Investing legend Peter Thiel has been a scary negotiator for more than two decades...
Thiel's greatest hits are a marvel of the investment world.
In the late 1990s and early 2000s, he and his partners – sometimes referred to as the "mafia" – built PayPal (PYPL) into one of the first successful digital-payment platforms. They sold it for $1.5 billion to e-commerce giant eBay (EBAY) in 2002 for top dollar in the midst of the dot-com crash.
He founded big-data analytics company Palantir Technologies (PLTR) in 2003... and helped successfully negotiate contract after contract with the U.S. government and its allies. Today, Palantir is a $17 billion company. Thiel still owns a 7% stake.
In 2004, Thiel picked up a 10.2% stake in Facebook for $500,000. He sold most of it eight years later when it was worth more than $1 billion. For those who don't want to do the math, that's a 199,900% return... or 159% per year for eight straight years.
(That's even better than our 1,380% return on the stock from May 2013 through October 2021.)
Also in 2005, he launched venture-capital firm Founders Fund alongside Sean Parker of Napster and Facebook fame. Founders Fund backed companies including Airbnb (ABNB), LinkedIn, SpaceX, and Stripe before they took off. Thiel's negotiating skills have made his investors billions.
Those skills have played out in his personal life as well. He near-singlehandedly sunk the gossip website Gawker after taking exception with it running stories about his private life.
It's a fascinating story – in short, Thiel sponsored numerous lawsuits against the website, including one from wrestler Hulk Hogan. Gawker was fined $140 million and subsequently filed for bankruptcy.
All of this is to say Thiel has had a huge impact on the investing world... and the world at large. Those who know him personally attribute his success to many different traits and skills.
Perhaps I'm just a debate nerd, but I (Rob) believe one of the key strategies that has benefited Thiel most is his commitment to a technique called the "steel man."
You may have heard of the 'straw man' argument before...
Put simply, it's a technique folks use when they want to win an argument but don't have sufficient facts to do so. Rather than attacking their opponent's actual points, they'll misrepresent the argument and knock that down instead.
You can see a real-world example of this in the 2019 Australian federal election (or in practically any other political debate in history).
The Australian Labor Party proposed that within 10 years, all vehicles sold should be electric. The ruling coalition government responded by accusing the Labor Party of declaring "war on the weekend." It said that the Labor Party was trying to ruin the ability of families to take long weekend driving trips.
The Australian government created a straw man. Instead of debating the merits of electric vehicles ("EVs"), Labor had to declare its stance on Australians taking vacations.
The issue with a straw-man argument is it never actually gets to the root of a debate. It just changes the focus.
Even when it works, you still haven't won the debate at hand. Eventually, your opponent will catch on and bring the real subject back into focus.
The 'steel man' technique turns the straw man on its head...
Here's how it works... Instead of manufacturing the weakest version of an opposing view and attacking it, you do the opposite. You work with the person on the other side of the table.
You ask questions to understand the core tenets of their argument. Then, you help them reinforce those points.
Going back to the Australian election example, the steel-man technique would have looked something like this...
The coalition government would have had a good-faith debate with the Labor Party on the merits of an EV initiative. It would have asked questions like...
Why should we want to make all cars EVs?
What are our real goals to help improve the environment and emissions?
When do we need to reach these goals by?
It might sound counterintuitive at first. But by asking these deep questions, the coalition could have better understood the argument's underpinnings. That makes it easier to understand where the disagreement lies. It's also easier to come to a middle ground.
I won't pretend I've ever been in the same room as Peter Thiel. But those who have talk about how this is just what he does.
When Thiel debates a big-picture investing idea, a business strategy, or a transaction, he doesn't seek to prove his opponent wrong and "win." He builds up the other person's argument to the strongest it can be.
He embraces why his opponent is right and absorbs the most logical, relevant points. That helps him create the best possible counterargument.
The steel-man mentality is an essential tool for investors...
Great investors are constantly thinking about everything that can go right in a stock. But the best investors are also considering exactly what could go wrong.
One of our favorite quotes about this idea is attributed to author F. Scott Fitzgerald...
The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.
When you buy a stock – and for as long as you own it – it's not enough to just focus on why you think it's a good opportunity.
You should also consider why you shouldn't own the stock.
And you shouldn't dismiss those counterarguments with a wave of the hand, either. Do your best to make the strongest possible argument against this investment. Use the steel-man strategy to prove yourself wrong.
Only when you've done that... and you still have conviction in your original idea... can you really know you're making the right decision.
October 7, 2022