A pandemic unicorn, a 400x Indian compounder, and a public SaaS unwind.
At first glance, unrelated. But there’s a single thread connecting them that provides an answer to the eternal question: when should you sell?
Recently, I came across a podcast clip on X where a European seed investor was reminiscing on how she had written an angel check in Hopin (a hype-unicorn from the pandemic era), which got crazily marked-up from a ~$2.5M pre-seed valuation in 2019 to ~$7.6B Series D valuation in 2021, and she didn’t sell even while the founder took $200M off the table via secondary.
This reminded me of my “When To Sell” post from Sep 2023. I think this is a good time to do Part 2 of that and add some recent examples to this discussion.
Fractal Analytics
An Indian analytics company called Fractal Analytics, which was founded in 2000, recently went public in India. What is fascinating is that their first angel investor, Gullu Mirchandani (who had started Onida Electronics back in the early 80’s, and launched India’s first-ever color television), continues to hold his initial position more than 2 decades out, even though it has run up by more than 400x. Note: check out this excellent post by Rahul Mathur (DeVC) on this investment by Gullu.
Freshworks
Girish Mathrubootham, founder of iconic Indian cross-border SaaS company Freshworks, stepped down as the CEO in Sep 2025 and became a full-time AI VC.
With the recent rout of SaaS stocks and the market consensus being that these companies are going to face secular headwinds from AI going forward, in hindsight, the Freshworks founder stepping down was a leading signal that the SaaS story was decisively over.
While folks can make up many reasons behind his departure, the fact is that a founder who is barely 50 years old is voting for where he’d like to devote his energy, relative to the opportunity cost of all the things he can pursue. Note: I asked ChatGPT to do a quick analysis of all Freshworks stock sales done by Girish. He sold zero shares in 2022. But post the launch of ChatGPT, sold ~$39M of stock in 2023 and ~$49M in 2024.
Essentially, any public market investor who didn’t entirely exit their Freshworks holding when Girish stepped down needs to have their judgment severely questioned.
Map To The Founder
What is a common learning from these cases of Hopin, Fractal, and Freshworks? It’s a learning related to exits that all experienced GPs frequently cite:
Investors should map their exit to the founder. If the founder is selling, you should sell. If the founder is holding, you should lean towards holding.
Applying this framework to the above 3 cases:
1/ Assuming that the Hopin angel knew that the founder was selling (even if the exact amount was unknowable), she should have immediately sold at least some part of her holding.
2/ Fractal had 5 co-founders in the beginning. Three of them left in 2007. But even as of today, 2 original co-founders continue to hold fort in full-time operating roles – Srikanth Velamakanni as Group CEO and Pranay Agrawal as US CEO.
This is perhaps why Gullu didn’t sell over all these years – he astutely mapped his position to the founders, and as long as even a couple continued to believe in the business and were competent enough to run it, he continued to hold.
3/ In the case of Freshworks, every significant stock sale by the founder should have been a warning signal for public market investors to re-evaluate the business as well as the price relative to underlying business quality.
On the founder’s full exit in Sep 2025, astute investors should have mapped their strategy to how the founder is voting with his time and money, and completely exited their position.
So, the experienced venture GPs were actually right! Adding a simple mental model for the “when to sell?” decision for myself as a VC – map to what the founder is doing.
Notes from my Q2’24 India trip – everything from post-election vibes to public markets and the state of the venture ecosystem.
Just returned from my quarterly trip to India. With the recently held elections (and a bit of a surprising result there!), it was interesting to get a pulse of what’s happening on the ground. Here are some key takeaways from my meetings with founders, investors, and operators in the ecosystem:
1/ Real reasons behind BJP’s weakened mandate
While Modi created a massive pre-election narrative of the BJP coming back to power with an even bigger majority than in 2019, it ended up losing ground in the actual results tally.
Honestly, I didn’t see it coming but talking with people on the ground, one of the major reasons behind the weakening of BJP seems to be shrinking employment opportunities, especially for young graduates. While the India macro story stays strong, there are pockets of economic distress in the poor states and amongst the lesser-skilled parts of the population/ those graduating from non-top-tier universities.
It’s clear that while Modi focused a lot on infra buildout over the last 2 terms, one of his core focus areas in the 3rd term needs to be continuous job creation for all sections of society. This might require some bold reforms.
2/ Investors are largely unperturbed by the election results
Given that the BJP-led NDA coalition still has a comfortable majority in the Parliament, and Modi continues to be the PM with a largely unchanged cabinet, Investors are expecting political and economic continuity in this 3rd term of the govt.
So, expect continued momentum on key execution tracks from the last 2 terms, including physical infrastructure buildout, expansion of digital public goods, and focus on technology startups.
3/ General Catalyst acquiring Venture Highway
The news of GC acquiring VH broke out while I was in Bangalore. While it could be a one-off development, it’s still a positive greenshoot that a large Silicon Valley-based, premier capital pool is allocating to the India venture market.
Personally, I also believe it’s a smart move from Hemant Taneja to acquire a high-performing team that is local and has developed on-ground expertise, versus parachuting people in from the Bay Area or doing the fly-in-and-out model.
Not recruiting and empowering a high-quality local leadership team is a classic India entry mistake that both Y Combinator and AngelList did, which is why they have struggled to crack the market.
4/ All VCs talking deeptech now
Similar to the Valley, deeptech has now clearly become the flavor of the season. Even a few years back, major Indian VCs spending time at the IIT incubators or looking at sectors like manufacturing and semiconductors was unheard of. This time, I heard multiple instances of VCs writing large seed checks into deeptech companies.
My only fear is that based on past history, the Indian VC ecosystem tends to behave in steep emotional cycles, flooding hot sectors with capital in tandem like a herd (eCommerce 15 years back, fintech 10 years back, lending and SaaS 5-7 years back), and then abandoning verticals also in tandem like a herd (eg. no one is touching edtech now).
These emotional cycles are incredibly counter-productive for long-term company building, and also tend to be incredibly disturbing, especially for younger, 1st-time founders. As the deeptech wave begins, I hope some lessons are learned and implemented from previous cycles.
5/ Angels suffering from 2021 vintage markdowns and illiquidity
One of my observations on the Indian venture ecosystem has been many new-gen angels tapping out in 2023/24. While some of the marquee spray-and-pray ones, as well as the conventional IAN/Mumbai Angels persona, continue to be active, many high-quality operator angels seem to have bowed out of the game.
On bringing this point up with folks, they confirmed that the portfolios of many new angels who started deploying in 2020 and 2021 are suffering from either major markdowns and writeoffs or prolonged illiquidity of marked-up positions. I would also add layoffs, salary rationalizations, and a lack of broader ESOP liquidity (barring a few cases here and there) to the list of reasons behind many angels bowing out of the game.
6/ Seed capital is plenty but wants more traction. Series As continue to be hard.
Similar to the Bay Area, I heard that while there is plenty of pre-seed/seed capital available in the ecosystem right now, the bar for raising Series A has significantly gone up. As a result, companies are seeing both larger seed rounds as well as extension/ top-up rounds happening as we speak.
Several seed investors shared with me that one of their learnings from doing many idea-stage deals in 2021 is how companies are taking so much longer than they initially estimated to go from zero to even $100k ARR. This is adversely impacting the IRRs of seed portfolios. Also, given valuations have now massively corrected, the next round markup isn’t in line with the time it’s taking to get to early traction.
Given this dynamic, many seed investors are now tracking companies and waiting to see more traction before pulling the trigger on idea-stage companies. Btw, am seeing similar behavior even in the late seed/ pre-Series A/ Series A spectrum too, where VCs are waiting to see a long enough timeline of revenue growth, retention, and other metrics before engaging seriously.
Another related observation – growth capital for tech companies is a major gap in the India venture ecosystem right now. Many strategics and hedge funds that were writing large checks post-pandemic have either completely exited the market (eg. Softbank, Alibaba, and Tencent) or are triaging their current portfolios. Recent cases like Prosus writing off its entire ~$500Mn investment in Byju’s isn’t helping to build confidence either.
7/ Public markets continue to rip, lots of FO appetite for pre-IPO rounds
It is noticeable to see frequent ads on Indian TV channels encouraging everyone to invest in mutual funds. An uncle who recently visited us in SF was bragging over chai about how he “made 55 lakhs in the market already this year”.
During this India trip, I saw my father casually opening and checking his brokerage app dashboard multiple times daily. I also noticed that a majority of YouTube consumption by this age group is financial influencer and stock tips content.
On a similar note, a few institutional investors shared how domestic Family Offices are showing an increased appetite for pre-IPO investments in companies like Lenskart, FirstCry, and Oyo. In fact, with the domestic index doing really well, FOs are more skeptical of taking LP positions in venture funds right now, preferring to either stay liquid in public markets or take relatively de-risked, later-stage positions in pre-IPO private companies.
Subscribe
to my weekly newsletter where in addition to my long-form posts, I will also share a weekly recap of all my social posts & writings, what I loved to read & watch that week + other useful insights & analysis exclusively for my subscribers.
While public markets appear to be decisively reviving this year, venture activity barring AI is still very slow at large.
With founders & investors worried about when the good times will return, I turned to an age-old framework by the OG Sir John Templeton to try and answer this question.
In this pod, Bill cited an insightful quote by the late Sir John Templeton, the legendary founder of Templeton Funds:
Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria.
Sir John Templeton
A. Templeton’s framework
Bill then goes on to apply this Templeton’s framework to explain market cycles over the last 15 years as follows:
During this period, the first point of maximum pessimism was in March 2009, which then birthed a new bull market. The next point of max pessimism was March 2020, which gave rise to another bull market.
Dec 2020 was the point of optimism, post which the market fell ~38% but then rallied again. Ultimately, the point of euphoria was reached in Nov 2021, which saw the peak of popularity for innovation bulls like Cathie Wood of Ark Invest. At this time, interest rates were at rock bottom while valuations of unprofitable growth companies were sky-high.
The most recent point of max pessimism was in the Fall of 2022. Since then, overlaying market performance on top of Templeton’s framework, it’s safe to say that the next bull market has already started. Markets are up ~20% since this last point of max pessimism and therefore, this new bull run appears to have reached the “grow on skepticism” phase in July 2023.
Bill then goes on to say something super insightful (man, the amount of wisdom in this 10 min monologue!). Paraphrasing a bit here:
Microstrategists try to use their view of the economy to determine where the market is going. And that’s exactly backwards.
The economy doesn’t predict the market. The market predicts the economy.
The market comprises of real people with real money at risk, and the totality of them is how the market acts.
Bill Miller
Just think about the 2nd para in the above quote. It’s an amazing thought! Intuitively, we all tend to think of the market as an analytical engine when in fact, it’s actually a prediction engine. It’s a complex system where hundreds of millions of people are looking at all the info they have, making a prediction of where the economy is likely to be headed & placing bets with real money based on this prediction.
But I digress! Coming back to Templeton’s framework, as I was digesting it in the context of public markets, I ran a thought experiment on whether it applies to the venture market as well. This is how the exercise went.
B. Applying Templeton’s framework to venture
It’s important to mention upfront that private markets differ from public markets in a few important ways, which manifest in specific behavioral characteristics:
1/ They are illiquid ➡ price discovery happens gradually & therefore, lags public markets at least by a few months if not years, due to system inertia.
2/ They have fewer (very small retail participation) but more sophisticated participants ➡ both upward & downward resets have relatively less internal momentum & are, therefore, more gradual.
3/ They have high information asymmetry ➡ takes time to gather, analyze & react to information. Given higher imperfections, probabilities & confidence intervals are assigned to conclusions more conservatively.
4/ There is negligible automated trading & auto-pilot inflows ➡ information is analyzed & acted on by real humans in a slower, more deliberate way.
Essentially, private markets are slower, more concentrated & more deliberate with longer feedback loops than public markets. Therefore, while public markets can be analyzed daily, weekly, or monthly, I believe a safe unit of time to analyze the cyclicality of private markets is a year.
To start applying Templeton’s framework to the US venture market, I looked at data for total venture capital $$ invested in the US every year since the dot-com bubble. Here’s how the data looks:
Source: NVCA Yearbooks(for years marked with *, data was sourced via ChatGPT as it was unavailable on the NVCA website)
Here are some insights I gathered from this data:
1/ During the dot-com bubble, 1997 and 1998 look like the years when the venture bull run entered the “grow-on-skepticism” phase. It then hit the “mature-on-optimism” phase in 1999, achieving the “point-of-euphoria” in 2000.
As per the Templeton framework, the point of euphoria is when the bull market typically starts its journey toward death. This is exactly what happened to the dot-com bull run between 2001 and 2003, hitting the point of maximum pessimism in 2003. Interestingly, going back to the earlier point of a lag between public and private markets, this 2003 point of max pessimism for US venture was a year behind the same for public markets (they bottomed in Oct 2002 when the S&P500 hit a 5 and a 1/2 year low).
2/ Moving forward, the US venture market again followed Templeton’s argument of “bull markets are born in pessimism”. The seeds of its next bull run were sowed in 2003, subsequently entering grow-on-skepticism during 2004 and 2005. This bull run entered mature-on-optimism in 2006 and 2007, growing 25%+ y-o-y.
But before it could hit a real point of euphoria, the housing crisis happened in 2008. The US venture market hit the point of max pessimism in 2009, and similar to the dot-com run, lagged the public markets by a year (their point of max pessimism was in Sep 2008).
3/ With the tailwinds of the Fed’s zero interest rate policy post the ’08 crash, the US venture market saw a secular bull run between 2010 and 2021. Barring a few corrections and a brief Covid hiatus, this was an almost uninterrupted, decade-long, dream bull run.
Fueled by massive liquidity injection by the Fed to counter potential Covid-driven economic distress, on top of astonishingly low levels of interest rates, the US venture market hit the point of euphoria in 2021. As I wrote in my post “Making Hay During Market Peaks“, this was the year of “Crypto shitcoins, ape NFTs, meme stocks, IPOs of unbaked tech companies, and real estate boom in as far as Denver & Raleigh”.
C. Where are we now in the current venture cycle?
Consistent with Templeton’s framework, the recent decade-long venture bull run started its downward spiral from the point of euphoria in 2021 and subsequently hit a point of max pessimism in 2022 (~30% y-o-y decline in VC $$ invested).
But this framework also tells us that the seeds of the next venture bull run were also sown simultaneously at this point of max pessimism in 2022.
As we stand today, I get the feeling that the US venture market is close to entering the Day 0 of the grow-on-skepticism phase of its next bull run (I wrote about how the excesses of 2021 are now winding down in my post “Cheetah in the Rainforest: 2021 Vintage of Venture“).
Per Bill Miller, public markets have already entered the grow-on-skepticism phase decisively, showing ~10% gains in H1 2023, and are likely to continue on this trend in H2. Assuming a ~1-year lag between public & private markets like in previous cycles, my expectation is that the next venture market bull run will decisively enter the grow-on-skepticism phase in 2024.
C. Closing thoughts
As a disciple of Charlie Munger, while I don’t believe in macro forecasts (especially by economists & equity research analysts), I am also a disciple of Howard Marks and therefore, a strong believer in the importance of studying market cycles across asset classes. Where we are in a cycle should be one of the important inputs for deliberation on an optimal investment stance, including what mix of offense & defense to aim for.
Hence, my fascination with Templeton’s framework, and how well it works as a tool for studying cyclicality in both public & private markets.
Subscribe
to my weekly newsletter where in addition to my long-form posts, I will also share a weekly recap of all my social posts & writings, what I loved to read & watch that week + other useful insights & analysis exclusively for my subscribers.
Successful investing, be it in stocks or venture capital, requires avoiding behavioral landmines at every step of the way.
Here are the major ones that every investor should have top-of-mind.
Successful investing outcomes, be it in public or private markets, are typically the result of the following sequence of events:
#1 Real world research and/ or experience germinates a non-consensus view.
#2 A conviction-building process for this view helps in getting to a probabilistic distribution of future outcomes.
#3 Courage helps in putting real money behind the view.
#4 If all goes well, the non-consensus view starts turning out to be right (non-consensus ➡ non-consensus-and-right).
#5 After a certain hold-out period, the market provides a liquidity opportunity that is attractive-enough for the investor to cash out.
Investors have to fight specific pitfalls at each step of this sequence:
For #1, it’s the herd mindset that evolution has deeply wired into our psychology. We seek comfort in others validating our views, which is the exact opposite of what contrarian thinking entails.
A by-product of herd mindset is FOMO, which has quickly become the dominant driving emotion of modern urban life.
For #2, it’s hasty bias-to-action. Individuals have a tendency to overcommit & get positively biased very quickly, often even before adequate investigation. Every investing action releases dopamine, which makes individuals feel powerful & good about themselves. Therefore, even sophisticated individuals are quite trigger-happy & demonstrate a tendency to “just do it”.
Running a solid investing process calls for a scientific approach that starts with default skepticism, generating a hypothesis & then putting in the work to approve/ disapprove it with intellectual honesty. PS: check out more about bias from consistency & commitment tendency in this amazing write-up by Charlie Munger on Farnam Street.
For #3, it’s fear. Fear of losing money, of losing face, of future distress. Am sure we all have seen many examples around us of folks who did a decent job at #1 and #2, but never pushed chips on the table. That friend who spotted Google at the earliest stages. Or who had heard of Bitcoin from credible sources before everyone else. Or who was seeing East Bay become the new South Bay or Gurgaon become the new Delhi.
Am also confident that as children, each of us saw our parents hold a non-consensus view for those times & not act on it, which in hindsight, would have led to asymmetric gains.
For #4, it’s lack of patience. Markets typically take time to appreciate & subsequently reward non-consensus views. This period can range from a couple of years to sometimes more than a decade. Holding out with a view that doesn’t match the crowd for long periods of time is extremely hard psychologically for even the most experienced investors.
Humans by nature seek thrill & quick rewards. While a lucky few are born with the delayed gratification gene (like this Nevada’s Pension Fund Manager), for others like us, we have to train ourselves to get better at it.
For #5, it’s greed. Once the market slowly starts appreciating your non-consensus view, given its pendulum nature, it then starts gradually moving towards the other extreme. At a certain point in time, it will soon provide windows where very attractive, & sometimes egregious, returns can be booked. Case in point: after the Nvidia stock stayed flat for several years, the recent AI-fueled stock run-up is finally providing an opportunity for insiders to cash-out.
But then, greed starts kicking in. Maybe hold-out longer for even better returns? This is where the discipline of taking chips off the table & booking profits becomes really important. However, this is really hard to do when investors have faced a long lean period & are now starting to see things finally go up. As legendary fund manager Mohnish Pabrai often says – the art of when to sell is the most difficult.
To summarize, the key to successful investing is recognizing and working towards actively avoiding the above landmines at every step of the way, most of which are behavioral.
Subscribe
to my weekly newsletter where in addition to my long-form posts, I will also share a weekly recap of all my social posts & writings, what I loved to read & watch that week + other useful insights & analysis exclusively for my subscribers.
New-age Indians are learning to bet & loving it. Everything from stocks to fantasy sports is fair game.
Unpacking this behavior change, its upsides & potential risks, as well as how it’s likely to shape India going forward.
During my recent India trip, one clear trend I observed was how prevalent retail day trading had become across generations. I met a 21-year-old fresh grad who does regular options trading. I met a bootstrapped founder who, to paraphrase his words, “goes into the market whenever his savings dip below a certain point”.
One of my mother-in-law’s friends was boasting how “her son made 50 Lakhs profit in shares”. FYI this person is the 2nd generation heir of a massive family business. My father too, though not exactly a day trader, actively invests in hot Indian tech IPOs via these new-gen brokerage platforms (without ever consulting me, of course!).
To validate these observations, I went back to check on the growth numbers of Zerodha, the #1 brokerage platform in India by market share. And it’s a classic hockey stick! I am sure this isn’t news for many of you but for me, this was an eye-opening stat given I have a bit of a blind spot around India’s digital evolution during Covid years when I wasn’t able to spend much in-person time there.
Another similar trend I have been intrigued by, and again this might not be news for many of you, is the rise of online real-money gaming (RMG). Dream11, India’s top fantasy gaming company, has shown hockey-stick growth numbers similar to Zerodha. During my conversations with even the next tier RMG companies, their active usage numbers & profitability (hence, cash flow) are off the charts.
One clear takeaway from the above charts is that both these digital verticals took-off simultaneously in 2017-18, just after the launches of Jio & UPI in 2016. Jio’s cheap 4G services, combined with easier micro-transactions enabled by a UPI-powered digital payments ecosystem, have proven to be major unlocks. While Zerodha was founded in 2010 and Dream11 in 2012, their real inflection points came much later once growth enablers at the ecosystem-level were in place.
The widespread adoption of new-gen brokerage & RMG platforms is indicative of how markets in India will behave very differently in the coming decade. Accessibility, ease of use & small ticket sizes is unlocking retail “betting” behavior like never before.
Fresh college grads doing options trading at scale was unheard of in my generation (and I am a cusp millennial, so not that outdated!). In my time, both education & access were gaps. We didn’t have financial influencers sharing everything about markets on YouTube & Instagram. I still remember the good old days where one had to jump through multiple hoops of paperwork just to open a demat account, not to mention the terrible online UX that was impossible to navigate. And playing games with real money on the Internet? Forget it!
On the positive side, this broad-based participation in public markets is going to provide support to many different types of IPOs. Case in point is the recent SME IPO of Infollion Research. Its public offer was subscribed a massive 279 times at close. The retail investors’ portion was subscribed 264 times. The stock was listed at INR 209 as against an issue price of INR 82, a huge 155% premium.
Btw this isn’t a hot growth story riding a trendy tailwind like AI. It’s a business research services company with INR 35 Cr topline & INR 5 Cr PAT. A few years back, no one would have counted on such a company to garner this kind of investor interest. I believe this is a sign of a new type of retail investor coming into the market, which is fantastic for smaller companies that want to go public in India.
While it’s great that more people have an opportunity to own shares of public companies, this accessibility & ease unlock is also fanning dopamine-inducing emotions of greed & thrill. I have seen that happen with Robinhood in the US. In fact, one of my frequent advice to anyone looking to create long-term wealth with stock investing is to first close their Robinhood account. There is a real risk of young investors falling prey to the cocktail of ease of use, greed, fun & small “casino-style” bets.
Another side-effect of this trend is going to be more herd behavior. So, for any new investing pattern or idea that is starting to emerge, expect it to unfold at a significantly accelerated rate compared to a decade back. Similar to the meme stock frenzy that we saw in the US in 2021, will India have its own GameStop or AMC moment in a few years? Highly likely!
Finally, expect regulators to have a keen eye on these markets. We are already seeing the SEC crackdown on Coinbase, a company that is formally listed in the US & has passed all scrutiny to get here. With Indian retail investors participating in various markets in a big way, local regulators will need to be ahead of the 9-ball & safeguard both the interests of these individuals as well as the long-term stability of these markets.
The intertwined trends of retail trading & online gaming are going to have some fascinating implications for India. While I am all for more digital consumption & market participation, given a few grey hair I now have, I would also advise young Indians to navigate these markets responsibly.
Subscribe
to my weekly newsletter where in addition to my long-form posts, I will also share a weekly recap of all my social posts & writings, what I loved to read & watch that week + other useful insights & analysis exclusively for my subscribers.
Here are some insightful ideas & quotes from Munger that stayed with me from David’s experience:
1/ Buy wonderful businesses at fair prices
Before Munger joined Berkshire, Buffet used to invest in Ben Graham’s “cigar-butt” style – buying super-cheap stocks, often trading below book value.
Munger gave him a new blueprint: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices”. This is what led to Berkshire becoming the compounding machine it is today.
2/ Cash is king
Through a company called Blue Chip Stamp, Munger & Buffet learned about the value of “float”- excess cash that a business throws up due to the timing difference between receiving payments & settling payouts. This excess cash could then be re-invested in profitable companies.
Through his early investing experiences, Munger started seeing the advantages of investing in better businesses that didn’t have big capital requirements and did have lots of free cash that could be reinvested in expanding operations or buying new businesses.
Munger advises keeping enough cash at all times, in order to take advantage of stock market crashes.
We made so much money because when the great deals came during an economic crisis, we had cash and could move fast.
Charlie Munger
3/ Acting on the few big ideas that matter
Munger says that very few times, you will be presented with an opportunity to buy a great business run by a great manager. Not buying enough when presented with this opportunity is a big mistake.
You have to be willing to act when the right opportunity comes along. ‘Cos great opportunities don’t last very long in this world.
Real wealth is created via concentration. Or to put it in another way, over time, one should expect 1-2 outlier winners to constitute a majority of the portfolio.
When Munger wrapped up his pre-Berkshire fund, Blue Chip Stamp accounted for ~61% of his portfolio.
Worshipping at the altar of diversification is crazy. One truly great business will make your unborn grand children wealthy.
Charlie Munger
5/ Chase unfair advantage
Competition is for losers! Why would you want to compete with people?
Some quotes from Munger on this:
“My idea of shooting fish in the barrel is to first drain the barrel”.
“Only play games where you have an edge”.
“Differentiation is survival”.
“Aim for durability”.
Munger talks about how size and market domination has its own kind of competitive advantage. When a company is deeply entrenched with customers, it acts as a deterrent for other players to enter the space.
Sectors that are generally considered to be “bad businesses” (eg. retail, textile, airlines etc.) are intensely competitive. Players beat each other over price and drive down profit margins for everyone, killing cash flows and bringing down chances for long term survival.
That’s why Berskhire looks for great businesses that have a durable competitive advantage.
Mimicking the herd invites regression to the mean.
Charlier Munger
6/ The power of Compounding
Find an exceptional business where underlying economics are going to keep increasing its value, and then hold on to it over time.
Quoting Munger – “Time is the greatest friend of an exceptional business. It’s the greatest enemy of a mediocre business”.
Compounding also works in knowledge. Munger gives an example of how over 50 years of consistently reading Barrons, he found just 1 idea worth investing in but that made him $80Mn, which he then gave to Chinese fund manager Li Lu, who turned it into $400-500Mn!
7/ The value of Rationality
To quote Munger:
“We don’t let other people’s opinions interfere with our rationality”.
“Life is like poker. You have to be willing to fold a much loved hand when new info or facts come to light“.
“It’s remarkable how much long term advantage people like us have got by trying to be consistently not-stupid, instead of being highly intelligent”.
8/ Focus is a super-power
Munger says:
“I succeed because I have long attention spans. People who multi-task give up their advantage”.
“You will always lose in a race to that one guy who sacrifices everything he has in service of one idea”.
“Extreme specialization is the key to success”.
“Intense interest in a subject matter is super powerful”.
He cites examples of how great companies tend to focus on optimizing one specific lever in their business:
Costco – optimizes costs
Geico – optimizes distribution via direct-to-consumer
Nebraska Furniture Mart – optimizes price for the end customer
What’s the one thing that both Warren Buffet & Bill Gates said was the key to success? Focus!
9/ Frugality drives value
Munger cites one common quality amongst all Berkshire businesses – they will go to great lengths to keep operating costs low. Even Berkshire itself demonstrates the same behavior:
It has no PR department.
It has no investor relations office.
For many years, its annual report was published on the cheapest possible paper & had no expensive color photos.
10/ Brands are magic
Munger says – “A great brand is a piece of magic”.
Brands like Coca Cola & See’s Candies have a piece of a consumer’s mind & therefore, have no competition. Charlie calls them “consumer monopolies”.
A lot changed the day Berkshire realized the power of brands.
11/ Business plans are useless
Munger says Berkshire has no master plan – “We always wants to be accounting for new information. We are individual-opportunity driven. Our acquisition style is driven by simplicity”.
He shares an interesting anecdote. When Mrs. B (Rose Blumkin), Founder of Nebraska Furniture Mart, was asked about having a business plan, she said – “yes, sell cheap & tell the truth”.
12/ Patience is rare
Human nature is all about being impatient. People just can’t sit around, waiting patiently. They want to feel useful. So they end up taking action and doing something stupid.
13/ Learning from mistakes is crucial
Learning from history is a big form of leverage. The biggest financial disasters get forgotten in a few years.
Munger says:
“Wise people step on troubles early”.
“Every missed chance is an opportunity to learn”.
“Be willing to take life’s blows”.
I love rubbing my nose in my mistakes. It’s an extremely smart thing to do.
Charlier Munger
14/ It takes many, many attempts to find your life’s work
For context, Munger started working on Berkshire in its current form only in his 40s.
15/ Finally, lots of life advice…
“Build relationships with A players”.
“Problems are a part of life. So why are you letting them bother you?”.
“The best way of reducing problems is to go for quality – Go for Great!”.
“It’s the strong swimmers who drown”.
“Envy has no utility. The key to living a well-lived life is killing envy”.
“The best armor for old age is a well spent life preceding it”.
to my weekly newsletter where in addition to my long-form posts, I will also share a weekly recap of all my social posts & writings, what I loved to read & watch that week + other useful insights & analysis exclusively for my subscribers.
As a long-time student of Charlie Munger, I eagerly wait for his musings at the Daily Journal Shareholders Meeting every year. This time was no different! Here are some of my notes capturing Charlie’s wisdom at the DJCO 2023 meeting:
Importance of under-served markets in software
Both Munger & Buffet are big believers in moats. Having witnessed the natural creative destruction of even the best companies like Kodak & Xerox, they understand the power of competition & what it can do to long term returns of investors.
Munger spoke about how the software business of DJCO, which offers a solution to automate legal courts, is operating in a large yet unaddressed market that incumbent software companies hate. It’s an unsexy business that has long sales cycles & as Munger himself said – “it will be a long grind”.
However, these same reasons also limit competition in the space. Munger believes that this combination of a large, underserved TAM + low competition is likely to drive superior long-term returns, as long as DJCO shareholders are prepared to ride through the grind & hold over the long term.
In my view, this idea also has some interesting insights for venture investors in the enterprise software/ SaaS space. Too often, investors start chasing the hot market of the year without realizing that a space that is obviously popular will end up attracting disproportionate competition & investor $$. And as history shows us, too much competition in a market drives down returns for everyone.
Therefore, there is some merit in looking at startups going after unsexy or under-served verticals. These non-obvious nooks & crannies often hold the most potential for contrarian-and-right bets.
2. Holding is tax-efficient
Munger spoke about how he hates to sell his holdings as California would straight-up take 40% away in taxes. As he went on a brief rant about how California is driving businesses away with its tax policies, the underlying insight stayed with me – how holding securities over the long term is a brilliant strategy for tax efficiency. A simple rule that anyone from Berkshire & DJCO to common folks like you and me can follow in our lives.
As the likes of Robinhood have leveraged the excess liquidity environment over the last several years to create a generation of young day traders, many of them don’t realize how tax-inefficient frequent trading is.
3. #1 bias is denial
When asked what the #1 behavioral bias is, Munger said “denial”. And it’s so true. Often times, when the present reality is too brutal to bear, our brain tricks us into living in a delusion. While this stems from an evolutionary survival mechanism our brains have developed, taking major decisions under this denial state can cause havoc in our lives.
Proactively trying to see & live in one’s reality at any point in time is the best way to behave rationally. If one thinks of all of grandma’s wisdom handed down to us in popular sayings (eg. “live within your means”), they all urge us to recognize & live within our own realities.
4. Betting big when the right opportunity knocks
I loved this sentence from Munger – “What % of your networth should you put in a stock if it’s an absolute cinch? The answer is 100%”.
While I am positive that Charlie wouldn’t like this to be construed as a stance against diversification, which is important for almost all portfolios in varying degrees, the spirit of this sentence is this – a few times in your life, you will come across a no-brainer opportunity with massive asymmetric upside. It will happen very infrequently, but when it knocks on your door & you are convinced about it, go all in & bet really big. Over a lifetime, these bets will drive the majority of your returns, financial or otherwise.
If there is one thing that separates the likes of Buffet & Munger from other investors, it’s the mindset of betting really big when the odds are extraordinarily in your favor. During the meeting, Munger mentioned how Ben Graham made 50% of his money from just 1 stock – GEICO. Also, he illustrated the importance of power laws by sharing how Berkshire’s initial $270Mn investment in BYD (made in 2008) is now worth $8Bn!
Munger admitted to having used leverage to buy Alibaba stock in the DJCO portfolio. When asked why he violated his own rule (his famous quote being “there are only 3 ways a smart person can go broke – liquor, ladies & leverage”), Munger responded with another fascinating quote:
The young man knows the rules. The old man knows the exceptions.
Charlie Munger
The insight behind this is something I say a lot – context is everything! Rules & checklists are great for driving overall discipline & avoiding foolish behavior but as Munger demonstrates, it’s not wise to become a prisoner of your own rules. With experience, one should learn to spot exceptions & when the context is favorable, be bold enough to break the rules.
6. On long-term economic trends
While both Munger & Buffet generally hate to predict macro trends, Charlie mentioned a few interesting observations:
-Inflation is here to stay over the long run, given most democratic govts. globally have shown an ever-increasing inclination to print money.
-Most govts. across the world are going to be increasingly anti-business, with tax rates steadily going up.
-If one looks at economic history, the best way to grow GDP per capita is to have property in private hands & make exchange easy so economic transactions happen (the essence of capitalism).
If these trends are even directionally true, it makes sense to hold assets that can fight inflation (eg. stocks), as well as invest in a tax-efficient way, over the long term. Developing an investor mindset that can operate in a high-inflation environment will be important.
7. The playbook for success in life – Rationality + Patience + Deferred Gratification
When asked the thing that’s helped him the most in life, Munger said – rationality! Loved this line from him:
If you are constantly not crazy, you have a huge advantage over 90% of people.
Charlie Munger
To significantly improve the odds in your favor, Munger prescribes combining 3 things:
-Rationality (which is often, just doing the obvious)
-Patience (take advantage of compounding)
-Deferred gratification (live within means, save & invest)
Like most things Munger says, the above ideas are simple & profound, yet hard to consistently follow for most people as their biases come in the way.
Subscribe
to my weekly newsletter where in addition to my long-form posts, I will also share a weekly recap of all my social posts & writings, what I loved to read & watch that week + other useful insights & analysis exclusively for my subscribers.
Today, I was remembering my strategy professor from ISB Prof. Prashant Kale. All my batch-mates will agree that he was probably one of the best, if not the best, professors that year for Class of 2010. In particular, one of his classes where he taught the legendary Southwest Airlines strategy case is imprinted in my consciousness — I even remember exact drawings he created in the class.
The key takeaway from that class was that the competitive advantage of Southwest Airlines wasn’t a single linear element; rather, it was a “Mesh of inter-connected, inter-dependent, self-reinforcing activities” that was almost impossible to replicate by competition. Eg., turning around a plane in 15 mins (fastest in the industry), which required the gate staff to operate at a certain cadence, which in-turn, required the check-in staff to do certain activities at a certain speed etc. Essentially, executing any precedent element well made the next dependent element even stronger; conversely, if one of the elements was poorly executed on, the entire mesh advantage ceased to exist. This Mesh model has been a transformative strategy concept for me, and has been a key foundational element of my thinking.
Illustrating the proverbial “Mesh of Competitive Advantage”
I recently got reminded of this concept again after a decade, this time in an entirely different context of public market investing. I was reading the Q1 2019 Quarterly Investor Letter by O’Shaughnessy Asset Management (OSAM), a top quant asset management firm founded by the legendary public markets investor Jim O’Shaughnessy. This letter is particularly fascinating, as it talks about how to cultivate real edge as an investment firm.
OSAM defines the following framework for real investing edge (quoting the letter):
“Real investing edge should (instead) be cultivated at the organizational level.”
“Properly built, an edge should be very difficult or impossible for others to replicate.”
“Ideally, the edge naturally increases over time — something venture capital investor Keith Rabois calls an “accumulating advantage.”
Specifically, OSAM does 2 things that drive the edge — 1) consciously building a Research Graveyard, which essentially means doing lot of research, data analysis and number crunching projects that don’t necessarily lead to immediately improved investing outcomes but increase the overall ideation & knowledge of the firm in a compounded way over the long term; and 2) building tools (data-sets, software and combos thereof) and then deliberately opening them up publicly for other researchers to use (like the way Amazon opened up its cloud infra to developers, creating AWS), whose usage, in turn, has generated some of the best research insights for OSAM.
As a finance and investing person, while both these elements are individually interesting to me, the real deal was this sentence (again quoting the letter):
“These things — software, data, research partners, our graveyard, even the podcast and our twitter activity — all link into and depend on each other, which makes each more valuable and harder to copy.”
“Think back to the ownership data project. Without other connected tools, that would have just been a dead idea — time wasted. But now the ownership data set has become a critical piece of another software tool we use for clients called Portfolio X-Ray. It is now also a new data set available to research partners, who may find something interesting that we did not.”
This is the “Mesh of Competitive Advantage” all over again. A set of activities that, while look replicable in isolation, are almost impossible to replicate by competition as an inter-dependent, inter-connected, self-reinforcing system. This, my friends, is where true competitive advantage comes from!
This is the same reason why, despite having an incredibly transparent investing strategy, framework, terms, processes & activities, other venture firms are unable to replicate the Y Combinator model. This is the same reason why I saw Alibaba winning in China eCommerce (a rhythmic mesh of commerce, payments, logistics, cloud and advertising that is perhaps, impossible to replicate even with infinite capital). It’s the same reason why, as Prof. Kale told us in 2009, Southwest won in the US airline market.
As I think more about this concept in the context of tech startups & Silicon Valley, I believe the following execution elements are important drivers of on-ground success:
Mesh creation has to be deliberate — it’s really hard to defend individual, linear advantage elements in the long run (eg. just having more capital than competition).
Constituent elements of the Mesh need to flow from an authentic place residing inside founders/ leadership teams — what we call as DNA, else it’s hard to sustain.
The Mesh strength compounds over time — demands consistent execution over a long-enough period of time.
This is why true diversity in the team is important — underlying this Mesh of Competitive Advantage, is really, a Mesh of diverse people, each contributing a uniqueness that, combined as a whole, is a super-power. Like the YC Founders or Paypal Mafia.
Would love to hear how you have created competitive advantage for yourself/ your companies.
Side-note: the “Mesh of Competitive Advantage” can also be used to differentiate yourself as an individual professional. Instead of being linear in your career, try to create your own cross-functional, cross-sector, cross-cultural & cross-market Mesh of skills & experiences that, while individually might not look compelling enough, combine together to give you a truly differentiated world-view and approach to life. In today’s age of automation & tech-driven leverage, having this type of Mesh is worth its weight in gold as it can’t be replicated by software; rather, software & tech tools can be used to leverage it up & further magnify its impact.
Related note for parents raising kids in Silicon Valley: given we live in an echo-chamber, with template approaches to pretty much everything (from hiking at the same spots, wearing similar Patagonia vests, to starting up and listening to the same podcasts), it’s important we consciously expose our kids to the non-Silicon Valley world. We would do well to nurture their authentic qualities and original habits, whether they fit with the Valley way of doing things or not. In fact, I would argue that the more contrarian or differentiated these intrinsic personal qualities are, the more we as parents, should encourage them. This will set them up as adults to create their own, authentic “Mesh of Competitive Advantage” that stands the test of time and disruption.
