Cynics Right, Optimists Rich

Shaan Puri discusses how different investment approaches work in different contexts, contrasting tech investing with traditional value investing.

Different investment philosophies for different domains

• Warren Buffett's approach to investing is based on predicting that the future will repeat the past
• Tech investing and VC investing do "100% the opposite" - betting on disruption and change
• Both approaches are valid, but they work in different domains:
  • Value investing/stock market: Looking at past performance is the right approach
  • Private equity: Traditional metrics and past performance matter
  • Tech investing/entrepreneurship: Looking at the past is "absolutely the wrong way to think about things"

The Cynics vs. Optimists Framework

• "In our business the cynics get to be right and the optimists get to be rich"
• Cynics will be right 8 out of 10 times
  • This might feel good intellectually
  • Being right most of the time doesn't necessarily lead to wealth in tech
• Optimists are the ones who get rich
  • They only need to be right on the big opportunities
  • Tech investing is a "hits-driven game" where you only need one big win

Why traditional market sizing fails for disruptive tech

• AT&T example: They made a $12 billion mistake by not investing in cell phones early
• Aaron Levy quote: "Sizing the market for a disruptor based on the incumbent's market is like sizing the car industry based on how many horses there were in 1910"
• Uber example: In San Francisco, Uber grew to 3x the size of the entire taxi market
  • Disruptive products don't just take market share - they expand the entire market

Risk tolerance in entrepreneurship vs. traditional business

• In entrepreneurship/tech investing, you can be wrong 8-9 times out of 10
• As long as you get one big win, you can be successful
• This is different from other domains:
  • School: Can't pass tests by getting most answers wrong
  • Traditional jobs: Can't succeed with mostly bad performance
  • Private equity: Warren Buffett's "rule number one: don't lose money"
  • VCs and entrepreneurs: Lose money all the time, but win big occasionally