During their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Simple Rules – Intelligent Behavior/Complex Rules – Dumb Behavior. Here’s an excerpt from the episode:
Tobias: JT, you want to give us your veggies?
Tobias: Welcome Bill back?
Jake: Let’s do it.
Bill: I had a lot of pork last night. So, I’m ready for these.
Jake: [laughs] Oh, I don’t think that’s how it works.
Bill: Well, it’s got to be.
Jake: All right. You guys know who Chuck Jones is of Looney Tunes fame?
Jake: I know Looney Tunes.
Jake: So, one of the OG creators, artists. He, one of his books, wrote about these nine simple but strict rules for Road Runner and the Coyote. Guys, I’m sure enough of you are familiar with the Road Runner and Coyote cartoons that– When I read you these rules, you’ll be like, “Oh, yeah, that seems to jive.”
All right. Rule number one, the Road Runner cannot harm the Coyote except by going beep, beep. Rule number two, no outside force can harm the Coyote. Only his own ineptitude or the failure of the Acme products. Number three, the Coyote could stop any time if he were not a fanatic. And then, it says, “Repeat, a fanatic is one who redoubles his effort when he has forgotten his aim.” And that was a quote by George Santayana, I think. Rule number four, no dialogue ever except beep, beep. Rule number five, the Road Runner must stay on the road. Otherwise, logically, he would not be called Road Runner. Rule number six, all action must be confined to the natural environment of the two characters, the Southwest American desert. Rule number seven, all materials, tools, weapons, or mechanical conveniences must be obtained from the Acme Corporation. Rule number eight, whenever possible, make gravity the Coyote’s greatest enemy. And rule number nine, the Coyote is always more humiliated than harmed by his failures.
Okay. So, here we have these nine rules. When put together, you can very easily see like, “Wow, that explains every single episode of Road Runner and Coyote.” They use these constraints. All right. Let’s– [crosstalk]
Bill: Why Acme? Do you know?
Jake: I don’t know. Is that just like generic–
Tobias: Generic [crosstalk] pinnacle, but there are Acme products around– [crosstalk]
Bill: Yeah, Buffett owns the bricks, right?
Jake: Yeah, I don’t know which came first, but I’m sure someone got sued.
Bill: Sorry. Continue. I like this. This is good.
Jake: All right. So, shift gears. This guy named Dee Hock, born 1929, passed away last year. 1968, he’s a vice president at a local bank in Seattle, kind of a nobody, effectively. And the bank was franchised by Bank of America to issue its credit card brand, which was called BankAmericard. Now, through a series of happy accidents, Hock helped invent a network of competing cards between, and he also became the CEO of a company that was owned by its member banks. Okay. That company changed its name from National Bank America in 1976, and it became, what you might have heard of today, this almost $500 billion market cap company called Visa. So, this is where the founding of Visa came from.
Hock built originally a very deliberately decentralized organization. And he coined this term called chaordic, which is a portmanteau of chaos and order together. What he preached was that simple rules allowed for emergent behavior. He has this great quote. It’s actually one of my all-time favorites. “Simple, clear, purpose and principles give rise to complex, intelligent behavior. Complex rules and regulations give rise to simple, stupid behavior.” He credited the worldwide success of Visa with its chaotic structure that he invented, basically. It was owned by its member banks, which both competed with each other for customers and also cooperated by honoring one another’s transactions across borders and currencies.
Similar to the Road Runner and Coyote, there was this set of principles that were very simple and followed exactly, but it allowed this emergent behavior that was actually very complex. I think, Toby, when I think about the things that you work on in the investment space, I think that you’re similarly trying to follow simple rules that allow-
Tobias: I’ve been taking that too.
Jake: -an emergent behavior that is hopefully complex, and nuanced, and more creative. I think Berkshire, I think, is similar. It’s got some ground rules that it follows, but otherwise, it’s very decentralized. I would say, Berkshire is a chaotic organization.
Tobias: Yeah, I love that. I think that was great. That’s very interesting. Yeah, I like that approach. Very simple rules. I think you get the chaos in holding. If you hold for long enough, you get the chaos.
Jake: [laughs] Yeah, you’re right.
Bill: I like the idea of the complex rules lead to simple– simple but what?
Jake: Stupid behavior.
Bill: Yeah. It seems to make sense to me.
Jake: Yeah. How many pages is the IRS tax code at this point?
Bill: Yeah, I don’t know. I’ve been thinking about it a lot in Florida, the insurance problem.
Jake: Oh, yeah.
Bill: Somebody told me their parents put a roof on a house that was designed to last 50 years, but it’s 20 years old. The insurance companies have this– This is a simple rule, but I think it’s because of complex rules where they’re like, “Look, if it’s older than 20 years, we’re just not underwriting it.” So now, these people have to either not have insurance or pull the roof off when it’s not even halfway done with its useful life, where now you’re almost penalizing the people that did the right thing for a rule, because other people– I don’t know, it’s one-
Jake: Yeah, you are causing stupid behavior.
Bill: -of these longer things where it’s like now the smart people have to not do smart things because they’re absorbing stupid people risk.
Tobias: There’s a couple of good comments here. One is from John DeGrummond. “Gravity is to the Coyote as interest rates are to stocks.”
Bill: Yeah, I don’t know. Gravity pulls the Coyote down and stocks- [crosstalk]
Jake: As long as you don’t look down, you’re good.
Tobias: As long as you don’t realize, you’re fine.
Bill: Yeah, I kind of like it, but I feel like it’s a little off. But thank you for adding value to the show. You’re doing more than I am.[laughter]
Tobias: There’s one from Thomas Murr as well. “That’s how artists work as well. Painters restrict themselves to certain rules, materials, etc., actually focuses the creativity.” I like that. I think that’s true. Constraints leading into creativity.
Tobias: Hopefully, not just to get around the constraints. That’s the problem.
Jake: Well, don’t they say that, basically, all financial innovation has been about figuring out ways to get around existing constraints, like laws and regulations?
Tobias: That’s crypto. That’s certainly not– [crosstalk]
Jake: No, I think it’s more generally true than that. Not just crypto.
Tobias: As a recent example, that’s true. Yeah, I agree with that. But crypto just seems to be a way to get around legacy system. I don’t think the crypto guys would disagree with that characterization either.
Jake: Have you guys read about this new thing that’s called, I think, buy now and then pay later?
Tobias: Is it new–? [crosstalk]
Jake: It’s revolutionizing-
Bill: I’ve heard about it.
Jake: -[crosstalk] finance.
Bill: I’ve heard about it. I think there may be credit risk in there, but I don’t know. People tell me there’s not.
Jake: [laughs] Well, there’s computers working on all that stuff. So, it’s fine.
Bill: Yeah, that’s right. We’ll see. A lot of these ideas, like Upstart, the stock hasn’t worked.
Jake: What do they do?
Bill: They’re like computers helping subprime lending would be–
Jake: Sorry, you were breaking up there.
Bill: Yeah. Last I checked, the underlying loan portfolio actually has done pretty well. But I need to get really deep.
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