Secrets, Specialization and Competition
“Contrarian thinking,” write Peter Thiel and Blake Masters in Zero to One, “doesn’t make any sense unless the world still has secrets left to give up.” Remember that as we wend toward Part II of our conversation with Mr. Masters, below.
Did you know that Warren Buffett bought Class A shares of Berkshire Hathaway in 1962 for $11? Fifty-three years later, they trade for $212,139.
Steve Jobs successfully started three separate businesses over 30 years, creating hundreds of billions of dollars in value.
The Voya Corporate Leaders Trust Fund that we featured in these pages on March 13 has consistently beat the S&P 500 for at least 40 years.
What did they know to accomplish these things?
A secret, obviously. By definition, they’re doing something almost everyone else isn’t.
Everyone knows what everyone knows. Common knowledge doesn’t give you a leg up. Sure, it’s important to know conventions, like a2 + b2 = c2. But the Pythagorean theorem doesn’t give you an edge over anyone. It’s no secret.
We’re in the business of uncovering secrets for you. We look at the world and markets, make an educated guess about where they’re headed and alert you to ways we think you can protect yourself and profit before events occur. The mainstream catches up to secrets… like bubbles bursting… or the shale revolution… or the age of regenerative medicine… after the fact, when they’re already commonly known.
For better or worse, the prevailing model plots the probabilities of these different events along a bell curve. Things that are most likely to happen and that people know about — like the stock market might go up 1% in a day — go in the middle of the curve. There are no secrets in the middle of the bell.
The least likely possibilities — like the chance of financial armageddon or the existence of an IMPACT system that can help you make reliable, big, fast gains from the currency wars — go on the ends, or “tails,” of the curve.
The bell should go from most likely in the center to increasingly less likely, all the way out to impossible. But as our co-founder Bill Bonner explained in these pages, way back on Oct. 8, 2003, out at the end of the bell curve, “scientists have found small bumps and bulges. Things that were not expected to happen very often actually happened more than they thought.
“‘Hundred-year floods,’ for example, happened every 88 years,” he wrote. “‘One in a million’ shots hit their mark every 700,000 or so. Statisticians refer to these odd bulges on the extremities of bell-shaped curves as ‘fat tails.’ Instead of tailing off as they are supposed to, the rare events seem to swell up where you don’t expect them.”
Identifying those rare occurrences or secrets is our beat. Meanwhile, the mainstream media report to you from the center of the bell curve.
When secrets are discovered, they slowly transform into conventional wisdom. By the time that happens and you hear about it on CNBC’s Mad Money, the edge that information gives you is gone. The real money or advantage in everyday life is already gone, because everyone has access to mainstream ideas.
Few people understand this. “We have given up our sense of wonder at secrets left to be discovered,” write Thiel and Masters in Zero to One. But if you don’t think secrets exist or think they can’t be found beforehand, they write, “you’d have to believe we’ve already solved all great questions.”
They outline four reasons why more people don’t believe in secrets…
- Incrementalism: Most institutions, especially schools, are structured with a step-by-step curriculum. Overachievement, critical thinking and deviation from those steps — all things necessary for discovering secrets — aren’t rewarded.
- Risk Aversion: People are scared of secrets because they don’t want to be wrong. The prospect of being right but marginalized is bad enough. Imagine being wrong and marginalized…
- Complacency: Social elites have the most freedom and ability to spend their time thinking, yet they believe in secrets the least. That’s because they can make a comfortable living by maintaining the status quo. Why find a secret if you don’t need to?
- “Flatness”: This is simply doubt. People believe the world is flat — that globalization has created a highly competitive market of 7 billion people. If it were possible to discover a secret, one reasons, wouldn’t someone smarter or more ambitious have already found it and exploited it for himself?
“The actual truth is that there are many more secrets left to find,” Theil and Masters conclude, “but they will yield only to relentless searchers. There is more to do in science, medicine, engineering and technology of all kinds. We could cure cancer, dementia and all the diseases of age and metabolic decay. We can find new ways to generate energy that free the world from conflict over fossil fuels.
“We can invent faster ways to travel from place to place over the surface of the planet. We can even learn how to escape it entirely and settle new frontiers. But we will never learn any of these secrets unless we demand to know them and force ourselves to look.”
Below, we continue our conversation with Blake Masters. During our discussion, he revealed the No. 1 change you should make to live a more fulfilling life. Read on…
Peter Coyne: Blake, yesterday we were talking about disruption and creative destruction. The conclusion we arrived at is that those two concepts are good and necessary. Today, “entrepreneurship” has become a buzzword that can be wasteful at best and harmful to progress at worst.
But let’s assume for a moment that more entrepreneurs were focused on finding secrets than they were on making a fashion statement. There would still be people — those who may lose their job from innovation or have a hard time coping with change — who would be hurt by these secrets, correct?
Blake Masters: You’ve basically diagnosed the problem. It’s a particularly acute problem that appears the more democratic society becomes. And there are costs and benefits. People get to decide what kind of society they want to live in.
But France bans Uber — at least Paris just flat out bans it, I believe. And I just read something recently that said Paris has about as many taxicabs as it did five or 10 years after the end of the World War II. And the city’s grown considerably since then. They’ve got this guild system and the taxicab lobbying association or industry group, and it’s apparently incredibly powerful there. That’s the classic trade-off.
You let Uber operate freely in that city and I’m quite sure that consumer surplus would increase, yet those cabdrivers would lose, right? So I think on a macro scale, this is what we’re talking about.
Things like the self-driving car would put a lot of those people out of work. It’s terrible for those people, frankly, in the short term. It’s really painful stuff. I think people in the libertarian ranks tend to ignore that, or at least the way they talk about it makes them sound so insensitive that they just sort of offend people. But the wider point is totally right, because innovation is a net plus to humanity.
There’s something to the argument that innovation really does free up other people to do other things. We have fewer bank tellers today because of ATMs, yet today there are more people working in banking than ever before. Maybe they’re approving loans or something like that.
As we try to get toward a final utopia or singularity when everybody’s just free to cultivate their own interest and talents — as opposed to scarcity society — you can view any increase in wealth, GDP, per capita income, whatever, as a step toward that.
I think it’s inevitable that as things change, though, there are some painful disruptions. The key is that you can modulate some of this pain through the political process and through democratic governance, but the question we always have to ask is: Has that gone too far, and do interest groups and broken politics freeze advancement?
I think they have. It’s always hard to say by how much, because no one ever gets to speak for all the things that didn’t get created because of some political gridlock. But I think more and more people are coming around to the idea. I mean, it’s a cliche at this point to say, “Politics is broken, and it holds back advancement,” but people believe it.
The question is can we actually innovate fast enough again? Can we do new things fast?
I don’t think we’re going to reform the political system to be friendly for innovation and then all of our problems will be solved. I really do think the question is can we build enough new technology? Can we do new things faster? And a very static political process can hold those things back.
Peter Coyne: By definition, if technology is something that’s unimaginable and politics is reactive, then as entrepreneurs innovate, they pull the rug out from under politicians. They’re not able to stop it, because they can’t see it coming.
Blake Masters: That’s the thing. You sort of have to like the odds in the long run, right?
Who knows whether Bitcoin, for example, will live up to the promise of some of its greatest supporters. But that’s the kind of thing that global finance could not have foreseen and yet may have to deal with and reorient themselves around looking 10 years into the future. We’ll have to see, but that’s exactly the kind of thing that technology could accomplish.
Peter Coyne: In your book, you and Peter note that there were rapid technological advancements between World War I and when Kissinger opened up relations with China, which was in 1971. When I saw ’71, I sat up in my seat, because that’s when President Nixon closed the gold window and the global monetary system switched.
Since then, more and more people seem to have turned to financial innovation than they have social or technological innovation. Did you or Peter ever consider the impacts of paper money on innovation?
Blake Masters: Right, we put Kissinger going to China as the geopolitical card, but I think your point about the gold standard is probably even more important.
Not being an expert in finance, I do think that you get bizarre consequences in a world with basically zero interest rates. It does become a financialized world.
That’s basically everybody — or at least the people who are involved in setting interest rates — collectively admitting, “We have no idea what to do.” So you get all this financialization.
I think at this point, the financialization of the world is way too complicated for nonexperts to understand. It’s really bizarre.
It’s been good for Silicon Valley lately, because it’s just awash in money. It’s super easy to raise a venture fund right now, at least barring any macroeconomic downturn. It’s very easy to raise capital, and it probably will stay that way for six months to a year. So there’s enough money to try new things now, but it is with this symptom of no one having any idea what to do with the money.
Peter Coyne: Are you seeing startups in Silicon Valley that shouldn’t be getting money getting money? Are resources being wasted there?
Blake Masters: That’s hard to say. Certainly, ex post, you can always find investments that didn’t work but were probably good ideas. And you see that sometimes later, because that same idea got funded — maybe three years later, which is enough time for certain conditions to have changed — that business can be really successful.
For example, I think there are probably too many on-demand delivery startups in San Francisco right now — there’s kind of a frenzy to enter the market. But I do think there will be some terminal winners — some really good companies — built with that business model.
A lot of people tried that in the late 1990s in the dot-com mania, and they got burned. So those are the kind of investments that when they fail, you can look back and say, “OK, there’s actually some substance there.” So I guess it’s malinvestment in one sense, because it didn’t work. It was a waste of maybe tens of millions of dollars just to get burned.
But there are some investments you look back on and say, “Well, it’s hard to see how that one could ever have worked.” The clean-tech space may be one example, where people invested as much out of emotion as any sort of rational analysis.
So you do get these startups where it’s very tempting to say, “That was a failed investment. That money would have been much better deployed somewhere else.” But in general, I don’t like to criticize failed investments.
The thing about ventures is you’re investing in someone with an idea. It may be a bad idea. It may be someone with a bad idea is charismatic and persuades you, or maybe they’re not even charismatic and you’re just caught up in a bubble or something. But usually, there’s a company with a pitch deck and a team and an idea, and they’re trying to make something concrete happen.
It’s not just agnostically putting your money into a fund or funds hoping that someone else has an idea. I think we need more people with good ideas, and at this point, we have more money than people with good ideas who can execute on those good ideas.
I like backing specific projects and specific people with a specific plan to change things. There’s a sort of operative finance in that way. So is there too much money? Well, I think it’s good that it’s easy to raise money at this point, but you get some bad consequences.
And again, it goes back to this: Do we have a culture of building things and envisioning specific ways in which the future could be different? Or do we have a culture of stasis, where the only way to get any alpha is to incessantly just manipulate things in a financialized way and never actually create anything new?
I think we can all come down on the side of tangible, concrete progress.
Peter Coyne: Right. Blake, a lot of these questions are abstract for the individual investor or a person trying to raise a family or get ahead at their workplace. What’s the one insight from Zero to Onethat our readers can internalize and implement in their everyday life?
Blake Masters: Sure, The main piece of advice is don’t compete. Or think seriously about the ways in which you might be competing with other people right now in your professional life. It goes back to the difference between working hard and working smart. That is a cliche: Work smart, not hard. But a lot of people do mistake hard work for creating value.
Maybe all you’re doing is working harder and harder to make yourself ever more indistinguishable from someone else. If you’re not really specializing — again, it’s a little trickier, because not everybody can afford to think, How can I specialize? Maybe you have a truly hard manual laboring job or something like that.
But assuming we’re talking about people fortunate enough to be doing something else, you always want to think about how you are differentiating from people. Are you just becoming more the same or becoming more different?
If you have a skill that no one else can do, you’re just way more valuable to your own enterprise or to any employer or whatever. I’ve even thought about this in my home.
I have a 1-year-old son, and the crazy mimetic thing to do at this point — we live in San Francisco — is figure out which preschool he’s gonna go to and tour it right now, before he can even walk or talk. And we’ve got to apply, and you’re competing with all these other people.
And we thought, what happens if he gets in? Maybe it’s a good school, and they’re letting him play instead of trying to teach him things while he’s too young. But it just seems to me like it’s very easy to fall into these kinds of things without realizing that that whole project is very competitive.
Its stated goal is to make him the same, to make sure he doesn’t fall behind. We have these optimistic ways of couching it, but really it’s to make him the same and have the same skill set as every other kid. When maybe it would be much more valuable to just let him play more and develop his own interests and he doesn’t have to be this omnicompetent 6-year-old who’s going to get into the best middle school.
I think this stuff starts early, and even having written Zero to One, I see it more viscerally with this preschool question that my wife and I have started talking about now.
And then I ask myself, “Well, where am I missing this in my own life? Am I taking on certain projects in my own work where someone else could do it better and I should figure out how to support them?”
Should you really start your own business? Are you singularly the best person to start a business, or should you find a successful business where you think you can get a really good foothold and make it better in a really concrete, specific way?
This is maybe what all those entrepreneurs with the business cards saying “entrepreneur” should think more about. Maybe they shouldn’t be founders; maybe they should be early employees or something like that.
The short version of a long-winded answer is just think seriously about how to create unique value. Again, that sounds like a cliche. It’s just the kind of thing that’s so hard to do, because so much of what we do is just look to other people for our cues and try to match their skills.
We really forget, I think, about this question of uniqueness. Are you a monopoly of one? If they could fire you and get someone to do your job just as well, it’s not an indictment of you; it just means maybe you haven’t found the thing you’re best at yet. So I think people should think more about that.
Peter Coyne: Before you took Peter’s class at Stanford that informed Zero to One, did you hold different notions about these topics?
Blake Masters: I think I learned a lot. I was never geared that differently, so it wasn’t like I had a full revelation. But I think I did learn a lot. For example, I spent half my time in college reading books. The other half I spent playing basketball. I tried to make Stanford’s varsity basketball team.
I spent two or three years training, often training with the guys on the team over the summer to try to make it as a walk-on. And ultimately, I didn’t make it. They went with 14 guys. They didn’t take a walk-on that year, even though I would have said I was good enough to contribute.
My postmortem on it, sort of with Peter’s thinking with the Zero to One ex-post analysis, was: Did that really make sense? I mean, I was probably a D3 college basketball player at best. I wasn’t a D1 player. So what was I doing? I was just competing with people who were better than me at this thing I was never gonna equal them at, just so I could get better at competing with them.
It didn’t make a lot of sense. It was fun, and I don’t beat myself up that much about it, but it’s not a mistake I’d want to make again in my 20s, or later in my 30s, or 40s or 50s. I do think it’s a valuable lesson.
I think even having the experience happen to me isn’t enough. I really had to put it through this sort of competition monopoly lens. And it was never going to be something I was going to be good at. So it was a consumption good; it was recreational. But that’s not how it seemed at the time. That was what I was doing. That was how I was investing in my near-term future.
Zero to Onedoes provide a pretty good analytical lens to sort of look at where you are and where you’re going and figure out how you can sort of create and capture the most value going forward. And with me, at least, it’s not basketball.
Peter Coyne: Thanks a lot, Blake. That’s good advice. I appreciate you making the time to speak with us.
The book is Zero to One: Notes on Startups, or How to Build the Future. It’s worth grabbing your own copy on Amazon, right here, and reading closely. At the very least, it will help you think differently about what you do each day and why.