Paul Graham is one of the few lucky household names in Silicon Valley. In fact, you don’t even need to say his full name for people to know who you’re talking about; usually, “PG” is enough. Paul describes his occupation(s) on his website as a programmer, writer, and investor–in that order. In 1995, he and a partner started a company called, Viaweb which later sold to Yahoo for nearly $50M. You could say, Paul caught and rode the dot-com wave perfectly. But then in 2005, Paul and his partners started another kind of innovative venture: Y Combinator. Y Combinator, or “YC” as it’s more commonly referred to, was one of the first startup incubator programs to accept “batches” of companies. Each admitted company receives a few months of rigorous feedback and advising, in exchange for a small equity stake. Today, Paul and his team have made micro-investments in over 1,000 startups, including notable companies such as: Airbnb, Dropbox, Weebly, and Optimizely, among others. Yet despite Paul’s financial success as an investor, he never actually studied business. Paul’s educational background includes a PhD in Computer Science from Harvard University, as well as studying painting at the Rhode Island School of Design, and in the Accademia di Belle Arti, in Italy. No surprise then that his only book not on the subject of programming is titled, Hackers and Painters.
In addition to his impressive resume and book listed above, Paul manages to carve out time about once a month to write and share free essays, which he publishes on his site. I’ve actually referenced his essays before, in this Latticework post on How to Make Better Decisions. The particular quote from that piece which is good enough to repeat here is, “The recipe for great work is: very exacting taste, plus the ability to gratify it.” It’s a line that probably originates from the world of art, which Paul studied at great length, but is also extremely applicable to investing, as taste is a critical quality for anyone whose profession involves making repeated choices.
Though, it wasn’t Paul’s thoughts on taste that inspired this post, brilliant as they may be. In a more recent essay, called Life is Short, Paul drops some heavy wisdom, which I feel has the potential to be quite powerful if applied appropriately. So with that, I’m just going to dive in, and highlight some of my biggest takeaways here. The first problem Paul presents in his essay on the shortness of life is actually defining the term, “short”. What does shortness actually look and feel like?
Then I had kids. That gave me a way to answer the question, and the answer is that life actually is short. Having kids showed me how to convert a continuous quantity, time, into discrete quantities. You only get 52 weekends with your 2 year old. If Christmas-as-magic lasts from say ages 3 to 10, you only get to watch your child experience it 8 times. And while it’s impossible to say what is a lot or a little of a continuous quantity like time, 8 is not a lot of something.
There are two value investing ideas that apply here. Before finding an answer, Paul had to be able to define the problem in units that actually make sense. Value investors spend an awful lot of time discussing the “circle of competence”. But a circle of competence doesn’t do you much good if you don’t have a well-defined border for your circle. So, I think the lesson from Paul here is that one of the best ways to know you’re investing within your circle is if you have an understanding of the units involved. For example, it’s one thing to suppose that because you own and use an iPhone, you understand Apple’s business model. It’s another thing if you happen to work in industrial design, and know the supply logistics and unit economics for every chip, camera, and screw in your iPhone. The lesson being: breaking down a complex problem or idea, into smaller more understandable units, is one method to achieving competence.
But this is just the beginning. From there, Paul goes on to explore this concept of shortness further. Accepting the fact that life is indeed, short; Paul then inverts his problem. What is life too short for?
It has for me. It means arguments of the form “Life is too short for x” have great force. It’s not just a figure of speech to say that life is too short for something. It’s not just a synonym for annoying. If you find yourself thinking that life is too short for something, you should try to eliminate it if you can.
When I ask myself what I’ve found life is too short for, the word that pops into my head is “bullshit.” I realize that answer is somewhat tautological. It’s almost the definition of bullshit that it’s the stuff that life is too short for. And yet bullshit does have a distinctive character. There’s something fake about it. It’s the junk food of experience.
Tren Griffin, author of Charlie Munger: The Complete Investor has written an entire post about Charlie Munger’s love for and thoughts on inversion. Essentially, Charlie believes, “Many hard problems are best solved when they are addressed backward.” This is exactly what Paul has done by flipping this question around. Paul’s conclusion then, is that one should actively and ruthlessly prune the “bullshit” from life. However you want to describe it, this ability to selectively control your attention is another trait among the greatest value investors. At the last Berkshire Hathaway Annual Meeting, I was particularly impressed with the way Charlie Munger said that he ignores the things that don’t matter. This point is highly evident in the fact that Warren and Charlie have built Berkshire from their hometown of Omaha, far away from Wall Street and without a computer in their office.
But being a focused investor is also recognizing that new ideas are not automatically plopped on your desk every day that you go in on a Monday and do a screen. It doesn’t work that way so it’s a big advantage. If you’re an active manager, why play the game everybody else is playing? Charlie Ellis wrote about this decades ago, and that’s also between Buffett and Munger, and Fisher, and Charlie Ellis, Bogle, simplicity again these are the foundational elements of our investment philosophy and we try to enhance those through being focused. Again, focus can be an edge if properly applied. And then at the beginning and at the end of the day, if that edge is repeatable, now you have an interesting debate.
(More from David in The Manual of Ideas Members Area.)
There’s one final point in Paul’s essay worth mentioning here. In addition to pruning the bullshit from life, Paul then recommends allocating time to things that matter. But similar to the way he deconstructed the meaning of, “short”, Paul once again asks, how do you know if something matters?
One heuristic for distinguishing stuff that matters is to ask yourself whether you’ll care about it in the future. Fake stuff that matters usually has a sharp peak of seeming to matter. That’s how it tricks you. The area under the curve is small, but its shape jabs into your consciousness like a pin.
I immediately translated this into value investing terms by replacing “stuff” with companies, and “matters” with value. How do you distinguish companies with value? Ask if it will still be valuable in the future. Putting a potential investing idea through a screen of future value and importance, is a good way to evaluate if there’s actually some intrinsic value in the asset, or if the deal you’re thinking about only has the temporary appearance of value.
You can read the full Life is Short essay by Paul Graham, here. PG is one of those rare intellectual and original thinkers always worth a read. His background in art reminds me a lot of François Rochon of Giverny Capital, who we’ve featured before. My biggest takeaway from Paul’s essay, besides all the points mentioned above, is that good ideas and quality thinking preserve their value across fields. This is why it’s even possible to form a latticework of mental models in the first place; because if the ideas weren’t transferable, all you’d have would be a collection of non-connecting threads. The fact that you can take an essay like Life is Short and extract out key principles which are highly relevant and applicable to value investing, is beautiful testimony to that point. Happy pruning.