It’s Either Hell Yeah or No

When it comes to thinking and decision making, Derek Sivers is one contemporary philosopher I look up to.

In 1998, Sivers was making a comfortable living as a full-time musician. He wanted to sell his music CDs online, but there was no way for a small time musician to sell online, so Sivers took matters into his hands and built a website to sell his CDs. Very soon his friends started requesting him to list their CDs on the website. That’s how CD Baby was born. Ten years later when he sold the company, it was doing $100 million in revenues. Sivers gave away the proceeds from the sale ($22 million) to a charitable trust.

Sivers has authored a wonderful book titled Anything You Want – which is an account of his entrepreneurial journey and the lessons he learnt along the way.

There are a lot of ideas in his book that find parallels in making sensible investing decisions. One such idea which Sivers spoke about is – It’s either “HELL YEAH!” or “no.” He writes –

When deciding whether to do something, if you feel anything less than “Wow! That would be amazing! Absolutely! Hell yeah!”—then say “no.” When you say “no” to most things, you leave room in your life to throw yourself completely into that rare thing that makes you say “HELL YEAH!”

Every event you get invited to. Every request to start a new project. If you’re not saying “HELL YEAH!” about it, say “no.” We’re all busy. We’ve all taken on too much. Saying yes to less is the way out.

Sivers is asking us to select very few things and devote all our energies to them instead of spreading ourselves too thin.

It’s true for picking stocks too. Every new investor begins with the same problem. They like every new investment idea they come across. Thus begins the never-ending process of spray and pray. They sprinkle their money on every new investment fad and hot picks.

However, long-term investment success is mostly determined by how many stocks you said ‘No!’ to. The difference between successful people and really successful people, says Warren Buffett, “is that really successful people say no to almost everything.”

Buffett has always been averse to investing in technology companies. But a few years back he revealed that he’s been reading the annual reports of IBM for past 50 years and kept saying no to IBM for five decades before he finally pulled the trigger in 2010. For some investors, reading the annual report of a company itself becomes a reason to invest. The force of sunk cost is maddeningly hard to overcome.

For a stock to qualify as a potential investment idea, you need few basic things. It should be inside your circle of competence. The price should be well below the estimated value, and the quality of management and growth prospects of the business should be strong. These filters are elementary but very few businesses pass all of them. And when you find such business, it’s usually a no-brainer. A “HELL YEAH!”. For the rest, just say no.

If you find yourself saying HELL YEAH! frequently, you are not doing it right. Great investments are by definition scarce, and they come along rarely.

During an Apple Worldwide Conference in 1997, Steve Jobs said:

People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things.

This then circles back to Charlie Munger’s favourite strategy – The Inversion Principle. Focus on what should be avoided rather than what should be done.

In Berkshire Hathaway AGM, after fielding questions from shareholder Buffett usually passes the query to Charlie Munger. Most of the time Charlie shakes his head with his most common reply – “I have nothing to add.”

Buffett, who never misses an opportunity to tease Munger, once chuckled, “He sometimes subtracts.”

Charlie is a firm believer in subtractive knowledge. Nassim Taleb calls this the principle of Via Negativa. The constant process of elimination. In his book, Antifragile, Taleb writes –

The greatest – and most robust – contribution to knowledge consists in removing what we think is wrong – subtractive epistemology. We know a lot more what is wrong than what is right…negative knowledge (what is wrong, what does not work) is more robust to error than positive knowledge (what is right, what works). So knowledge grows by subtraction much more than by addition – given that what we know today might turn out to be wrong but what we know to be wrong cannot turn out to be right, at least not easily.

Michelangelo, the sixteenth-century Italian sculptor, left the pope in awe with his masterpiece (the statue of David). When the pope asked him about the secret of his genius, Michelangelo’s answer was:

It’s simple. I just remove everything that is not David.

Saying yes frequently is an additive strategy. Saying no is subtractive. Keep saying no to a lot of things, and once in a while, you’ll be left with an idea which is so compelling that it would be a screaming no-brainer.

Now, remember what’s a no-brainer to you may not be so for another investor. Two highly-educated, emotionally stable, and reasonable people can view the same information and come to very different conclusions, writes Brent Beshore in his Forbes article.

Warren Buffett once said he’s owned 400 to 500 stocks during his life and made most of his money on 10 of them. Buffett, on his desk, has three baskets – In, Out, and Too Hard. He categorizes companies into these three –

1. The ‘In’ list is the smallest one, carrying the names of companies that Buffett understands very well, and that are simple businesses.
2. The ‘Out’ list is made up of companies that Buffett tries to understand first, but doesn’t. He transfers them to this list.
3. The ‘Too Hard’ list is the biggest. Buffett once revealed that 99% of the stock ideas that came to him found their way into this list.

There are more than 5,000 businesses listed on the Bombay Stock Exchange alone. Following Buffett’s strategy, an investor can expect that more than 99 percent of these BSE stocks would fall in either ‘Too Hard’ or the ‘No’ basket. That means the investor would be left with merely 50 stocks. But that’s not a tragedy because, going by Via Negativa, the goal of an investor is to find a reason to NOT invest in a business.

Statistically, more than 99 percent of the stock ideas that an investor studies in his investing lifetime will never make him any money. If you keep that in mind, you will invest very differently from the crowd.

For an idea to qualify as HELL YEAH!, an investor needs to have a pre-existing analysis framework. The framework doesn’t need to be perfect. For most new investors, their frameworks are usually flawed and their no-brainer bets could turn out be a dud. It happens even with many experienced investors. Like it happened to Buffett with his IBM investment, even though he patiently waited for fifty years. But that’s the part of the game and that’s how you investment skills get polished over time – by going through some inevitable errors.

Ace value investor Mohnish Pabrai added his own spin to this idea and called it – Few Bet, Big Bets, Infrequent Bets. Pabrai’s words echo what Charlie Munger said in his speech at the University of Southern California. He said:

The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.

About a century ago, an Italian Economist Vilfredo Pareto observed that 20 percent of the people in Italy owned 80 percent of the land, and vice versa. This 80/20 effect, also popularly known as the Pareto principle, is found in anything where humans invest effort with the expectation of making returns, i.e., from the distribution of wealth to book sales per author. The ratio 80:20 may not be accurate, but the idea holds good across the whole spectrum of human endeavours. A majority of returns come from a very small set of resources.

Morgan Housel, in his wonderful post titled Tails, You Win wrote –

The S&P 500 rose 22% in 2017. But a quarter of that return came from 5 companies – Amazon, Apple, Facebook, Boeing, and Microsoft. Ten companies made up 35% of the return. Twenty-three accounted for half the return. Apple alone was responsible for more of the index’s total returns than the bottom 321 companies combined.

You can drill this down even more.

Amazon drove 6.1% of the S&P 500’s returns last year. And Amazon’s growth is almost entirely due to Prime and AWS, which itself are tail events inside a company that has experimented with hundreds of products, from the Fire Phone to travel agencies.

Which means, in investing also, 20 percent of the investors make 80 percent of the money. And, of course, eighty percent of your portfolio returns would come from twenty percent of the stocks. Taking this idea to its logical conclusion, it’s not very hard to see that only twenty percent of the stocks that you pick up for studying have any chance of becoming profitable. Why shouldn’t you then say no to most of the stocks that you analyze?

It’s easier said than done. Saying yes brings hope. Saying no is hard for it pushes you in the abyss of uncertainty.

You have to be very patient, says Munger, “you have to wait until something comes along, which, at the price you’re paying, is easy. That’s contrary to human nature, just to sit there all day long doing nothing, waiting. It’s easy for us, we have a lot of other things to do. But for an ordinary person, can you imagine just sitting for five years doing nothing? You don’t feel active, you don’t feel useful, so you do something stupid.”

You could extend this idea to life in general. When it comes to spending time with people and investing in relationships, remember, your time is precious. Every time you say yes to a request from a stranger, don’t forget that it’s time you’re taking away from the people who matter to you. Life isn’t short, but we make it short by squandering away our time away uninspiring, critical, or negative people who drag us down. HELL YEAH! or No strategy is a brilliant hack to fill our time and space with a small set of people who energize us and challenge us to be better.

Every time you say yes to another page of an uninteresting book, it’s at the cost of reading a page from a super-text that you could read again. Not every book is worth finishing.

Put simply, the HELL YEAH! Or No trick means saying no over and over again to the unimportant things flying in our direction every day and remaining focused on saying yes to the very few things that truly matter.