Finding Method in the Madness

Attempting to decipher 8 hours of conversation between Jim & Alex Danco

The [Infinite Loops] Crown Jewels (1887) | Blaise-Alexandre Desgoffe (French, 1830-1901)

In October 2022, Alex Danco’s title as Infinite Loops Emperor seemed insurmountable.

The stats didn’t lie: with six episodes recorded and more planned, Alex had a clear lead over the pretenders who dreamed of the throne.

But over the last two years, we’ve witnessed a bloody revolution from a resurgent Liberty RPF, who has launched a daring bid for Alex’s coveted position. One, two, three, four hall-of-fame episodes were rattled off in quick succession by Liberty until suddenly, earlier this year, the stats became a sobering read for the Dancoheads: Alex had crawled to seven episodes, while Liberty, holding all the momentum, was on five. The crown was within Liberty’s reach.

Yet, as the saying goes, only three things in life are certain: death, taxes & Alex Danco.

Armed with sizzling hot takes on the sad death of Twitter likes and a new secret weapon in the form of his catchphrase-turned-episode theme (“Without mystery, there is no margin”), Alex returns to the battlefield today to shore up his position and once again put daylight between him and his rivals.

We’ve shared the usual Apple/Spotify/YouTube links, transcript, etc, below. But first, we’re here to answer a burning question.

What on earth are Jim and Alex talking about?

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Over eight hours of fiercely unstructured, defiantly unplanned, proudly meandering conversation, Jim and Alex have ambled their way through everything from the physical layout of CBGBs to why Jim needs a safeword.

Return listeners will know their conversations’ hallmark: bottom-up complexity. Certain ideas, patterns, and topics stubbornly resurface time and again.

Despite Jim and Alex’s best efforts, it appears that there is a method to the madness.

Here’s a first attempt to identify that method.

Let’s take eleven examples. We’ve got at least one from every episode.

1. A frictionless version of Super Mario Bros would be a black screen with a button saying “Rescue Princess!”

2. Unlike those at the top (Jan Levinson) and the bottom (Stanley Hudson), Michael Scott doesn't have a ‘real’ job. It’s an abstraction. His response is to retreat into delusion, creating for himself a fictional world that he needs to believe is true to derive a sense of purpose.
   

3. In a thriving music scene, everyone works together to advance the scene as a whole (positive-sum) while also competing internally for status within it (zero-sum). This tension gives the scene its energy.
   

4. The wine industry’s success relies on balancing transparency with mystery. While the origin and process of a wine can be meticulously documented, its taste remains unknown until uncorked. Complete transparency would diminish its value.
   

5. In an ideal social scene, the status of the people at the top and bottom is clear, but the middle remains unresolved. This opacity lets everyone feel they belong. Without it, social cohesion would disintegrate.
   

6. Bands are in the meaning business, manifested through the sale of merch. The meaning of that merch is created rather than discovered and is upstream of its utility.

7. The best way to gain agency is to make things.
   

8. Don Quixote is heroic for embracing the fact that life is cope. His self-delusion gives his life meaning and purpose, and those around him who maintain his fantasy are providing an act of friendship.
   

9. A well-crafted joke gradually reveals itself piece by piece, with the punchline crystalizing exactly at the point at which it is delivered.
   

10. Kids are naturally better systems thinkers than adults, as they have not yet been trained to think in terms of cause-and-effect. They understand that the world is out of their control, so instead, they dynamically interact with its component parts rather than trying to solve them. Their modus operandi is seeing and making, not problem-solving.
    

11. Sometimes, friction in commerce makes it fun and meaningful, e.g., for merchants figuring out their first sale and buyers hunting for the perfect product.

Notice anything?

Squint a little, and these examples begin to blur together.

One by one, like a black hole absorbing nearby galaxies, they collapse into a single. insight:

Meaning isn’t found; it’s forged through friction.

Whether it’s your brain clicking into gear as a joke reaches its crescendo, the jostling for status in a social group, the nervousness when uncorking an expensive bottle of wine, or the stubborn efforts of Don Quixote and Michael Scott to maintain a sense of purpose, it’s our interaction — physical, psychological, emotional — with life’s complexity that forges its meaning.

Four years ago, one of the first points that Alex made in his first episode was as follows:

“A lot of what we think about all day internally at Shopify is how do we surface and orient you correctly around the good friction so that you grow and feel yourself growing and then trust yourself more.”

Though he was referring to Spotify Shopify, Alex was laying the foundation for the eight hours of conversation that followed.

As we slide into an increasingly frictionless world, our challenge is to identify the ‘good friction’ and to do what we can to preserve it.

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Sizzle Reel

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Links & Transcript

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Jim O’Shaughnessy:

Well, hello everyone. It's Jim O'Shaughnessy with yet another Infinite Loops. I was upgrading my potentially recurring guest before we began recording.

Alex Danco:

I'm not a potentially recurring guest. I'm a kinetically recurring guest.

Jim O’Shaughnessy:

Alex Danko, my friend and inimitable philosopher of basically all things I can throw virtually anything at you and you can talk about it. You are amazing, because give you a mic, you'll go 30 minutes on anything, which I love and we've experimented quite a bit in the past, and this time around, same deal. I haven't really prepared at all. I was gleeful when I saw yesterday that you were going to be my conversant today, Alex. Well, for people who don't know Alex, I think we are creating a complex adaptive system here with all of the podcasts that is going to make an emergent amazing, maybe even best-selling book with all of the things that we have discussed in the past. Alex is the director of product at Shopify, not Spotify, right?

Alex Danco:

Not Spotify. That's correct. One of these days.

Jim O’Shaughnessy:

And so, I'm just going to jump right in.

Alex Danco:

Sure.

Jim O’Shaughnessy:

And it's kind of my, what the fuck is going on? What the fuck? I was rereading one of my favorite science fiction books called The Fifth Science, and they've got a passage in there that I want to read to you and then we will discuss. In the book, he says, "We call it narrative collapse when a planet gets so connected, basically a time inevitably arrives where it becomes really difficult to work out what is actually happening. Video, audio can be fake, testimony is unreliable. All truths fall into a relative flatness."

Alex Danco:

This is a good prompt for me to bring up one of my great grievances of the past couple months, and this is surely something that you have some opinions about and I genuinely don't know which side of the fence you're on this, so I'd like to know. Jim, are you pro or are you anti hiding likes on Twitter?

Alex Danco:

Was it a good move or was it a bad move?

Jim O’Shaughnessy:

Wow, I hadn't even-

Alex Danco:

I'll connect this to your question in a second, but I want to know where you stand on the issue.

Jim O’Shaughnessy:

Connect it to my question, but I am like Patrick used to joke, I ruin every sample survey that I get put into, because I don't-

Alex Danco:

You don't ruin the sample surveys, you just respond to it with gifs.

Jim O’Shaughnessy:

Alex, I literally do not care nor know, I know how many followers I have. I have no idea who is following me, nor do I care. I never respond to likes. Nice. Fine. So is it good or bad? Well, I think on the good side, it allows people who are always worried and terrified what other people will think of them to stop falsifying their preferences and actually like material that might put them in a class of citizenry that might be in the basket of deplorables or that type thing. By the way, I think one of the funniest things Elon could do would be to turn likes back on.

Alex Danco:

That's the big joke, right? Everybody was like, one day you just turn it back on again. Yeah, it's the Twitter version in the Office when Jim starts adding nickels into Dwight's phone handset one at a time every day is one day I took them all out.

Jim O’Shaughnessy:

So again, yeah, I mean I don't really care. I mean, that's my answer. I don't know. I will look to you to educate me on whether it was a good thing or a bad thing.

Alex Danco:

Sure. Okay, so first let me connect why I asked you this question, this question back to your question about narrative collapse. So when we think about this idea of like, hey, what does anybody even think is real anymore? What is the actual true narrative versus what is these reflexively created narratives that can be deep faked into existence or psyopped into existence or whatever? It's like, okay, if you take Twitter, I refuse to call it X, I don't know about you, but it's Twitter. Come on.

Jim O’Shaughnessy:

I always call it Twitter.

Alex Danco:

Yeah. Take Twitter as sort of this little microcosm of the world saying, listen, here is this nice little terrarium where you can observe what is the discourse. To me, the single greatest signal of who was really caring about what was not the hard feed of posts and retweets, it was the soft signal of being able to piece together these breadcrumbs of seeing which people liked what thing, because this gave you a very… a trail of breadcrumbs that you, the Twitter user, needed to piece together to figure out what people were thinking and what people thought were funny, right? And what the joke is, right? So Twitter is basically a format for discourse where the native unit of content is the joke and the main character, right? We've talked about this before, right? It's like every day on Twitter there's a main character, and every day on Twitter there is a joke, and the way that you consume the format is you rarely see the joke first.

Alex Danco:

You see the reactions to the joke first. Then you have to go figure out, okay, what is the joke that we're all making today? Or you see people making fun of the main character, but you don't know who it is. Then you, it's like you have to go do the work of back propagating to find out who we're all making fun of today, right? It's incredible format. And the reason why I bring this up, is that act of back propagation, of deriving the main character and deriving the joke, is an incredibly bottoms up way of maintaining the integrity of real narratives. Because the narrative is built continuously by people. It is not something that is made and then put out into the world and then commented on the act of commenting. It is what makes it in the first place. The reaction is the content distilled down to its purest form. Now, what has really irked me about removing likes or not removing likes, I should say making likes private, is it removed one of the main ways by which that rebuilding of the story continuously happened.

Alex Danco:

It's like, hey, imagine someone makes a JD Vance joke, and then there are a million riffs off the joke, and when one of those riffs might get likes from these five people that you seeing the like of the Tweet making fun of the joke is a reconstruction of the joke that happens through the reader's mind. Each time it makes the thing new, which in fact is like this is how our brains actually work, right? You are not consuming reality, right? You are consuming a construct that you are making all the time, and Twitter mirrored that thing really perfectly. When you take out that key signal of these people liked the tweet that made fun of this joke, that referenced that person, you're left with something that is really dumb to lowest common denominator in a weird way. It's just sort of bulk likes, which is less interesting.

Alex Danco:

Now, the converse to that of course is this very, very real thing that you identified, which is preference falsification, right? This is like, yes, of course there is this human nature to not actually what you like and not actually say what you're really thinking, but I'm not convinced that it was worth the cost here. It seems like a really hamfisted way to approach that, as opposed to the real service that likes were doing. And I say that as overall, I'm not a hater how Elon's been running Twitter. I think that Community Notes is one of the most successful products of the last decade. It is unbelievably good. Holy shit. That product has earned so much goodwill from a, it is truly working at something very difficult. Then look, clearly, I think this team has a set of principles over how they want this network to work this sort of pulsating massive story, but I think that hiding likes really did a lot of damage to people's ability to not only reconstruct the joke as is being generated all day but also construct who should I be following. What threads should I be, in the future, anticipating to pull on? Because that's how you construct a really great experience. I think it must be miserable for something starting out on Twitter today if there even are such people. How do you know how to get into this? The public likes were a really great way to start, and so I'm sad that's gone.

Alex Danco:

That's my-

Jim O’Shaughnessy:

I like the take. Especially, as you know, I don't watch live TV. I don't watch sports, and yet I know, through the memes about the Australian breakdancer, because they were some of the best fucking memes. I laughed out loud. And to your point, I had to figure out when I saw the first one, which was Breaking Bad ... It was the TV poster for the show Breaking Bad, and it's got them on top, and then it has her. I just laughed immediately, and I'm like, "I wonder what this is about." And so, it did drive me to go find her Elaine-Benes version of breakdancing.

Alex Danco:

Right. It is really ... That format of explicitly re-deriving the original topic in the minds of the consumers is ... How do I put it?

Alex Danco:

Do you think that this actually meaningfully varies by platform? I guess it must. I'm basically only on Twitter. I don't use Instagram or TikTok or any of those other things. I don't really know to what degree, if at all ... Clearly, things go viral on TikTok, right? It's just as much, if not more, but I don't really know, as a non-consumer, what the actual mechanism of this is. I know that reactions are a big thing, which rings true to me.

Alex Danco:

But I don't know. Do you feel like your use of Twitter has changed meaningfully over time? Or do you use it the same way?

Jim O’Shaughnessy:

Use it exactly the same way. I just sort of ... This too shall pass is usually my attitude about any changes. Again, I'm an anomaly in that I really don't give a shit, as long as you can pretty much say whatever you want, and we're going to get to that in a minute.

Jim O’Shaughnessy:

I really don't like the ... I wish there was some way to verify a person's identity. And yet, coming from my previous background in asset management, a lot of compliance departments will not let really super smart people comment on social media, and so most of financial asset management folks are anonymous. They're not anonymous…

Alex Danco:

Right. All the other ones are anonymous.

Jim O’Shaughnessy:

All of the good ones are anonymous. Now, I know most of them because I reach out and figure out who they are, but the idea that the trolls and bots ... I ignore them, but I know that other people get really worked up about it.

Alex Danco:

Paul Graham tweeted yesterday something. I'm paraphrasing this thing. I'm going to butcher it. Basically, "I bet there will be a next wave of social networks where suppressing trollship is actually built into the architecture in the first place, much in the way that you have secure operating systems as opposed to the open and vulnerable ones."

Alex Danco:

Perhaps that's true. I have a hard time imagining how you would do that in any way that would still make it meaningfully open. I think it's ...

Alex Danco:

My other response to that is ... I think, in practice, that exists today. It's called Instagram and Threads mostly, right?

Jim O’Shaughnessy:

Right.

Alex Danco:

I guess that's not built into the social network itself so much as that just works due to sort of very, very heavy moderation as a culture and in the business, which is no mean feat, right? It is hard to actually accomplish. That team over at Meta has clearly decided that moderation is the product, and they have succeeded at it accordingly.

Jim O’Shaughnessy:

I'm going to move on to the intent of the first question. As an old ... If the following things had happened when I was, say, 25, 30, if a sitting President of the United States had to be hounded out of seeking reelection by his governing party and was replaced by his vice president who, let's be real here ... Prior, she didn't get much love from either Biden, his administration-

Alex Danco:

Anyone.

Jim O’Shaughnessy:

... or anyone, and so that has happened. And where are the news people? Where is Sam Donaldson shouting at the press secretary every morning, "Why aren't you invoking the 25th Amendment? If he can't run, how come you're not," ... I mean, it seems to me that our corporate media has kind of just gone ... Where are the ... Let me leave it here. Where are the journalists? Which I love. I love real journalists (i.e., "Oh, something happened over at the Watergate. We might want to look into that.")

Alex Danco:

Did you ever watch Silicon Valley, the show?

Jim O’Shaughnessy:

Yes, of course.

Alex Danco:

It was like, "Oh, these aren't real journalists. These are tech journalists." You think one of them is going to go to jail to protect a source? They work for TechCrunch.

Alex Danco:

Anyway, back to your question, I don't know to what degree CNN or Fox or any of those people were, in fact, putting up any characters to say those things every day. I think, to me, as a person who gets their news from Twitter ... I feel like the main way in which I encounter specifically, "Where's 25th Amendment? Who's going to do it?" is sort of characters like David Sacks. You get ... There have been some characters that have really ... David Sacks, in particular. Man, do you remember that really good week on Twitter where it's not only did we get, "Hey, hear about this guy, JD Vance? He gets home from work, and the couch is a headache."

Alex Danco:

Not only did we get that ... And we got ... But we got the whole ... All of Silicon Valley piles on David Sacks all at once, and it was really spectacular. Not just the Paul Graham being, "Hey, buddy. Do you want people to actually know what happened?" Not only that but then also when Sacks spoke at the RNC, and it was crickets and some isolated boos or whatever for whatever he was saying. Ukraine. I can't remember. I can't remember what the content was. It doesn't matter. But what we remembers is the reaction to the content, which is not whatever he said, not even the reaction at the convention, which was crickets, but then him tweeting where he was like, "Nobody booed. Some people clapped, actually." It's like, "My, buddy. Never tweet those words."

Jim O’Shaughnessy:

PR fail 101.

Alex Danco:

"Nobody booed. Some people clapped, actually," is one of the great one-liners. Of course, it's ... He's obviously ... Him and then Chamath and the All-In guys have clearly figured out a formula that works. You can't slag it too badly, but also it's like, "Man, that was funny." What a great week.

Alex Danco:

I tweeted out that week. I was like, "Twitter's so back." It really feels like it's sort of back to that manic energy that was sort of pulsing with 2013, '14, '15. That period of time. There are some flavors of that that are back.

Jim O’Shaughnessy:

Yeah, but I am going to continue to drill in until you give me an answer that doesn't be just a Twitter. Honestly-

Alex Danco:

Don't you remember media training 101? Don't answer the question. Just say whatever-

Jim O’Shaughnessy:

No, of course I remember that. How do you think I made it through being in the media all those years? I completely ignored the question and then answered the one I wanted to.

Jim O’Shaughnessy:

No, but seriously ... And I mean this objectively for I don't care what your political beliefs are, right? If you are an investigative journalist who is on the left, or you are an investigative journalist who is on the right, or maybe, it might be the rarest thing in the world, an investigative journalist who is neither of the left or the right but just wants to figure shit out, where are they? It seems to me that ... To announce what a nerd I was as a child, during the summer of the Watergate hearings, I was what? 13? Dude, that's all I did. All I did was watch those hearings because they were riveting, and it just seems to me that everything seems air stats. Everything seems like a Potemkin village.

Alex Danco:

Well, part of ... Here's where I think you actually get some pretty radical departures on each side of certainly the American political spectrum insofar as the DNC right now, or Democrats right now, sort of peak demonstration of ... You know the meme of Nancy Pelosi on the phone that originally was, "Buy these Nvidia calls," or whatever but has since been used all across the board? Right? It's like you have that level of Xi Jinping-style party control of, "We're going to orchestrate the meetings."

Alex Danco:

Do you remember when that poor guy got taken off in the national ... It was in the Chinese ... I'm going to butcher exactly what this was, but it was a couple of years back. He had one sort of main opposition leader. And during the main congress of everybody getting in, it's like they got the cameras to point right at him in the middle of a speech, and then a bunch of people ushered him offstage, and then he was not seen again. They're basically doing, "Hey, apparently the people want there to be a deep state. Let's give them some deep state."

Alex Danco:

And then on the other side, you have the phenomenon of the arrested development sketch-type. Trump family is back, and it's going to be Kimberly Guilfoyle as Secretary of State, and it's going to be this incredibly ragtag shoestring thing trying to just keep alive the ember of this feeling of, "Can Trump still successfully do standup to a crowd? Or has he lost the mojo?" Right?

Alex Danco:

Wherein it's, in either case, this concept of conventional journalism is sort of made a mockery of because in the Democrat case it's, "Oh, you don't have access to what's really going on, so you are only reporting on surface-level symptoms."

Alex Danco:

In the sort of Republican case, it's like the surface-level symptoms are actually ... Not only is that literally all there is to it, but it's like all there is to it in this sort of almost ... It's all parody at this point. It's self-referential parody, and so it's like the act of reporting on it ruins the ... It collapses the narrative. There's your narrative buzzword. It sort of collapses the ability of the magic to work anymore, and I think this is part of why you see all this sputtering frustration out of the past ...

Alex Danco:

When was Biden stepping down? Also, by the way, back to your previous idea, stepping down via a screenshot of a letter posted on Twitter by the Twitter intern or whatever. Man, oof.

Jim O’Shaughnessy:

And then you hit on it, right? In earlier eras, the eyebrows would've all been permanently like, "What the fuck?"

Alex Danco:

Well, and they were. I remember in the 48 hours after Biden posted the letter, a fair amount of my feed, certainly, was, "Hey, so did the intern get a little power-drunk or something? What's going on here?" Do we know he posted this?

Jim O’Shaughnessy:

The intern is like, "Oh, I'll do it myself, Goddammit."

Alex Danco:

Do you remember there was maybe a 36-hour story arc that it was the Obamas who were sort of master choreographing before we settled on, "No, no, no. It was Nancy. Come on, come on,"? They decided she was the superior meme for the format.

Alex Danco:

But that was the really big ... "It was always Barack all along. He was always the one that controlled the Twitter account. He had the keys to the Okta account." I just love this idea of ... I forget. Somebody posted this idea where it's, "Hi, Verizon. I lost my phone. I need a new SIM card, please. My name is Joe Biden. Yep. I'll hold, please. Date of birth is," ...

Alex Danco:

Stranger things have happened.

Alex Danco:

Verizon would do it.

Jim O’Shaughnessy:

Of course they would. Of course they would. That's the funny part. It's just like everything because we're so connected, right? Maybe what I hear you suggesting is that you have to develop, you have to relearn, how to follow the breadcrumbs you mentioned earlier, right? You have to figure out, "Okay, this was odd. It appeared on Twitter, and it wasn't on presidential stationery, and this looked… things that make you go hmm," but the thing that I find interesting is ... Let's not just keep picking on Biden. I mean, this is everywhere in politics. It doesn't matter what side of the aisle you happen to be on. It's everywhere happening the same way.

Jim O’Shaughnessy:

And I'm just wondering. First off, does it need fixing? You can say no. If it doesn't or if it does need fixing, how does that happen?

Alex Danco:

Let's see here. The thing that was so compelling about that month in there that we seem to have now ... I think now we're kind of past the month. Now, it seems to be it's got back to business as usual. What was so compelling about it was things were genuinely surprising. It's an actual surprise as the meta character, right? That is the meta characteristic that is attractive about something or that is desirable about something is really powerful.

Alex Danco:

There's a study that came out a while ago, which is if ... People were sort of screening various movies, and then they put eye-tracking things on people to look at where their eyes were focused and where their focus changed over time as the screens on the movie changes, and you can do all of this signal analysis on each pixel of the movie frame, which is, "Hey, where do people actually look? What are the characteristics?" Especially in terms of the information content as measured from an information theory point of view. And the answer is people don't look at the pixels where there is the most uncertainty. They look at the pixels where there's the most surprise, right?

Jim O’Shaughnessy:

Well, that's Claude Shannon's information theory in a nutshell, right?

Alex Danco:

Yes.

Jim O’Shaughnessy:

Basically, Shannon ... Right? What he said was ... Or it wasn't him, but somebody's commenting on it. Was basically a political speech has zero information because it has no new or surprising things. A poem is just chock-a-block full of information because people are surprised.

Alex Danco:

In this case, surprise is almost akin to the first derivative of information.

Alex Danco:

Pure information isn't interesting either. That's white noise. White noise is pure information. What's interesting is relative changes in information versus sameness is where its signal is.

Alex Danco:

This idea of surprise as being inherently how you sell things is something that I've been really interested in because, again, if you think about it, what are elections? Elections are a sales process. You're trying to do it ... There's an organized effort to sell a thing to a group, and there are competing processes, and the better one wins.

Alex Danco:

Through that, I've been really thinking a lot, a lot about ... Did you read in The New York Times the other day ... There was this great profile of Alex Karp, the Palantir CEO.

Jim O’Shaughnessy:

I did.

Alex Danco:

It included one of my favorite little lines, which I'd heard somewhere else, but it was nice to see it again, which is one of the Peter Thiel lines, which is the paradox of sales. Do you remember this?

Jim O’Shaughnessy:

Mm-hmm.

Alex Danco:

Paradox of sales being, if you're trying to sell something, you need to do two things simultaneously better in opposition to each other. On the one hand, you need the prospect to think, "This guy is just like me," because that's how you build trust.

Alex Danco:

But on the other hand, you need him to think, "This guy is completely different from me," because that's how you get him to think that you have something he doesn't. And you need to impose both of these things at the same time. "We are just like you except for I also have this mysterious reservoir of things from the Far East or whatever that contain mystery and therefore contain margin." Without mystery, there is no margin.

Alex Danco:

And so, how do you do both of these things? One of the ways that you see people do this successfully is being able to surprise people. If I can really surprise you about something, it's like I am most of the way to selling you something. If you look at certainly in VC and this idea of the two-way sale between a founder and an investor, which is a bi-directional sales process, it's like they're kind of both trying to do this dance wherein they both are like, "We are the same. We're a founder-friendly investment firm. And, hey, I have all these characteristics of all these investments you were trying to pattern-match against," but then also you need to have your angle where I'm like, "I'm going to tell you something that makes you completely rethink everything you've ever thought about X," from which you derive the mystery that makes the sales process worthwhile because there's margin in it.

Alex Danco:

Anyway, if you take this all sort of back to elections and the sort of question that you're asking, this is a large sales process that takes many months to complete. The way that you get people to cue into you being the team that is selling something interesting that I need to pay attention to that has mystery in it ... Again, look at Trump's 2016 candidacy. Incredible on both dimensions. One, "We're just like you because we have all these hilarious everyman flaws," that were made into spectacle. This man shits on a gold toilet seat. "Wow, he's just like me." He also has no taste.

Alex Danco:

But then also this idea of, "Oh, my God, there is this dark mysterious force here that I don't understand. This is so compelling. I need to vote for this." Or if not vote for it, even ... This, actually, I think was particularly true for the people who were like, "I'll never vote for you. You're repulsive," but it's like, "I have to pay attention to you," which is most of the battle.

Alex Danco:

And it's like nowadays, eight years later, it's like, man, I feel like there's no mojo on either count now out of that team from what I see anyway. It's like it's no longer an everyman story because now it's sort of retrenched to, "We're going to get back," but there's no mystery to it either. Not especially. I feel like a lot of what they used to use ... It's sort of been replaced by ... I don't know how you put it. I'm not completely current and up-to-date with how things have shaken out going into the Democratic Convention, but it feels like it's just sort of turning into this sort of generic back to the regular no surprises slug-it-out campaign type of thing. Certainly, at least the Democrats would like to take it onto grounds where they can remove all the uncertainty out of it and sort of go play ground game, which is ... Nah, that's boring though. There's no good content in that.

Alex Danco:

I don't don't know if that answered your question at all, but ...

Jim O’Shaughnessy:

No, as ... That's what I love about you, Alex, actually, is the fact that you sometimes ... When going out of your way not to answer my question, you come up with beauties like, "There's only margin in mystery." I love that. That's good. I'm for sure our producers are going to pull that as a full quote. No doubt.

Alex Danco:

Sure.

Jim O’Shaughnessy:

But-

Alex Danco:

You know who I think said that originally, just to add a little tie-in there? It was actually Ryan Petersen from Flexport.

Jim O’Shaughnessy:

Really?

Alex Danco:

When he was talking about freight forwarding. And people are ... How lots of software people will be like, "This sounds like a really low-margin, shitty, stupid business that's done on pen and paper. Why do you think there's any money in this?" He's like, "Because no one understands how this actually works." It's like there's so much mystery into it, and it was ... I fell for the line, anyway. I thought it was a good line. I don't know if it's appeared to be true, but who cares?

Jim O’Shaughnessy:

Actually, I'll recount an old story when I was doing asset management. I had a guy who was the consultant to one of our largest first ... We had a family that had sold their enterprise to a big company, and so they got a shit-load of money. And my book, What Works on Wall Street, had just come out, and so literally he called me. And he's like, "Come out, please. You got to come to New Mexico, but I really like your process." Blah, blah, blah.

Jim O’Shaughnessy:

Anyway, my whole gig was complete transparency. We will show you every line of code that goes into the empirical algorithms that select the securities, et cetera, et cetera, and you get to see everything. In fact, we even had a line. "We use a lucite box, not a black box." And so, anyway, the consultant who followed ... About two years later, we had a portfolio that was literally fire. This is the late '90s. You can guess what kind of portfolio it was. It was pure momo, pure momentum, and it was up triple digits going into the end of 1999.

Jim O’Shaughnessy:

And so, this guy says, "Can I come by and see you?" And I'm like, "Sure." And so, he comes in, and he sits down, and he goes, "Jim, I want to make you a billionaire, and there's one really simple thing you can do for that to happen." I'm like, "I'm all ears." And he goes, "Make it a black box. Make it a mystery." He goes, "Because without the mystery, you're only going to get clients," like the big client that I did retain who he was advising who was a real engineer's mentality. “If I can't see you the way it's working, I'm not going to do it.” But that always struck me as something ... Was I ever a fucking moron for not taking his advice?

Alex Danco:

Well, there's so much to this where this idea of ... When does opacity make things better for everybody?

Alex Danco:

But I feel like one of the classic examples is that ... Venkatesh Rao has something about this where it's ... Suppose you have a set of 10 friends in high school that, if truth be told, if everybody actually sat down, you could rank them from one to 10 in coolness, right? No one is ever going to do this, though, because everybody is worse off if you do this, right? The only rule is that you have to know who's number one, and you have to know who's number 10. It's always clear who the alpha of the group is, and it's clear who the court jester is. But two through nine have to be a mystery. It's really interesting. Wall Street gives you so many very literal examples where you can actually put numbers on the degree to which this is true. To give you some examples, you look at these closed-end funds that either trade to premiums or discounts to NAV. The dream ... What's it called? What's the fund that holds a bunch of SpaceX and Stripe and shit that trades at some massive premium?

Jim O’Shaughnessy:

Would that be Cathie Wood?

Alex Danco:

No, no, no. This not that. This is private companies.

Jim O’Shaughnessy:

Private companies. Got it. Got it. Got it.

Alex Danco:

This is closed-end fund that somehow acquires shares of all these private companies.

Jim O’Shaughnessy:

Yeah, no, I don't know about that one.

Alex Danco:

Okay. Matt Levine talks about this a lot, but the summary of this is like you have this fund, it owns all these privately held tech startups that it's not 2021 anymore, but they're still desirable. It's things like Stripe, and SpaceX is the big one. It's like people will pay you a premium to be able to say at the golf course, "Oh, I own some SpaceX." Sure, sure.

Alex Danco:

Yeah, you can put a price on that. And so it acquires shares in all these tech startups. And so it lists and it trades at some stupid premium to NAV that is actually harmful at this point where it's like, yeah, having a small premium is fine, but if the premium is the majority of the price you are paying, then you are only buying a bet on the premium going up or down. It's like the degree to which you will make money on this investment has nothing to do with how SpaceX performs. It has everything to do with how people feel like this weird bet is going.

Alex Danco:

The converse to that would be the Bill Ackman story of, "We're going to do Pershing Square USA. It's going to trade to a premium, everybody. I'm going to raise 10 billion," and then it was 40 billion and then it was 1 billion and then it was nothing. Where he's like, "Well, I'm Bill Ackman and I'm a great investor and I would like to go buy things. I would like to go buy publicly listed companies. And because I'm Bill Ackman and because I have a lot of Twitter followers, it will add a lot of value and therefore, we feel like it should trade at a premium to NAV."

Alex Danco:

And there was a period of time where people were like, "Yeah," until it became the keep it simple, stupid, answer to the question made itself obvious, which is like, "You can see which companies by they're publicly traded companies. Why would anyone pay a premium for this?" It's like, "What do you think we're morons?" It's like there wasn't enough mystery to it. It's like the mystery was basically restricted to him saying, "I really want to be able to tweet about these companies more and I can't under my current fund structure. But if I can make this fund, then I'll be allowed to tweet more and I'm good at Twitter, therefore there's premium here," was more or less one of the cases being made.

Alex Danco:

It's like there's no mystery about what Bill Ackman's tweets are. It's like you tweet enough. If you tweeted less, maybe you would've gotten your fund, maybe you would've raised the money, but not the first time in history that that mechanic has played out.

Jim O’Shaughnessy:

Is it almost like a barbell? When people ask me for asset allocation advice, I'm like, "What should you do? Well, I think what you should do is buy the cheapest all world ETF and just hold it, literally. And, or if you want to be very different than the market, like the portfolios that I design, but there's going to be mystery and fun in those because you have no idea what's going to happen."

Jim O’Shaughnessy:

On one end of the barbell are the mystery, the fund holding all those private... I love that idea by the way. I'm going to look further into that. There's that, the mystery and nobody knows how it gets done. Now also in that category would be our friend, Bernie Madoff. But then the other end of the barbell is the... I can't remember which you probably read it too. I think it was in The Journal or the New York Times about the pension fund, maybe Nevada who-

Alex Danco:

Oh, there's one guy? Yeah.

Jim O’Shaughnessy:

one guy, index funds and top percentile.

Alex Danco:

Okay. This is what's so great about there being 50 states is like, yeah, you get one state that's just one guy who gets up in the morning makes some coffee and buys more SPY. Perfect. Yeah. Well, I was going to say. I don't know the first thing about how you actually do capital allocation from a fund's point of view. It's like, yeah, I'm sure there's all this shit around, "Oh, there's this much withdrawal commitments per year and this and that and you have to do all this strategy." I don't know how any of that shit works actually. What I do know is that if you measure all of these funds, they all underperform the S&P. And a lot of stories get told as to why they can't just buy the S&P. And so it's really nice to have one to serve as the counterfactual just to make them sweat a little bit.

Alex Danco:

Yeah, I really wonder sometimes the degree to which... Okay, something really interesting is that Canada has a different flavor of that phenomenon, which is our pension funds directly buying these assets without going through a layer or two as you know. And that in turn makes a different category of people frustrated, which is like, "Why aren't our services needed here? Why doesn't Canada understand that you need people packaging these products?" It's like, "I don't know, man. They just decide to buy the windmills directly. They're big and they can do that." And it seems to work for us.

Alex Danco:

I think it leads to what I don't really know, you probably actually have a much better sense than I do, is the degree to which is like, yeah, you're looking after public pension or something like that, you reasonably need to do things like diversification of, "Yeah, if our economy's in the shitter, it's good for some other country to own our toll roads and vice versa." You get that geographical stuff. But it leads to a lot of everyday complaints of people driving on the toll roads like Highway 47 in Toronto being like, "Ah, I can't believe the Argentinians getting 20 more of my dollars," or whatever.

Alex Danco:

And again, and that sentiment is actually a genuinely important input into what is actually politically possible in terms of when the tough choices are made to how to do things in the either public or quasi public obligation pool, i.e. like, "Hey, are we actually doing right by all of our engineers and our retirees?" The degree to which you're like, "Not only are we going to sell off all these things, we're then going to go buy a bunch of stuff that is surprising. We're going to buy maximum surprise." I guess the Quebec pension did that when they bought a bunch of... What's it called? Not Sam Bankman-Fried, but the other one, Celsius.

Jim O’Shaughnessy:

Oh, right.

Alex Danco:

Those guys I think did two different big crypto scams from what I recall. Someone there has really learned the lesson of the best way to be successful in your career is to lose a billion dollars. It's just like me.

Jim O’Shaughnessy:

Yeah. John Merriwether did a hat trick there. He was of long-term capital thing, and then I remember saying to a friend, "Well, this guy's never going to be able to raise money again." Oh, sorry, I was wrong.

Alex Danco:

Oh, no. Oh, he'll have a fund in two days. Oh, yeah, yeah.

Jim O’Shaughnessy:

Well, this is intriguing to me because the thread today that I want to continue to pursue is this idea of mystery surprise equaling margin.

Alex Danco:

Sure.

Jim O’Shaughnessy:

If you were consulting a startup of any variety, what would be your strategy? How would they do? You know Lulu Meservey? Yeah?

Alex Danco:

Mm.

Jim O’Shaughnessy:

Okay. I like her stuff because she consistently surprises me with the way-

Alex Danco:

She's our boss now.

Jim O’Shaughnessy:

Oh, really?

Alex Danco:

Yeah, she's on our board. Yeah, she's on Shopify's board now.

Jim O’Shaughnessy:

Okay. Well, good. You can ask her for me.

Alex Danco:

That's right.

Jim O’Shaughnessy:

Because you're a big shot at Spotify. Anyway.

Alex Danco:

That's right. [Inaudible]

Jim O’Shaughnessy:

Right, exactly. Now you're putting your consultant hat on. Given what we've just gone over, what we've talked about. And let's say that you've got... How would you have marketed that disastrous AI wearable, what do they even call it? I've blanked on it's name.

Alex Danco:

Which one, the Humane one or the Friend?

Jim O’Shaughnessy:

That one. That one. That one. Because I bought one because I love all things AI. I gave it to one of my grandchildren and said, "Well, have fun if you can use it." But walk me through how could they have done things better in terms of the theme and thread of mystery and surprise?

Alex Danco:

Well, I feel like we got that answered for us with the friend.com launch. You saw that I trust?

Jim O’Shaughnessy:

I did. I did. I ordered one. I ordered one.

Alex Danco:

Yes. Oh, yeah, yeah. Not only is it this just great premise, which is like, "We don't make you more efficient in any way whatsoever. We're just your friend and we text you and say hi." All right. That's already funny and compelling. But the thing that made it actually work is everybody getting mad on the internet being like, "You raised two and a half million dollars and then you spend $2 million of it on friend.com. What an incredible waste of money." It's like, no, that's genius. It's like I cannot think of a better use of this money. It's first, if you tried to spend money to be the main character on Twitter for two days, how much money do you think it would cost? More than that and you get friend.com, the domain.

Jim O’Shaughnessy:

A boat load more than that.

Alex Danco:

Yeah. It's like and you also have this nice domain, Dan, that you can probably sell for decent recovery value. Yeah. Again, part of this, I think in the perennial product managers and past sort of discussion of are you selling something very concrete to the user? Which is, "Look at the value that you are getting, which we are going to spell out in very understandable bullet points. Here's the pain points we're solving you and here is how much money it's costing you and here is how much you earn by using our product"

Alex Danco:

And then there's the counter thing, which is like, "This product feels nice. It is aesthetically beautiful. You like it for reasons you have a hard time putting your finger on. You just do." A lot of the really high leverage products in the large sense have that second characteristic of, "I like it because it's fun and aesthetically nice to use." Toby cares about this a lot with Shopify's product, and that is informed not from best practices on how to make SaaS products, but more from best practices on how to write programming languages.

Alex Danco:

The really, really, really great programming languages, which are some of the highest leverage things we've built today are, it's like, yeah, the main thing they care about here is developer ergonomics and what are the ways in which they feel delightful to use? And then what are the costs that they incur in order to get you those feelings of that delightful use case in other ways? It's the idea of ergonomics is one way you can describe it. Aesthetics is another way to describe it.

Alex Danco:

And really it's like, again, this comes down to there are a handful of people on Twitter who are just really good at hammering home this beat like Shady Taylor, one of these people who are just like, "Yeah, the great thing about Silicon Valley is also the great thing that holds it back in these powerful ways, which is that it's a bunch of nerds that don't understand aesthetics. Except for a couple really do understand aesthetics and then they win."

Alex Danco:

I think it's the Steve Jobs calligraphy story. Again, it's one of those stories where it's like whether that story actually happened or not, it's like it doesn't matter. It's true now. Now it's part of the canon. It's part of the lore. The fact that he was a calligraphy student in Oregon is essential to the development of, "Oh, no, every line inside the map has to be a brush stroke and everything."

Alex Danco:

The why they needed to do the Lisa, I don't know my Apple history as well as I should. But just this idea which is like, "Oh, yeah, everything that made it special was everything that was the exact mirror space of, "Here are the benefits you're going to get that are spelled out in very legible relief." The things that are illegible are the things you actually want because there's mystery in them. There is mystery in terms of what is it that you want and why do I want it. That the minute that you make it really, really legible, you'd wreck a lot of it. I don't know.

Jim O’Shaughnessy:

As I listen to you, I'm thinking of Howard Bloom's book on how to reinvent capitalism. And I'm thinking about my friend, Rory Sutherland. And they have the same message, which is if you really want to supercharge anything that you're trying to sell, if you're trying to sell something, what you really ought to address is not the... The old school, when advertising began, it was basically a block of text. "Here are the benefits for this product," and then it would be just bullet... I mean literally it looks like a tombstone of text.

Alex Danco:

Yeah. Features.

Jim O’Shaughnessy:

Features, and both Rory and Howard Bloom would argue, "No, no, no, no, no. What you got to do is you have to address feelings because that's the entire game. The entire game is going to be through addressing feelings." Now, I don't entirely agree with that obviously, quant that I am, but what do you think about that?

Alex Danco:

Well, okay. There's this great summit talk. This is Shopify's annual conference that Toby did several years ago where he says, "Hey, what is it that people in the video game industry really understand that other people in the business world don't understand?" And so he frames it, he inverts the problem like this, he's like, "Imagine if a bunch of SaaS companies tried to make Mario Brothers. What would happen? How would they do it?" It's like, "Well, they would get a bunch of people together and they would do their user research and they were figure out their problem, which is the problem is that the princess needs to be rescued from the castle. We're going to go build a product, we're going to do a lot of efficiency and a lot of figure out a lot of flows. And we're going to take all of the friction out of the product because nobody likes friction. Friction is bad, and at the end, what you get is a single Windows XP dialogue button that says, 'Rescue Princess. Okay.'"

Alex Danco:

Then you're like, "There we go. We ship the product." It's like, "Okay, why is this absurd? Why is this so obviously funny in this video game example?" It's like, "From the point of view of a game, it's like the product is everything that leads until the button where you rescue the princess. It's like the product itself is the journey there. And the challenge of you learning how to play this game and learning what a Goomba is and learning how to jump over it. And the feeling of you doing it yourself is actually what you're paying."

Alex Danco:

And this flies directly in the face of this very simple maxim of friction is bad, get rid of the friction. If you get rid of the friction more, then the utility of the objective is even more salient and then people will want the thing. And it's like, no, actually there's something really important in the feel. It's like if the purpose of the product is just to deliver you some result, then it's like, yeah, that approach can work fine. But if the real purpose of the product is to change you as the user, as for you to feel that you are learning a skill or developing a certain aptitude or developing a certain characteristic of yourself, it's like, no, no, no. Learning how to play the game is actually the entire product. And you overcoming the friction and you doing everything, it's like that's where all the joy is.

Alex Danco:

And something really interesting is there are a handful of contemporary products that all have shared this characteristic of when they're really early and they're really glitchy and hard to use is when users love them the most. And so if you think about early Snapchat or actually in a certain different way, early Web 3.0, where it's using this thing was awful. It was like the UI of just connecting your wallet and claiming a token or whatever, this is the most miserable thing. But also people are relentlessly addicted to it and they love it because it's a challenge that they've learned how to do.

Alex Danco:

And inevitably what happens is you try to grow these products as you try to grow these user bases, you end up optimizing for getting rid of all of those things as the product matures and becomes more real and all the glitches around out in it. And it's like, yeah, you more successfully achieve the outcome that the product does, but at the cost of all the joy of using it.

Alex Danco:

And if people primarily using it for the joy, then it's like, guess what? They're going to move on. They're going to move on to something else. They were never actually out for the thing that you thought the thing was solving. They were out for a certain kind of entertainment and story and feeling of accomplishment and feeling of like, "I did this."

Alex Danco:

There's something really in there where it's like you sow the seeds of your failure by fixing your bugs. And again, there's no obvious answer to what to do. It's like, "Okay, so do you leave the bugs in?" It's like, "No, not exactly, but you need to know what your product is and why people are deriving their juice from it on a regular basis."

Jim O’Shaughnessy:

That's really scarily close to what I am looking at right now. And we're looking at a particular, I wouldn't even call it a product, but a more of a platform in which all of the things you just mentioned have to be present. For example, if you could go to a platform where you could get surprised by whatever new content is there, I hate that word content, but I can't come up with a better word for it yet. But the ability to get engage people through puzzles, through learning, through experimentation, but it absolutely has to be fun.

Jim O’Shaughnessy:

If it's not fun, then it's like trying to come up with new ways to teach grade schoolers math. We've seen a bunch of companies, some of them that we were quite intrigued by. And they involve teaching kids things in a new way. And the thing that I continued to come back to, which is the reason for this other idea that we're working on is how boring can you make this?

Jim O’Shaughnessy:

If it was the intention in America, and to a lesser extent in Canada, when we formed our educational systems it was industrialists saying to the state, " No, no, no, no, no, no. What we want is them to be acclimatized to sitting in a room for eight hours following instructions." That might've worked for the industrial era. We need a whole new way of teaching people today. And I think, it's my opinion, I'm usually wrong as you know, but it's my opinion that we have to engage fun. We have to make it entertaining as well.

Alex Danco:

Yeah, I mean so the distillation of all of I think the well-intentioned and constructive theory that you can say about how do you get people to develop agency in the world and grow out to be useful members is literally make things. It's really, really just this act of when you make something, all of the really hard to describe but necessary parts of challenging people are distilled into instructions that are not hard to follow.

Alex Danco:

It's like, "Hey, start with nothing, make something." And then what happens to you as a result is really constructive. This idea of like, "Hey, are you making something in the world that you are proud of, that feels like a gift that you're making to the world? Because you've put in all the loving care into the details that people will never see, and because you have all this emotional attachment into this particular process that you did in order to make it good."

Alex Danco:

To me, my personal example in my life that I always think back to is when I was in the band and we were making music and recording albums. And it's like you're making art and you are making it. It's like you're not making a PowerPoint presentation about the art. You have to make the art. And that process, and there's just an unbelievable level of depth that goes into the process of turns out that fractally within the challenge of make an album is the equally difficult challenge of how do you put a mic on a snare drum?

Alex Danco:

Turns out that challenge contains just as much challenge as the parent challenge and it fractally goes to infinity down below it. How do you get a snare drum to not sound like shit on a recording is actually really hard. And from a process of teaching people, "Hey, how do you interact with this challenge in general?" It's like there's no substitute for make stuff.

Jim O’Shaughnessy:

That actually, I'm happy you said that because that is part of, as I'm writing about this to think about it, one of the things that I jot it down is you have to allow users to make stuff in a variety of categories, and the engagement comes. I think that many people, I love the comment about agency. How do you make a high agency person? You make a high agency person by giving them challenges and puzzles and everything that engage them and that they actually execute against.

Alex Danco:

I guess my contention, if I were to try to steal man your argument a little bit, which is that puzzle, I'm skeptical about puzzles in the sense that doing a puzzle is not the same thing as making something. Doing a puzzle can often feel like work, but actually be fake work. It's again, not to say that there's no value in them. I love doing a crossword. A crossword can be great and I think there's an overwhelming amount of evidence that, for example, doing crosswords is great at every year of your life. But I don't think it's quite the same thing as making something. Maybe it's worth unpacking the difference there. I think-

Jim O’Shaughnessy:

Let me give you an idea.

Alex Danco:

Yeah, give me an idea.

Jim O’Shaughnessy:

Something to rip off of. If it was books, would making something apply to fan-written fiction?

Alex Danco:

Oh, yeah. Look, if you're actually writing it and it's actually a real... I think there's a huge difference between writing a fanfic book versus writing fanfic comments. It's like to actually make something requires you to go through the process of hating it and refactoring it and feeling that you're bad at doing it. And all of the essential steps of the creative act, which involves the requisite amount of self-loathing and the requisite amount of having to go on the journey of realizing that at the bottom of the trough you actually open up all the possibility and all the good stuff.

Alex Danco:

And that's not to say that longer equals better, it's just like it is more often correlated with you actually going through the hard work. Byrne Hobart of newsletter fame has a good observation about this, and I have actually observed this as well with my newsletter back in the day, which is there is a pretty direct correlation between how many people read any given newsletter issue and how long it is. And the correlation is not the shorter, the more. It's the longer, the more. Or the longer the piece is the more people read it. And you're like, "Wait a minute. It flies against everything I've heard about how what we want is short form content and our expectations are for shorter, shorter, short."

Alex Danco:

It's like, "Well, what we actually want is things that are good." And things that are long are more likely to be good because it's more likely you went through the crucible of having to make it. The mileage may vary, but for the most part, that relationship is going to hold true I think. If you go back to this idea of how do you get people into the habit of doing that thing? A lot of it is if you look at crafts and disciplines that have really, really good traditions to them. Engineering being one of the hallmark examples of the tradition of engineering is all the stuff that works for a reason.

Alex Danco:

Another one is sort of the tradition of designers. It's like all these people have this common element of, "What is your portfolio? Show us your portfolio of things that you have made that you regularly revisit and that you can send to somebody." If somebody says, "Hey, what have you made?" You can send somebody an email that contains links to 10 things that you've made. It's like it really does not matter what those things are. What matters is that you have it in a format. And again, if the thing you're sending is really good PowerPoint decks, it's like I'm not saying that's impossible. It is totally possible that you can make something that takes the form of what would mostly be analysis or deliberation.

Alex Danco:

I don't know. There exists somewhere, some slide deck probably on actual adhesive slides that was John Malone inventing EBITDA. It's like, okay, that counts as something you made. And it probably appeared in the form of PowerPoint deck before PowerPoint, but still, you made that, right? A lot of real work went into being like, we're going to make a thing and now we have it and it's good. Yes, that counts as a thing you made, but most often it's going to be somewhat more tangible.

Jim O’Shaughnessy:

So what would you do if, let's put it into something that is more in your vernacular, somebody comes to you at Shopify and you think, oh, okay, they seem to have really great products. They seem to be differentiated enough. Take us through, if there are two of those companies selling pretty much identical merchandise, what are the characteristics of the one who sells a shit ton, and obviously no names, what are the characteristics of the one who just, even though they're selling the same stuff, just don't engage, they don't get a foothold.

Alex Danco:

Yeah. Okay, so we get to do this thing, which we always do in every episode of Infinite Loops, which is to bring it back to the original topic of margin is mystery. So again, in e-commerce, e-commerce is commerce except for CAC is rent. When you run a storefront business on of the main variables that is under your control is like where do you set up the store? Do you set up the store in the place that has tons of foot traffic and is expensive rent or do you put it way out in some abandoned lot because your customers absolutely need your product and they will drive 20 minutes for it so therefore you can pay nothing on rent? Or are you trying to figure out some sort of optimal thing in the middle based on particulars?

Alex Danco:

So for e-commerce, it's the same thing except for instead of foot traffic, it's like where am I putting my ads? How am I thinking about where my ads go or how are you generating people discovering your product and finding your way to your store and buying? This is not the most surprising thing you've ever heard. And as a merchant, more or less what you do is you're like, okay, I have my product and I sell my product for a gross margin, let's say the gross margin is 40% or whatever, and that gives me a budget out of each sale to be like, all right, how am I allocating this budget in order to make the bicycle stay upright as it travels?

Alex Danco:

You have a lot of ways that you can think about doing this. You can say, I'm going to fling all of it at Facebook to do Instagram ads. You can say, okay, I want to do affiliate sales where I can say a bunch of affiliates, I'm going to have Jim go out and Tweet about the product and I'll give him 10% off for every user that comes and uses code Infinite loops. That's a thing you can do. You can say, I'm going to really develop a mailing list of first party users and then from that mailing list I'm going to say, here is 25% off because you're my customer and that's how I spend that margin. Discounts on a product is another huge source of spending that margin.

Alex Danco:

Ultimately, if you look at the people that don't just sell a lot of products but actually have really sustainable businesses. Sustainable businesses are the ones where you're actually making a lot of money on the products you sell, not just selling a lot of volume. And in order to do that, the main way that you sort of shoot yourself in the foot as a business is just to give everything away in the discount, give everything away in order to get people in the door. Whereas in contrast, a lot of the businesses that really work are businesses that, not to say that every business is a scarcity business or a [inaudible 01:24:39] good business, but the invention of the flash sale was a remarkable discovery of...

Alex Danco:

Again, you think flash sales are getting the friction out of commerce? No, you're making it harder for people to buy the sneakers. That's why they buy them and why they pay full price for them is just that little feeling of being squeezed in and being a little uncomfortable and there being a bit of mystery as to whether you will get it or not and being a bit of mystery in terms of how many people will show up.

Alex Danco:

Again, there are some businesses like retail and sneakers and fashion and things like that where flash selling is well understood and pretty much all of that happens on Shopify, but there is a much larger business that is for the most part, not on Shopify, which is the broader industry that looks like things like publication and ticketing and various kinds of selling, either sort of the rights to a place in line or the rights to a piece of copyrighted intellectual property or things where it's like you're not really selling a physical thing, you are creating value and then arranging the value in such a way that people line up for it.

Alex Danco:

That is one of the big areas of Shopify, we'll get to it eventually, but just things like Live Nation Ticketmaster, everybody's mad at them. It's like, yeah, you want to know why people are mad at them? Because they make all the money and they make it in mysterious ways. And the mystery is not just them having a black box for how do I get the ticket as opposed to a bot get the ticket, it's because also there is a mystery of rights agreements between, just in the case of a concert, it's like you have the record label, you have the artist, you have the separate company that is contracted with selling the merch for the artist and the separate point of sale system that has the exclusive rights to do that, paying out the cut to the venue, who then pays their cut to Live Nation. It's like, yo, this world is so mysterious.

Alex Danco:

And the people who actually live in this world, and really I'll plug one of my favorite app partners, this guy named Tommy, who runs a company called Single Music. They're one of my favorite Shopify apps because their job is just to understand this murky black box, mysterious cavern and have the flashlight that they can take people around and be like, "Hey, do you want your business to be able to do X? Okay, well we can help you do that," and they can charge lots of money and they earn every amount of it by just having this purchase saying, by using this, you are not going to have to spend all your margin on this thing because you're going to understand the mystery and you're going to be able to play in this dark space.

Alex Danco:

And I think Shopify's job is not to shine light on every single dark cavern where money is being made. Our job is more to just be like, hey, here is sort of this common stable platform on which various different people can build their ways of taking people through the dark caves and getting the mystery and helping you run your businesses such that if they ever have to interact together, it just works. Our job that we really try to do is try to lower the cost of communicating across firms in the coast sense such that more fascinating mysterious work can be done by small entities as opposed to large ones. That's really sort of the work, the really great work is for small teams of creative motivated people to have access to mysterious margin as opposed to the only people who can capture it being big companies. That's a good way of summarizing the [inaudible 01:28:08].

Jim O’Shaughnessy:

I love that. Given our normal conversation that oddly sounds like an actionable item for me, so I appreciate that.

Alex Danco:

Well, I wanted to ask you about this actually, which is in the asset management world, and this is this world that has gone through a couple of different reinventions over your life. How has the mystery, relative to the ultimate client or whoever is paying for this ultimately, how has that mystery moved around and changed shape over your career and who has been able to exploit it in its different forms?

Jim O’Shaughnessy:

Wow, that's a great…

Alex Danco:

Mutual funds, now it's payment for order flow, whatever. Yeah, all those words that people throw around.

Jim O’Shaughnessy:

It's really interesting because if you could invent or come up with and explain well to potential investors, a new way of investing in the market. For example, my book, what Works On Wall Street literally made me, because what I did was I went, everyone, when you listen to all these people talk about what kind of stocks they like, they're always talking about, yeah, we like a stock that has a low PE ratio. We like a stock that has the highest growth rates, et cetera. I was always like, I wonder how that works over long periods of time?

Jim O’Shaughnessy:

And so did the book, for the first six months of O'Shaughnessy Capital, which was the first version of what became OSAM, all of our interest was inbound. One of the guys who worked for me is very funny and he said that one of my original employees was arguably the highest paid phone rep in the world because literally all the calls came in to us. We raised about 600 million after the book and that wasn't nothing back in the late nineties.

Jim O’Shaughnessy:

But then I've always operated under the assumption, if you've got something right and you're there ahead of other people, the only way that you can make sure that it's sustainable is you better have a competitor or two show up rather quickly. So if they don't, you're wrong. And for whatever reason people were initially interested, but it wasn't going to perpetuate. For example, if you can invent an asset class or what seems to be an asset class, for example, I tried it with Netfolio, Patrick, my son actually brought it to fruition at OSAM with Canvas, which is personalized investing strategy or done just for you.

Jim O’Shaughnessy:

So that worked because all of a sudden you could have a portfolio that was truly unique to you. So you no longer had, like ESG funds for example, well, with Canvas you can do your ESG, Alex's ESG. If you happen to drugs, sex and rock and roll, you get to pull, yeah, me too, you get to pull the buttons. I always had a problem with the idea of the so-called ESG fund being somebody else's idea of what was a ethical investment, right?

Alex Danco:

Sure.

Jim O’Shaughnessy:

But the thing that I always laud Patrick for because it is critical, and I think you'll probably agree, coming up with the term custom indexing, he was able to take all of the…

 Alex Danco:

That’s such a great term.

Jim O’Shaughnessy:

isn't it? When he walked into my office with that, I was just like-

Alex Danco:

Active management. Custom.

Jim O’Shaughnessy:

Oh, my... Exactly. Because what he did was he colonized already deeply embedded in our cognitive awareness - indexing when we came up with Canvas was about as popular as it could ever get. Then take the word custom and put it in front of, it's indexing just for Alex.

Alex Danco:

Well, everything is [inaudible 01:33:01] this book, right?

Jim O’Shaughnessy:

There you go. Yes, everything is positioning. So it has changed in the regard to those kind of things can get real legs. If you're first in a new asset class, you can do super, super well if you execute right. But ultimately the way we always do, Alex, we're coming back to our original point in the conversation. The guys who do really well tend to be the two and twenty guys who are deeply mysterious.

Jim O’Shaughnessy:

There was a study done, for example, when all the robo-advisors came online, everyone was saying, "Well, if you're logical, this is what you're going to do. You're just going to do it because it's going to be the lowest cost in the world and you get a good index fund." Or whatever. But the secret is once your wealth gets above a certain amount, at the time of the study I'm familiar with, it was like half a million dollars US, even if you are the most do-it-yourself type of person, you want somebody else to be your wing man. You need somebody else or want for the most part, unless you're an anomaly, to do that despite all of the ideas like you're probably just better off with an index fund. It continues to be a massive industry.

Alex Danco:

Honestly, just speaking for myself, the single product that I would want, and if this exists tell me if it exists, that I would want most, when people are talking about AI and all the new language like GPT stuff and what is it going to be useful for? To me when I look at all of this, I'm like, okay, a lot of these use cases seem a bit suspect to me, but the one that just doesn't, the one where it's like I abide that this is the most important thing in a long time is the ability for it to be a good teacher.

Alex Danco:

So it's saying if you are learning a skill, if you are putting in the hours, how to make things, how to play the piano, how to go make anything and how to be an investor is one of those things, the main thing that you really need is the ability to try things and get stuck and get yourself unstuck. And having a teacher who is infinitely patient with you and non-judgmental because I really don't like all the use cases where it's like this is like a human, but worse but not much worse. It's like I'm zeroes on all those things. What I'm more into is what are situations where it being not a human is better than it being a human and it being non-judgmental is the biggest one. It doesn't get tired of you. It doesn't judge you. It doesn't get exasperated with you making the same mistake a bunch of times. It's just helpful and you know it's just helpful because it's just a thing running on your computer, it's not a real person.

Alex Danco:

So it's like, yeah, the ability to say... I kind of like to tell people, if people ever ask me, they're like, "Hey, should I own individual stocks or should I own index funds?" My general answer is, well, you should basically own index funds. But there's a notable exception here, which is the value of buying an individual stock because it makes you give a shit about the stock and you might learn something by really following it and seeing the thing go up or down and more things about the company surface in your Google feed, and it makes you take an interest into all of these things that you wouldn't otherwise know. And it's like, that's actually probably worth a tick or two of performance if you actually learn something in the process and it makes you better at it. It up levels in a meaningful way.

Alex Danco:

It's like, your ability to supercharge that with having teachers embedded in your portfolio, which is like, “Hey, that really seems like an awesome product.” Where again, the thing where it's like it is not promising better returns, nor is it promising you a cheaper but just as good version as something that a human would do, it's just like, look, here's non-judgemental, not outcomes help, but process help, right? It's like, man, that's super, super, super, super promising. I think a lot of that.

Jim O’Shaughnessy:

You just described many of the things that we are working on here at our little O'Shaughnessy Ventures.

Alex Danco:

Excellent. Sign me up. When it's available in Canada let me know.

Jim O’Shaughnessy:

And as you know, we also invest in outside companies. So Synthesis School is complete AI for kids, and kids are learning at rates that are ridiculous. They're off the charts because Synthesis has nailed the idea of they're non-judgemental, they're infinitely patient and the kids, they just absolutely love using these programs. And you're also hitting a bit on one of my passions, which is if you want to help people learn things, it's got to be fun and it also has to be, or maybe wrong term, fun.

Alex Danco:

Yeah. I don't think fun is the right word. Yeah, I think we're the same page.

Jim O’Shaughnessy:

Yeah.

Alex Danco:

It has to feel real.

Jim O’Shaughnessy:

Yes, it's got to feel like, ooh, this is going to keep my attention for a long time because I just love doing it.

Alex Danco:

Making it fun at the expense of realness is counterproductive, which is a lot of what people do when they gamify things.

Jim O’Shaughnessy:

Totally agree.

Alex Danco:

Yeah.

Jim O’Shaughnessy:

Boy, we could not be more copacetic because that's the problem. When you just intentionally say, oh, we're going to gamify how to learn how to invest, we're going to gamify... No, no, no, no, no, no. It has to be real where that person literally is like, man, I just learned a shit ton about... And fill in the blank, Alex. It doesn't have to be about investing. It can be about any other thing. And your key element here that we also agree with is the non-judgmental part.

Jim O’Shaughnessy:

For example, in my history as an asset manager, you could always tell if a husband and wife, we didn't deal with the end client very often, but in our early days we did and when the husband and the wife came in, I would bet dollars to donuts and win virtually all of those bets the man does not want to admit that he doesn't know what CAGR means. The man will not admit that he doesn't know what it means.

Alex Danco:

“CAGR, I've been to a few of those in school, but... Buddy, I'm an expert on CAGR.”

Jim O’Shaughnessy:

Me too.

Alex Danco:

“Honey, don't worry.”

Jim O’Shaughnessy:

But especially the difference between men and women here is really critical. Men will not admit that they don't know terms of art that are jargon, that if you're good at what you do, you shouldn't be using anyway, but they will never admit it. Women on the other hand, the wife is always like, "What the fuck are you talking about, man? I don't understand. Can you just explain this to me quite simply?" And the amount, and of course, it's not always the man and the woman, sometimes there's women who are also that way.

Alex Danco:

Yeah, mileage may vary.

Jim O’Shaughnessy:

Mileage may vary, but the point is, if you can solve that problem, you have a massive, massive thing on your hands.

Alex Danco:

I think I texted you while this was happening, but several months back we were in the process of buying life insurance. I can't name a single product in the world where there's a bigger discrepancy between how good the product is and how awful it is described. It's like, here's a product that's literally just like, stop paying taxes. That's a great product. I love that product. Give me more. But how it's sold is just miserable. Anyway, point being is as part of this process, my wife is there, it's the usual sort of uncertainty of do you know what you're doing here? I'm like I don’t kn… And then in the middle of it, they tried to sell me some O'Shaughnessy funds because it's Royal Bank. So I thought of you during this, it's like, God, stay out of this.

Jim O’Shaughnessy:

I love that.

Alex Danco:

We didn't get them, sorry.

Jim O’Shaughnessy:

On that note, I ignored the first cane pull from my producer, but I'm going to have to pay attention to the current one. Alex, as always, the emergent properties of these conversations, I'm putting them all in AI.

Alex Danco:

Well, you said what I was just going to say. It's like now we can actually finally get this done because it's like in the old days, all three of our listeners would've had to have done that themselves. But this time you get Claude to do it, and we'll have a book in no time. I look forward to it.

Jim O’Shaughnessy:

And again, one of the privileges that you earn is that you get to incept more people more times than anyone else because you've been on more. So you remember the exercise, we're dubbing you the emperor of the world. You can't kill anyone, you can't put them in reeducation camps, you can't do any of that but you can speak into the magic microphone. Two things everyone's going to wake up the next morning and say, I just had two of the best thoughts in the world. I'm going to act on them. What you got?

Alex Danco:

One thing that I was thinking about recently on exactly this prompt was if I get a wave of magic wand and change one group of people's attitudes about something, I think one that I'm currently thinking about is get the green energy people to be more both curious and also grateful about oil and gas. And I think of this for a variety of reasons.

Alex Danco:

It's one of those things where it's like, yeah, okay, everybody seems to agree that oil and gas got us here and they're very important and now we got to get off and how are we going to do it? And it's like the fact that a lot of these things have turned into ideological purity tests is incredibly counterproductive. Whereas starting with, oh man, it is so cool that we managed to actually pull off all this amazing infrastructure to get all of this cheap fuel, to do all this amazing things. That's the right starting point, I think, for figuring out how we're going to get this big transition happen. As opposed to, you look at what's going on in, that's not even oil and gas, what's going on in Germany is just sort of really tragic.

Jim O’Shaughnessy:

Very.

Alex Danco:

And it's like, okay, how are we going to avoid that? How is North America going to really avoid that? We have a whole bunch of advantages, but I think it has to start with this mindset of not just appreciation, but also genuine curiosity of the fact that we pulled off within three generation a production and distribution system that result in this thick oil from Venezuela being tiny explosions in the cylinder of your car that makes it go down the street when you push a pedal with your foot, it's like that's insanely cool. And I hate to see a lot of stuff when it comes to electricity and batteries and all the next stuff turn into a much more dumbed down version of like, man, the old challenge was really good though, and it was fun that we did it. Maybe this one should be as interesting too. So that's my answer. That's my answer for this round.

Jim O’Shaughnessy:

I love it. Alex, as always, it is a joy to talk to you. Hopefully next time around it will be less time in between conversations because we have a book that has to write itself here, my friend.

Alex Danco:

That's right. The modern book deal, right? You don't get an advance to write the book, it's like you've already paid for the GPT credits. Now you have to produce the content.

Jim O’Shaughnessy:

All right, Alex                 

Alex Danco:

Great to talk to you. Thank you. See you later.

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Jim O’Shaughnessy:

My favorite, I'm curious what your answer to this would be, but my favorite idea of the alive versus dead and growth versus post growth, is this idea that startups are dangerous.

Alex Danco:

Young businesses full of all this explosive energy are really dangerous. It's very easy for them to say yes to things. It's like somebody is like, "Hey, we should do this thing." And everybody's like, "Yeah, sure." Right? And then you do it. It's like, "Oh my God, that's so dangerous." Right? It's like it's dangerous, because these people are idiots. They don't know any of the costs, they don't know any of the downsides, they don't know anything about anything. It's like the famous PayPal story where it's like they didn't know what a chargeback was until a year into making a business. Yeah, that's dangerous, because these companies can actually say yes to things and move. And then if you sort of contrast this to a big organization where it's like some question poses itself in front of some leaders and in order to get to, yes, you have to get 10 different stakeholders to all say yes to something.

Alex Danco:

And inevitably what happens is you get nine yeses and one no, and the one no is actually for principled to good reasons. So you're like, "All right, what do you do here?" Rarely is the answer to be increasingly convincing and change the no into a yes. What actually happens is someone steps up and saying, all right, I'm going to do some leadership here. I'm staking my personal social capital on saying you need to disagree and commit, and then if this turns out to have been a good course of action to take, I earn my social capital back with interest. And if it turns out to have been a poor decision to make, then I lost that capital. I spent it and I got no ROI on it. And this act of sort of continuously, and again, the social capital takes the form in the company of storytelling.

Alex Danco:

It's like it exists as stories in people's minds. And you can draw on, Toby talks about this, a lot of saying the founder actually has this incredible reservoir of storytelling capital, which gets replenished every time people tell the founding story of the company where people tell the founding story of some product or some decision or whatever. It's like that's what keeps this capital alive. And the thing is that having this capital is not enough. It's like if people one day decide in the company, it's like, I don't really need to reinvest and restake the social capital on turning nos into yeses. I'm going to simply coast where I am. That's when growth is over. That's when you can no longer turn those nos into yeses and then it's like you are what you are at that point. You can't do anything meaningfully new or hard without that thing.

Alex Danco:

And it turns out that it sort of reverts back to the literal definition of a growth versus a value business. Growth businesses are businesses that are able to reinvest all of the social capital that their risk-takers earn, and if you're not doing that, then growth is over. You're only worth the DCF of previous risks taken by people, then you be that as it may.

Jim O’Shaughnessy:

I completely agree. I might use some of this in the pod.

Alex Danco:

Sure.

Jim O’Shaughnessy:

But all right, are you ready to go?

Alex Danco:

Absolutely. All right, let's go.

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