Wednesday, July 9, 2014

Catmull's Mental Models

OK, so I mentioned this book in my last post:

      Creativity, Inc: Overcoming the Unseen Forces That Stand in the Way of True Inspiration.

This is written by Ed Catmull, one of the founders of Pixar.  It's always great to read something written by such an amazing person about an incredible business they built.  Just as I like to read investment books written by people who have actually done it well, business books tend to be better when they are written by the actual people who have done it.  Yes, there is self-serving drivel sometimes too, but this is definitely not such a book.

I think it should be required reading for just about anyone involved in business and investing.  There is something for just about everyone to learn from it, even if they are not in necessarily creative industries.  It's about human nature and organizational dynamics too, so there are lessons to be learned from anyone who deals with people.

But what prompted this post was some mental models, as Catmull calls them, that he says has helped the people at Pixar get through the tough times.  And without getting through the tough times, there would have been no great movies (just as there would be no Berkshire Hathaway today without having gone through tough times.  If Buffett wanted to avoid nasty bear markets, nobody would know who he is today!)  None of their blockbuster movies came easily.  I think there is a perception, that Catmull meticulously dismantles, that Pixar is such a wonderful, talent-full business that they can crank out these amazing movies like Model T's on an assembly line.

These mental models, by the way, aren't the sort of mental models that Munger talks about.  They are more like metaphors that help people get through the inevitable rough periods that they go through when making movies.  He says that all of their movies suck at first (OK, maybe he didn't put it that way), and they have to keep working on it to make them better.   Sometimes it doesn't work out.

Tangent (already?)
OK, so as I was looking through the book to find the quotes, I found this quote and it immediately reminded me of a recent event so I can't help mentioning it:  Catmull quotes Apple's chief scientist, "The best way to predict the future is to invent it."  Of course, the first thought that came to mind when I read this was Bill Ackman's purchase and activism in Allergan  (or any activist investment for that matter, actually).   I actually like and respect Ackman, so this is just for fun (I know this is not the unanimous view of him in the value investing world).

Back to Mental Models
Before getting into Catmull's mental models (which, by the way, aren't really Catmull's mental models, but models he has observed and were articulated to him by his directors etc.), there is a similar model that I found in Chris Davis' letter to fund holders back in 2008:
Shelby M. C. Davis offers a sailing metaphor to describe this fundamental challenge of investing: "To sail across the ocean, you must balance making progress in fair weather with the ability to withstand the inevitable storms. Those who think only of the storms will never leave the shore. Those who think only of fair weather will never reach the other side."
So this is very similar to Andrew Stanton's model, and what's interesting is that Shelby Davis is talking about investing and Stanton is talking about directing a movie. 

I think Shelby Davis also said something about guiding the ship by the lights of the lighthouses in the distance and not by the waves tossing the ship around.  This metaphor was really helpful to me in getting through big down days/weeks/months in the market or my portfolio.

Anyway, here are some of the models that made me go, "wow, that's exactly the same as in investing!".

Brad Bird (directed Ratatouille, The Incredibles at Pixar) 
The themes Catmull recognizes in Bird's dreams (read the book to get the whole story) are blindness, fear of the unknown, helplessness and lack of control.  All us traders and investors experience this too.  Bird's mental model is skiing.  He relates:

This is where directing is a lot like skiing, "I like to go fast," Brad says, before launching into a story about a trip he took to Vail when, "in the course of a week, I cracked the lens of my goggles four times.  Four times I had to go to the ski store and say, 'I need a new piece of plastic,' because I had shattered it crashing into something.  And at some point, I realized that I was crashing because I was trying so hard not to crash.  So I relaxed and told myself, 'It's going to be scary when I make the turns really fast, but I'm going to push that mountain away and enjoy it.'  When I adopted this positive attitude, I stopped crashing.  In some ways, it's probably like an Olympic athlete who's spent years training for one moment when they can't make a mistake.  If they start thinking too much about that, they'll be unable to do what they know how to do."
This reminds me of those people who get in and out of the market all the time due to all sorts of fears.   Many of them understand that value investing works over time, but they just can't stand losing money, so they sell out every time the market looks scary to avoid a drawdown.  This sort of thing just totally destroys their performance.

This fear of failure also reminds me of what I talked about in the previous post about non-founder CEO's; they so fear destroying the wonderful business that a super-genius created that they become timid, avoid taking risks and make the easy decisions.  Catmull talks about how avoiding risk, going for the sure thing and making safe decisions in movie-making will most definitely create a mediocre, derivative movie.  Think about what happens to a company after a superstar, founding CEO retires.  Hmmm....

Andrew Stanton (WALL-E, Finding Nemo, A Bug's Life etc.)
If you're sailing across the ocean and your goal is to avoid weather and waves, then why the hell are you sailing?  You have to embrace that sailing means that you can't control the elements and that there will be good days and bad days and that, whatever comes, you will deal with it because your goal is to eventually get to the other side.  You will not be able to control exactly how you get across.  That's the game you've decided to be in.  If your goal is to make it easier and simpler, then don't get in the boat." 
As Buffett says, if it will upset you if a stock you buy goes down by 50%, then don't buy stocks because stocks will inevitably go down.  And we usually can't know when it will go down so we won't be able to enjoy the upside and then get out just in time to avoid a downturn.  Stanton's view is exactly the same idea.

Pete Docter (Up, Monsters Inc. etc.)
Peter Docter compares directing to running through a long tunnel having no idea how long it will last but trusting that he will eventually come out, intact, at the other end.  "There's a really scary point in the middle where it's just dark," he says.  "There's no light from where you came in and there's no light at the other end; all you can do is keep going.  And then you start to see a little light and then a little more light and then, suddenly, you're out in the bright sun."  For Pete, this metaphor is a way of making that moment - the one in which you can't see your own hand in front of your face and you aren't sure you'll ever find your way out - a bit less frightening.  Because your rational mind knows that tunnels have two ends, your emotional mind can be kept in check when pitch blackness descends in the confusing middle.  Instead of collapsing into a nervous mess, the director who has a clear internal model of what creativity is - and the discomfort it requires - finds it easier to trust that light will shine again.  The key is to never stop moving forward. 
This reminded me of 2008/2009.  I had no doubt that we would come out the other end, eventually.  I just didn't know when.  But I was 100% confident that we would come out of it.  After all, the banking crisis was just about money and liquidity.  We weren't facing nuclear annihilation.  Some entities were insolvent and/or had no liquidity, but there was a lot of cash/liquidity lying around.  It was just a matter of some traffic cop moving things around to avoid a total collapse.

If you own a business at a valuation you are comfortable with, and the business is sound and is run by good, competent people, then they should be able to get through the tunnel just fine and we as shareholders should hold on without too much fear.  If you have high confidence in their survival, there is nothing to worry about.

And it's amazing how he says "...and the discomfort it requires" about creativity.  We all know that value investing and even trading requires a lot of discomfort.  In my trading days, we used to say that the hard trade is the right trade, and that if a trade is easy, then it's probably wrong and you are probably about to get crushed.   Greenblatt says that most people don't do value investing because it's too hard.  Most can't take the ups and downs that is a must in this business.  Like my friend that was a temporary value investor; it was great during the bull market but once the market turned, he was no longer a value investor.

Michael Arndt
Michael Arndt, who wrote Toy Story 3,  and I have had an ongoing dialectic about the way he envisions his job.  He compares writing a screenplay to climbing a mountain blindfolded.  "The first trick," he likes to say, "is to find the mountain.".  In other words, you must feel your way, letting the mountain reveal itself to you.  And notably, he says, climbing a mountain doesn't necessarily mean ascending.  Sometimes you hike up for a while, feeling good, only to be forced back down into a crevasse before clawing your way out again.  And there is no way of knowing where the crevasses will be. 
Catmull, of course, has his own mental model and he describes it in the book.  It's basically about the concept of "mindfulness".  It resonated with many of the issues that he was thinking about at Pixar; control, change, randomness, trust, consequences.

All of this stuff is from Chapter 11, "The Unmade Future", pages 223 - 239 in the current hard cover book.  (Don't make me figure out what percentage that corresponds to on your Kindle. OK, the last numbered page is page 340 so figure it out yourself)

I am always fascinated when I read something and note the similarities to investing and in so many diverse endeavors. I don't think I would ever have imagined any connection between making films at Pixar and investing (that's not why I read the book!).

But I suppose we shouldn't be surprised that when going for excellence, there is a lot in common in just about every area.  One can learn to be a better investor by learning how others achieve what they do in other areas, and the Pixar book was very inspiring in that sense.

There is much, much more in this book than this sort of thing.  This is just what really struck me at the time and I just had to make a note of it.  I was actually going to write this out in my private notebook, but I thought other investors might get something out of it so decided to post it publicly.


  1. I would really love to buy the book from your bookstore, but you only give the hardcover option and I read kindle only these days. I do enjoy your blog, would like to buy it thru you.

    1. Hi,

      Thanks for the thought. This is not a revenue business or anything like that so you can go ahead and order it whatever way you can. I thought that by putting something in the Brooklyn Investor store, that you would have options. I didn't realize there is no option for the Kindle version. Sometimes it says, "buy through Amazon" and you get other options, but in this case there is just "add to cart".

      So I don't know how that all works. I can add a Kindle version to the store, but then I would have two of the same book, and for me it's more of a directory of sorts than a business so I'd rather just keep it simple.

      Anyway, if there is a way to put one book in the store with many purchase options, I will do it that way.

      Thanks for the thought.

  2. Interesting post - thanks

  3. This is an excellent post. As insightful as it was enjoyable to read. The Davis quote is fantastic.

    1. Thanks. I'm glad you like the Davis quote... (and the rest of the post)

  4. I really enjoyed this post. Charlie Munger said to always invert and it's great advice. With your comment about your friend being a value investor. A lot of folks I know said they're investing for the long-term, basically they're long-term investors. But they don't act that way when s#$% hits the ceiling fan.

    1. Yes, exactly. Everyone's a long term investor when the market is going up, and then they turn into macro traders when the market is down, lol... They want to be Buffett on the upside and Soros in a bear market. Yeah right. (how many of us got emails from friends and relatives asking us for advice on some good bear funds, dollar bear funds in 2008/09? etc...)

  5. just want to second the recommendation you make a kindle version available on your bookstore.
    I have bought every book you recommended. would love to support you in any way I can (except buy hardcover)
    look forward to each post

    1. Hi, you guys are too kind. OK, so I added the kindle book to the store. If you already bought somewhere else, that's totally fine. I usually encourage people to try the library first anyway...

  6. Thanks for all your excellent blog posts. Just posted an article on IBM on seeking alpha and referenced/linked to some of your articles here. Would love to hear any feedback if you have time. Thanks! here is the article:

    1. Wow, that's a nice, thorough article. Thanks for the kind reference. Keep up the good work!

    2. Rob K - I have to admit - my initial reaction to your posting a link in the comments was "spam", but after reading it, I have to say "Great job" and "keep it up".

  7. I would be interested in your thoughts on owning BRK vs Small cap value index over the next 10+ years. As a true value investor, we all admire Buffets track record and value oriented wisdom. However, BRK has underperformed the small cap value etf and broad market over the last 15 and 10 years, respectively. At this point, given BRK's size, Warren's age and longevity, should BRK really be the highest conviction and largest weight in a value investors portfolio? I believe that you have said it could be a core holding that is like the S&P500 but will most likely slightly outperform. Any thoughts are most appreciated. Thanks.

    1. Hi,

      That's a very good question. I think for most people. an index fund (S&P 500) or BRK would be best for most of their equity exposure. And yes, I do agree that BRK's size (and other factors) make it likely it will outperform the S&P 500 by only a very small margin. Buffett has hired some great investment managers, and they can do great with a few billion. But I wonder how well they will do when some day they have to manage $100 billion. It won't be easy. Buffett has already said that the two T's are finding how hard it is to invest with much larger sums of capital.

      So for 'conservative' investors, I still think BRK/ S&P 500 index is fine, and frankly, I don't even have that much of a preference one way or the other. Obviously, BRK is probably a little better.

      For more enterprising investors, I think there are ways to find good capital allocators and pick stocks.

      As for the small cap value fund, I would be very careful as many measures seem to suggest that small caps are now highly overvalued, and that may explain the outpeformance (maybe small caps were cheaper back then and now are just way more expensive).

      I tend not to be a fan of looking at things that way, by market caps or sectors, even though some studies suggest small cap values do better than overall value etc... But then if you buy when things are very expensive, that may not be true going forward. I would avoid getting into specific market caps/sectors or anything like that just because of trailing performance figures.

      Anyway, that's just my opinion.

      Sorry for not being too helpful...

    2. So if you think small caps are over valued right now, what do you think about large caps? Also if the market is overvalued, what would you invest your cash in or would you hold onto it?

    3. Hi,

      I think a lot of large caps are reasonably priced. Buffett said stocks are in a zone of reasonableness and the market hasn't really done too much since then so what he said in the 2014 annual report is still valid. Go back and read it if you haven't.

      If you are worried that you buy stocks now and they 'crash' tommorow, then just spread out the purchases over time. But only invest an amount that you won't get stressed out if markets go down because they will every now and then...

  8. Hi kk,

    Really enjoy your blog - keep up the good work!

    I was just reading up on a few interviews with Jim Chanos, and he mentioned that he likes to short companies that depend on acquisitions for growth. Talking about Valeant, he says “We’re short because it’s a roll-up and roll-ups have a unique set of problems,” “Roll-ups are generally accounting-driven, and we certainly think that’s the case in Valeant. We think that Valeant is playing some very aggressive accounting games when they buy companies, write down the assets.”

    What are your thoughts on this? Post seems to fit squarely into this category.


    1. Hi,

      Well, my response is that it depends. One thing the street always seems to do is to pick a category and then say it's always the same. When Heinz cut costs drastically, skeptics immediately said that they might have cut costs too much and they may suffer going forward. Not *all* cost cuts are bad. You have to look at *who* is doing the cost-cutting. Is management experienced with this sort of thing, or are they just cutting indiscriminately left and right and destroying the business? 3G Capital's historical record suggests that they know what they are doing, and history (and my own experience) shows that there is tremendous waste in some of these older companies that have been built up over the years.

      So roll-ups are like that too. Are *all* rollups bad? Of course not. There are some bad ones, like Tyco. CSCO's game didn't work out too well either even though it looked good for a while in the late 90's (use high stock price to acquire etc...).

      Valeant is a tough call but I wouldn't automatically throw it into the "it's a rollup so it's bad" category at all. BRK is sort of a roll-up too (what are they doing in real estate brokerage, for example. Kind of rollup-ish...

      Ackman does a good job of explaining VLX in his presentation (including accounting issues).

      As for POST, it is run by Bill Stiritz, a really great capital allocator. Druckenmiller called him the greatest capital allocator ever (or some such), so I wouldn't put POST in that category of bad rollup. I don't know if it will work out or not (cereal is under pressure etc...), but when you get a chance to invest with Stiritz, I think it's not a bad idea to hitch a ride.

    2. Ok in general I think I agree with you. But I'm not so sure about Post; Stiritz seems to have lost the plot a little bit, with his excessive acquisitions spree (i don't think the street expected him to make as many acquisitions as he did) and his rather public dalliances with Herbalife (which is strange to say the least)..

  9. Your owner operator Stiritz at Post is getting destroyed today. Any thoughts? Thanks.


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