10% on sales.

By contrast, nearly all major drug companies earn more than 25% on sales — almost unheard of among companies with over $10 billion in sales. 25% net margins are more appropos to small niche operations, such as a mugging or petty theft.

So are drug companies the perps? Well, not lately. Their profits have been falling dramatically for the past five years, and sales are pretty flat. Over the same period, health insurers have grown enormously, though they remain relatively unprofitable.

(As an aside, health insurers are probably worth a look for investors, because their rapid growth doesn’t seem to be priced into their stock in all cases.)

The implication is that until about 2001, drug companies were shaking people upside down to make the coins fall out. Then they stopped. (OK, what really happened is that they had high profit margins due to patent exclusivity, but then those patents began expiring.) Around the same time, insurers started taking more of the pie. But they didn’t keep much of it as profit, instead paying most of it through to employees and suppliers.

What suppliers, though? Not drug companies. Not doctors. So we must ask again: where it it all going?

Wesco Financial Annual Meeting Notes

Tuesday, May 22nd, 2007

Here are my notes from the Wesco Financial annual meeting of shareholders on May 9, 2007. I am paraphrasing Wesco chairman (Berkshire Hathaway vice-chairman) Charlie Munger — there are few direct quotes here.

Why was Berkshire Hathaway a “lollapalooza”? (Charlie Munger’s word) It was multiple factors acting in concert, reinforcing one another:

  • Warren Buffett is smart, though not the smartest.
  • He was extremely interested in investing from age 10. Hard to excel in a subject if you’re not intrinsically fascinated.
  • To start early in professional life is a tremendous advantage.
  • Buffett is one of the best “learning machines.” Consistent, lifelong learning.
  • In investing, accumulated wisdom doesn’t decay rapidly in value (contrast this with technical disciplines such as software).
  • All the work of Berkshire was concentrated in one man’s mind. As with Singapore under Lee Kwan Yew, one excellent individual drove the entire enterprise to victory.
  • Buffett has a habit of maximizing his objectivity.
  • He received constant rewards for doing well. This has the effect that behavioral conditioning would predict: he continued to improve. Contrast this with normal corporate pay, which rewards a CEO no matter what he does.
  • Buffett is not influenced by “nuttiness”: envy, greed, profligacy, revenge, self-pity, “world is unfair to me,” etc.
  • He is more like Marcus Aurelius: a tough stretch is, for him, an opportunity to learn, teach, etc.

“You could argue I was forced into investing, because one is rendered a social outcast in most fields by calling revered luminaries “nuts.”

There is a great difference between intelligence and judgment. Having one implies nothing about whether one may have the other.

  • For example, by basic good judgment, it’s obvious that trust is more important than compliance. Any contractual clause you may write in can be trumped by an untrustworthy counterparty. Yet many otherwise intelligent people don’t value trust highly enough in their business dealings. By contrast, we (Wesco Financial) didn’t even do audits until the outside world forced it upon us. Instead, we dealt only with people we trusted.
  • For example, avoiding conflict of interest is more important than being current in your books. If you mark derivative instruments to market, for example, you leave valuation in the hands of internal people with a strong incentive to overestimate their value. Thus being current creates a conflict of interest, and thus obviously should not be done. Even senior accountants don’t understand this.

“Posco is not a commodity business.” — technology advantages were learned from Nippon Steel that give them an edge. But don’t write off commodities entirely — even they are attractive at some price.

“We don’t play gin rummy with our friends.” (meaning that Berkshire only buys businesses to keep, not to resell.)

  • This reputation attracts better businesses — companies that would sell to no one but Berkshire.
  • By contrast, because private equity buys to flip, they cannot get access to the quality of deals we do.

Envy is driving endowments to throw money into private equity. To see what will happen, observe what happened in to endowment investments in venture capital a few years ago.

USG made a mistake to do a rights offering in summer 2006 at well below intrinsic value.

Useful mental model: inversion. For examle, instead of “what do I want, and how do I get it,” also consider “What do I dislike, and how do I avoid it?”

Investor question: “what long-held belief have you changed recently?” Munger’s answer: We changed a lifelong belief about railroads recently. Why? Because of the recent comparative advantage of railroads over trucking. Rail improved with double-stacked trailers, computer scheduling, and rising real energy costs.

Book recommendations:

  • “Martians of Science”
  • “Deep Simplicity”
  • Isaacson’s biography of Einstein
  • Supermoney (decades old, but worthwhile)

Two kinds of market inefficiency these days:

  • Too small for anyone to follow it.
  • Craziness in bigger markets, e.g. panics.

Two markets in China:

  • Gross excess in Shanghai
  • A few interesting things elsewhere. Hong Kong is still pretty inefficient.

Treasury Secretary Nicholas Brady reversed his decision to cut off Salomon Brothers from government bond auctions based essentially on his trust of Buffett and his reputation.

Munger bought his first new car at age 60, long after he had become very wealthy.

Much trouble traces to “self-serving bias.” Plus envy.

Think of investing in terms of opportunity cost, not hurdle rate.

Lessons of the past 10 years — more of the same:

  • Be more selective.
  • No regret at passing up immoral investments, e.g. chewing tobacco.
  • Don’t let envy drive investment decisions.

Simplifying customer service

Saturday, May 19th, 2007

This was originally an email to Doug. He liked it, so I posted.

Woot is designed around simplifying customer service, which is an underappreciated tactic.

To simplify doesn’t mean to skimp, but instead to do away with service entirely by redesigning what they sell and how they sell it. Rather than use dorky buzzwords like “reengineering,” I’ll illustrate by example.

I loved a take-out lunch place that used to operate on the Stanford campus. The grumpy Thai lady who ran it had a key insight: they do their entire business from noon to 1, so service speed is the scarce resource. She responded by rounding off all prices to whole numbers of dollars. By not handling coins, they double their throughput, I estimate. They sling chow and pocket greenbacks at an unbelievable pace, serving hundreds from a single window in only an hour. Wonderful.

I was so impressed by that restaurant that I adapted the idea years later to Firepad. From 2003 to 2006, the entire online software industry was giving away free samples, except me. I found that by offering no free trial, but an unlimited 30-day money back guarantee, I eliminated 90% of my support load, with almost no effect on sales. The free-trial guys rarely buy, it turns out. They just consume resources. My Firepad income per work hour (the key measure) went up by an order of magnitude.

Like the grumpy Thai lady, Woot seems to do nothing but sling chow and pocket greenbacks.

My best investment return ever

Saturday, May 12th, 2007

The highest investment return I have ever achieved was not on a stock, bond or business investment.

It was to replace my home thermostat.

My home was built in 1977. Almost exactly 30 years later, in March 2007, I updated to a modern programmable digital thermostat, which cost $40 plus a half hour of installation time, using only a screwdriver.

In the first 8 weeks, our gas use fell by more than half compared to last year, despite colder weather this year. The savings are at least $150. Summer air conditioning results remain to be measured, but the implication is we will save between $500 and $1500 in the first year, on a $40 investment.

This can happen because programmable thermostats are flexible. By day, you want the temperature at 67 degrees, but at night, no one cares if it falls to 62. That 5-degree change causes a nonlinear reduction in energy use — depending on outside temperature, it can be the difference between running the heater 10% of the time or 100% of the time at night.

Whether you value energy conservation or frugality, this is an astonishing result. The implication is that, if you have an old house, you can save more energy with a $40 thermostat upgrade than by buying a $20,000 Toyota Prius.

Bicycle touring on the cheap

Wednesday, May 2nd, 2007

New touring bicycles cost thousands of dollars, but we live in an era of industrial plenty — perfectly good used bicycles are available at an 80% to 90% discount from new. Here are some things to know.

1980s-vintage lugged “chromoly” steel frames are an incredible bargain. Also known as chromium-molybdenum alloy, or CrMo for short, these were state of the art during the bicycle fad of the late 1980s. Used chromoly bikes are cheap, light, indestructible, and last forever. Best of all, they flex in a way that provides remarkable comfort on high pressure tires. My 1987 chromoly Trek 520 runs 95psi tires, yet is more comfortable over uneven surfaces than my 2006 Bianchi Milano, which has big soft tires but a rigid TIG-welded aluminum frame.

In my experience, many vintage bikes are actually more durable than newer ones of similar configuration, because the components are mechanically simpler. For example, my 1987 Trek has gone 100 times as many miles as my wife’s 1997 Trek 2100, yet her Shimano shifters have already failed. Mine can’t fail, because there is nothing to break — they are simple downtube index shifters.

Cheap used 1980s chromoly bikes of interest include Trek, Nishiki, and even high-end Schwinn. You can purchase whole bikes for under $100 at garage sales, and they often need nothing more than new brake cables ($20), handlebar tape ($10) and a modern seat ($50) to approach modern standards of performance, and to exceed modern standards of durability.

Bicycling across America

Wednesday, May 2nd, 2007

Bicycling across America

Several years ago I bicycled solo from Newport Beach, California to St. Augustine, Florida, pedaling roughly 2,500 miles in 40 days.


  • Anyone can do it. It’s a test of mind, not body. You build strength
    (both kinds) as you go.

  • Solitude is rare and valuable. Reflection, like family, is one of the
    basic sources of meaning.

  • Gulf Coast motorists throw beer bottles at bicyclists.

Market Inefficiency in Sea Kayaks

Wednesday, May 2nd, 2007

You can exploit inefficiency in non-equity markets, of course. Here is a way to get screaming bargains on used kayaks from craigslist.

I wrote this Ruby port of Jeremy Zawodny’s similar Perl script. It runs every 20 minutes, notifying me by email of new postings likely to interest me.

The result is effective, but potentially creepy: you post an item on Craigslist, and your phone rings 5 minutes later with my offer to buy. This freaks a few people out.

Using this method, I bought a nearly new $1500 sea kayak for $600, and a well-maintained $1200 Stairmaster for $200. Beneficial deflation in action.

(You could do this with an RSS reader, as craigslist can publish your search as a feed. But I always forget to check RSS. By contrast, nothing shakes you by the lapels like an incoming email saying, “bargain here.”)