Invest Like the Best with Patrick O'Shaughnessy
· Nick Kokonas, Patrick O'Shaughnessy
[00:00:00] S1: I guess this one's harder to explain. Right when you said that at the outside I was like, oh that's going to be the tough part to explain because in one sense everything has an outcome. But not everything has a measurable outcome. If you're working on a software product and you change the color of something, you can A, B, C, D, E, F, G test it all you want. That sort of iterative thing has outcomes. But more than that, just trying different products entirely, different lines of revenue for your business, different aspects of what you're doing, whether you're a writer or you're a painter or whatever it may be. You need to get it to some sort of completion where there is an outcome that can be measured. That's all that means. I see a lot of people starting businesses and spending time drawing logos in a notebook so to speak. And that's not a measurable thing. You haven't produced anything. You haven't tested it. There's no end to the next part of the question, which is like you're the casino. If you have thousands and thousands of outcomes and you're right more than half, you're going to win even though 49% of the time you lose. [00:00:00] S0: Do you think that that 51% is better than say, 80%? By it being 51% you're moving and making enough decisions with high enough velocity. There's more room for learning with a lower percentage being right.
· Patrick O'Shaughnessy, Nick Kokonas
[00:00:00] S0: Do you think that that 51% is better than say, 80%? By it being 51% you're moving and making enough decisions with high enough velocity. There's more room for learning with a lower percentage being right. [00:00:00] S1: No, no, no, no. That wasn't intended that way. It was more like, you could be wrong an awful a lot and still come out ahead. And I think that in managing decisions and managing people and feeling good about your work and yourself, it's easy to get down very quickly in any business because you're going to have a whole bunch of things that don't work. I mean, we're all human. No one likes to have their stuff not do well. No one likes to fail the test. Learning to be wrong and accept that as a process or indeed an inevitable outcome if you're doing things correctly means that you can be correct and wrong at the same time, if that makes sense. Yeah, I'd much rather be right 80% of the time and hopefully we drive towards that. But I grew up, I was a derivatives trader, really becoming the house of the casino is the goal. You don't need a lot of edge in running a blackjack game. You just need a little bit and then you need a lot of players. And that's all that this is. That's that whole statement in a nutshell. [00:00:00] S0: We're going to apply that thinking to the restaurant business a lot in our conversation today, but to set the stage, I'd love to hear the way through which you came to be familiar with the restaurant business in the first place. What was the first event or exposure that got you interested in this part of the world?
· Nick Kokonas
[00:00:00] S1: No one's really asked that ever. The very first exposure was the Greeks. If you're a Greek in Chicago ... My joke is always like, if you're a Greek in Chicago and you don't own a restaurant by the time you're 40, they give you a hotdog joint on the west side for free because they just feel bad for you. So I grew up and my dad in the '60s before I was born, owned a diner. That was the upward mobility for sort of the uneducated Greeks. And so I knew somebody who owned a restaurant my whole life. Mind you, I did well academically throughout my life. And so my dad was always going, "Look, go become a lawyer, go become an engineer or something like that. You don't want to own a restaurant. It's a terrible business." So my first exposure was all of these people telling me not to do it but meanwhile they were at their kid's basketball games. They were the dads who were present for their families and they were the people who controlled their own situation as we spoke about. Even though as all of them were telling me, "Hey, you're the white sheep of the family. Go get a graduate degree." I was looking at it and going like, "Well geeze, they seem like they're doing pretty darn well and I don't really want to work at Goldman anyway." That was my first exposure to the restaurant business and then when I graduated from college we actually knew a very famous restaurant that was going out of business. I had spoken to my dad about, hey, we should try to buy that. And he was really just wildly against it. He allowed me to have the conversation but he was wildly against it. Sadly he died in 2001 so he never saw any of my involvement in the restaurant business and perhaps that's better. I think he probably would have tried to talk me out of it.
· Patrick O'Shaughnessy
[00:00:00] S0: Can you describe why in your opinion there still is this view that restaurants are just bad businesses? That too often they're vanity businesses or it's like trying to make a movie or something. The economics just don't work.
· Nick Kokonas
[00:00:00] S1: What's always interesting to me is that most businesses are not great businesses. If there is a great business out there with high margins, there's something else about it that's hard to get into. So it's very interesting to me that everyone says, "Oh yeah, restaurant business is terrible." I mean, I remember when we started building Alinea, just getting a slight bit ahead but this will make sense to your question. When we started building Alinea there was a suburban restaurant in Chicago and I really liked it and the guy was a good looking chef and he seemed like he had his stuff together. And I kind of knew him a little bit and I said, "Oh by the way, I'm embarking on building a restaurant." And he said, "Well, you don't want to do that. It's a terrible business and it's all sorts of awful stuff and all that." And I said, "Why did you build four more?" If you build one and it's such a terrible business, why did you build four more? Why is it that there are some celebrity chefs that have 35? It's not because they like to get punched in the face. Clearly you can make money at it. Also, coming from a floor trader, a derivatives trader background, when I got down there all anyone told you about was how terrible it is. "Oh my god, you're going to get beat up. It's a terrible environment. People are mean. 99 out of 100 people don't make it their first year and then even the one out of 100 that makes it only 99 of 100 then fail afterwards. Only one out of a 1,000 ever becomes a millionaire or whatever." And I was like, "So you're saying there's a chance." I like businesses that are hard because if I can figure them out, whether that be a great arbitrage in derivatives or that's the restaurant business or publishing, which I think is an awesome business. I just go like, well people are full of shit. They're defending their position. And the fact of the matter is that there are a lot of people in the restaurant business that are not in business so to speak. They did it out of passion or they did it, as you said, as a vanity project or they thought that they were great entertainers at home and they knew how to throw a dinner party so they decided to open a restaurant. I was accused of all of those things when I started building Alinea with Grant. So much so I would just drill into him, this will be run as business first.
· Nick Kokonas, Patrick O'Shaughnessy
It's not an art project, it's a business. If we run it well as a business then we can invest more in the art and it becomes a virtuous cycle. I think that the barrier to entry to the restaurant business is actually relatively low compared to many other businesses, especially in terms of actual knowledge requirements. You can't just start a software company as a sole proprietor if you don't know how to program. So the barrier to entry there is fairly high. The barrier to entry to a restaurant is you sign a lease and build a kitchen and start cooking. It's a lot but it's doable. And consequently there's going to be a high failure rate. [00:00:00] S0: I should note for audience that I think the one time I did go to Alinea years ago it was literally ranked the single best restaurant in the world so I think it's very interesting that you say you and Grant agree that you would run it as a business first at its inception. In what ways did that cause your behavior or your plan to depart from the typical new high end restaurant opening?