Larry Abrams is a successful, Houston-based angel investor and venture capitalist. In addition to his wide-ranging investments, especially in biotechnology, he has produced films such as C.H.U.D. and co-produced By the Sword. In 2010 he published his first novel, The Philosophical Practitioner.
Kaizen: Much of your career as an investor has been in biotechnology. What attracted you to biotech?
Abrams: Biotech is the hope of humanity. There is nothing more exciting or that has the same potential for changing our lives. For example, beyond curing diseases, there is the possibility of one day re-engineering the genetic code which dictates that we become increasingly feeble with age and that we cannot live beyond a maximum (so far) of 122. This is the big constraint; life is so short. We spend all this time learning all kinds of interesting things and becoming better and better at what we are doing and then, unfortunately, we die. So anything that can prolong our lives or make them better while we are alive has to be the most important thing we can possibly do because everything else we do depends upon us being alive to do it. So the longer we live, the more of our other inventions we can take advantage of; the more knowledge we can get; the more love we can get; the more we can experience.
Kaizen: Your story starts in New York. You were born there?
Abrams: In Brooklyn, yes.
Kaizen: What was it like growing up there? It has changed a lot over the years.
Abrams: It was sort of like a small town or how I imagine a small town would be. You knew a lot of your neighbors and visited and spoke with them a lot. And, perhaps hard to imagine, the streets were safe — a lot safer than now. Women, in particular, were safer than now. It was quite nice.
Kaizen: What kind of schooling did you get?
Abrams: Public school and then Brooklyn Technical High School, otherwise known as Brooklyn Tech.
Kaizen: Did you have strong ideas about what you wanted to be when you grew up?
Abrams: I always knew that I wanted to write fiction some day, but I also knew that I didn’t want to sell my time, eight hours a day, to someone else who would tell me what to do with it, and I saw no way out of that except to find a way to buy my time back from the open market. The only way I could figure out how to have an independent income was to see if I could figure out the stock market.
Kaizen: That is very articulate thinking. How old would you have been when you were thinking this way?
Abrams: I was introduced to the stock market when I was 13. I had a bar mitzvah and my father bought me ten shares of something called Bayuk Cigar. I was outside playing stickball, came in for dinner, and my father opened the newspaper to the stock market pages. He pointed to Bayuk Cigar and it said “plus one.” He said, “See this?” I said, “Yeah. So?” He said, “Well you have ten shares of it, so that means you made ten dollars.” I said, “Whoa! Wait a minute. You mean I was out playing stickball and I made ten dollars?” He said, “Yes, because you own ten shares of this company.” So I said, “Why don’t I collect these things? Why don’t I just collect stocks? Maybe I would have enough money coming in that I wouldn’t have to do anything else.” My father got very angry and he said, “I never want to hear you talk like that again. Man survives by the sweat of his brow. Anything to do with investments is strictly on the side.” I thought, I don’t know what his problem is, but I’m going to collect these things. That’s how I got interested.
Kaizen: You started at the University of Chicago when you were just 16 years old. You hadn’t graduated high school, so how did you get in so young?
Abrams: All you had to do was pass their entrance exam. I took it and I passed it; they gave me a scholarship.
Kaizen: Why Chicago?
Abrams: Because all you needed to do was pass their entrance exam. They didn’t require a degree if you could just pass their entrance exam.
Kaizen: How long did it take to get your bachelor’s degree?
Abrams: I graduated in 3 years with $4,000 in debt.
Kaizen: What did you study as an undergrad at Chicago?
Abrams: I studied liberal arts. No major.
Kaizen: Was there a required series of courses?
Abrams: There were standard courses that you had to take, and once you took those you had your degree. You were supposed to take four a year; I took five the first and second years. But there were certain courses I knew — or thought — that I didn’t have to study for, so they wouldn’t be much of a burden. Those were math and English. I thought you can’t much study for math; you can either do the problems or you can’t. And for English — at Chicago, the final exam was writing essays in response to questions. I thought, “Well, I can write well enough.” I didn’t think that I needed to go to class to learn how to write, so I didn’t study for those two and it was easy for me to take extra courses.
Kaizen: So the extra courses you took allowed you to graduate in three years?
Kaizen: After graduating, you went to Pennsylvania?
Abrams: Yes, the University of Pennsylvania.
Kaizen: What did you study there? This was for a master’s degree.
Abrams: Theoretical economics.
Kaizen: Why economics?
Abrams: I didn’t know what I wanted to do job-wise.
Kaizen: At this point you were 19?
Abrams: That’s right. I had always been interested in the stock market—since that Bayuk Cigar incident. So I thought if I studied economics, I would get more knowledge about how to invest well. Actually, I applied to business schools and graduate schools of economics. I got into Harvard Business School, Cornell Business School, Wharton, and Pennsylvania. I asked them — well, two of the three — how long it would take to get an MBA. They said two years, and I asked if I could do it in one. They said, “No, you can’t.” I asked, “Why not?” They said, “Because you have to take Accounting I and Accounting II, and Accounting I is a prerequisite for Accounting II.”
So I called up the graduate school of arts and sciences at Penn and asked for the Department of Economics and they said the same thing. They said, “Two years.” I asked if I could do it in one. The University of Pennsylvania said, “Well, nobody has ever done that.” So I said, “Uh-huh. Can I do it in one?” They said, “You can try.” So I said, “Great! I’m coming there.” I would have gone to Harvard Business School even though it would have taken two years, but they told me that they were reserving a place for me in an entering class, but I was too young and I should come back in two years. Since I was in a hurry to get out in the world and do whatever it was I was going to do, I said, “Thanks, but no thanks.”
Kaizen: That was going to be my next question. I’m sensing urgency here. You finish at Chicago in three years, and it’s important that you be able to do the master’s in one year. Why the urgency?
Abrams: Well, I thought school was just a preparation for being out in the world and living life and doing what you are going to do; I wanted to get at it as soon as possible.
Kaizen: At Penn, what did it take of you to get the two-year program done in one year?
Abrams: It wasn’t difficult. I expected it to be difficult. I thought graduate school would be harder than undergraduate, but graduate school at Penn didn’t seem any more difficult than undergrad at Chicago.
Kaizen: So you just doubled-up on your course-load? Did you have a strategy, like not studying for math and English as you had for undergraduate school?
Abrams: No. There was nothing like that. I just had to take extra courses. Math and English were not given in that program. Everything was knowledge-based.
Kaizen: After theoretical economics at Penn, you went in a different direction and started a Ph.D. program in psychology?
Kaizen: And that was back at the University of Chicago?
Kaizen: How did that come about?
Abrams: Midway through my master’s degree in economics, I thought, “This is boring. This is not really what I want to do.” So midway through, I applied to the University of Chicago to go into psychology because I had always been told by people that I was good at sussing out what they were thinking and how to respond to people. And I enjoyed interactions with people. Well, the University of Chicago didn’t accept me right away. They said, “You have to take the Miller Analogies Test like everybody else.” I did that and then they accepted me and I spent a year in their Clinical Psychology program.
Kaizen: Why did you decide not to finish the Ph.D.?
Abrams: Because in one of our courses we had a textbook that was sort of the Bible, and in that textbook it said that the rate of cure for any given school of psychology was equal to the rate of spontaneous remission. On top of that, they didn’t know how to define “cure.” I looked at that and said, “Now, wait a second. What are you telling me here? You’re telling me that there’s no value-added that I’d be giving to anybody who comes in as a patient. Why am I here?” So I left.
Before I left, I was doing pretty well grade-wise, so the head of the department called me in: “Why are you leaving?” I told him, and he said, “Look, I’ll tell you what. Why don’t you stick around for the summer and I’ll personally give you a reading course in every theory of psychology there is and maybe you’ll find one that you like.” At this point, I was 20 years old and it didn’t occur to me that given what I’d read about spontaneous remission, that wouldn’t work. [Laughs] So since it didn’t occur to me, I stayed. I did those readings and then I left.
Kaizen: Could you have looked at that another way? They don’t know how to solve these problems right now, but you are interested in psychology, so this will be your Ph.D. research program to work it out. But for you it was a deal-breaker. You didn’t want to go in that direction?
Abrams: It isn’t so much that I didn’t want to. It’s that I was 20 years old and that never occurred to me. It would occur to me now, but it didn’t at that time.
Kaizen: Did you have another idea of where you wanted your career to go? You were still a young man of 20.
Abrams: I did some work before starting my own investing. I spent my summers while in college as a waiter in the Catskills and as a stockboy for a Manhattan textile firm. My job was to carry (heavy!) rolls of textiles from storage shelves to the cutters for order fulfillment. I knew that ultimately I wanted to write, but that was far down the road after I had bought my time back from the open market. All I knew was that I had to find a way to do that. I thought I would try to get a job somehow as an analyst analyzing stocks.
I went to several big Wall Street houses and I applied for a job, and they all said the same thing: “Have you taken accounting?” I said, “No.” And they said, “Sorry. You have to have taken accounting.” So I went to the library and got a book on accounting and read it. I went back to some of these places and I was ready for them. They said, “Have you taken accounting?” I didn’t want to lie, so I said, “No, but I read a book on it.” They said, “Sorry. You have to have taken accounting.” They all refused me.
By this time, I was six months out of school, no job and no money. I thought, “I have to go to a headhunter to see if they can help me out,” but it was expensive. Nevertheless I went to a Wall Street headhunter, and there was a bench of people waiting to be interviewed, and the door to her office was open. There were three people ahead of me and there was one person in her office and he said that he wanted to be a stock analyst. And she said, “Well, that’s pretty hard. There aren’t many jobs like that open. There’s one—they’re picky, but you’ll have to go to the Value Line Investment Survey at 44th Street.”
So I quietly got up from the bench and I zipped off to the subway and went to the Value Line. I said, “Hi there, I’d like to become an analyst.” They said, “Go upstairs to the fifth floor. You have to take this test.” They gave me this test, which was math, general reasoning, and English. The proctor, who was the secretary to the boss, timed me on the math and on the general reasoning. On the English, she said, “You have all the time you want on this one.” So I’m going through all of these questions and I get up, stretch, look out the window, and then I come back and do a few more questions. She comes in and she says, “Time.” So I said, “Whoa! You said I had all of the time I wanted for this.” And she said, “Well, yeah. I meant that everybody always finishes it.” I said, “But I didn’t know that.” [Laughs] I left 13 questions blank. I said, “Can I at least fill in randomly—anything?” “No, you can’t. You have to put down your pencil.” So I put down my pencil and I figured, “Well, that’s the end of that.” But it was only 13 questions out of 100. I asked, “When will I know about this?” I had very little money—I had $80 left, and I was living in a fifth floor walk-up all the way on the east side, which I was renting for $8 a week. It had four apartments sharing one bathroom and one phone on the floor below for those two floors. She said, “You’ll hear from us in two weeks.”
The next morning, I wake up and I’m brushing my teeth when I hear someone yelling from the floor below: “There’s a phone call for Abrams.” [Laughs] So I went downstairs and picked up the phone: “This is Mr. Huxley from Value Line and we’d like to offer you a job. When can you come down here?” I said, “How about an hour from now?” [Laughs] They gave me a job as an analyst. Apparently, I had done well enough on the English exam and the math and reasoning were okay too.
Kaizen: What did they have you do?
Abrams: I was an analyst trainee at the beginning. They would review your salary—I forget if it was every six months or every year. At first, I remember lunches of macaroni and cheese because that was the cheapest lunch I could find. I also walked to and from work to save carfare—from Manhattan’s West 22nd street to East 44th street, the Value Line offices. But in a three year period, they tripled my salary and I became an editor/analyst. Then I had an offer to be hired away from there.
Kaizen: From whom?
Abrams: A mutual fund wanted to hire me. A senior person from that fund took me to lunch and offered me a job running a fund. I told them, “Look. The problem is that I don’t have very much money and what I would like you to do is advance me $100,000 for me to invest in my own recommendations, with the proviso that if there are any losses, you take them—not me.” They said, “Okay. We’ll do that.” And I said, “Great. I’ll tell you what I’m recommending and then I’ll buy the stocks for my own account and then you can buy them for your funds.” And they said, “No, we can’t do that. That’s against the law. You have to give us the recommendations first and then you can buy them.” This arrangement would have made the stocks more expensive for me. I said, “But you’ll be pushing up the prices because I’m dealing with small-cap stocks.” He said, “Well, there’s nothing we can do. We can’t do it the other way.” I said, “Sorry. Thanks, but we can’t do business.”
Kaizen: A brokerage firm was your next offer?
Abrams: I gave them my conditions and my conditions were that I have my own hours; I can work on whatever stocks I want; I don’t have to have any contact with your customers; I don’t need a contract either. All I’ll do is tell my conclusions and reasoning to your brokers, and they can reflect it back to your customers. And, of course, I also want my own office. They said, “Fine.” So I went with them. Oh, and they had to double my salary as well. I was about 24 at the time.
Kaizen: So these two other organizations that made offers to you, how did they hear about you? It sounds like you have a reputation already.
Abrams: Yes. What happened is that I had a few brokers that I was using on Wall Street, and they were familiar with how my picks were doing. I started off with $4,000 in debt, no cash at all.
Kaizen: From college?
Abrams: Yes, from college. I think it was a little less, but then I lost some money going short a stock—a warrant, actually—that ultimately cratered, but cratered too late for me. At any rate, I was $4,000 in debt in my first year and by the end of the year, I had $1,200.
Kaizen: Of debt?
Abrams: No, plus $1,200. At the end of the second year, I had $12,000. At the end of the third year, $50,000, and at the end of the fourth, $150,000.
Kaizen: This is in your personal account?
Abrams: Right. Now, I was the only one who knew these figures, but my brokers could see what my stocks were doing because they saw my account and my bosses at Value Line got the idea as well. Several brokers asked me if they could buy the stocks I was buying when I was through; of course I said yes, as their buying would help me. There was no way I could stop them anyway. These days, I don’t think many brokers would bother to ask. But that’s what caused me to get these offers from brokers.
Kaizen: What were you were looking for in the stocks you invested in?
Abrams: I went through over 1,000 stocks. I picked out the ones that had done particularly well over the last few years and I wrote down hypotheses as to what they might have in common. I also read lots of books about investment theory, and I combined my conclusions about what they had in common with my understanding of what determined value as opposed to price. What I was looking for: I would look for new ideas, new products, new innovations in old industries, and also financial variables, things like sales growth, profit margins, return on equity, debt, debt relative to earnings, price/earnings ratios. I didn’t pay much attention — in fact I didn’t pay any attention to dividends.
Kaizen: How long was it before you decided to go out on your own as an investor?
Abrams: After a year at the brokerage firm, it was being acquired by a larger firm, and they asked me to go along with them. But by this time I had $250,000 and — I had started as a destitute student — at $250,000, I thought, “Why keep selling my time? I know how to do this now. Besides, even if I just invest this at five percent, if I live frugally, I can do that.”
Kaizen: About $12,500 a year?
Abrams: Yeah, but I was in a rent-controlled apartment. By this time I had moved out of the initial apartment. Now I was in a rent-controlled apartment on West 22nd Street. My rent was extremely low and I could eat carbohydrates, which didn’t cost that much money, right? [Laughs] But I don’t have to do that, I thought. I looked at my record. I drew a graph — it was a silly thing to do, to draw that graph, because there is no way that I could continue at those percentage levels, and I didn’t. But I thought, “I know how to do this now and I want my time to be mine. I want to read and I want to take a walk in the park when the mood strikes me. I want to study lots of subjects and listen to music. I’m only here once and that’s what I want to do.” So I told them thanks for the offer, but I’m not going to go along with you.
Kaizen: So you went out on your own. Was it qualitatively different being out on your own as opposed to being in a firm where there is structure and insurance? How did it feel being out there as an entrepreneurial investor using your own money?
Abrams: It was different from Value Line. At Value Line, your written conclusions had to be in line with Value Line’s proprietary rating system, whether or not you agreed. You couldn’t give advice contrary to that. Out on my own, I didn’t pay any attention to the rating system. The system is quite good, by the way. But I’m most comfortable with my own system, so I don’t pay attention to anybody else’s. So that was a lot different.
As far as doing it on my own, investing my own money, I never had any trouble with that. When you’ve thought about it enough and you’ve tested your conclusions enough, both retroactively and proactively, and you know that it all works, there isn’t any trepidation about doing it.
I used to make an analogy to the oil business, which I went into at one point. When I went into the oil business, the ratio for wildcats was about 1:9. That meant that the wildcats were very risky — eight times out of nine you would lose every dollar. But on average, the one time you would hit, you’d make 30:1. So I thought, “This isn’t very complicated. I lose eight dollars on, say, the first eight, but on the ninth, I make $30. I can do that math.”
So I took several trips to Houston, and I’d meet with these oil guys. I’d say, “Let me see your wildcat prospects.” They’d say, “You don’t want wildcat prospects because that’s very risky. You want development prospects where we can hit two times out of three or three times out of four.” I said, “Yeah. But everybody knows that, right? That means that the cost of acreage would be reflected in those statistics. What’s your final payoff?” And they said, “Huh?” So I said, “Look. Just show me your wildcat wells.” “Are you sure?” “Yes. I’m sure.” I invested in a lot of wildcat wells because of the arithmetic that I just mentioned. So I always made that analogy to stocks; the numbers are different but the principle is the same. If you know your system works and you know that the odds are in your favor, even though you’ll have many times when you’ll have losses, you end up ahead. You have to end up ahead, provided you are accurately gauging the odds. If you don’t accurately gauge the odds, of course, then you’re likely to lose money. And all kinds of extraneous things can mess up your calculations, such as wars and depressions. But it’s the best you can do, so I never saw investing my own money as a problem. I always saw it as an opportunity. And as fun.
Kaizen: When you went out on your own, were there particular fields you were investing in? Biotech? Entertainment? Manufacturing?
Abrams: Since risk and reward are highly correlated and I was shooting for big percentage gains because my starting capital was so low, I made very risky investments and monitored them closely. This is before biotech. Sometimes I looked for new products. Most often I would screen first for impressive trends in sales, earnings, profit margins, return on capital, and cheap to reasonable valuations. As I said, I paid no attention to dividends. Anything that met my criteria was fine — and I invested all across the board.
Kaizen: What would you be using as sources of information for possible investments?
Abrams: At the time, I used the Value Line a lot. It’s a great resource, both was and is. I didn’t pay any attention to the write-ups for each stock because, again, those had to follow their proprietary ranking system. But I paid lots of attention to the wonderful statistics that they provided, going back 15 years for each stock. And sometimes I would scan the write-ups because sometimes they would mention prospective products and something unique about the company. I just wouldn’t be interested in the conclusion. That was the main resource, that and The Wall Street Journal.
Kaizen: In your early years, what size was the standard investment for you? You started out with $250,000 of your own capital.
Abrams: I actually started my own investments when I was with Value Line, with the $1,200. The kind of investments were always the same — the ones that met my criteria. The amounts invested just grew proportionately with the amount of net worth I had.
Kaizen: What is the distinction between “angel investing” and “venture capital”?
Abrams: Angel investing is venture capital, but it’s done by non-professionals. The term “VC,” venture capitalist, is usually reserved for professional investors who run significant VC partnerships.
Kaizen: So the difference is between professionals and non-professionals?
Kaizen: There’s no investment size issue?
Abrams: As a general rule, the professionals are going to invest a lot more money because they have pools that they raised. But there is no limitation to what an angel can put up. Some of them, some very rich angels, put up quite a lot.
Kaizen: How would you describe yourself? As a venture capitalist or as an angel?
Abrams: I’m not a venture capitalist in the sense of having run a fund which has raised a lot of money from other people. But I do venture capital as an angel and as a limited partner of venture capital funds, often investing side-by-side with the venture capital funds in which I am a limited partner. I am also on the advisory board of one of them. As well, I still invest in the stock market.
Kaizen: How does the angel investing or venture capital process typically go? If I’m a person with an idea, how do I seek out an angel or VC so I can make my pitch?
Abrams: You can just go to something like Kickstarter to start a company, but there you are just trying to raise money from the public in general. The various venture capital funds all have websites, of course. You can find the principals’ contact information and you can call them up or email them. It’s easy to email them a business plan; this is done all the time.
Kaizen: You find out what they specialize in and if that fits with what you are doing …
Kaizen: In your years doing VC, angel investing, and so on, are you out prospecting for potential investments? Do you meet with people? Go to conferences? Or do people just send you stuff?
Abrams: I used to go to conferences and meet with people and read lots of business plans, but I don’t do that anymore. Well, I do it very, very little because now I want my time to be reserved for things like studying and writing. So I leave the bulk of that to the venture capitalists with whom I invest as a limited partner and sometimes side-by-side.
Kaizen: So they do all of the research and bring the investments to you — the ones they think you’ll be interested in?
Abrams: Yes. Sometimes people who know of my past activities will send business plans and proposals directly to me, and I’ll generally forward them to the VCs.
Kaizen: To focus on bio-tech, since that was a significant part of your career. When you went to conferences and met with people and read the business plans, what were you looking for? What would catch your interest?
Abrams: You look for new ways of doing old things, the formation of new industries, new ways of addressing diseases, and sometimes platform technologies, which can be applied to many different diseases. You’d also look at who’s running a company — what his past record has been, what his education experience has been, his job experience, and try to get an impression of the person as well—because integrity is extremely important. This last is by far the most important. Without integrity, everything else is meaningless. Of course, this doesn’t mean you won’t make mistakes, because you inevitably will.
Kaizen: You didn’t have a background in biotech, so how did you judge what’s innovative or promising? Did you self-educate in biological fields?
Abrams: Yes, I self-educated a lot. This did not bring my level of knowledge up to a Ph.D. in biology by any means, but it did educate me well beyond the average layman. I did the best I could with the knowledge that I was able to pick up.
Kaizen: Were there threshold profit-margin numbers that would make you interested?
Abrams: Everybody has different levels that they look for. There is no cut-off point that would apply to all VCs. And of course there are no initial profits for a startup. For me, I look for potential return of at least 10:1.
Kaizen: The third component you mentioned was the people running the show—their track record and their integrity. How do you make judgments about someone’s integrity?
Abrams: Well, that’s a very hard thing to do. It’s very qualitative. I think everybody is familiar with meeting people and making judgments about them, but trying to put into words exactly how you judge someone, unless you have some record of their actions over a number of years, is something I really can’t do. You just do the best you can.
Kaizen: Does it involve talking with people directly who know them: friends, former colleagues, etc.?
Abrams: Yes. That’s checking them out. That is one way. Of course, the names that they provide—you’re almost always going to get people who they know are going to give them a good review. But sometimes you can get around that by asking the right questions.
Kaizen: Did you do it all yourself? Reading up on the biology? Judging the business plan? Checking people out? Or did you hire some of that out?
Abrams: I used to do it all myself, which is something I don’t recommend. These days I mainly let my VC funds do it to save myself time. Also technology evolves so fast now that I don’t have the competence to evaluate all the new ideas that come along even if I wanted to.
Kaizen: Doing it all yourself sounds like a lot of work. How many investments in a year would you comfortably do?
Abrams: I would say, during that time I probably averaged one a month.
Kaizen: Over the course of a year, twelve new investments?
Kaizen: The investments that don’t go so well—what goes into the decision whether to extend further financing or pull the plug?
Abrams: That’s difficult to say because each situation is unique, and each set of problems that arises is unique, and each industry that you’re dealing with is unique. So the weightings that you have to give to each factor will change all the time. You can’t say in advance which are the most important factors. If you could say which ones were most important and quantify them, you could cut way down on the number of loss transactions.
Kaizen: As a starting-step—of the investments that have not worked out, are there common patterns or reasons? They were over-ambitious in the technology or had bad office politics or whatever?
Abrams: Certainly, there are almost always technological risks. However one of the biggest problems is a company running out of money and not being able to raise another round of funding when for one reason or another their original projections turned out to be over-optimistic. But you can’t accurately quantify in advance which factors are going to lead to a wipeout in a particular investment because, obviously, if you could, you wouldn’t invest in those. Then no companies that were going to fail would ever get funded. And, of course, that’s not true.
Kaizen: Are people dynamics another category? Some people just don’t mesh well together?
Abrams: Yes, that certainly happens a lot. Unfortunately, you only find out about that later. [Laughs] I’ve never found that out in advance because they always put on their best face when they make their presentation.
Kaizen: And then general economic conditions? Or downturns in various sectors.
Abrams: Yes, they will get in the way quite a lot; but you don’t let that stop you. If you see a very good idea, you just factor-in the economic conditions as one of the risk factors and if the risk-reward ratio looks good, do it anyway.
Kaizen: For a company you have invested in, what follow-up contact do you typically have? Do they just send you an email once in a while? Personal visits?
Abrams: Today, they will often suggest in-person visits, but I tell them that email is fine. Again, I want to conserve my time for other things.
Kaizen: What’s an appropriate email frequency?
Kaizen: Have you ever found it necessary to go in and take over an investment? Things are really dysfunctional, but it is still possible if investors take over the show with more experienced people?
Abrams: Yes. That’s done very often. It’s done by venture capitalists. I don’t do it because I don’t want to spend the time doing it. I would rather let the investment go and take the loss. That’s one of the reasons why it is advantageous for me to go in with venture capitalists, because that is part of what they do. I could do it as well, in many cases at least, but again, I don’t want to spend the time.
Kaizen: You’ve also invested in movies, Broadway, and television.
Kaizen: At what point did you become interested in investing in movies?
Abrams: All of my life I had been going to movies and seeing endings I thought were foolish and thinking that they should have been done a different way. I would walk out thinking, “Why did they do it that way? I could do it better than that.” Finally it occurred to me that nobody was going to come knocking at my door and say, “Hey, we hear you could do better than that.” If I wanted to do better, I would have to find a way to make it happen myself. So I learned by doing. What I did was I took a course on movie making, movie financing. Then I made a proposal to the course instructor. I said, “Hey, why don’t we form a company together?” He said, “Forming a company to make movies? That’s a good idea, but why do I need you?” I said, “Why don’t I take you to dinner and I’ll tell you why you need me.” So we did that and we formed a movie company. That was my entrée into the movie business.
Kaizen: You were in New York?
Abrams: Yes. I thought, “Well, this is going to take money that I’m going to have to put up—money of my own. I’m not going to raise it from anybody else. And this is an industry that I’ve never had anything to do with before. We can’t show a track-record and that would be risking other people’s money in a way that I don’t think is the right thing to do. So I’ll risk my own.” I knew what the figures of the movie industry were and it looked like if I did this, the chances were that I would lose my money. So I thought, “Okay. What’s money for?” Well, once you have enough to buy your time back from the open market, it’s just for doing what you want in life and this was one of the things I wanted to do. So if I lose this money, will I still have enough to live on the way I want to live? Yes, I will. Okay. Let’s do it.” So I did it.
Kaizen: What was your first movie?
Abrams: It was called C.H.U.D., and apparently it has some sort of cult following. I was told that it has fifty websites devoted to it. That was several years ago. I never checked it out, but I’m assuming it’s true. A lot of people, when they hear that I made that movie, say, “Oh yeah. Right. Cannibalistic Human Underground Dwellers. Nobody remembers that that is the wrong explanation of C.H.U.D. — that’s the explanation given by the villain in the piece. The acronym is actually for Contamination Hazard Urban Disposal. But nobody seems to care, and given all the things to care about in the world, I can’t say I blame them.
Kaizen: Aside from the funding, what was your role for this film? You mentioned one of your motivations was your interest in endings and making sure that things get done right.
Abrams: Yes. I had input into the script. I made various suggestions. Right now, I don’t remember which suggestions I made. I think that was 1987. But I had comments that were interesting to me at least to make about the script. A producer can generally define his own functions — whatever degree of hands-on he’s comfortable with. An executive producer is primarily about raising the money.
Kaizen: Was it as fun as you’d hoped?
Abrams: Yes. It was great fun. It was terrific fun.
Kaizen: And the financial projections that you would likely lose your money? Did they come to pass or did you do all right?
Abrams: On C.H.U.D., I think we came very close to breaking even. We might have actually broken even, but I believe we probably lost a little bit of money.
Kaizen: Does this include after-market: videos, etc.
Abrams: Yes, including everything. Now I said I didn’t raise money for the company—and I didn’t. But I did raise money from investors for C.H.U.D. So that wasn’t all my money.
Kaizen: So how big was C.H.U.D.’s budget?
Abrams: $1.2 million.
Kaizen: Was that standard for a certain kind of movie at the time?
Abrams: It was considered low-budget. It wasn’t considered very low-budget, but it was low-budget.
Kaizen: What year did that one come out?
Abrams: I believe it was 1987.
Kaizen: You later produced By the Sword. What went into that one?
Abrams: There are two movies with the title By the Sword. The one that I was co-producer on stars F. Murray Abraham and Eric Roberts. I was a co-producer and they sent me a script. I told them the changes I thought should be made.
Kaizen: Who are “they?”
Abrams: It was the producer, Phil Rose, who sent me the script.
Kaizen: A New York guy?
Abrams: He was a New York guy. That was an interesting experience too because I was very enamored of the script. And the director we hired said, “Wow! This is such a great script. I’m not going to make any changes in this at all. I’m going to film it as is because it is so terrific.” He didn’t.
Kaizen: Was that one profitable financially?
Abrams: We got financing from Sony Television. I put up a small amount of money, and that money was not returned.
Kaizen: It sounds like you’re doing the movies primarily for fun?
Abrams: That’s correct. Obviously, I had hoped that each film would make money because that way we could recycle the money and make more films. But it was primarily for fun.
Kaizen: You invested in a television company and a Broadway production?
Abrams: Yes. The Broadway production was Look Homeward Angel. It lasted a whole week. [Laughs]
Kaizen: What was its big problem?
Abrams: The script and the songs were quite good, and the acting was quite good. I think the big problem was that the producer, who was not me, did not have much of an advertising budget. Others could possibly fault something else as being the problem, but that is what I think it was.
Kaizen: And the television company? What was that investment about?
Abrams: It was about getting financing from film studios to make television movies. I was mainly the money guy.
Kaizen: Is that still a going concern or was that temporary?
Abrams: I stopped being a part of it a long time ago. So it’s not a going concern from my point of view.
Kaizen: Do you plan to invest more in entertainment and movies, television, and theater?
Abrams: Probably that phase in my life is finished, because the major movie studios have a lock on distribution and their distribution deals are very bad for financiers. I had an interesting back-and-forth with a film company at one point. The film company that had distributed C.H.U.D. was very enamored of the film, and they thought, “Wow! Let’s get these guys to do more films.” I was the producer of C.H.U.D. and they called me and said, “Have you got any other scripts for us? We’d like to do more with you.” I gave them two more scripts and they called back and said, “These are great scripts. We don’t want to do The Child Buyer because it’s too controversial, too difficult. But this other one, the basketball film, we want to do that. So let’s go. We’ll put up the money.” So I said, “Okay. What’s the distribution deal?” They said, “It’s the standard 35 percent of net.” I said, “Whoa. Hold it. Thirty-five percent of what net? There is no net.” They said, “Well, yeah. The net is what is left-over after you take off all expenses.”
Kaizen: They could make it so there never was a net.
Abrams: Yeah. I said, “Here are your films for the last five years. Let’s take a look at the most successful one.” At the time it was Children of the Corn. “If we apply your net formula to your most successful film, what would be the net to the producer?” And they said, “Well, you can’t really look at it that way.” So I said, “All right. Look at it any way you want. What would be the net to the producer?” He said, “Look. Thirty-five percent is what we offer. Those are the standard terms.” I said, “As far as I can see, at 35 percent, I don’t make any money. Why don’t I make you a counter-offer? Why don’t we do it this way?” I gave them a counter-offer that after they got their money back, we got some small percentage, I forget what it was, of the gross. They said, “That’s very interesting, Mr. Abrams. Let me talk to the boys and I’ll get back to you.” So they called me back in a few days and said, “I spoke to the boys and they said no. We can’t do that.” I said, “Why not?” “Because that’s not our deal. The deal is 35 percent.” I said, “I understand that’s not your deal, but I can’t make any money your way.” So I said, “I tell you what. Since the boys didn’t like that, let me make you another counter-offer.” So I made another counter-offer whereby they get their money back plus some percentage interest on their original investment before our gross kicks in. I said, “Guys, you can’t lose this way. You are getting your money back, you’re getting interest on it, and I’m getting a little bit of the remainder afterwards, but at least I’m certain of getting something.” “Well, Mr. Abrams, that’s very interesting. We’ll get back to you. I’ll talk to the boys.” Again, a few days after that I get a call: “Well, we can’t do that.” “Why not?” “Because it would set a precedent.” So I said, “I’ll tell you what I’ll do. Not only will I contract not to tell anybody what the deal is, but I’ll sign a statement saying that if anybody finds out, I forfeit all of the money.” He said, “Well, that’s very interesting. I’ll get back to you.” That’s the end of the story. They got back to me and they couldn’t do that either.
Kaizen: Why then would anybody ever invest with movie theaters?
Abrams: To a lot of them, 35 percent sounds like 35 percent of the profits. Net means after costs are recouped. That’s what it normally means, except not in this industry. That’s a problem for a lot of investors. But there are some who do understand that and are dying to do it anyway because “There’s my name up on the screen!”
Kaizen: They are buying some fame and want to be a part of the industry.
Kaizen: Outside of professional investing, you have other interests—chess, for example. Did you start as a child?
Abrams: Yes, when I was 11 years old. My father would not teach me because he said that I was too young when I was 11, so I learned someplace else — from a friend. Then I challenged my father who was surprised that I actually knew the rules.
Kaizen: How strong a passion is chess for you?
Abrams: I thought then, as I think now, that it is absolutely fascinating. I was on my high school chess team. I was on the University of Chicago chess team. I won the New York City Mensa Chess Championship, and I was the champion of the state of Connecticut. I should add that I could do none of those things today.
Kaizen: The tournaments are demanding, both intellectually and physically.
Abrams: Yes. Also you have to study. I’m not about to spend the time studying and getting up-to-date on all of the latest openings. I just don’t care enough. I would care enough if I had an infinite lifetime.
Kaizen: Hence your interest in biotech. [Laughs] Philosophy has also been an interest for you?
Abrams: Philosophy is a lifelong interest. What could be more important than knowing how to live? What to do with your life? It is truly the architectonic science.
When I was 20 years old at the University of Chicago in the Ph.D. program for psychology, you had to have some psychotherapy with one of the approved people there. So the department chairman asked, “What would you like? A man or a woman?” I said, “Are you kidding? I’ll take a woman.” [Laughs]
When I entered the office the first day, I came with a yellow pad with all kinds of questions. The main thrust of my questions was: “I look around and see people going to work at nine in order to come home at five in order to go to work again at nine and to come home at five. I don’t understand that. I don’t want to do that. As far as I can see, there isn’t any place in this world for me.” It turns out that she was a non-directive therapist. She said, “So you think that there is no place in the world for you?” I said, “That’s right.” She said, “And this concerns you.” I said, “That’s right.” She said, “Uh-huh.” I had never heard of a non-directive therapist. After a few more questions like this, I said, “Wait a minute. Are you going to just repeat what I said without commenting on it?” And she said, “You are concerned that I might just be repeating what you said.” [Laughs] So I said, “You are just going to repeat what I said and not give me any of your input or comment on anything at all.”
So I felt cheated and I’m afraid I became a little hostile. I said, “Well, as long as I’m here, and as long as you’re not going to comment on my questions here, I don’t see any point in continuing with my questions. So why don’t I just make a few comments?” She was sitting like this [motions] and her desk was here [motions]. I said, “Has anybody ever told you that you have nice legs?” She got all red and swung her legs back under the desk. I said, “That’s not very nice. I told you that I was enjoying looking at your legs and you take away the view.” She wrote me after I left the University of Chicago, and we had a short correspondence. She told me she almost left the field because of me.
Kaizen: So you showed up with some philosophical / existential questions and concerns that were significant, about people on the nine-to-five treadmill …
Abrams: Yes. When I was that age, that’s when I remember for sure that I was concerned with questions of meaning, but I’m sure that it had started before that. I can’t pinpoint the time, though. I’ll stick with what I know, which was that at the age of 20 I was asking these questions.
Kaizen: Your undergraduate degree at the University of Chicago included some philosophy.
Abrams: Yes. I had a teacher named Schwab. Everybody wanted to be in Schwab’s class. He was dynamic and he was insightful. At the University of Chicago, whoever you were assigned to, you didn’t have to go to his class — you could go to any class that you wanted to. Nobody cared because all you had to do at the end of any course was pass the comprehensive exam, and the comprehensive exam was marked anonymously. So everybody would show up to Schwab’s class. The class was called O.M.P., Organization, Methods, and Principles of the Sciences. It was the big, overarching, senior-year philosophy course. I thought, “All right! This is it! Now I’m going to find out what it’s all about.” So I went to O.M.P. and they presented all of these different philosophers.
I remember that Schwab gave an assignment that you had to compare the views of Einstein, Laplace, and some third philosopher with respect to where ideas came from. So I read them and found the sections: this is what this guy says, that is what that guy says; I wrote it all down and sent in the paper. Schwab was also known for his sarcasm and acerbity; he’d always make cutting comments. So everybody loved to be in his class, but they were afraid of him. The day comes when we were supposed to get our papers back. Schwab has a bundle of papers in his hands and he picks one up, looks at it and says, “Who’s Abrams?” [Laughs] I got all red and thought, “Well, I guess I’ve got to own up to this.” I put up my hand and everybody’s expecting, including me, some really bad put-down. And he said, “I think that this is better than I could have done. A+.”
Abrams: After my initial shock, I went home, I looked at the paper—I hadn’t done anything original whatsoever. All I did was copy out what each guy had said. There wasn’t any interpretation. And I thought, “I’m getting an A+ on this essay for doing nothing at all. This guy is supposed to know about philosophy.”
Kaizen: So it soured you on the formal study of philosophy?
Abrams: It wasn’t that exactly. It was very strange to get an A+ for doing what I considered then—and I still consider—to be no original work whatsoever. It wasn’t just that that soured me on philosophy. It was also that none of the people I read seemed to have any of the answers.
Kaizen: Similar to why you left psychology?
Abrams: That’s right.
Kaizen: Your early ambition to be a writer and your interest in philosophy nevertheless came together, and you’ve written a novel with the word “philosophical” in the title. What’s the theme of the novel?
Abrams: The book is The Philosophical Practitioner. It’s a love story, a mystery, and an exploration of what life is all about. Its description on Amazon is: “Eric is a philosophical practitioner—a new profession that emphasizes reason but doesn’t slight emotions. He isn’t rich, but his old girlfriend is now both rich and famous. She wants to get back together with him, but their goals and lifestyles are very different. His father’s mind is going. His clients want to know how to live their lives. And a woman he’s never seen before wants to kill him.”
Kaizen: I read it last year. Very well done. Very engaging.
Abrams: Thank you.
Kaizen: It pulls together your interests in philosophy, writing, and psychology. Standard therapy is psychotherapy, but here we have philosophical therapy.
Abrams: Psychologists will come down on me hard for this, but I don’t see how psychotherapy can be nearly as effective as when and if you combine it with philosophy.
Kaizen: Therapy is a very philosophical enterprise — figuring out who you are and what you are about, what’s going on, and how you are interacting with the world.
Abrams: Yes, that is true. But the philosophy there is almost always implicit. If it is not explicit, what your clients can get out of it is likely to be not nearly as compelling. Also, if it is only implicit, you won’t be able to be consistently philosophical yourself.
Kaizen: Was the novel something you had wanted to do for a long time or was it a recent interest?
Abrams: The particular plot was a recent interest, although I’ve been refining the philosophy for many years. I worked on the book only on weekends, and it took me two and a half years of weekends. It was a few years ago.
Kaizen: It came out in 2010 or 2011?
Kaizen: So you probably started it in 2007 or 2008.
Abrams: Maybe a year or so prior to that, because it took a year of me sending it around to various places.
Kaizen: How did you come up with the central character, Eric—having him be a psycho-philosophical therapist?
Abrams: I thought that the way to help people the most would be by combining philosophy and therapy and by doing it explicitly. I didn’t know if any school was doing that; I found out subsequent to writing the book that there is an association of philosophical practitioners. In my book I said, “We have our own website.” But I didn’t know about them at the time; I thought I was making it up. But there is such an organization. In fact, they read my book and I was asked to become a reviewer for them. On Amazon, they wrote a very good review of my book.
Kaizen: Many people have ambitions to write, but they don’t necessarily act on it. What motivated you to actually sit down and do it?
Abrams: Well, if you are like me, you operate in different areas of endeavor, and people know you in that particular area, but don’t know much about you otherwise. For example, some people know me as a financial guy, like the VCs I interact with. Chess players know me as a chess player but as nothing else. Similarly with any activity.
Kaizen: One’s life becomes compartmentalized.
Abrams: Yes. We have different friends for different purposes. It’s very rare that someone will share all of your interests. As a consequence of that, they don’t know you as a person. They only know you for particular capabilities that you have. I wanted to be known as a person. Really for two reasons: first, I wanted to be able to interact with people on a more holistic basis so that they would be interacting with Larry Abrams the person rather than just Larry Abrams the particular capability that they saw. I thought this might deepen my relationships with those who knew me, and also perhaps find me new people who thought as I did.
Also, I wanted my ideas out in the world — just because I think a lot of the world is operating on wrong and harmful ideas and I want to, to at least some small extent, have some input into changing that. I want to tell people about how I think about the important issues in life — what to pursue in the limited time one has here, how to act toward others, what is the most successful kind of life (what counts as real success in living).
Kaizen: And it was a conscious decision that now was the time to do it?
Abrams: I think it’s been coming together all of my life, so I don’t know that I would say that it all came together as being the right time five years ago. Although maybe that’s the right way to describe the decision to do it.
I’ve been reminded often of Rabbi Hillel’s dictum: If not now, when? Since this is something I wanted to do and time was passing, I figured, if this was something I wanted to do, I can’t just keep thinking about it, I’ve got to do it. It’s much like what I was thinking when I decided to go into the movie business. If I wanted to be in the movie business, I would have to take steps to do it. There’s always some reason to postpone what you want to do, and the ultimate consequence of that is that you become Scarlett O’Hara.
Kaizen: The Philosophical Practitioner has been out now for two years. Are you working on another? Abrams: I’m thinking about it. I’m trying to decide whether to make it a stand alone or a sequel.
Kaizen: The further adventures of Eric?
Abrams: Happily, I’ve had some people, like some of the reviews on Amazon, express an interest in having a sequel. That won’t be my deciding factor, though. I still haven’t made my decision.
Kaizen: To go back to investing and biotech in particular: one sees statistics about the high rate of failure of start-ups, like three out of four start-ups fail. Has that failure rate been true to your experience?
Abrams: That depends on how you define failure. If you define failure as going bankrupt, then that figure is too high. If you define it as not getting all of your money back, then yes, that’s about right.
Kaizen: You have spent a lot of time in biotech. Is that fair to say that you’ve gotten out of biotech investment largely because of an increasingly difficult regulatory environment for biotech?
Abrams: Yes. The FDA. Their byzantine approval process requires companies to invest huge amounts of money, really huge. I mean, $1 billion, sometimes much more, to get a drug through the whole process, from discovery through the FDA, is not unusual. It can take ten years or more. And at the end of spending huge amounts, there is no guarantee that you are going to get a product to pass the FDA. The FDA is just a huge bottleneck, and because they are very capricious, or at least it certainly looks that way from the outside, you never know if you are going to get approval or not. As a consequence of their very convoluted process for approval, people die who might have lived if they’d had access to a particular drug. Sometimes someone with a terminal disease can get “compassionate use” from the FDA, and they can get a drug that is still unapproved, but mainly that is not the case.
For example, a terminal cancer patient has a week or two to live; there’s nothing he can do. He just has to sit around and wait to die. Yet here’s this company that has something in trials that has worked on animals and has worked to some extent on people in phase I trials and maybe phase II trials, but the dying person is not allowed to take it because it has not been approved by the FDA. Years later, the drug maker passes the FDA and now the drug saves lives, but it’s too late for that guy. The FDA, by not allowing him to try that drug, has in effect killed him.
Kaizen: The drug lag problem, as it is called.
Abrams: Yes. If you want to have an FDA at all, then my solution is to have it as an advisory body. Have a label on your drug that says, “This drug has not been approved by the FDA. It could be dangerous to your health.” Then, people who are terminal cases can either take it as their only chance or, if they want, they can wait for the FDA’s approval.
Kaizen: So you give people a choice rather than making the decision paternalistically for them.
Kaizen: Is there a decline in biotech investment because of the regulatory process? Is it shifting overseas? Or are people just dealing with it?
Abrams: They certainly are just dealing with it to the extent that they don’t shift overseas. There is some shift overseas, but whether there has been a major shift I couldn’t tell you. I haven’t looked at those statistics. There is a company I know of now, which I’m an investor in, that has a treatment for glioblastoma, which is brain cancer. It’s had wonderful results in phase I trials so far, but it’s been a small number of trials. You have to go through phase II and phase III. But right now there are people dying from brain cancer who can’t use it even though it has been very successful and there aren’t any better therapies. At least not that I know of.
Kaizen: And it is still stuck in trials.
Kaizen: Since have you been shifting out of biotech, have you been focusing in some other sector or are your investments scattered?
Abrams: I’d say they are scattered. They are mainly in information technology, but that category is itself very scattered. It’s everything digital.
Kaizen: Of your current investments, are there some that you are particularly excited about that you can talk about?
Abrams: There’s the glioblastoma that I just mentioned. There is also a company doing coal gasification, which has raised $1.2 billion for a coal gasification plant or series of plants. Lots of others.
Kaizen: This is extracting the gases from coal?
Abrams: Yes. There’s also a company that has a unique way of identifying fingerprints, which is not deflected by wetness or grime or anything else that has been tested so far. It could have very broad applications. It could be used, for example, to ensure that only you can fire your gun, or only you can open your computer.
Kaizen: Or start your car?
Abrams: Yes. Car companies are interested. There’s another company that is working on software to better identify potential underground oil and gas formations.
Kaizen: This all sounds exciting and cutting edge.
Abrams: It’s always exciting.
Kaizen: Closing questions here. You have a lot of intelligence — early entry into the University of Chicago, finishing your master’s degree in one year, playing chess, investing, and so on. In the investment field, how important is intelligence relative to other traits? Lots of smart people fail as investors. So how important are other traits like objectivity, putting your time in, or being able to bounce back from failure, or the courage to write a big check, and so on?
Abrams: All those are important. Perseverance is particularly important. As Churchill said: “Never, never, never give in!” Well, I don’t know about never. Very rarely will do.
Interestingly enough, I don’t think intelligence is particularly important. This is not rocket science and the principles behind successful investing are not difficult to find or understand. There are many people who know them, but there are not many people who are able to practice them because the most important thing, in my opinion from my experience, is the ability to control your emotions. People get scared. When I was living in New York, I used to have lunch sometimes with a partner in a very large brokerage house. I would tell him what I was doing. For example, I would tell him: “I’m going into this oil deal. I’m drilling this wildcat well and there are eight chances out of nine that it’ll be dry. Would you like to go in?” He’d say, “No! I don’t want to go into that. That’s crazy.” I explained the figures that I mentioned earlier: if you drill nine such wells you’ll lose eight dollars with, say, the first eight tries and with the ninth dollar, on average, you make $30. He didn’t have any problems with the figures. He said, “I understand that.” So I said, “So how much do you want to go in for?” “I can’t do that!” “But you said that you understood that if the risk-reward ratio was good, it’s a good investment. You’re going to make money if you keep drilling at these odds.” He said, “I know, but I can’t do it.”
About your intelligence comment, I want to give some counterpoint. Everyone is good at some things and not at others. I want to tell you how I came to take the test at the University of Chicago. The reason I left high school early to go to Chicago is that although I’d done quite well at math, my next required math course was solid geometry. I didn’t know exactly what that was, but it sounded like I had to visualize possibly complex two-dimensional objects in three dimensions. Now that seems to be easy for most people, but I knew myself well enough to know I was very bad at it. Terribly bad. So I didn’t know if I was going to be able to pass fourth-year mathematics. I figured, why don’t I sort of slip out of high school and go to college? So I took the University of Chicago entrance exam. I took it because I knew my disabilities in being able to imagine even mildly complex three-dimensional objects. I remember in my mechanical drawing class—very vividly remember—the instructor drew a cone on the board and he slashed through it at an angle; it’s called a truncated cone. He said, “I want you all to draw the back view of this cone.” And I said, “But I can’t see the back view.” [Laughs] He said, “Of course you can’t see the back view. You have to imagine it.” I said, “But I can’t imagine it.” But you had to imagine it in order to pass the course. Somehow or another I managed, but everybody else did it with no problem at all. Guys who had trouble with “Farmer Jones has three cows and he sells two, how many are left,” could do it without any problem. And as it turned out, the University of Chicago entrance exam had three parts: math, English, and spatial relations.
Now get this picture: the 16-year old Larry, insecure and in a strange new city, goes for his opening meeting with his Chicago advisor. He sits down. The advisor opens the Larry Abrams file and says, reassuringly, “Oh, this is very interesting. You almost didn’t get into this school. On the spatial relations test, there are only four choices. By random chance, you’d get one out of four right. You got one out of five.” So it really all depends on how you define intelligence. I was good at math and English, but in a hunter-gatherer society, I’d probably be considered an idiot.
Kaizen: Everyone has their strengths and weaknesses.
Kaizen: So the important thing is knowing where your strengths are, playing to those, and avoiding the weaknesses.
Abrams: Yes. And it’s also more fun to go with your strengths; you enjoy it.
Kaizen: So is this a risk-adverse trait?
Abrams: I’m not sure if there is a risk-adverse trait. I think the risk-adverseness comes from lack of confidence in your own analytical skills. And in investing, maybe just fear of losing money, but that fear has to be connected to your lack of confidence in your own analytical skills. If you are convinced that what you are doing is the right way to succeed, I don’t see what else would stop you.
Kaizen: Let me run some examples by you from other fields. In sports, there are people who are known to be clutch shooters and those who “choke,” so to speak. So you might have somebody who is an 80 percent free throw shooter and he knows he’s an 80 percent free throw shooter, but you put him on the line for the final shot in a game he’ll miss most of the time. Other people are 80 percent free throw shooters, but when they step up to the line when the pressure is on, they make the shot. Or, in other studies, people will be given a mathematics problem at a certain level of complexity, and they’ll be told that, for example, if they get it wrong, it will cost them $10,000 to the company. Then give them the same problem, but tell them that if they get it wrong it costs the company $500,000, and the success rate of people being able to do that problem goes down. The higher the stakes, the lower the success rate.
Abrams: But I think in both cases there, you’re putting situational pressure on the person that doesn’t exist in the investment world. In the investment world you can choose to invest whatever sum you’re comfortable with. I suppose it would be different if your wife is dying and if you lose the money, you can’t afford her operation. Other than situations such as that, where you can have an external pressure, it’s just straight statistics, straight risk-reward-ratio-math. I don’t fully understand what stops people if they’re convinced of the math.
Kaizen: Another example that comes to mind: Suppose you give someone $1,000 and say, “This is your $1,000. Do whatever you want with it.” And when the person has adjusted to that, you say: “I want to make you an offer. I have an envelope here, and in this envelope there is either nothing or $10,000. You can trade your $1,000 for this envelope, or you keep your $1000.” Now, if we take your investor calculations, we’d say, “No problem. Of course, trade for the envelope because it is a 10:1 payout.” But more than 50 percent of the people in such experiments don’t make the trade. They might say, “I don’t want to lose $1,000.” To them, it doesn’t seem as real to say, “I might get $10,000.” That’s why I was asking about risk-averseness or if there were some other traits.
Abrams: So these people are definitely risk-averse, if we assume they believe the odds of winning the $10,000 are 50%, which is not specified in the example (if there was, say, one chance in 100 that the envelope had $10,000 it would still fit the “might contain $10,000” description). But is risk-averseness a trait? Or is their risk-aversion due to something else?
Kaizen: Such as confidence in their cognitive abilities?
Kaizen: Fair enough. So you would say, then, that it isn’t intelligence per se, but perhaps objectivity? Or the way you put it was “controlling your emotions.” That would be to say that if your emotions are lining up with your thinking, then go for it. If not, go with your thinking. And do that consistently.
Abrams: That’s right. Your emotions will often be at odds with your thinking. For example, if you’re in the stock market and the stock market has been going down every day for several days. Each of those days, let’s say starting with day five, it was very cheap, but you didn’t go in because it was down and you were afraid to go in. Now it’s down seven days, eight days, nine days, and you know that each time if you had thought that it was cheap and had gone in, you would have lost money. So your judgment is telling you to invest, but your emotions are telling you that you are just going to lose money, so don’t do it.
Now, if you are a fully integrated person, your emotions and your judgment would always be in concert with one another. I don’t know of anybody like that. Some are better than others at being able to go by reasoning rather than emotions. It’s a bell curve. Those who are able to do it best are the most successful investors.
Kaizen: As an investor, have you found that there are particular emotions that you would struggle with? Suppose you made an investment and it went bad and you feel depressed about that. Would you just not invest for a little while to recover?
Abrams: Let me stop you there, because that doesn’t happen. I don’t get depressed if I lose money.
Kaizen: Merely sad?
Abrams: Well, maybe you could say sad. What happens is I think, “Well, that’s too bad. The odds were in my favor and it went the other way. That’s going to happen.” Then I just go on to the next thing. I’m not even sure that I’m sad.
Kaizen: So it’s your wildcat drilling principle: that one is going to go bad, but one of your wells will come in.
Abrams: I don’t know which well is going to succeed, but I figure that eight of them are going to go bad.
Kaizen: How about on the upside? The market is going up, people are getting excited, and you’re getting excited. The urge to jump in prematurely?
Abrams: That happens all the time. If the market is going up all the time, you think, “Wow! If I had gone in yesterday, I would have made X. Or if I had gone in two weeks ago, I would have made a huge amount of money. Well, I’m not going to wait anymore; I’m going to jump in.” Everybody has those emotions. But again, the most successful people are the ones who can say: “Hold it. Is the market cheap or not cheap? Am I getting good value or am I not getting good value? If I’m not getting good value and the market is going up—good luck to all of those people who are investing. I won’t do it.”
Kaizen: Over the next year or two, what are your main projects?
Abrams: I’ll keep doing venture capital; I’ll keep doing stock market investing; and I’m hopeful that I’ll spend more and more time writing — a different novel that addresses additional life issues. I’ve been distracted by the huge debts this country has been and is amassing and the need to scope out ways to protect myself from what I believe to be the inevitable consequences of massive money printing.
Kaizen: If you look back on your career so far, what have you enjoyed the most about being an investor?
Abrams: The thing I enjoy most is being able to buy my time back from the open market so I’m able to spend the time of my life exactly as I want to. But it’s also fun being on the cutting edge of things and being proven right.
Kaizen: On the flip side of that question, have you found in your career as an investor that there is something that you consistently struggle with?
Abrams: Not really. The big problem, as I said before, more generally, is being able to control your emotions, and I never had much of a problem with that. What would be hard for me would be to not be in control of my life.
Kaizen: Controlling your emotions — did that come naturally to you? Or is it a cultivated trait? I don’t want to put words into your mouth, but is it that you use your emotions rather than letting them use you? Or a matter of balance?
Abrams: Talking off of the top of my head, I think the right balance is using your emotions as motivators but using your reason to calculate your decisions.
Kaizen: Suppose you have convinced yourself that reason is the calculator. Say we have strong passions; then when we are at the point of making important decisions, how do we make sure that we are doing it the right way?
Abrams: I guess it would be two things. One would be just monitoring your processes and always being aware of whether you are using reason or whether you are jumping in emotionally. The other would be to check your conclusions with reason. Wait until you have the answer and then check it out. Of course, you can also have the same problem checking it out. You might feel that you have the right answer [Laughs], but I can’t prescribe beyond that.
Kaizen: Is there any piece of advice that stands out from a mentor or a friend that has guided you over the years?
Abrams: You know, in the field we are talking about, which is finance, I didn’t have a mentor, unfortunately. The closest I can think of would be my immediate boss at Value Line, Walter Boschen. He was always calm and composed; guys would come to him with all kinds of problems and get emotional, and he would just sit back and ask them for the facts and come to a rational conclusion. I really admired that guy. But I don’t suppose you could call that a mentor because it had nothing to do specifically with investing criteria.
Kaizen: He was a striking example …
Abrams: … of how to live life in general and how to function in whatever field you are in.
Kaizen: One final thought. Since our primary audience is younger people who are just starting out, is there a piece of advice you would give to young people, particularly when they are transitioning from college to the rest of their lives to help send them on their way?
Abrams: Think about your goals. Make them real to yourself. Read enough in your field to give yourself confidence that you’re not going in blind. Then dive in. And — this is not unique to me — but I would say to do what you love, and never mind the money, except as the means to a clearly defined end. Never mind prestige; never mind fame; never mind other people’s opinions. Never mind anything except giving yourself the opportunity to fall in love with life — it’s so very short. A major goal should be to have no regrets at the end of your life; that way you’ll end up with as few as possible.
This interview was conducted for Kaizen by Stephen Hicks. For more information about Larry Abrams, please visit his author’s page at Amazon’s website.
© 2013 Stephen R. C. Hicks. All rights reserved.