By Elliot Trexler. Originally published at ValueWalk.
Interview with Jacob L. Taylor, author of The Rebel Allocator.
“Charlie Munger called me after reading a copy of this book and was adamant I get it made into a movie,” Jacob L. Taylor is the author of The Rebel Allocator and CEO of Farnam Street Investments.
Who among us claims to be “A conventional investor with an inability to think differently?” Yet, the vast majority of investment results are undifferentiated, and these are the result of undifferentiated thinking. So, do you dare to be the Rebel Allocator who generates differentiated results?
Q4 hedge fund letters, conference, scoops etc
In an entertaining and educational fashion, The Rebel Allocator uses a fictional plot to teach us of the important principles of both life and capital allocation. Whether you’re an investor or capital allocator, I highly recommend reading The Rebel Allocator, there are lessons throughout the book we can all learn from.
How would you describe the book, is it fictional, educational, business? And why did you pick this style?
The style of the book is unique. It’s a fictional story but has very real business lessons to be learned. The book reads like the diary of a recent college graduate who’s struggling to find his way in the world. There are sections of internal dialogue that are sometimes funny and sometimes heavy. By the end of the book, I hope you were entertained and that I surreptitiously taught you a few important business lessons without causing too much headache.
What prompted you to write the book?
Being a professional investor, I’ve spent a lot of time studying what makes for a good business. I discovered that outstanding capital allocation (like, what a business spends its money on, from paperclips to share buybacks) is of paramount importance. Yet I continuously see capital being misallocated by very smart people which cost shareholders, employees, and management dearly. Really, it hurts all of us by wasting natural resources. Many have observed the problem, including Warren Buffett, but no one seemed to be working particularly hard to fix it. I thought if I could teach some of the core principles, I might make my little dent in the universe.
How much of the book is true? For example, did you really meet Warren Buffett and someone named Mr. X?
The story is fiction, but I did borrow elements from my own experiences to add color. I think most good writers do that to find their authenticity. I had the incredible fortune of winning a lottery to travel to Omaha to meet Warren Buffett as a first year MBA student. The Rebel Allocator never would have been written without that stroke of luck.
How many years have gone by since your “education” with Mr. X? And have your thoughts on anything you learned changed?
My fateful trip to Omaha was in 2007. I’ve been back for the Berkshire Shareholders’ Meeting every year since. I don’t pretend to have everything figured out. I’m still learning new things about capital allocation all the time, even after years of deep-dive study. I hope I never get it all figured out.
Are these lessons timeless? Or are they applicable to a modern society and business?
One of my goals was to write something I’d still be proud of in twenty years. To do that, I made every attempt to guard the principles from obsolescence. The specific applications might change, but the bedrock takeaways shouldn’t. The lessons are especially applicable to a modern society. Good capital allocators are the grease in the capitalist system. It’s easy to take for granted the mundane miracles capitalism gives us every day.
What’s the biggest take-away for capital allocators?
Just like other investors, you have to be careful of herd behavior. If you want to be an excellent capital allocator, you have to be willing to ignore the crowd and think for yourself. As Mr. Buffett said of investing, “It’s simple, but it isn’t easy.” There’s no complex math required in any of this—every CEO is plenty smart enough. But it requires leaning on the courage of your convictions. If you can do that, it’s not difficult to be wildly successful. I’d argue you have a moral duty to be the best capital allocator you can be. Society is trusting you with a critical function: deciding what projects get funded to meet our wants and needs.
How do you incorporate the lessons in the book into your investment analysis?
I spend a lot of time evaluating management’s capital allocation decisions. I ask myself: What would I do if I were in their shoes? After finding a management team who is trustworthy and has a good track record, I can sleep like a baby knowing they’re doing the right things to allocate capital within their business. This compounds intrinsic value like little else, and over a long enough timeline, price will reflect that value and I’ll do well as an investor.
What do you hope readers get from the book?
I hope this book inspires a generation of capital allocators to trust themselves to make their own choices and not just copy their peers. That diversity of thought would go a long way toward creating a higher functioning capitalist system. Our system is more robust when it’s populated with independent thinkers. Rebels even. The natural perturbations of capitalism can be smoothed when we avoid the confluences of entrepreneurial errors from lemming-like groupthink.
Will there be a sequel?
Maybe! But not any time soon. Charlie Munger called me after reading a copy of this book and was adamant I get it made into a movie. That’s a long way off, but who am I to argue with Charlie?
When will the book be available?
The book is currently available on Amazon in both physical and digital formats. An audio version is in the works, and thankfully it’ll to be read by someone with a much better-sounding voice than me.
Biography
Jacob L. Taylor is the CEO of Farnam Street Investments, the host of the author interview series Five Good Questions, creator of the world’s first hikecast, and was an adjunct professor at UC Davis’s Graduate School of Management. The Rebel Allocator is Jake’s first literary effort. He lives in Folsom, California with his wife and two boys where he enjoys being the second best-selling author in the house.
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