Monthly Archives: January 2020

M&A is a Power Law

Warren Buffet once famously stated that compound interest is the eighth wonder of the world. Power laws rule much around us, but more so in the technology and business worlds. One fantastic deal, such as Facebook buying Instagram, can shift the bedrock of business everywhere. Despite the common belief that 80% of company acquisitions are failures, the remaining 20% can shape a new path for in that company – the expected value is still enormous and is definitely a worthwhile path if executed properly.

Many people mistake averages for value. Venture capital is exactly the opposite of this: missing the seed round of AirBNB if you had the chance to invest means you would be financially worse off than had you invested in 50 Theranoses. The difference is that in the first case you would make 1000x your investment or at worst 0, so the opportunity cost is immense. 

Power Laws also exist in company acquisitions.  

The Power Law of Company Acquisitions is why companies continue to make acquisitions. In the few cases it does work, like Google’s purchase of YouTube, the gains can continue to reap dividends decades later. Fundamentally, most of the best acquisitions are contrarian in nature; otherwise, they would have been bought by another company already. And sometimes, like the YouTube acquisition, there are only a few companies that could have acquired it successfully – the key is to stay within your circle of competence. 

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Financially Drowning on $300k a Year

Exorbitant Salaries don’t make for Exorbitant Lifestyles

Here is an interesting paradox: the world is experiencing the largest bull market in history, but fewer than one out of five Americans feel like they’re living the American Dream. Many of these people have incomes ranging well above six figures, in the vicinity of $200-400k, and still worry about making ends meet. 

In 2018, the Department of Housing found that a salary of $117,000 is considered low income in San Francisco. Effectively, making six figures puts one into poverty in SF (if you are taking care of a family). Sadly, this is not a trend isolated to the Bay Area. There is a financial disparity amongst people who are in the top 2% of earners in the U.S. who live in expensive areas, and not because they can’t afford a yacht.

All-together, these families are earning a tremendous salary by any standard (often more than $300k per year), attending the most prestigious graduate schools and coming from upper-middle-class backgrounds. The scariest part is that these are not people you’d expect to be struggling. In fact, if you took and average U.S. family of four and told them that a family who made $300k/yr – the top 2% of income in the U.S. – was struggling, they would laugh hysterically.  They would never believe you because the median US salary is $62k. It would be called fake news.

Unfortunately, this story is playing out across the country. Of course, it is not happening everywhere nor is it happening to everyone.  It is primarily happening to secular people that have kids and live in ultra-expensive places like New York City, DC suburbs, Bay Area, etc.  The inflation rate in those cities for core goods (housing, healthcare, and education) have been growing at a rate of more than 10% a year for the last 10 years. How do these elites manage to keep afloat? The short answer is that they’re not able to and the consequences could have a drastic impact on the future of our nation’s democracy.

Sisyphus’ Hedonic Treadmill

The Elite With No Savings (TEWNS)

A necessary piece of the puzzle requires imagining what these people look like; how fanciful are their lives that they feel like they are working class on $300k a year? People have a tough time believing this because on the surface, The Elite With No Savings (or TEWNS) are doing well. To paint the picture, these are families with two college educated parents, perhaps they met at an Ivy League school, with young kids.  They live in expensive cities, far from their parents, while paying off a mortgage. Daycare and expensive schools are a must for these families, eating into their bottom-line and leaving almost nothing for savings. 

For the top 2%, life should be different; they played the game well by delaying gratification and they went to a top school while knocking their academic careers out of the park. They passed the Marshmallow Test. Still, many are financially underwater after learning that there’s more to life than just academics.

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deeper article on why the famous Peter Thiel interview question is such a good one

Over at the SafeGraph blog, I write about why the Peter Thiel interview question (“what is a heretical view you have”) is so predictive. Take a look.

It reveals that most people hold conventional opinions and call them “heretical.” Almost everyone cannot come up with an answer that most people they know do not agree with.

What makes for a good answer?

One that sparks a unique view of the world and shows the candidate doesn’t think like their peers. This signals that the candidate:

1) thinks differently

2) is open-minded

3) is brave enough to discuss an unpopular opinion