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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 13 March 2022:

1. Tech and War – Ben Thompson

In response to the invasion Western governments unleashed an unprecedented set of sanctions on Russia; these sanctions were primarily financial in nature, and included:

• Disconnecting sanctioned Russian banks from the SWIFT international payment system
• Cutting off the Russian Central Bank from foreign currency reserves held in the West
• Identifying and freezing the assets of sanctioned Russian individuals

The sanctions, which were announced last weekend, led to the crashing of the ruble and the ongoing closure of the Russian stock market, and are expected to wreak havoc on the Russian economy; now the U.S. and E.U. are discussing banning imports of Russian oil.

This Article is not about those public sanctions, by which I mean sanctions coming from governments (Noah Smith has a useful overview of their impact here); what is interesting to me is the extent to which these public sanctions have been accompanied by private sanctions by companies, including:

• Apple has stopped selling its products in Russia (although still operates the App Store).
• Microsoft has suspended all new sales of Microsoft products and services in Russia, and SAP and Oracle have suspended operations.
• Google and Facebook suspended all advertising in Russia.
• Activision Blizzard, Epic Games, EA, and CD Projekt suspended game sales in Russia.
• Disney, Sony, and Warner Bros. paused film releases in Russia, and Netflix suspended its service.
• Visa and Mastercard cut off Russia from their respective international payment networks, and PayPal suspended service.
• Samsung stopped selling phones and chips, and Nvidia, Intel, and AMD also stopped selling chips to Russia.

This is an incomplete list! The key thing to note, though, is few if any of these actions were required by law; they were decisions made by individual companies…

…Last January I wrote an article entitled Internet 3.0 and the Beginning of (Tech) History that argued that technology broadly has passed through two eras: 1.0 was the technological era, and 2.0 was the economic era.

The technological era was defined by the creation of the technical building blocks and protocols that undergird the Internet; there were few economic incentives beyond building products that people might want to buy, in part because few thought there was any money to be made on the Internet. That changed during the 2000s, as it became increasingly clear that the Internet provided massive returns to scale in a way that benefited both Aggregators and their customers. I wrote:

Google was founded in 1998, in the middle of the dot-com bubble, but it was the company’s IPO in 2004 that, to my mind, marked the beginning of Internet 2.0. This period of the Internet was about the economics of zero friction; specifically, unlike the assumptions that undergird Internet 1.0, it turned out that the Internet does not disperse economic power but in fact centralizes it. This is what undergirds Aggregation Theory: when services compete without the constraints of geography or marginal costs, dominance is achieved by controlling demand, not supply, and winners take most.

Aggregators like Google and Facebook weren’t the only winners though; the smartphone market was so large that it could sustain a duopoly of two platforms with multi-sided networks of developers, users, and OEMs (in the case of Android; Apple was both OEM and platform provider for iOS). Meanwhile, public cloud providers could provide back-end servers for companies of all types, with scale economics that not only lowered costs and increased flexibility, but which also justified far more investments in R&D that were immediately deployable by said companies.

There is no economic reason to ever leave this era, which leads many to assume we never will; services that are centralized work better for more people more cheaply, leaving no obvious product vector on which non-centralized alternatives are better. The exception is politics, and the point of that Article was to argue that we were entering a new era: the political era.

Go back to the two points I raised above:

• If a country, corporation, or individual assumes that the tech platforms of another country are acting in concert with their enemy, they are highly motivated to pursue alternatives to those tech platforms even if those platforms work better, are more popular, are cheaper, etc.
• If a country, corporation, or individual assumes that tech platforms are themselves engaged in political action, they are highly motivated to pursue alternatives to those tech platforms even if those platforms work better, are more popular, are cheaper, etc.

Again, just to be crystal clear, these takeaways are true even if the intentions are pure, and the actions are just, because the question at hand is not about intentions but about capabilities. And while I get it can be hard to appreciate that distinction in the case of a situation like Ukraine, it’s worth noting that similar takeaways could be drawn from de-platforming controversies after January 6 and the attempts to control misinformation during COVID; if anything the fact that there are multiple object lessons in recent history of the willingness of platforms to both act in concert with governments and also of their own volition emphasizes the fact that from a realist perspective capabilities matter more than intentions, because the willingness to exercise those capabilities (to a widely varying degree, to be sure) has not been constrained to a single case.

2. The Secret to Braving a Wild Market – Jason Zweig

In the fall of 1939, just after Adolf Hitler’s forces blasted into Poland and plunged the world into war, a young man from a small town in Tennessee instructed his broker to buy $100 worth of every stock trading on a major U.S. exchange for less than $1 per share.

His broker reported back that he’d bought a sliver of every company trading under $1 that wasn’t bankrupt. “No, no,” exclaimed the client, “I want them all. Every last one, bankrupt or not.” He ended up with 104 companies, 34 of them in bankruptcy.

The customer was named John Templeton. At the tender age of 26, he had to borrow $10,000—more than $200,000 today—to finance his courage…

…The next year, France fell; in 1941 came Pearl Harbor; in 1942, the Nazis were rolling across Russia. Mr. Templeton held on. He finally sold in 1944, after five of the most frightening years in modern history. He made a profit on 100 out of the 104 stocks, more than quadrupling his money.

Mr. Templeton went on to become one of the most successful money managers of all time. The way he positioned his portfolio for a world at war is a reminder that great investors possess seven cardinal virtues: curiosity, skepticism, discipline, independence, humility, patience and—above all—courage.

3. The Changing World Order: Focusing on External Conflict and the Russia-Ukraine-NATO Situation – Ray Dalio

As explained before and more comprehensively in my book Principles for Dealing with the Changing World Order, it seems to me that we are now seeing three big forces that are changing the world order in ways that never happened in our lifetimes but happened many times throughout history:

1) The Financial/Economic One: Classically and currently the world’s leading power (which typically has the leading currency) is spending much more money than it is earning, which is leading it to borrow a lot and print a lot of money to buy the debt, which is reducing the value of the debt and money relative to the value of goods, services, and non-debt investment assets. This is producing inflation in goods, services, and investment assets. History has shown that when the coffers are bare and this sort of money printing takes place, financial weakness is near, and financial weakness causes all sorts of problems and precedes declines. When the coffers are bare and there is the need for more spending on both “guns and butter” there is a lot more printing of money, inflation, and political reactions to inflation.

2) The Internal Conflict One: Classically and currently there is great internal conflict over wealth and values gaps that is leading to populism of the right and populism of the left and fights between the sides. There is a “win at all cost” mentality, which eliminates the compromising and rule-following that is essential for maintaining internal order. The more internal disorder there is the more polarity and fighting there is, which typically leads to some form of civil war.

3) The External Conflict One: Classically and currently the rising of one or more foreign powers to become comparable in power to the leading power(s) leads to power struggles, typically external wars, that determine which power(s) will be in control and what the new order will be.  

Classically and currently these three cycles—i.e., the financial/economic one, the internal conflict one, and the external conflict one—are both individually evolving and influencing each other to create the Big Cycle of rises and declines of empires, countries, dynasties, and world orders…

…Some relevant principles are:

• International relations are driven much more by raw power dynamics than internal relations are. That is because all governance systems require effective and agreed-upon 1) laws and law-making abilities (e.g., legislators), 2) law enforcement capabilities (e.g., police), 3) ways of adjudicating (e.g., judges), and 4) ways of inflicting punishments. None of these has been able to be established on a global basis because the most powerful countries won’t give up power to the majority of countries because it would be unwise for them to do so. For example that is the reason that the US-China trade dispute wasn’t adjudicated by the World Trade Organization.
• There are five major kinds of competitions or wars that exist between countries:

1. Trade/economic wars
2. Technology wars
3. Geopolitical wars
4. Capital wars
5. Military wars   

• These competitions or wars reward the winners and penalize the losers, which reinforce their strengthenings or their weakenings. They vary in severity from healthy competitions to all-out wars. The progression tends to be from the first one on the list (trade/economic wars) toward the last one on the list (military wars), with each growing in intensity. Then, when a military hot war begins, all four of the other types of wars are applied full-on and weaponized. For these reasons, by monitoring the progression and intensities of the conflicts one can pretty well anticipate what is likely to come next.
• To be a leading world power one must be strong in most of the major ways. For example the United States and China are now strong in all of these ways but Russia is not. For that reason Russia needs to align itself with a leading power (China) to win wars.
• The weak will lose to the strong.
• One must be strong internally in order to be strong externally. These ways and how strong each country is in them are measured and shown in the appendix to my book and will be updated on economicprinciples.org. 
• People and countries are more likely to have cooperative relationships during economic good times and to fight during economic bad times.
• Shortly before there is a military war there is an economic war that typically includes:

1. Asset freezes/seizures
2. Blocking capital markets access
3. Embargoes/blockades

Over the weekend we saw significant intensifications of these economic war actions by Western (mostly NATO) powers, inflicting them on Russia. The magnitudes of increases and levels of these are a classic red flag that we should worry about a hot war between the major powers. At this moment we haven’t yet seen a retaliation by Russia, though we are hearing nuclear and other threats. So it appears that we are in the “at the brink” part of the cycle that is just after the big intensification of the economic war attacks and just before the military hot war. In other words, while the military hot war has been confined within the borders of Ukraine, it could spread to include the major powers. Seeing an acceleration and intensification of these economic war actions and/or a retaliation by Russia to hurt the NATO countries would signal a major increase in the risk of a major hot war. When I say that it would signal a major increase in the risk, I wouldn’t yet say that it is probable.  

• The choice that opposing countries face between fighting or backing down is very hard to make because both are costly—fighting in terms of lives and money expended and backing down in terms of the loss of status, since it shows weakness, which leads to reduced support. This is playing a role for both Russia and the opposing Western powers since backing down would be viewed as an unacceptable sign of weakness as the world is now looking to find out who will win this war. Putin now appears trapped. This could be dangerous or it could neuter Russia as a power. We will soon find out which happens.
• Hot wars typically occur when irreconcilable existential issues cannot be resolved by peaceful means. For example existential issues a) for Putin might be having another Western/NATO-supported country on its border, b) for China might be not having control over Taiwan, c) for Iran and/or North Korea might be not having nuclear weapons to protect themselves, and d) for the US and other countries might be these countries having these things.[1]
• The greatest risk of hot war is when both parties have military powers that are roughly comparable because if one side is dominant it typically gets its way by simply threatening war. Russia and NATO have roughly comparable military capability.
• Winning means getting the things that are most important without losing the things that are most important, so wars that cost much more in lives and money than they provide in benefits are stupid. This looks like a stupid war.

While these things sound ominous, my experiences over my lifetime have been that when push came to shove all sides, when faced with the choice of pulling back or experiencing mutually assured destruction, chose pulling back from hot wars. My first encounter with this, which is also the most analogous case to the one at hand, was the Cuban Missile Crisis when Russia had a sympathetic government and arms on the border of the United States and the United States considered that an existential threat and the parties could have gone to nuclear war fighting over it. I remember watching TV news and thinking that it was implausible that either side would back down and then being relieved that the decision makers chose to back down and find a path out of what could have been total destruction. I also remember how close a call that was because some of the leaders and generals favored war over the path that was taken to avoid war. For that reason, I believe it’s too early to consider the movement to a hot war between Russia and NATO countries likely. Instead of trying to anticipate it I’d rather react to the next stepped-up threats and/or some form of actual attack, which I would expect to be more restrained than an all-out military hot war.

4. Eric Mandelblatt – Investing in the Industrial Economy – Patrick O’Shaughnessy and Eric Mandelblatt

[00:11:16] Patrick: I’m sure the answer varies by commodity, by different parts of the world, but I think we’ve become so used to the ability of supply to catch up to demand in the digital world instantly or extremely quickly, whereas in the physical world there are cycles. There’s undersupply, there’s building of supply, there’s a lot on the other side. Walk us through what cycles look like in commodities. What drives them, how long does capex take to get outlaid to start pulling more commodities out of the ground? Give us a tutorial on how this world works, because it’s not this instant supply demand matching like we’ve come to expect in digital economies.

[00:11:51] Eric: We’re not going to reprogram the software. It’s a lot more complicated than that. Let’s use numbers to frame. Global oil and gas capex in the middle part of the last decade was running $0.5 trillion a year. Global metals and mining capex was running $140 billion a year. So, these are big capital-intensive businesses. Frankly, it’s why investors don’t like them. They’re cyclical and they’re capital intensive, but it depends upon the industry. All industries within commodities are not the same, but these tend to be pretty long lead time, long capital cycle commodities. Again, US shale would be an exception to that. But I’ll use copper as an example. First of all, 3 of the largest 10 copper mines in the world today were discovered over 100 years ago. And we estimate that from start to completion, if you and I, Patrick wanted to go build a copper mine in the Andes Mountains today, we estimate based on the mines that were developed over the last 10 years, that is a roughly 10 to 15 year investment cycle. Meaning we’re going to this project to FID and it’s going to take us a decade plus in order to bring supply online.

So, the punchline here is these tend to be relatively long lead time industries. Again, depends upon your sub-industry. It’s tough to be too generic. What’s different this cycle versus previous cycles is what I would call the relative inelasticity of supply growth. This is a key investment theme for us here at Soroban. There’s a saying in commodity land that the cure to high prices is high prices. What that means is that in a traditional commodity cycle, when the price of the commodity goes up, you’ve created an economic incentive for producers to drill new wells, build new mines, bring new supply in. When that supply comes into the market, ultimately it creates an equilibrium and the price comes down. And what we’re seeing this cycle is something that is very different, where not only are the big markets we’re investing behind, aluminum, copper, nickel, oil, as examples, in deep structural undersupply today, meaning inventories are drawn, there’s already shortages emerging up these commodities. But we’re also seeing a lack of a supply response.

And why is that? I think there’s a few factors that are playing into the inelasticity of supply. One, the most important one is I think the decarbonization and ESG backdrop, where governments, politicians, key stakeholders, including shareholders, and society at large is uncomfortable with the notion, particularly in energy, that we’re going to add new fossil fuel resources. So, shareholders are saying, “We don’t want to invest in energy companies. We want to starve the supply base.” That is having real implications. Banks not lending against E&P companies. And therefore the energy sector is probably the best example of this inelasticity, it’s creating supply tightness. Where normally when the price moves up, everybody, the producers are ready to go spend money. This time around because of the government interference, because of differing shareholder and societal pressures, we’re not seeing the same supply response.

So, I think that’s part of it. Part of it is the fear of carbon taxes. A lot of these industries, steel, aluminum, fertilizers are large carbon emitters. We could be stepping into a world, and we can talk more about this, where carbon taxes is a critical driver of the profitability of producers. And right now we don’t know what the rules of the carbon tax and quota world are going to look like. On one hand, we have the US with no carbon taxes today and then many industries in Europe are subject to carbon taxes today that are over $100 a ton in Europe. So, producers are hesitant in these carbon intensive, big emitting industries to add new supply because they don’t know how the carbon intensity of their product is going to be taxed. So, I think there’s an element of it there. I think part of it is just economics. We lived in a major down cycle for the last decade. Use oil as a great example. Less than two years ago, WTI oil was at -$37 a barrel. Today we’re at $93. So, there’s been $130 move in the oil price in less than two years. Now let’s pretend, Patrick, you and I are on the board of Exxon Mobil or Chevron. We’re debating. Should we take to FID? Should we commission a project in the deep water, Nigeria, Angola, Guyana?

Well, we’re not going to get our capital back on that project for probably 10 years. We’re going to get no cash flow for 5 years. So, what commodity price should we be budgeting? Should we budget -$37 or should we be budgeting $93? So part of it is returns on capital were depressed. The commodities themselves are incredibly volatile and that’s creating angst in the shareholder base, in the management teams, and in the boards, as they’re determining what rate of supply growth, how aggressively do they want to attack supply? So, the net of all of this is we’re in an environment right now where the global economy’s booming. We’re hopeful China’s coming back after a really weak 2021. We have a very favorable demand backdrop. We think, for certain commodities, that demand backdrop is going to get exceptionally good because of this decarbonization trend. Think of the green commodities, the coppers and the nickels, the aluminums that are going to see demand spike because we’re pushing decarbonization initiatives. But generally it’s a very favorable demand backdrop and yet we’re having major supply challenges here. And our view at Soroban, each commodity’s different, but we don’t think these supply challenges are going to be rectified in the near term. We think these are potentially decade plus supply challenges in front of us…

…[00:43:47] Patrick: If I wanted to compare businesses within commodity industry, how do you do that? Like how much differentiation is there both from a stock ownership shareholder perspective and also from a customer perspective producer? Because I think about oil, it’s this fungible thing, you’re a price taker, like there’s some lousy features. In the same way you highlight the great features of the railroads, there’s some really lousy features structurally of an oil business. How do you think about Exxon versus Chevron, or the differing nature as you’re building a portfolio of individual securities, not just buying like a sector ETF or something, what do you think about that?

[00:44:20] Eric: Each commodity is different, but you’re correct. These are capital-intensive, they’re cyclical businesses, and you’re price takers. It’s not a railroad that you get three to four points of price. So you have to start with understanding the commodity market itself. If you’re going to invest in steel equities, you have to have a point of view on the steel cycle, and the consolidation that’s happening in North America, or fertilizers, aluminum, copper, et cetera. The interesting thing today, this is an overly generic comment, is almost every market we’re looking at is in deep structural undersupply, and we have this issue around inelasticity around supply. And then in some commodities we’re seeing spiking demand. It’s a backdrop I’ve never witnessed during my career where you have the starting point today – we could talk individuals, aluminum, copper, nickel, zinc, oil, fertilizers – deep structural under supply, real tightness in the underlying commodities, inventories drawing significantly to razor tight levels.

So that’s the starting point. And then let’s talk supply and demand. Demand? Global economy’s booming. It’s booming with China largely having been on its back in 2021. Now the US is going to slow. So I think there’s going to be a bit of a handoff between the US and China, but overall, US nominal GDP is growing, I think grew 12% in 4Q. So we have a pretty strong backdrop of demand. Plus we’re going to get the decarbonization spike in the coppers, and the nickels, and the aluminums. And then on the supply side, we have this inelasticity, the shareholder activism, the resource nationalism that we’re not seeing the supply response. So it’s this incredible cocktail, again, that I’ve never seen of deep, deep under supplied markets today, lack of immediate supply growth, and a demand picture that’s actually quite favorable. Oh, and then we can talk about carbon taxes, which is going to throw this whole system in whack, because carbon’s in everything we consume, and certain end markets that are very carbon-intensive – aluminum, cement, fertilizers as an example – if the world moves to a carbon quota system, if the world becomes Europe, it’s going to throw cost curves completely out of whack. And there’s going to be certain producers, I’d highlight Alcoa in aluminum as an example of this, that are going to make windfall profits for a decade plus because of the new carbon tax regime. So it’s an incredible cocktail in front of us right now.

[00:46:53] Patrick: You mentioned Alcoa, it seems like a really interesting opportunity to dig in on one example of how all this stuff might affect a fairly simple and recognizable business. Most people have probably heard of Alcoa. I like the description you gave of Alcoa to me one time, which is that it’s the physical manifestation or derivation of energy as a concept placed into a physical product. So walk us through Alcoa’s business, just at a high level, and how these exogenous things like carbon taxes, like the carbon scene that you’ve just painted, might affect an individual business like this.

[00:47:23] Eric: That’s great. So what do they do? They make aluminum. They make over 2 million tons of aluminum per year. They’re roughly a 3% supplier into the global market. Now they were the biggest aluminum supplier in the world 20 years ago. So what happened in aluminum? I think it’s an illustrative, a good illustrative market. The Chinese woke up 20 years ago, they said, “We have all this cheap coal, let’s turn it into power. What do we do with the power? Well, let’s make aluminum. Let’s make fertilizers. These are really power-intensive, energy-intensive commodities. And let’s export that all over the world.” So what happened? 20 years ago they essentially had no domestic aluminum industry. Today they’re almost 50% of the global aluminum supply. It’s amazing. They destroyed the aluminum business. Their very cheap, but very dirty and carbon-intensive coal, they turned it into aluminum, and they exported it all over the world. And if you were a developed world producer, if you were Rio Tinto, they own Alcan, if you’re Alcoa, they destroyed your business. And we lived in a 15 year down cycle in the aluminum business.

Now what’s different this time? Well, China’s woken up and they’ve said, “Wait a second, the world doesn’t like us emitting all this carbon, we’re destroying our environment, we’re making no money making this aluminum, maybe we should not continue to grow our domestic aluminum supply.” And they’ve created a cap, the global market’s 70 million tons of aluminum, and they’ve created a cap, I think it’s at 45 million tons, and they’ve said, “We’re just not going to build smelters beyond that. We’re ultimately going to reduce our reliance on aluminum smelting as a country.” The problem is there’s no one taking the handoff, because Alcoa’s not building new smelters, Rio Tinto’s not building new smelters. And the backdrop, aluminum’s one of the highest demand growth commodities, pre-decarbonization, and it’s a major decarbonization winner. So we’ve got a demand backdrop that’s going to grow 4% or 5% a year, the Chinese were more than supplying all of that for the last 15 years, and now they’ve said, “Well, we’re capping out supply.” So what’s going to happen? In our opinion, you’re already seeing the inventory draws. What’s going to happen is the world’s going to be short aluminum.

So let me give you the Alcoa examples here. Let’s put aside carbon taxes, we’ll come back to that. Aluminum’s at $3,200 per ton today. At $3,200 aluminum, Alcoa’s generating low teens EPS per share, no capital allocation, the business has zero debt at the end of the year. So just looking at the EBIT, dropping it to net income, they’re doing $12, $13 of earnings and free cash per share; the stocks at $70. The business being valued at six times free cash flow. So that’s like a 17% unlevered free cash flow yield at $3,200 aluminum. 

But two things. Number one, I think prices are going up. The best commodity forecasters nobody can do it well, none of us know exactly where commodity prices are going to land, the best commodity forecasters out there are Jeff Currie’s group at Goldman Sachs. They’re carrying $3,850 aluminum price forecasts for 2022, and ultimately rising to a $5,000 aluminum price, I think it’s in 2024. At $5,000 aluminum, Alcoa is doing $27 per share of free cash flow. And by the way, that’s before capital allocation. The share count’s coming down dramatically, because they’re sweeping cash now. So you have a business that’s being valued at $72 per share that ultimately is probably going to generate somewhere between $10 and $30 a share of earnings and free cash in the next few years.

You don’t need a lot of $20 per share of free cash flow to eat very quickly into what’s a $73 stock that has no leverage. In three or four years this company has no market cap if they’re paying dividends and buying back stock at the rate that we anticipate. And then on top of that, we have a point of view, it’s not happening tomorrow, it might be a 10+ year journey, but ultimately the world’s going to move to a carbon quota, carbon tax system. We’re not going to let the Chinese dump dirty steel, dirty aluminum, dirty fertilizers, nitrogen, phosphate in the United States and not tax it for the carbon intensity. If you think about it, the average smelter in China today is emitting 16 to 17 metric tons of carbon per ton of aluminum produced. Alcoa’s corporate average is 4.3. So take 16 minus 4. Alcoa is emitting 12 metric tons less carbon per ton of aluminum produced. So if we taxed carbon at $100 per ton, we’re already taxing it higher in Europe, that basically means that the marginal producer is getting priced up by the 12 tons, that’s $1,200 lower on the carbon cost curve that Alcoa is versus the Chinese. 

The Chinese are half the world’s aluminum. They are the marginal producer. $1,200 per ton of P&L for Alcoa is almost doubling what their P&L was in 2021. Said differently, to make it a per-share metric, $100 carbon tax is $8 per share of added earnings power at Alcoa. This is the mega bull case if I just take the Goldman tax $5,000 price forecast, that’s $27 a share free cash flow, I add an $8 per share from a carbon tax, This is ridiculous to even say, but there’s no doubt Alcoa is going to earn over $20, maybe over $30 per share before the share count comes down, so all the per share math is going to get better over time as well. So we look at that as a great thematic beneficiary, structural undersupply, demand’s growing strongly driven by decarbonization. And then the cherry on top is the optionality around carbon taxes.

5. Special: Ho Nam from Altos Ventures — A Different Approach to VC – Benjamin Gilbert, David Rosenthal, and Ho Nam

Ben: Ho, for folks who don’t know, what is the fox and the hedgehog concept?

Ho: Jim Collins wrote about this in Good To Great and his conclusion was these great CEO’s, great companies are run by these hedgehogs that really have one big idea and they have one big mission in life, versus the fox who is very smart and very clever, there may be polymaths, they’re the great serial entrepreneurs, and they’re very popular with VCs. They could hang out at these cocktail parties. They’re very smooth. They’re really, really good at fundraising.

The hedgehog is really this boring creature, not very good at fundraising, does no networking, he doesn’t even like VCs, he doesn’t want to meet anybody. They’re just too busy doing their own thing. Nose to the ground, that’s the hedgehog personality. Collins just perfectly nailed it and when I wrote that blog post, I was thinking this is just like Sam Walton. I had Sam Walton in my mind. He’s one of the all-time great hedgehogs. His book, Made in America, told me what the mind of an amazing entrepreneur looks like.

We’re very, very fortunate that he got sick at the end of his life because he never would have written that book. He would’ve been out duck hunting, visiting his stores, and doing all those things he loved, but he was bound at home. Everybody wanted him to write something and he finally wrote it. We’re very lucky that we got to get a glimpse into his mind.

Buffett, of course, is another amazing hedgehog. You have this guy who, at the time—I don’t know how old he was, in his 80s or 70s—he hasn’t needed to work for money for decades, but he’s still working; he’s now 90 or 91 years old.

David: He didn’t have to work for money when he left Graham Newman.

Ho: That’s right, at age 25 he had enough to retire, but they keep going. They keep going on and on like the Energizer Bunny. They never run out of energy. Why is that? What is it about certain guys that become billionaires and they’re still showing up to work? Not only showing up to work, but they say they tap dance to work. Bezos copied Buffett’s lines, he’s like, I tap dance to work every day. Buffett’s still there. Sam Walton’s still there to the end, to the very end. You have to carry them out with a stretcher.

They’re some of the people who are just like that. We’re trying to study who these people are. We’re trying to incorporate some of that for ourselves as well. How do we structure the work and surround ourselves with the types of people that give us joy, that motivate us to come back, to keep coming back, to keep doing it, rather than to say I’m done, I’m punching out?

We’re always thinking about that because our role model is the Buffett kind of guy. We didn’t set out to start the venture firm for ourselves, so we punch out at the age of 50 or 60 and say, why did I start something so I could give it to the next generation?

I think I’m going to just be around for a while. The next generation could join us. They’re fantastic people and these are people I want to invest in. We think of the next generation as we are both LPs and GPs. We want to invest in that next generation. I think that’s one of the things we observe with some really enduring franchises, where they are no longer thinking about the business as a GP. They’re really thinking about it as an LP. They become both LP and GP…

…Ho, let me ask you a question. This will take us a little bit into the firm history. We’ve thrown around Roblox, we’ve thrown around Coupang, we’ve thrown around Woowa Brothers. At this point, these multi-billion dollar investments, these things keep happening to you. You know what excellence feels like now in terms of the results, and then back-testing that against what those entrepreneurs look like when we invested very early in them. Can you take us back emotionally to what it was like the first time you started to see your first 3X, 5X, 8X, where you knew you had something in the portfolio, where you were looking at each other, like we actually might be good at this. One of these companies might go and what your psychology was around that point in time.

Ho: It’s such an interesting question. It’s complicated. There’s the people equation and then there’s also the business equation. I’ll talk about the people a little bit and then we’re going to talk about the business fundamentals. The people, we already talked about a little bit. We just have a bias towards certain kinds of entrepreneurs, what we call the hedgehog versus the fox.

There’s nothing wrong with foxes and nothing wrong with amazing serial entrepreneurs. They’re incredibly competent people. They will make money over and over again. But I call the great serial entrepreneurs just amazing people who just have not yet found their true life’s calling. You could be a serial entrepreneur, have a bunch of fantastic hits but then you will find something and say, oh my God, this is it. I found what my life’s purpose is. I’m here for the rest of my life. We’re looking for that match—company founder fit.

Sam Walton was like that. Sam Walton was a very successful serial entrepreneur, very successful even as a teenager. He was making all kinds of money. He was making thousands of dollars which is big money back in those days. Just like Buffett was a very successful teenage entrepreneur. He’s always been fairly wealthy, fairly successful, but he did not start Walmart until age 46. He was already a wealthy, successful guy. At 46, he founded Walmart and that was it. That was it for the rest of his life, the one thing.

We’re looking for the people, the one thing. This is our true life’s mission at this point in our lives. We’re not looking for yet another deal to make money. Why would we do that? Don’t show me another deal that just makes money. Show me an opportunity to build something really special with a special group of people that have a mission, their life’s mission (hopefully) and how can we support them on that.

Guess what, if you actually do that, the money will be there. Don’t worry about making money, that cannot be the reason to do any deal. It’s got to be because you want to work with these people and it’s got to because we have a chance to build something. It’s about the people that’s such a critical component.

David: You’ve said a bunch to me and I love adapting a Buffett analogy, but you want to find people and I think you all think of yourselves this way in Altos. Where you’re painting a masterpiece versus your painting by numbers. When you’re painting a masterpiece, there is no formula and it’s never done.

Ho: Yeah. Every time it’s just different. But Buffett calls Berkshire his painting, that’s my painting. When he buys business from one of these great founders who became a billionaire, he tells them, you have this masterpiece. I want to hang it in my museum. I’m not going to touch it. I’m not going to rip it apart, sell it off in pieces. I’m going to hold onto it forever. It’s a beautiful masterpiece.

Sometimes you do the painting and it turns out to be not so good. Sometimes it’s a masterpiece, but it’s just unique. It’s just different every time. We’re looking for an artist. There’s a lot of people out there who want volume, they want scale and paint by numbers will do it. You could build a much, much bigger business that way. Certainly much more predictable and much more repeatable. There’s a lot of people who want that.

David: Or maybe a bigger business faster.

Ho: Yeah. I think it’s the LP’s that are driving it. LPs really want predictability, repeatability. They don’t want to take too much risk. I kind of joke that everybody wants Berny Madoff without the fraud. Nobody wants fraud of course, but I think everybody was Berny Madoff. They want nice, steady. They don’t want to be too greedy. They just want steady returns, and there’s a lot of big funds that are just geared, they’re set up for that. Company after company, deal after deal, it’s like a cookie cutter. Crank them out of a factory and it’s a deal factory, a deal machine and the LP’s want it.

Okay, good for you that’s fine. We’re just going to do something different over here. If you want that, it’s a small piece of your portfolio because we’re not going to be able to crank it up in volume like that. We just have our own little thing going.

6. Moving Money Internationally – Patrick McKenzie

As we’ve covered previously about bank transfers, “moving money” is a misnomer, a simplification which covers a complex coordinated series of offsetting agreements about debts. When you move money domestically, your bank and the recipient’s bank use some intermediary system to coordinate a series of agreements which result in your bank agreeing it owes you less than it did prior and the recipient’s bank agreeing that it owes the recipient more than it did previously.

This same principle is at play in moving money internationally, with one interesting difference: banks largely cannot hold money extraterritorially directly, for most useful values of “directly.” Instead, they rely on a correspondent banking relationship.

Banks can have accounts at other banks, and extremely frequently do. A major reason to do this internationally is to facilitate payments in other currencies and other jurisdictions.

An example which shows the general pattern (with one tiny fib to save a few paragraphs of irrelevant detail): once upon a time, shortly before the global financial crisis, a young American banking at a small institution in Gifu Prefecture, Japan needed to send in his student loan payment to the servicer working for the U.S. government. The U.S. government, somewhat predictably, strongly prefers dollars over yen, and (perhaps less predictably) has incredible difficulty taking payments internationally.

That small institution, which will remain nameless since I still bank with them, holds some dollars on its books (a few hundred million dollars worth) but does not “physically” control more than the tiniest fraction of them. (That tiny fraction is paper dollars which, if you are a Gifuite anticipating a vacation to e.g. Hawaii, you can purchase at your local branch office in small quantities for a fairly hefty spread.) The vast majority of its dollars are owed to it by Mitsubishi UFJ Bank, the largest bank in Japan.

MUFJ is the largest supplier of yen/dollar liquidity in Japan, but it does not have direct access to the U.S. banking system. (In something of an oddity, it does today control a U.S. subsidiary which has full access, but that was not available back in the day.) Instead, it holds accounts at a variety of U.S. banks.

The one which acted as the intermediary bank on the wire (Wachovia) is no longer with us. MUFJ had an account with Wachovia, which is to say that the dollars MUFJ owned were owed to it by that bank. Neither MUFJ nor my own bank had custody of the dollars they were going to move on my behalf.

MUFJ’s intermediary had full access to the U.S. financial system, including to FedWire, which does domestic wire transfers.

When my local bank executed the wire, it passed an instruction to MUFJ, which passed an instruction to Wachovia, which effected a funds transfer through FedWire, which goes through the Federal Reserve, causing Bank of America to be owed slightly more money by the Fed, which it swiftly agreed that it owed me most of (after deducting a fee). And thus an offsetting series of rapid agreements about changes in amounts owed between bilateral counterparties results in me having less yen and the U.S. federal government having more dollars, plus each at least five entities earning a fee.

In broad strokes, this is how correspondent banking has always worked. Note the absence of an explicit technological substrate here: it could be conducted over TCP/IP, by a telegraph, or with a letter carried between countries on horse. And, indeed, all of those have been extensively used in correspondent banking over the centuries.

7. Brinton Johns, Jon Bathgate – Cadence: Software Behind Semiconductor Design – Matt Russell, Brinton Johns, and Jon Bathgate

[00:03:22] Matt: I’m personally excited for this breakdown. I spent my career as an investor dedicated to energy and industrials, so it always felt like we were the Sunday matinee, and software and tech was the primetime programming. So I thought a good place to start with Cadence, where it sits at this interesting intersection of software and hardware, it’s a $40 billion company at the time of this recording, but by no means a household name. I thought maybe we could start working backwards, and Brinton, I’ll start with you. Can you share a product that I interact with on a day to day basis, and how Cadence plays a role in bringing that product to life?

[00:04:00] Brinton: Well, first of all, thanks for saying, that we were the main event, because Jon and I, a semiconductor analyst, really, most of the time, we felt more like the redheaded stepchild than the main event. That’s very flattering. If you think about your phone, let’s just use an iPhone, and we work backwards, then this device, of course, has a lot of chips inside of it. Those chips, a lot of them are now designed by Apple itself, an OEM that became a chip maker. A lot of them are designed by other companies, they’re made at TSMC or Samsung, but probably mostly TSMC. And then they are made behind semiconductor equipment. So we think about ASML and KLA and AMAT, and then we sort of work back. And they’ve got memory in it, which is a different kind of chip. And then, all the way back, and the linking factor throughout all of these things is, you have to have a tool to design all those chips on. I’m going to simplify it, Jon will give a more nuanced answer, but there’s really only two companies in the world that do that. This is the tool that engineers live on, every day, all day long, every company that designs chips has it. And it’s integral to the way the world works today.

[00:05:08] Jon: You described it well, Brinton. I think, if you think about a knowledge worker, if you’re working in financial services, and you come sit at your desk every day, you probably are working in Microsoft Office and Excel or PowerPoint. Unfortunately, I would say, if you’re a creative, you’re are probably in the Adobe suites, you’re working on Photoshop, or illustrator. And EDA tools, so tools from Cadence, and their closest competitor, Synopsys, are the productivity tools for designing a chip. One way you can think about how the software actually works is, the end result, what you’re trying to produce is really a blueprint for a chip. You think about a company like Autodesk, that provides the software for architecture and engineering, when you’re trying to build a house, and you’re trying to build a blueprint for that house. And semiconductors, you’re also trying to build a house and a blueprint. But you’ve got 60 billion rooms in that house, and in each room in the house is one ten thousandth the width of a human hair. That’s the starting point of what EDA software is. It’s highly, highly technical. It’s this productivity platform and design platform for designing a chip. To Brinton’s point, they partner with the chip designer, which would be an engineer at someone like Apple, which is a systems company that designs their own chips, or household chip design names, someone like NVIDIA or Intel or AMD. Some broader context on just how the in works? So semiconductors, to Brinton’s point, it’s a $550 billion industry. Roughly 15% of chip industry sales are spent on R&D. It’s a very highly R&D intensive industry. Actually, 15% of that, give or take, is spent on ESA tools.

Take 15% squared, is 2.25%, I think, going back to my math degree. That gets you about a $10 billion market for EDA software. What I think is fascinating about EDA software is, you have a $10 billion industry, cadence has, give or take, a third of that market. You have this $550 billion industry sitting on top of EDA software and semiconductors, where you literally cannot build a chip or design a chip without this mission critical software. You abstract that one more level, and you think about, I mean, smartphones are a $400 billion industry, PCs are a $250 billion industry, and you’ve got hundreds of billions of dollars going into the Cloud. We’ve realized that you can’t build a car now without semiconductors, you go to medical devices, and this long tail of things that are built on chips. So it feels like the whole global economy that’s going digital, which, I would argue, is most of the economy at this point, is built on the shoulders of these two special companies, which are Cadence and Synopsys. That’s why we’re excited to talk about it…

…[00:09:06] Jon: Cadence, specifically, so they were formed by the merger of two EDA companies, EDCA and SDA, which I think are trivia questions in the semiconductor industry now. Cadence was formed in 1989. What’s interesting about the forming of Cadence, as it was where the semiconductor industry had gone, from a vertical integration model, with everyone doing everything themselves, to Brinton’s point, to specialization. It also coincides with when TSMC was founded in the ’80s. Also, when some of the major equipment manufacturers, like ASML and Lam Research, were also founded. I think part of it was, the writing was on the wall a little bit, like in the ’70s and early ’80s, the number of transistors in a given chip was in the thousands. You could see with the progression of Moore’s Law, that number was doubling in density every two years, basically, that things were going to get extremely complex very quickly. That’s why you had this interest in disaggregating this vertical integration model. Also, I would say, it democratized the chip business because it made it possible for someone, whether it’s a vertically integrated equipment maker, or end device maker, or just a group of engineers, to come in and start a company. Because all of a sudden you don’t need millions of dollars to build a factory and build your own internal tools, and build the equipment. You can just by the software from Cadence, and partner with TSMC, to actually build your design. That’s the founding story, where I think it’s so interesting, as it coincides with this disaggregation of the vertical integration model in Semiconductor Land.

...[00:12:14] Matt: Yeah, maybe you could walk us through the process. I think you touched on this a little bit, in one of your previous answers, but if a company like Apple wants to actually get into the designing of a chip, can you walk us through what the cycle of that looks like, all the way from initial plans, how they integrate Cadence, working with a chip manufacturer, and then into production?

[00:12:36] Brinton: Sure, there’s a couple of good examples. I’ll start at, think about Apple, or even Amazon, for that matter. Apple bought PA Semiconductor in 2008, it was a relatively small transaction, from Apple terms, hundreds of millions of dollars, not billions. We look at what they’ve done with it over time, of course, making the application processor, and now, all the way to displacing Intel into their PCs with an M1 chip, that’s an arm-based trip. You hire a team of engineers, you use these tools, Cadence and Synopsys. You develop IT over time, and then get it fabbed at TSMC. They started a relationship directly with TSMC, and then, that chip then goes to Foxconn. They put your phone together and it gets shipped straight to the customer, right? Most of the time, the brand isn’t even touching the device. It’s sort of fascinating. Also, one of the areas we haven’t hit on yet, that’s been democratized, is IP blocks, and Jon can talk about this a lot more. But just one important point to make is, in semiconductors, there is no GitHub of IP. It’s distributed around a lot of different companies. Developing your own IP is important, but most of the chip is still IP blocks that you’re sourcing from other places, and you have to deal with several companies to get those.

[00:13:53] Jon: This IP point is really important. So the basic building blocks for building a chip is a great team, to Brinton’s point. And you need the basic tools, the EDA tools, from Cadence or Synopsys. On the IP front, most designs, especially in digital semiconductora for a smartphone, in this example, use what we call off-the-shelf IP, where you actually license intellectual property from a third party. Arm Holdings, which is in the news daily right now, because if the failed acquisition attempt by NVIDIA, provides that IP. For the processor that is in your iPhone, or in your Mac and MacBook, and iPad now, the architecture, the instruction set for that chip, was actually licensed from Arm. Then Apple will take their thousands of engineers, and literally, I mean, at one point, that I think is noteworthy on a leading edge chip, like we’re talking about with Apple, where they’re using the most kind of advanced process technology out there, the cost of designing these chips is in the high hundreds of millions of dollars for a five nanometer chip, which is the leading edge.

Right now, there’s numbers out there from McKinsey or Gardner, or other third parties, that would put that number at over 500 million. The basics of designing the chip are incorporating these third party IP blocks, which is almost like Legos. A lot of the process now is actually taking, even something as simple as if you want to have USB in the chip. USB is actually not that differentiated, or USB compatibility, I would say. So you don’t need to invent the next USB, you just need something that is going to charge when you plug it in. The device will understand how that process works. That’s something they could actually license from a company like Cadence or Synopsys. It’s kind of a multi-year journey. You put the IP blocks together. You actually do a lot of simulation on the chip, both in software, and actually in hardware. There are tools, where Cadence does very well, called emulation tools.

You actually will run really heavy simulation, that looks just like a server rack, or racks of servers, like a server container, to actually simulate the chip, to make sure it’ll work. The way the process works is at the end of designing the chip, it’s called taping it out. So you tape out the design. Then you have to put that into a photomask, which is kind of the stencil for the chip, or it’s like the negative, if you’re thinking about a negative of an old photo, or something like that. And those, even the masks themselves, cost $10 million now. The cost of failure on one of these designs is very high, and that’s part of the reason why these tools are so critically important. First of all, they’re enabling a lot of innovation, but also, you have to really trust the tools, that you are going to come out with the outcome that shooting for.

Once you have the photomasks, you actually, you would pass that on to your manufacturing partner. One of the things we haven’t really gone into is just the different kinds of chip companies. Brinton mentioned fabulous companies. That’d be someone like NVIDIA, where a fab is the term for chip manufacturing facility. It’s short for a fabrication facility. A fabless company is a company like NVIDIA, that designs the chips, but they do not own their manufacturing. That’s different from what’s called an IDM, which is the Intel model, which is integrated device manufacturer. And that’s where manufacturing and design are still incorporated into the same company. It is important to distinguish those two. So if you were at NVIDIA, you would hand off that design, and the photo mask, to your manufacturing partner, which is TSMC, or if you were Intel, you would hand that off to your manufacturing group, which is obviously, inside of Intel.

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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 06 March 2022:

1. TIP 422: Frontier Market Investing w/ Maciej Wojtal – Stig Brodersen and Maciej Wojtal 

Stig Brodersen (00:01:12):

So we are very excited to speak with you here today and talk about investing in frontier markets, and specifically about Iran. And here on the show, we are big followers of, Warren Buffett. I don’t necessarily think Warren Buffett would invest in Iran. That’s not so much what I’m saying, but he’s very famous of saying that there’s no difficulty bonus in investing. And I thought of this exact quote, going into this interview, because I heard you comparing investing in Iran with what happened in Poland and China, whenever the markets open up. So perhaps for our listeners, could you talk about what does a market open an up mean?

Maciej Wojtal (00:01:45):

So market opening up can mean, obviously, many different things and it will be different. But if we look at the last 20 years of history and those main markets, the main thing it meant is that there was an inflow of foreign capital and usually not enough liquidity in the stock market to absorb it, which meant that the local market was just moving rapidly higher in a very short period of time. For example, in the early 90s, China opened up, also not fully partially, and the index in dollar terms went up around 12 times in less than two years. Well, it’s interesting to know that at that time, China was actually still under sanctions after Tiananmen Square. So it wasn’t very easy and it wasn’t very straightforward still, when it opened up and there were no foreign investors involved. When they came, the market just skyrocketed. With Russia, it was similar. I mean, the index in dollar terms in, I think, it was 1994, went up around 10 times. Again, in less than two years.

Maciej Wojtal (00:02:50):

[Poland] was so even more striking because the stock market was launched around 1992, 1993. For the first two years, nothing really happened. The stocks were trading at free time earnings. No one was investing. There were no foreigners. Then foreign investors saw, okay, it’s actually a stable enough economy after transitioning from socialism to market economy. It’s stable enough. And they started investing and the market went up in dollar terms almost 25 times, 25X in less than two years. Then it crushed, obviously, then it went up again. But at the beginning, it was just moving sideways at very low valuations. And then there was this sudden inflow of foreign capital that just lifted the market big time…

…Maciej Wojtal (00:07:13):

But actually, Iran is much more than just China, Russia, and Poland in the early 90s because of the same sanctions. The other countries just opened up to the flow of foreign capital. Iran will also open up its economy. Right now when you look at Iranian companies, you have exporters. For example, petrochemical exporter, most profitable petrochemical companies in the world, just like in Saudi Arabia, highest margins. But if you are an Iranian exporter and want to sell your products abroad, it’s difficult for you to find investors because it’s Iranian, people know there are sanctions. So they don’t know whether they are allowed to buy products from you or not. So you have to entice them by offering discounts. So the selling prices that you’re realizing are much lower than global prices that other companies are realizing. Then try to get paid. If you’re Iranian company, banks don’t really work. The connections between Iranian banks and foreign banks, try to get your products insured, try to arrange logistics…

…Maciej Wojtal (00:12:43):

Iran is completely misunderstood because it’s been under sanctions because it’s been shut down, there are not too many foreigners in Iran, investing or living. So people just don’t know. And Iran, so starting with the very basic facts, is a big country of 84 million people with the median age of around 30 years with the beautiful demographic profile. And it’s located in the region between Middle East and Central Asia. So it’s very important because Iran benefits from its location because it is, for example, on the way of Chinese China’s Belt and Road Initiative, and very important country between Europe and Asia. But it’s also important because Iran plus all its neighbors, it’s more than 500 million people. It’s like second Europe. And Iranian companies have very good connections in the region. They are well placed to export in this region. So the whole market, when you look at Iran for those companies, say, okay, 80 million people, but then many regional exporters export to the market of 500 million people. That’s why they can gain enough scale. And for example, sustain through sanctions.

Maciej Wojtal (00:13:56):

But what is very important is the quality of people in Iran. So the education level, so tertiary education enrollment rates are similar to Europe. Iranians have 5,000 years of written history and there is a strong sense when you speak to Iranians that they understand this and that there is this heritage, strong culture heritage, and that education has always been important. So you get very strong quality of people that you can employ and wages are lower than in Vietnam. It’s as ratio of cost quality, probably the best country in the world. Now, when it comes to the economy, indeed, Iran has the largest combined oil and gas reserves in the world. But it is only, right now, it’s actually less than 10% of GDP. It used to be 15% then because of sanctions, now, Iran is exporting much less oils, so it’s less than 10%, for sure.

Maciej Wojtal (00:14:55):

And the rest of the economy, it’s a well diversified economy. You have a lot of manufacturing. They produce more than a million cars per year. So while the industry is related to car manufacturing and the steel industry is huge, auto parts, then petro chemicals industry is very important. So all this makes it a well diversified economy that is self-sufficient to a large extent. So they don’t import a lot of goods. They do have to import some essential goods, some food products, some pharmaceutical products. But the majority of what they consume is actually they can produce themselves. These are good things about having sanctions for a couple of decades, that you don’t have a choice. You need to develop all those different industries so that your economy can function properly.

Maciej Wojtal (00:15:39):

So yes, it is rising because when you look at Iraq or Saudi Arabia, more than 90% of GDP is coming from oil. And in Iran, those commodities, so it’s not only oil and gas, it’s also metals like iron ore, zinc, some other industrial metals deposits as well. This is an additional feature of the Iranian economy that can help to kickstart the growth and help finance infrastructure investments, for example. So this is important. But the biggest opportunity is actually in the non-oil part of the Iranian economy and in the resources, that’s the main resource of the Iranian economy. And this is also reflected in the stock market. What struck me, I mean, I was very surprised to learn that the stock market has 600 companies listed across 50 different industries and there is no oil and gas on the stock market. So it’s not a proxy on oil prices.

Maciej Wojtal (00:16:32):

You have petrochemicals, telecoms, steel companies, pharmaceuticals, lot of different manufacturing companies, software companies, consumer staples, FMCG companies. So really like a proper well diversified market. The market cap is around $250 billion. So probably one of the biggest frontier markets. If it was classified as a frontier, it would be one of the biggest frontier market with proper liquidity. So the average daily liquidity last year was around $400 million. $400 million of trading per day in Iran with no foreign investors. All of foreign investors are, as I said, less than half a percent of the market cap. So it’s all local money driven by individual retail investors. So you have one to 2 million retail investors that invest probably around $100 on average. And this makes the market very inefficient, which is very interesting as well for professional investors. It’s a bit like China A-Shares before hedge funds started investing there or Vietnam at an earlier stage before institutional investors got involved.

Maciej Wojtal (00:17:43):

So this was what struck me when I started learning about Iran. One thing is how well developed the country is. Then absolutely how I enjoyed meeting and spending time and talking with the local people. And they’re super friendly. I mean, another misconception about Iran, because of political reasons, the whole country is often portrayed as the country of, I don’t know, terrorists or some dangerous place out there. And when you go to Iran, if you travel there by yourself, you see that if you go around different cities, you meet people. If they speak English, they will approach you and have a chat with you. They don’t have too many tourists. So everyone is curious. Everyone is super friendly. So not only neutral, they’re friendly and want to have a chat, want to get to know you. It’s a very tolerant society.

Maciej Wojtal (00:18:34):

So obviously, Iran as a country is Muslim. It’s a [Shia] Muslim country. You have big minorities, Sunni minorities, Jewish minorities, Christian minorities. I was going around site seeing different churches, was going to Jewish synagogues, Zoroastrian churches, Christian churches, and everyone is doing his thing. There is no police in front of the church. It’s open and the society is tolerant. More than that, you actually have permanent seats in the Iranian parliament for the Jewish minority, Christian minority, and the Zoroastrian minority, so that they are also represented in the parliament. Again, the situation with women. So I guess that people in the West who don’t know, who don’t understand Iran, probably only notice that women in Iran have to wear hijab, right? That this is compulsory to cover your head. But when you look deeper, actually, the majority of students are women from the top universities in Iran. When you start to get to know the local families, you understand that households and household budgets and the most important decisions they are run by women. They actually control the households.

Maciej Wojtal (00:19:48):

And when I meet with women in professional jobs, working in banks and so on, they are the best educated with the best English, doing really important jobs. With countries like Iran, it’s so important, it’s so good to go there by yourself, and actually not only do your own investment research, but get to know the country, start to understand its culture, its population. So this was a very surprising, positively surprising thing to observe. And I had no bias. I mean, I had never met an Iranian in my life before my first trip to Iran. I went there for the first time in 2016, when the JCPOA was signed, so the Iran nuclear deal was signed. The UN sanctions were lifted and it became legal for non-US people to invest in Iran. So this is the first time I went there.

2. An Interview with Intel CEO Pat Gelsinger – Ben Thompson and Pat Gelsinger

Stepping back, a critical piece of making this strategy work is the secular bet that computing is going to significantly increase. TSMC has obviously made the same bet and their capital expenditures are stratospheric. Right now we see this chip shortage, it’s very acute, but at the same time, IFS isn’t going to reach scale for several years. Are you worried that we’re going to have a situation where all this TSMC capacity comes online, IFS comes online, Samsung comes online — this is classic in the semiconductor industry — that there’s suddenly way too much capacity? Are you worried about a slump in that case?

PG: I’m not really, but let’s tease it apart a little bit more, Ben, while I sit here. The first thing I’d ask you, because there is a cyclical nature to the semi industry, when was the last time we had a logic surplus, not a memory surplus?

I don’t know.

PG: The last memory surplus was about three and a half years ago. The last logic surplus was over a decade ago. So, this idea, as I asserted at the investor event, was there’s an insatiable demand for computing and high performance.

You had smartphone though over the last decade though; going forward it’s all high performance, machine learning, that’s where you see all the demand coming from.

PG: Yeah, I just could see I want my phone to be more powerful at lower power. I want my cloud to be more powerful at lower power, my car — we’ve talked about the automotive industry going from 4% of the BOM to 20% of the BOM by 2030. Where’s that bill of materials going in the auto semi? High performance connectivity, autonomous vehicle characteristics, which are hundreds of tops of performance requirement, advanced infotainment systems, and EV, the electrification of the vehicle, which is largely specialty nodes at that point. None of it’s going into mature nodes, all of it’s going into advanced computing. As we tear that apart, we’re not all that worried.

Now, let’s look at the capital expenditures. Only three companies get to go below 10 at scale. Samsung, TSMC, and Intel. Obviously, Samsung’s capital budget is clearly going to be carved up between memory, taking the majority of it, and logic. My budget is not going to be carved up between memory and logic, it’s all about logic. TSMC’s capacity is carved up between mature — they’re now having to go can reinvest the mature nodes.

3. ‘Yes, He Would’: Fiona Hill on Putin and Nukes – Maura Reynolds and Fiona Hill

Maura Reynolds: You’ve been a Putin watcher for a long time, and you’ve written one of the best biographies of Putin. When you’ve been watching him over the past week, what have you been seeing that other people might be missing?

Fiona Hill: Putin is usually more cynical and calculated than he came across in his most recent speeches. There’s evident visceral emotion in things that he said in the past few weeks justifying the war in Ukraine. The pretext is completely flimsy and almost nonsensical for anybody who’s not in the echo chamber or the bubble of propaganda in Russia itself. I mean, demanding to the Ukrainian military that they essentially overthrow their own government or lay down their arms and surrender because they are being commanded by a bunch of drug-addled Nazi fascists? There’s just no sense to that. It beggars the imagination.

Putin doesn’t even seem like he’s trying to make a convincing case. We saw the same thing in the Russian response at the United Nations. The justification has essentially been “what-about-ism”: ‘You guys have been invading Iraq, Afghanistan. Don’t tell me that I can’t do the same thing in Ukraine.”…

…Reynolds: Do you think Putin’s current goal is reconstituting the Soviet Union, the Russian Empire, or something different?

Hill: It’s reestablishing Russian dominance of what Russia sees as the Russian “Imperium.” I’m saying this very specifically because the lands of the Soviet Union didn’t cover all of the territories that were once part of the Russian Empire. So that should give us pause.

Putin has articulated an idea of there being a “Russky Mir” or a “Russian World.” The recent essay he published about Ukraine and Russia states the Ukrainian and Russian people are “one people,” a “yedinyi narod.” He’s saying Ukrainians and Russians are one and the same. This idea of a Russian World means re-gathering all the Russian-speakers in different places that belonged at some point to the Russian tsardom.

I’ve kind of quipped about this but I also worry about it in all seriousness — that Putin’s been down in the archives of the Kremlin during Covid looking through old maps and treaties and all the different borders that Russia has had over the centuries. He’s said, repeatedly, that Russian and European borders have changed many times. And in his speeches, he’s gone after various former Russian and Soviet leaders, he’s gone after Lenin and he’s gone after the communists, because in his view they ruptured the Russian empire, they lost Russian lands in the revolution, and yes, Stalin brought some of them back into the fold again like the Baltic States and some of the lands of Ukraine that had been divided up during World War II, but they were lost again with the dissolution of the USSR. Putin’s view is that borders change, and so the borders of the old Russian imperium are still in play for Moscow to dominate now.

Reynolds: Dominance in what way?

Hill: It doesn’t mean that he’s going to annex all of them and make them part of the Russian Federation like they’ve done with Crimea. You can establish dominance by marginalizing regional countries, by making sure that their leaders are completely dependent on Moscow, either by Moscow practically appointing them through rigged elections or ensuring they are tethered to Russian economic and political and security networks. You can see this now across the former Soviet space.

We’ve seen pressure being put on Kazakhstan to reorient itself back toward Russia, instead of balancing between Russia and China, and the West. And just a couple of days before the invasion of Ukraine in a little-noticed act, Azerbaijan signed a bilateral military agreement with Russia. This is significant because Azerbaijan’s leader has been resisting this for decades. And we can also see that Russia has made itself the final arbiter of the future relationship between Armenia and Azerbaijan. Georgia has also been marginalized after being a thorn in Russia’s side for decades. And Belarus is now completely subjugated by Moscow.

But amid all this, Ukraine was the country that got away. And what Putin is saying now is that Ukraine doesn’t belong to Ukrainians. It belongs to him and the past. He is going to wipe Ukraine off the map, literally, because it doesn’t belong on his map of the “Russian world.” He’s basically told us that. He might leave behind some rump statelets. When we look at old maps of Europe — probably the maps he’s been looking at — you find all kinds of strange entities, like the Sanjak of Novi Pazar in the Balkans. I used to think, what the hell is that? These are all little places that have dependency on a bigger power and were created to prevent the formation of larger viable states in contested regions. Basically, if Vladimir Putin has his way, Ukraine is not going to exist as the modern-day Ukraine of the last 30 years…

…Reynolds: So how do we deal with it? Are sanctions enough?

Hill: Well, we can’t just deal with it as the United States on our own. First of all, this has to be an international response.

Reynolds: Larger than NATO?

Hill: It has to be larger than NATO. Now I’m not saying that that means an international military response that’s larger than NATO, but the push back has to be international.

We first have to think about what Vladimir Putin has done and the nature of what we’re facing. People don’t want to talk about Adolf Hitler and World War II, but I’m going to talk about it. Obviously the major element when you talk about World War II, which is overwhelming, is the Holocaust and the absolute decimation of the Jewish population of Europe, as well as the Roma-Sinti people.

But let’s focus here on the territorial expansionism of Germany, what Germany did under Hitler in that period: seizure of the Sudetenland and the Anschluss or annexation of Austria, all on the basis that they were German speakers. The invasion of Poland. The treaty with the Soviet Union, the Molotov-Ribbentrop pact, that also enabled the Soviet Union to take portions of Poland but then became a prelude to Operation Barbarossa, the German invasion of the Soviet Union. Invasions of France and all of the countries surrounding Germany, including Denmark and further afield to Norway. Germany eventually engaged in a burst of massive territorial expansion and occupation. Eventually the Soviet Union fought back. Vladimir Putin’s own family suffered during the siege of Leningrad, and yet here is Vladimir Putin doing exactly the same thing.

Reynolds: So, similar to Hitler, he’s using a sense of massive historical grievance combined with a veneer of protecting Russians and a dismissal of the rights of minorities and other nations to have independent countries in order to fuel territorial ambitions?

Hill: Correct. And he’s blaming others, for why this has happened, and getting us to blame ourselves.

If people look back to the history of World War II, there were an awful lot of people around Europe who became Nazi German sympathizers before the invasion of Poland. In the United Kingdom, there was a whole host of British politicians who admired Hitler’s strength and his power, for doing what Great Powers do, before the horrors of the Blitz and the Holocaust finally penetrated.

Reynolds: And you see this now.

Hill: You totally see it. Unfortunately, we have politicians and public figures in the United States and around Europe who have embraced the idea that Russia was wronged by NATO and that Putin is a strong, powerful man and has the right to do what he’s doing: Because Ukraine is somehow not worthy of independence, because it’s either Russia’s historical lands or Ukrainians are Russians, or the Ukrainian leaders are — this is what Putin says — “drug addled, fascist Nazis” or whatever labels he wants to apply here.

So sadly, we are treading back through old historical patterns that we said that we would never permit to happen again. The other thing to think about in this larger historic context is how much the German business community helped facilitate the rise of Hitler. Right now, everyone who has been doing business in Russia or buying Russian gas and oil has contributed to Putin’s war chest. Our investments are not just boosting business profits, or Russia’s sovereign wealth funds and its longer-term development. They now are literally the fuel for Russia’s invasion of Ukraine.

4. SPAC Startups Made Lofty Promises. They Aren’t Working Out – Heather Somerville and Eliot Brown

Dozens of startups that went public in a pandemic-fueled stock market frenzy are missing the projections they used to win over investors, many by substantial margins and just a few months after making those forecasts.

Nearly half of all startups with less than $10 million of annual revenue that went public last year through a special-purpose acquisition company, known as SPAC, have failed or are expected to fail to meet the 2021 revenue or earnings targets they provided to investors, according to a Wall Street Journal analysis…

…In November, eight months after electric bus and van maker Arrival SA’s public listing through a SPAC merger, Chief Executive Denis Sverdlov offered an update on an earnings call with investors. “We withdraw our long-term forecasts,” he said, adding that the company was putting forward “a more conservative view.”

It was a different tone from the pitch the company gave investors when it went public in March: Its revenue would grow from zero to $14 billion in just three years. It was a stunningly rapid pace—five years faster than Alphabet Inc.’s Google, the fastest U.S. startup ever to reach that level of revenue—particularly given Arrival hadn’t yet produced any vehicles.

The company declined to comment for this article. Its stock is down roughly 85% since listing.

Investors and academics have criticized speculative companies’ use of projections, saying they are used to create buzz and attract investors. The U.S. Securities and Exchange Commission has indicated it is considering new limits on the practice and some federal lawmakers have advanced bills to curtail it. While regulations around traditional initial public offerings strongly discourage companies from making forecasts about future performance, companies that list publicly by merging with SPACs—which are sometimes called blank-check companies—have freely used forecasts, often presenting investors with charts showing enormous growth…

…Professors who examined the issue found a correlation between ambitious forecasts and poor stock performance. Michael Dambra, an associate professor of accounting at University at Buffalo, and two co-authors looked at SPACs from 2010 through 2020 and concluded in a 2021 working paper that high-growth revenue projections are likely to be “overly optimistic and misleading to uninformed investors.”

“The more aggressive your revenue is, the more likely you are to underperform,” Mr. Dambra said in an interview.

5. TIP421: Expectations Investing w/ Michael Mauboussin – Trey Lockerbie and Michael Mauboussin

Trey Lockerbie (00:06:08):

Well, yeah. And the reason I brought up Bill is because I believe that success leaves clues. And he talked about the Santa Fe Institute and how much that had an impression on you, and how that might have shaped his thinking so to speak. So I know you’ve had a number of years working with the Santa Fe Institute, being chair of the board, etc. Maybe give us a glimpse or maybe even an example of a day you walked out of there and said, “Wow. That really changed my mind on something.”

Michael Mauboussin (00:06:33):

Yeah. So the first just by way of background, the institute was found in the mid ’80s. And the original founders felt that academia had become very siloed. So the biologists talked to the biologists, and the physicists to the physicist, and the economists to the economists. And most of the interesting and truly vexing problems in the world lied at the intersections of disciplines. And science has made incredible strides through reductionism, breaking things down into their components. But the argument is to go forward, we really need to unify different disciplines in some important way.

Michael Mauboussin (00:07:04):

So that was the mission. And if there’s a sort of unifying theme, it’s a study of complex adaptive systems, these evolutionary systems. And the simplest way to think about it is a bunch of different agents, whether they’re investors in the stock market, or neurons in your brain, or ants in ant colony that interact with one another. And then we examine what emerges from that whole set of processes. So you get this sense of it right there, no disciplinary boundaries whatsoever. It’s just interesting people pulled together.

Michael Mauboussin (00:07:30):

Let me maybe give two examples of things I think are super cool. One, and I think profoundly important in the world of investing was Brian Arthur’s work on increasing returns. Of course if you take an economics class, and really this appeals to common sense as well, what you learn is that high returns on capital tend to be competed away, which makes sense. So Trey, if your key business is super profitable, I come along and I say, “Gee, I can do what Trey does and maybe charge a little bit less than he does.” So you have to match my prices, and so on and so forth. So we sort of migrate our way down to earning our cost to capital.

Michael Mauboussin (00:08:07):

What Brian Arthur talked about was under certain conditions and circumstances, businesses could actually enjoy increasing returns. In other words, they end up being winner take most or winner take all markets. And again, this is not broad. This is not everywhere you look, but under certain conditions it could be true.

Michael Mauboussin (00:08:24):

And I think Bill was one of the first people to think about connecting that idea to markets, and thinking about businesses, and what the implications were. So that’s one that was both intellectually interesting, but also could be very lucrative in a market setting.

Michael Mauboussin (00:08:37):

The second bit of work, and this is just sort of a side. It is the work on scaling. And this is probably most associated with Geoffrey West. He wrote a wonderful, beautiful book called Scale for those who are interested in this topic in more detail. And just to set it up, Geoffrey’s trained as a theoretical physicist, but he collaborated with Jim Brown who’s a biologist and Brian Enquist who’s an ecologist. So people from different disciplines.

Michael Mauboussin (00:09:00):

So the simplest description of scale where they started was this idea of do you imagine just an X, Y chart, like one you’d know. But the key is that the X axis in this case is on a logarithmic scale. So instead of one, two, three, four, five, it is 1, 10, 100, 1,000. So the increments are the same percentage differences. So it’s a log scale. And then the Y axis same thing, also log scale.

Michael Mauboussin (00:09:22):

So on the X axis, you put the mass for example of a mammal. So how much they weigh. And on the Y axis, you put their metabolic rate, which is basically how much energy they need. So mass metabolic rate. You plot every mammal from a shrew or mouse to a blue whale, and they all fall on the same line on this log log scale with a three quarters exponent.

Michael Mauboussin (00:09:42):

Totally awesome. Right? So this has been understood for about 100 years. More than 100 years, probably. I think it’s called Kleiber’s law that Kleiber figured it out, but no one knew why. So the mystery was the why. So Geoffrey, along with Jim and Brian got together and figured out the why of why this particular scaling law works. And that immediately opened up a huge threat of research about scaling laws in other social systems, including cities and corporations. So this is really exciting stuff that is really coming out fast and furious.

Michael Mauboussin (00:10:16):

So cities also follow very fascinating scaling properties as do companies. We understand the mechanisms now for biological systems. I think the mechanisms for social systems are still being explored, which is super cool. So that has some implications for investing, for example. But maybe not as direct, but just a cool bunch of ideas, right?

Michael Mauboussin (00:10:35):

And this is just a tiny tasting. So there are many, many other things that are going on that are exciting and other whole initiative and collective intelligence. Collective intelligence work directly maps over to markets and market efficiency. So there are lots of parallels you can draw, but it’s super fun going down the path, right? Because there’s so many interesting people. And last thing I’ll say about SFI is that almost by nature, it draws people who are intellectually curious. Most of the scientists we have there have extraordinary street credibility in their own discipline, their core discipline. But they’re obviously very interested in lots of other stuff. So that makes it so much fun because everybody walks around. Everybody’s actively open-minded, so every conversation tends to be a blast. So that’s a little bit about SFI…

…Trey Lockerbie (00:26:35):

So going back to your restaurant example, it just came to mind a very tangible business, right? Real estate, and book values, and things like that. But you mentioned earlier this rise of intangibles. So also keeping on the theme of earnings that actually don’t create value necessarily. I’d love to break down the idea of intangibles for the audience. Let’s first walk through what constitutes an intangible and how it’s expensed, and then maybe how it could actually even distort a company’s earnings.

Michael Mauboussin (00:27:05):

So a tangible asset, a physical asset’s very much what it sounds like, right? Something you can touch and feel move. So think about factories or machines, inventory, stuff like that. An intangible asset is by definition non-physical. So what should conjure up is brand building, training, software code is considered to be an intangible. So these are ‘softer’ things. But of course, as you know important for building value.

Michael Mauboussin (00:27:31):

Now what’s happened is our global economy has transitioned from a reliance on tangible assets. So think back to the year 1900 and the dominant organization being something like U.S. Steel. So you have these big furnaces, and you’re moving steel around and so forth. That’s very tangible. And then if you think today of the most dominant companies, you’re thinking mostly companies that have intellectual capital. So you’re going to think about the Googles or the world, or big pharmaceutical companies, or something where the primary thing that drives the value are recipes, or ideas, or algorithms, or software basically.

Michael Mauboussin (00:28:06):

So that’s how the world’s changed. And to put a finer point on it, in the 1970s, tangible investment exceeded intangible investment by a factor of about two to one. And today, that relationship’s completely flipped. So intangible investment is twice as big as tangible investment, right? So that’s the first thing is a level set is our global economy has transitioned. By the way, if you think about it, it makes sense. We’ve gone through other transitions before.

Michael Mauboussin (00:28:30):

Now the second interesting question is how this is accounted for. So a physical asset, and let’s just say a restaurant might be a good example or a factory. You have to spend the money today to build it. And the accountants would say, “This is going to deliver value for some period of time. Let’s just make it say it’s 10 years.” There’s a something in accounting called the matching principle. What we want to do is match the expense over that full period of time. So you’d spend $1,000 on your factory. And then we depreciate that factory over 10 years. So $100 a year for 10 years. And that depreciation shows up as an expense, but that’s it. Just one 10th of it per year, over time.

Michael Mauboussin (00:29:08):

Intangible investments by contrast as accounts are like, “We’re not sure about the payback. We’re not sure about the useful life. And to be conservative, what we’re going to do is expense it.” So it’s all in expense day one. So even if you spend a lot of money on R&D or a branding campaign, and you’re completely persuaded that there’s a multi-year payoff, accounts are going to say, “Too uncertain, so we’re going to expense it all.” So again, the same investment in a tangible investment will go on the balance sheet and be depreciated. Whereas the intangible will go on the income statement and be expensed.

Michael Mauboussin (00:29:41):

Okay. So let’s try to make one more concrete example. Let’s say Trey, that you have a subscription business, right? And you want to get people to buy your subscription. And on average, when they buy your subscription, they stick around for five years. Well, the way to break it down is there’s going to be some cost to acquire those customers, right? Whether it’s your marketing spending or whatever it is. And then you’re going to get some stream of cash flows, again contractually for the next five years. And let’s say that’s a great investment. In other words, the cash flows you’re going to get over five years is worth a lot more than the cost to get those customers. So it’s an economically really attractive proposition for you as a business person to do this.

Michael Mauboussin (00:30:15):

Well, what’s going to happen to the accounting, right? It’s going to look horrible, right? Because the faster you grow, the more of these upfront expenses you’re going to be shouldering. Your earnings are going to look horrible, even though you’re building value every single day.

Michael Mauboussin (00:30:27):

Now the parallel back in the traditional world, the tangible world was Walmart. Walmart for the first 15 years it was public had negative free cash. So they earned money, but their investments were bigger than their earnings. So they spent more than they made, right? And by the way, when you’re negative free cash flow, that means you have to raise capital. That means you have to raise equity, or debt, or whatever it is. And Walmart did that for the first 15 years. Was negative free cashflow problem? No, it’s fantastic. Right? Because the stores they were building were wonderful. Great returns on capital. So the faster they grow, the more wealth they would create. Again, negative free cash flow. But really good economic propositions.

Michael Mauboussin (00:31:04):

So this is what’s happening in the world today is that as we’ve transitioned from one tangible world to an intangible world, even good unit economics, good businesses, they’re going to appear very different than they did in generation or two before. And as a consequence, you have to be careful about relying solely on earnings.

6. Berkshire Hathaway 2021 Shareholder Letter – Warren Buffett

Berkshire owns a wide variety of businesses, some in their entirety, some only in part. The second group largely consists of marketable common stocks of major American companies. Additionally, we own a few non-U.S. equities and participate in several joint ventures or other collaborative activities.

Whatever our form of ownership, our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO. Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers…

…Last year, Paul Andrews died. Paul was the founder and CEO of TTI, a Fort Worth-based subsidiary of Berkshire. Throughout his life – in both his business and his personal pursuits – Paul quietly displayed all the qualities that Charlie and I admire. His story should be told.

In 1971, Paul was working as a purchasing agent for General Dynamics when the roof fell in. After losing a huge defense contract, the company fired thousands of employees, including Paul.

With his first child due soon, Paul decided to bet on himself, using $500 of his savings to found Tex-Tronics (later renamed TTI). The company set itself up to distribute small electronic components, and first-year sales totaled $112,000. Today, TTI markets more than one million different items with annual volume of $7.7 billion.

But back to 2006: Paul, at 63, then found himself happy with his family, his job, and his associates. But he had one nagging worry, heightened because he had recently witnessed a friend’s early death and the disastrous results that followed for that man’s family and business. What, Paul asked himself in 2006, would happen to the many people depending on him if he should unexpectedly die?

For a year, Paul wrestled with his options. Sell to a competitor? From a strictly economic viewpoint, that course made the most sense. After all, competitors could envision lucrative “synergies” – savings that would be achieved as the acquiror slashed duplicated functions at TTI.

But . . . Such a purchaser would most certainly also retain its CFO, its legal counsel, its HR unit. Their TTI counterparts would therefore be sent packing. And ugh! If a new distribution center were to be needed, the acquirer’s home city would certainly be favored over Fort Worth.

Whatever the financial benefits, Paul quickly concluded that selling to a competitor was not for him. He next considered seeking a financial buyer, a species once labeled – aptly so – a leveraged buyout firm. Paul knew, however, that such a purchaser would be focused on an “exit strategy.” And who could know what that would be? Brooding over it all, Paul found himself having no interest in handing his 35-year-old creation over to a reseller.

When Paul met me, he explained why he had eliminated these two alternatives as buyers. He then summed up his dilemma by saying – in far more tactful phrasing than this – “After a year of pondering the alternatives, I want to sell to Berkshire because you are the only guy left.” So, I made an offer and Paul said “Yes.” One meeting; one lunch; one deal.

To say we both lived happily ever after is an understatement. When Berkshire purchased TTI, the company employed 2,387. Now the number is 8,043. A large percentage of that growth took place in Fort Worth and environs. Earnings have increased 673%.

Annually, I would call Paul and tell him his salary should be substantially increased. Annually, he would tell me, “We can talk about that next year, Warren; I’m too busy now.”

When Greg Abel and I attended Paul’s memorial service, we met children, grandchildren, long-time associates (including TTI’s first employee) and John Roach, the former CEO of a Fort Worth company Berkshire had purchased in 2000. John had steered his friend Paul to Omaha, instinctively knowing we would be a match.

At the service, Greg and I heard about the multitudes of people and organizations that Paul had silently supported. The breadth of his generosity was extraordinary – geared always to improving the lives of others, particularly those in Fort Worth.

In all ways, Paul was a class act.

7. Surprise, Shock, and Uncertainty – Morgan Housel 

What Covid-19 and the Ukrainian invasion have in common is that both have happened many times before but westerners considered them relics of history that wouldn’t resurface in their own modern lives. Maybe the common lesson is that there are difficult parts of humanity that can’t be outgrown.

However crazy the world looks, it can get crazier. History is just a long story of the unthinkable happening, precedents being broken, and people reading the news with bewilderment and denial…

…Uncertainty amid danger feels awful. So it’s comforting to have strong opinions even if you have no idea what you’re talking about, because shrugging your shoulders feels reckless when the stakes are high. Complex things are always uncertain, uncertainty feels dangerous, and having an answer makes danger feel reduced. We want firm answers when things are the most uncertain, which is when firm answers don’t exist…

…At the height of the Cuban missile crisis, Defense Secretary Robert McNamara left an emergency briefing at the Pentagon and walked outside. He later wrote: “It was a beautiful fall evening, and I went up into the open air to look and to smell it, because I thought it was the last Saturday I would ever see.” Estimates were that in a full-blown nuclear war there would be 100 million deaths in the first hour.

What was avoided during those days is probably the most important news event in human history. But since it’s something that didn’t happen, it’s now just a neglected footnote. It probably left us with a false sense of security, blind to how dangerous it can be when one or two powerful and often crazy people can hold everyone else hostage.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have no vested interest in any companies mentioned. 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 27 February 2022:

1. Share prices are tanking. Please read this – Scott Phillips

Right now, I’m sitting at my desk, a little numb.

My Twitter feed is full of real-time reports of the Russian invasion of Ukraine.

True, it’s half a world away, but I can’t help but think “There but for the grace of whatever god there may be, go I”.

The invasion is, of course, unconscionable. Despicable.

Ukrainians are pondering a scary and uncertain future, not sure what happens next. Hoping, I’m sure, for the best, but perhaps expecting the worst.

For a world used to relative peace (with exceptions) in modern times, this is a sobering slice of ugly reality.

I’m a finance guy, of course. The Motley Fool is an investment advisory business.

Markets are down today. By a decent margin.

I’ll get to that, but it’s hard to prioritise a relatively small percentage point loss, against what the people of Ukraine have awoken to this morning, their time.

I just did a finance segment on Radio 2GB in Sydney. Yes, the market is ugly, I said. But it’s hard to make that the first thing we talk about, given the impact on lives in Europe.

And yet, as I said, I’m a finance guy, working for an investment company. So, knowing that people would be worried, and in keeping with my area of expertise, I did what I thought was important: I explained what’s going on, finance-wise, and I put it in the context of the long term journey of wealth creation and preservation.

And, of course, it’s possible to walk and chew gum at the same time: to fully acknowledge the horror of an invasion of Ukraine and at the same time consider the investment response…

…I want you to know that no-one knows what the short-term will bring. Just as geopolitics is unpredictable, so is the share market.

Why? For the same reasons: the fundamentals are one thing… but in the short term it’s people who influence things most. Sentiment. Mood. Emotion. Panic. Fear. Greed. They’ll all govern how share prices move in the next few days and weeks.

And the problem is that we can’t know how that’ll change. Maybe investors and traders go into a long, drawn-out funk. Or maybe bargain hunters start buying first thing in the morning, and the ASX closes higher tomorrow.

I don’t know, and you don’t know. And we need to make our peace with that short-term uncertainty.

I want you to know that, with a few exceptions, ASX-listed companies won’t be doing anything different tomorrow, next week, next month or next year, no matter what happens in Ukraine.

Which means that any share price falls are completely disconnected from business fundamentals in many, frankly most, cases. Woolworths Group Ltd (ASX: WOW) keeps selling groceries. Cochlear Limited (ASX: COH) keeps restoring hearing. Commonwealth Bank of Australia (ASX: CBA) keeps processing transactions…

…I’m (almost) always fully invested.

Why? Because, over time, the market has always set new highs.

Not in the absence of tough days like today.

But despite these sorts of days.

2. What Is Swift and Could It Be Used in Sanctions Against Russia? –  Patricia Kowsmann and Ian Talley

What is Swift?

The Society for Worldwide Interbank Financial Telecommunication, or Swift, is the financial-messaging infrastructure that links the world’s banks. The Belgium-based system is run by its member banks and handles millions of daily payment instructions across more than 200 countries and territories and 11,000 financial institutions. Iran and North Korea are cut off from it. 

Why is Swift important for countries, including Russia?

Cross-border financing is critical to every part of the economy, including trade, foreign investment, remittances and the central bank’s management of the economy. Disconnecting a country, in this case Russia, from Swift would hit all of that.

Why are other countries resisting it?

Critics say there could be economic blowback, not just in Europe, which has deep trade ties and relies heavily on Russia’s natural gas exports, but also the rest of the world. Some former U.S. officials say the move could severely hurt Russia’s economy, but also harm Western business interests such as the major oil companies. President Biden, while ruling it out for now, said the option isn’t off the table completely…

…Additionally, using Swift as a weapon could erode the dollar-dominated global financial system, including by fostering alternatives to Swift being developed by Russia and the world’s second largest economy, China. That could undermine Western power, especially the diplomatic leverage that sanctions offer.

3. Teaching AI to translate 100s of spoken and written languages in real time – Sergey Edunov, Paco Guzman, Juan Pino, and Angela Fan

For people who understand languages like English, Mandarin, or Spanish, it may seem like today’s apps and web tools already provide the translation technology we need. But billions of people are being left out — unable to easily access most of the information on the internet or connect with most of the online world in their native language. Today’s machine translation (MT) systems are improving rapidly, but they still rely heavily on learning from large amounts of textual data, so they do not generally work well for low-resource languages, i.e., languages that lack training data, and for languages that don’t have a standardized writing system.

Eliminating language barriers would be profound, making it possible for billions of people to access information online in their native or preferred languages. Advances in MT won’t just help those people who don’t speak one of the languages that dominates the internet today; they’ll also fundamentally change the way people in the world connect and share ideas…

…The AI translation systems of today are not designed to serve the thousands of languages used around the world, or to provide real-time speech-to-speech translation. To truly serve everyone, the MT research community will need to overcome three important challenges. We will need to overcome data scarcity by acquiring more training data in more languages as well as finding new ways to leverage the data already available today. We’ll also need to overcome the modeling challenges that arise as models grow to serve many more languages. And we will need to find new ways to evaluate and improve on their results.

Data scarcity remains one of the biggest hurdles to expanding translation tools across more languages. MT systems for text translations typically rely on learning from millions of sentences of annotated data. Because of this, MT systems capable of high-quality translations have been developed for only the handful of languages that dominate the web. Expanding to other languages means finding ways to acquire and use training examples from languages with sparse web presences.

For direct speech-to-speech translation, the challenge of acquiring data is even more severe. Most speech MT systems use text as an intermediary step, meaning speech in one language is first converted to text, then translated to text in the target language, and then finally input into a text-to-speech system to generate audio. This makes speech-to-speech translations dependent on text in ways that limit their efficiency and make them difficult to scale to languages that are primarily oral.

Direct speech-to-speech translation models can enable translations for languages that don’t have standardized writing systems. This speech-based approach could also lead to much faster, more efficient translation systems, since they won’t require the additional steps of converting speech to text, translating it, and then generating speech in the target language.

In addition to their needing suitable training data in thousands of languages, MT systems today are simply not designed to scale to meet the needs of everyone around the globe. Many MT systems are bilingual, meaning there is a separate model for each language pair, such as English-Russian or Japanese-Spanish. This approach is extraordinarily difficult to scale to dozens of language pairs, let alone to all the languages in use around the world. Imagine needing to create and maintain many thousands of different models for every combination from Thai-Lao to Nepali-Assamese. Many experts have suggested that multilingual systems might be helpful here. But it has been tremendously difficult to incorporate many languages into a single efficient, high-performance multilingual model that has the capacity to represent all languages.

Real-time speech-to-speech MT models face many of the same challenges as text-based models but also need to overcome latency — the lag that occurs when one language is being translated to another — before they can be effectively used to enable real-time translations. The main challenge comes from the fact that a sentence can be spoken in different word orders in different languages. Even professional simultaneous interpreters lag behind the original speech by around three seconds. Consider a sentence in German, “Ich möchte alle Sprachen übersetzen,” and its equivalent in Spanish, “Quisiera traducir todos los idiomas.” Both mean “I would like to translate all languages.” But translating from German to English in real time would be more challenging because the verb “translate” appears at the end of the sentence, while the word order in Spanish and English is similar.

4. What’s at stake in Ukraine is the direction of human history – Yuval Noah Harari

At the heart of the Ukraine crisis lies a fundamental question about the nature of history and the nature of humanity: is change possible? Can humans change the way they behave, or does history repeat itself endlessly, with humans forever condemned to reenact past tragedies without changing anything except the decor?

One school of thought firmly denies the possibility of change. It argues that the world is a jungle, that the strong prey upon the weak and that the only thing preventing one country from wolfing down another is military force.

This is how it always was, and this is how it always will be. Those who don’t believe in the law of the jungle are not just deluding themselves, but are putting their very existence at risk. They will not survive long.

Another school of thought argues that the so-called law of the jungle isn’t a natural law at all. Humans made it, and humans can change it. Contrary to popular misconceptions, the first clear evidence for organised warfare appears in the archaeological record only 13,000 years ago.

Even after that date there have been many periods devoid of archaeological evidence for war. Unlike gravity, war isn’t a fundamental force of nature. Its intensity and existence depend on underlying technological, economic and cultural factors. As these factors change, so does war…

…During the same period, the global economy has been transformed from one based on materials to one based on knowledge. Where once the main sources of wealth were material assets such as gold mines, wheat fields and oil wells, today the main source of wealth is knowledge. And whereas you can seize oil fields by force, you cannot acquire knowledge that way. The profitability of conquest has declined as a result.

Finally, a tectonic shift has taken place in global culture. Many elites in history – Hun chieftains, Viking jarls and Roman patricians, for example – viewed war positively. Rulers from Sargon the Great to Benito Mussolini sought to immortalise themselves by conquest (and artists such as Homer and Shakespeare happily obliged such fancies). Other elites, such as the Christian church, viewed war as evil but inevitable.

In the past few generations, however, for the first time in history the world became dominated by elites who see war as both evil and avoidable. Even the likes of George W Bush and Donald Trump, not to mention the Merkels and Arderns of the world, are very different types of politicians than Atilla the Hun or Alaric the Goth…

…The decline of war is evident in numerous statistics. Since 1945, it has become relatively rare for international borders to be redrawn by foreign invasion, and not a single internationally recognised country has been completely wiped off the map by external conquest. There has been no shortage of other types of conflicts, such as civil wars and insurgencies.

But even when taking all types of conflict into account, in the first two decades of the 21st century human violence has killed fewer people than suicide, car accidents or obesity-related diseases. Gunpowder has become less lethal than sugar…

…The decline of war didn’t result from a divine miracle or from a change in the laws of nature. It resulted from humans making better choices. It is arguably the greatest political and moral achievement of modern civilisation. Unfortunately, the fact that it stems from human choice also means that it is reversible.

Technology, economics and culture continue to change. The rise of cyber weapons, AI-driven economies and newly militaristic cultures could result in a new era of war, worse than anything we have seen before. To enjoy peace, we need almost everyone to make good choices. By contrast, a poor choice by just one side can lead to war.

This is why the Russian threat to invade Ukraine should concern every person on Earth. If it again becomes normative for powerful countries to wolf down their weaker neighbours, it would affect the way people all over the world feel and behave.

The first and most obvious result of a return to the law of the jungle would be a sharp increase in military spending at the expense of everything else. The money that should go to teachers, nurses and social workers would instead go to tanks, missiles and cyber weapons.

A return to the jungle would also undermine global co-operation on problems such as preventing catastrophic climate change or regulating disruptive technologies such as artificial intelligence and genetic engineering. It isn’t easy to work alongside countries that are preparing to eliminate you.

And as both climate change and an AI arms race accelerate, the threat of armed conflict will only increase further, closing a vicious circle that may well doom our species.

5. The Infinite Optimism of Physicist David Deutsch – John Horgan and David Deutsch

Horgan: Are you as optimistic now as when you wrote The Beginning of Infinity?

Deutsch: What I call optimism is the proposition that all evils are due to a lack of knowledge, and that knowledge is attainable by the methods of reason and science. I think the arguments against that proposition are as untenable as ever.

I’m also “optimistic” in the sense that I expect progress to continue in the future. I’m even a little more so now than I was, because I see that the idea of it is catching on.

Horgan: Do you really, truly, believe in existence of other universes, as implied by the many-worlds hypothesis?

Deutsch: It’s my opinion that the state of the arguments, and evidence, about other universes closely parallels that about dinosaurs. Namely: they’re real – get over it.

But I think that belief is an irrational state of mind and I try to avoid it. As Popper said: “I am opposed to the thesis that the scientist must believe in his theory. As far as I am concerned ‘I do not believe in belief,’ as E. M. Forster says; and I especially do not believe in belief in science.” (Actually Forster’s view was much more equivocal than Popper’s on this.)…

…Horgan: Do you believe in what Steven Weinberg has called a “final theory” in physics?

Deutsch: No. I guess that deeper theories will always reveal still deeper problems. (“Deeper” doesn’t necessarily mean “in terms of ever smaller constituents,” by the way.)

Horgan: Edward Witten has said that consciousness “will always remain a mystery.” What do you think?

Deutsch: I think nothing worth understanding will always remain a mystery. And consciousness (qualia, creativity, free will etc.) seems eminently worth understanding.

6. Sebastian Kanovich – Powering Emerging Markets Payments – Patrick O’Shaughnessy and Sebastian Kanovich

[00:16:18] Patrick: What have you learned given how many times you’ve done it about working with new regulators and regulatory environments? What is excellent to you on your team at dealing with this unique aspect of it, if that’s such a key part of success?

[00:16:32] Sebastian: To me, the biggest lesson has been the importance of treating regulators as grownups that are trying to do the best they can in the markets under the conditions they operate. Sometimes us from a payment standpoint or from a technology standpoint, we want to move fast. We want everything to be obvious in 30 seconds. We forget that people in the regulatory bodies have a very different set of incentives. They want to understand exactly what is it that’s going to be processed, and making sure that you raise their comfort level and you continue to invest in that education process, it’s something that we’ve learned.

In many countries where we operate, we are working with the regulator to build a regulatory framework. This is how a regulatory framework should look for a company like Google. These are the things you should take care of. This is how you should think of taxes. And I think over time, they get to see us more and more as an enabler. The thing that has happened in the last few years is that some of the merchants for which we process have become ubiquitous in the markets where we operate. Users won’t live without Facebook or without Google, or they’ll do WhatsApp messaging and commerce, and they’ll drive an Uber and they’ll get a Rappi . All of that complexity exists and regulators understand. So they are more and more open to say, how do we cover for this? How do we make sure there’s a regulatory framework? There’s a way for these companies to be able to thrive and us as a regulator to be comfortable. Understanding those two things has been extremely important…

…[00:29:18] Patrick: There’s a nice thesis that I like to think about, which is that for every repetitive digital function, there will be an API first company that standardizes that function and provides a sort of Lego piece so that developers can build as many apps as they want. And they basically hire out the discreet repeatable functions. Since you’re doing that, providing one of those very big function in this case, abstracted away from payments, what have you learned just about great API building? What advice would you give to the founders out there not in payments, but just in the API space that are trying to build an excellent single function that becomes widely adopted for developers?

[00:29:55] Sebastian: I think the biggest temptation when you are building an API business is what your API should do and what it shouldn’t do and what are the limits of what you are trying to build. APIs are powerful where they’re standardized. So if for any given use case, you need to integrate into five different places, even if the value proposition is great, to me, that’s dead before starting. We always try to find an initial pain point that can be covered and be ruthless about saying no to the other stuff, because we think that’s a way that you generally differentiate. It’s tough to be solving hundreds of things because you are aiming to standardize. By definition if you standardizes, you need to say no to some stuff. If you have too many use cases, you are not covering anything. That’s something we’ve learned and we’ve learned the hard way.

The other thing is API businesses are sometimes tempted to compete with their customers. When you’re providing infrastructure, you are sitting in the middle of that transaction where value is being created, and it’s very tempting for companies to say, “I understand the user. I understand the merchants. Why do I sit in the middle?” Part of what I think has made dLocal successful as of now, it’s making sure that our merchants and our counterparts understand that we are not here to compete with them. We are here to power them and for infrastructure place like us and typically API based companies are infrastructure place, I see many of them being tempted to be in front of the end user, and that’s something I would strongly discourage.

[00:31:11] Patrick: Maybe we could give an example of each of those two things. Those are awesome lessons. So starting with the first one, in dLocal, what was an example of the feature that was tempting to build or that you did build that turned out to too much of a distraction for whatever reason?

[00:31:25] Sebastian: We’ve been asked 100 times to go to Germany or to the U.K. Is it easy to do from an API standpoint? Very easy. Do we have the regulatory framework? Absolutely. Are we going to do it? No way. Part of that is saying, what are the use cases that are really complex that we’re going to be able to solve? I’m sure that we could get some traction in that business. Is it going to be a differentiator? No, it’s not. So we’d rather double down or invest in places where it might take longer, but if we get it right, we are differentiating. That’s why we get much more excited over Bangladesh than we get about Germany, because there’s other APIs that are solving the German problem really well or the U.K. or the U.S. problem really well. That’s one lesson.

On the second side on not going after your users, when we were starting, we got many of our merchants to ask us to send emails to our database saying, promote our product. Today it’s very easy to say no. Back in 2016, when we were starting, we said it might be tempting. And we understood really fast that was not a smart decision. Many payments companies do that. We were always against it, because the moment you do it once, you start, the next situation is to this is the product you should be buying. This is how you should be thinking about which ride sharing company to use. And we want to be able to provide infrastructure. We shouldn’t be choosing winners. It’s very tempting and it’s something we haven’t done. And we are strongly committed not to do.

7. Makes You Think – Morgan Housel

A few lines I came across recently that got me thinking:

“It is far easier to figure out if something is fragile than to predict the occurrence of an event that may harm it.” – Nassim Taleb…

…“Everything feels unprecedented when you haven’t engaged with history.” – Kelly Hayes

“My definition of wisdom is knowing the long-term consequences of your actions.” – Naval Ravikant…

…“It is difficult to remove by logic an idea not placed there by logic in the first place.” – Gordon Livingston

“The best arguments in the world won’t change a single person’s mind. The only thing that can do that is a good story.” – Richard Powers…

…“Technology finds most of its uses after it has been invented, rather than being invented to meet a foreseen need.” – Jared Diamond…

…“Science gathers knowledge faster than society gathers wisdom.” – Isaac Asimov

“Humans don’t mind hardship, in fact they thrive on it; what they mind is not feeling necessary. Modern society has perfected the art of making people not feel necessary.” – Sebastian Junger

“Psychology is a theory of human behavior. Philosophy is an ideal of human behavior. History is a record of human behavior.” – Will Durant

“No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future.” – Kolossus

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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 dLocal. 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 20 February 2022:

1. Classic 05: A History of 5 Stock Market Crashes w/ Scott Nations – Sitg Brodersen, Preston Pysh, Scott Nations

Preston Pysh  01:18

So Scott, in this episode we’re going to be talking about the crashes of 1907, 1929, 1987, 2008, and the Flash Crash of 2010. I’m sure some, if not all of those years are very familiar for a lot of people in our audience. But let’s start all the way back to 1907. And for people not familiar with this crash, JP Morgan was a key character in this crash. So talk to us a little bit about him and talk to us about the characteristics of the 1907 Crash.

Scott Nations  01:46

JP Morgan was a fascinating man. He was a fascinating man. He was a man of privilege. He was born into privilege. His father was Judas Morgan, who was, well, essentially made the family even more wealthy by selling civil war bonds in London during the American Civil War. JP Morgan was educated as you would expect somebody of his wealth. He had a peripatetic education. He was obviously educated in the United States, but also in Switzerland and in Germany. As a young man in Germany, he developed an appreciation for art; actually a love for art, which informed his private life. But JP Morgan was really raised to be a banker in the early part of the 20th century. He was by far the wealthiest man on Wall Street. Well, maybe not the wealthiest, but certainly the most powerful. He was absolutely the most powerful man on Wall Street. He was called, “the Zeus of Wall Street.” And he really was involved in every aspect of finance in the United States in the first part of the 20th century.

Stig Brodersen  02:54

Now, if we go back to October 1907, the market crashed almost 50 percent from previous ESP. The panic might have been even worse if it hadn’t been for JP Morgan, and he pledged a huge sum of his money and convinced others to do the same. Perhaps you could tell us some of the factors about what caused the crash, but also the story about Morgan’s intervention in the market. It’s a very fascinating story.

Scott Nations  03:22

Before 1907, the United States was really beginning to understand that it was going to be the American Century. It was powerful. It was probably at that point, the most powerful country on the globe. And so, frankly, the United States got carried away with itself. And we’ll talk about some of the specifics of some of these crashes and how these shared some similarities in a bit. But you asked specifically about Morgan’s intervention in the market. This was before the US Federal Reserve existed. In fact, the Panic of 1907 was the cause the Federal Reserve was created. But if you were worried about the market; you were worried about the Panic of 1907, the person you went to see was JP Morgan because, again, he was so powerful. And one example occurred in the midst of the panic. On Thursday, the 24th of October of 1907, when the Press of the New York Stock Exchange went to JP Morgan. At the time, his office was directly across the street from the New York Stock Exchange. Very simply, “Mr. Morgan, we will have to close the exchange early. There’s simply too much selling.” And JP Morgan understood what that meant.

Scott Nations  04:37

His question was: How in the world do you ever reopen a stock market that you’ve been forced to close because there’s too much selling? And so, JP Morgan asked, “When do you normally close?” “Well, sir, we normally close at three o’clock, but we can’t get there. It’s too much sign.” He said, “Then, you will not close one minute early.” And his confidence was…it was not naked. He rounded up bankers in the Wall Street area. Got them all into his office. It was a time when if JP Morgan called, you came running. And he told the assembled bankers, “You have 15 minutes to raise $25 million to save the stock market.” $25 million back then was a colossal amount of money, but JP Morgan essentially said, “You have 15 minutes to raise this money or the stock market is going to close. And who knows when it will ever reopen?” And that’s just one specific story of his involvement. That’s not the first time he did something like that. Probably the most immediate, but within 15 minutes, they had raised actually more than $25 million. The officials were able to go on the floor and say, “We have $25 million to lend to investors, who are in trouble.” People were so desperate to get this money that the clerk, who was responsible for recording borrowers and amounts had his suit coat ripped off of him in the turmoil. So JP Morgan was really the man; the single man, who managed to save the stock market in 1907.

Preston Pysh  06:11

So Scott, you briefly mentioned that the Panic in 1907 was the reason for the creation of the Federal Reserve. Talk to us a little bit more about that idea.

Scott Nations  06:19

It became obvious to everybody after things had settled down after the Panic of 1907, the United States government needed a way to inject liquidity into the system and didn’t have it. And that there needed to be a lender of last resort, if you will, for the financial market. And that didn’t exist before 1907. And so, the Federal Reserve was created in 1913 because everybody realized, if nothing else, JP Morgan is not going to live forever. And we can’t rely on one man, one person to essentially bailout the stock market in times of stress.

Stig Brodersen  06:57

Let’s turn to the next crash, the crash of 1929. And to really understand what happened, we also have to understand how crazy the market behaved in 1927 and 1928. And I think you do a fantastic job of that in your book explaining everything leading up to the crash. In 1928, the Dow closed in 300, which probably to the listeners out there seems outrageously cheap, but that was definitely not the case. And this was at the end of the second biggest two-year run ever. It was actually more than 90%. So Scott, what drove the all-time highs leading up to the crash in 1929?

Scott Nations  07:38

In the late 1920s, actually much of the entire decade, but particularly in the last half of the 1920s, there were simply a euphoria at work in the United States. It was not just financial. It was…it had to do with the United States’ place in the world. And from a military point of view, also from an industrial point of view. So as you pointed out, in 1927 and 1928, the stock market gained more than 90%. We had come out of World War I. We felt great about our place in the world, but there were also some other things that were…for example, in a situation like that; with an economy roaring like that; a stock market booming like that, you would expect the Federal Reserve, which was new at the time, you would expect them to raise rates. One Federal Reserve officer at one time described it as “taking away the punch bowl, when the party really got going.” And the Federal Reserve did not do that. In fact, they kept rates low. They kept rates too low, largely because they wanted to help England return to the gold standard after World War I. That was a tragic mistake–keeping rates that low. There was also a roster of new technologies that were unleashed following World War I. Radio would probably be the biggest, but also the automobile industry really got going; really came into its own. And then, America just felt good about itself. And so, all of those things spawn this euphoria that eventually made its way into the stock market. And the stock market got carried away with itself.

Stig Brodersen  09:13

It’s very interesting. And you mentioned that before here with the Federal Reserve. Now, could you talk more about which actions did it take? You already, again, briefly touched upon that. But if you should outline and put some years on like before, during and then, especially after the crash. It was very interesting, the type of monetary policy that the Federal Reserve decided to carry out.

Scott Nations  09:34

The Federal Reserve really started making errors in policy in 1924, when they were essentially begged by the British government to help them get back on a gold standard by lowering interest rates here in the United States. And they did that. And they continued that sort of policy, and eventually the Federal Reserve simply lost control of the monetary situation in the United States. There was so much money being made by industry and individuals that they were happy to loan that money, the stock market speculators, and that’s sometimes called, “the call money market.” Call money is money that’s available to investors to speculate with, and for a long time that money had been provided by banks. And now, outside investors were providing it, and they did it in droves because interest rates were so low, otherwise. And the bubble was undeniable. In the late 1920s, American brokerage firms paid a $100,000 to put a brokerage office on a single transatlantic liner, the Barren Garea. A $100,000 just to open up; the opportunity to open a brokerage office. Another brokerage firm opened a tent at the US Amateur Golf Open in Pebble Beach. The stock market was such a phenomenon, and the rally was such a phenomenon that people didn’t want to get away from it. 

2. Latest success from Google’s AI group: Controlling a fusion reactor – John Timmer

As the world waits for construction of the largest fusion reactor yet, called ITER, smaller reactors with similar designs are still running. These reactors, called tokamaks, help us test both hardware and software. The hardware testing helps us refine things like the materials used for container walls or the shape and location of control magnets.

But arguably, the software is the most important. To enable fusion, the control software of a tokamak has to monitor the state of the plasma it contains and respond to any changes by making real-time adjustments to the system’s magnets. Failure to do so can result in anything from a drop in energy (which leads to the failure of any fusion) to seeing the plasma spill out of containment (and scorch the walls of the container).

Getting that control software right requires a detailed understanding of both the control magnets and the plasma the magnets manipulate, or, it would be more accurate to say, getting that control software right has required. Because today, Google’s DeepMind AI team is announcing that its software has been successfully trained to control a tokamak…

3. EE380 Talk [on cryptocurrencies and their externalities] – David Rosenthal

“Blockchain” is unfortunately a term used to describe two completely different technologies, which have in common only that they both use a Merkle Tree data structure. Permissioned blockchains have a central authority controlling which network nodes can add blocks to the chain, and are thus not decentralized, whereas permissionless blockchains such as Bitcoin’s do not; this difference is fundamental:

• Permissioned blockchains can use well-established and relatively efficient techniques such as Byzantine Fault Tolerance, and thus don’t have significant carbon footprints. These techniques ensure that each node in the network has performed the same computation on the same data to arrive at the same state for the next block in the chain. This is a consensus mechanism.
• In principle each node in a permissionless blockchain’s network can perform a different computation on different data to arrive at a different state for the next block in the chain. Which of these blocks ends up in the chain is determined by a randomized, biased election mechanism. For example, in Proof-of-Work blockchains such as Bitcoin’s a node wins election by being the first to solve a puzzle. The length of time it takes to solve the puzzle is random, but the probability of being first is biased, it is proportional to the compute power the node uses. Initially, because of network latencies, nodes may disagree as to the next block in the chain, but eventually it will become clear which block gained the most acceptance among the nodes. This is why a Bitcoin transaction should not be regarded as final until it is six blocks from the head.

Discussing “blockchains” and their externalities without specifying permissionless or permissioned is meaningless, they are completely different technologies. One is 30 years old, the other is 13 years old.

Because there is no central authority controlling who can participate, decentralized consensus systems must defend against Sybil attacks, in which the attacker creates a majority of seemingly independent participants which are secretly under his control. The defense is to ensure that the reward for a successful Sybil attack is less than the cost of mounting it. Thus participation in a permissionless blockchain must be expensive, so miners must be reimbursed for their costly efforts. There is no central authority capable of collecting funds from users and distributing them to the miners in proportion to these efforts. Thus miners’ reimbursement must be generated organically by the blockchain itself; a permissionless blockchain needs a cryptocurrency to be secure.

Because miners’ opex and capex costs cannot be paid in the blockchain’s cryptocurrency, exchanges are required to enable the rewards for mining to be converted into fiat currency to pay these costs. Someone needs to be on the other side of these sell orders. The only reason to be on the buy side of these orders is the belief that “number go up”. Thus the exchanges need to attract speculators in order to perform their function.

Thus a permissionless blockchain requires a cryptocurrency to function, and this cryptocurrency requires speculation to function.

Why are economies of scale a fundamental problem for decentralized systems? Participation must be expensive, and so will be subject to economies of scale. They will drive the system to centralize. So the expenditure in attempting to ensure that the system is decentralized is a futile waste…

…The costs that Proof-of-Stake imposes to make participation expensive are the risk of loss and the foregone liquidity of the “stake”, an escrowed amount of the cryptocurrency itself. This has two philosophical problems:

• It isn’t just that the Gini coefficients of cryptocurrencies are extremely high[4], but that Proof-of-Stake makes this a self-reinforcing problem. Because the rewards for mining new blocks, and the fees for including transactions in blocks, flow to the HODL-ers in proportion to their HODL-ings, whatever Gini coefficient the systems starts out with will always increase. Proof-of-Stake isn’t effective at decentralization.
• Cryptocurrency whales are believers in “number go up”. The eventual progress of their coin “to the moon!” means that the temporary costs of staking are irrelevant.

There are also a host of severe technical problems. The accomplished Ethereum team have been making a praiseworthy effort to overcome them for more than 7 years and are still more than a year away from being able to migrate off Proof-of-Work.

4. Geoffrey Moore – Building Gorilla Businesses – Patrick O’Shaughnessy and Geoffrey Moore 

[00:03:07] Patrick: Geoffrey, your books were some of my earliest education in the world of the competitive landscape of technology. I’d actually start at the end in terms of how I think about your work, which is with the concept of a gorilla as a business. Everyone’s going to know, Crossing the Chasm. We’re going to talk a lot about all the insight from that book and that thinking. But I think the gorilla as a concept is for me a great unifying theme of your work, aspirationally we all are going to want to be gorillas or invest in gorillas, or start gorillas at some point. Maybe just begin there. What do you mean by a gorilla company? Define that for us to begin.

[00:03:43] Geoffrey: The simplest definition is a market share leader in a powerful category. In order to sort of take that model apart, we created something called the hierarchy of powers. The idea behind the hierarchy of powers was, go back to investing. If you want to invest in a successful company, you want to invest in one that has more competitive advantage than the alternative investments. How would you actually analyze competitive advantage? That led us to something called the hierarchy of powers. This is the core investment model by on the Gorilla Game and a book called Living on the Fault Line and Going Forward. The hierarchy of power says the most powerful power is what we call category power. It has to do with the technology adoption life cycle, and where is the category that this company specializes in monetizing, where is it in its adoption life cycle? For most businesses most of the time it’s on what we call main stream. In other words, the category’s been established for a decade or more, there’s budget for it. It’s settled out. There’s a pecking order of vendors in the category and the category probably grows close to GDP growth rates. Value investors spend most of their life with categories in that world.

Tech investors, and my whole world is tech. We invest at the beginning of these life cycles. Sometimes before this, there’s not even a category, it doesn’t even exist yet, it’s called category creation. But the key moment in that category development life cycle or what they call the technology adoption life cycle, is when all of a sudden the world goes all in on the new paradigm. The way we went all in on cloud computing, the way we went all in on mobile apps, the way we’ve gone all in on streaming video. When it goes all in what happens is, all of a sudden the world which in a prior year did not have budget for this category, now everybody has budget for this category. And so it creates this huge secular uplift and spend, we called it the tornado. We had a book called Inside the Tornado, huge secular. That’s category power. If you are in that category, that rising tide floats all boats, that is the number one predictor of your future success for the next several years. That’s why you see these incredible valuations in companies that are losing money because the investing community said, yeah, but they’re in the hot category. Having said that, the next thing we said is, well, that category is going to sort out with a pecking order. The power law of returns from that pecking order is, the gorilla is going to get the lion share or the gorilla’s share if you will.

Number two will probably get half of what the gorilla gets. And number three will get half of what the chimp gets. And so that led to gorilla to chimp monkey sort of returns. And so the idea behind the Gorilla Game was, you would see a category going into tornado. You would buy a portfolio of companies that could win. As you saw who was winning, you would gradually exit the ones that are monkeys and chimps and put more and more money into your gorilla. And then you would hold the gorilla because the gorilla’s power position, what happens is the ecosystem forms around the gorilla, which instantiates the gorilla permanently in that category. Now you can screw it up, but in general, it’s not just that the gorillas powerful during the tornado, even on main street, the world is now organized permanently around the gorillas de facto standards and whatever. There was just a clear sense of the sooner you could identify the gorilla and then concentrate in the gorilla, the better it would go…

…[00:09:43] Patrick: I want to come back to category creation and how you think about the idea of a category itself, but this is a great excuse to talk about your notion of architecture. If we were to think about a two by two matrix or something with open and closed architecture on one access and proprietary and non proprietary on the other, this is for me, a critical unlocking idea. Salesforce is a great example. Most power full version of a gorilla. I love the litmus test that you never get fired for blank. The blanks are the gorillas. But talk us through this concept of architecture. Why is this so important within a category? What does it mean? And what does that two by two matrix mean?

[00:10:19] Geoffrey: The difference between open architecture and closed architecture was, Apple has a very closed architecture. You don’t participate in Apples architecture. Whereas Android has a very open architecture. Okay. The idea is, do you want other people to complete your solution? The cable box was contained, but the Roku is an open architecture. In general, I think originally it was all closed. The IBM architecture was just IBM. DEC was just DEC. The Sun just Sun. No, actually it was Sun, they began to do open architecture. They would buy their storage from a different vendor or you’d get your operating system from the Berkeley operating system. That was the beginning of open architecture. I think what we learned during the last 20 years is in general open architecture beats closed architecture, because closed architectures always have a single point of failure. Meaning if any part of the closed architecture doesn’t work, you can’t ship. In an open architecture if you have a failure of one component, you can get it from another vendor and get back in the game.

Now open architecture is harder to manage for quality, and so that was always the challenge, but that was closed versus open. Proprietary versus non-proprietary, has to do with who gets to control the next release of this thing. Open source is not proprietary. Open source, there’s no locking. But proprietary there is locking. And so the most powerful idea was proprietary open architectures, where you had proprietary control of an ecosystem that involved other companies, but they had to eventually play to your standard. That’s what gave the gorilla the most power. Because now what the gorilla can do is, you have to stay with me, I’m a market mover. I don’t just move my own products. I move everybody’s products. By the way, by staying with me, you leave my competitor behind. Every time I differentiate from my competitor, then you conform to my standards, you just made yourself incompatible with their standards…

…[00:16:40] Patrick: What’s that been like watching more recently, if we think about the most pure play enabling technologies today? It might be the API companies, the Stripe, the Twilio, the Okta’s of the world. Well, how did those companies solve this problem of you need the actual use case, the actual application? Amazon AWS is enabling technology, but it was its own best first customer on the retail side. So that application problem was solved by them. How do you approach these pure play, hire this API for this one function in your application type company?

[00:17:09] Geoffrey: It’s typically around the use case. Like Okta, I think started with single sign on. People were just saying, this is such a pain in the neck, that I have to sign into this, have sign. Okta said, okay, we’ll do single sign on. And then once you did single sign on, you thought, well, wait a minute, we’re sitting in a very interesting piece of real state here. There’s a bunch of highways coming together. Maybe we should have some service stations and a restaurant, we should build some hotels. That’s what Okta did. But enabling infrastructure always starts with a problematic application use case that you can’t solve with existing infrastructure.

And so initially, first of all it looks like, well, your market is so small, there’s only this one use case and there’s only this one application and you’re building all this technology to make that better. Are you sure you want to do that? And if that was the only return, the answer would be, well, no, it doesn’t make any sense at all. But if you’re say, no, that’s my point of entry. And then expand, we called it the bowling alley phase of the technology adoption life cycle, where you’d say I, okay, I’ve got my first use case in my first industry. Can I get a second use case in that industry? Or can I find that use case in the second industry? Either way you were going to expand outward. And then at some point, if you can get enough expansion, the world goes well, hang on, this is the new infrastructure. That’s when the tornado starts.

5. Twitter thread on the importance of alignment within a company – Jean-Michel Lemieux

Another common question I’m answering working with scaling tech companies is…

Q. What’s the worst leadership advice you’ve heard?

A. By far the worst is “Hire great people and get out of their way”. 

Let me explain… 🧵 (1/32)

2/ After a year leading engineering at Atlassian @scottfarkas told me in my perf review that I was doing ok but wondered why I didn’t talk and involve him more regularly.

3/ My answer was “I thought that was my job — to take away all this crap from you and let you do your CEO thing. I thought you wanted me to be autonomous. I need autonomy.” He said sure, but you should cheat “and use my brain to help you”

4/ At that point I changed some habits, involved him more in different ways, got over the autonomy complex, and we got a lot more done together. I learned a lot and we made better decisions.

5/ Since then I’ve hired many leaders and had to repeat the same conversation that @scottfarkas had with me over and over and over. Most people default to expect the wrong version of autonomy.

6/ These experiences sent me down a multi-year reflection. Why did I feel like success was maximizing autonomy and showing that I could take care of things without bugging my boss?

7/ I prioritized autonomy over alignment. It’s a million times easier to measure and feel high autonomy than it is to measure high alignment.

8/ What I’ve learned since, way too slowly, is that companies are performing a monumental balancing act trying to decide what 98% of their problem space to focus, what to ignore, and how to ship. That’s your strategy. And it’s complex, ambiguous, and changing.

9/ The hardest part of building a company is alignment on strategy and clearly communicating it. Think about it this way, a 1 degree deviation in course of a rocket heading to the sun means it will miss the sun by 1.2 million miles. A lack of alignment compounds quickly…

…14/ There’s mass confusion on what to align on? Most people just want to know the very high level goals. And this causes most companies that I work with to align superficially. Their strategy is a superficial incomplete map, they don’t remove scope, communicate clearly, etc…

…17/ The biggest alignment problem is the gap between how much people think they have to align versus what they should align on. There are many strategic decisions in the “how”. eg, what technologies to use, new system vs integration, build in core or in an app.

18/ Alignment forces you to talk with your boss and peers to: – define a strategy, narrow focus – communicate it clearly together – and ensure you’re hired enough people who “get it” and can fill in the implementation details with their teams.

19/ So…when you hire someone or you have a new leader, your number one job is alignment. And you do this continuously. It’s definitely never going to be “hire them and get out of their way”.

6. Owning the funnel – Lillian Li

Since I started writing Chinese Characteristics, I’ve been puzzled by a few observations: why is there a fanatic fixation on internet traffic? Why do firms distinguish between private and public traffic? Why did every consumer app become a super-app? And why are B2B offerings are going the same way? Why is every player worth their salt is moving into payments now? Finally, why do Alibaba’s acquisitions tend to languish while Tencent’s investments tend to thrive?

My current framing for Chinese tech’s underlying logic is that every player is always working on owning the awareness-to-fulfilment funnel (or customer journey). This is a descriptive product strategy that builds on a foundational ethos of owning the user. It outlines the offerings that a tech platform needs to provide to achieve that goal. It looks like Western players are converging in the same direction, Shopify and Google’s move into payments and Facebook’s store fronts are all part of the trend.

This behaviour pattern is stark in Chinese tech is for two reasons. The first is that a defined geographical market constrains Chinese tech. It’s no secret that Chinese companies tend to struggle with internationalisation. Unlike their western counterparts, who can build sizable companies being the best-of-breed for different geographies, Chinese tech companies have to focus on owning the user (and funnel) to grow. As I mentioned in my Bilibili piece:

Relative to western consumer tech companies, who tend to focus on “serving a function” as their core mission, Chinese companies tend to focus on “owning the user” as their core mission (though the initial wedge into the consumer is always through a function – Meituan through food delivery, Ofo through bike-sharing, etc.). Owning the end-user and their attention is what led to the rise of the super apps and Bilibili is no different….Put another way; they want to own the Chinese Gen Z population’s attention through providing a comprehensive entertainment service rather than be the platform that caters for all Chinese UGC video needs. 

In an ecosystem where hundreds of competitors spring up overnight, functions and features get commoditised as soon as they are made. Owning the user by providing the whole monetisation funnel is the closest thing to a moat.

The second reason is Tencent. Tencent is the default operating system for the Chinese population, and it has a particular trait. It doesn’t rely on advertising to monetise. What started as a shrewd product decision to prioritise the user experience has had a lasting impact on the nature of internet traffic in China. Inventory on WeChat is scarce, and it commands a premium from advertisers. In chat, links are earned, Tencent’s anointed portfolio can share links, while the associates of arch-nemesis Alibaba and Bytedance get blocked for spam. Baidu has been stagnating in their ad revenue strategy from lacklustre search (owning the funnel means a walled garden approach). When traffic hegemons are capricious, everyone suffers.

Regardless of the origins, once some tech players have started the game of owning their proprietary funnel (or user), everyone has to move in the same direction just to keep up.

7. Six Questions For Derek Thompson – Morgan Housel and Derek Thompson

What aren’t people talking about enough?

For the world, carbon removal technology. It’s the most obviously important nascent technology on the planet, given the fact that even if we shift immediately to 100% renewable energy, that still leaves all the carbon dioxide we’ve already spewed into the atmosphere, which will stay there for decades. We have to find a way to vacuum the skies to avoid the worst effects of global warming…

…What do you want to know about the economy that we can’t know?

What is the right level and distribution of income to maximize total national happiness, both now and in the future? The time element of the question is important. If you waved a magic wand and made it so that everybody had equalish income today, that would clearly eliminate a lot of misery. But if you enforced equal incomes permanently, you’d create a lot of new problems. Where are the rewards for effort? Where are the incentives for hard work, or invention, or problem-solving? How do you fix the issue of free-loading, or resentment between workers and loafers in the utopia of pure and permanent equality? Mandating perfect and permanent equality doesn’t work. But it’s really, really hard to determine what level of inequality is “right.”

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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), Apple, Meta Platforms (parent of Facebook), Okta, Shopify, Tencent, and Twilio. Holdings are subject to change at any time.