Wednesday, July 10, 2019

50th Law (by 50 Cent and Robert Greene) - Book Summary



Before we start with the summary, we ask - Why did Robert chose Fifty? Why Curtis Jackson?

In the preface, explains that Fifty is the perfect example of his teachings in his last three books. Quoting Robert from the preface:

"With an open mind and the idea of figuring out what this book could be, I hung out with Fifty throughout much of 2007. I was given almost complete access to his world. I followed him on numerous high-powered business meetings, sitting quietly in a corner and observing him in action. One day I witnessed a raucous fistfight in his office between two of his employees, with Fifty having to personally break it up. I observed a fake crisis that he manufactured for the press for publicity purposes. I followed him as he mingled with other stars, friends from the hood, European royalty, and political figures. I visited his childhood home in Southside Queens, hung out with his friends from his hustling days, and got a sense of what it could be like to grow up in that world. And the more I witnessed him in action on all these fronts, the more it struck me that Fifty was a walking, living example of the historical figures I had written about in my three books. He is a master player at power, a kind of hip-hop Napoleon Bonaparte."

In the introduction, Robert tries to explain what fear is by quoting Franklin Delano Roosevelt:

“Fear creates its own self-fulfilling dynamic—as people give in to it, they lose energy and momentum. Their lack of confidence translates into inaction that lowers confidence levels even further, on and on. ‘So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror, which paralyzes needed efforts to convert retreat into advance.’”

Robert gives examples of fearless personalities like…

An example of the fearless type would have to be the great abolitionist and writer Frederick Douglass, who was born into slavery in Maryland in 1817. As he later wrote, slavery was a system that depended on the creation of deep levels of fear. Douglass continually forced himself in the opposite direction. Despite the threat of severe punishment, he secretly taught himself to read and write. When he was whipped for his rebellious attitude, he fought back and saw that he was whipped less often. Without money or connections, he escaped to the North at the age of twenty. He became a leading abolitionist, touring the North and telling audiences about the evils of slavery. The abolitionists wanted him to stay on his lecture circuit and repeat the same stories over and over, but Douglass wanted to do much more and he once again rebelled. He founded his own antislavery newspaper, an unheard-of act for a former slave. The newspaper went on to have tremendous success.

At each stage of his life Douglass was tested by the powerful odds against him. Instead of giving in to the fear—of whippings, being alone on the streets of unfamiliar cities, facing the wrath of the abolitionists—he raised his level of boldness and pushed himself further onto the offensive. This confidence gave him the power to rise above the fierce resistances and animosities of those around him. That is the physics that all fearless types discover at some point—an appropriate ratcheting up of self-belief and energy when facing negative or even impossible circumstances.

And the Fifty Cent…

The rapper known as 50 Cent (aka Curtis Jackson) would have to be considered one of the more dramatic contemporary examples of this phenomenon and this type. He grew up in a particularly violent and tense neighborhood—Southside Queens in the midst of the crack epidemic of the 1980s. And in each phase of his life he has had to face a series of dangers that both tested and toughened him, rituals of initiation into the fearless attitude he has slowly developed.

One of the greatest fears that any child has is that of being abandoned, left alone in a terrifying world. It is the source of our most primal nightmares. This was Fifty’s reality. He never knew his father, and his mother was murdered when he was eight years old. He quickly developed the habit of not depending on other people to protect or shelter him. This meant that in every subsequent encounter in life in which he felt fear, he could turn only to himself. If he did not want to feel the emotion, he had to learn to overcome it—on his own.

He began hustling on the streets at any early age, and there was no way he could avoid feeling fear. On a daily basis he had to confront violence and aggression. And seeing fear in action so routinely, he understood what a destructive and debilitating emotion it could be. On the streets, showing fear would make people lose respect for you. You would end up being pushed around and more likely to suffer violence because of your desire to avoid it. You had no choice—if you were to have any kind of power as a hustler, you had to overcome this emotion. No one could read it in your eyes. This meant that he would have to place himself again and again in the situations that stimulated anxiety. The first time he faced someone with a gun, he was frightened. The second time, less so. The third time, it meant nothing.

Testing and proving his courage in this way gave him a feeling of tremendous power. He quickly learned the value of boldness, how he could push others on their heels by feeling supreme confidence in himself. But no matter how tough and hardened they become, hustlers usually face one daunting obstacle—the fear of leaving the streets that are so familiar and that have taught them all of their skills. They become addicted to the lifestyle, and even though they are likely to end up in prison or die an early death, they cannot leave the hustling racket.

Fifty, however, had greater ambitions than to become merely a successful hustler, and so he forced himself to face and overcome this one powerful fear. At the age of twenty and at the peak of his hustling success, he decided to cut his ties to the game and dive into the music racket without any connections or a safety net. Because he had no plan B, because it was either succeed at music or go under, he operated with a frantic, bold energy that got him noticed in the rap world.

He was still a very young man when he had faced down some of the worst fears that can afflict a human—abandonment, violence, radical change—and he had emerged stronger and more resilient. But at the age of twenty-four, on the eve of the release of his first record, he came face-to-face with what many of us would consider the ultimate fear—that of death itself. In May of 2000 an assassin poured nine bullets into him in broad daylight as he sat in a car outside his house, one bullet going through his jaw and coming within a millimeter of killing him.

In the aftermath of the shooting, Columbia Records dropped him from the label, canceling the release of his first album. He was quickly blackballed from the industry, as record executives were afraid to have any kind of involvement with him and the violence he was associated with. Many of his friends turned against him, perhaps sensing his weakness. He now had no money; he couldn’t really return to hustling after turning his back on it, and his music career seemed to be over. This was one of those turning points that reveals the power of one’s attitude in the face of adversity. It was as if he were confronting the impassable Alps. At this moment, he did as Frederick Douglass did—he decided to ratchet up his anger, energy, and fearlessness. Coming so close to death, he understood how short life could be. He would not waste a second. He would spurn the usual path to success—working within the record industry, nabbing that golden deal, and putting out the music they thought would sell. He would go his own way—launching a mix-tape campaign in which he would sell his music or give it away for free on the streets. In this way he could hone the hard and raw sounds that he felt were more natural to him. He could speak the language of the hood without having to soften it at all.

Suddenly he felt a great sense of freedom—he could create his own business model, be as unconventional as he desired. He felt like he had nothing to lose, as if the last bits of fear that still remained within him had bled out in the car that day in 2000. The mix-tape campaign made him famous on the streets and caught the attention of Eminem, who quickly signed Fifty to his and Dr. Dre’s label, setting the stage for Fifty’s meteoric rise to the top of the music world in 2003, and the subsequent creation of the business empire he has forged since.

We are living through strange, revolutionary times. The old order is crumbling before our eyes on so many levels. And yet in such an unruly moment, our leaders in business and politics cling to the past and the old ways of doing things. They are afraid of change and any kind of disorder. The new fearless types, as represented by Fifty, move in the opposite direction. They find that the chaos of the times suits their temperament. They have grown up being unafraid of experimentation, hustling, and trying new ways of operating. They embrace the advances in technology that make others secretly fearful. They let go of the past and create their own business model. They do not give in to the conservative spirit that haunts corporate America in this radical period. And at the core of their success is a premise, a Law of Power that has been known and used by all the fearless spirits in the past and is the foundation of any kind of success in the world.

Now the 50th Law:

The 50th Law, however, states that there is one thing we can actually control—the mind-set with which we respond to these events around us. And if we are able to overcome our anxieties and forge a fearless attitude towards life, something strange and remarkable can occur—that margin of control over circumstance increases.

And the people who practice the 50th Law in their lives all share certain qualities—supreme boldness, unconventionality, fluidity, and a sense of urgency—that give them this unique ability to shape circumstance.

Chapter “1” is titled “See Things for What They Are-Intense Realism”.

REALITY CAN BE RATHER HARSH. YOUR DAYS ARE NUMBERED. IT TAKES CONSTANT EFFORT TO CARVE A PLACE FOR YOURSELF IN THIS RUTHLESSLY COMPETITIVE WORLD AND HOLD ON TO IT. PEOPLE CAN BE TREACHEROUS. THEY BRING ENDLESS BATTLES INTO YOUR LIFE. YOUR TASK IS TO RESIST THE TEMPTATION TO WISH IT WERE ALL DIFFERENT; INSTEAD YOU MUST FEARLESSLY ACCEPT THESE CIRCUMSTANCES, EVEN EMBRACE THEM. BY FOCUSING YOUR ATTENTION ON WHAT IS GOING ON AROUND YOU, YOU WILL GAIN A SHARP APPRECIATION FOR WHAT MAKES SOME PEOPLE ADVANCE AND OTHER FALL BEHIND. BY SEEING THROUGH PEOPLE’S MANIPULATIONS, YOU CAN TURN THEM AROUND. THE FIRMER YOUR GRASP ON REALITY, THE MORE POWER YOU WILL HAVE TO ALTER IT FOR YOUR PURPOSES.

Keys to Fearlessness

KNOW THE OTHER, KNOW YOURSELF, AND THE VICTORY WILL NOT BE AT RISK; KNOW THE GROUND, KNOW THE NATURAL CONDITIONS, AND THE VICTORY WILL BE TOTAL.

–Sun Tzu

STEP 1. REDISCOVER CURIOSITY—OPENNESS

One day it came to the attention of the ancient Greek philosopher Socrates that the oracle at Delphi had pronounced him the wisest man in the world. This baffled the philosopher—he did not think himself worthy of such a decree. It made him uncomfortable. He decided to simply go around Athens and find a person who was wiser than he—that should be easy and it would disprove the oracle.

He engaged in many discussions with politicians, poets, craftsmen, and fellow philosophers. He began to realize that the oracle was right. All the people he talked to had such a certainty about things, venturing solid opinions about matters of which they had no experience; they were full of so much air. If you questioned them at all, they could not really defend their opinions, which seemed based on something they had decided years earlier. His superiority, he realized, was that he knew that he knew nothing. This left his mind open to experiencing things as they are, the source of all knowledge.

STEP 2. KNOW THE COMPLETE TERRAIN—EXPANSION

War is fought over specific terrain. But there is more involved than just that. There is also the morale of the enemy soldiers, the political leaders who set them in motion, the minds of the opposing generals who make the key decisions, and the money and resources that stand behind it all. A mediocre general will confine his knowledge to the physical terrain. A better general will try to expand his knowledge by reading reports about the other factors that influence an army. And the superior general will try to intensify this knowledge by observing as much as he can with his own eyes or consulting firsthand sources. Napoleon Bonaparte is the greatest general who ever lived, and what elevated him above all others was the mass of information he absorbed about all of the details of battle, with as few filters as possible. This gave him a superior grasp on reality.

STEP 3. DIG TO THE ROOTS—DEPTH

This must be the power and the direction of your mind whenever you encounter some problem—to bore deeper and deeper until you get at something basic and at the root. Never be satisfied with what presents itself to your eyes. See what underlies it all, absorb it, and then dig deeper. Always question why this particular event has happened, what the motives of the various actors are, who really is in control, who benefits by this action. Often, it will revolve around money and power—that is what people are usually fighting over, despite the surface gloss they give to it. You may never get to the actual root, but the process of digging will bring you closer. And operating in this way will help develop your mind into a powerful analytical instrument.

STEP 4. SEE FURTHER AHEAD—PROPORTION

If you have a long-term goal for yourself, one that you have imagined in detail, then you are better able to make the proper decisions in the present. You know which battles or positions to avoid because they don’t advance you towards your goal. With your gaze lifted to the future, you can focus on the dangers looming on the horizon and take proactive measures to avert them. You have a sense of proportion—sometimes the things we fuss over in the present don’t matter in the long run. All of this gives you an increased power to reach your objectives.

STEP 5. LOOK AT PEOPLE’S DEEDS, NOT WORDS—SHARPNESS

In war or any competitive game, you don’t pay attention to people’s good or bad intentions. They don’t matter. It should be the same in the game of life. Everyone is playing to win, and some people will use moral justifications to advance their side. All you look at are people’s maneuvers —their actions in the past and what you might expect in the future. In this area, you are fiercely realistic. You understand that everyone is after power, and that to get it we all occasionally manipulate and even deceive. That is human nature and there is no shame in it. You don’t take people’s maneuvers personally; you merely try to defend or advance yourself.

In general, looking at people through the lens of your emotions will cloud what you see and make you misunderstand everything. What you want is a sharp eye towards your fellow humans—one that is piercing, objective, and nonjudgmental.

STEP 6. REASSESS YOURSELF—DETACHMENT

Your increasing powers of observation must occasionally be aimed at yourself. Think of this as a ritual you will engage in every few weeks—a rigorous reassessment of who you are and where you are headed.

Chapter 2 - Make Everything Your Own—Self-Reliance

Look at a man like Rubin “Hurricane” Carter—a successful middleweight boxer who found himself arrested in 1966 at the height of his career and charged with a triple murder. The following year he was convicted and sentenced to three consecutive life terms. Through it all Carter vehemently maintained his innocence, and in 1986 he was finally exonerated of the crimes and set free. But for those nineteen years, he had to endure one of the most brutal environments known to man, one designed to break down every last vestige of autonomy.

Carter knew he would be freed at some point. But on the day of his release, would he walk the streets with a spirit crushed by years in prison? Would he be the kind of former prisoner who keeps coming back into the system because he can no longer do anything for himself?

He decided that he would defeat the system—he would use the years in prison to develop his self-reliance so that when he was freed it would mean something. For this purpose, he devised the following strategy: He would act like a free man while surrounded by walls. He would not wear their uniform or carry an ID badge. He was an individual, not a number. He would not eat with the other prisoners, do the assigned tasks, or go to his parole hearings. He was placed in solitary confinement for these transgressions but he was not afraid of the punishments, nor of being alone. He was afraid only of losing his dignity and sense of ownership.

As part of this strategy, he refused to have the usual entertainments in his cell—television, radio, pornographic magazines. He knew he would grow dependent on these weak pleasures and this would give the wardens something to take away from him. Also, such diversions were merely attempts to kill time. Instead he became a voracious reader of books that would help toughen his mind. He wrote an autobiography that gained sympathy for his cause. He taught himself law, determined to get his conviction overturned by himself. He tutored other prisoners in the ideas that he had learned through his reading. In this way, he reclaimed the dead time of prison for his own purposes.

When he was eventually freed, he refused to take civil action against the state—that would acknowledge he had been in prison and needed compensation. He needed nothing. He was now a free man with the essential skills to get power in the world. After prison he became a successful advocate for prisoners’ rights and was awarded several honorary law degrees.

Think of it this way: dependency is a habit that is so easy to acquire. We live in a culture that offers you all kinds of crutches—experts to turn to, drugs to cure any psychological unease, mild pleasures to help pass or kill time, jobs to keep you just above water. It is hard to resist. But once you give in, it is like a prison you enter that you cannot ever leave. You continually look outward for help and this severely limits your options and maneuverability. When the time comes, as it inevitably does, when you must make an important decision, you have nothing inside of yourself to depend on.

Before it is too late, you must move in the opposite direction. You cannot get this requisite inner strength from books or a guru or pills of any kind. It can come only from you. It is a kind of exercise you must practice on a daily basis—weaning yourself from dependencies, listening less to others’ voices and more to your own, cultivating new skills. As happened with Carter, you will find that self-reliance becomes the habit and that anything that smacks of depending on others will horrify you.

Your life must be a progression towards ownership—first mentally of your independence, and then physically of your work, owning what you produce. Think of the following steps as a kind of blueprint for how to move in this direction.

STEP ONE: RECLAIM DEAD TIME

Time is the critical factor in our lives, our most precious resource. The problem when we work for others is that so much of this becomes dead time that we want to pass as quickly as possible, time that is not our own.

STEP TWO: CREATE LITTLE EMPIRES

While still working for others, your goal at some point must be to carve out little areas that you can operate on your own, cultivating entrepreneurial skills. This could mean offering to take over projects that others have left undone or proposing to put into action some new idea of your own, but nothing too grandiose to raise suspicion. What you are doing is cultivating a taste for doing things yourself—making your own decisions, learning from your own mistakes. If you fail in this venture, then you have gained a valuable education. But generally taking on such things on your own initiative forces you to work harder and better. You are more creative and motivated because there is more at stake; you rise to the challenge.

STEP THREE: MOVE HIGHER UP THE FOOD CHAIN

STEP FOUR: MAKE YOUR ENTERPRISE A REFLECTION OF YOUR INDIVIDUALITY

CHAPTER 3 - Turn Shit into Sugar—Opportunism

Events in life are not negative or positive. They are completely neutral. The universe does not care about your fate; it is indifferent to the violence that may hit you or to death itself. Things merely happen to you. It is your mind that chooses to interpret them as negative or positive. And because you have layers of fear that dwell deep within you, your natural tendency is to interpret temporary obstacles in your path as something larger— setbacks and crises.

In such a frame of mind, you exaggerate the dangers. If someone attacks and harms you in some way, you focus on the money or position you have lost in the battle, the negative publicity, or the harsh emotions that have been churned up. This causes you to grow cautious, to retreat, hoping to spare yourself more of these negative things. It is a time, you tell yourself, to lay low and wait for things to get better; you need calmness and security.

What you do not realize is that you are inadvertently making the situation worse. Your rival only gets stronger as you sit back; the negative publicity becomes firmly associated with you. Being conservative turns into a habit that carries over into less difficult moments. It becomes harder and harder to move to the offensive. In essence you have chosen to cast life’s inevitable twists of fortune as hardships, giving them a weight and endurance they do not deserve.

What you need to do is take the opposite approach. Instead of becoming discouraged and depressed by any kind of downturn, you must see this as a wake-up call, a challenge that you will transform into an opportunity for power. Your energy levels rise. You move to the attack, surprising your enemies with boldness. You care less what people think about you and this paradoxically causes them to admire you—the negative publicity is turned around. You do not wait for things to get better —you seize this chance to prove yourself. Mentally framing a negative event as a blessing in disguise makes it easier for you to move forward. It is a kind of mental alchemy, transforming shit into sugar.

MAKE THE MOST OF WHAT YOU HAVE

TURN ALL OBSTACLES INTO OPENINGS

An opportunist in life sees all hindrances as instruments for power. The reason is simple: negative energy that comes at you in some form is energy that can be turned around—to defeat an opponent and lift you up. When there is no such energy, there is nothing to react or push against; it is harder to motivate yourself. Enemies that hit you have opened themselves up to a counterattack in which you control the timing and the dynamic. If bad publicity comes your way, think of it as a form of negative attention that you can easily reframe for your purposes. You can seem contrite or rebellious, whatever will stir up your base. If you ignore it, you look guilty. If you fight it, you seem defensive. If you go with it and channel it in your direction, you have turned it into an opportunity for positive attention. In general, obstacles force your mind to focus and find ways around them. They heighten your mental powers and should be welcomed.

LOOK FOR TURNING POINTS

Look for any sudden successes or failures in the business world that people find hard to explain. These are often indications of shifts going on under the surface; perhaps someone has inadvertently hit upon a new model for doing things and you must analyze this. Examine the greatest anxieties of those on the inside of any business or industry. Deep changes going on usually register as fear to those who do not know how to deal with them. You can be the first to exploit such changes for positive purposes.

MOVE BEFORE YOU ARE READY

Most people wait too long to go into action, generally out of fear. They want more money or better circumstances. You must go the opposite direction and move before you think you are ready. It is as if you are making it a little more difficult for yourself, deliberately creating obstacles in your path. But it is a law of power that your energy will always rise to the appropriate level. When you feel that you must work harder to get to your goal because you are not quite prepared, you are more alert and inventive. This venture has to succeed and so it will.

Remember: as Napoleon said, the moral is to the physical as three to one—meaning the motivation and energy levels you or your army bring to the encounter have three times as much weight as your physical resources. With energy and high morale, a human can overcome almost any obstacle and create opportunity out of nothing.

Chapter 4 - Keep Moving—Calculated Momentum

IN THE PRESENT THERE IS CONSTANT CHANGE AND SO MUCH WE CANNOT CONTROL. IF YOU TRY TO MICROMANAGE IT ALL, YOU LOSE EVEN GREATER CONTROL IN THE LONG RUN. THE ANSWER IS TO LET GO AND MOVE WITH THE CHAOS THAT PRESENTS ITSELF TO YOU—FROM WITHIN IT, YOU WILL FIND ENDLESS OPPORTUNITIES THAT ELUDE MOST PEOPLE. DON’T GIVE OTHERS THE CHANCE TO PIN YOU DOWN; KEEP MOVING AND CHANGING YOUR APPEARANCES TO FIT THE ENVIRONMENT. IF YOU ENCOUNTER WALLS OR BOUNDARIES, SLIP AROUND THEM. DO NOT LET ANYTHING DISRUPT YOUR FLOW.

Life has a particular pace and rhythm, an endless stream of changes that can move slowly or quickly. When you try to stop this flow mentally or physically by holding on to things or people, you fall behind. Your actions become awkward because they are not in relation to present circumstances. It is like moving against a current as opposed to using it to propel you forward.

The first and most important step is to let go of this need to control in such a direct manner. This means that you no longer see change and chaotic moments in life as something to fear, but rather as a source of excitement and opportunity. In a social situation in which you want the ability to influence people, your first move is to bend to their different energies. You see what they bring and you adapt to this, then find a way to divert their energy in your direction. You let go of the past way of doing things and adapt your strategies to the ever-flowing present.

Understand: momentum in life comes from increased fluidity, a willingness to try more, to move in a less constricted fashion. On many levels it remains something hard to put into words, but by understanding the process, becoming more conscious of the elements involved, you can place your mind in a readied position, better able to exploit any positive movement in your life. Call this calculated momentum. For this purpose, you must practice and master the following four types of flow.

MENTAL FLOW

Da Vinci remains the icon and the inspiration for a new form of knowledge. In this form, what matters are the connections between things, not what separates them. The mind has a particular momentum itself; when it heats up and discovers something new, it tends to find other items to study and illuminate. All of the greatest innovations in history come from an openness to discovery, one idea leading to another, sometimes coming from unrelated fields. You must develop this spirit and the same insatiable hunger for knowledge. This comes from widening your fields of study and observation, letting yourself be carried along by what you discover. You will find that you will come up with unexpected ideas, the kind that will lead to new practices or novel opportunities. If things run dry in your particular line of work, you have developed your mind along other lines that you can now exploit. Having such mental flow will allow you to constantly think around any obstacle and maintain your career momentum.

EMOTIONAL FLOW

Forgetting is a skill that you must develop in order to have emotional flow. If you cannot help but feel anger or disgust in the moment, make it a point to not let it remain the following day. When you hold on to emotions like that, it is as if you put blinders on your eyes. For that amount of time, you see and feel only what this emotion dictates, falling behind events. Your mind stops on feelings of failure, disappointment, and mistrust, giving you that awkwardness of someone out of tune with the moment. Without realizing it, all of your strategies become infected by these feelings, pushing you off course.

To combat this, you must learn the art of counterbalance. When you are fearful, force yourself to act in a bolder fashion than usual. When you feel inordinate hate, find some object of love or admiration that you can focus on with intensity. One strong emotion tends to cancel out the other and help you move past it.

It might seem that intense feelings of love, hate, or anger can be used to impel you forward on some project, but that is an illusion. Such emotions give you a burst of energy that falls quickly and leaves you as low as you were high. Rather, you want a more balanced emotional life, with fewer highs and lows. This not only helps you keep moving and overcoming petty obstacles, but it also affects people’s perceptions of you. They come to see you as someone who has grace under pressure, a steady hand, and they will turn to you as a leader. Maintaining such steadiness will keep that positive flow in motion.

SOCIAL FLOW

About your model in any venture that involves groups of people:

You provide the framework, based on your knowledge and expertise, but you allow room for this project to be shaped by those involved in it. They are motivated and creative, helping to give the project more flow and force. You are not going too far in this process; you set the overall direction and tone. You are simply letting go of that fearful need to make people do exactly as you desire. In the long run, you will find that your ability to gently divert people’s energy in your direction gives you a wider range of control over the shape and result of the project.

CULTURAL FLOW

Understand: you exist in a particular cultural moment, with its own flow and style. When you are young you are more sensitive to these fluctuations in taste and so you generally keep up with the present. But as you get older the tendency is for you to become locked in a style that is dead, one that you associate with your youth and its excitement. If enough time passes, your style-lock can become quite ludicrous; you look like a museum piece. Your momentum will grind to a halt as people come to categorize you in a narrow period of time.

Instead you must find a way to periodically reinvent yourself. You are not trying to mimic the latest trend—that will make you look equally ludicrous. You are simply rediscovering that youthful attentiveness to what is happening around you and incorporating what you like into a newer spirit. You are taking pleasure in shaping your personality, wearing a new mask. The only thing you really have to fear is becoming a social and cultural relic.

CHAPTER 5 - Know When to Be Bad—Aggression

THE WAY I LEARNED IT, THE KID IN THE SCHOOL YARD WHO DOESN’T WANT TO FIGHT ALWAYS LEAVES WITH A BLACK EYE. IF YOU INDICATE YOU’LL DO ANYTHING TO AVOID TROUBLE, THAT’S WHEN YOU GET TROUBLE. —50 Cent

This is how it is in life for everyone: people will take from you what they can. If they sense that you are the type of person who accepts and submits, they will push and push until they have established an exploitative relationship with you. Some will do this overtly; others are more slippery and passive aggressive. You must demonstrate to them that there are lines that cannot be crossed; they will pay a price for trying to push you around. This comes from your attitude—fearless and always prepared to fight. It radiates outward and can be read in your manner without you having to speak a word. By a paradoxical law of human nature, trying to please people less will make them more likely in the long run to respect and treat you better.

CHAPTER 6 - Lead from the Front—Authority

To master the art of leadership you must see yourself as playing certain parts that will impress your disciples and make them more likely to follow you with the necessary enthusiasm. The following are the four main roles you must learn to perform.

1: THE VISIONARY

2: THE UNIFIER

A group needs a centripetal force to give it unity and cohesion but it is not enough to have that be you and the force of your personality. Instead it should be a cause that you fearlessly embody. This could be political, ethical, or progressive—you are working to improve the lives of people in your community, for instance. This cause elevates your group above others. It has a quasi-religious aura to it, a kind of cult feeling. Now, to fight or doubt you from within is to stand against this cause and seem selfish. The group, infused with this belief system, will tend to police itself and root out troublemakers. To play this role effectively, you must be a living example of this cause.

3: THE ROLE MODEL

4: THE BOLD KNIGHT

A DISTINGUISHED COMMANDER WITHOUT BOLDNESS IS UNTHINKABLE. NO MAN WHO IS NOT…BOLD CAN PLAY SUCH A ROLE, AND THEREFORE WE CONSIDER THIS QUALITY THE FIRST PREREQUISITE OF THE GREAT MILITARY LEADER. HOW MUCH OF THIS QUALITY REMAINS BY THE TIME HE REACHES SENIOR RANK, AFTER TRAINING AND EXPERIENCE HAVE AFFECTED AND MODIFIED IT, IS ANOTHER QUESTION. THE GREATER THE EXTENT TO WHICH IT IS RETAINED, THE GREATER THE RANGE OF HIS GENIUS. —Carl bon Clausewitz

CHAPTER 7 - Know Your Environment from the Inside Out—Connection

MOST PEOPLE THINK FIRST OF WHAT THEY WANT TO EXPRESS OR MAKE, THEN FIND THE AUDIENCE FOR THEIR IDEA. YOU MUST WORK THE OPPOSITE ANGLE, THINKING FIRST OF THE PUBLIC. YOU NEED TO KEEP YOUR FOCUS ON THEIR CHANGING NEEDS, THE TRENDS THAT ARE WASHING THROUGH THEM. BEGINNING WITH THEIR DEMAND, YOU CREATE THE APPROPRIATE SUPPLY. DO NOT BE AFRAID OF PEOPLE’S CRITICISMS—WITHOUT SUCH FEEDBACK YOUR WORK WILL BE TOO PERSONAL AND DELUSIONAL. YOU MUST MAINTAIN AS CLOSE A RELATIONSHIP TO YOUR ENVIRONMENT AS POSSIBLE, GETTING AN INSIDE “FEEL” FOR WHAT IS HAPPENING AROUND YOU. NEVER LOSE TOUCH WITH YOUR BASE.

All living creatures depend for their survival on their relationship to their environment. If they are particularly sensitive to any kind of change—a danger or an opportunity—they have greater power to dominate their surroundings. It is not simply that the hawk can see farther than any other creature, but that it can see great detail, picking out the slightest alteration in the landscape. Its eyes give it tremendous sensitivity and supreme hunting prowess.

We live in an environment that is mostly human. It consists of the people that we interact with day in and day out. These humans come from many varied backgrounds and cultures. They are individuals with their own unique experiences. To know people well—their differences, their nuances, their emotional life—would give us a great sense of connection and power. We would know how to reach them, communicate more effectively, and influence their actions. But so often we remain on the outside and lack this power. To connect to the environment in this way would mean having to move outside ourselves, train our eyes on people, but so often we prefer to live in our heads, amid our own thoughts and dreams. We strive to make everything in the world familiar and simple. We grow insensitive to people’s differences, to the details that make them individuals.

We are social creatures who make things in order to communicate and connect with those around us. Your goal must be to break down the distance between you and your audience, the base of your support in life. Some of this distance is mental—it comes from your ego and the need to feel superior. Some of it is physical—the nature of your business tends to shut you off from the public with layers of bureaucracy. In any event, what you are seeking is maximum interaction, allowing you to get a feel for people from the inside. You come to thrive off their feedback and criticism. Operating this way, what you produce will not fail to resonate because it will come from the inside. This deep level of interaction is the source of the most powerful and popular works in culture and business, and a political style that truly connects.

The following are four strategies you can use to bring yourself closer to this ideal.

1. CRUSH ALL DISTANCE

2. OPEN INFORMAL CHANNELS OF CRITICISM AND FEEDBACK

3. RECONNECT WITH YOUR BASE

4. CREATE THE SOCIAL MIRROR

Alone, in our minds, we can imagine we have all kinds of powers and abilities. Our egos can inflate to any size. But when we produce something that fails to have the expected impact, we are suddenly faced with a limit— we are not as brilliant or skilled as we had imagined. In such a case, our tendency is to blame others for not understanding it or getting in our way. Our egos are bruised and delicate—criticism from the outside seems like a personal attack, which we cannot endure. We tend to close ourselves off and this makes it doubly difficult to succeed with our next venture.

Instead of turning inward, consider people’s coolness to your idea and their criticisms as a kind of mirror they are holding up to you. A physical mirror turns you into an object; you can see yourself as others see you. Your ego cannot protect you—the mirror does not lie. You use it to correct your appearance and avoid ridicule. The opinions of other people serve a similar function. You view your work from inside your mind, encrusted with all kinds of desires and fears. They see it as an object; they see it as it is. Through their criticisms you can get closer to this objective version and gradually improve what you do. (One caveat: beware of feedback from friends whose judgments could be tainted by feelings of envy or the need to flatter.)

CHAPTER 8 - Respect the Process—Mastery

THE FOOLS IN LIFE WANT THINGS FAST AND EASY-MONEY, SUCCESS, ATTENTION. BOREDOM IS THEIR GREAT ENEMY AND FEAR. WHATEVER THEY MANAGE TO GET SLIPS THROUGH THEIR HANDS AS FAST AS IT COMES IN. YOU, ON THE OTHER HAND, WANT TO OUTLAST YOUR RIVALS. YOU ARE BUILDING THE FOUNDATION FOR SOMETHING THAT CAN CONTINUE TO EXPAND. TO MAKE THIS HAPPEN, YOU WILL HAVE TO SERVE AN APPRENTICESHIP. YOU MUST LEARN EARLY ON TO ENDURE THE HOURS OF PRACTICE AND DRUDGERY, KNOWING THAT IN THE END ALL OF THAT TIME WILL TRANSLATE INTO A HIGHER PLEASURE—MASTERY OF A CRAFT AND OF YOURSELF. YOUR GOAL IS TO REACH THE ULTIMATE SKILL LEVEL—AN INTUITIVE FEEL FOR WHAT MUST COME NEXT.

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ALL OF MAN’S TROUBLES COME FROM NOT KNOWING HOW TO SIT STILL, ALONE IN A ROOM. —Blaise Pascal

The following are five principal strategies for developing the proper relationship to process.

1. PROGRESS THROUGH TRIAL AND ERROR

2. MASTER SOMETHING SIMPLE

3. INTERNALIZE THE RULES OF THE GAME

4. ATTUNE YOURSELF TO THE DETAILS

5. REDISCOVER YOUR NATURAL PERSISTENCE

CHAPTER 9 - Push Beyond Your Limits—Self-Belief

YOUR SENSE OF WHO YOU ARE WILL DETERMINE YOUR ACTIONS AND WHAT YOU END UP GETTING IN LIFE. IF YOU SEE YOUR REACH AS LIMITED, THAT YOU ARE MOSTLY HELPLESS IN THE FACE OF SO MANY DIFFICULTIES, THAT IT IS BEST TO KEEP YOUR AMBITIONS LOW, THEN YOU WILL RECEIVE THE LITTLE THAT YOU EXPECT. KNOWING THIS DYNAMIC, YOU MUST TRAIN YOURSELF FOR THE OPPOSITE—ASK FOR MORE, AIM HIGH, AND BELIEVE THAT YOU ARE DESTINED FOR SOMETHING GREAT. YOUR SENSE OF SELF-WORTH COMES FROM YOU ALONE—NEVER THE OPINION OF OTHERS. WITH A RISING CONFIDENCE IN YOUR ABILITIES, YOU WILL TAKE RISKS THAT WILL INCREASE YOUR CHANCES OF SUCCESS. PEOPLE FOLLOW THOSE WHO KNOW WHERE THEY ARE GOING, SO CULTIVATE AN AIR OF CERTAINTY AND BOLDNESS.

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YOUR OPINION OF YOURSELF BECOMES YOUR REALITY. IF YOU HAVE ALL THESE DOUBTS, THEN NO ONE WILL BELIEVE IN YOU AND EVERYTHING WILL GO WRONG. IF YOU THINK THE OPPOSITE, THE OPPOSITE WILL HAPPEN. IT’S THAT SIMPLE. —50 Cent

What block us from moving in the direction of self-belief are the pressures we feel to conform; our rigid, habitual patterns of thinking; and our self-doubts and fears. The following are five strategies to help you push past these limits.

1. DEFY ALL CATEGORIES

Understand: the day you were born you became engaged in a struggle that continues to this day and will determine your success or failure in life. You are an individual, with ideas and skills that make you unique. But people are constantly trying to fit you into narrow categories that make you more predictable and easier to manage. They want to see you as shy or outgoing, sensitive or tough. If you succumb to this pressure, then you may gain some social acceptance, but you will lose the unconventional parts of your character that are the source of your uniqueness and power. You must resist this process at all costs, seeing people’s neat and tidy judgments as a form of confinement. Your task is to retain or rediscover those aspects of your character that defy categorization, and to give them even greater play. Remaining unique, you will create something unique and inspire the kind of respect you would never receive from tepid conformity.

2. CONSTANTLY REINVENT YOURSELF

3. SUBVERT YOUR PATTERNS

What often prevent us from using the mental fluidity and freedom that we naturally possess are the physical routines in our lives. We see the same people and do the same things, and our minds follow these patterns. The solution then is to break this up. For instance, we could deliberately indulge in some random, even irrational act, perhaps doing the very opposite of what we would normally do in our day-to-day life. By taking an action we have never done before, we place ourselves in unfamiliar territory—our minds naturally awaken to the novel situation. In a similar vein, we can force ourselves to take different routes, visit strange places, encounter different people, wake up at odd hours, or read books that challenge our minds instead of dull them. We should practice this when we feel particularly blocked and uncreative. In such moments, it is best to be ruthless with ourselves and our patterns.

4. CREATE A SENSE OF DESTINY

The higher your self-belief, the more your power to transform reality. Having supreme confidence makes you fearless and persistent, allowing you to overcome obstacles that stop most people in their tracks. It makes others believe in you as well. And the most intense form of self-belief is to feel a sense of destiny impelling you forward. This destiny can come from otherworldly sources or it can come from yourself. Think of it in these terms: you have a set of skills and experiences that make you unique. They point towards some life task that you were meant to accomplish. You see signs of this in the predilections of your youth, certain tasks you were naturally drawn to. When you are involved in this task, everything seems to flow more naturally. Believing you are destined to accomplish something does not make you passive or unfree, but the opposite. You are liberated of the normal doubts and confusions that plague us. You have a sense of purpose that guides you but does not chain you to one way of doing things. And when your willpower is so deeply engaged, it will push you past any limits or dangers.

5. BET ON YOURSELF

CHAPTER 10 - Confront Your Mortality—the Sublime

IN THE FACE OF OUR INEVITABLE MORTALITY WE CAN DO ONE OF TWO THINGS. WE CAN ATTEMPT TO AVOID THE THOUGHT AT ALL COSTS, CLINGING TO THE ILLUSION THAT WE HAVE ALL THE TIME IN THE WORLD. OR WE CAN CONFRONT THIS REALITY, ACCEPT AND EVEN EMBRACE IT, CONVERTING OUR CONSCIOUSNESS OF DEATH INTO SOMETHING POSITIVE AND ACTIVE. IN ADOPTING SUCH A FEARLESS PHILOSOPHY, WE GAIN A SENSE OF PROPORTION, BECOME ABLE TO SEPARATE WHAT IS PETTY FROM WHAT IS TRULY IMPORTANT. KNOWING OUR DAYS TO BE NUMBERED, WE HAVE A SENSE OF URGENCY AND MISSION. WE CAN APPRECIATE LIFE ALL THE MORE FOR ITS IMPERMANENCE. IF WE CAN OVERCOME THE FEAR OF DEATH, THEN THERE IS NOTHING LEFT TO FEAR.

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I HAD REACHED THE POINT AT WHICH I WAS NOT AFRAID TO DIE. THIS SPIRIT MADE ME A FREEMAN IN FACT, WHILE I REMAINED A SLAVE IN FORM. —Frederick Douglass

Thank you!

Sunday, June 30, 2019

Zero to one (by Peter Thiel) -- Book Summary


Reading from preface...

EVERY MOMENT IN BUSINESS happens only once. The next Bill Gates will not build operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them. Of course, it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. The act of creation is singular, as is the moment of creation, and the result is something fresh and strange. Unless they invest in the difficult task of creating new things, American companies will fail in the future no matter how big their profits remain today. What happens when we’ve gained everything to be had from fine-tuning the old lines of business that we’ve inherited? Unlikely as it sounds, the answer threatens to be far worse than the crisis of 2008. Today’s “best practices” lead to dead ends; the best paths are new and untried.

WHENEVER I INTERVIEW someone for a job, I like to ask this question: “What important truth do very few people agree with you on?” This question sounds easy because it’s straightforward. Actually, it’s very hard to answer. It’s intellectually difficult because the knowledge that everyone is taught in school is by definition agreed upon. And it’s psychologically difficult because anyone trying to answer must say something she knows to be unpopular. Brilliant thinking is rare, but courage is in even shorter supply than genius. Most commonly, I hear answers like the following: “Our educational system is broken and urgently needs to be fixed.” “America is exceptional.” “There is no God.” Those are bad answers. The first and the second statements might be true, but many people already agree with them. The third statement simply takes one side in a familiar debate. A good answer takes the following form: “Most people believe in x, but the truth is the opposite of x.” I’ll give my own answer later in this chapter.

ZERO TO ONE: THE FUTURE OF PROGRESS

When we think about the future, we hope for a future of progress. That progress can take one of two forms. Horizontal or extensive progress means copying things that work—going from 1 to n. Horizontal progress is easy to imagine because we already know what it looks like. Vertical or intensive progress means doing new things—going from 0 to 1. Vertical progress is harder to imagine because it requires doing something nobody else has ever done. If you take one typewriter and build 100, you have made horizontal progress. If you have a typewriter and build a word processor, you have made vertical progress.


The single word for vertical, 0 to 1 progress is technology. The rapid progress of information technology in recent decades has made Silicon Valley the capital of “technology” in general. But there is no reason why technology should be limited to computers. Properly understood, any new and better way of doing things is technology.


STARTUP THINKING

A startup is the largest group of people you can convince of a plan to build a different future. A new company’s most important strength is new thinking: even more important than nimbleness, small size affords space to think. This book is about the questions you must ask and answer to succeed in the business of doing new things: what follows is not a manual or a record of knowledge but an exercise in thinking. Because that is what a startup has to do: question received ideas and rethink business from scratch.


LESSONS LEARNED

’Cause they say 2,000 zero zero party over, oops! Out of time!

So tonight I’m gonna party like it’s 1999!

—PRINCE

The NASDAQ reached 5,048 at its peak in the middle of March 2000 and then crashed to 3,321 in the middle of April. By the time it bottomed out at 1,114 in October 2002, the country had long since interpreted the market’s collapse as a kind of divine judgment against the technological optimism of the ’90s. The era of cornucopian hope was relabeled as an era of crazed greed and declared to be definitely over.

Everyone learned to treat the future as fundamentally indefinite, and to dismiss as an extremist anyone with plans big enough to be measured in years instead of quarters. Globalization replaced technology as the hope for the future. Since the ’90s migration “from bricks to clicks” didn’t work as hoped, investors went back to bricks (housing) and BRICs (globalization). The result was another bubble, this time in real estate.


THE DOT-COM CRASH

The entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash that still guide business thinking today:

1. Make incremental advances

Grand visions inflated the bubble, so they should not be indulged. Anyone who claims to be able to do something great is suspect, and anyone who wants to change the world should be more humble. Small, incremental steps are the only safe path forward.

2. Stay lean and flexible

All companies must be “lean,” which is code for “unplanned.” You should not know what your business will do; planning is arrogant and inflexible. Instead you should try things out, “iterate,” and treat entrepreneurship as agnostic experimentation.

3. Improve on the competition

Don’t try to create a new market prematurely. The only way to know you have a real business is to start with an already existing customer, so you should build your company by improving on recognizable products already offered by successful competitors.

4. Focus on product, not sales

If your product requires advertising or salespeople to sell it, it’s not good enough: technology is primarily about product development, not distribution. Bubble-era advertising was obviously wasteful, so the only sustainable growth is viral growth.

These lessons have become dogma in the startup world; those who would ignore them are presumed to invite the justified doom visited upon technology in the great crash of 2000. And yet the opposite principles are probably more correct:

1. It is better to risk boldness than triviality.

2. A bad plan is better than no plan.

3. Competitive markets destroy profits.

4. Sales matters just as much as product.

It’s true that there was a bubble in technology. The late ’90s was a time of hubris: people believed in going from 0 to 1. Too few startups were actually getting there, and many never went beyond talking about it. But people understood that we had no choice but to find ways to do more with less. The market high of March 2000 was obviously a peak of insanity; less obvious but more important, it was also a peak of clarity. People looked far into the future, saw how much valuable new technology we would need to get there safely, and judged themselves capable of creating it.

We still need new technology, and we may even need some 1999-style hubris and exuberance to get it. To build the next generation of companies, we must abandon the dogmas created after the crash. That doesn’t mean the opposite ideas are automatically true: you can’t escape the madness of crowds by dogmatically rejecting them. Instead ask yourself: how much of what you know about business is shaped by mistaken reactions to past mistakes? The most contrarian thing of all is not to oppose the crowd but to think for yourself.

ALL HAPPY COMPANIES ARE DIFFERENT!

THE BUSINESS VERSION of our contrarian question is: what valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value is not enough—you also need to capture some of the value you create.

This means that even very big businesses can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline industry’s profit margin that year. Google makes so much money that it’s now worth three times more than every U.S. airline combined. The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain the difference: perfect competition and monopoly.

“Perfect competition” is considered both the ideal and the default state in Economics 101. Socalled perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down, and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they’ll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.

The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits.

To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state, or innovates its way to the top. In this book, we’re not interested in illegal bullies or government favorites: by “monopoly,” we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute. Google is a good example of a company that went from 0 to 1: it hasn’t competed in search since the early 2000s, when it definitively distanced itself from Microsoft and Yahoo!

Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.

Monopoly Lies

Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized, and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly—usually by exaggerating the power of their (nonexistent) competition.

Think about how Google talks about its business. It certainly doesn’t claim to be a monopoly. But is it one? Well, it depends: a monopoly in what? Let’s say that Google is primarily a search engine. As of May 2014, it owns about 68% of the search market. (Its closest competitors, Microsoft and Yahoo!, have about 19% and 10%, respectively.) If that doesn’t seem dominant enough, consider the fact that the word “google” is now an official entry in the Oxford English Dictionary—as a verb. Don’t hold your breath waiting for that to happen to Bing.

But suppose we say that Google is primarily an advertising company. That changes things. The U.S. search engine advertising market is $17 billion annually. Online advertising is $37 billion annually. The entire U.S. advertising market is $150 billion. And global advertising is a $495 billion market. So even if Google completely monopolized U.S. search engine advertising, it would own just 3.4% of the global advertising market. From this angle, Google looks like a small player in a competitive world.


What if we frame Google as a multifaceted technology company instead? This seems reasonable enough; in addition to its search engine, Google makes dozens of other software products, not to mention robotic cars, Android phones, and wearable computers. But 95% of Google’s revenue comes from search advertising; its other products generated just $2.35 billion in 2012, and its consumer tech products a mere fraction of that. Since consumer tech is a $964 billion market globally, Google owns less than 0.24% of it—a far cry from relevance, let alone monopoly. Framing itself as just another tech company allows Google to escape all sorts of unwanted attention.

Competitive Lies

Non-monopolists tell the opposite lie: “we’re in a league of our own.” Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition. Suppose you want to start a restaurant that serves British food in Palo Alto. “No one else is doing it,” you might reason. “We’ll own the entire market.” But that’s only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well? These are hard questions, but the bigger problem is that you have an incentive not to ask them at all. When you hear that most new restaurants fail within one or two years, your instinct will be to come up with a story about how yours is different. You’ll spend time trying to convince people that you are exceptional instead of seriously considering whether that’s true. It would be better to pause and consider whether there are people in Palo Alto who would rather eat British food above all else. It’s very possible they don’t exist.

In 2001, my co-workers at PayPal and I would often get lunch on Castro Street in Mountain View. We had our pick of restaurants, starting with obvious categories like Indian, sushi, and burgers. There were more options once we settled on a type: North Indian or South Indian, cheaper or fancier, and so on. In contrast to the competitive local restaurant market, PayPal was at that time the only emailbased payments company in the world. We employed fewer people than the restaurants on Castro Street did, but our business was much more valuable than all of those restaurants combined. Starting a new South Indian restaurant is a really hard way to make money. If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother’s recipe—your business is unlikely to survive.

Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets:

British food ∩ restaurant ∩ Palo Alto

Rap star ∩ hackers ∩ sharks

Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets:

search engine ∪ mobile phones ∪ wearable computers ∪ self-driving cars

What does a monopolist’s union story look like in practice? Consider a statement from Google chairman Eric Schmidt’s testimony at a 2011 congressional hearing: We face an extremely competitive landscape in which consumers have a multitude of options to access information. Or, translated from PR-speak to plain English: Google is a small fish in a big pond. We could be swallowed whole at any time. We are not the monopoly that the government is looking for.

RUTHLESS PEOPLE

The problem with a competitive business goes beyond lack of profits. Imagine you’re running one of those restaurants in Mountain View. You’re not that different from dozens of your competitors, so you’ve got to fight hard to survive. If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you’ll need to squeeze out every efficiency: that’s why small restaurants put Grandma to work at the register and make the kids wash dishes in the back. Restaurants aren’t much better even at the very highest rungs, where reviews and ratings like Michelin’s star system enforce a culture of intense competition that can drive chefs crazy. (French chef and winner of three Michelin stars Bernard Loiseau was quoted as saying, “If I lose a star, I will commit suicide.” Michelin maintained his rating, but Loiseau killed himself anyway in 2003 when a competing French dining guide downgraded his restaurant.) The competitive ecosystem pushes people toward ruthlessness or death.

A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products, and its impact on the wider world. Google’s motto—“Don’t be evil”—is in part a branding ploy, but it’s also characteristic of a kind of business that’s successful enough to take ethics seriously without jeopardizing its own existence. In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.

MONOPOLY CAPITALISM

Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can’t dream of.

Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.

Tolstoy opens Anna Karenina by observing: “All happy families are alike; each unhappy family is unhappy in its own way.” Business is the opposite. All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.

WAR AND PEACE

Why do people compete with each other? Marx and Shakespeare provide two models for understanding almost every kind of conflict.

According to Marx, people fight because they are different. The proletariat fights the bourgeoisie because they have completely different ideas and goals (generated, for Marx, by their very different material circumstances). The greater the differences, the greater the conflict. To Shakespeare, by contrast, all combatants look more or less alike. It’s not at all clear why they should be fighting, since they have nothing to fight about. Consider the opening line from Romeo and Juliet: “Two households, both alike in dignity.” The two houses are alike, yet they hate each other. They grow even more similar as the feud escalates. Eventually, they lose sight of why they started fighting in the first place.

In the world of business, at least, Shakespeare proves the superior guide. Inside a firm, people become obsessed with their competitors for career advancement. Then the firms themselves become obsessed with their competitors in the marketplace. Amid all the human drama, people lose sight of what matters and focus on their rivals instead.

Let’s test the Shakespearean model in the real world. Imagine a production called Gates and Schmidt, based on Romeo and Juliet. Montague is Microsoft. Capulet is Google. Two great families, run by alpha nerds, sure to clash on account of their sameness. As with all good tragedy, the conflict seems inevitable only in retrospect. In fact it was entirely avoidable. These families came from very different places. The House of Montague built operating systems and office applications. The House of Capulet wrote a search engine. What was there to fight about?

Lots, apparently. As a startup, each clan had been content to leave the other alone and prosper independently. But as they grew, they began to focus on each other. Montagues obsessed about Capulets obsessed about Montagues. The result? Windows vs. Chrome OS, Bing vs. Google Search, Explorer vs. Chrome, Office vs. Docs, and Surface vs. Nexus. Just as war cost the Montagues and Capulets their children, it cost Microsoft and Google their dominance: Apple came along and overtook them all. In January 2013, Apple’s market capitalization was $500 billion, while Google and Microsoft combined were worth $467 billion. Just three years before, Microsoft and Google were each more valuable than Apple. War is costly business.

Competition can make people hallucinate opportunities where none exist. The crazy ’90s version of this was the fierce battle for the online pet store market. It was Pets.com vs. PetStore.com vs. Petopia.com vs. what seemed like dozens of others. Each company was obsessed with defeating its rivals, precisely because there were no substantive differences to focus on. Amid all the tactical questions—Who could price chewy dog toys most aggressively? Who could create the best Super Bowl ads?—these companies totally lost sight of the wider question of whether the online pet supply market was the right space to be in. Winning is better than losing, but everybody loses when the war isn’t one worth fighting. When Pets.com folded after the dot-com crash, $300 million of investment capital disappeared with it.

CHARACTERISTICS OF MONOPOLY

What does a company with large cash flows far into the future look like? Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding. This isn’t a list of boxes to check as you build your business—there’s no shortcut to monopoly. However, analyzing your business according to these characteristics can help you think about how to make it durable.

1. Proprietary Technology

Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate. Google’s search algorithms, for example, return results better than anyone else’s. Proprietary technologies for extremely short page load times and highly accurate query autocompletion add to the core search product’s robustness and defensibility. It would be very hard for anyone to do to Google what Google did to all the other search engine companies in the early 2000s.

As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market.

The clearest way to make a 10x improvement is to invent something completely new. If you build something valuable where there was nothing before, the increase in value is theoretically infinite. A drug to safely eliminate the need for sleep, or a cure for baldness, for example, would certainly support a monopoly business.

Or you can radically improve an existing solution: once you’re 10x better, you escape competition. PayPal, for instance, made buying and selling on eBay at least 10 times better. Instead of mailing a check that would take 7 to 10 days to arrive, PayPal let buyers pay as soon as an auction ended. Sellers received their proceeds right away, and unlike with a check, they knew the funds were good. Amazon made its first 10x improvement in a particularly visible way: they offered at least 10 times as many books as any other bookstore. When it launched in 1995, Amazon could claim to be “Earth’s largest bookstore” because, unlike a retail bookstore that might stock 100,000 books, Amazon didn’t need to physically store any inventory—it simply requested the title from its supplier whenever a customer made an order. This quantum improvement was so effective that a very unhappy Barnes & Noble filed a lawsuit three days before Amazon’s IPO, claiming that Amazon was unfairly calling itself a “bookstore” when really it was a “book broker.”

You can also make a 10x improvement through superior integrated design. Before 2010, tablet computing was so poor that for all practical purposes the market didn’t even exist. “Microsoft Windows XP Tablet PC Edition” products first shipped in 2002, and Nokia released its own “Internet Tablet” in 2005, but they were a pain to use. Then Apple released the iPad. Design improvements are hard to measure, but it seems clear that Apple improved on anything that had come before by at least an order of magnitude: tablets went from unusable to useful.

2. Network Effects

Network effects make a product more useful as more people use it. For example, if all your friends are on Facebook, it makes sense for you to join Facebook, too. Unilaterally choosing a different social network would only make you an eccentric.

Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small. For example, in 1960 a quixotic company called Xanadu set out to build a two-way communication network between all computers—a sort of early, synchronous version of the World Wide Web. After more than three decades of futile effort, Xanadu folded just as the web was becoming commonplace. Their technology probably would have worked at scale, but it could have worked only at scale: it required every computer to join the network at the same time, and that was never going to happen.

Paradoxically, then, network effects businesses must start with especially small markets. Facebook started with just Harvard students—Mark Zuckerberg’s first product was designed to get all his classmates signed up, not to attract all people of Earth. This is why successful network businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all.

3. Economies of Scale

A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales. Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.

Many businesses gain only limited advantages as they grow to large scale. Service businesses especially are difficult to make monopolies. If you own a yoga studio, for example, you’ll only be able to serve a certain number of customers. You can hire more instructors and expand to more locations, but your margins will remain fairly low and you’ll never reach a point where a core group of talented people can provide something of value to millions of separate clients, as software engineers are able to do.

A good startup should have the potential for great scale built into its first design. Twitter already has more than 250 million users today. It doesn’t need to add too many customized features in order to acquire more, and there’s no inherent reason why it should ever stop growing.

4. Branding

A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly. Today’s strongest tech brand is Apple: the attractive looks and carefully chosen materials of products like the iPhone and MacBook, the Apple Stores’ sleek minimalist design and close control over the consumer experience, the omnipresent advertising campaigns, the price positioning as a maker of premium goods, and the lingering nimbus of Steve Jobs’s personal charisma all contribute to a perception that Apple offers products so good as to constitute a category of their own.

Many have tried to learn from Apple’s success: paid advertising, branded stores, luxurious materials, playful keynote speeches, high prices, and even minimalist design are all susceptible to imitation. But these techniques for polishing the surface don’t work without a strong underlying substance. Apple has a complex suite of proprietary technologies, both in hardware (like superior touchscreen materials) and software (like touchscreen interfaces purpose-designed for specific materials). It manufactures products at a scale large enough to dominate pricing for the materials it buys. And it enjoys strong network effects from its content ecosystem: thousands of developers write software for Apple devices because that’s where hundreds of millions of users are, and those users stay on the platform because it’s where the apps are. These other monopolistic advantages are less obvious than Apple’s sparkling brand, but they are the fundamentals that let the branding effectively reinforce Apple’s monopoly.

Beginning with brand rather than substance is dangerous. Ever since Marissa Mayer became CEO of Yahoo! in mid-2012, she has worked to revive the once-popular internet giant by making it cool again. In a single tweet, Yahoo! summarized Mayer’s plan as a chain reaction of “people then products then traffic then revenue.” The people are supposed to come for the coolness: Yahoo! demonstrated design awareness by overhauling its logo, it asserted youthful relevance by acquiring hot startups like Tumblr, and it has gained media attention for Mayer’s own star power. But the big question is what products Yahoo! will actually create. When Steve Jobs returned to Apple, he didn’t just make Apple a cool place to work; he slashed product lines to focus on the handful of opportunities for 10x improvements. No technology company can be built on branding alone.

BUILDING A MONOPOLY

1. Start Small and Monopolize

Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market. Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one. If you think your initial market might be too big, it almost certainly is.

Small doesn’t mean nonexistent. We made this mistake early on at PayPal. Our first product let people beam money to each other via PalmPilots. It was interesting technology and no one else was doing it. However, the world’s millions of PalmPilot users weren’t concentrated in a particular place, they had little in common, and they used their devices only episodically. Nobody needed our product, so we had no customers.

With that lesson learned, we set our sights on eBay auctions, where we found our first success. In late 1999, eBay had a few thousand high-volume “PowerSellers,” and after only three months of dedicated effort, we were serving 25% of them. It was much easier to reach a few thousand people who really needed our product than to try to compete for the attention of millions of scattered individuals. The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Any big market is a bad choice, and a big market already served by competing companies is even worse. This is why it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market. In practice, a large market will either lack a good starting point or it will be open to competition, so it’s hard to ever reach that 1%. And even if you do succeed in gaining a small foothold, you’ll have to be satisfied with keeping the lights on: cutthroat competition means your profits will be zero.

2. Scaling Up

Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets. Amazon shows how it can be done. Jeff Bezos’s founding vision was to dominate all of online retail, but he very deliberately started with books. There were millions of books to catalog, but they all had roughly the same shape, they were easy to ship, and some of the most rarely sold books—those least profitable for any retail store to keep in stock—also drew the most enthusiastic customers. Amazon became the dominant solution for anyone located far from a bookstore or seeking something unusual. Amazon then had two options: expand the number of people who read books, or expand to adjacent markets. They chose the latter, starting with the most similar markets: CDs, videos, and software. Amazon continued to add categories gradually until it had become the world’s general store. The name itself brilliantly encapsulated the company’s scaling strategy. The biodiversity of the Amazon rain forest reflected Amazon’s first goal of cataloging every book in the world, and now it stands for every kind of thing in the world, period.

eBay also started by dominating small niche markets. When it launched its auction marketplace in 1995, it didn’t need the whole world to adopt it at once; the product worked well for intense interest groups, like Beanie Baby obsessives. Once it monopolized the Beanie Baby trade, eBay didn’t jump straight to listing sports cars or industrial surplus: it continued to cater to small-time hobbyists until it became the most reliable marketplace for people trading online no matter what the item. Sometimes there are hidden obstacles to scaling—a lesson that eBay has learned in recent years. Like all marketplaces, the auction marketplace lent itself to natural monopoly because buyers go where the sellers are and vice versa. But eBay found that the auction model works best for individually distinctive products like coins and stamps. It works less well for commodity products: people don’t want to bid on pencils or Kleenex, so it’s more convenient just to buy them from Amazon. eBay is still a valuable monopoly; it’s just smaller than people in 2004 expected it to be. Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.

3. Don’t Disrupt

Silicon Valley has become obsessed with “disruption.” Originally, “disruption” was a term of art to describe how a firm can use new technology to introduce a low-end product at low prices, improve the product over time, and eventually overtake even the premium products offered by incumbent companies using older technology. This is roughly what happened when the advent of PCs disrupted the market for mainframe computers: at first PCs seemed irrelevant, then they became dominant. Today mobile devices may be doing the same thing to PCs. However, disruption has recently transmogrified into a self-congratulatory buzzword for anything posing as trendy and new. This seemingly trivial fad matters because it distorts an entrepreneur’s self-understanding in an inherently competitive way. The concept was coined to describe threats to incumbent companies, so startups’ obsession with disruption means they see themselves through older firms’ eyes. If you think of yourself as an insurgent battling dark forces, it’s easy to become unduly fixated on the obstacles in your path. But if you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create. Indeed, if your company can be summed up by its opposition to already existing firms, it can’t be completely new and it’s probably not going to become a monopoly.

Disruption also attracts attention: disruptors are people who look for trouble and find it. Disruptive kids get sent to the principal’s office. Disruptive companies often pick fights they can’t win. Think of Napster: the name itself meant trouble. What kinds of things can one “nap”? Music … Kids … and perhaps not much else. Shawn Fanning and Sean Parker, Napster’s then-teenage founders, credibly threatened to disrupt the powerful music recording industry in 1999. The next year, they made the cover of Time magazine. A year and a half after that, they ended up in bankruptcy court. PayPal could be seen as disruptive, but we didn’t try to directly challenge any large competitor. It’s true that we took some business away from Visa when we popularized internet payments: you might use PayPal to buy something online instead of using your Visa card to buy it in a store. But since we expanded the market for payments overall, we gave Visa far more business than we took. The overall dynamic was net positive, unlike Napster’s negative-sum struggle with the U.S. recording industry. As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.

THE LAST WILL BE FIRST

You’ve probably heard about “first mover advantage”: if you’re the first entrant into a market, you can capture significant market share while competitors scramble to get started. But moving first is a tactic, not a goal. What really matters is generating cash flows in the future, so being the first mover doesn’t do you any good if someone else comes along and unseats you. It’s much better to be the last mover—that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits. The way to do that is to dominate a small niche and scale up from there, toward your ambitious long-term vision. In this one particular at least, business is like chess. Grandmaster José Raúl Capablanca put it well: to succeed, “you must study the endgame before everything else.”

YOU ARE NOT A LOTTERY TICKET

THE MOST CONTENTIOUS question in business is whether success comes from luck or skill.

What do successful people say? Malcolm Gladwell, a successful author who writes about successful people, declares in Outliers that success results from a “patchwork of lucky breaks and arbitrary advantages.” Warren Buffett famously considers himself a “member of the lucky sperm club” and a winner of the “ovarian lottery.” Jeff Bezos attributes Amazon’s success to an “incredible planetary alignment” and jokes that it was “half luck, half good timing, and the rest brains.” Bill Gates even goes so far as to claim that he “was lucky to be born with certain skills,” though it’s not clear whether that’s actually possible.

Perhaps these guys are being strategically humble. However, the phenomenon of serial entrepreneurship would seem to call into question our tendency to explain success as the product of chance. Hundreds of people have started multiple multimillion-dollar businesses. A few, like Steve Jobs, Jack Dorsey, and Elon Musk, have created several multibillion-dollar companies. If success were mostly a matter of luck, these kinds of serial entrepreneurs probably wouldn’t exist.

In January 2013, Jack Dorsey, founder of Twitter and Square, tweeted to his 2 million followers: “Success is never accidental.”

Most of the replies were unambiguously negative. Referencing the tweet in The Atlantic, reporter Alexis Madrigal wrote that his instinct was to reply: “ ‘Success is never accidental,’ said all multimillionaire white men.” It’s true that already successful people have an easier time doing new things, whether due to their networks, wealth, or experience. But perhaps we’ve become too quick to dismiss anyone who claims to have succeeded according to plan.

Is there a way to settle this debate objectively? Unfortunately not, because companies are not experiments. To get a scientific answer about Facebook, for example, we’d have to rewind to 2004, create 1,000 copies of the world, and start Facebook in each copy to see how many times it would succeed. But that experiment is impossible. Every company starts in unique circumstances, and every company starts only once. Statistics doesn’t work when the sample size is one.

From the Renaissance and the Enlightenment to the mid-20th century, luck was something to be mastered, dominated, and controlled; everyone agreed that you should do what you could, not focus on what you couldn’t. Ralph Waldo Emerson captured this ethos when he wrote: “Shallow men believe in luck, believe in circumstances.… Strong men believe in cause and effect.” In 1912, after he became the first explorer to reach the South Pole, Roald Amundsen wrote: “Victory awaits him who has everything in order—luck, people call it.” No one pretended that misfortune didn’t exist, but prior generations believed in making their own luck by working hard.

If you believe your life is mainly a matter of chance, why read this book? Learning about startups is worthless if you’re just reading stories about people who won the lottery. Slot Machines for Dummies can purport to tell you which kind of rabbit’s foot to rub or how to tell which machines are “hot,” but it can’t tell you how to win.

Did Bill Gates simply win the intelligence lottery? Was Sheryl Sandberg born with a silver spoon, or did she “lean in”? When we debate historical questions like these, luck is in the past tense. Far more important are questions about the future: is it a matter of chance or design?

Futurists fall into four categories:

Vertical dimension has people who are either “Optimistic” view or “Pessimistic” view about the future.

Horizontal dimension has people who are either “Definite” about what they are going to do to build their future, or the second category of people who are “Indefinite” about what should be done to build the future.

The chart above also show how their investment and savings behavior will be.

THE POWER LAW OF VENTURE CAPITAL

If you rank the best companies to invest in the past year on the horizontal axis and the returns that these companies provided on the vertical axis, you will find that the drop in the returns with respect to ranked companies is exponential.

FOUNDATIONS

EVERY GREAT COMPANY is unique, but there are a few things that every business must get right at the beginning. I stress this so often that friends have teasingly nicknamed it “Thiel’s law”: a startup messed up at its foundation cannot be fixed.

Beginnings are special. They are qualitatively different from all that comes afterward. This was true 13.8 billion years ago, at the founding of our cosmos: in the earliest microseconds of its existence, the universe expanded by a factor of 1030—a million trillion trillion. As cosmogonic epochs came and went in those first few moments, the very laws of physics were different from those we know today.

It was also true 227 years ago at the founding of our country: fundamental questions were open for debate by the Framers during the few months they spent together at the Constitutional Convention. How much power should the central government have? How should representation in Congress be apportioned? Whatever your views on the compromises reached that summer in Philadelphia, they’ve been hard to change ever since: after ratifying the Bill of Rights in 1791, we’ve amended the Constitution only 17 times. Today, California has the same representation in the Senate as Alaska, even though it has more than 50 times as many people. Maybe that’s a feature, not a bug. But we’re probably stuck with it as long as the United States exists. Another constitutional convention is unlikely; today we debate only smaller questions.

Companies are like countries in this way. Bad decisions made early on—if you choose the wrong partners or hire the wrong people, for example—are very hard to correct after they are made. It may take a crisis on the order of bankruptcy before anybody will even try to correct them. As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.

OWNERSHIP, POSSESSION, AND CONTROL

To anticipate likely sources of misalignment in any company, it’s useful to distinguish between three concepts:

• Ownership: who legally owns a company’s equity?

• Possession: who actually runs the company on a day-to-day basis?

• Control: who formally governs the company’s affairs?

A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjoy possession. And a board of directors, usually comprising founders and investors, exercises control.

In the boardroom, less is more. The smaller the board, the easier it is for the directors to communicate, to reach consensus, and to exercise effective oversight. However, that very effectiveness means that a small board can forcefully oppose management in any conflict. This is why it’s crucial to choose wisely: every single member of your board matters. Even one problem director will cause you pain, and may even jeopardize your company’s future.

A board of three is ideal. Your board should never exceed five people, unless your company is publicly held. (Government regulations effectively mandate that public companies have larger boards —the average is nine members.) By far the worst you can do is to make your board extra large. When unsavvy observers see a nonprofit organization with dozens of people on its board, they think: “Look how many great people are committed to this organization! It must be extremely well run.” Actually, a huge board will exercise no effective oversight at all; it merely provides cover for whatever microdictator actually runs the organization. If you want that kind of free rein from your board, blow it up to giant size. If you want an effective board, keep it small.

ON THE BUS OR OFF THE BUS

As a general rule, everyone you involve with your company should be involved full-time. Sometimes you’ll have to break this rule; it usually makes sense to hire outside lawyers and accountants, for example. However, anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. At the margin, they’ll be biased to claim value in the near term, not help you create more in the future. That’s why hiring consultants doesn’t work. Part-time employees don’t work. Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day. If you’re deciding whether to bring someone on board, the decision is binary. Ken Kesey was right: you’re either on the bus or off the bus.

SALES IS HIDDEN

All salesmen are actors: their priority is persuasion, not sincerity. That’s why the word “salesman” can be a slur and the used car dealer is our archetype of shadiness. But we only react negatively to awkward, obvious salesmen—that is, the bad ones. There’s a wide range of sales ability: there are many gradations between novices, experts, and masters. There are even sales grandmasters. If you don’t know any grandmasters, it’s not because you haven’t encountered them, but rather because their art is hidden in plain sight. Tom Sawyer managed to persuade his neighborhood friends to whitewash the fence for him—a masterful move. But convincing them to actually pay him for the privilege of doing his chores was the move of a grandmaster, and his friends were none the wiser. Not much has changed since Twain wrote in 1876.

Like acting, sales works best when hidden. This explains why almost everyone whose job involves distribution—whether they’re in sales, marketing, or advertising—has a job title that has nothing to do with those things. People who sell advertising are called “account executives.” People who sell customers work in “business development.” People who sell companies are “investment bankers.” And people who sell themselves are called “politicians.” There’s a reason for these redescriptions: none of us wants to be reminded when we’re being sold. Whatever the career, sales ability distinguishes superstars from also-rans. On Wall Street, a new hire starts as an “analyst” wielding technical expertise, but his goal is to become a dealmaker. A lawyer prides himself on professional credentials, but law firms are led by the rainmakers who bring in big clients. Even university professors, who claim authority from scholarly achievement, are envious of the self-promoters who define their fields. Academic ideas about history or English don’t just sell themselves on their intellectual merits. Even the agenda of fundamental physics and the future path of cancer research are results of persuasion. The most fundamental reason that even businesspeople underestimate the importance of sales is the systematic effort to hide it at every level of every field in a world secretly driven by it.

The engineer’s grail is a product great enough that “it sells itself.” But anyone who would actually say this about a real product must be lying: either he’s delusional (lying to himself) or he’s selling something (and thereby contradicting himself). The polar opposite business cliché warns that “the best product doesn’t always win.” Economists attribute this to “path dependence”: specific historical circumstances independent of objective quality can determine which products enjoy widespread adoption. That’s true, but it doesn’t mean the operating systems we use today and the keyboard layouts on which we type were imposed by mere chance. It’s better to think of distribution as something essential to the design of your product. If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business—no matter how good the product.

SEEING GREEN

AT THE START of the 21st century, everyone agreed that the next big thing was clean technology. It had to be: in Beijing, the smog had gotten so bad that people couldn’t see from building to building—even breathing was a health risk. Bangladesh, with its arsenic-laden water wells, was suffering what the New York Times called “the biggest mass poisoning in history.” In the U.S., Hurricanes Ivan and Katrina were said to be harbingers of the coming devastation from global warming. Al Gore implored us to attack these problems “with the urgency and resolve that has previously been seen only when nations mobilized for war.” People got busy: entrepreneurs started thousands of cleantech companies, and investors poured more than $50 billion into them. So began the quest to cleanse the world.

It didn’t work. Instead of a healthier planet, we got a massive cleantech bubble. Solyndra is the most famous green ghost, but most cleantech companies met similarly disastrous ends—more than 40 solar manufacturers went out of business or filed for bankruptcy in 2012 alone. The leading index of alternative energy companies shows the bubble’s dramatic deflation:

WHY DID CLEANTECH FAIL? (AND THE SEVEN BIG QUESTIONS)

Conservatives think they already know the answer: as soon as green energy became a priority for the government, it was poisoned. But there really were (and there still are) good reasons for making energy a priority. And the truth about cleantech is more complex and more important than government failure. Most cleantech companies crashed because they neglected one or more of the seven questions that every business must answer:

1. The Engineering Question

Can you create breakthrough technology instead of incremental improvements?

2. The Timing Question

Is now the right time to start your particular business?

3. The Monopoly Question

Are you starting with a big share of a small market?

4. The People Question

Do you have the right team?

5. The Distribution Question

Do you have a way to not just create but deliver your product?

6. The Durability Question

Will your market position be defensible 10 and 20 years into the future?

7. The Secret Question

Have you identified a unique opportunity that others don’t see?

Whatever your industry, any great business plan must address every one of them. If you don’t have good answers to these questions, you’ll run into lots of “bad luck” and your business will fail. If you nail all seven, you’ll master fortune and succeed. Even getting five or six correct might work. But the striking thing about the cleantech bubble was that people were starting companies with zero good answers—and that meant hoping for a miracle.

It’s hard to know exactly why any particular cleantech company failed, since almost all of them made several serious mistakes.

TESLA: 7 FOR 7

Tesla is one of the few cleantech companies started last decade to be thriving today. They rode the social buzz of cleantech better than anyone, but they got the seven questions right, so their success is instructive:

1: TECHNOLOGY. Tesla’s technology is so good that other car companies rely on it: Daimler uses Tesla’s battery packs; Mercedes-Benz uses a Tesla powertrain; Toyota uses a Tesla motor. General Motors has even created a task force to track Tesla’s next moves. But Tesla’s greatest technological achievement isn’t any single part or component, but rather its ability to integrate many components into one superior product. The Tesla Model S sedan, elegantly designed from end to end, is more than the sum of its parts: Consumer Reports rated it higher than any other car ever reviewed, and both Motor Trend and Automobile magazines named it their 2013 Car of the Year.

2: TIMING. In 2009, it was easy to think that the government would continue to support cleantech: “green jobs” were a political priority, federal funds were already earmarked, and Congress even seemed likely to pass cap-and-trade legislation. But where others saw generous subsidies that could flow indefinitely, Tesla CEO Elon Musk rightly saw a one-time-only opportunity. In January 2010—about a year and a half before Solyndra imploded under the Obama administration and politicized the subsidy question—Tesla secured a $465 million loan from the U.S. Department of Energy. A half-billion-dollar subsidy was unthinkable in the mid-2000s. It’s unthinkable today. There was only one moment where that was possible, and Tesla played it perfectly.

3: MONOPOLY. Tesla started with a tiny submarket that it could dominate: the market for high-end electric sports cars. Since the first Roadster rolled off the production line in 2008, Tesla’s sold only about 3,000 of them, but at $109,000 apiece that’s not trivial. Starting small allowed Tesla to undertake the necessary R&D to build the slightly less expensive Model S, and now Tesla owns the luxury electric sedan market, too. They sold more than 20,000 sedans in 2013 and now Tesla is in prime position to expand to broader markets in the future.

4: TEAM. Tesla’s CEO is the consummate engineer and salesman, so it’s not surprising that he’s assembled a team that’s very good at both. Elon describes his staff this way: “If you’re at Tesla, you’re choosing to be at the equivalent of Special Forces. There’s the regular army, and that’s fine, but if you are working at Tesla, you’re choosing to step up your game.”

5: DISTRIBUTION. Most companies underestimate distribution, but Tesla took it so seriously that it decided to own the entire distribution chain. Other car companies are beholden to independent dealerships: Ford and Hyundai make cars, but they rely on other people to sell them. Tesla sells and services its vehicles in its own stores. The up-front costs of Tesla’s approach are much higher than traditional dealership distribution, but it affords control over the customer experience, strengthens Tesla’s brand, and saves the company money in the long run.

6: DURABILITY. Tesla has a head start and it’s moving faster than anyone else—and that combination means its lead is set to widen in the years ahead. A coveted brand is the clearest sign of Tesla’s breakthrough: a car is one of the biggest purchasing decisions that people ever make, and consumers’ trust in that category is hard to win. And unlike every other car company, at Tesla the founder is still in charge, so it’s not going to ease off anytime soon.

7: SECRETS. Tesla knew that fashion drove interest in cleantech. Rich people especially wanted to appear “green,” even if it meant driving a boxy Prius or clunky Honda Insight. Those cars only made drivers look cool by association with the famous eco-conscious movie stars who owned them as well. So Tesla decided to build cars that made drivers look cool, period—Leonardo DiCaprio even ditched his Prius for an expensive (and expensive-looking) Tesla Roadster. While generic cleantech companies struggled to differentiate themselves, Tesla built a unique brand around the secret that cleantech was even more of a social phenomenon than an environmental imperative.

Monday, June 17, 2019

The Little Book of Common Sense Investing (by John C Bogle) - 15 minutes long summary



This post is about the book “The Little Book of Common Sense Investing” by John C Bogle. John is the founder of the Vanguard Group and he is credited to be the creator of the first index fund.

So the book starts with the following lines in which the author tries to explain what index fund is:

“SUCCESSFUL INVESTING IS ALL about common sense. As the Oracle has said, it is simple, but it is not easy. Simple arithmetic suggests, and history confirms, that the winning strategy is to own all of the nation’s publicly held businesses at very low cost. By doing so you are guaranteed to capture almost the entire return that they generate in the form of dividends and earnings growth. The best way to implement this strategy is indeed simple: Buying a fund that holds this market portfolio, and holding it forever. Such a fund is called an index fund.”

A line about index funds:

Index funds eliminate the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.

In this one sentence author has covered the major risks that are there when it comes to investing.

Risks of individual stocks as in ‘Google’ or ‘Yahoo’. Here Google is the winning stock, Yahoo is the loser stock.

Market sectors as in ‘Financial services’ (involving stocks like Axis bank and ICICI bank) or ‘Infrastructure’ involving companies like L&T.

With index fund, you do not need to do manager selection as there is no requirement of any manager here. For ex: Nifty50 is maintained by National Stock Exchange of India.

Now few lines about compounding:

Please don’t underestimate the power of compounding the generous returns earned by our businesses. Over the past century, our corporations have earned a return on their capital of 9.5 percent per year. Compounded at that rate over a decade, each $1 initially invested grows to $2.48; over two decades, $6.14; over three decades, $15.22; over four decades, $37.72, and over five decades, $93.48.

So you can see here that money is more than doubling every decade.

Great men like Albert Einstein have tried to highlight the importance of the compounding with lines like:

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.

Few lines are about ‘The Men in The Middle’ and the ‘brokerage’ that investors pay:

The costs of playing the investment game both reduce the gains of the winners and increases the losses of the losers. So who wins? You know who wins. The man in the middle (actually, the men and women in the middle, the brokers, the investment bankers, the money managers, the marketers, the lawyers, the accountants, the operations departments of our financial system) is the only sure winner in the game of investing. Our financial croupiers always win. In the casino, the house always wins. In horse racing, the track always wins. In the Powerball lottery, the state always wins. Investing is no different. After the deduction of the costs of investing, beating the stock market is a loser’s game.

This book will tell you why you should stop contributing to the croupiers of the financial markets, who rake in something like $400 billion each year from you and your fellow investors. It will also tell you how easy it is to do just that: simply buy the entire stock market. Then, once you have bought your stocks, get out of the casino and stay out. Just hold the market portfolio forever. And that’s what the index fund does.

Next comes the parable about Gotrocks family and how they were losing money to men in the middle.

Once upon a Time...

A wealthy family named the Gotrocks, grown over the generations to include thousands of brothers, sisters, aunts, uncles, and cousins, owned 100 percent of every stock in the United States. Each year, they reaped the rewards of investing: all the earnings growth that those thousands of corporations generated.

Each family member grew wealthier at the same pace, and all was harmonious. Their investment had compounded over the decades, creating enormous wealth, because the Gotrocks family was playing a winner’s game.

But after a while, a few fast-talking Helpers arrive on the scene, and they persuade some “smart” Gotrocks cousins that they can earn a larger share than the other relatives. These Helpers convince the cousins to sell some of their shares in the companies to other family members and to buy some shares of others from them in return. The Helpers handle the transactions, and as brokers, they receive commissions for their services. The ownership is thus rearranged among the family members. To their surprise, however, the family wealth begins to grow at a slower pace. Why? Because some of the return is now consumed by the Helpers, and the family’s share of the generous pie that U.S. industry bakes each year 100 percent at the outset, starts to decline, simply because some of the return is now consumed by the Helpers.

The smart cousins quickly realize that their plan has actually diminished the rate of growth in the family’s wealth. They recognize that their foray into stock-picking has been a failure and conclude that they need professional assistance, the better to pick the right stocks for themselves. So they hire stock-picking experts—more Helpers! —to gain an advantage. These money managers charge a fee for their services. So when the family appraises its wealth a year later, it finds that its share of the pie has diminished even further.

Alarmed at last, the family sits down together and takes stock of the events that have transpired since some of them began to try to outsmart the others. “How is it,” they ask, “that our original 100 percent share of the pie has dwindled to just 60 percent?” Their wisest member, a sage old uncle, softly responds: “All that money you’ve paid to those Helpers and all those unnecessary extra taxes you’re paying come directly out of our family’s total earnings and dividends. Go back to square one, and do so immediately. Get rid of all your brokers. Get rid of all your money managers. Get rid of all your consultants. Then our family will again reap 100 percent of however large a pie that corporate America bakes for us, year after year.”

They followed the old uncle’s wise advice, returning to their original passive but productive strategy, holding all the stocks of corporate America, and standing pat. That is exactly what an index fund does.

. . . and the Gotrocks Family Lived Happily Ever After

“The Investor Emotions”

We can measure the emotions of the investors by the price/earnings (P/E) ratio, which measures the number of dollars investors are willing to pay for each dollar of earnings. As investor confidence waxes and wanes, P/E multiples rise and fall. When greed holds sway, we see very high P/Es.

When hope prevails, P/Es are moderate. When fear is in the saddle, P/Es are very low. Back and forth, over and over again, swings in the emotions of investors momentarily derail the steady long-range upward trend in the economics of investing.

“Reversion to Mean”.

This phenomenon is the reason why ups and downs in the stock market do not affect index funds.

Curiously, without exception, every decade of significantly negative speculative return was immediately followed by a decade in which it turned positive by a correlative amount—the quiet 1910s and then the roaring 1920s, the dispiriting 1940s and then the booming 1950s, the discouraging 1970s and then the soaring 1980s—reversion to the mean (RTM) writ large. (Reversion to the mean can be thought of as the tendency for stock returns to return to their long-term norms over time—periods of exceptional returns tend to be followed by periods of below average performance, and vice versa.)

“Noise of the Emotions”.

My advice to investors is to ignore the short-term noise of the emotions reflected in our financial markets and focus on the productive long-term economics of our corporate businesses. Shakespeare could have been describing the inexplicable hourly and daily—sometimes even yearly or longer—fluctuations in the stock market when he wrote, “[It is] like a tale told by an idiot, full of sound and fury, signifying nothing.” The way to investment success is to get out of the expectations market of stock prices and cast your lot with the real market of business.

This is the last part.

It is taken from the chapter:

“How Most Investors Turn a Winner’s Game into a Loser’s Game”

• All investors as a group must necessarily earn precisely the market return, but only before the costs of investing are deducted.

• There are, then, these two certainties:

(1) Beating the market before costs is a zero-sum game;

(2) Beating the market after costs is a loser’s game.

That was all about the book, hope you enjoyed it!