The Poker Chronicles

Go read "Fooled By Randomness," by Nassim Nicholas Taleb. It does some debunking of the efficient market hypothesis and is generally interesting.

I agree that the above statement is damn near beyond stupid, but I do not necessarily agree with all of your post.

What does Chris care about the difference between risk and difficulty in your argument? If his odds of failure are still the same, it makes no difference to him or more importantly, to his money.

Obviously if I invest in a restaurant, I am going to do some research beforehand on the location, the food served and its popularity in that market, the management team, labor and food costs, etc. Doing so reduces my risk. However, there are also going to be factors completely beyond my control. Those risks cannot be avoided no matter how skillful I am.

Also, investing in chains or franchises is a much different animal than simply opening a restaurant on your own. The brand strength of the chain/franchise will be a huge factor in its success, where as "Chris's Pizza" is going to have to build that brand equity entirely on its own. Not quite apples to oranges, but very different. If Chris's Pizza is a hit, he pockets all the profits. Not so for a chain/franchise. Franchises help minimize your risk, but they also limit your flexibility.

One important thing you did not mention is the return involved. If restaurants fail 80% of the time, but the ones that succeed more than earn me back my investment, I have no problems being a long term investor in restaurants.　Same as in poker, I just need to make sure my bankroll can cover the inevitable unlucky streak.

Jeff:

What factors do you see as being beyond the control of the owners of the restaurant? There are some very rare ones I suppose. People might get e Coli from some spinach you served. Unless you run the farms yourself I guess that's out of your hands. You really can't do much about that other than sue your distributor and hope to get enough money to start a new one elsewhere.

But I don't see any common risk factors that drive restaurants out of business though. When one closes it's generally due to poor menu, poor atmosphere, poor location, lack of funding, mismanagement, etc. It seems to be bad decisions that lead to almost every single failure in the industry.

The difference risk and difficulty is huge for a potential investor, because one can reasonably be predicted and one can't. Perhaps you have to make your living from a truly risky job like poker to understand all of the reasons why a business whose success is based entirely on your performance is so much better than one that is truly risky, at least in terms of your own sanity. It's his sanity that Chris is trying to save by a career change.

In a business where random chance is a huge factor it's nearly impossible to learn from your mistakes, because you can't directly correlate results with performance. For a logical person like me or Chris, who expends serious mental resources to figuring out why things are the way they are and how to take advantage of them, the inability to know why you're succeeding or failing or to do much about it can be hell.

Restaurants are surely a great way to make money, I never said they weren't. I didn't discuss it because it wasn't relevant to how stupid that quote was. I just said they fail not because they're risky but because they're hard to do. I hope to find myself owning one or more of them eventually. It's a tough business, due to the extreme level of competition. But they're less risky than almost every other way to make very good money than I can think of. And the potential payout is tremendous, far more than one could earn at poker.

Matt, I think we agree much more than we disagree on this.

As for what you can't control I was thinking very macro stuff. The economy shits the bed, some sort of local economic disturbance affects the level of free cash your clientele has, etc.

I am from Boston, and the biggest restaurant group here (the Lyons Group) tends to remake their locations every 3-4 years, almost regardless of how well they are doing.

I also agree about self-employment. I have never been there (yet, though I hope to be) but I cannot imagine that anything else gives you more motivation to educate yourself so as to completely remove any risk that can be removed.

Dorks like myself who have studied portfolio theory would call what remains "market risk" which cannot be eliminated.

I too am highly logical and hope to have more time to apply it to poker in the future. Finishing an MBA right now so that is eating up most of my free time. I have managed to make myself a marginally average poker player (down about $300 in a year and a half of online playing) and think I can do better with some applied effort.

Both you and Chris have struck me, through your blogs, as very intelligent people which is why I follow your posts regularly. I don't know if Chris is just stuck in the rut of all ruts or not, but I have a feeling he will continue to be successful at poker once he figures out what the issue (leak?) is.

I've known a few people who have opened up restaurants, all with mixed results. None of them really have much business savvy and all come from cooking backgrounds and not business. Really, these people needed to partner with someone with quality business skills but cannot afford to.

Like most other businesses, I think new restaurants suffer from serious funding issues, maybe even moreso then other new business. I don't think banks are overly ambitious in giving financing to cooks wanting to open a restaurant and they have to rely on small amounts of personal financing. They probably have to settle for locations that may not be optimal and probably have to scale back renovations and decoration as well.

I'm sure they also suffer from other problems such as not identifying their target market, managing price and quality, etc.

Most businesses fail for a reason well outside of randomness. Some things cannot be predicted with 100% accuracy and you simply have to do your best to adjust and try to make the best decisions. Obviously, some are much better then others at doing so. I would think though, that restaurants are significantly less risky and much more predictable then most other startups.

From what I understand Jeff restaurants are relatively unaffected by things like overall economy, local disturbances, etc. Obviously nothing is totally unaffected by those, but my point was (and this is what I've read in a lot of books on the topic) that the food industry is much more resilient than most.

One of the books I read pointed out a restaurant in your area called The Rusty Hammer, if I remember correctly. Ever been there? I've never been to Boston but hope to get out there soon.

My father is still the most successful person I've ever known in my life. I once asked him, "What is the key to success?" His answer: "Find out whatever a successful person does and do it better."

Matt is right on with this one, restaurants don't just fail, they are pushed towards failure. As I see it, the biggest problems with restaurants is the people that you hire. Take a look at the average Applebees, Ruby Tuesday's, Friday's, etc. All but the managers make more than minimum wage, and those people are usually undependable (I once heard that Waffle House sends out 3 times as many W-2's as they have employees...that's turnover). It's a terrible recipe for success. There's a guy who occasionally plays in our home game who went from security at Sears to manager at Ruby Tuesday. Anyone who calls and all-in with A-3 off shouldn't be running anything, let alone something that involves the health of the community. I used to live in Jackson, MS where the best (aka successful) new restaurants were simple concepts, with few employees, and moderate prices. Keep in mind, if a customer's first impression is average, they won't be back, there are too many other options. How many times have you walked out of a restaurant and thought "What did I just pay $30 for????" Scratch it off the list.

I think the Hammer is up in Portsmouth, NH. Only about an hour's drive from Boston.

Kind of makes sense, since no matter what we all are going to keep on eating.

I hear the winter has been warm so far but I have been in Asia since August and Tokyo since September, but you definitely want to visit Boston in early summer or fall.

It has been the kind of winter that makes us all wonder if global warming is really that bad. I might try to get out that way this spring, while it's still in driving distance. This looks like it might be the last year where I'll be able to say that.

Matt you are confused.
A restaurant and a franchise are two very different things. Starting a restaurant is very risky (at least 80% failure rate). Starting a franchise is like buying yourself a job (much lower risk profile but not nearly as much potential upside).
I don’t know how you came to the conclusion that starting a restaurant is not risky (apparently it is just hard). Your logic is flawed. No amount of hard work can guarantee success in the restaurant industry – ask any successful restaurant / bar owner and they will tell you many tales of failure in spite of hard work.
It is irresponsible to tell people that the restaurant industry is not risky. It is a very risky (high probability of failure) industry and even the successful ventures are usually just mildly cash flow positive. Very few restaurants end up being wildly profitable.
FYI.

You completely and totally misunderstood what I meant by that. Your reading comprehension could not possibly be lower.