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We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 23 January 2022:

1. Interview: Ryan Petersen, founder and CEO of Flexport – Noah Smith and Ryan Petersen

N.S.: The supply chain crunch has been the biggest economic story in the world for about a year now, causing inflation and throwing the Biden administration’s plans into disarray. What sparked the supply chain crunch? How much of a factor was increased demand for physical goods due to the pandemic? Were shifting trade patterns at all to blame? Basically, why now?

R.P.: The supply chain crunch was started by increasing demand for goods, as consumers stopped spending on services. Americans in particular had more money in their pockets because they weren’t going on trips, spending at restaurants and bars, or attending concerts. Instead as city after city started enforcing lockdowns and restrictions, people started spending a lot more goods and not services. You’ve got to get your dopamine somewhere. So what we saw was an unprecedented increase in imports from China—as much as 20% more containers entering the United States than were leaving our ports since the start of the pandemic. It turns out, our infrastructure is just not made to scale this fast, and by infrastructure what we mean is the entire ecosystem: The number of container ships in the world, the number of containers available, the throughput of our ports, the availability of trucks and truck drivers, the availability of chassis (the trailers that haul containers around), the entire system is overwhelmed and clogged. We simply don’t have enough of these essential supply chain elements, or resilient systems that are agile enough to shift the supply of these assets to where they’re needed.

While the pandemic drove this shift in demand from services to goods, it also changed where consumers were buying goods (increasingly online), the types of goods they were buying, and where those goods were flowing to and from. One thing to note is that e-commerce logistics networks are fundamentally different in their geographical and physical space than that of traditional retail. They’re more complicated because you are edge caching your inventory to be closest to your users instead of positioning everything in a distribution center in a single hub. You now have to position your warehouses all over the United States, making it exponentially more complicated. So the more people bought things online, the more these systems were overloaded.

Then there was the impact of cascading second orders that are inherently unpredictable. For example, as imports increased as much as 20%, exports actually decreased because the United States economy was slow to reopen. In fact exports are still down. If you look at the journey of a shipping container, it runs in a loop: The same container that brings in imports later helps transport exports out of the U.S. So if there are fewer exports going out, that means companies are consciously choosing to ship empty containers back to Asia or else they will run into shortages at the origin ports. At one point over the last year, as an industry, we were 500,000 shipping containers short in Asia. These shortages led to increases in prices. If you wanted to get a container you had to pay a real premium to get access. In some cases renting a container for one journey was more expensive than the price to buy one. In January 2019, rates on the Trans Pacific Eastbound route (TPEB), and Far East Westbound (FEWB) were around $3000. In December 2021, rates remained elevated in the $12,000 – $15,000 range. At one point this year, TPEB rates were as high as $24,000.

Consumers are just buying more stuff than ever and our infrastructure, frankly, isn’t ready for it. It’s getting held back by dilapidated port infrastructure, by congestion, non-automated ports, and bad rail connections to the ports. We’re just recognizing the pain of 20 years of not investing in our infrastructure. And we’re feeling all that pain in one year right now. It’s increasingly difficult for truckers to pick up or drop off containers at ports and warehouses, leading to today’s congested ports, lots, and railyards. So boats can’t get in, we don’t have enough containers, a lot of the empty containers are stuck on the chassis, we don’t have enough chassis because we don’t have enough warehouse space, and we don’t have any space in the warehouses because we can’t move the goods out fast enough.

Until we can focus on what actually clears the ports, rail yards and warehouses, and goods can begin to move at a pace that aligns more closely with the growth in consumer demand, there’s nowhere for the containers to go, and the number of ships waiting to unload will continue to grow…

...N.S.: Was the global economy simply over-engineered? Did we optimize supply chains for efficiency at the cost of resilience, like a machine with tolerance gaps that are too small? And if so, should we recalibrate going forward, to leave more slack in the system in case of future crises?

R.P.: In my opinion, what’s caused all the supply chain bottlenecks is modern finance’s obsession with Return on Equity (ROE). To show great ROE, almost every CEO stripped their company of all but the bare minimum of assets. “Just-in-time” everything with no excess capacity, no strategic reserves, no cash on the balance sheet and minimal investment in R&D. We stripped the shock absorbers out of the economy in pursuit of better short-term metrics. Large businesses are supposed to be more stable and resilient than small ones, and an economy built around giant corporations like America’s should be more resilient to shocks. However, the obsession with ROE means that no company was prepared for the inevitable hundred-year storms. Now as we’re facing a hundred-year storm of demand, our infrastructure simply can’t keep up.

Most global logistics companies have no excess capacity, there are no reserves of chassis, no extra shipping containers, no extra yard space, no extra warehouse capacity. Brands have no extra inventory and manufacturers don’t keep any extra components or raw materials on hand.

And let’s not forget the human aspect of the workforce that makes this all happen. A lot of companies in the industry haven’t invested in taking care of their people, especially during market downturns, so now they can’t staff up quickly to meet surging demand.

When the floods inevitably hit, the survivors will be those who invest in excess capacity, in strategic reserves of key capital assets, in employee trust that let them attract and retain talent. Running lean systems may seem beneficial, until the whole system fails like it did this year. We’ve removed the shock absorbers from the economy and it’s time we add them back.  

2. Standard Oil Part I – Ben Gilbert and David Rosenthal

We dive into original American capitalist mega winner, Standard Oil, and its legendary founder John D. Rockefeller…

…David: Yeah. Rockefeller though just got this vision where he’s like, oh man, the more profit I make, the more capital I can put into this, the more oil I can hold, and the more I can produce. When the price crashes, I’ll just keep buying. He buys the dip over and over again. Because his operations are so much more efficient and so much more profitable, he can afford to pay more than anybody else. He can afford to hold this stuff longer. He’s really thinking long-term in a way that none of his other competitors are.

Ben: When we say he’s tweaking stuff and he’s so much more profitable, he is both horizontally and vertically integrating. Let’s talk about vertically integrating first. He’s doing things like realizing, jeez, we’re hiring a lot of plumbers to come in and lay this pipe every time we do a build-out. They do things like hire their own plumber, hire their own blacksmiths, and decide actually, we should do this ourselves. That way, we can save all this money on piping instead of buying it from a third-party contractor.

Later down the road, he even plants a forest. He buys up a forest so that they can cut down the trees themselves to build the barrels out of.

David: To make their own barrels. Oh my gosh, this is so great.

Ben: They save all this money rather than buying barrels from somebody else. Then, of course, they can innovate on the barrel-making process. He figures out, oh, if we treat the wood in the forest, then it’s lighter and cheaper to ship back to the refinery so we save all this money on transportation. That’s the vertical integration side of things, which would be crazy enough, but he’s figuring out that wait, we do this process. How can we use the whole buffalo? What can we sell the gasoline for? I think they invented Vaseline.

David: Yes. I think they buy the company that invents Vaseline. Petroleum jelly, which is one of the byproducts, they commercialize it.

Rockefeller found his calling here. This is divine passion. There’s just one problem which is the partner, Clark. Clark is not so into how much capital Rockefeller is tying up in the business here. He’s like, hey, we’re merchant traders. The point is profits, and then we keep the profits.

Rockefeller is like, no, reinvesting it in R&D, CapEx, and inventory. Rockefeller starts going around to all the banks and all the financers in Cleveland and lining up. He’s not even using just the profits from their operations. He’s getting more external financing to finance growth here.

Ben: When I say both vertically and horizontally integrating, in the horizontal sense, he is obsessed with trying to figure out how to be the sole supplier of oil to the world. As soon as he figures out that there are economies of scale here, he’s like, okay, cool. How do we start the flywheel, get as much capital as possible, build out as much production as possible, and start having agreements with whoever’s got rights to the land as possible so we can start vending to the world?

David: Yeah, and own this super strategic chokepoint of refining in cities. Clark is spooked by all this. Chernow has this amazing quote that he finds from Rockefeller. I don’t know where he found this. I should look up in the notes at the end of Titan. This is so good. Rockefeller apparently wrote or said this at some point. “Clark was an old grandmother and was scared to death because we owed money to the banks.” It’s so great. 

Rockefeller engineers a coup. Some of Clark’s brothers are also partners in the business at this point in time. They get into all these arguments. John baits them one day into threatening that they should just dissolve the partnership. John’s like, okay, great, let’s dissolve the partnership.

Ben: Because he knows that if he goes to them and says, look, first of all, I don’t think you are risk-tolerant enough, and second of all, I don’t think you’re upstanding so I want out. He knows that he loses leverage by doing that. That’s why he baits them into doing their normal thing of getting all up in a fit and saying we’re going to back out.

David: Totally. Rockefeller immediately goes to the local paper and places a notice that the partnership is dissolving and that there’s going to be an auction for the assets of the partnership including the oil refineries. It sets up this showdown where the Clark brothers and Rockefeller bid against each other for each other’s 50% stake in the business.

Ben: Which is, by the way, a great way to do it. If you’ve got a partnership that’s blowing up, all right, whoever wants to pay more to buy the other person out is the person that should get to own the whole thing. The idea of a bidding war between the two of them to figure out how to value the business makes total sense.

David: Between the two principals. Rockefeller though, remember, he’s been going and getting the relationships with all the banks and financiers, he lines up financing in advance of the auction. He’s got basically unlimited resources, although the price ends up stressing him out. He buys Clark’s 50% of the oil business for $72,500. In exchange, Rockefeller gives Clark his 50% share of the produce trading.

Ben: Which by the way, he probably buys him out for $3–$4 million, something like that, in 2021 dollars.

David: A good chunk of change. That 50%, that $72,500 or however you want to think about it, is 50% of Standard Oil right there.

Rockefeller would say later, “It was the day that determined my career.” Probably bigger than job day. “I felt the bigness of it, but I was as calm as I am talking to you now.” This is what we’re going to see. This man has literally solid ice running through his veins. It’s crazy.

This was a big price. It was more than Rockefeller wanted to pay, but this happens in February of 1865. Back to what’s going on in America, two months later, General Lee surrenders to Grant, and the Civil War is over. With the Civil War over, what’s less important? Commodity, produce trading. What is all of a sudden a hell of a lot more important? Oil, industry, urbanization, everything.

Ben: Because all these soldiers are coming back and getting jobs in factories, you have an industrial boom here. It’s interesting how Rockefeller is obsessed with I’m not a speculator. I’m not one of these people rushing to prospect various plots of land in Western Pennsylvania. It’s funny that it’s, I would say, a picks-and-shovels play. I guess the point to make here is he’s doing the predictable, reliable, stable, very strategic part of the value chain. He’s not out prospecting land.

David: To just doubly underscore strategic, did Rockefeller know the war was going to end in two months? Probably. Sherman’s probably marching to the sea at this point.

Chernow writes, “The war had stimulated growth in the use of kerosene by cutting off the supply of southern turpentine, which had yielded a rival illuminant called camphene. The war had also disrupted the whaling industry, and led to a doubling of whale oil prices. Moving into the vacuum, kerosene emerged as an economic staple and was primed for a furious postwar boom. This burning fluid extended the day in cities and removed much of the lonely darkness from rural life.”

Soon, John D. Rockefeller would reign as the undisputed king of that world. He’s now got the oil operations, the refining business all to himself. December of 1865, the war’s over, all this is going on, and he opens a second refinery in Cleveland next to the Excelsior Works with a new name that he chooses, he wants to let everybody know that his oil, his kerosene, his business, and his operations are going to be bigger than anyone else. It’s going to be the best quality and it is going to reign from sea to sea. What does he call the new operation?

Ben: Standard Oil.

3. Bitcoin Failed in El Salvador. The President Says the Answer Is More Bitcoin – David Gerard

More than 91 percent of Salvadorans want dollars, not bitcoins. The official Chivo payment system was unreliable at launch in September—the kiss of death for a new system. Users joined for the $30 signup bonus, spent it or cashed it out, then didn’t use Chivo again. The system completely failed to check new users’ photos, relying solely on their national identity card number and date of birth; massive identity fraud to steal signup bonuses ensued. Bitcoin’s ridiculously volatile price was appreciated only by aspiring day traders. Large street protests against compulsory Bitcoin implementation continued through October. The government stopped promoting Chivo on radio, TV, and social media. Chivo buses and vans were seen with plastic taped over the company’s logo.

Bukele’s financial problems remain. El Salvador can’t print its own dollars, so Bukele urgently needs to fund his heavy deficit spending. The International Monetary Fund has not lent the country the $1 billion Bukele asked for, and has indicated its strong concerns about the Bitcoin scheme.

So Bukele, known for a populism that is half aspiring dictator, half Elon Musk, once more announced national policy from the stage: At the Latin American Bitcoin and Blockchain Conference on Nov. 20, Bukele came onstage to an animation of beaming down from a flying saucer and outlined his plans for Bitcoin City: a new charter city to be built from scratch, centered on bitcoin mining—and powered by a volcano.

Bitcoin City would be paid for with the issuance of $1 billion in “volcano bonds,” starting in mid-2022. The 10-year volcano bonds would pay 6.5 percent annual interest. $500 million of the bond revenue would be used to buy bitcoins. The bitcoins would be locked up for five years, then sold to recover the $500 million purchase price; any profit on the sale would be paid out as an additional dividend. Holding $100,000 in volcano bonds for five years would qualify investors for Salvadoran citizenship.

4. TIP406: Finding Hidden Treasure w/ Thomas Braziel – Trey Lockerbie and Thomas Braziel

Trey Lockerbie (35:25):

You mentioned your investors expecting you to knock the cover off the ball sometimes. There is this unbelievable example or this investment that you did that I think encapsulates a lot of what we just talked about on this episode, and that was your Mt. Gox investment. So start at the top of this example. I know you’re going to try and spin it in a very humble way, but this is just such an incredible investment. Give us the lay of the land here with this, what you saw and how it’s panning out.

Thomas Braziel (35:54):

You know, I would just say that so much of your life in business, your personal life, and in investing is going to be serendipitous in the sense that I really believe so much of it as preparation meeting opportunity. I happen to be in the right place at the right time. I happen to know a lot about bankruptcy. I happen to know how to buy claims. And I just so happen to something I thought, “Well, wow, this is ridiculously asymmetric. If this works, yeah, this could really work, and I’ll get this ridiculously magnified return on probably the most volatile and interesting asset of our time.” So Mt. Gox was interesting. I mean, I tripped upon Mt. Gox reading the FT, and I saw the administration. It was probably year into the administration and there was an article in the FT. And I had known what Bitcoin was, but I didn’t think anything of it. I mean, I’m living, as we all do, I’m living in my own bubble.

Thomas Braziel (36:50):

And that’s the hard part about investing is this time period where you need to have your ears up and your antennas out and you’re looking, scoping out, trying to find opportunities. But then when you find something that might be interesting, you have to choose and choose wisely as best you can on where you’re going to spend your time. So for this, I saw the docket, I thought, “Wow, Japanese insolvency cryptocurrency claims. Wow. That’s amazing. That is really crazy. I wonder how you buy these.” It was out of curiosity. I wonder how you actually paper buying this kind of thing. And I thought, “Wouldn’t it be cool to buy one just to see if I could do it?” It was like someone saying like, “Wouldn’t it be cool to build a cabinet, see if I could just do it?” And there’s something like that. Someone.

Thomas Braziel (37:35):

So I did. So I went out there in the market, and it’s easy to read about the case. It was all in English and in Japanese, it was in dual languages, just because there were so many foreign creditors that they do everything in English and Japanese. So this is 2016, Bitcoin was probably at $300. I remember I bought some Bitcoin on Zappo and maybe on Coinbase as well, just to be like, “Hey, if I’m going to buy these claims, I should probably know what Bitcoin really is. People talk about it.” I bought one claim and I thought, “Oh, that’s really cool.”

Trey Lockerbie (38:08):

Where did you buy the claim? How did you find someone to sell you a claim?

Thomas Braziel (38:11):

So this is true in American cases, it’s not always true in foreign cases, and it just happened to be that a list of creditors, of approved creditors was… It is available if you’re a creditor in the court, but someone had actually leaked the approved creditor list, and I remember, hopefully this was pre-GDPR, but we had gotten ahold of the list and it’s all public there. I mean, I think there was even links probably to a newspaper where they had the list posted or at least in their servers or whatnot. But there was a list of approved creditors floating around. So I started fishing around and I figured, “Okay, I’ll start with the funny names because those will be easier to Google and find somebody that matches it, because John Smith’s going to be pretty hard to find. But your last name is Lockerbie, is that how you say it?

Trey Lockerbie (38:58):

Lockerbie, yeah.

Thomas Braziel (38:59):

That’s pretty, Trey Lockerbie, I might Google Trey Lockerbie and I’d look for a guy who was maybe into computer science.,Maybe he was into crypto, if he had it as an interest on LinkedIn or on Twitter, something, and maybe he’s the right age, maybe he’s below 35 and is into computer science or is somehow into cryptography and whatnot. So I started doing that and I basically found a few claims, bought them, and I didn’t think… At the time crypto was at 300, we bought the claims for a look through price of about $100 in Bitcoin. So it was an OK trade. It was like, “That’s an okay trade.”

Thomas Braziel (39:36):

This happens a lot of times in the life cycle with trades. It’s like a company you know a lot about. I don’t know, maybe if you follow Disney really close or something and you’re like, “This is an inflection point.” The real inflection point in the trade was 2018, I think when Bitcoin went to over 20,000, but it kind of pulled back, and the trustee was sold some crypto to basically raise a fiat. And we were able to buy the claim, where we were buying the crypto for free. And let me explain how. If you added up the cash in the estate and you added up the crypto, or you just added up the cash, leave the crypto for a second, and you divided by the outstanding claims, you were going to get about 450 to 480 dollars per claim, per BTC, per Bitcoin.

Thomas Braziel (40:23):

And we were able to buy them anywhere between 300 to 400 dollars. So we always knew we were going to get the 450 to 480 back in cash. And on top of the cash was Bitcoin. And I pitched this trade all over town in New York, trying to get a hedge fund to put in capital and let’s do it. And they were… People were like, “Hey, this is not that scalable, this is crypto. We’ll never get it past…” The common objection, too small, not scalable, it’s crypto. I’ll never get it past my investment committee. Or, “Oh, I get it. You’re getting free optionality, but what is Bitcoin even worth? I mean, let’s be real.” And I was like, “Yeah, I don’t know. I think it’s a real possibility it could be worth something, and it hasn’t died yet.”

Thomas Braziel (41:06):

Even at the trade I was putting it on, assuming Bitcoin stayed where it was, it was somewhere between the 8 and 10 X return. And that was in Bitcoin, I think was at about 10 grand. So we’re getting the Bitcoin for free. So our downside extremely limited. I mean, in my mind, practically zero, other than legal risk and cost of collection and IRR risk, and optionality and convexity was incredibly high. So I loaded the boat. I mean, my hedge fund at the time, we were actually winding it down, so we didn’t add any in the hedge fund, but I was able to get a family office on board, and since my hedge fund was winding down, we were making distributions. I mean, this is crazy and I would never recommend someone do this. I put all my personal money in it.

Thomas Braziel (41:49):

So I did that knowing that it was a little aggressive and maybe I did it out of spite for my hedge fund closing, but no, not really. I really thought it was an amazing trade. I remember I actually had a… The claims that we bought in the whole setup, I remember sitting at dinner here in London, where I am now, and one of my investors was coming through. And I remember sitting at dinner with him, trying to explain to him how great this was. And his just… And he is a nice guy and he’s very smart but just can’t be bothered to look at the spreadsheet that… I’m such a young, somewhat naive person just thinking that this guy at dinner, when we’re having drinks and dinner, wants to see my spreadsheet that I printed out where I lay out the convexity and how great this is and all this stuff.

Thomas Braziel (42:36):

And he’s like, “This is great. Yeah, whatever, whatever. Great, great, great.” And he just doesn’t… He did not care. Maybe I wasn’t very good at pitching it, but anyway. So I got a family office on board. We bought a few million dollars worth. I put all my money into it. And I’m going to say the rest is history, because we’ve been buying claims over the years, but now we buy claims, of course we’re not making 40 X, we’re buying the Bitcoin for about half price and maybe 60 cents on the dollar. So we buy them for a large crypto hedge fund that believes in crypto. And I have to say, I’ve spent a lot of time in crypto now because of this, and I’m a bit of a believer.

5. Is the Fed Responsible for an 800% Gain in the Stock Market? – Ben Carlson

In a recent post I shared how the U.S. stock market is now up more than 800% since the lows of the financial crisis.

Right on schedule my Twitter replies and inbox were full of people bemoaning the fact that this entire bull market is an artifact the Federal Reserve policies…

…But what about Japan and Europe? Their central banks have also taken on trillions of dollars of assets on their balance sheets…

…The S&P 500 is outperforming stocks in each of these developed countries by more than 200% in total over the past decade. These countries have been providing similar levels of monetary stimulus over this time and their interest rates have been even lower than ours.

While the 10 year U.S. treasury bond currently yields around 1.7%, yields in Japan (0.1%) and Germany (-0.1%) are much lower. Why aren’t stocks exploding higher in those countries?

Interest rates certainly have an impact on how people allocate their capital but low interest rates alone don’t explain everything that happens in financial markets.

6. How Shein beat Amazon at its own game — and reinvented fast fashion – Louise Matsakis, Meaghan Tobin, and Wency Chen

Over the past decade, thousands of Chinese clothing manufacturers have begun selling directly to international consumers online, bypassing retailers that traditionally sourced their products from the country. Equipped with English-language social media profiles, Amazon seller accounts, and access to nimble garment supply chains, they’ve fueled the acceleration of trends and flooded closets everywhere with a wave of impossibly cheap clothes.

Rest of World spent the last six months investigating this new ecosystem, speaking with manufacturers, collecting social media and product data, making test buys, and interviewing shoppers and industry experts in both China and the U.S. Our reporting reveals how Chinese apparel makers have evolved to cater to the desires of internet-native consumers — and transformed their consumption habits in the process. Capitalizing on this shift are companies like Shein: the most successful, well-known, and well-funded online retailer of its kind.

Shein is now one of the world’s largest fashion companies, but little is known about its origins. 

It was founded in 2012 under the name SheInside, and reportedly began by selling wedding dresses abroad from its first headquarters in the Chinese city of Nanjing. (A spokesperson for Shein denied it ever sold wedding dresses, but declined to specify other details about its history.) The company says its founder, Chris Xu, was born in China, though a since-deleted press release described him as from the U.S.

Shein eventually expanded to offer apparel for women, men, and children, as well as everything from home goods to pet supplies, but its core business remains selling clothes targeted at women in their teens and 20s — a generation who grew up exploring their personal style on platforms like Instagram and Pinterest. 

Its clothes aren’t intended for Chinese customers, but are destined for export. In May, the company became the most popular shopping app in the U.S. on both Android and iOS, and, the same month, topped the iOS rankings in over 50 other countries. It’s the second most popular fashion website worldwide.

By 2020, Shein’s sales had risen to $10 billion, a 250% jump from the year before, according to Bloomberg. In June, the company accounted for 28% of all fast fashion sales in the U.S. — almost as much as both H&M and Zara combined. The same month, a report circulated that Shein was worth over $47 billion, making it one of the tech industry’s most valuable private startups. (Shein declined to say whether the sales or valuation figures were accurate.)…

…Through its manufacturing partners on the ground in China, Shein churns out and tests thousands of different items simultaneously. Between July and December of 2021, it added anywhere between 2,000 and 10,000 SKUs — stock keeping units, or individual styles — to its app each day, according to data collected by Rest of World. The company confirmed it starts by ordering a small batch of each garment, often a few dozen pieces, and then waits to see how buyers respond. If the cropped sweater vest is a hit, Shein orders more. It calls the system a “large-scale automated test and re-order (LATR) model.”…

…The secret is Shein’s internal software, which connects its entire business from design to delivery. “Everything is optimized with big data,” Lin said. Each of Shein’s suppliers gets their own account on the platform, which spits out information about what styles are selling well and can also quickly identify which might become future hits. “You can see the current sales, and then it will tell you to stock up more if you sell well and what you need to do if you don’t sell well. It’s all there.”

The software contains simple design specifications that help manufacturers execute new orders quickly. “A big brand might need a very high-end designer, or a designer with top technology, and even then may only be able to produce 20 or 30 styles a month,” said Lin. “But Shein does not have high design requirements. It is possible that a typical university student could get started designing quickly, and the output could be high.”…

…To convince suppliers to join its system, Shein had to meet only a very basic bar: paying them on time. Receiving timely payments is a huge problem for factories in China, said Malmsten. “They’ve built a lot of loyalty from their suppliers, so they can have more urgency on their orders,” she said. The result is that over 70% of products on Shein’s website were listed less than three months ago, Malmsten found, compared to 53% at Zara and 40% at H&M. “Shein just kind of blew Zara out of the water,” she said.

7. Casualties of Your Own Success – Morgan Housel

Two scientists, Aaron Clauset of the Santa Fe Institute and Doug Erwin of the Museum of Natural History, explained why in a paper that is dense but summed up in a wonderful sentence: “The tendency for evolution to create larger species is counterbalanced by the tendency of extinction to kill” off larger species.

Body size in biology is like leverage in investing: It accentuates the gains but amplifies the losses. It works well for a while and then backfires spectacularly at the point where the benefits are nice but the losses are lethal.

Take injury. Big animals are fragile. An ant can fall from an elevation 15,000 times its height and walk away unharmed. A rat will break bones falling from an elevation 50 times its height. A human will die from a fall at 10 times its height. An elephant falling from twice its height splashes like a water balloon.

Big animals also require lots of land per capita, which is brutal when land is scarce from farming or natural disaster. They can need more food per unit of body mass than small animals, which is the end game in a famine. They can’t hide easily. They move slow. They reproduce slow. Their top-of-the-food chain status means they usually don’t need to adapt, which is an unfortunate trait when adapting is required.

The most dominant creatures tend to be huge, but the most enduring tend to be smaller. T-Rex < cockroach < bacteria.

Size is nature’s leverage. Sought after for its benefits straight up to the point that it ferociously turns against you.

Same thing applies to companies and investments.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.  Of all the companies mentioned, we currently have a vested interest in Amazon. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 16 January 2022:

1. My first impressions of web3 – Moxie Marlinspike (a.k.a Matthew Rosenfeld)

To get a feeling for the web3 world, I made a dApp called Autonomous Art that lets anyone mint a token for an NFT by making a visual contribution to it. The cost of making a visual contribution increases over time, and the funds a contributor pays to mint are distributed to all previous artists (visualizing this financial structure would resemble something similar to a pyramid shape). At the time of this writing, over $38k USD has gone into creating this collective art piece.

I also made a dApp called First Derivative that allows you to create, discover, and exchange NFT derivatives which track an underlying NFT, similar to financial derivatives which track an underlying asset 😉.

Both gave me a feeling for how the space works. To be clear, there is nothing particularly “distributed” about the apps themselves: they’re just normal react websites. The “distributedness” refers to where the state and the logic/permissions for updating the state lives: on the blockchain instead of in a “centralized” database.

One thing that has always felt strange to me about the cryptocurrency world is the lack of attention to the client/server interface. When people talk about blockchains, they talk about distributed trust, leaderless consensus, and all the mechanics of how that works, but often gloss over the reality that clients ultimately can’t participate in those mechanics. All the network diagrams are of servers, the trust model is between servers, everything is about servers. Blockchains are designed to be a network of peers, but not designed such that it’s really possible for your mobile device or your browser to be one of those peers.

With the shift to mobile, we now live firmly in a world of clients and servers – with the former completely unable to act as the latter – and those questions seem more important to me than ever. Meanwhile, ethereum actually refers to servers as “clients,” so there’s not even a word for an actual untrusted client/server interface that will have to exist somewhere, and no acknowledgement that if successful there will ultimately be billions (!) more clients than servers.

For example, whether it’s running on mobile or the web, a dApp like Autonomous Art or First Derivative needs to interact with the blockchain somehow – in order to modify or render state (the collectively produced work of art, the edit history for it, the NFT derivatives, etc). That’s not really possible to do from the client, though, since the blockchain can’t live on your mobile device (or in your desktop browser realistically). So the only alternative is to interact with the blockchain via a node that’s running remotely on a server somewhere.

A server! But, as we know, people don’t want to run their own servers. As it happens, companies have emerged that sell API access to an ethereum node they run as a service, along with providing analytics, enhanced APIs they’ve built on top of the default ethereum APIs, and access to historical transactions. Which sounds… familiar. At this point, there are basically two companies. Almost all dApps use either Infura or Alchemy in order to interact with the blockchain. In fact, even when you connect a wallet like MetaMask to a dApp, and the dApp interacts with the blockchain via your wallet, MetaMask is just making calls to Infura!

These client APIs are not using anything to verify blockchain state or the authenticity of responses. The results aren’t even signed. An app like Autonomous Art says “hey what’s the output of this view function on this smart contract,” Alchemy or Infura responds with a JSON blob that says “this is the output,” and the app renders it.

This was surprising to me. So much work, energy, and time has gone into creating a trustless distributed consensus mechanism, but virtually all clients that wish to access it do so by simply trusting the outputs from these two companies without any further verification. It also doesn’t seem like the best privacy situation. Imagine if every time you interacted with a website in Chrome, your request first went to Google before being routed to the destination and back. That’s the situation with ethereum today. All write traffic is obviously already public on the blockchain, but these companies also have visibility into almost all read requests from almost all users in almost all dApps.

Partisans of the blockchain might say that it’s okay if these types of centralized platforms emerge, because the state itself is available on the blockchain, so if these platforms misbehave clients can simply move elsewhere. However, I would suggest that this is a very simplistic view of the dynamics that make platforms what they are…

…Given the history of why web1 became web2, what seems strange to me about web3 is that technologies like ethereum have been built with many of the same implicit trappings as web1. To make these technologies usable, the space is consolidating around… platforms. Again. People who will run servers for you, and iterate on the new functionality that emerges. Infura, OpenSea, Coinbase, Etherscan.

Likewise, the web3 protocols are slow to evolve. When building First Derivative, it would have been great to price minting derivatives as a percentage of the underlying’s value. That data isn’t on chain, but it’s in an API that OpenSea will give you. People are excited about NFT royalties for the way that they can benefit creators, but royalties aren’t specified in ERC-721, and it’s too late to change it, so OpenSea has its own way of configuring royalties that exists in web2 space. Iterating quickly on centralized platforms is already outpacing the distributed protocols and consolidating control into platforms…

…“It’s early days still” is the most common refrain I see from people in the web3 space when discussing matters like these. In some ways, cryptocurrency’s failure to scale beyond relatively nascent engineering is what makes it possible to consider the days “early,” since objectively it has already been a decade or more.

However, even if this is just the beginning (and it very well might be!), I’m not sure we should consider that any consolation. I think the opposite might be true; it seems like we should take notice that from the very beginning, these technologies immediately tended towards centralization through platforms in order for them to be realized, that this has ~zero negatively felt effect on the velocity of the ecosystem, and that most participants don’t even know or care it’s happening. This might suggest that decentralization itself is not actually of immediate practical or pressing importance to the majority of people downstream, that the only amount of decentralization people want is the minimum amount required for something to exist, and that if not very consciously accounted for, these forces will push us further from rather than closer to the ideal outcome as the days become less early.

2. Unpacking the Web3 Sausage – Dror Poleg

The vision for web3 is admirable. But Moxie set out to understand how the decentralized sausage is made in practice. He was not impressed.

Moxie’s first concern was that Web3 is not as decentralized as it claims. In this case, access to the basic infrastructure of web3 (the Ethereum blockchain) ends up being routed through a couple of popular API providers. So, even though the blockchain itself is decentralized, most apps that depend on it still go through bottlenecks that are centralized and operated by private, for-profit entities.

To use an analogy, consider a person who buys a piece of gold and stores it in a keyed vault, under a mountain, maintained by a Swiss bank. When the person logs into the bank’s app to check his gold balance, the app doesn’t send a person into the vault to check how much gold is there or whether someone tampered with the vault’s key. Instead, it simply shows data from a third-party database that records the inflow and outflow of gold bars from the whole mountain. So, the customer gets the latest information, but it does not get direct, indisputably true information.

The imaginary bank does this because it’s much easier to maintain a central database of all deposits and remittances from the mountain rather than send someone in person each time a client logs into the app. Ethereum-based apps use API providers for the same reason: it’s easier and simpler for them to do so rather than verify every query on the blockchain itself.

This choice of expedience over decentralization is bad in some use cases and harmless in others. The issue Moxie raised is known, and Ethereum developers have spoken and written about them publicly and are working on ways to mitigate them. And I have also written about how each wave of decentralization creates a concurrent wave of centralization…

…Moxie created an NFT on OpenSea. He intentionally programmed the listing to look different on different platforms (by loading a different image depending on the IP of the requesting site). Initially, he could see the NFT in his crypto wallet, which meant his ownership of it was documented on the Ethereum blockchain. However, a few days later, OpenSea decided to remove his NFT from their marketplace, claiming Moxie violated their terms of services (due to the code that changes what users see).

Technically, the fact that OpenSea decided to remove the NFT from their marketplace should not matter. Moxie still owned it, and this ownership was recorded independently of OpenSea, on the blockchain itself. But when Moxie checked his crypto wallet app, he noticed the NFT had disappeared. How could this be?

Moxie dug deeper and found out that the wallet app he was using (Metamask) did not really show what was in his account on the Ethereum blockchain. Instead, his wallet app relied on an API — the OpenSea API! — to check which NFTs were associated with which blockchain account. And since Moxie’s NFT was removed from OpenSea, the API showed it no longer existed.

This felt like Web 2.0 all over again. A powerful platform managed to confiscate/delete a user’s data and assets from his account without his consent.

But there’s an essential distinction between what happened to Moxie and what happens when a Web 2.0 platform decides to delete a user’s file or listing…

…Moxie dove into how Web3 apps interact with one another and discovered a few key limitations. The most alarming among them was the disappearance of his hard-earned digital goods from his crypto wallet.

But even though Moxie’s NFT did not appear in his wallet app, it still existed, and Moxie was still its owner. The failure to see the NFT was a problem with the wallet app’s architecture and the API it relied on.

The wallet app relied on an API instead of verifying information directly on the blockchain, and the API provider did not include NFTs that were not listed on OpenSea.

If Moxie had used a different app that checks the status of his NFT directly on the blockchain, he could have seen that the NFT is still there. Indeed, you can see that NFT on Rarible, an OpenSea competitor. To return to our earlier analogy, the gold bar is still inside the vault, inside the mountain, even though the bank’s app doesn’t show it.

Of course, the fact that popular wallet apps don’t display stuff in people’s accounts even though that stuff is still there is a problem. But the good news is that even though OpenSea removed Moxie’s NFT, that NFT “survived” and remains in his posession.

3. Mark Smith – Finch Therapeutics: Empowering Immune Systems – Patrick O’Shaughnessy and Mark Smith

[00:02:55] Patrick: Mark, we’re going to talk about an especially interesting topic today, one that I’ve definitely read a bit about, but I’m somewhat of a rookie on. And so you can educate the audience alongside me. And that topic is the microbiome. It’s one of the areas of health and wellbeing that is a very recent phenomenon in the public consciousness and certainly in medical research. It would be good for you to begin by giving us an overview of what this thing is, this word “microbiome,” what it represents. And then I’d like to get into your own origin story and why you’ve devoted this part of your career to this idea.

[00:03:28] Mark: First off, Patrick, thanks for having me here. Excited to share the story of the microbiome and the hidden majority of microbes that live inside all of us. There are about as many microbial cells as there are human cells inside all of us, and they’re fundamental to everything that we do, from the way we digest food and extract energy from it, synthesis of important vitamins, regulation of our immune system. Even how we think and feel can be manipulated by these bacteria that live on and inside of us. It’s almost like a new organ system that we’re just now learning to understand. And the reason that it’s taken us such a long time to really understand the importance of this community is that a lot of these bacteria are actually really hard to grow in the lab. So it’s only when we started to use the methods of high throughput genomic sequencing, that we first used to sequence the human genome, we started to shine that flashlight onto the microbiome over the last 10 years, that we realized there’s actually this enormous diversity of microbial organisms that lives inside all of us and has been really important to our health. You can think about it like a rainforest that lives inside of each one of us and is responsible for keeping us healthy in a lot of ways. As we think about the evolution of this space, this first chapter, which is understanding what’s there. And now we’re at a really exciting point. We’re able to actually go in and manipulate the microbiome, so we can make changes, make edits, add subtractions, and do that in a targeted, rational way in order to try to improve health outcomes for patients.

[00:04:57] Patrick: Give us an overview of where these things are. It’s non-human cells living inside human bodies. You said it’s almost equal in terms of allocation of cells, human versus not. That’s pretty crazy. Where do these things mostly exist? Is there a useful taxonomy or categorization system that might help us understand, for the rest of the conversation, the types of these things, what they’re doing, why they’re related to our health, why they’re there in the place?

[00:05:22] Mark: They’re everywhere. In fact, inside of every one of your cells, there’s this thing called mitochondria. That’s what helps us get energy from food. It’s actually a bacteria that’s just lived with us for such a long time that got embedded into all of our cells. In addition to those, though, the bulk of the microbes that we’re talking about, thinking about here, those that are not part of our human cells and the primary place that they reside is in our gut. And the reason for that is, while microbes are pretty much ubiquitous throughout our bodies, our gut is actually specifically designed to grow bacteria. We’ve spent the last 10 years trying to get really good at growing bacteria. Despite tens of millions of dollars of investment, we think we’re pretty good at solving this problem. We’re orders of magnitude less efficient than you are right now at growing these bacteria inside of your gut. And that’s because we’ve evolved this system specifically to ferment bacteria, and we can go into a little bit more around why we’ve evolved that capability and what it does for us, and why think it’s an important target for developing medicines. But just in terms of a framework to think about these going forward for the rest of the conversation, I usually think about these commensals, that are bacteria that are either neutral to our health or helping us out, and then their pathogens. If you study a medical textbook, you just hear about all the pathogens, all the bad bacteria, but they’re actually the minority. In most of us, most of the time, are dominated bacteria that are a really important part of who we are and our identities…

…[00:10:45] Patrick: What would happen if inside of a human, the entire stock of bacteria was nuked and gone? What would happen to that person?

[00:10:53] Mark: Your immune system would freak out. We actually have examples where we’ve done this, gnotobiotic or germ free animals. We grow them up in incubators, surgically remove them from their moms, prevent any microbes from getting into them when you feed them throughout their lives. They live shorter lives. They’re profoundly unhealthy, and they have dysfunctional immune systems. If we’re the landlord renting out space to bacteria, we want to really firmly control where they are, because if they suddenly got into our bloodstream, they’d make us really sick and we could die from that. Like a nuclear reactor, you want to carefully contain it and prevent it. It can be awesome when it’s going in the right spot, but it’d be really harmful if that leaked out and got into places where it’s not supposed to be. We have this immune system that takes a very significant percentage of our total energy balance. And it’s not dysfunctional that we have this chronic lifelong infection. It’s actually one of the main purposes of it is to shape and control that system. It’s almost like a dead man switch, back in the Cold War. “If you don’t get a signal we’re alive every two minutes, send out nukes” or something like that. How your immune system is regulated, you constantly need to get a signal from your microbiome that they’re paying the rent. And there are these metabolites that they use, energy currency that they pay us in. And if you don’t get that, your body starts to mount this immune response.

And one of the things that’s really interesting is, while antibiotics don’t nuke your entire microbiome and eliminate all the bacteria, they diminish it pretty significantly. We’ve been on this massive uncontrolled experiment over the last 70 years, since we started developing antibiotics. And what happens when you just give a bunch of people antibiotics and really decimate this microbiome, what does that do to their health? And right now we use about 42 billion doses of antibiotics every year, around the world. And what we’ve learned is they have a really big impact on our microbiome, unsurprisingly. That’s what they’re designed to do. We found that there are a lot of diseases that basically didn’t exist a hundred years ago that are now some of the big scourges of humanity. Chronic autoimmune and inflammatory diseases that seem to be linked both in time and place to changes in our relationship with our microbiome. We believe that by restoring the functionality of this interface between these organisms that we’ve co-evolved with since before we were human, in our immune system, by restoring that relationship, you get at the underlying cause of a lot of these autoimmune and inflammatory diseases. Right now, the way we treat those diseases, some of the best selling drugs in the world try to shut down the immune response. And that has a lot of negative consequences and doesn’t necessarily address the underlying cause of that inflammation, which is disrupted communication between our microbiome, this organ system inside of us, and our immune system…

…[00:31:39] Patrick: If the Finch Therapeutic story has got chapter headers from inception through now, what have been those major chapters? So if there’s this blunt force instrument of fecal transplant, C. diff is one disease killing 30,000 people, what are the other addressable conditions that we’re confident in some sort of therapy here working to mitigate or eliminate? I did a conversation on tumor treating fields in cancer, which is this other interesting new modality for treating a big class of problems and has to be tuned for brain versus lung versus whatever other cancer. So what’s the equivalent here? What do you think the biggest, chunkiest problems to be solved are? And then we’ll go into those chapter headers for Finch Therapeutics to business.

[00:32:19] Mark: We see a very large opportunity here. Again, we think this is fundamental to human biology. We think that your immune system is regulated by your microbiome. Your immune system touches almost every disease and that’s the common thread. The nested opportunities that we see laid out ahead of us are C. diff, where we have a phase three program ongoing right now. There’s a lot of evidence that this can be highly effective there. The next wave of opportunities that we see are in conditions where there’s a GI component, maybe multiple opportunities to benefit. So ulcerative colitis, Crohn’s disease. Autism, actually, interestingly enough, there’s a meaningful GI component. About a third of kids with autism have severe GI symptoms. And we’ve seen benefits both on the GI symptoms as well as behavioral endpoints. Those are a wave of indications that we’re really excited to develop. It gets broader than that. So you start thinking about your point around applications in oncology. There’s some really interesting data that’s come out over the last year. Some of the most interesting new therapies that have been developed over the last few years are these things called checkpoint therapies, that unleash your immune system to attack cancer. We’re actually all developing cancers almost every day. And our immune system mostly clears them before they become problematic. And if you can help to empower your immune system to drive that assault, you can fight cancers. Checkpoint therapies for tens of billions of dollars a year in sales. It turns out that your life expectancy on checkpoint therapy is half as long if you have antibiotics within six months of starting checkpoint therapy. If you take a microbiome from a responder into a non-responder, you can drive a more than twofold increase over the expected response rate complementing what we’ve seen as the setback that you get from disrupting your microbiome.

That speaks to the potential breadth here, where seemingly unrelated indications all have this common thread. And it’s an area that we’ve spent a lot of time focused on. To summarize the broad chapters in developing this technology, for us, the first step was just show this works somewhere, show that we can put all the pieces together to develop an effective therapy. We can manufacture it, we can do it in a consistent way, can deliver it to the right location, all that stuff. The obvious first choice for us was going to C. diff. We had a lot of experience treating those patients and serving that community. C. diff is the first step. For us, this long journey to go from zero to one, and then to go from one to many has actually been a lot faster for us because we’ve been building plans for how we would attack all these other diseases once we’ve proven to the world that this works somewhere. We saw C. diff as creating a floor value in the company where we know it works there. We know we can serve patients and have a reliable revenue stream. And we can use that as a foundation to take some really big swings into these large, potentially transformational opportunities and get to our long term view, which is, “This is going to be a really important new class of therapies over the next 10 years.” My personal mission is to accelerate that reality as much as possible and bring that forward now, so that patients don’t have to wait. When I think about my wife’s cousin having to do this on his own, that is not okay. That’s unacceptable answer to me. There are tons of other patients like that that are out there, just waiting for these therapies to be developed. And every day that we delay that, we’re doing a disservice to that group.

[00:35:27] Patrick: Talk me through the end game. Let’s say you’re successful. You’re able to have a solution that’s much more frictionless than the current, sounds like really arduous problem solving for C. diff or something similar. What does that look like? Are we taking a pill that’s been engineered for us? Are we doing something different? What does the end game look like and what’s the timeline look like?

[00:35:47] Mark: The end game here is that we can sequence your microbiome, identify deficiencies, and then come in and deliver this. Say, the following 10 groups of bacteria, we’re going to deliver those to you. You’re going to take these five pills and that’s going to restore your health and not only treat the specific disease you have today, but potentially prevent other diseases. We’ve made a lot of progress over the last hundred years in terms of living long. We don’t necessarily live well. People end up with these chronic diseases throughout their lives that make their lives really unpleasant with tools like antibiotics. Those are some of the things that drove the longevity and those are life changing and amazing therapies. And I want to be able to use some of those agents that modulate our immune system, that change our microbiome and can save people’s lives, without impacting the quality of those lives. That’s an important long term objective. In terms of what the timeline is, this is happening now. There are already … at OpenBiome are the first step in my journey, we treated over 60,000 patients, built a network of about 1300 hospitals and clinics that we were serving. That is very much a practical reality for patients today. The next step is, we’re running a phase three clinical trial right now at Finch to develop an approved therapy that can scale and serve many more patients. If things go well, this will be available in the next couple of years for patients. These aren’t applications that are decades away. This is already reality for many patients today and has quickly become standard of care. Now we’re scaling that up and bringing it to new indications where we also believe that we can have a differentiated impact. And the way that we do that at Finch is unique to this therapeutic area.

Classically, drug development is all about risk management. And we fundamentally think about ourselves as risk managers. It costs about a billion dollars to develop a new drug, this incredibly capital intensive exercise. And anything you can do to reduce risk early on in that process has a dramatic impact on the expected value of this kind of product. Normally, when you start development of a drug, you maybe have a 5 to 10% probative success when you treat your first patient, that it’s going to actually get approved. You lose roughly a third of candidates just because of safety when you treat the first 10, 20 patients. Before we start any program, a firm underwriting criteria for us to support an investment in new program is we need to have clinical data that already shows that a composition works. And it’s this incredible privilege to basically start with the answer before you underwrite new investments. We start off with all this microbiotic transplant data. At Finch, we built the company around this concept of human first discovery, essentially reverse translation from what’s happening in the clinic, where there are more than 300 ongoing clinical trials exploring all these new applications. When I talked to you about ulcerative colitis and Crohn’s disease and oncology, that’s not speculation, like, “Hey, maybe this could work here and we’ve got some animal model that suggests it.” Those are completed clinical studies that have read out data, where clinical investors went in, modulated someone’s microbiome and saw that that radically changed their clinical outcome.

We think that’s an exceptional place to start from and to launch a drug development enterprise from. There’s this long co-evolved history of engagement between microbes and humans. It’s the absence of those microbes that’s dangerous, not the presence of them. There’s this expectation and empirical reality that these are generally well tolerated when run in well controlled clinical studies. There are all of these ongoing clinical studies with microbiotic transplantation which gives us that shotgun approach. And then we can mine all that data to figure out why did that work? What made that work? And then use that to develop the next gen products that we’re advancing at Finch. One of the things that’s really interesting is, we don’t just say, “This strain of bacteria matters.” We can say, “This specific strain from this sample put 10 patients into remission. That’s the strain I want to put in my drug.” We can actually cryo-revive these things. We have a massive biorepository with more than 10,000 samples that have been in patients, and we understand what the outcomes are. And we can go back and say, “This strain is a strain that I want to put into my drug. Now I’m going to grow it up and do that going forward.” So it’s that combination of all of these elements of the clinical data, some of the samples and the algorithms to make sense of it that have enabled us to use this strategy of reverse translation from what’s already working in the clinic today.

4. Are we witnessing the dawn of post-theory science? – Laura Spinney

Isaac Newton apocryphally discovered his second law – the one about gravity – after an apple fell on his head. Much experimentation and data analysis later, he realised there was a fundamental relationship between force, mass and acceleration. He formulated a theory to describe that relationship – one that could be expressed as an equation, F=ma – and used it to predict the behaviour of objects other than apples. His predictions turned out to be right (if not always precise enough for those who came later).

Contrast how science is increasingly done today. Facebook’s machine learning tools predict your preferences better than any psychologist. AlphaFold, a program built by DeepMind, has produced the most accurate predictions yet of protein structures based on the amino acids they contain. Both are completely silent on why they work: why you prefer this or that information; why this sequence generates that structure.

You can’t lift a curtain and peer into the mechanism. They offer up no explanation, no set of rules for converting this into that – no theory, in a word. They just work and do so well…

…Somewhere between Newton and Mark Zuckerberg, theory took a back seat. In 2008, Chris Anderson, the then editor-in-chief of Wired magazine, predicted its demise. So much data had accumulated, he argued, and computers were already so much better than us at finding relationships within it, that our theories were being exposed for what they were – oversimplifications of reality. Soon, the old scientific method – hypothesise, predict, test – would be relegated to the dustbin of history. We’d stop looking for the causes of things and be satisfied with correlations.

With the benefit of hindsight, we can say that what Anderson saw is true (he wasn’t alone). The complexity that this wealth of data has revealed to us cannot be captured by theory as traditionally understood. “We have leapfrogged over our ability to even write the theories that are going to be useful for description,” says computational neuroscientist Peter Dayan, director of the Max Planck Institute for Biological Cybernetics in Tübingen, Germany. “We don’t even know what they would look like.”

5. Fundsmith 2021 Annual Letter – Terry Smith

In investment, as in life, you cannot have your cake and eat it, so it is difficult if not impossible to find companies which are resilient in a downturn but which also benefit fully from the subsequent recovery. Of course, you could try to trade out of the former and into the latter at an appropriate time but it is not what we seek to do as the vast majority of the returns which our Fund generates come from the ability of the companies we own to invest their retained earnings at a high rate of return because they own businesses with good returns and growth opportunities. In our view it would be a mistake to sell some of these good businesses in order to invest temporarily in companies which are much worse but which have greater recovery potential… 

…Our portfolio consists of companies that are fundamentally a lot better than the average of those in either index and are valued higher than the average S&P 500 company and much higher than the average FTSE 100 company. However, it is wise to bear in mind that despite the rather sloppy shorthand used by many commentators, highly rated does not equate to expensive any more than lowly rated equates to cheap.

The bar chart below may help to illustrate this point. It shows the ‘Justified P/Es’ of a number of stocks of the kind we invest in. What it shows is the Price/Earnings ratio (P/E) you could have paid for these stocks in 1973 and achieved a 7% compound annual growth rate (CAGR) over the next 46 years (to 2019), versus the 6.2% CAGR the MSCI World Index (USD) returned over the same period. In other words, you could have paid these prices for the stocks and beaten the index — something the perfect markets theorists would maintain you can’t do…

…You could have paid a P/E of 281x for L’Oréal, 174x for BrownForman, 100x for PepsiCo, 44x for Procter & Gamble and a mere 31x for Unilever.

I am not suggesting we will pay those multiples but it puts the sloppy shorthand of high P/Es equating to expensive stocks into perspective…

…Turning to the themes which dominated 2021, you may have heard a lot talked about the so-called ‘rotation’ from quality stocks of the sort we seek to own to so-called value stocks, which in many cases is simply taken as equating to lowly rated companies. Somewhat related to this there was periodic excitement over so-called reopening stocks which could be expected to benefit as and when we emerge from the pandemic — airlines and the hospitality industry, for example.

There are multiple problems with an approach which involves pursuing an investment in these stocks. Timing is obviously an issue. Another is that their share prices may already over anticipate the benefits of the so-called reopening. As Jim Chanos, the renowned short seller, observed ‘The worst thing that can happen to reopening stocks is that we reopen.’ It is often better to travel hopefully than to arrive.

In our view, the biggest problem with any investment in low quality businesses is that on the whole the return characteristics of businesses persist. Good sectors and businesses remain good and poor return businesses also have persistently poor returns as the charts below show:…

6. What A World – Morgan Housel

Franklin Roosevelt looked around the room and chuckled when his presidential library opened in 1941. A reporter asked why he was so cheerful. “I’m thinking of all the historians who will come here thinking they’ll find the answers to their questions,” he said.

Everything we know about history is limited to what’s been written down, shared publicly, or spoken into a camera. The stuff that’s been kept secret, in someone’s head, taken to the grave, must be – I don’t know – 1,000 times as large and more interesting…

…Gabby Gingras was born unable to feel pain. She has a full sense of touch. But a rare genetic condition left her completely unable to sense physical pain.

You might think this is a superpower, or an incredible gift. But her life is dreadful. The inability to feel pain left Gabby unable to distinguish right from wrong in the physical world. One profile summarized a fraction of it:

As Gabby’s baby teeth came in, she mutilated the inside of her mouth. Gabby was unaware of the damage she was causing because she didn’t feel the pain that would tell her to stop. Her parents watch helplessly.

“She would chew her fingers bloody, she would chew on her tongue like it was bubble gum,” Steve Gingras, Gabby’s father, explained. “She ended up in the hospital for 10 days because her tongue was so swelled up she couldn’t drink.”

Pain also keeps babies from putting their fingers in their eyes. Without pain to stop her, Gabby scratched her eyes so badly doctors temporarily sewed them shut. Today she is legally blind because of self-inflicted childhood injuries.

Pain is miserable. Life without pain is a disaster…

…John Maynard Keynes once purchased a trove of Issac Newton’s original papers at auction. Many had never been seen before, having been stashed away at Cambridge for centuries.

Newton is probably the smartest human to ever live. But Keynes was astonished to find that much of the work was devoted to alchemy, sorcery, and trying to find a potion for eternal life.

Keynes wrote:

I have glanced through a great quantity of this at least 100,000 words, I should say. It is utterly impossible to deny that it is wholly magical and wholly devoid of scientific value; and also impossible not to admit that Newton devoted years of work to it.

I wonder: Was Newton a genius in spite of being addicted to magic, or was being curious about things that seemed impossible part of what made him so successful?…

…Part of the Armistice that ended World War I forced the dismantling of Germany’s military. Six million rifles, 38 million projectiles, half a billion rounds of ammunition, 17 million grenades, 16,000 airplanes, 450 ships, and millions of tons of other war equipment were destroyed or stripped from Germany’s possession.

But 20 years later, Germany had the most sophisticated army in the world. It had the fastest tanks. The strongest air force. The most powerful artillery. The most sophisticated communication equipment, and the first missiles.

A catastrophic irony is that this advancement took place not in spite of, but because of, its disarmament.

George Marshall, U.S. Army Chief of Staff, noted:

After the [first] World War practically everything was taken away from Germany. So when it rearmed, it was necessary to produce a complete set of materiel for the troops. As a result, Germany has an army equipped with the most modern weapons that could be turned out. That is a situation that has never occurred before in the history of the world.

There’s a set of advantages that come from being endowed with resources. There’s another set of advantages that come from starting from scratch. The latter can be sneakingly powerful.

7. Twitter thread on evaluating people – Dan Rose

In 2006 I was meeting with Jeff Bezos to discuss acquiring Audible when he described their founder Don Katz as “a missionary, not a mercenary.” I later learned Jeff got this framing from John Doerr, and it struck me as a good distinction when evaluating people…

…Most great founders are missionaries. Starting a company requires a level of commitment that lends itself to missionary zeal. Of course some founders are primarily motivated by money, but mercenary founders tend not to build lasting companies, opting instead for a quicker exit.

Missionary founders also care about making money, but they are primarily motivated by a higher calling. The mission of the company means something to them in their bones. They truly believe in serving their customers, improving people’s lives, putting a “dent in the universe.”

I remember my new hire orientation at Amazon in 1999. They shared a letter from a customer living in a rural village in Eastern Europe who was grateful to have access to books. We left with stickers that read “Work hard. Have fun. Make history.” I remember thinking, Let’s Go!

Chris Cox delivered a new hire orientation speech at Facebook religiously every Monday talking about the evolution of communications from the printing press to the internet and social media. Cox’s missionary speech left everyone in the room with that same feeling, Let’s Go!

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.  Of all the companies mentioned, we currently have a vested interest in Amazon and Facebook. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 09 January 2022:

1. We may finally be able to test one of Stephen Hawking’s most far-out ideas – Paul Sutter

In the 1970s, Hawking proposed that dark matter, the invisible substance that makes up most matter in the cosmos, may be made of black holes formed in the earliest moments of the Big Bang. 

Now, three astronomers have developed a theory that explains not only the existence of dark matter, but also the appearance of the largest black holes in the universe…

…Dark matter makes up over 80% of all the matter in the universe, but it doesn’t directly interact with light in any way.  It just floats around being massive, affecting the gravity within galaxies.

It’s tempting to think that black holes might be responsible for this elusive stuff. After all, black holes are famously dark, so filling  a galaxy with black holes could theoretically explain all the observations of dark matter.

Unfortunately, in the modern universe, black holes form only after massive stars die, then collapse under the weight of their own gravity. So making black holes requires many stars — which requires a bunch of normal matter.Scientists know how much normal matter is in the universe from calculations of the early universe, where the first hydrogen and helium formed. And there simply isn’t enough normal matter to make all the dark matter astronomers have observed.

That’s where Hawking came in. In 1971, he suggested that black holes formed in the chaotic environment of the earliest moments of the Big Bang. There, pockets of matter could spontaneously reach the densities needed to make black holes, flooding the cosmos with them well before the first stars twinkled. Hawking suggested that these “primordial” black holes might be responsible for dark matter. While the idea was interesting, most  astrophysicists focused instead on finding a new subatomic particle to explain dark matter.

What’s more, models of primordial black hole formation ran into observational issues. If too many formed in the early universe, they changed the picture of the leftover radiation from the early universe, known as the  cosmic microwave background (CMB). That meant the theory only worked when the number and size of ancient black holes were fairly limited, or it would conflict with measurements of the CMB. .

The idea was revived in 2015 when the Laser Interferometer Gravitational-Wave Observatory found its first pair of colliding black holes. The two black holes were much larger than expected, and one way to explain their large mass was to say they formed in the early universe, not in the hearts of dying stars.   

2. Orlando Bravo – The Art of Software Buyouts – Patrick O’Shaughnessy and Orlando Bravo

[00:09:54] Patrick: Would you take us all the way back to the very first deal? I think Prophet 21 was the name of the firm that you did in the software world. I want to start there, because obviously, this has become an absolute dominant trend in the world of investing, of businesses, et cetera. But back then, when you did your first one 22 years ago, it was a very different situation. I think the evolution from then to now is really important for people to understand. Talk us through the unique dynamics of that deal, how you came to it, how you got the idea, how it was financed. I know that was very different back then. I would love to hear the story of the first technology software deal that you did.

[00:10:30] Orlando: Prophet 21 was a deal that our team originated because we had an investment team at the time after the dot-com bubble burst in 2000. We were looking to do something different than all of private equity, really. We were searching for it. Carl Thoma, my mentor, was open-minded enough to allow us to do that. The theme that we had at the time was you can buy software maintenance streams… remember, it was all on-premise two years ago… you can buy software maintenance streams less expensively than almost any other form of recurring revenue in different industries, media, radio, which was popular then, transaction processing, and that quality of that revenue is even more sticky than those categories. Now, the challenge was that that universe, which is a challenge today, by the way, but the challenge then, having us not done that before, was that these companies were unprofitable, especially coming out of that bust that happened in the year 2000. We had to say, theoretically, with 90% gross margins, these businesses can be high cashflow generative, and therefore good candidates for a fundamental control-type investing.

In doing our work, we came across Prophet 21. The company was for sale. We were able to succeed, actually, without much competition. That was interesting. It was one of those unusual deals where there was not that much competition, even though there were players starting in the software industry back then that were very good and had similar ideas as we had. It was interesting, because that company had never made money before. Now, it wasn’t losing all kinds of money. It was close to break-even, so management did care about that. That wasn’t a completely irrelevant concept to them. Secondly, the company had never done a lateral acquisition and the company had inconsistent performance. We bought the business and part of the reason was the price looked great at around two times maintenance revenue, one times two. Imagine, remember those days.

[00:12:37] Patrick: Charming.

[00:12:39] Orlando: Exactly, those were the days. We decided through meeting the person that became chairman of our operating committee, that the best approach was to back existing management for all the reasons that I mentioned before that existing management has. They really wanted to win, but have them work with our operating partner in terms of improving that company. Of course, three years later, you end up with a success story, a five margin, good growth, six software acquisitions, and it was a great investment. That experience really made us very passionate about the possibility of working with existing management that deeply cares about that business, that doesn’t move from company to company, that lives in that environment. They provided software for small and mid-market distributors, so they knew all the distribution customers, they knew the culture, they knew how they talk, how they trade, how you have to discount it. They know that world and were good at it. If you can marry that with an operational approach… as my partner would always say, “Everybody needs somebody to learn from”… if you can marry that with what we would bring, you would not only have the possibility of great success, but also it was a good approach to doing business. It felt really good. Then we did a second deal, and the same thing happened with existing management, and then a third one and so on and so forth, so we quickly developed this as our mission.

[00:14:02] Patrick: I’d love to zoom out and talk about the software industry, maybe even the enterprise SaaS-specific sector of it, where you’ve done a lot of your work and some of the weird features of it. You mentioned some of these businesses have 90% gross margins. Everyone herald’s software as like the best business model ever, but I think the average public market business, or maybe even the private market ones, they lose a lot of money still. Obviously, there’re reasons for that, but I’d love you to just walk through what seems like a huge dissonance between the average SaaS company and the type of company that you’re trying to run and manage.

[00:14:34] Orlando: There is no difference in the business model between that average and what we’re looking to do. In essence, when you see us buy control of the business, we are underwriting our plan, not what is going on in that company. In many cases, we’re buying break-even businesses or businesses that may be losing money. That’s not the way it’s going to be run in partnership with management going forward, because the model would break and you couldn’t support some debt into that transaction, which is highly creative. The challenge is for the market inefficiency here is that public investors who are extremely smart, creative, highly-educated, and great, for some reason they believe that “investing in growth” is the same and goes hand-in-hand with losing money and having a negative margin. Those two concepts are completely different. They many times have nothing to do with one another, and many times high profitability leads to higher growth because what high profits means, really, is that first you have operating management that innovates correctly, that runs those different functional areas in a way that is operationally sound. They measure all their activities. They look at inputs versus outputs. They readjust to what is working. Being highly profitable also means that you have a good enough product and you’re charging a price for that product that allows you to produce that profitability, where for example, the yearly increase in the value of that product merits a price increase that is higher than your labor inflation, a key point today in this inflationary world. If you do that really, really well and you provide so much value to your customers that you capture some of that in your price, and every day you become better at your operations because you learn from the past and you’re actually measuring this, it means that you have more money to invest in tactical growth, which is sales and marketing or distribution and more money to invest in strategic growth, which is product development, R&D and new initiatives.

See, when you’re highly profitable and you’re growing very fast, it also means that management is making the right investment decisions in growth. You’re an investor. You see all kinds of different sales channels. Well, if you lose money and you can lose money, sure, you’ll try it all. You’ll try direct sales, channel sales, inside sales, web sales, marketing. You can try all kinds of marketing plays. When you’re really profitable, it means you’re doing the right ones that fit your product and your business and what your customers need. The same thing is in R&D. You could have 20 R&D initiatives, and if one works and you grow really fast, that’s great. But how about the other 19? I can get really passionate about this. The other fallacy that I see with investors in this space is saying, “Well, this company’s growing really fast now. It’s 200 million in ARR, which is plenty of scale by the way to run it profitably, and I’m going to model what management told me, which was a 30% operating margin in year four. I understand why they’re losing a lot of money now is they’re growing at 50%.” But see, the operating world doesn’t work that way. That company in year four is not all of a sudden going to change how they plan, how they think about initiatives, how they tell their direct reports what’s important and what’s not. It just doesn’t work that way. They’ll never get there. You’ve got to start now to get there.

[00:18:23] Patrick: What do you think most explains… I think I have these numbers roughly right… the average SaaS company, maybe in the category has a slightly negative EBITDA margin, losing money on an EBITDA basis? I think probably your portfolio is closer to 35 or 40% EBITDA margin today. That’s a huge gap. What are the major explanations that make up that 40%? I mean, you’ve started to talk around some of the attitude differences, but literally, where do you think that change in margin most comes from versus the average SaaS company out there that’s loss-making?

[00:18:54] Orlando: I think that comes from investors really incenting management teams, just on top line. We work in a free market, capitalist, incentive-based system. If you’re running a company and your investors tell you, “I don’t care about the bottom line at all. Go grow revenues as quickly as you can,” that’s the directive from the shareholders and that’s what’s most likely going to happen. Now, those investors, at what point in time did they become indoctrinated with this business model? We could have a philosophical discussion about that.

[00:19:29] Patrick: Yeah. I’d love to hear.

[00:19:30] Orlando: Right. Is it that early-on VCs, teach these companies that way in order for them to, of course, grow in winning their markets? That’s the great thing to do, but also by doing that, do these companies need to raise more money and therefore there’s more room for investors to get the equity and then so on and so forth? It’s very interesting. One of the things that’s just so important to say is we believe in both high growth and high margin, and they’re not mutually exclusive. One actually drives the other, because when you also get growth, you should drop to the bottom line a higher margin than your existing margin in your business. In software where you have the marginal cost of your product is nearly zero, you do have to provide support, and of course, you have to pay for the distribution.

3. 10 Lessons from 2021 – Michael Batnick

Investors don’t necessarily get better with experience because markets are adaptive, unlike most of our learning environments. I won’t ever touch a stove again on purpose because I know it’s hot. I won’t go in a cold shower because I know it’s cold. But “I won’t ever buy stocks again when the CAPE ratio is above 25 because I remember 1999” is not the same thing.

To quote myself, “The greatest lesson we can learn from history is that those who learn too much from it are doomed to draw parallels where none exist.”

Skeptics sounds smart. Optimists make money. As I said at the top of this post, my reflections and lessons of this year are a time capsule of the current environment. An environment that might change as soon as I hit publish. Sure doom and gloomers will look like soothsayers from time to time, but I don’t know anybody who got rich fading the human spirit. Don’t short capitalism.

It’s easy to be a knee-jerk skeptic. In fact, that will probably serve an investor well. Shiny objects can be dangerous. But a healthier attitude, especially in a bull market, is to be knee-jerk curious. “Metaverse? What’s that? Sounds dumb, but maybe it’s worth investigating.”…

…Avoid extremes. Never go all in or all out. Both lead to extreme thinking, which leads to extremely bad outcomes. It’s one thing to say, “crap, I guess I can’t handle a portfolio of 80% stocks, I’ll dial it back to 60%.” It’s a whole other thing to say, “crap, I can’t handle the volatility. I’m gonna go to cash until things settle down.” One person is going to survive the ups and the downs and the other person isn’t.

4. DAOs, DACs, DAs and More: An Incomplete Terminology Guide – Vitalik Buterin

Here, we get into what is perhaps the holy grail, the thing that has the murkiest definition of all: decentralized autonomous organizations, and their corporate subclass, decentralized autonomous corporations (or, more recently, “companies”). The ideal of a decentralized autonomous organization is easy to describe: it is an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automaton itself cannot do.

Given the above, the important part of the definition is actually to focus on what a DAO is not, and what is not a DAO and is instead either a DO, a DA or an automated agent/AI. First of all, let’s consider DAs. The main difference between a DA and a DAO is that a DAO has internal capital; that is, a DAO contains some kind of internal property that is valuable in some way, and it has the ability to use that property as a mechanism for rewarding certain activities. BitTorrent has no internal property, and Bitcloud/Maidsafe-like systems have reputation but that reputation is not a saleable asset. Bitcoin and Namecoin, on the other hand, do. However, plain old DOs also have internal capital, as do autonomous agents.

Second, we can look at DOs. The obvious difference between a DO and a DAO, and the one inherent in the language, is the word “autonomous”; that is, in a DO the humans are the ones making the decisions, and a DAO is something that, in some fashion, makes decisions for itself. This is a surprisingly tricky distinction to define because, as dictatorships are always keen to point out, there is really no difference between a certain set of actors making decisions directly and that set of actors controlling all of the information through which decisions are made. In Bitcoin, a 51% attack between a small number of mining pools can make the blockchain reverse transactions, and in a hypothetical decentralized autonomous corporation the providers of the data inputs can all collude to make the DAC think that sending all of its money to1FxkfJQLJTXpW6QmxGT6oF43ZH959ns8Cq constitutes paying for a million nodes’ worth of computing power for ten years. However, there is obviously a meaningful distinction between the two, and so we do need to define it.

My own effort at defining the difference is as follows. DOs and DAOs are both vulnerable to collusion attacks, where (in the best case) a majority or (in worse cases) a significant percentage of a certain type of members collude to specifically direct the D*O’s activity. However, the difference is this: in a DAO collusion attacks are treated as a bug, whereas in a DO they are a feature. In a democracy, for example, the whole point is that a plurality of members choose what they like best and that solution gets executed; in Bitcoin’s on the other hand, the “default” behavior that happens when everyone acts according to individual interest without any desire for a specific outcome is the intent, and a 51% attack to favor a specific blockchain is an aberration. This appeal to social consensus is similar to the definition of a government: if a local gang starts charging a property tax to all shopowners, it may even get away with it in certain parts of the world, but no significant portion of the population will treat it as legitimate, whereas if a government starts doing the same the public response will be tilted in the other direction.

5. In the Middle of Transition: 2022 Semiconductor Outlook – Doug (Fabricated Knowledge)

The semiconductor market for years has been characterized by booms and busts… Historically, the boom-bust cycles are primarily driven by supply.

The core reason for this is that capacity additions are extremely lumpy and adding new capacity via a fab came with huge fixed costs, and then very low variable costs, especially in sub-sectors like memory. The incentives were obvious. If you had a new fab, you could use your marginal cost advantage to offer a cheaper product and, in the process, blow up the total profit pool. In many ways, this was the story of the ~80s-90s memory market…

…But of course, things changed. Moore’s law slowed down and the rising cost of making semiconductors from both the fabrication and design perspective has forced consolidation and more rational industry competition. Why blow up the profit pool of your entire industry when the magnitude of costs is reaching tens of billions of dollars? Why not add capacity in a more disciplined manner given that you know what your competitors are doing? This is exactly what’s happening in memory, the most hyper-cyclical part of the industry. Most of the more mature semiconductor segments have already started to focus on their own product fiefdoms. With little competition head to head and only at the margins. Consolidation also helped quite a bit.

Another large driver as software eating the world and semiconductors being used in more and larger parts of the economy. Our cars and our homes took more semiconductors, and of course, our phones became much more integral parts of our lives. We went from essentially one market in the 1990s (PCs) to multiple end markets today…

…The important thing is that each of these cycles are happening independently. For example, phones are starting to slow down in volume as the average life of a phone increases, while automotive companies are just starting to ramp EV and ADAS content in their cars.

This is a simple expression of the law of large numbers. If semiconductors have a positive growth relationship it would mean that the bigger the number of different markets that are not correlated, the closer the aggregate results will approach the underlying trend. Each new diversifier will lower the volatility of just a single market’s results. I think that’s happening today.

So back to the path of cyclical to secular growth and what it would look like. Especially for a cyclical industry, each time there’s a year of sustained strong results there’s an expectation of a reversal to the mean. As bullish as I am, I don’t have the guts to say, “growth only, no down years.” That kind of statement is insane to make if you’re in the business of having reasonable accurate projections given the historical base rate.

But right now, we have clear indications of new demand streams from AI, new industries, and the broader slowing of Moore’s law. We also have more disciplined and consolidated supply, and despite the crazy capacity additions that have already taken place, the industry continues to grow. Semiconductors seem to have swapped from a supply-driven industry to a demand-driven industry since the pandemic. That, to me, is the big key of what the cyclical-to-secular market would look like. Additionally, semiconductors actually grew through a recession, which is pretty telling for the secular argument.

If there were ever a scenario of an historically cyclical and supply-driven market shifting into a secularly growing, demand-driven market, we’re living in it. Students of history know that each year there should be a supply-driven correction at some point, but each year the balance of supply and demand looks to be in demand’s favor. So, while we think that the continued and consistent supply additions will eventually turn the market, demand continues to outweigh supply additions.

If this sounds familiar, it’s because it’s pretty much the regime we’ve been living under since 2020. The chip shortage was originally expected to abate or turn around by the end of 2021 and that looks like it won’t happen. Now it’s expected to end in 2023, but it’s not like there hasn’t been a huge capacity addition since last year. The supply-demand crossover always seems to be just one year away. What’s happening? Why haven’t the recent capacity additions relieved the supply-chain crisis? An exchange that I thought was pretty enlightening was this conversation on the Q3 2021 ASML earnings call, answering an analyst’s question:

“Yes, Sandeep. I mean you’ve been around a long time and you asked the million-dollar question. So — and the real answer is we don’t know. We have some indications and some ideas. And yes, you are absolutely right, the wafer out capacity today is a big — is a lot larger than it was in Q4 2020. That’s true. And still, we see these shortages. Now I spoke to a very large customer and basically asked the same question.

And I actually said, Peter, we don’t know either. Because somehow we haven’t been able to connect all the dots that actually are the underlying drivers for this demand.”

This sounds like an anecdote in favor of the shift towards a demand-driven market. Each year, massive supply is added, yet demand continues to simply outweigh it. That would be what the “secular growth” case would look like for me, and in some ways we’re in the perfect expression of that transition. We’re in the middle of it.

6. Does Not Compute – Morgan Housel

Investor Jim Grant once said:

To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.

That’s always been the case. And it will always be the case.

One way to think about this is that there are always two sides to every investment: The number and the story. Every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow.

The numbers are easy to measure, easy to track, easy to formulate. They’re getting easier as almost everyone has cheap access to information.

But the stories are often bizarre reflections of people’s hopes, dreams, fears, insecurities, and tribal affiliations. And they’re getting more bizarre as social media amplifies the most emotionally appealing views.

A few recent examples of how powerful this can be:

Lehman Brothers was in great shape on September 10th, 2008. Its Tier 1 capital ratio – a measure of a bank’s ability to endure loss – was 11.7%. That was higher than the previous quarter. Higher than Goldman Sachs. Higher than Bank of America. It was more capital than Lehman had in 2007, when the banking industry was about as strong as it had ever been.

Seventy-two hours later it was bankrupt.

The only thing that changed during those three days was investors’ faith in the company. One day they believed in the company. The next they didn’t and stopped buying the debt that funded Lehman’s balance sheet.

That faith is the only thing that mattered. But it was the one thing that was hard to quantify, hard to model, hard to predict, and didn’t compute in a traditional valuation model.

GameStop was the opposite. The statistics showed it was on the edge of bankruptcy in 2020. Then it became a cultural obsession on reddit, the stock surged, the company raised a ton of money, and now it’s worth $11 billion.

7. TIP410: The Changing World Order w/ Ray Dalio – William Green and Ray Dalio

William Green (00:11:23):

You make some slightly chilling predictions about the US without being definitive because, obviously, these are probabilistic bets. For example, I think at one point you say, “I think that the odds of the US devolving into a civil war type dynamic within the next 10 years are around 30%.” You say that’s related to the high risk of internal conflict, the kind of politic polarization and anger that we’re seeing in the country. You also talk about the rivalry with China and say that the probability of a big war in the next 10 years is 35%. I was both struck by the way that you think the importance of thinking probabilistically, which is something that’s always struck me when I interview great investors, whether it’s Joel Greenblatt or Howard Marks, this sense that nothing is black and white. It’s always betting on probabilities, which clearly is something that you’ve been a master of over the decades.

William Green (00:12:17):

But also I was very struck by actually the seriousness of those claims. I wondered if you could talk about that gravity because you say, for example, that the US really is in danger of tipping over one way or the other. It’s that you say it’s, “The world’s leading power is on the brink and could tip one way or the other.” Can you give us a sense, digging into firstly the debt issue and the printing of money, why this is such a precarious position to be in? Because I’m no economist and I sort of need the idiot’s guide to why this is such a treacherous financial situation to be in.

Ray Dalio (00:12:53):

Maybe I can describe the typical cycle and then pull it out. I won’t go through all of the 18 measures, if that’s okay. I think it’ll create the template. There are internal orders and there are external orders, and what I mean by an order is a system of operating. Usually, internal orders are written by constitutions and external orders are written by treaties and so on, and they follow a war typically. Let’s say World War II. There’s a war. After the war, there are winners and losers. The winners get together and they determine the order, the system. For example, the system in 1944 they determined the Bretton Woods monetary system with the dollar at the center and gold at the center. It was an American world order because the United States had 80% of the world’s gold, it accounted for half the world’s economy and it had the monopoly on nuclear weapons, which was dominant.

Ray Dalio (00:14:06):

So the United States was dominant in all ways and the center of it, the reason United Nations is in New York and the IMF and the World Bank are in Washington because we began the American world order dominated that way. That’s an example. But if you go back to other cases, the Treaty of Versailles was the prior world order. In order words, a war and then a resolution of that war and then new rules as to who did what. If you keep going back, you will see that there are those world orders that just go back, the Peace of Westphalia in something like 1668 or something. Each system then creates a new system and a new world order, and then that happens also internal orders like, let’s say, revolution.

Ray Dalio (00:14:57):

The Chinese domestic order began in 1949. They had a civil war and then they started their domestic order in 1949. There’s a cycle, and the way the cycle works typically is after the war there’s a peace. The peace comes because there’s a dominant power that no one wants to fight, and also everybody’s so sick of war and then so you usually have a period of peace, often quite an extended period of peace. And there’s the consolidation of power by the new leader and then the development of a system that allows development because you wiped out a lot of the old. You wiped out the old debts, you wiped out many of the old things, but you’re in the process of wiping them out and new start. Then that begins the arc of the period of peace and prosperity and productivity.

Ray Dalio (00:15:53):

For example, the Second Industrial Revolution was that kind of period, the post World War II period was that kind of a period in which there’s competition, things working hard and there’s a rise in living standards. Those rise in living standard, particularly work well in a capitalist economy. Capitalism was really, that I mean markets, stock market and so on, was invented by the Dutch. It’s a way of creating buying power to enable, let’s say, entrepreneurs to be able to do well but it distributes wealth indifferently so that it creates a larger wealth gap. Over a period of time, it creates a larger opportunity gap because there’s a tendency of those who gained well to be in a favored position.

Ray Dalio (00:16:47):

For example, their children can get education that poor children can’t get or they might have more influence and so on, and so you get larger gaps and those gaps also can represent opportunity gaps and so on. There’s a tendency also toward debt and capital market valuations to keep rising, so debt rises in relation to income because debt is buying power but there’s… If you pay it back in hard dollars or hard whatever the currency is, then that’s a problem. So you see it rise. All of these cycles, you see debt rise relative to income and that’s because it’s better to have spending power like we had this last cycle, send out the checks and send out the money. You’re sending out buying power. That is so much easier to do and favorable to do than to restrict it and to contain it. That’s what raises debt relative to income and raises that so that you produce a debt cycle.

Ray Dalio (00:17:55):

Go back to Old Testament and they’ll about the 50 year cycle and the Year of Jubilee and so on. But these cycles have gone on for a long time, and so these wealth gaps grow, level sort of indebtedness grow. Also what happens is the competitiveness as they get richer, the competitiveness declines because… It declines first because people, as they get richer they become more expensive in the world, they want to work less hard and also they gather more competition. Let’s say, for example, the Dutch built ships that were the best to go around the world and collect riches, but the British learned from that and hired Dutch ship builders to build ships or inexpensively and better ships by learning from them. So others become more competitive.

Ray Dalio (00:18:52):

Also, when they do very well at the top they typically become dominant in world trade. The Dutch accounted for 25% of world trade. As a result, they bring their currency and the currency that’s then commonly used around the world becomes a world currency, which we call a reserve currency. When they have that currency, then that becomes also something that people want to save it so those in other countries will want to buy that currency, which means lend and so that they will lend to countries, which tends to make them get more into debt. It’s a great privilege, they call it the exorbitant privilege, to be able to borrow money because you the reserve currency, but it does get you deeper into debt in your own currency. That sows the seeds again for problems.

Ray Dalio (00:19:48):

There’s a political system that also operates with this kind of cycle, which is the political system rewards spending and it doesn’t penalize debt. Nobody pays attention to how much debt you get into, they pay attention to what they receive. When they get more stimulation, that produces it so there’s a tendency to have that which raises the living standard over the short run but also produces the indebtedness for the long run. So that when you get, let’s say, in the top of that cycle you can see living standards are really at their highest, they’re very high. You start to see the complexion of the finances deteriorate, you see the competitiveness deteriorate and so on. People also behave differently.

Ray Dalio (00:20:38):

There is an age cycle. Those who went through the war and went through the Depression have a different psychology than those who are now the next generation, so as this passes on so then you have newer generation operating that, they know really to enjoy life more, devote attention to other things and so on. So competitiveness starts to decrease while the indebtedness… But it’s a very good feeling position to be in, but that sows the seeds. Then when you have excessive levels of indebtedness… When you have the gaps and the excessive level of indebtedness and you have the bad finances… Because when you have that borrowing, the debt, then it’s bad for the owners of the debt. Right now you have very negative real interest rates, in other words inflation adjusted interest rates so it doesn’t make any sense to hold the debt, those assets. Then you see the movement to other things and so on.

Ray Dalio (00:21:42):

Then when you have the large wealth gaps that enters into it at the same time as you have internal conflict and external conflict. When that gets… The cycle’s described in detail in the book, but you start to see political polarity and the rise of populism of the left and populism of the right becomes extreme and progressively more extreme. As a result, you no longer can be in the middle. In other words they say, “Pick a side and fight.” And the media and the politics work together to enrage people and to make them more inclined to fight. Of course, that generation didn’t go through war. Because they didn’t go through war, they’re more inclined to fight and everybody is cheering the fighter who will fight for their side.

Ray Dalio (00:22:33):

In history, it shows that when the causes that people are behind are more important to them than the system, the system is in jeopardy, which is the case now. That progresses and you have either an internal conflict, you have a financial problem [inaudible 00:22:50]. Now other things matter. You asked about the cycle because there are other things like education and civility. A long leading economic indicator is the quality of education, but education is not just understanding history and memorizing or knowing how to do math and such things, it’s also education in civility, how people behave with each other, the idea of all of those. As there’s better education, there’s better productivity that follows.

Ray Dalio (00:23:21):

There are a number of measures that I include in there. For example, infrastructure investing, how you’re improving your infrastructure, there’s measures of the military strength. When they go internationally, they need a stronger military to protect their supply lines and all of that. All of those… There’s 18 different measures that you can see, and you can see what the numbers were and are of those types of things to make up the arc, but the arc is basically along those lines until you get to the irreconcilable differences, whether they’re internal or external, and you get to the financial problems. That’s why I’m saying… I think just by the measures that’s where we are. If we take the very simple financial, is the amount of money that somebody’s earning greater than the amount that they’re spending? Are their assets better than their liabilities?

Ray Dalio (00:24:19):

That’s true for individuals, companies and countries because that country’s an aggregate of those. You can look at the financial condition. When you get to the printing of money stage, you are very late in the cycle. That’s a concerning thing. You have that financial piece together with the internal conflict or, let’s say, internal order and disorder piece. There’s a chapter on internal order and disorder, explains the cycle. Then there’s the external order and disorder, but it’s made up of a number of those other things like education, quality of leadership and so on.

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We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

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But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 02 January 2022:

1. I Have A Few Questions – Morgan Housel

Who has the right answers but I ignore because they’re not articulate?

What haven’t I experienced firsthand that leaves me naive to how something works? As Jeff Immelt said, “Every job looks easy when you’re not the one doing it.”

Which of my current views would I disagree with if I were born in a different country or generation?

What do I desperately want to be true, so much that I think it’s true when it’s clearly not?

What is a problem that I think only applies to other countries/industries/careers that will eventually hit me?

What do I think is true but is actually just good marketing?

What looks unsustainable but is actually a new trend we haven’t accepted yet?

What has been true for decades that will stop working, but will drag along stubborn adherents because it had such a long track record of success?

2. TIP409: 2021 Top Takeaways w/ Trey Lockerbie – Trey Lockerbie

Trey Lockerbie (00:00:02):

In today’s episode, I am sharing my top takeaways from some of the conversations I had throughout 2021. I can’t express how grateful I am for having the privilege to learn from some of the greatest minds in finance, business, and investing. People like Howard Marks, Jeremy Grantham, Joel Greenblatt, Kyle Bass, Chamath Palihapitiya, Jim Collins, and so many more…

…Trey Lockerbie (00:04:47):

All right. So keeping on the topic of inflation, I also wanted to highlight this soundbite from episode 351 with Morgan Housel. At the beginning of the year, a lot of people were speculating around hyper-inflation just simply because of the money being printed.

Trey Lockerbie (00:05:01):

But Morgan’s point was highlighting that hyper-inflation really doesn’t happen until there’s also the supply side component. Now funny enough later in this year, we’re starting to see some real inflation numbers due to supply-side issues. But what Morgan’s really getting at here is how at risk, the dollar is from hyper-inflating away.

Morgan Housel (00:05:18):

Most historical periods of hyper-inflation if we’re really talking about real hyper-inflation, virtually all of them, I would struggle to find one example that did not take place in a society where they had massive output shrinkages. Because either it’s during the war and their factories are bombed to rebel, like happened in, Weimar Germany, or happened at the end of world war II in a lot of countries, or if it’s because the government has confiscated the major industries and run them into the ground as happened in Venezuela and Zimbabwe.

Morgan Housel (00:05:45):

It’s never just too much money, it’s always too much money during a time where your production, your GDP are collapsing. And I think that’s really important because of what happened after 2008 when the Feds started printing a lot of money. So many people, including myself, by the way, were saying, “Hyper-inflation right around the corner,” Feds printing so much money, you know what’s going to happen.

Morgan Housel (00:06:04):

And it didn’t. And I think the reason it didn’t is that the economy was well able to soak up a lot of that excess liquidity because our factories still had all the capacity that they can make stuff and produce stuff in a way that did not exist during Weimar Germany, or in Zimbabwe when the government had confiscated so many of the firms and run them into the ground. Or in Venezuela where the oil industry has been confiscated and run into the ground because they didn’t keep anything up.

Morgan Housel (00:06:30):

So it’s not to say that you can’t have a rise in inflation unless you have a decline in supply. It’s not that, but most of the time, big bouts of inflation come from a massive shrinkage in any economy’s ability to produce. Now, could that happen in the United States, too? Sure. Could it happen that we just don’t keep up with factory investment or we’re not investing in the right fields and we get to a spot where supply is shrinking, yes, of course, that could happen.

Morgan Housel (00:06:53):

And it’s happening right now in some specific fields. What’s happening in housing right now and particularly lumber is really fascinating, where the price of lumber is just going berserk. It’s going off the charts. I think it’s up about fivefold in the last year, the price of lumber to build a house. And from my understanding why that is, is not because we ran out of trees or even ran out of cutdown timber, there’s plenty of timber that’s been cut down and stripped of as bark, there’s plenty of that.

Morgan Housel (00:07:18):

From my understanding, a lot of the mills last spring said, “Oh, because of COVID, we’re going into the next great depression, shut down the mill, don’t invest in the mill, lay off the mill workers.” And now even though there’s plenty of logs, there’s not enough supply to manufacture finished wood. So we do have a decline in output in something like that. And sure, in enough we have nearly hyper-inflation in lumber.

Morgan Housel (00:07:41):

So it can happen in specific industries. I wont to be surprised if it happens in airlines this summer too, where you have airlines, some of whom have laid off tens of thousands of their workers or just through attrition have lost thousands of workers, flight attendants, pilots, and whatnot. Because last year, there was no work for any of them, and now this summer everyone who’s vaccinated is going to want to get on a plane and go somewhere.

Morgan Housel (00:08:02):

And so at the same time, you’re going to have maybe record demand, you have a huge decline in supply and could that lead to huge inflation in airlines? I think almost certainly. I think it’s some senses it will. The other area where I know it’s happening right now is rental cars. Where last year, a lot of the rental car companies just in a bid to survive started liquidating their fleets, just so that they had enough money to survive.

Morgan Housel (00:08:25):

And now that everyone wants to book a vacation right now, there are so many fewer rental cars available right now than there were last summer. So is there going to be huge inflation in rental cars this summer? Probably, but again, I’m making this point that it’s not just the money coming in, it’s the supply that went out that really causes the problem…

…Trey Lockerbie (00:57:51):

And as far as my favorite definition of risk, I think it came from Morgan Housel’s book where it says risk is what is left over when you think you’ve thought of everything. And in my episode with Morgan, he shared some amazing color around it. Here it is.

Morgan Housel (00:58:05):

People hear that and they think, “Okay, that’s great,” but let’s talk about the biggest risks that are out there. And you’re like, “No, no, no. The biggest risk is what no one is talking about because it’s impossible to know.” Or it’s so unlikely, it’s so crazy that people just wouldn’t even think about. Here’s a story that I wrote about this week that I think is really fascinating.

Morgan Housel (00:58:20):

During the Apollo space missions in the 1960s, before we started launching ourselves into space in rockets, NASA tested all of its equipment in super high altitude hot air balloon. So they would take a hot air balloon up to 130,000 feet, like just scraping the edge of outer space and they would test their equipment. They’d test their theories before they actually went up in rockets. So one time in 1961, NASA sent up a guy named, Victor Prather to 130,000 feet.

Morgan Housel (00:58:48):

And the goal of this mission in this hot air balloon was to test NASA’s new space suit prior to actually going into space. They wanted to go up to 130,000 feet, make sure everything was airtight. It worked under pressure, et cetera. Victor Prather goes on this mission, goes to 130,000 square feet, test a suit, the suit works beautifully everything’s great. Prather, Is coming back down to earth and when he’s low enough, he opens up the visor on his helmet, the face shield on his helmet.

Morgan Housel (00:59:13):

When he is low enough to breathe on his own, he can breathe the earth’s air, he’s low enough that he can do that all fine. He lands in the ocean as his planned and as the rescue helicopter comes to get him, he’s trying to tie himself onto the rescue helicopter’s rope and he slips, slips off his craft and falls into the ocean. Again, not a big deal because as soon is designed to be watertight and buoyant, but Victor Prather had opened up the mask in his helmet. As he falls into the ocean, he’s now exposed to the elements. His suit fills up with water and he drowns.

Morgan Housel (00:59:44):

And this to me is so fascinating because the NASA space missions during the moon race in the 1960s was probably the most heavily planned mission ever. You had thousands of the smartest people in the world, planning out every single minute detail and checking it over and over again, and being signed off by the most sophisticated expert risk committees that exist in the world, and they were so good at it. I mean, to have men walking on the moon, you need like every single millisecond was planned out every detail. And with Victor Prather, it was the same thing. They planned out every second of that mission.

Morgan Housel (01:00:20):

And then you overlook one tiny little microscopic thing, like opening your visor when it’s okay to breathe the earth air. And it kills them, and that to me is just an example of a risk is what’s left when you think you’ve thought of everything. And I think that’s an example of what happens in a lot of fields. Think if you were an economic analyst in the last five years and your job is to forecast the economy and you spend all your day, you spend 24 hours a day modeling GDP, modeling employment trends, modeling inflation, every detail about what the federal reserve is doing.

Morgan Housel (01:00:50):

You built the most sophisticated model in the world to predict what the economy’s going to do next. And then a little virus sneaks in and 30 million people lose their job. That’s how the world actually works. No economists in their right mind would’ve included that in their forecast. If you go back to 2019 or whatever, no one would’ve said, “Oh, I expect GDP is going to fall 20% next year, because we’re going to have…”

Morgan Housel (01:01:12):

No one said that. Of course, you couldn’t. You would be ridiculous to say that, but that’s how the world works. And I think it’s the same thing if you look at September the 11th or Pearl Harbor or Lehman brothers going bankrupt, because I couldn’t find a buyer, all the big events that actually move the needle, are things that people didn’t see coming.

3. Brantly Millegan – Ethereum Name Service – Eric Golden and Brantly Millegan

[00:05:40] Eric: And so I think a fun part to jump off, as I went through this, I’ve just learned so much about naming numbers, which is way more complex and interesting than I ever could have imagined. I think something that would be interesting is to just start with Web 2.0, and how Domain Name Services worked in general, and this idea of DNS. So if I wanted to own Ericgolden.com today, how would that work? How does the current internet work with naming numbers?

[00:06:05] Brantly: DNS actually predates not only Web 2, but it actually predates Web 1. It was not invented for the web. A lot of people think of these as like web domains, because that has become their primary use case. But it was actually not invented with the web in mind because the web didn’t exist. The current DNS came out 1984, 1985. The basic thing is, okay, you have types of identifiers that make sense for software. A software, if you have a string of 15 numbers, it can identify that, that number, non-number a second, it takes is easy. It can generate these things automatically. But of course, people can’t read this not friendly. We need language and social context, which computers, at least for the time being, are terrible at. Maybe AI will solve this problem, but right now it’s not. So naming system, at least with DNS, it’s just trying to bridge that gap. In some ways, the basic concept is to look up system. You have a name and you have data attached to that name. So when you type in a name somewhere, your computer just goes and looks it up on the system and grabs the relevant data and brings it back, just does all this in the background. The current system DNS has the best of 1980s technology. Something for people to remember on that is okay, public private key cryptography, which was invented in the ’70s, that was illegal to use in most contexts in the 1980s.

It was invented by some people in the United States, U.S government basically recognized that this is extremely powerful technology, we need to protect this. It wasn’t until the ’90s, there was this PGP movement with Phil Zimerman and Hal Finney and a couple others, that basically pressed the issue with the U.S government, eventually convinced the U.S government to make it no longer considered a munition, basically made it so anybody could use it. You wouldn’t get in trouble for sharing technologies with our enemies or something. That public private key cryptography technology, that is necessary for how the whole internet works. It’s the basis of wallets. So cryptocurrency wallets is just a public private key pair. It’s what it is. You have your private key and you have your public address. It’s really the hash of your public address. But this is critical technology. That was not legal in the ’80s. So all this is to say is DNS was designed and built without this. This is like the level of technology. And there have been attempts after the fact to try to add this into DNS, but it doesn’t even necessarily have wided options. It’s kind of hard once you build something. So DNS is very simple. It doesn’t have all the best technology. Something I will say for DNS though, is that it overall works extremely well. In insane engineering achievements in the world that this little project in the ’80s which was never intended to be used by the whole world, successfully scaled it up to billions of users. It’s spectacular. I have huge respect for the DNS community.

[00:08:48] Eric: Research this and getting to about ENS and DNS, I learned this idea called the Zooko’s triangle, that you needed these three properties to have an ideal naming system. Human meaningful, which is the fact that those numbers don’t mean anything to us. So how can we use English language or language to connect security and decentralization? So to your point, DNS is created in the ’80s. The decentralization for was essentially illegal. How did DNS satisfy those things today? How did names work today?

[00:09:20] Brantly: Is DNS decentralized? Depends on what you mean by this. There’s aspects of DNS that are very decentralized. So there’s parts DNS that are not decentralized. I’d say with our standards today, we’d probably say it’s not decentralized. It lacks things like users don’t have self custody of their names. So the way DNS works, if you own brantly.com, the fact that you own that depends on a number of other trusted third parties to maintain that for you. You can’t do self custody of brantly.com. That’s not possible given the way the system works. There’s always other people who have access to your name and could take it away from you if you want. By the way, that’s good and bad. Obviously it’s bad because it can be abused, censorship or something. It’s kind of good though. It’s really convenient. People who do a lot of bad things on the internet, it’s really convenient that the powers that be can just shut it off. It’s a double edge sword. But what ENS does is takes a lot of the DNS architecture, it virtualizes it, it puts it on Ethereum. It takes out all of those trusted third parties that they’re just required based on how the technology works with the old system, and allows for things like self custody and censorship resistance, which I think are very powerful.

[00:10:31] Eric: So people that were studying DNS and thinking about doing naming services with the introduction of Blockchain, it doesn’t seem like ENS was necessarily the first, but it does seem like it’s become very popular. And I’m always cautious with the word winning or the best. To me, and I’ve heard you talk about this, I just think about the usage. I see a lot of people with .eth names that it’s kind of being adopted. So I guess when people had the depth of history you had of DNS, saw Blockchain, give me a little understanding of there was Namecoin or there were other projects that I think attempted to do this, and how did they lead to ENS and how are they different?

[00:11:08] Brantly: Satoshi Nakamoto invented Blockchain technology because he wanted to have a decentralized currency, that was his motivation. That technology, as we all know well now, can be used for other things. Decentralized currency or peer-to-peer currency is just one application of Blockchain technology, of many. And people realized this pretty early on. The first non-currency use of Blockchain technology or attempt uses, was for internet naming. So Namecoin was some people called the first altcoin. Whenever you talk about a first, it’s like, “Well, what do you count?” There was that little project that kind of got going, but didn’t last very long. Do you count that. Namecoin was certainly the first important one, I would say. It has its own Blockchain, it has its own coin, it has Dot-Bit names. I think Satoshi was involved. Aaron Schwartz who sadly took his life in that whole MIT debacle thing, he was involved. There were a bunch of other people involved. They were right, that Blockchain technology is great for naming and provides a lot of interesting things. Namecoin’s now a dead project, it’s not doing anything. The problems with it is that you now had bootstrap your own Blockchain, it was kind of siloed off. They had problems with the distribution of names, things like this. But then came Ethereum in 2015. Ethereum was a revolution in the Blockchain space. There is like before Ethereum times and the after Ethereum times. Before Ethereum, if you wanted a new application, you had to build your own Blockchain and bootstrap it. This is very, very difficult to do. If you ever wanted to change anything about it, it’s really hard to change. Ethereum said, “Hey, let’s have a general purpose Blockchain. You can put any application on it. You don’t have to launch your own Blockchain, you just launch it on our Blockchain. Launch new applications easily.” And this led to this explosion of creativity and experimentation and development.

So ENS launched 2017, it has a huge number of advantages of Namecoin. So one, it’s in the Ethereum ecosystem. So it has composability. It can interact with everything else in Ethereum. It benefits from all the Ethereum infrastructure. We don’t have to build our own metamask and our own wallets and things like that. It’s like it all just in the Ethereum ecosystem, benefit from the security of that. So we just focus on that application. I think we also learned from some of the other failures of Namecoin regarding distributions to Nick being from the beginning was Like,” we have to have the incentive setups to disincentivize squatting and incentivize use from the beginning.” Because if you don’t, it just gets taken over by squatters and no one uses it, and the project actually fails. There have been many attempts, good faith attempts over the years. I would say ENS is the first one that’s actually gotten serious adoption and has gotten escape velocity. And I would say it’s the first one that has a shot at actually becoming a new protocol of the internet, which I think is really exciting and also makes the core team feel law of responsibility. Like, “Oh crap, this thing that many people have been working on and thinking about for years and attempts, we actually have something that is working. We need to not screw this up.”…

…[00:18:59] Eric: So, one thing I want to go back to is the enforcement and this censorship resistant thing that gets people very passionate, and I definitely see the arguments. In the current DNS system, if I’m a malicious actor and I set up a website, you had mentioned earlier they could shut it down, this is the strength in the weakness. First question is, who has the rights under DNS to shut down a domain or a bad actor?

[00:19:23] Brantly: So, there’s a bunch of different levels to the DNS system, but for the most part, generally speaking, people actually can’t just willy nilly shut down your website. And it depends on the reason why, and they’ve actually developed… See, something that the DNS community grappled with, actually early on, was there was no system for determining what could be shut down or not, or someone’s abusing something, can you do an enforcement action against them? And the DNS community, over many years, came up with a system called UDRP, which was an attempt to have a system with due process and everything. So, if you think someone’s misrepresenting themselves as you, or so something this, there’s a way you can take action. It’s not perfect. A lot of people think it’s just entirely arbitrary. That’s not true. It’s something. With ENS, when I tell people… Because some people say, “Well, what about abuse on the internet? You have to have a way to stop it,” which, actually, I agree on. We don’t want people using ENS for terrible things. But what I tell people is that you just have to come up with a new type of enforcement framework. What this means is, if someone’s doing something bad, let’s say, with .eth name, you can’t call up ENS and get them to fix it, you have to go to that person. You can’t do it through a centralized thing, you sort of have to go to that person, you have to find that person. Of course, you can always enforce something with the person themselves. That’s another thing, too. We use the word, like censorship resistance. That’s not the same thing as uncensorable. There is no such thing as something that’s uncensorable. That doesn’t exist in the world. Anybody who tells you that is not accurate. Censorship resistant just means maybe it’s harder to censor, or not through the normal ways that you would censor something.

4. The Lazarus heist: How North Korea almost pulled off a billion-dollar hack – Geoff White and Jean H Lee

In 2016 North Korean hackers planned a $1bn raid on Bangladesh’s national bank and came within an inch of success – it was only by a fluke that all but $81m of the transfers were halted, report Geoff White and Jean H Lee. But how did one of the world’s poorest and most isolated countries train a team of elite cyber-criminals?

It all started with a malfunctioning printer. It’s just part of modern life, and so when it happened to staff at Bangladesh Bank they thought the same thing most of us do: another day, another tech headache. It didn’t seem like a big deal.

But this wasn’t just any printer, and it wasn’t just any bank.

Bangladesh Bank is the country’s central bank, responsible for overseeing the precious currency reserves of a country where millions live in poverty.

And the printer played a pivotal role. It was located inside a highly secure room on the 10th floor of the bank’s main office in Dhaka, the capital. Its job was to print out records of the multi-million-dollar transfers flowing in and out of the bank.

When staff found it wasn’t working, at 08:45 on Friday 5 February 2016, “we assumed it was a common problem just like any other day,” duty manager Zubair Bin Huda later told police. “Such glitches had happened before.”

In fact, this was the first indication that Bangladesh Bank was in a lot of trouble. Hackers had broken into its computer networks, and at that very moment were carrying out the most audacious cyber-attack ever attempted. Their goal: to steal a billion dollars.

To spirit the money away, the gang behind the heist would use fake bank accounts, charities, casinos and a wide network of accomplices.

But who were these hackers and where were they from?

According to investigators the digital fingerprints point in just one direction: to the government of North Korea.

That North Korea would be the prime suspect in a case of cyber-crime might to some be a surprise. It’s one of the world’s poorest countries, and largely disconnected from the global community – technologically, economically, and in almost every other way.

And yet, according to the FBI, the audacious Bangladesh Bank hack was the culmination of years of methodical preparation by a shadowy team of hackers and middlemen across Asia, operating with the support of the North Korean regime.

In the cyber-security industry the North Korean hackers are known as the Lazarus Group, a reference to a biblical figure who came back from the dead; experts who tackled the group’s computer viruses found they were equally resilient…

…When the bank’s staff rebooted the printer, they got some very worrying news. Spilling out of it were urgent messages from the Federal Reserve Bank in New York – the “Fed” – where Bangladesh keeps a US-dollar account. The Fed had received instructions, apparently from Bangladesh Bank, to drain the entire account – close to a billion dollars.

The Bangladeshis tried to contact the Fed for clarification, but thanks to the hackers’ very careful timing, they couldn’t get through.

The hack started at around 20:00 Bangladesh time on Thursday 4 February. But in New York it was Thursday morning, giving the Fed plenty of time to (unwittingly) carry out the hackers’ wishes while Bangladesh was asleep.

The next day, Friday, was the start of the Bangladeshi weekend, which runs from Friday to Saturday. So the bank’s HQ in Dhaka was beginning two days off. And when the Bangladeshis began to uncover the theft on Saturday, it was already the weekend in New York.

“So you see the elegance of the attack,” says US-based cyber-security expert Rakesh Asthana. “The date of Thursday night has a very defined purpose. On Friday New York is working, and Bangladesh Bank is off. By the time Bangladesh Bank comes back on line, the Federal Reserve Bank is off. So it delayed the whole discovery by almost three days.”

And the hackers had another trick up their sleeve to buy even more time. Once they had transferred the money out of the Fed, they needed to send it somewhere. So they wired it to accounts they’d set up in Manila, the capital of the Philippines. And in 2016, Monday 8 February was the first day of the Lunar New Year, a national holiday across Asia.

By exploiting time differences between Bangladesh, New York and the Philippines, the hackers had engineered a clear five-day run to get the money away.

They had had plenty of time to plan all of this, because it turns out the Lazarus Group had been lurking inside Bangladesh Bank’s computer systems for a year.

In January 2015, an innocuous-looking email had been sent to several Bangladesh Bank employees. It came from a job seeker calling himself Rasel Ahlam. His polite enquiry included an invitation to download his CV and cover letter from a website. In reality, Rasel did not exist – he was simply a cover name being used by the Lazarus Group, according to FBI investigators. At least one person inside the bank fell for the trick, downloaded the documents, and got infected with the viruses hidden inside.

Once inside the bank’s systems, Lazarus Group began stealthily hopping from computer to computer, working their way towards the digital vaults and the billions of dollars they contained.

And then they stopped.

Why did the hackers only steal the money a whole year after the initial phishing email arrived at the bank? Why risk being discovered while hiding inside the bank’s systems all that time? Because, it seems, they needed the time to line up their escape routes for the money.

5. “Play-to-earn” and Bullshit Jobs – Paul Butler

In Bullshit Jobs: A Theory, David Graeber makes the case that a sizable chunk of the labour economy is essentially people performing useless work, as a sort of subconscious self-preservation instinct of the economic status quo. The book cites ample anecdotal evidence that people perceive their own jobs as completely disconnected from any sort of value creation, and makes the case that the ruling class stands to lose from the proletariat having extra free time on their hands. It’s a thoughtfully presented case, but when I read the book a few years back, I was skeptical that any mechanism to create bullshit jobs could arise from a system as inherently Darwinian as capitalism.

I’ve recently been exploring the themes around web3 to see if there’s a “there” there, and Graeber’s book has been on my mind again. One of the most apparently successful examples of web3 that people point to, aside from art NFTs, is so-called play-to-earn games. The most successful of these is Axie Infinity, a trade-and-battle game reminiscent of Pokemon.

In a crypto economy crowded with vapourware and alpha-stage software, Axie Infinity stands out. Not only has it amassed a large base of users, the in-game economy has actually provided a real-world income stream to working-class Filipinos impacted by the pandemic. Some spend hours each day playing the game, and then sell the in-game currency they earn to pay their real-world bills. That’s obviously a good thing for them, but it also appears to be a near-Platonic example of Graeber’s definition of a bullshit job.

Gamers have a word, grinding, to describe repetitive tasks undertaken to gain some desired in-game goal, but are not fun in themselves. This seems to sum up players’ experience with Axie Infinity, which is often described as work or a chore…

…There is some logic to the idea that the game could sustain a mix of players, some of whom are net recipients of capital and some of whom are net contributors who are in it for a good time. This is how other in-game economies have sustained themselves. I’m wholly unconvinced that Axie Infinity is headed in that direction, frankly, because it just doesn’t look fun enough that people will pony up upwards of $1,000 to play it for its own sake. Informal polls, unscientific as they are, seem to bear this out.

(As for power and respect, well. I’m old enough to remember the momentary schoolyard respect associated with earning a rare Pokemon in the original GameBoy game, but it’s not a kind of respect that can be bought and sold.)

By blurring the line between “player” and “worker”, the game has effectively built a Ponzi scheme with built-in deniability. Sure, some users will be net gainers and other users will be net losers, but who am I to say the net losers aren’t in it for the joy of the game? The same could be said about online poker or sports betting, to be sure, but we would rightfully recoil if those were positioned as a way to lift people out of poverty.

6. Why it’s too early to get excited about Web3 – Tim O’Reilly

The term Web 3.0 was used in 2006 by Tim Berners-Lee, the creator of the World Wide Web, as a look forward to the next stage of the web beyond Web 2.0. He thought that the “Semantic Web” was going to be central to that evolution. It didn’t turn out that way. Now people make the case that the next generation of the web will be based on crypto.

“Web3” as we think of it today was introduced in 2014 by Gavin Wood, one of the cocreators of Ethereum. Wood’s compact definition of Web3, as he put it in a recent Wired interview, is simple: “Less trust, more truth.”

In making this assertion, Wood was contrasting Web3 with the original internet protocol, whose ethos was perhaps best summed up by Jon Postel’s “robustness principle”: “TCP implementations should follow a general principle of robustness: be conservative in what you do, be liberal in what you accept from others.” This ethos became the foundation of a global decentralized computer network in which no one need be in charge as long as everyone did their best to follow the same protocols and was tolerant of deviations. This system rapidly outcompeted all proprietary networks and changed the world. Unfortunately, time proved that the creators of this system were too idealistic, failing to take into account bad actors and, perhaps more importantly, failing to anticipate the enormous centralization of power that would be made possible by big data, even on top of a decentralized network…

…If Web3 is to become a general purpose financial system, or a general system for decentralized trust, it needs to develop robust interfaces with the real world, its legal systems, and the operating economy. The story of ConstitutionDAO illustrates how difficult it is to build bridges between the self-referential world of crypto assets being bought with cryptocurrencies and a working economic system where the Web3 economy is linked to actual ownership or the utility of non-Web 3 assets. If the DAO (decentralized autonomous organization) had succeeded in buying a rare copy of the US constitution at auction, its members wouldn’t have had a legal ownership stake in the actual object or even clear governance rights as to what might happen with it. It would have been owned by an LLC set up by the people who started the project. And when the DAO failed to win the bid, the LLC has had trouble even refunding the money to its backers.

The failure to think through and build interfaces to existing legal and commercial mechanisms is in stark contrast to previous generations of the web, which quickly became a digital shadow of everything in the physical world—people, objects, locations, businesses—with interconnections that made it easy to create economically valuable new services in the existing economy. The easy money to be made speculating on crypto assets seems to have distracted developers and investors from the hard work of building useful real-world services…

…There is another kind of bubble, though, identified by economist Carlota Perez in her book Technological Revolutions and Financial Capital. She notes that virtually every past major industrial transformation—the first Industrial Revolution; the age of steam power; the age of steel, electricity, and heavy machinery; the age of automobiles, oil, and mass production; and the internet—was accompanied by a financial bubble.

Perez identifies four stages in each of these 50–60-year innovation cycles. In the first stage, there’s foundational investment in new technology. This gives way to speculative frenzy in which financial capital seeks continued outsized returns in a rapidly evolving market that is beginning to consolidate. After the speculative bubble pops, there’s a period of more-sustained consolidation and market correction (including regulation of excess market power), followed by a mature “golden age” of integration of the new technology into society. Eventually, the technology is sufficiently mature that capital moves elsewhere, funding the next nascent technology revolution, and the cycle repeats.

An important conclusion of Perez’s analysis is that a true technology revolution must be accompanied by the development of substantial new infrastructure. For the first Industrial Revolution, this included canal and road networks; for the second, railways, ports, and postal services; for the third, electrical, water, and distribution networks; for the oil age, interstate highways, airports, refining and distribution capacity, and hotels and motels; for the information age, chip fabs, ubiquitous telecommunications, and data centers.

Much of this infrastructure build-out is funded during the bubble phase. As Perez puts it:

What is perhaps the crucial role of the financial bubble is to facilitate the unavoidable over-investment in the new infrastructures. The nature of these networks is such that they cannot provide enough service to be profitable unless they reach enough coverage for widespread usage. The bubble provides the necessary asset inflation for investors to expect capital gains, even if there are no profits or dividends yet…

…So is what we’re calling Web3 the foundational investment period of a new subcycle, or the bubble period of the preceding one? It seems to me that one way to tell is the nature of the investment. Is abundant financial capital building out useful infrastructure in the way that we saw for the previous cycles?

It’s not clear to me that NFTs fit the bill. There’s no question, though, that the disruption of finance—in the same way that the internet has already disrupted media and commerce—would represent an essential next stage in the current cycle of technological revolution. In particular, if it were possible for capital to be allocated effectively without the trust and authority of large centralized capital providers (“Wall Street” so to speak), that would be a foundational advance. In that regard, what I’d be looking for is evidence of capital allocation via cryptocurrencies toward productive investment in the operating economy rather than capital allocation toward imaginary assets. Let me know of any good instances that you hear about.

To make clearer what I’m talking about, let me take an aside from crypto and Web3 to look at another technology revolution: the green energy revolution. There, it is completely obvious that bubble valuations are already financing the development of lasting infrastructure. Elon Musk has been a master at taking the outsized speculative price of Tesla stock (which at one point a year or two ago was valued at 1,500 years of the company’s profits!) and turning it into a nationwide electric vehicle charging grid, battery gigafactories, and autonomous vehicle capabilities, all the while catalyzing entire industries to chase him into the future. So too has Jeff Bezos used Amazon’s outsized valuation to build a new infrastructure of just-in-time commerce. And both of them are investing in the infrastructure of the commercial space industry.

In assessing the progress toward Web3 as advertised, I’d also compare the adoption of cryptocurrency for other functions of financial systems—purchasing, remittances, and so on—not only with traditional banking networks but also with other emerging technologies. For example, are Ripple and Stellar more successful platforms for cross-border remittances than bank transfers, credit cards, or PayPal, in the same way that Google Maps was better than Rand McNally or first-generation GPS pioneers like Garmin? There’s some evidence that crypto is becoming a meaningful player in this market, though regulatory hurdles are slowing adoption. Never mind remittances, though—what about payments more generally? How does growth compare with that of a non-crypto payment startup like Melio, which is focused on building against small business use cases? Given the interest in crypto from companies like Square (now Block) and Stripe, they are well positioned to tell us of progress for crypto relative to more traditional payment mechanisms.

7. Explaining Our Miraculous Flourishing – Marian L. Tupy

There is no God in Jonah Goldberg’s new book, Suicide of the West: How the Rebirth of Tribalism, Populism, Nationalism, and Identity Politics is Destroying American Democracy. But the book nonetheless revolves around a miracle. “The Miracle” is the shorthand Goldberg, a bestselling author, syndicated columnist, senior editor at National Review and a fellow at the American Enterprise Institute, uses to describe the escape of our species from the depths of ignorance, poverty and every-day conflict to the heights of scientific achievement, material abundance and relative peace.

To appreciate Goldberg’s Miracle, consider the following. Homo sapiens are between 200,000 and 300,000 years old. Yet the modern world, with all the conveniences that we take for granted (I wrote this article sitting on a plane 8 kilometers above ground, using an internet connection provided by a satellite orbiting 37,000 kilometers above the surface of the Earth), is merely 250 years old. Put differently, for the first 99.9 percent of our time on earth, progress was painfully slow. Then everything suddenly changed. Why? That’s the question that Goldberg strives to answer…

…The Miracle happened not because of, but in spite of, hundreds of thousands of years of evolution. Our rule-based society, where equality before the law takes precedence over the social and economic status of the individual, a staggeringly complex global economy that turns strangers from different continents into instant business partners, and a meritocratic system of social and economic advancement that ignores people’s innate features, such as race and gender, is both very new and extremely fragile…

…In a refreshingly non-relativistic manner, which is one of Goldberg’s trademarks, he writes, “I believe that, conceptually, we have reached the end of history. We are at the summit, and at this altitude [political] left and right lose most of their meaning. Because when you are at the top of the mountain, any direction you turn – be it left toward socialism or right toward nationalism … the result is the same: You must go down, back whence you came.”

And that descent (decline, if you will) is the key threat that we all ought to keep in mind. The forces of tribalism always linger just below the surface and are never permanently subdued. From Russia and China to Turkey and, to some extent, the United States, the all-mighty chieftain is back in charge. From the darkest corners of the web, where nationalists and anti-Semites thrive, to the university campuses, where identity politics flourish, group loyalty takes precedence over the individual. These dangerous sentiments originate, it is true, in human nature. But their renewed lease on life springs, as Goldberg reminds us, from something much more banal – ingratitude defined as “forgetfulness of, or poor return for, kindness received.”

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.  Of all the companies mentioned, we currently have a vested interest in Alphabet (parent of Google Maps), Amazon, PayPal, and Tesla. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 19 December 2021:

1. Want to be a Disruptor? – Marc Randolph

Stories of disruption almost always start this way.

I recently consulted for a large manufacturer who sold their product using a classic distribution model; they sold their product to distributors; the distributors sold to retailers; the retailers sold to the end users.  Everyone was happy.  Of course, to support so many tiers of distribution, the price to the end-user had to be high, but so what?  They had a monopoly.  Where else was a customer going to go?

But then the inevitable happened.  A start-up launched a similar product, but rather than take the leader on directly, they bypassed the usual channels and sold directly to end users.  The product wasn’t as good, but by cutting out distributors and high-priced salespeople, their prices were about half.

The CEO of the larger company saw this happening and knew exactly how to respond.  They would launch their own direct-to-consumer division and use their more powerful brand name and dramatically larger marketing budget to nip this threat in the bud.  All good.

All good, that is, until their VP of sales heard about it.  “We’re going to compete with our own distributors? You’re going to make my job harder? I’m out of here!”

The next call came from their biggest distributor. “You’re going to compete with me?  Find yourself another distributor!”

Soon the entire retail network was up in arms.  The direct-to-consumer division idea was shut down before it even started.

And the start-up?  They got three good years of market share gains before the larger company finally decided to launch the D2C division they should have launched at the beginning.  But by then it was too late. 

2. The Volatility is the Point – Joshua Brown

You don’t grasp that returns only come to those who are willing to bear that volatility when others won’t.

The volatility is the point.

It is the growling guard dog that keeps others away and safeguards the opportunity for you, if you dare.

It’s the reminder that the road to wealth isn’t freshly paved blacktop. As Logan Roy explained to his son this weekend, “It’s a fight for a knife in the mud.”

Its the governor that forces us – me, you, everyone – to be thoughtful about the size and nature of risk we’re about to take.

If not for the volatility, the fluctuation and drawdown, the pain of seeing dollars on a screen disappear, then premium returns over the interest rate on a checking account would not exist. That’s where the term ‘risk premium’ comes from. No risk, no premium. Showing off your ignorance of this concept lets everyone know how immature, inexperienced, uninformed and short-sighted you are.

Real players of the game know this. That’s why you never see them cackling at others over losses, be they temporary or permanent. Anyone who’s ever accomplished anything in the investment markets has lost. Many times. Lost big. Will lose again.

You cannot win if you are unwilling to lose.

It cannot be any other way.

3. Aaron Wright – A Primer on DAOs – Eric Golden and Bill Aaron Wright

[00:05:08] Eric: From that germ, that whitepaper, that first let’s call it DAO, it was about a year later, they were attempting to raise $500,000. They raised something like 150 million. There was a famous hack, which people can go read about, and then an SEC letter that said, “These are securities.” And so the first DAO didn’t go well. And I think what I’m really curious about is someone like you, who’s starting to take a very successful career and dedicate it to this space, what made you stay with DAOs in the midst of all this, I’m assuming, very negative emotion?

[00:05:37] Aaron: Why did I get involved with this? Many ways, lawyers are architects. They structure transactions, they help people manage risk, and they also help structure the flow of value. And so it’s a core thing that lawyers think about all the time or these top level issues related to how value flows, how to create different structures to accommodate the different risks, and also governance. That’s a big thing of what lawyers think about, particularly if they’re counseling in a more traditional setting, like a board of directors, or working with clients that may have these difficult questions that emerge when different groups of people work together. And so for me, I was fortunate enough to fall down the Bitcoin rabbit hole pretty early, fascinated by concepts around Bitcoin. And I think many folks in the ecosystem recognized that the DAO itself was an experiment. And even though it didn’t wind up in a place that everybody was hoping, this core idea of having a different and disparate group of people work together to pull capital to begin to support projects was something that I’ve always found really fascinating.

I think the notion that we can build more effective organizations, more efficient organizations is something that is probably one of the most important sets of questions that we, as a society, have to grapple with. I think for folks that have grown up during the time when I’ve grown up, we’ve seen failures on the part of different corporations, different governmental bodies, different organizations, to be responsive to the needs of people. And to me, DAOs, at their broadest level, are hopefully going to be able to present new ways to do things or improve ways to do things so that we can begin to tackle these problems. But at its core, why have I been so focused on blockchain technology and Ethereum? I think it’s because this idea that’s embedded in blockchains is exceptionally powerful. How can we work together, even though we may live in different countries, even though we may live in different time zones, to build something that we can all reasonably rely upon in order to order our affairs, whether that’s a store value like Bitcoin or the broader use cases that we’re seeing on Ethereum?

I just think that that’s one of the most important technical tasks that we can spend time with. And that’s why I’ve been so focused on it. And I do think that its core, Ethereum is a super fascinating system, not just because it’s a more generalized version of Bitcoin and not just because it has this global virtual machine that you can execute smart contract code in, but fundamentally, it’s a rules engine and it’s a protocol for rules and law. And that’s something that I’ve spent a lot of time thinking about, both as a practicing lawyer and as an academic. So not surprisingly, it tickles me in all the right places…

…[00:13:26] Eric: So I’m super excited to go into Flamingo. But before we do that, I just want to go back to something you said about Silicon Valley missing some of the biggest moves here. What do you think it is about Silicon Valley that led to this blind spot?

[00:14:34] Aaron: Crypto is one of the first major technology categories that didn’t come out of traditional academia. Obviously, lots of academic innovations have fed into crypto, but Bitcoin started with a synonymous whitepaper, a, or a group of developers that released into the wild on a message board… Mailing list, not even a message board. So I think it’s always been a little non-traditional, and I think a lot of the entrepreneurs and innovators that work in the crypto space don’t necessarily fit the classic archetype of a Silicon Valley entrepreneur. They may not have gone to the best schools. They may be located outside of the Valley. They may be working on remote teams, at least pre-COVID, was not the norm. They may not have gone to the most illustrious schools.

So, that combination, I think, has always made it a little bit of an oddity to some Silicon Valley-type investors. It’s not that they haven’t backed amazing teams, they have. I just think there’s been some that have slipped through the filter, which I’m sure always happens, but it seems to happen at a higher rate when it comes to crypto.

I think the other thing is, for the projects that they did back, in many ways, they seemed obvious to plenty of folks in the space that they needed capital and support. It didn’t make much sense that that capital shouldn’t come from the community that they were interacting with. The folks that were actually going to use the platforms or projects or DAP or whatever they’re developing and/or continue to provide longer-term support. I think that was another thing that fed in into our thinking…

…[00:18:05] Eric: We’re going to jump into the legal side, obviously, and understand the difference between this and an LLC. But before we get there, I think the secret sauce of DAOs, in particular, from my watching of Flamingo from the outside, it’s this idea of a hive mind as you call it. First, can you just define for the audience, what is a hive mind because I really think this is the secret sauce that people don’t focus on as much of what makes a DAO or specifically Flamingo special?

[00:18:30] Aaron: I think it’s a unique characteristic of our DAOs and other DAOs that are following a similar model. We have 70 plus members, many of whom put their own capital at risk. And they’re passionate about a particular topic. So this is what they’re geeking out on. They’re spending countless hours per day, even if they have other jobs, completely obsessing over NFTs, opportunities, different communities, artists, ecosystems that are creating NFTS by blending together the voices of not just a handful of people, let’s say like one or two people, or maybe possibly more, which would be the normal setup inside of like a hedge fund or a venture capital fund. It’s a broader group.

That broader group creates a filter about potential opportunities. So we’ve seen in the NFT ecosystem plenty of projects that launch and then their price goes up and then it rapidly comes down. Those types of projects don’t tend to gain traction inside of Flamingo. Even though if you’re an avid reader of CryptoTwitter, or even paying attention in the popular press, some of these projects would’ve hit your radar. This broader base of active participants, I think just creates a better noise to signal ratio. And people are interested in different parts of the ecosystem.

We have some folks that are really focused on early NFTs and collectibles. We have other members that are really focused on generative art. And we’ve done a lot to support generative art, both by supporting Art Blocks and also by collecting a whole bunch of generative artworks. We have other folks that are focused more on this transition of digital artists into NFTs or emerging artists that are using NFTs to develop their platform. We have folks that have been diving deep into the metaverse, and that’s why we set up Neon because we realized that that was a bigger opportunity. And we’re geeking out on different land or parcels or other items that can be acquired in the metaverse.

We had folks that were focused on gaming and other subcategories inside that broader NFT ecosystem. So because this broad range of coverage, it’s like a brain. Different people are focused on different areas, but everybody could have an opinion on it. And you kind of get a sense of whether or not you’re making a good or bad decision, palpably feel opportunities and whether people are excited about it. And now that have a network of DAOs, you can see these different hive minds coming to decisions. And sometimes you get some interesting signal across all the DAOs.

[00:20:51] Eric: How does this brain work? I’d really like to talk about the investment process. How do you source a deal? How do you think about what people would in normal investing think about is due diligence? How do you make a decision and then monitor that investment?

[00:21:06] Aaron: In terms of deals, that would be more kind of in the bucket of the LAO. So supporting a project or a company or some other more venture capital like, venture capital styled investment, there the deals come from all angles. All of our members have different networks that they’re a part of. They know different founders. And if they hear that a project that they’re interested in is raising, they’ll flag it. We congregate on Discord. So they’ll flag it in a new opportunities channel. And they’ll circulate a little bit of information. That catches one or more person’s eye. Then either that member will schedule a time to talk to the team to get more detail, and then report that back. My company, Tribute Labs, will fill in the gaps. So if no member’s able to do that, we’ll schedule a call and collect that information and report it back.

Either based in the conversation in Discord. We also have some calls that people can voluntarily join, which are pretty well attended. We’ll get a flavor of whether or not people want to move forward. If there’s like a sentiment that people want to move forward, there’ll be some soft polling on Discord, just to get a sense and confirm it. And assuming that they want to move forward, it goes up for a formal vote.

Somebody will draft up a proposal or the team will apply and describe why they need the capital. And then it goes up for a formal on-chain vote at that point in time. If more people want to support the project than not support the project during a voting window, it’s seven days in LAO. It’s shorter in some of the other DAOs. Then the capital’s committed. And then we take steps to kind of make sure that all the legal docs and other things are in order and are authorized to settle the transaction on behalf of the members.

[00:22:47] Eric: So in the LAO, I guess thinking about that, that sounds a lot like a venture capital model. How do you think in the way of speed that what you just described, going into a Discord, saying, “I have an idea. I was just talking to this founder. I like it. Let’s get together.” How does that compare in speed to a traditional several partners at a venture capital firm having a meeting to say, “We should do this deal”?

[00:23:07] Aaron: Before crypto, and I think a lot of VC funds that operate in crypto are moving faster, but we can come to a decision in a matter of hours if needed. People are online. They can weigh in on polling. If we need to move quick, then we can move quick. If things are slower, we can move slower and collect some more information. So just the cadence. If you look at the number of deals that the LAO’s done, it’s over a hundred. That’s a lot for most VC funds.

They’re really looking, at least a lot of them are looking to kind of maximize their exposure into a smaller number of bets. We take a slightly different approach where we’re looking to build connections to great projects and teams. We’re happy to participate in a number of different rounds and work with as many teams as we think are worthy of working with.

Inside Flamingo, when it comes to a particular project in different capacities or NFT opportunity, well, it’s a similar process in the sense that people flag either an artist or they’ll flag a set of NFTs that they’re interested in, and there’ll be a conversation related to it. And people will get excited and will decide what the allocation should be. And then either members will acquire them or we’ll acquire them on behalf of the members.

[00:24:18] Eric: One of the beautiful things about blockchain is I can look into your portfolio and see things that you’ve purchased. And now I’m talking about Flamingo. When I look at it, you have 242 CryptoPunks, which I think makes you one of the top holders. You have 22 Bored Apes. I’m curious, just how did you arrive at those allocations? What was it like? Someone said, “Hey, these Bored Apes are launching. This is a good idea. Let’s just throw some money at it.” Or were you saying, “No, we really want to meet with the founders first.” Like, how do we go from, I just saw something on Twitter or my friend told me something we should get involved to sending capital from the Flamingo DAO?

[00:24:51] Aaron: CryptoPunks have been around for a while. We developed inside Flamingo just some core buckets that we were interested in collecting. One of those buckets inside Flamingo was early NFTs. So that included things like CryptoPunks, Autoglyphs, and there’s a handful of other projects.

We began to look at the market and tried to get a sense of what we thought the opportunity would be. When it came to Punks, we bought a handful off the bat. And then there was increasing numbers of proposals to just expand that exposure until we got to a point where we became one of the largest holders in that project. The thesis there, at least distilling it down for members, was really that if there’s going to be trends of NFTs, at some point, people would look back to see what the really first original ones were. And there was some one-off ones, but CryptoPunks stood out as being one of those early iconic sets. And we wanted to have a pretty heavy exposure into that.

For Bored Apes, Bored Apes, it’s an amazing project and I think it’s completely fascinating. And I think they’ve developed an amazing community and have an incredible roadmap. That one, I think members were a little less sure about, just because of the way it was kind of released. And the fact that at that point in time there was more sets of NFTs that were getting created every day. But one member in particular was very, very interested in Bored Apes and thought that we should at least have some exposure there. So we just decided to acquire a handful. And then, I think we acquired a couple more after that, as we began to learn a little bit more about what Bored Apes was thinking about as a community and the plan for developing those sets of characters.

4. Integrating Around The Consumer: A path forward for the global apparel manufacturing supply chain – Jon George and Peter Ting

A widely used but erroneous framework that has guided the supply chain’s business model evolution (and those of other industries) is based on the notion of core competence. If a process fits a company’s core competence, it’s done internally, and if another company can perform the process better or for lower cost, it’s outsourced. The problem with this approach is that what may not be a value-added activity today, may be crucial tomorrow and vice versa. Additionally, core competencies can actually become core rigidities, limiting a company’s ability to adapt to a changing landscape. So, “core competence” is not the most reliable framework for managers in deciding which activities their companies should perform in order to maintain attractive profits over time.

In contrast, the Theory of Interdependence and Modularity is based on the fact that products, services, and even entire industries have architectures that dictate which components or steps are required to make something work and how they should fit together. Products and services have multiple constituent components, and they go through several value-added processes before reaching consumers. The place where any two components fit together is called an interface. Interfaces exist not just within products but also between stages in the value-added chain. For example, there is an interface between manufacturing and distribution, and another between distribution and retailing.

An architecture is interdependent if one process component cannot be completed independently of another. This happens if the way one component is designed and made depends on the way other components are designed and made. When there are unpredictable interdependencies across an interface, the same organization needs to perform both steps in that value chain in order to adequately do either step.

Businesses commonly adopt an interdependent architecture during early phases of an industry when products and services aren’t quite good enough for consumers. An interdependent architecture optimizes on performance, and businesses need to integrate multiple components and value-added processes to be competitive. For example, early computer manufacturers like IBM designed and produced nearly all the required components—including microprocessors, drives, memory, operating systems, etc.—to deliver computers with enough performance to satisfy customer expectations.

In contrast, in a modular architecture, components and processes fit and work together in well understood and highly defined ways. This happens when there is no unpredictability across interfaces. In this architecture, each step of the value-added process is specifiable, verifiable, and predictable. Therefore, it doesn’t matter who makes a given component or performs a service in a certain part of the value chain. Today’s personal computer industry is highly modular. Nearly any component from any manufacturer can fit into any motherboard due to industry-wide standards that specify exactly how interfaces pass data from one component to another (SCSI, USB, etc).

A modular architecture optimizes on flexibility, but this comes at the cost of performance. Modular architectures must be highly specified. As a result, engineers have less latitude in designing a product for bleeding edge performance. Thus, modular architectures tend to be prevalent in products or industries that have matured to a point where some aspects of performance can be sacrificed in favor of choice and customization.

The primary difference between the two architectures and the main implication to businesses is the basis of competition, or the way in which companies must optimize their offerings in order to compete effectively. Initially, when there is a performance gap—when functionality and reliability are not yet good enough for consumers—companies win by taking the interdependent architecture and controlling every critical component of their offerings. However, as products and services improve over time, the basis of competition changes. Performance gaps that once necessitated integration become performance surpluses, and consumers at some point stop paying a premium for ever more functionality. When this overshooting happens, what becomes “not good enough” is that consumers cannot get exactly what they want, when they need it, as conveniently as possible. As a result, the industry migrates to a modular architecture to meet customer demand along new dimensions: speed to market, convenience, and customization. 

5. Could cosmic rays unlock the secret tomb of China’s Qin Shi Huang guarded by terracotta warriors? – Stephen Chen

The Mausoleum of the First Qin Emperor in Xian, Shaanxi province, was built by hundreds of thousands of labourers over nearly four decades and finished around 208BC, according to Han dynasty historian Sima Qian, who lived soon after that period.

With a total area more than 70 times the size of the Forbidden City, it is the biggest tomb ever built for an individual in the world.

The tomb’s surface buildings are no longer standing, but its underground structures are mostly still intact. Some archaeologists believe the central chamber that housed the emperor’s coffin and most valuable treasures remain undisturbed after they combed the entire field and found no holes indicating thieves had been at work.

The study, funded by the central government to evaluate the feasibility of the cosmic ray project, found at least two cosmic ray detectors would be needed, to be planted in different locations less than 100 metres (328 feet) under the surface of the tomb.

These devices, each about the size of a washing machine, could detect subatomic particles of cosmic origin piercing the ground.

The data would allow scientists to identify hidden structures unseen using other detection methods in high detail, said Professor Liu Yuanyuan and her colleagues at Beijing Normal University in a paper published in Acta Physica Sinica, the official journal of the Chinese Physical Society, on Monday…

…After decades of surveying, archaeologists have confirmed the existence of an underground palace more than 30 metres tall. They also found trace evidence supporting descriptions by Sima that had been disregarded as fairy tale, such as pools and waterways filled with mercury to mimic China’s major rivers and the sea.

But the palace’s detailed structure and the exact location of the emperor’s chamber remained uncertain. Sima’s other descriptions – such as traps armed with arrows and crossbows to shoot anyone who enters the tomb – were not verified.

Using cosmic rays in archaeology is a concept that dates as far back as the 1960s. Astrophysicists discovered that cosmic rays could hit air molecules and produce a particle known as a muon that could penetrate almost anything.

Muons have a higher chance of being absorbed when going through denser materials. By comparing the number of muons a detector received from various angles, archaeologists could discover hollow structures, such as hidden chambers or passages in a building.

6. How To Be Successful – Sam Altman

Most people are primarily externally driven; they do what they do because they want to impress other people. This is bad for many reasons, but here are two important ones.

First, you will work on consensus ideas and on consensus career tracks.  You will care a lot—much more than you realize—if other people think you’re doing the right thing. This will probably prevent you from doing truly interesting work, and even if you do, someone else would have done it anyway.

Second, you will usually get risk calculations wrong. You’ll be very focused on keeping up with other people and not falling behind in competitive games, even in the short term.

Smart people seem to be especially at risk of such externally-driven behavior. Being aware of it helps, but only a little—you will likely have to work super-hard to not fall in the mimetic trap.

The most successful people I know are primarily internally driven; they do what they do to impress themselves and because they feel compelled to make something happen in the world. After you’ve made enough money to buy whatever you want and gotten enough social status that it stops being fun to get more, this is the only force I know of that will continue to drive you to higher levels of performance.

This is why the question of a person’s motivation is so important. It’s the first thing I try to understand about someone. The right motivations are hard to define a set of rules for, but you know it when you see it.

Jessica Livingston and Paul Graham are my benchmarks for this. YC was widely mocked for the first few years, and almost no one thought it would be a big success when they first started. But they thought it would be great for the world if it worked, and they love helping people, and they were convinced their new model was better than the existing model.

Eventually, you will define your success by performing excellent work in areas that are important to you. The sooner you can start off in that direction, the further you will be able to go. It is hard to be wildly successful at anything you aren’t obsessed with.

7. Investing: Is it skill or luck? – Eugene Ng

“There’s a quick and easy way to test whether an activity involves skill: ask whether you can lose on purpose. In games of skill, it’s clear that you can lose intentionally, but when playing roulette or the lottery, you can’t lose on purpose.

— Michael Mauboussin”

With activities of skill, like chess, swimming, basketball, one can lose on purpose (as long as you have some basic mastery of the activity). Whereas with activities of luck, like roulette, coin toss, lottery, one cannot lose on purpose. If one cannot lose on purpose, one cannot win on purpose. Following which, if one can lose on purpose, one too can win on purpose, it is likely to be an activity of skill. This has significant implications to us as investors, who are buyers of individual stocks for the long-term. Can this similarly be applied to investing? Which begs the question, can one lose intentionally and pick losing stocks for the long-term?…\

…That is also, why we are of the following view that:

1. Investing, especially over relatively short periods of time, is much more a matter of luck than of skill.
2. Investing, especially over relatively long periods of time, is much more a matter of skill than of luck.

Investing is often viewed by many and the financial media as more luck than skill, because in the short-term, feedback loops are often unclear and inconsistent and can be very volatile. In addition, very few investors keep playing the game very well for decades and beyond, thus investing is rarely viewed as a skilled game by most. But as we think one can possibly win intentionally (read our book to find out how), we do believe one can also lose intentionally as well. To us, investing is both a game of both luck and skill, and where it is on the continuum, depends on the strategy deployed, how it is being played, and the time perspective.

We do believe that gradually with time, in years and decades, that investing as an activity in the luck-skill continuum, can shift more to the right over time (i.e. more skill than luck), as skill becomes more evident for the ones who do have the skill, with luck still playing a crucial role.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We don’t have a vested interest in any companies mentioned. Holdings are subject to change at any time.