All articles

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 14 November 2021:

1. Meta’s Andrew Bosworth On Moving Facebook To The Metaverse – Alex Heath and Andrew Bosworth

But acknowledging the moment we’re in, I mean, what do you say to the people who say this is a change to distance the brand tax that exists with the Facebook name now, for certain people and for lawmakers and the press, from everything else you all are doing?

Yeah, it’s not that. I mean, everything that we do is centered around consumers and consumer expectations. So we really were starting to hit these unusual spots. I’ll give you an example. So we had Oculus accounts. And part of the problem with Oculus accounts was that people really weren’t building up any kind of network to connect with. And what we do know is that when people have a network, they have more fun. For the same amount of time spent in the headset, they enjoy it more. That’s what they tell us.

And so we went to pretty elaborate extents to try to get, “Okay, let’s use the Facebook network in Oculus.” It’s an odd fit. It was an odd fit. And now Mark has announced that we’re going to change the way that we do accounts in Oculus.

So we’re trying to solve a problem and the only solution available to us isn’t a great solution. This kind of thing was happening all over the place. Facebook is a product. Having it try to also be an umbrella brand, which we tried, obviously, for the last several years, was really a struggle for us. It was really a struggle for consumers. I don’t think consumers really had a strong mental model of how that works.

If you ask consumers about Instagram and WhatsApp, and do you want to link these things or not link them, they understand what that means because those are products that they can have a sense of. And so I think we want to be able to have things like accounts that are at the Meta level, but still give consumers a really strong understanding of how products relate to the data that they’re giving up, who they’re connecting to, what value they’re getting in exchange for all of that, make sure they feel good about it. So I think all these things are very consumer-friendly.

That’s a very practical reason to do it. The second part of it, for me, is — I know that it’s cheesy. No one wants to just run with the story we’re telling. But it’s the real damn story. It’s an exciting vision of what comes next. To some degree, we have hit the natural saturation point with mobile phones, with the mobile internet, with social networks. They kind of are what they’re going to be. There’s a lot of them, it’s very competitive, but they’re competitive on the margins. But we’re not seeing big steps forward and totally new things as much anymore.

And I think the metaverse feels like something that doesn’t exist today, and you can’t do it any other way. It’s in pockets, there’s little glimpses of it. And I think we’re excited about that. But the things that we’re describing are mostly just not possible without tremendous investment. And so I think for us, the corporate umbrella of Facebook served us so well for such a long time, because it was itself an unfulfilled vision. There’s still a lot of work to do there, obviously, but now we have a new unfulfilled vision that I think can power us for, let’s say, the next 15 or 20 years…

…This whole metaverse concept, I talked a lot with Mark about this. We can keep it pretty high-level. The idea is this immersive, embodied internet that is 3D. You could think of today like Roblox or Fortnite, where people are hanging out as avatars. And you guys are wanting to build this in AR and VR. I’m curious about how you take the concepts that we know today, a lot of them that you helped invent at Facebook and social media, and translate that to the metaverse. Is there going to be a News Feed in Horizon, which is this metaverse platform, software platform, you’re building? How are you thinking about the ways people engage with content in the metaverse?

I don’t think there will be a literal News Feed, except there might be your actual News Feed from Facebook. There’s no reason that 2D interfaces aren’t going to be an important part of an immersive metaverse in the same way that they’re an important part of how we navigate the physical world. But yeah, of course. There’s going to be so much to do. And in some ways, if you think about when you go to a city, there’s so much to do in a new city. How do you figure out what you want to do? There’s entire services, entire industries designed to help you navigate the amount that there is to do.

There’s going to be way more to do in the metaverse, especially when you can instantaneously travel to any of the many cities that we kind of imagine ultimately populating the place. You’ll definitely need to have services that help you with what’s new, what’s hot, what’s trending, and what’s going on. What are other people doing? What are your friends doing? How can you plan things? Can you schedule things? So all those services are going to exist and we’re super excited about them. But I do think that it’s a little bit cart before the horse. Before I can figure out how I need to rank content for you, I need to have content for you. That’s just the sequencing that has to happen…

…I think this is getting at how maximalist and expansive this idea is, because I think when people think of the metaverse and Facebook, they think of a 3D version of Facebook and the Meta headset. What you’re talking about, especially using blockchain potentially, is taking it from one environment to the other. Say I want to move from Fortnite to Horizon. They’re both in VR. I want to take my avatar and all my virtual goods with me. Still, I’m very skeptical that you guys are going to figure that out with all the competitors in the industry. Maybe once this becomes just so realized that people have to do it because consumers are demanding it, then maybe. But building up to that, Apple, for example, they’re doing mixed reality. They’re going to have a headset. They’re going to have glasses. I think there’s zero chance they work with you all on interoperability in any kind of a virtual world. Maybe you disagree, but that’s the largest company in the world as an example. So how do you get people to actually buy into this?

There are a lot of levels here. I certainly think that you’re right. Just as the internet itself went through a lot of revisions and protocols that were designed but never adopted, and then these ones were adopted and different things happened. I expect the same to happen around the metaverse. And the majority of these questions are hard and they’re still ahead of us. Having said that, I don’t think we’re as far apart from most of the people in the industry as you might think. I think we all generally get a sense that if we can empower creators to have a richer economy, that creates a flywheel where more digital creation happens; that’s really good for consumers and that grows the economy, that grows the pie. We all benefit. One of the obvious things that you can do to increase the value that you’re giving to your developers, your creators — I’ve heard Roblox, I’ve heard Epic, I’ve heard a lot of people talk about this — is getting them a larger audience. That’s an easy one. It costs you nothing. They’re developing the same thing and now the audience is larger. So I think the watch word for the metaverse is continuity, being able to have a continuity of experiences across both experiences and platforms built by different companies.

And so, yeah, there are areas where this is actually pretty workable. Let’s take avatars. Being able to implement somebody else’s avatar or having to implement your avatar for someone else’s system is actually pretty workable. It’s not an impossible challenge. Does that mean every avatar is going to be useful everywhere? No, of course not. But there are also clothes that I can’t wear in every place that I go in the physical world; that wouldn’t be appropriate.

I’d love to know what this is.

You know, I wouldn’t wear an Easter bunny costume to church. That seems like a mixed message. And so it’s not unheard of that we would have these cases where’s like, yeah, I can’t take this thing over there because of whatever rules that apply over there. So it’s not totally unheard of even in the physical world. So anyway, I bring this up to say, I agree it’s going to be hard. You’re absolutely right. If there’s a thing to be skeptical of, you nailed it. That’s the hardest part for sure. However, at least at a conversational level, whether I’m talking to people at Microsoft, talking to people at Google, different people, there is a vision that we share, I think, that is coming into focus for the industry. And if we can find really strong standards in a way that allows people to recoup their investments, because this is expensive work, as Mark said, then I think there’s a chance. There’s a path.

There’s a second path, which is the one that often works, which is you get enough consumers in one area. And then you’re able to attract more and more partners into the area to interoperate on that platform because they want to go where the marketplace is. And that’s another path that is possible.

2. She drew millions of TikTok followers by selling a fantasy of rural China. Then politics intervened – Liu Yi-Ling

On camera, Li Ziqi, one of China’s most darling vloggers, lives a peaceful, enviably pastoral life. In one video, Li spends her morning riding through a misty forest on horseback, collecting magnolia flowers in a wooden basket. Dressed in a sweeping red cape, she looks like a cross between a Disney heroine and a mythological Chinese princess — something that taps into a current craze for traditional hanfu clothing, popular among young people nostalgic for a simpler, pre-industrial past of rites and etiquette. At her Sichuanese countryside home, off the grid and entirely self-sufficient, there are no signs of modern life: no smartphones, laptops, money, or microwaves. She returns to cook the flowers on a traditional stove fueled by dry hay, preparing magnolia pastries from scratch. “I’m hooked,” one YouTube user commented. “Straight out of a dream.” 

Scenes from Li’s life — harvesting jujube dates, hatching ducklings, and simmering peach blossom wine — have mesmerized audiences around the world. She’s drawn a following of 55 million on Douyin, the local version of TikTok, and a YouTube subscriber base of 16 million (where she gained the Guinness World Records title for the most subscribers to a Chinese-language channel). She is beloved by fans from China to Portugal to Bangladesh, was named an “ambassador” of Chinese culture by the Communist Youth League, and dubbed “Quarantine Queen” by The New York Times. She is a balm for her followers’ high-pressure, screen-centric, time-constrained existences. Through her, they live vicariously in an online Eden, where pollution, industrial food chains, and coronaviruses cease to exist…

…In Li’s videos, viewers found solace in a fantasy that is simple, unchanging, and untouched by the chaos of the outside world. That fantasy dimmed when, in July, she disappeared from online life. In August, her assistant made a cryptic post on Weibo to address her silence: Li Ziqi had “neglected many real-world problems,” and was “taking time to resolve some issues.” A few days later, Li posted a photo of herself filing a report at a police station: “Capital indeed has its good tricks!” read a comment she wrote under the post. She deleted the post shortly after.

Chinese social media swirled with rumors, speculating a profit-breakdown dispute between Li and her management. International news outlets guessed that Li’s silence was connected to the broader crackdown on online celebrities, such as the condemnations of actors Kris Wu and Zhao Wei, and the censure of online fandoms, which took place around the same time. Some fans wondered if she’d been driven underground by the pressure of the “Kimchi Wars” — a nationalist spat between Chinese and Korean netizens that exploded in the comments section of one of Li’s videos about harvesting and preparing pickled vegetables. 

After a largely unbroken three-month hiatus, she finally resurfaced with a deft, two-step move: first, appearing for an interview with CCTV; then, only days later, filing a lawsuit against Hangzhou Weinian. When the CCTV host asked her about her plans for the future, she explained that she wanted to do work related to “rural revitalization” and “common prosperity,” and “guide youth … away from becoming influencers,” toward a path of “positive energy,” parroting all the hottest official keywords of the day. “I think of myself as a new socialist farmer,” she said. In distancing herself from the “bad values” of the influencer economy and aligning herself with the “good values” of the Party, she cut ties from one patron and cozied up to another. She is yet to upload any new, full-length videos.

3. An Interview with Eric Seufert about the Impact of ATT – Ben Thompson and Eric Seufert

I want to ask about that because I noted too that they described it very differently. I interpreted that though as them both saying the same things just in different ways. But do you actually feel like Snap was actually not that good at building these detailed user profiles, and they were more simplistic about it? Which in some respects is a good thing, because it almost feels like that would make them be able to recover more quickly even though they seemed more behind the eight-ball here.

ES: I do think that’s probably the case. I mean, first of all, they have fewer users, they generate less data, their ads platform is younger. They rolled out some of these products years behind when Facebook did so I think just for those very straightforward reasons they probably had a less mature product and also Facebook’s just got a much bigger org around this. Also before the Snap exec said that, he said something like, “No, we think our ability to target is basically uninhibited relative to where it was before. It’s just that we’re not able to measure the outcomes and so, for that reason, our advertising suffered as a result of that.”

So the process — that round trip is very important. Facebook serves an ad to you, you click on the ad, you go to a website or you go to an app. In either one of those, the destination would happen from an ad in the mobile app, that’s where 95% of their ad revenue comes from their mobile products, Instagram or Facebook Blue. You click the ad, you go to either website or an app and then when you do things on those properties, Facebook observes the fact that you do those things, either through the pixel on the website or through this SDK integrated into the app and then when you do those things and it observes that you do those things, it ingests that data into its own system and because it has an IDFA linked to your Facebook user account and the destination property had either the pixel sending data back with your Facebook ID linked, or the app had your IDFA attached to those events, it’s able to enrich its profile of you. Then it knows more about what you’d like to do and what you like to, more importantly, what you like to buy and then, with that knowledge, the next time it serves an ad to you, it’s a little bit smarter about what you’re most likely to click on and interact with.

I wrote a long thread on QuantMar, which is this stack exchange site that I operate. I found this video from, I don’t know, six, seven years ago from one of Facebook’s ad auction economists and he was giving a presentation at UC Berkeley to some grad students and it was on some grainy cam and I don’t know that it was meant to be seen by a lot of people, but he just walks through the whole logic of the auction algorithm, it’s really, really interesting.

The way they operate that calculus of deciding which ad to show you is an impression pops up in your feed and they have a whole universe of things that they could potentially fill that with. That pertains to content, so like stuff that your mom shared or whatever, but also some of those units are dedicated to ads, some proportion. The way that they decide what to fill into that space, onto that canvas, is they take this whole set of content options, whether it’s content or an ad and they look at your profile and your history of clicking on stuff and they say, “What’s the probability that this person’s going to click on this thing?” Then they multiply that times the expected value of you going to do that thing and so if it’s content it’s “Are they likely to engage with this? Are they likely to leave a comment? Are they likely to like it?” Engage with it in some way beyond just scrolling past it. If it’s an ad, “How likely are they to click on it? What’s the expected value of their participation in that product? Are they likely to make a purchase? Are they likely to put something in a cart? Are they likely to complete a level in a mobile game? What’s the expected value of that?” And then they use that expected value, they moderate it by the click probability and that’s how they rank them, that’s how the whole bid mechanism works.

So if I’m a niche product, and I have a very deep monetization in my product, or a very early-stage monetization where it happens very quickly but there’s a low probability of click, I have to bid a lot higher to win that space than somebody else that’s got lighter monetization but there’s a higher probability that you do the click and then do that thing subsequent to that click. So that’s the kind of logic that’s used to power the filling of those impressions, those content spaces. That’s the logic they use and then when you do that thing, well then that helps them inform the next decision…

…Why is SKAdNetwork so bad? What are its limitations in, I know there’s a lot of them, so it’s hard to summarize it. But in a nutshell, what is the problem with SKAdNetwork?

Just for the audience, SKAdNetwork is Apple’s API for apps to basically measure to do ads. It’s supposed to be a replacement for what they got from Facebook, etc. It’s from Apple, Apple has perfect knowledge of an app because it’s happening on their OS and the app was obtained through their App Store and so Apple could theoretically make SKAdNetwork actually even better than anything Facebook could do because they have perfect knowledge of what’s happening, but it’s definitely not that. What are the issues with it?

ES: It’s hard to know even where to start. First of all, SKAdNetwork was actually released in 2018 and I discovered it somehow on a message board or something for app developers. I wrote an article about it, like basically, “What is this thing? Is Apple going to totally transform mobile advertising with this SKAdNetwork?” And nothing ever became of it. It was totally irrelevant, no one used it, no one.

It wasn’t a competitive product.

ES: I think it was just they were releasing V1 in anticipation of ATT. I don’t know that they necessarily had planned ATT in terms of the exact way that it was rolled out and exact way that it was defined, but I think they knew they were going to do something like that down the road and they wanted to have this ready. Anyway, so at WWDC20 they introduced the Version 2.0 of it, which was designed as the replacement for IDFA-based attributions. What it does is it allows you to attribute an install to a campaign, but without including any information about the specific user that installed the ad. It’ll basically provide you with the knowledge that an install happened and that install was driven by some campaign, but you don’t know which user that was. It can include some context around what that user did in the app subsequent to installing, so there’s ways to instrument events that can be tracked and returned with this SKAdNetwork signal, it’s getting a payload which is called a postback.

But it’s just designed in such a way to be totally inadequate, I think that by design it does not work. There’s a couple of reasons for that. One, is that operates on this timer system that is incomprehensible as to what the purpose of this timer system is, aside from just making the pushback data useless…

…Is there a chance that Facebook doesn’t actually come back from this, this ends up being more fatal than we think?

ES: No, I think where I see Facebook moving is I wrote this Twitter thread about it last quarter and my sense is, short term they’ll all regain measurement efficiency, there are approaches. Instead of the brute force guerilla collect all the data and attach it to a user approach, just much more sophisticated and technically demanding statistical and probabilistic approaches. And they’ll move in that direction.

That’s all the CapEx on computers to crunch all that data.

ES: Right. Exactly. In mid-term, it’s content fortresses. They just pull as much content interaction into their own environment as possible. It’s all first party data to them and they just get stronger as a result. And then, longterm, it’s metaverse, that would be the bull argument for Facebook. But they have risks, this is unprecedented stuff, this is corporate warfare, like atomic warfare, this isn’t skirmishes at the border.

Right.

ES: But there’s a whole lot of new opportunity that’s arising as a result of this for creating whole new measurement paradigms, for potentially shifting a lot more content onto the open web. So maybe this just reshapes our relationship with content and reshapes the things that we interact with on our phones and elsewhere. It’s also a very exciting time because just these ideas that we held as absolute have been shattered.

And it’s not just on Facebook, that’s on Apple too. The idea that you could link out to an alternative payment system in your app a year ago, two years ago, you’d be risking a lot to do that, that was almost unthinkable. And now, it’s policy. The idea that you could just with aplomb email your users and say, “Don’t buy your stuff in the app, buy the stuff on the web shop right now.” that’s totally new, these are new commercial venues that have opened up. It creates a lot of opportunity.

It was very interesting actually on Twilio’s earnings call, they were talking about this. The ability to connect directly to your customers, it’s always been valuable, but now it’s astronomically valuable and that’s why they feel well placed for obvious reasons. But I thought that fits with what you’re saying here.

ES: Yeah. At the same time that Apple’s exerting more dominance in some areas of mobile, it’s also having its dominance receding. One thing that’s really exciting about the opportunity to open up a web shop that services the in-app content environment, is that the App Store really sucks as a storefront. It’s just clunky. There’s not a lot of options for it, there’s not a lot of tools, you can’t A/B test stuff. If you have a web shop, you could do anything. The web is super easy to just quickly make changes and deploy them, you don’t have to do an app update that requires a manual review. You can do everything on the backend, you can A/B test to your heart’s desire. It’s just much more dynamic than what you can do in this very restrained environment, which is the App Store.

So I think the ability to have a web shop where you personalize offers to people, you offer dynamic discounts, you offer a totally tailored bespoke product to you based on your behavioral profile that I have from a first party data environment, that’s super exciting and that didn’t exist in the App Store before. That’s an opportunity that just got opened up and really, I mean, to do it in public without having to worry about Apple punishing you, that opportunity only arose in the last couple weeks.

That’s super interesting. So in your estimation, if Apple has to allow purchases outside of the app, then net relative to killing IDFA, Apple’s feeling the pain actually probably much more?

ES: Well, we’ll see. I mean, I don’t know. Maybe that’s what IDFA was all about. Maybe it was just, let’s try to wrap our arms around this and say, “Hey, you could do a web shop, but you need featuring from us to be a successful business. So do you really want to risk that?” Maybe that was the whole idea here. Maybe it was just pre-empting what they saw as the inevitable opening up of the App Store environment.

4. Mike Cannon-Brookes – Sriram Krishnan and Mike Cannon-Brookes

I want to switch gears just a bit. This next section is roughly “Teach me to do your job.” It’s one of my favorite questions to dive into with interesting people. Let’s start with a very simple one. Tell me how you spend your time. What does a calendar in the normal work week look like for you?

I always try to be very intentional with my time. Time is the one thing you can’t get back. By intentional, I mean that I choose as carefully as I can where to spend my time. Everything flows from that as it creates constraints.

For example, the first thing I put in is “kid time.” I have certain times of the week where I do school drop-offs, I do pickups, I do things like that. That’s the first time that goes into the calendar and you cannot book a meeting over it. My EA has been trained that if someone tries, they get told “Eff off.” Unless it’s crazy important—and I mean it has to be crazy important—that time is blocked out. That’s worked out really well as people learn to adapt around it. Being intentional is one thing.

Second, I have a lot of interests now. As such, I intentionally have 10% of my week dedicated to work outside of Atlassian on a calendar-time basis. Obviously sometimes I have a board meeting that takes six hours. But if a week’s roughly fifty hours of work, there’s five hours that can be done outside of work. My investment team and philanthropic team outside of work receive a certain portion of that and I have to decide how I want to use it over a month or a quarter. That 90/10 percentage split seems like it’s worked well. Within the 90%—at Atlassian—that is made up of one on ones, as much on product and strategy as possible, and lastly, storytelling. I define storytelling as the broadest version of scaled communication.

One of the things that’s really hard in a larger company is sharing and repeating stories. This is less about the company’s founding and such, but rather “What is our strategy? What are we trying to achieve? What are we doing?” Though people can look up our OKRs, it’s not quite the same. If someone new starts tomorrow, they’re going to get directed to the company OKRs throughout the course of onboarding. They’ll read them and be like, “Okay.” It’s different than if they hear repeatedly in different forums that we’re guiding the ship towards a few sets of goals. I think storytelling is incredibly important and that takes a lot of forms. Because of this, I try to divide my time evenly between product strategy and scaled storytelling—town halls, presentations, et cetera. Ironically, working from home has been amazing. Yesterday I recorded two videos—fifteen to twenty minutes each—that were going to different groups in different formats…

…What does a good product review, business review, or business update meeting with you look like? What does a bad one look like?

I’ll take two angles: the product and the team.

On the product—whatever it is that we’re building—I always think about whether we’ve combined technology and creativity in a clever way. I think about whether the product is exciting; whether it has a distribution advantage or at least some way that we can see it work, where we’re playing the chess moves ahead.

You can’t help but get excited when you come in and go, “Oh, man, that thing’s just going to crush it.” When the team has taken some new piece of technology and used some creativity to twist it or turn it in a unique way—that excites me. You can just see it working. If you do it long enough, you walk out of the meeting and you’re like, “That thing. That’s a lock. That’s a win. That one there—done. We don’t even need to do an A/B test.” Ironically, we have a bunch of examples where we have literally gone, “I know, we’re big on A/B testing. Just ship it. That thing’s great.” From a product side, when you just walk out and you know—that’s a great meeting. It’s very hard to explain why that is. I would say the closest thing is when you see the potent creativity and technology mix, when art and science have merged in the right way.

On a team basis, it’s a great meeting if the team seems to have its shit together. I know that sounds like a weird or a simple answer, however, you can pick up on things if you’ve watched or managed teams for long enough. You can say, “That’s a strong team,” or “That’s a weak team.” Sometimes even the product has a long way to go, but you can walk out confidently and say, “Man, that team knows its space. It knows what it’s trying to do. It seems to have the right level of leadership.”

If it’s just the product manager answering questions, that’s a bit of an alarm. At Atlassian, we operate on a triad model—we have many different triads between the product manager, designer, and engineering lead. If the designer and engineer are answering each other’s questions, that’s usually a good sign that the team knows what they’re trying to do. It’s crucial to home in on whether a team has the energy, consistency, and excitement to execute.

You can feel the energy in the room when the team is in sync, getting along, and excited. Similarly, you can also feel if they’re not in alignment, if they’re trying to put on a brave face for the Emperor. You can just feel it in the room if you’ve been there enough times.

Exactly!

Two other things: Confidence is vital. I like to see if senior leaders disagree with founders. As I get older, I increasingly ask open questions and note if opinions change or not once I weigh in. If a leader disagrees and pushes back on something with evidence to back it up, that’s a good sign.

It is vital to instill the team with the confidence to disagree with senior leaders. Not disagreeing offensively, but rather saying something like, “Hey, actually no, we did the customer research and I think left is a better direction to go on that particular issue.” or “No, the competitors are all charging that. Here’s why I think that we should hit the bottom of the pricing curve.”

Disagreement with seniority in a constructive way usually shows that the team has their shit together. It means that they know more than you do and that’s good. They inevitably should know more than I do.

One of Scott’s favorite techniques—which I’ve started to adopt over the years— is to scratch one area quite deeply. We often use it in interviews. For instance, I have asked people to tell me about what happens when you click a button in a web browser in technical interviews. I try to go as deeply as I freaking can. I’ll continue: “How does that turn into HTTP?…Okay, cool. And that runs into TCP? How does that work?” If I get to the point that I’ve run out of questions, and the candidate can still go deeper, that means he/she is likely a really good engineer; he/she has thought about the seventeen layers of stuff that go together to make a web page work.

I like when engineers can pick any area—even those outside of their core speciality/expertise—and go deeply. They should always be aware of first principles. Similarly, you can ask me about Atlassian strategy and I can go six levels deep on anything straight off the top of my head. That’s my job…

…Alright, here’s the next one. The name is a little unclear, but perhaps it’s the Obama Priority System? In short, it allows you to assign tasks priority from P1 to P4. Though I did a lot of Googling, I could not find any evidence of President Obama actually using this tactic.

I inquired a long time ago about how Obama prioritized. I found that it was basically a simplified form of Kanban in a world where he did not control what was actually happening.

The way I remember reading about Obama’s prioritization system was that every big issue going on for him as President was assigned Priority 1, 2, 3, or 4. He had a certain number of P1s and P2s that came directly to him, as he was going to make the call on those particular issues. With P3s, maybe he knew about them and advised from afar, but he did not delve into the weeds. P4s were off his radar completely. The latter two—P3s and P4s—were handled by his Chief of Staff, the Secretary of the Treasury, or whomever. He could only have two P1s and four P2s simultaneously to prevent decision fatigue and overwhelm.

Because he was President, there was a natural limitation to this Kanban strategy. Every week—sometimes every day—he would have to rejuggle this schedule because he lacked control over his inputs. For example, if Syria starts a war with Yemen, that becomes an immediate P1. He didn’t get to choose that. It immediately went to the top of his pile.

That said, what Obama did so brilliantly was develop a system to rearrange his priorities. Without this, he would not be able to think clearly amidst the chaos of his office. He would move one of the two P1s to P2; one of the P2s to P3; and so on. Again, the basic idea was that he, as President, couldn’t control his inputs. Though he had many issues that he wanted to tackle—Obamacare, for instance—he allowed himself two big issues and four small issues to work on simultaneously. Everything else was passed to other people down the chain.

I try to use this in my own thinking. Though, to be honest, the last year has been really bad for that, but that’s another story. I have P1s, P2s, P3s, and P4s that I move around. There’s a whole chain underneath that reassigns tasks automatically. When I say that P2 is now a P3, my Chief of Staff and EA know exactly what that means and take action accordingly.

It’s less Syria and Yemen, less big, hairy, global issues, so it happens less frequently than it did on Obama’s Kanan. That said, it’s a useful mental model as I can only really focus on two big things and four small things.

This doesn’t just apply to work, oftentimes the four small things are personal things that are going on. I think it’s important and realistic that these things be on the list because they take up both time and mental space.

5. The Tim Ferriss Show: Chris Dixon and Naval Ravikant — The Wonders of Web3, How to Pick the Right Hill to Climb, Finding the Right Amount of Crypto Regulation, Friends with Benefits, and the Untapped Potential of NFTs (#542) – Tim Ferriss, Chris Dixon, and Naval Ravikant

Tim Ferriss: Perhaps, Chris, we could also start just to show, it could be change, it could be evolution, but Web1, Web2, Web3, if you could lay it out.

Chris Dixon: The way I think about it is Web1, the internet, of course, existed before the ’90s, but the web sort of this killer app on top of the internet was created in 1990. I think of Web1 as let’s call it 1990 to 2005. The key thing with Web1 is, it was dominated by open protocol. So the web has a protocol called HTTP, email has a protocol called SMTP and these were the proto, these were the platforms you were building on then.

So, if you were Larry and Sergey and you were building Google, you were building it on top of HTTP, right on top of the web. The web was open, which means no one controlled it. What that means from Larry and Sergey’s point of view is, they knew if they built a successful product, a successful search engine, they would own it and they would control it. You couldn’t have somebody come along and say, “I’m going to take 50 percent or I’m going to shut you down.”… 

…People call Web2, let’s call it around 2005, and at that time you had two competing models. Let’s just take Twitter. There was an open protocol called RSS. That was the obvious thing to compete with Twitter.

I mean, it’s still around, but it’s not nearly as popular as Twitter and Facebook and everything else. There were sort of open ways to build social networks in the 2000s. Then, there were closed ways to build them. For a variety of reasons, I won’t go into all the details, the closed ways1, and a lot of it had to do with the ease of use. The way I think about it is Web2, the open protocols were just limited in what they could do…

…So Web3 is coming along. It’s a Web3 is like, just my definition is it’s an internet owned by users and builders orchestrated with tokens. This new concept of a token is the kind of the key concept of Web3. This comes sort of historically, from the movement that started with Bitcoin. Although, I think it’s sort of a different branch of the genealogy or something.

A lot of the stuff’s actually built on a different crypto network called Ethereum and then there are other kind of alternatives to it. The big kind of innovation with Ethereum was it’s fully programmable. It’s a computer. Just like a blockchain, it’s a modern blockchain like Ethereum, it’s a computer in the quite literal sense. It’s funny, this is like the most controversial thing I’ve said on Twitter, I got huge. When I said blockchains are computers, they are computers.

6. Interview with Tom Engle: Investing Legend – Chris Reining and Tom Engle

You might not have heard of Tom Engle. He was born poor in Louisville, Kentucky, where his family shared a two-bedroom house with his grandparents.

He watched his parents quickly climb out of poverty by investing, and learned at a young age to invest what money he could, and most importantly, to keep it invested. This mindset changed his life forever – after working just nine years at a gas station he was able to retire…

…New investors oftentimes feel overwhelmed and scared. How should they approach investing?

Corrections, bear markets, and recessions can look scary to new investors. I panicked during the 1973-75 recession and sold because it looked as if the world was going to end. The market recovered in a reasonable amount of time, and I learned a big investment lesson:

Corrections and recessions are great times to buy stocks, not sell them.

With this in mind, I was ready when the 1987 market crash occurred. Like a kid in a candy store I bought stocks under $4 that previously had sold for over $25. This crash was a picnic compared to the previous one, but people were again afraid.

Fear can be a powerful force. It prevents people from investing, and causes them to sell when they should be buying. The simplest way to become a successful investor is to make small investments. This way no matter what happens you’re determined to keep that money in the market.

I was forced to use small investments because I didn’t have much money, but because of that I learned another big lesson:

Small amounts invested in quality companies grow into very large amounts if you leave them alone.

So my advice is to attack the fear using small amounts of money, and be determined to keep it invested…

…How many stocks should an investor own to be properly diversified?

First you have to define diversification. Is it to provide safety or growth? If it’s safety then a stock like Starbucks and cash are sufficient. But if it’s growth, then buying a large number of companies shouldn’t be as important as diversifying over better value points, economic conditions, and greater levels of knowledge.

10 to 20 stocks provides plenty of diversification.

Investors shouldn’t attempt to add them all at once though. For example, in 2007 an investor could have purchased 100 different stocks. By November 2008, every single one would have been down. Owning more didn’t help. I don’t want to fill my portfolio with mediocre stocks for the perception of safety, because growth is sacrificed when the market recovers.

What are the top mistakes you see investors make?

There’s a few. Investors sell too soon, both their winners and losers, and they tend to look at the stock price when making decisions, rather than the valuation.

The biggest investing mistake is trying to out-trade a world of traders.

Let the traders take short-term profits. Instead, crush them by accumulating shares at better value points over time, and holding long-term.

7. Arman Gokgol-Kline – Universal Music Group: The Gatekeepers of Music – Patrick O’Shaughnessy and Arman Gokgol-Kline

[00:03:28] Patrick: We get to talk today about one of my absolute favorite topics, which is music and the business behind it. Been obsessed with music since I was right in that sweet spot of Napster. I was just cresting into my music fandom right as Napster came out and so, I think that’s the place we have to start. There’s this line in the sand in the history of music, maybe it’s late ’90s, early 2000s, when the whole business changed and we have to start there. Before we talk about UMG, maybe you can begin by just laying out what you view as the important points of history in the business of music.

[00:03:59] Arman: Yeah. First of all, thanks for having me. You’re right. That was a pivotal point for this industry. Prior to this industry, prior to 2000, when Napster and the ripping services emerged, it was an interesting model for this business. You had a few dominant, large labels that controlled every aspect of music from the discovery of the talent, to the producing of the songs, to the recording of the songs, because they own the studios because it was so expensive, to the production of physical distribution, putting it was on CDs and records, to the marketing, to the distribution channel controls. I mean, it was just all controlled by these few groups and as a result, they were affected by the gatekeepers and the way they monetize the music was interesting. If you want to think about it, it was kind of like an upfront perpetual license.

You bought an album, it was a bundled product. Back in the days, singles weren’t even a big part of the business. So, you had to buy 12, 15 songs from an artist in an album format. You had to pay upfront for the perpetual use of that and every incremental piece of music you bought cost you money. You had to have this high threshold for wanting to consume incremental music beyond just listening passively on the radio station, if you want on demand access to your product. And for the record labels and for the industry, that meant profits were heavily front end loaded. And so, the whole system was set up to not drive consumption through life, but to drive initial sales after launch. That’s when almost all the profits for the industry were made.

The other thing it did for the industry is basically five markets drove the great majority of the revenues and profits. US, UK, Germany, France, Japan were three quarters of the revenues of the entire industry because you had respect for IP rights in those markets and then you had a willing and able consumer base to pay for those rights. That was the model that was set up by the industry and by the labels of, let’s call it, 50, 60, 70, 80, 90 years. I mean, that was basically the way it worked.

If you want to think about it though, is that really the best consumer proposition? Which is hey, you have to buy a bundled product. I control what comes to market. Once it comes to market, you have to pay a pretty sizable upfront cost to buy it. Then you can use it forever as long as you keep the physical product with you, but every time you hear something new and want to listen to it a second time or third time, fourth time on demand, you have to go pay me for it. And that’s what the ripping services to me were.

It was two things. One is it was trying to solve a consumer problem with the industry and then two, is technology was enabling this digital consumption of music and the industry just was not forward on that. iTunes was a reaction, if you will, to the ripping services, whereas you could have argued actually it should have been what drove the consumer to the digital format. Late ’90s, the world says, “Hey, we don’t like this model. We want to be able to listen to individual songs when we want and we want to not have to pay a whole lot of money every time we want to consume a new piece of music,” and so you have the Napster’s of the world show up and try to break the mold.

Now interestingly, that wasn’t actually a great format for consumers either. First of all, it was actually a time-consuming process. I am also a product of, I was in college in the late ’90s, without incriminating myself, I may have known people that and it would take a fair bit of time to find the content. Yeah. It was like a job. Try to burn the CD if you wanted access to it on-

[00:07:36] Patrick: CDRW.

[00:07:36] Arman: Right, exactly. And then beyond that, the quality consistency was not there. It was just actually not great quality. By the way, it was illegal. And so, there was these three consumer problems with that as well, but it was the first sign to the industry that hey, this old model that you have, which worked great for you when you controlled all aspects of it. As technology emerged and we were able to try to find ways of pushing back on this not so great consumer proposition, consumers were basically like, “We’re going to change the way this works.”

Not surprisingly, profits for this industry globally peaked in 1999 and believe it or not, in nominal dollars, we’re still not back to those profit whether it’s 20 years later, much less in real dollars. From the late ’90s to mid-teens to mid-2010s, the industry was in decline, partly because of this ripping issue coming to the fore, but partly because they weren’t offering the consumer a product they wanted that was increasingly becoming digital in the consumers buying, but not so much digital in the industry’s mind.

The first attempt by the industry to solve that was iTunes. Essentially said, “Hey, we’re going to try to get past this issue of you having to buy physical media. We understand you want digital and so, we’re going to offer you consistent quality, a good UX, and we’re going to be able to deliver the product to you. Oh, and we understand that you don’t like this bundling idea and so, we’re going to offer you the ability to buy individual songs as opposed to just buying albums.”

And so that certainly helped a little bit with demand, but it didn’t solve this more monetization issue that consumers seem to have, which was why do I need to pay every new piece of content I want to consume? And in fact, if you want to think about the original price when it was like 99 cents on iTunes, it eventually went up from there, but effectively if you think of an album as 14, 15 songs and an album cost 14, $15, all they did is they just divided the number of songs by the price of the album, that was the price point for Apple. The consumer proposition wasn’t fully resolved. It was just a step by the industry in the direction. It also wasn’t great for the industry because you had essentially one distribution channel that controlled the market. And so, it was a powerful model for them.

And so it helped, but we didn’t see a major reaction in terms of return to growth and monetization in the market. That really started to change around 2014, 2015 as streaming came to the market and streaming, to me, solves not only the first point, which is around the UX and the digital experience, but it solves the monetization point too, which is now you have product coming to market where you’re saying, “Hey, not only do you have digital consumption, consistent quality of product, and you can digitally carry around your product, listen to it on demand, but I’m going to give you access to almost every song ever recorded in the Western world for a fixed, all you can eat, platform.”

And so that solves to me, the bigger part of the consumer proposition which again, potentially led to the initial issues that the industry was having in 1999 with people saying, “Hey, why are we having to consume the content you were trying to sell us in the way we are, but on top of that, why are we having to pay for this in the way that we are? I don’t want to listen to the same song 50 times. I want to be able to listen to different songs, but what about being able to do it on demand?”

And so if you want to just think about pricing on a per capita basis, back in 1999 in the US the average consumer spent about $80 a year on music. If you look to today and look at the including promotional price plans that the major streaming companies offer today, it’s about $80 a year. In the Western world and the big markets, we’ve come back a little bit full circle to say, “Hey, we’d like you to consume music at the price points you were comfortable with,” and this is nominal. We haven’t gotten into real yet, but for that price we’re not going to give you a vastly better experience.

The market has reacted. So just to give you an idea, I mean 2014 was really the year where we started to see Spotify was the leader in this industry scale. It was founded in 2006, but it’s first five, 10 years of existence, it was a much smaller business, just trying to A, get the access to the content that it needed and then B, just to build it out. From 2014 to 2021, we’ve gone from a very small percentage of Americans consuming music streaming, to last year, 60% plus of Americans are now consuming music through streaming. So, the markets reacted in a very positive way and good news for the industry in a way that now starts to bring this idea of value and price to music content.

[00:12:11] Patrick: Absolutely amazing history that involves something creative that we all consume probably on a daily or weekly basis and also technology disrupting and making possible a new consumer value proposition. It begs the question, I come at this conversation as a very biased, enormous fan of Spotify, the service and the business and the leadership there. And so, it’s fun to talk about sort of the other side of the equation. You mentioned that prior to, let’s call it 1999, that major music labels, they were sort of vertically integrated, controlled the entire value chain end to end and obviously profits reflected that back in 1999.

We haven’t gotten back there, which is wild to consider because it feels like music has gotten, if anything, more ubiquitous as part of our daily life and TikTok and all these different places, there’s more and more soundtrack to our lives. And so, I’d love to understand what the industry of music labels itself looks like. I promise we’ll get to Universal here not too long from now, but was this and is this an oligopoly? How did those businesses evolve from the heyday of the late ’90s through to how they look today as businesses and how they monetize?

[00:13:18] Arman: We are kind of in an oligopoly today. Over two thirds of the market is controlled by the big three. This is Western music. I’m talking about that part of the market. Just to be clear, 60% of consumption of music in each individual country tends to be local content. So it is important to understand that when we talk about Western music, we’re talking about Western markets and excluding some markets that are emerging and it’s something we should talk about later, which is in the old days, as I mentioned earlier, five markets drove the entire business. We are seeing that start to break down with the emergence of streaming as well. But it is effectively an oligopoly today and it was an industry that really started to consolidate pre-1999, so that you had some major players emerging because there are real scale benefits to this business.

But to your point, they were the gatekeeper. As we just talked about, if you wanted to have the money to record a song before an album before, you needed them in terms of production assistance, you need them in terms of studio time, you needed them to burn your CDs and distribute your CDs and market your products and get access to the retailers, the Targets, the Walmart’s of the world or Tower Records, if we can all remember that, and put your content so it had a prominent place and sell through. To your point, technology fundamentally changed that and so, not only did it change distribution which we’ve been talking about with the Spotify’s of the world, but technology changed other things.

Today, with a decent software program on a laptop and a few hundred dollars of equipment like this mic that I’m talking on now from Amazon, I can produce studio quality sound. I don’t need a label anymore to go produce a high quality soundtrack. Using social media, I can now market my product and I can actually communicate with my fans globally, forget locally. Technology has not only disrupted the distribution side, which is I can push a button now and push it out on streaming platforms to the world over and when we talk about this, there are services that will do that for you for 20 bucks a year or something, but I can actually produce the content. I can actually do some basic marketing and all of that.

So, the model of the major labels certainly has changed, but by the way, after 15 years of decline and pressure, we are now in a world where the major labels continue to be the dominant players in the market and so, a good question is why is that? What is their value today to the consumer and to the artist? Democratization of music has done some things that are scary for the labels. It’s also done some things that are scary for artists.

So in 2000 a report I saw a little while ago, talked about roughly one and a half million songs a year came to market. Last year, 22 million songs were uploaded on Spotify. We have 60,000 songs a day and growing being uploaded to Spotify and Spotify is, like I said, the leading platform, but there are other platforms out there certainly outside the US, in the Western world in particular, but that is a scary proposition for any artist, including the biggest artists because in the old days, yes, you had these gatekeepers that you had to get access to, but once you got there, you didn’t have quite as much competition. And if they featured you, you were what the world listened to. Today, you’re like, “How do I cut through 22 million soundtracks a year so that I get listened to?” And that’s a challenge for the industry and that’s a challenge for artists and that’s a challenge for everyone.

Secondly, your strengths to distribution increasingly get fragmented. So in the early days of streaming Spotify as the leader was the dominant platform, but we’ve seen not only other large leading streaming platforms develop and we can get into that dynamic because that’s a very interesting part of the market as well, but we’ve now started to see distribution channels beyond just streaming develop. So, Spotify’s share of major label digital revenues has actually dropped over the last few years, not grown. That’s because you’re starting to see use cases like Peloton, like TikTok, like Roblox, like all these, to your point that you made earlier Pat, you’re starting to see new use cases emerge for this content to becoming more ubiquitous. And the owners of the IP are starting to generate revenues beyond just the pure streaming.

Now streaming is still the most important digital channel by far, but you’re starting to see these new things emerge. So for an artist, there is a lot more complexity to distributing your product now. It’s not just about what are my CD sales in the various retail channels. It’s that, retail is still a not insignificant part of the market. It’s streaming and by the way, there is a handful of streaming companies depending on which country you go to that dominate those markets that you need access to. And now there’s all these new channels emerging on top of that and so, you need someone who can help you with that. And beyond that, the traditional roles of I’d love to have my content featured on video. I’d love to have my content featured in live and these kinds of things. So, there’s a lot more complexity to it.

Third, global reach, as we talked about, it used to be five markets. So, if I figured out what US, UK, Germany and Japan, what my strategy was, I basically cover the market. That is now starting to break down where we’re starting to see other markets. So, the top five share has gone from about 75% to the high 60s in just the last five years because we’re starting to see monetization of the other channels emerge and so, that’s yet more complexity for these artists to deal with. And then finally, even though the top artists as a group drive the majority of streams, over half the streams come from the top 50 artists, which is not surprising if you think about it. No individual artist over multiple rolling years is a significant part of the market. In any one year, the leading driver of streams in a market is usually low single digits market share and it’s rare that you see over five years the same person headline every year. And so, it’s hard for an individual artist to be able to go to these distribution platforms and say, “Hey, you really need me,” because the distribution platforms are like, “Hey, that’s true. It’s great. You’re awesome. You’re 3% of my streams, and that doesn’t help me a whole lot.” Just step back to the role of the majors today, they still have this traditional VC and production ecosystem role, which they’ve always had. They fund the production of music. They have a big portfolio of superstars that they can say, “Hey, why don’t you guys do a song together,” or they can bring in superstar producers, give you a little bit of an edge as you bring to market. On top of that now, they still have all the guts of the physical. They have this marketing promotion organization globally that we just talked about that’s being set up to deal with this complexity. And perhaps most importantly, they have scale in a way that no one individually has.

So, UMG is the largest global label, major label, and they have a high 30 share of streaming overall. And when you walk into Spotify with a high 30 share versus a two to 3% share, and you’re in the high 30s every year, it’s a different conversation, not only for the label, but for the artists who they’re putting together, and then… Who they’re representing. And then finally is data. Data’s becoming a hugely important aspect of this business. Again, an individual can tie into data streams from various outlets, be it social media, be it streaming, but the ability to capture a full picture, looking at the physical, looking at the global data, looking at every outlet, again, when I have 39, 40% market share in a market, I get data in a way that is very hard for even indie labels to get. We’ve talked to indie labels who will tell you the majors have a data edge in this business.

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

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

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

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

Here are the articles for the week ending 07 November 2021:

1. DAOs: Absorbing the Internet – Mario Gabriele

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

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

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

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

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

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

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

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

What does that mean?

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

Simple enough, right?

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

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

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

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

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

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

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

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

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

David Gardner first touched on how he picks stocks.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4. Let the Market Worry For You – Michael Batnick

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Then Nov. 1 happened.

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

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

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

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

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

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

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

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

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

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

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

A few that stick out from economics:..

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

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

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

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

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

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

Edison’s answer was predictable:

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

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

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

“Greater. Much greater,” he replied.

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

“Along all lines.”

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

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

That was why Edison was so optimistic about innovation.

He explained:

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

He gave some examples:

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

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

This, of course, is exactly what happened.

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

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

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

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

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

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

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

Here are the articles for the week ending 31 October 2021:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. Data as a factor of production – Lilian Li

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

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

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

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

Tambua Health (Kenya)

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

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

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

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

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

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

— Sumon Sadhu, Global Angel Investor

Ejara (Cameroon)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RUBIN: I agree with that.

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

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

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

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

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

7. Internal vs. External Benchmarks – Morgan Housel

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

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

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

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

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

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

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

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

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

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

Maybe he’s got it all figured out.

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

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

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

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

Here are the articles for the week ending 24 October 2021:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2. It Sounds Crazy – Collaborative Fund

So what happens when the world lurches but opinions lag?

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

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

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

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

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

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

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

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

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

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

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

4. Skill and Luck – Michael Batnick

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[00:40:10] Patrick: Sucks.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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