Warren Buffet is 93 - and he just released his 2023 annual letter. Berkshire Hathaway saw record profits of $97 billion last year. If you scroll to the bottom of this year's letter, you can see he's got an almost 20% CAGR since 1965 and an overall gain of 4,384,748% since 1964. That is hard to imagine. It's even harder to do.
I think part of it comes from how grounded in reality he is. He focused on what doesn't change instead of what does and on who his "actual" competition is.
“Berkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital. Anything beyond “slightly better,” though, is wishful thinking. This modest aspiration wasn’t the case when Bertie went all-in on Berkshire – but it is now.” - Buffett on Berkshire's prospects for shareholders like his sister, Bertie
Buffet is not looking for lottery tickets; he's stacking little wins. There's power in that. He also pointed out that as stock trading has become more accessible - it's made daily buying and selling easier, but also more erratic. That, unfortunately, benefits the "house" more than these individuals.
Warren Buffett is a legend for many reasons. Foremost among them might be that he's one of the few investors who clearly has an edge ... and has for a long time.
While many people consider Buffett to be an investor, I also consider him to be an entrepreneur.
At the age of six, he started selling gum door to door. Obviously, selling gum wasn't the key to his path to riches. So, how did he make his first million? Here's a video that explains it.
Buffet has always been honest about his bread-and-butter "trick" ... he buys quality companies at a discount and holds on to them.
It is fascinating to recognize how much the world has changed – and yet how much it has stayed the same.
For one last bonus, here's one of my favorite quotes from his 2011 letter.
“Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” … No matter how serene today may be, tomorrow is always uncertain.
Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.
We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”
Nothing stopped so many innovators and entrepreneurs more than the fear of failure. If you allow yourself to be constantly scared into thinking that the world is doomed you will never take that risk which might result in great reward. And perhaps worse, if you never fail you will never learn to get up, brush yourself off, move on and succeed in the future. This does not mean you should wander through this world with great complacency and blind optimism, but if you deny yourself the ability to maximize your full potential, you will always come up short.
Fear, uncertainty, and greed are all hallmarks of every year. There are undoubtedly ebbs and flows to everything, but we are clearly marching towards greener pastures.
A great lesson to learn from Buffet is that the game isn't about the next year or even three years ... it's about a lifetime and the generations that come after us.
Let's continue to make our tomorrows bigger and better than our today.
And, here’s a whole community forum focused on desire paths.
It’s often easier to take advantage of human nature ... or just nature ... than fight against it.
To that effect, I shot a short video on how this relates to your business and tech adoption. I call it functional mapping. Check it out.
Understanding the natural path for both technology and your clients makes it easier to understand and anticipate the capabilities, constraints, and milestones that define your path forward. That means you actually have to understand the different types of users and what they expect to do.
Each stage is really about the opportunity to scale desired capabilities and automation.
It isn’t really about building the technology; rather, it is about supporting the desire.
You don’t have to get it right. You just have to create momentum in the right direction. This means that if you understand what is coming, you don’t have to build it … but you should figure out where you want to build something that will move things in the right direction.
You’ve probably heard me talk about how Capabilities become Prototypes. Then, Prototypes become Products. And ultimately, Products become Platforms.
This model is fractal. That means it works on many levels of magnification or iteration.
What first looks like a product is later seen as a prototype for something bigger.
SpaceX’s goal to get to Mars feels like their North Star right now ... but once it’s achieved, it becomes the foundation for new goals.
This Framework helps you validate capabilities before sinking resources into them.
It helps you anticipate which potential outcomes you want to accelerate. Rather than simply figuring out the easiest next step … you have to figure out which path is the best next step to your desired outcome.
The world is changing fast! I hope you’re riding the wave instead of getting caught in the riptide!
Why do people use decision models? Obviously, to make better decisions. But really, they use models to create a process that avoids many of the mistakes or constraints that prevent good decisions.
You make countless decisions every day - and at a certain point, you reach decision fatigue. It can be harder to make decisions when you are tired, after you've made too many, or when the intensity of the environment distracts or drains you.
It's one of the reasons I rely on artificial intelligence. Here are some others.
Best practice becomes standard practice.
It accounts for signal and noise.
It attempts to quantify or otherwise make objective assessments, comparisons, and choices.
And, it often gives you a better perspective by letting you apply and compare different models or decision techniques to achieve the desired outcome.
Nonetheless, many algorithms are dynamic and adaptive automation of processes or strategies that humans have used successfully before.
So, let's take a closer look at the OODA Loop, which stemmed from analyzing many interactions between and among fighter pilots during battle and training.
Observe
The first step is to observe the situation to build the most accurate and comprehensive picture possible. The goal is to take in the whole of the circumstances and environment. It's not enough to observe and collect information ... you must process the data and create useful meaning.
It's the same with data collection for an AI system. Ingesting or collecting data isn't enough. You have to be able to apply the data for it to become useful.
Orient
The second step is less intuitive but very important. When you orient yourself, it becomes easier to recognize strengths, weaknesses, opportunities, and threats to identify how changing the dimensionality or perspective alters the outcome.
This step reconnects you with reality in the context of your cognitive biases, recent decisions, and more. For example, have you received new information since starting?
I think of this as carrying a map and pulling out a compass while exploring new lands. Sometimes, you need to remember where you started, and sometimes, you need to make sure you're going where you think you are.
Decide
The last two steps provide the foundation for taking action.
When there are multiple decisions in front of you, observing and orienting help you choose wisely.
In business and with AI, you can go through these loops multiple times.
Act
Finally, remember that the best-made plans mean nothing if you don't act on them.
Once you've taken action, you can reobserve, reorient, and keep moving forward.
Conclusion
Like most good mental models, The OODA loop works in many situations and industries.
Speed is often a crucial competitive advantage. For example, knowing (and taking decisive action) while others are still guessing (and taking tentative action) is something I call time arbitrage.
Said another way, you make progress faster by walking in the right direction than by running in the wrong direction.
These processes (and technology) also help us grow more comfortable with uncertainty and uncomfortableness. Markets are only getting more volatile. Uncertainty is increasing. But, when you have the ability to adapt and respond, you can survive and thrive in any climate.
It's remarkable how much of the market ChatGPT currently controls on its own. In 2023, it is estimated that ChatGPT attracted 14.6 billion visitors, or more than 60% of all AI tool visits.
With that said, it's a marathon, not a sprint. The "feel" of this AI market reminds me of the dot-com bubble times of the late 90s and early 2000s. Many products took the world by storm only to be overthrown by a more robust competitor. For example, consider how few early web browsers or search engines still exist. I suspect that will be true of many early leaders here, too.
It isn't sexy, but it is a safe bet that Google's Bard and Microsoft's Copilot will continue to grow because of investment, acquisition, and distribution.
Remember, new technologies lead to new products and new platforms ... and the current crop of these AI tools are still only at the beginning of their cycles. I anticipate that many innovative frontstage products like ChatGPT will gain greater importance and profitability (albeit with less prominence) as they move backstage to become the backbone or plumbing infrastructure of various other products and services.
The development of new technologies brings about the emergence of new products and platforms.
AI capabilities and adoption are growing exponentially. It will be interesting to see what else stays on the list three years from now.
You can find forecasts anywhere ... but since they're basically guesswork and I don't know what data they are using or excluding, I don't spend much time on them.
That said, I found this infographic easy to look at and think about. So, it's as good a place to start as any. Also, VC draws from a database of 700 expert forecasts to make this chart.
Some are pretty easy to predict - like GenAI's shift to text-to-video. Or, an increase in lawsuits and regulations around AI. Others are questionable. In the past few months, we've seen TikTok investing heavily in the growth of its e-commerce business. Insiders have stated they believe they're trying to compete with Amazon. We'll see how that goes?
On a positive note, it seems like most are predicting positive effects on the market & economy, including a decrease in inflation and interest rates, bonds on the way back, and record highs in the S&P 500.
I'd love to hear your predictions. What do you think?
Jim Simons is a mathematician and cryptographer who realized that the complex math he used to break codes could help explain financial patterns – and he made billions with those ideas in his notoriously secretive hedge fund firm, Renaissance Technologies.
Though he stepped down in 2021, I still think his legacy is fascinating, not just for its impacts on the Hedge Fund industry - but on trading as a whole.
He is famous not only for the duration of his success and the size of his results … but also for the way he made his money (with much lower volatility and risk than his peers and competitors).
His background is impressive. Simons taught at Harvard and MIT and worked with the NSA. Here is a video where he shares some thoughts in a 2015 TED talk interview. It's worth a watch.
Despite advanced math still being a mystery to many, we rely on it more than ever as the foundation of many exponential technologies.
The Heart of AI is Still in Humans
Simons built a team of mathematicians whose motivation was doing exciting mathematics and science (rather than hired guns who could be lured away by money or pure trading quants, biased by the industry).
This hits on something important.
Humans are still important ... and companies that pursue exponential thinking and exponential technologies still have to champion integrity, culture, and purpose.
Better Math is a Competitive Advantage - So is More and Better Data
We stayed ahead of the pack by finding other approaches and shorter-term approaches to some extent … but the real thing was to gather a tremendous amount of data
– Jim Simons
On top of his intelligent hiring and novel approach to trading, Jim Simons recognized that an impressive data pipeline - and the technological infrastructure to digest and analyze that data was a moat to competitors.
It is hard to have an edge if you use the same process and the same data as your competitors.
As the flywheels of commerce spin faster, edges will emerge and decay faster. Finding a solution is only a step in an ongoing process.
Robust, reliable, and repeatable innovation at scale is a meaningful competitive advantage. That implies that idea factories will become as important (if not more so) than factories that produce material products. Likewise, innovation funnels will become more important than sales funnels.
The world changes at the speed of thought ... and as technology continues to improve ... even faster.
Overall, markets improved, which is unsurprising after the year we had in 2022. With Energy seeing such a massive boom last year, it recessed a little, but real estate and technology both saw strong gains.
Here is a more global look at return by asset class.
Japan saw significant growth, partly driven by China’s Real Estate issues.
Oil, commodities, and Chinese equities all lost, but that loss in oil and commodities could be driven by China’s woes.
In 2022, I said it was unlikely that the trends would continue into 2023, which wasn’t much of a prediction ...
On one level, I try not to think about or predict markets, because I know better. On the other hand, it is an election year, and my opinion matters as a proxy for what people like me think or feel in an election year. So, with that in mind, I predict that we see a brief market correction blamed on various geopolitical instabilities and partisan weaknesses, followed by a long and steady push higher as we approach the November elections.
What do you expect for 2024?
Do you think the continued investment into generative AI will impact these trends?
I've been an entrepreneur ever since I can remember. I sold tadpoles and frogs in elementary school, colored sand terrariums in middle school, stereos and sound systems in high school and college, and I started a database development company in business school.
But it wasn't until the early 90s that I made being an entrepreneur my career.
I quickly realized I needed peer groups and advisors to help take my businesses to the next level.
Verne Harnish was one of the first people I found. I joined the Young Entrepreneur's Organization (but so many of us have lost our "Y" that it's now just called the Entrepreneurs' Organization.) Among many entrepreneurial endeavors, Verne founded EO, Gazelles (a global executive education and coaching company), and Birthing of Giants (now called the Entrepreneurial Masters Program at MIT).
I was recently at a party with him in Arizona. While there, I asked him, "What's changed about entrepreneurship over the last 30 years?". Here is a short video with his response.
I was happy to hear that the answer was "Nothing". While the hot industries, technologies, and players have changed, many of the winning principles are timeless.
This is a helpful reminder that, even when innovating, we should focus on what doesn't change - rather than what does.
I shared an article titled “Who’s The Most Innovative?” a few weeks ago. That post alluded to the power of patents. Here, we'll discuss the importance and value of intellectual property in more detail.
Historically, profitable companies often built or sold some tangible product. Consequently, the Titans of industry were automobile manufacturers, oil producers, landowners, etc.
However, over the past 20 years, the Titans have changed dramatically. Now, the leaders are in tech, intellectual property, and other intangible assets.
As business becomes more digital, you will see an increasing shift towards creating and protecting intellectual property.
When most people hear that, they probably think about patents. So, let's start there.
A patent is property ... meaning it is an asset. Technically, it is a legal right granted by the government to an inventor, giving them the exclusive right to make, use, sell, and import an invention for a limited period (typically 20 years from the filing date) in exchange for public disclosure of the invention. To obtain a patent, an inventor must apply and prove that their invention is new, non-obvious, and useful. In addition, the application process involves disclosing the details of the invention so that others can learn from it.
Patents and trademarks are a great way to build a moat between you and your competitors ... but they’re more than that. They help you create partnerships and an ecosystem. Ecosystems & communities have proven to be the difference between legacy businesses and flash-in-the-pans. It’s the difference between having a product and having a platform.
Patents add dimensionality and revenue streams.
Take Tesla. They’re not just in the business of making cars or pushing the proliferation of electronic vehicles. They’re creating a suite of capabilities that are patentable and licensable. In the future, they can license the self-driving capability (because why would someone build it when they can license it?). They can license the ability to update a car’s operating system over the Internet (or by their Starlink Satellite offering). They can also grow into a clean energy business. I’m sure there are other strategic byproducts I’m missing – but you get the idea.
As they develop these tools and create intellectual property, these same inventions can also become a weighing and measuring tool to find out where people are interested, and identify where people are spending time, money, and energy. Here is a 60-second video that explains the concept.
Patents make the intangible, tangible.
They provide a concrete form to innovative concepts, enabling businesses to protect and capitalize on their intellectual property.
This mindset also creates the infrastructure for change and anticipating future needs, and ensures companies remain adaptable and positioned for long-term sustained growth.
Getting Started
When I help people understand how to move forward with AI, the first thing I ask them is “What’s your why?”. I ask that because as soon as you lose sight of why you built your business in the first place, you’re lost.
After you understand yourself and your business, you have to understand the industry-wide ecosystems, and where the low-hanging fruit are.
If you know the low-hanging fruit, your problem statement, your value proposition, and your “why” you’re in a great place to move forward.
You can use that understanding to stack some easy wins and create bandwidth for larger endeavors.
The effort-to-impact ratio is a great way to think of how you get started. As you begin thinking about staking ground, you don’t want to do the flashy and cost-intensive stuff first. You want to keep a low profile and start to create walls that will help you in the future.
You can use trade secrets, instead of patents, when you don't want to disclose what you do and how you do it. A trade secret is any non-public information that provides a business with a competitive edge and is subject to reasonable steps taken by the business to keep it secret. The protection of trade secrets does not require registration or disclosure to the public. The information remains protected as long as it is kept secret and continues to provide a competitive advantage.
You can also use your intellectual property as part of an attraction strategy to find potential partners or collaborators – creating what Dan Sullivan calls the “Freezone Frontier”.
Final Thoughts
In essence, patents are not just legal safeguards—they are strategic instruments that can shape the future trajectory of businesses. By embracing a holistic approach that combines legal protection, market intelligence, and strategic foresight, companies can harness the full potential of patents, unlocking new dimensions of success in an ever-evolving business landscape.
Warren Buffett's Lifetime Legacy
Warren Buffet is 93 - and he just released his 2023 annual letter. Berkshire Hathaway saw record profits of $97 billion last year. If you scroll to the bottom of this year's letter, you can see he's got an almost 20% CAGR since 1965 and an overall gain of 4,384,748% since 1964. That is hard to imagine. It's even harder to do.
I think part of it comes from how grounded in reality he is. He focused on what doesn't change instead of what does and on who his "actual" competition is.
Buffet is not looking for lottery tickets; he's stacking little wins. There's power in that. He also pointed out that as stock trading has become more accessible - it's made daily buying and selling easier, but also more erratic. That, unfortunately, benefits the "house" more than these individuals.
Warren Buffett is a legend for many reasons. Foremost among them might be that he's one of the few investors who clearly has an edge ... and has for a long time.
From 1976 to 2017, his Sharpe ratio (excess return relative to risk) was approximately double the overall market. He even did well in 2021. Berkshire Hathaway passed a trillion in assets last August (up from $700 billion in 2019) – and is still performing well.
While many people consider Buffett to be an investor, I also consider him to be an entrepreneur.
At the age of six, he started selling gum door to door. Obviously, selling gum wasn't the key to his path to riches. So, how did he make his first million? Here's a video that explains it.
via Coolnimation
He made his first million at age 30 (in 1960). For context, a million dollars in 1960 would be worth about $10.4 million today.
Buffet has always been honest about his bread-and-butter "trick" ... he buys quality companies at a discount and holds on to them.
It is fascinating to recognize how much the world has changed – and yet how much it has stayed the same.
For one last bonus, here's one of my favorite quotes from his 2011 letter.
Further, the Pragmatic Capitalist highlights this lesson:
Fear, uncertainty, and greed are all hallmarks of every year. There are undoubtedly ebbs and flows to everything, but we are clearly marching towards greener pastures.
A great lesson to learn from Buffet is that the game isn't about the next year or even three years ... it's about a lifetime and the generations that come after us.
Let's continue to make our tomorrows bigger and better than our today.
Onwards!
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