1%

Of the places I’ve been to, there’s one entire city that I think would singularly defy explanation to an ancient visitor.  It isn’t one based on manufacturing, like Shenzhen, or trade, like Dubai,  or a port, like Antwerp, or a capital seat of power, like Washington D.C.  It’s not even a city based on mirages, like Los Angeles, or tourism, like Orlando.  Because it wouldn’t be that hard to explain these places.

Buildings are a concentration of energy and resources, and a reflection of our values and culture.  An ancient Egyptian looking up at the skyline, would see the Pyramid of Khufu, the deity-king, and go about his business, knowing that in his world, the link between the afterlife and this life was sound.  An ancient European, looking at the nearest castle or church, would have similarly seen the relationship between herself, the powers that be, and the powers that govern the ever after.

Even in our modern world, you can pretty much look at any building and identify its reason for being.  Office towers – a clustering of service-industry companies.  Malls – our consumerist economy at work, and/or modern town centers.  Residential towers – lack of space in a city where people want to live.

But.  There’s an island in the middle of the South China Sea with some of the largest buildings in the world.  Likely, 99% of the population of the world will never go there, nor have a reason to.  And I’m not so sure an ancient visitor would have any idea what they were for, nor understand how they were built.  They aren’t residences, marketplaces, nor granaries, offices buildings, warehouses, or anything that could have existed a few hundred years ago.

Because these buildings?  They’re a type of factory built on a single mathematical probability, and that is the probability that over hundreds of thousands of games played, it will lead to a convergence towards a single number – 1%.  It is an island built on our modern world’s triumph of risk management.

I’m talking about Macau.

Now there are a lot of different directions we can go here, but I want to start with the sheer size of these buildings.

Ancient descriptions of splendor always interest me.  For example, Marco Polo, arriving at the court of Kublai Khan, marveled at the “greatest palace that ever was”, with gilded walls and a main hall so large that it could seat 6,000 dinner guests.  The Khan’s palace, like many other palaces, were built to awe, stupefy, and impress power upon their subjects and vassals.

Now of course, this kind of breathless praise is subjective, and dependent on the eye of the observer.  What if we applied this kind of writing to modern buildings?  How’s this one:

A massive pleasure ground filled with all sorts of marvels and luxuries, boasting 30 restaurants of cuisines from all around the world, accessible to guests by means of a gondola crossing a lake, nearly 6 football fields in size, activated with fountains that explode into the sky in a synchronized dance.  At the end of the voyage, guests are greeted by attendants who show them into a staggering hall accommodating nearly 10,000 pleasure-seekers at once.  Above them, more than 1,000 stately rooms await, bedecked in lavish gold leaf and precious metal furnishings.  Plush carpeting create a serene environment for these guests of honor, who arrive at their rooms passing carousels and ferris wheels arranged throughout the lobby, made entirely of floral arrangements.  Artwork carefully selected from around the world and across the span of history, with priceless Qing Dynasty treasures and more than $120 million worth of contemporary paintings alike, greet these visitors.  Costing a staggering sum of more than $4 billion dollars, constructed over a 2-year period with a city’s worth of laborers, this pleasure palace is…the Wynn Palace in Macau.

Located in Cotai, the Wynn Palace is one of twelve casino resorts built with a similar level of stupefying investment.  At 400,000 square meters (4.5 million square feet), its gross area is larger than most buildings in North America, including the Mall of America (the largest mall in America) and the One World Trade Center (the tallest building on the entire continent), and larger than Disneyland or Disney World Magic Kingdom, including parking lots.  It’s larger than airports.

To build the Palace, Wynn invested more money than went into the One World Trade Center, a building whose reason for being, in Manhattan, is more or less crystal clear.

The Wynn’s neighbor, the Venetian Macau, ranks among the top 5 largest buildings in the world.  At over 1,000,000 square meters (250 acres), the single casino resort is more or less the size of Hudson Yards’ East Yard (home of 4 skyscrapers each over 900 feet tall, a retail mall, hotel, 2 million square feet of residential properties).

And on the Cotai Strip alone, there are ten more like them!

Returning to our ancient visitor.  No doubt he would be astounded to step foot inside one of these palaces, although he would have no idea what people were doing inside of them.  He probably would have been even more astounded by the fact that unlike ancient tombs, palaces, temples, or castles, stepping inside one of these modern palaces is completely free of charge.

Now imagine you’re the ancient visitor, entering a casino in Macau.  The casino floor sprawls out for, literally, acres.  There are people with their eyes glazed over the slot machines, seemingly engaged in some sort of modern-day temple offering.  They insert tokens of monetary value into a metallic, neon offering jar.  Capriciously, it offers some back.  Other times it swallows the tokens, as if appeased.

If you walk a little further, out to the open expanse of the tables, then you might see something that you can relate to.  No machines here.  Just a simple exchange between two humans, and a crowd of people surrounding them.  The two humans seem engaged in some sort of rite.  One of them wildly gesticulating, engaged in all sorts of rituals of extreme concentration: blowing on some pieces of paper, mumbling what seem to be incantations, shouting words as they flip them over, peeking slyly under them, slamming the side of a hand down and pretending to ‘chop’ the paper in half.

This is baccarat in Macau.  

This is a game where the house edge is slight, and the actual decision-making made by players is almost nonexistent.  Add to that the influence of native Chinese superstitions, and you get a game where paradox of the illusion of control looms large.

In baccarat, or punto cano, one plays the game by betting on one of three outcomes: whether the “banker”, usually the dealer, or the “player”, usually another player, will  win.  Or that they will tie.  The two sides are dealt cards, and these two players then flip them, nothing else.  Then they are issued new cards according to strict rules.  Literally, after you bet on one of these three outcomes you have nothing else to decide.  

And for the player herself, she does nothing else but flip the cards or draw them according to preset rules.  There is literally nothing to stop casinos from replacing the “players” and dealers with robot arms.  But perhaps for this simple reason, an elaborate edifice of rationalizations in the form of rituals and superstitions, arises.

Gambling has a rich mythology. From the earliest days of human society, casting lots —often by drawing straws or tossing dice made from the knuckle bones of sheep—was a way to ask the gods for answers. The high priest who wanted influence soon learned to become a “sharper,” positioning the straws just right, shaving the dice, or even devising elaborate rules to ensure that more than random chance would determine the outcome. In many societies, it was a serious crime for anyone but the high priest to touch the instruments used to divine the will of the gods. This imbued the dice with a sacred quality. It also made sure no one could tell if they were loaded.

A screen by the table displays whether the banker or player has won previous rounds, in alternating colors.  What is this screen even for?  The result of a previous hand has literally nothing to do with the next round of play.  

But when a player gets hot, you see the player’s marker blazoned in blue or red, curling back down and around, like an improbable banner, a dragon’s tail.  You see players in states of concentration, chain-smoking, guzzling tea by the gallon, “cutting” their cards with a big fist, pounding it down on the table, then chopping it in half before taking the edge of the card, like it weighs a ton and he’s struggling against the weight of his fight against fate, peeling it back with the force of the spirits unleashed in his hands.  Then you see tables erupting in pandemonium as players go on streaks, crowds gathering around the table four deep, jostling for position to bet, often through reps located closer to the action, chips flying above and through the crowd and landing all over the table, and then ladies of the night creeping up and slipping their phone numbers to the big winners.

The energy is intense, and it makes you start believing it, this thing called luck.

And on second thought, maybe it’s not so far-fetched to believe that an ancient visitor would have related to what goes on there.

*******

Gambling is 90%+ of revenues in Macau.  In Las Vegas, that percentage is closer to 40%.  Baccarat alone accounts for 80% of revenues in Macanese casinos.  And of this 80% of revenues, most of it is from VIP gaming, where the minimum bet size is $5,000 US dollars.  

By some estimates, the actual count of these VIPs is in the thousands or tens of thousands, meaning that it is the population of a small town driving the revenues of a small country’s GDP.

The mechanics of the baccarat game are worth reiterating.  

When you play baccarat, unlike most casino games, where there is no strategy or decision making.  You do not decide to draw or stand, like blackjack.  You do not have dozens of options, like in roulette.  You do not look at the other players’ cards or try to read their faces.  You can try to card count, but the consensus among the best card counters alive, including Ed Thorpe, are that “despite the resemblances between baccarat and blackjack, the favorable situations detected by perfect card counting methods are not sufficient to make the game favorable.”  

A more appropriate analogy might be to think of it as a team-based version of casino war.  There is no winning strategy.  The odds are given.  The “banker” will win 45.9% of the time, and the “player” will have the upper hand 44.6% of the time.  And you can bet on either.  Less than 1% of the time, they will tie.

The net of these three outcomes results in a 1% advantage for the casino.  It’s the slimmest of odds, and it’s the statistical substrate on which nearly billions of dollars in buildings have been built.  

Take some time to think about whether you would build a business on a 1% margin.  Does that sound appealing?

You might be saying that if it’s a sure thing, then of course!  

But the problem is that probabilities are not sure things.  In fact, because the house edge is so slim, in short games, small volumes, and large hands, baccarat players can go on inexplicable streaks that wreck holes in casino vaults.

Bill Zender, former Nevada Gaming Control Agent, sums it up: “your risk is 100 times your average bet.  So if a guy is betting $10,000 a hand, he could conceivably win $1 million from you.  That’s within two standard deviations, so it can happen.”

And in a game where VIP regularly wager half a million dollars a hand, the casino can lose tens of millions of dollars in minutes.  If this sounds theoretical, let’s take a trip back to 1990.

This was the era of one of the greatest bubble eras in human history, with its epicenter in Japan.  Residential land in Tokyo was worth $6,000/sqm.  That’s more than $60,000 a square foot!!!  The Nikkei stock index had quadrupled in less than 10 years.  The appraised value of the Imperial Palace was reportedly higher than the land value in California.  Reeling from the heights of their stock market, Japanese banks, companies, and businessmen were on a shopping spree, snapping up properties in Manhattan and London and “priceless” artworks the world over.  It was, for many Japanese companies and businessmen, the height of their arrogance.   

It was in this milieu that two real estate tycoons met.  One was a shadowy Japanese businessman named Akio Kashiwagi.  Rumored to have ties to the yakuza, Kashiwagi was known among casino owners to be a whale, one who would wager hundreds of thousands of dollars a hand.  And for this reason, he was widely courted.

His game of choice was baccarat, and he was the type of player to play big hands and have the ability to walk away with profits.  Exactly the type of player that casinos both love and fear.  In effect, because of the even nature of the game, a casino owner inviting a whale to play is himself making a gamble – that the combination of circumstances, custom rules, and setting will induce the player to stay as long as possible to let the slim 1% odds play out.

The second tycoon?

None other than our current president, Donald Trump.

This was their second meeting.  In their first meeting, Kashiwagi walked away with $6 million of the Trump Plaza’s money.  Earlier in the year, he had blown a $20 million hole in the vaults of the Diamond Beach casino in Australia, almost bankrupting it.  In other words, he was a fearless and skilled(?) gambler.

Now in their second encounter, Kashiwagi wagered $18 million an hour, playing a hand every 50 seconds.  At one point he had looted Trump’s vaults of that amount, $18 million.  The RAND consultant/mathematician that Trump had hired, along with Trump himself, watched in confoundment and extreme anxiety as the pile of $5,000 chips overflowed off the felt onto the carpet.

It was more money than the entire rest of the casino had lost or even wagered that weekend, meaning that this single chain-smoking businessman was single-handedly wrecking the hotel’s profits for the year.

As the marathon gambling session went on, the grindstone of the ever-present 1% odds began to work in Trump’s favor.  Kashiwagi started giving back his winnings, millions at a time.  He was down $10 million with every intent to continue playing when Trump decided to call it quits, reportedly against the terms of the $12 million freeze-out agreement that had been negotiated.

The point is not what happened.

It’s that the house edge of 1% is not assured.  A casino’s very fortunes can swing on the volatility of one player.  It takes time for probabilities to play out.  The probabilities also play out over multiple players.  Getting as many people to play, and staying as long as possible, is the only way to ensure that the probabilities work out in the long run.

Returning to our ancient visitor again.  By this time, having explained the workings of the casinos to him or her, perhaps explaining the game as a battle of spirits or gods, what would the game look like?

Macau, as a machine that crunches half a trillion dollars in rolling chips, the clay tokens thrown or carefully slid across the felt tables by players, making countless glances into the edges of their cards.  Millions of cards folded beyond recognition, thrown across the table, billions of dollars exchanged into chips, and as the probabilities roll on across millions of plays spanning thousands of hours, a residue.  A layer at the top, the 1% that is the house take, resulting in the gross revenues that drive the entire place.  A place where the vagaries of superstition, fortune-telling meet the caprices of probabilities and fortune, and have largely been…controlled.  

Essentially, a factory where thousands of hands transform money into revenues for the casino.  And that, is the reason for Macau’s very existence.  

Living in a Ghost Town

Taipei, Taiwan

The pictures looked great online.  And having no knowledge of the terrain, we judged it not so far from the subway station.

Only 20 minutes away by bus, they said.

After living in small apartments for the past three and a half years, we were ready for an upgrade.  It was an unimaginable size for us, over 1,500 square feet, which in most Asian cities is a mansion.

Little did we know, after settling in, that we were living in a typical Chinese ghost town, developed one of those mainland developers starting with the letter ‘V’.

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In our building of 22 floors, we’ve counted about five families.  We see the same faces in the lobby.  A twin building next door to us, reserved only for owners, has one actual tenant, judging by the lights at night.

Inexplicably, about five of the lights come from homes with no curtains, whose owners just decide to keep their lights on for some reason.  Maybe to ward off ghosts, maybe to give the impression to prospective buyers that the community is not so deserted.

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I’ve wandered a lot of ghost towns and shopping centers in China over the past few years, and the thing that sticks out to me the most, is how quickly a development can be overtaken by nature.

Make no mistake, we are all here by the grace of the planet and not long after we’re gone, there will be no trace.  For an unmaintained building, the process might take less than a year, if that.

Next to us a set of villas have a plastered wall around them, literally whitewashing over the fact that they lie in a decrepit, dilapidated state, although you can glimpse the broken windows, missing walls, above them.

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But our twin buildings are pristine.  The staff who work here, outnumber the residents, and it results in an echo chamber of a residence where you are never really out of surveillance range.

Four children under the age of 10 live across forty-four floors of residences, and two of them walk to a school down the street.  And the whole way, from their exit out of our buildings, to the corner of the development, and finally to the converted villa that is their school, vigilant guards with walkie-talkies announce their progress.

Of course, it’s nice living here.  It’s serene.  When the weather is right, you can see almost the entire expanse of Taipei.  And sometimes when it’s cloudy below, it’s sunny up here.  Other times, the clouds envelop us, making it seem as if we’re literally floating.  And there are no problems with our building.  In fact, it’s like a 22-story hotel being maintained for just the ~20 of us.

All of it is maintained, but at what cost?

It’s difficult to imagine a scenario where all this is being maintained profitably.

Especially since next door lays a work-in-progress, triplet of a tower that has been under construction for the past few years, where a single worker shows up several days of the week to operate a drill that reverberates loudly throughout the entire neighborhood, but is otherwise ineffectual.

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I can’t help but note that if this building were located anywhere else in China, where there was an actual market for this stuff, the whole building would be taken to completion from its present state, in a matter of weeks, if not days.

I have a problem with the way the media portrays China’s “ghost towns”, because a lot of the developments are in a state of waiting, built in advance of the demand.  Sometimes they actually do fill in over time, while sometimes they don’t.

But I’ve always had an underlying anxiety with isolation.  And this lays bare why.

Something so far from an urban center has great costs to maintain.  The cleaners and clerks commute here by scooter or bus.  The landscaping.  The maintenance of two minibuses an hour that service the residences.  It all seems fragile.  Because if for some reason the owner of the development decided one day to stop financing it, it would no doubt within a few years, look as if no one had ever lived here.

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Elements: Jiufen, Taiwan

Jiufen is an old mining town in Taiwan and is famous for a traditional old retail street.  The street is a market that winds down narrow alleys, giving it a souq-like atmosphere.

On the weekends, the amount of people visiting gives it a feel like you’re in Downtown Disney – packed full of people walking in either direction, not exactly leisurely.

But it’s famous for a reason.  The elevation and its placement on the hillside also gives you charming, wonderful vistas like this one.

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So much so, that it was reportedly an inspiration for Miyazaki’s Spirited Away.  You might see the resemblance.

What is the essential element of this place that gives it magic?

1.  The stairways and elevation changes give it a lot of charm.  You don’t know what’s around the corner, and you have a lot of views that are uncommon.

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2.  Red lanterns: lighting is huge, and by stringing these everywhere, basically it gives the night market a special glow.  Warm, inviting, a little magical.  Lighting can be a huge signature, and you can really see the difference here when you compare the market during the day versus the evening.  So simple.

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3.  Vibrant tenant mix.  I’ve consulted on a lot of projects where clients try to artificially create this kind of retail entertainment.  There’s nothing wrong with that, but usually where projects like this fail, is that everyone spends time on creating an incredibly fantastic, magical environment and less time on the actual substance of the place – it’s great to have spectacular surroundings, but what will people actually end up doing?

Shopping, eating, being entertained – and that is delivered by the individual tenants themselves.  Ensuring a vibrant, authentic, sometimes irreverent tenant mix is the absolute key.

If you really think about it, and decompose Jiufen into its elements, that last one is really the secret to its success.  There’s nothing so crazy about stringing up red lanterns, or narrow alleys.  But the reason it’s like Disneyland on a summer weekend, with a crush of people walking in either direction, is because of the combination of all three of those elements.

The other place I’ve seen this is in Hongyadong, in Chongqing, which is arguably more fantastic and magical looking than Jiufen.  You can take the whole sight of Hongyadong in, at a glance, but you can’t put the architecture or structures of it into any category.  You can’t even tell where it starts or stops, or what anything even is.  It’s hands down the craziest piece of real estate I’ve ever seen.  Below:

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Do yourself a favor and Google ‘hongyadong’.  It’s really one of the most insane structures I’ve ever seen.

And inside, it’s much of the same.  Chongqing is a hilly city, and you need to climb narrow winding stairs to get anywhere.  Once inside, you’re greeted by a crush of people, restaurants, shops, like you’ve arrived at a magical floating island.

Back to Jiufen.  Teahouses are one of the essential places to visit in Jiufen.  And there’s a lot to be said about Chinese teahouses.

This is the one we visited in Jiufen.

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The apothecary-like counter and cabinets holding a variety of teas, accessories, paraphernalia imbues the place with a special, bespoke touch.  You get the feeling they’re sifting through all these pots and bottles for the tea that you and you alone ordered, mixing it in the exact proportions right for you.  They possess an arcane knowledge of teas, the depths of which are mysterious and a world to be explored.

The teapots on the counter look industrious.  You get the feeling that something is always brewing 🙂

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The individual seat compartments are divided by dark woods and stone, and spaced at perfect intervals.  Solid, subdued materials surround you and invite quiet contemplation.

One day I’d like to develop such a place, but it’ll be one dedicated to chocolate.

A Real Estate Career: Lessons Learned (2012-2015)

It’s weird the things that stick with you.  For the next few years, I worked three full-time jobs at a time.  I was in full execution mode as a property tax agent, international theme park consultant, and commercial property agent – and I don’t remember much about the period.

When I look back, I think it’s because I wasn’t growing.

There was little new to the jobs.  I was just executing on processes I had put in place years earlier.  I had become proficient, an ‘expert’.  And so the result was that financially, they were some of my peak earning years, but overall I’m not sure it was that fulfilling.

If you can find jobs where you get paid handsomely for personal growth, now that’s the holy grail.

But there were a few things that stuck with me.

I had a client who was an ex-Drexel Burnham Lambert banker.  He predated Michael Milken give/take by a decade, and had apparently made so much money that there was nothing else to do with it but plow it into real estate.

He worked out of one of his apartment properties in Brentwood, in a ground floor office strewn with papers and newspaper clippings.  He was in his 70s and his main tactic in any negotiation or even discussion was to immediately pretend he was slow.

Whenever you began speaking, he would tilt his head and look at you curiously before responding with a set of ‘is that right’s and ‘you don’t say’s.  He didn’t say much, but you could tell he was processing everything.  With so much office space all around LA, he offered free space to young brokers as a way of being plugged into deal flow.  Essentially, to listen.  He was always listening.  Sometimes his ‘you don’t say’s were sarcastic, as if he couldn’t keep listening to our stupidity anymore, but he was always listening.

We had another client who was a movie mogul.  Over a few decades, he had opened a regional chain of movie theaters and plowed the proceeds into real estate.  And about a mile down from our office, he owned 25 condos in the heart of Redondo Beach.  We brought him multiple offers on the property.  $18 million.  $20.  $22.  But he wouldn’t budge for less than his number, which was a million dollars per unit.

And although we had clients who probably would have bit at $22, he didn’t.  Something about his patience struck me, sitting in his office modeled after a miniature theater, cracking a grin at each new offer we brought him, and sitting back, a picture of consummate contentment, and telling us, if we could please try to get a higher number.

Years later, he was proved right.  Actually, the value of his condos probably exceeded a million dollars a unit.

The thing that both these clients had in common were that both owned and controlled more than $100 million in properties, each, both were well into retirement age, and both arrived at their offices at the crack of dawn.

This is just a sample.  There are people like this all over the country, all over the world.  It was just another lesson about wealth.  In so many ways, wealth is not the goal.

I wanted to be like them.  It would be nice to have the level of wealth they did, but I’m talking about their working for the purpose of their work itself.  And having a purpose that made them work harder than people half their age.

No doubt, it’s what made them great.

Then we had another client.  She had emerged as a buyer for another client’s property in Hermosa.

She made us work.

Among other things we had to do to close the deal, we had to chase down people to get them to sign estoppels.  The existing owner didn’t want to do it, because he preferred to be liked more than he preferred to sell the building.

This meant we had to camp out in front of all 12 units and try to get the tenants to sign a document verifying that they were paying, exactly what the rent rolls said they were paying.

Naturally, a lot of them were suspicious.  Was the new owner going to kick them out?  Was she going to convert the apartment into condos?  They were nervous.

No, no, I answered confidently.  I reassured them there was nothing to worry about, that the new owner had no intention of redeveloping.

But there was something else I had forgotten about.

After dragging the deal across the finish line, I felt a sense of relief as we pulled up to the new owner’s $10 million house in Palos Verdes, with a tennis court in the back.  In the living room, she proudly showed us a rent roll of the $80 million portfolio she managed, from her living room.

And later, she even more triumphantly emailed us to say that she had doubled rents, because the previous owner had been undercharging.

It left me with a bad taste for these kinds of deals and people in general.  All part of the industry, but I couldn’t help but think that while knocking on doors to get those estoppels, I had led some of those people astray.  Some of them, kids younger than I was.

It turned out to be my last deal there.  That, combined with the diminishing fortunes of the property tax appeal business, a countercyclical business if there ever was one, led me to other things.

One last reflection about wealth.  I spent half this time period in Hong Kong.

And in Hong Kong, a summer rite is the boat trip.  On the weekends the waters around Hong Kong and its myriad islands teem with junks and yachts that anchor off a secluded beach, then descend into drunken orgy-level partying.

One of our friends was dating a guy who was as close as you could get to Hong Kong royalty.  He was the scion of a billionaire tycoon, which made him one himself, but you wouldn’t know it to meet him.  Well-educated, low-key, soft-spoken, there is no way you could pick him out in a lineup, as is often the case with billionaires.

Anyway, this weekend we had use of his dad’s yacht.  For seven of us, a uniformed staff perhaps double that number helped us board, navigated, helpfully pointed out the amenities, cooked us a hot lunch, and generally gave us the kind of five-star service you would expect from what was basically a floating villa, way larger than my childhood homes, combined.

After anchoring, there are only a few things you can do.  We rode jet-skis.  We bounced off of inflatables.  Some of us read a book on the upper deck.  Some of us just floated in the water.

Which is what I did.  Bobbing, I could see all the other boats around us.  Some of them were like us.

Splendid, sleek yachts.  Barely any people on them, though.  There were kids on some of the nicer yachts, towards the front, and they looked bored out of their minds.

And, the people on the nice yachts were all looking in the same direction I was, which was towards the bacchanal boats, the ones thumping music that could be heard hundreds of feet away, with the people backflipping off the upper rails, doing keg stands, sliding headfirst and belly up down makeshift slides into the water, floating around the boat suspiciously in pairs.

Of course sometimes it’s nice to be alone.  But also sometimes I think that with great wealth comes great isolation.

I noticed this during my brokerage days in LA.  Sometimes it seemed like our richest clients called…just to talk.  Or when we went out in Hollywood – there is type of person, usually male, who buys drinks for everyone, is exceedingly generous, talks a lot, is best friends with everyone at the bar, is also exceedingly rich, and then at some point during the night…leaves alone in a nice car.

In the summers in LA, you can ride a bike from Venice Beach down to Redondo.  Over the course of 15 miles, the crowd changes.  Rowdy and larger up around Venice and El Segundo, Playa del Rey, huge barbeques with organized beach football games.  Then you reach the $10 million houses (at least) in the South Bay, along the Strand.  Nice organized picnics going on, some beach volleyball games, more individual, more rich, smaller.  Sometimes just a guy on the upper balcony of his home sipping coffee and looking out over the ocean.  Of course in some of the houses in between were always some frat antics going on, but still.  Richer, more individual.  In many ways, more alone, although there’s nothing wrong with alone.

But, now why is that?

A Real Estate Career: Lessons Learned (2010-2012)

The optics of business school are great because being a student gives you a halo – you appear to be “studying”, hard at work, transforming yourself.

Whereas if you took two years off to just actively look for, recruit, and interview for jobs in a new industry it would raise eyebrows, if you instead pay vast sums for the privilege of doing so, while paying even more in opportunity cost / lost income, it is more professionally accepted.  Ironic and backwards, but that is the imprimatur of business school.  That’s what people pay for.

Also, it’s a good two year break that looks good on a resume.

I entered Haas because I wanted a break.  I also wanted to be close to home, and the counties where Property Tax Advisors was appealing cases.  I wanted to be on the West Coast, because most of my consulting clients were in Asia – and I would have to fly there from time to time.  In case it wasn’t obvious, I still wanted to work part-time.  And also, to seal the deal, Haas gave me a scholarship, which combined with what Gary still owed me, made it an all-expenses paid, tax-free, two year vacation.

But I don’t want to make it seem like I didn’t take the whole experience seriously.  I did want to learn.  I wanted time to read books again.

The first thing I did when I arrived on campus was sign up for Mandarin classes, which I took with undergrads.  And then I signed up for some advanced real estate classes to try to figure out WTH had just happened in the world.

I took real estate classes every quarter.  And I read books on real estate history outside of it, outside of the classes.  At the end of it, I’m not sure I came very much closer to understanding the mechanics of what had happened, but I did gain an appreciation of how fragile things are in the world.

For our final project in a real estate financing class, we had to analyze a CMBS prospectus (commercial mortgage-based security), you know, those products that had helped bring down the global financial system.

I remember little about the product except that its supporting document was about two hundred pages.  Five of us pored through it for weeks.  All of us had come from real estate development, banking, or brokerage backgrounds.  One of us actually had a real estate lawyer for a father so we ended up asking him about the finer points.

But the prospectus was written so as not to be comprehended.  It was written in legalese, even though it was describing what should have been a fairly straightforward series of waterfalls in Excel.

And in the end, it couldn’t be modeled, because it was worded so ambiguously.  It was another lesson in what I had long suspected, which was that in business, maybe a small fraction of people know what they’re talking about, and the rest are just pretending.

I guarantee the bankers selling the junk we tried to model were in the latter camp.  Some of them were probably in business school at the same time as me.

Business school was also an opportunity to experiment.  I tried out different careers.  I interned for a hedge fund manager in San Francisco.  The first time I had a conversation with him, my mind almost exploded.

We began talking about a gold mining company, and his process of thinking out loud led the discussion into energy consumption requirements of the world, and caloric intake of Africans.  It all had a logic, but it was just beyond my grasp.  Just like, say, a college lecture that is beyond your head will make you fall asleep, this conversation had all the trails of making sense, but it was beyond my comprehension.  Struggling under the mental strain of it, I had to go home afterwards and just lay down for a few hours.

They say investing is the last liberal art.  It is the best cross-disciplinary, systems thinking training that anyone can get, I truly believe that.

In the summer, I interned for GE Capital Real Estate, the first big company I had ever worked for.  It also turned out to be a mistake.  Not the company or job itself.  As part of the Global Valuations Team, for the first time, I worked with people who were all exceedingly kind, competent, and able to regulate their emotions.  I had never worked with such nice people before.  I also had a boss that summer who was the best boss I had ever had up to then, and since.  She was patient and a great communicator.  I saw in all the ways what I had been missing by working only at small shops and with extreme people.

But at the same time, in order to take the job, I turned down offers from a resort development company (US-based), and a Mongolian conglomerate that wanted me to help them create a business plan for yurts, in Ulaanbataar.  There is no way I would have that kind of opportunity again.  It was a mistake to turn down adventure when I was still single and should have taken those kinds of “risks”.  It remains one of my regrets.

But the job was a revelation to me in other ways.  I came away from the internship and my classes at school with a more profound realization about the world.  Mostly, about the fragility of it.

You could see this clearly because GE Capital was such a high-level investor and manager.  By high-level, I mean that they invested in properties that were worth hundreds of millions of dollars, and purchased portfolios that were in the billions of dollars.  When scale gets that large, numbers become abstract.  When you’re evaluating a portfolio of hundreds of properties, the individual properties themselves also just become pieces of paper holding different lease terms and cash flow logic, encumbered by loan contracts that are themselves just other pieces of paper.

I looked at the stack of hundreds of pages we were poring through, which represented the several billion dollar portfolio we were buying.  And that was it.  Although we weren’t buying the pieces of paper, the pieces of paper held the agreements that held this entire thing together, all the terms and clauses and logic that would be transferred, on other pieces of paper, from a different owner to us, moved like you would a large boulder, carefully, so that at the end, someone could print out another, similar stack of papers with our name on them instead, and magically all the obligations and claims would belong to someone else.

Yet what was contained on these stacks of paper allowed us to borrow more money against it, allowed us to engage service providers and managers to service it, and served as the basis for the valuation of our company.  All around the world, balance sheets were being rearranged, title was being rewritten, people were moving, getting hired, fired.

You might note that this is just a larger scale, of the same type of transaction you would undertake when buying a car or getting a loan.  It’s true, but just think about those transactions too.  Do you ever read every word in a contract?  Do you really know every implication of every clause in a contract?  I doubt 99% of the world does.  Similarly, there were things in the contracts of our portfolios, and the leases, that if you read them carefully were questionable, or ambiguous at best.

But the whole thing was wrapped together by a system of trust.  Trust that people down the channel, the title officers, the lenders, the managers, the agents, the lawyers, everyone, was doing their jobs correctly.  No one at GE Capital was going to have time to review every single line.  Internally we all had to depend on each other, and us as an organization also depended on our service providers, suppliers, the governments and cities in which the real estate was, etc, to do their jobs.

At a scale that enormous, no one person has the whole complete picture.  And if you telescope out to the national economy, the world, it’s the same thing.  No one person has the complete picture.  It’s held together by trust.  And when that trust breaks, the system breaks.

And that, I think, was the main lesson I learned at GE Capital, and probably the main lesson of the financial crisis for me.

After my summer in Connecticut, I moved again.  Business school offered a semester abroad.  And I was going to study abroad in Hong Kong.

Living and studying abroad has been the source of some of my deepest relationships and experiences.  After studying abroad in Hong Kong, I decided I would have to live there.

Also, one night while eating hot wings at a place that prided itself on the scoville (spiciness) levels of its food, I found myself dry heaving, tingling, and in tears after half a bite of their vaunted apocalypse wings.

I began rubbing my eyes, which was a mistake because for some reason the XXL-killer-apocalypse-suicide hot oil had spread to the back of my hand, and now I couldn’t feel my face anymore.

It was at that moment, with fluids draining out of my face, that a girl in a white and black dress walked in smelling of spring, and sat down with me and my friends.

A few years later, she would become my wife.

Elements: The Best Theme Park in the World?

DisneySea is the gold standard of theme parks.  Most people in the industry who I ask will nominate it as their favorite, and as the best theme park ever constructed.  Just a few of the examples are here and here.

There are better guides and writeups on DisneySea out there, but this is my personal note of appreciation for it.

DisneySea is my favorite park too, although I think if you’re talking about the best park in the world, it depends on who you’re asking.

You’ll notice that the people declaring this is the best park in the world, are adults.  Most kids would probably not say DisneySea is their favorite theme park.  It has less rides and attractions than Disneyland and is a more subtle experience.

As way of background, Tokyo DisneySea is the second theme park at Tokyo Disney Resort.  It opened in 2001 on land reclaimed by the Oriental Land Company in the 1960s, and while Disneyland got the better, more stable land, DisneySea had to be built with as much attention to the subsurface because it was over a deeper area.

All sorts of fancy engineering was applied to the land to avoid problems of differential settlement, and the inevitable result was cost overruns.

All this is to say that in my opinion, Tokyo DisneySea is the theme park version of the Steve Jobs standard of crafting things to perfection, even the parts unseen.

First, this is perhaps the most beautifully themed amusement park in the world.  Parts of it do not resemble a traditional theme park.  They resemble an art installation, or a museum.

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This is Ariel’s Grotto, a visually spectacular masterpiece.

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This East Coast waterfront area is visually one of the most intricately themed experiences I’ve ever seen anywhere.  They put that much work into this ship floating in the water, and it cannot even be boarded or accessed.  Only appreciated from afar.

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Most things, when they are simulacra of another, suffer in comparison.  They can’t pass the authenticity test.

This is because too many details are missing.  Here, Tokyo DisneySea has the opposite issue.  It has MORE details and more features, I’m sure, than the originals.

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Gorgeous theming.  Not a brick out of place or corner cut.

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The park is filled with areas like this, in areas you can’t even access.  Here’s a dhow in the middle of the water, and it’s full of stuff – cargo, utensils, equipment – and the fact that it has this stuff in it deepens the mystery.  You want to go see it, but you can’t.

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Exquisite rockwork.  Bubbling water.  The water doesn’t have to foam and bubble.  But it does, because this is Disney.

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At DisneySea, they’ve recognized that food is an important part of the experience, and for many people, maybe the primary part of the experience.  Why other theme parks haven’t yet adopted this philosophy is beyond comprehension.

At DisneySea, you get multiple popcorn flavors spread out in different areas of the park.  It is a game to either find/taste them all, or find the one you want.  Here’s blueberry popcorn.

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Here’s milk chocolate popcorn.

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Here’s the line for the caramel popcorn.

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You have a food court that has a line of more than 30 minutes to enter:

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Operationally, it excels.  Every cast member has been impeccably trained.  On the kids’ rides, the cast members wave to you the entire time you’re riding.  Bonus points if you can catch them not smiling.

I can’t tell how much of this part is cultural; i.e., would you get the same frenzy and crowds in say, Orlando?  But in DisneySea, there are queues everywhere.  When I mean everywhere, I mean – at food kiosks.

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To take pictures next to a themed stall.

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And ride-equivalent wait times to take pictures with the characters.  Some of this is undoubtedly Instagram culture, which is worldwide, but I can’t shake the feeling that I’m not sure you would get a neat, impromptu lines like the above at Disney World.

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Then you get the Easter Eggs and minute details that are completely extraneous, but are the differentiator between a Disney park, and everyone else.

Plaque reads: “They That Go Down to the Sea in Ships, 1623-1912”.  This is taken from the Gloucester’s Fisherman’s Memorial; the original has the dates 1623-1923, but I will bet that the difference of the latter year has some meaning to it and is not an error.

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There are theme parks developed for a fraction of a Disney park.  You can have great theming, good hardware (roller coasters) that rival the best in the world, you can have rockwork and incredible landscapes, but there’ll always be something missing.

That something is internal consistency, but internal consistency wrought with a level of attention to details that would confound a rocket scientist.

Part of this internal consistency that most theme parks ignore is music.  Music in a Disney or Universal park is central to the experience.  Hidden speakers take you on a cinematic journey and evoke emotions appropriate to that land.  The audio quality is superb and makes it seem like you’re in a theater the whole way.  The transitions between the lands are seamless.

Instead, in most parks, what do you get?  Non-immersive, dim audio, sometimes tinny, and lots of areas that are just completely silent.  Soundtracks that are nonexistent, and instead, playing pop music unrelated to the park.

Here are some speakers hidden in a bamboo grove.

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And some others disguised into a building facade, all designed to create that seamless experience.

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Paying attention to the parts unseen, indeed.

If you decide to do something, to do it all the way, and to completely commit to the conceit that you’ve set up. 

This is DisneySea’s major accomplishment.  This is something worth considering and learning from.

A Real Estate Career: Lessons Learned (2010)

Almost exactly when The Year of Reflection had ended, I received a call from an old contact, Tim.

He wanted to know what I was up to these days, and whether I might be interested in helping him out.  Over the phone, I couldn’t really process what he was saying.  He spoke of taxes and property values excitedly.  I know how that sounds.  But yes, he was excited.

From what I could make out, it was evident that this was an opportunity that had risen because property values had crashed.

One thing did stand out, though, and that was the word “ridiculous”.  Tim was using the word “ridiculous” quite liberally to describe the situation, the money, and the job itself.

If there was anything I had learned about myself in my career so far, it was that I was a ridiculousness hunter.  Intrigued, I accepted his invitation to come in and check out their operation.

Indeed, when I arrived at their “offices” in Manhattan Beach, I found the situation a little ridiculous.  The office was a two bedroom apartment off Manhattan Beach Boulevard with no natural lighting, and seven people were working in it.  Files were scattered everywhere, like debris from a bomb explosion.  I met Jason, who worked with Tim in the master bedroom.  Gary, the owner, worked in the second bedroom.  Everyone else worked in the living room.  Files were stored everywhere, including in the kitchen cabinets and in the oven, which no one used.

The operation was one that appealed property taxes.  This meant going down to the assessors’ office of the California counties and argu-, demonstrating that our clients’ properties were not worth the inflated prices they had purchased them for.

Jason, Tim, and Gary explained this to me as I surveyed the wreckage of an office, and asked me when I could start.

That weekend, I moved to Manhattan Beach and came into the office the following Monday.

Bureaucracy causes pain, and pain causes opportunities.  This whole operation was there, because dealing with the county assessors’ offices was a bureaucratic and logistical nightmare.  If my experience at ERA was like being in a time capsule from the 1970s, the assessor’s offices were dated at least a few decades earlier.  They communicated only by phone, mail, or through in-person hearings, the latter of which gave it the flavor of judicial and legal proceedings.

All this is to say the following.

Challenging the roll value of a property in California, in most of the counties, [was] free.  Free.

But like most things taxes, people hired us to do the job for them because they couldn’t understand the process.  Or even if they did, the psychic pain of having to be put on hold and transferred through the various departments of the assessor’s office, having to search for information on values retroactively to the assessment date, or attend hearings in the middle of the day scheduled months in the future, caused them to hire us.

The business was unglamorous, taxing, under the radar, and operated out of a master bedroom with soiled carpets.  And at Property Tax Advisors, we were discreetly generating ~six digit sums in fees, per week.

This is when I learned that a real business eases pain.  A real business is not the storefront, or the colleagues, or business cards, or a website.  A real business is where someone pays you to do something they can’t or won’t do themselves.  At real scale.  And sometimes you can create a profitable business out of something that is already free.

Don’t be afraid of boring businesses.  I’m sold on boring businesses.

The substance of the work was scouring through reams of data, photos, and assembling a case.  The actual analysis didn’t take long, but it was time-consuming, carpal-tunnel inducing, and after working out of the cave of a master bedroom for about a month, I noticed another something.

I was losing a lot of weight quickly.  People have a misconception about Southern California.  They think if you live by the beach, it’s balmy and tropical.  It’s not, especially in the South Bay.  Most of the time it’s under cloud cover, and if you’re not under the direct sun, there’s a sea-cold to it.  I lost 10 pounds the first month I worked there, just from the ambient bone chill.

The cold and the enormous workload brought something out of me that had lain dormant for a few years.  It was time to dust off my Excel macro skills.

Over a few weeks, I made a program that automatically valued our cases at the rate of one every two minutes, which was a vast improvement over the 45 minutes it took to do it manually.

Because in order to win a case, we had to present a preponderance of evidence that proved the house was overvalued.  “Preponderance” meant that often we pulled together hundreds of pages of evidence for a single property, replete with pages of full color photos.  We took this burden of preponderance seriously, and made sure that our cases were also preponderantly heavier, in actual weight, than the appraisers we faced.

Sometimes I could see a visible sigh from the appraisers when they saw the buckets of paper we hauled in during hearing days.  It was a psychological tactic.  Because when I saw those sighs, I knew that we were winning.

And you might think that it’s weird I use the word ‘winning’ in conjunction with something like a valuation.  But I discussed this before; the concept of value is a vague one.

What is value, really?  Value is a consensus arrived at by subjective opinions.  Everyone starts with the same facts.  Your value is what you choose to emphasize and omit out of those facts.

The assessor’s office was biased towards preserving the roll value.  We were biased towards lowering the roll value, to alleviate taxes for our clients.  And it was a clash of opinions and wills.

But whatever side you’re on, bias takes its toll.  For instance, when you believe that values are too low and are going to go higher forever, like a broker does, you’ll start making yourself susceptible yourself to frauds and bubbles.

This is just as true on the other side.  Exhibit A was our owner, Gary.

There are people you’ll encounter who seem absolutely suited for the work they do.  Sometimes this is because when you do something every day, it can’t help but influence the person you become.  And sometimes it’s the other way around.

For Gary, I couldn’t tell if he was always the way he was, or it was the 20+ years in the tax appeals business that had shaped his entire worldview.

To back up, our work involved looking for direct evidence that our clients had overpaid.  Every case needed to be presented as, “our clients made a mistake and bought at the top of the market and everything is worth about 30-50% less.”

And repeating this story thousands of times over a few decades, I can’t help but think it influenced Gary a little.  Because Gary categorically believed that everyone in the world was overpaying for everything.

From $20 million megamansions in Bel-Air to gym memberships at Equinox, Gary opined endlessly on the ways not to get f**’ed, how to not buy at the top of the cycle, and how to save money.

To him, any debt of any kind was idiotic, even mortgages, and he railed against buying any car new.  One summer when I dropped by to say hi, riding a rented Audi (a free upgrade from the Chevy I had reserved, which was out of stock), he had some choice words.

He was the type of person who, as a Manhattan Beach millionaire, thought nothing of sometimes walking across the street to the motel and helping himself to the free continental breakfast, with a wink and a nod to the staff.

Or walking into the gym with free passes and registering multiple times under different names to extend free trials for months.

Or on Tuesdays, skipping a place for lunch because on Fridays, that’s when they had a promotion and it was 15% cheaper.

Or expounding on the exact depreciation schedule of items like sofas, automobiles, cutlery, and researching gas stations miles away, where prices were pennies cheaper than our local one.

At the time, Gary was going through a lot.  The financial crisis had halved his net worth from $20 million to less than $10 million (I know).  And he was in the middle of a bitter divorce.  All this, I’m sure, conspired to make him feel poorer than he really was, but part of it was probably also in his makeup.  The son of a mailman in Hawthorne, he had always looked at the society people in the towns around him like Palos Verdes, and wanted to be them.

But now he was them, but I don’t think he ever felt like them, nor wanted to be them.

He always had some words about the overpriced nature of the houses around us, and the fallacy of the dual-income homeowners who had taken out million+ dollar loans for them.  How can it be worth it to live like that, and slave for decades just to pay off the mortgage on a property, he would rail.  Why would he buy that car when he’s a [enter profession here] and making [enter salary here], he would exclaim.  Why do people feel like they have to keep up?  He would rant for the entire 40 minutes it took to drive to downtown LA for a hearing.

And slowly, I began to take on his mentality too.  I couldn’t help it.

This was in the ashes of the financial crisis, and still shell-shocked from the previous year, I began making it a game to see how frugally I could live.

For a time, I slept on the carpeted floor of my apartment on a sleeping bag because I didn’t want to buy a bed.  I proudly clipped coupons and returned to my old trick of asking people in restaurants if they were going to finish their meals.  I needed to regain those 10 pounds, after all.

The irony, again, is that the year was turning out to be my best yet, financially.  Again.  I was drawing on two sources of income, and making consulting calls to clients in Russia and Arizona alike, stepping outside on the patio.

Anyway, Gary was shameless in a way with his frugality.  And Jason, who handled sales and collections, was just…shameless.  And shameless about his shamelessness.

Shameless people are an object of fascination in our society.  They have their role.  And in our office, Jason was the id.  He was the walking manifestation of the things we wanted to say and do, because he had no filter.

If you’ve ever worked with real good salesmen, you’ll understand they’re a different breed of person.  Until I worked at the Harris Group, I’d never met real good salesmen, even at Wharton.

Jason had more energy than anyone I’d ever met.  This wasn’t drug-addled energy.  This was just raw male energy, like he was a wind-up toy that was just always…on.  If you stood next to him it became uncomfortable from waves of enormous body heat, like some sort of constant metabolism of targets was taking place.

This extreme energy had him going through a hundred phone calls a day, with no let up in pace.

Like all good salesmen, he didn’t care about rejection.  And unlike other good salesmen, he was completely honest.  He was almost honest about everything he believed and felt, and that made him good on the phone.

Being honest and tireless also made him good with girls.  Bear with me through this section because there is a point.

Every weekend he went out and found himself another girlfriend.  He hooked up with a girl who was going door to door selling magazines, who he invited in to his apartment.  He hooked up with a girl who was selling hats on 3rd Street Promenade.  He had hooked up with the woman who he had purchased his used car from, offering a lower price and a steak dinner.

When he was at bars, he was completely straightforward about what he wanted.  If a girl he was pursuing had a boyfriend or a husband, he didn’t hesitate to say the conversation was over.  He didn’t want a relationship, and every Monday, the endless stream of text messages from his weekend romances bounced in, letting up only around Wednesday.

You may or may not condone this.  I regarded this then with a mixture of wonder and grudging respect.  If nothing else, he was honest.

That honesty extended to the office.  He was not above hanging up violently on clients after calling them dishonorable scumbags for not paying, or calling out people within the office for not working hard enough – and he was right.

For him, what was right was right, what was wrong was wrong, and he knew exactly what he wanted and did not want.  And it always struck me, seeing someone so honest, that people do not really respond well to honesty.

Clients who had been through the Jason treatment didn’t pay until Gary called them back and apologized, assuring them that they were not dishonorable but just “forgetful”.

People in the office who were slacking did not step up their game when called out.  They shut down, and resisted the idea that they were fallible.

And the endless stream of girls (I’m using girls instead of women deliberately) who he had warned in advance and made clear all throughout the duration of their 36 hour romance, that he was not interested in anything longer than a weekend, texted him endlessly.

It’s just a point to consider.  People don’t listen to the ‘what’, they listen to the ‘how’.  Jason knew the effect of never filtering himself, but he accepted the consequences and lived as he did.

Also, back to the energy point.  It’s hard to win against or resist someone who has higher energy.  10 pounds lighter and feeling lightheaded from my endless working, I found it hard to ever win an argument against Jason, no matter how hard I tried.  He kept coming.  And I would definitely never even have a chance after lunch, when I was soporific and for some reason he was going the same speed as at 10 in the morning.

It was then I realized that energy levels are an underrated part of success, especially when you’re working for yourself, and need to be cultivated as carefully as other resources like money or time.

The work was interesting, the growth in revenues was inspiring, the money was lucrative.  But midway through the year, I decided it was time for me to go back to business school.  Reasons to be discussed in a later post.

If I had stayed, I would have earned my way into a relatively easy few million dollars over the next few years.  I knew that.  And I still gave up my equity.  To be clear, I did stay involved with the business over the next few years.  It was one income stream.  But I gave up ownership in order to be free, and have time to do my own things.

People ask me all the time why I did it.  And for a long time I found it hard to articulate.  It just never felt like my thing, or my destiny.  It was Gary’s thing.  It was Tim’s thing.  It was not my trade.  Does that make sense?

Also, maybe it was just hubris again.  Still, I believed that I would find that few million dollars somewhere else, in the future.

Finally, maybe because I just wanted more…adventure?