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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 10 April 2022:

1. Antonio Gracias – Pro-Entropic Investing – Patrick O’Shaughnessy and Antonio Gracias

[00:02:52] Patrick: Antonio, I was trying to figure out where to begin this conversation. I always like to dive straight into the meat of some interesting idea, not do the childhood background stuff, we’ll get to that later. And because of our conversations over the last many months, I think this idea of pro-entropic companies is one of the most interesting ideas that I have personally encountered maybe ever in investing, and an ideal place to start. I would love you to walk us through this concept, because I think it really defines your style of investing and is quite a bit different of a lens than I’ve heard from other investors investing at a similar stage.

[00:03:25] Antonio: Sure, Patrick. Thank you. It’s a word we use here internally in our investment framework, and we think about – there are lots who use the word resilient. And to us, resilient things, resilient companies are things that recover quickly. So when you talk to neuroscientists about the word resilient, they define it as you come out of homeostasis, something happens to you, the adrenaline goes up, cortisol, whatever, and then you recover quickly, you go back to homeostasis and make a good decision. If you don’t recover quickly, then you can’t make a good decision.

Pro-entropic, as you think about a company, if a company’s resilient, it means that it recovers quickly when something happens. There’s a crisis, management’s good, they figure out a pivot, they figure out what to do. For us, pro-entropic, it really is a company that is good at chaos. So this kind of comes from our trying to understand and learn how to get better at not making mistakes and make great investments, right?

So, how do we figure out how to lower our errors and improve our successes? And we started to identify this idea that the world’s going to be more chaotic, a lot more chaotic – almost 10 years ago now. And the chaos was driven by the idea that de-globalization was changing the world, technological disruption was changing the world, climate change was changing the world, politics was changing the world, demographics are changing the world. So much was changing all at once. And if you think about the second law of thermodynamics, it tells us that everything tends towards entropy anyway, and entropy being chaos, it felt to us that the world was getting more chaotic. And we wanted to find things that were good that got better when chaos went up. And one of the reasons we invested so heavily in a company like SpaceX is because whatever we could imagine was happening in the world, this company just got better, and it was actually good for it.

And I think how we really think through it is thinking about all of the probabilistic outcomes of the world. We’re Bayesian thinkers here, we think a lot about Bayesian probability trees and Bayesian updating. And as you think about all the probabilities that might occur to a company – pandemic, wars, recession, whatever might happen, how will that company respond if nothing changes? So it’s strategy itself. That’s how we differentiate from resilient. If something’s resilient, resilience is great too, we invest in resilient companies as well. But every once in a while, we’ll find something that we think is really pro-entropic. And that for us is the holy grail of investing; a company that gets better no matter what, just by virtue of what it’s actually doing. It’s certainly true of SpaceX. We have a company called Gopuff in our portfolio, which also actually is, I think, heavily pro-entropic. And believe it or not, these guys are disrupting 7-Eleven, so it’s really convenience stores. Convenience stores do well in recessions. They do well in pandemics, they deliver convenience store stuff. It does well in almost any environment you can imagine, and it did extremely well through COVID. They’re still growing very quickly now. We think they’ll grow through a recession. Believe that’s the case, because usually convenience stores do. So it’s not just the super high tech stuff. It could also be things like Gopuff, where you’re providing a very valuable service to people no matter what, and they need it no matter what. That’s how we think about it.

And then when we find a company where the strategy is pro-entropic, we think about, are the managers pro-entropic? The people running this company, are they really good at understanding chaos in the world? And the way we think about this, and I’ll differentiate again for resilience, is that a great pro-entropic thinker is someone who is able to keep their probability state, their Bayesian probability state, open on options. So you’re running a company. You always want to have optionality in what’s going to happen and how you’re going to build the company. They will be able to keep that probability state open to the appropriate moment and then close it for execution, because great managers, great CEOs, great executives are great at strategy, and they’re great at keeping options open. But then when you watch what happens, moments will be like, “Nope, we’re going to close that probability set. We’re going to do that thing. We’re choosing one of those paths or maybe two of those paths. We can’t have 20 of them all the time.” If you have somebody who’s always open state, they don’t get anything done, and you’ve probably seen that too. We have too many ideas and we don’t go anywhere.

Executives that are really good at doing both of those things, opening the probability tree and then knowing when to close it and execute really hard and then reopen it; we define that as pro-entropic thinkers. And they rarely get knocked out of homeostasis. They’re resilient too. They’re usually really good at recovering, but they get knocked out of, I’d say their regular homeostasis by events less than someone who’s resilient because they’re already predicting it. They’ve got a probability tree they’re running already about what the world’s going to look like. And their inference is running against what the world’s going to look like. They’re making decisions about that, and they’re deciding when to toggle down and close off and when to reopen. It’s been really valuable to us…

...[00:15:08] Patrick: One term you used earlier that I want to make sure I understand as contrasted against resiliency and pro-entropic is durable. What do you mean by durable? And what is the full spectrum of companies? If we got pro-entropic at one end, what’s the other end of the spectrum, and where does durable fit in that?

[00:15:22] Antonio: Our framework is pro-entropic, resilient, durable, cyclical, and then fragile. And we do not do fragile. The word durable, think of durable as almost the little boat in the ocean and the ocean’s going up and down, a big storm comes, and it survives. It’s battered and beaten, but it came out the other end and it’s okay. And we have done some of that in the past. In the more traditional growth, the GARP kind of investing, I think that’s what you end up doing a lot of. These are companies that are probably growing nicely in good economic cycles, and they do okay. They survive bad cycles, and the timing of that investment matters a lot. Unless you really like to manage it a lot, probably don’t invest in those kinds of companies.

And a durable thinker is someone that is not resilient, and we use a neuroscience construct here. You have something happen to you that’s an event. Knocks you out of homeostasis, your limbic system fires off. It impacts your prefrontal cortex, your ability to make decisions. So we call that the limbic hijack. You can’t make a good decision because you’re in an emotional state. Recovering emotionally, recovering your physiological homeostasis quickly makes you resilient. There are lots of people in the world that don’t necessarily recover quickly, but they’re really good at just compartmentalizing it, sort of shove it down. And what happens when you do that? When you talk to neuroscientists about this, they call it allostatic load, which is the load of stress on your brain. Think about the number of windows open in the background of your brain. We think about your brain as a neural network. The number of windows just keeps going up. They’re open and open. Your processor’s spinning on this stuff in the background. Your decision quality goes down over time.

So it’s both true for companies that have a strategy where they’ll survive the crisis, they’ll come through it, they’ll still be there. But man, they’ll be a little battered, beaten. And then for decision makers who will survive the crisis, they’ll come through it, but they will probably be battered, beaten, and their coping strategy will not be to resolve and recover. It will be to compartmentalize and move on. And this idea of, the windows are still open and processing in the background means they probably won’t have as much processing power available for the next thing that happens, and the next thing that happens. And over time, that just adds up. And I don’t want to say that I’m a neuroscientist here, but I studied it very carefully, so maybe an amateur neuroscientist. I think about it as, as that stress builds up over time and what they call allostatic load is going up, eventually it can lead to PTSD. You get that from one event that’s super terrible or from lots of events that are bad that you don’t resolve…

...[00:22:05] Patrick: I want to come back to the transition into early Valor, but you mentioned the theory of constraints. And I want to talk about operations and the operations work that Valor does, I think completely uniquely, relative to peers, discuss that concept. what is the theory of constraints? Why is it so powerful? Do you think it’s universally applicable in business, or is it more applicable to certain kinds of businesses?

[00:22:25] Antonio: I think it’s universally applicable. I recommend to anyone listening to this podcast, “The Goal”. When I was trying to figure out how to run this factory, and I didn’t know what to do, I went to a friend of mine who was at business school and said, “What should I read?” And he told me to read this book called “The Goal”, which was great. And it really comes down to physics. So the laws we’re talking about, the second law of thermodynamics, the theory of constraints, these all are concepts that exist inside of physics. And it’s simply that a system operates at its slowest limiter. In the plating context, an example, we had big, long lines, hundred-foot long lines that had plating of nickel, gold, et cetera, going onto beryllium-copper substrates. And the slowest thing in that line to plate was nickel. And I asked the question one day of one of our platers, “Is there a way to make this thing go faster, please?”

He was a second shift guy. And he said, “Oh yeah, there’s a way to do it. The guy that ran the company before you, he had three nickel baths, and now we have one, and we go one third as fast.” So I went to go talk to the chemist and I asked him the question, “What’s going on?” And he’s describing Faraday’s law. If you have an aqueous solution and you put a current through it, basically the current dissipates in the center. So if you make the bath longer, you’ve got to slow the whole thing down to get the right amount of plating on the part. And we went, let’s take over three nickel baths. Well, it takes one extra chemist, it’s going to cost pretty much nothing. Okay, let’s do that. That’s an example. It’s a closed system and, in a closed system like this, the thing that limits its speed is the slowest element.

That was really how I started thinking about closed versus open systems theory. And first I started thinking about entropy, which is when you’re thinking about entropy, it’s actually an open system. If the world tends towards more entropy, it’s because the system is open. When you have these very closed systems, like in a manufacturing facility, you don’t have as much entropy inside, what you have is this idea of constraint-based thinking. In this case, it was driven by Faraday’s law, but it happens in pretty much any business I’ve seen.At our business here, we’re in the asset management investment business, we think about it this way. We know that our constraints should always be in our operations teams. We’re continuing to hire operations people. We could invest more capital, there’s more good opportunities, than we have operations people to help them. And so we think about this as our portfolio size, the amount of capital we’re managing, is driven by our ability to serve our companies. In our business here, we define our customer as the company we’re investing in. Our operations work, the lean stuff we do for them, is the valuable service we provide them. And so we know that that’s our primary constraint and everything else revolves around actually being able to make investments that are really, really good. But the thing that limits how many investments we’re making here, is can we serve them?

I have yet to run into a good business where, if we really thought through it with the executives, they weren’t constraint-based thinking. And it’s one of the things, by the way, I really enjoyed about working with Elon over the years, because he has a physics background, he 100% thinks this way. And most of the executives I’ve met, whether they know they’re doing it or not, actually think this way. What part of my business should I work on today to make the whole system go faster? And if things are high quality and high speed, typically the product is good. The customer’s happy. The velocity’s going up, and if you’re improving velocity quality, your business is getting better…

…[00:32:51] Patrick: It’s a great excuse, the concept of risk, to talk probably for a while about one of my favorite things that you and I have talked about, which is the evaluation of people. And this really gets into the world of psychology. You’ve mentioned your foray into neuroscience a couple of times already, but I think that the ability to understand people, their motivations, the type of person they are, the type of leader they’ll be, is incredibly important. Certainly in pro-entropic companies, it probably drives the outcomes. I would love you to take us down this road that you’ve been on for 15 years or so into the world of psychological research, the theories or ideas that you’ve found to actually be helpful in investing and why. I just think this is such a rich area of understanding. And I know it’s a passion area for you.

[00:33:31] Antonio: Part of this starts at the story of how I started thinking about this. In the same fund that we did Tesla and SpaceX, we had actually, what turned out to be a Medicaid fraud, and I was just tortured by this. These were things I did, okay, so I’m not blaming anybody but me, I made these decisions. How could it be that I could make some sets of decisions that are just great, and others that are just terrible? And in very close proximity in time. And so I actually went and found a psychologist and theologian named Galen Buckwalter, who thinks about some of these questions, and asked him to help me figure it out. We started thinking about, could we create a cultural test to help us understand people better? And one of the things he studies is people that have a brain anomaly that their amygdala doesn’t fire properly and clinically we call these people psychopaths.

The reality is that I want to be careful with that word, because it’s got a very negative connotation. But if you watch the movie Free Solo, you see Alex Honnold, he just doesn’t feel risk and anxiety the same way that people might. And some of these folks go on to do great things, some of them can be criminals. And one of the things he pointed out to me is, look, when you have someone who might commit a fraud, and they’re high performing, there’s no way to figure this out ex ante. You really have to have known them and watched them, because they’re really good at it. And if they’re clinical, they’re probably already in jail, but if they’re high IQ and subclinical, they’re probably in your office, and that’s the kind of people we try to sort out.

And so he took us through trying to learn how to think about this problem of sorting out people that really didn’t fit for us in terms of values, and sorting in people that were really good. And I think the key learning that I would share with you is this: he told us about 5% of the human population has this brain anomaly and they concentrate in areas like finance, law, entrepreneurship, politics, et cetera, all the power professions. And that we should think about it as probably 10% of the people we deal with are going to do things that we don’t like, other people might like them, we don’t like them. They don’t fit for our values just because of the nature of how they think and the way their brain operates, their actual, physical brain operates.

And so we changed our base rate forecast. We do base rate forecasting here on our investments all the time. What’s the probability of a 3x, what’s the probability of a 5x? We weren’t base rate forecasting people. Most people I talk to, if I said to them, “Hey, what percent of people do you think walk in your office, sit down for a meeting, just are not telling you the truth and think it’s okay? Not that they’re not telling the truth and think it’s not okay, but they’re not telling the truth and think it is okay?” Most people would say none. I would’ve said zero before I heard this. And so we raised our base rate forecast to 10% and it’s actually helped a lot, because you’d say, think about it as a base rate toward 10%. It should take you six or nine months to figure it out.

And so, one of the reasons that six month thing happened is, as we get to know people, and they get to know us, one of the questions we’re asking ourselves, “Are our values aligned?” That doesn’t mean someone’s bad or good. We have our set of values, other people their values. And if our values are very misaligned, we’ve found over the years that we’re just not going to enjoy the experience, which means you won’t be great partners, they won’t be good partners for us, and that’s not good for anyone. And our values, they’re here up on the wall in the conference room, humility, integrity, responsibility, and excellence. These are the things you believe in, we believe in it for ourselves; we hold ourselves accountable to it and we want to work with people that do the same thing.

It takes us about six to nine months to figure out whether or not we match up on that stuff, and that’s why this small check goes in first then we get to know each other, and once we match up, I think we’re great partners. We will go to bat for you, we will go to war for you. We will, 100%. But we’ve got to believe that the values matched up. And then it continued and we went deeper in the neuroscience, we brought in a woman, Laura Harrison, who’s been working on some of the stuff we’re talking about here. She’s got a PhD in the neuroscience of emotion from CalTech, and she’s brilliant. The things that I’m telling you about with decision-making have come from the work that we’ve had with this team of Galen and Laura and some of our folks internally, thinking about how we are understanding decision-making, and how we make better decisions, and how we analyze other people making decisions. And soon, how we can help train other people to make better decisions…

...[00:45:45] Patrick: This concept of identity that’s related to ego has always interested me. With a background in philosophy I always loved the Paul Graham essay, I think the title was Keep Your Identity Small. The idea that when you establish an identity, things you identify as or with, you’ll do irrational things to align with that view of your own identity. You’ll act to protect this identity you’ve built up for yourself, even though it’s BS typically. Identities are sort of illusory. What have you done personally, to not make those kinds of mistakes? To not make the affirmation ego related? Is it Atul Gawande checklist manifesto type stuff? What are the tools in that toolkit that are actually effective at improving this category of error?

[00:46:25] Antonio: I’ll start with internal things, then the external things. So internally a meditative practice I started several years ago as a young man, then dropped it for a while, then picked it back up again now a little over a decade ago. I started doing TM, transcendental meditation, which is a useful mantra. And I found that that gave me space between my limbic brain and my prefrontal cortex to make even a millisecond decision about how I’m going to respond, how I’m going to feel. And that was very useful to me. After practicing that for a long time, I was able to actually get myself to a place where I could use a mantra to replace the dialogue in your head that’s always going. And one thing that’s important about the dialogue, just to tell you, we tell people a lot, it’s not you thinking. It might be you but it’s often the source of emotional bias or cognitive bias. It’s important to know this, unless we direct it, it’s not really always thinking.

Thinking is occurring in the background and when you are asleep, and meditation, and TM in particular, opened a space between my limbic system and my prefrontal cortex so I could make a millisecond decision. That is a response that is correct, if it’s mediate to the environment, it makes sense or if it doesn’t, I should just do nothing and be calm. Over time, what happened to me, I got more deeply into it. I had done some Zen Buddhist meditation when I was in Japan when I was very young. I was able to return to a breathing practice, a meditative practice that is without a mantra, where I could reduce the voice. And this happened to me just a few years ago, I went to Japan with my family, and I went back to my very favorite place on earth, a temple called Ryoanji, outside Kyoto. It’s a beautiful zen temple.

And I was meditating there on New Year’s Day, and it was the first time in my life that I could take the voice down to zero, be in a state of awareness without hearing the voice and just be. This has allowed me to, I think, mediate between my sense of ego and what is really happening in the environment, because there’s a space there for me now. It’s been really very useful to me, just made my life more pleasant frankly.

The other thing I’ve done here is, I have some wonderful, wonderful partners I work with, very smart people and really great humans. And it’s part of our process. If you go look at our underwriting documents, it has bias, it’s got cognitive, behavioral and emotional bias in it. And we literally sit around and talk about it. And there’s a culture here where I want people to check me and I check them, why are we doing this? Does it really make sense? What are you feeling about it?

And having a conversation about feelings around an investment table, I know it sounds a little crazy, when it’s so data driven, but it’s important because we want our people to be passionate. We want to be passionate about what we’re doing, that’s the whole point, we like doing it. We want to make the world better, but at the same time we want to make sure it doesn’t override our cognitive systems. And so we have external checks as well, which is more of the checklist manifesto thing, where we’re actually just checking off and saying, yeah, we thought about it, we talked about it.

We don’t even say they don’t exist actually, we just identify them. And when we go back in time and look at our errors, cause we still make errors, we will look at the underwriting, look at the numbers, all the qualitative, quantitative stuff we do, we’ll look at the bias states; we’ll look and see if we made a mistake. If we miss a bias, did something happen there?

2. As Russia Plots Its Next Move, an AI Listens to the Chatter – Will Knight

A radio transmission between several Russian soldiers in Ukraine in early March, captured from an unencrypted channel, reveals panicked and confused comrades retreating after coming under artillery fire…

…As the soldiers spoke, an AI was listening. Their words were automatically captured, transcribed, translated, and analyzed using several artificial intelligence algorithms developed by Primer, a US company that provides AI services for intelligence analysts. While it isn’t clear whether Ukrainian troops also intercepted the communication, the use of AI systems to surveil Russia’s army at scale shows the growing importance of sophisticated open source intelligence in military conflicts.

A number of unsecured Russian transmissions have been posted online, translated, and analyzed on social media. Other sources of data, including smartphone video clips and social media posts, have similarly been scrutinized. But it’s the use of natural language processing technology to analyze Russian military communications that is especially novel. For the Ukrainian army, making sense of intercepted communications still typically involves human analysts working away in a room somewhere, translating messages and interpreting commands.

The tool developed by Primer also shows how valuable machine learning could become for parsing intelligence information. The past decade has seen significant advances in AI’s capabilities around image recognition, speech transcription, translation, and language processing thanks to large neural network algorithms that learn from vast tranches of training data. Off-the-shelf code and APIs that use AI can now transcribe speech, identify faces, and perform other tasks, often with high accuracy. In the face of Russia’s numerical and artillery advantages, intercepting communications may well be making a difference for Ukrainian troops on the ground.

Primer already sells AI algorithms trained to transcribe and translate phone calls, as well as ones that can pull out key terms or phrases. Sean Gourley, Primer’s CEO, says the company’s engineers modified these tools to carry out four new tasks: To gather audio captured from web feeds that broadcast communications captured using software that emulates radio receiver hardware; to remove noise, including background chatter and music; to transcribe and translate Russian speech; and to highlight key statements relevant to the battlefield situation. In some cases this involved retraining machine learning models to recognize colloquial terms for military vehicles or weapons.

The ability to train and retrain AI models on the fly will become a critical advantage in future wars, says Gourley. He says the company made the tool available to outside parties but refuses to say who. “We won’t say who’s using it or for what they’re using it for,” Gourley says. Several other American companies have made technologies, information, and expertise available to Ukraine as it fights against Russian invaders.

3. RWH003: How To Win The Investing Game w/Joel Greenblatt – William Green and Joel Greenblatt

William Green (00:07:38):

When you think of the biggest mistakes that you made, not just in those early years. I remember you saying to me that actually, you didn’t have that many disasters other than obviously, the wonderfully amusing story of Florida, Cypress Gardens. Well, you tell the story, what happened to Florida, Cypress Gardens?

Joel Greenblatt (00:07:53):

Well, the interesting thing, a Harcourt Brace Jovanovich, which was a publisher, but also owned amusement in parks in Florida, believe it or not, went to buy a very small company called Florida Cypress Gardens, which I remembered as a kid going to, and they had water skiing Santa Claus, during Christmas time, and all kinds of water shows and beautiful gardens. It was a very unique, interesting, and very memorable place to visit when you’re five or six years old.

Joel Greenblatt (00:08:18):

When I saw they were getting taken over, and this was literally in the first month I went into business for myself. I was pretty nervous. I was 27 and I had gotten money from a very famous guy and I want to do a good job. I saw this opportunity where Florida Cypress Gardens was being taken over, and there was a nice spread in that deal where I could make a lot of money if it went through. I thought the deal made a lot of sense at the time. I was able to have a big smile on my face and buy Florida Cypress Gardens as one of the first investments I made when I went out on my own.

Joel Greenblatt (00:08:48):

A few weeks before the deal was supposed to close, unfortunately, Florida Cypress Gardens fell into what’s called a sinkhole, meaning the main pavilions of Florida Cypress Gardens literally fell into a hole that appeared out of nowhere. Apparently that happens a lot in Florida, I wasn’t that familiar with it, and thank God I wasn’t at Florida Cypress Gardens when it happened, but the wall street journal wrote a real humorous story about it. I was like, “Why is this funny? I’m about to lose my business. I had taken a pretty decent sized bet in the a deal.”

Joel Greenblatt (00:09:15):

It just tells you, things can happen that you don’t anticipate, that it’s not really your fault. I’d never even heard of a sinkhole before I read about this happening, so it’s a risk that I… When you’re doing a merger deal, you’re not really saying risk of sinkhole is in your checklist of things to look for, so stuff happens, less kind words for that. It’s a good lesson to learn, especially out of the box. I was sweating pretty good. They ended up re-cutting the deal at a lower price and I lost money, but not that terrible. I got… Howard Marks, my favorite line from Howard Marks is always, “Experience is what you got when you didn’t get what you wanted.” I always loved that line and that’s what I got in Florida Cypress Gardens, some good experience…

…William Green (00:18:29):

Have you ever figured out ways to handle your emotions and to become more emotionally resilient? Because I think of someone like Howard Marks, who we talked about before. Howard, I think is… He says that he’s a worrier, but I think also he’s not super emotional. I always felt… When I was with him, it felt like being in the presence of a most superior machine, with about 50 more IQ point than I had. When I think of someone like Charlie Munger, who said to me at the bottom tick, in March 2009, when he was buying Wells Fargo, he didn’t feel any emotion, any fear. I was wondering if you were wired that way yourself, not to be too anxious, focused on odds, or if there were things that you had to do to get your emotions under control during these very rocky periods?

Joel Greenblatt (00:19:12):

Yeah. I think what you’re alluding to is, to be a really good investor and have a strong enough stomach, do you have to have a screw loose someplace to be able to handle it? I think the answer is, yes. You have to have a little bit of a screw loose to be able to take those risks. On the other hand, I do feel the kick in the stomach when I lose a lot of money, but I usually adjust to it in two or three days, try to get my wits about me to take advantage of the opportunity. I think I’m human, at least in that part, where the kick in the stomach, but you kind of get used to it. I think different parts of your career are different. When you’re young, you figure you have time to make it back. When you’re older, you maybe have the experience to know that it will come back. I’ve seen this before and I’ve seen it not only once but many times, so what do you do here?

Joel Greenblatt (00:19:57):

I’m not saying you can completely defeat the emotions that are involved and those emotions are very strong. But I do think, at least for me, being able to adjust and count your blessings fairly quickly and say, “Okay, can I live with where I am now? Yes, let’s move forward and try to do it the right way.” One of the best experiences I had, was when I had a summer job and a friend of mine was working for, actually, the head of risk arbitrage at [Drexel 00:20:26]. The guy running that department was about 72 at the time, which I thought was ancient, now I think he was a youngster.

Joel Greenblatt (00:20:32):

But I forgot why I had an opportunity to talk to him, but either way, we were taking a walk someplace or whatever and I was saying, I was so upset that I lost money in this thing and how unfair it was, and this thing came out of the blue. This gentleman turned to me and he says, “Well, have you ever made money where you were kind of lucky and it turned out better than you expected.” I said, “Yeah, that happens a lot.” He said, “Well, does it happen more than when the bad things happen?” I said, “Yeah.” And he said, “Well, stop complaining.” It’s a good way to contextualize, if you didn’t take risk, you couldn’t make extra money. You can put your money in the bank and only take inflation risk or whatever that might be, but at least you know what you have. But one of the reasons you’re able to make money is that the stock market gets very emotional sometimes, creates these opportunities, but it also comes along with pain. If it didn’t, everyone would do it and you wouldn’t have this opportunity.

Joel Greenblatt (00:21:27):

Of course, I’m saying something now, not in the heat of the moment, that sounds very logical, but eventually you get there. Eventually when bad things happen in a few days, if you can get your sea legs back and start thinking, “Okay, where are my opportunities? What can I do? Can I trade around in my portfolio? Is there a new opportunity that came up that’s maybe better than what I have?” That’s been the case. Good investors maybe still get kicked in the stomach, but then come back soon enough to take advantage of the opportunities that come there. I think big, big picture, you have to have a little bit of a screw loose to take the pain, especially with a very concentrated portfolio that a number of people I know, pursue.

Joel Greenblatt (00:22:06):

I did it for a number of reasons. When I’m looking for really, what I would call unfair bets, I don’t have 50 or a hundred unfair bets at a time to take, so by necessity, I have to, when I was running a very concentrated portfolio, take six or eight of them. Just have a very fine… I think you have to have a very high hurdle. Meaning, to get into the portfolio, it has to be really great. If you own six or eight great things, or at least great bets, that’s more comforting if you actually know what you own. If you don’t know what you own, if you don’t know how to value a business, you’re just going to react to the emotions, because you don’t actually understand what you own. But if you actually understand what you own, and the premise that you bought those things with is still intact, that’s actually the only way I think you can deal with the emotion, because you realize what you own is still good…

…William Green (01:08:00):

I wonder if I could talk to you a bit about Success Academy? Because obviously it’s an extraordinary thing. This network of, I think 46, 47 charter schools in New York City, that you helped to set up. That have had incredible results in turning around the lives of low income and minority kids in particular. This is a subject close to my heart, because my son Henry is an English teacher at Success Academy in New York City at the moment. Teaching 6th grade. So I get the inside dope on how well the system works. So I wondered [crosstalk 01:08:27]

Joel Greenblatt (01:08:26):

He’s really the one you should interview, by the way.

William Green (01:08:29):

Exactly.

Joel Greenblatt (01:08:29):

Because that’s a hard job. That’s a hard job.

William Green (01:08:31):

It’s a challenging job. This is something I never really included in the book, but it really struck me when I interviewed you about Success Academy. That your thought process in solving the problem of education was remarkably similar to your thought process in solving the problem of investing. That you went to about it in a similar way. I wondered if you could talk us through how you looked at the problem of, okay, here’s this existing school system that isn’t working. Let me figure out what might work well and solve this puzzle. How in a…

William Green (01:09:03):

It worked well and solve this puzzle. And how, in a sense, part of what you were doing was finding a simple idea that was very powerful, a simple strategy that was very powerful and replicable because that strikes me as in some ways, not dissimilar to your approach with something like the magic formula, where you said, okay, let me distill this very complex game of investing to it assets, of here’s, how you buy cheap and good stocks. And in some ways I see a real similarity in the way that you’ve tackled the education problem. Without you saying, this is the best way, you’re saying this is a really good solution.

Joel Greenblatt (01:09:32):

Well, I appreciate that. Together with my partner, John Petry, we really took a business approach to the way we wanted to tackle this. We’re not education experts, but to some extent we see what businesses work. And so first off, there are a lot of good one off schools. If you get the best teachers and you give them enough resources, you can have a really good school. But the real challenge is to scale a really good school and then also scale to kids who probably need more help than others, because they have less resources when they come in. And so what we knew from a business standpoint was that if you just rely on the top 1% of teachers, you’re going to run out of those. And so can you make an average teacher? Can you give them a model that works for them to be great and really teach those kids?

Joel Greenblatt (01:10:20):

In addition, you don’t want to scale a model that doesn’t work and you have to be willing to make errors. So you want to first come up with a prototype that works and then expand that, and it has to work because it’s replicable, whatever you do has to be replicable. And so if you start with that concept, what happened with successes? We had a school, we hired most brilliant women I’ve ever met named Eva Moskowitz to sort of follow with this strategy, try to design a school that was replicable. Of course we weren’t looking for bad teachers and we weren’t even looking for average teachers. So that’s part of it. But we were looking for a prescriptive model, which could help any teacher become much better and started with one school. And when it started to doing pretty well, a couple years later, we opened three more schools.

Joel Greenblatt (01:11:07):

And the only question I asked was not, are these schools great, but how much ahead are these three schools than the first school? How are the kids doing? And most of schooling is done with inputs, meaning, well, if we get this teacher and they have this much experience and we get whatever, but if you’re measuring outputs, which is, are the kids learning? It’s a very different, and we’re agnostic of how that happens. We want to figure out something where the kids are learning and that’s, it’s the output that matters to us, not the input. We have a theory of teachers have to do this, or the curriculum has to do this, but how do we get the outputs? Putting all those principles together actually lets you scale. And so each time we opened more schools and now there are, I think 47 schools and 23,000 kids, we make sure we’re making progress on all those elements.

Joel Greenblatt (01:11:54):

And there was a lot of trial and error what worked or what worked better and what’s the best way to recruit teachers and what’s the best way to train them and all those other things and all these things that I give total credit to Eva Moskowitz has been incredible. And I think she’s the only part that’s not replicable, but she has created a system that I think other people can take a lot from and copy. And so she’s done an amazing job and we really used our business sense as to get to a replicable model. And so I think a lot of that is based on not obviously being education experts, but being business experts and just saying, instead of profits, our profits are kids learning at a high rate and at a good level and measuring it that way. All those things together, we’re sort of the basis of how Success got started. And you know, I think part of why it’s been successful.

4. Nvidia: The GPU Company (1993-2006) – Benjamin Gilbert and David Rosenthal

David: Yup. NVIDIA at this point, they’re halfway down the road of developing the next chip that they think Sega is going to adopt for what ultimately would become the Dreamcast. NVIDIA was calling the NV2. When Sega comes back and says, we’re switching horses, we’re not going to do this, they’re screwed.

For so many reasons, everything we’ve discussed, there’s also in the interim year-and-a-half since NVIDIA started, the price of memory dropped because, thank you, Moore’s Law. NVIDIA’s chips were designed to be super, super tight on memory. The memory cost about $200 in component parts to go into their chips. Their competitors have more memory that’s costing them $50.

Ben: That was just in that one iteration. It’s interesting to note that NVIDIA, by being first and not projecting out the exponential change that would come from Moore’s Law, was actually at a disadvantage. Because they didn’t get a chance to watch and see where the standards were adopted, so they picked their own lane and went off in their own direction, which ended up not being what everyone else picked, which put them at a disadvantage. But second of all, everyone else’s cost structure was way lower or at least everyone else could see that the cost structure was getting way lower. NVIDIA designed for a constraint that was no longer true by the time everyone else came out with their stuff.

At this point, Jensen and his co-founders had to look at each other and say, okay, do we scrap everything we did? And if so, how do we not make this mistake again? How do we make sure that in future generations, we premeditate the exponential curve of Moore’s Law and prices coming down and design for things that are two, three, four generations beyond what we actually have available to hardware right now?

David: When all this goes down, the company has about nine months of runway left. Literally anybody else, you pull the plug. It’s over. Everything in the deck is stacked against you, like your F’d. I can’t imagine sitting there dreaming up a way out of this. But Jensen, God, he’s such a G. He’s like, no, we’re not going out like this.

When you hear Jensen talk today about NVIDIA’s culture, he says that intellectual honesty is the cornerstone of NVIDIA’s culture. This is what he’s freaking talking about. He sits down with Curtis and Chris. Remember, they’re engineers.

They’ve recruited NVIDIA a hundred-plus engineers into the company at this point and sold them on this technological vision of how we’re going to define the industry, we set the standards. We’re not going to use some off-the-shelf stuff. It’s all toast. Jensen’s like, guys, this is a pipe dream. We need to throw it all out if we’re going to survive.

The only thing we can do is standardize on the same Microsoft Direct3D as everyone else, same architecture, and our only shot is just to compete on performance and try to become the best chip out there in this now sea of commodity chips. His co-founders don’t want to do this. This is not an exciting vision for a Silicon Valley engineer.

Ben: When your CEO comes to you and says that, what they’re basically saying is, look, if my job was strategy and your job is execution, the strategy failed, so we just now need to literally out-engineer all of our competitors. We need to be smarter at engineering decisions, so we can be more performant at a lower price point using less energy than our competitors.

Microsoft being Microsoft had all the developer attention. And because Microsoft set a standard, NVIDIA realized, look, we have no ability to uniquely get our own developers, at least at that point in the company’s history. So we must just on our left, look and see all the developers are coming from Microsoft using this API, on our right is all the same consumers. We have to compete just head to head on raw engineering ability with everyone else.

David: You’re saying engineering ability. But remember, this is essentially a commodity at this point. Really, it’s not just engineering ability. It’s how fast you can ship. How fast can you design the next generation of chips? And can you ship it before everybody else? Because everybody knows what’s going to be on that ship.

Ben: And why is it? What fundamentally was it about graphics cards that made it a commodity?

David: At this point, all the other peripherals—and we’re going to get into this in a sec—there was nothing that special about it. They all did the same thing, which was take polygon-level, 3D graphics processing out of the CPU and onto this other chip on the motherboard. Just like sound cards were doing the same thing for sound, just like networking cards were doing the same thing for networking.

It was just like, what’s the price performance ratio of doing that? The interfaces and the programming language, that’s all standardized by Microsoft. You’re just a commodity hardware.

Ben: What GPUs actually do or did, at least in this point in time, say, okay, the system is going to feed me in basically point clouds, like vertices that make polygons that represent like a 3D world and my job as the GPU is to, as fast as I can, in the highest resolution that I can or I suppose a standard predetermined resolution, output a 2D thing that goes on the screen?

I turned 3D stuff into 2D stuff. I have to do that better than other things that I’m competing against, where basically all of us are. When you say commodity, you mean limited by Moore’s Law and doing right up to the edge of what integrated circuit manufacturing techniques enable us to do.

David: Yup. Everybody knows what this means. They got to ship faster than their competitors. They also got to ship faster than their competitors because they’re about to go bankrupt. They draw up this plan. They’re trying to thread the tightest needle possible here.

They have to lay off 70% of the company, which they do. They go down to about 35 people. Everybody who’s staying knows we now have to design from scratch and ship a new chip before our runway runs out, which is nine months. You can’t do that on a normal chip design cycle.

Ben: It takes two years, right?

David: Yeah. With these fabless chip companies, the way they would design chips is they would work on the design, they would send them over to the fabless company, the fabless company would produce some prototypes, they’d send them back, they test them, they go back and forth a few times.

Ben: You mean the foundry would produce some, like the TSMC, or the Samsung, or the GlobalFoundries.

David: Now importantly, NVIDIA is not using TSMC at this point because they can’t. TSMC only works with the best and NVIDIA is not the best. They’re using secondary foundries. That process takes a long time. Then at the end of it, when you’re sure you got the design right, then you do what’s called a tape-out of the chip.

Ben: I love this term, by the way.

David: It harkens back to literally when you used to tape masks to do the photolithography on the chip back in the day, but it just means finalizing the design.

Ben: But you actually do run it on some prototypes first. The foundry sends back some, hey, thanks for the designs, here’s the chip, run your tests on it, and make sure everything does what you think it does. That process takes two years to get a full iteration on.

David: Yup. They’re like, we can’t do this. Jensen’s like, here’s what we’re going to do. I’ve heard about these new technologies, some new machines out there that enable emulation of chips. In our case, we’re going to use it to emulate the graphics chip that we’re designing. It’s all in software and it works.

Ben: They’re startups, but they exist.

David: The problem is, when you emulate it in software, it’s really slow. When you play a game, when you’re looking at your computer monitor or whatever, it’s refreshing 30 to 60 times a second. If you’re a professional gamer, you probably have a go on it, like 120 times frames per second. This emulator runs at one frame every 30 seconds. They’re going to have to debug this thing in software to save this time going at one frame every 30 seconds.

Ben: It’s just insane.

David: That’s brutal.

Ben: They’re basically making this trade-off of, okay, if we want to ship something in nine months, we don’t have time to actually have it execute on the hardware. We are going to make the trade off of our testing being mind-numbing, like running whatever our graphics tests are, where we’re looking for this certain specified output. We need to plant someone in front of a screen to watch the new frame render once every 30 seconds and look again some tests to verify that the output is correct. If it is and this person does that mind numbing work, and sits there just observing, and observing, and observing, then we will go right to manufacturing without ever producing a physical prototype and ship that.

David: That is exactly what they did. They had spent a million dollars just to get the emulator hardware and software to do this.

Ben: I think they had generated some revenue, but it was still a third of the cash that they had in the entire bank account.

David: They go down to six months until they cash out in the company. They get it done in a few months and then they call up their foundry. I don’t know if they’re using United or one of the other foundries in Taiwan, not TSMC. They’re like, all right, we tape this thing out and send it to production. The foundries were like, you guys sure about that? They’re like, yup, we’re sure. Make 100,000 units.

Ben: If I’m remembering right, I think NVIDIA basically was the only customer of that emulation software. That was a startup that really wasn’t fully proven yet. NVIDIA was like, look, we literally have no options.

David: Yeah, they were the only customer and then that company went out of business after. The chip they designed is now the advantage. This is lunacy, what they’re doing. Obviously, they have to do it because their back is against the wall.

The advantage of this, though, is they are now designing this chip with the same set of assumptions about what technology is available as all their competitors, but their competitors are working on those designs. They’re not going to be able to get them out for 18 to 24 months. NVIDIA is going to get the same generation of design out in six months. This chip is called the RIVA 128. It’s what they call it. It is a freaking beast in every sense of the word.

Ben: It’s big.

David: It’s big. It’s extremely powerful relative to anything else on the market.

Ben: More powerful than any customers are telling them they want.

David: Yeah, way, way more powerful. But it comes with some downsides. With great power comes great responsibility. Because they built this thing in such a manner, it barely works. There are a lot of stuff wrong with it. I forget the exact number of this, but essentially, Direct3D at the time had something like 24 or 25 different ways and techniques.

Ben: These are the blend modes?

David: Yeah. I think that’s what it was, blend modes. The RIVA only works about two-thirds. One-third of it just freaking crashes. It doesn’t work.

Ben: I thought even worse than that. Basically, I think NVIDIA had to launch a campaign, going around to all the different developers and being like, come on, what do you really need more than these eight for? What are you really going to do where you need to use that fancy stuff? Do us a favor. For this generation of the chip, these eight work great. You’re going to love them. They’re so good. Just use those.

David: This is so, so great because people do it. They learn about the market. In the first iteration of NVIDIA, we’re going to build all this technology. We’re going to drive the market. They didn’t know anything about the market. They were just making all these assumptions about what people wanted.

But now, Jensen’s actually going into these developers trying to convince them to do this. They all do it. Why did they do it? Because the only thing that matters is performance. Consumers are going to buy hardware and games based on the quality of the graphics. This is being discovered for the first time. People are willing to make a lot of compromises in service of performance. NVIDIA’s the first one that figured this out because they have to go around and do this, and developers all get on board.

Ben: To be clear, it’s because the consumers are making the buying decision on what graphics card they buy.

David: It’s a completely interrelated system where the consumer is making all of the decisions. That’s where the demand is, the consumer is deciding what hardware to buy. That’s what NVIDIA’s business is.

Ben: Whether they’re buying it as a fully built computer from the OEM or whether they’re buying the card put in later themselves, they’re making a decision on what graphics card goes in the computer.

David: Exactly. The game developers are making decisions on what graphics cards to support and how to build their games with the assumption of what’s my target market of consumers? Who do I think will this game run on? You need to have at least an X-level performance rig in order to run my game in its fullest form.

Ben: The developers are premeditating what graphics cards are going to be out in the market when their games launch. They’re saying it’s going to be the most performant one at the right price point, so whatever the mass market is, we have to target that. If you’re telling us that we’re going to test it and it turns out that yours is the best performance per price, performance per watt, or whatever, if it’s the most efficient card, then people are going to buy that one, so we must target that card.

David: And they’re going to buy my game. I remember that this is a few years later. This is a trope that happened. There was a game called Crysis. Do you remember this?

Ben: Oh, yeah. What’s the relationship between Crysis and Far Cry?

David: Far Cry was the first game, the Crysis Engine, and then Crysis also. It was super convoluted. Basically, my perception of this thing was when Far Cry came out—this was mid-2000s—the graphics were unbelievable. If you had a rig powerful enough to run it, just unbelievable. The game itself was total crap. I don’t think I ever played more than 10 minutes of it.

Ben: I’m pretty sure if your computer didn’t support it, there were all these videos that people would record of building a tower of a thousand gasoline barrels and then shooting it. Because it was too complex for their graphics card to handle, their computer would just freeze. That was the failure mode of Far Cry with non-performant chips.

David: This is how the hardcore gaming industry evolves. Far Cry sold so much software and so much hardware just because people wanted to attempt to experience that level of graphics. That’s what the developers are starting to figure out. They’re like, all right, well, you can ship this thing. We’ll use only those eight blend modes whatever it takes because graphical performance is the most important thing.

It works. They sell one million units of the RIVA 128 within four months. I should have looked at what the MSRP was, but that is a lot of revenue.

5. An Interview with Dan Wang about COVID, Chinese Manufacturing, and China’s Response to Ukraine – Ben Thompson and Dan Wang

That’s good! I’m happy for you. What are you hearing, though, from people who are there? The views we have from the outside, whether that be news reports or what gets out under Western social media, it’s pretty scary. People struggling to get food, even water. Kids separated from their parents. What’s the view on the ground. Is it as bad as it seems from the outside?

DW: I think it might be quite a bit worse than what it seems than the outside. Now, Shanghai started to lock down about a month ago when it started posting a few cases, and at the time very few of us had been terribly concerned. What was surprising about this wave is that the bad news just kept piling on and on, such that we saw just a steady increase of new restrictions. At one point we woke up and figured out that all the schools had now been closed. Steadily the grocery delivery and eCommerce delivery platforms like Hema for groceries and JD.com for e-commerce had been slightly breaking down. So to have this series of steady escalation has been very surprising indeed.

Now for those of our listeners who don’t know, Shanghai has been doing very, very well in China, and has been known for having a light touch on COVID throughout the entire pandemic. Beijing, where I used to live, would lock down tight every single time, every other city would lock down for a few cases, Shanghai had a pretty light touch, it never really locked down. So we all feel that Shanghai is now guilty of quite a lot of hubris and is locking down in the most severe way; I think the really comparable event here is Wuhan in February 2020, or March 2020, when most people were confined to a space, and when Beijing deployed the People’s Liberation Army to really try to control the pandemic. So the situation is now pretty serious indeed.

I asked you this the last time you were on, but is zero-COVID sustainable? I know that was the message from Xi Jinping, so of course the Shanghai situation is going to be blamed on the local leaders, but is that messaging going to carry the day, that Shanghai should have done better? Or is there going to start to be some realization that this is impossible for the long run?

DW: We’re probably getting a little bit closer to the realization that zero-COVID is not possible, especially given the variant on top of Omicron which makes it far more transmissible. I think the way to think about this is that Beijing has deployed the People’s Liberation Army, again, for only the second time throughout this pandemic, and if you deploy the army to try to control this virus, well, then it becomes very slightly more complicated to say, “A lot of this is just local incompetence, the rules were not properly enforced,” because if the army is involved, then things are much more challenging to pass the buck.

It really is pretty surprising how poorly the Shanghai government has managed things. Shanghai is known throughout the rest of the country for being the most progressive, for having the greatest resources, for being the richest jurisdiction in the country, for doing a lot of the nicest things. I’ve written recently about how pleasant a city Shanghai really is. Every time we Shanghaiers would have to go to Beijing, we’re asking ourselves, “Why do we, who are living in mini New York, have to visit mini Pyongyang again?” So it’s been pretty shocking to see how poorly Shanghai’s government has bungled things.

In my view, the most stark issue here is that for a lot of people, Shanghai is out of food. So the grocery delivery platforms have been mostly shut down for the last few days, even over the last few weeks. It’s become quite a bit more difficult to buy groceries. Now that everyone is confined to home, the government is now sending rations of packs of vegetables to different people. Now, some of these rations are fairly generous. You have people getting some fish, you have people getting some shrimp and an assortment of things, but a lot of these ration packets are a head of cabbage, a few potatoes, carrots, and that is what you have to live on for the next while. This is the big surprise to all of us, that the government has looked fairly hesitant, uncertain, even incompetent in this case, and not correctly managing what should be a more straightforward affair with delivering food to most people.

I think you mentioned your annual letter in passing, referring to talking about Shanghai versus Beijing, and we’ll have a link to it, as it’s always an amazing read. But I think I would gauge that letter and our last interview as being pretty optimistic about China, I think particularly relative to maybe broader opinion. Over the last few months, though, you not only have this COVID situation coming back to the fore, but you also seem to have some backtracking around initiatives like reforming the real estate market or Common Prosperity. Are things looking a little bit stormier than they were even a few months ago?

DW: Things are absolutely more stormy over the last few months in China than even just three months ago when I published my letter. I think there are four big risks this year that’s going to make 2022 a very, very special year indeed. The first big risk, as you put it, is COVID. Right now the biggest economic city in the economic center in the country is under the most severe lockdown, demanding the army. That is a pretty big thing, and the danger here is that even if Shanghai is back to normal in something like two or three weeks, which I think is the most optimistic scenario, we don’t know if we have to do these rolling lockdowns throughout the rest of the country throughout the rest of the year. So that is the first big risk.

Second, if there are huge lockdowns of something like, let’s say, 10% of the country going dark for any given point, then the economy cannot do well. The National People’s Congress this year set a target of 5.5% GDP growth. It was ambitious in the best of times when there wasn’t quite a bit of COVID running around, but to have something like 5.5% growth while shutting down 10% in the country at any given point, that is looking far more difficult indeed.

The third big risk is this geopolitical uncertainty as it relates to Russia. It’s hard to figure out what exactly is going on here, but at least we can acknowledge that there are a lot of unknown unknowns.

And finally, the major event that will be the controlling force for this year is going to be the 20th party Congress held sometime in the fall, probably September or October of this year, when General Secretary Xi Jinping, is going to very likely almost certainly seek a third term as China’s top leader. And so, having this Party Congress in place, I think, is a very big reason that the country is pursuing zero-COVID, to make sure that COVID is not running rampant over what is the most important political event in China every five years, especially for Xi Jinping on a personal level; and then also, to set this fairly ambitious growth target so that people are feeling pretty good.

I think one of these things are going to have to give. Even in the other previous few party Congress years, we have a lot of politicians being purged for the sin of joining the wrong political faction, and when you add up all of these four factors together: COVID, the economy, geopolitics, as well as the Party Congress, this is going to be just a really weird brouhaha and I am not sure how things are going to shake out this year in China.

The level of uncertainty is really striking. You said that “almost certainly” Xi Jinping will be re-elected. Is there any thought or any discussion that that wouldn’t happen? From the outside, it’s certainly just been assumed that will be the case.

DW: The conventional wisdom in China is that Xi Jinping will have a third term, but what we don’t know is the shape of his responsibility. Now, there are a lot of tea leaf watchers in Beijing who are following these things much more closely than I am, but there is some speculation that he resurrects the title of Party Chairman, which previously only Mao Zedong held, and then appoints a new General Secretary, which would be his successor. Also, the other major uncertainty is the composition of the Politburo, and is there some sense that the Politburo will be stacked a little bit more evenly between different factions within the party? Or is he going to have a run of the table and have many of his own people in place at this most senior leadership positions?…

…One final question. How, if at all, has your view of the Taiwan risk changed? I have to ask you this because I was traveling over the last couple weeks, and as you can imagine, I got asked this constantly, so I will put it to you.

DW: Ben, I want to hear your answer first.

My answer is I think it has decreased the risk in the short-term, because I think that China is probably surprised by the unanimity and vigor of the Western response, and it’s probably a bit of a wake up call that the West still can get its crap together to a certain extent, but it’s probably increased the medium-term, in that China now knows what it has to do, what issues it has to overcome, what preparations it has to make. It, to your point, focuses minds on doing that. I do also think the clear trepidation in the West about Russia using nuclear weapons might also weigh into this, in that China may realize they have a bit of a trump card, which is, “Hey, if we do an embargo, and say we’re going to respond with nuclear, the West isn’t going to do anything.” That adds an additional layer of ambiguity into the question. Basically, short-term risk, I would say, is down a bit, but medium-to-long term risk is probably up a bit. I’m not sure what exactly the time periods are with that, but that’s my answer.

DW: Yeah, that’s exactly my view, that in the short-term at least, Beijing certainly knows that whatever lack of vigorous response it can hope for from the West, probably is now put to bed because of all of these different actions from the West. The major uncertainty that we have here, is that none of us can define a timeline. If we don’t know what the medium-term is, if we don’t know what the long-term is, then it becomes much more difficult to say when exactly these things will happen. My sense has always been that Beijing has never laid out a clear deadline of when it would really like to liberate Taiwan Island.

Just teasing you here, Ben.

6. Can Matt Mullenweg save the internet? – David Pierce

Most of Mullenweg’s time is spent as CEO of Automattic, one of the web’s largest platforms. It’s best known as the company that runs WordPress.com, the hosted version of the blogging platform that powers about 43% of the websites on the internet. Since WordPress is open-source software, no company technically owns it, but Automattic provides tools and services and oversees most of the WordPress-powered internet. It’s also the owner of the booming ecommerce platform WooCommerce, Day One, the analytics tool Parse.ly and the podcast app Pocket Casts. Oh, and Tumblr. And Simplenote. And many others. That makes Mullenweg one of the most powerful CEOs in tech, and one of the most important voices in the debate over the future of the internet…

…In every way that matters, Automattic is a reflection of Mullenweg (you could say he puts the “Matt” in Automattic). He started building web software because he wanted a place to store and share his photos; he’s a blogger to the core, and loves anything that aids in the free expression of ideas on the internet. He loves jazz, which is why WordPress releases are named for jazz musicians. He loves to read and write and work from anywhere, so he turned Automattic into a company that supports bloggers and promotes remote work. He buys companies that make products he likes, and companies that have missions he believes in. Most of all, he believes that open-source software is the future of everything. And he’s betting on it every way he can.

Eighteen years after he first started working on WordPress, Automattic is more powerful than ever. It’s a $7.5 billion company, one of the biggest private companies in the industry. And yet its founding idea — that software should be available to everyone and editable by anyone, that communities can build great things together, that walled gardens always eventually fall — seems more tenuous than ever. There’s another 17-year-old company named Facebook that flies in the face of everything Mullenweg believes in, and is threatening to own the future of the internet…

…The first time Mullenweg and I spoke for this story, I asked him what he thought about the state of the tech industry. It was early September, and conversations were raging about antitrust, misinformation, surveillance capitalism, Big Tech’s overreach, Facebook’s effect on democracy and in general the society wrought by the tech industry.

Before he answered, Mullenweg changed the frame of the question. This happened constantly in our conversations: I’d ask about Instagram or the iPhone, he’d respond with Plato or Camus. Once, when I asked him about Facebook, he responded with a story about the printing press. In this case, he simply urged me to think more broadly. “I don’t think you have to limit yourself to looking at technology,” he said. “Zoom out to human history, or look at the current state of the world, and look at the tension and the pendulum swing between freedom and authoritarianism.” That back and forth has always existed, he said, and to expect a bunch of companies to suddenly fix it is unrealistic.

The cycle plays out the same in tech, he said. Take the internet: built as an open platform, eventually colonized by a handful of dictatorial players. To them, Mullenweg says: Congratulations on all your accomplishments, but you’ll lose in the end. “You get folks who want to ride that openness, but then close people off,” he said. “Like Facebook using your contact books or your email to bootstrap its growth, but then not allowing anyone to do the same on Facebook.” That can work, Mullenweg acknowledges. Sometimes really, really well. “But it also contains the seeds of its own demise.” Users inevitably begin to feel hemmed in and controlled by the closed platforms, and yearn for open pastures. Then they go build something better. Something open. “People’s natural desire for freedom starts to get more and more of the best and brightest in the world working on open, distributed, decentralized systems.”

The seeds of this change are already everywhere, he said. Tesla has open-sourced its patents in an effort to speed up innovation in electric vehicles, because as Elon Musk said, the company’s goal is not just to sell cars but “to accelerate the advent of sustainable transport.” There’s also the whole decentralized, Web3, blockchain community, which excites Mullenweg every time it comes up. “There’s an inevitable gravitational pull towards open source affecting literally every field: finance, health, politics,” he said. “All the things that currently happen in closed ways, what if they were open? What if they were transparent? What if you could copy and paste it? Do your own version? Remix it?”

And then he offered the closest thing you’ll find to a Unified Theory of Matt Mullenweg. “As more and more of our lives start to be run and dictated by the technology we use, it’s a human right to be able to see how that technology works and modify it. It’s as key to freedom as freedom of speech or freedom of religion. So that is what I plan to spend the rest of my life fighting for.”…

…There’s just no hurrying Mullenweg, it seems. Even as the tech industry swirls around him, with regulatory fights and social media backlashes and the seemingly hourly shift in priorities, Mullenweg remains steadily on course. “We aspire to create the layer that every other application on the web can run on,” he said. “Hopefully one day, 85% or 90% of all websites have WordPress as their base layer.” Right now, the web operates largely on top of closed platforms owned by companies like Amazon and Facebook. “But to truly be a platform,” Mullenweg said, “it has to be open. Otherwise it’s more like a trap.”

He plans to spend the rest of his career building the web’s one true platform, the open system the internet deserves. What exactly does that look like? Who knows. Mullenweg is increasingly fascinated by all things Web3 and crypto, and sees in that space much of the collaboration and community he loves about WordPress and open source in general. He proudly reminded me that WordPress.com began accepting bitcoin in 2012, and that Vitalik Buterin, who eventually created Ethereum, wrote about Automattic for Bitcoin Magazine the same year.

“To me, what Web3 embodies is two essential ideas: decentralization and individual ownership,” Mullenweg said at his recent annual State of the Word speech, where he updates the WordPress community on the year that passed. He preceded that by saying he didn’t really know how to define Web3 at the moment — who does, really? — but supported the belief in an internet that anyone can help build, tweak to fit their own needs, and own themselves without paying rent to some large tech giant. He did issue a warning, though: “For every project which is asking for your money, dollars, for you to pay the cost of a house for a picture of an ape, you should ask: Does it apply the same freedoms which WordPress itself does? How closely does it apply to increasing your freedom and agency in the world?”

7. The Metaverse Has Bosses Too. Meet the ‘Managers’ of Axie Infinity – Edward Ongweso Jr

It’s only in the past year, however, that games have begun to not only shoehorn cryptocurrency into their rewards systems but also fully build themselves around crypto-tokens and digital assets like NFTs. What’s emerging is an ecosystem known as “play-to-earn,” where the players can generate revenue directly from playing video games, harvesting digital assets, and trading them…

…Axie Infinity is arguably the industry standard-bearer for play-to-earn games, and it’s a deceptively simple one at that. Axie, developed by Vietnam-based studio Sky Mavis, centers on NFTs of monsters called Axies that form a team whose battles earn players Smooth Love Potion (SLP) tokens. The game features its own blockchain, named Ronin, to facilitate faster and cheaper transactions for SLP, Axie’s governance token (AXS), and Ronin’s native token (RON). Battling is basic, akin to if your entire team of Pokémon battled at once. Axies, as well as other in-game items, are represented by NFTs which can be bought or sold on an in-game market. 

The rise of play-to-earn games, however, has not been as clear-cut as some suggest. The prices of Axie Infinity’s core tokens as well as trading of its Axie NFTs have consistently fallen since their peak last year. A recent hack threatens even greater downward pressure on prices. Questionable economics and labor dynamics have risen up from the froth: Play-to-earn is not just giving rise to a new class of digital workers who see a fraction of the total earnings from their efforts, but bosses, too. 

Getting started in Axie isn’t like other games, however. To play Axie at the highest level of the game—to be, effectively, a boss—you need start-up capital. 

To start playing Axie Infinity, you need to buy three Axie NFTs—an investment that, when crypto markets were stronger, cost well over a thousand U.S. dollars. Today, the cost hovers around $300. Axies can also be bred―for a fee that grows each time―using a basic tripartite genetics system allows for selection for different traits as well as random permutations. These newer and potentially stronger Axies NFTs can be minted for use in teams, or sold on marketplaces. 

Not everyone has enough money IRL to be their own boss in the metaverse, however. That’s why you can also loan your Axies to players unable to afford their own in exchange for a cut of any profits they generate, which can run from 20 to 50 percent. Manager cuts can go even higher, with “ranges from 30% – 75% cut per scholar based on their monthly rewards”  according to Axie Infinity’s co-founder and chief operating officer Aleksander Larsen (also known as “Psycheout” online). These players are known as “scholars,” and their benefactors—who may employ a few scholars or run massive operations with dozens or hundreds of scholars toiling away—widely refer to themselves as “managers.”…

…”I can’t specifically call it a boss/employee. It’s more of a partnership, or let’s call it a joint venture. One party puts up the capital and the other puts up the time,” Conor Kenny, an Axie Infinity manager and a YouTuber who documents crypto trades, told Motherboard. “The scholar grinds daily, you split the profits. Everybody wins!”

In his YouTube videos, however, Kenny strikes a different tone. “I employ them,” he enthusiastically says of his scholars in a September video agonizing over whether Axie Infinity was still a worthwhile investment for managers. “As we stand right now, Axie Infinity is a Ponzi scheme. It’s built on new players coming into the world,” Kenny added in the video…

…“Everything in life is a Ponzi,” said one Venezuelan manager who goes by Iguano and directs five scholars, reflecting the widespread idea that Axie Infinity’s buy-in requirement and diminishing returns as its token sinks in value make it similar to a Ponzi or pyramid scheme. “The first bunch of people who invested in the game have better profit than the people who invest at the end. The economy of Axie needs new people to join to provide gains to the people who were there before.”…

…Rafar’s scholarship program is a comprehensive one: It includes a one-month trial to maintain a competitive ranking, a daily quota of 75 SLP, an onboarding system complete with Google Doc guides, playtesting, live feedback, and a community Discord to ask questions and get further help.

“I also see Axie as a gateway for Filipinos to be educated about crypto which I believe will help advance them in the future,” he told Motherboard. “I’ve set up crash courses for them about the basics of crypto (how to create wallets, trade, and how to avoid scams)—basically making them literate in the crypto world.”

When someone is in desperate need of funds, Rafar said, he has in the past offered Axie scholarships as a way for them to solve their problems themselves. 

“For example I had one family member that is a scholar earning maybe $250 a month from their job,” Rafar told Motherboard. “They are having a kid and need money to pay the hospital bills, estimated to be about $500. I offered them an Axie account and held on to their SLP till the baby’s birth month. They are about to receive about $600 from earnings, which they wouldn’t have had otherwise.”…

…All this may be even further complicated by a recent major hack that rocked the Axie Infinity ecosystem: 173,600 ETH (about $588 million) and 25.5 million in a stablecoin called USDC was stolen from the Ronin Network on March 23, but was only noticed on March 29. Ronin is a so-called “sidechain” designed to allow people to use Axie Infinity without incurring expensive fees on Ethereum for every action. The hackers drained the liquidity from the Ronin “bridge,” which allowed for assets to be transferred between Ethereum to Ronin, leading to the bridge and its affiliated Katana decentralized exchange to both be deactivated. This means deposits and withdrawals are paused, including on Binance, stranding the funds of those who have wagered that this game will make them money, even as its core tokens have shed most of their value over the past year….

…Before the reforms announced in February, the most SLP an incredibly skilled player could expect daily was somewhere north of 324 tokens per day in Season 19 if they had 20 or more Axies, played at the highest levels of Adventure Mode, and got a 60 percent win rate while battling in higher ranks of PvP battling. At the current SLP price of $0.02 that’s a daily wage of $6.48, excluding the manager’s cut, which could be half of those earnings. In the Philippines, where nearly half of all players reside, the average minimum wage is about 366 pesos or $7.13. 

A research report from gaming research and consulting firm Naavik affirms as much: For low-level players or those just starting out, playing Axie Infinity each day earned less than a minimum wage job in the Philippines, the research concludes. That was in November, when the price oscillated between $0.06 and $0.08.

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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 Meta Platforms (parent of Facebook), Microsoft, and TSMC. 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 03 April 2022:

1. Hundreds of AI tools have been built to catch covid. None of them helped – Will Douglas Heaven

“This pandemic was a big test for AI and medicine,” says Driggs, who is himself working on a machine-learning tool to help doctors during the pandemic. “It would have gone a long way to getting the public on our side,” he says. “But I don’t think we passed that test.”

Both teams found that researchers repeated the same basic errors in the way they trained or tested their tools. Incorrect assumptions about the data often meant that the trained models did not work as claimed.

Wynants and Driggs still believe AI has the potential to help. But they are concerned that it could be harmful if built in the wrong way because they could miss diagnoses or underestimate risk for vulnerable patients. “There is a lot of hype about machine-learning models and what they can do today,” says Driggs.

Unrealistic expectations encourage the use of these tools before they are ready. Wynants and Driggs both say that a few of the algorithms they looked at have already been used in hospitals, and some are being marketed by private developers. “I fear that they may have harmed patients,” says Wynants…

…Many of the problems that were uncovered are linked to the poor quality of the data that researchers used to develop their tools. Information about covid patients, including medical scans, was collected and shared in the middle of a global pandemic, often by the doctors struggling to treat those patients. Researchers wanted to help quickly, and these were the only public data sets available. But this meant that many tools were built using mislabeled data or data from unknown sources.

Driggs highlights the problem of what he calls Frankenstein data sets, which are spliced together from multiple sources and can contain duplicates. This means that some tools end up being tested on the same data they were trained on, making them appear more accurate than they are.

It also muddies the origin of certain data sets. This can mean that researchers miss important features that skew the training of their models. Many unwittingly used a data set that contained chest scans of children who did not have covid as their examples of what non-covid cases looked like. But as a result, the AIs learned to identify kids, not covid.

Driggs’s group trained its own model using a data set that contained a mix of scans taken when patients were lying down and standing up. Because patients scanned while lying down were more likely to be seriously ill, the AI learned wrongly to predict serious covid risk from a person’s position.

In yet other cases, some AIs were found to be picking up on the text font that certain hospitals used to label the scans. As a result, fonts from hospitals with more serious caseloads became predictors of covid risk.

Errors like these seem obvious in hindsight. They can also be fixed by adjusting the models, if researchers are aware of them. It is possible to acknowledge the shortcomings and release a less accurate, but less misleading model. But many tools were developed either by AI researchers who lacked the medical expertise to spot flaws in the data or by medical researchers who lacked the mathematical skills to compensate for those flaws.

A more subtle problem Driggs highlights is incorporation bias, or bias introduced at the point a data set is labeled. For example, many medical scans were labeled according to whether the radiologists who created them said they showed covid. But that embeds, or incorporates, any biases of that particular doctor into the ground truth of a data set. It would be much better to label a medical scan with the result of a PCR test rather than one doctor’s opinion, says Driggs. But there isn’t always time for statistical niceties in busy hospitals…

…What’s the fix? Better data would help, but in times of crisis that’s a big ask. It’s more important to make the most of the data sets we have. The simplest move would be for AI teams to collaborate more with clinicians, says Driggs. Researchers also need to share their models and disclose how they were trained so that others can test them and build on them. “Those are two things we could do today,” he says. “And they would solve maybe 50% of the issues that we identified.”

Getting hold of data would also be easier if formats were standardized, says Bilal Mateen, a doctor who leads the clinical technology team at the Wellcome Trust, a global health research charity based in London.

Another problem Wynants, Driggs, and Mateen all identify is that most researchers rushed to develop their own models, rather than working together or improving existing ones. The result was that the collective effort of researchers around the world produced hundreds of mediocre tools, rather than a handful of properly trained and tested ones.

“The models are so similar—they almost all use the same techniques with minor tweaks, the same inputs—and they all make the same mistakes,” says Wynants. “If all these people making new models instead tested models that were already available, maybe we’d have something that could really help in the clinic by now.”

2. The Pendulum in International Affairs – Howard Marks

Because psychology swings so often toward one extreme or the other – and spends relatively little time at the “happy medium” – I believe the pendulum is the best metaphor for understanding trends in anything affected by psychology. . . not just investing…

…The first item on the agenda for Brookfield’s board meeting was, naturally, the tragic situation in Ukraine.  We talked about the many facets of the problem, ranging from human to economic to military to geopolitical.  In my view, energy is one of the aspects worth pondering.  The desire to punish Russia for its unconscionable behavior is complicated enormously by Europe’s heavy dependence on Russia to meet its energy needs; Russia supplies roughly one-third of Europe’s oil, 45% of its imported gas, and nearly half its coal.

Since it can be hard to arrange for alternative sources of energy on short notice, sanctioning Russia by prohibiting energy exports would cause a significant dislocation in Europe’s energy supply.  Curtailing this supply would be difficult at any time, but particularly so at this time of year, when people need to heat their homes.  That means Russia’s biggest export – and largest source of hard currency ($20 billion a month is the figure I see) – is the hardest one to sanction, as doing so would cause serious hardship for our allies.  Thus, the sanctions on Russia include an exception for sales of energy commodities.  This greatly complicates the process of bringing economic and social pressure to bear on Vladimir Putin.  In effect, we’re determined to influence Russia through sanctions . . . just not the potentially most effective one, because it would require substantial sacrifice in Europe.  More on this later.

The other subject I focused on, offshoring, is quite different from Europe’s energy dependence.  One of the major trends impacting the U.S. economy over the last year or so – and a factor receiving much of the blame for today’s inflation – relates to our global supply chains, the weaknesses of which have recently been on display.  Thus, many companies are seeking to shorten their supply lines and make them more dependable, primarily by bringing production back on shore.

Over recent decades, as we all know, many industries moved a significant percentage of their production offshore – primarily to Asia – bringing down costs by utilizing cheaper labor.  This process boosted economic growth in the emerging nations where the work was done, increased savings and competitiveness for manufacturers and importers, and provided low-priced goods to consumers.  But the supply-chain disruption that resulted from the Covid-19 pandemic, combined with the shutdown of much of the world’s productive capacity, has shown the downside of that trend, as supply has been unable to keep pace with elevated demand in our highly stimulated economy.

At first glance, these two items – Europe’s energy dependence and supply-chain disruption – may seem to have little in common other than the fact that they both involve international considerations.  But I think juxtaposing them is informative . . . and worthy of a memo…

…U.S. companies’ foreign sourcing, in particular with regard to semiconductors, differs from Europe’s energy emergency in many ways. But both are marked by inadequate supply of an essential good demanded by countries or companies that permitted themselves to become reliant on others.  And considering how critical electronics are to U.S. national security – what today in terms of surveillance, communications, analysis and transportation isn’t reliant on electronics? – this vulnerability could, at some point, come back to bite the U.S. in the same way that dependence on Russian energy resources has the European Union.

How did the world get into this position?  How did Europe become so dependent on Russian exports of energy commodities, and how did such a high percentage of semiconductors and other goods destined for the U.S. come to be manufactured abroad? Just as Europe allowed its energy dependence to increase due to its desire to be more green, U.S. businesses came to rely increasingly on materials, components, and finished goods from abroad to remain price-competitive and deliver greater profits.

Key geopolitical developments in recent decades included (a) the perception that the world was shrinking, due to improvements in transportation and communications, and (b) the relative peace of the world, stemming from:

• the dismantling of the Berlin Wall; the fall of the USSR;
• the low perceived threat from nuclear arms (thanks to the realization that their use would assure mutual destruction);
• the absence of conflicts that could escalate into a multi-national war;
• and the shortness of memory, which permits people to believe benign conditions will remain so.

Together, these developments gave rise to a huge swing of the pendulum toward globalization and thus countries’ interdependence.  Companies and countries found that massive benefits could be tapped by looking abroad for solutions, and it was easy to overlook or minimize potential pitfalls.

As a result, in recent decades, countries and companies have been able to opt for what seemed to be the cheapest and easiest solutions, and perhaps the greenest.  Thus, the choices made included reliance on distant sources of supply and just-in-time ordering.

3. How a Founder’s Childhood in India Inspired His Fight Against Climate Change – Annie Goldsmith and Shashank Samala

Samala grew up outside Hyderabad in southeast India, where he saw firsthand the effects of wealth inequality and climate change.

The house that I grew up in was around 200 square feet for five people. And I was exposed to droughts and cyclones and so forth. People don’t call it climate change there, which shows the [lack of] education. But the worst impacts of climate are faced by the world’s most vulnerable people, and these are them.

When Samala was nine, his father moved to the U.S. with hopes of bringing his family along when he was financially stable.

My dad was away for many years, working any minimum wage job he could get, trying to figure out how to bring us here. He actually went to pharmacy school—a pharmacist is just not a valuable job in India. In his early 40s, he moved to Reston, Va., where there’s this massive mall, Tysons Corner Center. He got a job serving Dippin’ Dots ice cream and he would send money back for [me, my mom and my two siblings] to live. He eventually realized that if you pass a bunch of exams, you can become a pharmacist here. It took him a few years, and the first job he got was as an intern at a Rite Aid in Old Town, Maine. He didn’t know where Maine was, but at that point he would take anything. So he just went to the bus station. I don’t know how he managed to do it.

He and his mother and siblings moved to Bangor, Maine, when Shashank was 12, relocating near the pharmacy where his father worked.

The high school was 1,300 kids and I was one of few nonwhite folks. It was overwhelming to me—there was a big culture shock. I really wanted to go back to my friends and everyone in India, but I somehow stuck through it. I remember flying into Boston Logan [International] Airport and you couldn’t see outside—it was just white. I asked my dad, “What is that?” It was four feet of snow…

…After nearly seven years at the company, Samala left in 2020 to found his current venture, Heirloom Carbon. 

I just realized, at the end of the day, [Tempo was creating] more gadgets in the world. I mean, important gadgets in many cases—like medical devices and rockets and so forth. But I think the inequity issue just kept coming back to me. I thought about where I wanted to spend time. That’s when I started thinking about other things.

Increasing climate crises intensified Samala’s desire to work in environmental technology.

In 2020, in Hyderabad, there was this massive flood, like a once-in-a-century type of flood, and those are just happening even more and more. That’s my hometown, completely flooded. The airwaves [in America] don’t catch that stuff, but that’s very prominent in a lot of these people’s lives. Now, basically Heirloom has a bunch of these carbon removal contactors and these kilns, and our first site is going to be deployed this time next year. It’s going to be in the [San Francisco] Bay Area. Call it a demonstration, I guess, but it’s the first deployment of its kind in North America, second one in the world. It’s going to be capturing a meaningful amount of CO2.

4. How People Think – Morgan Housel

2. What people present to the world is a tiny fraction of what’s going on inside their head.

The Library of Congress holds three million books, or something like a quarter of a trillion words.

All of the information accessible on the internet is estimated at 40 trillion gigabytes, which is roughly enough to hold a high-def video lasting the entire 14 billion years since the big bang.

So much of history has been recorded.

But then you remember, that’s just what’s been publicly shared, recorded, and published. It’s a trivial amount of what’s actually happened, and an infinitesimal amount of what’s gone through people’s heads.

As much as we know about how crazy, weird, talented, and insightful people can be, we are blind to perhaps 99.99999999% of it. The most prolific over-sharers disclose maybe a thousandth of one percent of what they’ve been through and what they’re thinking.

One thing this does is gives a false view of success. Most of what people share is what they want you to see. Skills are advertised, flaws are hidden. Wins are exaggerated, losses are downplayed. Doubt and anxiety are rarely shared on social media. Defeated soldiers and failed CEOs rarely sit for interviews.

Most things are harder than they look and not as fun as they seem because the information we’re exposed to tends to be a highlight reel of what people want you to know about themselves to increase their own chances of success. It’s easiest to convince people that you’re special if they don’t know you well enough to see all the ways you’re not.

When you are keenly aware of your own struggles but blind to others’, it’s easy to assume you’re missing some skill or secret that others have. Sometimes that’s true. More often you’re just blind to how much everyone else is making it up as they go, one challenge at a time…

…4. We are extrapolating machines in a world where nothing too good or too bad lasts indefinitely.

When you’re in the middle of a powerful trend it’s difficult to imagine a force strong enough to turn things the other way.

What we tend to miss is that what turns trends around usually isn’t an outside force. It’s when a subtle side effect of that trend erodes what made it powerful to begin with.

When there are no recessions, people get confident. When they get confident they take risks. When they take risks, you get recessions.

When markets never crash, valuations go up. When valuations go up, markets are prone to crash.

When there’s a crisis, people get motivated. When they get motivated they frantically solve problems. When they solve problems crises tend to end.

Good times plant the seeds of their destruction through complacency and leverage, and bad times plant the seeds of their turnaround through opportunity and panic-driven problem-solving.

We know that in hindsight. It’s almost always true, almost everywhere.

But we tend to only know it in hindsight because we are extrapolating machines, and drawing straight lines when forecasting is easier than imagining how people might adapt and change their behavior.

When alcohol from fermentation reaches a certain point it kills the yeast that made it in the first place. Most powerful trends end the same way. And that kind of force isn’t intuitive, requiring you to consider not just how a trend impacts people, but how that impact will change people’s behavior in a way that could end the trend…

…7. We are pushed toward maximizing efficiency in a way that leaves no room for error, despite room for error being the most important factor of long-term success.

The world is competitive. If you don’t exploit an opportunity your competition will. So opportunity is usually exploited to its fullest extent as soon as possible.

That’s great – it pushes the world forward. But it has a nasty side effect: When all opportunity is exploited there is no room for error, and when there’s no room for error any system exposed to volatility and accident will eventually break.

Describing the supply chain fiasco of the last year, Flexport CEO Ryan Petersen explained:

What caused all the supply chain bottlenecks? Modern finance with its obsession with “Return on Equity.”

To show great ROE almost every CEO stripped their company of all but the bare minimum of assets. Just in time everything. No excess capacity. No strategic reserves. No cash on the balance sheet. Minimal R&D.

We stripped the shock absorbers out of the economy in pursuit of better short term metrics. Now as we’re facing a hundred year storm of demand, our infrastructure simply can’t keep up.

The global logistics companies have no excess capacity, there are no reserves of chassis (trailers for hauling containers), no extra shipping containers, no extra yard space, no extra warehouse capacity. The brands have no extra inventory. Manufacturers have no extra components or raw materials on hand.

He’s right, but part of me can also empathize with the CEOs who maximized efficiency because if they didn’t their competition would have and put them out of business. There’s a weird quirk of human behavior that incentivizes people to maximize potential all the way up to destroying themselves.

So many people strive for efficient lives, where no hour is wasted. But when no hour is wasted you have no time to wander, explore something new, or let your thoughts run free – which can be some of the most productive forms of thought. Psychologist Amos Tversky once said “the secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours.” A successful person purposely leaving gaps of free time on their schedule can feel inefficient. And it is, so not many people do it.

The paradox that room for error is essential to survival in the long run, but maximizing efficiency in a way that eliminates room for error can be essential to surviving the short run, is a strange one.

Those who fight it – the rare company or employee or economy willing to sacrifice short-term gain for long-term survival – are the oddballs, rarely understood, easily belittled, who underperform most of the time but survive long enough to get the last laugh, and the highest returns…

…16. We are blind to how fragile the world is due to a poor understanding of rare events.

John Littlewood was a mathematician who sought to debunk the idea of miracles being anything more than simple statistics.

Physicist Freeman Dyson explains:

Littlewood’s law of miracles states that in the course of any normal person’s life, miracles happen at the rate of roughly one per month.

The proof of the law is simple. During the time that we are awake and actively engaged in living our lives, roughly for eight hours each day, we see and hear things happening at a rate of one per second. So the total number of events that happen to us is about 30,000 per day, or about a million per month.

With few exceptions, these events are not miracles because they are insignificant. The chance of a miracle is about one per million events. Therefore we should expect about one miracle to happen, on average, every month.

The idea that incredible things happen because of boring statistics is important, because it’s true for terrible things too.

Think about 100-year events. One-hundred-year floods, hurricanes, earthquakes, financial crises, frauds, pandemics, political meltdowns, economic recessions, and so on endlessly. Lots of terrible things can be called “100-year events”.

A 100-year event doesn’t mean it happens every 100 years. It means there’s about a 1% chance of it occurring in any given year. That seems low. But when there are hundreds of different independent 100-year events, what are the odds that any one of them will occur in a given year?

Pretty good, in fact.

If next year there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are … uncomfortably high.

Littlewood’s Law tells us to expect a miracle every month. The flip side is to expect a disaster roughly as often.

Which is what history tells us, isn’t it?

History is “just one damn thing after another,” said Arnold Toynbee. Dan Carlin’s book The End is Always Near highlights periods – from pandemics to nuclear war – where it felt like the world was coming to an end. They exist in every era, every continent, every culture. Bad news is the norm.

Even during what we remember as prosperous periods, like the 1950s and 1990s, there was a continuous chain of grief. Adjusted for population growth, more Americans lost their jobs during the 1958 recession than did in any single month during the Great Recession of 2008. The global financial system nearly fell apart in 1998, during the greatest prosperity boom we’ve ever seen.

The world breaks about once every ten years, on average. For your country, state, town, or business, once every one to three years is probably more common.

Sometimes it feels like terrible luck, or that bad news has new momentum. More often it’s just Littlewood’s Law at work. A zillion different things can go wrong, so at least one of them is likely to be causing havoc in any given moment.

5. An Interview with Nvidia CEO Jensen Huang about Manufacturing Intelligence – Ben Thompson and Jensen Huang

Well, it’s interesting because I mean, not to hop ahead, but I was going to ask you about the shift to memory bandwidth and super wide just being more and more important. One of the things that was really striking in your keynote this time was every time whether you talked about chips, or you talked about your new CPU, or you talked about your systems, you basically just spent the whole time talking about memory, and how much stuff can be moved around. It’s interesting to hear you say that that was actually a key consideration really from the beginning. Everyone thinks about the graphics part of it, but you have to keep those things fed, and that’s actually been important all along as well.

JH: Yeah, that’s exactly right. It turns out that in computer graphics, we chew through more memory bandwidth than just about anything because we have to render to pixel, and because it’s a painter’s algorithm, you paint over the pixels over and over and over again, and each time, you have to figure out which one’s in front of which, and so there’s a read-modify-write, and the read-modify-write chews up more memory bandwidth, and if it’s a blend, that chews up more memory bandwidth. So, all of those layers and layers and layers of composition just chews up a ton of bandwidth, and as we moved into the world of machine learning and this new era of computing where the software is not written just by a human, the architecture’s created by the human, but the architecture’s tuned by the machine studying the data, and so we pump in tons and tons of data so that the machine learning algorithm could figure out what the patterns are, what the predictive features are, and what the relationships are. All of that is just memory bandwidth and so we’re really comfortable with this area of computation, so it goes all the way back to the very beginning as served as well.

I have always said the most misnamed product in tech is the personal computer, because obviously the personal computer is your phone and not the PC you leave on your desk, but we’ve wasted such a great name. I feel like GPUs is like the opposite direction. We call this a graphics processing unit, but to your point, the idea of keeping it fully fed, doing relatively simple operations and massively parallel all at the same time, that’s a specific style of computing that happened to start with graphics, but we’re stuck calling it GPU forever instead of, I don’t know, advanced processing unit or whatever it should be. I mean, what should the name be?

JH: Once GPU took off and we started adding more and more capabilities to it, it was just senseless to rename it. There were lots of ideas. Do we call it GPGPU? Do we call it an XPU? Do we call it a VPU? I just decided that it wasn’t worth playing that game, and what we ought to do is assume that people who buy these things are smart enough to figure out what they do, and we’ll be clever enough to help people understand what the benefits are, and we’ll get through all the naming part.

The thing that is really remarkable, if you look at TNT, it was a fixed function pipeline, meaning every single stage of the pipeline, it did what it did, and it moved the data forward, and if it ever needed to read the data from the frame buffer, the memory, if it ever needed to read the memory data back to do processing, it would read the data, pull it back into the chip, and do the processing on it, and then render it back into the frame buffer, doing what is called multipass. Well, that multipass, a simple fixed function pipeline approach, was really limiting, which led to the invention several years later of the programmable shader which —

This is great. You are literally walking down my question tree on your own, so this is perfect. Please continue.

JH: (laughing) So, we invented a programmable shader, which put a program onto the GPU, and so now there’s a processor. The challenge of the GPU, which is an incredible breakthrough, during that point when we forked off into a programmable processor, to recognize that the pipeline stages of a CPU was, call it umpteen stages, but the number of pipeline stages in a GPU could be several hundred, and yet, how do you keep all of those pipe stages and all of those processors fed? You have to create what is called a latency tolerant processor, which led to heavily threaded processors. Whereas you could have two threads in a microprocessor going in any CPU core, hyper-threading, in the case of our GPU, at any given point in time, we could have 10,000 threads in flight. So it’s 10,000 programs, umpteen thousand programs, that are flying through this processor at any given point in time, which really reinvented the type of this new style of programming, and our architecture called CUDA made it accessible, and because we dedicated ourselves to keeping every generation of processors CUDA-compatible, we invented a new programming model. That was all started right around that time.

I’m actually curious about this, because what is fascinating about NVIDIA is if you look backwards, it seems like the most amazing, brilliant path that makes total sense, right? You start by tackling the most advanced accelerated computing use case, which is graphics, but they’re finally tuned to OpenGL and DirectX and just doing these specific functions. You’re like, “Well, no, we should make it programmable.” You invent the shader, the GeForce, and then it opens its door to be programmed for applications other than graphics. NVIDIA makes it easier and more approachable with CUDA, you put SDKs on top of CUDA, and now twenty-five years on NVIDIA isn’t just the best in the world at accelerated computing, you have this massive software moat and this amazing business model where you give CUDA away for free and sell the chips that make it work. Was it really that much on purpose? Because it looks like a perfectly straight line. I mean, when you go back to the 90s, how far down this path could you see?

JH: Everything you described was done on purpose. It’s actually blowing my mind that you lived through that, and I can’t tell you how much I appreciate you knowing that. Just knowing that is quite remarkable. Every part of that you described was done on purpose. The parts that you left out, of course, are all the mistakes that we made. Before there was CUDA, there was actually another version called C for Graphics, Cg. So, we did Cg and made all the mistakes associated with it and realized that there needed to be this thing called shared memory, a whole bunch of processors being able to access onboard shared memory. Otherwise, the amount of multipassing-

Yeah, the coherence would fall apart, yeah.

JH: Yeah, just the whole performance gets lost. So, there were all kinds of things that we had to invent along the way. GeForce FX had a fantastic differentiator with 32 bit floating point that was IEEE compatible. We made a great decision to make it IEEE FP32 compatible. However, we made a whole bunch of mistakes with GeForce FX —

Sorry, what does that mean? The IEEE FP32 compatible?

JH: Oh, the IEEE specified a floating point format that if you were to divide by zero, how do you treat it? If it’s not a number, how do you treat it?

Got it. So this made it accessible to scientists and things along those lines?

JH: So that whatever math that you do with that floating point format, the answer is expected.

Right.

JH: So, that made it consistent with the way that microprocessors treated floating point processes. So we could run a floating point program and our answer would be the same as if you ran it on a CPU. That was a brilliant move. At the time, DirectX’s specification of programmable shaders was 24 bit floating point, not 32 bit floating point. So, we made the choice to go to all 32 bits so that whatever numerical computation is done is compatible with processors. That was a genius move, and because we saw the opportunity to use our GPUs for general purpose computing. So that was a good move.

There were a whole bunch of other mistakes that we made along the way that tripped us up along the way as we discovered these good ideas. But each one of these good ideas, when they were finally decided on, were good. For example, recognizing that CUDA was going to be our architecture and that we would, if CUDA is a programmable architecture, we have to stay faithful to it and made sure that every generation was backwards compatible to the previous generation, so that whatever install base of software was developed would benefit from the new processor by running faster. If you want developers, they’re going to want install base, and if you want install base, they have to be compatible with each other. So, that decision forced us to put CUDA into GeForce, forced us put CUDA into Quadro, forced us to put CUDA into data center GPUs, into everything, basically, and today, in every single chip that we make, it’s all CUDA compatible…

…You talked about there being four layers of the stack in your keynote this week. You had hardware, system software, platform, and then application frameworks, and you also have said at other times that you believe these machine learning opportunities require sort of a fully integrated approach. Let’s start with that latter one. Why is that? Why do these opportunities need full integration? Just to step back, the PC era was marked by modularity, you had sort of the chip versus the operating system versus the application, and to the extent there were integrations or money to be made, it was by being that connective tissue, being a platform in the middle and the smartphone era on the other hand was more about integration and doing the different pieces together. It sounds like your argument is that this new era, this machine learning-driven era, this AI era is even more on the integrated side than sort of the way we think about PCs. Why is that? Walk me through that justification.

JH: Simple example. Imagine we created a new application domain, like computer graphics. Let’s pretend for a second it doesn’t run well on a graphics chip and it doesn’t run well on a CPU. Well, if you had to recreate it all again, and it’s a new form of computer science in the sense that this is the way software is developed, and you can develop all kinds of software, it’s not just one type of software, you can develop all kinds of software. So if that’s the case, then you would build a new GPU and a new OpenGL. You would build a new processor called New GPU, you would build a new compiler, you would build a new API, a new version of OpenGL called cuDNN. You would create a new Unreal Engine, in this case, Nvidia AI. You would create a new editor, new application frameworks and so you could imagine that you would build a whole thing all over again.

Just to jump in though, because there was another part in the keynote where I think you were talking about Nvidia DRIVE and then you jumped to Clara, something along those lines, but what struck me as I was watching it was you were like, “Actually all the pieces we need here, we also need there”, and it felt like a real manifestation of this. Nvidia has now built up this entire stack, they almost have all these Lego bricks that they can reconfigured for all these different use cases. And if I’m Nvidia, I’m like, “Of course these must be fully integrated because we already have all the integrated pieces so we’re going to put it all together with you”. But is that a function of, “That’s because Nvidia is well placed to be integrated” or is that “No, this is actually really the only way to do it” and if other folks try to have a more modular approach, they’re just not going to get this stuff working together in a sufficient way?

JH: Well, deep learning, first of all, needed a brand new stack.

Just like graphics once did. Yeah.

JH: Yeah, just like graphics did. So deep learning needed a brand new stack, it just so happened that the best processor for deep learning at the time, ten years ago, was one of Nvidia’s GPUs. Well, over the years, in the last ten years, we have reinvented the GPU with this thing called Tensor Core, where the Tensor Core GPU is a thousand times better at doing deep learning than our original GPU, and so it grew out of that. But in the process, we essentially built up the entire stack of computer science, the computing, again, new processor, new compiler, new engine and new framework — and the framework for AI, of course, PyTorch and TensorFlow.

Now, during that time, we realized that while we’re working on AI — this is about seven years ago — the next stage of AI is going to be robotics. You’re going to sense, you’re going to perceive, but you’re also going to reason and you’re going to plan. That classical robotics problem could be applied to, number one, autonomous driving, and then many other applications after that. If you think through autonomous driving, you need real-time sensors of multiple modalities, the sensors coming in in real-time. You have to process all of the sensors in real-time and it has to be isochronous, you have to do it consistently in real-time and you’re processing radar information, camera information, Lidar information, ultrasonics information, it’s all happening in real-time and you have to do so using all kinds of different algorithms for diversity and redundancy reasons. And then what comes out of it is perception, localization, a world map and then from that world map, you reason about what is your drive plan. And so that application space was a derivative, if you will, of our deep learning work, and it takes us into the robotic space. Once we’re in the robotic space and we created a brand new stack, we realized that the application of this stack, the robotic stack, could be used for this and it could be used for medical imaging systems, which is kind of multi-sensor, real-time sensor processing, used to be traditional numerics.

Right. Well, it’s like you started out with like your GPU like, “Oh, it could be used for this and this and this”. And now you built a stack on top of the GPU and it’s like, it just expands. “It could be used for this and this and this.”

JH: That’s exactly right, Ben! That’s exactly right. You build one thing and you generalize it and you realize it could be used for other things, and then you build that thing derived from the first thing and then you generalize it and when you generalize it, you realize, “Hold on a second, I can use it for this and as well”. That’s how we built the company.

6. Rule #1: Do No Harm – Permanent Equity

At Permanent Equity, “Do No Harm” is a primary cornerstone of our approach, defined within the context of our values and priorities. “Do No Harm” sounds simple.  But what counts as harm?

The ethics of defining harm have always been challenging. Even Hippocrates, commonly credited with penning primum, non nocere (first, do no harm) didn’t actually include it in the Hippocratic Oath. If a doctor were actually going to do no harm, active surgical intervention would never happen, and the ongoing harm of a tumor would be allowed to fester and spread.

In any type of decision-making, from healthcare to investing, the possibility for harm is everywhere, and Do No Harm is not a neutral statement.

By approaching our partnerships with humility and curiosity, by prioritizing outcomes in which everyone wins, by building trust in our relationships with operations teams, and by understanding the value we can provide, we’ve figured out what harm means to us. And we work like hell not to do it…

…In G.K. Chesterton’s 1929 book The Thing (bear with us), two reformers come across a fence in the middle of a field. The first leaps into action, proclaiming “I don’t see the use of this; let us clear it away.” The second quickly replies “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”

We like to think we’re the second kind of reformer, even if we tend to think in terms of strategic changes to small business operations instead of fences and fields (although if you’ve got a fencing company you’re interested in selling, by all means get in touch).

Every process, procedure, and position a small business has was initially created (and probably with some pain and suffering); it had a purpose, even if that purpose isn’t clear to someone new coming in the door. Just as Chesterson’s fence wasn’t beamed down by aliens, a small business’s invoicing system wasn’t cooked up in a fever dream.

One of the basic tenets of Do No Harm is that everything in a small business was put in place because somebody thought it would be good for something. If we can’t figure out what that something is, we’ve likely missed some other thing and misplaced our humility. And if we start making changes from a place where we’ve decided things are meaningless and mysterious, chances are that harm will follow–whether that be alienating existing leadership or employees, gumming up processes we thought could run smoother, shifting customer profiles to a market that doesn’t exist, deleting some operationally critical Excel sheet that looked like it was outdated lunch orders, or some other harm we can’t even think of because potential harms are innumerable–and specific to company and context.

Whatever the “fence,” we prioritize studying it and talking to the people who built it. Only once we know fully why it’s there, what it’s supposed to do, and whether it is or isn’t doing that, then we collectively can decide whether to keep it, replace it, repair it, double down on it, or practice our hurdle sprints over it…

…Let’s also be clear that harm to a company can start well before investment boots hit the ground and reverberate after exit. In many cases, harm–or at least the potential for harm–is baked into the system from the get-go.

Do No Harm, scaffolded by our commitment to humility, extends to the price we pay, our aversion to transactional debt, our default to asking questions, and our unwillingness to let non-business-related events like a change in ownership drive changes in the business.

A business operates with certain economic pressures (e.g., payroll) consistently over time. When an equity transaction happens, depending on the way that transaction is structured, the magnitude and source of those pressures can shift enormously, very quickly. For example, traditional private equity’s model frequently hinges on debt and complicated fee structures. In this case, it’s possible for a business to go from having total autonomy over its cash flows to having 60% or more of cash flows earmarked for debt payments.

Whether such a structure inflicts direct financial harm is specific to that business, but it changes the very rules of the game. That business must now shift their decision-making to prioritizing repaying debts first. Debt is not a productive operating priority. This change to the operating core, prompted by an investment system based in debt, has the potential to do significant harm.

In practicing the principle of let great be great, we go back to Rule #1 and typically employ no debt. We have no transaction fees or other “gotchas.” In principle, we aim to design deals that do not put financial and operating priorities at odds–and therefore enable operators to focus on operating to build durable value.

The leveraged buyout incentive system also ramps up the potential for harm post-close. When the primary objective is to provide investors a return in three to five years, decision-making is made in that context. Dramatic increases in EBITDA are inevitably the aim because that’s the most straightforward path to a higher valuation exit. But if you’re moving fast enough, you can keep adding to a leaky bucket and have it feel full. But someone at some point will be left with a mess.

It’s hard to square these foundational choices with a principle of Do No Harm; when we say “Do No Harm,” we’re not just talking about not making major changes before we’ve forged relationships and gotten a genuine read on the landscape–it means, from the very beginning, we aim to make rational investments that acknowledge embedded risks in reality–without introducing new forms of harm.

7. Elon Musk discusses the war in Ukraine and the importance of nuclear power — and why Benjamin Franklin would be ‘the most fun at dinner’ – Mathias Döpfner and Elon Musk

Mathias Döpfner: Before we talk about the future, let’s look at the present. There is war in Europe. If you see the horrible images of Putin’s troops invading Ukraine, killing people. What are your thoughts?

Elon Musk: It is surprising to see that in this day and age. I thought we had sort of moved beyond such things for the most part. It is concerning. If you can get away with it, then this will be a message to other countries that perhaps they could get away with it too…

…Döpfner: You did something very concrete, 48 hours, upon the request of the digital minister of Ukraine. And that was delivering Starlink material in order to grant internet access. What was the motivation, and how is it developing?

Musk: We did think that Starlink might be needed, and we took some preemptive actions to ensure that it could be provided quickly. When the request came, we acted very rapidly. It is worth noting that the satellite internet connectivity of Ukraine was taken offline by a cyberattack on the day of the invasion permanently. The cell towers are either being blown up or they are being jammed. There is a major fiber backbone which the Russians are aware of. It was quite likely that they will sever that fiber link. This would leave Ukraine with very few connections open. So Starlink might be, certainly in some parts of Ukraine, the only connection.

Döpfner: What happens if the Russians and Chinese are targeting satellites? Is that also a threat for Starlink?

Musk: It was interesting to view the Russian anti-satellite demonstration a few months ago in the context of this conflict. Because that caused a lot of strife for satellite operators. It even had some danger for the space station, where there are Russian cosmonauts. So why did they do that? It was a message in advance of the Ukraine invasion. If you attempt to take out Starlink, this is not easy because there are 2000 satellites. That means a lot of anti-satellite missiles. I hope we do not have to put this to a test, but I think we can launch satellites faster than they can launch anti-satellites missiles.

Döpfner: Russia said that they are going to stop the delivery of rocket engines. Is that a threat or an opportunity for SpaceX?

Musk: At SpaceX, we design and manufacture our own rocket engines. So we did not really own any Russian components at all…

…Döpfner: With knowledge, products and services, Elon Musk is almost a strategic weapon in modern warfare. How do you see your role in that context?

Musk: I think I can be helpful in conflicts. I try to take a set of actions that are most likely to improve the probability that the future will be good. And obviously sometimes I make mistakes in this regard. I do whatever I think is most likely to ensure that the future is good for humanity. Those are the actions that I will take…

…Döpfner: History doesn’t repeat itself, but it rhymes. And we see a rhyme these days. Back to the big strategic picture. The terrible actions of Putin are, to a certain degree, also a result of strategic mistakes that Europe, particularly Germany, has made, the dropout of nuclear energy in 2011.

Musk: It is very important that Germany will not shut down its nuclear power stations. I think this is extremely crazy.

Döpfner: If we really want to reduce Putin’s power as well as Europe’s and Germany’s dependence on Russian energy, we have to decarbonize. It’s the only way. Is more nuclear energy the key to free ourselves from dictators and autocrats like Putin.

Musk: I want to be super clear. You should not only not shut down the nuclear power plants, but you should also reopen the ones that have already shut down. Those are the fastest to produce energy. It is crazy to shut down nuclear power plants now, especially if you are in a place where there are no natural disasters. If you are somewhere where severe earthquakes or tsunamis occur, it is more of a question mark. If there is no massive natural disaster risk-which Germany does not have-then there is really no danger with the nuclear power plants.

Döpfner: Aren’t there any safer alternatives that could have a similar effect? Solar and wind won’t do it. Do you have any other ideas in mind about future energy policy?

Musk: I think long term, most of civilization’s energy is going to come from solar, and then you need to store it with battery because obviously the sun only shines during the day, and sometimes it is very cloudy. So you need solar batteries. That will be the main long-term way that civilization is powered. But between now and then, we need to maintain nuclear. I can’t emphasize that enough. This is total madness to shut them down. I want to be clear, total madness…

…Döpfner: How is the climate issue going to look like in 15 years? Better than today?

Musk: From a sustainable energy standpoint, much better.

Döpfner: So we are going to solve this problem?

Musk: Yes, absolutely. We will solve the climate issue. It is just a question of when. And that is like the fundamental goal of Tesla.

Döpfner: You once said that the decrease of birth rate is one of the most underestimated problems of all the times. Why?

Musk: Most people in the world are operating under the false impression that we’ve got too many people. This is not true. The birth rate has been dropping like crazy. Unfortunately, we have these ridiculous population estimates from the UN that need to be updated because they just don’t make any sense. Just look at the growth rate last year. See how many kids were born and multiply that by the life expectancy. I would say that is how many people will be alive in the future. And then say, is the trend for birth rate positive or negative? It is negative. That is the best case, unless something changes for the birth rate.

Döpfner: That is also why we need alternatives. You have recently presented Optimus, a human robot, and shared great expectations, what that could do for the world. I assume it is not only about the first visit to Mars that could be done by Optimus, but it might also be a game changer in AI. Could you share this vision?

Musk: With respect to AI and robotics, of course, I see things with some trepidation. Because I certainly don’t want to have anything that could potentially be harmful to humanity. But humanoid robots are happening. Look at Boston Dynamics. They do better demonstrations every year. The rate of advancement of AI is very rapid.

Döpfner: Concretely, Optimus is going to be used in Tesla factories. That is one of the use cases, but what is the broader use case beyond Tesla?

Musk: Optimus is a general purpose, sort of worker-droid. The initial role must be in work that is repetitive, boring, or dangerous. Basically, work that people don’t want to do.

Döpfner: Why has Optimus two legs? Just because it looks like a human being, or is it more practical? I thought four legs were better.

Musk: Haha, four legs good, two legs bad. Kind of reminds me of Orwell. Humanity has designed the world to interact with a bipedal humanoid with two arms and ten fingers. So if you want to have a robot fit in and be able to do things that humans can do, it must be approximately the same size and shape and capability…

…Döpfner: Could you imagine that one day we would be able to download our human brain capacity into an Optimus?

Musk: I think it is possible.

Döpfner: Which would be a different way of eternal life, because we would download our personalities into a bot.

Musk: Yes, we could download the things that we believe make ourselves so unique. Now, of course, if you’re not in that body anymore, that is definitely going to be a difference, but as far as preserving our memories, our personality, I think we could do that.

Döpfner: The Singularity moment that the inventor and futurist Ray Kurzweil has, I think, predicted for 2025 is approaching fast. Is this timeline still realistic?

Musk: I’m not sure if there is a very sharp boundary. I think it is much smoother. There is already so much compute that we outsource. Our memories are stored in our phones and computers with pictures and video. Computers and phones amplify our ability to communicate, enabling us to do things that would have been considered magical. Now you can have two people have a video call basically for free on opposite sides of the world. It’s amazing. We’ve already amplified our human brains massively with computers. It could be an interesting ratio to roughly calculate the amount of compute that is digital, divided by the amount of compute that is biological. And how does that ratio change over time. With so much digital compute happening so fast, that ratio should be increasing rapidly…

…Döpfner: You have solved so many problems of mankind and presented so many solutions. I’m surprised that one topic does not seem to fascinate you as much: Longevity. A significantly increased life span. Why aren’t you passionate about that? Aren’t you personally interested in living longer?

Musk: I don’t think we should try to have people live for a really long time. That it would cause asphyxiation of society because the truth is, most people don’t change their mind. They just die. So if they don’t die, we will be stuck with old ideas and society wouldn’t advance. I think we already have quite a serious issue with gerontocracy, where the leaders of so many countries are extremely old. In the US, it’s a very, very ancient leadership. And it is just impossible to stay in touch with the people if you are many generations older than them. The founders of the USA put minimum ages for a local office. But they did not put maximum ages because they did not expect that people will be living so long. They should have. Because for a democracy to function, the leaders must be reasonably in touch with the bulk of the population. And if you’re too young or too old, you can’t say that you will be attached.

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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 Tesla. Holdings are subject to change at any time.

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

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

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

Here are the articles for the week ending 27 March 2022:

1. RWH002: Investing Wisely In An Uncertain World w/ Howard Marks – William Green and Howard Marks

William Green (00:34:23):

Part of what’s curious to me though, is that I always had this image of you, having interviewed you several times, that I was sort of in the presence of a most superior machine, that you clearly had a lot of extra IQ points, but you were also very rational and analytical. But then what kind of started to mess with my head was that I started to realize, well actually you do have very strong intuition, and not only that, but you were a good artist as a young man, you’re a very good writer. There’s something kind of curious about your makeup, where there are these characteristics that seem kind of contradictory, or at least it’s very unusual to see them together in the same chemical experiment. Does that resonate at all that view of you?

Howard Marks (00:35:00):

I think so. I hope so. Because I’d hate to be able to be reduced to one dimension of some brain sitting in a tank some place turning out investment ideas. The investors that I respect are not all the same. Some write, some don’t, some draw, some don’t, some ski, some don’t. But they’re all bright. Buffet says, “If you have an IQ of 160, sell 30 points, you don’t need them.” But they’re all bright. I think they’re just about all unemotional, but you can be lots of other things. And in fact, I think you have to be able to, again, reach conclusions that are not analytically based, quantitatively based. You have to have some imagination.

Howard Marks (00:35:38):

If you go back and read the memos that I wrote, for example, during the Global Financial Crisis, October of ’08, which was the bottom for credit, it was a meltdown that was going on in the credit world that month. Or the one that I wrote two weeks earlier, it was, I guess Lehman went out bankrupt on September 15th of ’08, I think it was, so I put out a memo four days later titled, I think it was Now What? or something like that. I think it was Now What? You couldn’t figure out whether or not the world was going to continue to exist. You couldn’t prove that the financial institution world was not going to melt down. And a lot of people thought it would. And a lot of people were absolutely panicking to sell. And there was no experiment you could conduct, no calculation you could perform to prove that it wasn’t going to happen. It felt like a meltdown.

Howard Marks (00:36:26):

And we had Bear Sterns disappear and Merrill Lynch go into the hands of B of A and then Lehman bankrupt, Washington Mutual, Wachovia Bank. And everybody knew who was next, and who was after them. And it felt like falling dominoes. And so I wrote a memo, Now What? And I said, “What do we do now? Do we buy or don’t we?” And I said, “If we buy and the world melts down, it doesn’t matter. But if we don’t buy and the world doesn’t melt down, then we failed to do our job. We must buy.” Now that’s not scientific. It’s logical. I hope it’s logical. As you say, I think I’m logical. But it sure wasn’t quantitative or analytical or anything like that. It was an intuition.

William Green (00:37:08):

And there was a deep level of gut. Because I remember you coming back from a meeting with an investor who kept saying, “Well, what if it’s worse than that? What if it’s worse than that?” And you telling me that you rushed back to your office and you were like, “I’ve got to write about this.” Because sometimes it’s too bad to be true. So that’s actually again for somebody who I had viewed as a superior machine, actually, that’s a lot of EQ involved in seeing that and seeing, “Oh, people have melted down to this extent that they can’t see that things can get better.”

Howard Marks (00:37:35):

Well, I think that’s right. That was discussed in a memo. I think that was October the 12th of ’08. And that’s one of my favorites. It’s called the Limits to Negativism. But as an investor, one of our responsibilities is to be skeptical. And most people think that to be a skeptic, you have to blow the whistle when people are too optimistic. Somebody comes into your office and says, “I’ve managed money for 30 years. I’ve made 11% a year. I’ve never had a down month.” You have to say, “No, that’s too good to be true, Mr. Madoff.” But what I realized on that day in that meeting was that our job as a skeptic also includes blowing the whistle when it’s things that people are saying are too bad to be true, when there’s excessive pessimism. And that’s what that day was.

Howard Marks (00:38:15):

We had a levered loan fund. It was in danger of getting a margin call and melting down. So I went around to the investors, asking them all to put up more equity. And the one person that you mentioned said to me, “Well, what if this happens?” And I said, “Well, we’re still okay.” “Well, what if this happens, what if it’s worse than that?” Well, we’re still…” “What if it’s worse than that?” And I could not come up with a set of assumptions that satisfied her as to being negative enough. And she refused to participate in this re-equitization. So as you say, I ran back to my office, I wrote out the memo, and she was the only one who wouldn’t participate.

Howard Marks (00:38:51):

So I felt it was my duty to put up the money. I put up the money. It was one of the best investments I ever made. And I did it in part out of duty. You say EQ, one of the great things we can do, which has nothing… Well, it’s hopefully based on financial analysis, but when we have a sense for the excesses of emotion in the market, whether it be too optimistic or too pessimistic, if you can meld that with financial analysis to have a sense for what things are worth, see the differences from where they’re selling, understand the origin of the difference as coming in large part from emotional error, then you really have a great advantage.

William Green (00:39:30):

So when you look at today’s environment, as someone with 50 years of pattern recognition, with deep skepticism, but also with this renewed sense of humility about the fact that maybe some of your previous principles need to be updated because we’re living in a different world today. How do you look at this moment that we’re in now in this kind of impressionistic way that you do? Are you seeing evidence that it’s a time when investors need to be more defensive than usual, that too many people are taking too much risk? I’m just curious to see how you weigh the kind of optimism that’s baked into prices and behavior and deal structures and the like in the way that you do when you are looking to gauge a market?

Howard Marks (00:40:11):

Well, as I mentioned before, life gets harder when you have to give up on things never being different. And when you can’t live by a formula or a rule and the S&P 500 hit 3,300 on February 19th of ’20, and then it hit 2200 and change on March the 24th. So it was like 33 days later. And it was down a third. By June of ’20, it was back around 3,300, back to the all time high. And a lot of people said, “This is ridiculous because we’re still in a big mess. We still have a pandemic. The economy is still shut down. We just had the worst quarter in history for GDP. How can the market possibly be back intelligently to its pre COVID high?” So people started to blow the whistle and say, “Bubble, it’s a bubble.” And obviously now the stock market is a third higher than that. So it’s around 4,500.

Howard Marks (00:41:07):

So anybody who blew the whistle on bubble and went to the sidelines was at minimum too early. It’s now 20 months later. I would normally have been among the cautionary commentators. And maybe it was because of the conversations that were going on between me and Andrew. I couldn’t bring myself to do it because for two reasons. Number one, I think that a bubble is an irrational high. I think today’s prices are not irrational. They’re rational given the low level of interest rates. Interest rates have a profound effect on what something is worth in dollars and the lower the interest rate, the higher the value. So I think that today’s values are relatively appropriate given the level of interest rates. And the other thing is I believed and believe that we are looking at a period of healthy economic growth.

Howard Marks (00:41:55):

So we have rational prices, albeit low, and a good economic outlook. I don’t think that’s a formula for a collapse of the markets. And so I’ve given up on saying, “Buy, sell. In, out.” What I now say is, “If you know your normal risk posture, is today a time to be more aggressive or more defensive?” And I would say around your normal posture may be a little defensive, mainly because today’s prices are fair given the interest rates, but we all think that interest rates are going to rise somewhat, which means that assets will be worth less, somewhat, offset somewhat by the economic strength. But I don’t think it’s a time to take extreme action, timing wise, in either direction. I wouldn’t ramp up my aggressiveness, but I wouldn’t hide under the mattress.

William Green (00:42:40):

And you’ve lived through intense inflationary times before. Can you give those of us like me who haven’t been through this before, I’m 53, I didn’t experience it. Although one of my childhood memories was of my dad and my uncle getting smashed by the market in those days. How do sensible, prudent investors invest wisely during inflationary times? What are the tweaks you make to your portfolio just to sort of adjust the sales a little bit so that you’re likely to survive and prosper?

Howard Marks (00:43:08):

Well, first of all William, I get this question. Is this like the ’70s? And that was about with inflation. And number one, I believe that some aspect of today’s inflation is temporary because I think that there were supply chain interruptions, which took longer to work out than people expected or hoped. But it makes sense. A Toyota, I think has 30,000 parts. If one of them is unavailable, you get no cars for a while. So it makes sense. So I think that some of this and some of it is a bulge in demand, which came from too many people being given too much money in COVID relief in ’20 and early ’21. So an artificially high demand, artificially low supply, some of it will probably be temporary, depending on what happens with so-called inflationary expectations and whether they get baked in.

Howard Marks (00:43:58):

Number two, we have roughly 7% inflation now for the last eight, nine months. We had about twice that in the ’70s. Number three, nobody had an idea how to fix what was going on. We tried wind buttons, whip inflation now, we tried price controls, we had a pricing Czar. But they couldn’t figure out how to beat inflation. Now we know all you have to do is raise rates. Maybe it causes a recession, but you can do it. The other thing is that the private sector was heavily unionized in those days. It is not now. The union contracts had cost of living adjustments where if the cost of living goes up, you get a wage increase. But if you get a wage increase, it feeds through to the cost of the goods manufacturer. There’s more inflation and somebody else gets a wage increase. So it was circular and upwards spiraling. We don’t have COLAs anymore in our private sector.

Howard Marks (00:44:49):

So I don’t think we’re going to have inflation like we did then, or interest [inaudible 00:44:54] like we did then. I had a loan outstanding at three quarters over something called prime, if you remember prime. And I used to get a slip from the bank every time it changed, I have framed on my wall, the slip which says, “The rate on your loan is now 22 and three quarters.” I don’t think we’re going there, but we’ll have more inflation in the next five years than we did in the last five. There will be some unpleasant aspects to that. It’s important to remember that most of the world was trying to get to 2% inflation for the last decade or two, and they couldn’t do it. They couldn’t get inflation that high. Now it’s going to run hot for a little while.

2. Gaurav Kapadia – Everything Compounds – Patrick O’Shaughnessy and Gaurav Kapadia

[00:05:30] Patrick: Maybe you could describe the aspects of each of those dimensions where it ends up being the hardest, the types of situations in which it’s the hardest to be rigorous or the hardest to be kind, because like any company values that might sit on someone’s wall or in a poster or something, they’re hard to disagree with ever. They’re always aspirational and sound great and then are useless unless they’re, as you’ve described, constantly in practice. At some point, it’s hard to do that and it’s the whole point. So maybe pick for each one, I’d love to do both, an example, an anecdote, whatever, when it was really hard to stick to that standard.

[00:06:06] Gaurav: The first thing is people con sometimes confuse what rigor is and what kindness is. Kindness doesn’t mean just being unfailingly polite, or it can conflate the issue or being non-confrontational. One of the kindest things people do, they tell you the truth. Getting people in that mindset sometimes in the most difficult situation and most complicated interaction, the kindest thing to do is to say, as an example, tell someone that it’s unlikely they’re going to be promoted here or make a career here for the long run, and it hurts. I’ve had to do that many times. I’m crying, they’re crying, but in the end it ends up almost unfailingly I get a call a few years later saying, “You are totally right. That was the kind thing to do, and by the way, thank you for following up with me along the way to make sure I landed in the right place and mentor me, give me a reference,” whatever that is.

That’s a good example of things that are over the long-term kind, but feel cruel in the moment. Just being honest and transparent as a measure of kindness, rigor, I think people get rigor wrong in investing a lot, especially people who come through a specific analytical background. It’s not that you have to get your estimates or model perfect. That’s actually almost like the table stakes. Of course everyone we hire, interview can do that. What’s the rigor around it, which is how do you put pieces together? How do you take conclusions that are not obvious and stitch them together in a differentiated way? So that could mean chasing down some orthogonal competitor, going to a trade show. It could be looking at the end product. It could be just a different, more qualitative form of rigor. It doesn’t need to be quantitative necessarily, but it has to inform the mosaic to make you a great investor or a great colleague…

…[00:14:28] Patrick: What have you learned about the art of interacting with company management? So if you spend a lot of time doing that and you want to show that to the team, if I compared you when you were 28 or something to you today in an important management meeting, how would you be different today and how you conduct those versus then?

[00:14:46] Gaurav: Interestingly, the 28 versus today I don’t think is that different. I was very lucky in that I had a huge accelerator and a huge mentor very early in my career. So instead of going to investment banking or private equity out of college, I went to a consulting firm. I went to the Boston Consulting Group, and that it was a really interesting experience because when you’re 22, you have to interact with senior management teams immediately, and so that’s a real trial by fire. One of the things that I decided and I observed is very few investors, public or private view themselves as partners or advocates for the management team or companies. If you go to many meetings, they automatically start adversarial. They go, “How much shares are you going to buy back? Why do you miss your margins?” We never start by that. We lead with insight. We lead with work. We never go to a management meeting without tons of prep.

Almost always, we have a significant prep document that we often share with the companies so they know from the outset that we have the long-term interest of the company at heart and that we’re putting in the elbow grease to make sure that we understand what they’re trying to accomplish. That alone has been a huge differentiator. Can you imagine 90% of investor interactions are like, “Why didn’t you do this for me lately?” Hopefully, the ones with us are, “We see a lot of potential. We think the world’s not it. Help us understand it better. Can we help you understand how to communicate it better? What are we missing? How can we help? Do you need a customer introduction?” That just changes the tenor of the conversation. That started for me really early because I had this luxury of starting, I think, as a consultant. I worked for people my whole career who became successful very early in their own careers. I was lucky to be able to do that too, so there’s no hierarchy of seniority.

I would walk in, be prepped and hopefully, be able to lead the meeting to ask important questions, develop a really good relationship. It’s actually interesting, so these three executive partners that I mentioned and a bunch of the executives I still have relationships with. I met Carl when I was 24. I met Jan when I was 23 and I met Rob when I was 28. That relationship still carries through. One of the most gratifying things for me is that it’s not just me anymore. If you look across the whole organization, look outside this conference room, everyone here brings that kindness and rigor, the insight, the management interactions that I really want to pride our organization around, they do it independently. One of the really fun things I’ve been able to observe, because I have some of my colleagues here that I’ve known for 20 years, worked with five or 10 and seeing them grow and be huge and impactful leaders and partners is great. My favorite thing these days is when I talk to a CEO and they’re like, “Hey, Gaurav. Great to see you. I’m good. I’ll talk to one of your colleagues.” That’s a great way for me to measure-

[00:17:51] Patrick: Success.

[00:17:52] Gaurav: -our impact. Yeah. Yeah…

…[00:36:01] Patrick: I absolutely love the notion of trying to figure out what problem each company or leader of a company is dealing with at a given moment and having that be the wedge of the initial relationship. Is there a common pattern that you observe of those problems? What are the most common problems that you see people dealing with?

[00:36:17] Gaurav: One thing that investors don’t often realize is the stock price or the investor is often the last thing on the guy’s list of all the stuff he has to deal with. He has HR. He has an uprising at his company. He has unionization issues. So on the plethora of things they have to deal with, most likely, the thing that’s most important to you, it hasn’t even crossed their mind. And so being humble enough to know that is half the battle. You really try to understand. And by the way, you’ve got to do the work. It’s not like you just go and ask nice questions. Our largest public position is a company called Wabtec. It’s a combination of three mergers. There’s a big NOL. There’s a bunch of filings that you got to tie through. And once you do that, you kind of have an idea of what the issues are. How do I integrate this business? How do I go after these customers? What’s this transition to green energy going to do for the locomotive business? You focus on that and that opens up the aperture. Once you really hit what the CEO thinks or the core issues of the business, it really opens up your understanding of what the core issues of the business are. They’re not the same as what the rank and file industrial or sell side report would say.

[00:37:28] Patrick: Yeah, I love the idea that you are the bottom of the priority list of the person that you’re meeting. All too true, all the time. What are the then features of the business if you have a strike zone or an area of focus where you can potentially be that Jack Welch best-in-class or whatever? What defines that strike zone?

[00:37:46] Gaurav: Investing is complicated in two ways. You have to get the business right and then you got the valuation right. I think there’s people who are reasonably good at getting the business right. I think we’re hopefully better and we’re applying more analytical rigor and toolkits. Because even on the public side of the portfolio, we only have 10 to 12 positions at any time, so we could go really deep in them. And we hold them oftentimes for years and years and years, so we really have a long, longitudinal history. And now, we actually hold them from private to public, so we would have all that data too. Hopefully we’re better at that, and so there’s usually like an insight or a kernel that we see that the market doesn’t see. “Oh, the incremental margins are going to be so much higher.” “Actually, your market share in green locomotives is 20 points higher than your existing ones, and that’s a positive mix shift.” Or luxury’s going to move online. What’s the best way to capture that? So there’s some business insight. You got to marry though that business insight with asymmetry of share price in public or private. And so that’s really the art of investing. What you’re trying to find, generally speaking, is really good business that’s valued as a poor business or a mediocre business, that has the ability to compound through. That’s what I think we excel at, is this asymmetry with the business analysis. And so what that often manifests itself is you end up having optionality on multiple expansion and compounded capital growth in terms of free cash flow per share or something like that in the public or the private side…

3. The Chinese Tech Playbook for Winning – Part I – Lilian Li

Understanding whether a big market is winnable involves asking a few questions that may not seem straightforward. What is the end state of the market? What is the level of network effects in the market? Knowing the answer to the previous questions, when is the right time to get into the market?

In asking about the end state of the market, inversion is used to understand how many big players the market can sustain. Is it one, three, seven or more? Here Wang has an exquisite framework where he draws a correlation between the level of network effects in the market to the degree the market exhibits winner-takes-all outcomes. Why are network effects important, we ask? As it’s an ever-present moat for most consumer companies, knowing its relative strength will deliver different entry, competition, and growth strategies.

Network effects are where the value or utility a user derives from a good or service depends on the number of users of compatible products. As size gets sufficiently big, advantages in user experience and cost base scale. Here’s a summary of the different types of network effects that can exist:

There is a deep linkage between the level of network effects in a system and how many top players it can sustain. Knowing there’s a graduation in network effects reveals the potential for new entrants into markets. While Taobao’s grip on e-commerce seemed all-encompassing during the 2010s, correctly knowing the limitations of its linear network effects can allow a founder or investor to bet on Pinduoduo’s emergence. Asymptotic network categories like grocery delivery or transportation platforms will always face new competition since effects are localised. This will lead to money burning protracted war without clear resolutions for years to come.

For markets with high network effects, such as search or social, getting to a segment early is all that matters. Once the race is on, it is hard to beat a market leader (even if the lead is slight at the onset) because of another effect in the digital age. 

4. The Future is Vast: Longtermism’s perspective on humanity’s past, present, and future – Max Roser

Before we look ahead, let’s look back. How many came before us? How many humans have ever lived?

It is not possible to answer this question precisely, but demographers Toshiko Kaneda and Carl Haub have tackled the question using the ​​historical knowledge that we do have.

There isn’t a particular moment in which humanity came into existence, as the transition from species to species is gradual. But if one wants to count all humans one has to make a decision about when the first humans lived. The two demographers used 200,000 years before today as this cutoff.1

The demographers estimate that in these 200,000 years about 109 billion people have lived and died.2

It is these 109 billion people we have to thank for the civilization that we live in. The languages we speak, the food we cook, the music we enjoy, the tools we use – what we know we learned from them. The houses we live in, the infrastructure we rely on, the grand achievements of architecture – much of what we see around us was built by them…

…How many people will be born in the future? 

We don’t know. 

But we know one thing: The future is immense, the universe will exist for trillions of years.

We can use this fact to get a sense of how many descendants we might have in that vast future ahead.

The number of future people depends on the size of the population at any point in time and how long each of them will live. But the most important factor will be how long humanity will exist.

Before we look at a range of very different potential futures, let’s start with a simple baseline.

We are mammals. One way to think about how long we might survive is to ask how long other mammals survive. It turns out that the lifespan of a typical mammalian species is about 1 million years.5 Let’s think about a future in which humanity exists for 1 million years: 200,000 years are already behind us, so there would be 800,000 years still ahead. 

Let’s consider a scenario in which the population stabilizes at 11 billion people (based on the UN projections for the end of this century) and in which the average life length rises to 88 years.6

In such a future, there would be 100 trillion people alive over the next 800,000 years…

…But, of course, humanity is anything but “a typical mammalian species.” 

One thing that sets us apart is that we now – and this is a recent development – have the power to destroy ourselves. Since the development of nuclear weapons, it is in our power to kill all of us who are alive and cause the end of human history.

But we are also different from all other animals in that we have the possibility to protect ourselves, even against the most extreme risks. The poor dinosaurs had no defense against the asteroid that wiped them out. We do. We already have ​​effective and well-funded  asteroid-monitoring systems and, in case it becomes necessary, we might be able to deploy technology that protects us from an incoming asteroid. The development of powerful technology gives us the chance to survive for much longer than a typical mammalian species.

Our planet might remain habitable for roughly a billion years.8 If we survive as long as the Earth stays habitable, and based on the scenario above, this would be a future in which 125 quadrillion children will be born. A quadrillion is a 1 followed by 15 zeros: 1,000,000,000,000,000.

A billion years is a thousand times longer than the million years depicted in this chart. Even very slow moving changes will entirely transform our planet over such a long stretch of time: a billion years is a timespan in which the world will go through several supercontinent cycles – the world’s continents will collide and drift apart repeatedly; new mountain ranges will form and then erode, the oceans we are familiar with will disappear and new ones open up.

But if we protect ourselves well and find homes beyond Earth, the future could be much larger still.

The sun will exist for another 5 billion years.9 If we stay alive for all this time, and based on the scenario above, this would be a future in which 625 quadrillion children will be born. 

How can we imagine a number as large as 625 quadrillion? We can get back to our sand metaphor from the first chart. 

We can imagine today’s world population as a patch of sand on a beach. It’s a tiny patch of sand that barely qualifies as a beach, just large enough for a single person to sit down. One square meter.

If the current world population were represented by a tiny beach of one square meter, then 625 quadrillion people would make up a beach that is 17 meters wide and 4600 kilometers long. A beach that stretches all across the USA, from the Atlantic to the Pacific coast.10

And humans could survive for even longer. 

What this future might look like is hard to imagine. Just as it was hard to imagine, even quite recently, what today might look like. “This present moment used to be the unimaginable future,” as Stewart Brand put it. 

5. A Fool and His Gold – Doomberg

When judging the potential economic value of a gold deposit, there are three critical questions: how much gold is in the ground, at what average concentration, and in what form? While all three are important, the last one is often the strongest determinant of gold mine economics. How the gold presents itself in a deposit dictates the means needed to isolate it in pure form, and those means can vary from easy to nearly impossible – at least financially.

On the easy end of the spectrum sit placer gold deposits that result from the weathering and disintegration of rock formations containing seams of gold, thus liberating the precious metals. Creeks and rivers then transport and concentrate the relatively pure gold over millennia, often depositing it at ancient river bends and in bedrock depressions. Placer gold can be isolated with water and gravity, using contraptions as simple as a pan or as sophisticated as a sluice box. Placer mining once dominated US gold production (it is still the form of mining profiled on the popular show Gold Rush) but the best and most accessible placer deposits have already been exhausted.

On the more difficult end of the spectrum sit lode deposits, where the gold is still trapped inside rocks and veins, surrounded by minerals and other impurities. Here, extracting and concentrating the gold is more challenging and usually involves crushing the rock in a mill, leaching the ore with a cyanide solution, isolating the high-value metals, and forming them into doré bars which are sent to refiners for final processing. No two ores are alike and the exact details of the process flow required vary from mine to mine.

The above process works well enough for oxide ores where the gold is trapped in silica minerals like quartz. It’s a different story for the class of deposits known as sulfide ores, where the gold is surrounded by sulfides of iron. Sulfide ores are so difficult to mine they are often categorized as refractory deposits, and the gold industry has spent decades trying to develop cost-effective methods to free this gold from its stubborn prison. Here’s how a recent study from McKinsey frames the issue (emphasis added throughout):

“Gold miners are facing a reserves crisis, and what is left in the ground is becoming more and more challenging to process. Refractory gold reserves, which require more sophisticated treatment methods in order to achieve oxide-ore recovery rates, correspond to 24 percent of current gold reserves and 22 percent of gold resources worldwide (Exhibit 1). Despite offering a higher grade, these ores can only be processed using specific pretreatment methods such as ultrafine grinding, bio oxidation, roasting, or pressure oxidation (POX).”

Knowing this, imagine our shock when we woke up on Tuesday, March 15, to the news that AMC Entertainment Holdings (AMC) had invested in a gold mine!…

…Hycroft’s only mine has been in and out of operation for several decades, but most of the easy oxide ore was mined throughout the 1980s and 90s. While meaningful amounts of gold remain in the ground, it is predominately difficult sulfide ore, and the concentration of gold is quite low. In other words, the Hycroft Mine is a low-grade refractory deposit from which it is nearly impossible to extract gold in a way that makes money. Not that others haven’t tried.

In 2014, the mine was owned by Allied Nevada Gold Corporation, which launched an ambitious $1.4 billion plan to revitalize the mine and crack the sulfide ore challenge. By March of 2015, the company filed for bankruptcy protection:

“U.S.-based gold miner Allied Nevada Gold Corp filed for bankruptcy protection on Tuesday, buckling under a heavy debt load amid weaker metal prices. Allied Nevada, which owns the Hycroft open pit gold and silver mine in Nevada, said in a statement it was filing to restructure its debt, which stood at $543 million at the end of September.”

Allied Nevada emerged from bankruptcy as a privately-held company in October of the same year and was renamed Hycroft Mining Corporation. The company continued to wrestle with the difficulty of mining its sulfide ore, with minimal success. In January of 2020, during the early stages of the Special Purpose Acquisition Company (SPAC) boom, Hycroft agreed to be acquired by Mudrick Capital Acquisition Corporation and became a publicly-traded company once again on June 1, 2020. To address the predicament of economically mining a low-grade refractory deposit – a requirement of survival – the slide deck promoting the deal claims a proprietary, patent-pending breakthrough technology for processing sulfide ores:…

…In every quarter since the SPAC transaction, Hycroft reported operating losses, negative free cash flow, and continually managed down expectations about the viability of their “Novel Process” to economically extract gold from sulfide ores. Then, in mid-November, the company reported its Q3 2021 results with a press release that was a classic “turn out the lights” moment. The chair of the board resigned. The chief operating officer – who had just been hired in January of 2021 – resigned. Most importantly, the company came clean on the failure of the sulfide ore technology, fired half its workforce, and ceased its run-of-mine operations:

“The Company has previously discussed its strategy for developing an economic sulfide process for Hycroft. Based on the Company’s findings to date, including the analysis completed by an independent third-party research laboratory and the independent reviews by two metallurgical consultants, the Company does not believe the novel two-stage sulfide heap oxidation and leach process (“Novel Process”), as currently designed in the 2019 Technical Report dated July 31, 2019 (“2019 Technical Report”), is economic at current metal prices or those metal prices used in the 2019 Technical Report.  Subject to the challenges discussed below, the Company will complete test work that is currently underway and may advance its understanding of the Novel Process in the future.”

A technology miracle was needed to make the Hycroft Mine viable, and none was forthcoming. Virtually every major gold miner in the world has been working on finding economically viable ways to extract gold from refractory deposits, and to think that a decades-old mining operation that spends virtually nothing on research and development and relies on outside consultants and third-party research laboratories for their technology needs would produce a Holy Grail outcome is the height of lunacy. The stock traded below $0.30 a share, and bankruptcy seemed inevitable.  

6. When the Optimists are Too Pessimistic – Nick Maggiulli

What happened from March 2020 to August 2020 reminds me of an incredible piece Drew Dickson wrote on Amazon that had an intriguing thought experiment.

Imagine it’s 2007 and a bunch of research analysts are debating what Amazon’s revenues will be like in 2020. One group of these analysts (let’s call them the “value” group) believes that Amazon will have $27 billion in revenue in 2020. But another group (let’s call them the “growth” group) thinks Amazon will have $37 billion in revenue by this time.

The two groups disagree on almost everything. They have different assumptions about expected GDP growth rates, Amazon’s margins, and what Amazon’s earnings will look like in 2020. Yet, despite their differences, both groups turned out to be astronomically wrong. Because Amazon’s revenues weren’t $27 billion or $37 billion in 2020, they were $386 billion!

This demonstrates why Amazon has been such an exceptional stock, but it’s also demonstrates how upside surprises are often overlooked by investors.

Why is this true? Because people hate losses much more than they love gains (*prospect theory has entered the chat*). As a result, they spend far more time thinking about downside surprises (market crashes) than upside surprises (extraordinary growth). Nevertheless, upside surprises happen more often than people realize.

7. 10 Lessons from Great Businesses – Mario Gabriele

The Collisons’ business shines by converting complexity to simplicity. Stripe absorbs the scuff and tangle of payment infrastructure so that it can radiate clean technical primitives. It is fitting that the company’s founders also apply this talent in other domains. Perhaps most usefully, it plays a vital role in Stripe’s culture. 

The best example of this is the firm’s approach to recruiting. Attracting exceptional people is a startup’s most important task outside of finding product-market fit. Much has been written on the tricks and tactics to secure top talent. What interview process produces optimal results? What perks are most persuasive? 

All of these things matter. But, we can simplify. More than any particular stratagem or scheme, the most effective way to hire extraordinary people is to be so persistent it hurts. From The Generalist’s piece on Stripe: 

Patrick notes that “the biggest thing we did differently…is just being ok to take a really long time to hire people.” It took the company six months to hire its first two employees. Describing their “painfully persistent” process of recruiting in his conversation with Lilly, Patrick noted that he could think of five employees that Stripe had taken three or more years to recruit.

Like Stripe itself, this maneuver is the sort of thing that sounds simple – like accepting payments online – but is deceptively tricky. Persistence and pestering are twins with scarcely a mark to distinguish them. The difference is articulation, tone. If you can find the right words, the right message, you can persist – if you fail, you pester. Attempting to thread this needle involves some jeopardy of one’s emotions (it does not feel nice to badger) and reputation. But how often do we stop right before we succeed? How often do we stop one ask too soon? 

Though The Generalist does not have the prolific hiring requirements of a high-growth startup, I have found the Collisons’ framing broadly applicable. When you see an exceptional opportunity or happen upon an extraordinary potential partner, find the words. Find a way to be absurdly, painfully persistent.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, we currently have a vested interest in Amazon, Meituan, Meta Platforms (parent of Facebook), and Tencent (parent of WeChat). 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 March 2022:

1. The Tim Ferriss Show Transcripts: Morgan Housel — The Psychology of Money, Picking the Right Game, and the $6 Million Janitor (#576) – Tim Ferriss and Morgan Housel

Morgan Housel: And here’s what’s crazy about this, two weeks before that, maybe it was a week before it, it was a very short period of time before it, he went on CNBC. When it was starting to look like maybe the market was getting toppy and someone asks him like, “Warren, what would you do if the market starts falling?” He laughs and he says, “I’ll tell you what I’m not going to do. I’m not going to sell.” Two weeks later, he sold all of the airline stocks when this virus hit.

Now, you can say that that was actually not a mistake, even though the majority of them have regained almost all of their value. You can say that was not a mistake because the possibility of a complete catastrophic wipe out, particularly in airlines with COVID, was there. So you could say like, “It was actually the right thing to do.”

But even Buffett in this situation, when the world starting falling apart, he panicked and he did not buy anything of significant value with big numbers during that huge market decline. Even for him, I’m saying, it’s much easier said than done. I had my own story about this in the early days of COVID. Yes.

Tim Ferriss: Morgan, can I ask you to bookmark that, don’t lose your place. But I want to interject with a question and that is, do you think that earlier career Buffett would have also sold? And the reason I ask is that I saw an interview with Munger from — I don’t know a year or two ago? Maybe it was actually more like two or three years ago, and he said, “Too many people have their entire life savings and are depending on Berkshire.”

Morgan Housel: Yeah.

2. A History Of Invasions, Wars & Markets – Jamie Catherwood

During the American Revolution, for example, the British government attacked America’s currency (“continentals”) by launching a counterfeiting campaign designed to induce widespread inflation by flooding the market with paper money. Benjamin Franklin complained:

“Paper money was in those times our universal currency. But, it being the instrument with which we combatted our enemies, they resolved to deprive us of its use by depreciating it; and the most effectual means they could contrive was to counterfeit it. The artists they employed performed so well, that immense quantities of these counterfeits, which issued from the British government in New York, were circulated among the inhabitants of all the States, before the fraud was detected.

This operated considerably in depreciating the whole mass, first, by the vast additional quantity, and next by the uncertainty in distinguishing the true from the false; and the depreciation was a loss to all and the ruin of many.”

Fast forwarding to World War II, the United States conducted a similar operation against Japanese forces in places like Burma and the Philippines, in which Japan began issuing new “occupation currencies” after taking over. Working with Australia and Canada, the allied forces started printing counterfeit notes of Japan’s “invasion money” to destabilize the economies. Estimates show that allied forces printed over 70,000 pieces of counterfeit bills as part of this operation…

…This week has underscored just how damaging economic warfare can be. Regardless of whether you think America should send troops to Ukraine, the fact that there is even an argument about whether economic sanctions will be enough demonstrates the affect that sanctions can have. Again, the concept of restricting enemy’s access to financial markets and capital is nothing new. In fact, Russia endured this exact problem during the Bolshevik Revolution a century ago. The Bolshevik’s 1905 Financial Manifesto read:

“There is only one way out – to overthrow the government, to deprive it of its last forces. It is necessary to cut the government off from the last source of its existence: financial revenue. This is necessary not only for the country’s political and economic liberation, but also, more particularly, to restore order in government finances.”

Eventually, in 1917, the Bolshevik leaders intentionally defaulted on its debts after overthrowing the tsarist regime. Bloomberg’s Tracy Alloway discusses this fascinating case study in my latest financial history course. The parallels to today are obvious, with NATO countries agreeing to remove certain Russian banks from the global SWIFT network, and sanction specific Russian leaders. In turn, there are now reports that Russian companies have stated they will not pay out dividends to investors in countries that imposed sanctions on Russia. The economic aspect of this crisis is escalating quickly.

3. Say Less – Josh Brown

Sometime around 400 BC, Socrates was quoted as having said “The only true wisdom is in knowing you know nothing.”

Twenty five centuries later, give or take, Albert Einstein says “The more I learn, the more I realize I don’t know.”

And in between, during the thousands of years from Ancient Greece to mid-20th Century America, this insight has occurred to countless learned men and women. It can take a long time to get there, especially if everyone in your life and profession insists on treating you as though you’re the leading expert in this subject or that. You may well be – but expertise over a single subject matter – say, infectious disease or pandemics or investing in Russia – will not ever be enough to stave off the inevitable curveball thrown at you by the universe.

There’s always something you cannot anticipate. There’s always some wrinkle or nuance that becomes a lot more important than you might have originally thought. Change is constant. You might be in possession of knowledge that is no longer applicable to the current state of the world. And sometimes, no matter how smart you think you are, know matter how highly prized your judgment is to other people, you just f*** things up.

It happens! Experts are not Gods! Experience helps, it does not guarantee anything.

All of this is especially true when it comes to war, the ultimate exercise in unpredictability…

…Sam is among the world’s foremost authorities on investing in Russia and in understanding the situation in Eastern Europe. Remember, he studied international relations and history prior to his multi-decade experience allocating capital there. His knowledge stretches far beyond the bounds of mere stocks and bonds. And he still f***ed it up.

Bloomberg:

Russia was one of the biggest long bets for the hedge fund at the start of February, with 9% of its gross assets invested in the country’s shares, after a research trip to the country in January, the document shows. Sam Vecht, head of the team that manages the fund, told investors he raised the bet further when the invasion began, one of the people said. The fund currently has zero exposure to Russia, after writing down all its positions, two people said.

“We travelled to Russia at the end of January to assess the situation on the ground given our large net long position there,” the fund told clients in a letter, sent before the war began. The letter cited Russia’s large current account surplus, attractive bond returns, cheap stock valuations and undervalued currency as reasons for the bullish bets.

Despite Russian stocks losing the most for the fund in January, exposures were kept and later raised. “We believe the risk reward of being long Russian equities is favorable relative to the risk we see of conflict,” the team said in the letter. The Emerging Frontiers fund has never lost money in a full year since launching in Sept. 2011, according to the letter.

Sam’s long-short Emerging Europe fund hadn’t lost money in a single year going back to 2011. Not easy to do considering the experience most investors have had in emerging market funds these past ten years. Brutal. But this guy did it as good as anyone has ever done it.

And yet, when the big moment arrived, he got it wrong. BlackRock Emerging Europe writes down all of its positions to zero, just a month after adding to them. Based on all of his wisdom, experience, research, connections, contacts, reading, listening, studying, his conclusion was that the risk was overblown and Putin was bluffing.

Nope.

And if he wasn’t in a position to have gotten this right, what on earth could make you believe that anyone else could? Sam missed it but your financial advisor at Raymond James, who works in the strip mall next to PetSmart has a view on when this might all blow over? Do you have any idea how abjectly absurd it is for anyone managing money to have a fully formulated view of what’s to come during this crisis? I hear the theories and gambits and propositions in the financial media and I wince. Is no one capable of embarrassment anymore? Have we all been vaccinated against shame? You’re “putting on a Russia bet here”? Are you kidding me?

4. Of Ben Graham, Investing, and Eternity – Vishal Khandelwal

Marshall Weinberg, one of the students from Graham’s class said that the biggest lesson he drew out of that class was on long-term thinking. Here’s what he said –

One sentence changed my life…Ben Graham opened the course by saying: ‘If you want to make money in Wall Street you must have the proper psychological attitude. No one expresses it better than Spinoza the philosopher.’

When he said that, I nearly jumped out of my course. What? I suddenly look up, and he said, and I remember exactly what he said: ‘Spinoza said you must look at things in the aspect of eternity.’ And that’s what suddenly hooked me on Ben Graham.

Spinoza actually said, “Sub specie aeternitatis,” which translates to “under the aspect of eternity,” or “from the perspective of the eternal.”

Critics of this idea may believe that with such thinking, there is no reason to believe that anything matters. But where Spinoza may be coming from is the idea that, in the larger scheme of things, nothing matters, which leads us to put our pains and struggles – including, as investors – into perspective.

Much of the time, in life and in investing, we would be better off zooming out than zooming in. Rather than being ticker watchers of our own lives, and rather than zooming in and magnifying and thus worrying about the daily volatility in our stocks, we would be better off thinking about our lives and investments as pale dots that are just specks on the canvas of eternity.

5. Lessons from the Past for Today’s Tech Bear Market – Chin Hui Leong

Lesson #2: You don’t have to time the bottom 

If you think that Buffett made a poor investment decision in October 2008, you may want to reconsider. For him, it was never about timing the bottom. In his op-ed, Buffett made it clear that he didn’t know where stock prices are headed over the next month or even a year. Not that it mattered. 

Between 16 October 2008 and today, the NASDAQ has risen by almost 650%, a satisfying return despite missing the bottom. Individual stocks have done even better. For instance, shares of Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL) are up almost 57-fold and over 42-fold, respectively, over the same period The examples above send a clear message. 

You don’t need to buy at the bottom to generate handsome returns…

…Lesson #5: Quality beats timing

Like Buffett, I have never timed any of my stock buys perfectly. Let me share two examples. 

In February 2007, I bought shares of Chipotle Mexican Grill (NYSE: CMG), a Mexican restaurant chain. With the benefit of hindsight, my timing was terrible. In October 2007, less than 10 months after I bought the shares, the NASDAQ hit 2,860 points before proceeding to fall to below 1,270 points over the next one and half years. That’s a 56% fall. As it turns out, my timing didn’t matter in the long run. Today, 15 years later, those shares are up over 2,500%, a satisfying return by any account. And that’s not the only instance. 

Here’s a different example. 

In May 2010, I bought shares of Booking Holdings (NASDAQ: BNKG), more than a year after the stock market had bottomed out in March 2009. By then, the stock market was already up by 37% from its low. Again, the timing of my entry was off by a wide margin. But that didn’t matter in the end. Today, over a decade later, shares have risen by over 10-fold from the day I bought my first shares.   

6. iPhone Production Site Locked Down, An Interview With Bill Bishop about China (and Substack) – Ben Thompson and Bill Bishop

That’s actually an interesting way to transition to what’s happening in Ukraine and the way China’s approaching and dealing with it. I was telling some friends when this first happened that because there’s sort of a conflicting messages, some Chinese banks were not forwarding financing for Chinese companies buying energy from Russia, for example, it’s like “Oh, yeah, China’s leaping on board”!, and then meanwhile, you would have diplomats being on the other side giving the talk about this territorial integrity and “NATO’s actually the real problem”, and it’s like territorial integrity seems to only apply to Russia, not to Ukraine. It does seem like that latter message is starting to really carry the day, you haven’t heard any real deviation from that. Is that your read too? They’re trying to straddle this line of not out and out endorsing Russia’s action, but at the same time, they also believe that big countries should be able to take territories that they believe are theirs, and that US encroachment is the real problem.

BB: That’s right. China is very clearly leaning towards the Russian side. You see it in the way they talk about the roots of the crisis. You see it in the way they don’t describe it as an invasion, they use the Russian term, I think is like “special military operation”. They are coordinating and amplifying Russian disinformation. The big thing in the last few days has been the biolabs in Ukraine, and this is all before the news today. This was leaked out of the White House, they were spreading it around DC yesterday, to multiple outlets and people this idea that the US has intelligence that the Russians have asked Beijing for military aid and China hasn’t said yes, so that’s not necessarily an indication of Beijing leaning to one side or the other. But clearly, governments in Europe, NATO, there is not a lot of doubt where China really is leaning, and you have to go back to the February 4th statement when Putin went to Beijing for the Olympics opening ceremony and before that in a summit with Xi Jinping and they put out this 5,000+ word document that was effectively a manifesto for a new international order that was basically a Sino-Russian-led order. I don’t know that Xi Jinping knew and I doubt he would have approved or not approved of what Putin was doing, but it’s not a coincidence that within a matter of weeks Putin went in and Beijing has not really done anything to criticize the Russians.

What do you think has been China’s view of the response of the West? Because I think even those of us in the West have been surprised and struck by the vigor of that response. Is that a similar sense in China too, where they expected the West to roll over and it be like a similar Crimea sort of situation or in China’s case, a South China Sea situation, and the degree of fervor in response has been a shock to them? Or is it like “The West is raising a big hissyfit and it’s not going to make any difference”?

BB: No, I think it’s been a bit of a shock, I also think it’s been useful to them.

First on the shock part, I do think that they’re especially surprised by the German and the EU reaction, not so much by the US reaction. And certainly, I think China in that February 4th statement with Russia, they called out NATO, China does not like NATO, and I think it is disturbing or distressing for them to see what looks like a strengthening NATO, as opposed to one that was kind of almost destroyed under the previous US president who might have pulled out.

From a utility perspective though, seeing this set of sanctions is incredibly useful to Beijing, as it has been working for several years on how to strengthen its financial system to be able to deal with what they expect to be US-led financial war against China at some point in the future. Xi Jinping over the last few years has been talking up self-sufficiency in all sorts of areas. Last year, he made a big point of talking up the importance of building up strategic reserves, and they’ve built up strategic reserves for a long time, but this signaled a much more concerted push and a much larger number of sectors. There was a joke going on from some Russian foreign policy guy about “The great thing for Beijing about Russia and the Soviet Union is they get to look at their big brother up north and learn from all the mistakes they make” because, obviously, Xi Jinping and the Communist party made a big deal about learning from why do the USSR fall and how do we avoid that here and the people’s Republic of China. So, there is a lot of value, I think, for Beijing in watching how these sanctions unfold, seeing what the US and EU can do, but also seeing who’s not participating. India’s not participating, a lot of the Middle East, the global South — it’s not the whole world. As much as here in say, DC or Brussels, maybe people talk about everyone’s united, in fact, not really.

When the UN vote happened, I saw a tweet and someone was like, “Oh, Russia stomped at the UN”. And I’m like, well, no, actually, if you go through and calculate by population, this is pretty close to 50/50. Particularly, since a lot of the largest countries in the world abstained.

I guess this is really the critical question about what China is going to do in response. To what extent are they really going to lean into building an alternative to the US dollar, US tech-dominated world? To what extent is that going to be a super explicit policy? Is this going to be “We’re going to do stuff on the edges” or is this going to really be a hardcore focus going forward? And how does that play into the Russia thing? Are they going to sell stuff to Russia? Are they going to allow a flourishing grey market that they can sort of pretend doesn’t exist but does? I mean, how do you see them responding to this in the long run?

BB: So, there are a few questions there. First, I think China already wants to build a tech ecosystem that is as independent as possible from US domination and risks in the US. I mean, that was the lesson they learned from a little bit from ZTE, but really from Huawei and the way the US government effectively destroyed that company. On the financial side, China has also been trying for a long time to move away from the dollar-based global financial system. It isn’t happening and it’s been far too slow and far too hard to do.

Are they really actually willing to go all the way to be what would be necessary to be a global reserve currency? I guess the question I have about China is they always tend to default towards what’s best for China, and there’s some extent where if you want to be a global hegemon, you have to do things that benefit the hegemon, the overall broadly, even if there’s some angles that hurt you specifically. The US, in some aspects they’re hurt by the deficits that they run, but running the deficits is critical to the dollar being dominant. Is China willing to actually go all the way?

BB: Not yet. A great question, it’s one of the great points. It’s one of the reasons why it hasn’t worked. You can put money in China, but you can’t get it out. There are a lot of reasons why most people or most countries, most big investors, don’t want to put a lot of their cash into Renminbi.

This is not something that happens overnight, but what’s happening though, and especially, under Xi Jinping and especially given the relationship with the US over the last several years, is all of these things have taken on a lot more urgency inside China and inside the Chinese leadership, and I think the Ukraine crisis and the sanctions against Russia will only add to that kind of urgency. China has to look at “If there’s certain things we want to do that involve taking territories that we see as key to our national rejuvenation, how will the rest of the world react and how do we harden our system to be able to withstand those shocks?”

To one of your earlier questions though, I think actually that the big Chinese banks, I would be very surprised if they flout the sanctions, because they have too much to lose globally. Sanctions on North Korea, the big banks have tended to actually go along because, again, they have too much to lose. The issue’s going to be in some of the smaller banks, some of the banks that are not as worried about losing access to the global financial system. And certainly, there’s going to be a lot of people trying to make money on the side, on arbitrage trades, where even if there’s some big deal where some state-owned company buys a bunch of oil from Russia at a discount, I can pretty much guarantee you that they’re going to be people who then take some of the oil and then try and probably resell it overseas for the markup. This actually opens up a whole bunch of business opportunities from the Chinese side to deal with these sanctions, because Russia does not have a lot of leverage or bargaining power right now when they’re selling all the things that China wants.

7. SONY, Season 10, Episode 3 – Benjamin Gilbert and David Rosenthal

Ben: And we are your hosts. Listeners, today we are telling the story of the company that Steve Jobs idolized and modeled Apple computer after, the Sony Corporation.

David: Literally modeled himself after. You know the story of the black turtlenecks and the Sony connection.

Ben: Enlighten us.

David: The story goes that Steve idolized Sony whenever he visited and saw that there was a uniform that Sony employees had. He was like, that’s a great idea. I want Apple to have a uniform. Where did you get that uniform? He bought a pack, he made a proposal to Apple, and people were like NFW.

Ben: Didn’t Sony employees have uniforms because the clothing was scarce after World War II?

David: Yeah, I think that was part of the origin. Steve decided, okay, if Apple can’t have a uniform, I’m going to have a uniform. And so he went to Issei Miyazaki, the famous Japanese designer who had made the Sony uniform, and got him to make him a hundred black turtlenecks…

…David: Interesting. Of course, Sony also does pretty well in the cassette industry with what you’re referring to, the Walkman. This is another thing I didn’t realize. The Walkman came out pretty concurrently with the rise of CDs, but as you were saying, it’s not like you could take a big honk in-home CD player on the road.

Ben: No. CDs were not portable for a long time. On the EA episode where we interviewed Trip Hawkins, we talked about how famously, Madden was Trip’s folly. Of course, he was vindicated and proven very right even though it cost a lot of money, took a lot of time, and ended up being an enormously powerful franchise.

That is the story with the Walkman. This is Morita’s folly. He single-handedly thought that, hey, we’ve got this cassette player, but really, it’s a cassette recorder and it doesn’t have speakers. It’s a little chunky, but people can take it out in the world, record stuff, and listen to it on the speakers. I think there’s a market for people who want a slimmer, sexier version of that where we throw away the recording capabilities, we get that right out, stop taking up space with the speaker, and attach headphones.

All of the marketing people at Sony are like, no, there’s no market for that. No one wants to walk around outside in their own little world listening to music and headphones. You concurrently have the engineering saying, but we need lots of power to produce all the sound. It’s not really technically viable because we need to produce all this audio so that it goes out into the world.

You have Morita going, no, it’s going to be low power because we’re going to make these amazing low-power headphones. We only need to produce a little bit of sound because it’s going to be right next to people’s ears.

This was a consumer behavior that did not exist in the world that Akio Morita just said, everybody, trust me, let’s invest in this. It completely changed human history forever and the way that humans walk around out in the world.

David: It’s amazing that it was Morita who did this. This is the kind of stuff that Ibuka usually does. The sentiment on the board and in the company against Morita—Morita at this point is that the CEO of Sony—was so strong that he had to make a promise that if the initial 30,000-unit production run didn’t sell by the end of the year, then he would resign from Sony.

Ben: I didn’t realize that.

David: Yeah. He had to literally lay his cards on the table.

Ben: The way Morita phrases it in the book is this quote that is “Steve Jobs before Steve Jobs.” I’m going to make that point 11 times in this episode because it’s not that Steve Jobs is a rip-off of Akio Morita. It’s that he so badly wanted to be Akio Morita. He was such a better marketer in his time of a lot of the concepts that a lot of us grasp on to Steve’s version of them, even though a lot of the concepts are actually Akio’s version of them.

There’s this one quote in particular, which is, “I do not believe any amount of market research could have told us that the Sony Walkman would be successful, not to say a sensational hit, that would spawn many imitators. And yet the Sony Walkman has literally changed the habits of millions of people around the world.” He said this in 1986. Steve Jobs would say things like this, “Apple doesn’t do focus groups.” “You have to invent something.” “People can’t tell you what they want.” These are all Morita-isms.

David: I know. It’s so amazing. Everybody really should go read the book, Made in Japan. It’s very, very good.

Ben: John Sculley, between Steve and Steve CEO at Apple who famously Steve convinced to come over from Pepsi so he didn’t have to sell sugar water for the rest of his life. His quote about Steve is that he was a freak about Sony and that it was nearly fetishistic. In fact, he even had a collection of Sony letterhead and marketing materials.

He talks a lot about how the Mac factory was designed to emulate the Sony factory, that super crisp, pristine look, the idea that the factories were spotless. John Sculley says this made a huge impression on him. While Apple didn’t have colored uniforms, it was every bit as elegant as the early Sony factories that we saw.

He goes on to say, which I thought was really interesting, Steve didn’t want to be Microsoft. He didn’t want to be IBM. He wanted to be Sony. Right around this time, Sculley and Steve even met with Akio Morita. He says, “I remember Morita gave Steve and me one of the first Sony Walkmans. None of us had ever seen anything like it before because there had never been a product like that.” This is 25 years ago. “Steve was fascinated by it. The first thing he did was take it apart and look at every single part, how the fit and finish was well-done, how it was built.”

This whole thing comes totally full circle when Morita eventually passes away. Steve Jobs in ’99 is giving the Macworld keynote. He starts the keynote by putting up a picture of Akio Morita, who they used in the Think Different campaign, and says—and this is a quote from Steve on stage—”While he was leading Sony, they invented the whole consumer electronics marketplace, the transistor radio, Trinitron television, first consumer VCR, Walkman audio CD.”

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