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