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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 07 November 2021:

1. DAOs: Absorbing the Internet – Mario Gabriele

As late as 1820, just 20% of the American population worked for an organization that paid wages. The rest farmed, fished, ran their own businesses, or split their time between these activities.

Over the following 130 years, that changed rapidly. Industrialization offered the chance for greater wealth while demanding increased labor. That drove the consolidation of workers beneath large organizations with centralized command systems. These shifts meant that by 1950, as much as 90% of the populace depended on companies for wages.

The company, then, is a modern phenomenon, at least in the way we usually think of it. What seems so embedded and intractable today — the default for most new ventures ​​— is really just humanity’s latest attempt to solve the problem of coordination.

A better alternative may have emerged. Though far from perfect, decentralized autonomous organizations (DAOs) seek to remedy some of the company’s flaws while enabling human collaboration at scale. This internet and crypto-native structure looks to decentralize governance and ownership, giving contributors the chance to determine a project’s direction and profit from its success.

While still in its fledgling stages, the explosion of interest in this organizational framework indicates that DAOs are an idea to be taken seriously. Over the last few months, in particular, new DAOs have risen to prominence, attracting meaningful capital and high-caliber, devoted talent. Historically, those that have paid attention to such dislocations in the crypto realm have looked prescient years later — even when the hype seemed overblown. Both builders and investors would be wise to give the space due consideration..

..But still, it is worth spending a moment thinking through this most direct of questions: what is a DAO?

Even after learning about DAO lore, it’s a deceptively tricky query to answer. Or at least, to answer well.

To start, we can return to words from which the acronym is derived: a “decentralized autonomous organization.”

What does that mean?

Well, if true to their name, DAOs should be free of a centralized authority (decentralized), operate independent of governments or private sector actors (autonomous), and be, well, organizations.

Simple enough, right?

Not quite. The matter becomes rather hazy when you realize that very few entities we call “DAOs” today actually fit this definition. True decentralization is rare, especially to begin with since most projects need a degree of centralization to get up and running. The same can be said of autonomy.

Critically, these traits shouldn’t be viewed as binary. Answering whether a DAO is decentralized or not is not a “yes” or “no” question but a matter of degree. Decentralization and autonomy are sliding scales, and “DAOs ”position themselves differently on this spectrum.

Since a literal reading doesn’t get us very far, we need other ways to think about DAOs. The slippery part here is that the act of elaboration raises its own questions. Indeed, every person to define a DAO is likely to give you a subtly or meaningfully different response. For example, one gameful interlocutor might reasonably classify a DAO as a group chat with a shared bank account, a second might categorize it as a community with distributed ownership, and a (dreamy) third might simply call it a “vibe.”

All would be right, in their own way. DAOs are group chats, and communities, and many of them separate themselves through their culture or vibe. But though capacious, something about these depictions sells the idea short.

DAOs are — or can be — a lot more than just a Discord channel with a native token. Rather, they are entities geared towards a shared purpose: the creation of value. That is the common denominator across our stated articulations.

Of course, how value creation is defined varies. Some focus on building tangible digital products, whereas others look to accumulate and compound social capital. Still, this fundamental purpose abides.

This is the most basic description of a DAO, and it is unsatisfying. Could we not say that almost any organization is minded towards the creation of value? Don’t companies seek the same end? What about nations and religions? 

“Value” is too subjective to give us sufficient clarity. To get a higher fidelity understanding of DAOs we need to go beyond nomenclature, and look at the characteristics that distinguish this form of entity from others.  

2. 9 Investing Lessons From “Breaking the Rules With David Gardner” Podcast – Sudhan Purushothuman

David Gardner first touched on how he picks stocks.

He has six traits he looks out for in a rule-breaking company and they are listed below with Gardner’s explanations.

“So the first attribute is probably the most important one, being a top dog and a first mover in an important emerging industry. So I love to find the companies that are the leaders, if you’re not the lead Husky, the view never changes. And so we’re always asking, who’s the leader? But not anywhere, not in big oil today or telecom, I love important emerging industries. That’s where most of the great stocks come from, the ones that make you money for 20-plus years.”…

…“Number two, we’re looking for a sustainable competitive advantage that takes many different forms. Examples would be, we’ve got Jeff Bezos, you’re down. So the founders, the human capital and companies. Certainly within the world of biotechnology, there’s patent protection for 20 years for your successful new drug, that’s an example of a competitive advantage. And others’ competitive advantages, if everybody else is inept and you’re not smartest guy in the room, kind of a thing.”…

…“Because truly, a sustainable competitive advantage means so much more to me than an attractive looking price to sales ratio. It’s so much deeper, it’s harder to earn, and it’s so much less ephemeral. It will stand the test of time in a time where people are memeing stocks up and down like silly, and it’s all so short term, and it’s not really going to create sustainable wealth for people playing short-term games.”…

…“Because the whole framework hangs together, if you just isolate one of those factors, like that last one you mentioned, it doesn’t work every time. There are things that are crazy over valued and that you wouldn’t want to buy, but when you’re seeing the full integration of the model and you’re saying, “Yes, yes, yes, yes, yes,” in those first five, and everybody’s saying it’s overvalued, that really does work.”

3. Eliud Kipchoge: Inside the camp, and the mind, of the greatest marathon runner of all time – Cathal Dennehy 

Two stories you need to know about Eliud Kipchoge, each painting a picture of a man who is, well, different.

The first is from Vienna, October 12, 2019. Earlier that day, Kipchoge had become the first man ever to run a sub-two-hour marathon, clocking 1:59:40, a time that didn’t count as an official world record due to the use of rotating pacemakers and Kipchoge being handed his drinks from a bike (rather than picking them off a table).

The INEOS 1:59 Challenge, bankrolled by British billionaire Jim Ratcliffe, gathered many of the world’s best to help pace Kipchoge to a mark many had deemed impossible. But then he did it, holding an absurd pace of 4:33 per mile or 2:50 per kilometre before sprinting, exulted, into the arms of his wife, Grace, and his coach, Patrick Sang, for an achievement that would echo in eternity.

Later that night, organisers held a no-expense-spared party for those who’d been part of the project.

Kipchoge was there, handing out trophies to the 41 men who’d paced him, and he then made a speech to thank those who’d worked so hard behind the scenes. Alcohol flowed through the room in torrents, and most athletes present ended up out on the town until late night turned to early morning.

Kipchoge? He didn’t touch a drop of alcohol (he never drinks) and once his speech was made, the man responsible for the entire celebration quietly exited the room, going back to his hotel for an early night.

He has a thing about celebrating, Kipchoge. Sees it as something sinister, something dangerous, a self-indulgent act that might derail his mindset, make him think, somewhere in his subconscious, that he has arrived, the inference being he has nowhere left to go.

He’ll punch the air at the finish, alright, but try to get him into an open-top car or to attend a huge welcome-home party and you’ll get a polite but firm rejection…

…Another story, this one from the Tokyo Olympics. On Sunday, August 8, the last day of the Games, Kipchoge once again eviscerated the world’s best marathoners to retain his Olympic title, dropping an almighty hammer 19 miles into the race and coming home a whopping 80 seconds clear of his closest rival.

The race was held in Sapporo, more than 800km from Tokyo, but tradition dictates that the men’s marathon medals are handed out at the Olympic closing ceremony. Kipchoge and his fellow medallists, along with their coaches, were flown to Tokyo that afternoon, then made to wait for a few hours at the airport before being driven to the stadium.

Cramped in a dull room with hours to kill, the Olympic medallists did what most would do: they opened their phones, logged into wifi, and started scrolling through the river of goodwill messages.

All except one. Kipchoge placed his phone in front of him and never touched it, sitting there — for hours — in contented silence.

4. Let the Market Worry For You – Michael Batnick

Let me tell you about the time when my brain was poisoned. It was October 2012 and I was at my first financial conference…

…I spent my time during the GFC as a waiter at an upscale restaurant. Business was dead. The last 6 months of my tenure were spent playing arcade games while patrons mostly stayed home. I entered the real world with a crappy resume and the lousiest economy in 40 years. I spent 2 years cold calling people who didn’t know me to sell products they didn’t want. I spent the next two years unemployed and figuring out what I was going to do with my life. I got more rejections than I can remember. Over the years, even living at home, I drained the bank account that I had built up during my earlier working years.

So when I walked into that conference room, I was ready, willing, and able to be convinced that bad times were here to stay.

The economic recovery was the weakest one we’ve ever experienced coming off such a severe contraction. The stock market, however, more than doubled from the lows. So it sure seemed reasonable to ask, and even suggest, that the market had gotten ahead of itself.

And that’s just what happened.* One of the chief strategists on the stage was talking about the dark ages or some shit. I can’t remember the exact details. But one thing he said did stick with me. “My job is to worry about the downside. The upside will take care of itself.” I thought that was the most profound thing I ever heard. Looking back, I had it all wrong…

…Worrying is normal. Life is full of disappointments so we tend to protect ourselves from emotional harm. Expect the worst and bathe in the dopamine when it doesn’t come to pass.

Investors have to constantly fight to stay positive. Actually, let me rephrase that. You don’t have to be positive or negative, you can be both. You can worry about the short term and be optimistic about the long term. That’s how I tend to behave. When I say you have to constantly fight, what I’m talking about is the never-ending negativity. You can’t give in!

5. Bill Miller 3Q 2021 Market Letter – Bill Miller

Over the past decade or so my letters have been focused mostly on saying the same thing: we are in a bull market that began in March of 2009 and continues, accompanied by the typical and inevitable pullbacks and corrections. Its end will come either when stocks get too expensive relative to bonds or when earnings decline, neither of which is the case now. There have been a few other themes: since no one has privileged access to the future, forecasting the market is a waste of time. It is more useful to try and understand what is happening now and give up trying to predict what is going to happen. In the post-war period the US stock market has gone up in around 70% of the years because the US economy grows most of the time. Odds much less favorable than that have made casino owners very rich, yet most investors try to guess the 30% of the time stocks decline, or even worse spend time trying to surf, to no avail, the quarterly up and down waves in the market. Most of the returns in stocks are concentrated in sharp bursts beginning in periods of great pessimism or fear, as we saw most recently in the 2020 pandemic decline. We believe time, not timing, is key to building wealth in the stock market.

When I am asked what I worry about in the market, the answer usually is “nothing”, because everyone else in the market seems to spend an inordinate amount of time worrying, and so all of the relevant worries seem to be covered. My worries won’t have any impact except to detract from something much more useful, which is trying to make good long-term investment decisions.

6. ‘I Lost Everything’: How Squid Game Token Collapsed – Connor Sephton

With Squid Game rapidly becoming Netflix’s most popular series ever, it was inevitable that altcoins inspired by the hit TV show would follow.

SQUID launched last Tuesday with a price of just $0.01 — and promised to offer access to an online play-to-earn game inspired by the brutal survivor drama.

The token’s value rose dramatically, and just 72 hours later, it was worth $4.42 — an increase of 44,100%. By then, it had already attracted coverage from some of the world’s biggest media outlets, including the BBC and CNBC.

But even then, there were signs that something was amiss. CoinMarketCap had received multiple reports of users struggling to sell SQUID on the decentralized exchange PancakeSwap.

A token that’s surging in value has little use when its owners are unable to sell it.

Unfortunately, many of the articles published about SQUID failed to make it clear this token is not officially affiliated with Netflix — giving it a sheen of respectability that may have lulled investors into a false sense of security.

Headlines discussing its surging value will have contributed to a fear of missing out — spurring crypto investors to get their hands on the token in the hope of astronomical gains.

Then Nov. 1 happened.

Prices stood at $38 as of 6am London time on Monday morning — accelerating to $90 by 7am, $181 by 8am, and $523 by 9am.

Just 35 minutes later — at 9.35am — SQUID appeared to hit highs of $2,861.80. A surge of 7,500% in three-and-a-half hours is unheard of… even in the notoriously volatile world of cryptocurrencies.

SQUID owners have told CoinMarketCap how they had little choice but to watch helplessly as the token’s value rose. An anti-dumping mechanism that was imposed by the project’s developers meant they could not sell.

Five minutes after this supposed all-time high, at 9.40am, SQUID had cratered to $0.0007926 — a fall of 99.9999%.

Curiously, trading volumes throughout the rollercoaster ride had remained steady at about $11 million, indicating SQUID’s surge wasn’t matched by a rise in investor activity.

This is a classic sign of a rug pull, where developers abruptly abandon a project — taking their investors’ funds with them.

7. The Same Stories, Again and Again – Morgan Housel

Anthropologist Franz Boas says, “Every culture has its own genius and should be judged in its own terms.”

Sure, but every culture and era also share universal characteristics that repeat again and again. The same attitudes, the same flaws, the same stories that show up all over the place. They’re reflections of how people’s heads work no matter where they live or when they were born.

Those common behaviors are what I find the most interesting from history because they’re not just trivia – you can be nearly assured that they’ll eventually impact your own life.

Social sciences get a bad rap because so many insights are hard or impossible to reproduce. I think the only solution is paying special attention to the few behaviors that have repeated themselves throughout history.

A few that stick out from economics:..

…3. Innovation is hard to predict and easy to underestimate because so much occurs by accident, when several boring discoveries compound into something extraordinary.

A common story through history is that past innovation was magnificent, but future innovation must be limited because we’ve picked all the low-hanging fruit.

On January 12th, 1908, the Washington Post ran a full-page spread called “America’s Thinking Men Forecast the Wonders of the Future.”

Among the “thinking men” buried in the fine print was Thomas Edison.

Edison had already changed the world at this point, becoming the Steve Jobs of his time.

The Post editors asked: “Is the age of invention passing?”

Edison’s answer was predictable:

“Passing?” he repeated, in apparent astonishment that such a question should be asked.

“Why, it hasn’t started yet. That ought to answer your question. Do you want anything else?”

“You believe, then, that the next 50 years will see as great a mechanical and scientific development as the past half century?” the Post asked Edison.

“Greater. Much greater,” he replied.

“Along what lines do you expect this development?” they asked him.

“Along all lines.”

This wasn’t just blind optimism. Edison was successful because he understood the process of scientific discovery. Big innovations don’t come at once, but rather are built up slowly when several small innovations are combined over time. Edison wasn’t a grand planner. He was a prolific tinkerer, combining parts in ways he didn’t quite understand, confident that little discoveries along the way would be combined and leveraged into more meaningful inventions.

Edison, for example, did not invent the first lightbulb; he just greatly improved upon what others had already built. In 1802 – three-quarters of a century before Edison’s lightbulb – a British inventor named Humphry Davy created an electric light called an arc lamp, using charcoal rods as a filament. It worked like Edison’s lightbulb, but it was impractically bright – you’d nearly go blind looking at it – and could only stay lit for a few moments before burning out, so it was rarely used. Edison’s contribution was moderating the bulb’s brightness and longevity. That was an enormous breakthrough. But it was built on the back of dozens of previous breakthroughs, none of which seemed meaningful in their own right.

That was why Edison was so optimistic about innovation.

He explained:

“You can never tell what apparently small discovery will lead to. Somebody discovers something and immediately a host of experimenters and inventors are playing all the variations upon it.

He gave some examples:

Take Faraday’s experiments with copper disks. Looked like a scientific plaything, didn’t it? Well, it eventually gave us the trolly car. Or take Crooke’s tubes; looked like an academic discovery, but we got the X-ray from it. A whole host of experimenters are at work today; what great things their discoveries will lead to, no one can foretell.

“You’re asking if the age of invention is over?” Edison asked. “Why, we don’t know anything yet.”

This, of course, is exactly what happened.

When the airplane came into practical use in the early 1900s, one of the first tasks was trying to foresee what benefits would come from it. A few obvious ones were mail delivery and sky racing.

No one predicted nuclear power plants. But they wouldn’t have been possible without the plane. Without the plane we wouldn’t have had the aerial bomb. Without the aerial bomb we wouldn’t have had the nuclear bomb. And without the nuclear bomb we wouldn’t have discovered the peaceful use of nuclear power.

Same thing today. Google Maps, TurboTax, and Instagram wouldn’t be possible without ARPANET, a 1960s Department of Defense project linking computers to manage Cold War secrets that became the foundation for the Internet. That’s how you go from the threat of nuclear war to filing your taxes from your couch – a link that was unthinkable 50 years ago, but there it is. Facebook began as a way for college students to share pictures of their drunk weekends and within a decade was the most powerful lever in global politics. Again, it’s just hard to connect those dots with foresight. And that’s why all innovation is hard to predict and easy to underestimate. The path from A to Z can be so complex and end up at such a strange point that it’s nearly impossible to look at today’s tools and extrapolate what they might become.

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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), Meta Platforms (parent of Instagram), Netflix, and Twilio. 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 31 October 2021:

1. An Interview with Mark Zuckerberg about the Metaverse – Ben Thompson and Mark Zuckerberg

You talked about things like interoperability and the importance of openness and you referenced your experience being an app on someone else’s platform and how that influenced your thinking. But there is a tension here where to deliver on a metaverse vision, particularly when you talk about things like being able to carry, say purchases, across different experiences, where it actually may be easier if there is one company providing the totality of the fabric, and that does seem to be this vision where Facebook is the water in which you swim when you’re in the metaverse, not Facebook, but whatever the new name, the new idea for this metaverse is, and then other people can plug into it. Is that a good characterization of the way you’re thinking about it? Or do you see this really being a peer-to-peer thing, where there are other metaverses and those are also interoperable? What’s your vision on how that plays out?

MZ: I think it’s probably more peer-to-peer, and I think the vocabulary on this matters a little bit. We don’t think about this as if different companies are going to build different metaverses. We think about it in terminology like the Mobile Internet. You wouldn’t say that Facebook or Google are building their own Internet and I don’t think in the future it will make sense to say that we are building our own metaverse either. I think we’re each building different infrastructure and components that go towards hopefully helping to build this out overall and I think that those pieces will need to work together in some ways.

We’re trying to help build a bunch of the fundamental technology and platforms that will go towards enabling this. There’s a bunch on the hardware side — there’s the VR goggles, there’s the AR glasses, the input EMG [electromyography] systems, things like that. Then there’s platforms around commerce and creators and of course, social platforms, but there will be different other companies that are building each of those things as well that will compete but also hopefully have some set of open standards where things can be interoperable.

I think the most important piece here is that the virtual goods and digital economy that’s going to get built out, that that can be interoperable. It’s not just about you build an app or an experience that can work across our headset or someone else’s, I think it’s really important that basically if you have your avatar and your digital clothes and your digital tools and the experiences around that — I think being able to take that to other experiences that other people build, whether it’s on a platform that we’re building or not, is going to be really foundational and will unlock a lot of value if that’s a thing that we can do.

I’ve talked a bunch about how I think that we should design our computing platforms around people rather than apps and I guess that’s sort of what I’m talking about. On phones today, the foundational element is an app, right? That’s the organizing principle for kind of your phone and how you navigate it. But I would hope that in the future, the organizing principle will be you, your identity, your stuff, your digital goods, your connections, and then you’ll be able to pretty seamlessly go between different experiences and different devices on that. I think that building that in upfront is going to be pretty important to maximizing the creative economy around this and making it so that somebody who’s building one of these digital goods or experiences can make it as valuable as possible because it just works across a lot of different things…

…I will admit, I’ve been very impressed with Workrooms. I’ve actually been using it with my team that’s been working on Passport for meetings once a week, and your focus on presence I think — it’s one of those things you talk about it a lot but until you actually experience it, it’s hard to articulate why it is valuable.

It’s very interesting, you talk about there’s this distinction between people versus apps that we talked about. Is there a similar distinction between presence versus asynchronous communication? Because I think that’s one of the things people like about messaging, for example, is you don’t necessarily have to be right on top of it, it can be an ongoing conversation over days and weeks and months. Whereas the good thing about presence is it is quite tangible, I have to say, I’m very impressed by it, on the other hand, you do have to sit down, you have to put on the headset, you have to log in. There’s a very deliberate part of that, that feels very different than where we’ve been.

MZ: Yeah. I mean, I think you’ll get both sides of this. I think that there’s a clear arc of technology where — when I got started with Facebook, most of the content online was text, and that was for a bunch of technological reasons. And then we got phones that had cameras and the Internet became a lot more visual, and then the Internet connections got a lot better to the point where now the primary way that we share experiences is video. But at each step along the way, it’s not like text went away. You’re going to have a lot of that, but I do think that now what we’re enabling is a new level of immersion and experience.

I certainly don’t think you’re going to put on a VR headset in order to have a quick message thread. Although I do think that for augmented reality, for example, one of the killer use cases is basically going to be you’re going to have glasses and you’re going to have something like EMG on your wrist and you’re going to be able to have a message thread going on when you’re in the middle of a meeting or doing something else and no one else is even going to notice. Think about what we’ve had over the last couple of years during the pandemic where everyone’s been on Zoom, and one of the things that I’ve found very productive is you can have side channel conversations or chat threads going while you’re having the main meeting. I actually think that would be a pretty useful thing to be able to have in real life too where basically you’re having a physical conversation or you’re coming together, but you can also receive incoming messages without having to take out your phone or look at your watch and even respond quickly in a way that’s discreet and private. So I think that there are going to be those use cases. I think that there are going to be easier ways to get in and out of experiences where you’re experiencing that deep sense of presence.

But again going back to one of your opening points today, you were like, “Why did you put together this video?” I think a big part of it is that it has been very hard to explain some of these concepts without people actually experiencing them. You talk about presence in Workrooms, and I think no matter how many times I explain or try to express how profound of a sensation this feeling of presence is, it’s not really until people get into the experience that they actually have a sense of it. And I thought that putting together this film would start to elucidate some of the use cases in a useful way for people. But I think you’re probably right that it’s not until people really experience what that real augmented reality experience is or get a VR headset that fits the use cases that they need that a lot of these things are really going to come to life. I think it’s just going to keep growing because these are very useful use cases to people.

Why now for the vision? There is an aspect of Facebook’s seems very hamstrung as far as acquisitions go, is there really any other alternative for Facebook’s cash flow other than returning it to investors than this all-in bet on the metaverse? I guess, in other words, is Facebook building the metaverse because it is best positioned to build something that is inevitable, or because Facebook needs the metaverse to exist so that it has further growth opportunities that are independent of Apple?

To your credit, you did buy Oculus way back in 2014, so this obviously isn’t a new vision. But to right now reorganize the company, to paint out this vision, to start announcing how much you’re investing and to what degree, obviously there’s the news cycles going on, why now? Why in October 2021 is this the time to paint this vision and be super public and upfront about it?

MZ: Well, I think there’s a few things. There’s all the business reasons and product reasons. I think that this is going to unlock a lot of the product experiences that I’ve wanted to build since even before I started Facebook. From a business perspective, I think that this is going to unlock a massive amount of digital commerce, and strategically I think we’ll have hopefully an opportunity to shape the development of the next platform in order to make it more amenable to these ways that I think people will naturally want to interact.

One of the things that I’ve found in building the company so far is that you can’t reduce everything to a business case upfront. I think a lot of times the biggest opportunity is you kind of just need to care about them and think that something is going to be awesome and have some conviction and build it. One of the things that I’ve been surprised about a number of times in my career is when something that seemed really obvious to me and that I expected clearly someone else is going to go build this thing, that they just don’t. I think a lot of times things that seem like they’re obvious that they should be invested in by someone, it just doesn’t happen.

I care about this existing, not just virtual and augmented reality existing, but it getting built out in a way that really advances the state of human connection and enables people to be able to interact in a different way. That’s sort of what I’ve dedicated my life’s work to. I’m not sure, I don’t know that if we weren’t investing so much in this, that would happen or that it would happen as quickly, or that it would happen in the same way. I think that we are going to kind shift the direction of that.

2. Alex Rampell – Investing in Operating Systems – Patrick O’Shaughnessy and Alex Rampell

[00:18:40] Patrick: Peter Thiel has this awesome definition of technology, which is really simple, which is just to do more with less. So this tool of leverage that creates for possibility and maybe therefore world-changing, to use your term. And one fun way I’ve heard you describe what you’re trying to do with your investing is that you’re hunting for operating systems, which are the ultimate form of technology leverage, if you will. Can you talk through this investment concept, what you mean by searching for operating systems as companies. And maybe we can go into as much detail as you’re able on this really interesting concept.

[00:19:12] Alex: My absolute favorite companies or businesses to invest in are ones that I think have an operating system like Mechanic. And that doesn’t mean that it’s Windows or Mac OS, but it has the same concept, which is if you ever go to a dentist or any modern dentist, I should say, almost every dentist in the country runs something called a DPM, a dental practice management software product. And that keeps track of all of the customers. It keeps track of the pictures of all of the customers’ teeth. And there are a number of companies that make them. Actually, one of the early ones was Henry Schein, which actually makes dental equipment, but turned out to get into the dental software space. But the retention rate of these products is basically a hundred percent. It’s a product that if you are the receptionist at a dental office or even the dentist himself or herself, you’re logging into this product every single day to check pictures of the teeth, to check when the next person’s appointment is, to check your outstanding billings, to go charge customers credit card. So it is the system of truth.

And when I say operating system, it actually means two things. It means system of truth. So it keeps track of everything at a company or even for a consumer, and I’ll talk about that a little bit later. It has very, very high utilization and usage. So it is this canonical, in consumer terms you would call it a DAU, a daily active use product or weekly active used product, because in the long run, what really matters the most, you could show evidence of a mode if you have a product that people use every single day and the margins that you’re able to extract from the product that you sell to these customers that use it every day, are maintained or even increased over time. So an operating system is basically something that runs the business, it is the system of truth, so it keeps track of what inventory you have, what your sales receipts are, how much you have in sales tax, all of these things. And the reason why that’s so valuable is because even though there is this kind of concept, the much valued concept of the App Store, you can start adding other things into that operating system.

So what does that mean? If you’re a dentist, you want to offer installment payments for the crown or cavity that that patient needs. It’s very easy, and you actually have free distribution of that new product if you are the operating system, versus what I would say, the very, very uphill battle of, “I am just a financing company that offers financing for cavities and crowns. Now I got to go find every dentist. I got to sign them up. The person that I signed up that works at the dental office might leave one month later, then I got to sign them up again. Then after I’ve signed them up, I have to hopefully count on the fact that they’re going to market this or push this in front of their patients, but they probably won’t do, so I have to re-market to them.” Again, versus the operating system where it’s the system of truth. There are operating systems for a lot of businesses like Toast, which went public recently. That’s an operating system for restaurants. They don’t just do payment processing. Like a lot of people think of it as like, “Oh, like I paid for my bill at the restaurant with Toast.” Well, Toast actually does payroll for the people that work at the restaurant.

They have tablets that go to the kitchen. So when the waiter or waitress goes and enters your hamburger order, it shows up immediately at the tablet at the kitchen. So it’s basically like a custom built piece of software that runs the business. And it will even keep track of how many hamburger patties are in the back kitchen as well. So these operating systems, they really retain customers extraordinarily well. And they are very adept. There’s a lot of what I would say out of the money call option value, if you will, of them being able to position other products and services to either the end customers, like the customer’s customers, or the customer itself. I actually wrote a blog post on this when I first joined this firm Andreessen Horowitz, which was my key learning, I called this the TiVo problem. This was at my company trial pay which I sold to Visa. So the TiVo problem, I call this, which is in 1998 TiVo and this other company called ReplayTV invented this amazing technology, at least amazing for people that were around it in 1998 like I was, that allowed you to pause live television. And TiVo was a very, very popular thing in the late nineties.

But today in 2021, it’s basically a patent troll rate. It was sold to another company which is effectively a patent troll that just sues other companies. I would never want to be in that position and I don’t have a lot of high regard for companies that do that. But the reason why that actually happened was TiVo did not control the distribution. They have this great product, but TiVo was not valuable if you just had a TV set and you lived in Antarctica. It only had value if you had Comcast, or if you had DirectTV. You need a TV to go. You need an actual television content to go into that TV, and then you would have live content to pause, hence TiVo. And I think the problem is that if you build an amazing, amazing innovation, and this is outside of the Clay Christiansen framework of disruptive versus sustaining innovations, it really is, “Do you control the distribution or not?”

So, Comcast has that pipe into your house. I think the problem is if you build TiVo, which is an amazing world changing thing, it’s not a sustaining innovation, it’s an amazing thing. But the problem is you have three outcomes that will eventually happen. Number one is Comcast says, “You know what? We should buy you. You’re an amazing company.” But if Comcast goes and buys TiVo, then what about Time Warner Cable and DirecTV? They’re going to say, “Hey, we’re not going to sell TiVo anymore. It’s owned by our competitor.” So you have this weird case in M & A where you can have not a control premium, which is a term often used where you’re paying more per share for the entire thing then you would for the marginal share. You’re going to have a control discount because TiVo is going to lose a huge chunk of their sales from the competitor. So that’s option one. Option two is that Comcast says, “Hey, you know what, let’s partner because we’re the ones that have the pipes into all the homes. We’re going to take 99 cents on the dollar. And you’re going to take 1 cent on the dollar.” And TiVo’s like, “Well, that’s not fair. I want a better deal than that.”

They’re like, “Yeah, well screw you. We’re just going to go with ReplayTV.” So you don’t really have that much leverage in a negotiation vis-a-vis the distributor. And then option number three is basically Comcast says, “That’s a nice little tool that you have there. We’re just going to go hire Accenture. I don’t know, some consulting firm or a bunch of engineers to go build a crappy version of the same thing.” And basically the problem is that one of those three options always happens to the TiVo, the metaphorical TiVo in this example, which is you build this amazing thing, it changes the world, you don’t control the distribution, unfortunately, and you either get copied, you get bought in an unfair price, or you get a partnership agreement which is really tilted out of your favor. So the lesson is, I mean, it sounds crazy to give this to an entrepreneur or a true innovator who’s like, “Don’t build TiVo, build Comcast.” Because if you build Comcast and you have a good product and engineering team, or you can actually create stuff, you have unlimited option value to go rollout TiVo, to charge more for TiVo, and so on and so forth.

Whereas if you’re TiVo, you’re kind of at the mercy of Comcast and you might get lucky, you probably won’t be. And 20 years later, you might get patent troll. And that’s kind of how I got to the operating system thesis to begin with, which is you want to look like Comcast. What does that mean? You want to be the pipes that actually control the backend of the business, because if you do that, and ideally even the front end. If you do that, you could be a body shop. Body shops should run on body shop software. Who’s going to build that software? Well, they’re going to have perpetual rights to offer, cross sell of whatever body shops need, whatever the customers of body shops need and so on and so forth. Or, you’ve got this whole other category of what I would call horizontal operating systems. QuickBooks is effectively an operating system. They do one thing for lots of types of businesses, which is the backend accounting. Or Square is a kind of operating system for lots and lots of businesses in a very horizontal way.

I use horizontal and vertical. As vertical is like focusing on one particular trant of business. It’s like Toast is a vertically focused operating system for restaurants, full stop. Square does that too, but it’s not as customized for restaurants, which is why Toast was able to steal a lot. But both of them effectively are operating systems. How do you know if it’s an operating system or not? I think this was a Supreme Court Justice Potter Stewart said, “How do you know if something is pornography?” And he said, “I’ll know it when I see it.” How do you know if something is an operating system? And I’ll say, “I’ll know it when I see it.” But really it’s like, “Is this thing the permanent system of record that stores all customer business interactions and is it used almost every single day?” And if the answer is, “yes,” it’s probably an operating system. If the answer is, “yes,” there’s almost this permanent up-sell capability where if you have, again, if you have a great management team, there are so many things that they can do with this.

Facebook is kind of an operating system for human interaction. That’s maybe a little bit of a stretch because there are plenty of ways of operating outside of Facebook. But what other products and features has Facebook added over the last 15 years? It’s really remarkable. So much of their business growth has been from that. Because again, they had very high retention, people use the thing almost every single day, and therefore there was a lot, like if you go add another feature, if you add a TiVo-like feature that’s really cool, you know that you’re going to get the distribution because you already have these daily interactions with customers…

…[00:43:33] Patrick: In addition to this awesome idea of the operating system, another thing obviously that you spend a lot of time thinking about is FinTech. And I’d love to turn the conversation there for a while. It’s where you do a lot of your investing, it’s where you founded businesses before. And maybe the right way to introduce our conversation on FinTech is with this funny joke you’ve got about the pig. Maybe you could give us the pig joke as an entry point into the world of FinTech.

[00:43:54] Alex: I love this one and I apologize for people that listen to this and they’ve heard me say it 10 times before. But basically the joke is there’re two pigs in a barn. One of them says to the other, he’s like, “This place is awesome. Everything is free, it’s heated, there’s free food, the water tastes great.” And the caption underneath says, “If you’re not the customer, you’re the product being sold,” which of course means that the pigs are being turned into bacon and they don’t even know it yet, but they’re living a life of luxury until they do. Basically, those were the two business models. Either you sell a product to a customer, and this is either a transactional business model or a subscription business model. So Peloton sells you a bike and they sell you a subscription, and you’re the customer. Or it’s the Facebook business model, which is you, the user of Facebook, are not the customer, you’re the product being sold. Hopefully the product that Facebook is offering is good, that’s why you show up. But the actual customer is the advertiser. And that’s where Facebook, where Google, draws in most of their revenue. So when we would meet a company, we’d say, “Well, which one are you? Are you an advertising company or are you a transaction company?” Because it was like bucket one, bucket two, there was no bucket three.

Now there is a bucket three and bucket three is effectively what I call embedded financial services. So now if you were to extend that joke, it turns out it’s like, “Oh no, the barn is free, we just have to use the checking account provided by the barn owner and hopefully use this debit card that has more than exempt interchange on it.” Et cetera, et cetera. I joined this firm in 2015 to spin up and run our FinTech practice. But now almost every company in some way, shape, or form is a FinTech company. Not because it is a pure play FinTech company, but because if you’re building the next Facebook, if you’re Mark Zuckerberg of 2021, you now see that there are three routes to revenue. You charge transaction fees or a subscription revenue to your customers, and you may sell advertising, and you might decide, “Hey, it’s very, very lucrative for me to offer financial products and services to my customers because they already trust me, they know who I am. And if I’m able to be the dominant checking account. If I’m their checking account,” which I know sound strange, you would think you get your checking account with Bank of America or First Republic or Chase or something like that. But if you have your checking account with somebody, they have so much control and ability, going back to the old refrain, to upselling products to sell you other things. So as an example, it might sound insane, but Uber and Lyft should offer checking accounts to all of their drivers for a few reasons.

One is it turns out both of those businesses are historically supply side constraints. So everybody wants to take an Uber from the airport at 5:00 PM, especially with all the stimulus checks and everything else that’s hitting, not as many people want to drive for Uber. They drive for Uber for two weeks then they quit. What would be very smart is we’re going to give them a checking account, and that has two benefits. One is when they’re running low on money, I can send them a message saying, “Hey, you’re low on money. Why don’t you drive for Uber today? We’ll pay twice as much.” It’s got this daily active use product. They don’t have to re-market to that customer because they already own the customer. And number two, the way that the whole, you’ve already listened to my visa thing because you interviewed for that, but for people that don’t know, the way that the credit card and debit card infrastructure works is that there’s typically something in the neighborhood of a 2% fee per card swipe, which is assessed to the merchant, which can be retained by what’s called the issuing bank or the issuer of the card.

So if Lyft gives every driver a card and a free checking account, and the free checking account is a lot more appealing than the one that Bank of America gives you that has minimum fees and all this crap. They give you this free thing, they own you as a customer, 2% of all the spending that you get, they get to keep, which is very compelling, and they get to win you back as a driver when you might be low on cash. And they’ve got that real retention at work. And again, you wouldn’t have thought of that as a use case 10 or 15 or 20 years ago. But now what we see is that even outside of what I would call the FinTech team, a huge number of enterprise software companies, and a huge number of consumer software companies, are trying to monetize with FinTech as a third leg of that stool.

3. Data as a factor of production – Lilian Li

On April 9, 2020, the CCP Central Committee issued the “Opinions on Building a More Complete System and Mechanism for Market-oriented Allocation of Factors” (henceforth “Opinions”), where they introduced data as a factor of production alongside land, labour, capital, and technology.

The “Opinions” put forward the direction that China is creating a market-based allocation mechanism to realise the value generated by data inflow. The Chinese governance apparatus’ concern with data is clear — as the digital economy takes a larger share of a country’s GDP (in 2020 the digital economy accounted for 38.6% of the Chinese GDP), data governance is governance. China’s development state has always taken the stance that markets, societies and economies thrive under defined rules2. The role of the Chinese government is to assist in the creation of effective markets (as expansive as that word entails).

By creating the concept that data is a factor of production, China Inc. has formalised and legislated the stance that data itself is valuable rather than the algorithms it helps train. The Chinese leadership has subtly but deftly implied that data’s value to a nation is underpriced and currently subjected to market distortions. A country can unlock credible growth and competitive advantage by harnessing a resource such as data or land through a market-based allocation mechanism. Under this framework, today’s tech giants look similar to the Standard Oil of yesteryear, whose value came from its monopoly of the underlying natural resource. (For readers about to predict that China’s going to nationalise big tech, please read on).

4. Frontier Giants: Companies to Watch in Emerging Markets – Mario Gabriele

Tambua Health (Kenya)

I find that exciting emerging market investments have three key traits: they’re highly original, capable of securing a monopoly, and leapfrog existing technology due to restrained starting conditions.

Tambua Health, an African deep-tech company has all three.

The company is led by 21-year old Lewis Wanyeki, an MIT dropout from the spectral imaging lab. He could be considered one of the most intensely technical founders on the continent. He and the Tambua team have created a low-cost, portable ultrasound machine that leverages advances in neural networks for acoustic detection, sensor arrays, and software. Those innovations allow doctors to conduct ultrasound exams with instant image analysis on a rugged android tablet screen. The product can be used by hospital systems to build their own low-cost medical imaging practice, or by developers — Tambua has a number of APIs that can be accessed by others.

The company’s interdisciplinary approach across hardware, software, cloud, and sensors effectively replaces expensive ultrasound devices with a miniaturized machine costing less than $1,000. That’s an order of magnitude lower than existing devices, putting it within reach of many African healthcare facilities that have traditionally been priced out. This has profound implications, allowing for the rapid detection of many medical ailments that rely upon instant ultrasound for diagnosis, including respiratory illnesses.

What I find most exceptional is that the company created its sophisticated hardware and software product with less than 15 people and $3 million in financing. Tambua is quickly becoming a destination for great African deep-tech talent.

By being forced to miniaturize, Tambua has re-invented one of the most fundamental healthcare services: medical imaging. That would be a feat for any deep-tech company, let alone an African one. With that achieved, Tambua has the chance to become a global giant that the likes of Siemens and other incumbents couldn’t see coming from the continent. 

— Sumon Sadhu, Global Angel Investor

Ejara (Cameroon)

At FirstCheck Africa, we invest in the overlooked potential of Africa’s women in technology. We back female founders early, at the pre-seed stage, so I’m always on the lookout for startups with excellent leadership. We only started this journey in January 2021, and we’ve made a few exciting investments. Still, if there’s one that’s gotten away so far, it’s Ejara, a decentralized investment and savings platform. The startup is led by Nelly Chatue Diop, a high-octane female founder from Douala, Cameroon.

Nelly is one of the pioneers of Africa’s crypto industry. She and her team at Ejara are exceptional on multiple fronts. They’re tackling a complex, meaningful problem with crypto and scaling a mission-driven startup to address the financial needs of Francophone Africa’s 430 million people. Many are locked out of the region’s sub-optimal, inefficient, expensive, and politically complex financial system. Ejara wants to give underserved users — including women, urban gig-workers, community savings groups, smallholder farmers, and rural populations ​​— the ability to invest and save in cryptocurrencies, stablecoins, and tokenized assets.

There’s so much to admire about Ejara’s approach, and what the team has achieved already. They’ve built a simple mobile interface on a proprietary platform, with a few clever design decisions to help drive inclusion. By using crypto rails, Ejara can offer lower fees, faster transaction processing, and higher yields. Nelly is particularly keen on reaching female users. Already, about 40% of Ejara’s user base are women (roughly 3x crypto averages), though she is targeting 50%. Ejara created the first non-custodial wallet in Africa, meaning their users can exercise complete control over their assets. This decision is pivotal on a continent where men hold 80% or more of financial assets and where gender social norms can limit women’s financial freedoms. Ejara’s wallet is simple, operates in local languages, and works on basic smartphones in low-data environments. The startup’s platforms provide financial education on investment and savings, risk, and responsible crypto trading. Ejara is growing its user base at 25% month on month and is already live in eight countries one year after launch.

I first came across Nelly early this year when she joined one of the regular Clubhouse rooms that my partner and I started for Africa’s female founders and women in tech. She spoke about her frustration trying to raise VC for her startup, and without revealing much about the business, talked about how she’d put the entire process on pause to bootstrap instead. Our fund planned to stay in touch with her, but somehow, regrettably, never did. When Nelly and I reconnected not long ago, she had raised one of Sub-Saharan Africa’s largest female-led seed rounds to date and in record time. Her serendipitous journey kicked off with an interview on the Blockworks podcast, Empire, with Jason Yanowitz, which took her inspiring story of building in crypto from Francophone West Africa to the world.

Ejara announced its $2 million seed round a few weeks ago, with a press photo that made me incredibly proud. Here were six female technology leaders of one of the most exciting crypto startups in Africa who looked like me and many of the women I know. They were dressed boldly in bright, traditional African prints, each beautifully poised, with her head held high. Nelly tells me that every single decision in the photo was deliberate. Her team at Ejara is gender-balanced, but it was important to show the world what funds like FirstCheck Africa know already: African women are building too.

African female founders, like Nelly, are unicorns in the truest sense of the word. In 2021 so far, a record fundraising year for the continent, below 1% of the $3 billion of venture capital deployed has gone to startups led by a woman — less than $30 million. Just six startups led by an African woman have raised a seed round of more than $1 million this year. Nelly and her African female founder peers are trailblazers.

Stories like Nelly’s are why FirstCheck Africa exists. In a recent conversation, she and I spoke animatedly about the dream we share for female founders in Africa: record rounds in record time to build the startups, like Ejara, that will change the face of a continent.

— Eloho Omame, Co-Founder & General Partner of FirstCheck Africa

5. Mark Leonard (Constellation Software) Operating Manual – Colin Keeley

Mark Leonard is the billionaire founder of Constellation Software (CSI). CSI is a Canadian software conglomerate that acquires and holds vertical market software (VMS) companies.

They are a perpetual owner (they never sell) and own 500+ VMS companies at this point. They have only sold one business because they were offered a really high price in the early days. Mark regrets selling to this day. 

These companies span over 75 verticals from library software to marina management…

…Mark Leonard, started Constellation with $25 million Canadian dollars in 1995 (equivalent to $32.85 million in 2021 US dollars) raised from investors. 

The company went public on the Toronto Stock Exchange in 2006 to give some of it’s VC investors liquidity. The bulk of their investors were from a pension fund that didn’t need an exit. The VC investors sold their shares at a roughly $70 million valuation at the time, but no additional money was raised. Constellation’s market cap today is around $31 billion as of June 2021. CSI has reliably compounded at 30+% a year…

…When he was working in venture capital in Canada, it wasn’t going that well. He was particularly irritated by VC’s unflinching focus on companies operating in large addressable markets.

He saw plenty of great businesses operating in niche spaces that were great business, but may not have had the upside potential to be huge venture outcomes. 

VMS businesses were high gross margin and sticky, and selling mission-critical software that was instrumental in a buyer’s operations.

He raised $25 million Canadian from his old venture colleagues and mostly from Ontario Municipal Employees Retirement System (OMERS), a pension fund where a friend from business school worked, with the goal of becoming the best buyer of VMS businesses in the world…

…Horizontal market software are things like word processors and spreadsheet programs that can be used in a wide array of industries. 

Vertical market software is developed for and customized to industry-specific needs. These are businesses focused on a niche markets like spa & fitness or dealerships that have specific needs, but aren’t attractive to the larger players. 

Their favorite businesses are bought directly from Founders. They naturally have the best cultures…

…Decentralized Human Scale. Mark has a great description of this:

“We seek out vertical market software businesses where motivated small teams composed of good people, can produce superior results in tiny markets. What we offer our BU Managers is autonomy, an environment that supports them in mastering vertical market software management skills, and the chance to build an enduring and competent team in a ‘human-scale’ business. While we have developed some techniques and best practices for fostering organic growth, I think our most powerful tool is using humanscale BU’s. When a VMS business is small, its manager usually has five or six functional managers to work with: Marketing & Sales, Research & Development (“R&D”), Professional Services, Maintenance & Support and General & Administration. Each of those functional managers starts off heading a single working group. If the business leader is smart, energetic and has integrity, these tend to be halcyon days. All the employees know each other, and if a team member isn’t trusted and pulling his weight, he tends to get weeded-out. If employees are talented, they can be quirky, as long as they are working for the greater good of the business. Priorities are clear, systems haven’t had time to metastasise, rules are few, trust and communication are high, and the focus tends to be on how to increase the size of the pie, not how it gets divided. That’s how I remember my favourite venture investments when I was a venture capitalist, and it’s how I remember many of the early CSI acquisitions.

That structure usually suffices until there are perhaps 30 to 40 people in the business. At that stage, some of the teams – perhaps R&D if the product is rapidly evolving or has high needs for interfaces or compliance changes – must grow beyond the five to nine optimal team size. If the head of R&D in this example is brilliant and is willing to work hours that are unsustainable for most of us, he may be able to parse out tasks for each of the team members despite the increased team size. He may be able to judge the capabilities and cater to the development needs of each of his direct reports. He may be able to recruit excellent new employees, and he may be able to manage the demands and trade-offs required to coordinate with the other functional managers. The more likely outcome, is that the R&D manager isn’t a brilliant workaholic and cannot cope as the team size exceeds double digits. Instead, he’ll break his team up into multiple teams. A new level of middle managers will be born, with all the potential for overhead creation, politics, and bureaucracy that comes with another tier of middle managers.

The larger a business gets, the more difficult it becomes to manage and the more policies, procedures, systems, rules and regulations are generated to handle the growing complexity. Talented people get frustrated, innovation suffers, and the focus shifts from customers and markets to internal communication, cost control, and rule enforcement. The quirky but talented rarely survive in this environment. A huge body of academic research confirms that complexity and co-ordination effort increase at a much faster rate than headcount in a growing organisation. If the BU is small enough, and has a competent BU manager who has several years experience in the vertical, and good functional managers, then he/she will be able to cope with complexity for a while, making the right calls to optimise organic growth as the business grows. The challenge of running a BU of this size is human-scaled.

As a BU becomes larger (by our standards, that’s greater than 100 employees), I worry that even an extraordinarily brilliant and energetic manager, who has been in the vertical and the BU for a very long time, and is surrounded by a strong team that he/she has selected and trained over many years, is going to struggle to steer the business to above industry average organic growth. No one wants to admit that they’ve hit their limit. Some BU Managers lack the humility, some lack the courage, and most lack the time for reflection, to notice that their task is getting too large, and the sacrifices are getting too great. This is the point at which our Operating Group Managers or Portfolio Managers can provide coaching. If a large BU is not generating the organic growth that we think it should, the BU manager needs to be asked why employees and customers wouldn’t be better served by splitting the BU into smaller units. Our favourite outcome in this sort of situation is that the original BU Manager runs a large piece of the original BU and spins off a new BU run by one of his/her proteges. Ideally, he/she has been grooming a promising functional manager who’ll be enthusiastic about running and growing a tightly focused, customer-centric BU.

This dividing of larger BU’s into smaller units is rare, but not unknown, in other large companies. One of the HPC’s that we studied was Illinois Tool Works Inc. (“ITW”). It has hundreds of BU’s. We began following the company from afar in 2005. The most relevant period in ITW’s history for CSI was the tenure of John Nichols. Nichols began consulting to ITW in 1979, and appears to have been the primary author of its decentralisation strategy. He was CEO as the company went from $369 million in revenues in 1981 to $4.2 billion in 1995 ($6.7 billion in today’s dollars). Prior to Nichols’s tenure, ITW had acquired only 3 businesses. During his tenure, ITW aggressively acquired and often split the larger acquisitions into smaller BU’s. ITW had 365 separate operating units by 1996 when Nichols retired. I’m sorry I didn’t reach out to some of the ITW employees and ex-employees until 2015. When I did talk with one of the senior managers, he said (I’m paraphrasing) “Something wonderful happens when you spin off a new business unit.” … “With a clean sheet of paper, the leader only takes those he needs. They set up in an open office with good communication and no overheads. They cover for each other. They leave all the bureaucracy and the crap behind”. I did record a couple of verbatim quotes from that conversation: “Don’t share sales, R&D, HR, etc. because the accountants never get the allocations right and the business units always treat the allocated costs as outside their control”, and “When you get big you lose entrepreneurship”.

Volaris and TSS regularly divide their larger BU’s into smaller BU’s that focus on sub-segments of their markets. Volaris feels strongly that splitting larger BU’s into smaller ones allows more targeted products and services that differentiate their offerings from their more horizontal competitors. Harris has very successfully acquired multiple BU’s in the same industry and run them independently rather than combining them into one BU. Both tactics forego obvious and easily obtainable benefits from economies of scale. We think we get something valuable when we constrain BU headcount, but it isn’t a panacea for all of our organic growth challenges.”

6. A Conversation with David Swensen – Robert E. Rubin and David Swensen

RUBIN: But then I think the question, David, is this—and this is what I think myself; I’m very focused on it. I agree with what you just said. But then do you have—does that enter—since you’re not a market timer, but a long-term investor, does that enter into your asset allocation at Yale? Should it enter into my asset allocation? I’m a long-term investor. Or should you just take the view these things are going to happen, they’re pretty much unpredictable in terms of timing and duration and magnitude, and so we accept them and figure that if it goes down, it’ll go back up? Which do you do?

SWENSEN: So we’re absolutely not market timers, but I would talk about market timing as kind of a short-term swing in the portfolio to take advantage of some knowledge that you have or some belief that you have about where markets are headed in the short term. But I think we have to take strategic positions in the portfolio. One of the most important metrics that we look at is the percentage of the portfolio that’s in what we call uncorrelated assets. And that’s a combination of absolute return, cash, and short-term bonds. And those are the assets that would protect the endowment in the—in the event of a market crisis.

Prior to the downturn in 2008, we were probably about 30 percent in uncorrelated assets. By the time 2009-2010 rolled around, we were probably around 15 percent. And the reason for the dramatic decline is these are the sources of liquidity in times of stress. And so today we’ve rebuilt that. It actually works out quite nicely from a cyclical perspective, if you’ve got a rebound afterwards. Instead of being 70 percent in risk assets, you’re 85 percent in risk assets. But over the years subsequent to the crisis, we’ve rebuilt our uncorrelated assets position to an excess of 30 percent. And we’re currently targeting about 32 ½ percent, which is somewhat above the long-term goal…

…RUBIN: What about the notion, David, that over time—a notion that I think is getting a lot of currency now, actually, that over time AI, machine learning, and all these kinds of things are going to replace the David Swensens of the world. And they will be—and I know all of us reject that. And we say, no, our judgement is what we want to rely on, but they have done an awful lot of back-testing on one thing or another, and they have a sort of an interesting case to make. Do you have any view of that?

SWENSEN: So, Bob, usually I’m not glad that I’m 63 years old—(laughter)—and nearer to the end of my career than the beginning of my career. But that question actually makes me glad of those two facts. (Laughter.) You know, I have never been a big fan of quantitative approaches to investment. And the fundamental reason is that I can’t understand what’s in the black box. And if I don’t know what’s in the black box, and there’s underperformance, I don’t know if the black box is broken or if it’s out of favor. And if it’s broken, you want to stop. And if it’s out of favor, you want to increase your exposure.

And so I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position. And then if it goes against them, I can have another conversation and try and figure out whether the thesis was wrong and we should exit, or whether the thesis is intact and we should increase the position. And I don’t understand any other way to invest…

…RUBIN: They’ve survived a difficult environment for that activity, yeah. (Laughs.) This may seem like an odd question, but I was thinking about it myself the other day. If you look back, say, 10 or 15 years ago, or 20—whatever you want to do; I don’t care—and you think about how you thought about investment then, and you think about how you think about investment now, is it any different conceptually or practically?

SWENSEN: You know, I think if you asked me that question 25 years ago, I would have had a reasonably long list of things that I thought were important in an investment management firm. Today, I would say that number one is the character and quality of the investment principals. Number two is the character and quality of the investment principals. Number three—(laughter)—you get the idea. And you have to go further down the list before you get to some of the nuts and bolts. And I’m absolutely convinced that there is nothing more important than being partners with great people.

RUBIN: I agree with that.

SWENSEN: In the investment world, if people are the way that you’re taught and—introductory econ—if they’re maximizers, they’re going to raise massive funds, charge high fees, and make a lot of money for themselves. I’m looking for somebody that’s got a screw loose and they define winning not by being as rich as they can be individually, but by producing great investment returns. And you do that—you can still make a great living, but instead of managing $20 billion, you probably manage $2 billion. And the other day we met with a manager, and they said their goal was to be in the IRR hall of fame. And I love that, because if they produce great returns, that’s going to benefit the university. But if they gather huge amounts of assets and charge high fees, that’s going to benefit them and not Yale…

…RUBIN: Well, we’ll find something next year. But, no, but this is my final question. But it was sort of what I was getting at. I’m not equipped to do what you can do, which is make these bottom-up judgments. But it does strike me we live in a very complicated world.

And so my final question will be this—and maybe this is—I’m not going to phrase this exactly the right way, but it seems to me, but maybe I’m wrong, that when I think as an investor, which I do, about the world that we’re in, it seems to me to have a lot more uncertainty and complexity in many kinds of ways—geopolitically, economically, populism, all this sort of thing—than it did 15 or 20 years ago.

Now, my friend Larry Summers tells me that you always think that the present moment is more dangerous than other moments, and therefore you overstate that. And maybe Larry’s right, but maybe he’s wrong. So I’ll ask you what you think; not a choice, by the way, he necessarily acknowledges. (Laughter.) But I’ll ask you what you think. (Laughs.)

SWENSEN: So what Larry says resonates with me, because one of the things that I like to say is that we should never underestimate the resilience of this economy. But that—that said, it does feel as if this is a particularly fraught time.

7. Internal vs. External Benchmarks – Morgan Housel

There are two ways to measure how you’re doing: Against yourself and against others. Internal vs. external benchmarks.

There’s a time and a place for both, but I’ve come to appreciate how much happier you can be if you appreciate when internal benchmarks should get the spotlight.

If Jeff Bezos started a new company that got to $100 million in revenue and sold for a billion dollars, it would mean … nothing to him, both financially and on his list of accomplishments.

But if I did it, it would be … unbelievable. Everything would change.

So accomplishments have a cost basis. What you gain or lose is always relative to where you began. And since we all begin at different spots, there’s a range in how people feel when experiencing the same thing…

…External benchmarks are deceiving because accomplishments are advertised while the ugly, hard, and painful parts of life are often hidden from view. Almost everything looks better from the outside. When you’re keenly aware of your own struggles but blind to others’, it’s easy to assume you’re missing some skill or secret that others have. Few things are as awful as chasing something you eventually realize you never actually wanted…

…The most important point may be this: Internal benchmarks are only possible when you have some degree of independence.

The only way to consistently do what you want, when you want, with whom you want, for as long as you want, is to detach from other peoples’ benchmarks and judge everything simply by whether you’re happy and fulfilled, which varies person to person.

I recently had dinner with a financial advisor who has a client that gets angry when hearing about portfolio returns or benchmarks. None of that matters to the client; All he cares about is whether he has enough money to keep traveling with his wife. That’s his sole benchmark.

“Everyone else can stress out about outperforming each other,” he says. “I just like Europe.”

Maybe he’s got it all figured out.

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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, Apple, Facebook, and Square. 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 24 October 2021:

1. The Triumph and Terror of Wang Huning – N.S. Lyons

Wang Huning much prefers the shadows to the limelight. An insomniac and workaholic, former friends and colleagues describe the bespectacled, soft-spoken political theorist as introverted and obsessively discreet. It took former Chinese leader Jiang Zemin’s repeated entreaties to convince the brilliant then-young academic—who spoke wistfully of following the traditional path of a Confucian scholar, aloof from politics—to give up academia in the early 1990s and join the Chinese Communist Party regime instead. When he finally did so, Wang cut off nearly all contact with his former connections, stopped publishing and speaking publicly, and implemented a strict policy of never speaking to foreigners at all. Behind this veil of carefully cultivated opacity, it’s unsurprising that so few people in the West know of Wang, let alone know him personally.

Yet Wang Huning is arguably the single most influential “public intellectual” alive today.

A member of the CCP’s seven-man Politburo Standing Committee, he is China’s top ideological theorist, quietly credited as being the “ideas man” behind each of Xi’s signature political concepts, including the “China Dream,” the anti-corruption campaign, the Belt and Road Initiative, a more assertive foreign policy, and even “Xi Jinping Thought.” Scrutinize any photograph of Xi on an important trip or at a key meeting and one is likely to spot Wang there in the background, never far from the leader’s side.

Wang has thus earned comparisons to famous figures of Chinese history like Zhuge Liang and Han Fei (historians dub the latter “China’s Machiavelli”) who similarly served behind the throne as powerful strategic advisers and consiglieres—a position referred to in Chinese literature as dishi: “Emperor’s Teacher.” Such a figure is just as readily recognizable in the West as an éminence grise (“grey eminence”), in the tradition of Tremblay, Talleyrand, Metternich, Kissinger, or Vladimir Putin adviser Vladislav Surkov.

But what is singularly remarkable about Wang is that he’s managed to serve in this role of court philosopher to not just one, but all three of China’s previous top leaders, including as the pen behind Jiang Zemin’s signature “Three Represents” policy and Hu Jintao’s “Harmonious Society.”

In the brutally cutthroat world of CCP factional politics, this is an unprecedented feat. Wang was recruited into the party by Jiang’s “Shanghai Gang,” a rival faction that Xi worked to ruthlessly purge after coming to power in 2012; many prominent members, like former security chief Zhou Yongkang and former vice security minister Sun Lijun, have ended up in prison. Meanwhile, Hu Jintao’s Communist Youth League Faction has also been heavily marginalized as Xi’s faction has consolidated control. Yet Wang Huning remains. More than any other, it is this fact that reveals the depth of his impeccable political cunning.

And the fingerprints of China’s Grey Eminence on the Common Prosperity campaign are unmistakable. While it’s hard to be certain what Wang really believes today inside his black box, he was once an immensely prolific author, publishing nearly 20 books along with numerous essays. And the obvious continuity between the thought in those works and what’s happening in China today says something fascinating about how Beijing has come to perceive the world through the eyes of Wang Huning…

…Also in 1988, Wang—having risen with unprecedented speed to become Fudan’s youngest full professor at age 30—won a coveted scholarship (facilitated by the American Political Science Association) to spend six months in the United States as a visiting scholar. Profoundly curious about America, Wang took full advantage, wandering about the country like a sort of latter-day Chinese Alexis de Tocqueville, visiting more than 30 cities and nearly 20 universities.

What he found deeply disturbed him, permanently shifting his view of the West and the consequences of its ideas.

Wang recorded his observations in a memoir that would become his most famous work: the 1991 book America Against America. In it, he marvels at homeless encampments in the streets of Washington DC, out-of-control drug crime in poor black neighborhoods in New York and San Francisco, and corporations that seemed to have fused themselves to and taken over responsibilities of government. Eventually, he concludes that America faces an “unstoppable undercurrent of crisis” produced by its societal contradictions, including between rich and poor, white and black, democratic and oligarchic power, egalitarianism and class privilege, individual rights and collective responsibilities, cultural traditions and the solvent of liquid modernity.

But while Americans can, he says, perceive that they are faced with “intricate social and cultural problems,” they “tend to think of them as scientific and technological problems” to be solved separately. This gets them nowhere, he argues, because their problems are in fact all inextricably interlinked and have the same root cause: a radical, nihilistic individualism at the heart of modern American liberalism.

“The real cell of society in the United States is the individual,” he finds. This is so because the cell most foundational (per Aristotle) to society, “the family, has disintegrated.” Meanwhile, in the American system, “everything has a dual nature, and the glamour of high commodification abounds. Human flesh, sex, knowledge, politics, power, and law can all become the target of commodification.” This “commodification, in many ways, corrupts society and leads to a number of serious social problems.” In the end, “the American economic system has created human loneliness” as its foremost product, along with spectacular inequality. As a result, “nihilism has become the American way, which is a fatal shock to cultural development and the American spirit.”

Moreover, he says that the “American spirit is facing serious challenges” from new ideational competitors. Reflecting on the universities he visited and quoting approvingly from Allan Bloom’s The Closing of the American Mind, he notes a growing tension between Enlightenment liberal rationalism and a “younger generation [that] is ignorant of traditional Western values” and actively rejects its cultural inheritance. “If the value system collapses,” he wonders, “how can the social system be sustained?”

Ultimately, he argues, when faced with critical social issues like drug addiction, America’s atomized, deracinated, and dispirited society has found itself with “an insurmountable problem” because it no longer has any coherent conceptual grounds from which to mount any resistance.

Once idealistic about America, at the start of 1989 the young Wang returned to China and, promoted to Dean of Fudan’s International Politics Department, became a leading opponent of liberalization.

He began to argue that China had to resist global liberal influence and become a culturally unified and self-confident nation governed by a strong, centralized party-state. He would develop these ideas into what has become known as China’s “Neo-Authoritarian” movement—though Wang never used the term, identifying himself with China’s “Neo-Conservatives.” This reflected his desire to blend Marxist socialism with traditional Chinese Confucian values and Legalist political thought, maximalist Western ideas of state sovereignty and power, and nationalism in order to synthesize a new basis for long-term stability and growth immune to Western liberalism.

2. It Sounds Crazy – Collaborative Fund

So what happens when the world lurches but opinions lag?

You get situations where what’s true sounds crazy because people’s beliefs haven’t caught up with reality…

…The S&P 500 gained 27% in 2009 – a fantastic return. Yet when asked in early 2010, 66% of investors thought it fell that year, according to a survey by Franklin Templeton. The idea that the market was surging sounded crazy because “the market crashed” was such a powerful narrative after 2008. People just clung to it…

…China’s demographics are so poor it’s going to face labor shortages in the coming years like few other countries have ever dealt with. Its total population is already falling. That sounds crazy because it’s the most populated country on earth and synonymous with rapid growth and endless pools of cheap labor. But its working-age population will decline by more than 20% over the next 30 years.

3. What If Central Banks Issued Digital Currency? – Ajay S. Mookerjee

The impetus for more radical change is coming from China, whose central bank has been running an experiment with a form of cash called Central Bank Digital Currency (CBDC), which it envisions as the cash of the future, ultimately eliminating the need for paper money.

In a CBDC world, the digital code for each virtual currency unit will be held in a digital wallet and transferred seamlessly by the wallet-holder to other people’s digital wallets, very much as we see with today’s fintech and Big Tech digital wallets (think Venmo and ApplePay) and the wallets offered by the traditional banks (such as Zelle, a cooperative of six-banks including Chase, Bank of America, and Wells Fargo).  In China, these services will be licensed to four state banks and three telecommunications companies, who will act as wallet distributors rather than cash depositories. Users will scan barcodes on their phones to make in-store payments or send money to other mobile wallets.  The People’s Bank of China (PBOC) will periodically receive copies of customer transactions, stored on a mixed central and blockchain database.

The Chinese pilot began with the distribution of 100 million digital Yuan through lotteries in nine cities, including Shenzhen, Suzhou, Chengdu, Xiong’an, and the 2022 Winter Olympics Office Area in Beijing.  By the end of September 2021, the digital currency pilot had recorded around 500 million transactions with 140 million users. E-Yuan will be fully rolled out during the Winter Olympics in February 2022, and if bilateral agreements with foreign monetary authorities are reached, tourists and business travelers in China will be able to obtain a Chinese e-wallet on their own phones…

…But China is not the only the only country interested in CBDCs:  Sweden, Singapore, and South Korea are among 13 other countries testing pilots. The US is likely to follow suit; the Federal Reserve Bank of Boston, in collaboration with MIT, is currently designing a CBDC prototype.  Possibly the US is worried about being left behind and the potential threat from China’s digital Yuan and its potential emergence as the global reserve currency supplanting the US dollar.

Ultimately, the technology underlying CBDCs will be Blockchain, the technology that enables Bitcoin. It consists of time-stamped record blocks with encrypted transaction activity, continuously audited by all verified network participants. Blockchain decentralizes the storage and trustworthy transmission of money. Although Blockchain remains slow and cannot yet support large-scale applications, the technology is expected to mature over the next three to five years and is likely to overcome its limitations.  At a certain point, therefore, the existing digital infrastructure will be replaced, which will eliminate the dependence of new entrants on the resources and capabilities controlled by incumbent financial institutions…

…Paper cash is essentially a bearer IOU issued by a central bank, for the bearer to spend (or put under the mattress) at any given time. Today’s digital currencies are predicated on the convertibility of the digital codes issued by commercial banks into paper cash, which is dependent in turn on the commercial bank having paper money on hand to use for the conversion.  It’s that link to paper cash that gives the digital currency issued by commercial banks value and makes it safe to use.

But CBDCs are direct liabilities of the central bank, just as paper cash is, which makes CBDCs a safer form of digital money than commercial bank- issued digital money. The situation is equivalent to a scenario in which every citizen has, in essence, a checking account with the Central Bank. Their pay and investment payouts arrive in their central bank accounts, and they can keep cash in there, on which the central bank can, if it chooses, pay interest. Unlike a traditional deposit or checking account at a commercial bank, however, the depositor carries no risk, as a central bank is a sovereign credit, backed, at the end of the day, by the government’s ability to tax, not on a cushion of reserves and equity capital.  There are no “runs” on the central bank, which eliminates the necessity of protecting depositors from bank runs through insurance plans. And at the level of the overall banking system, all liquidity (and credit) risk are spread across the entire population, not just each individual bank’s depositor base.

4. Skill and Luck – Michael Batnick

Over the last 5 years, Apple is up 430%, more than 3x the return of the S&P 500. If you held Apple over that time, if you didn’t hold a lot of cash, and if you didn’t jump in and out of the market, you probably beat the market by a decent amount.*

How much of this was skill versus luck? I was thinking about this because a reader asked:

Curious to hear your take on beating the S&P index as an individual. The past few years I’ve done pretty well with picking individual stocks, beating the S&P 500 by a considerable amount in my Roth IRA. I’m not sure how much of this is skill, versus me being lucky. Any thoughts on this area? How long of a track record of beating the S&P do you think one would need to have to say you’re good at picking stocks, versus just being lucky? 5 years? 10 years?

Before answering this question, we should talk about the role of luck in stock picking. Michael Mauboussin, the author of the best book written on this topic, put it well. He says:

“There’s a quick and easy way to test whether an activity involves skill. Ask whether you can lose on purpose.”

5. The Death and Birth of Technological Revolutions – Ben Thompson

What was especially remarkable about Carlota Perez’s Technological Revolutions and Financial Capital was its timing: 2002 was the middle of the cold winter that followed the Dotcom Bubble, and here was Perez arguing that the IT revolution and the Internet were not in fact dead ideas, but in the middle of a natural transition to a new Golden Age.

Perez’s thesis was based on over 200 years of history and the patterns she identified in four previous technological revolutions:

• The Industrial Revolution began in Great Britain in 1771, with the opening of Arkwright’s mill in Cromford
• The Age of Steam and Railways began in the United Kingdom in 1829, with the test of the ‘Rocket’ steam engine for the Liverpool-Manchester railway
• The Age of Steel, Electricity and Heavy Engineering began in the United States in 1875, with the opening of the Carnegie Bessemer steel plant in Pittsburgh, Pennsylvania
• The Age of Oil, the Automobile, and Mass Production began in the United States in 1908, with the production of the first Ford Model-T in Detroit, Michigan
• The Age of Information and Telecommunications began in the United States in 1971, with the announcement of the Intel microprocessor in Santa Clara, California

Perez’s argument was that the four technological revolutions that proceeded the Age of Information and Telecommunications followed a similar cycle:

6. Sam Bankman-Fried – Creating a Perfect Market – Patrick O’Shaughnessy and Sam Bankman-Fried

[00:37:33] Patrick: So you came late to this ecosystem, and I don’t mean the word mercenary in a negative way at all, but in a world that was previously filled with so many pure missionaries, like zealots for crypto as the solution to everything, which I wouldn’t characterize you as that. Because you had this late, relatively speaking late, and pragmatic view on this entire space. What has you so excited? Why have you devoted your time and attention, which we talked about at the beginning, you’re allocating meaningfully for some larger goal. What is it about this ecosystem that has attracted you and so many other talented people, and do you anticipate staying in it a long time?

[00:38:11] Sam: There are a bunch of things leading to that. First of all, just huge, huge demand in this space and not enough supply. And I need that on many levels. I’ve met that historically in terms of buying versus selling crypto currencies. It’s still today the case that one thing you can look at for instance, is, I don’t know, on FTX, which is the crypto exchange I started, we have a [bought] borrow lending book, where there’s market forces determining the interest rates of the various assets. And right now, if you want to borrow a Bitcoin, which you can use to short sell, you’re paying a little bit less than a percent a year in interest. Then there’s $700 million of open interest there. If you want to borrow a dollar, which you could use to get long crypto, you’re paying 10% a year, and there is $2 billion of open interest.

So this is still the case today that there’s more demand to buy cryptocurrency than there is supply of dollars in the space to buy cryptocurrency. But I also mean this in terms of infrastructure, there’s huge demands being placed on all the infrastructure in crypto and not enough supply of great infrastructure. And that ratios off by a sort of a comical amount, especially rewind a few years, exchanges were crashing daily because they couldn’t handle the load, risk engines were incinerating a million dollars a day of customer funds because they couldn’t margin call on time. It was a total fucking mess because it was massive, massive interest, demand, excitement, capital volume in the crypto industry. And it just hadn’t had time to mature enough for the infrastructure to catch up with that. So one part of this is just like business opportunity. It seems like there’s a lot of demand for a new business here and someone’s got to do it.

And it didn’t seem like the existing players were going to get their act together. Another piece of this is, you pointed this out, when I first tried to do a crypto trade, the hardest part of the crypto trade was the wire transfer. And I think that’s super instructive for me. I think what it sort of made me think was, wow, the existing financial infrastructure we have has some issues.

[00:40:10] Patrick: Sucks.

[00:40:12] Sam: Somehow, despite the fact that this space seems like a total shit show, it still is actually easier to use than a bank. And there’s obvious ways to make this space a lot more efficient. And so it just sort of felt like, yeah, boy, payments must be real bad. And when you sort of start to dig into it, it’s like, yeah, they are. We often don’t notice it, but we’re bleeding 3% of our GDP each year to payments. Every time you go to a supermarket and buy a banana, you’re paying 3% to a credit card company to cover up the fact payments don’t really work. You’re trying to wire money to Nigeria, you’re losing tens of percents. And I think that there’s just substantial opportunities to start fresh, the natively digital and natively online approach. The nice thing about decentralized lectures is that it allows international cooperation, it allows cooperation between companies on sending value between each other. There’s a lot of economic opportunity in crypto rails. And when you look at the potential of something like DeFi, here’s one cool thing you can do with DeFi. You could put social networks on chain.

What does that mean? It means you build a protocol on chain for sending encrypted messages. Maybe they’re DMs, maybe they’re public, depending on whatever setting you choose. Every social network could draw from that same protocol, that same set of messages. What that means is that if you tweet, someone else can like it on Facebook, because they’re both accessing that same underlying set of messages and that same underlying protocol, that’s extremely valuable. It solves this network issue where no one wants to use a social media company and tell all their friends are using it. So it makes them interoperable with each other. And it also allows cool approaches to censorship, have a permissionless underlying protocol layer, and then anyone can build their own user interface on top of that and can make their own decisions about whether to censor it.

And if you’re sort of upset with the censorship level on some platform, you can start your own and you already have access to all the messages that are floating through there. So I think that sort of like is another example, a pretty cool application of blockchain tech, which I think could actually be better than the existing products, but would take a lot of work to build out…

…[00:47:25] Patrick: How do you think about the centralized nature of most regulation historically that it’s far easier to regulate, say, bank charters and a limited number of them, than a decentralized ledger and the decentralized ledger provides so many of the interesting properties. There’s this weird tension here between what you can regulate, whether it’s the exchanges or the wallets, or whatever it might be, what the right point is, that seem to naturally have to then centralize versus the benefits of a decentralized ledger. How do you square this circle in terms of innovation?

[00:47:56] Sam: I have some thoughts, but I don’t know what the answer will ultimately be. And I do think that’s something that regulators are very much struggling with and trying to figure out how to approach, what could you do there? Well, here’s one example. I think a reasonable thing to do is to try to find strategic parts of the ecosystem, to put the bulk of the regulation in. And as an example, I think centralized exchanges and anyone who’s running a fiat to cryptocurrency conversion business is a really good place to start looking for, at the very least, anti-money laundering, anti-financial crimes regulation, and also market integrity regulation and things like that. I think with stablecoins, I don’t know what the perfect approach is. Here’s something which I think would be a substantial step forward from where we are. On the regulatory side without endangering the product would be a registration regime based around reporting and transparency, where you have to say exactly what assets you’re holding.

And there have to be QI audits confirming that, and you have to have policies around redemptions and honoring those, and maybe some blacklist for addresses known to be associated with financial crimes. Maybe the assets have to be held in a US bank account, some sort of regime like that, which I think would address a lot of the consumer protection and financial crimes worries that exist with some regulararies, with stablecoins, while still allowing the space to thrive. And I think that I almost explicit what we want to say. I don’t know what the perfect thing is. I sort of think that’s a really hard question and it depends on how the space develops over time, and rather than shooting for the perfect here, I think the right thing to do is take steps in the right direction. Start to build out frameworks that protect consumers, that prevent financial crimes without killing the industry, start with that, take steps forward.

And then yeah, in three years, maybe there’s going to be a second round of things. With a regime like that with stablecoins, that addresses most of the large points of concerns while allowing USD stablecoins to thrive, which I think is really valuable from the economic efficiency perspective for the crypto ecosystem. Also, frankly, for like dollar dominant. There are going to be stablecoins in the world. And if you ban USD stablecoins, then it’s going to be Euro coins or be CNY stablecoins. It’s not a question of whether there will be stablecoins. It’s a question of which country they come from and which currency they’re backed by.

7. Investor perspectives on pre-crisis Asia – Michael Fritzell

Claire Barnes’s book Asia’s Investment Prophets is a historical document.

It was written in 1994 and published in 1995, just before the Asian Financial Crisis. Since it’s now out of print, it’s difficult to find and costs US$189 on Amazon. So to spare you from buying the book, I thought I should give you a summary of the key insights I absorbed from the book.

The book is an Asia 1990s version of The Market Wizards. It features 16 interviews with famous fund managers at the time, as well as a profile of an insurance company operating in Hong Kong at the time (I left this part out of my review below as I thought it didn’t add much value).

What makes the book special in my view is not just the historical perspective, but also the fact that it was written right before the Asian Financial Crisis in 1997. Some cautious investors saw the crisis coming and hedged themselves appropriately. Others bought into the hype.

I also tried to track down every investor featured in the book by Bloomberg, Google and other public sources to see where they are today. Some investors remain successful even today. And many of those who suffered excessive drawdowns didn’t live to see another day.

This is the story of 16 investment prophets on the cusp of one of the greatest financial crises the world has ever seen.

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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 Apple 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 17 October 2021:

1. Nature Shows How This All Works – Morgan Housel

California has been devastated by wildfires for a decade. Back to back, year after year. Long-term droughts turned forests into dry tinder.

So everyone was elated when 2017 brought one of the wettest winters California had seen in recent memory. It was epic. Parts of Lake Tahoe received – I’m not making this up – more than 65 feet of snow in a few months. The six-year drought was declared over.

But the fires just got worse. The wettest year in memory was followed by “the deadliest and most destructive wildfire season on record.” And those two things were actually related.

Record rain in 2017 meant a surge of vegetation growth. It was called a super bloom, and it caused even desert towns to be covered in green.

That seemed great, but it had a hidden risk: A dry 2018 summer turned that record vegetation into a record amount of dry kindling to fuel new fires.

So record rain led to record fire.

2. The DMZ Partners Owners’ Manual – Soumil S. Zaveri

We will invest in a business only if we are willing to potentially own it for a decade. This is important to us for four reasons: 1) It ensures we focus on quality businesses whose fundamentals are likely to persist over time. As per Nassim Taleb’s advice, we will think long and hard about resilience in alternative future outcomes (say, in times of regulatory, economic or competitive stress). 2) We are not too excited by the prospect of getting rewarded on the basis of how an asset ought to be valued by catalysts in the medium term – nor do we want to deceive ourselves into believing that we have any expertise in being able to do so. Even if successful, such an investing style may deviate us from the prospect of compounding capital over decades by remaining patiently invested in exemplary companies. We would be deceiving ourselves in assuming that we can be better capital allocators than the people that run among the most outstanding companies we can find. 3) We are blessed with the privilege of patience – we intend to monetize it by identifying exceptional management teams, building franchises with immense scalability prospects over decades. This importantly allows us to partake in the “optionality value” that emanates from the bounty of unforeseeable surprises that accompany the actions of exceptional people. Experience has shown that it would be a folly to discount this phenomenon. Finally, 4) Taking an unusually long-view also gives us the advantage of an uncrowded spot as institutional imperatives often force professionals to check their relative performance scorecard every quarter, half-year or year. Our approach, if deployed well, is designed to help us deliver superior outcomes over a decade. Having an exemplary outcome over a decade is not the same as having ten exceptional one-year outcomes, much like a five-year-plan is not five good one-year plans.

We will never choose to own an asset solely based on valuation. No point bringing home junk for free – it still occupies valuable and limited space. Opportunity costs are very real, which we will remain acutely aware of. Gregory Mankiw wastes no time reminding microeconomics students that “the cost of something is what you give up to get it.” We take his advice to heart. To put it in practical terms, if you own a poorly governed, mediocre business solely because it is seemingly a mouth-watering bargain – time is effectively your enemy. The longer you must wait for your value to be realized, the greater the chances that the mediocre business faces setbacks or that inept management commits grave errors – in effect, permanently impairing your investment. We want time to be firmly on our side. In owning wonderful businesses run by exemplary people, time is an exceptionally potent tailwind!

3. DocuSign CEO Dan Springer offers surprising lessons learned from four years as a stay-at-home dad sandwiched between two IPOs – Byron Deeter and Dan Springer

Dan considers his role as a father to be his greatest career accomplishment. He believes that to be a great leader, you need a firm sense of what’s important in life—beyond just the confines of your office walls. What’s more, Dan says that the skills you develop as a caregiver will serve you greatly as a leader and mentor.

And he also points out that, while he’s gotten praise and media attention for his decision to pause his career for fatherhood, making a similar decision is considered wholly unremarkable for his female leader counterparts. “My feminist friends say if I were a woman, nobody would be asking me why I paused my career at its height. They say, ‘Well, you should have been staying home with your kids anyway, at least a little bit.’ As a dude sitting here, we should be aware we have these biases.”

Now Dan can’t unsee the double standards that plague career-oriented women. “Feedback is truly a gift,” he says. “So thank you to all the women and men in my life who are great feminists and have helped educate me in areas I was missing.”

Both his personal experience and burgeoning awareness of bias prompted him to do things differently as the leader of DocuSign. He created a parental leave program that guarantees all employees who become biological or adoptive parents six months of paid leave. “I hope everyone copies it. If you’re a founder out there, take away my competitive advantage. Offer this to your employees,” says Dan. “They will love you, and you’d be amazed how quick it’ll transform your culture.”

4. Slackers of the World, Unite! – Ellen Cushing

Eight years, more than 10 million users, and an acquisition bigger than the GDP of El Salvador later, Slack has managed to mostly hold on to the cachet of its early days. “All of the other messaging apps that we tested just felt sort of corporatey,” says Melanie Pinola, who wrote the Wirecutter review that declared Slack “by far” the best team-messaging app. “And the ones that were fun were really just imitations of Slack.” The user-experience researcher Michele Ronsen, who has done work for Slack and other global brands, told me that she’s seen no other product evoke such uniformly positive reactions among consumers. “When I recruit and conduct studies, over half of the people volunteer their love for the product and the platform and the benefits, completely unsolicited,” she said. “That does not happen very often.”

This is great for Slack, and also a little ridiculous: Enterprise software is meant to blend in, silently and only semi-effectively wringing more productivity out of us before we can call it a day. It is not supposed to create zealous brand loyalists. But Slack so thoroughly permeates companies’ culture that it changes them. It changes the language of the office and the texture of the workday. It enables a sui generis kind of communication, one that’s chatty, fast, stream-of-consciousness, and always on; one that often feels less like an email than a group text. It is work software that insinuated itself into our lives precisely by feeling unlike work software—and, in turn, it has made work feel less like work…

…On Slack, everyone has the same size megaphone, regardless of hierarchy or chain of command. And between the jokes and the special channels and the spontaneity and the freewheeling way of talking to your colleagues—who are also kind of your friends—it encourages a type of personal expression that is new to the American workplace.

A decade or two ago, identity formation, friendship, meaning-making, and political agitation were much more likely to be the things we did on nights and weekends. Now they’re central to work. If you’re an entry-level grunt, this might be thrilling. If you’re a boss, it can be scary. In August, Apple blocked employees from starting a Slack channel devoted to discussing pay equity, citing a policy that Slack activity “must advance the work, deliverables, or mission of Apple departments and teams.” (Channels about dad jokes, pets, and gaming were left alone.) In April, Basecamp, which makes software with a function similar to Slack’s, banned “societal and political” discussions on its own Basecamp account. And in 2018, employees at the luggage company Away were fired after creating an unsanctioned private Slack channel where employees—particularly those identifying as LGBTQ and people of color—talked freely about what they felt was an inhospitable work environment.

Slack’s inherent flatness means that anyone can emerge as a leader. In fact, the most influential person on Slack is almost never the boss, in part because in many organizations the more powerful you are, the less you use Slack. Being good at Slack is a skill, and it’s a different one from being well liked, or effective in meetings, or even good at your job. It’s more like being a social-media influencer. “People can amass power in the organization by being good at this tool,” Dash said. “They are not elevated by an institution; they just happen to have mastered a technology. And that is a thing that people can find threatening or find upsetting or that can be misused.”

5. Embracing Complexity – Tim Sullivan and Michael Mauboussin

A complex adaptive system has three characteristics. The first is that the system consists of a number of heterogeneous agents, and each of those agents makes decisions about how to behave. The most important dimension here is that those decisions will evolve over time. The second characteristic is that the agents interact with one another. That interaction leads to the third—something that scientists call emergence: In a very real way, the whole becomes greater than the sum of the parts. The key issue is that you can’t really understand the whole system by simply looking at its individual parts.

Can you give us a concrete example?

A canonical example of a complex adaptive system is an ant colony. Each individual ant has a decision role: Am I foraging? Am I doing midden work? Each one also interacts with the other ants. A lot of that is local interaction. What emerges from their behavior is an ant colony.

If you examine the colony on the colony level, forgetting about the individual ants, it appears to have the characteristics of an organism. It’s robust. It’s adaptive. It has a life cycle. But the individual ant is working with local information and local interaction. It has no sense of the global system. And you can’t understand the system by looking at the behavior of individual ants. That’s the essence of a complex adaptive system—and the thing that’s so vexing. Emergence disguises cause and effect. We don’t really know what’s going on.

Why is an ant colony the first example you think of?

Complex adaptive systems are one of nature’s big solutions, so biology is full of great examples. Ant colonies are solving very complicated, very challenging problems with no leadership, no strategic plan, no Congress.

Once you’re aware of how the structure works, though, you’ll see these systems everywhere—the city of Boston, the neurons in your brain, the cells in your immune system, the stock market. The basic features—heterogeneous agents, interaction, and an emergent global system—are consistent across domains.

Why should businesspeople pay attention?

So what could a biologist or an ant specialist or a honeybee specialist possibly tell us about running businesses? The answer is, a whole lot more than you might guess, if you are willing to make some connections. This to me is an essential way to think—especially in the 21st century.

Consider capital markets. Rather than looking at them through the rational-expectations model, or even using the no-arbitrage assumption—the idea that you won’t find any $100 bills on the sidewalk because somebody has already picked them up—you can look at them through a complex adaptive systems model, which empirically fits how the markets work. But complexity doesn’t lend itself to tidy mathematics in the way that some traditional, linear financial models do.

6. Kyle Samani – Solana: Faster, Cheaper, More Scalable – Patrick O’Shaughnessy and Kyle Samani

Patrick: [00:02:49] So Kyle, while this is going to be a breakdown on Solana specifically on which I think you’re one of the great experts and someone who can explain it in ways that I think everyone listening will understand. I think it’s probably necessary to take a step back from Solana and first frame, how you view the opportunity or the landscape in blockchain technology, generally speaking. And maybe the first question I’ll ask is what do you think the killer app of decentralized ledgers or blockchains is given that so many people think it’s Bitcoin, it’s this kind of new non-sovereign money. I think you have a different take. So maybe just frame the entire conversation by what the huge opportunity is here, and then we’ll get more specifically into Solana.

Kyle: [00:03:30] The history of the crypto-ecosystem, like all things is kind of pat dependent and there’s different cultural movements kind of that have bubbled up to the top of it at different points in time. Bitcoin was found in 2009. Satoshi, I don’t think had a strong view of what Bitcoin should be or what it could do, but he made something that was a breakthrough in a number of ways. Ethereum took a lot of those same ideas and just said, “Hey, just make it a little bit more programmable.” But there was no real plan for how to make it large scale. Certainly, again, even if you go look at Vitalik’s first introduction of Ethereum, which was in January 2014 at the Miami keynote, through that 17-minute video, and you can tell, he has no idea what this thing is useful for. He vaguely alludes to a couple of DeFi concepts in the video, but can’t coherently articulate what DeFi is or why it should matter.

And the important thing I would think we as an industry have learned really since the last probably five years or so is that the killer app for blockchains is DeFi. And I think you should probably interpret DeFi as broadly as possible. That means recreating existing financial contracts for trading spot assets, derivatives, options, interest rates, whatever, certainly in this kind of new paradigm where you get auditability and composability and its instant settlement. All those things are obvious. But I think the other implication of DeFi is then can you take financial concepts and inject them into new places that haven’t really traditionally had financial concepts in them? You’re just now starting to see this in a little bit with NFTs and people starting to play with fractionalizing NFTs. You look at this loot game thing that just came out a few weeks ago and you can see we’re kind of at the tip of the iceberg of lot of that stuff happening.

I think if you add social tokens kind of onto that and then combine NFTs and social tokens, this is a very ripe design space to do a lot of interesting new forms of capital formation, community engagement, create monetization, all those things. But again, all of these are still kind of finance centric concepts. So the conclusion I came to internally probably about a year ago was that what if you reframe the point of blockchains, not as non-sovereign money that happens to be programmable, which is what Ethereum launched at as, but what if you just reframe blockchains as the best conceivable DeFi system that happens to have non-sovereign monetary properties to it?

If you reframe the question that way, then the right design fundamentally probably is not something that looks like Bitcoin, but it’s something that is written from the ground up to really be finance native. And that probably means a few things. One, it means you need to have as low of latency as possible, because anything in finance that has derivatives means you have leverage. If you have leverage, you have risk of blowouts. And if you have risk of blowouts, you need to have low latency. You need to have high throughputs so that you can manage liquidations and risk in the system. The other thing that probably means is you want to have super high performance program languages and look at where all HFT is written at the bleeding edge of high performance realtime systems, and you want to be writing in those languages to just have optimized performance in every way. There’s some other implications as well, but those are broadly speaking, the two obvious ones.

Patrick: [00:06:37] Maybe just one click deeper on the notion of DeFi as the north star for crypto systems rather than not in sovereign money. Right? Like very, very, very big change from, I think what most people just starting to get familiar with this system would describe crypto as, they’d probably go straight to Bitcoin. But maybe this is the right time to compare sequentially. Actually, what is happening here? This is just a database and it’s just a record of who owns what, whether it’s Bitcoin or Solana or Eth or whatever. And there are really clever mechanisms for the world to all agree without any centralized authority on who owns what inside the ledger?

And transactions per second maybe is one interesting data point to talk about from Bitcoin to Eth, to something like Solana, given the frame that you just gave us. If all we’re trying to do is change the state of that underlying database or ledger, and maybe just tell the transactions per second story, starting with Bitcoin all the way through where we are today and why you think that’s interesting.

Kyle: [00:07:37] Bitcoin launched in 2009. Satoshi, I believe it was 2010. Some people were like spamming the Bitcoin network or something. And in order to prevent the system getting over flooded with too many messages bouncing between the computers, Satoshi just put in a very, very rudimentary fix, which is he just like added a few lines of code and said, “Blocks cannot be bigger than one megabyte.” Super arbitrary determination. He definitely didn’t consult with anyone publicly about it. My guess is he didn’t spend more than 10 seconds thinking about it and just put something in there with an expectation that he would change it later. Unfortunately, by putting that one megabyte cap in there that set a hard cap on the ceiling of Bitcoin at about seven or so transactions per second, maybe 10, somewhere in that range, I guess, is if he thought that that was going to persist in perpetuity, he probably wouldn’t have done that, but he did.

And then kind of as the culture of Bitcoin evolved over the next five to seven years, this really becomes apparent in the block size wars, which was 15 to 17 kind of timeframe. And ultimately the side that one was basically the side that said you can’t introduce the hard fork that breaks the rules of the system. And a hard fork would’ve meant changing that one limit to something else. And that camp kind of won in whatever Bitcoin is today. The only ways really to scale Bitcoin that have emerged are ways to compress data. So to fit more data into the same amount of space, which the SegWit thing did in 2017. And then the only other way is really like off chain transactions, meaning like lightning, which has not grown very effectively. People have been trying to operate within those constraints for last five, six years. And I’m extremely disappointed I think with the aggregate results of that.

Not to say there hasn’t been no gains, but it’s like a 3X gain in six years is by software standard pretty bad. Ethereum launched with the same basic proof of work model as Bitcoin for consensus. And then the programming model is pretty different actually. One of the big things, Ethereum people did not think too hard about that’s really creating a source of a lot of problems today is parallelism. In Ethereum, you have this basic problem of right. You’ve got all these people all over the world sending transactions to update the state of the system, right? Move money from point A to point B, do this trade, whatever it is. The vast majority of transactions that probably happen within a block, whether a block is milliseconds or even whether it’s 15 seconds, even probably whether it’s a minute, probably don’t have dependencies on one another.

So like a simple example would be if your account balance is zero and you want to send money to Bob, but I need to send money to you first, then there’s obviously some dependencies there for that to happen. So chronology does matter. But if you think about most things that happen in the world, at least within the context of 10 seconds, even a minute, you probably don’t have very many dependencies. You can just make the payment between people. So the unfortunate thing for Ethereum is the way that the Ethereum virtual machine is designed. They never really tried to deal with transaction parallelism. The challenge here, just in the kind of basic computer science problem terms is you have two people sending a transaction in the system. There’s a pretty high probability of those transactions don’t write to the same piece of the global state at the same time, but you have no 100% guarantee that they won’t.

So you need to make sure they don’t overlap with each other, because if they do, then you need to figure out which one to execute first. And this has been a basic problem in computer science for 30 or 40 years. Basically, the only solution is to know which parts of the state it’s going to touch before you execute it. And then if you see overlaps in what you’re going to touch, then you run them serially. Otherwise, you can run them in parallel. Pretty intuitive. Not too hard to reason about that in abstract terms. Implementing that in operating systems and such as just mechanically, a lot of work and Ethereums didn’t do it. And the EVM, which is the Ethereum Virtual Machine is written that way. And then all of the tooling around the EVM and all of the actual transactions today are all written with that assumption that there is no parallelism in the system.

So the EVM just runs everything serially. So your laptop today probably has four cores, maybe eight cores in it, and your graphics card is probably a thousand cores in it, maybe 4,000 cores. And you’re only taking advantage of one core because you’re just running everything serially. So Ethereum, when they launch, I think it was like call it 10 transactions per second or thereabouts, they’ve increased the gas limit a few times, which is kind of a very simple way of increasing the throughput. They’ve got it to call it 30 or so transactions per second by doing that, but there’s no been real major breakthroughs in the core system. Solana, if you look at all of the NextGen chains, people have tried to solve this problem. The only one that’s really attempting to do intra-shard parallelism is Solana. And this is, if you look at why it’s like, look at Anatoly’s background,. You did chip design at Qualcomm for a long time at high performance systems, at Dropbox and some other OS places.

His whole life, he spent saying, “How do I take an existing piece hardware and make it go as fast as possible?” That’s what he’s done for 20 years. And he looked at a modern computer and said, “Okay. How do I make network of computers all over the world that don’t trust each other to just go as fast as humanly possible.” The key to that unlock is parallelism. So Solana runs transactions natively on graphics cards, modern NVIDIA cards that I’d call have 4,000 cores. I think the next ones coming up have 8,000. You can obviously then run 8,000 jobs in parallel. The key obviously to be able to do that is each transaction header needs to specify what part of the global state it is going to touch. And so long as the header states that, then the system can line everything up and say, “Okay, these things aren’t going to interfere with each other. So run them all in parallel.”

And anything that has dependencies, you run serially. There’s some other approaches to thinking about parallelism that other teams have taken the most notable, which is sharding and Ethereum, Polkadot, Avalanche, NEAR, and perhaps others are all doing various… and Cosmos are all doing various forms of sharding. What sharding gives you is you get parallelism where you get one thread per shard. So you get parallelism in the sense that each shard gives you a new lane to move forward. If you need to communicate between the shards, there’s like a lot of latency, a lot of additional gas costs in doing so. So kind of the key questions I think about scaling these systems is can you scale a shard. If you can’t scale a single shard, how few shards can you get away with on a global scale to minimize all of the additional latency costs and gas costs that come from cross shard stuff. That’s kind of the basic framework of the thing. And today’s Solana runs at, I’d call that 50,000 transactions per second.

7. In depth: behind HNA’s fall, a web of nepotism from N.Y. to Hainan – Ji Tianqin, Yu Ning, Han Wei, and Denise Jia

Details of the alleged crimes committed by the two executives were not disclosed by the police, but Caixin’s yearlong investigation, including a review of the company’s filings and previous interviews with multiple former and current executives, found that HNA Chairman Chen Feng, now deceased co-founder Wang Jian and multiple senior executives owned companies controlled or invested in by family members that conducted business with HNA. These businesses, many registered in New York as well as Hainan, where the company headquarter was located, obtained funds and contracts from HNA ranging from aviation materials to real estate development, advertising and insurance. Some of those relatives even became frequent guests in New York’s philanthropy circle and leaders of Chinese businesses associations in the U.S.

None of the related-party transactions, some of which were related to the conglomerate’s overseas acquisitions, were fully disclosed in HNA’s regulatory filings.

Chen’s and Wang’s brothers were both involved in aviation material businesses that have supply contracts with HNA. HNA might have paid 30% to 50% more than competitors for aviation materials and 10% more for aircraft, a former HNA executive said.

“The more expensive, the more commission they could get,” the former executive said. “This is impossible at state-owned enterprises. Isn’t this embezzlement?”

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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 DocuSign. 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 10 October 2021:

1. Unit Economics and The Pursuit of Scale Invariance – Tribe Capital

When we think about unit economics we are primarily thinking about the following quantity:

gm*LTV – CAC

The three quantities in the above equation are meant to be somewhat impressionistic. From an analyst’s point of view there are choices with regards to what to count in gross margin, CAC and LTV (lifetime value).

To explain the quantities, consider the example of a prototypical SaaS company that sells some software to business customers. In that case gross margin is usually fairly high – in the 80% range. LTV here means empirically observed LTV_n or realized cumulative revenue collected after n months. CAC means all sales and marketing costs needed to acquire and onboard the customer. The salient question that we start with is “how long does it take to get paid back” or, analytically, for what value of n does gm*LTV_n = CAC. This leads one to a payback of n months and the rule of thumb for most venture investors is to consider n<6 months to be great and n>2 years to be not so great and everything in between to be the range of normal. From an investor’s point of view, shorter paybacks translate to leverage on the invested dollar because capital spent on S&M can be recycled faster when paybacks are short. Note that this approach doesn’t use extrapolated LTV. Oftentimes people will compute full LTV using some formula involving imputed parameters (see discussion here). We don’t use that because we’d rather not assume things about the long tail of customer lifetime and instead focus on what has actually transpired. As a result, we tend not to look at quantities such as LTV:CAC because it includes these often spurious extrapolations. Instead, we tend to focus on gm*LTV_n – CAC which we refer to as the “unit (or contribution) margin after n-months”.

2. David Fialkow – Paint Outside the Lines – Patrick O’Shaughnessy and David Fialkow

Patrick: [00:16:03] Can I ask you a question about that painting the lines thing? You mentioned creativity as a key ingredient, not just for what you’ve done, but your background is very atypical to build such a large investment firm. But it’s what makes it interesting.

What have you learned about identifying real creativity in potential founders? Because that’s a renewable resource, I’ve found. It’s not just a moment of inspiration early on and then you build for 10 years. You constantly have to be creative. How do you underwrite that? If you’re backing people very early, you don’t know much about the business. There is no business. You have to lean on that creativity, I’m sure, a lot. How do you do that? How have you learned to identify that early?

David: [00:16:37] Let me be very direct and answer the question in a soundbite. It’s only is always a founder that loves their products so much. Nothing else, man. They don’t hear the other conversations in the room. They certainly don’t hear criticism that you’re making of it. They don’t view the difficulty of the execution as a problem, which is a great thing. Hopefully, they address it by bringing in people around them. There are four things that we get turned on by, in our filter. I hate to say a checklist, because it’s another checklist. Number one, does that founder love their product and is willing to do anything to get Patrick and David to use their product? And will run through walls to make sure the world… Because they believe that the world needs their product more than they need oxygen.

Number two, do they know how to sell? And selling means can they storytell? Can they make it clear to others? How important this product and this mission is? The third thing is that they absolutely have to have some form of modesty so that they listen to other people. The smartest people in the world are smart because they listen to others. Now they may not always follow the advice of others, but they listen. If we feel that somebody isn’t going to listen to us or others who are maybe smarter than us, then it’s hard to back them because you know at some point there’s no room for a pivot, which is the major part of where venture capital returns come from. And the second thing is they’re not going to take feedback in a way from many people, including people on their own team that’s positive.

And then the fourth thing is a true north. And that mission that I talked about earlier is deeply important to us because it’ll get tested and challenged, often. There will be interpersonal decisions that that founder will make about their lives, their team, investors, their marketplace. It’s hard to tell, but you can get a feel for somebody, whether they’re going to be a standup person.

Because the expression that’s my guiding principle here is adversity does not teach character, it reveals it. We talked about Icarus. Bryan Fogel is one of the greatest founders of all time. He was the director and the character in Icarus. You’ve got to have that person that you feel that, when bad shit goes down, wherever it does, they will be in a position of being able to make the right decisions. And don’t rely upon a rule or some principles written down somewhere. They have a gut instinct about doing the right thing all the time. And those are the four things you look at, Patrick. And I’ll tell you if you do it, it’ll be very, very selecting for you as an investor.

Patrick: [00:19:26] And there’s one on that list that really stands out because I’ve never heard anyone say it quite this way, which is the first. That they love their product. What is the inverse of that look like? What does it look like when someone clearly doesn’t love the product that they’re building?

David: [00:19:38] Meatball question. Perfect. It’s somebody that comes in and says they want to do a startup. And we’re like, “Great.” I don’t know. I’m looking at all these different industries. Well, Sean he has a really good podcast. Maybe I’ll do a podcast. The Alco’s got a good venture firm. They’re focused on the commercial part of this. You want somebody who’s commercial, but that’s not going to get them to the promised land. Normally what happens is, and we can give some examples of this, but people come. They want to have a discussion with us or other firms, that is, “I got to tell you about what I’m building.” And we’re like, “Great.” And let’s not focus on margins or CAC, LTV or any metrics yet. Let’s just get straight what this product is. Because here’s what happens, and this leads to the pivot. When somebody is so obsessed about their product, and then they get feedback.

If they’re good, they don’t believe their product is a failure. They believe their creative instinct and their right brain can pivot it to be able to do something else. They never lose track of the fact that this is still their product. They don’t say, “Okay, this is water. And nobody liked water and therefore, I’m going to turn it into beer.” Here’s a great example. I joined the board five years ago of Boston Beer Company, Sam Adams. Why? Because my neighbor is Jim Koch, the founder. And in one of my impulsive moments, which I’ll share later, I almost bought a brewery. And Jim said, “It’s a bad idea.” The brewery I was going to buy and why I was going to buy it, it was in Northern New England and it would have been like a boat anchor. So Jim and I became really good friends over the years. He’s just a fabulous friend. He built a good business.

But about five years ago, Sam Adams was in deep dodo. It had declining sales. And it was trapped between really hip micro-brews and the big guys who had gotten really good. So Jim said, “Hey, it’d be great if you could join the board and help me in my team turn the business around.” I didn’t do much to turn it around, but I watched an unbelievable turnaround. This is the story. Jim Koch walks into a board meeting one day and we’re looking for a new CEO because our CEO who had been like a co-founder with Jim, who was done. And done a great job and gotten the company to a point. And now it was time to move on. And Jim says, “A lot of you have been talking about how one product is going to kill the beer business.” We had told him that one product that was going to kill the beer business was tequila because no sugar, it’s light. It’s an up, it’s a great experience. And young people started doing tequila and not drink as much beer.

So Koch takes that away and comes back and says, “I have a product that can compete with tequila.” So we’re going, “What?” And he pulls out this can that he had made over the weekend, a Red Bull can, a thin cylinder, 10 ounce or whatever it is. And it was vile tasting flavored soda water. And he goes, “Forget about what you think today. 90 days from now, this will be the biggest product on the market.” And he invented, with our board member who became CEO, the two of them invented Truly, which went in three years from zero to a billion dollars. Zero to a billion. It took him 40 years to get to a billion dollars in beer. And in less than three years, Truly is over a billion dollars. What an amazing founder? He never said, “Beer is failing.” He said, “It’s just innovated. It’s changed.” And he used beer malt, which is how he got around a beer company selling it because beer companies can’t sell spirit, tequila and vodkas. But he built it out of beer malt because that’s what great founders do.

It was that love of his product, beer. But what really changed it for him was understanding the tastes and needs of other people. So that’s the kind of stuff I need. When we look at a founder, we look at, are they going to be that person that is going to be capable of making those pivots and stuff when they have to? And if you paint between the lines, you get too frustrated and you look at yourself as a failure. Because you went to an Ivy League school and then you went to a business school and you went to Goldman Sachs, whatever. Your life had been about getting gold stars. I’m not saying that’s not a bad life. It’s just not the life you and I had. But you tend to look at risk as painful. “I don’t want to lose a gold star. I don’t want to have a blemish.” We’re embarrassed all the time. Like, oh my God. You’re going to ask you later, I know, about failures. Well, I mean, really? You’re going to need me back all week to record it. Because we get this stuff so wrong all the time and we got to look at it as a learning experience. And then we got to do it with empathy and dignity. And make sure that the people around us do too…

…Patrick: [00:40:54] I have to pull the amazing bookend that everyone’s been waiting for and tie this back to Icarus.

David: [00:41:00] Are you saying that this is over? It’s over?

Patrick: [00:41:02] No, no, no. I’m just using my opportunity to tie off at least one loose end.

David: [00:41:08] All right.

Patrick: [00:41:08] When I saw the movie, the documentary, what struck me was, again, what we opened with, which is you’ve told the story of the opposite, people that love their product and have … The fourth thing you said was North Star. They’ve got, I think of that as almost ethics or integrity or morals or something like they’re doing it for a bigger purpose or a certain way or both. And what struck me about Icarus was how far people can go doing things the wrong way to achieve an end or an outcome that we think of as good or as a win or whatever. What did you learn there? Is this a counter pattern that you can deploy in your investing?

David: [00:41:40] Let’s get facts straight. This is a movie that failed pivoting. Bryan Fogel was introduced to us by Dan Cogan and this woman Geralyn Dreyfus introduced us. Two film partners of ours introduced Jim Schwartz and me to Fogel, who wanted to make a movie, which he described as Supersize Me for biking, for doping. I’m going to race one year and we’re going to film it. I’m going to race a second year on dope and I’m going to do better and it’s going to be fun. Okay.

But here’s what happened. Here’s what happens. The movie doesn’t work. He races on dope and he does really well. He then goes through a year of protocol, and this is Fogel, and he dopes and he does worse. Now he does worse for a variety of circumstances, not relevant why, other than maybe he was doped. I don’t know. But he didn’t do well. So he is sitting there like a founder on the floor, in the fetal position in Geneva, Switzerland. “I did worse. The movie failed.”

Well, not exactly. So Jim and I said, listen, we’re VCs. This happens all the time. How do we pivot this to give you your next thing? And Bryan was not a founder of a tech company, so it wasn’t something that he was as connected to take a headshot on. And over dinner, we said to him, “If you were going to do one thing to do something extraordinary, what the hell would that be?” He go, “I’d get tomorrow morning, I’d go to Moscow, and I’d find Gregory Rodchenkov, and I’d figure out how he helped the Russians cheat in the Olympics.” And we’re like, “That sounds like a really good pivot. This one’s in the rear view mirror. It didn’t work. Let’s go.” And we re-upped. We gave him a series A. We gave him more money. And what happened next is the guy made one of the greatest films of all time. He held on.

All we did was helping him pivot. Now along the way, yeah, some help in the Justice Department ended up being important. Jim Schwartz found this great lawyer to help us with the US judicial system. But we never abandoned him. The same thing that Jim and I do with early-stage companies, we did with Fogel. We provide him air cover. We provided encouragement and nutrition along the way to keep going. And then when things got really ugly, and they did, we were getting all hacked. The Russians were going to try to kill Rodchenkov. It was all this kind of stuff. And we couldn’t lose our resolve. We had to tell Bryan, “Listen, hang in there, buddy. We’re going to get this.” And Bryan was great founder, filmer. Me and Jim were really great partners. He was fabulous.

And I think a lot of it is that we had some experience together doing deals in the VC. And I knew that this was a guy who wouldn’t crack and would not ever do the wrong thing by Bryan or another founder. So that transformation was Bryan’s vision, and we were there to support it. Now what also got lucky was you had a character in Rodchenkov, who’s right out of central casting. I mean, if we were going to make a feature movie, meaning with actors, we’d have to have Rodchenkov play himself. I mean, the guy’s so good at playing himself, I mean, he’s a character and he’s a dynamo. So everything lined up.

The third thing is just luck. Okay. So I use this quote without a connection to factual numbers. Okay? 40% of every return is what the market’s doing at the time. Some number like that. You can build the best company in the world and in a shitty market, you’re going to get lower. How lucky could we be, Patrick O’Shaughnessy, that the day the movie premiered at Sundance, the exact day, is the day that Trump gets inaugurated. Okay? And by the way, we talk about the [Collisons] , how good of guys are they? John Collison comes to that premier in Sundance for me. I hope you liked the movie. But he came. Nobody knew what this movie was.

Patrick: [00:45:43] Showing up is big.

David: [00:45:44] Well, no, no. We couldn’t even promote what the movie said. We couldn’t say we have prima facie evidence of Russian doping. We would have been laughed out of the world or Rodchenkov would have been killed or something. So we had to go to Sundance. This woman, Carrie Putnam, deserves a shout out. She ran Sundance. We went to her and we showed her a clip and she was like, “You’re kidding me. You have proof that the Russians doped in the Olympics?”

I go, “We’ll show it to. We’ll show it to you.” Dan Cogan, one of our producers, said to her, “Listen, you should see this.” And Dan said to her, “You got to let us in so we can play the movie, but we can’t promote what’s inside the movie.” And Carrie is just a very, very, very fine CEO of Sundance, loves filmmakers, same thing. She’s just protecting a founder. She goes, “You got it.” So much so that we didn’t have the film printed and finished until 3:00 AM the morning of Sundance because of all this stuff that was going on. And she allowed us to load it in the middle of the night.

There’s this protocol that a film has to be loaded by 9:00 PM the night before, for the whole day, so they don’t have technical screw ups. And we said to her, “This thing’s arriving at 3:00 AM. We’re going to have to load it then.” She’s like huge believer. By the way, isn’t it great to have all these analogies? So here’s a film. It’s exactly … She’s a VC, a great VC, supportive of her founder. If she hadn’t of let that movie play at Sundance, it would have never gone on to the prominence that it did, one of the top docs. There’s been a lot of great docs made, but it certainly was a very transformative documentary. So that’s the story of Icarus.

3. China, Semiconductors, and the Push for Independence – Part 2 – Lilian Li and Jordan Nel

There’s conflicting desires around using local semiconductors in China. – Though the government broadcasts supply chain independence, private companies are not simply government drones: they have to be simultaneously global and local. Given the global sprawl of the semiconductor value chain, local-only companies don’t make it. Yet, Chinese company executives have just watched Huawei, SMIC (China’s leading foundry) and others get nailed by US restrictions. They are carrying heightened inventory to buffer against possible restrictions yet must balance this with the demand and supply mismatch in the industry. They are also fielding requests from local leadership for regional development, and they are dependent on CCP goodwill for local policy, talent, and cheap funding. Together, this combination of uncertainty, local policy, and strategic necessity means many local companies will prefer to buy local “commodity tech” (like CPUs/GPUs) if they can. It just helps with the tick-the-Buy-China-box stuff.

Local policymakers are facing the rush of non-semi companies, lured by the easy money, into semi-manufacturing.2 This is not unusual for Chinese industrial plans. There’s a finely crafted, handpicked set of national company “champions” who the policymakers are expecting to succeed.3 However, provincial leaders always have their say in the exact details of implementation.

The net result? Delinquency and low-return investment is common. It’s one thing to have the money and the drive, but it’s entirely different to be able to effectively pull the talent, IP, tech, and market dynamics together. This sows thorns in the path of leading-edge development.

As far as semiconductor buildout goes, China is progressing well in areas wherein lower labour costs are an advantage and where high capex is the main barrier to entry. This is mainly lagging edge logic, flash memory, some fabless, and all but the most advanced edges of outsourced assembly and packaging. They rely heavily on US EDA tools. They continue to lag in foundry growth, with national-champion foundry SMIC being refused EUV and critical semicap access and struggling to replicate the necessarily sophisticated talent and processes. They have a very low market share in equipment and materials – both are industries with high barriers to entry, scaled incumbents, and steep learning curves at advanced nodes. The critical chokepoint here is thus semicap, and design tools…

…China’s goal of locally fabricating 70% of the semis used by 2025 is highly ambitious. The best odds of this would be for YMTC to rapidly gain NAND and low-end DRAM market share, and target building scaled capacity for >28nm. Measured in dollar spend, China is unlikely to produce even 50% of its chips this decade (Figure 15), in terms of actual chips used, 70% may be achievable around 2028. These would be mostly lagging-edge.

Even to achieve a semblance of leading-edge independence, China is at least a decade away. The need for lithography and design tools is only going to increase for tech beyond 7nm, and neither SMEE, nor Empyrean are close enough to ASML and Cadence/Synopsys to offer competitive systems. Like the US, China relies on TSMC and Samsung (among others) to produce 100% of their advanced chips. It’ll be interesting to see what levers China can pull with TSMC going forward to move the needle here.

Increasingly, Chinese firms could begin to challenge Western competitors – both as they creep up the lagging edge (as YMTC has done) and begin developing their own technologies (as the semicap players are experimenting with). There have been some investments into non-silicon processes as a workaround, particularly with the advent of electric vehicles increasing the demand for power-focused chips. However, the outlook for these is mixed at best. Still, it’s a good reminder that in the 1990’s the incumbents took a speculative fling on ASML’s immersion lithography machines to avoid buying machines from Japan. Sound familiar?

As for true independence, I’m sceptical. The entire supply chain is so globalised today, and the benefits of specialisation so entrenched that it’s almost impossible. Having one country design, fab, package, and sell a leading-edge chip is already super tough. To do that all without that chip, or any of the equipment that helped make it, ever crossing a border is almost unthinkable.

Yet China has no interest in true-blue isolationism. China’s interest lies in strategic removal of dependence on the US. To this end, semicap and design tools are the biggest hurdles.

4. What happened to Facebook? – Justin Gage

Outages are a fact of life: if you work in software they are bound to happen to your company sooner or later. There are a lot of different types of outages: they can be related to your application, your infrastructure, or even the infrastructure that supports your infrastructure.

Teams set up all kinds of monitoring, graphs, and alerts to catch these incidents before they happen. But you simply can’t prevent them all. This particular incident (again, we think) seems to have been related to DNS, so let’s dive into what that is exactly.

Someone famous once said that the internet is really just a bunch of cables, and that’s basically true; it just refers to all the computers in the world, networked together via cables or wireless. When you load a website on your laptop, what you’re really doing behind the scenes is just connecting to another computer – in this case, a server – far away, via a bunch of transfers and switches. You ask that server for the web page you want, and it sends it over.

In that interaction between you and the server, there’s a lot going on behind the scenes. As you can probably tell, there’s no single cable that’s going from your laptop to Facebook’s server. There’s an entire set of infrastructure in the internet’s “middle” that takes care of taking your laptop’s request, routing it towards Facebook’s servers, and getting the answer back to you. A big part of that is DNS – the flashy subject of our next section.

5. Nobody Really Knows How the Economy Works. A Fed Paper Is the Latest Sign. – Neil Irwin

It has long been a central tenet of mainstream economic theory that public fears of inflation tend to be self-fulfilling.

Now though, a cheeky and even gleeful takedown of this idea has emerged from an unlikely source, a senior adviser at the Federal Reserve named Jeremy B. Rudd. His 27-page paper, published as part of the Fed’s Finance and Economics Discussion Series, has become what passes for a viral sensation among economists.

The paper disputes the idea that people’s expectations for future inflation matter much for the level of inflation experienced today. That is especially important right now, in trying to figure out whether the current inflation surge is temporary or not.

But the Rudd paper is part of something bigger still. It reflects a broader rethinking of core ideas about how the economy works and how policymakers, especially at central banks, try to manage things. This shift has also included debates about the relationship between unemployment and inflation, how deficit spending affects the economy, and much more

In effect, many of the key ideas underlying economic policy during the Great Moderation — the period of relatively steady growth and low inflation from the mid-1980s to 2007 that also seems to be a high-water mark for economists’ overconfidence — increasingly look to be at best incomplete, and at worst wrong.

It is vivid evidence that macroeconomics, despite the thousands of highly intelligent people over centuries who have tried to figure it out, remains, to an uncomfortable degree, a black box. The ways that millions of people bounce off one another — buying and selling, lending and borrowing, intersecting with governments and central banks and businesses and everything else around us — amount to a system so complex that no human fully comprehends it.

6. Why we do not own shares in Alibaba – Aikya Investment Management

The starting point in our assessment of stewardship is to study a company’s incorporation history. We are looking to avoid companies with strong government ties and hints of crony capitalism, because these businesses are not as resilient as they may first appear. We also prefer to steer clear of businesses that are influenced by the government as these are not run with the best interests of shareholders in mind.

Emerging Markets often have fragile institutions and limited rule of law. If a business is built with the help of the government, what happens when the political powers change their minds? Or what happens if the key people in the government are replaced? If the government decides to start challenging a business, there is no recourse at all. Such government connections can go from being a powerful moat to a liability at the stroke of a pen.

A number of Alibaba’s pre-IPO investors in 2014 had strong connections to the Shanghai faction of the government under President Jiang Zemin. There was Boyu Capital, established by Alvin Jiang, the grandson of Jiang Zemin; New Horizon Capital, which was co-founded by Wen Jiabao’s son, Winston Wen; and CITIC Capital, headed by princelings Wang Jun and Chen Yuan.

This CITIC connection was evident for the wrong reasons soon after IPO, when Alibaba bought a company called CITIC21CN where Wang Jun and Chen Yuan served as Chairman and Vice Chairwoman. The business, which had not made a profit in eight years, did not even have a functioning website and growth prospects were limited. Nevertheless, Alibaba’s investment resulted in a windfall profit for Ms Chen worth a reported $500 million…

…History dictates that it is difficult to trust Jack Ma. In 2011, he controversially spun off Alipay (later renamed Ant Financial) and took control of the asset, in what remains the most notorious abuse of the VIE concept. With no means of recourse, Alibaba’s foreign partner Yahoo! was forced to accept significantly diluted commercial terms on their investment in Alipay. The Alipay controversy had such a negative impact on the Alibaba share price that management decided to delist the stock and take it private. To recall, Alibaba has now been listed three times.

Controversy around the shareholding structure of Ant Financial has persisted over the years. In 2019, Alibaba converted its profit share into a 33% stake in Ant Financial, making it the second largest shareholder after Junshun Equity Partnership, a vehicle controlled by Jack Ma, Simon Xie, and close associates. The continued presence of an increasingly outspoken Jack Ma influenced the recent suspension of the Ant Financial IPO. It was the latest reminder of how Alibaba, or at least Jack Ma, appears increasingly misaligned with the political status quo.

Alipay is not the only episode to raise questions around trust. Related party transactions and acquisitions have been a matter of habit for the Alibaba Partnership. In April 2014, Alibaba gave Simon Xie a $1 billion loan which he used to purchase a 20% stake in Wasu Media5 through an entity that was jointly owned by Jack Ma and Simon Xie. Alibaba claimed that they were not able to invest in Wasu Media directly because of Chinese regulations and that investing through Mr. Xie’s entity was the only way. In fact, Alibaba has regularly invested alongside Yunfeng Capital, a Shanghai based private equity company that was established by Jack Ma in 2010. The list of such related party transactions runs long and as recently as 2019 Alibaba Pictures gave a $103 million loan to struggling film studio Huayi Brothers Media in which Jack Ma has a considerable stake6. The lines between Alibaba’s shareholder interests and Jack Ma’s personal interests are very blurry, and at odds with our philosophy of backing clean and well aligned ownership structures.

Alibaba’s share-based compensation expenses are also alarmingly high. Over the past five years, Alibaba has paid its management nearly $17 billion in stock-based compensation, which equates to a third of stated net income. In contrast, for Tencent and Netease these figures were at 10% and 15% respectively…

…Which brings us to the second concern that we have, the recognition of gains associated with the acquisition of related companies. Alibaba employs a “step up valuation” approach, which works very simply as follows: Firstly, Alibaba acquires 49% of a company at $100, meaning they book an asset entry of $49. Next, they buy a further 2% of the company for $6 determining the value of the company to be $300, meaning their original investment needs to be re-marked. However, with the subsequent investment Alibaba now owns 51% of the company, so is obliged to reclassify its original equity investment as a subsidiary company. This reclassification values the overall investment at $153. All considered, for spending $6, they recognise an accounting gain of $104.

This is not a hypothetical example. Going back to the Cainiao Network acquisition, Alibaba invested $803 million in the company in 2017 which took their ownership from 47% to 51%. Having consolidated Cainiao Network as a subsidiary, Alibaba was at liberty to take a positive revaluation gain of $3.6 billion on their original investment, which was made a few months earlier.

Not all such step-up acquisitions have detailed footnotes like the Cainiao Network example. Often hundreds of millions of dollars of write ups have no explanation at all.

Is this revaluation of assets material? In short, yes. Almost half of Alibaba’s earnings are explained by such revaluation techniques, and the opaque methodology and convoluted ownership structure raises serious questions about the intentions of such aggressive accounting.

7. Note to Facebook Employees – Mark Zuckerberg

Second, now that today’s testimony is over, I wanted to reflect on the public debate we’re in. I’m sure many of you have found the recent coverage hard to read because it just doesn’t reflect the company we know. We care deeply about issues like safety, well-being and mental health. It’s difficult to see coverage that misrepresents our work and our motives. At the most basic level, I think most of us just don’t recognize the false picture of the company that is being painted.

Many of the claims don’t make any sense. If we wanted to ignore research, why would we create an industry-leading research program to understand these important issues in the first place? If we didn’t care about fighting harmful content, then why would we employ so many more people dedicated to this than any other company in our space — even ones larger than us? If we wanted to hide our results, why would we have established an industry-leading standard for transparency and reporting on what we’re doing? And if social media were as responsible for polarizing society as some people claim, then why are we seeing polarization increase in the US while it stays flat or declines in many countries with just as heavy use of social media around the world?

At the heart of these accusations is this idea that we prioritize profit over safety and well-being. That’s just not true. For example, one move that has been called into question is when we introduced the Meaningful Social Interactions change to News Feed. This change showed fewer viral videos and more content from friends and family — which we did knowing it would mean people spent less time on Facebook, but that research suggested it was the right thing for people’s well-being. Is that something a company focused on profits over people would do?

The argument that we deliberately push content that makes people angry for profit is deeply illogical. We make money from ads, and advertisers consistently tell us they don’t want their ads next to harmful or angry content. And I don’t know any tech company that sets out to build products that make people angry or depressed. The moral, business and product incentives all point in the opposite direction.

But of everything published, I’m particularly focused on the questions raised about our work with kids. I’ve spent a lot of time reflecting on the kinds of experiences I want my kids and others to have online, and it’s very important to me that everything we build is safe and good for kids.

The reality is that young people use technology. Think about how many school-age kids have phones. Rather than ignoring this, technology companies should build experiences that meet their needs while also keeping them safe. We’re deeply committed to doing industry-leading work in this area. A good example of this work is Messenger Kids, which is widely recognized as better and safer than alternatives.

We’ve also worked on bringing this kind of age-appropriate experience with parental controls for Instagram too. But given all the questions about whether this would actually be better for kids, we’ve paused that project to take more time to engage with experts and make sure anything we do would be helpful.

Like many of you, I found it difficult to read the mischaracterization of the research into how Instagram affects young people. As we wrote in our Newsroom post explaining this: “The research actually demonstrated that many teens we heard from feel that using Instagram helps them when they are struggling with the kinds of hard moments and issues teenagers have always faced. In fact, in 11 of 12 areas on the slide referenced by the Journal — including serious areas like loneliness, anxiety, sadness and eating issues — more teenage girls who said they struggled with that issue also said Instagram made those difficult times better rather than worse.”

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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 ASML, Facebook, and Tencent. Holdings are subject to change at any time.