Transcript: Podcast #10 with Cedric Chin

This is the full transcript of podcast #10 with Cedric Chin

Liberty:
Cedric, welcome to the Liberty and Cedric Podcast. I think I've told you this before, but it's so weird how when I think about someone, most of the time they live pretty close to me. So I can think of them as over there, right, then on the horizon. I go west or go south. But with you, you're really under my feet somewhere, right? We're the bread and the planet is in between, right? We're making the earth sandwich, so it's crazy. We're in the world where we can have this conversation at basically real time at no cost.

Cedric Chin:
Yeah. It's incredible. If there was an elevator, right? I could just go down all the way and then pop up at your house.

Liberty:
Yeah. Some old [inaudible 00:00:33] villain digging underground. So first things first, can you just give the quick intro to you? Who are you? What have you done? What are you doing? Just so people have an idea.

Cedric Chin:
Sure. So I write a blog called Commonplace. It's at commoncog.com/blog. And that's actually pretty terrible as a branding. And I probably, I'm going to redesign and figure out a proper naming thing that people don't get confused. But most people say oh, you write the Commoncog blog. And effectively right now, I'm basically a blogger, right? But before this, I worked for a Singaporean company and I ran operations in Vietnam. And we bootstrapped the company from basically nothing. We were doing consultancy, right, which is this fancy term that people use when you're basically an outsourcing company and you are building mobile apps for other, geographical arbitrage. You're in Vietnam, and then it's really cheap. And then it's just a couple hours away from every Southeast Asian country, right? And Singaporean startups, they pay good money.

Cedric Chin:
So originally, my boss, he created this company and it was outsourcing. And then he hired me because he wanted a shift to product because people eventually realized that, oh, you're an outsourcing company, you're basically just, you're trading time for money. And there's a limit to the amount of leverage that you can have. Long story short, we were there, we pivoted the selling point of sale systems, and the company really grew quite well when I left. I think it was zero to 4.5 million in annual revenue from scratch in a period of maybe two to three years. And then I left and I wanted to go start my own company. But then I looked at my skills and I was like, I know operations, I know how to code, I know to manage engineers, and hire, and all that stuff. But I don't know anything about sales. And I don't know anything about marketing. Oh, sorry. I know. I suck at sales.

Liberty:
[inaudible 00:02:12] It's not even zero. It's negative.

Cedric Chin:
Yes. I didn't know anything about marketing and you have to be good in one of the two, right, if you're starting a company, right? At least know the ropes. So I was like, okay, let's figure out how can I learn marketing? You need a sandbox when you're learning, right? So I started writing the blog on commoncog.com/blog. And at first, it was trying to learn content marketing, and eventually became this outlet to understand a lot of the business that I'd seen when we were building the company. Right? And the business is much, much bigger now and much more successful. But along the way, I had met a lot of what I call traditional Chinese businessmen. So these are incredibly superstitious, very common in the region due to the Chinese diaspora in Southeast Asia.

Cedric Chin:
And so, these are the stereotypical, they've never had education. They started a couple of businesses when they were young and then they failed, or they were apprentice, or one of them, the story that I like to think about is ... or recently I was digging into was this guy who eventually started this food chain in Singapore. Right? And he started out selling push cart noodles from a push cart before he was ... he was caught by the police and said like, oh ... so stereotypical, these kinds of people who learn the skills of business in the school of hard knocks, right? And then we dealt with them and they were amazing. They could put together all sorts of deals that we'd never seen before and give us the run around, and sometimes ... yeah, good partners.

Cedric Chin:
I think one of them was we were providing point of sale systems to this one guy who he was 60 or something like that. And what he was doing was he was basically doing a roll up of all the convenience stores run by individual proprietors who were old and their kids didn't want to take over the business. And he was putting it all into one big company. And the pitch to them was like, oh, we're going to list on the Singapore Exchange so that you can all retire and get your payout. Right? And he was amazing. Anyway. So my blog became this thing where I was trying to figure out a lot of the things in business I had seen. And along the way, I don't know how you found it, my joke is that Fintwit seems to have adopted me for some reason that I don't understand because I'm an operator writing about operational things.

Liberty:
That's what I was going to say. It's like, we're all obsessed with balance sheets and cash flows and this, and you're like, no, no, no. Let's look at the operations. Let's look at how are they doing it on the ground, right? And there's not enough of that on Fintwit.

Cedric Chin:
Well, but the interesting thing is I get a huge amount of value from reading your stuff and Fintwit stuff, right, because as an operator, financial, knowing your numbers at the back of your hand and understanding cash flow and velocity and all these things, these are incredibly useful things. And the instant I read, you know how Buffett has this saying about being an investor makes me a better business person, and being a business person makes me a better investor? 100%. When I start reading, I start subscribing to Substacks of various Fintwit writers, right? A lot of the concepts that they talk about, it's super intuitive if you have the framework of running a business at the back, the skeleton of running a business, right?

Cedric Chin:
And then you just hang these concepts on and you're like, oh, so that's why they were doing this, or oh, no wonder they try to optimize for cashflow, even though it compresses their margins because they have no choice, right? In a scenario where they are willing to take a discount on the price that they charge you if you pay earlier, it was like, why, you work so hard, right? And then like, no, no, no, actually it's because if they don't pay, then they have cash flow problems, and cashflow is everything for these people if you're running a small business.

Liberty:
It feels like there's these two sides. And if you have a lot of one, then the other, it becomes more valuable, right?

Cedric Chin:
Yes.

Liberty:
In the sense that there's diminishing return to only focusing on one side. So I think getting a good balance of both is what more investors should do. You start seeing all kinds of stuff that you will never notice if you start thinking more like an operator, say, when you've been more a financial person, and probably vice versa. If you are surrounded by people who only think about operations all the time, if you have any kind of that more financial background, probably gives you an edge, right? You're going to see some stuff that they're not going to see.

Cedric Chin:
Oh, no. 100%.

Liberty:
I guess I'm preaching to my own choir as a generalist, right, trying to do the 80-20 rule on a bunch of different fields, but it feels like the intersection of different fields. There's a lot of low hanging fruits that the specialists might not find.

Cedric Chin:
So one of the things that, after falling to the finance rabbit hole and going oh, actually there's a lot to learn here, a lot that's useful to me as an operator, is I start listening to a huge amount of finance podcasts, right? And they invite these famous hedge fund managers or investors onto the podcast. And what I get out of it, so I think what a typical investor listener might get out of it would be oh, here are the ways to get off of, the strategies or the way he thinks about it, right? What I'm getting out of it is actually if you listen carefully to the ones who run successful, large institutional firms, I keep noticing that these people are really good organizational designers, right?

Cedric Chin:
And in a way that when I listen to a typical, an investor in a smaller firm might not be as good. My feeling is that, in the investment business, it's a completely people business, right, where the quality of your returns is completely based around the talent that you can track and how well they can perform in a group setting, right? And then once you scale, the question is can you scale that people-centric more than, it's more than, let's say, an operational business where, say, when we are selling point of sale systems, then there's things related to supply chain, getting hardware, and writing software, and all these things, and putting it together, right?

Cedric Chin:
Finance businesses are simpler where it's just literally what's in the brains of the people making the decisions, and then that there's a trading department, right? But, operationally, it's actually less complex than most typical businesses that I see. But then the magic of why some shops can grow very large is that they're actually good organizational designers. And I feel like most investors, especially if they're in a smaller firm or a medium size firm, they either don't have that skillset or they don't know that a skillset exists, right?

Liberty:
That's super interesting. And it's like, there's the IP, that's the knowledge and the brains of all the employees. There's the sales side because you're going to sell the firm to outsiders and also to the talent, right? There are two kinds of sales that you've got to do if you run one of these, it feels like.

Cedric Chin:
That's true, yeah.

Liberty:
But then, I'm also wondering everywhere I look, it's all power loss. So is it the same with these firms where, if you're lucky, you become a shelling point for your niche, right? So, oh, I want to invest in fancy new tech things. Oh, I'm going to go in Arc. Right? People think about it immediately like the retail investor. And some other niches is going to be like, okay, I'm this kind of investor. I'm going to go with WCM or with Counterpoint Global. Some names just pop to mind and they've built this brand, right? It feels like, as you say, there's a lot that you have to do that may not be obvious at first, right, when you're a smaller scale and you're not dealing with the same distribution problem.

Cedric Chin:
Yeah. Well, I mean, you could say some of the genius of constellation is in the org design, right?

Liberty:
Yeah.

Cedric Chin:
Because they're able to do such a high velocity of deals, right? Whereas, I don't think, I could be wrong, but I don't think, Buffett, from reading about him, is as good at org design as [inaudible 00:09:06] is, right, because Buffett is pretty much hands off. He does design the incentive structures quite well, but then he doesn't have to have this incredibly high velocity, which requires a certain amount of, you have to figure out how is your organization going to run? And it's definitely a larger organization in Constellation than it is in Berkshire. Berkshire, I think hasn't grown for how many decades, right? There's that. And then, there's another layer of complexity if you go up to the multi-part hedge funds and you listen to the people talking about this. I was listening to Invest Like the Best recently. And there was one of the founders of one of the ... he sounded like a typical business person who was thinking about how to scale the organization as opposed to an investor.

Cedric Chin:
Anyway, this is things that you pick up when you think in terms of org design, right, which is how do you design the incentives? But also how to design in a way that the politics doesn't get in the way of the organization's goals. And then you have to figure out how to do stakeholder management, how to do good LP management. It seems like that's part of the game.

Liberty:
Oh yeah. That sounds terrible. I'm glad I don't have to do that because they're all calling you at the same time at the worst possible moment when you're trying to focus on ... when the opportunities all come at the same time in the market, all of a sudden, you're getting emails and phone calls from freaked out LPs, right?

Cedric Chin:
Yeah. I would really like to hear some investors explicitly talk about the org design aspect of the business because for all of curiosity and also as an operator, I love when I can listen to somebody who's really good at trying to figure out the right structure for the business, right? That gives them an advantage. Here's a funny story. Okay. This is back in my wheelhouse of businesses, right? So we sell point of sale systems to, basically there are three kinds of businesses that you sell point of sale systems. So there's the gyms where you have CRM, right? Sorry. I should start from the most basic. So the most basic is the 7-Eleven at the convenience store, where you bring the goods to the counter and you pay it. And then there's, what do you call it? The gyms where there's some membership component attached to it or whatever, loyalty, right? It could be dance studios as well, or Karate dojos, right? And then there's F&B, and F&B's a completely different world where you have to do all the management and stuff.

Cedric Chin:
So we could figure out the first two fairly quickly, but then dealing with F&B restaurants and cafes, right, was a completely different wheelhouse. And it took us a very long time, I think maybe two years, to find out how to sell to them and what their incentives are. And so the typical incentives for an F&B industry, and I think what's funny about this is that we had to learn this the hard way, but trial and error. We couldn't read a book. Maybe we should have gone to somebody with more experience and they would explain the business model to us, right?

Liberty:
When you were doing this, it was all green field, right. There was nobody already there that you were competing with. You had to create the model for the, locally or-

Cedric Chin:
There was competitors, but I think we were clueless, or stupid or, or yeah. There are frameworks and stuff like that, right, but then we never actually taught this thing. How does the restaurant industry work and how does this translate to us doing sales? Right? So to give you maybe more concrete detail on what's the problems that we face, when you sell to convenience stores, one of the pitches that we could do is cash theft is a problem, right, because you are dealing with a lot of cashiers in all these shops. Right? And when you say cash theft, you know that it's an incentive. They have the incentives to reduce it because the eyes light up. And then when you go to restaurant owners and you say like, "Hey, this solves cash theft." Their eyes will not light. Oh, interesting. Interesting. Okay. Cool. Right?

Cedric Chin:
And for CRM, it's more are there ways to reach out to your existing membership to incentivize them to upgrade or whatever. Right? And going somewhere with this with scale. So a typical F&B business, the ongoing cost is basically 80% rent, cost of ingredients, and then labor. Right? And that's it. And so cash theft isn't that big of a deal because the number of transactions per night isn't that high. Right? And if you come to them and say, oh, our point of sale systems will help you manage inventory and allow you to save costs. They'll be like, "Ah, ingredient costs, we can't really change it. The marginal saving is not really great." Right? And so we eventually realized that the way to sell to them is to tell them hey, our point of sale system has the ability to increase your sales.

Cedric Chin:
And the way we do that is we say, oh, if you have automated ordering system, because the Singapore government was trying to push people, giving grants out for automated ordering systems for immigration reasons because they didn't want to import too many waiters from elsewhere. Yes. Singapore is interesting. And so if you use an automated ordering system, your per order size goes up, right, because the app never forgets to upsell at the end of the ordering session.

Liberty:
Right.

Cedric Chin:
So when you go to a McDonald's kiosk in Singapore, this is actually very clear. The flow is always to suggest desserts, right? So then the per order size goes up. Right? And we know from running this extra $3, $5. And when you tell this is the restaurant owner, the eyes light up. Right? So all is well and good. We finally figure out how to sell. Okay. There are many other features that we can do that leans into this insight. And then once we reach that scale players, suddenly they were like yeah, whatever. We're not that interested in bringing in more traffic or increase orders. And then we were like, why? Right? So it turns out that if in Singapore, if you hit scale, the higher scale ... so I suppose I should clarify what I mean by scale players. I mean, specifically the food court operators and the coffee shop operators. So in Singapore and Malaysia, there's this thing called food courts, which by the way, if you ever come, I will bring you to take a look at them.

Liberty:
Yeah. Let's do it.

Cedric Chin:
Where it's a really interesting model where they buy some large space in the shopping mall, and then they divide the entire lot into multiple small stores. And then, each store sets up different food. Could be noodles and wine and rice in the other, and Thai food in the other. And they collect rent from these stalls. Right? So they're like a mini landlord, but they're branded. So there's brand power in the sense that people know that, oh, this is a good food court and we should go there. Right? They completely were not motivated by footfall because they had a symbiotic relationship with the malls here where if you are a mall operator, you want to have a food court because then it attracts footfall because people know, oh, there's a good food option. And indeed, if you're in Singapore, right, you could go to a mall and go oh, do I want to eat Ramen? Let me check the Ramen shops.

Cedric Chin:
Oh, the default option is always, let's just go to the food court and see what's there and eat. Right? So they don't really care about transaction size or footfall because if they've done their work well, they have already got a good deal with the malls that they select so that there is always high footfall. So their own design, and I did not realize this until much, much later, and I've left the company, and my boss was like, okay, we finally figured out what motivates them. And it is they completely tune everything for scale. So, for example, every single worker in a food court, they have SOPs, Standard Operating Procedures, tuned to the last detail. They centralized purchasing. They have a central kitchen to prepare soup bases and stuff. And so the incentive structures completely change, right?

Cedric Chin:
And when I heard this, I was like, wow, the amount of org design and scale and tuning to be able to run a business from a couple of shops to this size, and it happened over the last three decades, I say, since the late '80s to now, right? That was pretty impressive. And I did not realize and I started digging further. But anyway, so this is the things that you come up when you're operating business. I think you like to say that investing is your window to learn about the world. I think running businesses and then looking at businesses, and then talking to other people, running businesses is how I see the world. And that's what I write about.

Liberty:
It reminds me of a tweet I posted today about how there's the cat scratching post. And then there's a cat thing in the box. And it's like, what you think the user will want and what they actually want, right? It's exactly what you have to do as a business. Try to put yourself in the shoes of your customers and figure out what they really want. And from the outside, at first, you may think, oh, it's obvious, right, or they all want the same thing at different scales. But as soon as you change a few of the incentives or a few of the details on the ground, it could be very, very different. And so that detective work that you're talking about that you had to do for different types of customers, that's probably a lot of the work at first, right?

Liberty:
Just for a few years, you're not getting traction and you don't know why, but nobody's going to come and tell you, well, if you only solve this problem for us, it would change everything because it's not the customer's job to tell you how to do your job basically. They're just going to wait for you to figure it out. Right? That's why some customers are so valuable because some of them will unlock it for you, right? Some of them will tell you the right thing at the right time, and it changes everything. But most of them probably won't.

Cedric Chin:
Actually, one thing that I've learned is whenever you talk to a startup operator or a business operator, well, probably a startup operator because they have more of this problem of trying to figure out what the customer wants, right? Whereas, if you're running a typical business, like a barber shop, then that's not really a problem. But if you ever talk to a startup operator, the question that I like to ask is can you tell me about the a-ha moment where you understood something surprising about your customer? There's always one. There's always one. It'll be some weird thing where they realize that oh, this pattern of behavior where they're not responding to this particular sales pitch, but they're responding to this one or two sentences. And then you dig in a bit further and then you realize a whole business is structured in a way that makes the customer very incentivized to do this, to get this one thing done. There's always one. There's always one.

Liberty:
Maybe because we talked about him before the intro, but makes me think of Jimmy Soni's book about PayPal and how they all wanted to build a certain business. Right? Oh, we want to be money with the [inaudible 00:18:34].

Cedric Chin:
Oh, yes.

Liberty:
But the customers were all basically telling him, no, that's not what we want. We want to email money. But they only build that feature as a side thing. And that's what was getting traction for a long time. They were trying to fight distraction. They were trying basically to tell customers they were wrong. No, come back to this product. It's much cooler. But nobody wanted it, right? It's so funny how, even in the middle of it, even when dollars are coming in for something, it may still not be obvious.

Cedric Chin:
Yes. My God. Yes. I really like that part of the conversation where your podcast, your interview with Jimmy Soni, right, where Soni was saying when you talk to people trying to invent something, it's usually not what they intended that turns out to be the thing, right? It's always something else. It's always some unintended thing. And then they're smart enough to go like, okay, let's, why not? We just lean into that. Right? And he talks about how that's actually something that people should pay attention to, instead of all these stories about tech, right? If there's actually something quite beautiful, but also scary about trying to figure out something new and then your original plan never works. Right? Wait, so you have startup experience as well. I'm sure you have seen some variant of this, right?

Liberty:
Yeah. It's pretty deep in the archives of my mind. So I have to think about some concrete examples. But, definitely, you're always figuring out new things, right, especially if you're not a fast follower or someone who's like, okay, there's a clear leader, what they're doing is working. We're going to take that model and run with it. But if you're inventing the model as you go, maybe you have a bunch of competition, but they're all at the same point as you are. Right? Everybody's trying to figure out at the same time. It's exciting, but it's also, you can bang your head against the wall for a long time before you figure it out. And during that period, it seems like it's never going to work.

Cedric Chin:
Wait. So I'm curious. At the time, were you already quite financially savvy? In the sense that you were the investor, and then you could start seeing things in that business, the startup that you're working at, because you were already learning these things about evaluating businesses?

Liberty:
No, not at all. Not at all. I learned that later. So at first, it was totally coming from let's just do the job, right? Let's just make the thing happen. And I knew nothing on the business side. I learned through it, right, just by living through it.

Cedric Chin:
So that's basically somewhat similar to my experience, right, because right now, so we've had this conversation before. I can't be an investor. I'm not an investor. I don't know whether I have the stomach to be an investor, right? In your AMA, you talk about how to weather bear market, and you get used to it, but in the beginning, I noticed you said it was quite horrible. So I hear things like this and I'm a bit scared and I don't think I can be an investor. But very much in the same boat in the sense that my startup experiences were not very, I didn't really know what gross margin and all these things, all these typical things like velocity, free cash flow, right, pretty important stuff. And then you realize that actually business people who have been at it for a while, even if they're not formally educated and they don't know the names for these things, they intuitively know in their gut because this is the essence of business. Right?

Cedric Chin:
But I only learn about these terms much later. Now that I've had this experience and I'm sure you've had this experience as well, I wonder, most people who do tech companies, they don't think in terms of finance or they don't, unit economics is something that VCs have to drill into some founders' heads. And they don't think about the implications of certain features on the business or they're not very savvy in terms of how the bones or the business work.

Liberty:
It reminds me of something Rob Coffman told me about how if he had to do it again, start a new business, he would've so many advantages over the first time because there are so many things he had to learn the hard way and took a long time. And it feels to me there's this, on one end and on the other hand, right? So on one end, if you do it a second time, you know so much, you're going to make fewer big mistakes. But on the other, you're probably older, you have a family. You're not going to burn the midnight oil and spend all day and all night at the office. So I don't know if these advantages can tell each other out or if certain people can make it work and others just couldn't redo the startup from scratch again. I don't know.

Liberty:
Another thing I was curious about, I just love this idea, your idea about how, I think you call this cognitive flexibility theory, or is it this thing about how it's hard to extract principles from stories and anecdotes and stuff that happen to people because there's, I don't know if it's a fractal nature or is it orthographic encoding or something, but there's a lot of data that you're going to lose if you try to take it out of context too much. Am I getting it right? Can you explain this-

Cedric Chin:
Right. Yes. Yes. Okay. So I guess for the benefit of your listeners who don't know, who are not familiar with my work, I write a lot about business, but also from an operational point of view. But everything that I write from is from the perspective of how do I become a better business operator, right? A lot of my readers, they're coming along for the ride, because I'm looking for better ways of thinking about operations. I know what I'm good at. I'm fairly upfront about it. I'm fairly good at org design. I'm a fairly good manager. I think I'm okay in terms of understanding how a market, and trying to figure out what the customers want in the market. Not so good in finance and improving, but any tool that I can get and I can use to become a better venture, a better business operator, right, I will go and dig into it and write about it.

Cedric Chin:
And so, this theory is a learning theory that comes from a book called Accelerated Expertise. And at some point, I think I do want to have a conversation with whoever. I think the first time we talked, I ask you what is the nature of expertise in investment. And you're like, oh, there's so many styles. And at some point, maybe we should talk about this after this, because this is one of my big interests, the nature of expertise, because I figured out the nature of expertise in business. But anyway, the book is a report commissioned by the US Department of Defense, right, on all the techniques that the military has figured out on how to accelerate expertise. And basically near the end of the book, the researchers say that everything that they've done that have worked, right, rests on two learning theories.

Cedric Chin:
And cognitive flexibility theory is one of the theories mentioned. And so after reading the whole book, which by the way, I do not recommend unless you have a lot of patience for reading academic lit review because two thirds of the book is a lit review of the existing literature, right? And only in the last third, do you get the stuff like here's what we've done, here's the stuff, the expertise that we've successfully accelerated. And that's really the interesting bit. But anyway, so cognitive flexibility theory is a theory about learning from, the original feel was from trying to accelerate medical expertise. And it deals with something called an ill-structured domain. There are actually four big ideas that we have to cover in order to talk about theory. So two ideas to set up what the theory is about, and then the two ideas that the theory actually consists of.

Cedric Chin:
So the first big idea is that it is concerned with ill-structured domains. And the definition of an ill-structured domain is there are concepts in a domain, but the way the concepts instantiate in the real world when you have to operate on it is highly variable, right, even though for the same type of concept. So example, in medicine is heart attack is a concept. You can read about and learn about the mechanism of a heart attack in a textbook. But when you have to diagnose a heart attack in the real world, right, there are so many ways that heart attacks can present themselves, right? Some heart attacks, they start out as indigestion, and you come to the doctor of indigestion. And some heart attacks are very long. They can take multiple days. And some attacks are like the textbook kind that you imagine in your head where you get a heart attack and then-

Liberty:
In the movie, right? Grab my arm and fall on the floor.

Cedric Chin:
Exactly. But real world doctors know that heart attacks can present themselves in incredibly huge variety of ways. Right? And so, the trick is how do you teach these to medical students, right, who read about heart attacks in the textbook and they probably have a prototypical idea of the movie's version of a heart attack, right? When in real life, heart attacks can be completely different based on the gender, the age, the case history of the patient, a huge amount of things, right? That is idea number one, ill-structured domains. And you can see why this might be valuable to business people or investors, right, because-

Liberty:
It sounds super familiar, right?

Cedric Chin:
Exactly. Right? If I tell you scaled economies, right? The polytypical textbook example might be, oh, you build a large factory and then you have lower unit costs. But then in Hamilton Helmer, 7 Powers, he has this case study of Netflix, right, which has scale economies. But the scale economy, he doesn't have a factory. Instead, he raised a huge amount of junk bonds. And then he used the junk bonds to create this content pipeline. Right? And then the per subscriber cost amortized across the entire subscriber base because the Netflix was the largest streaming service meant that there was this bar that every other competitor who wants to enter into the streaming services, unless they already have an incredibly large content library, would have to struggle to match, right? So there are many different instantiations of unit cost. Anyway. So we live, definitely business operators and investors live in a ill-structured domain.

Cedric Chin:
Idea number two. If you are in an ill-structured domain and you want to teach people to be able to operate well, right? You cannot rely on first principles or frameworks or concepts alone. In fact, the researchers claim that cases are asked if not more important than concepts. And the argument that they give is that if you go look at doctors, right, junior doctors are not able to reason from case presentation and symptom presentation down to the mechanism of disease, nor can they reason from the mechanism of disease that they've learned in their textbooks to the actual instantiation in the real world. So, and in fact, if you go and interview, and they've done this, right, they've done cognitive task analysis on expert doctors. Expert doctors are able to deal with new novel case presentations by analyzing it, and then combining and fragments from previous cases that they've seen. So they reason from previous cases that they've looked at and they combine fragments from different, it looks a little bit like this and a little bit like that.

Liberty:
Right. Right. They don't go back to first principle, right? You don't go back to this is what's happening inside of the sales. So this is what I'm seeing on the patient's face.

Cedric Chin:
Exactly. Exactly. And so if you agree, you believed what the researchers say, right? That this is the nature of reasoning inside such a ill-structured domain, then you should also think, wait, this makes sense for business and investing as well. Right? I mean, a lot of people talk about how Elon Musk is incredible first-principles thinking. And I think Soni's book, Jimmy Soni, has talked a lot about how the PayPal people have incredible first-principles thinking. But if you look at a lot of their problems, obviously there are first-principles thinking aspects to what, to any problem solving approach. For Musk, I think the most famous story is when he's trying to figure out how to build a Starship cheaply. Right? And then from first principles, the building materials of how it goes into a Starship.

Liberty:
Yeah. If you go on the commodities exchange and you buy the materials per pound, right?

Cedric Chin:
Exactly.

Liberty:
It's going to cost this. And then what's the minimum cost of rearranging these atoms in the form of a spaceship. Right? That's very first principle.

Cedric Chin:
And that works, right? But then if you think about some of the more business moves that SpaceX had to do in its history, if I'm not mistaken, there was another executive who came up with a business model. Right? And surely that isn't completely first principles. Right? That a bit of trial and error. And this also explains to me some other things. To make my biases very clear, I am a computer science graduate and more engineering trained, and so I believe that first-principles thinking is the best, right? That's my bias. Right?

Liberty:
It's certainly the most elegant. I feel like-

Cedric Chin:
It is.

Liberty:
For big breakthroughs, you need it a lot of the time. For everyday operations and running a business, you just can't, right? Our brains are not designed for that, but it's this magic ingredient that you need to sprinkle on top of-

Cedric Chin:
Yes. No, no, no. Exactly. Exactly. So I think in your interview with Jimmy Soni, Soni was saying that there was this almost throw away command where he said oh, surely you can't work for 100% of the time, but then the truly breakthrough innovations, it's usually the 10% of the time that it does work. Right? And that is the fundamental takeaway that one of the engineers in early PayPal had. Now that he goes to any other place, he always tries to put on the first principles thinking hat, just to see where it brings him. I am probably destroying the anecdote. But for those listeners who want to know, go listen to Liberty's podcast with Jimmy Soni. But if you look at some other thinkers, right, so this is a thing that was always confusing to me as a person who is incredibly biased towards first principle's thinking, right?

Cedric Chin:
Charlie Munger reasons a lot from analogy. People like to talk about how he has hold this mental model thinking. But when you listen to him, right, every time he talks about some business situation or he analyzes it, he'll be like, oh, this reminds me of, and then he pulls up an analogy from some business in how many decades ago, and he tells you the story. This reminds me of this and this. And he's using it to make a point, right, which is very unusual because a management consultant or an engineer-trained person will be trained to, here is the point, and here's the supporting argument. Here is the-

Liberty:
Sometimes I wonder if, I don't want to derail your point.

Cedric Chin:
Go, go, go.

Liberty:
But I'm wondering if this is the way humanity has evolved. We can compress stories really well in our brains and remember them very well. So there may be a benefit to keeping the whole story because there's information in there that you can apply later. And if you extract only the bullet points, you're going to miss a lot of it. That can be true. But at the same time, I think it can be true that people have a lot of stuff stored in their database, right, in their brain. Basically, the way they can keep it in there and apply it is by using, it's like the water flowing downhill, right? To our brain, it's much easier to use and remember stories. So I wonder if these two things combine.

Cedric Chin:
Oh, that's a really good point. There's a quote, I think, by one of the, I think Gary Klein, right? The guy who created pre-mortems. He likes to say that data may be what convinces us, but it's the stories that we carry with us going forward. So there's definitely something there, where if you want to remember things, it's very natural for your brain to look at stories that you have in the back of your head, in your database, right, and then draw a fragment from it and then combine it with another fragment of another story that you remember. Right?

Liberty:
Right. And Buffett does it all the time too, right?

Cedric Chin:
Yes.

Liberty:
If he had a super jargony term for standing on tiptoes at a parade, you wouldn't remember it as well. But when you think about okay, standing, okay. I get it immediately. So it's the way to compress the idea, remember it. And so a longer story, a longer business story is just a version of this. I think Eugene Wei had a good post about how Bezos is also great at compressing ideas in memorable ways. So the business, the perfect business anecdote, is just a longer version of day one, right? Day one is short and sweet. But the story about how Coke bought shrimp farms and oil rigs, that story also makes a really good point about diversification, right?

Cedric Chin:
Yes. I think the other thing that stories does is that if you make a point, right, the problem with business and I think in investing as well, primarily businesses is that if you make a point, obviously the point is true for some businesses, in some instances, in some industries, but not others. Right? So you have to make the point in the context of a story, right? And that's not to say that the person who uses the story and uses this analogical reasoning, right, which is a rich area of research in cognitive science, it's worse, somehow worse than a first-principles thinker. It depends on the context, the domain that you're operating in.

Cedric Chin:
In a domain that has incredible variable instantiations of concepts, you cannot remove the contexts from the point you're making, right? Because if you try to make the point, if I say make a blanket statement saying that oh, in scale industries, scale will always lead to advantage. You'll be like, no. Well, there's this one in business, and this one. There's always an exception, right?

Liberty:
The most important thing is R&D and development velocity, well, if you're in software maybe. But if you're in real estate development, maybe not, right?

Cedric Chin:
Yeah, exactly. Or maybe it applies to you, but then there's maybe one incredibly unsexy portion of the software industry, right, where the competition isn't as fierce, and therefore it's not as important. What's more important like some other thing, right, and then that changes the data. Yeah. If you've looked at enough businesses, you realize that oh, there's always weird exceptions because of some weird quirk or maybe some local law or some weird label market inefficiency, right?

Liberty:
Or some person that is so outstanding and heads and shoulder above everybody else that they do something that they shouldn't be able to do in some industry. Right? Some industries are known as terrible businesses, but there's this exception over there that's been making, I don't know, 20% kickers for 20 years.

Cedric Chin:
No. 100%. And when you take a look at these two ideas, if we take the finding from medical education acceleration seriously, right? The idea that you need to focus on cases to teach not just the concepts, then this rhymes a bit more with my experience with business where you can never start, it's never enough to teach the framework. You always need to know how the framework instantiates in the real world, in at least a few scenarios before you can reason about how to apply to your business. Right? And so I've always been distrustful of people who come in and go like, oh, we're just going to follow this framework. Really? Have you actually tried to apply a framework before? There's always weird caveats or weird things that you have to fit to your situation. Right?

Cedric Chin:
Anyway, so these are the two ideas to set up cognitive flexibility theory to core. The theory is that in ill-structured domains, the theory claims that experts reason by doing two things. The first thing is that they have a large experience base and they draw fragments from prior cases that they've seen to reason about the current case that tends to be novel because concept instantiation is highly variable. And then the second thing they do is that they eventually all adopt an approach that a belief that there is never one model that explains the world. There is always multiple models, multiple prototypes. They're all equally valid or equally helpful. It's surprising like all good doctors have this mindset. So unlike us, where we have a prototype of what a heart attack looks like, they never have one prototype of what a heart attack looks like. They have a cluster of prototypes that they can draw from, right?

Cedric Chin:
And similarly for you, right, when you look at a business, you'll be like it's not just one prototype of what a good business looks like. There's a whole cluster that you can draw on and fragments on when you're looking at analyzing a business. And as an operator, if I'm looking at a certain sales, efficiency is down, right, I'm not immediately going oh, from first-principles, sales efficiency means this. Right? I'll be trying to draw from what I know the rest of the company and what I've seen before to reason about is this a bad thing or a good thing, where should I go to, who should I go ask in an organization for more information or what might be going on. Right? So it's this reasoning that seems to rhyme with how I see things and how I, at least, my experience in business and I think when I tell this to people, especially investors, they tend to be like, oh yeah, that actually makes sense. I don't know. What do you think?

Liberty:
No, no. Totally. And it feels like in the abstract, if you add infinite intelligence, right, if you were some Ian Banks AI, and you could really understand everything at the same time from the physics point of view, right? I know the position of every atom in this part of the universe, you could really understand the whole thing from first principle. But our brains are so limited, that's why we have to simplify everything and look at a tiny part of it there, a tiny part of it here, and then try to make this little mosaic from a few of these models. So it feels like trying to reason from only a few principles is just a smaller bottleneck for reality to come into us. Right? If you have all of these different experiences and stories you know about, it's just a wider lens to try to catch more of what's important. It feels to me like anyway. I know it's abstract to describe it like this, but it's not because it's physically impossible. It's just, we are so limited that, at the end of the day, we can only see and understand so much.

Liberty:
So we have to try to, as we're saying, compress it into something we can understand. So if I could really look at the whole business, right, if I have a thousand employees and I could see inside the brains of these thousand, I would've a much, much better understanding of what's going on. Right? If I could really understand every customer, my thousands of customers, it would be very, very clear what's going on with the business. But if I'm sitting here in my office on the fifth floor, I have very little real information about the business. I have some people under me who give me reports. I'm in a few meetings. I talk to a few customers, but it's super limited. So that's why you have to pattern match from very, very incomplete information. So it makes total sense to me. I'm not sure how our limited human brains could do more than that from first principle, right? It has to be that you have to pattern match much more widely.

Cedric Chin:
Well, so here's the catch, right? Here's the interesting catch with that, right? So don't get me wrong, if the domain is well structured, which means that concepts are always, they always turn up, you should do first-principles thinking. It is the most efficient way and the best way of reasoning about problem solving. Right? So engineering problems, a lot of them.

Liberty:
Yeah. If you're debugging some code, right? Don't try to be fuzzy about it.

Cedric Chin:
Yes. But you see, here's the catch. Because we've been trained I think by our education systems to value this, it's the principle or the technique that matters, and the examples are disposable, right? So we learn this in math class, right? We teach you how to solve a quadratic equation and we give you one or two examples. But you know that the examples are disposable. And what's important is learning how to, the moves, or why the quadratic equation is like that. Right? At least for a certain class of people who have been inculcated with the STEM method, or if you go through management con- I find that management consultants are the same thing. Right? They're taught to think very, very logically, right? When you try to explain your expertise, and your expertise consists of this cluster of prototypes, you would try to distill it down to a principle or framework.

Cedric Chin:
And then I wonder if you've ever had this experience and you try to explain your principle, your framework. It's always really easy. It's just this one rule. Right? And you explain it to a subordinate whose maybe more a novice, right? There's no way they can do it. The same thing that you can do, right, because they don't know how it instantiates in the real world. So they'll do something incredibly boneheaded. And you're like, no, I just told you the rule. But how do they know that the rule applies in that particular scenario, right?

Liberty:
The same words trigger very different parts of, in my brain, if I hear this phrase, it triggers a whole set of stuff, right, of experience and memories, but in the newbie's brain, the same words don't trigger much. Right?

Cedric Chin:
Yes. Yes.

Liberty:
So they mean very, very different things. Yeah. That makes total sense. And that's why it's so difficult to transfer this experience-based knowledge because a lot of it is not ... if all my knowledge about a business came from a few books, I could give the same books to someone else and, in theory, we could have the same knowledge. But if you've lived it, if you've been in the trenches and a bunch of stuff is non-verbal, a bunch of stuff is you don't even know why you know it or how you know it, but it's just accumulated over time. And not even that, it's not just that you've lived through it, but it's been processed over time. Right? I feel like there's a lot of stuff that I lived through 15 years ago in a certain business.

Liberty:
It's like a book, right? If you read the same book twice 20 years apart or 10 years apart, the book is exactly the same, but you've changed. So you're going to interpret it differently. It's the same software that's going to be running on different hardware or something like that. So it feels the same with business. A bunch of Elon Musk's early experiences is probably getting something different out of them, looking at them from today's vantage point. Super interesting.

Cedric Chin:
So here's the actionable bit of the theory, right? These researchers, they came up with this not because they, of course they came up with the theory because they want to publish, but they were also doing in the context of trying to accelerate these medical students, right, who were leaving the textbook and the lecture halls for the first time and they're embedded in these hospitals and faced with patients for the first time. Right? So they say, look, if you think about it, the theory makes these two claims and you can actually invert it, right, to get to the actionable bits. So if experts reason and they reason better in ill-structured domains because they have a larger case library in their heads to draw from, to draw fragments from, then obviously one thing you need to do is you need to give students these difficult cases. Right? So they did this thing where they created this system and they gave students incredibly complex, rich, complicated heart attack cases. Right?

Cedric Chin:
And the way they say that you should do it is you give them the first case, right? Okay. We show it. This is a heart attack. And then you immediately give them a second case that's very different from the first. So you disequilibrate them, right? You make them go like, oh, okay. It's not just one thing. It's not just one prototype. Heart attacks can also look like this very different other situation. Right? And the case would be something like a man falls down and he gets brought into the hospital. And then the second case, the man comes in for two visits.

Liberty:
Right. But it's a way to make sure their mind is open to more. Right?

Cedric Chin:
Correct. Correct.

Liberty:
Because if you give them 10 cases that are all the same, then their mind is like, okay, now I know it and you close down, you don't look as much for new information. But if you have two very different ones at once, it's like, oh, okay. I got to be on the lookout for a third way that it could show up, a different way, different posture.

Cedric Chin:
Exactly. So now imagine you apply this to investing education, right? Imagine how much faster you might accelerate your ... say, I give you the annual report of a good company, or I don't know how you might want to compress a case. And then I give you a second one that's very different, very different maybe, I don't know, margin characteristics. Right? But you say this is also a good company, right? And you explain why. And you give them a third, and a fourth. And the researchers say that you want to aim between 10 and 20 for ill-structured domains like medicine, right? At the end of it, right, students who have all these cases, and then you ask questions like, okay, tell me how case A is similar to case D, even though on the surface, it looks very different. Or tell me how case B is very similar to case E, even though on the surface, they're very similar. Tell me how they're different. All right?

Cedric Chin:
And then you force the young doctors to reason about oh, here are some surface things that are similar, even in cases that are very different because they're the same nominal type of the concept, there should be some similarities, right, and you force them to do this. And that's one way of learning. Right? So can you imagine applying it to the investing or maybe for business operations will be developing a competitive moot. All right? Process power shows vary differently depending on the industry.

Liberty:
One thing that comes to mind is how I've seen many investors evolve with this. Right? So they start out, maybe they learn about Buffett or Ben Graham, and they're deep value investing is where it's at. Right? All intelligent investing is value investing, and this is the way to do it. This is the answer to everything. Right? And some people may come up from somewhere else. Right? Some people are day trader or technical analyst, and they think their way to do it is the way, right. That's the smart way to do it. And then, over time, they look around and see that other people seem to make sense. Right? It's not hey, I thought I had found the way, right, I had the right religion or whatever. And then over time, they go look a little elsewhere.

Liberty:
Oh, maybe the growth people have some good ideas. Oh, maybe the, I don't know, the technical people, it's not all voodoo. Right? Maybe some of it is part of human psychology and they understand a few things that ... I'm no expert at everything, but the more time passes, the less judgment I pass on other styles of investing that are different from my own. And even my own, I'm having trouble describing it because it used to be very oh, I'm a Buffett guy or something. And now it's like, well, I'm something, right? And this feels like a more zoomed out way of looking at different types of cases that are all very different, all contradict to each other. And you try to figure out what's good in each what's, what's bad in each, and it keeps your mind more open to learning. Right?

Liberty:
I feel people get stuck on one thing. It's like the guy who thinks all heart attacks are the same. Right? All value investing is about finding this cigar butt at 0.5 book value, and then you sell it when it gets to about 0.8 for margin of safety. Right? That's a very rigid way of thinking about the world. And it could be suboptimal by itself if it's wrong. Right? But it could also be that the world is going to change on you and if you're not open to looking at all these other inputs and cases, you're going to be left behind.

Cedric Chin:
Oh, yes. I think it's funny that the theory describes that every expert in an ill-structured domain eventually turns out to be like this, right, where because they realize that the concept instantiation is so different from each case to each case, right, that eventually they're like, okay, I need to have multiple ways of looking at every case that I see. And if you can give me a tool, even if it doesn't seem to make sense, let me try it on for size first. And maybe it'll help me with some of the cases that I'm looking at. And eventually, the true experts are the ones who never get bogged down in one definition. And so that's how you get really good doctors. Right? They've seen so many cases over the course of their lives that they know like, okay, the body's a really complex system. We don't know how it's going to show up. So let's be a bit humble with our models of these diseases even if we know the mechanism.

Liberty:
It reminds me of a quote I really like by, I think, it's [inaudible 00:46:19]. It's tangential to this, but he talks about how some people will basically live the same day over and over again. Right? They never do anything new. They never learn much. And so they may be 50 years old, but they may have lived, I don't know, 15 years of unique days in their lives. And some other people may be the same age, but they're like a 5,000-year old vampire because every day to them, they're learning a ton. They're doing always new things, exploring. So you can't judge someone just by the time they've been doing something. Right?

Cedric Chin:
That's true.

Liberty:
So this doctor, he could extract much more value out of each case in the way that he thinks about it or the patterns he's seeing. And this other doctor could extract almost no value from even seeing different cases because basically making mistakes by sticking to his first impressions of what a heart attack should be or whatever. I'm not a doctor. Right? I can't comment on the medical stuff precisely, but I can clearly see in my mind that this kind of foundation of keeping your mind open to these kinds of patterns, you're going to extract so much more value from it. It's the deliberate practice versus just practice where you don't stress yourself at all and you don't improve. Right?

Cedric Chin:
But it's so hard, right? The older you get, you think that you know what's going on, right? For us, I guess, we probably struggle with crypto. I don't know about you, but I certainly do. And I'm younger than you and I'm a technologist, right, so I should be more open-minded. But there are certain aspects of crypto that I'm going really? Really? I was telling NFTs to a friend, right, a programmer friend, and he was like, "Cedric, I've never felt so old so quickly in my life. Can we go back to 10 years ago when everything made sense?"

Liberty:
Well, I think it's a good test. It's good practice. With crypto, there's a lot I like, and there's a lot I dislike, but I always try to keep an open mind to it, so that, at some point-

Cedric Chin:
Yes. So hard.

Liberty:
I could see something and be like, oh, this is really impressive. This is creating a ton of value. This is solving a problem. What's tough to me is there's so much noise, right? And I'm not 18 with all my time. I can't be in 200 Discord channels at the same time and sit through all of the noise. I'm sure there's a ton of good stuff, but it's wrapped around 10,000 Ponzi schemes and crypto scams, and everybody's spamming you on Twitter. I feel like, yeah. Somethings are, I want to say a young man's game, but when I was a certain age in between a certain period of my life, I had so much free time to go down rabbit holes about anything. I'm still coasting on a lot of stuff I learned when I was that age on books I read at that time. I feel like I just can't do as much of it anymore.

Cedric Chin:
I map this back to the whole 1999 dot-com boom in [inaudible 00:48:48] right? There's a lot of [inaudible 00:48:50] companies back then because there's a book. There are now websites that make fun of crypto. Right? They say oh, crypto's really rubbish. I think there's [inaudible 00:48:58]. The site that describes all the scams and all the failures in crypto. But back in the day, there was this website called FuckedCompany.com, right? Right? And then it became a book. And, sure. The guy got published and it was probably very entertaining for all the people who were skeptical of dot-coms, but we don't care about those companies that are dead now. We live in the world that's shaped by Facebook and Google and Amazon. Amazon was around, Google and Facebook later. But we live in the world shaped by these companies that emerged from the dot-com boom, right?

Cedric Chin:
And so, similarly, the question, the difficult thing about crypto right now is it's not the bullshit companies. That's easy, right? That you can get like a gajillion likes just pointing out this is stupid. This doesn't make sense. This is environmentally bad. Right? The really hard thing is what's the Amazon that's currently amongst all the power of really bad projects, right, that's going to change the lives of our kids? And that's the thing that worries me or makes me go oh, maybe I should go dig further and ...

Liberty:
Yeah. No. That's such a good point, right? At the end of the day, it's like a VC portfolio, right? If nine out of 10 of their businesses go bankrupt, but the 10th one is Google, doesn't matter. And so, totally. That's why I try to keep my ear to the ground there. My test is always is it creating value and solving a real problem or is it a way for people to speculate on price moves? And so far, I'm seeing a lot of ways to speculate on price moves and I'm not seeing that many ways of solving someone's real problem. There are some of it I just would want to see more of it or see one of those become huge instead of ... the only big businesses that come out of crypto are Coinbase and all these businesses that are mostly a bunch of people buying and selling stuff. That's less interesting to me, right? They may make billions of dollars, but it's just not as interesting to me.

Cedric Chin:
I mean, if you think back to the Amazon example, right? Amazon was, for incredibly long time, looking like a terrible business. And so I worry that some form of that would happen with some crypto coin. Right? And we all like, oh, it's stupid, stupid for 10 years. And then, 10 years later, we would be like, oh, we are all using it. And we're hitting ourselves on the hand for not realizing that it was run by a genius. But we can't tell, we can't tell. We just have to try to forcibly hold open our minds and not dismiss it just because it's easy to do so, but it's so hard. It's so incredibly hard.

Liberty:
Yeah. Well, it's like a muscle. The more you do it, the better you get at it. It's like admitting you're wrong. Do it as many times as possible as publicly as possible, that's the only way that you are going to train yourself to be able to do it when it really matters. Right? So if you're wrong about a small thing, I try to put a correction, tell the person, I just make sure I do it when it's easier because, otherwise, there's no chance I'm going to be able to do it when it's a real huge thing and I really screwed up.

Cedric Chin:
Okay. So since we are very near the adjacent to the topic, right? So I mentioned in Accelerated Expertise, there were two learning theories, right? And we just talked about one, cognitive flexibility theory. The other theory is exactly what you just said. It's it is an explanation of why certain people can reach mastery through trial and error and other people cannot. Right? So this theory is called cognitive transformation theory. And the core assertion of the theory is that the way we learn is we do something, so maybe ice skating or whatever, and you form a mental model of the domain, right? And when you're very unskilled, what happens is that you make a lot of mistakes and your mental model is constantly disequilibrated and then you have to re-form a new one, right?

Cedric Chin:
At some point, most people have a mental model that is complex enough to let them be good at the thing, right, or to be able to accomplish certain results that they want, in whatever field it is, whether it's writing or podcasting or investing or business, right? The difference between the people who stagnate at an intermediate skill level and the people who reach true mastery is that the ones who reach true mastery are willing to let go of certain bits of their model. Right? So at some point, when you become a intermediate skill level, your mental model becomes complex enough that it becomes a knowledge shield. And what that means is that you use your rich mental model to explain away data that you don't like.

Liberty:
Ah, right.

Cedric Chin:
Experts never do this. I mean, experts in the real world who manage to reach incredible levels of expertise to trial and error, they always have tricks to try to make themselves correct their model or go back and relearn lessons. I think Munger has this thing where he says I've trained myself to really love destroying my favorite ideas. And this, to me, is a mechanism that he has developed to try to achieve this. The theory then goes on to say that this implies that the higher you go up in the skill tree, the more energy you have to put into this correcting and checking your models. And the reason why this is hard and what it will feel like is that when your model is rich enough and you have to make a small correction to it, what you have to do is you have to go back to all your old lessons and re-encode those memories with the new model. And this is quite difficult for people to do.

Liberty:
That's something I admire so much when I find someone who's, some people are really good at you know that moment where it's like, huh, that's weird. They notice when something doesn't quite fit. And my reflex most of the time is to explain it away. It's like, oh, they power through it or it doesn't matter. But some people will find a little thing that stands out and they'll learn from it. And that's when you learn something new that doesn't fit the model, and then you update the model. And I'm trying to learn, to teach myself to be very open to these hmm, that's weird moments, right?

Cedric Chin:
Two implications of the learning theory, right, cognitive transformation theory that you can use immediately. So the first implication is if you know that you have to go back and re-encode your models, right? This means that you should never hold onto the lessons you've learned from prior experiences too tightly because you might suddenly go up another skill level in your skill tree, and then realize that you actually learn the wrong lessons. And it's, in fact, common to learn the wrong lessons when you're at a intermediate level or the lower skill level. Right? So you should expect to need to go back to prior experiences and relearn certain lessons or draw new conclusions from them, right, so that's the first thing. And conversely, the people who stagnate are the ones who never revisit all lessons and they accepted as ground truth. I've learned this lesson forever, and that's forever.

Cedric Chin:
And the example that I like to give here that I think matches to real world experience, right, is because it's all theoretical and abstract is love, right? We don't go to school to learn how to date and how to get married. Right? We learn it through mistakes. And it's totally possible for you to do some stupid thing when you're a teenager and learn the wrong lessons from that experience in your first relationship or whenever that is or however young you are. And then later on, you are trapped by those stupid lessons that you drew when you were younger, stupider version of yourself.

Liberty:
Or people learn from movies, right? They think real life relationship is supposed to be like a Disney movie or romantic comedy.

Cedric Chin:
Yes. Yes. 100%. Right? And the second actionable implication of this is that anytime you meet someone who is an expert and who has gotten their true trial and error and experience, you should check not just for the mental models that they hold in their heads, right, but also for it is highly likely that they have developed certain tricks for revisiting and correcting their mental models when they were intermediate skill level. And it's really important to try to go and steal those techniques instead of, if you cannot, you only have a couple minutes of them, right? And there's no way you can extract or apprentice, be apprentice to them to extract the actual models of expertise in your hits, right? You should try and ask them how do you deal with mistakes, or can you tell me about a time when you changed your mind and developed a new lesson? You notice that nearly all the successful business people that I've met also, and investors who talk publicly have little tricks that they use to make it easier to go back and change their mind about things.

Cedric Chin:
Ray Dalio has this thing where he says lean into the pain, right? The pain is the signal that you need to update something about your beliefs about the world, right? And Munger has this whole thing about point of feeling good when ... I think not just Munger, but you have said this as well, right? When you try to change your mind or something, you try to make yourself feel good about it. I could be wrong with it. I don't know if you've said this before.

Liberty:
I'm trying to remember. I don't remember this exact formulation.

Cedric Chin:
Okay. Maybe I'm mistaken, but we've talked about changing minds before in the past.

Liberty:
Yeah. I say so many things, right? It's hard to keep up with everything I've said. I'm in the point where I often, I'm about to write something and then I'm like, oh, sounds familiar. And then I look it up on Google, on my own site, and I've written about it a year and a half ago.

Cedric Chin:
The curse of the writer.

Liberty:
Yeah.

Cedric Chin:
Well, especially given that you're so prolific, right?

Liberty:
Yeah. Well, it's a blessing and a curse. I was talking with Jimmy about this. He wrote a book over five years. You spend so much time with the material. You can revise it, you improve it. You polish every sentence. I was telling him about some parts of the books. And he was like, oh yeah, I wrote this. I was thinking this. I rolled out of bed and I had this idea. He has metadata about every part of the book because he spent so much time on it. On my side, it's like, okay, this has to go out this morning because then I have something else right after. Right? There's a benefit to having this ongoing conversation with people because I can get immediate feedback. A lot of the feedback from one edition is what powers the next edition. So this has a great flow to it.

Liberty:
And with a book, it would be hard for me to write for so long without feedback. Right? People haven't seen my book for three years. Is it even good? Do I even know what it is about anymore? This perspective would be very, very different. But at the same time, sometimes I look back and if I had more time, I could have done such a better job on this part, or I could have explained this thing much better. So there's pros and cons.

Cedric Chin:
Well, there are certain affordances of your style, right, that you can't really pull off in a book. So for example, right, there are themes in your work that if a reader has been reading your stuff for long enough, they're like, no, ah, Liberty is on. It's nuclear. Everybody should be on nuclear power thing again. Right? Right? Right?

Liberty:
Yeah. Yeah, for sure.

Cedric Chin:
I mean, we know this. If you read Mel Levine, Mel Levine has this whole everything is all securities fraud, wait. Securities? What was his saying again?

Liberty:
Yes. Securities fraud.

Cedric Chin:
Yeah. Everything is securities fraud. He also had the Elon markets hypothesis, right? The joy of the newsletter writer is that you get to call back and bring up teams and say, ah, look at this new development, right, which ties into this thing that has been one of my [inaudible 00:59:25] for the longest time. I mean, I don't publish as frequently as you, but certainly there are certain things that just keep popping up again and again in my writing because, and if you've read it for a long time, you know that it's obsession. Right? One of my obsessions is how do I extract expertise from the hits of experts if I meet an expert, right? That's an ongoing obsession. And everything that I've just talked about, all the learning theories actually just comes from this field of research that has specialized in doing exactly that.

Cedric Chin:
The field of research, by the way, if you're interested, if anybody's interested in Googling, it's called naturalistic decision making. And it's basically the fuel of psychology funded by the military that basically enabled Gary Klein to do all of his work. So pre-mortems, the Sources of Power book, all of that and the body of work that he has built and all his collaborators, right, is built around this idea of you developing methods to extract expertise from the heads of experts, and then turning those into training programs. And you can probably see why the military is so interested in that. Right? But I want to use that for business and for operations and stuff like that.

Liberty:
That's another great source of value. Right? When you take the tools from one field and apply it to a different field, the first person that use, I don't know, some type of machine learning from a field where that never been applied before. You get a bunch of the value and the low hanging fruits there. But once everybody's doing it, it's the Buffett thing. Everybody's standing on tiptoes of the parade.

Cedric Chin:
Yes.

Liberty:
When you were talking about how when you read someone, you keep seeing the same themes again and again. I wrote something a while ago called something like why your mentors seems less impressive over time or something like that.

Cedric Chin:
Oh, I love that. I love that.

Liberty:
The basic idea is that nobody is going to come up with new original ideas faster than someone else can learn them. Right? So when you start from zero, everything you learn from Buffett is blowing your mind because you're starting from zero. But over time, you'll never reach Buffett's level. There's still a differential between you and him. But this differential is a lot smaller than it was when you were at zero and he was at 95, and now you are maybe at 70 and he's still at 95, but he's still much better than you are. And also, Buffett, that's why old Buffett fans would be like, oh yeah, there's nothing new in the letter this year, right? It's the same thing.

Liberty:
It's like, yeah sure, but let's try to see how many ideas of the caliber of Buffett's ideas that are going to come up with in your own life. Right? You can't hold him to a standard that's impossible to achieve. When I look at my writing, I could try to be like, oh, I've already written about this. I got to find something new, something new. But this obsession with the new has downsides too. I feel like some stuff is more like your favorite album. Right? You listen to it a bunch of times and you find new things in it. Over time, you find new depths in it, you notice new things. So I feel like if you study the same ideas for a long time, part of it is you change, so how you interpret the data, maybe the same data is different. It's going to be like rereading the same book, right? There's some of that.

Liberty:
But also, a good idea is rich enough that you can apply it to so many things and so many situations and stuff that it shouldn't feel stale right away. Right? You should be able to get a lot of mileage out of it. So that's why I try to look at the same types of ideas, but from different angles, or I don't know. I feel like some people are too obsessed with the new, right? Some people should be reading scientific textbooks instead of the new journals, right, or the new controversies of the day.

Cedric Chin:
I'm going to make a very bad joke. You're looking for new concept instantiations.

Liberty:
Oh.

Cedric Chin:
I mean-

Liberty:
That should be the subtitle of my site.

Cedric Chin:
That is how your expertise is built, right, as an investor?

Liberty:
Yep.

Cedric Chin:
You have an idea. But if you find new concept instantiations, it's not like you're not learning anything new. You're learning a new case that you can draw fragments from when you're analyzing some other company or some other idea, right? So it's totally legitimate and valuable for you to go oh, here's a new way of looking at this old topic because the world is incredibly complex and the world is filled with varied case instantiations, right? It's 100% what you do, there is value in trying to take old ideas and making them fresh because who knows the person reading it, right, just this particular way of framing the thing doesn't resonate with them. But then this other way of framing, it resonates with them. I think there's this thing by Jason Zweig, right, the finance writer. He says that there's actually nothing new in personal finance or investing, nothing radically new. And so the job of the finance writer, if you're writing for a personal finance audience, is to find new ways to repeat the same ideas again and again, and make sure that they don't know that you're actually repeating yourself again and again.

Liberty:
Yeah. It's one of my, things I keep saying over and over again. In investing, almost all of the important ideas are simple. They're just difficult to execute and they're difficult to remember. So that's why you have to refresh them in memory over and over again and try to iterate on them and practice. And like that muscle, right, that you have to train, so when the time is right, you can do it because figure out the value of something, try to pay less than it, try to figure out if the business is durable, try to diversify in some way. All these concepts are not super difficult. And yet, you look around and people keep making the same types of mistakes, right?

Cedric Chin:
Yes.

Liberty:
It's just like, oh, someone overpaid, someone was too concentrated in stuff they didn't understand. Someone fell in love with the story of the thing and missed changes in the fundamentals. or missed changes in the end market. or missed competition coming in. All these concepts are not super, you don't discover one of these frequently, right? There's not some writer coming in and saying hey guys, I figure out something totally new about business that nobody had ever thought about before. Right? But the application of it is, I don't know, I don't know if it's because it's counterintuitive. I don't know if it's because all of our brains are pretty similar.

Liberty:
So if something is making everybody else react in such a way that the market is crashing, it's probably going to make you react too. Right? If it wasn't making you react, it probably will make others react. So it's hard to be totally outside of the system, looking at it totally objectively and detached because we all have similar brain architecture. I don't know. The way to make these simple but difficult lessons stick, to go back to what we're saying, maybe it is with these case studies and these stories. Maybe these stories can burrow deeper into our brains and affect more how we see the world than these abstract principles that our ancestors on the Savannah never had to deal with, right?

Cedric Chin:
Well, if we take the theory seriously, right, CFT, right? They did the lift by abstract principle. They may try to communicate it using abstract principle, right? But then it's actually represented as cases in their hits. And so that if we take that seriously, this is a very good reason or a very good excuse to read lots and lots of business biographies. And actually, when I read this theory, I felt relief because, for the longest time, my friends would press me on. Why would I read so much business biographies? Why am I reading about some conglomerate that happened in the '60s, right, because it's never going to exist again. Right?

Cedric Chin:
And then my response to them is now I have a coherent response, right, but in the past I would be like, oh, you have to learn from history, otherwise, you don't have any sense of context. But now I know actually what's the real cognitive mechanism that allows you to have benefit from reading a lot of biography, which is that you have more cases and more fragments to draw from when it's time to make a problem assessment and you're trying to solve some problem in an ill-structured domain. And so I finally have a coherent response to why I read so many business biographies.

Liberty:
I'm glad I also have a way to explain it now because when I started out, I read some biographies and some more business books in the abstract. And over time, I now realize I got so much more from the biographies. I think it's David Senra from Founder's Podcast who made me realize the power of these biographies because that's what his podcast is. He's reading these biographies and memoirs. And then he's trying to distill the main points, the main stories from them in podcast format. And it's incredible the amount of value that I'm getting. We're all running mental models of other people in our brains. Right? And so you know your wife very well, and you can know what she's thinking about stuff and what she's going to say. Well, you have a mantle model for Warren Buffett, and Elon Musk, and Steve Jobs. They are lower resolution and they're based on secondhand anecdotes, but they're still running in your mind.

Liberty:
And so when you keep adding these people in your mind, all these biographies, when you look at something, now you can be like, what would Henry Singleton think about this, right? The stock is low, and they don't need the market for financing. Should they do a tenure offer? You can, these people who are easier to call upon than just what would be ideal capital allocation with the five types of capital? Some stuff is not going to come to the surface as easily as if you had a friend was advising you on it, the consigliere over your shoulder. He's like, "I've seen this before, a long time ago, and that's a very different" Anyway, for me, works better.

Cedric Chin:
You just quote out to a book, right? I think it's Will Thorndike, The Outsiders, right, where he articulated the playbook, right? But the book was represented with a number of case studies. Right?

Liberty:
Exactly.

Cedric Chin:
So I think that's a perfect example of what a learning session with CFT, using CFT principles. Right? You introduce the concept and then you just repeat the concept again and again and again with different case studies. So I think it was Henry Singleton in the beginning, which is crazy. He invented the whole stock buyback technique. Well, not invented, but-

Liberty:
A genius in so many fields. For him, business was like, oh yeah. It's one of the things I do. Right?

Cedric Chin:
Buying back 90% of the outstanding stock. And then there was Warren Buffett, who else? John Malone is definitely one of them. And so, when you finish the book, you're not only walking away with oh, here's the capital allocation playbook. But here are six or seven, I can't remember how many CEOs, completely different case studies of how to implement the capital allocation playbook. And that's what you should be aiming to be when you are a CEO. It's one of my favorite books because when you're running a business, you don't often have somebody sit you down and go like, "Oh, actually, there's this other role that you have to do when you're running a business and it's generating money, which is that you have to decide where to allocate the money," and that it's more an investor than a business person and you need to understand the financials, the numbers in order to do a good job of that. Right? And there's the famous Buffett quote about top CEOs training to be top pianists their whole life. And suddenly, they get up to the top and then they're told to play a violin.

Liberty:
Yeah. People climb up the ranks in sales or management and they've never had to do any capital allocation, and all of a sudden it's their main job. It must be such a culture shock. Speaking of Outsiders, this book to me is so much more powerful when combined with the Halo Effect by, is it Phil-

Cedric Chin:
Yes. Phil Rosenzweig. Rosenzweig or Rosenzweig?

Liberty:
So to me, these two books balance each other out so perfectly that the whole is more than the sum of the parts. It's easy to come out of the Outsiders thinking oh yeah, this is the only way to do it. But then you read the other thing and you realize, well, a business that has great success, people are going to impute all kinds of qualities to management. Other businesses that did the same thing failed. So it's always a lot more complex than just buy back your shares or do some M&A. As the meta point of all this is it's always way, way more complex, which is why you should study so many different case studies, right, so many real world-

Cedric Chin:
So many different animals.

Liberty:
Yeah. Yeah. So many different animals. So that when you see elephant for the first time, you don't think it's a tree trunk, or a serpent ... we're mixing metaphors.

Cedric Chin:
We have a mutual friend in Lillian Li, right, who writes Chinese characteristic to Substack.

Liberty:
She's great.

Cedric Chin:
One of the jokes that I have of her is any equity research analyst or finance Substack writer who describes businesses as she does, right, she describes Chinese tech businesses to the outsider, right? What you're basically doing is you're a biologist. You're holding up a Platypus, right, to the reader and go, look at this weird animal. Look, it has claws, and it has a beak, and it lays eggs, but it's a mammal, right? You might think that this is a really weird animal, but then let me explain to you the ecology that it comes from. Right? The evolutionary path that it took, the competitors that it had. Right? The food sources that it had. Right? And that's totally 100% like what's going on in businesses. Right? A lot of these Chinese businesses are incredibly weird, but then they make sense once you, once-

Liberty:
In the environment with the evolutionary pressures, right?

Cedric Chin:
Exactly. With the competitors and the dynamics and the sources of capital and the government, changing and shaping the market, right? Then these Chinese businesses aren't completely weird. I think she was recently talking about some business. I can't remember which business, but it was like the cross between a fitness influencer app and a social network and Zoom or something like that. It's weird. In the West, you'll be like what kind of app is this, right? But in China, after she describes how it grew and the puff dependent, opportunities they took, it made sense. And so, when Phil Rosenzweig was talking about the Halo Effect, talking about how you cannot, there's never a strategy or an approach to the business that works in every domain, the reason is because there's different ecologies and different ecosystems and different competitor sets, right? And every animal has to figure out their own evolutionary or adaptation to thrive in the particular setting that they find themselves.

Liberty:
Exactly. It's like reading Ben Graham today. Right? If you take it out of its context, it could lead you to big mistakes because the context has changed so much, right? He was investing at a time when there were lots of net nets. And you can learn from what he did in the context that he did it. And then you try to change that so that it works today, right? A lot of the same principles work, just not the mechanical application of these principles exactly as you did them.

Cedric Chin:
Yes. Yes.

Liberty:
You have to evolve with the time, especially in a complex adaptive system that, as these lessons diffuse through the system, through the members of the system, the investors, and everybody that's doing stuff, the system has adapted to these lessons, so they may not work as well.

Cedric Chin:
Oh, 100%. Everything seems to come back to CFT, right, which I'm obsessed about, which is, well, I mean, if you look at scale economies, right? Even just looking at the story of one person, what's the founder of TSMC again? Morris Chang. Morris Chang. Right?

Liberty:
Morris Chang.

Cedric Chin:
So Morris Chang came up with, what do you call it, the pricing curve model for semiconductors. It was at Texas Instruments.

Liberty:
Brilliant. Brilliant.

Cedric Chin:
Yeah. Crazy. The idea of pricing things incredibly low so that you have incredibly large volume, you capture the market share, right, for that chip. And then you run out the production lines to drive down the learning cost. And then hopefully that you can keep running that chip for incredibly long amount of time to recoup all the initial costs that you got from keeping unit costs, unit price incredibly low. But then later when he got kicked out of Texas Instruments and he was forced to start TSMC, he couldn't use the same strategy because everybody else had understood the implications of that pricing curve model. Right? So the way that he could get to scale and have advantages from scale economies was completely different. And what a master that he invented, the pricing model that the whole industry used. And then later, had to adapt to everybody understanding it, and still finding a way, right? A niche, ecological niche will slowly grow TSMC into this now powerhouse that's very, very difficult to compete against. So same concept, different concept instantiation in different cases.

Liberty:
Once again, I have to plug. The guys from Acquired did a series on TSMC that's excellent. So if you've not listened to it, I'm sure you have, but if the listener, if you have not listened to it, I highly recommend it. And there's a new one in video too. They're killing it on semiconductors.

Cedric Chin:
It's so good.

Liberty:
It's the closest thing to magic that humanity can do right now. Just the ASML machines, that's just magic in itself. And then TSMC itself, the foundry part, that's totally magic, right? And then once you have the final product, you have this tiny bit of polished sand that can do trillions and trillions of operations per second. I think if most people understood better the technology that they have in their pockets and on their desk and everything, our minds would be constantly blown, right? I guess it's a good thing for humanity that we adapt so quickly to what we have and we're dissatisfied and we want more. It pushes us to do better and keep improving and innovating. But still, I think sometimes we should appreciate a bit more what we've been able to do. Listen, we have to do this again because we can talk for hours. But before we go, there's one more thing I want to ask you about. Tell me about your experience reading Iain M. Banks' Science Fiction. I'm curious. It's been years since I've read those books, but they've been important to me. So I'm curious what you think.

Cedric Chin:
Oh my God. So a number of things. I think I should have stuck with your, the recommended reading list, right, but I skipped ahead to Player of Games because I'm a huge board game fan and multiple people, that when I went to Good Reads, right, I knew one guy who was a huge board game fan, that's why he was like, "This is the best, best science sci-fi novel I've ever read in my life. If you love board games, you must read this." I was like, okay, I'm sold. And I read that, right? And I highly recommend anybody listening to this who has not read Iain Banks' The Culture Series. Every book is different. If I'm not mistake- well, actually, is that true? Because you gave me a certain order, so I assumed that it might be something to that order.

Liberty:
They're all based in the same universe, but the same characters don't carry from one book to the other. I think there are some cameos from some AI ships and some things that appear in more than one book. But, in general, it's more like an anthology than a series with the same characters. That's why you can read it in a different order.

Cedric Chin:
Here's the funny thing, right? So I was reading the book and because I started with Player Games, they don't actually explain what a GSU is or what these big ships, they use acronyms. I think it's GC, GCU, GSU, and all these ships have incredibly weird names. Right?

Liberty:
Yeah. They give their names to themselves. I think they're AI-powered ships. So basically the ship is conscious and it's incredibly intelligent. Some of them are almost planet sized and they have, most of them have a sense of humor too and they have crazy names. Most people have probably been exposed to these names because Elon Musk has been giving these names to the drone ships that catch the rockets at sea.

Cedric Chin:
So this was the thing that I didn't realize. It felt really off, and weird, and funny, and yet familiar at the same time. But only after I read the book, I think a few months after I read a book, I was listening to your interview with Jimmy Soni, that was the drone ships that the SpaceX rockets land on are named after Culture ships, which is why they have these weird names like Just Read the Instructions, or-

Liberty:
I still love.

Cedric Chin:
Yes, I still love you.

Liberty:
Of course, I still love you. It's funny. One of the most sci-fi things that exist today has names has come from actual sci-fi, right? It's like the chicken and the egg. Right?

Cedric Chin:
And it fits, right, because the drone ship are also, in SpaceX are also powered by AIs, right, so they're autonomous. Right?

Liberty:
But imagine in a hundred years, right, humanity is much farther along than we are today. We have all kinds of spaceships and rockets and stuff. And maybe they all have super clever, weird names just because of-

Cedric Chin:
I would love that.

Liberty:
Musk started the trend. Right? It would be super funny that some huge Starship going to Mars, it's called, I don't know. Some of them are, ah, now I wish I had to list in front of me. Very little gravitas, indeed, or weird names like that.

Cedric Chin:
Well, so okay. Here's my pitch to anybody who's listening why should you read Iain Banks' The Culture Series, right? I think there are a lot of sci-fi novels, especially in this point in time that are dystopian, or they talk about how technology destroys mankind or leads us to do horrible things. And it feels too close to the current state of the world. At least the zeitgeist, right, what we believe in. The Culture Series is not like that. The Culture Series is a utopia where AI and humans coexist. I think the other novel, really novel thing, is that The Culture, as a civilization, is not planet-based. So it is completely based on ships. And there's no such thing as territory that they hold.

Cedric Chin:
It's more like what systems are under their influence because their ships can pass through. But most of the population of the culture lives in the ships. And I found that incredibly novel and the world is completely coherent. And the world building is slowly reviewed over the books, even though the books are self-contained stories that you can read. And yes, if you like playing board games, read the Palio games. It is so good.

Liberty:
So what's interesting is most sci-fi is dystopian because that's more dramatic. What Iain Banks has done is created a utopia that is a great vision for that you could hope for for the future, but then the books are still dramatic because The Culture only controls a certain portion of the universe, right? So most of the books happen at the intersection of The Culture and somewhere else. So The Culture has these special forces that they call special circumstances. And these people go into different other planets and other systems and they try to get various types of missions. So there's still a bunch of drama. One of the things I love about The Culture is basically, it's almost as if humanity had created a GI, right, general intelligence, that self improves the point where it's so much more intelligent than we are.

Liberty:
But then they use this intelligence to create a super interesting and comfortable world for themselves where they have a lot more control. So I don't know if they talk about this in Player of Games or just other books, but they talk about how, even if you're still a biological human, inside your mind, you can look at a dashboard for your body and you can control your own hormones and drugs and stuff. Oh yeah. I would like to do a heroin trip right now, but without any addiction or problem. Oh, I would like to be female. Right? So your hormones are going to change and, over time, you're going to become a woman, and then you can switch back to that. All that stuff is just trying to think of how humanity could, I don't know, give itself more control. They have all these VR world that you can go into, but the real world's also super interesting inside these giant planet-size ships. And anyway, it's fun to mentally live in a utopia if only for a little while.

Cedric Chin:
And also, it's really hard. I think he was very ambitious to set himself a utopia instead of a dystopia, right, because there's no tension. You want for nothing. There's no currency. Anything you want, you can have, right?

Liberty:
It's a post scarcity world, so do it nanotech and everything. They can basically make anything physical that you could want. So that's exactly why you're going to see when you read Use of Weapons, that's why you follow these special circumstances that go into other worlds where it's absolutely not like that. And the contrast is part of the cool thing. And by the way, Iain Banks wrote this stuff in the '80s. So the way he could think about technology in a way that didn't age too much, right, because it's so advanced as it's basically almost like [inaudible 01:21:02] says. It's almost like magic that it didn't age as much as some other stuff that's a bit too close to us, it's too computer-based and you read about it and it's like we are way past that. Right? They couldn't have imagined iPhones and the internet. And so yeah, I think Iain Banks has aged pretty well.

Cedric Chin:
And also, I think the other bit of the challenge that he did really well is that humans don't change, right? So even though they're in a post scarcity while they're still envy and jealousy and status and love, right? And so out of this lack of tension, he can still create certain storylines that are so compelling because he has to fall back to human universals instead of some sort of external situation where there is a conflict or there is a obstacle to some goal because it's a utopia, which is why I think it ages so well, speaking to your point. So read The Culture. I think it was the best recommendation that you have given me so far. I can't wait to see what's after.

Liberty:
Before we go, I'm going to tease the reader with a little thing that may want to make them read it more. So there's a joke in Use of Weapons that involves a hat that I think is one of the funniest thing I've read. And so when you get to it, let me know. Get back to me.

Cedric Chin:
Okay. Okay. All right.

Liberty:
All right. It was great talking to you. It's a nice morning for me. I guess you're going to go to bed soon. That's that's a thing with being-

Cedric Chin:
Yes. Immediately.

Liberty:
A planet sandwich, right?

Cedric Chin:
Yes.

Liberty:
We're opposite times of the clock. So I'm going to let you go, but this was great. And let's do this again soon.

Cedric Chin:
All right. Yes, definitely. Bye, Liberty.

Liberty:
Bye-bye.