This podcast answers the following questions:
- Who is Peter Thiel and what is his book Zero to One about?
- What are the important takeaways from Zero to One?
- Where does the Investors’ Panel disagree with Peter Thiel?
Ask The Investors: Should you still invest for the long-term in a non-tax world?
In today’s episode the Investors’ are accompanied by Hari Ramachandra who was first featured in episode 4. Hari is both an entrepreneur, and a Senior Engineering Manager at LinkedIn. He also runs the website BitsBusiness.com. Hari was invited back to the show to provide the audience with his Silicon Valley, insider-knowledge about Peter Thiel.
1. Who is Peter Thiel and what is the book Zero to One about?
Peter Thiel is a German-American entrepreneur and Billionaire that co-founded PayPal and Palantir Technologies. Perhaps his most famous investment was in Facebook where he was the first outside investor, and purchased a 10.2% stake in the company. In his book, Zero to One, he talks about his own path when he started his entrepreneurial career. The book originated from a series of lectures about start-ups at his Alma Mater, Stanford University, where one student made very detailed notes. The student, Blake Masters, kept in contact with Peter Thiel and his notes eventually turned into this book, Zero to One.
2. What are the important takeaways from Zero to One?
1. Competition is bad. If you want to create wealth for society you can’t compete with everyone else out there. You really need to create something brand new. According to Peter Thiel very little competition, like monopolies, can be considered a good thing for the society. Monopolies have both the capital and platform that can trigger progress and innovation for society, because they can think long-term and not be pressured by competition. Another take in the book, is that competition is an autonym for capitalism. Capitalism is about accumulating wealth, while more competition means less profit.
2. Backwards planning is the key to success. The book addresses whether success is driven by luck, or whether it can be planned. Peter Thiel clearly believes in the latter. He tries looking 20-30 years ahead into the future, imagining a unique and new milestone, then he plans backwards each step that would be required to reach that major accomplishment.
3. Competitive advantage matters. Just as a bubble occurred in IT in 2000, similar patterns can be found in clean tech technology. A lot of companies make the mistake of entering a rapid growing market with no unique characteristics or individual plan to create wealth to society. The lesson learned is that profit can’t be sustainable if your company has no competitive advantage. Important advice for both entrepreneurs and stock investors!
4. Be a contrarian. When Peter Thiel interviews candidates for a job he likes to ask the following question: What truth do you know, that very few people agree with you on? The point was to be a contrarian, and to explore a rare business opportunity that creates value for society that everyone else might be over-looking.
Where does the Investors’ Panel not agree with Peter Thiel?
1. You can plan everything. Peter Thiel specifically mentions Warren Buffett as someone who has claimed himself to be lucky. The panel believes that while you can plan the vast majority of your business, luck is still a factor – even for someone like Warren Buffett. This is simple because factors like where you are born and your parents do have a huge impact on you. Another thing about planning is that you need act based on the information you currently have and you have to remain agile. Having a master plan can unintentionally make you inflexible.
2. You need to come up with something new. While it is true that groundbreaking new technology can both benefit yourself and society, the panel does not agree that making improvements to existing products should be forgone. To prove their point, the panel discusses Warren Buffett as an example. Buffett did not invent a new type of product or service, yet his giving over 60 billion dollars to charity upon his death (the value he created to society). Also, the panel argues that if you are thinking about starting your own company, improving existing businesses is probably the best place to start.
4. Ask The Investors: Should you still invest for the long-term in a non-tax world?
The Investors’ suggested that the incentive to hold stocks for the long-term is not as strong when capital gains tax doesn’t exist. With that said, you still want to buy fantastic businesses, at great prices. As a result, when you find that great business, you’ll probably want to continue holding it for the long-haul. An advantage of owning a business with a strong competitive advantage, that has minimal debt, great earnings, and superior leadership, is that it will continue to produce good profits. Why sell a business that performs great?
Books and resources mentioned in this episode
Hari’s Blog: BitsBusiness.com
A WSJ Interview with Peter Thiel
Bill Kristol Interviews Peter Thiel
Hari Ramachandran is this week’s guest – perhaps, a returning guest. His website is bitsbusiness.com. This time, he will discuss about a book entitled Zero to One authored by Peter Thiel. Preston, Stig and Harry have all read the book and are qualified to talk about it.
This week is the start of a new chapter. Preston and Stig will read different executive books by billionaires and then summarize and discuss both the good and the bad points.
Peter Thiel is a German-American entrepreneur, billionaire and cofounder of PayPal. He is actually the founder of X.com. Soon after, both PayPal and X.com merged into the same business. PayPal then turned into a billion-dollar business. Aside from PayPal and X.com, Peter is also the also founder of Palentir – another billion-dollar company based in Los Angeles. Adding to that, he also owns a 10.2% stake initial investment in Facebook. This gentleman is obviously a very accomplished person. He has the ability to find himself on the leading hedge of a lot of start-up companies that turned into a million-dollar business.
His book was fascinating read. Entrepreneurs are advised to read it. He talks about a lot about being a founder and what he had to do to bring his business from nothing to a billion-dollar category. Throughout the book, he discussed the steps, the way he thinks, and the stock process in order for that to happen.
The top 3 points in the book are:
Competition – Anyone who really wants to create wealth to society can’t compete with everybody out there. He needs to create something new. The keyword is create. Starting a business is not looking at what somebody else is doing and trying to mimic that.
Going with the flow means starting off on the wrong foot. A dedicated businessman and investor has to think of something that would add value to the society and the people. He needs to create that from the ground up. That’s where he creates extraordinary value.
The scalability factor – For example, Preston came up with a good idea and he feels like he can go into this new notch and not have to compete with anybody. if he really wants something that will impact the society, it has to be scalable. Preston can’t just create something that applies to a market of 10 people; he needs to think big.
Backwards planning – It is so profound that he’s talking about how people feel like things are either driven by luck or created and planned for. Peter sides with the latter. Things are truly a result of planned effort. It’s truly backwards planning. For example, where would Stig want to be in 20 years? He puts that milestone on the calendar and figures out the steps that needs to occur between now and that milestone in order for him to achieve it.
Competition is good and monopoly is bad. However, Harry was surprised that Peter Thiel tuned it completely around. He believes that monopoly is good. A monopoly makes a lot of drift. You start to innovate and you have not heard that someone will take over your place.
Peter says that planning attributes much to success, while Buffett believe that it’s just luck. The truth is almost anybody can accomplish whatever they are setting for. It’s just a matter of what hill they have to climb and where they started.
Planning backwards is good, but the investor still has to be flexible based on his experiences and sides deepening on his opportunity cost. Decision-making is the most important thing in investing to take advantage of the chances.
Plan B has to prepared in case plan A fails. Everyone should have plans, so they won’t be surprised if ever things didn’t go the way they expected to.
Success can also be achieved by improving practices. Coming up with something that can save the cost of making 10 cans by 10% can be a starting point for investing. Buffet didn’t invent something; he made things better.
Two ways to look at business is as a fierce competition or as something to be improved for the benefit of the society. It is healthier to be in a place with no fierce competition. Improving the company is a better entry way to success, and then just slowly slide into other ventures.
Question from the AskTheInvestor.com
Question: Warren Buffett’s rule about holding for the long term in order to avoid tax charges. There are some governments though that provide tax-free ways for the citizens to invest in the stock market. Therefore eradicating tax consideration. I know that the UK and Japan have some tax-free accounts. My question is if in an ideal world, there was no such thing as capital gains tax, would Buffett’s rule on holding for the very long term still be a relevant and useful guide to follow?
In a non-tax role, look at holding stocks for a long time. However, the argument is different. The reason relates to timing. We want to hold on a stock for long not only to avoid tax, but also because it is an outstanding company that will bring great gains. It’s about finding very good stocks and holding it for a vey long time.
if you’re looking at from a swappable point of view, you can swap as much as you want. but Buffett has that rule because of the swapping. For Buffett, finding a business with a great management is hard to find. There are very few businesses that fit the category. Buffett says that if you find it, it’s not something that you want to get rid of. If you find it having poor performance, it’ll be more gradual and you can transition it slowly opposed to abruptly. Find a business that you can own forever. That’s the essence and the true root cause for Buffet having that rule.
We are typing executive summaries in every book that we read. We will discuss a book every other week. If you want a copy of the outline chapter by chapter, go to the reading list: Preston-Stig Investing Book Club. If you want to receive outlines, sign up to the mailing list.
The next book that we will discuss is The Science of Success by Charles Koch. You may read it ahead so you can follow better during the discussion next week.
If there’s anything you’re interested, we’ll have that in the notes at theinvestorspodcast.com.
We want to hear your voice if you have questions. Go to asktheinvestors.com and record your question. We may play it in the show and if your question gets picked, you win a prize – a signed copy of the book The Warren Buffett Accounting Book.