Jack Dorsey  1:24  

Yeah, yeah. I really missed the boat on creating Uber, but I was huge into dispatch. I’m from St. Louis, Missouri. And so in the 40s, 50s, and 60s, a lot of people left the city and moved out to the suburbs. My parents always stood by the city. 

For me, it developed this obsession and fascination with cities as well. And the way that really manifested for me, for maps. I was just obsessed with maps, and I would get lost in them constantly, just wondering what was happening. What was down the street, and whatnot. I had tons of maps of St. Louis Tons, and tons of maps of my other favorite city that have never been to New York City. 

2:04

My parents also had a police scanner. They were always on CB radio. I would always listen to the trucks, the police, the fire trucks, and the ambulances. And eventually, my parents got an IBM PC Jr. and a Macintosh. I would actually take the information from the police scanner and plot it out on my paper map, so that I could actually watch the police cars move. There is reporting where they are and where they’re going, and what they’re doing. 

But little by little, the computer became this thing that was amazing because I could actually build a map on it. I can make those. I could put dots on that map and I can make those dots move. I taught myself just enough programming to make that happen.  

My approach in my life is I’ve never really had a desire to become an engineer. I never had a desire to become a CEO or to start a company or to be an entrepreneur. I learned whatever it took to move me to the next step, to unblock whatever I wanted to do. 

3:13

And for me, I wanted to see the city in any way. The computer was the way to get there. Little by little, I found public databases that were accessible on the Internet of historical movements that I could program in. And then I learned when I was about 17 or 18 years old, that this whole thing that I was doing had a name. And it was called “dispatch.” 

I found the biggest dispatch from *inaudible*, which happened to be in New York City. It was called DMS. I found their website, but they had no contact information. There was no way to get in.

I was pretty good at computers at this time. St. Louis had a pretty strong underground hacking culture. I learned a lot from it. I figured out a hole in their website. I found their corporate email list. I found the name of the CEO, the email of the CEO, and the chairman. I sent him an email saying, “Your website has a hole in it. Here’s how you fix it. And by the way, I write dispatch software.” 

They flew me out. I joined DMS. Suddenly, I was working on dispatch for all of New York City. It was amazing. The thing about dispatch for me is you can actually see how the city is working, living, breathing, and how it moves. 

4:34

Unfortunately, in that case, it was from a very vertical standpoint, in terms of city services. Twitter was born out of a desire to see it from a personal level. If an individual could report what they’re doing, where they’re going, and what they’re doing next, we could see that all in real time. What would that look like? Most of my fascination and career really started in dispatch. It was just highly transactional, always available, low latency systems that were deep in the background.

Stig Brodersen  5:10  

Very interesting response. It was not so much the point about how to hack a future employer to get a job. But it was more on the concept that Jack Dorsey is working under. He started with the end in mind, and then working backwards. 

  

In this situation, he was living in the city, and was working with dispatching. This is a very powerful concept that many successful and effective people are using. It’s also a concept that is relatively simple, and we can all utilize. This is all about starting things with a clear idea of your destination, so that the steps you take are always in the right direction. 

5:46

Said in another way, if you have to be pissy, at least you should always be doing what’s important to you. This is more like a subconscious trick that you’re doing. The principle tells us that “Things are created twice.”

The first creation is your mind. The second is the fiscal reality. Aside from very successful business people, this is also very commonly used in elite sports. What coaches would tell the athletes is to imagine the successful result of an event before they start competing. 

Not only will they use all the conscious energy, but also all the unconscious energy toward that goal. It also means that they won’t second guess themselves or be nervous, but they’re more just going through the motions, and doing what they’re trained to do to reach the end goal.

Preston Pysh  6:36  

Alright, so for Jack’s next response, he was asked this question: “How do you see Square working with things like Apple Pay in the introduction of NFC chips on smartphones? Additionally, how do you see cryptocurrencies like Bitcoin working on the Square platform?”

Jack Dorsey  6:56  

We’re building this register right. We need to empower our sellers to accept every form of payment that comes across the counter. Whether that’s cash, cheque, EMP, NFC, Bitcoin, or any other digital currency that comes our way, our sellers should never have to think about that. They should only think about making the sale. 

Buyers should just have the freedom to use whatever they want to use. If they want to use Bitcoin, they should be able to use Bitcoin. The seller should not have to think about what currency or what payment method they’re using. 

We started in the US. We opened in Canada and Japan. NFC has just never been large in those markets. I know that it seems counter to what you all experience because NFC is growing quite quickly in the rest of the world. But I’ve always found that the US is really behind in mass technology adoption.

7:58

Even on Twitter, it took us 10 years to really adopt SMS and mass. You all had it for 10 years prior to the United States. We didn’t really get it until 2005 to 2006. The reason why is, it was the first time when you could send a text message between two large carriers, which were Verizon and Singular. They both had different technologies. SMS, as you know, is a GSM technology. Verizon is CDMA.

We never really invested in building an NFC reader because we’re in markets that had no buyer adoption whatsoever of NFC. Apple could change that. But what they’ve done is they’ve created a convenience which is a chip that proxies a physical card and allows it to be read by an NFC terminal. 

We certainly don’t see it as competition anyway because we’re not building a phone. We’re not building a payment device. We’re building a register that accepts payments. What that means is we need to build an NFC terminal that accepts it. 

9:10

Back to that philosophy of making sure that our sellers can accept every form of payment, it’s something we have to do. We have a product called Square Market that allows anyone who’s using the register to flip a switch on any of the items in the register. It builds a web page for them that they can tweet out, put on Facebook, or put on their own webpage. 

Buyers can actually use Bitcoin to pay with that. If they’ve turned on the e-commerce side for any of those items, Bitcoin is an option for a buyer. We get a small amount of orders from that. But it was important for us to make sure that we’re constantly testing these new technologies. Our sellers are paying us to do that work, and to be ahead of it.

Preston Pysh  9:59  

Alright, so just to give a little bit of context behind Jack’s response here. Let’s talk about the tech piece a little bit for people to understand some of the terminology that he was using there. 

He mentioned NFC chips. And what that stands for is Near Field Communication. Let’s say you went to Target or you went to any type of store, and you were paying for something, and you’ve seen the new credit card readers and how they have like a little logo on them for maybe smartphone use, or if you’re able to bring your credit card kind of close to the device, it’ll read it. That’s using a near field communication chip. 

All that is are radio waves. They’re within a 10 centimeter distance. You’re able to establish a line of communication using radio frequency waves in order to conduct a purchase. That’s what Jack was addressing in the discussion there. 

Not to geek out on people, there’s another thing called RFID technology. This is a read-only, while the NFC, the Near Field Communication is a two-way back and forth between the two devices. 

11:09

Long story short, the reason that I want to talk about this is because I think it really highlights Jack’s hyper focus on the customer, the current demands of the customer. He’s not trying to build too much into the types of products that he’s delivering to the marketplace too far in advance of the demand. 

And so when you’re looking at this NFC technology, you’re seeing it in wide use in other parts of the world, but here in the United States, customers aren’t demanding it. Customers aren’t using it at a high rate.

I find it really interesting that a lot of the devices that he has put out there into the marketplace weren’t already equipped with this technology. Now in the future, it sounds like they’re moving in that way. But this wasn’t something that he immediately built in. 

Instead, he was just focused on what is it that people need right now. Let me service that. Let me not try to build in too much technology that is too early, and then ship this stuff way late and lose market share.

I just found that fascinating. That wasn’t something that was built into his product originally, even though that technology was out there. I think it was all based on his strong understanding of what the demand signal was here in the United States for that specific piece of technology. 

12:33

There’s a really fascinating book. We’ve mentioned it a couple times on the show. The name of the book is “Inside the Tornado.” This was one of Steve Jobs’ favorite books. If you’re in the tech sector, and you’re trying to understand where, when and how you need to field certain pieces of technology into the marketplace, I think that this is just a premium book for a person to read. It would help them understand the thought process and the methodology. 

When you look at a company like Apple, and companies like Square, you can see that these founders and leaders are putting these products into the marketplace. They truly cannibalize themselves. They use a lot of the fundamentals that are talked about in that book. 

I just want to put that book out there, as well as this idea of properly integrating technology into the marketplace at the right time and mastering that optimization. 

The other piece here that was interesting in the conversation was this idea of crypto. What’s interesting is the point that I just made. I thought Jack did really well by not putting that into the marketplace too soon. 

You see him being way out in front of cryptocurrency. And so, I have to ask myself, “Why is he so early on this because how many people were going to the store trying to buy something with Bitcoin?”

13:57

I think one of the reasons is that he has done this, and I might be completely wrong, so if you have a better narrative, hit us up on Twitter. Let us know what you think. But I think one of the reasons he’s doing this is first of all, it’s really good for marketing. 

A lot of the people in the cryptocurrency space are heavily involved on Twitter. He’s probably seeing a lot of that traffic. I think it got a lot of his attention. I think he’s realized that, “Hey, if I can implement something, and it’s not a lot of work for me to do onto my platform, then hey, that might be some really good marketing for Square.” 

When you look at what’s required for him to do to implement Bitcoin payments, I don’t really think that it’s too difficult for him to receive those types of payments because at the end of the day, it’s kind of a barcode scan that’s required in order for a crypto purchase, or at least a Bitcoin purchase to take place. 

If he can kind of work with some type of exchange that just immediately converts it into US dollars before his company receives their cut of the payment, it should be relatively straightforward. 

15:09

Now I’m sure I’m oversimplifying the software piece to this. But in general, compared to implementing a chip, when you get into the NFC stuff that we were talking about earlier, this would probably be a much easier technical solution. 

And again, if I’m oversimplifying this, be sure to let us know on Twitter. We’ll try to make a correction. It’s just an interesting dynamic as he was talking about these various technologies. You look at the timing of how he inserted it versus not inserting it.

That’s pretty much all my thoughts on that clip. We’ll go ahead and move on to the next question.

Stig Brodersen 15:47  

For the next clip that we’re going to play, Jack Dorsey is giving a talk about how Square is making commerce easier. In the clip, Jack talks about his friend, Jim McKelvey. He co-founded Square at the time when he still had a small shop as a glass artist.

Jack Dorsey  16:06  

I went back to St. Louis in 2008 for Christmas. We wanted to work together. We wanted to do something together. We didn’t really know what. We didn’t know what to do together. He had an idea. He said, “Let’s build an electronic car.” I said, “Okay. I have no idea how to do that, but I’d really love to work with you on figuring it out.” 

And then we kept coming up with ideas. Nothing was really sticking. And then he called me in frustration saying, “Jack, I just lost a sale because I couldn’t accept a credit card.” And you know, we both had these phones next *inaudible*. His iPhones and super computers that could do anything for the next four years. 

We were wondering, “Why was that so difficult? Why was it so difficult for Jim to accept a credit card?” We took a month. We figured it out. That month was the answer to that question, “Why?” And that month was the beginning of Square.

Since then, we realized what we’re actually doing. We were making commerce easier. With Twitter, we made communication easy. We simplified it down to its base essence. 

17:06

With Square, we want to make commerce just as easy. The interesting thing about communication and commerce is I don’t really see a very large difference between the two. We were actually trading goods as a civilization before we’re using language to speak with one another. 

Commerce actually was occurring before communication was occurring. Communication has always been worked on to be more efficient, more free, more frictionless, easier, and simpler. You see that with Twitter, Instagram, Facebook and in Vine today. 

But commerce for whatever reason became more complicated, more abstract and more expensive. It departed from communication. But when you really think about what commerce is, it’s not payments. It’s a simple activity between buyer and seller. It’s a simple exchange of value. Exchange of value is just communication. 

So our mission at Square is to make commerce as free as communication. It is to make sure that it goes back to its natural state. It is to make sure it goes back to something social, and something that is conversational. 

18:11

The way we started is we looked at the system. We realized that, “Hey, everyone in the world is paying with plastic now. Everyone is paying with credit cards. They’re not paying with cash anymore. They’re not carrying their checkbooks around.” You have all these people using these cards, but you barely have anyone who can accept them. 

No one can accept them for whatever reason. We didn’t really know what the reasons were. But we found out. We saw that people were not only charged for the hardware. They were charged monthly. They were charged a PCI fee. They were charged a fee for the transaction. They were charged a percentage fee which is called the interchange. It is just this giant guessing game of things that you have to do. It took anywhere from a week to four weeks to even start accepting credit cards.

If the economy is moving to plastic, and you can’t participate as a small business, as a medium-sized business, or even as a large business, then how do you build your business up? How do you remain relevant? The answer is you can’t. That’s the problem that we wanted to solve immediately. 

Jim had that problem. We wanted him to be able to accept credit cards. That was the picture initially. It was something that we could achieve. We decided that we wanted to get it down to such simplicity that someone could download an app, and in under a minute, start accepting credit cards. 

19:31

You could just download an app, put in their name, put in their mailing address, we’d send them a free credit card reader, and they were in business. We actually were able to do that. We were able to build the hardware and the software. We did that in one month. 

This was the best company to pitch and demo in the world. I would go around to all my friends and to all these investors and say, “Do you want to see my new product?” And they would say, “Yes.” 

I would say, “Well give me your credit card.” And they would say, “No.” And I would say, “Well, I’ll show someone else then.” They’ll say, “Okay.” And I would take anywhere from $5 to $500, depending on who it was. 

Some people would give me a black Amex. You know exactly what I would do with that. So we ate very well in the early days of the company. But the thing is, when people saw that swipe, they said, “Wow.” And the second time they said, “Wow” was when they signed on the screen with their finger. 

20:28

It seems very simple now. It seems very obvious now. But at that time, it was seen as a superpower. You just took money off my card. I said, “Yeah, check your statement. It’ll say Jack Dorsey, $500.”

It was just an amazing feeling. And then I would say, “See you.”

Stig Brodersen 20:47  

I really found this clip very interesting. I listened to this interview not too long ago with Jeff Bezos. He talked about how important it was to invest in mega trends. I think Square is a part megatrend.

One mega trend that is evident, I’ll perhaps use Amazon as the best example, is the value of matching the buyer and the seller much faster and better-targeted than ever before. This is simply a result of consumer internet taking over commerce. I just don’t see that stop anytime soon.

Square’s a good example. Amazon’s another. We can look at all the companies who have grown really fast due to the same mega trend. LinkedIn is matching buyers and sellers of labor much smarter than before. Airbnb is matching vacant rooms and guests looking for a place to stay. Uber can make cars available for a traveler.

21:41

You just see that in so many places right now. There are so many successful businesses because of that principle. I think that the business people and the stock investors should factor this mega trend in when we’re making a business and investment decision. 

It’s definitely not a recommendation to buy Square. I was really tempted to do some research for this episode. I think Square’s an amazing business. It seems like the market also realized that. It has priced it really expensive. 

But I think that we need to factor in the companies who really mastered this matching efficiently. They can sustain revenue growth rates that are much higher and perhaps even longer than we previously have seen.

Preston Pysh  22:26  

All right, Stig. Let’s go ahead and hit the next topic. 

I thoroughly enjoyed the way that Jack responded to this next question. He was asked about the key lessons he learned from starting Twitter that helped influence the way that he launched Square. This is how he responded.

Jack Dorsey  22:47  

There are many. I really had no aspiration to be a CEO, to be a leader in a company, or to even create a company. I just wanted to build and use this thing. I was so excited about that. You learn whatever you have to learn to make that work. Right now, a company is just a great vehicle to spread an idea around the world.

It allows an idea to thrive. But the idea and the purpose of our work always leads not the company. The company is a support, and the business is oxygen to that idea. I think when you are tasked with creating a company, you tend to, or at least I did, you grow up a little bit too fast sometimes. You try to put too much structure in place or the wrong structure in place. And that distracts you from really the work that you absolutely need to do. 

I learned two big lessons from that time. Number one was the power of instrumentation. The power of knowing exactly what’s happening within the system. The power of transparency within the system but also within the company. 

24:14

We would go down a lot in the early days of the company because we just had no instrumentation at all. It’s like driving a car, flying a plane and not having any sense of how fast you’re going. It’s extremely dangerous. 

We just didn’t know what people were doing with it. How the resources were being used. And ultimately, it just crashed through a halt multiple times. And little by little, we started instrumenting the system. We built simple things that would tell us what the system is doing or how people are using it. These seem like of course, you build dashboards, and of course you look at the data. 

But in the moment, when you’re creating these things, that’s not what you put first. It’s often an afterthought. The biggest thing that that solved was we stopped speculating about what was going on. We could actually point to what was going on. 

And then, since we could point to it, we could fix it. We had a ton of communication issues in the company at that time. We wouldn’t talk to each other in some cases. 

25:32

Engineering sometimes wants to talk to operations. And when you have those divisions in the company, the people using the service actually see the results of it. Any organizational difficulty actually manifests in the service itself. That’s just ultimately rude and selfish. You’re putting your own mess in front of the people that are using your service or the customer. 

As we started instrumenting the system, we had a lot of healthier communication. This is a funny thing. We were building a communication company but we couldn’t communicate internally. That was number one. The first bit of code I wrote for Square was an admin dashboard. We could actually see everything that’s happening constantly. 

And then number two is just how important it is to really make sure that you’re building the right team dynamic. That means hiring great people who share the purpose and the vision. But it also means that we’re parting ways with people who don’t. 

We had some people in the early days of Twitter who did not work well together with others. This was probably the hardest thing for me to do as a CEO in the early days. I had to fire someone who had the entire system in their head. And when you’re faced with that, you’re like, “Well, I can’t fire this person. Because if I fire this person, then the whole system is going down. We can never get it back up.”

27:17

It took me a long time to do. It took about five to six months. That’s a regret, actually. But ultimately, when I did it, I did it. When we were parting ways, I was crying. He was crying. And then I went back to tell the company. We were only about seven people. I was crying and the company was crying. It was a very emotional period. 

We were also under a lot of stress because we were constantly going down. Now we just parted ways with a guy who knew how to bring the system back up. But something really interesting happened immediately after that. All these new leaders in the company emerged. Actually, we didn’t go down. We built a lot of great practices to stay up. 

I think when you’re just getting started, whether it’s a company or an organization, you try to get people really quickly. You don’t edit as much. You don’t really make sure that there’s a great team dynamic. And if you don’t, it can be really poisonous to the culture. Ultimately, it will block new ideas and new leadership from emerging. Constantly looking at the team and making sure that we have the right team in place is something I applied to Square as well.

Stig Brodersen  28:29  

At this point in time of the show, it’s time to play a question from the audience. This question comes from Kyle.

Audience 1  28:35  

Hi Preston and Stig. I’m Kyle from South Africa. I just want to ask a question about a comment Stig made in one of the beginning podcasts. He said that he bought two stocks last year. He felt like he was overtrading.

I just want to know how you guys invest. Do you save up a large capital, and then invest that three times or four times a year? Or do you invest monthly with a monthly savings?Do you take your savings and just reinvest in stocks that you’re currently earning, as opposed to one or two large investments? Thank you guys. I’m loving the show. Keep up the great work.

Great question, Kyle. I don’t have a fixed rule about my monthly cash flow. If anything, my rule is that I set aside money every month for investments. But I don’t always put it into the market. 

Stig Brodersen  29:22  

It’s more of a question about whether or not I can find a great investment. If I can, I’ll invest in it. And if not, I won’t. 

In the comment you referred to, I felt that I was overtrading because I bought two new stocks. I would like to provide some context to that. The reason why I accept that is that I generally have a very concentrated portfolio. It is less than 15 stocks. 

I simply can’t watch 100 stocks. What I do is I monitor a smaller amount of high quality stocks that I feel I understand and are trading at good prices. The good businesses do come across but trading at a great price really hasn’t happened for a long time. 

30:02

Now, that being said, I don’t want to have much cash in my portfolio. The opportunity cost is high since cash has no yield. It’s a balance since the opportunity cost of being invested in an overvalued market is also high. You’re taking a high risk of losing your principal.

The approach I use is that I invest in high quality stocks, even at fair prices. That way I feel I get the best of both worlds, or perhaps as you say, the least given the current market conditions. I still get a return. My risk of losing a principal is limited. 

This can actually be a bit harder mentally than what it sounds like. Investing in your winners, for instance, Berkshire Hathaway, for a much higher nominal price than what you bought it for in the first place. It is difficult because it increases your average price of the stock. 

For instance, if you bought Berkshire Hathaway at say, $50. And now, you’re adding to that position at a stock price of $200. You feel like you’re taking a risk. It doesn’t feel good to have a new higher average price you bought in that.

31:10

I would actually argue the opposite. Investing in new winners that you have followed for years. Understand them. If it’s trading at an okay price, I think that’s a great placeholder for most of your cash given the current market conditions.

Preston Pysh  31:25  

So Kyle, similar to Stig, I don’t have any fixed rule for buying and selling. But I will say this, in general, I try to keep my portfolio under 15 stocks. ETFs in more than 10. That’s kind of where I’m trying to have ownership in that range. 

I personally think that anything above 15 gets kind of hard to keep track of. All the information, research and knowledge that you really need to have under your belt in order to actually own something. 

And then, I think anything under 10, you’re just kind of getting too focused in your portfolio. There’s been a lot of research done on the specific number of 15, and the statistics behind how exposed you become assuming that you kind of have an equal weighting if you have 15 picks. But that’s just the general rule that I have.

As far as the way that I invest, I’m heavily reliant on the ideas of deep value investing. These are a lot of the things that Toby Carlisle writes about as far as using filtering mechanisms in order to find the right picks. And then what I do is each month, I look at the free cash flow that my business, or that I’ve generated personally. I am looking to invest non-operationally. 

32:44

I look at that cash flow and whatever that amount is that I’m looking to invest. I’ll look at how the picks that I currently own have changed. I’ll look if there are new picks that have showed up on some of the filtering mechanisms that I use through deep value fundamentals. I will try to see if something else looks like a better value, or is producing a higher yield. If so, then maybe I’ll bring that into my mix. 

A lot of the time, I reallocate capital into companies that I already have in my portfolio. That really depends on what changes have occurred over the last month. But typically, my buying and selling happens on a once per month kind of basis. I would tell you that I don’t really trade much more than that. It all comes down to the yields that I’m expecting.

I don’t know if that helps you understand, but that’s just kind of the way I personally do it. It doesn’t mean that that’s right or wrong. It’s just the method that I use. 

So Kyle, as a token of our appreciation for leaving your question, we’re going to give you access to one of our free courses on the TIP Academy page on our website. The course that we’re going to give you is our Intrinsic Value course. 

33:52

Our Intrinsic Value course teaches people how to determine the value of an individual stock. It also teaches you how to think about the market cycle when you’re buying your stock. It also teaches you some stuff about options trading. 

We’re really excited to give you this course. If anybody else out there wants to check out the course, you can go to tipintrinsicvalue.com, or you can just go to our website and click on Academy. It is a link at the top of the page. The courses are right there. 

So if anyone else wants to leave a question on the show, go to asktheinvestors.com And if your question gets played on the show, you’ll get a free course.

Stig Brodersen  34:24  

Alright guys, that was all the Preston and I had for this week’s episode of The Investor’s Podcast. We’ll see each other again next week. 

Outro  34:31  

Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. 

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