Capital Allocation 101

Jonathan Horgan on how The Rebel Allocator increased his understanding of business and life principles

Published a year ago on May 26, 2019 Read

The Rebel Allocator by Jacob Taylor is a fictional novel involving a series of dialogues between an older successful businessman Mr. X and a recent college graduate. Nick is just starting his professional career as an entry-level analyst in the cutthroat world of private equity, while Mr. X is an older and well-known businessman who operates a burger chain (“Cootie Burger”) headquartered in Wichita Kansas. Mr. X is plain-spoken, playful, insightful, ambitious, and purposeful and methodical in his actions. He believes that business is his calling in his life and is extremely engaged in his pursuits. Nick has a very limited understanding of business, having majored in journalism. Soon after his first year at the private equity firm, Nick is essentially forced to start a graduate program in business (i.e., “MBA”) in order to continue his employment. He meets Mr. X while in school and the two begin a series of dialogues with the stated purpose of Nick writing an authorized biography on the business titan. The graduate school program enables Nick to have a very basic understanding of general business topics (i.e., accounting, investments, competitive strategy, etc.), which serves him well as he engages with Mr. X. One could argue that Nick is on parallel graduate school tracks, one curriculum taught by the local university in California (theoretical) and one taught by Mr. X (practical). Mr. X understands that he has to communicate somewhat abstract business concepts to a novice and uses the Socratic method to ensure that his pupil retains a clear understanding of vital fundamentals. The core of the Mr. X curriculum is capital allocation, which the author very elegantly describes as “the process of deciding how money is spent inside a company.” 

The series of dialogues between Mr. X and Nick explores key principles for business and life. The latter is important as those who anticipate a clever story limited to business should expect pleasant surprises related to life as well. Additional storylines (i.e., Nick and his girlfriend, Nick and his private equity employer) are strategically weaved around the central purpose of the dialogues, allowing the reader to stay emotionally engaged. The author notes “emotion is the glue that makes any lesson stick.” The novel is compact; approximately 250 pages and 45 succinct chapters. Most readers, particularly those with a background in business and/or finance, can likely move through at a brisk pace, yet still digest the key points. I finished the book in only two sittings and thoroughly enjoyed every minute.

As someone with a background in finance and investments (i.e., MBA, CFA charter), I was already familiar with many of the concepts introduced in the novel. Nevertheless, my understanding of key business concepts increased immeasurably. More importantly though, my appreciation for and my understanding of other ideas (business and life principles) “brokered” by the author was profound. Why use the term “brokered”? As the author readily admits in the acknowledgements section, “you won’t find an original idea of mine in this book.” Essentially, the author curates a wealth of powerful ideas across multiple disciplines and strategically incorporates them into the novel at critical times to benefit the reader. Are you familiar with the concept of mental models, or of specific mental models like “The Pareto Principle” or “The Map is Not the Territory”? Are you familiar with the term “biological baggage” and how our biological impulses influence our decision-making? Are you familiar with the concept of yarak (staying hungry) or of the pinecone strategy (extreme patience)? If not, be prepared for countless and wondrous ideas that can help you in life and in business, primarily by avoiding being stupid (see Charlie Munger) and by attempting to minimise unforced errors (see Howard Marks). The acknowledgements section alone is a treasure trove of ideas for anyone to research independently. As someone who is attracted to ideas, this was akin to striking gold. 

This is a wonderful book for anyone to read and should be appreciated by experts and novices alike. I highly recommend it and feel quite strongly that the yield (i.e., ideas harvested after reading) relative to the cost is very high. On a final note, one key message delivered by the novel is how capital allocation done properly (simple but not easy) can not only benefit an individual company (public or private) but also benefit countless other stakeholders (hint – society at large). Lastly, don’t take my word for it; take Charlie Munger’s! After reading the book, Munger reached out to the author and suggested the book be turned into a movie.