Common Lessons from running Growth teams, Investing and Genomic Biology - a hypothesis is a liability

 “When someone is seeking, it happens quite easily that he only sees the thing that he is seeking; that he is unable to find anything, unable to absorb anything, because he is only thinking of the thing he is seeking, because he has a goal, because he is obsessed with his goal. 

Seeking means: to have a goal; but finding means: to be free, to be receptive, to have no goal. You, O worthy one, are perhaps indeed a seeker, for in striving towards your goal, you do not see many things that are under your nose.” - Hermann Hesse

There is a hidden cost to having a hypothesis. It arises from the relationship between night science and day science, the two very distinct modes of activity in which scientific ideas are generated and tested, respectively. With a hypothesis in hand, the impressive strengths of day science are unleashed, guiding us in designing tests, estimating parameters, and throwing out the hypothesis if it fails the tests. But when we analyze the results of an experiment, our mental focus on a specific hypothesis can prevent us from exploring other aspects of the data, effectively blinding us to new ideas. A hypothesis then becomes a liability for any night science explorations. The corresponding limitations on our creativity, self-imposed in hypothesis-driven research, are of particular concern in the context of modern biological datasets, which are often vast and likely to contain hints at multiple distinct and potentially exciting discoveries. Night science has its own liability though, generating many spurious relationships and false hypotheses. Fortunately, these are exposed by the light of day science, emphasizing the complementarity of the two modes, where each overcomes the other’s shortcomings.

The gorilla experiment

Many of us recall the famous selective attention experiment, where subjects watch a clip of students passing a basketball to each other. If you have not seen it, we recommend watching it before continuing to read. 

As you watch the two teams in action, your task is to count the number of passes made by the team in white. About halfway through, a person dressed up as a gorilla enters the foreground. The gorilla pauses in the center, pounding its chest with its fists, before exiting to the opposite side of the frame. Surprisingly, half of us completely miss the gorilla, as we are focused on counting passes, even though hardly anyone overlooks it when simply watching the clip without the assignment.

We believe that a similar process happens in various phases of life. 

Growth teams

Growth teams are laser focussed on hypothesis building, executing on the hypothesis, tracking progress against goals measured using metrics assumed to be impacted by the hypothesis. Some of these experiments lead to metrics wins and some of them not so much. It is equally important to distill learnings from the wins and the failures and articulate them to build the next hypothesis. This kind of learning at the project level, aggregated produces the future direction of the team and informs the organization level strategy in growth companies. Hence, the failures even though they seem innocuous or wasted opportunity at certain points serve the valuable purpose of informing future roadmap direction and strategy for the organization. This helps form the future organization level hypothesis, goal and metric. Also in committing to a hypothesis based on these learnings, there is also a pseudo commitment about not investing on other hypothesis (in case of limited team bandwidth). Hence the process of distilling the learnings in growth teams and the quality of the learnings serve the lifeblood of the organization. 

Investing

Similar idea can also be applied to active portfolio managers who are making certain bets driven by hypothesis. It is very important to shed biases and question each and every assumption behind hypothesis building. 

Interestingly this concept formalized appeared in this journal on genome biology. I merely tied this concept to other spheres of life. 

Comprehensive vs Interesting tradeoff

 Being comprehensive vs interesting:

You might want to give all the details, explain all the things fully in one breath. But you risk overwhelming your audience.

Optimize for being interesting instead. If you hook their interest you’ll earn the chance to share more later. 

How to ask great questions as a PM ?

 1)

Less “How will we build this?”

More “How will we differentiate?”

2)

Less “How to enforce accountability?”

More “How to foster ownership?”

3)

Less “What problems can we solve?”

More “What problems are worthwhile?”

4)

Less “What is the 3-yr roadmap?”

More “What is the 3-yr strategy?”

5)

Less “How to run growth experiments?”

More “How to get more distribution?”

6)

Less “What is the process for X?”

More “What is the purpose of X?”

7)

Less “Does this team run well?”

More “Does this team learn well?”

8)

Less “What are top user requests?”

More “What are top user needs?”

9)

Less “What is the template for Y?”

More “What is my goal with Y?”

10)

Less “What is the schedule?”

More “What are the priorities?”

11)

Less “Are all stakeholders happy?”

More “Are all stakeholders aligned?”

12)

Less “How many resources do we need?”

More “What is the marginal impact?”

14)

Less “How can I use metrics?”

More “How can I use psychology?”

15)

Less “Who will write the blog post?”

More “How can we create excitement?”

16)

Less “What will get me promoted?”

More “What will get the buyer promoted?”

17)

Less “How did Google solve this?”

More “How are we different?”

18)

Less “What does the CEO want?”

More “What does the CEO know?”

19)

Less “What are competitors saying?”

More “What is their strategy?”

20)

Less “What is rational for users?”

More “What is natural for users?”

For the original content and discussion, please read Shreyas's thread

Ellsberg Paradox and Option value of investing

 Ellsberg Paradox 

People prefer to take risks in situations where the odds are known, rather than a scenario where the odds are unknown - even when the latter scenario has the guarantee of a positive outcome (its just that the magnitude of the outcome is unknown). Its often used to evaluate how people have an aversion to ambiguity. 

Where do the traditional financial tools fall short ? 

In traditional investing, the most common financial tool for valuing a company is DCF model (discounted cash flow model). Under this methodology, investors attempt to accurately model out the discrete financial metrics of a company over a finite period of time, and discount the cash flow generated to determine the appropriate valuation for a company.

The issue is though that in real investing, businesses have embedded options which have unknown outcomes everywhere. DCF is terrible at valuing these businesses which have both : 1. uncertain payoff magnitude and 2. uncertain timing as to when it will occur. Examples of such options : 

• Amazon is able to extend its dominance on one ecommerce category(books) to multiple categories
• Amazon is able to extend its dominance in ecommerce to build the largest retail search engine in the world and draw advertising dollars
• Google is able to leverage its technology prowess in building scalable and reliable search infrastructure to build Google Cloud and democratize building distributed systems technology. Same for AWS and Azure
• Apple launching Wearables segment (Watch, airpods, etc) using its expertise in building iphones

For each of these successful options, there are multiple failed investments like Fire Phone, Google's communication apps, etc. However, in net all these embedded options have generated multiples of shareholder value which would not have been able to be correctly valued through DCF. 

This paper articulates this concept in detail : Get real, using real options in security analysis

This diagram illustrates how the valuation breakdown of such companies progresses

Some of the parameters to evaluate such businesses are

Management 

• Superior capital allocation 
• Access to cheap capital from markets or through high profit margin businesses
• Execution track record
• Ability attract top talent in the industry

Business

• Strong moat
• Economies of scale
• Economies of scope

Evolving markets

• New trends of user behavior and patterns
• Uncertainty

No wonder FAANGs check several of the above boxes and continue to generate superior returns for their shareholders. 

References

1. Hayden Capital Quarterly Letter Q3 2020

2. Get real, using real options in security analysis

Return to India - Financial Guide

Scenarios

- Planning to return to India 

- Keeping US accounts as a non-resident alient

What are the implications of moving on brokerage accounts ? 

• Allow reasonable access, under non-resident alien terms (with a W-8BEN). There may be some restrictions on the type of thing you can trade, and you may have to send paper forms in for some things that could otherwise be done online, but overall the account functions relatively well. Buy and sell, and things like 401ks, IRA rollovers and Roth conversions are still available.

• Limit activity as noted upthread. That is, you can sell existing holdings on your own schedule but not buy any new ones. Over time, that makes the account hard to manage (rebalancing, for example).

• Force you to close your account and move your money out.

Which occurs seems to to depend heavily on which country you move to, its tax treaty status and regulatory framework, and so on.

What are the tax implications ? 

It depends which country you live in. If it has an income tax treaty with the US, you will pay US tax on dividends at the treaty rate. It's typically 15%, but could be higher, perhaps 25%. A few countries have a 10% rate. If it has no income tax treaty, you will pay 30% in US tax on dividends. Vanguard will take the correct rate automatically through withholding once you've sent them a W-8BEN. It's a flat rate tax, so you cannot recover any of it from the IRS. You might however be able to use it as a credit against local income tax on these dividends.

No US capital gains tax implications. The US does not tax capital gains for nonresident aliens. Watch out though for US estate tax. If you country lacks a US estate tax treaty, your heirs could face 26%-40% of the balance of your holdings above $60,000 should the worst happen. This applies also to any IRA or 401k accounts you hold in the US. The US estate tax treaties with Ireland and South Africa are reportedly deficient, so best not to rely on those.

What about tax returns ? 

If you're neither a US citizen (or resident) or a green card holder, if you have to file anything it's always a nonresident alien return, so a 1040-NR.

In general though, you should have no need to file one. Provided Vanguard applies the correct US tax withholding on dividends, your US tax liability will exactly match your US tax withholding, and in that case you don't need to send any US tax return. See 1040-NR instructions for more.

If for any reason you do have to file a 1040-NR, perhaps Vanguard overwithheld relative to your treaty rate, you'd only have to declare your US source income on that. You don't tell the IRS anything about your non-US earnings, interest, or anything else financial happening in your (non-US) country of residence on that form. 

The IRS will only issue tax refunds in USD, either as a cheque or ACH payment to a US bank account.

Some tips

1. Remittance from brokerage accounts to directly foreign accounts through transferwise if possible. I am not sure this works. Seems like a hassle. 

2. Interactive Brokers seems to have a global presence

3. 

Appendix Links

1. United states income tax treaties 

2. India tax treaty documents 

3. US Estate and Gift tax treaties

4. Interaction of Indian and US tax laws

5. Keeping vanguard accounts as a non-resident alien

6. Bogglehead link on non-residen alien taxation

7. Beware the taxation angle if you want to invest in direct foreign equities from India - Reddit thread

8. Taxation for international residents

9. Non-US investors guide to navigating US tax traps

10. A guide to selling US property for foreign residents and expats