Zero to One – Peter Thiel & Blake Masters

zero-to-one

Bottom line, if you’re in business, invest in business, thinking about starting a company or are currently starting a company, you should read this book!

The premise of the book is that you have to control your destiny, do not depend on luck and do not think it will happen automatically. Creating a new business category happens only once, hence 0 to 1 (technology). Whereas incremental progress is 1 to n (globalization). Thiel outlines how to make that happen, drawing from his experience as one of the founders of PayPal and Palintir. He offers very good advice, but no magic bullet, because there are no magic bullets.

Brief chapter overviews:

In the 1999 crash, businesses learned the wrong lessons and they are still practicing them. They should have learned to be bold, plan, not enter competitive markets and put energy into distribution.

You must create a monopoly company. Monopolies are what drive the future as they allow founders to do long term planning vs. short term planning. Competition kills the ability to do long term planning so avoid it at all costs.

To build a monopoly company you need some combination of proprietary technology, network effects, economies of scale and branding.

You must take control of your future by planning for it, chance will not get you there.

Remember the power law, only a small percentage of companies can ever succeed at a substantial scale. When it comes to your own life think hard about what will be valuable in the future, then pursue that will everything you have.

To build a valuable company you have to do something nobody has done before. To do that you have to tap into secrets that aren’t already universally understood.

When starting a new company you have to start right and have committed founders that add value.

Company culture should be of like minded people with individual talents. Internal conflict will tear a startup apart.

It is essential to have distribution and count it as part of your initial design. A company that has a product without good distribution is doomed to failure.

The computer should be a complement to human activity, it should supplement decision making.

If you want a successful business you must answer the following questions:

Do you have a breakthrough technology? Why is now the right time? Are you starting with a big share of a small market? Do you have the right team? Do you have a way to deliver your product? Will your position be defensible for 10 – 20 years? Have you identified a unique opportunity that others don’t see?

Thiel’s overriding question is whether we will be able to escape from optimistic indefinite and get back to optimistic definite. To do this we must think for ourselves and build businesses that go from 0 to 1. I get the feeling Thiel isn’t so optimistic about this.

I thoroughly enjoyed Thiel’s book and feel that he shared some of his secrets with us. I also think it is important to move the dial back to doing some planning after moving so far toward indeterminism. Creating a unique technology is no doubt a difficult task, but it is what is needed to keep our society moving forward. As a country we need to create the proper incentives so that smart people work on hard problems instead of spending that intellectual capital in the markets. It should be just as attractive for someone with the capabilities to be a scientist or engineer as it is to be a Wall St. trader/analyst. How do we get there?

A special thanks the Zero to One team for the advanced reader’s copy!

Book Notes

Before You Bet, Understand Expected Value!

With the upcoming super-bowl and all the betting surrounding it, you should understand expected value before you make any bets.

Informally, the expected value can be interpreted as the long-run average of the results of many independent repetitions of an experiment. (from wikipedia)

By using expected value as a guide over your life, you should come out ahead.

How to calculate expected value:

Say you have two options, one is to bet in a superbowl grid and the other is to bet on a 0-9 pool. To calculate the expected value of each do the following:

Expected Value = – (chance of losing * amount lost) + (chance of winning * amount won)

Ex. -(.99 * $100) + (.01 * $10,000) = $1 (Superbowl Grid)

(The above is simplified as with the grid you have a .01 chance of winning each quarter and for the half)

Ex. -(.9 * $100) + (.1 * $1,000) = $10 (0-9 pool)

Which would be the better choice?

In most decisions in life you would prefer the expected value be more than the amount at risk, this rarely happens with betting and is the reason the house always wins.

Milton Friedman on Inflation

From “Free to Choose”, chapter 9

Below are Milton Friedman’s five simple truths regarding inflation.

  1. Inflation is a monetary phenomenon arising from a more rapid increase in the quantity of money than in output (though, of course, the reasons for the increase in money may be various)
  2. In today’s world government determines – or can determine – the quantity of money
  3. There is only one cure for inflation: a slower rate of increase in the quantity of money
  4. It takes time – measured in years, not months – for inflation to develop; it takes time for inflation to be cured.
  5. Unpleasant side effects of the cure are unavoidable.

The United States has embarked on rising monetary growth four times during the past twenty years. Each time the higher monetary growth has been followed first by economic expansion, later by inflation. Each time the authorities have slowed monetary growth in order to stem inflation. Lower monetary growth has been followed by an inflationary recession. Later still, inflation has declined and the economy has improved. So far the sequence is identical with Japan’s experience from 1971 to 1975. Unfortunately, the crucial difference is that we have not displayed the patience Japan did by continuing monetary restraint long enough. Instead, we have overreacted to the recession by accelerating monetary growth, setting off on another round of inflation, and condemning ourselves to higher inflation plus higher unemployment.

We have been misled by a false dichotomy: inflation or unemployment. That option is an illusion. The real option is only whether we have higher unemployment as a result of higher inflation or as a temporary side effect of curing inflation.

In my view, we have and will have higher unemployment as a result of higher inflation. I think we are currently in the economic expansion from monetary growth. Based on comments earlier in the same chapter, increased monetary supply takes six to nine months to work its way through the system to increase economic growth and employment. Another 12 to 18 months elapse before the price level appreciates and inflation occurs or is speeded up.Given that a sharp increase in money supply started mid 2008, that would point to first quarter 2009 impact. This may be consistent with the above as we saw a market bottom in March 2009. So that would point to the end of the 1st quarter 2010 to the 2nd quarter 2010 to start seeing increased inflation.

Let’s see what happens.