Mental Models That Change How You Think | Bill Gurley

**Bill Gurley** (0:00)
We do live in a world where information is really cut up, but we also live in a world where you can have access to more information than you ever could.

**Shane Parrish** (0:10)
What are the key mental models that you keep coming back to that sort of explain how the world works to you?

**Bill Gurley** (0:16)
I'm a big believer in systems thinking. There's a book called Thinking in Systems that I read.

**Shane Parrish** (0:21)
What does that mean to think in systems?

**Bill Gurley** (0:23)
I'm on the board of the Santa Fe Institute. The Santa Fe Institute studies complexity theory. I would describe complex systems as multivariable nonlinear systems. And multivariable nonlinear systems are very hard to predict. They can behave one way for a long time and then one variable can switch and they can behave another way. The weather, stock markets, all these things. There's consequences that can be first, second, third derivative. And you can't just think with a linear model or just think one variable because things can go way off the path. Being aware that if you make a change here, it could change something here, which could change something there, and it has to be the whole system.

**Shane Parrish** (1:05)
How does that help you when you're solving problems or thinking about stuff?

**Bill Gurley** (1:09)
I think it keeps you out of trouble because you can avoid consequences that you might find out later.
I was talking to a guy that worked at one of the large dating sites. He had this idea making the profile longer would lead to more engagement. Simple heuristic, and they tested it and it was true, and so they rolled it out. They found out many, many months later that it was negative for conversion, like when people knew more at that level.

**Shane Parrish** (1:42)
Oh, interesting.

**Bill Gurley** (1:43)
But you find that out way later. There's my point about a second derivative effect. And so you just got to be really conscious of the consequence and not get too deterministic about a single metric or a single variable, and know what's important and what's on top.

**Shane Parrish** (2:02)
What was the process you took to go about learning the craft of investing, and who are the mentors and peers that played a role in that?

**Bill Gurley** (2:09)
So because I started on Wall Street, you know, and not in venture directly, I got caught up in all the people you would expect around Wall Street and stocks. And so that starts with Peter Lynch, one up on Wall Street, best selling book, probably the first book I read about investing, A Random Walk Down Wall Street, Burton McKay, All the Buffett Letters, Ben Graham. Once you read Buffett, you have to read Ben Graham. And then Howard Marks, who's just incredible. And you were talking about the purpose of your podcast. Those people have spent their whole career assembling their thoughts and publishing them along the way.
So those were the ones that I read everything. I think it had a very strong bedrock of financial understanding.

**Shane Parrish** (3:03)
It's interesting because as you're saying that, I'm thinking like value investing, and then you went into non-value investing in a way, right? How did that translate? How did what Buffett said translate into seed investing and sort of venture investing?

**Bill Gurley** (3:17)
I think having a firm understanding of the bedrock is super valuable. And then when you recognize a need to innovate on top of it, it's just really good to have that foundation. I have an incredible peer in this guy, Mike Mobison. I don't know if you've heard of him, but he's a writer of financial books. We started at First Boston. He had probably been there a year or two ahead of me. So it's just super fortunate that I landed in the same place as him. And we've been lifelong friends since then.
He introduced me to a gentleman named Bill Miller, who ran Legg Mason and had this 15-year run of beating the S&P, one of the most famous investors of all time. And he claimed to be a value investor, and he was the largest shareholder of Amazon for a very long period of time. And what he would say, I'm getting back to your question, he would say that value just means that the asset is under price relative to what you think it will be worth in the future. I spent a lot of time talking with Bill about network effects, and if you believe in that, then Amazon might be able to grow at an unreasonable growth rate for a very long period of time, which he believed. And so that's how you get there. But yeah, I've often thought that many of the VCs in Silicon Valley would benefit from having a better understanding of finance. And one other answer to your question about how it becomes valuable. You know, I've always thought of Wall Street as the buyer of the product that venture capitalists create, because the eventual liquidity is either an M&A or an IPO, and now the price is being set by that group and that institution. So if I know what they value, even if we're starting at a very early place, you see people in a PowerPoint, you're still thinking about when this thing grows up, is it going to be something they're excited about?