Fitzgerald, Twain, and Schopenhauer.
In the competitive game of venture capital, it’s often the contrarians — those who uncover information or hidden talents hidden in plain sight, or go against the grain of trends and public sentiment, or who wind up on the right side of a low probability bet — that find the most success and come out on top.
Venture capitalist Josh Wolfe is one such contrarian. His firm Lux Capital primarily invests in the hard sciences — with over $1 billion in assets and a portfolio of companies ranging from autonomous vehicles to advanced and innovative manufacturing to biotechnology to sustainable nuclear waste disposal.
Lux Capital sits at the cutting edge of business and science. Given the wide range of industries they invest in, as well as the rapid rate of scientific and technological advancement, it’s crucial that Josh process information at an equally rapid rate.
By his own admission, Josh suffers from information anxiety. It’s not just about processing the abundance of information that everyone else is consuming, but it’s about processing information that others aren’t processing or seeing. Uncovering the white space, where others aren’t looking, is what gives Lux its competitive advantage.
In a recent episode of The Knowledge Project with Farnam Street’s Shane Parrish, listeners get an incredible insight into how Josh approaches his information gathering requirement and the framework he uses to process information.
Alternative Table Stakes
We start with table stakes. In poker and in business, what is the minimum requirement to play a hand or enter the market? With information, table stakes are what everyone else is reading. That includes the most popular non-fiction books, as well as news sources.
Josh claims to read it all — Financial Times, The New York Times, Wall Street Journal, Washington Post, and even USA Today (“because I need to know what X millions of Americans waking up in Marriotts are being influenced by”). However, he’s not just reading the front page and the business section, he’s also seeking out information from other, less read sections.
[I read] not just for what it says on page one, but for what the editor puts on C22 of the newspaper, that they decree to be less important, and I have a different weighting of the magnitude of its importance. That to me is the meta insight.
As media becomes increasingly more democratized, it means that editors hold less power in determining what is “important”. Who’s to say that what’s on C22 is less “important”, for our contrarian objectives, than what’s on A1?
Yet, the democratization of information creates a gap between widely and scarcely read. Everyone is reading the most read, or most upvoted, or most highly ranked news. What of the articles and results on the second page of Google or Reddit?
The white space Lux Capital seeks to find, and invest in, doesn’t come from the front page.
Framework Of Information Processing
While Josh’s general advice is to “read as much as possible” — which is certainly a requirement for finding the whitespace on the back pages of Google and Reddit — he also introduced listeners to his framework of information processing, which helps to define where we should direct our attention.
He calls it Fitzgerald, Twain, and Schopenhauer, in reference to insightful quotes from the two famed authors and psychologist, respectively.
Courtesy of F. Scott Fitzgerald:
The test of a first-rate intellect is the ability to retain two opposing ideas in your head at the same time and still retain the ability to function.
Front page news is Fitzgerald situations — where two experts are making equally valid, yet opposite arguments. Gold is just a shiny metal versus gold is the ultimate store of value. China is a fraud versus China is the new global powerhouse. What does it mean that there’s no consensus? According to Josh,
The only certainty is in the uncertainty of the volatility between these two sides that are playing out over time.
With an acknowledgment of the volatility of a situation, caused by lack of consensus, how may that inform our decisions? As a contrarian, the decision may not be to pick a side but to take advantage of the volatility.
Courtesy of Mark Twain:
It ain’t what you don’t know that kills you, it’s what you know for sure that just ain’t so.
In 2008, everyone thought housing prices could only go up. In 2017, it was cryptocurrency. What do people know for sure and where might they be wrong?
Perhaps a closely related question is, what is everyone else reading and what might they be missing? How may contrarian viewpoints (as scarce as they may be in this scenario)aid our overall knowledge of the situation at hand?
Josh argues that the physics of information is entropy — everything gradually declines into disorder. When everyone believes some trend is going to continue, there’s bound to be “informational surprise” in the opposite direction.
From a decision-making perspective, a bet against the consensus may be low probability, but getting it right can have a huge upside.
Courtesy of Arthur Schopenhauer:
Talent can hit a target nobody else can hit. Genius can hit a target that nobody else can see.
Lux Capital’s mantra is “the best way to predict the future is to invent it”. In investment decisions, Josh and company seek to find and back scientists and inventors that envision — and seek to create — a future that nobody else can see.
Again, these scenarios may be low probability, but the sum of Josh’s information framework may give him a higher probability of success on low probability bets than the average, consensus-seeking individual.
Josh describes this sum as a “mosaic of finding different sources, putting them together, seeing trends and patterns”. To best inform Lux’s investment decisions, it’s a continual process of learning — reading, distilling information, speaking to experts, reforming hypothesis, rereading, redistilling information, respeaking to experts.
Particularly when seeking contrarian views, and from contrarian sources, it’s vital to weigh and reweigh the contrarian and expert viewpoints in the decision algorithm, so to speak, in order to create the highest low probability decision.
What’s The Goal Of Processing Information Like A Contrarian?
Josh believes in randomness and optionality. Josh says,
If you’re humbled to the idea that luck matters so much, then it opens you up to the possibility that there’s randomness and optionality, and you should try to maximize that as cheaply as possible.
It raises the question — how do you maximize randomness and optionality, and create your own luck?
I recently wrote about saying yes more often and creating serendipity. Processing information like a contrarian, and using Josh’s Fitzgerald, Twain, and Schopenhauer framework is another way of saying yes — of opening yourself up to the opportunity to maximize randomness and optionality.
There may be nothing worth reading on page C22. You don’t know until you turn there. You may miss the target that nobody else can see. You won’t know until you shoot at it.
It’s important to acknowledge that the goal of Josh, and other venture capitalists, is to make investment decisions — decisions that are inherently contrarian and bets against the status quo. It serves them well to process information like a contrarian.
Additionally, VC firms have a portfolio of companies. Their risk is inherently mitigated, allowing them to make low probability, high upside bets. The average person doesn’t have that luxury in their decisions and investments.
And being a contrarian is not easy — in fact, it compels us to resist some of our greatest psychological urges. When faced with uncertainty and an abundance of information, social proof — in which we view a behavior as correct in a given situation to the degree that we see others performing it — is a great heuristic to guide our decision making. Challenging and betting against the consensus is to resist the biological and psychological shortcuts that allow us to understand the world.
However, if we wish to disrupt, to innovate, to create change, or to reside on the cutting edge of what is currently possible, it’s required that we learn and act like a contrarian. With Josh’s Fitzgerald, Twain, and Schopenhauer framework, we’ve got an incredible model to help us do so.