022 - Yield vs Struggle

Today we’re going to focus on the concept of yield—both high-yielding activities and their opposite, wheel spinning.

The world’s top performers always focus on getting the most bang for their buck. From business to combat and everything in-between, this is a pretty steady rule. Let’s dive into it.

Investing

After reading “The Superinvestors of Graham-and-Doddsville,” something clicked for me.

Value investing is a fundamentally simple—but not easy—strategy. It’s resulted in tremendous success for a broad variety of people. If you’re interested in investing—since this is the “yield” episode, after all—you won’t find a better return for your time. It’s a very short article written by Warren Buffett himself. I’ll include a link to it https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors in the show notes.

Two modern examples of the Warren Buffett approach are Joel Greenblatt and Tobias Carlisle. If you listen to the podcast, you’ve undoubtedly heard me bring up Greenblatt many times. He famously returned 50% per annum for a decade using a special-situations strategy. But he also wrote a book (called The Little Book That Beats the Market) recommending a simple formula to beat the market without too much brain damage. It was based on TEV/EBIT yield and Return on Invested Capital. Tobias Carlisle improved upon this formula (in The Acquirer’s Multiple) by removing the “quality” factor—return on invested capital. His formula outperformed Greenblatt’s and the market.

The lesson: cheapness is king. Put another way—an obsessive focus on yield makes a such a huge difference that it overrides a complete lack of position-level diligence. Ben Graham himself (Warren Buffett’s mentor, the author of Security Analysis, and the father of value investing) said that he wished he had focused more on quantitative value rather than qualitative excellence.

Business 

Jocko Willink’s phrase “prioritize and execute” is the core of the yield idea. This framework is echoed in tons of books. It’s the main premise of the 80/20 Principle, The Effective Executive, Traction, The Lean Startup and many more.

When thinking about where to allocate your time and resources, it seems fairly obvious to choose the tasks that have the best bang for your buck.

But let’s consider the opposite. Let’s call these low-yield activities “wheel spinning.” Wheel spinning means quibbling over trivial details that won’t move the needle. On a task level, these things really jump out, but sometimes it’s easy to forget the big picture. Optimizing the components of the wrong process is a giant time suck. Blue Ocean Strategy, The 22 Immutable Laws of Marketing, and a section in Peter Thiel’s Zero to One all concern the idea that competition—struggling to win in crowded marketplaces—is a losing effort. I’ve said it before, and I’ll say it again. Crowded arenas lead to prisoner’s dilemma, which leads to the destruction of resource yield.

Entrepreneurship

If we transition to the entrepreneurial end of the business spectrum, this focus on yield intensifies. Elaine Pofeldt wrote and interesting book exploring the types of new enterprises that follow the law of yield. It’s another example of a goofy title with great content: The Million-Dollar One-Person Business. Pofeldt identifies six verticals ideally suited for her cause: e-commerce, manufacturing, informational content creation, professional services, personal services, and real estate.

What the common denominator? Super high return on invested capital.

Let’s take a step back here—earlier I was harping on the primacy of price (earnings yield) over quality (return on invested capital). So what gives? Here’s the difference. When you’re investing in public equities, you’re paying market price—not accounting equity. Your yield on price paid is the primary concern.

However, in the case of starting a business—you are paying investing capital! To you, this isn’t an accounting fiction, it’s a dollar expense leaving your bank account (cash on your balance sheet) and sitting in inventory or plant, property, & equipment, waiting to be used for future cash flow. The uniting factors are (a) what YOU PAY and (b) what YOU GET.

Back to Pofeldt’s concept. These six business types (again: e-commerce, manufacturing, informational content creation, professional services, personal services , and real estate) have really important commonalities. Foremost, the dollar investment required to get started is minimal. Chris Guillebeau mirrors this concepts in his books Side Hustle and The $100 Startup, in which he explores ways people buck convention and make money on their own.

Both of them explore two main groupings of businesses: service and brokerage.

Service businesses generally involve minimal capital outlay—you’re generally marketing the expertise you built in past years. Brokerage also involves minimal capital outlay—you’re generally serving as the connection between buyers and sellers or between people and ideas. If you’re interested, I highly recommend reading Joshua Kennon’s essay on Synthetic Equity. I’ve included a link https://web.archive.org/web/20150109034520/https://www.joshuakennon.com/creating-and-using-synthetic-equity-to-make-money/ in the show notes.

For an incredible example of synthetic equity in action, listen to episode 011 with Calvin Hawkes. His first company, Soul Ceramics, is completely synthetic-equity driven. Synthetic equity is brokerage. You play the role of “connector:” connecting people with ideas, connecting buyers with sellers.

These are all examples that work for a single entrepreneur. Moving into the VC / Startup world, you need to add in one extra factor: scale.

Take a moment to think of people and groups in society that have had success that propelled them from poor to ultra-rich. It generally involves either brokerage or media qualities. Let’s explore this idea.

Brokerage explains the success of cultural groups that have focused on acting as an agent—in real estate, in film, in television, in sports.

What I call the “media” model explains the success of individuals and companies in technology, sports, music, and the broad entertainment industry. Technology companies write code that’s free to reproduce and sell it to the masses. Athletes do the same thing by broadcasting themselves in action. Movie stars, singers, rappers, DJs—they’re all exploiting the advantages of high-yield activity stemming from zero incremental cost of production.

Combat

As we’ll discuss in next week’s interview with David Kilcullen, this is an area the US tends to do poorly. In The Snakes and The Dragons, Kilcullen explores ways the West’s adversaries are adapting to our strategies. Grim examples of yield being used against us: $30 IEDs destroying $9 million tanks, $100 RPG rounds destroying $40 million helicopters, and stealth fighters that are just about worth their weight in gold destroying targets far less expensive.

Counter-examples include the (a) Green Berets, who create a leverage effect by training indigenous forces and (b) using natural market incentives to increase the yield of hydroelectric devices on Afghani farms by making villages buy the power-generating devices rather than giving them out (and thus making them a prime target for insurgent seeking to send a message).

Grappling

High-yield techniques are the heart and soul of jiu jitsu. Helio Gracie famously said “give me the right lever, and I’ll move the world.” Each strangle and each joint lock is based on using the body’s strongest groups against the opponent’s weakest points.

Furthermore, when you look at the distribution of submissions in most elite competitors, you see a clear trend. The very best focus on an incredibly small set of techniques to finish their competition. Similarly, when you review tape, you’ll see that the pathways used to get there are very limited. Narrow focus with deep understanding equals mastery.

Athletics

Two great examples of high-yield in athletics are Pine City’s basketball team https://www.wsj.com/articles/the-basketball-team-that-never-takes-a-bad-shot-1485788165 and Pulaski Academy’s https://www.washingtonpost.com/news/sports/wp/2015/08/13/the-highly-successful-high-school-coach-who-never-punts-has-another-radical-idea/ football team. You might know them as the basketball team that only takes threes and layups and the football team that never punts and only attempts onside kicks.

These yield-based strategies are making their way to the professional leagues, as well. There’s the famous Money Ball example of the Oakland A’s using statistics to buy incredibly high-yielding players. It’s value investing “cigar butt style” for baseball. For those unfamiliar with that term, it comes from Ben Graham. The idea is that you can pick up a cigar with one last puff for free. It’s often not pretty, but you get something for nothing.

FiveThirtyEight recently did a really interesting study concluding that NBA 3-pointers as a percentage of shots taken has increased from roughly 57% to 67% from seasons ending in 2013 to 2019 https://fivethirtyeight.com/features/nearly-every-team-is-playing-like-the-rockets-and-thats-hurting-the-rockets/.

This yield-based also approach explains why LeBron James spends 74% of his time on the court walking https://www.espn.com/nba/story/_/id/23384071/lebron-james-plays-rests-keep-cleveland-cavaliers-hopes-alive. In the playoffs, he walks 79% of the time! It’s all about conserving energy for the critical moments.

Overarching Idea

In all of these cases, the subjects focus on high output relative to input. The polar opposite of this is what I call “wheel spinning.”

There are times when details are everything, tiny changes make an incredible impact, and perfection is necessary.

And there are times when we’re obsessing on result-free perfection. We become masters of trivia. I can’t remember where I heard the phrase, but I always loved it.

If—as investors—we begin by screening for buy opportunities by looking for low multiples of earnings or cash flow, the exercise below is going to focus on the opposite. High payments for low returns. We seek these activities, and we try to root them out.

We can go the quantitative root and begin with results versus time or other resources spent …

But another great place to start would be giving yourself a frustration assessment. There’s a high likelihood that forced, frustrating, exhausting activities are low yield. If we begin to account for the biggest sources of frustration, we can begin to uproot them.

Questions to consider

·         What are the critical results of my year, my quarter, my month, my week

o   What critical tasks drive these results

o   What trivial tasks don’t pull their weight

o   How can we shift our time and resources to double down on the productive portion of the distribution?

·         Times of day/week/year

o   When am I most productive?

o   When am I most frustrated?

o   How can I optimize my calendar such that I’m fully locked in during the high yield calendar periods?

o   How can I give myself a break during the low-production periods?

·         Where are my major resource leaks?

o   What are my lowest-yielding expenses?

o   What are my lowest-yielding habits?

o   What are my lowest-yielding grappling techniques?

o   What websites and news sources provide my lowest-yielding reading?

The all-time greats of any vertical are brutally stingy about the yield of their time and resources. We’d be well-advised to follow suit.

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