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

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

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

Here are the articles for the week ending 06 March 2022:

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

Stig Brodersen (00:01:12):

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

Maciej Wojtal (00:01:45):

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

Maciej Wojtal (00:02:50):

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

…Maciej Wojtal (00:07:13):

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

…Maciej Wojtal (00:12:43):

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

Maciej Wojtal (00:13:56):

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

Maciej Wojtal (00:14:55):

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

Maciej Wojtal (00:15:39):

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

Maciej Wojtal (00:16:32):

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

Maciej Wojtal (00:17:43):

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

Maciej Wojtal (00:18:34):

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

Maciej Wojtal (00:19:48):

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

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

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

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

I don’t know.

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

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

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

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

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

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

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

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

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

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

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

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

Reynolds: Dominance in what way?

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

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

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

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

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

Reynolds: Larger than NATO?

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

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

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

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

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

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

Reynolds: And you see this now.

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

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

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

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

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

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

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

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

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

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

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

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

Trey Lockerbie (00:06:08):

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

Michael Mauboussin (00:06:33):

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

Michael Mauboussin (00:07:04):

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

Michael Mauboussin (00:07:30):

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

Michael Mauboussin (00:08:07):

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

Michael Mauboussin (00:08:24):

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

Michael Mauboussin (00:08:37):

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

Michael Mauboussin (00:09:00):

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

Michael Mauboussin (00:09:22):

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

Michael Mauboussin (00:09:42):

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

Michael Mauboussin (00:10:16):

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

Michael Mauboussin (00:10:35):

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

…Trey Lockerbie (00:26:35):

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

Michael Mauboussin (00:27:05):

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

Michael Mauboussin (00:27:31):

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

Michael Mauboussin (00:28:06):

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

Michael Mauboussin (00:28:30):

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

Michael Mauboussin (00:29:08):

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

Michael Mauboussin (00:29:41):

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

Michael Mauboussin (00:30:15):

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

Michael Mauboussin (00:30:27):

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

Michael Mauboussin (00:31:04):

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

6. Berkshire Hathaway 2021 Shareholder Letter – Warren Buffett

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In all ways, Paul was a class act.

7. Surprise, Shock, and Uncertainty – Morgan Housel 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The invasion is, of course, unconscionable. Despicable.

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

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

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

Markets are down today. By a decent margin.

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

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

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

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

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

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

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

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

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

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

…I’m (almost) always fully invested.

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

Not in the absence of tough days like today.

But despite these sorts of days.

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

What is Swift?

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

Why is Swift important for countries, including Russia?

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

Why are other countries resisting it?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

7. Makes You Think – Morgan Housel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here are the articles for the week ending 20 February 2022:

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

Preston Pysh  01:18

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

Scott Nations  01:46

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

Stig Brodersen  02:54

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

Scott Nations  03:22

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

Scott Nations  04:37

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

Preston Pysh  06:11

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

Scott Nations  06:19

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

Stig Brodersen  06:57

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

Scott Nations  07:38

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

Stig Brodersen  09:13

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

Scott Nations  09:34

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let me explain… 🧵 (1/32)

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

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

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

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

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

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

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

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

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

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

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

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

6. Owning the funnel – Lillian Li

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

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

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

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

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

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

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

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

What aren’t people talking about enough?

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

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

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

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

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

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

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

Here are the articles for the week ending 13 February 2022:

1. The Reason Putin Would Risk War – Anne Applebaum

But of all the questions that repeatedly arise about a possible Russian invasion of Ukraine, the one that gets the least satisfactory answers is this one: Why?

Why would Russia’s president, Vladimir Putin, attack a neighboring country that has not provoked him? Why would he risk the blood of his own soldiers? Why would he risk sanctions, and perhaps an economic crisis, as a result? And if he is not really willing to risk these things, then why is he playing this elaborate game?…

…But although Putin missed the euphoria of the ’80s, he certainly took full part in the orgy of greed that gripped Russia in the ’90s. Having weathered the trauma of the Berlin Wall, Putin returned to the Soviet Union and joined his former colleagues in a massive looting of the Soviet state. With the assistance of Russian organized crime as well as the amoral international offshore-money-laundering industry, some of the former Soviet nomenklatura stole assets, took the money out of the country, hid it abroad, and then brought the cash back and used it to buy more assets. Wealth accumulated; a power struggle followed. Some of the original oligarchs landed in prison or exile. Eventually Putin wound up as the top billionaire among all the other billionaires—or at least the one who controls the secret police.

This position makes Putin simultaneously very strong and very weak, a paradox that many Americans and Europeans find hard to understand. He is strong, of course, because he controls so many levers of Russia’s society and economy. Try to imagine an American president who controlled not only the executive branch—including the FBI, CIA, and NSA—but also Congress and the judiciary; The New York Times, The Wall Street Journal, The Dallas Morning News, and all of the other newspapers; and all major businesses, including Exxon, Apple, Google, and General Motors.

Putin’s control comes without legal limits. He and the people around him operate without checks and balances, without ethics rules, without transparency of any kind. They determine who can be a candidate in elections, and who is allowed to speak in public. They can make decisions from one day to the next—sending troops to the Ukrainian border, for example—after consulting no one and taking no advice. When Putin contemplates an invasion, he does not have to consider the interest of Russian businesses or consumers who might suffer from economic sanctions. He doesn’t have to take into account the families of Russian soldiers who might die in a conflict that they don’t want. They have no choice, and no voice.

And yet at the same time, Putin’s position is extremely precarious. Despite all of that power and all of that money, despite total control over the information space and total domination of the political space, Putin must know, at some level, that he is an illegitimate leader. He has never won a fair election, and he has never campaigned in a contest that he could lose. He knows that the political system he helped create is profoundly unfair, that his regime not only runs the country but owns it, making economic and foreign-policy decisions that are designed to benefit the companies from which he and his inner circle personally profit. He knows that the institutions of the state exist not to serve the Russian people, but to steal from them. He knows that this system works very well for a few rich people, but very badly for everyone else. He knows, in other words, that one day, prodemocracy activists of the kind he saw in Dresden might come for him too. 

2. Classic 06: Elon Musk – Stig Brodersen and Preston Pysh

Preston Pysh  14:41

One of the key points that I felt was really important to highlight his childhood was his desire to read. They talked about in the book how he had pretty much gone to the local public library and almost had read every single book inside of that library. They described hs characteristic, “If you saw Elon Musk at any given point in time, he probably had a book in his hand, and he was reading it.” And I think that that’s really important for people to understand and to know that a guy like Elon Musk doesn’t become as intelligent as he is. And we’ll get into some of this stuff later on in the discussion here.

15:15

But the one takeaway that I had is this guy is brilliant. He is absolutely a wicked smart dude. And I attribute most of that to the fact that he is a total learning machine. And that’s such a common thread that we’ve found with all these billionaires that we study. They are total learning machines. They are learning something every single day. They’re learning something new. They’re studying things that might not even seem like they’re correlated. And we definitely got that at a very extreme level with Elon Musk, and I find that to be extremely important for people to understand…

...Preston Pysh  24:58

It was around 200 million, I want to say. From the sale of PayPal off to eBay, based on the equity that he owned, he had a very large chunk of money at this point. He moves to Los Angeles, and he really wants to get into the space industry. And he has this idea to start his own space company. There’s some time in between here where he’s living in LA and really trying to figure out what is it that he really wants to do in space. And he’s in these different Mars societies. And he’s donating money to these research stations and things like that.

But in the end, he decides that he wants to start his own space rocket company and really go into the private space industry. Now, where I think the story was really awesome in the book. He talks about how he wants to go over to Russia and buy some of their rockets to start his own space company. So he goes over to Russia and he just has a really bad visit with them. And they really didn’t take him seriously because he’s like 29 years old. He’s still in his 20s at this point. He goes over to Russia and he’s like, “Yeah, I want to buy some of your rockets.” And they look at him like he’s absolutely crazy and weren’t really playing ball really with him.

26:15

So on the flight back, he went over there with some of his close friends that he was wanting to start this space business with… And on the way back, he pulls out his laptop computer and has like all the components listed for basically building his own rocket. And he looks at his friends and he says, “We don’t need to buy this rocket from Russia. Let’s just do our own. Let’s just make our own.” And I think his buddies were looking at him like, “This guy’s going off the deep end.” He’s in these Mars society wanting to the initial thought was let’s put a plant on Mars. So we can say that we put life on Mars. And just this discussion in the book was absolutely fascinating. I think anybody who would read this part would really get a kick out of it.

But anyway, Elon was not in the least bit deterred by how crazy it might be to start his own rocket company and create his own space company from the ground up. I mean, literally, from the ground up and not be buying any of the components from anybody. He’s just like, “We’ll make it all and we’ll just do it.”

Stig Brodersen  27:20

I think it was just so much fun because what people don’t realize that if they listen to the book is that he has a very detailed plan of how to colonize Mars, like, “This year, there should be so many inhabitants. And this year, we should fly this out to Mars.” And if this came from anyone else than Elon Musk, I don’t know… The FBI will probably arrest that guy because he thought he was crazy. He is one that would harm other people. I don’t know. He just sounds so crazy.

But the interesting thing is that all of these things and we were talking about Tesla, and later on, but all these things that he said that would happen, actually happened. I mean, I can see why people would think he would be crazy with his plans about building a rocket because no one does that. Usually, you have countries doing this and it would take decades for countries to do it. But he just flies out to Russia with a friend of his to buy rockets. And when they said no, he just built his own. And he just seems so unrealistic that’s even possible.

Preston Pysh  28:23

You know, the thing I didn’t know before reading this book is I just thought the mission of SpaceX was really to pump all these private satellites into space and be profitable and bid on government work and stuff like that. But that wasn’t it. The mission of SpaceX is to colonize Mars. And I mean, they say that in a very straight face manner. Like that’s the thing that I think is so crazy. When I read that in the book, and I heard that for the first time, I was pretty much flabbergasted like, “Oh, that that was probably not right.” And then it keeps coming back up and keeps coming up. And I’m telling you, folks, the mission of SpaceX is to colonize Mars and to put human beings in colonies on Mars. That’s what Elon is wanting to do.

In fact, that mission statement is so strong for him, that he will not take the company public until that mission is pretty much assured. He will not take the company public. So that’s just totally… I find that to be total insanity. Okay, I really do I find that to be totally nuts because I just don’t think that you would find too many people in this world that would want to do that. Maybe I’m wrong. Maybe I’m out in the left field, but I don’t think you’d find too many people that would want to do that. Let alone would have the money to pay to go do that and live in those conditions. I just think that’d be really dismal. But what are your thoughts on that? Is he out to launch?

3. NZS Capital Part II: What’s Going on in Today’s Markets? (Plus more Semiconductors!) – Ben Gilbert, David Rosenthal, Brad Slingerland, and Jon Bathgate

David: Speaking of, we were talking before the episode, the reason we wanted to do this with you guys is from the first episode we did with NZS, your whole way of using complexity theory to think about investing in companies and markets is fascinating. I love it. So many of our listeners loved it and we thought because it’s so different from everything else we’ve heard. Let’s talk to you guys about what is going on right now here in late January 2022 as markets are different than they were a month ago.

Ben: Let me tee up with what David means by right now. We’re recording this at 9:00 AM Pacific on January 27. Right now, the S&P year to date is down about 9.5%, probably rebounded a little bit this morning, and the NASDAQ, which everyone knows is more tech-focused, down about 15%. Quite a start to 2022 after a hell of a run in 2020 and 2021.

By the time you hear this, who knows because it seems like every cycle in every part of the business has gotten shorter and shorter, but that is where we are today. Brad, maybe let’s start with you. This is an enormous question so you can choose to answer however you’d like, but what is going on and how did we get here?

Brad: I want to go all the way back a million years in time, but we probably couldn’t.

David: This is Acquired.

Brad: Around the evolution of human psychology. Just to not go quite back that far. I mean, obviously, we had the pandemic started, we’re coming up on two years on that. There was this initial fear that Jon references, I think everybody probably remembers, it does feel like a lifetime ago. Then this just unleashing of incredible coordinated global economic stimulus, both fiscal and monetary in form of low rates here in the US, literally checks being sent to people.

There is this period of uncertainty in 2020 that just exploded into this period of spending in 2021. You look at consumer spending 2021 over 2019 and it’s like probably 18% more I think is the recent Commerce Department data for the US. That’s […] 2020 but versus pre-pandemic levels, there’s just all this money. The way we’re spending it, where we’ve spent it as consumers has been in different places. Instead of going on vacation, we’ve been fixing up our houses, so it’s caused all this sort of acute demand for a lot of things and then not demand for these other things.

The economy just can’t turn. We are so global. We’ve been on the sort of 30-year globalization trend where the supply chain is getting more spread out, and in a lot of ways more fragile and you just can’t get your hands on things. This huge burst in demand last year caused this big pickup in inflation. I think one of the latest numbers is 6% or 7%, and some of it is transitory, some of it is maybe a little bit structural and we can come back to that.

Now the governments are saying, okay, well, we gave everybody way too much money. We gave way too much stimulus out there in the economy, and we’re going to reel it back in. The main tool they have to do that is to raise interest rates. They’ve signaled raising interest rates—depending on how you want to read the tea leaves—maybe four times.

Ben: When they’re raising interest rates, I think I haven’t seen, obviously they’ve been taking on more and more on their balance sheet every month. They’ve been buying hundreds of billions of dollars in assets and I think that’s tapering. Have they ever announced any plan to start shrinking the balance sheet of the Fed along with these interest rate raises?

Brad: I think that ultimately, the Fed would like to stop the experiment of running a massive balance sheet. Suddenly, there are a lot of questions on certainty around how that plays out. You end up with this scenario where no rates are going up and then there’s this tension in the stock market between people who think this is appropriate, inflation is the root of all evil, it’s structural, and it’s here to last and we’ve got to just kill it.

The people who think well, actually, the economy’s quite fragile. We’re still in a pandemic, people are still sick. There’s a lot of things going on. If we all of a sudden just hoover all of the money back out as quickly as possible, then that’s probably as bad as what the situation was, to begin with. The market always wants to find some level of homeostasis.

One of the things we learned from complex adaptive systems is to really think biologically rather than computationally, which is the way a lot of market participants think. If we think about homeostasis, here in our body, we’re trying to constantly maintain our temperature right around 98.6 degrees, we’re trying to make sure we’re not hungry, and then we get enough sleep at night. All these things that our bodies regulate often without us knowing.

The market’s also trying to do this. It’s trying to come to a consensus on what do we think interest rates are going to be a year from now, 5 years from now, or 10 years from now? What do we think inflation is going to be? What do we think profit margins are going to be? What do we think is going to happen in emerging market growth versus developed market growth?

Most of the time, you can never reach equilibrium or homeostasis in a complex adaptive system. You can in a biological closed system like a human body, but most of the time, it’s constantly being perturbed. This idea of disequilibrium is the equilibrium is a concept from Brian Arthur, who sort of wrote a lot of the great texts, complexity economics, and wrote the original paper on compounding and network effects.

David: Increasing returns, right?

Brad: Sorry, increasing returns not network effects. The market, in particular right now, is struggling to find this homeostasis point, these extreme bouts of volatility up and down. The one thing the market needs to come to some sort of agreement on is what is the discount rate? What are interest rates? What should people use as their hurdle rate for the next 1, 3, 5, 10 years? Right now, there are two camps that are disagreeing on it. I think this creates tension, this sort of bouncing back and forth between these two equilibriums in the market.

That started in March of 2021, actually. It was the first time rates started to go up, growth stock started to come down. You can just see this sort of anti-correlation over the last 10 months now of rates going up, growth stocks coming down, and then we’re in this extreme phase right now.

It’s interesting if you look back, I’ve been through a few rate hike cycles in the market over the last 24 years now, I guess. There does tend to be this initial difficulty in finding an equilibrium fear over high growth, high multiple stocks, stocks that may not have current earnings, but people are banking on earnings in the future.

Then what happens is people tend to gravitate back towards the growth assets because they are the assets that are going to create the most value long term. We’re in this initial period of finding equilibrium or something as close to equilibrium as we can get, and then I would expect this to be no different from prior cycles where unless there’s something structural that we’re not aware of yet, people would be gravitating back towards growth assets.

Ben: As another way to put that—just to make sure I’m understanding it—for these companies without earnings but have high growth that got tremendous multiple expansion by public market investors over the last several years, that was the first place where investors got scared and were selling and created all this downward compression on the multiples so these prices dropped like crazy if this high growth, currently unprofitable, or currently not cash generating tech companies.

Those get sort of whacked the hardest first, but you’re saying ultimately if that’s where the growth is in terms of the companies that will become large and profitable in the future, then that’s a place also where there’s flight back there after the exhale of, okay, we’re safe.

Brad: Yeah, that tends to be what happens. One of the things we learned from complex adaptive systems is we can’t predict the future. I’m always sort of on thin ice when I say this happened in the past and so it might happen in the future. I don’t see any particular reason why at the right equilibrium point, these growth assets aren’t, again, more attractive.

Everybody should have their own sort of way of managing a portfolio of investments, whether it’s in public markets, real estate, or whatever you do. What we do is we balance two types of investments we call resilience and optionality and we’re able to shift back and forth. In times of volatility like today, we like to say, and I’m quoting Brinton here but we don’t see volatility as risk, we view it as an opportunity.

Come back to whatever the basics of your own investment strategy are, it’s a very personal thing for everybody and say, what are the two different types of businesses that I own and where should I be shifting the portfolio today? For us that would be, as the market is volatile, moving out are more resilient growth businesses into our more optional growth businesses.

4. Joy & Competitiveness & Culture – Ravi Gupta

Talking about culture is easy. Living it is hard. But I think at least part of the reason it’s so hard to live is because people often don’t take the time to rigorously define it.

Before we get to some thoughts about how you might go about defining your culture, we should talk about why culture is important.3

Earlier in my career, I thought young people talked about strategy and execution being important and old people talked about culture being important. I actually think they are both true. It’s just a timing difference. The thing that matters right now is the strategy and the execution. The thing that matters in the long term is the people who are setting that strategy and driving that execution. In my mind, the culture determines who self-selects to be those people over the long-term. So if you care about the people who will make the strategy and execution decisions in the moment beyond right now, you should care about culture.

I think of culture as the unwritten contract with your team. Here’s what matters to us. Here’s what will endure even if everything else changes. You should only put things in it that you will honor no matter what. With that in mind, I think it makes sense to only have one or two of these things.

5. How Do You Solve A Problem Like Inflation? – Stephanie Kelton

The second chapter of my book, The Deficit Myth, is titled ‘Think of Inflation.’ From the very beginning, MMT has rejected the conventional approach to fiscal sustainability. While mainstream economists were warning of a looming debt crisis here in America, MMT economists were explaining that the relevant constraint facing currency-issuing governments (like the US, the UK, or Japan) is inflation, not bond vigilantes or insolvency.1

It’s been a long time since the world’s major economies had to wrestle with the problem of high inflation. For most of the last decade—and longer in Japan’s case—central banks have been struggling to push inflation higher not lower.

Now that inflation is here—and running well above target in the US, the UK, Canada, across the Euro Area, and beyond—a fiery debate has erupted over what sent prices soaring and what should be done to rein them back in.

Some blame monetary policy—i.e. the Federal Reserve—for stoking the fire by holding interest rates too low for too long and for ‘pumping too much liquidity’ into the system via the Fed’s massive bond-buying program. Others mainly fault Congress and the White House—i.e. fiscal policy—for sending out too many checks to too many people for too many months, sparking an “excess aggregate demand” problem. Occasionally, someone will even assert that the run-up in inflation is the natural consequence of having embarked on an “MMT experiment,” by which they usually mean the combination of quantitative easing (QE) and massive deficit spending.

On one level, I think it’s fair to say that policymakers did experiment with MMT. But I’m not talking about about QE, which was never championed by MMT economists. What I mean is that the fiscal response to the pandemic differed in important ways from what was done in the wake of the Great Recession, when people like Larry Summers and Jason Furman were helping to shape the Obama administration’s (inadequate) economic policy. Back then, both men pushed hard for deficit reduction, with Furman touting a White House budget that would “show that we can live within our means” by bringing “spending down to the lowest share of the economy since Eisenhower was president.” He delivered those remarks in February 2011, when the unemployment rate (U3) stood at 9 percent and headline inflation (CPI-U) was running at just 2.1 percent.

But this time around, it looked like Congress—Democrats and Republicans—had grown more comfortable with the idea of allowing fiscal deficits to cushion the downturn and sustain the economic recovery. And it was the robust fiscal response that came out of the late-Trump/early-Biden administrations that reflected a shift toward a more enlightened understanding of our monetary system and the spending capacities of the federal government—i.e. MMT. Instead of cowering in fear of debt and deficits, as it did during the Obama years, Congress went big. Not once, not twice, but repeatedly, committing some $5 trillion in fiscal support in the first year of the pandemic alone…

…Alongside the debate over what caused the current bout of high inflation is a debate about how to resolve the problem. A number of people have asked me for the MMT solution. There isn’t one. Let me explain.

Before the pandemic, when inflation was consistently running below 2 percent, I was often asked what MMT would tell us to do if inflation ever became a problem. I have probably answered that question a hundred times, and I always try to separate my response into two parts.

The first part of the answer reminds people that the goal is to fend off inflation before it becomes a problem—i.e. the MMT framework aims to promote price stability. The second part of the answer addresses the question of how to deal with inflation after prices begin to accelerate.

Here are my favorite pre-emptive measures. First, instead of relying on a pool of unemployed workers (NAIRU) to keep inflation in check, MMT relies on a buffer stock of employed workers—and a wage anchor—to promote price stability. This has always been the first line of defense against inflation in the MMT framework. The idea is to create a new automatic stabilizer that triggers a powerful counter-cyclical response to changing economic conditions.4 Instead of allowing millions of people to fall into unemployment each time the economy falters, workers could transition into a public service job that replaces some or all of their lost income. The program enhances price stability by maintaining a supply of employable labor from which employers can hire (at a small premium) as conditions improve. The program facilitates bigger deficits (or smaller surpluses) when the economy softens and smaller deficits (or larger surpluses) as demand strengthens.5

The other way to fend off inflationary pressures before they emerge is to change the way Congress currently evaluates proposed legislation. Instead of asking the Congressional Budget Office (CBO) to assess the budgetary impacts of a proposed legislation, lawmakers should seek to identify—and mitigate— any inflationary pressures before voting to authorize the spending (or tax cuts). As MMT economist Scott Fullwiler put it, this is about replacing the budget constraint with an inflation constraint.

6. Twitter thread on counter-intuitive investing truths – Max Koh

I’ve received a ton of crappy investing advice over the years. And I see even more here on Twitter. What I’m about to say will piss off some people. Don’t read if you’re easily agitated. Still here? Then grab a whiskey and here’s 25 investing “truths” that just ain’t so:

1. Picking individual stocks isn’t for everyone. 90% of people lack the temperament to be good investors. If seeing your net worth get eroded by 30% or more scares you… Then this is not the game you’re built for. It’ll cause you more pain than joy.  And you won’t last long

2. Diversification isn’t for idiots. People who diversify are those who acknowledge that they don’t know what the future holds. It’s healthy to have self doubt. The real idiot is the one who goes all in purely because you spent months deep diving the business.

3. Concentration isn’t an action. It’s an outcome. Concentration is mostly a result of letting your winners run. It’s an outcome that comes from great performance. It’s NOT something you do from day 1 based purely on your own blind faith (or ignorance)…

…9. A company can be a better buy at $200 instead of $20. When companies are much smaller, they’re less proven. But as they execute and their revenues grow, their market cap grows too. So a company can be a safer bet when it’s bigger. It’s all about the execution…

…12. Management is the most important moat of all. In the end, almost everything can and will be copied. What endures will be the culture and quality of people running the ship. That is much harder to replicate. Speaking of management… Find great leaders and teams who impress you with their character and values. You often find positive surprises when you invest in good quality managers. They also help you sleep better at night when your stock drops 50%.

13. Management is important, but execution is king. The quality of the people matters. But make sure the numbers align with the narrative. For great companies with great leaders, you should see a consistent trend in their key metrics. (continued…) Other than some hiccups along the way… The overall direction of the business and metrics should be moving up. Otherwise, something is amiss. I get suspicious if the management says a lot but numbers are taking a long time to show. Execution is everything…

…17. Everyone talks about product-market fit. Nobody talks about investor-portfolio fit. Even if you own the best companies, you could still lose $$. Because your portfolio may not be constructed in a way that suits your unique personality. (continued…) To endure drawdowns and hold through… Your portfolio must fit your specific risk profile and time horizon. And you only learn whether your portfolio is suitable for you during  corrections. The market is an expensive place to find out who you really are.

7. The Attention Span. “Racehorses and Psychopaths.” – Tom Morgan

Cognitive biases are not a particularly interesting topic to me. Just learning about biases doesn’t seem to change people’s behavior much. But I was fascinated by an excellent recent review of Julia Galef’s new book The Scout Mindset (below). Scott Siskind writes:

“Of the fifty-odd biases discovered by Kahneman, Tversky, and their successors, forty-nine are cute quirks, and one is destroying civilization. This last one is confirmation bias – our tendency to interpret evidence as confirming our pre-existing beliefs instead of changing our minds.”

Why is confirmation bias “destroying civilization?” I think it’s super helpful to step back for a second and examine this idea through the universal framework of map and territory. Consciousness exists on a spectrum from pure abstraction (map) to pure engagement (territory).

Galef’s Scout Mindset sets out to remove information to provide a clearer view of the territory. Soldier Mindset just adds more confirmations to make the map more elaborate, regardless of its accuracy.

The really, really dark side here is that the stronger an abstraction, often an outright lie, the more motivating it can be for tribal behavior. The soldier metaphor is doubly-appropriate. Taken to its most horrifying extreme, war and genocide is facilitated by abstraction. Beyond direct kinship bonds, we have developed common coordinating fictions like nationalities. We went from being able to mobilize a tribe of hundreds, to nations of millions. How many people do you personally think you’d be able to convince to risk their life for you? As the author of Sapiens, Yuval Noah Harari, puts it: “you could never convince a monkey to give you a banana by promising him limitless bananas after death in monkey heaven.” A motivating abstraction has to take over at the cognitive limits of empathy, beyond who you can really know and love personally. And yet we can compete and kill more easily by stripping universal humanity from our enemies by turning them into an out-group.

The single passage I have thought of most as I ponder the cultural events of the last two years, and last two thousand years, is from Karen Stenner:

“All the available evidence indicates that exposure to difference, talking about difference, and applauding difference – the hallmarks of liberal democracy – are the surest ways to aggravate those who are innately intolerant, and to guarantee the increased expression of their predispositions in manifestly intolerant attitudes and behaviours. Paradoxically, then, it would seem that we can best limit intolerance of difference by parading, talking about, and applauding our sameness.”

Social movements that create more in-groups are less likely to succeed than ones that emphasize our universal humanity. There’s a remarkable study where participants were shown a video of a hand being stabbed, while their empathic response was measured by fMRI. They found that the empathic response was larger when participants viewed a painful event occurring to a hand labeled with their own in-group, rather than a hand labeled with a different out-group. All it took was a single word emphasizing difference to change how people felt about others experiencing pain.

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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 PayPal and Tesla. Holdings are subject to change at any time.