Ask Us Anything: When did the guys take a risk that DIDN'T pay off? + A 20th Team for the AFL!?

0:00I'm Adam Schwab. I'm Adir Shifman. And this is The Contrarians with Adam and Adir.

0:07And we are back. Episode 127, Ask Us Anything. Michael, over to you. Yeah, thanks again, everyone, for all your questions each week and for making this show possible. I noticed, Adir, do you notice on Mike's, we've got a screen here, listeners, and there's a little thing that says Chief Question Asker. I've heard Mike's name there, which is very nice. Well, as I was waiting for Adir to get online with his copious tech issues. You've been waiting for that. I used for that. I was tinkering around with the platform we used to record and I noticed I can put a title in my description, so I decided to put Chief Question Asker.

0:48I've got a bigger issue with that, which is, all right, Chief Question Asker, that's fine. You've capitalised the first letter of every word. That's fine. but why is there a full stop after Asuka? What would you shake here on the pod? It's an absolute pedant. Like that's ridiculous. Like do you understand how punctuation works? Yeah, remove the full stop. It's ridiculous. This is ridiculous. He's gone. It's gone. It's gone. It's gone. It's dynamically gone. It's gone. Get rid of your questions. Okay, guys. Question one for this weekend comes in from Sam on LinkedIn in. And he asks, can you share a moment where you took a big risk professionally and it didn't pay off?

1:32How did you feel and how did you bounce back? What if, no, that's my answer. Next question. I'm joking. I think it's a good question because we spend so much time talking about successes, but I think, you know, Adir, I know you said to me in the past, like failures are as important as every success. So, it'd be interesting to hear your thoughts. I'm trying to think about, because the thing is this, I've got a long list of answers on the yes side of this ledger. Like I could talk about lots of different things, but there are some things I don't want to talk about. For example, there are things that I'm involved in where I took money investors along with me into a startup and then that startup ended up shutting down.

2:14And like I took some personal risks to bring those investors with me, but I don't really want to talk about that because I don't want to throw those people under the bus, right, because they did their best. And I obviously, like, had a court case that didn't go fantastically well for me, but, like, I feel like if I speak about that, then that's going to be a recipe for disaster because, you know, nobody wants truth in the judiciary. So, like, that's not going to go well. And so I'm trying to think about because the truth is there's a long list of things. Maybe I'm going to talk about this in a broader sense, not because I'm trying to avoid specific examples, but because I think I understand the essence of the question And then, Adam, you can talk about a specific example if you've got something that is – like I don't mind the humiliation factor.

2:55I just don't want to humiliate other people, if you know what I'm saying. And so I think the thing is this. How do I – I'll answer the second part of the question, which I think is the more interesting part of the question. How do you respond when you take a risk and it's a significant risk? It might be financial. It might be reputational. It might be time. It might be all of those. And it goes badly. It goes really badly. And I think the answer for me that I've come to, and so one of those things is how do you deal with it? And the other one is how does it affect your subsequent risk taking and should it affect your subsequent risk taking?

3:31And so I think the way that I have dealt with it now is reminding myself of these few tenets, I would say. The first is the story I always tell you about the man who lost his horse and that you never know if something is a good or bad omen except in retrospect. And lots of things where I've taken risk and they've gone badly. I emphasize there's been lots of examples of that. a lot of them have opened doors to me that wouldn't otherwise have been opened subsequently there's a difference between that and saying i made the most of a bad situation like i always try and do that but some things are if these bad things wouldn't have happened the door would never have been opened so that's tenet one tenet two for me is you can't judge decision making based on new information that wasn't available at the time of making the decision and taking the risk.

4:22That is the classic mistake that we all make with our cognitive biases. Oh, that went badly. I should never have done that. Well, that's actually probably not true. Maybe you shouldn't have done it because it wasn't a good decision at the time with the available information. But if it was, that doesn't change just because it went badly. And the third thing I say to myself is that the price of success is being willing to fail because you need to take risks if you're going to succeed. It is impossible to succeed without taking risks. And some significant percentage of endeavors, probably more than half in most cases, where you take that risk, it's going to end badly.

5:01It's hard to succeed. It's very hard. Lots of people want to do it. The odds are stacked against you. And so I just try to remind myself of those three things. Of those, the middle one is by far the hardest for me, which is not trying to use information I gained at the end of a process to say, oh God, why did I do that? Look how badly it turned out. I didn't know it was going to turn out badly. And if you take a risk, I was finished with saying this. If you take a risk, I'm going to simplify this into real basic maths. If you take a risk and the risk is you can double your money and there's a 51 % chance that you can double your money.

5:40And I'm taking everything else out, like your time and reputation, purely on a probabilistic basis. You should always take that bet because the bet is better than 50-50 that you'll get a doubling of your money. But the truth is that in 49 % of cases, that is going to fail. That's a lot of failure, right? And so, I think you just have to remind yourself, if you want to succeed, it's going to require taking risks. You should be very smart about how you take those risks, be very calculated, build decision trees, all sorts of tactics and techniques that I've learned. But ultimately, in the end, don't second guess your decision making based on an adverse outcome that represents new information that couldn't have been available at the time of making the decision.

6:19And I largely try to not let failures dissuade me from taking subsequent risks. That's a great summary. It's hard to give specific, I think the question Asker was asking about specific instances. That's really hard. I think, I think your point was right. Like, if you get 100 % of stuff you do in business right, then the business isn't very good because then you're never trying anything, you're never taking risk. Like you look at, and Jeff Bezos was a classic case of this, he would just try lots and lots of different stuff and heaps of it wouldn't work. And that was just part of the business. You're not going to get an AWS without an Amazon Fire.

6:51They're inextricably linked. To get the incredible results, you need to have failure. Ultimately, I probably almost opine we don't fail enough. I think where our probably hit rate is 70%, 80%, whatever it is, it probably should be more like 50. The only reason you maybe would hire is whenever you fail, there is a resource cost. So you want to be trying to allocating resources to where they have a reasonable chance of exceeding. But if you're getting it right 100 % of the time and everything you do does turn to gold, you talked about that Midas is actually a cautionary tale, not a nice story. You don't want to be a Midas in business as you don't want to be a Midas in Greek historical tale.

7:27They both end badly. You need to be taking risks. David Schaefer from Kogan says it beautifully when I interviewed him for my old pod. He said, Kogan's a business of asymmetric risks. We'll take a lot of chances. We know a lot don't pay off. then eventually we'll get a Kogan mobile, we'll get a Kogan first, we'll get the stuff that really works well, and then stuff won't work. So I think the notion that you can not take really big risks and succeed is just a ridiculous concept, and you've got to get lots of stuff wrong. And the best founders, the best CEOs, those who can take educated risks, know you're going to get some wrong and learn from it.

7:59That's a good comment, asymmetric risk, because generally, I was listening to a podcast recently, and the guy that runs Circle, you know, the stable coin, he was talking about that business and it got to a point where I thought, I can't really be as dumb as I feel right now not understanding a word that he's saying, which automatically makes me suspicious that it's not like some stuff is not right. But I think like asymmetric risk, it can sound a bit sophisticated, but actually it's very smart. It's basically saying if there's a chance to make 10 times your money and there's a one in three chance of that occurring, that's a good asymmetric risk, especially if it's a hundred times.

8:32Let's say you can make a hundred times your money at a one in three chance. Well, that is a good risk. And so how should you take that risk? Well, one is you should always make sure with every risk you take that you can live to fight another day if it fails. So for example, don't sue anyone unless you've got the money to pay legal fees. Don't bet your house and everything on a business idea where if it goes wrong, you have no house and no money and you can't recover and maybe your marriage ends or whatever it might be. And so I think, number one, you have to be able to recover from loss. And the best way I think about it is probably in Jeff Bezos' parlance, he uses one-way doors or two-way doors.

9:09And just a fairly, obviously, two-way door is something you can do and just turn back from it. That could be launching a small product on the site. We might launch dynamic packaging with flights, for example, for luxury escapes. And if it doesn't work, we just turn around and go back to not having dynamic packaging with flights. It's no big deal. Nobody cares. Nothing's lost. Versus a one-way door, which is selling your business or buying a massive business or taking out a lot of debt or stuff that if it goes wrong, you can't actually turn away. So two-way doors group, That one-way door is not so good.

9:36Not the same, don't ever do them, but the bar is much higher. Well, I would, yeah, that's a dangerous game. And the other thing I would say about taking this risk of 100x your money for a one in three chance is don't do it once. Because like if you do it once, you're probably going to fail. There's a two-thirds chance you fail. If you're going to take that kind of asymmetric risk and you're going to make sure that you can recover from failure, then you can't do it once. You can't be dissuaded because it means if you do it, I mean, notionally, if you do it three times, you're going to make 100x.

10:03but it might not be. You might have to do it six times because, you know, dice land in strange ways. But like you just have to be committed to saying I'm going to take smart calculated risks where I'm not overexposing myself and there's an asymmetric return if it succeeds. And I think that is the key to taking risk in life, in all parts of life. And people, I think eventually over time, the best risk takers, of which I am not one, like there are much better risk takers than me, like the best risk takers understand that idea of non-lethal asymmetric risk better so well, that is how they're making tons of money basically trading or doing whatever else.

10:40And if you look at, we talked about founders, but if you look at investors, so Jim Simons, Tim Simons and Warren Buffett, probably two of the greatest, maybe not the two, but two of the greatest investors. James Simons was much more of a quant trader. And if you look at Renaissance, so Renaissance Technologies has had a much better record financially than Berkshire and James Hollins died, I think, last year. And their returns were well in the 30s, I think, over a long period from the main fund. And their winning record was like 50.2. They just won more than they lost, but when they're winning, they put more into it.

11:13And that was a huge scale behind that slight differential. So they get almost as much wrong as right, and they're the best investors ever. And Buffett, the same. Buffett makes lots of mistakes like Buffett invests in USA. There's plenty of time, but the difference between Buffett and other people is Buffett, he's almost proud of his mistakes. He'll trumpet the mistakes in his annual, and he's also got such great credibility in bank cash that you can. It's really hard when you're a new founder or a new CEO working with somebody, but the sign of a great, and this is probably one of the benefits of a founder, is that they have the kind of runway or bandwidth to make a mistake and not be sacked for it.

11:46So that's why I think a lot of people love investing in founders. As long as they learn from it. As Mike said at the beginning, the beauty of things failing is the chance to really do a post-mortem and understand where things went wrong. Did they go wrong because I made a wrong assumption with the information I had? That's the worst. Did it go wrong because of new information that I didn't know at the time? Or did it go wrong because some execution failed, for example, or I was just unlucky? And so I think that's what you need to learn from those failures, basically. And a classic case is Mike putting chief question ask with a full stop.

12:22Like it was a two-way door. He just removed the full stop. And suddenly he's got chief question ask with perfect punctuation. So perfect. Well, the main problem with that particular risk that he took is I just can't see what the – there's very limited upside. I can't really see what the upside was of that whole chief question ask humiliation opportunity for him. Like, but it's all downside. You know, chief question asker, over to you. Now question number third. Okay. Hey, question from a friend of the show, J.K. Smith. In light of a recent guilty plea by a former fund manager to insider trading charges and in response to widespread concerns on social media re-leaking of confidential information, what concrete steps do publicly listed companies take to prevent the unauthorized disclosure of insider information?

13:10Which type of information poses greater challenges to manage and safeguard info relating to financial results, deal-making, or other? Such a tricky question. The first thing I'd say is this. Whenever you're involved in a business, like on the board or running the business, by definition, you're going to know more about that business than anybody who's outside the business. But we don't call that insider trading. And we don't call it insider trading for two reasons. One is because if we did, the whole system would fall to pieces. And the other reason is because the way that the rules work with respect to the ASX is that you have to disclose information that if it was known by the public, it would have a material impact on the share price, which I think is 5 % is the way people view it, or 10 % or whatever it might be.

13:58I think most people would take it as 10 % now. And so insider information is being in possession of information that's not in the public domain that likely would impact the share price if it was known by the public. And so then you say, what kind of information might that be? Definitely financial results that are not consistent with what the market expects that would for sure fall into that category. Information about transactions that are happening. Also, even information about sales like early on where maybe the sales are going to beat by miles or miss by miles. It's a pretty like loose definition, but I think quite easy to stay on the right side of.

14:37And so, there is no doubt that all public companies are susceptible to information leaking out. And the main reason is because people usually know this information who are not in the company. Like it's one thing to control people inside the business from leaking. And some of the steps that public companies take is they have trading blackouts for insiders around times where it is probable or maybe it could be perceived that they know information that's not available to the public. So before the release of results, for example, would be a time when there would be a blackout for public companies where people can't trade.

15:13The biggest, trickiest part is this. If you're releasing results, if you're doing a deal, if there are sales in the market, there are lots of people that are involved or know about it that are not directly involved with a business and the ability to control them is very limited. And so you can sign non-disclosure agreements and make all sorts of threats and fire organizations if they leak stuff out. But I can tell you that it would be, we can even talk about the NASDAQ rather than the ASX. Like things are leaky and my guess is on NASDAQ, most of the insider trading that occurs doesn't get picked up.

15:48And so I think that if you believe that insider trading is bad, I do. Some people don't, by the way. Some people think the market will work it out. The reason I don't like insider trading is because the counterparty that is selling or buying against the flow of known information is going to end up screwed. And so overall, yes, it will even itself out. But I think that you need more protection mechanisms on public markets to engender trust. But there are people that disagree with the idea of insider trading as a crime. But I think if you're going to have it, yeah, the only possible way of it working, because the incentives for insider trading are so high because it's such easy money.

16:25The only way to stop it is to have very large penalties and public hangings of people that are found guilty of insider trading to try to deter people from doing it. Because I think it's very hard to stop it completely on the inside of a company. Yeah. I think the issue I have with insider trading, and you touched on it, is there's a lot of people who obviously do it and don't get prosecuted. And there's people I don't know about. And there's people like, and I don't want to necessarily say he's insider trading specifically, but when the CEO of Setire sells shares, when he knows there's an audit issue happening that other people didn't know, I'm not saying whether that was a not insider trading, it might not have been, but there was clearly information asymmetry there that ASIC did nothing about.

17:06So there's all this gray area as well where there's possible insider information. Maybe there's not. Like, is it close enough to... It's such a gray area that I'm not sure it's particularly well handled generally. Asic only ever seemed to beat up on sort of small guys. Like if you're a little, if you're a big guy, like a big guy or girl, a big CEO, a big director, a rich person who's in such a way, they never seem to ever get done. It's just the little accountant or the junior person. Well, your better example, why don't you talk about Qantas? That's your real example of this happening, of Alan Joyce's sell down.

17:39Yep. And that was a great example when Alan Joyce was selling shares just before, I think it was while the ACCC investigation was happening and he got permission from Goida, the chairman, that apparently cleansed it. It was bizarre and then nobody touched him there. It was not a problem, nothing to see here. So my question with the insider training is, you say you believe in it, you think it should be law. I don't disagree, but I think it's so badly enforced now and no sort of rich people ever get prosecuted. It's only sort of middle, low-ranking people. Is it really properly prosecuted? Well, I'll tell you what loopholes look like for these things.

18:12So we'll use the ACCC as an example, but I just want to emphasize, I don't know the intricacies of what happened with Qantas. So I'm going to use something that's kind of fictitious, but like loosely based on what happened there. So let's say you're a large company and the ACCC sends you a letter that says, we might be interested in, we're interested in understanding more about this stuff. Now, no one wants to get that letter from the ACCC. Some of those letters look more likely to lead to action than other of those letters. But at that stage of the moment, there is no ACCC action and no inevitability of action.

18:50So you mean ASIC, right? I mean the ACCC or ASIC. It's irrelevant. A regulator. I don't think ACCC will ever prosecute inside training. That's an ASIC corporation. I'm not saying prosecuting inside training. I'm saying you've got a company and they receive a request for more information from a regulator about some concerns they have about a potential breach. And so the reason I use the ACCC is maybe there's a breach of consumer protection law or something along those lines. So the ACCC sends a letter to a company. And at the moment they send that letter, actually there's no investigation and there's not even an inevitability of an investigation.

19:24And usually it won't proceed to an investigation. And so technically, there's not anything to disclose under continuous disclosure obligations, arguably at that moment. And therefore, if an insider sold shares at that moment, there would be an argument to make that says, well, we didn't have to disclose because nothing's actually happening. All we got was a letter from, in my example, the ACCC. And my question would be, how would your biggest shareholders feel if they knew that you received this letter from the ACCC? Would they be tempted to sell or affect the share price? And I think that that question is the essence of the insider trading question, but it's not really the question that is asked in that kind of situation.

20:05And so I think that ASIC is serious about insider trading, but I think it is very amorphous and gray. They don't want to be too lenient on insider trading, but also they don't want to be too rigid on insider trading because it's very gray. And the consequence is they generally pick a few people to publicly hang in order to dissuade people from engaging in that kind of conduct. But as a company, like every public company I've ever been involved in, spoken to, chairs, do everything possible to try and stop insider trading because there's no upside for the company in people engaging in insider trading of the stock.

20:44The company is really one of the innocent victims. It's a disaster for a company if that happens. That's right. Lasting company wants us now. Great question. We'll go to a quick break. Be back with our final question just in a moment.

21:00And we're back. Chief Question Asker, off to you. Wrapping up this week's episode, and as always, guys, thecontrarianspod.com is a good way to send in questions otherwise linked in any of our direct messages. We will try to get to as many as possible. The third question today comes in from Joel Benjamin over on LinkedIn. Joel asks, there is a plan for a new Tasmanian team to join the AFL in the coming years, which would take the number of clubs to an uneven 19. From an economic perspective, where do you think the 20th team should be based? I need you to have first crack. That's a great question.

21:42I'm going to say something and then you're going to have first crack. and then I'm going to have second crack. But I want to say this because we don't often talk about sport on the podcast, which is kind of a bit weird in some ways. But I just want to say this one thing that it doesn't directly relate to this, but I wanted to mention it to you. And I haven't told you, so I might as well tell you on the podcast. I don't know if you saw – you probably saw this, but there was some match on the weekend where Hawthorne lost to Brisbane, I think. Yep, that's right, last game. Okay. And so obviously I was not super across the game, But I saw that in the dying minutes of that, there was a handball and it was ruled to be a deliberate out of bounds.

22:18And it was like, I thought it probably was, but it was questionable whether it was. And then Hawthorne ended up losing the momentum change direction a bit. And so I saw an interview with Sam Mitchell, the coach of Hawthorne, formerly great player. They said to him, what do you think about that decision at the end of the game that cost you like, you know, a goal essentially and maybe cost you the match? And I thought, if you want an example, because we live in an era where the people that are in charge of various high offices maybe are not the greatest role models at the moment, you could say. And I thought, if you want a role model, Sam Mitchell's response to this question is the role model question that I think is just the classiest answer.

23:00His answer was basically, I never comment about these types of matters. And whatever happened, the umpires made fewer mistakes than we did. So I just want to concentrate on the things that we can control ourselves. I thought that is the classiest response to a question about umpires and the impact on sport that I've ever heard. So that's my intro to a topic about the AFL, but you can answer the 20th question point since that was totally unrelated to the question. He is an unbelievable coach, Sam Mitchell. Look at the prototype. Young, pugnacious, recent ex-play, just fits every every box of what the great coaches have been over the last 30 years.

23:36He ticks. I think Chris Scott, Damien Hardwick, Alison Clarkson, who's a bit more pugnacious, but obviously coach Sam Mitchell. It's a very clear prototype and Hawthorne just nailed it there. My club St. Kilda got it completely wrong with Ross Lyons. I'll say it's easy, but there's a well-trodden formula and Hawthorne got it right. And that's a great example of why Sam Mitchell's a great coach. Where do you want your 20th club from? To get back to the question, I know that's annoying for us, but we have to - So Andrew Dmitriou, who I think was probably one of the worst administrators in the world and was effectively laughed out of the Crown investigation after he basically said he worked for James Packer rather than Crown shareholders.