We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.
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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 01 May 2022:
1. Henry Ward – Transforming Private Markets – Patrick O’Shaughnessy and Henry Ward
[00:15:45] Patrick: I remember reading about CartaX when it was first announced or posted online several years ago, and thinking, “Wow, what an interesting way to sit on top of the cap table infrastructure that you’ve built to now provide a real secondary exchange for private markets, and the possibilities that might unlock.” How would you grade yourself so far? Maybe describe CartaX. I think I kind of just have described it in its basic terms, but I’ll let you describe it how you see it. And I’d love to hear how you think it’s gone. Are you satisfied with the scale of it? What have been the lessons or the challenges you’ve learned building something notoriously hard to build? Because a huge defacto one doesn’t exist like the NASDAQ or the NYSE or something like this for this market.
[00:16:25] Henry: We’re definitely in the new market creation business. One question to ask is how you define a new market. And our definition is anything where you’ve made a way for money to exchange hands that hasn’t happened before. One example of that is having cap tables. We weren’t the first cap table provider. We were the first cap table provider to charge companies. And as an example, in CartaX we’re the first exchange where we’re charging buyers and sellers commissions to trade and provide crossing trades for them as a service. These things are really hard to get going. But when they go, they accelerate very, very quickly. If I were to grade ourselves, I’d give us a B minus on CartaX. I think we’re attracting a lot of supply, and now we’re building up the demand side of the equation. All marketplaces start this way. So if you’re an investor looking at marketplace companies, all marketplaces start with this thesis that there’s hidden embedded demand that you can’t see. And then the marketplace has somehow figured out how to unlock supply.
So if you look at Airbnb, there’s embedded demand that people wanted to sleep on people’s couches, and then Airbnb figured out how to unlock that supply and get people to do it. And the same for us. I think we have figured out how to unlock supply. I think companies are coming to us at scale. We run 20 liquidity events a month these days to unlock supply and create liquidity on their cap tables. The challenge now is, as supply starts to rise, every marketplace has this question. How do you then have demand rise as well? And it’s always that balancing act. And I think we’re in the demand side of this equation, how do we attract more investors to CartaX so that they can start buying into these pre-IPO liquidity trades?…
...[00:25:26] Patrick: How do you make those kinds of decisions faced with an infrastructure that, like you said gives you optionality, enables you to build other stuff? How do you decide what’s a good idea and what’s not? So I’ll leave it at that. I mean, it just seems like when there’s lots of options. Sometimes it’s very difficult to know what to focus on. So as a manager of a business now abstracting away from the specific problems you’re solving, what do you think are the right ways for other entrepreneurs to think about that problem of where to focus?
[00:25:53] Henry: I took something from our friend, Mark Andreessen where he talked to me about Andreessen Horowitz. There’s no bad ideas. It’s only timing. And if you have that belief system, he’ll walk you through this history of ideas that happened that were before their time, but then actually ended up being a good idea. I can do it for [Webend] versus Instacart, but the Andreessen people can do it for the like last 150 years. So we’ve taken that. What’s so great about that model is the question isn’t what’s a good idea, what’s a bad idea. The question to it comes is now the time for this idea. And that’s such a different way to think about investment decisions. I love that framework. We’re not investors, we’re operators. So we have our own framework, which is there’s no bad ideas, the question is which aperture you look at for this idea. So if you’re looking at an aperture saying, “Hey, we’re trying to solve this one problem for a user. It feels like we should do this for this user.” If that aperture is correct, when you’re a product manager focused on your user and the user wants feature X, we should do that. But then if you look at it through a different aperture, let’s say what is core to our mission over the next 10 years that feature may not actually be important to us. And we’re both right.
So the question is which aperture do we look through? I’ll give you one really good example. If you talk to some of our CEOs that are customers, some of them don’t like to give vesting email reminders to employees. This is a really weird one. But they don’t like it because they don’t employees worried about equity. It’s also sometimes they don’t want employees if they leave to know that their options can get exercised. There’s some weird dynamics that happen with some companies and investing email reminders for employees. So if you look through the aperture of what do I do to make my customer happy? You might say, “We should turn that off if a customer wants that.” If you look at through the aperture of our goal is to normalize equity as a means of compensation and educate the world about equity, we absolutely would send everybody vesting reminders and teach them about how important it is that they exercise their options. And both are correct answers. The question is which aperture do we want to look through today? And that’s how we look at everything is what’s the right aperture to look through a decision and then make a decision through aperture? And my job as a CEO is not to opine on yes, no versus good ideas, bad ideas, my job is to help the executive team to figure out what’s the right aperture for decision-making.
[00:28:07] Patrick: There’s this great idea, that idea of 1 of N versus N of 1 companies that I think I first became enamored with through David Haber, another mutual friend of ours, also at Andreessen. And I think he might have credited you with this model. Maybe talk about that concept a little bit and whether it also applies to this product, this decision framework, not just at the company level, but down at the feature level.
[00:28:28] Henry: I am a huge fan of the 1 of N versus N of 1 framework. And I just have to give credit, I probably talk about it more than anybody else because I’m such a disciple, but this actually came from Arjun at Tribe Capital who you may know. He told me this framework and I just ran with it. So an N of 1 business is one where the market structure allows for a monopolistic effect where there can be one and one winner. The N of 1 winner. A one event market is one where there’s lots of competition. You almost think of it like Peter Thiel’s competition is for losers, right? He has a very black and white view of the world. There’s either perfect competition or there’s monopoly and there’s nothing in between. And we subscribe to that view. Our job is to never enter 1 of N markets. Never enter anything where the end state of this marketplace has to be one with multiple competitors and only enter markets where we have a real chance at becoming the N of 1 player. And that actually makes it tricky because when you enter new markets to be an N of 1 player, by definition, you have to go to relatively small markets because large markets are really hard to become an N of 1 player. It takes a lot of time. You have to have the scale to take over these N of 1 markets. Like Amazon is still not N of 1, but boy, are they heading that direction. That is the balancing act where the investors that invest in Carta, the criticism might be, “Hey, they only go after small markets.” The bullish case is, “Well, hey, but they win all these markets. Each time they win a new market, it gives them optionality to build on top of that market and go into something bigger.” And so far we’ve been able to execute against that strategy.
[00:30:02] Patrick: What are some of the key principles of how you run the company that map back onto that idea of N of 1 market company, whatever? What is different do you think about running a company that, that explicitly is the goal or the strategy is to just be in markets that they can dominate?
[00:30:19] Henry: Yeah. I used to have this conversation a lot with candidates that I was trying to recruit. Back in the early days, especially, I’d compete against Instacart and I’d compete against MongoDB, and Gusto, and payroll companies and house tech companies. What I would always tell them is I would say, “Hey…” When I had a candidate that had an offer from a payroll type company and an offer from me and they were trying to figure out the two, and I would say to them, “Hey, there’s two types of businesses that you can pick from. One is a business like this payroll company we’re competing with that has line of sight to…” At that time, a billion in revenue seems crazy. Now, I would say 10 billion in revenue. But they had a line of sight to a billion in revenue when they were a series A or B company. The question was, could they out execute? There’s a billion dollars easily available in TAM for a payroll company or for a database company. The question is can they just execute better than incumbents and get there and build a better, faster, cheaper product?
For us, we’ve never seen line of sight to a billion in revenue or 10 billion in revenue in any one product line. We’re like that company that sort of has a machete and we’re hacking our way through a foggy jungle, and we’re building the path as we go. The first type of company, I would call an execution company. They know exactly what to do. The question is, can they organize a team and execute against that plan better than anybody else? For us, we don’t know what to do. We have to keep innovating and finding new markets because in any existing market, we’re going to run out of oxygen and we’ve raised venture capital. We’ve raised too much money to just flatline. And so we constantly have to innovate and find new paths. And the question is which company do you want to work for? High performance execution team or an innovation discovery company where we’re constantly beating our own path? And for some employees, it was better to go to an execution company. I would say everybody that comes to Carta is here for the journey, not the destination, because we don’t know what the destination is.
[00:32:11] Patrick: Let’s just imagine there was two classes of five amazing job candidates, a designer and engineer, whatever the lineup was. We could run a sliding doors experiment. So that five-person group went to payroll company in one world and they went to Carta in another world. In what ways are those two paths in the actual experience of doing the work the most different? I understand the concept, but in practice, like in literal terms, what is different about those two paths or those two kinds of companies and therefore those kinds of employees and how they operate?
[00:32:41] Henry: I would say that the experience of the employee is a top down versus bottoms up management style. If you’re an execution company like a database company or a payroll company, they know exactly what to do. The roadmap is defined from the top. Execution is measured and progress measured, OKRs, all this kind of stuff. So they’re given the thing. Here’s what you got to go do, and you just have to go do it. It’s great and you’ll do it really well, and all that kind of stuff. I think employees that come out of those companies become great executives. Because how do you become a great executive? I call it deterministic management. You know exactly what to do. You have a roadmap, you have a plan, and your job is to operationalize that plan. And they become great executives. If you work for a company like ours, we have no idea what to do. It’s very bottoms up. We intentionally organize that the best ideas come from the bottom. And my job is not to actually make decisions on what to do because I’m not close enough to the customer, to the markets, to all these things. My job is to give people the framework that they make the decisions on what to do.
So for example my framework is only N of 1 markets. We only do new market creations, so we’re not going to try to invade an existing market, we’re going to find a way for money to exchange hands that hasn’t happened before and make that true. I give all the frameworks for how to make these decisions, but you really push decision-making to the bottom. And it feels like for employees is it’s scrappy, it’s exciting. It’s also incredibly chaotic and they have no idea what’s going on half the time. And I would say the best thing, if you want to be a founder, Carta is the right place to do this. If you want to be an executive, this is a terrible place to learn to be an executive. But if you want to be a founder, this is how you do startups. We have the Carta cartel, we affectionately call it, early stage employees that have left to do startups, and there’s a dozen of them already. We breed founders. That’s what we do here.
[00:34:20] Patrick: What do you do to make that so true? What is the empowerment that’s happening? What is being pushed down, I guess, to that bottom that allows that experience to happen for them, deliberately from you and leadership team?
[00:34:33] Henry: A big part of it is roadmaps and decision making is pushed all the way down to the people that matter. So we’re very good at allowing experimentation to take place. I’ll give you a very practical example of this, which is really hard, hard to figure out. Let’s say a director level or senior director, something, their project tried a new product or new thing, and it didn’t work out. And now their performance review is coming up. We do a four point rating. Four is the best, one is the worst. Do you give them a two because it didn’t work out or do you give them a four because they tried. That question is it seems so simple, but it’s such a fundamental question because if you give them a two, nobody will ever take risks because they’ll only do things they know that work. And if you give them a four, people will want to take risks because they know that they’ll get rewarded for that effort. We’re a company that gives fours. Most companies won’t. If you ask most companies, what do you do when somebody tries something and they fail at it? They’ll say, “Well, we’re an outcome-based company. Results matter.” We’re an input based company, not an output based company. The results will be the results. What we question is do we do it the right way?…
…[00:45:02] Patrick: Maybe say a word of what you’ve learned about… You’ve given a lot of these interesting management concepts. I’d love any interesting, similar concepts on product you’ve got now beyond cap table, a number of different things that you do for your customer. What does great product, especially in the world of software, mean to you? What are the characteristics of a great product for Carta, but even more generally?
[00:45:22] Henry: There’s this great image I shared with all my product managers. I’ll try to describe it, hopefully, in words. There’s two styles of product management if you want to build a car and the first one was this, iteration of how to get to a car in pieces. You start with a chassis and then you start with a wheels and then you start with a steering wheel and then you put in a steering wheel and you put in seats and at the end of this, you get a car. Then the other style of product management was you start with a skateboard and then a scooter. Then you put a stick on it, it becomes a scooter. And then it becomes an electric scooter. And then it becomes a go-kart and then you get to a car. I love that one because what’s so powerful about that is, the first version of this product has utility in the second style, but not in the first. And so we talk a lot about… Everybody wants to build a car. We know that’s what we want to do, but that’s not the hard part in product management. The hard part in product management is the path to the car and how do you provide utility along the way? This is one of the things that big companies get wrong a lot, because they have so many resources. They’re like, “We’ll just go straight to the car. We’ll build a chassis, we’ll build this.”
We have executives that know how to operationalize this. We have a roadmap and a plan, but if you’re in a discovery company where you’re not sure what this car is going to look like, you have to start with utility early. And this is why it works really well for founder-led companies, because that’s what venture is like. Nobody gave me a billion dollars to start Carta. I started with 200K and then a million and a half. And each way I had to show utility, I had to show something that at that stage of the company was sustainable, we could build off of, and big companies don’t have that. And so they do these massive projects that often fail three years in where we instill that deeply into our product teams, even now we’re 2000 employees, that your job is to build a scooter first and not the chassis.
[00:47:10] Patrick: I love that. It reminds me of one of my favorite books by this guy, John Gall called The Systems Bible. And one of the principles in The Systems Bible is there’s no such thing as a complex system that’s just designed complex and implemented. Every complex system that works evolved from a simple system that worked first, and that really makes me think of that skateboard-scooter-car way of thinking about product. Same question for teams. Define what a great team looks like, especially given that it sounds like you are really pushing the fate of the company down onto relatively small teams at the edge of the business, not from the top down. What does a great functional team look like in your opinion?
[00:47:47] Henry: I talk a lot about this with my execs, where I have this interpersonal theory about how people talk and work together and I call it process and content. Process is how you work together. Content is what you’re talking about. Most teams and management C-level execs talk a lot about content. What’s the right budget here? What’s the right product here? What should we do here? All of it is around the decision making and what’s the right decision? And I spend a lot of time with them, especially with execs that come from bigger companies where vigorous debate is good because it gets you to the right answer. Another management maxim I can’t stand is, debate is good. And what I talk to them about is what I care most about this process, how we work together, how we talk to each other. You’ll give this example where two execs are arguing and not getting along and upset about something, but they ended up getting to the right decision, to the right outcome and agreeing on it.
They would consider that success. I would consider that failure. I use this phrase. Friction is failure, and most people think friction is good, because it shows a healthy debate. And so to me, it’s in a great exec team, works really well together and is okay if they don’t get the right answer. My favorite lines that I learned about partnerships is, great partnerships work when the relationship matters more than the answer, and I think that’s true for teams. How we work together matters more than the answer and we’re okay making mistakes to preserve the collaboration of what we’re working on together.
[00:49:13] Patrick: I like this line of questioning around aspects of the business so I’ll keep going. What defines great in go-to market, whether that’s marketing sales? You can tell me what matters more for Carta. What have you learned about what great means at doing this part of the company building motion really well?
[00:49:28] Henry: For us, I have a very specific answer. I don’t know that I can speak for all companies, but definitely for us, we are in this, I would say, later innings transition, the moving from a single product company to a multi-product company and the platform, yes. Multi-product and I would even say multi customer, because we both sell cap table software and compensation benchmarking software to companies, but we also sell back office and fund administration to venture funds. If you look at any life cycle of a company, obviously they start with an idea and they’re trying to get to product market fit. That’s stage one, is trying to get to product market fit. Then after product market fit, most companies die before that ever happens. That’s the first wave of death. The second wave that happens is they get to product market fit, but they can’t scale effectively, and that’s stage two, which is how do you scale this product that’s seems to be working? A lot of companies die there, but much, much fewer. That tends to be a little bit easier. Getting to product market fit is the hardest part.
And then at some point, unless your database is your payroll, you’re going to run out of oxygen there, you’re going to have to have a new product or a new customer, expand the market and then it becomes a multi-product, multi-customer company or platform. Vast majority of companies die there. That’s where you get the single digit billion outcomes, $2 billion market cap and always will be. But if you want to get the 10, 20, 100 billion in market cap, you have to become multi-product. Being in the midst of doing it right now, that’s actually really hard to do. It’s harder than I would’ve thought. And building a GTM motion that becomes the pipelines of distribution where we can invent a new product, we can acquire through M&A, Corp Dev a new product and then push that through the lines of distribution to our customers in a scalable way. That’s really challenging, but the teams that can do that’s incredibly valuable because now, if you get a good product market fit and a lot of that can be experimented with outside, you just look at these startups, you see which one’s getting traction and you buy it and you push it through your pipes. That is how you do Salesforce-level execution.
2. RWH005: Meet The Master w/ Aswath Damodaran – William Green and Aswath Damodaran
William Green (00:06:38):
You ended up at UCLA, you have multiple degrees if I remember rightly, and I wanted to get a sense of how you stumbled into teaching, because it seems like everything you do really is about teaching whether it’s being a professor at NYU, making videos for YouTube, writing your blogs, writing your books. And so, I’m curious how you actually discovered this lifelong passion which… What, you’ve been teaching now for 40 odd years?
Aswath Damodaran (00:07:02):
42 years now. No, it was accidental. Like so many things in so many people’s lives, it was just being at the right place at the right time. I came to UCLA to do my MBA. At that time, I’d already got a Master’s in Business in India, but because I had only 15 years of education, in India, school runs through quicker, US universities then required 16 years. So basically, I had to come back for a second Master’s. And my intent was to do what all MBAs do, which is to go work for some place which pay me a lot of money. When I started in 1979, that one might have been a consulting firm. But by the time I got towards 1981 and getting close to graduation, I was hitting the start of the growth of Wall Street exploding out, where you saw investment banks hiring.
Aswath Damodaran (00:07:47):
And I was on the verge of accepting that position at an investment bank when I realized I had run out of money and I needed to do something just to get enough funds to make it through when my job started. So I took a job as a TA, a teaching assistant, for an accounting class, a subject, as you might know, I don’t particularly care for. But I needed the money. So I remember I said, “I’ll get this done. It’s a quarter. How much pain can it be?” So I still remember that first day I walked into the class, and I was nervous. I mean, like everybody is when you’re in front of a big group of people. At about 15 minutes in, I don’t know what it was, but I realized that this was what I wanted to do with the rest of my life.
Aswath Damodaran (00:08:26):
I’m not a religious person, but I do believe that you get these moments of clarity when, I don’t know, some supreme being is saying, “Hey, listen, this is what you were meant to do.” I was lucky to be listening. And that moment changed my life because I said… And I remember right after that class, I marched up to the floor of the finance department, talked to professors there about, “Hey, how can I get into the PhD program? I want to be a teacher.” And luckily, that path opened up and I became a PhD. And the rest of my life has been all about teaching.
William Green (00:08:57):
I remember you once describing that as a [Godshot 00:09:00], which I thought was a wonderful phrase to describe that kind of 15 minutes that change your life. I am sort of a mystic who pretends to be rational because I cover the investing world where you’re supposed to be rational. So, I kind of love the idea that somehow there is some sense in which we’re being guided in life. I have no rational or objective basis to believe this, but it gives me pleasure to think it.
Aswath Damodaran (00:09:21):
And I believe we all get moments like that through our lives, but we’re so busy with our lives, we don’t listen. I tell my kids… They have social media, they’re constantly filling their days. And I still do this. Every day, I try to give myself some time. When I’ve nothing scheduled and I’ve open slots, it’s daydreaming time. I think we think about daydreaming as a waste of time. I think daydreaming is when you open your mind up to, “Hey, what can I do that’s different? What can I learn?” And I really value those moments because I think it makes a difference in my life…
…William Green (00:21:24):
But it also struck me that part of your skill was your willingness to provoke, to be a provocateur. And there was this wonderful beginning of the talk where, if I remember right, you said, “Basically, I sit at this nexus of these three really big, really badly run businesses of teaching, and writing, publishing, and finance. And they’re all begging to be disrupted and to be taken to the cleaners.” And I wondered if you had any advice for the rest of us on how to speak, how to communicate, because it seems to me that you’re really a master of this.
Aswath Damodaran (00:21:53):
I think that my two pieces of advice is don’t try to be somebody else. You got to be comfortable with your presence. And I’ll give you an example. I’ve never worn a suit to teach because when I started teaching, that was the standard. In business schools, people wore suits or [inaudible 00:22:09] ties when they walk to a classroom, because the view was students will not respect you if you’re not dressed up as if you’re an authority. And my view was, “Look, now if I bought a suit, I’m going to pay a few hundred dollars. My students are MBAs. They’re going to Barneys to get their suits for 3000 because they need to look good for investment banks. My suit is never going to look at as good as theirs and I hate wearing suits.” So I said, “Look, I don’t feel comfortable teaching in a suit. So, I’m going to teach in a T-shirt. I’ll teach in sweatshirts. Basically, I can teach in whatever makes me comfortable.” So, I had to pick something that made sense for me.
Aswath Damodaran (00:22:44):
Early on, I realized there’s some great teachers who were authoritarian teachers. I don’t know whether you remember the movie Paper Chase, I think where it’s about the Harvard Law School. And I don’t remember who it was, a great actor, maybe Gielgud was there playing the role. And he plays the role of a Professor of Law, and he intimidates. He has this immense presence in front of the classroom. But when he turns to a student, just the intimidation factor is enough to keep the class going. I realized very early that I was not in an intimidating person, that my presence couldn’t be built on, “I’m the authority figure, you’re not. And I’m going to tell you what to do.” So, I had to find a teaching style that fit me or a communication style that fit me. And my communication style is much more informal and much more open and much more willing to kind of accept the fact that there might be other people who push back. And over time, there are things I do better now than I did four years ago.
Aswath Damodaran (00:23:37):
One of the things I tell people is, “Look, there are days when you wake up and you get in front of a group, and you open your mouth and magical words come out. It’s like you can’t do anything wrong. You say, where did that come from?” It’s easy to teach when you’re in the zone, right? When baseball players are in the zone. When you’re in the zone, teaching is easy. Teaching or communication is difficult when you’re not in the zone. When you open your mouth and your tongue is getting in the way of your own words, it’s not your day. And I tell people, “You got to figure out ways to get into the zone when you’re not in the zone.” So, there are small tricks and I would suggest these. One is be well prepared. I’m prepared for my classes to the point I never have to look at my slides to know what’s on the slides.
Aswath Damodaran (00:24:18):
So I think that finding your zone when you’re not in the zone is something I do better now than when I started, because I’ve learned small tricks to bring myself back into the zone. Tricks like figuring out questions. One of the things you will notice in my slides is I’ve these questions asked or I give multiple choice answers and I put them up. So instead of throwing an open question to a group where nobody might react, I say, “Look, I’m going to throw this question up. I’m going to put five answers. None of the answers are going to be obviously wrong.” And I call for a minute of silence where people get to pick an answer. That minute actually helps me as much as it helps the students, because again, those moments allow you to gather your thoughts and say, “Okay, let me get back on track.” So, there are things I do now that keep me in the zone when I even…
Aswath Damodaran (00:25:03):[inaudible 00:25:00]. So there are things I do now that keep me in the zone even when I’m not feeling like I’m at my best. And being prepared, that I think is critical to teaching, but you’re right. One of the things I tell people is the biggest sin you can commit as a teacher is to bore people. I will provoke you. I will anger you. I’m willing to take any emotion over boredom. That doesn’t mean I’m going to prod at people just to make them mad. But it means that sometimes I would throw a question out that might be provocative because it challenges people’s beliefs.
Aswath Damodaran (00:25:32):
One of the first things I start my corporate finance class is I ask, “How many of you think markets are short-term?” Because that’s the conventional wisdom, at least is markets are short-term. We need to do other things to make them long-term. And about two-thirds of my class put up their hands and say, “Hey, I think markets are short-term.” And I say, “Can you give me a piece of evidence that backs up that view?” And it’s amazing how difficult it is to actually find actual evidence that markets are short-term.
Aswath Damodaran (00:25:57):
In fact, if you look at the actual evidence, you would conclude that markets are far too long-term. Otherwise, how can you explain the fact that you put $100 billion values on companies that haven’t figured out a business model yet? No short-term market would do that. So by opening up these questions where people have preset views and challenging those views, not because I want to change their views, that’s not my job, but to make them examine their own views. And if at the end they say, “I think markets there still short-term,” I’m perfectly okay with it. I’m not an evangelist when it comes to putting my views on others, but I want them to examine their own views…
…William Green (00:26:42):
One of the things I’ve particularly appreciated, and I’m agnostic about this. I don’t in any sense have the answer, but I really appreciate the way you’ve discussed ESG, the way you’ve been incredibly outspoken. This whole idea that companies should somehow be more environmentally and socially responsible and have better governance. And there’s obviously been a huge drive, commercially driven drive, I suspect from business leaders like Larry Fink, the CEO of BlackRock, to sell this idea to investors and to persuade everyone that it’s really beneficial for companies to do good, that it helps the bottom line and is profitable for shareholders.
William Green (00:27:14):
I think it’s fair to say that you are not convinced. And when I asked for questions on Twitter to ask you, there were several people who wrote to me about this. A listener named [Fabio Zugman 00:27:23], who I’m going to send a copy of my book, Richer Wiser Happier, to thank for his question, said to me, “You got to ask him about ESG.” And he said, “Do you think ESG will be a fad of the past? Or is it one of those things that will refuse to die as long as it serves as a marketing gimmick?” And so I wondered if you could talk us through this idea, why you’re so cynical about it, why you’re so skeptical.
Aswath Damodaran (00:27:44):
I first wrote about ESG in 2020, and I wrote about ESG because I’d never seen a concept explode that quickly out of nowhere to become the status quo. But usually concepts are the edges. No, the status quo had bought in, CEOs of companies. The corporate round table had bought this, signed the statement on stakeholders and how companies should be run for stakeholders. And the big investment funds led by BlackRock were pushing ESG to the forefront.
Aswath Damodaran (00:28:11):
But what made me suspicious was there seemed to be no trade-offs. So the sales pitch was you can have it all. You can do good and be more valuable. You can do good and earn higher returns. You can do good and you’ll have to sacrifice nothing. And through the history of humanity, being good has always been the more difficult choice. Being good has always cost you. In fact, if being good were the easier choice, we wouldn’t need religion in the first place, right? If the 10 commandments came to us as our natural choices, then why would we need religion?
Aswath Damodaran (00:28:41):
The nature of goodness is you got to have sacrifice. I’d have had a lot more respect for the ESG movement if they’d come up and said, “You know what, we need to make the world a better place. So companies have to accept that they will make less money and be less valuable in order to make the world a better place.” That investors have to accept lower returns because they want to be good.
Aswath Damodaran (00:29:01):
And if they’d made it a trade-off, I’d have said, “Okay, let’s talk. Let’s talk about what the trade-off is. Who’s making the trade-off? Who’s paying for this goodness?” And there’s still issues with ESG, but it would be an issue that you could talk about the trade-offs and say, “Does that make sense?”But the fact it was being sold as all good… It’s all cake, no calories. I said, “Somebody’s got to look under the hood.”
Aswath Damodaran (00:29:23):
So each of those in an area where I’ve seen this happen in the past, seen what happened. New concepts come up, which claim to be revolutionary, but really old wine in a new bottle claiming to be the magic way of coming up with a more valuable business. So it started with my favorite area, which is valuation. I said, “You guys keep telling me that ESG is good for value. Tell me where.”
Aswath Damodaran (00:29:46):
In my valuation class, I have a proposition called the It Proposition. If it does not affect the cash flows and it does not affect risk, let’s stop talking about it. So through time I’ve taken every buzzword in business and said, “Hey, whether it’s strategic considerations or China or cloud… Whatever that buzzword is, let’s talk about how it plays out in the cash flows and the risk because then we’re talking about something tangible.” Otherwise it just becomes this filler for whatever decision we want to make.
Aswath Damodaran (00:30:14):
So with ESG, that was my first reaction. Show me where. So I started looking at the evidence that ESG advocates were presenting. And I was horrified by the quality of research that passes for ESG research. Because, to be quite honest, it seemed to me that the research had many problems. One was, it was written by advocates, true believers. And they might have been deluding themselves saying, “I’m an objective researcher,” but when you start with a presumption or a prior that’s too wrong, it’s almost impossible to do clean research.
Aswath Damodaran (00:30:45):
The second was, they weren’t even sure what question they were answering. They were mixing up whether it was good for companies and whether it was good for investors in the same research. And the reason is very simple. One of the stories that has some backing to it is that ESG can make companies safer by protecting them from doing something stupid that can create a crisis.
Aswath Damodaran (00:31:05):
And I’m willing to listen to it. But if that story is true and ESG makes companies safer, those companies should have lower [inaudible 00:31:13], lower cost of equity, lower cost of capital. That’s good. But that means in the investors in those companies should earn lower returns as well. So what’s good for companies then can’t be good for investors as well. And much of this research was mixing up what was good for companies, what was good for… They weren’t sure what the question they were answering was.
Aswath Damodaran (00:31:31):
When I first started, very few people were pushing back. In the two years since, of course, the pushback has become much more tangible. And to be quite honest, I wrote a piece about ESG yesterday that I posted on my blog. I’m done with ESG, and I don’t want to re-fight. I’m going to move on to something else because I’m a dabbler. My interest has run out and I’ve pretty much said what’s on my mind. I’ve told people where I’m coming from and why I think what I do. I’ve no interest in forcing my thoughts on other people. And I will put out my views and if other people take strands of it and push back or make it their views, I’m completely okay with it. But I just wanted to make sure that people understood where I was coming from…
…William Green (01:01:23):
I was very struck by a wonderful line of yours that I think may have come from that Numbers and Stories book, which is a terrific book actually, where you wrote, “Humility as the single most important quality, you need to be a successful investor.” You also said hubris lies at the root of so much investing pain. Can you talk a bit more about how to guard against our own hubris and overconfidence? Because this is something that, particularly, for highly intelligent people who are used to being right and getting good marks at school and then they become investors, it’s an incredibly seductive mistake to make to assume that you’re going to be right in this game where you’re competing with other people who are equally brilliant and equally well qualified.
William Green (01:01:59):
So can you talk about that challenge of just dealing with overconfidence and hubris?
Aswath Damodaran (01:02:06):
The Buddhist are very fond of the word serene and the essence of serenity is when good things happen to you, don’t get over exuberant about what happened, and when bad things happened to you, don’t get down in the dumps, and investing is a lot of ups and downs. There are days you wake up and say, “That was an amazing day. My portfolio was up 8%.” Next day, you wake up and the end of the world is come, and recognizing that so much of what happens in markets has nothing to do with your great analysis or skill. It’s got to do with luck.
Aswath Damodaran (01:02:36):
This is a game where luck is the dominant paradigm, and it’s not like I tell people the difference between basketball and investing is you and I can go out there and try to shoot three pointers. Once in a while with luck, you might get one out of every 50, and I don’t even think I could get that, and as Steph Curry goes and do it, he does it 30 out of 50. Clearly, luck is not what’s explaining it. It’s skill. In investing though, you could get 30 hits in a row, and I can’t reject the hypothesis that he just got lucky 30 times in a row. It’s so difficult to separate.
Aswath Damodaran (01:03:08):
One of my favorite books, and I don’t know whether you’ve had Michael Mauboussin on your row, but you should definitely have him. He’s-
William Green (01:03:14):
He’s great.
Aswath Damodaran (01:03:14):
Separating out luck from skill in investing is how difficult it is to do, and that’s where humility comes from. It’s recognizing when you’re successful, how much of your success comes from luck. I still get asked by people, “What do you make around the market?” Usually, I don’t go around talking about my past performance because if I’m not asking for your money, really, it’s none of your business, whether I beat the market or not. But if I added up the returns, maybe they’re just curious. I might have made 3% or 4% more than the market going back over the last 30 years.
Aswath Damodaran (01:03:42):
Then they ask me, “Well, that must be payoff for you.” I say, “I have no idea what it is. I just might have gotten incredibly lucky at the right times.” I tell them about some of my successful investments. When I bought Apple in 1999, I bought it because I sorry for the company. Actually, I bought it as my charitable contribution. I’ve been an Apple user since 1981. Remember, ’99, Apple was facing a near-death experience. Their computers were not selling. It was just as Steve jobs was coming back, and they didn’t seem to be any way that you could recover from this crash.
Aswath Damodaran (01:04:12):
I bought Apple because I was I said, “You know what? They’ve been good to me, and I’m going to spend $5,000 buying Apple shares that I can write off.” Best investment I ever made, turned out to be a investment I made because I was feeling sorry for a company. The hubris, in my part, to go around starting with my return saying, “Look how great my investment in Apple was. “Without telling you that investment had nothing to do with doing full-fledge intrinsic valuation, and some are jumping in at exactly the right time. So it’s hard work though.
Aswath Damodaran (01:04:39):
I mean, it’s easy to let things go to your head, and the market, it’s just waiting for that to happen. It’s almost like markets are waiting and hiding for you to get all caught up in how good you are. So when I see these shooting stars the people who are lauded as the great investors because they’ve done well for two or three years, I say, “You know what? Just give it some time, because most of the time when you succeed, it goes to your head.
3. There’s a Piece of EV Tech Where the U.S. Has an Edge on China – Stephen Nellis and Gregg Lowe
hina dominates the electric vehicle supply chain, from processing raw minerals like lithium into chemicals for batteries all the way to building finished cars. But there’s one niche where America still has an edge: chips made from an exotic material called silicon carbide.
In EVs, these chips are used in inverters, which sit between the car’s battery and motors, converting the direct-current electricity the battery supplies into the alternating current the motors require. Such chips always lose some energy as heat, but silicon carbide chips lose far less than those made of conventional silicon. That difference can boost the range of an electric car 5% to 15%.
But the raw material for silicon carbide chips is difficult to manufacture. North Carolina–based Wolfspeed supplies about three-quarters of the world’s silicon carbide wafers—the thin discs on which chips are made, according to Piper Sandler analyst Harsh Kumar. Wolfspeed sells the wafers to major automotive chip firms including STMicroelectronics, Infineon and Onsemi, but also makes finished chips itself. In the coming weeks, Wolfspeed will open a $1 billion factory in upstate New York to boost its efforts to compete directly with those customers in making and selling the finished chips…
…Why should anybody care about something as esoteric as silicon carbide?
In a combustion engine car, think of your fuel lines going from your gas tank to your engine. With a silicon chip, it’s as if someone has poked a hole in it. As your fuel is coming to the engine, you’re just dumping a bunch out on the street. Your miles per gallon are going to be less because you’re losing some gallons as you’re driving. That doesn’t happen with silicon carbide.
This is a big deal for two reasons. One, the range of the car is longer, which is an important metric for people buying electric cars. Two, the amount of battery you need to drive a certain distance is less, and batteries are the most expensive thing in an electric car. So if you use fewer batteries, the car is going to be cheaper, which is another thing people care about…
…You’ve got a supply agreement with General Motors. Why are companies like GM coming directly to you?
The car companies have realized that they need to better understand their supply chains of semiconductors, and they need to get closer to the semiconductor manufacturers. I’ve been in this industry for 35 years, and never have I seen so many car factories being shut down because you can’t get a chip. So there’s been a wake-up call.
There’s a second element that is really important. The engine of a vehicle is the personality of the car. Some companies name their cars after the engine. For BMWs, the last two digits in the model name are the displacement of the engine in liters. A 525 is 2.5 liters, and a 550 is 5.5 liters, and so on. As technology goes from internal combustion engines to electric, the carmakers are trying to get their heads around it: How do we create our personality in this new engine, this inverter and the motor associated with it?…
…How are you thinking about China as a competitor? Are Chinese chipmakers also racing to develop silicon carbide manufacturing technology? And if so, how close are they to you?
They are, and so are our customers like the Infineons of the world. But this is a technology that’s really difficult to come after. Silicon carbide grows in a machine that operates at 2,500 degrees Celsius. That’s almost half the temperature of the sun. So this is not for the faint of heart.
You can’t buy that equipment on the open market. There’s not a vendor of silicon carbide machines. So that means you need to build it yourself. Well, to know how to build a machine like this, you need to know how to make silicon carbide. But to make silicon carbide, you need to know how to build a machine like this. There’s this whole startup process that takes many, many years. Our startup process began 35 years ago when the company was founded. And what we use today is dramatically different from what was used 35 years ago.
The game plan for typical Chinese companies is to take a bunch of capital and throw it at a problem. They can’t do that because you can’t just buy these machines. So I think that’s going to be a bit of a challenge. But the world’s supply of people that really understand this technology is pretty small.
We always have a healthy bit of paranoia around this. But it’s really tough.
4. TIP440: Beating The S&P500 Since 2004 w/ Bryan Lawrence – Stig Brodersen and Bryan Lawrence
Bryan Lawrence (00:17:22):
The second reason durable cash flows are great is that durable cash flows are more predictable. And the predictability of cash flows is a big advantage to a stock picker because they make valuing those cash flows more certain. And having certainty about valuation is a big advantage given how volatile share prices are, how volatile are share prices? This has amazed me since I started the business. When I started Oakcliff in 2004, I was lucky enough to find myself in a room with Warren Buffett and two dozen other aspiring stock pickers. We were very happy to ask him lots of questions, which pretty much all boiled down to, “How do we get to be like you but faster.” He very nicely broke to us the bad news that stock picking was a long game, but he said, “I do have a piece of good news for you, the average stock goes up and down by 80% in a year. And that’s an enormous advantage if you actually take the time to understand the underlying business because the stock price is not reflecting underlying value if it’s going up and down by 80%.”
Bryan Lawrence (00:18:17):
I said to myself, “80% in a year, he’s got to be out of his mind. He’s Warren Buffett, but he’s lost his mind.” I went back to New York, and I did the calculations he was suggesting, which was to compare the 52-week high to the 52-week low for every stock in the stock market and compare the percentage difference between those two things. And when I did the calculations, maybe not surprising because he is the Sage of Omaha, he was right. You can use Bloomberg and a computer to crunch these numbers for the thousands of companies. It’s about 4,000 companies in the US stock market going back 20 years. And if you do it, we do it about once a year, the answer is as astonishing now as it was in 2004 when I started.
Bryan Lawrence (00:18:55):
During a calm year like 2019, the average US stock price goes up and down by 50%, 5-0%. And in a crisis year, like the dot-com crash, we had in 2000 or the 08/09 financial crisis or the pandemic we just had in 2020, by up to 200%. Buffett, by saying 80%, was basically averaging a calm and a crisis year. That 50% in a calm year is also a median, and in a median year where it’s 50%, you have many stocks that are bouncing up and down by 80%. There’s no way that the intrinsic value of the average business is going up and down by so much each year, and this is a big advantage for a stock picker who’s done the work…
…Stig Brodersen (00:25:52):
Oakcliff’s net return to clients has underperformed the S&P 500 at eight out of 18 years, and yet your returns to clients outperformed the S&P 500 over time. I just wanted to mention some of those numbers. I also said it in the introduction before we kicked off this interview, Bryan, but I just can’t help but mention it because you’re too polite for you to say it yourself. But the S&P 500 with exception of Oakcliff Capital was 494.2% for the S&P 500, and net of fees is 718.3%. So, I mean, this is just an amazing track record. So bravo. You managed that impressive track record and at the same time, you underperformed the S&P 500 eight out of 18 years. I’m curious to hear your thoughts on that.
Bryan Lawrence (00:26:37):
Well, thank you, Stig. But we have had periods of underperformance, and those periods of underperformance have lasted for a year or more. This is not surprising. Warren Buffett gave a speech in 1984 about the super investors of Graham-and-Doddsville, which I would encourage your listeners to go find on the internet if they haven’t already. Just Google super investors of Graham-and-Doddsville and read Buffet’s speech and then the response by a professor at Columbia Business School, where he gave the speech. There are a couple of really interesting conclusions that can be drawn from that speech, basically, every concentrated value investor will underperform the market on an annual basis 30 to 40% of the time. It jumps out of the data. And this is data as of 1984, but you can carry this data forward and you’ll find it to be true.
Bryan Lawrence (00:27:29):
I think it’s an iron rule of underperformance. Joel Greenblatt talks about it. Warren Buffett talks about it. Here’s some data which is just fascinating. If you look at Berkshire Hathaway itself, okay, which is run by the patron saint himself, Warren Buffett, Warren has controlled Berkshire Hathaway for 57 years now, going back to 1965, and Berkshire Hathaway has underperformed the S&P 18 of those 57 years or 32% of the time. There’s that iron rule, 30 to 40%. You could say, “Oh, is that a function of the fact that he’s managing more and more money, making it more and more difficult for himself?” The answer would be no, because if you look at the first 25 years that he controlled Berkshire Hathaway, 1965 to 1990, he underperformed nine of those 25 years or 36% of the time.
Bryan Lawrence (00:28:21):
I think this is a reason why concentrated value investing, while it delivers great long-term results if it’s being done by people who actually have the ability and the temperament to handle it, why a lot of people kind of lose faith with it because you will find every practitioner of it having these periods of underperformance.
5. Quantum computing has a hype problem – Sankar Das Sarma
I am as pro-quantum-computing as one can be: I’ve published more than 100 technical papers on the subject, and many of my PhD students and postdoctoral fellows are now well-known quantum computing practitioners all over the world. But I’m disturbed by some of the quantum computing hype I see these days, particularly when it comes to claims about how it will be commercialized.
Established applications for quantum computers do exist. The best known is Peter Shor’s 1994 theoretical demonstration that a quantum computer can solve the hard problem of finding the prime factors of large numbers exponentially faster than all classical schemes. Prime factorization is at the heart of breaking the universally used RSA-based cryptography, so Shor’s factorization scheme immediately attracted the attention of national governments everywhere, leading to considerable quantum-computing research funding.
The only problem? Actually making a quantum computer that could do it. That depends on implementing an idea pioneered by Shor and others called quantum-error correction, a process to compensate for the fact that quantum states disappear quickly because of environmental noise (a phenomenon called “decoherence”). In 1994, scientists thought that such error correction would be easy because physics allows it. But in practice, it is extremely difficult.
The most advanced quantum computers today have dozens of decohering (or “noisy”) physical qubits. Building a quantum computer that could crack RSA codes out of such components would require many millions if not billions of qubits. Only tens of thousands of these would be used for computation—so-called logical qubits; the rest would be needed for error correction, compensating for decoherence.
The qubit systems we have today are a tremendous scientific achievement, but they take us no closer to having a quantum computer that can solve a problem that anybody cares about. It is akin to trying to make today’s best smartphones using vacuum tubes from the early 1900s. You can put 100 tubes together and establish the principle that if you could somehow get 10 billion of them to work together in a coherent, seamless manner, you could achieve all kinds of miracles. What, however, is missing is the breakthrough of integrated circuits and CPUs leading to smartphones—it took 60 years of very difficult engineering to go from the invention of transistors to the smartphone with no new physics involved in the process.
6. 103 Bits of Advice I Wish I Had Known – Kevin Kelly
- About 99% of the time, the right time is right now.
- No one is as impressed with your possessions as you are.
- Dont ever work for someone you dont want to become…
- …Ask funders for money, and they’ll give you advice; but ask for advice and they’ll give you money.
- Productivity is often a distraction. Don’t aim for better ways to get through your tasks as quickly as possible, rather aim for better tasks that you never want to stop doing.
- Immediately pay what you owe to vendors, workers, contractors. They will go out of their way to work with you first next time..
- …Speak confidently as if you are right, but listen carefully as if you are wrong…
- …The best way to get a correct answer on the internet is to post an obviously wrong answer and wait for someone to correct you. You’ll get 10x better results by elevating good behavior rather than punishing bad behavior, especially in children and animals…
- …Don’t wait for the storm to pass; dance in the rain…
- …When you have some success, the feeling of being an imposter can be real. Who am I fooling? But when you create things that only you — with your unique talents and experience — can do, then you are absolutely not an imposter. You are the ordained. It is your duty to work on things that only you can do….
- …Your best job will be one that you were unqualified for because it stretches you. In fact only apply to jobs you are unqualified for…
- …A wise man said, “Before you speak, let your words pass through three gates. At the first gate, ask yourself, “Is it true?” At the second gate ask, “Is it necessary?” At the third gate ask, “Is it kind?”…
- …. Getting cheated occasionally is the small price for trusting the best of everyone, because when you trust the best in others, they generally treat you best…
- …You see only 2% of another person, and they see only 2% of you. Attune yourselves to the hidden 98%.
- Your time and space are limited. Remove, give away, throw out things in your life that dont spark joy any longer in order to make room for those that do.
- Our descendants will achieve things that will amaze us, yet a portion of what they will create could have been made with today’s materials and tools if we had had the imagination. Think bigger.
- For a great payoff be especially curious about the things you are not interested in.
- Focus on directions rather than destinations. Who knows their destiny? But maintain the right direction and you’ll arrive at where you want to go.
- Every breakthrough is at first laughable and ridiculous. In fact if it did not start out laughable and ridiculous, it is not a breakthrough.
7. The Rich And The Wealthy – Morgan Housel
Cornelius Vanderbilt left his heirs the inflation-adjusted equivalent of something like $300 billion. Within 50 years it was gone.
In between sat three generations whose primary purpose was to compete on who could build the largest house and marry the bluest blood. The first heirs had some entrepreneurial sense of running the family business; over time the “family business” became insecurity and resentment.
In 1875 an op-ed said socialites “devote themselves to pleasure regardless of expense.” A Vanderbilt responded that actually they “devote themselves to expense regardless of pleasure.” It was a game that couldn’t be won, so everyone lost.
Reggie was one of the last Vanderbilts to inherit significant wealth. On his 21st birthday he received $12.5 million, or about $350 million in today’s dollars…
…Reggie’s two loves were brandy and gambling. The first left him dead at age 45, with cirrhosis so severe the blood flow from his liver was cut off and pushed up to his esophagus, where the veins abruptly ruptured and left him choking in a pool of blood. The latter left him broke – after repaying debts Reggie’s will was nearly irrelevant, as he had nowhere near the amount of money promised to his heirs.
Reggie’s grandson – Anderson Cooper – was one of the first Vanderbilts who was never promised dynastic wealth. It may have been a blessing. Cooper once said of inheritance: “I think it’s an initiative sucker. I think it’s a curse. From the time I was growing up, if I felt like there was some pot of gold waiting for me, I don’t know if I would have been so motivated.” It’s like he was the first Vanderbilt to be set free…
…I’m always interested in the difference between getting rich and staying rich. They are completely different things, and many of those skilled at the former fail at the latter.
Part of this topic is knowing the difference between rich and wealthy.
These definitions are my own, but here’s the distinction: Rich means you have cash to buy stuff. Wealth means you have unspent savings and investments that provide some level of intangible and lasting pleasure – independence, autonomy, controlling your time, and doing what you want to do, when you want to do it, with whom you want to do it with, for as long as you want to do it for.
What I find fascinating are stories like the Vanderbilts, who were the richest people on earth but, by my definition, some of the least wealthy. Money to them was less of an asset and more of a social liability, indebting them to a status-chasing life that left most of them seemingly miserable.
George Vanderbilt spent six years building the 135,000-square-foot Biltmore house – with 40 master bedrooms and a full-time staff of nearly 400 – but allegedly spent little time there because it was “utterly unaddressed to any possible arrangement of life.” The house nevertheless cost so much to maintain it nearly ruined Vanderbilt. Ninety percent of the land was sold off to pay tax debts, and the house was turned into a tourist attraction.
There are so many similar stories from the Vanderbilt family that you begin to ask, “What was the point?”
The point, as the New York Daily Tribune realized early on, was not to live a great life. It was to be rich – to be valued “upon no better basis than the possession of money.” Rather than using money to build a life, their life was built around money; rather than an asset, their inheritance was an insurmountable lifestyle debt, passed to the next generation until there was mercifully nothing left.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, we currently have a vested interest in Apple and Salesforce. Holdings are subject to change at any time.
