Today I was listening to investor David Dredge on a podcast. He's based in Singapore and deals in somewhat exotic investments but considers himself a value investor. He said something (see here) that grabbed me: “Low doesn’t mean cheap.”

Just because something has a low price, that doesn’t automatically mean it’s a cheap price. Price is the amount you pay for something. Value is what the thing is worth. The two concepts are often confused, but they’re different. And price alone can’t tell you the cheapness of something.

The key element that many miss is value. Once you calculate an item’s value, you can determine whether it’s cheap or not by comparing value to the price it’s being offered at. If the price is less than the value you’ve determined, it’s priced cheaply and is likely a deal. If the price has also been reduced, the item is low-priced and cheap.

Conversely, if an item has been reduced in price but is still selling for more than the value you’ve determined, it’s priced lower, but it’s also overpriced (i.e., not cheap).

For a long time, I looked for bargains. If something was on sale, I’d think it was a deal. That was a naive way of looking at things, and it led me to overpay for things (most notably my first residence). I now think much differently. I no longer start with price or how much the price has gone down. Instead, I try to first figure out the value of something (this isn’t always easy). Then, after I feel comfortable with the value I’ve determined, I look at the price. If the value exceeds the price, I feel confident about pulling the trigger because I’m getting more value than I’m paying for.

I’m reading a book this week about understanding the impact of luck and skill on successful (and unsuccessful) outcomes. It’s called The Success Equation, and it’s by Michael J. Mauboussin. It outlines a framework for assessing the influence of skill and luck on your decisions (many life outcomes are a combination of both) so you can increase the chances of getting a successful outcome. Very interesting book so far.

One section is called “Why Smart People Do Dumb Things.” I’ve been thinking about it a lot today. The key premise of this section is that intelligence tests measure some cognitive abilities but fail to measure others. One area these tests miss is decision-making ability. Smart people sometimes make stupid decisions.

The book goes on to distinguish between intelligence and rationality. Most would think they’re related, but this isn’t necessarily true, the book argues. There are two ways to evaluate someone’s cognitive ability:

• Intelligence quotient (IQ) – This is what traditional intelligence tests measure. It’s a rating of someone’s ability adjusted for their age and compared to the rest of the population. Think mental processing speed, memory, vocabulary, etc.
• Rationality quotient (RQ) – This is the ability to think and behave rationally. RQ attributes include “adaptive behavioral acts, judicious decision making, efficient behavioral regulation, sensible goal prioritization, reflectivity, and the proper calibration of evidence.” This is what interests me most.

The book highlights that many people with high IQs cannot act or think rationally and gives examples.

This section resonated with me for a few reasons. First, if decision-making is what matters most in life, then RQ is most important. IQ can’t be changed (as far as I know), but anyone can learn to act and think rationally through hard work and focus. So, if you didn’t win the ovarian lottery and don’t have a rocket-scientist IQ (I fall into this category), you can still have outsize success if you’re intentional about thinking and acting rationally. It’s not easy and takes work—e.g., I read this book—but I feel it’s definitely something that be learned and improved materially.

Second, this section mirrored something Warren Buffett said (I read it in The Warren Buffett Way last year). I wrote a post on the quote; see here. The gist is that rational behavior is what enabled Warren Buffett to achieve outsize success, not his IQ (which is very high, too). It’s not how smart you are, but how effectively you use the intelligence you have. Buffett says some smart people have a 400-horsepower brain but only get 100-horsepower output from it because of the decisions they make. He argues that by being rational, you can have a 200-horsepower brain and get 200-horsepower of output, which puts you ahead of the 400-horsepower “genius” who can’t act rationally.

When two wise people say the same thing, it catches my attention because they reached the same conclusion independently. The probability that both are wrong is low.

I’m excited to finish reading this book. Understanding IQ and RQ, and recognizing when luck heavily influences what I’m doing, has already changed some of my thinking and decision-making.

I’ve read two books by Michael J. Mauboussin, an investor and a professor at Columbia University. I’ve enjoyed learning and trying his frameworks, especially the expectations investing framework. Another concept he wrote about was the investment premortem, an analysis you do before you invest when you’re objective and your mind isn’t anchored (as it will be after you’ve already invested).

To create this document, you fast-forward a year or so and pretend your investment has failed. You then list all the possible ways the investment ended up in that worst-case scenario. Most people naturally focus on what could go right and their own belief that an investment will work. The goal of the premortem is to get you to consider negative alternative outcomes and ways to mitigate them.

This approach caught my eye, and I want to try it. Thinking in terms of scenarios and the probabilities of those scenarios occurring is something I’ve noticed successful entrepreneurs and investors doing. I’ve started doing more of it, but I want to improve. This premortem idea seems like a great way to force myself to crystallize my thoughts about scenarios that are the opposite of what I hope happens. And it’ll likely help me have more confidence in assigning probability weights to the bad outcomes that I don’t expect.

Venture capital firms have a dilemma: there’s no exit for their founders. I read about Georges Doriot’s VC firm, American Research and Development Corporation, being publicly traded (see here). But being a public company ended up causing issues, and Doriot merged the firm with a conglomerate in 1972. Since then, VC firms have been private, and there hasn’t been a market for buying or selling them.

Today, that changed. I read this article, which says that Goldman Sachs is buying Industry Ventures (IV) for a reported $665 million plus an additional $300 million based on performance. IV has about $7 billion in assets under management. This is interesting because VC firms weren’t considered assets that could be sold. Their founders’ wealth came from carry (profit-sharing) and management fees.

I’m curious to learn about the details of this transaction and see how the market reacts to it. If VC firms become assets that can be bought and sold, I imagine we’ll see a shift in the strategies and actions of founding partners of VC firms.

I had a good conversation with a friend this week about the number of recent IPOs. He’s a physician, so this really caught my attention. If someone who isn’t a professional investor or entrepreneur is noticing the increased activity, it’s noteworthy.

I’ve noticed the uptick in IPOs and public market investors being receptive to buying shares in these companies over the last few months. Several companies have sold shares above their target range, meaning the company’s valuation and capital raised were more than anticipated. Positive signs like that excite entrepreneurs and investors to pursue more IPOs.

Though the IPO market is picking up, we’re nowhere near 2021’s gargantuan levels (see here). I’ll dig into the year-to-date IPO stats and share what I find. The end of Q3 is right around the corner, so I’ll likely wait until then.

Yesterday, I shared why I love what Andrew Carnegie said about why you should put all your eggs in one basket, which is counter to how most people think. It’s simple, but it’s far from easy to execute. And even if you execute it well, success isn’t guaranteed.

Picking the right basket to put all your eggs in is the hardest part of execution. Whether you’re founding a start-up or making a concentrated investment, this choice is critical. And you must have conviction in your decision so you can weather the inevitable ups and downs. Therefore, you can’t haphazardly pick something based on a whim. You must do the work to deeply understand each of your options. Doing the work often leads to what others might consider an obsession, but it’s what uncovers the insight that others miss—the insight that reduces your risk, tilts the probabilities in your favor, and helps you build the conviction needed to go all in.

Andrew Carnegie’s method isn’t something that everyone is suited for. Making that kind of decision and sticking with it to the end requires mental grit and toughness. But for people with the right mind-set, when it’s done well, it can lead to outsize results.

A friend reminded me of some wisdom attributed to Andrew Carnegie that I’ve always loved because it’s counter to what most people believe leads to outsize success or investing returns:

The way to become rich is to put all your eggs in one basket and then watch that basket.

Mark Twain famously said something in the same vein after hearing about Carnegie's remark (source).

This quote resonates with me because it’s what every wealthy person I know personally did. In either company building or investing, concentration (i.e., extreme focus) on one thing is what led to outsize success. If you focus on one thing, you’re more likely to know everything about it and be able to assess it better than others. You’re likely to spot what others have missed, which reduces risk and tilts the probabilities of success in your favor. When everyone else thinks the chance of success is 10%, you realize it’s 60%.

What I’ve also seen is that after someone has achieved outsize success, they embrace diversification as a means of preservation and reducing downside risk.

Said differently, concentration is for building outsize wealth (or a business), and diversification is for preserving that wealth (or that business).

This week I had a conversation with an early-stage founder who’s building software for micro SMBs. After being at it for several years, he’s finally hit product–market fit. He’s doing over $1m in annual recurring revenue, is cash-flow break even, and wants to raise from VC firms to accelerate growth.

As we chatted, he told me that he’s made it to several final meetings with VC firms where he presents to the entire partnership. They love the product, but they don’t understand how the go-to-market will work for micro SMBs or how big the market opportunity is. So, they pass.

This conversation reminded me of a post I wrote a few months ago (see here). There’s no tried-and-true playbook for selling to micro SMBs like there is for enterprise SaaS, so lots of people avoid it. They don’t understand how big the market is or how to find potential customers.

To me, it’s an obvious white space that people—even some VC firms—are overlooking. And to this founder, the opportunity is crystal clear. He’s dumbfounded that forward-thinking investors don’t get it.

Micro SMBs is an overlooked and great market to go after. The entrepreneurs who get it now will end up building massive businesses with diversified and loyal customer bases. By the time others realize how big this opportunity is, these early entrepreneurs will have a first-mover advantage that will be hard to compete with.

I’m rooting for this founder. He finally found one firm whose people get it. They’ve agreed to be the lead and write a large check in his fundraising round. He’s on his way!

So, Figma finally had its much-anticipated IPO this week. In 2022, I shared that Adobe offered to buy it for $20 billion, but the deal was canceled because regulators wouldn’t approve it. This week, the company began trading on the NYSE.

The company sold shares at $33 a share. But when the stock began trading, it opened at $85 per share, or a $50 billion market capitalization (valuation). As of the writing of this post, the stock is at $122 and the company has a market cap of almost $60 billion.

For more details on the IPO and the above stats, see here.

Time will tell how the stock performs, but so far, the Adobe deal falling through has worked out well for Figma employees and investors. According to Bloomberg (see here), Index Ventures’ stake is worth over $7 billion, Greylock Partners’ stake is worth about $6.75 billion, Kleiner Perkins’s stake is worth about $6.05 billion, and Sequoia Capital’s stake is worth about $3.75 billion. Returns will depend on when, how much, and at what valuation each firm invested, but it appears that all have done well on this investment . . . so far.

In 2022, I shared that Figma was being acquired by Adobe for $20 billion (see here). A year later, the acquisition was called off because regulators wouldn’t approve the deal (see here), but it wasn’t all bad for Figma—it walked away with a $1 billion breakup fee for its troubles. Well, Figma is back in the news. According to Bloomberg, Figma is targeting an IPO this summer (see here).

Bloomberg says that Figma generated $821 million in revenue for the 12 months ending March 31 (a 49% growth rate) and is cash-flow positive. I haven’t confirmed these figures, but if they’re true, those would be amazing metrics. The devil is always in the details, and many times people don’t really understand a company’s financials, so I want to investigate for myself. I found a copy of Figma’s SEC S-1 registration statement (see here). I’m looking forward to digging into it to understand this company better, given that I know many entrepreneurs who love its product.