- “I’m always selling. Always.” “Learn to sell. In business you’re always selling – to your prospects, investors, and employees. To be the best salesperson, put yourself in the shoes of the person to whom you’re selling. Don’t sell your product. Solve their problems.” “No sales, no company.” “Make your product easier to buy than your competition, or you will find your customers buying from them, not you.” “Treat your customers like they own you. Because they do.” “Your customers can tell you the things that are broken and how they want to be made happy. Listen to them. Make them happy. But don’t rely on them to create the future road map for your product or service. That’s your job.” Being an effective salesperson is significantly underrated as an important life skill, especially by engineers who too often hope that a great product will sell itself. In thinking about the value of the ability to sell it is wise to remember that people sell much more than just products. For example, you were selling when you received your first romantic kiss. People must sell themselves to a potential spouse or “significant other” person. A business owner not only sells product but the company to employees and distributors. I have a good friend who likes to say that “everyone is talking their book all the time.” This is true and it is clear that some people are much better at talking their book than other people. It has been my experience that the best salespeople don’t even appear to be selling. I had a late friend who people said was such a good salesman that he was capable firing someone and that person would not know they were fired until they were at home that night telling their spouse about their day. “Hey, wait a minute…” On the last point Cuban makes above on future products, he seems to agree with Steve Jobs, who once said in an interview:
Business Week: Did you do consumer research on the iMac when you were developing it?
Steve Jobs: No. We have a lot of customers, and we have a lot of research into our installed base. We also watch industry trends pretty carefully. But in the end, for something this complicated, it’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them. That’s why a lot of people at Apple get paid a lot of money, because they’re supposed to be on top of these things.
- “Sweat equity is the most valuable equity there is.” “Everyone has ideas, but most people don’t do the work required to get the job done.” “It’s not about money or connections — it’s the willingness to outwork and out learn everyone.” “You accomplish much more with direct relationships than by using an intermediary.” Sweat equity is not only the cheapest form of equity to acquire, it is the most rewarding as well. But more than just acquiring cheaper equity is going on when you do something yourself since it means you are in the best position to know whether you are getting value and the real cost of the work. A person always has some path loss when they use an intermediary and path loss in not a good idea when a person can benefit so much from having accurate information. Young children are often taught about this idea when they are introduced to “the telephone game” in which a message is passed on in a whisper from person to person. The final version of the message is usually radically changed from the original after the person to person whispering is done, which teaches the lesson. If you always use a vendor to accomplish a task you may never fully know what is actually happening in your business. As an aside, when I say “path loss” in this context I am not referring to the reduction in power density of an electronic wave as it propagates through space. I refer to messages getting garbled when they travel from person to person.
Your Memory is like the Telephone Game: “A memory is not simply an image produced by time traveling back to the original event — it can be an image that is somewhat distorted because of the prior times you remembered it,” said Donna Bridge, a postdoctoral fellow at Northwestern University Feinberg School of Medicine and lead author of the paper on the study recently published in the Journal of Neuroscience. “Your memory of an event can grow less precise even to the point of being totally false with each retrieval.”
- “Whatever business you have, there is always someone trying to put you out of business.” “Business is a 24/7 job where someone is always out there to kick your ass.” Cuban’s point captures the essence of what Joseph Schumpeter called “creative destruction.” Other businesses are always out there trying to take your customers with a better product offering or a better a sales approach. This process that Schumpeter described is the engine of capitalism and results in the continual transformation of producer surplus to consumer surplus. This transformation process is happening faster than ever, which weirdly has caused some economists to believe innovation has slowed since producers surplus growth has slowed. Anyone who is actually engaged in business knows that the idea that innovation has slowed is completely detached from reality. Current business conditions are more competitive than ever. If you do not have a moat to prevent someone from capturing your customers, your profit will quickly disappear. Competition takes many forms and comes from many places. Harvard Business School Professor Michael Porter teaches his students competition can come from many sources such as customers, suppliers, potential entrants, and substitute products. Be careful out there…
- “Most people think it’s all about the idea. It’s not. Everyone has ideas. The hard part is doing the homework to know if the idea could work in an industry, then doing the preparation to be able to execute on the idea.” I doubt there many people above the age of 12 who have not said at least once when they see a successful business: “Hey, I thought of that idea first.” There is a vast gap between thinking about a business and actually doing what is needed to create the business and make it a success. If you are not willing to do the work and take risk nothing will ever be more than an idea. The ability to execute on an idea much rarer than people imagine. Cuban is saying that people who do the preparatory work first and avoid “fire, ready, aim” are much more likely to be successful in life. This point made by Cuban reminds me of Benjamin Franklin who famously once said: “By failing to prepare, you are preparing to fail.”
5. “Focus on finding big problems.” A business that serves a big attractive market is much more likely to be a success. Many businesses fighting over a niche market is not a pretty sight. The venture capitalist Eugene Kleiner said once that a few businesses fighting over a niche market is similar to a few bald men fighting over a comb. Cuban’s point reminds of of one of my favorite Gary Larson Far Side cartoons which involves two spiders sitting next to a playground slide with a spider web stretched across the bottom. One spider is saying to the other spider in the caption: “If we pull this off we’ll eat like kings!” Thinking big pays big dividends when operating a business.
- “Don’t start a company unless it’s an obsession and something you love. If you have an exit strategy, it’s not an obsession.” If you are missionary and not a mercenary the probability that you will create a successful business goes way up. You will work harder and survive the tough times far better if you love what you are doing and are obsessed with the business. Missionaries are not thinking much about exit strategies since their focus is on getting the job done and achieving their objectives. Which reminds me of joke. Two missionaries were captured by a tribe of hostile cannibals who put them in a large pot of water after building a huge fire under it. A few minutes later, one of the missionaries started to laugh uncontrollably. The other missionary could not believe what he was hearing and said: “What’s wrong with you? We’re being boiled alive! They’re going to eat us! What could possibly be funny at a time like this?” The other missionary responded, “I just peed in the soup.” This joke has nothing to do with starting a business, but it is funny and involves missionaries.
- “[Diversification] is for idiots.” “You can’t diversify enough to know what you’re doing.” Warren Buffett is agreeing with Cuban when he says: “Risk come from not knowing what you are doing.” Buffett believes: “concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as “the possibility of loss or injury. …You only have to do a very few things right in your life so long as you don’t do too many things wrong.” Of course, if you don’t want to do the work to “know what you are doing,” then diversity. Dumb or lazy money becomes smart money when people realize that they are dumb or lazy. A person’s got to know his or her limitations, as Dirty Harry famously said. Some people are hard working and thoughtful in the rest of their life but lazy and not thoughtful when it comes to investing. They spend more time picking out a shirt in a store than on selecting their investments and their investing results reflect that emphasis.
- “In every job, I would justify in my mind, whether I loved it or hated it, that I was getting paid to learn and every experience would be of value when I figured out what I wanted to do when I grew up. It is time to get paid to learn.” Until you get out of college you are usually paying to learn. Or at least someone like your parents is paying for you to learn. But after you graduate from college your goal should be to be paid by other people to learn. The more you learn in a given job, the more valuable that experience will be for you and the more other people will want to pay you to learn more. This is an example of a positive feedback loop and my own life is an example. I have been paid to learn my entire career since I left graduate school. The more I learned in life, the more people have wanted to pay me to learn more so I can help them solve problems and find new opportunities.
- “When you’ve got 10,000 people trying to do the same thing, why would you want to be number 10,001?” “What I do know, at least what I think I have learned from my experiences in business, is that when there is a rush for everyone to do the same thing, it becomes more difficult to do. Not easier. Harder.” Competition drives down prices to levels where financial return is equal to the opportunity cost of capital. That is the essential truth of capitalism and its engine. The goal in any business is to create some non-replicable advantage that is a moat against competition. Barriers to entry should be the goal of any business. The deeper and stronger the moat the happier the business owner will be with their financial results. Finding a source of differentiation is a beautiful thing. Harvard Professor Michael Porter puts it this way: “It’s incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long.” If you deliver the same product or service as your competitor you by definition don’t have a moat. Competition will in that case be based on price and price-based competition inevitably degrades to a point where profit disappears. Porter teaches: “If customers have all the power, and if rivalry is based on price… you won’t be very profitable.” He adds: “Producing the highest-quality products at the lowest cost or consolidating their industry is trying to improve on best practices. That’s not a strategy.” Cuban is making an additional point here about how a crowded market for X, makes achieving X harder and not easier. Resources become more scarce when there is a so-called crowded trade going on.
- “It doesn’t matter how many times you have failed, you only have to be right once.” Michael Mauboussin elaborates on the point Cuban is making: “In any probabilistic exercise: the frequency of correctness does not matter; it is the magnitude of correctness that matters.” This is the so-called Babe Ruth effect. Mauboussin writes: What is striking is that the leading thinkers across varied fields — including horse betting, casino gambling, and investing — all emphasize the same point.” Chris Dixon has a great post on this that I link to in the notes. Dixon points out: “The Babe Ruth effect is hard to internalize because people are generally predisposed to avoid losses.” If you can overcome this loss aversion and learn to benefit from convexity (big potential upside, small potential downside), you can beat the market averages. Doing this successfully is relatively simple concept to understand, but is not easy to do since most mistakes are emotional or psychological. I have said before I think ~10% of people are capable of beat the market but only ~3% are willing to do the work to actually do so. The problems are in no small part created by the fact that more than half of investors think they are in that 3%.
- “Never put your money in something where you don’t have an information advantage.” “Most people won’t put in the time to get a knowledge advantage.” Charlie Munger agrees with Cuban and advises investors to “Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage.” In trying to buy something for less than it is worth, you should be working to create an information advantage over the seller. How do you do that? Howard Marks points the way: “Mistakes are all that superior investing is about. In short, in order for one side of a transaction to turn out to be a major success, the other side has to have been a big mistake. There’s an old saying in poker that there’s a “fish” (a sucker, or an unskilled player who’s likely to lose) in every game, and if you’ve played for an hour without having figured out who the fish is, then it’s you. Likewise, in every investment transaction you’re part of, it’s likely that someone’s making a mistake. The key to success is to not have it be you.” If you do not have an information advantage or are not willing to do the work to get an information advantage, put your money in a low cost diversified portfolio of index funds.
- “I placed too much importance on comparing how much I had to others early on. Then I started realizing time was a far more valuable asset.” “The cheaper you can live, the greater your options.” Jealously is a useless emotion. Nothing good comes from jealousy. Ever. It is a far better idea to focus any energy that would be wasted on jealousy on creating more time to do what you love. The best thing that money can give you and people you love is better choices. People who do not have any money have terrible choices. Over the years I have seen a lot of people with expensive luxury possessions who do not have the cash required to always have the ability to make have good choices in their life. Liquidity matters. Howard Marks recently said: “When you go into risk assets and they go through a tough period, there will be heartburn and price declines. If you are going to need the money in the short term, you shouldn’t put it into potentially illiquid assets.” Having enough cash in the bank so you always have good choices is the ultimate luxury. No car, boat or house could ever be better than that feeling. CNBC’s Joe Kernan said to Marc Cuban in 2000: “Don’t you feel dumb that you cashed out your Yahoo stock at $200 & now it’s trading at over $230?”” Cuban answered: “Well, it’s hard to feel dumb when you’re flying around in your GV.” More importantly Cuban added: “I asked myself – what’s the worst that could happen? I walk away with $2B in the bank? How much money do I really need?”
USC Interview https://www.youtube.com/watch?v=fs9Gr8Gj6Cg
Young Money Interview: http://finance.youngmoney.com/entrepreneur/entrepreneur-advice/041703_01/
Michael Mauboussin on Babe Ruth: http://turtletrader.com/pdfs/babe-ruth.pdf
Chris Dixon on Babe Ruth: http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture-capital/