Please enjoy this transcript of my conversation with Eric Markowitz, Director of Research of Worm Capital, an investment firm focused on technology innovation and disruption. Transcripts for other episodes can be found here.
“Conviction is great. Opinions are really bad, because opinions will really screw you up.” – Eric Markowitz
Eric Markowitz (@EricMarkowitz) is Director of Research of Worm Capital, an investment firm focused on technology innovation and disruption. He worked as an award-winning investigative business journalist with bylines in Inc., The New Yorker, and Newsweek magazine before joining Worm Capital in 2016.
Transcript – Playbook: Eric Markowitz – Director of Research at Worm Capital
Daniel Scrivner (00:06):
Hello, and welcome to another episode of Outlier Academy's 20 Minute Playbook series, where each week, we sit down with an elite performer, from iconic founders to world renowned investors and bestselling authors, to dive into the ideas, frameworks, and strategies that got them to the top of their field, all in less than 20 minutes. I'm Daniel Scrivner, and on the show today, I sit down with Eric Markowitz, who is the Head of Research at Worm Capital. Worm is one of my favorite hedge funds, and I've been reading their quarterly reports for years. They run a concentrated long only strategy and invest in technology innovation and disruption. They have a concentrated portfolio of between five and 10 positions that today includes Shopify, Spotify, Tesla, Airbnb, Amazon, and NextEra Energy. Since inception, Worm has compounded their investors' capital at over 31% per year, while the S&P 500 over the same period has delivered just over 15%.
Daniel Scrivner (00:59):
In this episode, we cover Eric's origins as a journalist and how that shaped his approach to investment research. We talk about Worm's two-step research process, which starts with what they call the Jane Goodall phase and ends with Elon Musk, the engineer. Trust me, these names are weird, but the content is absolutely amazing. We explore why Eric focuses on slowing down the research process, as well as, the rules and guardrails they use to ensure they get the best research outcomes. And we discuss the behavioral side of investing, how Eric thinks about it and why it's so powerful in shaping investment results over time. You can find the notes and transcript for this episode at outlieracademy.com/99. To learn more about Worm Capital, visit wormcapital.com. You can also follow Eric Markowitz on Twitter, @EricMarkowitz. That's M-A-R-K-O-W-I-T-Z. With that, let's listen and learn to Eric Markowitz' playbook.
Daniel Scrivner (01:56):
Eric Markowitz, thank you so much for joining me back on Outlier Academy. I'm really excited to have you on to dive into the playbook portion. So we're going to talk about how you approach research, the behavioral side of investing, a ton of stuff. So, thanks for the time. So I want to start off this episode, for anyone that's listening to this, I highly encourage you to go and listen to the spotlight interview, where we talk about Worm Capital, where Eric's a Director of Research. I'm a huge fan of the firm. We talk about a bunch of how they view the world, the worm algorithm, the worm theory, bunch of worm stuff, which will make sense when you listen to it. In this one, Eric, I wanted to start off first by talking about your background, because you have a super fascinating background in that you started your career in journalism, and now you're in a similar but very different world of Director of Research focused on public equities. How did that happen? What was that journey like?
Eric Markowitz (02:45):
You'd be surprised. I mean, there's a bunch of ex-journalists working in this business, because I think actually the skillset, when you dig a little beneath the surface, they're pretty similar. And so, just by way of background, I went to school in New York, went to New York University. I went for both journalism and business, and I always thought I could find some job where I could just get to research lots of different things, because I think I have a bit of maybe professional ADD where I just want to learn stuff. I get bored of having to do the same thing every day. And so, I always thought of business journalism as I was always fascinated with business, because I think it's a reflection of culture and sort of the changing attitudes of societies.
Eric Markowitz (03:29):
And I was always interested in money and how money flows through culture and through individuals, and I was always fascinated with new technologies. And so, my first real reporting job out of college was I wrote about the intersection of business, technology, and culture. So I lived in New York, I wrote about technology companies, I wrote about the people at technology companies, I wrote about what they were doing, how it was potentially going to change the world. So I wrote articles about self-driving vehicles, drones, lots of different sort of tech gadgets. I spent some time living in San Francisco and writing a lot about Silicon Valley based companies. I got to know a bunch of investors and entrepreneurs. I was writing for a magazine called Inc. My last story there, just sort of to contextualize what I was doing, was the big feature cover story on Aaron Levie at Box, which is now a public company. I wrote about them when he was still private and he was kind of building out a big mobile part of their business.
Eric Markowitz (04:29):
So I was always just fascinated in sort of this idea of, well, we're living through kind of a unique period in time. I grew up before the internet, but kind of during the internet, and I got to see how it was just fundamentally changing the world for both good and bad. I remember partially when I first went to college, being so excited because that would enable me to get a Facebook account, back when Facebook, you still had to have a college. It was so fascinating to me to be able to spend the first part of my career kind of on the ground level of a lot of these big technology businesses. I always kind of knew that journalism to me was this great opportunity to spend my 20s just going out, traveling the world, writing about cool companies. One of my favorite stories, before I left journalism, was I went to Paris to go write about TASER.
Daniel Scrivner (05:21):
I'm actually a huge fan of them.
Eric Markowitz (05:23):
That's cool. Yeah, so I profiled Rick Smith, the founder and CEO of Axon, which created the TASER product. And so, that was sort of my idea of if I can go and just spend time researching companies, that would be amazing. I kind of had developed a sense that, "Okay, this would be really cool to do as an investor." Because as maybe some of your audience knows journalism, it's a tough industry to start building wealth for your family. And so, I was getting married and wanting to build a family and thought, "Okay, I'm going to take all these skills that I've developed as a journalist of asking the right questions, figuring out the story, sort of digging into something, maybe getting a little bit obsessed with the subject." Which is another soft skill that I think is definitely really applicable.
Eric Markowitz (06:16):
And it was really just sort of fate or kismet, I don't know what exactly, but I got an email from my now colleague, Dan Crowley, and he basically said, "Our founder, Arne Alsin, likes your writing about technology businesses. We're looking to potentially build out our research team. What do you say?" And I just thought, "Sure." It's an interesting meeting. Figured nothing would come of it, but why not? I was living in Los Angeles at the time. And I think I remember talking to my girlfriend then, who's now my wife. She goes, "Yeah, just go take the meeting." So, I met with Arne. I quickly realized, "Oh, this is the smartest guy I've ever met. He's fascinating, and he's kind of doing exactly what I want to be doing, which is investing in these cool technology businesses that are fundamentally changing the world around us."
Eric Markowitz (07:03):
That's a bit of a longer answer, but really, how I got to where I am today, which is spending the first eight, 10 years reporting, just interviewing thousands of entrepreneurs, executive investors, trying to understand what technologies, what companies were going to be sort of potentially the next big thing. Certainly at Inc, I was writing about companies like Etsy and Kickstarter. That was how I was just spending my time. And now, I'm kind of doing the same thing. I'm just allocating capital and helping sort of synthesize information so that we can make really good decisions. But ultimately, it just comes from a very similar process of asking questions and just spending my time kind of geeking out and reading all the stuff that comes out and talking to people and interviewing people.
Daniel Scrivner (07:57):
Yeah. I mean, even obviously hearing you talk through that, I'm like, "Yes, it's basically the same thing." It's just that the focus of your research is slightly more narrow, I guess, maybe in some ways. Growing up, did you dabble in investing? When did you get interested in? And maybe, you haven't had this experience, but I feel like there's being interested in business, and then there's being interested in investing. And I feel like they're mostly tangential and there's a little bit of an overlap, but it's not that much. What was your kind of avenue into investing and your curiosity there?
Eric Markowitz (08:27):
Yeah, I think I remember in high school, there was a student competition and it was a stock market competition. You were given fake dollars. Well, I did it and I think I... I'm not going to claim that I won. I remember winning, but who knows how memory works? I just remember being really excited by it, by being really excited by this idea that I could go and through the fruits of my research and my nerdy obsessions of just spending time on things potentially be able to reap great rewards from it. I didn't know anything about value investing. It took me much later in life to really discover a lot of sort of the core readings that I think are necessary to really work in this business.
Eric Markowitz (09:13):
To me, what attracted me to it, I was never a sports guy. I mean, I played, but I wasn't very good. I was more of a games guy. I loved games. I loved games of strategy. I loved poker in high school. I mean, I was just obsessed with poker. And I think I saw a lot of similarities to investing, which was you're playing against other people. If you make a few good decisions, your rewards can be really great. But it's a game where you don't have all the information. And so, you just have to make good calculated bets. And I think that's kind of initially what got me interested.
Daniel Scrivner (09:47):
So I want to talk about Worm's two-step research process, and partially because as we were kind of brainstorming what we might cover, you kind of launched into, "Here's a little bit of our research process," and I just thought it was absolutely fascinating. And I think one, just the way you were able to articulate it in terms of what you're doing at various different stages, but also, just the fact that it's not hard. But I think you have a unique approach. Can you talk about those two steps, and I won't give away what they are, but kind of the two steps in that process and how you think about that?
Eric Markowitz (10:22):
We can talk about those two steps, and this all comes from Arne Alsin, our founder and CIO. His mind is way more interesting than mine. But the number one step of research is what he calls the Jane Goodall approach, which is you plant yourself on the hillside and you just watch the chimpanzees. And you don't have an opinion, and you just watch them, you take notes, you see how they interact with each other. And that's our sort of metaphor for how we approach researching industries and companies, which is, we take our time, we have no opinions, and we just start watching them and seeing how they interact with the world around them. I think that the one thing that I've personally learned the most over the last, let's say, decade of doing this now is just this idea that it's so important to... Well, there's a big difference between conviction and opinions.
Eric Markowitz (11:15):
Conviction is great. Opinions are really bad because opinions will really screw you up. What's really important about this first step is just gathering the raw data, just saying, "Okay, well, this company is doing this. This is how this other company is doing it. This is how many customers they have. This is..." And you just start sketching out, quite literally, all the different companies in a specific industry that you're interested in. The next part of the research process is the engineering phase. That's what we call it, the engineering phase, where we start taking it apart and seeing actually how all these things work. So we just want to understand the inputs and outputs of the business, really this idea of value proposition of customers are exchanging capital for a product or service. What exactly is the product or service? How is it made? Where does it come from?
Eric Markowitz (12:01):
And so, this is really the technical analysis that we really spend a lot of time on, which is, once we've sort of identified the dynamics of the industry, we just spend as much time as possible to understand literally how the products are made or the services. And so, if we're looking at, let's say, just to use a big example like Amazon, how does the seller system work? How does the actual platform dynamics work? Who makes money? What percentage? Exactly, how it works. We don't care as much about the high level profits, how much Amazon is extracting at the end of every quarter. We want to understand the value proposition for the sellers on the platform, for really the nitty gritty of it. So, that's sort of our overall framework we call the two-step. It's the Jane Goodall, and then sort of the Elon Musk, the engineering phase, take it apart and put it back together again.
Daniel Scrivner (12:56):
I love that second part because I feel like, one, it recognizes that... This quote shows up in a lot of books, but a way that a lot of entrepreneurs think about building a business is that they're building the machine. I know Elon obviously talks about this a lot. This is a concept as well in Ray Dalio's principles of kind of you have to be working on the machine all the time, you have to be kind of looking down on it from above. And anyway, so I love this idea of, number one, it's almost like first, you're just observing. And part of that is so you don't have opinions.
Daniel Scrivner (13:21):
And so, you're starting from a blank slate and you're just taking it in. And then, part two is really about deconstructing and I think understanding how the systems and machines work, and looking at inputs and outputs and okay, something happens here. What shows up on the other side of the machine? It seems really interesting. And you talked about that a big part of doing this was just slowing down the research process. Why is that so important? And I guess, what is bad about a fast research process or where you're kind of, I don't know, speed running it?
Eric Markowitz (13:51):
Yeah. Humans are really just big hunks of flesh with some software attached, right? And I think our operating system isn't maybe not as great as we give it credit for. And so, our brains are like a Google Chrome with 50 tabs open, right? And so, this system starts to slow down itself if you have too much things going on, right? So I guess the way I think about research is close out all the tabs, exit out of all the programs that are taking up bandwidth, and just focus on one thing at a time, just open up one application. Often that involves just printing out stuff, or listening to a podcast and going for a walk. And so, I think that in my own experience, it's just been integral to really deconstruct and slow down.
Eric Markowitz (14:45):
Reading a transcript even, an earnings' transcript, and just reading it a couple of times, highlighting it, going through it, because I think our culture and sort of the environment that we're in right now is kind of obsessed with multitasking and doing a lot of things at once. And so, that's often antithetical to really good research. If you think about even Jade Goodall, or anyone who's been a great researcher of sociology, they just spend a lot of time doing one thing for a period of years, and then only do they really have great insights from it. So, I think that's part of it is just this recognition that our brains are limited and we have to optimize for what we're given, what we're born with, and we're not super computers. We can't take in lots of data and compute it really quickly.
Daniel Scrivner (15:36):
Well, that makes me feel better about my own capabilities. So if anything else, it sounds like we might... Yeah, I think my brain sounds a lot like that browser with 50 tabs open. There may not be anything new here because you just talked a little bit about why slowing down the process is so important and what that enables. So you've now been doing this for a number of years, and I would assume you've obviously gotten better, or you've had some Ahas or you've had some insights in terms of, "Okay, what does good quality research look like? Feel like?" And so, one of the questions I want to ask is just, one, are there any big lessons you've learned or Ahas? That's kind of on the positive side. Now on the flip side, are there any rules or guardrails that you have, or anything that, I don't know, when something's happening, your spidey senses go up and you say, "Okay, I don't do this," or, "It's just not something to do?"
Eric Markowitz (16:31):
Yeah. I mean, I suppose on the Aha side of just like... I think for me, it's a recognition of how long it really takes to understand something. And even when you think you understand it, you probably need to spend more time with it. Just to borrow from some experience that I had as a journalist, I think that you could read a story and you could say, "Wow, that reporter seems to know... It seems like they know a lot about this subject." But if you really enmesh yourself in something for so long where you become so kind of obsessed with it and you think you know every in and out of something, you can read that same story by that same reporter and realize, "Oh, actually, they're full of shit."
Eric Markowitz (17:16):
And so, I think what I've kind of realized is just the companies that we're focused on, it takes a lot of time to really know if what you're reading in the news or some analysis of it has credibility. Because I think that's ultimately what we're trying to do day-to-day is determine which pieces of input have credibility to our process, and synthesizing that and curating it so that we let in the correct information and keep out the bad information, the false information. So I think that's sort of the Aha is just, maybe it's not the sexiest answer, but just it takes a long time to really develop an expertise in something and feel confidence in it. And I'm certainly not there yet on a lot of areas that we study. It's sort of an active process. I'd say on the challenging, sort of avoid it, side is we've talked about this before of this idea of action bias, of feeling like just because you now know something, you spend time researching something that, "Wow, I have to do something."
Eric Markowitz (18:20):
And that could be defensive, that could be like, "Oh, I'm scared now because my thesis on something has changed and we should get rid of it," or it's be like, "Wow, this thing is so great. We should invest in it." And I think the lesson learned is there's so much value to patience in this business that just slowing down not only the research process, but the actual allocation process and the trading process, is immensely valuable. And I think some of the greatest investors just do nothing, right? That is such a hard thing to conceptualize, especially in our culture that values action and values doing things. But I think it's something that I've learned over time, or at least attempting to learn, that sometimes really the best answer is just do nothing.
Daniel Scrivner (19:03):
Yeah. It almost sounds like another way to maybe express that idea is if you just slow down the process, you immediately cross off a bunch of issues and risks in behavioral biases and things that are just not helpful. And so, just by reducing the speed, you're setting yourself up for success.
Eric Markowitz (19:20):
Yeah. I mean, I'm guessing you probably are as well, but just interested in behavioral psychology, behavioral economists. I think that some of the most valuable investing ideas are contained in books written by guys like Daniel Kahneman. That kind of genre. There's definitely an element of the quantitative is being super important, but I think the behavioral elements to this business are bigger than everything.
Daniel Scrivner (19:48):
Totally. They play a massive role and they're also invisible. And so, it's very easy to underweight them or not recognize them, or not see them or not appreciate them. Yeah. I want to talk about that a little bit, which is, one of the things that I know you and I have discussed before is just some of the behavioral advantages that you think you guys have at Worm just with your approach. We can focus on the Worm aspect of it, or we can just bubble it up super high level, but I wanted to just get your thoughts on what are the behavioral advantages and how have you focused on kind of cultivating those. And that could be at Worm, that could just be in your research and your work.
Eric Markowitz (20:27):
I think everyone has their own way of doing it. I'll just speak to how we do it, not necessarily that it's better or worse, but how we've even set up our organization to enable us to work in a way that's most comfortable to us. So, we don't have a big fancy office. I work from home. Arne Alsin, our founder and CIO, he works from home. And that's very much an intentional choice. We did this before the pandemic and everyone was remote. But I mean, so much about I think making good decisions is giving yourself the space and the time necessary and the comfort to do so. And I think that even the interpersonal dynamics of being in an office can yield potentially good outcomes. But I think in our business, a lot of it is just it's soloed work that is then shared via a Zoom call, or just a phone call, regular check-ins just to talk through things.
Eric Markowitz (21:22):
And it's a process that has worked for us. I think that if you're in an office and potentially behaviorally, there's an impulse to have more action like, "Hey, let's pitch this idea. Let's get this new idea in the portfolio." And that's just not how we wanted to optimize. We wanted to optimize for, well, Arne is our CIO and I'm Director of Research. How best can we work together to put together the optimal portfolio and together with our partners at the firm? This is just how we've chosen to do it. I think also just how we spend our time, what we read is really important. If you read sort of news constantly, you're just going to go crazy, because it's just all negative. It's going to force you into making bad decision.
Eric Markowitz (22:08):
And so, going back to books that we've read in the past that have been just sort of great guidelines of how to think and how to invest. There's a book I keep on my desk, I'm looking at it right now. It's 101 Years on Wall Street. Arne recommended this book to me a while back. It's an investor's almanac, just most boring book ever, but it just shows you that... In 1922, there was some great concern that everyone was freaking out about and that's over. The market is just a series of cycles and everything passes. And so sometimes, it's just good to sort of ground yourself in that. Yeah, I mean, they're sort of just a couple of things. But I think that just really thinking through what are you trying to achieve and physically setting yourself up, so that you can put together sort of the most optimal solution for it.
Daniel Scrivner (22:59):
Seems like a clear through line for a lot of Worm's culture is just kind of deliberately slowing down the process, being deliberate about how you're spending your time, being thoughtful. We talked earlier about that your office isn't anything like billions. It's almost instead, it's like a monastery or some sort of a zen Japanese structure.
Eric Markowitz (23:23):
Yeah, it's a bunker. It's just books and crazy notes on whiteboards and stacks of paper. If you have a great office, that's awesome. I've no ill will towards anyone who has that. For us, it's not pertinent to exactly what we do.
Daniel Scrivner (23:44):
I'm a huge believer in it's a single player game, you have to figure out what works for you. You're not going to learn that necessarily by observing what other people are doing. Okay, I want to ask a few kind of closing questions. And I'm sure you'll have a fascinating answer to this, not to add any more pressure, but one of my favorite questions to ask is just about a recent fascination. So something you've been researching, reading recently that you just can't get out of your mind. What is that at the moment? What has that been recently?
Eric Markowitz (24:13):
Yeah, we're obsessed with this idea of what does the future look like? And for me, it's right now, I'm like, "Bots. Robots." There's some companies pursuing this through a variety of modalities. But robotics in 2030, what could that look like? And so, it's very science fiction-y, but I think we're actually nearing a point where some of the neural net architecture that is necessary to have really generalized AI and sentient AI is becoming more likely, at least in the next few years. I'm very nerdily geeking out on the potential for that, and then also, which company is best poised to succeed, because what's the overall market for... What's the [TAM 00:25:04] of the labor market. It's pretty big. So, just questions around that is kind of a current fascination.
Daniel Scrivner (25:11):
Yeah. I mean, that's been a fascination of mine. A company I looked at recently is Gecko Robotics. And it's a private company, it's around robotics, but what it does is both super niche, but also I think just kind of fascinating. And this is one of the things I love about businesses, to what we've talked about, it's just kind of a window of curiosity and one thing leads to another leads to another. But with Gecko Robotics, basically the idea is for anyone living in a city or not in a city, here in Colorado near Denver, there's just massive industrial basis. You see all these different manufacturing plants, some of them are refining facilities. It's the big industrial facilities, those need to be inspected. They need to be inspected for a bunch of reasons. It could be a grain silo, it can be a water holder, it can be some sort of a coolant or an exhaust valve. They all have to be inspected.
Daniel Scrivner (25:58):
They're not particularly hospitable. The temperatures can reach hundreds of degrees up to 300 degrees. You have to scale these things. It's not like they're easy to climb around. And so, Gecko Robotics is these tiny, little robots that literally have almost like gecko feet so they can stick to almost anything. But they basically will just crawl and loop around and be able to survey these structures in a way that no human would be able to. The technology is both really advanced and also really basic in a lot of ways. And I feel like that's kind of robotics today is both really advanced in terms of capabilities, but really basics in terms of, I don't know, where it's at in its developmental cycle. It's fascinating. Okay, I wanted to ask as well, you talked about 101 Years on Wall Street. What other books have you loved? And these can be weird, esoteric ones, old ones. If you had to list a few of your top books that would live with 101 Years on Wall Street, what would they be?
Eric Markowitz (26:54):
I mean, I'm a sucker for the George Soros book, The Alchemy of Finance. Soros I find to be just a fascinating guy, because I think... I mean, he started his career really as a failed philosopher. I love people, maybe for myself, start in one direction, end up going in a different direction. So, that's one. And then, just a non-finance book that I really love is it's a collection of stories by a guy named Joseph Mitchell called Up in the Old Hotel. He was a writer for The New Yorker in the 30s and 40s, and he did these really colorful vignettes of just people who lived in New York City in that time period.
Eric Markowitz (27:34):
And it has no real investing advice, but I just think it's... I'm always fascinated in culture and how cultures evolve, and how ultimately, business is a reflection of changing cultures. And to me, I think there's just some interesting insights in there about individuals, and how they existed then and their desires, and how some of those things have changed or not changed. But ultimately, history just kind of repeats over time. And so, I found some cool insights from that book.
Daniel Scrivner (28:02):
Yeah, it's funny. It sounds like Up in the Old Hotel and 101 Years on Wall Street are kind of very similar at the end of the day. They just are focused on different spheres. Well, thank you so much again for the time. It's been amazing to have you on. And just really quickly, for anyone that wants to follow Worm Capital and Eric's writing, publishes an amazing newsletter called NightCrawler that everyone should subscribe to. And people can go and learn more about Worm Capital at wormcapital.com. They can also follow you on Twitter @EricMarkowitz. I mean, you talked about a bunch of amazing things including a few great books. We'll link to all that in the show notes at outlieracademy.com. Thank you so much for the time, Eric. It's been awesome.
Eric Markowitz (28:40):
Cool. No, thank you, Daniel. I appreciate it.
Daniel Scrivner (28:44):
Thank you so much for listening. You can find links to everything we discussed, as well as, the notes in transcript for this episode at outlieracademy.com/99. It's 99. For more from Eric Markowitz, listen to episode 96, where he joins me on our investor spotlight series to go deep on Worm Capital's approach to investing, including how they've compounded their capital at over 31% per year over the last decade, compared to just 15% for the S&P 500. And we dive into what they call Worm Algorithm and Worm Theory of Investing. You can also find more incredible interviews with the founders of Level, Superhuman, [Eat Sleep Rally 00:29:21] and Commonstock, as well as, bestselling authors and the world's smartest investors all at outlieracademy.com. You can now also find us on YouTube at youtube.com/outlieracademy. On our channel, you'll find all of our full length interviews, as well as, our favorite short clips from every episode, including this one. So, make sure to subscribe now. Thank you for listening. We'll see you right here next week on Outlier Academy.
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