Category: What We’re Reading

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 16 January 2022:

1. My first impressions of web3 – Moxie Marlinspike (a.k.a Matthew Rosenfeld)

To get a feeling for the web3 world, I made a dApp called Autonomous Art that lets anyone mint a token for an NFT by making a visual contribution to it. The cost of making a visual contribution increases over time, and the funds a contributor pays to mint are distributed to all previous artists (visualizing this financial structure would resemble something similar to a pyramid shape). At the time of this writing, over $38k USD has gone into creating this collective art piece.

I also made a dApp called First Derivative that allows you to create, discover, and exchange NFT derivatives which track an underlying NFT, similar to financial derivatives which track an underlying asset 😉.

Both gave me a feeling for how the space works. To be clear, there is nothing particularly “distributed” about the apps themselves: they’re just normal react websites. The “distributedness” refers to where the state and the logic/permissions for updating the state lives: on the blockchain instead of in a “centralized” database.

One thing that has always felt strange to me about the cryptocurrency world is the lack of attention to the client/server interface. When people talk about blockchains, they talk about distributed trust, leaderless consensus, and all the mechanics of how that works, but often gloss over the reality that clients ultimately can’t participate in those mechanics. All the network diagrams are of servers, the trust model is between servers, everything is about servers. Blockchains are designed to be a network of peers, but not designed such that it’s really possible for your mobile device or your browser to be one of those peers.

With the shift to mobile, we now live firmly in a world of clients and servers – with the former completely unable to act as the latter – and those questions seem more important to me than ever. Meanwhile, ethereum actually refers to servers as “clients,” so there’s not even a word for an actual untrusted client/server interface that will have to exist somewhere, and no acknowledgement that if successful there will ultimately be billions (!) more clients than servers.

For example, whether it’s running on mobile or the web, a dApp like Autonomous Art or First Derivative needs to interact with the blockchain somehow – in order to modify or render state (the collectively produced work of art, the edit history for it, the NFT derivatives, etc). That’s not really possible to do from the client, though, since the blockchain can’t live on your mobile device (or in your desktop browser realistically). So the only alternative is to interact with the blockchain via a node that’s running remotely on a server somewhere.

A server! But, as we know, people don’t want to run their own servers. As it happens, companies have emerged that sell API access to an ethereum node they run as a service, along with providing analytics, enhanced APIs they’ve built on top of the default ethereum APIs, and access to historical transactions. Which sounds… familiar. At this point, there are basically two companies. Almost all dApps use either Infura or Alchemy in order to interact with the blockchain. In fact, even when you connect a wallet like MetaMask to a dApp, and the dApp interacts with the blockchain via your wallet, MetaMask is just making calls to Infura!

These client APIs are not using anything to verify blockchain state or the authenticity of responses. The results aren’t even signed. An app like Autonomous Art says “hey what’s the output of this view function on this smart contract,” Alchemy or Infura responds with a JSON blob that says “this is the output,” and the app renders it.

This was surprising to me. So much work, energy, and time has gone into creating a trustless distributed consensus mechanism, but virtually all clients that wish to access it do so by simply trusting the outputs from these two companies without any further verification. It also doesn’t seem like the best privacy situation. Imagine if every time you interacted with a website in Chrome, your request first went to Google before being routed to the destination and back. That’s the situation with ethereum today. All write traffic is obviously already public on the blockchain, but these companies also have visibility into almost all read requests from almost all users in almost all dApps.

Partisans of the blockchain might say that it’s okay if these types of centralized platforms emerge, because the state itself is available on the blockchain, so if these platforms misbehave clients can simply move elsewhere. However, I would suggest that this is a very simplistic view of the dynamics that make platforms what they are…

…Given the history of why web1 became web2, what seems strange to me about web3 is that technologies like ethereum have been built with many of the same implicit trappings as web1. To make these technologies usable, the space is consolidating around… platforms. Again. People who will run servers for you, and iterate on the new functionality that emerges. Infura, OpenSea, Coinbase, Etherscan.

Likewise, the web3 protocols are slow to evolve. When building First Derivative, it would have been great to price minting derivatives as a percentage of the underlying’s value. That data isn’t on chain, but it’s in an API that OpenSea will give you. People are excited about NFT royalties for the way that they can benefit creators, but royalties aren’t specified in ERC-721, and it’s too late to change it, so OpenSea has its own way of configuring royalties that exists in web2 space. Iterating quickly on centralized platforms is already outpacing the distributed protocols and consolidating control into platforms…

…“It’s early days still” is the most common refrain I see from people in the web3 space when discussing matters like these. In some ways, cryptocurrency’s failure to scale beyond relatively nascent engineering is what makes it possible to consider the days “early,” since objectively it has already been a decade or more.

However, even if this is just the beginning (and it very well might be!), I’m not sure we should consider that any consolation. I think the opposite might be true; it seems like we should take notice that from the very beginning, these technologies immediately tended towards centralization through platforms in order for them to be realized, that this has ~zero negatively felt effect on the velocity of the ecosystem, and that most participants don’t even know or care it’s happening. This might suggest that decentralization itself is not actually of immediate practical or pressing importance to the majority of people downstream, that the only amount of decentralization people want is the minimum amount required for something to exist, and that if not very consciously accounted for, these forces will push us further from rather than closer to the ideal outcome as the days become less early.

2. Unpacking the Web3 Sausage – Dror Poleg

The vision for web3 is admirable. But Moxie set out to understand how the decentralized sausage is made in practice. He was not impressed.

Moxie’s first concern was that Web3 is not as decentralized as it claims. In this case, access to the basic infrastructure of web3 (the Ethereum blockchain) ends up being routed through a couple of popular API providers. So, even though the blockchain itself is decentralized, most apps that depend on it still go through bottlenecks that are centralized and operated by private, for-profit entities.

To use an analogy, consider a person who buys a piece of gold and stores it in a keyed vault, under a mountain, maintained by a Swiss bank. When the person logs into the bank’s app to check his gold balance, the app doesn’t send a person into the vault to check how much gold is there or whether someone tampered with the vault’s key. Instead, it simply shows data from a third-party database that records the inflow and outflow of gold bars from the whole mountain. So, the customer gets the latest information, but it does not get direct, indisputably true information.

The imaginary bank does this because it’s much easier to maintain a central database of all deposits and remittances from the mountain rather than send someone in person each time a client logs into the app. Ethereum-based apps use API providers for the same reason: it’s easier and simpler for them to do so rather than verify every query on the blockchain itself.

This choice of expedience over decentralization is bad in some use cases and harmless in others. The issue Moxie raised is known, and Ethereum developers have spoken and written about them publicly and are working on ways to mitigate them. And I have also written about how each wave of decentralization creates a concurrent wave of centralization…

…Moxie created an NFT on OpenSea. He intentionally programmed the listing to look different on different platforms (by loading a different image depending on the IP of the requesting site). Initially, he could see the NFT in his crypto wallet, which meant his ownership of it was documented on the Ethereum blockchain. However, a few days later, OpenSea decided to remove his NFT from their marketplace, claiming Moxie violated their terms of services (due to the code that changes what users see).

Technically, the fact that OpenSea decided to remove the NFT from their marketplace should not matter. Moxie still owned it, and this ownership was recorded independently of OpenSea, on the blockchain itself. But when Moxie checked his crypto wallet app, he noticed the NFT had disappeared. How could this be?

Moxie dug deeper and found out that the wallet app he was using (Metamask) did not really show what was in his account on the Ethereum blockchain. Instead, his wallet app relied on an API — the OpenSea API! — to check which NFTs were associated with which blockchain account. And since Moxie’s NFT was removed from OpenSea, the API showed it no longer existed.

This felt like Web 2.0 all over again. A powerful platform managed to confiscate/delete a user’s data and assets from his account without his consent.

But there’s an essential distinction between what happened to Moxie and what happens when a Web 2.0 platform decides to delete a user’s file or listing…

…Moxie dove into how Web3 apps interact with one another and discovered a few key limitations. The most alarming among them was the disappearance of his hard-earned digital goods from his crypto wallet.

But even though Moxie’s NFT did not appear in his wallet app, it still existed, and Moxie was still its owner. The failure to see the NFT was a problem with the wallet app’s architecture and the API it relied on.

The wallet app relied on an API instead of verifying information directly on the blockchain, and the API provider did not include NFTs that were not listed on OpenSea.

If Moxie had used a different app that checks the status of his NFT directly on the blockchain, he could have seen that the NFT is still there. Indeed, you can see that NFT on Rarible, an OpenSea competitor. To return to our earlier analogy, the gold bar is still inside the vault, inside the mountain, even though the bank’s app doesn’t show it.

Of course, the fact that popular wallet apps don’t display stuff in people’s accounts even though that stuff is still there is a problem. But the good news is that even though OpenSea removed Moxie’s NFT, that NFT “survived” and remains in his posession.

3. Mark Smith – Finch Therapeutics: Empowering Immune Systems – Patrick O’Shaughnessy and Mark Smith

[00:02:55] Patrick: Mark, we’re going to talk about an especially interesting topic today, one that I’ve definitely read a bit about, but I’m somewhat of a rookie on. And so you can educate the audience alongside me. And that topic is the microbiome. It’s one of the areas of health and wellbeing that is a very recent phenomenon in the public consciousness and certainly in medical research. It would be good for you to begin by giving us an overview of what this thing is, this word “microbiome,” what it represents. And then I’d like to get into your own origin story and why you’ve devoted this part of your career to this idea.

[00:03:28] Mark: First off, Patrick, thanks for having me here. Excited to share the story of the microbiome and the hidden majority of microbes that live inside all of us. There are about as many microbial cells as there are human cells inside all of us, and they’re fundamental to everything that we do, from the way we digest food and extract energy from it, synthesis of important vitamins, regulation of our immune system. Even how we think and feel can be manipulated by these bacteria that live on and inside of us. It’s almost like a new organ system that we’re just now learning to understand. And the reason that it’s taken us such a long time to really understand the importance of this community is that a lot of these bacteria are actually really hard to grow in the lab. So it’s only when we started to use the methods of high throughput genomic sequencing, that we first used to sequence the human genome, we started to shine that flashlight onto the microbiome over the last 10 years, that we realized there’s actually this enormous diversity of microbial organisms that lives inside all of us and has been really important to our health. You can think about it like a rainforest that lives inside of each one of us and is responsible for keeping us healthy in a lot of ways. As we think about the evolution of this space, this first chapter, which is understanding what’s there. And now we’re at a really exciting point. We’re able to actually go in and manipulate the microbiome, so we can make changes, make edits, add subtractions, and do that in a targeted, rational way in order to try to improve health outcomes for patients.

[00:04:57] Patrick: Give us an overview of where these things are. It’s non-human cells living inside human bodies. You said it’s almost equal in terms of allocation of cells, human versus not. That’s pretty crazy. Where do these things mostly exist? Is there a useful taxonomy or categorization system that might help us understand, for the rest of the conversation, the types of these things, what they’re doing, why they’re related to our health, why they’re there in the place?

[00:05:22] Mark: They’re everywhere. In fact, inside of every one of your cells, there’s this thing called mitochondria. That’s what helps us get energy from food. It’s actually a bacteria that’s just lived with us for such a long time that got embedded into all of our cells. In addition to those, though, the bulk of the microbes that we’re talking about, thinking about here, those that are not part of our human cells and the primary place that they reside is in our gut. And the reason for that is, while microbes are pretty much ubiquitous throughout our bodies, our gut is actually specifically designed to grow bacteria. We’ve spent the last 10 years trying to get really good at growing bacteria. Despite tens of millions of dollars of investment, we think we’re pretty good at solving this problem. We’re orders of magnitude less efficient than you are right now at growing these bacteria inside of your gut. And that’s because we’ve evolved this system specifically to ferment bacteria, and we can go into a little bit more around why we’ve evolved that capability and what it does for us, and why think it’s an important target for developing medicines. But just in terms of a framework to think about these going forward for the rest of the conversation, I usually think about these commensals, that are bacteria that are either neutral to our health or helping us out, and then their pathogens. If you study a medical textbook, you just hear about all the pathogens, all the bad bacteria, but they’re actually the minority. In most of us, most of the time, are dominated bacteria that are a really important part of who we are and our identities…

…[00:10:45] Patrick: What would happen if inside of a human, the entire stock of bacteria was nuked and gone? What would happen to that person?

[00:10:53] Mark: Your immune system would freak out. We actually have examples where we’ve done this, gnotobiotic or germ free animals. We grow them up in incubators, surgically remove them from their moms, prevent any microbes from getting into them when you feed them throughout their lives. They live shorter lives. They’re profoundly unhealthy, and they have dysfunctional immune systems. If we’re the landlord renting out space to bacteria, we want to really firmly control where they are, because if they suddenly got into our bloodstream, they’d make us really sick and we could die from that. Like a nuclear reactor, you want to carefully contain it and prevent it. It can be awesome when it’s going in the right spot, but it’d be really harmful if that leaked out and got into places where it’s not supposed to be. We have this immune system that takes a very significant percentage of our total energy balance. And it’s not dysfunctional that we have this chronic lifelong infection. It’s actually one of the main purposes of it is to shape and control that system. It’s almost like a dead man switch, back in the Cold War. “If you don’t get a signal we’re alive every two minutes, send out nukes” or something like that. How your immune system is regulated, you constantly need to get a signal from your microbiome that they’re paying the rent. And there are these metabolites that they use, energy currency that they pay us in. And if you don’t get that, your body starts to mount this immune response.

And one of the things that’s really interesting is, while antibiotics don’t nuke your entire microbiome and eliminate all the bacteria, they diminish it pretty significantly. We’ve been on this massive uncontrolled experiment over the last 70 years, since we started developing antibiotics. And what happens when you just give a bunch of people antibiotics and really decimate this microbiome, what does that do to their health? And right now we use about 42 billion doses of antibiotics every year, around the world. And what we’ve learned is they have a really big impact on our microbiome, unsurprisingly. That’s what they’re designed to do. We found that there are a lot of diseases that basically didn’t exist a hundred years ago that are now some of the big scourges of humanity. Chronic autoimmune and inflammatory diseases that seem to be linked both in time and place to changes in our relationship with our microbiome. We believe that by restoring the functionality of this interface between these organisms that we’ve co-evolved with since before we were human, in our immune system, by restoring that relationship, you get at the underlying cause of a lot of these autoimmune and inflammatory diseases. Right now, the way we treat those diseases, some of the best selling drugs in the world try to shut down the immune response. And that has a lot of negative consequences and doesn’t necessarily address the underlying cause of that inflammation, which is disrupted communication between our microbiome, this organ system inside of us, and our immune system…

…[00:31:39] Patrick: If the Finch Therapeutic story has got chapter headers from inception through now, what have been those major chapters? So if there’s this blunt force instrument of fecal transplant, C. diff is one disease killing 30,000 people, what are the other addressable conditions that we’re confident in some sort of therapy here working to mitigate or eliminate? I did a conversation on tumor treating fields in cancer, which is this other interesting new modality for treating a big class of problems and has to be tuned for brain versus lung versus whatever other cancer. So what’s the equivalent here? What do you think the biggest, chunkiest problems to be solved are? And then we’ll go into those chapter headers for Finch Therapeutics to business.

[00:32:19] Mark: We see a very large opportunity here. Again, we think this is fundamental to human biology. We think that your immune system is regulated by your microbiome. Your immune system touches almost every disease and that’s the common thread. The nested opportunities that we see laid out ahead of us are C. diff, where we have a phase three program ongoing right now. There’s a lot of evidence that this can be highly effective there. The next wave of opportunities that we see are in conditions where there’s a GI component, maybe multiple opportunities to benefit. So ulcerative colitis, Crohn’s disease. Autism, actually, interestingly enough, there’s a meaningful GI component. About a third of kids with autism have severe GI symptoms. And we’ve seen benefits both on the GI symptoms as well as behavioral endpoints. Those are a wave of indications that we’re really excited to develop. It gets broader than that. So you start thinking about your point around applications in oncology. There’s some really interesting data that’s come out over the last year. Some of the most interesting new therapies that have been developed over the last few years are these things called checkpoint therapies, that unleash your immune system to attack cancer. We’re actually all developing cancers almost every day. And our immune system mostly clears them before they become problematic. And if you can help to empower your immune system to drive that assault, you can fight cancers. Checkpoint therapies for tens of billions of dollars a year in sales. It turns out that your life expectancy on checkpoint therapy is half as long if you have antibiotics within six months of starting checkpoint therapy. If you take a microbiome from a responder into a non-responder, you can drive a more than twofold increase over the expected response rate complementing what we’ve seen as the setback that you get from disrupting your microbiome.

That speaks to the potential breadth here, where seemingly unrelated indications all have this common thread. And it’s an area that we’ve spent a lot of time focused on. To summarize the broad chapters in developing this technology, for us, the first step was just show this works somewhere, show that we can put all the pieces together to develop an effective therapy. We can manufacture it, we can do it in a consistent way, can deliver it to the right location, all that stuff. The obvious first choice for us was going to C. diff. We had a lot of experience treating those patients and serving that community. C. diff is the first step. For us, this long journey to go from zero to one, and then to go from one to many has actually been a lot faster for us because we’ve been building plans for how we would attack all these other diseases once we’ve proven to the world that this works somewhere. We saw C. diff as creating a floor value in the company where we know it works there. We know we can serve patients and have a reliable revenue stream. And we can use that as a foundation to take some really big swings into these large, potentially transformational opportunities and get to our long term view, which is, “This is going to be a really important new class of therapies over the next 10 years.” My personal mission is to accelerate that reality as much as possible and bring that forward now, so that patients don’t have to wait. When I think about my wife’s cousin having to do this on his own, that is not okay. That’s unacceptable answer to me. There are tons of other patients like that that are out there, just waiting for these therapies to be developed. And every day that we delay that, we’re doing a disservice to that group.

[00:35:27] Patrick: Talk me through the end game. Let’s say you’re successful. You’re able to have a solution that’s much more frictionless than the current, sounds like really arduous problem solving for C. diff or something similar. What does that look like? Are we taking a pill that’s been engineered for us? Are we doing something different? What does the end game look like and what’s the timeline look like?

[00:35:47] Mark: The end game here is that we can sequence your microbiome, identify deficiencies, and then come in and deliver this. Say, the following 10 groups of bacteria, we’re going to deliver those to you. You’re going to take these five pills and that’s going to restore your health and not only treat the specific disease you have today, but potentially prevent other diseases. We’ve made a lot of progress over the last hundred years in terms of living long. We don’t necessarily live well. People end up with these chronic diseases throughout their lives that make their lives really unpleasant with tools like antibiotics. Those are some of the things that drove the longevity and those are life changing and amazing therapies. And I want to be able to use some of those agents that modulate our immune system, that change our microbiome and can save people’s lives, without impacting the quality of those lives. That’s an important long term objective. In terms of what the timeline is, this is happening now. There are already … at OpenBiome are the first step in my journey, we treated over 60,000 patients, built a network of about 1300 hospitals and clinics that we were serving. That is very much a practical reality for patients today. The next step is, we’re running a phase three clinical trial right now at Finch to develop an approved therapy that can scale and serve many more patients. If things go well, this will be available in the next couple of years for patients. These aren’t applications that are decades away. This is already reality for many patients today and has quickly become standard of care. Now we’re scaling that up and bringing it to new indications where we also believe that we can have a differentiated impact. And the way that we do that at Finch is unique to this therapeutic area.

Classically, drug development is all about risk management. And we fundamentally think about ourselves as risk managers. It costs about a billion dollars to develop a new drug, this incredibly capital intensive exercise. And anything you can do to reduce risk early on in that process has a dramatic impact on the expected value of this kind of product. Normally, when you start development of a drug, you maybe have a 5 to 10% probative success when you treat your first patient, that it’s going to actually get approved. You lose roughly a third of candidates just because of safety when you treat the first 10, 20 patients. Before we start any program, a firm underwriting criteria for us to support an investment in new program is we need to have clinical data that already shows that a composition works. And it’s this incredible privilege to basically start with the answer before you underwrite new investments. We start off with all this microbiotic transplant data. At Finch, we built the company around this concept of human first discovery, essentially reverse translation from what’s happening in the clinic, where there are more than 300 ongoing clinical trials exploring all these new applications. When I talked to you about ulcerative colitis and Crohn’s disease and oncology, that’s not speculation, like, “Hey, maybe this could work here and we’ve got some animal model that suggests it.” Those are completed clinical studies that have read out data, where clinical investors went in, modulated someone’s microbiome and saw that that radically changed their clinical outcome.

We think that’s an exceptional place to start from and to launch a drug development enterprise from. There’s this long co-evolved history of engagement between microbes and humans. It’s the absence of those microbes that’s dangerous, not the presence of them. There’s this expectation and empirical reality that these are generally well tolerated when run in well controlled clinical studies. There are all of these ongoing clinical studies with microbiotic transplantation which gives us that shotgun approach. And then we can mine all that data to figure out why did that work? What made that work? And then use that to develop the next gen products that we’re advancing at Finch. One of the things that’s really interesting is, we don’t just say, “This strain of bacteria matters.” We can say, “This specific strain from this sample put 10 patients into remission. That’s the strain I want to put in my drug.” We can actually cryo-revive these things. We have a massive biorepository with more than 10,000 samples that have been in patients, and we understand what the outcomes are. And we can go back and say, “This strain is a strain that I want to put into my drug. Now I’m going to grow it up and do that going forward.” So it’s that combination of all of these elements of the clinical data, some of the samples and the algorithms to make sense of it that have enabled us to use this strategy of reverse translation from what’s already working in the clinic today.

4. Are we witnessing the dawn of post-theory science? – Laura Spinney

Isaac Newton apocryphally discovered his second law – the one about gravity – after an apple fell on his head. Much experimentation and data analysis later, he realised there was a fundamental relationship between force, mass and acceleration. He formulated a theory to describe that relationship – one that could be expressed as an equation, F=ma – and used it to predict the behaviour of objects other than apples. His predictions turned out to be right (if not always precise enough for those who came later).

Contrast how science is increasingly done today. Facebook’s machine learning tools predict your preferences better than any psychologist. AlphaFold, a program built by DeepMind, has produced the most accurate predictions yet of protein structures based on the amino acids they contain. Both are completely silent on why they work: why you prefer this or that information; why this sequence generates that structure.

You can’t lift a curtain and peer into the mechanism. They offer up no explanation, no set of rules for converting this into that – no theory, in a word. They just work and do so well…

…Somewhere between Newton and Mark Zuckerberg, theory took a back seat. In 2008, Chris Anderson, the then editor-in-chief of Wired magazine, predicted its demise. So much data had accumulated, he argued, and computers were already so much better than us at finding relationships within it, that our theories were being exposed for what they were – oversimplifications of reality. Soon, the old scientific method – hypothesise, predict, test – would be relegated to the dustbin of history. We’d stop looking for the causes of things and be satisfied with correlations.

With the benefit of hindsight, we can say that what Anderson saw is true (he wasn’t alone). The complexity that this wealth of data has revealed to us cannot be captured by theory as traditionally understood. “We have leapfrogged over our ability to even write the theories that are going to be useful for description,” says computational neuroscientist Peter Dayan, director of the Max Planck Institute for Biological Cybernetics in Tübingen, Germany. “We don’t even know what they would look like.”

5. Fundsmith 2021 Annual Letter – Terry Smith

In investment, as in life, you cannot have your cake and eat it, so it is difficult if not impossible to find companies which are resilient in a downturn but which also benefit fully from the subsequent recovery. Of course, you could try to trade out of the former and into the latter at an appropriate time but it is not what we seek to do as the vast majority of the returns which our Fund generates come from the ability of the companies we own to invest their retained earnings at a high rate of return because they own businesses with good returns and growth opportunities. In our view it would be a mistake to sell some of these good businesses in order to invest temporarily in companies which are much worse but which have greater recovery potential… 

…Our portfolio consists of companies that are fundamentally a lot better than the average of those in either index and are valued higher than the average S&P 500 company and much higher than the average FTSE 100 company. However, it is wise to bear in mind that despite the rather sloppy shorthand used by many commentators, highly rated does not equate to expensive any more than lowly rated equates to cheap.

The bar chart below may help to illustrate this point. It shows the ‘Justified P/Es’ of a number of stocks of the kind we invest in. What it shows is the Price/Earnings ratio (P/E) you could have paid for these stocks in 1973 and achieved a 7% compound annual growth rate (CAGR) over the next 46 years (to 2019), versus the 6.2% CAGR the MSCI World Index (USD) returned over the same period. In other words, you could have paid these prices for the stocks and beaten the index — something the perfect markets theorists would maintain you can’t do…

…You could have paid a P/E of 281x for L’Oréal, 174x for BrownForman, 100x for PepsiCo, 44x for Procter & Gamble and a mere 31x for Unilever.

I am not suggesting we will pay those multiples but it puts the sloppy shorthand of high P/Es equating to expensive stocks into perspective…

…Turning to the themes which dominated 2021, you may have heard a lot talked about the so-called ‘rotation’ from quality stocks of the sort we seek to own to so-called value stocks, which in many cases is simply taken as equating to lowly rated companies. Somewhat related to this there was periodic excitement over so-called reopening stocks which could be expected to benefit as and when we emerge from the pandemic — airlines and the hospitality industry, for example.

There are multiple problems with an approach which involves pursuing an investment in these stocks. Timing is obviously an issue. Another is that their share prices may already over anticipate the benefits of the so-called reopening. As Jim Chanos, the renowned short seller, observed ‘The worst thing that can happen to reopening stocks is that we reopen.’ It is often better to travel hopefully than to arrive.

In our view, the biggest problem with any investment in low quality businesses is that on the whole the return characteristics of businesses persist. Good sectors and businesses remain good and poor return businesses also have persistently poor returns as the charts below show:…

6. What A World – Morgan Housel

Franklin Roosevelt looked around the room and chuckled when his presidential library opened in 1941. A reporter asked why he was so cheerful. “I’m thinking of all the historians who will come here thinking they’ll find the answers to their questions,” he said.

Everything we know about history is limited to what’s been written down, shared publicly, or spoken into a camera. The stuff that’s been kept secret, in someone’s head, taken to the grave, must be – I don’t know – 1,000 times as large and more interesting…

…Gabby Gingras was born unable to feel pain. She has a full sense of touch. But a rare genetic condition left her completely unable to sense physical pain.

You might think this is a superpower, or an incredible gift. But her life is dreadful. The inability to feel pain left Gabby unable to distinguish right from wrong in the physical world. One profile summarized a fraction of it:

As Gabby’s baby teeth came in, she mutilated the inside of her mouth. Gabby was unaware of the damage she was causing because she didn’t feel the pain that would tell her to stop. Her parents watch helplessly.

“She would chew her fingers bloody, she would chew on her tongue like it was bubble gum,” Steve Gingras, Gabby’s father, explained. “She ended up in the hospital for 10 days because her tongue was so swelled up she couldn’t drink.”

Pain also keeps babies from putting their fingers in their eyes. Without pain to stop her, Gabby scratched her eyes so badly doctors temporarily sewed them shut. Today she is legally blind because of self-inflicted childhood injuries.

Pain is miserable. Life without pain is a disaster…

…John Maynard Keynes once purchased a trove of Issac Newton’s original papers at auction. Many had never been seen before, having been stashed away at Cambridge for centuries.

Newton is probably the smartest human to ever live. But Keynes was astonished to find that much of the work was devoted to alchemy, sorcery, and trying to find a potion for eternal life.

Keynes wrote:

I have glanced through a great quantity of this at least 100,000 words, I should say. It is utterly impossible to deny that it is wholly magical and wholly devoid of scientific value; and also impossible not to admit that Newton devoted years of work to it.

I wonder: Was Newton a genius in spite of being addicted to magic, or was being curious about things that seemed impossible part of what made him so successful?…

…Part of the Armistice that ended World War I forced the dismantling of Germany’s military. Six million rifles, 38 million projectiles, half a billion rounds of ammunition, 17 million grenades, 16,000 airplanes, 450 ships, and millions of tons of other war equipment were destroyed or stripped from Germany’s possession.

But 20 years later, Germany had the most sophisticated army in the world. It had the fastest tanks. The strongest air force. The most powerful artillery. The most sophisticated communication equipment, and the first missiles.

A catastrophic irony is that this advancement took place not in spite of, but because of, its disarmament.

George Marshall, U.S. Army Chief of Staff, noted:

After the [first] World War practically everything was taken away from Germany. So when it rearmed, it was necessary to produce a complete set of materiel for the troops. As a result, Germany has an army equipped with the most modern weapons that could be turned out. That is a situation that has never occurred before in the history of the world.

There’s a set of advantages that come from being endowed with resources. There’s another set of advantages that come from starting from scratch. The latter can be sneakingly powerful.

7. Twitter thread on evaluating people – Dan Rose

In 2006 I was meeting with Jeff Bezos to discuss acquiring Audible when he described their founder Don Katz as “a missionary, not a mercenary.” I later learned Jeff got this framing from John Doerr, and it struck me as a good distinction when evaluating people…

…Most great founders are missionaries. Starting a company requires a level of commitment that lends itself to missionary zeal. Of course some founders are primarily motivated by money, but mercenary founders tend not to build lasting companies, opting instead for a quicker exit.

Missionary founders also care about making money, but they are primarily motivated by a higher calling. The mission of the company means something to them in their bones. They truly believe in serving their customers, improving people’s lives, putting a “dent in the universe.”

I remember my new hire orientation at Amazon in 1999. They shared a letter from a customer living in a rural village in Eastern Europe who was grateful to have access to books. We left with stickers that read “Work hard. Have fun. Make history.” I remember thinking, Let’s Go!

Chris Cox delivered a new hire orientation speech at Facebook religiously every Monday talking about the evolution of communications from the printing press to the internet and social media. Cox’s missionary speech left everyone in the room with that same feeling, Let’s Go!

---

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.  Of all the companies mentioned, we currently have a vested interest in Amazon and Facebook. 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 09 January 2022:

1. We may finally be able to test one of Stephen Hawking’s most far-out ideas – Paul Sutter

In the 1970s, Hawking proposed that dark matter, the invisible substance that makes up most matter in the cosmos, may be made of black holes formed in the earliest moments of the Big Bang. 

Now, three astronomers have developed a theory that explains not only the existence of dark matter, but also the appearance of the largest black holes in the universe…

…Dark matter makes up over 80% of all the matter in the universe, but it doesn’t directly interact with light in any way.  It just floats around being massive, affecting the gravity within galaxies.

It’s tempting to think that black holes might be responsible for this elusive stuff. After all, black holes are famously dark, so filling  a galaxy with black holes could theoretically explain all the observations of dark matter.

Unfortunately, in the modern universe, black holes form only after massive stars die, then collapse under the weight of their own gravity. So making black holes requires many stars — which requires a bunch of normal matter.Scientists know how much normal matter is in the universe from calculations of the early universe, where the first hydrogen and helium formed. And there simply isn’t enough normal matter to make all the dark matter astronomers have observed.

That’s where Hawking came in. In 1971, he suggested that black holes formed in the chaotic environment of the earliest moments of the Big Bang. There, pockets of matter could spontaneously reach the densities needed to make black holes, flooding the cosmos with them well before the first stars twinkled. Hawking suggested that these “primordial” black holes might be responsible for dark matter. While the idea was interesting, most  astrophysicists focused instead on finding a new subatomic particle to explain dark matter.

What’s more, models of primordial black hole formation ran into observational issues. If too many formed in the early universe, they changed the picture of the leftover radiation from the early universe, known as the  cosmic microwave background (CMB). That meant the theory only worked when the number and size of ancient black holes were fairly limited, or it would conflict with measurements of the CMB. .

The idea was revived in 2015 when the Laser Interferometer Gravitational-Wave Observatory found its first pair of colliding black holes. The two black holes were much larger than expected, and one way to explain their large mass was to say they formed in the early universe, not in the hearts of dying stars.   

2. Orlando Bravo – The Art of Software Buyouts – Patrick O’Shaughnessy and Orlando Bravo

[00:09:54] Patrick: Would you take us all the way back to the very first deal? I think Prophet 21 was the name of the firm that you did in the software world. I want to start there, because obviously, this has become an absolute dominant trend in the world of investing, of businesses, et cetera. But back then, when you did your first one 22 years ago, it was a very different situation. I think the evolution from then to now is really important for people to understand. Talk us through the unique dynamics of that deal, how you came to it, how you got the idea, how it was financed. I know that was very different back then. I would love to hear the story of the first technology software deal that you did.

[00:10:30] Orlando: Prophet 21 was a deal that our team originated because we had an investment team at the time after the dot-com bubble burst in 2000. We were looking to do something different than all of private equity, really. We were searching for it. Carl Thoma, my mentor, was open-minded enough to allow us to do that. The theme that we had at the time was you can buy software maintenance streams… remember, it was all on-premise two years ago… you can buy software maintenance streams less expensively than almost any other form of recurring revenue in different industries, media, radio, which was popular then, transaction processing, and that quality of that revenue is even more sticky than those categories. Now, the challenge was that that universe, which is a challenge today, by the way, but the challenge then, having us not done that before, was that these companies were unprofitable, especially coming out of that bust that happened in the year 2000. We had to say, theoretically, with 90% gross margins, these businesses can be high cashflow generative, and therefore good candidates for a fundamental control-type investing.

In doing our work, we came across Prophet 21. The company was for sale. We were able to succeed, actually, without much competition. That was interesting. It was one of those unusual deals where there was not that much competition, even though there were players starting in the software industry back then that were very good and had similar ideas as we had. It was interesting, because that company had never made money before. Now, it wasn’t losing all kinds of money. It was close to break-even, so management did care about that. That wasn’t a completely irrelevant concept to them. Secondly, the company had never done a lateral acquisition and the company had inconsistent performance. We bought the business and part of the reason was the price looked great at around two times maintenance revenue, one times two. Imagine, remember those days.

[00:12:37] Patrick: Charming.

[00:12:39] Orlando: Exactly, those were the days. We decided through meeting the person that became chairman of our operating committee, that the best approach was to back existing management for all the reasons that I mentioned before that existing management has. They really wanted to win, but have them work with our operating partner in terms of improving that company. Of course, three years later, you end up with a success story, a five margin, good growth, six software acquisitions, and it was a great investment. That experience really made us very passionate about the possibility of working with existing management that deeply cares about that business, that doesn’t move from company to company, that lives in that environment. They provided software for small and mid-market distributors, so they knew all the distribution customers, they knew the culture, they knew how they talk, how they trade, how you have to discount it. They know that world and were good at it. If you can marry that with an operational approach… as my partner would always say, “Everybody needs somebody to learn from”… if you can marry that with what we would bring, you would not only have the possibility of great success, but also it was a good approach to doing business. It felt really good. Then we did a second deal, and the same thing happened with existing management, and then a third one and so on and so forth, so we quickly developed this as our mission.

[00:14:02] Patrick: I’d love to zoom out and talk about the software industry, maybe even the enterprise SaaS-specific sector of it, where you’ve done a lot of your work and some of the weird features of it. You mentioned some of these businesses have 90% gross margins. Everyone herald’s software as like the best business model ever, but I think the average public market business, or maybe even the private market ones, they lose a lot of money still. Obviously, there’re reasons for that, but I’d love you to just walk through what seems like a huge dissonance between the average SaaS company and the type of company that you’re trying to run and manage.

[00:14:34] Orlando: There is no difference in the business model between that average and what we’re looking to do. In essence, when you see us buy control of the business, we are underwriting our plan, not what is going on in that company. In many cases, we’re buying break-even businesses or businesses that may be losing money. That’s not the way it’s going to be run in partnership with management going forward, because the model would break and you couldn’t support some debt into that transaction, which is highly creative. The challenge is for the market inefficiency here is that public investors who are extremely smart, creative, highly-educated, and great, for some reason they believe that “investing in growth” is the same and goes hand-in-hand with losing money and having a negative margin. Those two concepts are completely different. They many times have nothing to do with one another, and many times high profitability leads to higher growth because what high profits means, really, is that first you have operating management that innovates correctly, that runs those different functional areas in a way that is operationally sound. They measure all their activities. They look at inputs versus outputs. They readjust to what is working. Being highly profitable also means that you have a good enough product and you’re charging a price for that product that allows you to produce that profitability, where for example, the yearly increase in the value of that product merits a price increase that is higher than your labor inflation, a key point today in this inflationary world. If you do that really, really well and you provide so much value to your customers that you capture some of that in your price, and every day you become better at your operations because you learn from the past and you’re actually measuring this, it means that you have more money to invest in tactical growth, which is sales and marketing or distribution and more money to invest in strategic growth, which is product development, R&D and new initiatives.

See, when you’re highly profitable and you’re growing very fast, it also means that management is making the right investment decisions in growth. You’re an investor. You see all kinds of different sales channels. Well, if you lose money and you can lose money, sure, you’ll try it all. You’ll try direct sales, channel sales, inside sales, web sales, marketing. You can try all kinds of marketing plays. When you’re really profitable, it means you’re doing the right ones that fit your product and your business and what your customers need. The same thing is in R&D. You could have 20 R&D initiatives, and if one works and you grow really fast, that’s great. But how about the other 19? I can get really passionate about this. The other fallacy that I see with investors in this space is saying, “Well, this company’s growing really fast now. It’s 200 million in ARR, which is plenty of scale by the way to run it profitably, and I’m going to model what management told me, which was a 30% operating margin in year four. I understand why they’re losing a lot of money now is they’re growing at 50%.” But see, the operating world doesn’t work that way. That company in year four is not all of a sudden going to change how they plan, how they think about initiatives, how they tell their direct reports what’s important and what’s not. It just doesn’t work that way. They’ll never get there. You’ve got to start now to get there.

[00:18:23] Patrick: What do you think most explains… I think I have these numbers roughly right… the average SaaS company, maybe in the category has a slightly negative EBITDA margin, losing money on an EBITDA basis? I think probably your portfolio is closer to 35 or 40% EBITDA margin today. That’s a huge gap. What are the major explanations that make up that 40%? I mean, you’ve started to talk around some of the attitude differences, but literally, where do you think that change in margin most comes from versus the average SaaS company out there that’s loss-making?

[00:18:54] Orlando: I think that comes from investors really incenting management teams, just on top line. We work in a free market, capitalist, incentive-based system. If you’re running a company and your investors tell you, “I don’t care about the bottom line at all. Go grow revenues as quickly as you can,” that’s the directive from the shareholders and that’s what’s most likely going to happen. Now, those investors, at what point in time did they become indoctrinated with this business model? We could have a philosophical discussion about that.

[00:19:29] Patrick: Yeah. I’d love to hear.

[00:19:30] Orlando: Right. Is it that early-on VCs, teach these companies that way in order for them to, of course, grow in winning their markets? That’s the great thing to do, but also by doing that, do these companies need to raise more money and therefore there’s more room for investors to get the equity and then so on and so forth? It’s very interesting. One of the things that’s just so important to say is we believe in both high growth and high margin, and they’re not mutually exclusive. One actually drives the other, because when you also get growth, you should drop to the bottom line a higher margin than your existing margin in your business. In software where you have the marginal cost of your product is nearly zero, you do have to provide support, and of course, you have to pay for the distribution.

3. 10 Lessons from 2021 – Michael Batnick

Investors don’t necessarily get better with experience because markets are adaptive, unlike most of our learning environments. I won’t ever touch a stove again on purpose because I know it’s hot. I won’t go in a cold shower because I know it’s cold. But “I won’t ever buy stocks again when the CAPE ratio is above 25 because I remember 1999” is not the same thing.

To quote myself, “The greatest lesson we can learn from history is that those who learn too much from it are doomed to draw parallels where none exist.”

Skeptics sounds smart. Optimists make money. As I said at the top of this post, my reflections and lessons of this year are a time capsule of the current environment. An environment that might change as soon as I hit publish. Sure doom and gloomers will look like soothsayers from time to time, but I don’t know anybody who got rich fading the human spirit. Don’t short capitalism.

It’s easy to be a knee-jerk skeptic. In fact, that will probably serve an investor well. Shiny objects can be dangerous. But a healthier attitude, especially in a bull market, is to be knee-jerk curious. “Metaverse? What’s that? Sounds dumb, but maybe it’s worth investigating.”…

…Avoid extremes. Never go all in or all out. Both lead to extreme thinking, which leads to extremely bad outcomes. It’s one thing to say, “crap, I guess I can’t handle a portfolio of 80% stocks, I’ll dial it back to 60%.” It’s a whole other thing to say, “crap, I can’t handle the volatility. I’m gonna go to cash until things settle down.” One person is going to survive the ups and the downs and the other person isn’t.

4. DAOs, DACs, DAs and More: An Incomplete Terminology Guide – Vitalik Buterin

Here, we get into what is perhaps the holy grail, the thing that has the murkiest definition of all: decentralized autonomous organizations, and their corporate subclass, decentralized autonomous corporations (or, more recently, “companies”). The ideal of a decentralized autonomous organization is easy to describe: it is an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automaton itself cannot do.

Given the above, the important part of the definition is actually to focus on what a DAO is not, and what is not a DAO and is instead either a DO, a DA or an automated agent/AI. First of all, let’s consider DAs. The main difference between a DA and a DAO is that a DAO has internal capital; that is, a DAO contains some kind of internal property that is valuable in some way, and it has the ability to use that property as a mechanism for rewarding certain activities. BitTorrent has no internal property, and Bitcloud/Maidsafe-like systems have reputation but that reputation is not a saleable asset. Bitcoin and Namecoin, on the other hand, do. However, plain old DOs also have internal capital, as do autonomous agents.

Second, we can look at DOs. The obvious difference between a DO and a DAO, and the one inherent in the language, is the word “autonomous”; that is, in a DO the humans are the ones making the decisions, and a DAO is something that, in some fashion, makes decisions for itself. This is a surprisingly tricky distinction to define because, as dictatorships are always keen to point out, there is really no difference between a certain set of actors making decisions directly and that set of actors controlling all of the information through which decisions are made. In Bitcoin, a 51% attack between a small number of mining pools can make the blockchain reverse transactions, and in a hypothetical decentralized autonomous corporation the providers of the data inputs can all collude to make the DAC think that sending all of its money to1FxkfJQLJTXpW6QmxGT6oF43ZH959ns8Cq constitutes paying for a million nodes’ worth of computing power for ten years. However, there is obviously a meaningful distinction between the two, and so we do need to define it.

My own effort at defining the difference is as follows. DOs and DAOs are both vulnerable to collusion attacks, where (in the best case) a majority or (in worse cases) a significant percentage of a certain type of members collude to specifically direct the D*O’s activity. However, the difference is this: in a DAO collusion attacks are treated as a bug, whereas in a DO they are a feature. In a democracy, for example, the whole point is that a plurality of members choose what they like best and that solution gets executed; in Bitcoin’s on the other hand, the “default” behavior that happens when everyone acts according to individual interest without any desire for a specific outcome is the intent, and a 51% attack to favor a specific blockchain is an aberration. This appeal to social consensus is similar to the definition of a government: if a local gang starts charging a property tax to all shopowners, it may even get away with it in certain parts of the world, but no significant portion of the population will treat it as legitimate, whereas if a government starts doing the same the public response will be tilted in the other direction.

5. In the Middle of Transition: 2022 Semiconductor Outlook – Doug (Fabricated Knowledge)

The semiconductor market for years has been characterized by booms and busts… Historically, the boom-bust cycles are primarily driven by supply.

The core reason for this is that capacity additions are extremely lumpy and adding new capacity via a fab came with huge fixed costs, and then very low variable costs, especially in sub-sectors like memory. The incentives were obvious. If you had a new fab, you could use your marginal cost advantage to offer a cheaper product and, in the process, blow up the total profit pool. In many ways, this was the story of the ~80s-90s memory market…

…But of course, things changed. Moore’s law slowed down and the rising cost of making semiconductors from both the fabrication and design perspective has forced consolidation and more rational industry competition. Why blow up the profit pool of your entire industry when the magnitude of costs is reaching tens of billions of dollars? Why not add capacity in a more disciplined manner given that you know what your competitors are doing? This is exactly what’s happening in memory, the most hyper-cyclical part of the industry. Most of the more mature semiconductor segments have already started to focus on their own product fiefdoms. With little competition head to head and only at the margins. Consolidation also helped quite a bit.

Another large driver as software eating the world and semiconductors being used in more and larger parts of the economy. Our cars and our homes took more semiconductors, and of course, our phones became much more integral parts of our lives. We went from essentially one market in the 1990s (PCs) to multiple end markets today…

…The important thing is that each of these cycles are happening independently. For example, phones are starting to slow down in volume as the average life of a phone increases, while automotive companies are just starting to ramp EV and ADAS content in their cars.

This is a simple expression of the law of large numbers. If semiconductors have a positive growth relationship it would mean that the bigger the number of different markets that are not correlated, the closer the aggregate results will approach the underlying trend. Each new diversifier will lower the volatility of just a single market’s results. I think that’s happening today.

So back to the path of cyclical to secular growth and what it would look like. Especially for a cyclical industry, each time there’s a year of sustained strong results there’s an expectation of a reversal to the mean. As bullish as I am, I don’t have the guts to say, “growth only, no down years.” That kind of statement is insane to make if you’re in the business of having reasonable accurate projections given the historical base rate.

But right now, we have clear indications of new demand streams from AI, new industries, and the broader slowing of Moore’s law. We also have more disciplined and consolidated supply, and despite the crazy capacity additions that have already taken place, the industry continues to grow. Semiconductors seem to have swapped from a supply-driven industry to a demand-driven industry since the pandemic. That, to me, is the big key of what the cyclical-to-secular market would look like. Additionally, semiconductors actually grew through a recession, which is pretty telling for the secular argument.

If there were ever a scenario of an historically cyclical and supply-driven market shifting into a secularly growing, demand-driven market, we’re living in it. Students of history know that each year there should be a supply-driven correction at some point, but each year the balance of supply and demand looks to be in demand’s favor. So, while we think that the continued and consistent supply additions will eventually turn the market, demand continues to outweigh supply additions.

If this sounds familiar, it’s because it’s pretty much the regime we’ve been living under since 2020. The chip shortage was originally expected to abate or turn around by the end of 2021 and that looks like it won’t happen. Now it’s expected to end in 2023, but it’s not like there hasn’t been a huge capacity addition since last year. The supply-demand crossover always seems to be just one year away. What’s happening? Why haven’t the recent capacity additions relieved the supply-chain crisis? An exchange that I thought was pretty enlightening was this conversation on the Q3 2021 ASML earnings call, answering an analyst’s question:

“Yes, Sandeep. I mean you’ve been around a long time and you asked the million-dollar question. So — and the real answer is we don’t know. We have some indications and some ideas. And yes, you are absolutely right, the wafer out capacity today is a big — is a lot larger than it was in Q4 2020. That’s true. And still, we see these shortages. Now I spoke to a very large customer and basically asked the same question.

And I actually said, Peter, we don’t know either. Because somehow we haven’t been able to connect all the dots that actually are the underlying drivers for this demand.”

This sounds like an anecdote in favor of the shift towards a demand-driven market. Each year, massive supply is added, yet demand continues to simply outweigh it. That would be what the “secular growth” case would look like for me, and in some ways we’re in the perfect expression of that transition. We’re in the middle of it.

6. Does Not Compute – Morgan Housel

Investor Jim Grant once said:

To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.

That’s always been the case. And it will always be the case.

One way to think about this is that there are always two sides to every investment: The number and the story. Every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow.

The numbers are easy to measure, easy to track, easy to formulate. They’re getting easier as almost everyone has cheap access to information.

But the stories are often bizarre reflections of people’s hopes, dreams, fears, insecurities, and tribal affiliations. And they’re getting more bizarre as social media amplifies the most emotionally appealing views.

A few recent examples of how powerful this can be:

Lehman Brothers was in great shape on September 10th, 2008. Its Tier 1 capital ratio – a measure of a bank’s ability to endure loss – was 11.7%. That was higher than the previous quarter. Higher than Goldman Sachs. Higher than Bank of America. It was more capital than Lehman had in 2007, when the banking industry was about as strong as it had ever been.

Seventy-two hours later it was bankrupt.

The only thing that changed during those three days was investors’ faith in the company. One day they believed in the company. The next they didn’t and stopped buying the debt that funded Lehman’s balance sheet.

That faith is the only thing that mattered. But it was the one thing that was hard to quantify, hard to model, hard to predict, and didn’t compute in a traditional valuation model.

GameStop was the opposite. The statistics showed it was on the edge of bankruptcy in 2020. Then it became a cultural obsession on reddit, the stock surged, the company raised a ton of money, and now it’s worth $11 billion.

7. TIP410: The Changing World Order w/ Ray Dalio – William Green and Ray Dalio

William Green (00:11:23):

You make some slightly chilling predictions about the US without being definitive because, obviously, these are probabilistic bets. For example, I think at one point you say, “I think that the odds of the US devolving into a civil war type dynamic within the next 10 years are around 30%.” You say that’s related to the high risk of internal conflict, the kind of politic polarization and anger that we’re seeing in the country. You also talk about the rivalry with China and say that the probability of a big war in the next 10 years is 35%. I was both struck by the way that you think the importance of thinking probabilistically, which is something that’s always struck me when I interview great investors, whether it’s Joel Greenblatt or Howard Marks, this sense that nothing is black and white. It’s always betting on probabilities, which clearly is something that you’ve been a master of over the decades.

William Green (00:12:17):

But also I was very struck by actually the seriousness of those claims. I wondered if you could talk about that gravity because you say, for example, that the US really is in danger of tipping over one way or the other. It’s that you say it’s, “The world’s leading power is on the brink and could tip one way or the other.” Can you give us a sense, digging into firstly the debt issue and the printing of money, why this is such a precarious position to be in? Because I’m no economist and I sort of need the idiot’s guide to why this is such a treacherous financial situation to be in.

Ray Dalio (00:12:53):

Maybe I can describe the typical cycle and then pull it out. I won’t go through all of the 18 measures, if that’s okay. I think it’ll create the template. There are internal orders and there are external orders, and what I mean by an order is a system of operating. Usually, internal orders are written by constitutions and external orders are written by treaties and so on, and they follow a war typically. Let’s say World War II. There’s a war. After the war, there are winners and losers. The winners get together and they determine the order, the system. For example, the system in 1944 they determined the Bretton Woods monetary system with the dollar at the center and gold at the center. It was an American world order because the United States had 80% of the world’s gold, it accounted for half the world’s economy and it had the monopoly on nuclear weapons, which was dominant.

Ray Dalio (00:14:06):

So the United States was dominant in all ways and the center of it, the reason United Nations is in New York and the IMF and the World Bank are in Washington because we began the American world order dominated that way. That’s an example. But if you go back to other cases, the Treaty of Versailles was the prior world order. In order words, a war and then a resolution of that war and then new rules as to who did what. If you keep going back, you will see that there are those world orders that just go back, the Peace of Westphalia in something like 1668 or something. Each system then creates a new system and a new world order, and then that happens also internal orders like, let’s say, revolution.

Ray Dalio (00:14:57):

The Chinese domestic order began in 1949. They had a civil war and then they started their domestic order in 1949. There’s a cycle, and the way the cycle works typically is after the war there’s a peace. The peace comes because there’s a dominant power that no one wants to fight, and also everybody’s so sick of war and then so you usually have a period of peace, often quite an extended period of peace. And there’s the consolidation of power by the new leader and then the development of a system that allows development because you wiped out a lot of the old. You wiped out the old debts, you wiped out many of the old things, but you’re in the process of wiping them out and new start. Then that begins the arc of the period of peace and prosperity and productivity.

Ray Dalio (00:15:53):

For example, the Second Industrial Revolution was that kind of period, the post World War II period was that kind of a period in which there’s competition, things working hard and there’s a rise in living standards. Those rise in living standard, particularly work well in a capitalist economy. Capitalism was really, that I mean markets, stock market and so on, was invented by the Dutch. It’s a way of creating buying power to enable, let’s say, entrepreneurs to be able to do well but it distributes wealth indifferently so that it creates a larger wealth gap. Over a period of time, it creates a larger opportunity gap because there’s a tendency of those who gained well to be in a favored position.

Ray Dalio (00:16:47):

For example, their children can get education that poor children can’t get or they might have more influence and so on, and so you get larger gaps and those gaps also can represent opportunity gaps and so on. There’s a tendency also toward debt and capital market valuations to keep rising, so debt rises in relation to income because debt is buying power but there’s… If you pay it back in hard dollars or hard whatever the currency is, then that’s a problem. So you see it rise. All of these cycles, you see debt rise relative to income and that’s because it’s better to have spending power like we had this last cycle, send out the checks and send out the money. You’re sending out buying power. That is so much easier to do and favorable to do than to restrict it and to contain it. That’s what raises debt relative to income and raises that so that you produce a debt cycle.

Ray Dalio (00:17:55):

Go back to Old Testament and they’ll about the 50 year cycle and the Year of Jubilee and so on. But these cycles have gone on for a long time, and so these wealth gaps grow, level sort of indebtedness grow. Also what happens is the competitiveness as they get richer, the competitiveness declines because… It declines first because people, as they get richer they become more expensive in the world, they want to work less hard and also they gather more competition. Let’s say, for example, the Dutch built ships that were the best to go around the world and collect riches, but the British learned from that and hired Dutch ship builders to build ships or inexpensively and better ships by learning from them. So others become more competitive.

Ray Dalio (00:18:52):

Also, when they do very well at the top they typically become dominant in world trade. The Dutch accounted for 25% of world trade. As a result, they bring their currency and the currency that’s then commonly used around the world becomes a world currency, which we call a reserve currency. When they have that currency, then that becomes also something that people want to save it so those in other countries will want to buy that currency, which means lend and so that they will lend to countries, which tends to make them get more into debt. It’s a great privilege, they call it the exorbitant privilege, to be able to borrow money because you the reserve currency, but it does get you deeper into debt in your own currency. That sows the seeds again for problems.

Ray Dalio (00:19:48):

There’s a political system that also operates with this kind of cycle, which is the political system rewards spending and it doesn’t penalize debt. Nobody pays attention to how much debt you get into, they pay attention to what they receive. When they get more stimulation, that produces it so there’s a tendency to have that which raises the living standard over the short run but also produces the indebtedness for the long run. So that when you get, let’s say, in the top of that cycle you can see living standards are really at their highest, they’re very high. You start to see the complexion of the finances deteriorate, you see the competitiveness deteriorate and so on. People also behave differently.

Ray Dalio (00:20:38):

There is an age cycle. Those who went through the war and went through the Depression have a different psychology than those who are now the next generation, so as this passes on so then you have newer generation operating that, they know really to enjoy life more, devote attention to other things and so on. So competitiveness starts to decrease while the indebtedness… But it’s a very good feeling position to be in, but that sows the seeds. Then when you have excessive levels of indebtedness… When you have the gaps and the excessive level of indebtedness and you have the bad finances… Because when you have that borrowing, the debt, then it’s bad for the owners of the debt. Right now you have very negative real interest rates, in other words inflation adjusted interest rates so it doesn’t make any sense to hold the debt, those assets. Then you see the movement to other things and so on.

Ray Dalio (00:21:42):

Then when you have the large wealth gaps that enters into it at the same time as you have internal conflict and external conflict. When that gets… The cycle’s described in detail in the book, but you start to see political polarity and the rise of populism of the left and populism of the right becomes extreme and progressively more extreme. As a result, you no longer can be in the middle. In other words they say, “Pick a side and fight.” And the media and the politics work together to enrage people and to make them more inclined to fight. Of course, that generation didn’t go through war. Because they didn’t go through war, they’re more inclined to fight and everybody is cheering the fighter who will fight for their side.

Ray Dalio (00:22:33):

In history, it shows that when the causes that people are behind are more important to them than the system, the system is in jeopardy, which is the case now. That progresses and you have either an internal conflict, you have a financial problem [inaudible 00:22:50]. Now other things matter. You asked about the cycle because there are other things like education and civility. A long leading economic indicator is the quality of education, but education is not just understanding history and memorizing or knowing how to do math and such things, it’s also education in civility, how people behave with each other, the idea of all of those. As there’s better education, there’s better productivity that follows.

Ray Dalio (00:23:21):

There are a number of measures that I include in there. For example, infrastructure investing, how you’re improving your infrastructure, there’s measures of the military strength. When they go internationally, they need a stronger military to protect their supply lines and all of that. All of those… There’s 18 different measures that you can see, and you can see what the numbers were and are of those types of things to make up the arc, but the arc is basically along those lines until you get to the irreconcilable differences, whether they’re internal or external, and you get to the financial problems. That’s why I’m saying… I think just by the measures that’s where we are. If we take the very simple financial, is the amount of money that somebody’s earning greater than the amount that they’re spending? Are their assets better than their liabilities?

Ray Dalio (00:24:19):

That’s true for individuals, companies and countries because that country’s an aggregate of those. You can look at the financial condition. When you get to the printing of money stage, you are very late in the cycle. That’s a concerning thing. You have that financial piece together with the internal conflict or, let’s say, internal order and disorder piece. There’s a chapter on internal order and disorder, explains the cycle. Then there’s the external order and disorder, but it’s made up of a number of those other things like education, quality of leadership and so on.

---

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 ASML. 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 02 January 2022:

1. I Have A Few Questions – Morgan Housel

Who has the right answers but I ignore because they’re not articulate?

What haven’t I experienced firsthand that leaves me naive to how something works? As Jeff Immelt said, “Every job looks easy when you’re not the one doing it.”

Which of my current views would I disagree with if I were born in a different country or generation?

What do I desperately want to be true, so much that I think it’s true when it’s clearly not?

What is a problem that I think only applies to other countries/industries/careers that will eventually hit me?

What do I think is true but is actually just good marketing?

What looks unsustainable but is actually a new trend we haven’t accepted yet?

What has been true for decades that will stop working, but will drag along stubborn adherents because it had such a long track record of success?

2. TIP409: 2021 Top Takeaways w/ Trey Lockerbie – Trey Lockerbie

Trey Lockerbie (00:00:02):

In today’s episode, I am sharing my top takeaways from some of the conversations I had throughout 2021. I can’t express how grateful I am for having the privilege to learn from some of the greatest minds in finance, business, and investing. People like Howard Marks, Jeremy Grantham, Joel Greenblatt, Kyle Bass, Chamath Palihapitiya, Jim Collins, and so many more…

…Trey Lockerbie (00:04:47):

All right. So keeping on the topic of inflation, I also wanted to highlight this soundbite from episode 351 with Morgan Housel. At the beginning of the year, a lot of people were speculating around hyper-inflation just simply because of the money being printed.

Trey Lockerbie (00:05:01):

But Morgan’s point was highlighting that hyper-inflation really doesn’t happen until there’s also the supply side component. Now funny enough later in this year, we’re starting to see some real inflation numbers due to supply-side issues. But what Morgan’s really getting at here is how at risk, the dollar is from hyper-inflating away.

Morgan Housel (00:05:18):

Most historical periods of hyper-inflation if we’re really talking about real hyper-inflation, virtually all of them, I would struggle to find one example that did not take place in a society where they had massive output shrinkages. Because either it’s during the war and their factories are bombed to rebel, like happened in, Weimar Germany, or happened at the end of world war II in a lot of countries, or if it’s because the government has confiscated the major industries and run them into the ground as happened in Venezuela and Zimbabwe.

Morgan Housel (00:05:45):

It’s never just too much money, it’s always too much money during a time where your production, your GDP are collapsing. And I think that’s really important because of what happened after 2008 when the Feds started printing a lot of money. So many people, including myself, by the way, were saying, “Hyper-inflation right around the corner,” Feds printing so much money, you know what’s going to happen.

Morgan Housel (00:06:04):

And it didn’t. And I think the reason it didn’t is that the economy was well able to soak up a lot of that excess liquidity because our factories still had all the capacity that they can make stuff and produce stuff in a way that did not exist during Weimar Germany, or in Zimbabwe when the government had confiscated so many of the firms and run them into the ground. Or in Venezuela where the oil industry has been confiscated and run into the ground because they didn’t keep anything up.

Morgan Housel (00:06:30):

So it’s not to say that you can’t have a rise in inflation unless you have a decline in supply. It’s not that, but most of the time, big bouts of inflation come from a massive shrinkage in any economy’s ability to produce. Now, could that happen in the United States, too? Sure. Could it happen that we just don’t keep up with factory investment or we’re not investing in the right fields and we get to a spot where supply is shrinking, yes, of course, that could happen.

Morgan Housel (00:06:53):

And it’s happening right now in some specific fields. What’s happening in housing right now and particularly lumber is really fascinating, where the price of lumber is just going berserk. It’s going off the charts. I think it’s up about fivefold in the last year, the price of lumber to build a house. And from my understanding why that is, is not because we ran out of trees or even ran out of cutdown timber, there’s plenty of timber that’s been cut down and stripped of as bark, there’s plenty of that.

Morgan Housel (00:07:18):

From my understanding, a lot of the mills last spring said, “Oh, because of COVID, we’re going into the next great depression, shut down the mill, don’t invest in the mill, lay off the mill workers.” And now even though there’s plenty of logs, there’s not enough supply to manufacture finished wood. So we do have a decline in output in something like that. And sure, in enough we have nearly hyper-inflation in lumber.

Morgan Housel (00:07:41):

So it can happen in specific industries. I wont to be surprised if it happens in airlines this summer too, where you have airlines, some of whom have laid off tens of thousands of their workers or just through attrition have lost thousands of workers, flight attendants, pilots, and whatnot. Because last year, there was no work for any of them, and now this summer everyone who’s vaccinated is going to want to get on a plane and go somewhere.

Morgan Housel (00:08:02):

And so at the same time, you’re going to have maybe record demand, you have a huge decline in supply and could that lead to huge inflation in airlines? I think almost certainly. I think it’s some senses it will. The other area where I know it’s happening right now is rental cars. Where last year, a lot of the rental car companies just in a bid to survive started liquidating their fleets, just so that they had enough money to survive.

Morgan Housel (00:08:25):

And now that everyone wants to book a vacation right now, there are so many fewer rental cars available right now than there were last summer. So is there going to be huge inflation in rental cars this summer? Probably, but again, I’m making this point that it’s not just the money coming in, it’s the supply that went out that really causes the problem…

…Trey Lockerbie (00:57:51):

And as far as my favorite definition of risk, I think it came from Morgan Housel’s book where it says risk is what is left over when you think you’ve thought of everything. And in my episode with Morgan, he shared some amazing color around it. Here it is.

Morgan Housel (00:58:05):

People hear that and they think, “Okay, that’s great,” but let’s talk about the biggest risks that are out there. And you’re like, “No, no, no. The biggest risk is what no one is talking about because it’s impossible to know.” Or it’s so unlikely, it’s so crazy that people just wouldn’t even think about. Here’s a story that I wrote about this week that I think is really fascinating.

Morgan Housel (00:58:20):

During the Apollo space missions in the 1960s, before we started launching ourselves into space in rockets, NASA tested all of its equipment in super high altitude hot air balloon. So they would take a hot air balloon up to 130,000 feet, like just scraping the edge of outer space and they would test their equipment. They’d test their theories before they actually went up in rockets. So one time in 1961, NASA sent up a guy named, Victor Prather to 130,000 feet.

Morgan Housel (00:58:48):

And the goal of this mission in this hot air balloon was to test NASA’s new space suit prior to actually going into space. They wanted to go up to 130,000 feet, make sure everything was airtight. It worked under pressure, et cetera. Victor Prather goes on this mission, goes to 130,000 square feet, test a suit, the suit works beautifully everything’s great. Prather, Is coming back down to earth and when he’s low enough, he opens up the visor on his helmet, the face shield on his helmet.

Morgan Housel (00:59:13):

When he is low enough to breathe on his own, he can breathe the earth’s air, he’s low enough that he can do that all fine. He lands in the ocean as his planned and as the rescue helicopter comes to get him, he’s trying to tie himself onto the rescue helicopter’s rope and he slips, slips off his craft and falls into the ocean. Again, not a big deal because as soon is designed to be watertight and buoyant, but Victor Prather had opened up the mask in his helmet. As he falls into the ocean, he’s now exposed to the elements. His suit fills up with water and he drowns.

Morgan Housel (00:59:44):

And this to me is so fascinating because the NASA space missions during the moon race in the 1960s was probably the most heavily planned mission ever. You had thousands of the smartest people in the world, planning out every single minute detail and checking it over and over again, and being signed off by the most sophisticated expert risk committees that exist in the world, and they were so good at it. I mean, to have men walking on the moon, you need like every single millisecond was planned out every detail. And with Victor Prather, it was the same thing. They planned out every second of that mission.

Morgan Housel (01:00:20):

And then you overlook one tiny little microscopic thing, like opening your visor when it’s okay to breathe the earth air. And it kills them, and that to me is just an example of a risk is what’s left when you think you’ve thought of everything. And I think that’s an example of what happens in a lot of fields. Think if you were an economic analyst in the last five years and your job is to forecast the economy and you spend all your day, you spend 24 hours a day modeling GDP, modeling employment trends, modeling inflation, every detail about what the federal reserve is doing.

Morgan Housel (01:00:50):

You built the most sophisticated model in the world to predict what the economy’s going to do next. And then a little virus sneaks in and 30 million people lose their job. That’s how the world actually works. No economists in their right mind would’ve included that in their forecast. If you go back to 2019 or whatever, no one would’ve said, “Oh, I expect GDP is going to fall 20% next year, because we’re going to have…”

Morgan Housel (01:01:12):

No one said that. Of course, you couldn’t. You would be ridiculous to say that, but that’s how the world works. And I think it’s the same thing if you look at September the 11th or Pearl Harbor or Lehman brothers going bankrupt, because I couldn’t find a buyer, all the big events that actually move the needle, are things that people didn’t see coming.

3. Brantly Millegan – Ethereum Name Service – Eric Golden and Brantly Millegan

[00:05:40] Eric: And so I think a fun part to jump off, as I went through this, I’ve just learned so much about naming numbers, which is way more complex and interesting than I ever could have imagined. I think something that would be interesting is to just start with Web 2.0, and how Domain Name Services worked in general, and this idea of DNS. So if I wanted to own Ericgolden.com today, how would that work? How does the current internet work with naming numbers?

[00:06:05] Brantly: DNS actually predates not only Web 2, but it actually predates Web 1. It was not invented for the web. A lot of people think of these as like web domains, because that has become their primary use case. But it was actually not invented with the web in mind because the web didn’t exist. The current DNS came out 1984, 1985. The basic thing is, okay, you have types of identifiers that make sense for software. A software, if you have a string of 15 numbers, it can identify that, that number, non-number a second, it takes is easy. It can generate these things automatically. But of course, people can’t read this not friendly. We need language and social context, which computers, at least for the time being, are terrible at. Maybe AI will solve this problem, but right now it’s not. So naming system, at least with DNS, it’s just trying to bridge that gap. In some ways, the basic concept is to look up system. You have a name and you have data attached to that name. So when you type in a name somewhere, your computer just goes and looks it up on the system and grabs the relevant data and brings it back, just does all this in the background. The current system DNS has the best of 1980s technology. Something for people to remember on that is okay, public private key cryptography, which was invented in the ’70s, that was illegal to use in most contexts in the 1980s.

It was invented by some people in the United States, U.S government basically recognized that this is extremely powerful technology, we need to protect this. It wasn’t until the ’90s, there was this PGP movement with Phil Zimerman and Hal Finney and a couple others, that basically pressed the issue with the U.S government, eventually convinced the U.S government to make it no longer considered a munition, basically made it so anybody could use it. You wouldn’t get in trouble for sharing technologies with our enemies or something. That public private key cryptography technology, that is necessary for how the whole internet works. It’s the basis of wallets. So cryptocurrency wallets is just a public private key pair. It’s what it is. You have your private key and you have your public address. It’s really the hash of your public address. But this is critical technology. That was not legal in the ’80s. So all this is to say is DNS was designed and built without this. This is like the level of technology. And there have been attempts after the fact to try to add this into DNS, but it doesn’t even necessarily have wided options. It’s kind of hard once you build something. So DNS is very simple. It doesn’t have all the best technology. Something I will say for DNS though, is that it overall works extremely well. In insane engineering achievements in the world that this little project in the ’80s which was never intended to be used by the whole world, successfully scaled it up to billions of users. It’s spectacular. I have huge respect for the DNS community.

[00:08:48] Eric: Research this and getting to about ENS and DNS, I learned this idea called the Zooko’s triangle, that you needed these three properties to have an ideal naming system. Human meaningful, which is the fact that those numbers don’t mean anything to us. So how can we use English language or language to connect security and decentralization? So to your point, DNS is created in the ’80s. The decentralization for was essentially illegal. How did DNS satisfy those things today? How did names work today?

[00:09:20] Brantly: Is DNS decentralized? Depends on what you mean by this. There’s aspects of DNS that are very decentralized. So there’s parts DNS that are not decentralized. I’d say with our standards today, we’d probably say it’s not decentralized. It lacks things like users don’t have self custody of their names. So the way DNS works, if you own brantly.com, the fact that you own that depends on a number of other trusted third parties to maintain that for you. You can’t do self custody of brantly.com. That’s not possible given the way the system works. There’s always other people who have access to your name and could take it away from you if you want. By the way, that’s good and bad. Obviously it’s bad because it can be abused, censorship or something. It’s kind of good though. It’s really convenient. People who do a lot of bad things on the internet, it’s really convenient that the powers that be can just shut it off. It’s a double edge sword. But what ENS does is takes a lot of the DNS architecture, it virtualizes it, it puts it on Ethereum. It takes out all of those trusted third parties that they’re just required based on how the technology works with the old system, and allows for things like self custody and censorship resistance, which I think are very powerful.

[00:10:31] Eric: So people that were studying DNS and thinking about doing naming services with the introduction of Blockchain, it doesn’t seem like ENS was necessarily the first, but it does seem like it’s become very popular. And I’m always cautious with the word winning or the best. To me, and I’ve heard you talk about this, I just think about the usage. I see a lot of people with .eth names that it’s kind of being adopted. So I guess when people had the depth of history you had of DNS, saw Blockchain, give me a little understanding of there was Namecoin or there were other projects that I think attempted to do this, and how did they lead to ENS and how are they different?

[00:11:08] Brantly: Satoshi Nakamoto invented Blockchain technology because he wanted to have a decentralized currency, that was his motivation. That technology, as we all know well now, can be used for other things. Decentralized currency or peer-to-peer currency is just one application of Blockchain technology, of many. And people realized this pretty early on. The first non-currency use of Blockchain technology or attempt uses, was for internet naming. So Namecoin was some people called the first altcoin. Whenever you talk about a first, it’s like, “Well, what do you count?” There was that little project that kind of got going, but didn’t last very long. Do you count that. Namecoin was certainly the first important one, I would say. It has its own Blockchain, it has its own coin, it has Dot-Bit names. I think Satoshi was involved. Aaron Schwartz who sadly took his life in that whole MIT debacle thing, he was involved. There were a bunch of other people involved. They were right, that Blockchain technology is great for naming and provides a lot of interesting things. Namecoin’s now a dead project, it’s not doing anything. The problems with it is that you now had bootstrap your own Blockchain, it was kind of siloed off. They had problems with the distribution of names, things like this. But then came Ethereum in 2015. Ethereum was a revolution in the Blockchain space. There is like before Ethereum times and the after Ethereum times. Before Ethereum, if you wanted a new application, you had to build your own Blockchain and bootstrap it. This is very, very difficult to do. If you ever wanted to change anything about it, it’s really hard to change. Ethereum said, “Hey, let’s have a general purpose Blockchain. You can put any application on it. You don’t have to launch your own Blockchain, you just launch it on our Blockchain. Launch new applications easily.” And this led to this explosion of creativity and experimentation and development.

So ENS launched 2017, it has a huge number of advantages of Namecoin. So one, it’s in the Ethereum ecosystem. So it has composability. It can interact with everything else in Ethereum. It benefits from all the Ethereum infrastructure. We don’t have to build our own metamask and our own wallets and things like that. It’s like it all just in the Ethereum ecosystem, benefit from the security of that. So we just focus on that application. I think we also learned from some of the other failures of Namecoin regarding distributions to Nick being from the beginning was Like,” we have to have the incentive setups to disincentivize squatting and incentivize use from the beginning.” Because if you don’t, it just gets taken over by squatters and no one uses it, and the project actually fails. There have been many attempts, good faith attempts over the years. I would say ENS is the first one that’s actually gotten serious adoption and has gotten escape velocity. And I would say it’s the first one that has a shot at actually becoming a new protocol of the internet, which I think is really exciting and also makes the core team feel law of responsibility. Like, “Oh crap, this thing that many people have been working on and thinking about for years and attempts, we actually have something that is working. We need to not screw this up.”…

…[00:18:59] Eric: So, one thing I want to go back to is the enforcement and this censorship resistant thing that gets people very passionate, and I definitely see the arguments. In the current DNS system, if I’m a malicious actor and I set up a website, you had mentioned earlier they could shut it down, this is the strength in the weakness. First question is, who has the rights under DNS to shut down a domain or a bad actor?

[00:19:23] Brantly: So, there’s a bunch of different levels to the DNS system, but for the most part, generally speaking, people actually can’t just willy nilly shut down your website. And it depends on the reason why, and they’ve actually developed… See, something that the DNS community grappled with, actually early on, was there was no system for determining what could be shut down or not, or someone’s abusing something, can you do an enforcement action against them? And the DNS community, over many years, came up with a system called UDRP, which was an attempt to have a system with due process and everything. So, if you think someone’s misrepresenting themselves as you, or so something this, there’s a way you can take action. It’s not perfect. A lot of people think it’s just entirely arbitrary. That’s not true. It’s something. With ENS, when I tell people… Because some people say, “Well, what about abuse on the internet? You have to have a way to stop it,” which, actually, I agree on. We don’t want people using ENS for terrible things. But what I tell people is that you just have to come up with a new type of enforcement framework. What this means is, if someone’s doing something bad, let’s say, with .eth name, you can’t call up ENS and get them to fix it, you have to go to that person. You can’t do it through a centralized thing, you sort of have to go to that person, you have to find that person. Of course, you can always enforce something with the person themselves. That’s another thing, too. We use the word, like censorship resistance. That’s not the same thing as uncensorable. There is no such thing as something that’s uncensorable. That doesn’t exist in the world. Anybody who tells you that is not accurate. Censorship resistant just means maybe it’s harder to censor, or not through the normal ways that you would censor something.

4. The Lazarus heist: How North Korea almost pulled off a billion-dollar hack – Geoff White and Jean H Lee

In 2016 North Korean hackers planned a $1bn raid on Bangladesh’s national bank and came within an inch of success – it was only by a fluke that all but $81m of the transfers were halted, report Geoff White and Jean H Lee. But how did one of the world’s poorest and most isolated countries train a team of elite cyber-criminals?

It all started with a malfunctioning printer. It’s just part of modern life, and so when it happened to staff at Bangladesh Bank they thought the same thing most of us do: another day, another tech headache. It didn’t seem like a big deal.

But this wasn’t just any printer, and it wasn’t just any bank.

Bangladesh Bank is the country’s central bank, responsible for overseeing the precious currency reserves of a country where millions live in poverty.

And the printer played a pivotal role. It was located inside a highly secure room on the 10th floor of the bank’s main office in Dhaka, the capital. Its job was to print out records of the multi-million-dollar transfers flowing in and out of the bank.

When staff found it wasn’t working, at 08:45 on Friday 5 February 2016, “we assumed it was a common problem just like any other day,” duty manager Zubair Bin Huda later told police. “Such glitches had happened before.”

In fact, this was the first indication that Bangladesh Bank was in a lot of trouble. Hackers had broken into its computer networks, and at that very moment were carrying out the most audacious cyber-attack ever attempted. Their goal: to steal a billion dollars.

To spirit the money away, the gang behind the heist would use fake bank accounts, charities, casinos and a wide network of accomplices.

But who were these hackers and where were they from?

According to investigators the digital fingerprints point in just one direction: to the government of North Korea.

That North Korea would be the prime suspect in a case of cyber-crime might to some be a surprise. It’s one of the world’s poorest countries, and largely disconnected from the global community – technologically, economically, and in almost every other way.

And yet, according to the FBI, the audacious Bangladesh Bank hack was the culmination of years of methodical preparation by a shadowy team of hackers and middlemen across Asia, operating with the support of the North Korean regime.

In the cyber-security industry the North Korean hackers are known as the Lazarus Group, a reference to a biblical figure who came back from the dead; experts who tackled the group’s computer viruses found they were equally resilient…

…When the bank’s staff rebooted the printer, they got some very worrying news. Spilling out of it were urgent messages from the Federal Reserve Bank in New York – the “Fed” – where Bangladesh keeps a US-dollar account. The Fed had received instructions, apparently from Bangladesh Bank, to drain the entire account – close to a billion dollars.

The Bangladeshis tried to contact the Fed for clarification, but thanks to the hackers’ very careful timing, they couldn’t get through.

The hack started at around 20:00 Bangladesh time on Thursday 4 February. But in New York it was Thursday morning, giving the Fed plenty of time to (unwittingly) carry out the hackers’ wishes while Bangladesh was asleep.

The next day, Friday, was the start of the Bangladeshi weekend, which runs from Friday to Saturday. So the bank’s HQ in Dhaka was beginning two days off. And when the Bangladeshis began to uncover the theft on Saturday, it was already the weekend in New York.

“So you see the elegance of the attack,” says US-based cyber-security expert Rakesh Asthana. “The date of Thursday night has a very defined purpose. On Friday New York is working, and Bangladesh Bank is off. By the time Bangladesh Bank comes back on line, the Federal Reserve Bank is off. So it delayed the whole discovery by almost three days.”

And the hackers had another trick up their sleeve to buy even more time. Once they had transferred the money out of the Fed, they needed to send it somewhere. So they wired it to accounts they’d set up in Manila, the capital of the Philippines. And in 2016, Monday 8 February was the first day of the Lunar New Year, a national holiday across Asia.

By exploiting time differences between Bangladesh, New York and the Philippines, the hackers had engineered a clear five-day run to get the money away.

They had had plenty of time to plan all of this, because it turns out the Lazarus Group had been lurking inside Bangladesh Bank’s computer systems for a year.

In January 2015, an innocuous-looking email had been sent to several Bangladesh Bank employees. It came from a job seeker calling himself Rasel Ahlam. His polite enquiry included an invitation to download his CV and cover letter from a website. In reality, Rasel did not exist – he was simply a cover name being used by the Lazarus Group, according to FBI investigators. At least one person inside the bank fell for the trick, downloaded the documents, and got infected with the viruses hidden inside.

Once inside the bank’s systems, Lazarus Group began stealthily hopping from computer to computer, working their way towards the digital vaults and the billions of dollars they contained.

And then they stopped.

Why did the hackers only steal the money a whole year after the initial phishing email arrived at the bank? Why risk being discovered while hiding inside the bank’s systems all that time? Because, it seems, they needed the time to line up their escape routes for the money.

5. “Play-to-earn” and Bullshit Jobs – Paul Butler

In Bullshit Jobs: A Theory, David Graeber makes the case that a sizable chunk of the labour economy is essentially people performing useless work, as a sort of subconscious self-preservation instinct of the economic status quo. The book cites ample anecdotal evidence that people perceive their own jobs as completely disconnected from any sort of value creation, and makes the case that the ruling class stands to lose from the proletariat having extra free time on their hands. It’s a thoughtfully presented case, but when I read the book a few years back, I was skeptical that any mechanism to create bullshit jobs could arise from a system as inherently Darwinian as capitalism.

I’ve recently been exploring the themes around web3 to see if there’s a “there” there, and Graeber’s book has been on my mind again. One of the most apparently successful examples of web3 that people point to, aside from art NFTs, is so-called play-to-earn games. The most successful of these is Axie Infinity, a trade-and-battle game reminiscent of Pokemon.

In a crypto economy crowded with vapourware and alpha-stage software, Axie Infinity stands out. Not only has it amassed a large base of users, the in-game economy has actually provided a real-world income stream to working-class Filipinos impacted by the pandemic. Some spend hours each day playing the game, and then sell the in-game currency they earn to pay their real-world bills. That’s obviously a good thing for them, but it also appears to be a near-Platonic example of Graeber’s definition of a bullshit job.

Gamers have a word, grinding, to describe repetitive tasks undertaken to gain some desired in-game goal, but are not fun in themselves. This seems to sum up players’ experience with Axie Infinity, which is often described as work or a chore…

…There is some logic to the idea that the game could sustain a mix of players, some of whom are net recipients of capital and some of whom are net contributors who are in it for a good time. This is how other in-game economies have sustained themselves. I’m wholly unconvinced that Axie Infinity is headed in that direction, frankly, because it just doesn’t look fun enough that people will pony up upwards of $1,000 to play it for its own sake. Informal polls, unscientific as they are, seem to bear this out.

(As for power and respect, well. I’m old enough to remember the momentary schoolyard respect associated with earning a rare Pokemon in the original GameBoy game, but it’s not a kind of respect that can be bought and sold.)

By blurring the line between “player” and “worker”, the game has effectively built a Ponzi scheme with built-in deniability. Sure, some users will be net gainers and other users will be net losers, but who am I to say the net losers aren’t in it for the joy of the game? The same could be said about online poker or sports betting, to be sure, but we would rightfully recoil if those were positioned as a way to lift people out of poverty.

6. Why it’s too early to get excited about Web3 – Tim O’Reilly

The term Web 3.0 was used in 2006 by Tim Berners-Lee, the creator of the World Wide Web, as a look forward to the next stage of the web beyond Web 2.0. He thought that the “Semantic Web” was going to be central to that evolution. It didn’t turn out that way. Now people make the case that the next generation of the web will be based on crypto.

“Web3” as we think of it today was introduced in 2014 by Gavin Wood, one of the cocreators of Ethereum. Wood’s compact definition of Web3, as he put it in a recent Wired interview, is simple: “Less trust, more truth.”

In making this assertion, Wood was contrasting Web3 with the original internet protocol, whose ethos was perhaps best summed up by Jon Postel’s “robustness principle”: “TCP implementations should follow a general principle of robustness: be conservative in what you do, be liberal in what you accept from others.” This ethos became the foundation of a global decentralized computer network in which no one need be in charge as long as everyone did their best to follow the same protocols and was tolerant of deviations. This system rapidly outcompeted all proprietary networks and changed the world. Unfortunately, time proved that the creators of this system were too idealistic, failing to take into account bad actors and, perhaps more importantly, failing to anticipate the enormous centralization of power that would be made possible by big data, even on top of a decentralized network…

…If Web3 is to become a general purpose financial system, or a general system for decentralized trust, it needs to develop robust interfaces with the real world, its legal systems, and the operating economy. The story of ConstitutionDAO illustrates how difficult it is to build bridges between the self-referential world of crypto assets being bought with cryptocurrencies and a working economic system where the Web3 economy is linked to actual ownership or the utility of non-Web 3 assets. If the DAO (decentralized autonomous organization) had succeeded in buying a rare copy of the US constitution at auction, its members wouldn’t have had a legal ownership stake in the actual object or even clear governance rights as to what might happen with it. It would have been owned by an LLC set up by the people who started the project. And when the DAO failed to win the bid, the LLC has had trouble even refunding the money to its backers.

The failure to think through and build interfaces to existing legal and commercial mechanisms is in stark contrast to previous generations of the web, which quickly became a digital shadow of everything in the physical world—people, objects, locations, businesses—with interconnections that made it easy to create economically valuable new services in the existing economy. The easy money to be made speculating on crypto assets seems to have distracted developers and investors from the hard work of building useful real-world services…

…There is another kind of bubble, though, identified by economist Carlota Perez in her book Technological Revolutions and Financial Capital. She notes that virtually every past major industrial transformation—the first Industrial Revolution; the age of steam power; the age of steel, electricity, and heavy machinery; the age of automobiles, oil, and mass production; and the internet—was accompanied by a financial bubble.

Perez identifies four stages in each of these 50–60-year innovation cycles. In the first stage, there’s foundational investment in new technology. This gives way to speculative frenzy in which financial capital seeks continued outsized returns in a rapidly evolving market that is beginning to consolidate. After the speculative bubble pops, there’s a period of more-sustained consolidation and market correction (including regulation of excess market power), followed by a mature “golden age” of integration of the new technology into society. Eventually, the technology is sufficiently mature that capital moves elsewhere, funding the next nascent technology revolution, and the cycle repeats.

An important conclusion of Perez’s analysis is that a true technology revolution must be accompanied by the development of substantial new infrastructure. For the first Industrial Revolution, this included canal and road networks; for the second, railways, ports, and postal services; for the third, electrical, water, and distribution networks; for the oil age, interstate highways, airports, refining and distribution capacity, and hotels and motels; for the information age, chip fabs, ubiquitous telecommunications, and data centers.

Much of this infrastructure build-out is funded during the bubble phase. As Perez puts it:

What is perhaps the crucial role of the financial bubble is to facilitate the unavoidable over-investment in the new infrastructures. The nature of these networks is such that they cannot provide enough service to be profitable unless they reach enough coverage for widespread usage. The bubble provides the necessary asset inflation for investors to expect capital gains, even if there are no profits or dividends yet…

…So is what we’re calling Web3 the foundational investment period of a new subcycle, or the bubble period of the preceding one? It seems to me that one way to tell is the nature of the investment. Is abundant financial capital building out useful infrastructure in the way that we saw for the previous cycles?

It’s not clear to me that NFTs fit the bill. There’s no question, though, that the disruption of finance—in the same way that the internet has already disrupted media and commerce—would represent an essential next stage in the current cycle of technological revolution. In particular, if it were possible for capital to be allocated effectively without the trust and authority of large centralized capital providers (“Wall Street” so to speak), that would be a foundational advance. In that regard, what I’d be looking for is evidence of capital allocation via cryptocurrencies toward productive investment in the operating economy rather than capital allocation toward imaginary assets. Let me know of any good instances that you hear about.

To make clearer what I’m talking about, let me take an aside from crypto and Web3 to look at another technology revolution: the green energy revolution. There, it is completely obvious that bubble valuations are already financing the development of lasting infrastructure. Elon Musk has been a master at taking the outsized speculative price of Tesla stock (which at one point a year or two ago was valued at 1,500 years of the company’s profits!) and turning it into a nationwide electric vehicle charging grid, battery gigafactories, and autonomous vehicle capabilities, all the while catalyzing entire industries to chase him into the future. So too has Jeff Bezos used Amazon’s outsized valuation to build a new infrastructure of just-in-time commerce. And both of them are investing in the infrastructure of the commercial space industry.

In assessing the progress toward Web3 as advertised, I’d also compare the adoption of cryptocurrency for other functions of financial systems—purchasing, remittances, and so on—not only with traditional banking networks but also with other emerging technologies. For example, are Ripple and Stellar more successful platforms for cross-border remittances than bank transfers, credit cards, or PayPal, in the same way that Google Maps was better than Rand McNally or first-generation GPS pioneers like Garmin? There’s some evidence that crypto is becoming a meaningful player in this market, though regulatory hurdles are slowing adoption. Never mind remittances, though—what about payments more generally? How does growth compare with that of a non-crypto payment startup like Melio, which is focused on building against small business use cases? Given the interest in crypto from companies like Square (now Block) and Stripe, they are well positioned to tell us of progress for crypto relative to more traditional payment mechanisms.

7. Explaining Our Miraculous Flourishing – Marian L. Tupy

There is no God in Jonah Goldberg’s new book, Suicide of the West: How the Rebirth of Tribalism, Populism, Nationalism, and Identity Politics is Destroying American Democracy. But the book nonetheless revolves around a miracle. “The Miracle” is the shorthand Goldberg, a bestselling author, syndicated columnist, senior editor at National Review and a fellow at the American Enterprise Institute, uses to describe the escape of our species from the depths of ignorance, poverty and every-day conflict to the heights of scientific achievement, material abundance and relative peace.

To appreciate Goldberg’s Miracle, consider the following. Homo sapiens are between 200,000 and 300,000 years old. Yet the modern world, with all the conveniences that we take for granted (I wrote this article sitting on a plane 8 kilometers above ground, using an internet connection provided by a satellite orbiting 37,000 kilometers above the surface of the Earth), is merely 250 years old. Put differently, for the first 99.9 percent of our time on earth, progress was painfully slow. Then everything suddenly changed. Why? That’s the question that Goldberg strives to answer…

…The Miracle happened not because of, but in spite of, hundreds of thousands of years of evolution. Our rule-based society, where equality before the law takes precedence over the social and economic status of the individual, a staggeringly complex global economy that turns strangers from different continents into instant business partners, and a meritocratic system of social and economic advancement that ignores people’s innate features, such as race and gender, is both very new and extremely fragile…

…In a refreshingly non-relativistic manner, which is one of Goldberg’s trademarks, he writes, “I believe that, conceptually, we have reached the end of history. We are at the summit, and at this altitude [political] left and right lose most of their meaning. Because when you are at the top of the mountain, any direction you turn – be it left toward socialism or right toward nationalism … the result is the same: You must go down, back whence you came.”

And that descent (decline, if you will) is the key threat that we all ought to keep in mind. The forces of tribalism always linger just below the surface and are never permanently subdued. From Russia and China to Turkey and, to some extent, the United States, the all-mighty chieftain is back in charge. From the darkest corners of the web, where nationalists and anti-Semites thrive, to the university campuses, where identity politics flourish, group loyalty takes precedence over the individual. These dangerous sentiments originate, it is true, in human nature. But their renewed lease on life springs, as Goldberg reminds us, from something much more banal – ingratitude defined as “forgetfulness of, or poor return for, kindness received.”

---

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

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

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

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

Here are the articles for the week ending 19 December 2021:

1. Want to be a Disruptor? – Marc Randolph

Stories of disruption almost always start this way.

I recently consulted for a large manufacturer who sold their product using a classic distribution model; they sold their product to distributors; the distributors sold to retailers; the retailers sold to the end users.  Everyone was happy.  Of course, to support so many tiers of distribution, the price to the end-user had to be high, but so what?  They had a monopoly.  Where else was a customer going to go?

But then the inevitable happened.  A start-up launched a similar product, but rather than take the leader on directly, they bypassed the usual channels and sold directly to end users.  The product wasn’t as good, but by cutting out distributors and high-priced salespeople, their prices were about half.

The CEO of the larger company saw this happening and knew exactly how to respond.  They would launch their own direct-to-consumer division and use their more powerful brand name and dramatically larger marketing budget to nip this threat in the bud.  All good.

All good, that is, until their VP of sales heard about it.  “We’re going to compete with our own distributors? You’re going to make my job harder? I’m out of here!”

The next call came from their biggest distributor. “You’re going to compete with me?  Find yourself another distributor!”

Soon the entire retail network was up in arms.  The direct-to-consumer division idea was shut down before it even started.

And the start-up?  They got three good years of market share gains before the larger company finally decided to launch the D2C division they should have launched at the beginning.  But by then it was too late. 

2. The Volatility is the Point – Joshua Brown

You don’t grasp that returns only come to those who are willing to bear that volatility when others won’t.

The volatility is the point.

It is the growling guard dog that keeps others away and safeguards the opportunity for you, if you dare.

It’s the reminder that the road to wealth isn’t freshly paved blacktop. As Logan Roy explained to his son this weekend, “It’s a fight for a knife in the mud.”

Its the governor that forces us – me, you, everyone – to be thoughtful about the size and nature of risk we’re about to take.

If not for the volatility, the fluctuation and drawdown, the pain of seeing dollars on a screen disappear, then premium returns over the interest rate on a checking account would not exist. That’s where the term ‘risk premium’ comes from. No risk, no premium. Showing off your ignorance of this concept lets everyone know how immature, inexperienced, uninformed and short-sighted you are.

Real players of the game know this. That’s why you never see them cackling at others over losses, be they temporary or permanent. Anyone who’s ever accomplished anything in the investment markets has lost. Many times. Lost big. Will lose again.

You cannot win if you are unwilling to lose.

It cannot be any other way.

3. Aaron Wright – A Primer on DAOs – Eric Golden and Bill Aaron Wright

[00:05:08] Eric: From that germ, that whitepaper, that first let’s call it DAO, it was about a year later, they were attempting to raise $500,000. They raised something like 150 million. There was a famous hack, which people can go read about, and then an SEC letter that said, “These are securities.” And so the first DAO didn’t go well. And I think what I’m really curious about is someone like you, who’s starting to take a very successful career and dedicate it to this space, what made you stay with DAOs in the midst of all this, I’m assuming, very negative emotion?

[00:05:37] Aaron: Why did I get involved with this? Many ways, lawyers are architects. They structure transactions, they help people manage risk, and they also help structure the flow of value. And so it’s a core thing that lawyers think about all the time or these top level issues related to how value flows, how to create different structures to accommodate the different risks, and also governance. That’s a big thing of what lawyers think about, particularly if they’re counseling in a more traditional setting, like a board of directors, or working with clients that may have these difficult questions that emerge when different groups of people work together. And so for me, I was fortunate enough to fall down the Bitcoin rabbit hole pretty early, fascinated by concepts around Bitcoin. And I think many folks in the ecosystem recognized that the DAO itself was an experiment. And even though it didn’t wind up in a place that everybody was hoping, this core idea of having a different and disparate group of people work together to pull capital to begin to support projects was something that I’ve always found really fascinating.

I think the notion that we can build more effective organizations, more efficient organizations is something that is probably one of the most important sets of questions that we, as a society, have to grapple with. I think for folks that have grown up during the time when I’ve grown up, we’ve seen failures on the part of different corporations, different governmental bodies, different organizations, to be responsive to the needs of people. And to me, DAOs, at their broadest level, are hopefully going to be able to present new ways to do things or improve ways to do things so that we can begin to tackle these problems. But at its core, why have I been so focused on blockchain technology and Ethereum? I think it’s because this idea that’s embedded in blockchains is exceptionally powerful. How can we work together, even though we may live in different countries, even though we may live in different time zones, to build something that we can all reasonably rely upon in order to order our affairs, whether that’s a store value like Bitcoin or the broader use cases that we’re seeing on Ethereum?

I just think that that’s one of the most important technical tasks that we can spend time with. And that’s why I’ve been so focused on it. And I do think that its core, Ethereum is a super fascinating system, not just because it’s a more generalized version of Bitcoin and not just because it has this global virtual machine that you can execute smart contract code in, but fundamentally, it’s a rules engine and it’s a protocol for rules and law. And that’s something that I’ve spent a lot of time thinking about, both as a practicing lawyer and as an academic. So not surprisingly, it tickles me in all the right places…

…[00:13:26] Eric: So I’m super excited to go into Flamingo. But before we do that, I just want to go back to something you said about Silicon Valley missing some of the biggest moves here. What do you think it is about Silicon Valley that led to this blind spot?

[00:14:34] Aaron: Crypto is one of the first major technology categories that didn’t come out of traditional academia. Obviously, lots of academic innovations have fed into crypto, but Bitcoin started with a synonymous whitepaper, a, or a group of developers that released into the wild on a message board… Mailing list, not even a message board. So I think it’s always been a little non-traditional, and I think a lot of the entrepreneurs and innovators that work in the crypto space don’t necessarily fit the classic archetype of a Silicon Valley entrepreneur. They may not have gone to the best schools. They may be located outside of the Valley. They may be working on remote teams, at least pre-COVID, was not the norm. They may not have gone to the most illustrious schools.

So, that combination, I think, has always made it a little bit of an oddity to some Silicon Valley-type investors. It’s not that they haven’t backed amazing teams, they have. I just think there’s been some that have slipped through the filter, which I’m sure always happens, but it seems to happen at a higher rate when it comes to crypto.

I think the other thing is, for the projects that they did back, in many ways, they seemed obvious to plenty of folks in the space that they needed capital and support. It didn’t make much sense that that capital shouldn’t come from the community that they were interacting with. The folks that were actually going to use the platforms or projects or DAP or whatever they’re developing and/or continue to provide longer-term support. I think that was another thing that fed in into our thinking…

…[00:18:05] Eric: We’re going to jump into the legal side, obviously, and understand the difference between this and an LLC. But before we get there, I think the secret sauce of DAOs, in particular, from my watching of Flamingo from the outside, it’s this idea of a hive mind as you call it. First, can you just define for the audience, what is a hive mind because I really think this is the secret sauce that people don’t focus on as much of what makes a DAO or specifically Flamingo special?

[00:18:30] Aaron: I think it’s a unique characteristic of our DAOs and other DAOs that are following a similar model. We have 70 plus members, many of whom put their own capital at risk. And they’re passionate about a particular topic. So this is what they’re geeking out on. They’re spending countless hours per day, even if they have other jobs, completely obsessing over NFTs, opportunities, different communities, artists, ecosystems that are creating NFTS by blending together the voices of not just a handful of people, let’s say like one or two people, or maybe possibly more, which would be the normal setup inside of like a hedge fund or a venture capital fund. It’s a broader group.

That broader group creates a filter about potential opportunities. So we’ve seen in the NFT ecosystem plenty of projects that launch and then their price goes up and then it rapidly comes down. Those types of projects don’t tend to gain traction inside of Flamingo. Even though if you’re an avid reader of CryptoTwitter, or even paying attention in the popular press, some of these projects would’ve hit your radar. This broader base of active participants, I think just creates a better noise to signal ratio. And people are interested in different parts of the ecosystem.

We have some folks that are really focused on early NFTs and collectibles. We have other members that are really focused on generative art. And we’ve done a lot to support generative art, both by supporting Art Blocks and also by collecting a whole bunch of generative artworks. We have other folks that are focused more on this transition of digital artists into NFTs or emerging artists that are using NFTs to develop their platform. We have folks that have been diving deep into the metaverse, and that’s why we set up Neon because we realized that that was a bigger opportunity. And we’re geeking out on different land or parcels or other items that can be acquired in the metaverse.

We had folks that were focused on gaming and other subcategories inside that broader NFT ecosystem. So because this broad range of coverage, it’s like a brain. Different people are focused on different areas, but everybody could have an opinion on it. And you kind of get a sense of whether or not you’re making a good or bad decision, palpably feel opportunities and whether people are excited about it. And now that have a network of DAOs, you can see these different hive minds coming to decisions. And sometimes you get some interesting signal across all the DAOs.

[00:20:51] Eric: How does this brain work? I’d really like to talk about the investment process. How do you source a deal? How do you think about what people would in normal investing think about is due diligence? How do you make a decision and then monitor that investment?

[00:21:06] Aaron: In terms of deals, that would be more kind of in the bucket of the LAO. So supporting a project or a company or some other more venture capital like, venture capital styled investment, there the deals come from all angles. All of our members have different networks that they’re a part of. They know different founders. And if they hear that a project that they’re interested in is raising, they’ll flag it. We congregate on Discord. So they’ll flag it in a new opportunities channel. And they’ll circulate a little bit of information. That catches one or more person’s eye. Then either that member will schedule a time to talk to the team to get more detail, and then report that back. My company, Tribute Labs, will fill in the gaps. So if no member’s able to do that, we’ll schedule a call and collect that information and report it back.

Either based in the conversation in Discord. We also have some calls that people can voluntarily join, which are pretty well attended. We’ll get a flavor of whether or not people want to move forward. If there’s like a sentiment that people want to move forward, there’ll be some soft polling on Discord, just to get a sense and confirm it. And assuming that they want to move forward, it goes up for a formal vote.

Somebody will draft up a proposal or the team will apply and describe why they need the capital. And then it goes up for a formal on-chain vote at that point in time. If more people want to support the project than not support the project during a voting window, it’s seven days in LAO. It’s shorter in some of the other DAOs. Then the capital’s committed. And then we take steps to kind of make sure that all the legal docs and other things are in order and are authorized to settle the transaction on behalf of the members.

[00:22:47] Eric: So in the LAO, I guess thinking about that, that sounds a lot like a venture capital model. How do you think in the way of speed that what you just described, going into a Discord, saying, “I have an idea. I was just talking to this founder. I like it. Let’s get together.” How does that compare in speed to a traditional several partners at a venture capital firm having a meeting to say, “We should do this deal”?

[00:23:07] Aaron: Before crypto, and I think a lot of VC funds that operate in crypto are moving faster, but we can come to a decision in a matter of hours if needed. People are online. They can weigh in on polling. If we need to move quick, then we can move quick. If things are slower, we can move slower and collect some more information. So just the cadence. If you look at the number of deals that the LAO’s done, it’s over a hundred. That’s a lot for most VC funds.

They’re really looking, at least a lot of them are looking to kind of maximize their exposure into a smaller number of bets. We take a slightly different approach where we’re looking to build connections to great projects and teams. We’re happy to participate in a number of different rounds and work with as many teams as we think are worthy of working with.

Inside Flamingo, when it comes to a particular project in different capacities or NFT opportunity, well, it’s a similar process in the sense that people flag either an artist or they’ll flag a set of NFTs that they’re interested in, and there’ll be a conversation related to it. And people will get excited and will decide what the allocation should be. And then either members will acquire them or we’ll acquire them on behalf of the members.

[00:24:18] Eric: One of the beautiful things about blockchain is I can look into your portfolio and see things that you’ve purchased. And now I’m talking about Flamingo. When I look at it, you have 242 CryptoPunks, which I think makes you one of the top holders. You have 22 Bored Apes. I’m curious, just how did you arrive at those allocations? What was it like? Someone said, “Hey, these Bored Apes are launching. This is a good idea. Let’s just throw some money at it.” Or were you saying, “No, we really want to meet with the founders first.” Like, how do we go from, I just saw something on Twitter or my friend told me something we should get involved to sending capital from the Flamingo DAO?

[00:24:51] Aaron: CryptoPunks have been around for a while. We developed inside Flamingo just some core buckets that we were interested in collecting. One of those buckets inside Flamingo was early NFTs. So that included things like CryptoPunks, Autoglyphs, and there’s a handful of other projects.

We began to look at the market and tried to get a sense of what we thought the opportunity would be. When it came to Punks, we bought a handful off the bat. And then there was increasing numbers of proposals to just expand that exposure until we got to a point where we became one of the largest holders in that project. The thesis there, at least distilling it down for members, was really that if there’s going to be trends of NFTs, at some point, people would look back to see what the really first original ones were. And there was some one-off ones, but CryptoPunks stood out as being one of those early iconic sets. And we wanted to have a pretty heavy exposure into that.

For Bored Apes, Bored Apes, it’s an amazing project and I think it’s completely fascinating. And I think they’ve developed an amazing community and have an incredible roadmap. That one, I think members were a little less sure about, just because of the way it was kind of released. And the fact that at that point in time there was more sets of NFTs that were getting created every day. But one member in particular was very, very interested in Bored Apes and thought that we should at least have some exposure there. So we just decided to acquire a handful. And then, I think we acquired a couple more after that, as we began to learn a little bit more about what Bored Apes was thinking about as a community and the plan for developing those sets of characters.

4. Integrating Around The Consumer: A path forward for the global apparel manufacturing supply chain – Jon George and Peter Ting

A widely used but erroneous framework that has guided the supply chain’s business model evolution (and those of other industries) is based on the notion of core competence. If a process fits a company’s core competence, it’s done internally, and if another company can perform the process better or for lower cost, it’s outsourced. The problem with this approach is that what may not be a value-added activity today, may be crucial tomorrow and vice versa. Additionally, core competencies can actually become core rigidities, limiting a company’s ability to adapt to a changing landscape. So, “core competence” is not the most reliable framework for managers in deciding which activities their companies should perform in order to maintain attractive profits over time.

In contrast, the Theory of Interdependence and Modularity is based on the fact that products, services, and even entire industries have architectures that dictate which components or steps are required to make something work and how they should fit together. Products and services have multiple constituent components, and they go through several value-added processes before reaching consumers. The place where any two components fit together is called an interface. Interfaces exist not just within products but also between stages in the value-added chain. For example, there is an interface between manufacturing and distribution, and another between distribution and retailing.

An architecture is interdependent if one process component cannot be completed independently of another. This happens if the way one component is designed and made depends on the way other components are designed and made. When there are unpredictable interdependencies across an interface, the same organization needs to perform both steps in that value chain in order to adequately do either step.

Businesses commonly adopt an interdependent architecture during early phases of an industry when products and services aren’t quite good enough for consumers. An interdependent architecture optimizes on performance, and businesses need to integrate multiple components and value-added processes to be competitive. For example, early computer manufacturers like IBM designed and produced nearly all the required components—including microprocessors, drives, memory, operating systems, etc.—to deliver computers with enough performance to satisfy customer expectations.

In contrast, in a modular architecture, components and processes fit and work together in well understood and highly defined ways. This happens when there is no unpredictability across interfaces. In this architecture, each step of the value-added process is specifiable, verifiable, and predictable. Therefore, it doesn’t matter who makes a given component or performs a service in a certain part of the value chain. Today’s personal computer industry is highly modular. Nearly any component from any manufacturer can fit into any motherboard due to industry-wide standards that specify exactly how interfaces pass data from one component to another (SCSI, USB, etc).

A modular architecture optimizes on flexibility, but this comes at the cost of performance. Modular architectures must be highly specified. As a result, engineers have less latitude in designing a product for bleeding edge performance. Thus, modular architectures tend to be prevalent in products or industries that have matured to a point where some aspects of performance can be sacrificed in favor of choice and customization.

The primary difference between the two architectures and the main implication to businesses is the basis of competition, or the way in which companies must optimize their offerings in order to compete effectively. Initially, when there is a performance gap—when functionality and reliability are not yet good enough for consumers—companies win by taking the interdependent architecture and controlling every critical component of their offerings. However, as products and services improve over time, the basis of competition changes. Performance gaps that once necessitated integration become performance surpluses, and consumers at some point stop paying a premium for ever more functionality. When this overshooting happens, what becomes “not good enough” is that consumers cannot get exactly what they want, when they need it, as conveniently as possible. As a result, the industry migrates to a modular architecture to meet customer demand along new dimensions: speed to market, convenience, and customization. 

5. Could cosmic rays unlock the secret tomb of China’s Qin Shi Huang guarded by terracotta warriors? – Stephen Chen

The Mausoleum of the First Qin Emperor in Xian, Shaanxi province, was built by hundreds of thousands of labourers over nearly four decades and finished around 208BC, according to Han dynasty historian Sima Qian, who lived soon after that period.

With a total area more than 70 times the size of the Forbidden City, it is the biggest tomb ever built for an individual in the world.

The tomb’s surface buildings are no longer standing, but its underground structures are mostly still intact. Some archaeologists believe the central chamber that housed the emperor’s coffin and most valuable treasures remain undisturbed after they combed the entire field and found no holes indicating thieves had been at work.

The study, funded by the central government to evaluate the feasibility of the cosmic ray project, found at least two cosmic ray detectors would be needed, to be planted in different locations less than 100 metres (328 feet) under the surface of the tomb.

These devices, each about the size of a washing machine, could detect subatomic particles of cosmic origin piercing the ground.

The data would allow scientists to identify hidden structures unseen using other detection methods in high detail, said Professor Liu Yuanyuan and her colleagues at Beijing Normal University in a paper published in Acta Physica Sinica, the official journal of the Chinese Physical Society, on Monday…

…After decades of surveying, archaeologists have confirmed the existence of an underground palace more than 30 metres tall. They also found trace evidence supporting descriptions by Sima that had been disregarded as fairy tale, such as pools and waterways filled with mercury to mimic China’s major rivers and the sea.

But the palace’s detailed structure and the exact location of the emperor’s chamber remained uncertain. Sima’s other descriptions – such as traps armed with arrows and crossbows to shoot anyone who enters the tomb – were not verified.

Using cosmic rays in archaeology is a concept that dates as far back as the 1960s. Astrophysicists discovered that cosmic rays could hit air molecules and produce a particle known as a muon that could penetrate almost anything.

Muons have a higher chance of being absorbed when going through denser materials. By comparing the number of muons a detector received from various angles, archaeologists could discover hollow structures, such as hidden chambers or passages in a building.

6. How To Be Successful – Sam Altman

Most people are primarily externally driven; they do what they do because they want to impress other people. This is bad for many reasons, but here are two important ones.

First, you will work on consensus ideas and on consensus career tracks.  You will care a lot—much more than you realize—if other people think you’re doing the right thing. This will probably prevent you from doing truly interesting work, and even if you do, someone else would have done it anyway.

Second, you will usually get risk calculations wrong. You’ll be very focused on keeping up with other people and not falling behind in competitive games, even in the short term.

Smart people seem to be especially at risk of such externally-driven behavior. Being aware of it helps, but only a little—you will likely have to work super-hard to not fall in the mimetic trap.

The most successful people I know are primarily internally driven; they do what they do to impress themselves and because they feel compelled to make something happen in the world. After you’ve made enough money to buy whatever you want and gotten enough social status that it stops being fun to get more, this is the only force I know of that will continue to drive you to higher levels of performance.

This is why the question of a person’s motivation is so important. It’s the first thing I try to understand about someone. The right motivations are hard to define a set of rules for, but you know it when you see it.

Jessica Livingston and Paul Graham are my benchmarks for this. YC was widely mocked for the first few years, and almost no one thought it would be a big success when they first started. But they thought it would be great for the world if it worked, and they love helping people, and they were convinced their new model was better than the existing model.

Eventually, you will define your success by performing excellent work in areas that are important to you. The sooner you can start off in that direction, the further you will be able to go. It is hard to be wildly successful at anything you aren’t obsessed with.

7. Investing: Is it skill or luck? – Eugene Ng

“There’s a quick and easy way to test whether an activity involves skill: ask whether you can lose on purpose. In games of skill, it’s clear that you can lose intentionally, but when playing roulette or the lottery, you can’t lose on purpose.

— Michael Mauboussin”

With activities of skill, like chess, swimming, basketball, one can lose on purpose (as long as you have some basic mastery of the activity). Whereas with activities of luck, like roulette, coin toss, lottery, one cannot lose on purpose. If one cannot lose on purpose, one cannot win on purpose. Following which, if one can lose on purpose, one too can win on purpose, it is likely to be an activity of skill. This has significant implications to us as investors, who are buyers of individual stocks for the long-term. Can this similarly be applied to investing? Which begs the question, can one lose intentionally and pick losing stocks for the long-term?…\

…That is also, why we are of the following view that:

1. Investing, especially over relatively short periods of time, is much more a matter of luck than of skill.
2. Investing, especially over relatively long periods of time, is much more a matter of skill than of luck.

Investing is often viewed by many and the financial media as more luck than skill, because in the short-term, feedback loops are often unclear and inconsistent and can be very volatile. In addition, very few investors keep playing the game very well for decades and beyond, thus investing is rarely viewed as a skilled game by most. But as we think one can possibly win intentionally (read our book to find out how), we do believe one can also lose intentionally as well. To us, investing is both a game of both luck and skill, and where it is on the continuum, depends on the strategy deployed, how it is being played, and the time perspective.

We do believe that gradually with time, in years and decades, that investing as an activity in the luck-skill continuum, can shift more to the right over time (i.e. more skill than luck), as skill becomes more evident for the ones who do have the skill, with luck still playing a crucial role.

---

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 don’t have a 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 12 December 2021:

1. TIP399: The Real Life Tony Stark W/ Josh Wolfe – Trey Lockerbie and Josh Wolfe

Trey Lockerbie (00:14:13):
That is interesting because yeah, it’s easy to assume that with that kind of money and success and ego, even, and experience, you would be tempted to apply that to the people you’re investigating and not let them be as autonomous as maybe you have. So that’s an interesting point. Bill’s also very interested in nuclear and I am as well. I’m just kind of hopeful for that for the future of energy. And you’ve got experience in the space as well and I’d like to just maybe take a minute and explore what the future of nuclear looks like in your opinion,

Josh Wolfe (00:14:44):
In part the future of nuclear is going to look like the past, or I think ought to, but we’ll get to that in a second. Bill funded a company called TerraPower, which is a traveling wave nuclear reactor and he was quite bullish on that. And frankly pre COVID and pre some of the tensions between US and China, it looked probable that China was going to become a big, early customer. But we spent a few years going back 10 years here at Lux looking at every part of the nuclear fuel cycle and studying it. And we did this as an exemplar of, while I was discussing before being intellectually competitive and looking where other people were looking, everybody in the venture world, going back to the early 2010s, was looking at clean and green, and they were looking at biofuels, ethanol, batteries, electric vehicles, wind solar, things that were mostly talked about in Al Gore’s movie of the time An Inconvenient Truth, which helped to light a fuse under the movement.

Josh Wolfe (00:15:30):
And it became a little bit of a religious movement, most of the people praying at the altar really did not talk about nuclear. Nuclear still had a, what I would consider, generational and celebrity taboo, the generational being going back to the ’60s and ’70s, and the celebrity being people like Neil Young and Patty Smith who were rockers of the day, who basically were singing at concerts, being like no nukes. And there was a conflation for the ever everyday person that no nukes as a form of nuclear weapon versus no nukes in the form of power, which is clean and green, and at the time nobody was really focused on low carbon. And so the conflation of nuclear war and nuclear power, I think, has set us back many generations. I think it’ll take another 50 years really until we see widespread nuclear use.

Josh Wolfe (00:16:12):
So we looked at every part of the nuclear fuel cycle, we decided that uranium miners were mostly hucksters and fraudsters, as many mining companies are in Nevada and Montana. And we basically said, leave that to somebody else. And the other unique thing about nuclear, as opposed to say oil and gas, was a characteristic that, the marginal price of the input in oil or gas is basically defined by your marginal cost of extraction, and it’s what guides markets. The marginal price of uranium is just a very small percentage of the total operating cost for nuclear. Most of it is the operations, the regulations, the CapEx that goes into the physical equipment, the maintenance, the human labor, it’s a very different construct. It’s a small sub single digit, single digit percentage so that when uranium fluctuates as it did going back a decade from like 25, to 30, to $70 per pound of uranium, it didn’t matter.

Josh Wolfe (00:17:01):
And so, we did not look at the mining people, we did look at modular reactors, and while Bill Gates had funded that in TerraPower, and there were probably six or seven other different constructs for efficient modular reactor instead of building a Gigawatt power plant that might cost $1 billion and could serve a million people. The idea was, could you build something that was smaller, maybe a $100,000 or $1 million and build hundreds of them? And put on powers you need in a very modular way. I think it’s a great idea, I just unfortunately think that it’s going to take a very long time, you’re going to have to have safety and approval and manufacturing. You also increase the chance that there’s a risk on any one thing that creates a failure point that could actually triple everything which normally in a redundant system you would be okay with, but in this you’re increasing more failure points.

Josh Wolfe (00:17:42):
The history of traditional nuclear power, particularly in the US is somewhere between exceptional and extremely exceptional. You had Three Mile Island, which was a disaster, zero people died. There was more evidence of the efficacy of the fail safe systems that basically shut the system down. That also, unfortunately, happened to coincide with the movie The China Syndrome. So this is going back to 1979, I think. And again, it captured the zeitgeist of a nuclear down, and so that was just unfortunate. In contrast, Chernobyl was an absolute certifiable disaster, and that’s been well documented literally in documentary or a dramatized movie, I think on HBO or Showtime about Chernobyl and I think it really talks not so much to the engineering failure, but to the human failure of being able to report truthfully up a chain of command to prevent things from getting worse.

Josh Wolfe (00:18:26):
And then Fukushima was also a disaster, less a human disaster, maybe you can say it would be the equivalent here of like an army Corps of engineers, but in failing to anticipate this super low, negative, back swan event, a super low probability high magnitude consequence, it wasn’t nuclear failure, it was a failure of the architecture to be able to prevent a breach from a tsunami. And so, that set it back, but already you see Japan beginning to restart and rebuild for nuclear. So one would’ve imagined that that would’ve been a generation or two before people would embrace nuclear again, already they are. You’re seeing the consequences both in energy scarcity in Europe, the rise of the green party, and Germany the increased leverage has given Putin in Russia with natural gas pipelines. France has, always generated about 80% of its electricity.

Josh Wolfe (00:19:09):
Southern California had shut down nuclear power plants and had to import electricity from Arizona, which was producing it by a nuclear. And so unfortunately the religious zeitgeist around no nukes has, I think, created some worse devils in the world. And I believe that the future is going to be a combination of speculative investment that is going into phishing, primarily large dollars will go into fusion. I expect that, of course, there’s a very low probability that many of those things will ever actually produce energy. Obviously this entire planet is premised on receipt of power from a fusion reactor, that is the sun, but I’m more skeptical about it being on a timeline that’s investible. And so I would advocate that there just needs to be a rebranding of nuclear. I talk about it as elemental power.

Josh Wolfe (00:19:51):
So people could talk about the sun, which they like the wind that they like. So solar and wind. You could talk about natural gas to an extent, and then you could talk about uranium, this wonderful yellow rock that, when enriched slightly can boil water with no carbon released and turn turbines and produce beautiful, clean electricity. As I joke that if elemental power were discovered, in recent weeks, we would be screaming with joy and it would grace every cover of every publication, exalted that we just solved the climate crisis. So, I think it more than any engineering or investment, it just needs a rebranding and zeitgeist to capture young people, advocate and demand for elemental power, and I think that would be the best thing for society…

…Trey Lockerbie (00:53:02):
One of the sense that was missing in your outline there that I just couldn’t help, but call out is the smell. The smelling sense that I know you had a passion for developing that technology, is there any update there?

Josh Wolfe (00:53:12):
No, it’s a constant hunt for me and maybe a hunt for a year or 10, I have no idea. But I am primed for the optionality of trying to discover it. What it is, just for people who are watching or listening, is the idea that I can pick up this phone and it is a remote control for pretty much everything in my life. I’m able to conjure a car, conjure a meal, control devices around me through response system, or iPhone, and I can capture high fidelity sound, I can play that sound back with high fidelity speakers. I can capture high fidelity imagery, static or dynamic in the form of video, increasingly 4k and 120 frames a second, and then I can play whatever high quality, high density, high pixelated displays.

Josh Wolfe (00:53:51):
The one sense that I can capture today, and I already have haptics that are tapping me on my watch, so I have a sense of feel, I can’t capture smell. And when you say, “Well, why do you want to capture smell?” It is our most salient memory connected sense. And so whether it’s the smell of a loved one, the smell of nostalgia, the smell of a wine or a food, being on a beach in vacation, capturing that dimension, not just of the sound of the waves or the visual of it in a different speed, slow motion, or faster, as realistic as possible. But that smell that is like the one French word I know, that [foreign language 00:54:21] of that moment, and being able to share that with somebody.

Josh Wolfe (00:54:25):
And so that second piece is not only, do you have to capture it? But you have to be able to play it back. Now capturing, if I would’ve told you 20 years ago, you can walk into a cafe and hold up a little magic Star Trek device and whatever song is playing, it will tell you exactly what that song is. You never have to write it down, you don’t have to record it and the ability to Shazam is effectively capturing a digital signature of sound waves that are permeating through the air, tied to a central database. It does pattern recognition, figures out what segment that is and what it matches to in the database. It says, “It’s this Drake song or whatever it is,” the same thing will happen with smell.

Josh Wolfe (00:54:56):
There are volatile organic compounds, today you can use a mass spectrometry machine to be able to look at the chemical signature of that visually. And eventually those technologies will become solid state, they will shrink down. Maybe they’ll be small scale lasers in the same way that we have like LIDAR in our iPhone today that can do 3D depth sensing of physical spaces used to require big machine, and you’ll be able to get a smell signature, press a button and basically have a Shazam for, hey, what is that smell? And then somebody else will have to invent the playback mechanism. So they’ll be recording and they’ll be playback, and I’m absolutely convinced it will happen because it kind of already obey the laws of physics, and there’s no reason that it can’t, we just have to find the right combination of technologies to put together, to make it happen and I hope to fund the ones that win. 

2. Blockchain Can Wrest the Internet From Corporations’ Grasp – Chris Dixon

As the internet has evolved over its 35-year lifespan, control over its most important services has gradually shifted from open source protocols maintained by non-profit communities to proprietary services operated by large tech companies. As a result, billions of people got access to amazing, free technologies. But that shift also created serious problems.

Millions of users have had their private data misused or stolen. Creators and businesses that rely on internet platforms are subject to sudden rule changes that take away their audiences and profits. But there is a growing movement—emerging from the blockchain and cryptocurrency world—to build new internet services that combine the power of modern, centralized services with the community-led ethos of the original internet. We should embrace it.

From the 1980s through the early 2000s, the dominant internet services were built on open protocols that the internet community controlled. For example, the Domain Name System, the internet’s “phone book,” is controlled by a distributed network of people and organizations, using rules that are created and administered in the open. This means that anyone who adheres to community standards can own a domain name and establish an internet presence. It also means that the power of companies operating web and email hosting is kept in check—if they misbehave, customers can port their domain names to competing providers.

From the mid 2000s to the present, trust in open protocols was replaced by trust in corporate management teams. As companies like Google, Twitter, and Facebook built software and services that surpassed the capabilities of open protocols, users migrated to these more sophisticated platforms. But their code was proprietary, and their governing principles could change on a whim…

…There has been a lot of talk in the past few years about blockchains, which are heavily hyped but poorly understood. Blockchains are networks of physical computers that work together in concert to form a single virtual computer. The benefit is that, unlike a traditional computer, a blockchain computer can offer strong trust guarantees, rooted in the mathematical and game-theoretic properties of the system. A user or developer can trust that a piece of code running on a blockchain computer will continue to behave as designed, even if individual participants in the network change their motivations or try to subvert the system. This means that the control of a blockchain computer can be placed in the hands of a community.

3. Bill Doyle – Novocure: Using Physics to Fight Cancer – Patrick O’Shaughnessy and Bill Doyle

[00:03:04] Patrick: So Bill, where to begin this really interesting conversation? It’s a field that I have limited experience with, but a deep interest in and before we get into Novocure specifically, maybe the best place to begin is a little bit higher level with just the state of cancer research and treatment writ large. If you could sort of paint a picture for us of what the world looks like today, relative to maybe when you first got involved in this space. So that we can appreciate the rate of change and the state-of-the-art today.

[00:03:32] Bill: From my perspective, and I certainly don’t have the only perspective here, but I think, first and foremost. We’re all familiar with cancer, we’re all touched by it, either personally or through loved ones. I think we all fear it. We fear it because not withstanding all of the research and progress that’s been made. The approaches to treat chemotherapy haven’t changed all that much in a 100 years. We still have essentially three tools and I’ll expand upon this a little bit, but those three tools are well known. Surgery, radiation therapy, and chemotherapy, or I’ll make a slightly larger basket, pharmacological therapy. There have been progress made in all of those areas. They’re all 120 years old, approximately. A few trace back to the first surgeries for breast cancer at Johns Hopkins or the first chemotherapies that were used in Germany and clearly the Curie’s in radiation therapy.

We’ve got about 120 years of history, but still today, the majority, and really the vast majority of people who are diagnosed with cancer will die of that cancer. Now, we have some wonderful examples of some cures. Great progress in areas, leukemia, certain types of breast cancer. But again, I can make the statement that most of the people who are diagnosed with cancer will die, in fact of that cancer. Now, there is more than hope. There’s been incredible, tremendous progress, particularly over the last 20 years. I think our understanding of the cell, understanding of the genetics of cells and proteins has clearly expanded and that has led and is leading to new therapies. Today, it’s still most effective of cancers, so called the simpler cancers, the cancers that may result from a simple genetic mutation and the more complex cancers we’ve yet to make progress. But we think that progress may be very much on the horizon.

[00:05:41] Patrick: Can you just describe, maybe an overly simplistic question, but what cancer is literally? What is happening in the cells or in the body when somebody gets and has a cancer that grows and becomes life threatening?

[00:05:52] Bill: Of course, normal cells grow. They divide and they die and then are removed from the body. In its simplest sense, cancer is an uncontrolled growth. In the case of solid tumors, which are the cancers that we’re focused on, literally results in masses that impinge upon normally functioning organs, for the most part and disrupt their function. Furthermore, those cancers will metastasize. And that’s the fancy word for spread from their point of initiation to other parts of the body, creating satellite cancers that also have this deleterious effect…

…[00:19:12] Patrick: Now we can finally get with that great setup and great overview of the space itself, into the technology that you at Novocure have pioneered. This idea of tumor treating field. So introduce us first to the technology. And then we’ll use that understanding to start to dive into the business itself too.

[00:19:28] Bill: So we start where you started. Historically, the therapies available to the oncologists have been broadly surgery, radiation and drug therapies. We just discussed that the drug therapies are … And the strategies are expanding from poisons to things like immune stimulators, but it’s still in that realm of pharmacology. Novocure has developed a completely new modality, a fourth modality to fight cancer. The original invention was made by a gentleman named Yoram Palti. Dr. Palti, is an MD, PhD professor at the Technion in Israel and Dr. Palti’s expertise actually his many expertise, but his principle expertise is the effect of electrical phenomenon on tissue. He’s one of the pioneers in developing the technology that is used to treat, for instance cardiac arrhythmias. When there are electrical signals that are going to the wrong place in the heart, that results in atria or the ventricles beating too quickly or too slowly.

One of the therapeutic approaches to treat those arrhythmias is to map those electrical pathways that are firing in the wrong direction and then put a catheter inside the heart and make a small burn to prevent that pathway. Dr. Palti was at the forefront of developing those systems that are used in hospitals around the world. But about 20 years ago, he called me and I got to know him. In an earlier part of my career, I was responsible for R&D and business development in the medical device group at J&J. So I got to know Professor Palti, as we were working on these cardiac ablation systems together. And he called me and I flew to Israel. We had lunch at one of these delightful beach restaurants in Tel Aviv. And I was expecting to hear the next generation of cardiac therapy and he surprised me with an idea to treat cancer. And again, this was completely out of left field.

But his idea was that many of the proteins that are involved in cell division have a very strong electrical charge. They’re so called strong dipoles. So they have a strong negative charge on one end of the protein and a positive charge on the other end of the protein and electric fields, similar to magnetic fields or gravitational field. A gravitational field pulls on masses, a magnetic field pulls on ferous metals. An electrical field pulls on charged bodies. And he said, “If I can get an electric field inside a cell, I think I can push and pull in those proteins. And instead of getting a normal cell division, I think I can kill that cell.” And that was the fundamental idea that we now call Tumor Treating Fields. That we can get an electric field selectively now into a rapidly dividing cancer cell push and pull on the machinery of division. And instead of that cell dividing and becoming two cancer cells, have it die during cell division.

[00:22:37] Patrick: So going back to the issue that you brought up, cancer is different from a bacteria, or virus that are so different, we’ve got cells that are roughly similar to normal healthy cells. What is the mechanism by which … I want to come back to how this thing actually works. The pulverizer of cancer cells through electrical fields, but how do you first make sure that you’re not pulverizing good, healthy cells? What is the difference that you’re able to work off of to make this targeted?

[00:23:02] Bill: That was one of the big questions on day one. This sounds good, but other cancer therapies. One does it work and two, what’s the toxicity profile of this therapy? Because we were all brought up worried about our cell phones, worried about living under power lines. There’s sort of all this mythology around electric fields. Now, we’re going to put it into the body. We have some lucky biology here. What I just described, in order for that to happen, obviously the electric field has to get into the cell and it turns out the cell membrane that surrounds the cytoplasm is actually a pretty good filter for electric fields. It keeps the electric fields out of the cells. And in order to get the electric fields into the cell, we have to tune them to a specific frequency that will penetrate the cell membrane. And it turns out because of a number of physical properties, back to the difference between cancer cells and normal cells. There are enough differences having to do with the salt on the membrane, the thickness of the membrane, the size of the membrane, where we can differentiate between cancer cells and normal dividing cells.

The analogy I like to use here, when I’m describing this to my non-physicist friends, which are most of my friends. We all have car radios. You can think about all the radio stations that we listen to, all exist in the ether. It’s not as, if you’re pressing a button and you’re turning on one station, they’re all there. But the box that we use allows us to filter one at a time. In the old days, when I had my first car, it had a knob and I would turn that knob, which turned a capacitor. And I grew up outside of Baltimore. So I would go to 98 megahertz that would let 98 Rock into the amplifier. And that’s what I would hear. I’d get tired of that. I’d go to DC 101, a 101 megahertz, and that would let 101 megahertz into the amplifier. And that’s what I would hear. That’s what we’re doing with cells. We tune that frequency for GBM, the Tumor Treating Fields get into the GBM cells. If we want to treat pancreatic cancer, we tune the Tumor Treating Fields to get into the pancreatic cancer and then we treat that cancer. So it’s maybe not a perfect analogy, but it’s like tuning an FM radio…

…[00:34:42] Patrick: This might be another odd question, but prior to meeting you, why had I not heard of this? I’ve known people that have had GBM, for sure. Obviously, cancer writ large. And I was very familiar with the original three, surgery, radiation chemotherapy. This didn’t come out last year. Like technology’s been around for, I think almost 20 years now. What are the interesting non-obvious barriers to adoption? What do people fear about this? What are some of the non-medical challenges that you faced? Why hadn’t I heard of it?

[00:35:10] Bill: Being a pioneer creates great opportunity, but also, there’s huge challenges. I sort of joke, when I had that lunch with Palti. The good news is, I was trained as an engineer. So I knew what an electric field was, the bad news for me is, I had no idea how hard it was going to be to change how medicine is practiced. Let’s face it, surgery, radiation, chemo, as I said, they’ve all been around for over a 100 years. The current generation of oncologists study these modalities in medical school. I won’t call it the military industrial complex. The oncology industrial complex is focused around doing drug research. Most of the oncologists, there is always that point and I don’t know whether it’s in high school or college where you go to physics or biology. Vast majority of docs went biology. They didn’t go to physics.

A lot of my discussions with clinicians and brilliant clinicians, but they start with, this is an electric field, It really is Physics 101. I think too, if you diagnose with GBM, I would hope in the US at least, Tumor Treating Fields would be presented to you as a therapy option. I know that’s not universally the case yet. We’re working very hard to make that the case. Right now, about 40% of the eligible patients in the US receive a prescription for Tumor Treating Fields. Now, that’s better than five. The other 60 can all benefit. So we’re working very hard to overcome really the educational gap, but let’s face it. I was skeptical when I first heard about this, everybody starts skeptical. Oh, yeah. We’re going to zap it with magic rays.

4. Web3 is Bullshit – Stephen Diehl

At its core web3 is a vapid marketing campaign that attempts to reframe the public’s negative associations of crypto assets into a false narrative about disruption of legacy tech company hegemony. It is a distraction in the pursuit of selling more coins and continuing the gravy train of evading securities regulation. We see this manifest in the circularity in which the crypto and web3 movement talks about itself. It’s not about solving real consumer problems. The only problem to be solved by web3 is how to post-hoc rationalize its own existence.

The blockchain offers nothing new or worthwhile to the universe of technology. It’s a one trick pony whose only application is creating censorship resistant crypto investment schemes, an invention whose negative externalities and capacity for harm vastly outweigh any possible uses. Every single problem proposed to be solved by blockchain hits up against three fundamental technical limitations that inescapably arise from economic or legal concerns. The three technical issues of the narrative are:

1. The Compute Problem
2. The Bandwidth Problem
3. The Storage Problem

On a compute basis, blockchain networks don’t scale except by becoming the very same plutocratic and centralized systems they allegedly were designed to replace. There is an absurd cost to trying to do censorship resistant computation. In this regime there is a hard incentive to minimize program execution time because the entire network is forced to recompute every single program as part of it’s insanely wasteful process of attempting to reach consensus about a giant global state machine. This inevitably drives the cost per program instruction into the stratosphere. The Ethereum virtual machine has the equivalent computational power of an Atari 2600 from the 1970s except it runs on casino chips that cost $500 a pop and every few minutes we have to reload it like a slot machine to buy a few more cycles. That anyone could consider this to be the computational backbone to the new global internet is beyond laughable. We’ve gone from the world of abundance in cloud computing where the cost of compute time per person was nearly at post-scarcity levels, to the reverse of trying to enforce artificial scarcity on the most abundant resource humanity has ever created. This is regression, not progress.

And then there’s the inconvenient truth about the bandwidth problem of both computers and human resources. Blockchain solutions are vastly more expensive to maintain than centralized solutions, and centralization always wins purely from its ability to physically serve data over a network to customers more efficiently. For this hypothetical proposed decentralized Facebook there are several inescapable logistic questions. Who will pay for the global data centers to serve content? Whose lawyers will respond to the DMCA requests? Who is going to ban the Nazi accounts? Who will issue deletes on CSAM content? Who will reset grandma’s password when she forgets? Running a global business on this scale requires an inescapable amount of centralization just by the brute fact of having to exist and interact with the rest of the civilization. If you introduce centralized data centres and processes to handle all of the messy human interactions, well then congratulations you’ve just recreated Facebook by another name.

Finally there’s the notion of the storage problem, which taps at the heart of what many argue is one of the biggest societal questions of the 21st century: “Who owns our data?”. The web3 narrative is incredibly antithetical to the notion of data deletion because the technical underpinnings of append-only and immutable databases don’t admit this operation by design. Yet every new business model must cross the bridge about customer data visibility and who they will let on the platform. Who’s servers will have custody of your private family photos and who get’s to determine those access controls? And these are questions that are not about consensus algorithms, distributed databases or cryptography at all, they’re inescapably questions about power, privilege and access. Technology won’t save us from having to ask the hard questions of who should have power to control our digital lives. The answer will always be somebody, it’s just a question of who.

5. The Strange Brain of the World’s Greatest Solo Climber – J.B. Mackinnon

Honnold is history’s greatest ever climber in the free solo style, meaning he ascends without a rope or protective equipment of any kind. Above about 50 feet, any fall would likely be lethal, which means that, on epic days of soloing, he might spend 12 or more hours in the Death Zone. On the hardest parts of some climbing routes, his fingers will have no more contact with the rock than most people have with the touchscreens of their phones, while his toes press down on edges as thin as sticks of gum. Just watching a video of Honnold climbing will trigger some degree of vertigo, heart palpitations, or nausea in most people, and that’s if they can watch them at all. Even Honnold has said that his palms sweat when he watches himself on film.

All of this has made Honnold the most famous climber in the world. He has appeared on the cover of National Geographic, on 60 Minutes, in commercials for Citibank and BMW, and in a trove of viral videos. He might insist that he feels fear (he describes standing on Thank God Ledge as “surprisingly scary”), but he has become a paramount symbol of fearlessness…

…The cognitive neuroscientist who volunteered to carry out the scan is Jane Joseph, who in 2005 was one of the first people to perform fMRIs on high sensation seekers—people who are drawn to intense experiences and are willing to take risks to have them. Psychologists have studied sensation seeking for decades because it often leads to out-of-control behaviors such as drug and alcohol addiction, unsafe sex, and problem gambling. In Honnold, Joseph saw the possibility of a more remarkable typology: the super sensation seeker, who pursues experiences at the outer limits of danger, yet is able to tightly regulate the mind and body’s responses to them. She is also simply in awe of what Honnold can do. She had tried to watch videos of him climbing ropeless, but being a low sensation seeker herself, found them overwhelming.

“I’m excited to see what his brain looks like,” she says, sitting in the control room behind leaded glass as the scan begins. “Then we’ll just check what his amygdala is doing, to see: Does he really have no fear?”

Often referred to as the brain’s fear center, the amygdala is more precisely the center of a threat response and interpretation system. It receives information on a straight pathway from our senses, which allows us to, for example, step back from an unexpected precipice without a moment’s conscious thought, and triggers a roster of other bodily responses familiar to almost everyone: racing heartbeat, sweaty palms, tunnel vision, loss of appetite. Meanwhile, the amygdala sends information up the line for higher processing in the cortical structures of the brain, where it may be translated into the conscious emotion we call fear.

An initial anatomical scan of Honnold’s brain appears on MRI technician James Purl’s computer. “Can you go down to his amygdala? We have to know,” says Joseph. Medical literature includes cases of people with rare congenital conditions, such as Urbach-Wiethe disease, which damage and degrade the amygdala. While these people generally don’t experience fear, they also tend to show other bizarre symptoms, such as a total lack of concern for personal space. One individual was comfortable standing nose-to-nose with others while making direct eye contact.

Purl scrolls down, down, through the Rorschach topography of Honnold’s brain, until, with the suddenness of a photo bomb, a pair of almond-shaped nodes materialize out of the morass. “He has one!” says Joseph, and Purl laughs. Whatever else explains how Honnold can climb ropeless into the Death Zone, it isn’t because there’s an empty space where his amygdala should be. At a glance, Joseph says, the apparatus seems perfectly healthy.

Inside the tube, Honnold is looking at a series of about 200 images that flick past at the speed of channel surfing. The photographs are meant to disturb or excite. “At least in non-Alex people, these would evoke a strong response in the amygdala,” says Joseph. “I can’t bear to look at some of them, to be honest.” The selection includes corpses with their facial features bloodily reorganized; a toilet choked with feces; a woman shaving herself, Brazilian style; and two invigorating mountain-climbing scenes.

“Maybe his amygdala is not firing—he’s having no internal reactions to these stimuli,” says Joseph. “But it could be the case that he has such a well-honed regulatory system that he can say, ‘OK, I’m feeling all this stuff, my amygdala is going off,’ but his frontal cortex is just so powerful that it can calm him down.”

There is also a more existential question. “Why does he do this?” she says. “He knows it’s life-threatening—I’m sure people tell him every day. So there may be some kind of really strong reward, like the thrill of it is very rewarding.”

To find out, Honnold is now running through a second experiment, the “reward task,” in the scanner. He can win or lose small amounts of money (the most he can win is $22) depending on how quickly he clicks a button when signaled. “It’s a task that we know activates the reward circuitry very strongly in the rest of us,” Joseph says.

In this case, she’s looking most closely at another brain apparatus, the nucleus accumbens, located not far from the amygdala (which is also at play in the reward circuitry) near the top of the brainstem. It is one of the principal processors of dopamine, a neurotransmitter that arouses desire and pleasure. High sensation seekers, Joseph explains, may require more stimulation than other people to get a dopamine hit…

…Even to the untrained eye, the reason for her interest is clear. Joseph had used a control subject—a high-sensation-seeking male rock climber of similar age to Honnold—for comparison. Like Honnold, the control subject had described the scanner tasks as utterly unstimulating. Yet in the fMRI images of the two men’s responses to the high-arousal photographs, with brain activity indicated in electric purple, the control subject’s amygdala might as well be a neon sign. Honnold’s is gray. He shows zero activation.

Flip to the scans for the monetary reward task: Once again, the control subject’s amygdala and several other brain structures “look like a Christmas tree lit up,” Joseph says. In Honnold’s brain, the only activity is in the regions that process visual input, confirming only that he had been awake and looking at the screen. The rest of his brain is in lifeless black and white.

“There’s just not much going on in my brain,” Honnold muses. “It just doesn’t do anything.”

To see if she was somehow missing something, Joseph had tried dialing down the statistical threshold. She finally found a single voxel—the smallest volume of brain matter sampled by the scanner—that had lit up in the amygdala. By that point, though, real data was indistinguishable from error. “Nowhere, at a decent threshold, was there amygdala activation,” she says.

Could the same be happening as Honnold climbs ropeless into situations that would cause almost any other person to melt down in terror? Yes, says Joseph—in fact, that’s exactly what she thinks is going on. Where there is no activation, she says, there probably is no threat response. Honnold really does have an extraordinary brain, and he really could be feeling no fear up there. None at all. None whatsoever.

6. The Secret Levels Master Plan (just between you and me) – Sam Corcos

Most people don’t yet realize the magnitude of the problem that metabolic dysfunction poses for society. If you want to dig deeper into this, you should check out our blog post, The Ultimate Guide to Metabolic Fitness, but the highlights are:

• More than 10% of the US is currently diabetic, and the rate is accelerating.
• There are almost 90 million prediabetic Americans; 70% of those people will be diabetic within 10 years, and 84% of people with prediabetes do not know they have it.
• Fewer than 25% of candidates of eligible age qualify for the military and this is largely due to being metabolically unfit; it’s a national security problem
• Metabolic dysfunction might be the single largest (preventable) force pushing up the cost of healthcare. Individuals meeting at least three criteria for metabolic syndrome have 60% higher annual healthcare costs; diabetes alone contributes to $327 billion in medical costs and lost productivity, expected to exceed $600 billion by 2030…

…One reason we’ve been so in the dark about metabolic health is that there are no good tools to measure how your diet affects you in a quantifiable way. The biggest levers for metabolic health are, in no particular order:

• Sleep
• Diet
• Exercise

There’s no way to say which is the most important because they’re so interdependent. If you sleep poorly, your body releases stress hormones, generates inflammation, triggers hormones that lead to sugar cravings, and develops acute insulin resistance. Together, this may result in erratic mood and energy throughout the day, making it harder to exercise and prepare healthy meals, and generate a negatively reinforcing cycle of poor metabolic health.

We currently have good tools for measuring and quantifying sleep (including Eight Sleep, Oura) and exercise (like the Apple Watch, Fitbit, Whoop). This has allowed people to discover how their choices affect those aspects of their life, but there hasn’t been a way to quantify how your diet affects you. This forces people into making guesses about what is working and what’s not, leaving 59% of people saying conflicting food and nutrition information makes them doubt their choices.

In the same way that everyone knows to get eight hours of sleep, and how Fitbit convinced people that walking 10,000 steps is a good target for exercise, we will show people that maintaining a flat glucose curve is optimal for lifestyle and long-term metabolic health.

Empowering people to see for themselves how their choices affect their health gives them agency. We all know that eating a box of donuts is bad for us in a general, ill-defined sense, but without an immediate consequence like pain or death, it’s hard to feel compelled to overcome the powerful rewards of smell, texture, and taste.

By quantifying the consequence of a choice in real-time, we can effectively close the loop on diet, connecting a specific action to the nature and degree of the reaction, and allowing us to continuously improve our choices. The first time you see the data that closes the loop on how your choice of breakfast directly caused your mid-day energy crash—that’s when you make a change.

7. Elements of Effective Thinking – Farnam Street

We’re seduced into believing that brilliant thinkers are born that way. We think they magically produce brilliant ideas.

Nothing could be further from the truth while there are likely genetic exceptions, the vast majority of the people we consider brilliant use their minds differently.

Often, these geniuses practice learnable habits of thinking that allow them to see the world differently. By doing so, they avoid much of the folly that so often ensnares others. Eliminating stupidity is easier than seeking brilliance.

I came across The Five Elements of Effective Thinking, authored by Dr. Edward B. Burger and Dr. Michael Starbird, which presents some practical ways for us to improve our thinking.

They make a pretty bold claim in the introduction.

You can personally choose to become more successful by adopting five learnable habits, which, in this book, we not only explain in detail but also make concrete and practical.

The five habits are:

1. Understand deeply
2. Make mistakes
3. Raise questions
4. Follow the flow of ideas
5. Change

---

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 do not have a vested interest in any company 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 05 December 2021:

1. Assured Misery – Morgan Housel

Most things you envy look better from the outside, because everyone crafts a selected image of what they’re doing and they are. A lot of time you’re envious of someone specifically because that person has done a good job crafting the image of their life. But since they’re crafting the image, it’s not a complete view. There’s a filter. Skills are advertised, flaws are hidden.

Instagram is full of beach vacation photos, not flight delay photos. Resumes highlight career wins but are silent on doubt and worry. Investing gurus are easy to elevate to mythical status because you don’t know them well enough to witness times when their decision-making process was ordinary, if not awful.

The problem is that when you are keenly aware of your own struggles but blind to others’, it’s easy to assume you’re missing some skill or secret that others have. It’s a sure path to feeling inadequate.

Everyone’s dealing with problems they don’t advertise, at least until you get to know them well. Keep that in mind and you become less envious and more forgiving – to yourself and others. 

2. Storm in the stratosphere: how the cloud will be reshuffled – Eric Bernhardsson

Here’s a theory I have about cloud vendors (AWS, Azure, GCP):

• Cloud vendors1 will increasingly focus on the lowest layers in the stack: basically leasing capacity in their data centers through an API.
• Other pure-software providers will build all the stuff on top of it. Databases, running code, you name it…

…There’s some sort of folk wisdom that the lowest layer of cloud services is a pure commodity service. So in order to make money you need to do at least one of:

• Make money higher up in the stack.
• Use services higher up in the stack to lock customers in. Then make money lower in the stack.

I think there’s some truth to these, at least looking historically, but there are some interesting trends blowing in the other way:

• The “software layer on top” is getting incredibly competitive. There’s so many startups going after it, fueled by cheap VC money and willing to burn billions of dollars on building software.
• Cloud vendors might be pretty happy making money just in the lowest layer. Margins aren’t so bad and vendor lock-in is still pretty high.

3. Will Marshall – Indexing the Earth – Patrick O’Shaughnessy and Will Marshall

[00:05:09] Patrick: I think one of the coolest trends in technology generally is making certain things legible to software through data sets, through image sets in your case, et cetera, and the wild things that can then be built on or learned on top of those emergent data sets. And so I’d love to tell that whole story through the Planet lens in as much detail as we can, maybe going all the way back to the beginning. You have the benefit of literally starting, I think, the first satellite, it was built in a garage. So the proverbial garage was a real one in your case. Take us back to the earliest days of Planet its origin story and why you started the business.

[00:05:43] Will: Yeah. I’m happy to do that. And by the way, the investors of dMY the group that we are merging with as part of our going public, his name’s Niccolo, and he says all the best software companies build their own hardware, Apple, you can think of like that. Tesla, he considers a software company, but he’s building his own hardware. There’s a way of viewing that. And I think certainly Apple’s, I think, a really fantastic example. We feel that the same. We’re not selling the satellite hardware, we are selling data that is produced from that. But by building our own satellite hardware, we create much efficiencies in that, back to the garage days, myself and a small team about seven of us left NASA to start Planet. And we literally started building the satellites in our garage. What we were thinking about at that time was how do we as space geeks help all these challenges of the world? From poverty, to climate change, to everything that was going on.

And we felt that there’s a huge business opportunity as well in one and the same mission, which was to image the whole earth every day, because we thought that data would spur economic development and it would help with these real huge problems. And no one had ever done that because it required at least about 100 satellites into orbit. Well, no one had ever launched 100 satellites and we’d have to do things very differently. We had been pioneering at NASA, this thing called the small spacecraft office, which was low cost, planetary missions and other things. And we were trying to take that a couple of steps further and say, okay, can we even leverage consumer electronics? Like the kind of electronics that’s in your laptop or in your phone in space and thereby instead of spending billions of dollars per satellite, spend a lot less, like 1000 times less than that, or 10,000 times less than that, like a $1 million or a $100,000 and do something like image the whole planet every day. We figured that we could and so we left NASA to do that. And six and a bit years later, we achieved that mission of having launched the largest constellation of satellites in history. We had just over 100 satellites in orbit. SpaceX, by the way, is just overtaken us recently in numbers of satellites.

[00:07:51] Patrick: The bastards.

[00:07:53] Will: Not that I’m too upset about that, by the way, if you count the number of satellites in orbit, they doubled roughly in the last five years and half of the satellites are now of two companies, that’s Planet and SpaceX. So although there’s a proliferation, it’s really quite concentrated at the present time. But anyway, yeah. So we started building our satellites in the garage and six or seven years later, we got to our daily cadence having lots of more of these satellites, it was much harder than I thought. I thought we could do it in three years or, and it took six, but we achieved something that was really cool.

And we have this brand new data set of an image of the entire earth every day. So it’s a bit like when you go onto Google and you see the satellite layer, that image is maybe three or five years old. We are doing that every day for the whole planet and we are keeping all of those images, so we have about 1700 images, for every point on the land of the earth, so a deep stack of images. So it’s like Google, but with a time access.

So it’s a recent data and a tall stack of information. And that’s how we figure out what’s changing on the planet, where all the resources are being moved, all the vehicles, agriculture, shipping, we figure all the changes on the planet over time. And we can train all our machine learning on top of that stack of data. You ask any machine learning expert, what’s the most exciting thing? It’s training data, well, we have gobs of it. We have 1700 images, as I said, of very place on the earth’s land mass on average, to train all your algorithms about what’s going on…

…[00:15:58] Patrick: Let’s talk now about how customers interface with you. I love the story of starting in the garage, building a very low-cost satellite, the Dove satellites, getting the constellation up there, mission accomplished. It’s going to keep compounding and getting higher and higher resolution. What was the first commercial interaction that you had? Did you plan to cater to the agriculture industry to start or did that emerge as sort of like an unpredicted or unpredictable use case?

[00:16:24] Will: We had thought about that use case as a very early one. One way to think about it is look at the areas of the earth and how are they used. About a quarter of the land mass of the earth, 25%, is agricultural land, so we went into that. A quarter of the land mass of the earth is forestry, so we went into that. About 10% is urban development, the suburb and/or urban, then there’s of course large areas of marine. Anyway, but agriculture was an obvious one just from a sheer area. We knew that we could do something useful in agriculture within the infrared band. That’s a known thing from land establishment been doing this for 40 years, except it’s just doing it in a slower cadence, which makes it less useful growing the crops and helping the crop development. It’s more for the annual survey of, “How did we do?” Which is useful at the end of the year, but it’s not helpful for the grower in the crop growing season.

Because what the farmer wants is intelligence about their field a few times a week during the crop growing season. And so by having daily information at that three-by-three meter area of every field of that farm, every one of their fields, we can help them do what’s called precision agriculture. That can improve their crop yield by 20 to 40%, at the same time decrease their use of things like fertilizer and other resources by similar amounts. That’s a big deal if you think of that. We can do that. Of course, a trillion dollar industry. This is, as I said, the general notion of big data and AI enabling the digital transformation of industries. Ag is a canonical example. We do that, for example, with Corteva. They use this to image about a million farmers’ fields every day. This is not a minor operation and the lot of those kind of companies that can use our data to help with precision ag.

The other areas, we help civil governments, normally things like disaster response. It’s also science. So we work with NASA on a lot of science, like climate science, but we also work with state and local governments and federal governments on things like floods and fires. We have been helping recently with the floods in Germany, where they had a lot of big floods, the biggest floods there for 60 years, with the fires here in California, helping the world wildfires. We can both detect where the fires are to help the firefighters, like where’s the wind blowing, where’s the edge of the fire, where is it compared with whatever hill? So we can help with it real time and we can help with preventative work. So we can actually, and we have, map every tree in California and where’s the fodder for growth for future mega fires? That can help them to then make clearing or do a fire lane in the future to stop future mega fires. So it’s preventative work.

Same with flooding, we can see the flood the day before, the day after the flood, and see which bridge is down to help the relief effort. But we can also then model where’s the floodplain going to be, which buildings are in the wrong place, where should they build and not build. Especially in developing countries, are often build in the wrong place, so we have a big project with Google where we’re doing this in Bangladesh and India. It’s because the floodplains change, they can then advise governments, “Don’t build here, do build here.” That’s important for getting assets out of the way of the flood. It’s also important for finance, by the way, because they also want to understand which assets are at risk from these various disasters or potential disasters. So civil government’s another area.

We also work with mapping. There’s a fascinating use case, and this is where it gets into what consumers might actually see, because we’re not actually selling the imagery to consumers, we’re selling to big businesses, but it does affect day to day people because the maps that you have online are kept up-to-date with our data. The news you see about world events, we’re sort of shedding light about everything going on on the planet. Pulitzer prize this year was won by some journalist who used our data to discover about 200 potential Uyghur, that’s Muslim detention camps in Western China that had previously not been known. And that sort of is really important for journalism. That happens using our data to uncover what’s going on around the world.

And also if you grew up in a disaster, our data might be helping the disaster responders to help you. So it actually affects people day to day. But with mapping that one case, we work with Google, for example, on updating the maps that you see online all the time, whenever they find any indication that map is going out date, they automatically task our stuff, it takes a picture of that location, extracts out that new road, that new train station, that new building, whatever it is, and then it updates the map you see online so that your directions and everything stay up to date. So there’s a lot of different applications. I’m just giving you a sample…

…[00:31:39] Patrick: If you stick in the earth-observation planet category, what do you think are the most far-fetched sci-fi potential futures for what the technology might enable, say, the rest of your career or something like that? On some timeline that’s long but reasonable.

[00:31:52] Will: Well, I do think that it’s possible in the long term that we would more or less be able to have a live image of the earth. I think that that’s possible. It’s not where we are now, and it won’t be for a long time, but it’s possible. And then the second thing is I imagine that you should be able to just query that. You should just be able to write… Just imagine a search query box on it and you can just say, “Hey, how many houses are there in Pakistan? Give me a plot of that versus time. Tell me where the trees were deforested, the latitude and longitudes of the trees that deforested in the Amazon in the last three weeks.”

It should be able to just tell you the answer to those questions without ever you looking at the images, or it may highlight that in the background or something, but you should be able to get answers, just like you can from Google. So I think a lot of what Planet’s doing in the long arm is a little bit similar to Google. Google figured out how to index the internet and make it searchable, and we are figuring out how to index the earth and making it searchable with the combination of the data and machine learning that sits on top…

…[00:34:02] Patrick: With this unique data set moving up the stack that you’ve done, what knowledge about the Earth has most surprised you that’s resulted from this data set so far?

[00:34:11] Will: Well, the degree of calamity of the destruction of ecosystems is just staggering. So we are wiping out forests, mainly to put cows on them so we can eat beef-burgers. We are destroying the fisheries with ocean trawling. We are seeing huge transitions. Because it’s not actually climate change. It’s mainly these things like deforestation and illegal fishing. So it’s been driven by humans deciding to change the use of those territories, and that is just really obvious and sad, but hopefully, our data can help companies and countries and individuals better manage the planet. We’ve, what, lost 70% of life on the planet in the last 40 years? It’s gobsmacking to think about. We are just whittling it away still. Our raison d’être, in many ways, is to help stop that, is to help the governments to see the deforestation. So we have a project to map all… Which we do. All the deforestation in the 64 tropical countries, with the Government of Norway paying for the data, helping that data be available to those forestry ministries to stop deforestation. It’s a huge project.

We have another one to map all the world’s coral reefs, and we just released that a few weeks ago, which is the first map of all the world’s corals, classification of different types, and showing early signs of bleaching. Or if there’s any illegal fishing going on, we can alert governments. In fact, there are already six countries have established marine-protected areas around coral reefs that we mapped for them. So those are the kind of things that can really help us protect and stop the eco side that’s happening on the planet. And so that is both a thing that’s super important for the planet, and it’s a massive business opportunity, because what is really happening is that global economy is going, “Ah, we cannot any longer presume that natural capital is free.” That the trees you cut down, and it’s free for the landowner; they can just cut down that tree and it’s cost nothing. Or you can just put gases into the atmosphere and it doesn’t matter, or pollutants into the rivers and it doesn’t matter.

There’s an externality of that cost. We’ve got to integrate the externality into our economic system. And that is the countries saying, “We’re going to measure these emission targets and set these limits,” and it’s companies doing their ESG targets and saying, “Hey, the environment piece I’m going to measure and make sure that my resources came from a sustainable source, or make sure I don’t build those assets in a flood-risk zone,” or these sort of things. And what does that mean? All of that means those countries and the companies have to measure all that stuff. So this is a massive business opportunity, because we have the data set that’s pretty foundational to the measurement of all that natural capital. It’s measuring all those things. It’s not just that we can see every tree and stop deforestation. We can count the carbon stock in all those trees. Our data is foundational to underpinning the transition to a sustainable economy, which is a multi-trillion dollar transition as well.

4. The Meaning of Decentralization – Vitalik Buterin

When people talk about software decentralization, there are actually three separate axes of centralization/decentralization that they may be talking about. While in some cases it is difficult to see how you can have one without the other, in general they are quite independent of each other. The axes are as follows:

• Architectural (de)centralization — how many physical computers is a system made up of? How many of those computers can it tolerate breaking down at any single time?
• Political (de)centralization — how many individuals or organizations ultimately control the computers that the system is made up of?
• Logical (de)centralization— does the interface and data structures that the system presents and maintains look more like a single monolithic object, or an amorphous swarm? One simple heuristic is: if you cut the system in half, including both providers and users, will both halves continue to fully operate as independent units?…

…Note that a lot of these placements are very rough and highly debatable. But let’s try going through any of them:

• Traditional corporations are politically centralized (one CEO), architecturally centralized (one head office) and logically centralized (can’t really split them in half)
• Civil law relies on a centralized law-making body, whereas common law is built up of precedent made by many individual judges. Civil law still has some architectural decentralization as there are many courts that nevertheless have large discretion, but common law have more of it. Both are logically centralized (“the law is the law”).
• Languages are logically decentralized; the English spoken between Alice and Bob and the English spoken between Charlie and David do not need to agree at all. There is no centralized infrastructure required for a language to exist, and the rules of English grammar are not created or controlled by any one single person (whereas Esperanto was originally invented by Ludwig Zamenhof, though now it functions more like a living language that evolves incrementally with no authority)
• BitTorrent is logically decentralized similarly to how English is. Content delivery networks are similar, but are controlled by one single company.
• Blockchains are politically decentralized (no one controls them) and architecturally decentralized (no infrastructural central point of failure) but they are logically centralized (there is one commonly agreed state and the system behaves like a single computer)

Many times when people talk about the virtues of a blockchain, they describe the convenience benefits of having “one central database”; that centralization is logical centralization, and it’s a kind of centralization that is arguably in many cases good (though Juan Benet from IPFS would also push for logical decentralization wherever possible, because logically decentralized systems tend to be good at surviving network partitions, work well in regions of the world that have poor connectivity, etc; see also this article from Scuttlebot explicitly advocating logical decentralization).

Architectural centralization often leads to political centralization, though not necessarily — in a formal democracy, politicians meet and hold votes in some physical governance chamber, but the maintainers of this chamber do not end up deriving any substantial amount of power over decision-making as a result. In computerized systems, architectural but not political decentralization might happen if there is an online community which uses a centralized forum for convenience, but where there is a widely agreed social contract that if the owners of the forum act maliciously then everyone will move to a different forum (communities that are formed around rebellion against what they see as censorship in another forum likely have this property in practice).

Logical centralization makes architectural decentralization harder, but not impossible — see how decentralized consensus networks have already been proven to work, but are more difficult than maintaining BitTorrent. And logical centralization makes political decentralization harder — in logically centralized systems, it’s harder to resolve contention by simply agreeing to “live and let live”.

5. Academic urban legends – Ole Bjørn Rekdal

Bauerlein et al. (2010) claim that we are currently experiencing an ‘avalanche of low-quality research’, and academia has become an environment where ‘[a]spiring researchers are turned into publish-or-perish entrepreneurs, often becoming more or less cynical about the higher ideals of the pursuit of knowledge’. Whether the current state of affairs is better or worse than before, it seems reasonable to assume that corner-cutting is an unfortunate side effect of publication pressure and competition for academic positions and scarce resources, especially in milieus where counting publications is more important than reading and evaluating them. In this article, I explore a particular set of corner-cutting techniques that reveal much about strategies of reading, writing, and citation, as well as the development of academic urban legends.

The digital revolution within academia

Twenty-five years ago, it could take weeks to obtain a specific source document needed in order to verify or explore a reference that for some reason had caught one’s attention. As a consequence of the digital revolution, it is possible today to obtain a wide spectrum of sources within minutes or seconds. Formidable databases, advanced scanners, optical character recognition (OCR) technology, and new features of reference management software such as Endnote have made it possible, with some experience, to read an academic text together with the sources it refers to.

For those of us who are old enough to know what a card catalog is, it is outright fascinating to sit in front of a computer with two monitors, reading an academic text on one of them and having the sources it refers to (or perhaps should have referred to) on the other. Having immediate access to most, if not all, of the sources behind an academic text opens up a number of exciting opportunities, but also exposes some unpleasant surprises. In the past few years, it has become dramatically easier to identify cases of plagiarism and scientific misconduct, and also to discover other types of academic shortcuts, and to see how shockingly frequently they are employed.

In this article, I will limit my focus to one specific type of situation that seems to cause problems for a large number of researchers and students and that provides a breeding ground for a wide variety of academic shortcuts. The situation of interest is one that all writing academics will encounter numerous times during their career: when we read a text and find a statement or specific point that we would like to use ourselves, and we discover that it is already accompanied by a reference.

6. China’s secret plan to become tech self-sufficient – Jeff Pao

A little-known group of experts is developing a roadmap to reduce China’s reliance on foreign technology and promote self-sufficiency, a high-stakes gambit that could change how China interacts and competes in the crucial and fast-moving global sector.

The advisory group, known as the National Science and Technology Advisory Committee (NSTAC), was only made public two years after its establishment in 2019. It recently submitted a secretive report focused on technology self-sufficiency that was deliberated by top Chinese officials, according to reports.

The committee’s creation was first raised by President Xi Jinping in February 2017, two weeks after the presidential inauguration of former-US president Donald Trump, who went on to ban Huawei and ZTE products in the US and restricted chip exports to China in the name of national security.

7. The Age of Funcertainty! – Joshua Brown

Can anyone deny that the last 18 months has been among the top stock market rollercoasters of all time? Existential panic to unbridled euphoria almost overnight. The worst, most sudden economic downturn in a century to the fastest stock market double in seventy years. But the speed of the recovery isn’t the real story here. It’s the giddiness with which we’re riding this recovery that is so remarkable, recognizable to anyone whose ever stumbled off a looping theme park coaster. Think about the last time you were at Six Flags or Disney or Universal. Getting off that first rollercoaster of the day. Even the people who were scared to climb on are climbing off with giant, goofy smiles plastered to their faces. First in line to see the picture of their car (or log, in the case of a flume) developed and for sale at the foot of the ride’s egress. There’s a glistening sweat on the foreheads of the riders, despite the fact they didn’t actually do anything but sit and grip. It’s chemical. It’s almost sexual. Again, again, again! 

There’s a heightened and sustained state of arousal in today’s markets, borne of easy gains and a de facto risk-free environment. The current zeitgeist engendered by oceans of fiscal stimulus, a dearth of corporate bankruptcies, endless financing and equity capital on offer and the ironclad promises of the central banks to let the stimulus and interest rate bonanza run on “lower for longer” this time. The backdrop against which this is all taking place is a starry sky of daily IPOs, SPACs and record-setting venture capital superlatives – the largest fund, most money raised, highest amount of billion-dollar startups, most gigantic valuations, fattest first-day founder scores…You can’t look away or pretend for a moment you’re immune to the thirst. It’s practically pornographic and, well, you’re only human. We all have desires.

Where did this lust come from? So soon after a near-death experience for our entire way of life? In the first 15 months of the plague, nearly 1 in 500 Americans died. Millions got sick, around the world, and a not-insignificant percentage of them had to be hospitalized. Living through this, and surviving – not just surviving the illness but all of the fear and doubt – it can produce a very counterintuitive feeling of joy. Dare we call it a thrill? The opposite of survivor’s guilt. Survivor’s appreciation for life. A sort of bravery can set in. What doesn’t kill me makes me stronger. You’ve heard the term distress but its antonym may not be familiar to you: Eustress. The word eustress refers to the positive kind of the stress, which is actually beneficial to the person experiencing it. It comes from the Greek root eu, meaning good. Same root as Euphoria. Eustress is why the discos and nightclubs in Tel Aviv fill up after a terror attack hits the city. It’s why you walk off a rollercoaster grinning like a f***ing idiot.

---

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 do not have a vested interest in any company 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 28 November 2021:

1. New Concerning Variant: B.1.1.529 – Katelyn Jetelina

This week we (epidemiologists and virologists) have been closely following a new COVID19 mutation. Three days ago it was designated the name B.1.1.529…

…B.1.1.529 was first discovered in Botswana on November 11. It was then quickly identified in South Africa three days later and identified in two cases in Hong Kong. This morning Israel and Belgium announced that they have cases. The Belgium case was a young, unvaccinated woman who developed flu-like symptoms 11 days after travelling to Egypt via Turkey. She had no links to South Africa. This means that the virus is already circulating in communities. As of yesterday, 100 cases have been identified across the globe (mostly in South Africa). As I write this, no cases have been identified in the United States.

B.1.1.529 has 32 mutations on the spike protein alone. This is an insane amount of change. As a comparison, Delta had 9 changes on the spike protein. We know that B.1.1.529 is not a “Delta plus” variant. The figure below shows a really long line, with no previous Delta ancestors. So this likely means it mutated over time in one, likely immunocompromised, individual.

Nonetheless, we always pay attention to changes on the spike protein because the spike is the key into our cells. If the virus changes to become a smarter key, we need to know. We are particularly interested in mutations that could do any of the following:

• Increase transmissibility;
• Escape our vaccines or infection-induced immunity;
• and/or Increase severity (hospitalization or death).

B.1.1.529 has the potential to do all three. We know this because we’ve seen a number of these mutations on other variants of concern (VOC), like Delta, Alpha, and Gamma…

…Of these, some mutations have properties to escape antibody protection (i.e. outsmart our vaccines and vaccine-induced immunity). There are several mutations association with increased transmissibility. There is a mutation associated with increased infectivity…

We know a lot about the Hong Kong cases because of their impeccable contact tracing. Health authorities published a report of these two cases yesterday.

The first case in Hong Kong was a 36 year old, fully vaccinated (two Pfizer doses in May/June 2021) male. He was traveling through South Africa from October 22 to November 11. Before returning to Hong Kong, he tested negative on a PCR. As per usual, once he landed in Hong Kong he was required to quarantine. On day 4 of quarantine (November 13), he tested positive on a PCR.

Another guest across the hallway was also infected with B.1.1.529. He was Pfizer vaccinated in May/June 2021 too. In both of these rooms, 25 out of 87 swabs were positive for the virus.

These Hong Kong cases tell us two things:

• Confirms that COVID19 is airborne (we knew this)
• During their PCR tests, the viral loads were VERY high considering they were negative on previous PCR tests. They had a Ct value of 18 and 19 value. So, this tell us that B.1.1.529 is likely highly contagious… 

…There are preliminary signs that B.1.1.529 is driving a new wave in South Africa. Health officials are looking particularly at a region called Gauteng. In just one week, test positivity rate increased from 1% to 30%. This is incredibly fast.

If we zoom out on South Africa as a whole, we see cases starting to exponentially increase. On Tuesday there were 868 cases, Wednesday there were 1,275 cases, Thursday there were over 3,500 cases. We do not know if these cases are all B.1.1.529, but the timing of explosive spread is suspect.

The rate in which these cases are spreading are far higher than any previous variant. Disease modeling scientist Weiland estimated that B.1.1.529 is 500% more transmissible than the original Wuhan virus. (Delta was 70% more transmissible). John Burn-Murdoch (Chief Data Reporter at Financial Times) also found that B.1.1.529 is much more transmissible than Delta.

2. Inside the cult of crypto – Siddharth Venkataramakrishnan and Robin Wigglesworth

Chris DeRose was noodling away on the internet when he stumbled over an intriguing post on Slashdot, a forum for extremely online hyper-geeks like himself.

“How’s this for a disruptive technology,” a user wrote on July 11 2010, enthusiastically describing a decentralised, peer-to-peer digital currency with no central bank, no transaction fees and beyond the reach of any government. Using computers to solve cryptographic puzzles would earn people “bitcoins”.

DeRose was intrigued yet unconvinced by the concept. The young Floridian programmer struggled to see what utility it might serve. Many others on the forum were also sceptical. “Hey thanks for trying to post something all edgy or controversial or whatever the hell you think it is,” one replied.

All this changed with the rise of Silk Road. The “dark web” marketplace, launched in 2011, convinced DeRose of bitcoin’s potential. Finally, the cryptocurrency had found its “killer app” and could become real digital money. And his fascination took flight. Regular board game nights with friends morphed into bitcoin nights at the local pub.

By 2013, DeRose, then aged 31, ditched his successful computer consulting business and threw himself wholeheartedly into the mushrooming cryptocurrency world, becoming a popular if controversial podcast host…

…In 2015 soaring interest triggered an explosion of new digital currencies of variable quality. Scams proliferated. The debate began to Balkanise. By 2017 — when the price of bitcoin took off like a rocket, going from under $1,000 per “coin” to almost $20,000 — early discussion had calcified into rigid dogma that bore little relation to reality. Bitcoin and its zealots were the strongest example of this, DeRose felt.

“If you look online at ‘what is bitcoin’, what you’ll see is a gigantic amount of literature and decontextualised media snippets that paint a beautiful picture of the imminent success and domination that is surely awaiting us,” he says.

“However, if you look at bitcoin off the screen, what you’ll see is declining merchant uptake, zero evidence of blockchain deployment or efficiency, and mostly just a lot of promotional events offering cures to whatever ails you.”

DeRose is not alone in his disillusionment. Cryptocurrency has over the past decade become a broad movement with its own language and symbols, driven by a constellation of prophets with varied but overlapping gospels, who treat both external and internal dissent as blasphemy and promise adherents that they form the intellectual vanguard to a bright new future. Sound familiar?

The definition of a cult isn’t cut and dry. Scholars, civil society groups and anti-cult counsellors offer varying and at times contradictory criteria, and the line between cult activity and mainstream religion can be vanishingly thin.

Most groups identified as cults feature a single charismatic leader, something that the crypto world lacks. But many other classic hallmarks of culthood — apocalypticism, the promise of utopia for worthy believers, shunning of external critics and vitriolic denouncement of heretical insiders — are increasingly dominant.

“Crypto is essentially an economic cult that taps into very base human instincts of fear, greed and tribalism, combined with economic illiteracy as a means to recruit more greater fools to pile money into what looks like a weird, novel digital variant of a pyramid scheme,” argues Stephen Diehl, a crypto-sceptic software engineer. “Although, it’s all very strange because it’s truly difficult to see where the self-aware scams, true believers and performance art begin and end. Crypto is a bizarre synthesis of all three.”

Given the global financial system’s growing exposure to digital currencies, the culture around crypto, how much or little it changes, could have major consequences for retail investors, central banks and the environment.

Crypto’s most ardent proponents predict it will eradicate inequality, wipe out corruption and create untold wealth. Most cults make similarly expansive promises. And as the gulf between promise and reality grows, things get dark.

3. ‘Buy the Constitution’ Aftermath: Everyone Very Mad, Confused, Losing Lots of Money, Fighting, Crying, Etc. – Jordan Pearson and Jason Koebler

The community of crypto investors who tried and failed to buy a copy of the U.S. Constitution last week has descended into chaos as people are realizing today that roughly half of the donors will have the majority of their investment wiped out by cryptocurrency fees. Meanwhile, disagreements have broken out over the future of ConstitutionDAO, the original purpose of the more than $40 million crowdfunding campaign, and what will happen to the $PEOPLE token that donors were given in exchange for their contributions.

Over the weekend, the next steps of the project repeatedly changed. In the immediate aftermath of the Sotheby’s auction, in which ConstitutionDAO lost to hedge fund CEO Ken Griffin, the founders of the project asserted on its official Discord that, though they lost, “we still made history tonight.” …

…The specifics of what is happening are quite complicated, but, basically, ConstitutionDAO raised more than $40 million worth of Ethereum using a crowdfunding platform called Juicebox. In exchange for donations, contributors had the option to redeem a “governance token” called $PEOPLE at a rate of 1 million $PEOPLE tokens per 1 ETH donated, issued through Juicebox. If ConstitutionDAO had won, those $PEOPLE tokens would be used for voting on what would happen to the Constitution.

It was never explained exactly how voting rights would be apportioned (the DAO said “Due to the unusual and extremely short timeline of needing to rally around obtaining the Constitution during the auction window, we have not been able to focus on giving the technical aspects of DAO governance mechanics the careful consideration and community deliberation this topic requires.”) But many DAOs use a proportional voting structure; for explanation’s sake, one way of doing this would have been to give 1 vote per $PEOPLE token, allowing people who donated more to have an outsized say in what happened to the document.

Crucially, ConstitutionDAO repeatedly said that donors were not buying a fractionalized share of the Constitution and that individual donors would not “own” part of the Constitution, they would merely have a say in where it was displayed, etc. ConstitutionDAO also said that donating to the project should not be looked at as an “investment.”

“You are receiving a governance token rather than fractionalized ownership of the artifact itself. Your contribution to ConstitutionDAO is a donation with no expectation of profit,” the DAO’s FAQ section read. “Some examples of this would be voting on advisory decisions about where the Constitution will be displayed, how it should be exhibited, and for how long.”

That’s all well and good, but regardless of the intentions of the core team, many people of course were looking at this as an investment (the meme was “buy the Constitution,” after all.) This was a somewhat reasonable expectation—many cryptocurrencies have skyrocketed to ridiculously high valuations off the strength of a meme alone, and DAO governance tokens are themselves a $40 billion market. Clearly, some people expected to be able to flip either a tiny ownership stake in the Constitution or $PEOPLE tokens for a profit. This did start happening over the weekend, with some investors selling $PEOPLE tokens on decentralized exchanges such as Uniswap. ConstitutionDAO repeatedly said on Discord that it “neither prohibits nor encourages any secondary trading of the $PEOPLE token.”

This is all important because, on Saturday, ConstitutionDAO’s admins announced two important things. First, it announced that it would be moving away from the $PEOPLE token into a new, yet-to-be-created token called “We the People” ($WTP), which would govern whatever future the project had. $PEOPLE, meanwhile, would go by the wayside because “we did not acquire the constitution and $PEOPLE’s explicit reason for existing has now run its course,” an admin said in what was billed as “a note from our legal team.” They also announced that they were going to try to issue refunds outside of the Juicebox platform to those who wanted them.

These announcements had the effect of cratering the price of the now apparently worthless $PEOPLE, according to hundreds of angry messages on the Discord ($PEOPLE’s price is not currently tracked by any exchanges, but recent trades on Uniswap show it going for $0.0044), as well as sowing confusion and anger within the community. Many posters on the ConstitutionDAO Discord felt like the team was moving away from $PEOPLE tokens for reasons that weren’t well-explained; this also led to a bunch of arguments about what the purpose of the project was, what the intentions of the founders were, and whether they were being scammed or not. As the price of $PEOPLE cratered, some people bought tons of the now close-to-worthless token.

By Sunday night, however, ConstitutionDAO announced that it would “return to the original plan.” This meant issuing refunds through Juicebox as was originally intended, as well as shelving the idea to create the $WTP token, which means that $PEOPLE was suddenly “useful” again, in the sense that if the project does continue in any way, $PEOPLE is currently the only token in existence.

“One of the reasons for this reversion to the prior plan is that the decision to launch a new token and a new governance token (the previously discussed $WTP token) requires careful consideration, time to incorporate more community feedback, and thoughtful planning around the technology and structure of that governance,” an admin posted. Previous references to $WTP in the Discord were edited out of the old announcements, leading to additional confusion.

The peer-to-peer price of $PEOPLE has continued to fluctuate, according to transactions viewed by Motherboard on Uniswap. Basically, $PEOPLE went from being a hype-y DAO token to orphaned and totally useless to potentially valuable again within a 24 hour period. Its future is still very much uncertain, but people on the Discord are still very angry, wondering if this is a scam, and wondering if $PEOPLE will still skyrocket in value because of the apparent “historic” nature of it as part of a failed meme attempt to buy the Constitution.

4. Ali Hamed – Amazon Aggregators: Buying Third-Party Sellers – Jesse Pujji and Ali Hamed

[00:03:28] Jesse: We’re going to jump right in. Can you start by telling us, we’ve all heard this word thrown around in the business world these days, Amazon aggregator. What is an Amazon aggregator?

[00:03:38] Ali: Well to back up, amazon.com is a big e-commerce business that you can buy a bunch of stuff from. It turns out that often when you’re buying stuff from Amazon, you’re not actually buying it from Amazon itself. You’re buying it from third party sellers often and usually. And there’s really three types of Amazon third party sellers. There’s resellers, they take items that are made by somebody else, they pick them off shelves and they try to sell on Amazon and the margins there are really low. There’s vendors who sell to Amazon and Amazon then sells to us. You give up control of your storefront, you let Amazon do a lot of the work for you, but it’s a little bit easier. And the main type, and usually when people are talking about Amazon aggregators and Amazon third party sellers, they’re talking about Amazon FBA businesses, FBA stands for fulfilled by Amazon.

And these are people who come up with an idea, they get it manufactured. It could be manufactured domestically, but more often in Vietnam or Thailand or China or wherever. You get it shipped to the United States or wherever your consumer is. It stays in the Amazon warehouse and they use an Amazon storefront to sell your product. Amazon aggregators, run around and go buy up these storefronts. If you think about what these storefronts are, they’re small businesses, they sell all kinds of things, might sell whiteboards, beauty creams, scissors, anything.

And what you do is you basically buy these seller accounts. You get the ASIN, you get the SKUs, you get the inventory, you get the reviews, the comments, all the assets, and you continue to operate them. The thought being that an Amazon aggregator finds these seller accounts more valuable than the seller themselves does, because the operator, the aggregator is able to operate at scale. They often have a point of view that post purchase they might be able to improve the assets. And so basically what these aggregators do is they run around, they raise a bunch of debt capital, they raise a bunch of equity capital, they use that capital to go buy these assets at what they think are reasonable prices and then operate them.

[00:05:26] Jesse: And how big is this market? Give us a sense for scale revenue-wise, EBITDA, in broad strokes.

[00:05:33] Ali: So this was the part that shocked us the most, and is what got us really obsessed with the space. About $300 billion of revenues per year is done by these Amazon third party sellers. And that might be an outdated number. And generally these businesses are able to operate at something like 15% to 25% net margins. Let’s call it 20%. So it’s a market that’s about $60 billion of addressable EBITDA. And shockingly is growing anywhere between 30% and 50% per year.

So this is a market that we think is going to be a hundred billion dollar plus EBITDA market. And I don’t know what it’ll trade at at maturity, as low as six to eight times, maybe as high as 10 times. I don’t know if interest rates stay at zero, a hundred times, whatever. When you think this is going to be between half a trillion and a trillion dollar market. If you think about it, what that means from the debt perspective, since this is a fairly levered space, if you were to try to leverage up this EBITDA something like four times, which would not be that aggressive, it would be actually quite conservative. We think something like $250 ish billion of capital can come into the space today. And over time, close to $500 billion of capital.

We think this is a really, really big deal for capital markets, because not only are these big businesses, but they’re voracious users of capital. It’s great for anybody who’s in the investing business. From a market value perspective, we think it’s just massive…

…[00:10:24] Jesse: Let’s talk a little bit more about the stores in particular. So you said there’s $300 billion in revenue today. Roughly how many stores is that, individual storefronts?

[00:10:33] Ali: It’s roughly a hundred thousand that we think are addressable.

[00:10:36] Jesse: So there’s a hundred thousand of these stores. And can you give us a couple examples of stores and maybe even what it looks like on the inside of it? You keep calling them small businesses, so explain what they look like.

[00:10:46] Ali: An Amazon seller account or one of these businesses that you might buy, often sells a hero SKU. So this is a product that they sell better than all their others. And then a handful of other SKUs that may be somewhat related, they might be variations or something similar. But often they’re fairly diversified. And they’re usually in one category, that might be home and goods, it might be in electronics, it might be in sleep, in kitchenware. And so what you’re doing is you’re basically going in and you’re buying the seller central account and all the associated assets that the business has, that they can then use to go sell products through their Amazon storefront.

Really, when we think about the value of a lot of these businesses, you can look at the cash flows, you can look at the assets they have. But more than anything, you’re really trying to buy what’s their ‘real estate’ within Amazon. We think about these businesses and we talk about what makes them so wonderful and what you’re really buying. By the way there’s negatives to these businesses too, but the three most positive attributes is that they have comment and review notes. What I mean by that is you might be ranked really highly in some random category, but if you have 50,000 reviews and your second best competitor has 20,000, you have a really big barrier to entry because the Amazon ranking algorithm is not some big black box. If you think of an industry like Google, a platform like Google, or Facebook timeline, or TikTok, it’s really unpredictable how things get ranked. On Amazon, it turns out that if you have the most comments, you have the most reviews, you’re ranked highly, you don’t run out of stock often and you price competitively, you’re going to be ranked highly.

You’re looking for these assets that have that comment review note. And then the other things that they often have that are associated is, they have manufacturing relationships that can be trusted, a robust supply chain, or often you can apply your supply chain to their supply chain to make it more robust, add some redundancy, make sure you can more consistently get inventory. You have what we like to think of as high margins. The reason is, if you’re ranked really highly and you have that comment review note, you end up having high margins, because you don’t have to spend the same amount of money on ads that a normal e-commerce website might have to spend money on.

And finally, what you’re buying is all the infrastructure that they’re getting through Amazon. Through their FBA program. So what’s really amazing is the P&L of a lot of these Amazon third party sellers is highly variable. If you look at the P&L of one of these businesses, they might do a hundred dollars of revenue. They might be spending $30 on cogs, $40 on Amazon FBA and about $10 on overhead expenses. So what you end up buying is a product that may or may not be hard to manufacture, may or may not be hard to find a manufacturer for, what we’re really buying is their presence and their ‘real estate’ within the Amazon ecosystem.

[00:13:19] Jesse: Yeah that makes a lot of sense. If we flip it around just a little bit to talk about from a stores vantage point, how do these guys start? Who are they, who is starting an Amazon store? How many people they tend to have? What are their average sales? Like? Just give us a sense for that $300 billion divided by a hundred thousand, what are all these little stores out there?

[00:13:37] Ali: Often it starts as somebody who has a day job, they have an idea for a product, they’ve been making it in their basement, their garage, a side room, whatever it might be, selling it on Amazon and it starts to take off. That might be because they’re in a new category. So as an example of a category that’s becoming wildly popular on Amazon is Pickleball. Pickleball is a new sport, it’s growing really quickly. It turns out that if you were selling Pickleball years ago, you were kind of a first mover.

And as the market grew, you grew with it. As categories get too big, what often happens is they attract large companies who want to spend a lot of ad money to try to buy promoted spots on the top of the page. So you have to be careful about figuring out a category that’s underserved or about to grow, where you can be one of those first movers. By the way, a lot of people use pay per click strategies to try to get themselves rank highly initially or some sort of other mechanism. But really the best way to do it is be a new entrant in a category that’s not big now, but might become big later and then accrue those reviews.

So they could be anybody. I have a friend whose father sells paint that changes color when the temperature in a room or atmosphere or environment gets too hot or too cold.

[00:14:44] Jesse: So there’s a bunch of people out there starting businesses for any reason, they’re pretty profitable. They have a good cost structure as you said. Take us back to the early days of the aggregator space. What was the initial insight? It sounds like Thrasio, a couple of the early people have. And what did they start to do? Give us a sense, the mental model for how it started to add up to being a big business.

[00:15:06] Ali: The first thing you’d ask yourself is, okay so these businesses sound pretty good. They have high comment review notes. By the way, we think this is one of the only spaces in the world where you can sell a commodity product with a high barrier to entry, without it being regulated. That’s a really big deal. So you have these hybrid entry products with high margins and variable cost P&Ls. That sounds really good, right? So why in the world, would anybody ever sell their business if it’s so wonderful and at low multiples?

Well, it turns out being a small Amazon seller is really, really hard. One reason is if you’re small, it’s very difficult to manage volatile cash flows. The EBITDA to cash conversion is not that obvious. Largely because if your business is organically growing, you have to keep taking the income that you’re making and reinvest into inventory. So you keep up with growth. On top of that, it’s not like growth happens on a linear basis. The holiday season is tough. The Chinese New Year is tough, if you have your manufacturers in China. Because a lot of these people have somewhat flimsy supply chains, they need to be overly conservative about how much inventory they’re holding at any given time. Amazon started limiting how much storage they allow in their warehouses, because they don’t want to be a storage company.

At the same time, it turns out that supply chain’s gotten harder over the last couple of years. For a lot of these Amazon sellers, you have a supply chain that’s flimsy, because you have a lot of redundancy, you might not have a backup 3PL, you might not have a backup truck broker in Long Beach who could pick up your stuff if there’s not an Amazon truck available. You may not have a warehouse available in Long Beach if you need to store your stuff somewhere, you may not have quality assurance on the ground in China to make sure that the quality of the manufacturing is where you want it to be. You may not have a plan of when you should water freight something, or when you should air ship something, if you need to come up with the inventory.

And by the way, the number one way to ruin your Amazon business is to run out of inventory. If you stock out too many times, Amazon will de-rank your listing, and what’ll happen is your competitors will realize that you’re starting to run out of stock, or starting to sell bad inventory if you didn’t have quality assurance. And so, they’ll start spending more money on advertising to sink you. So, you now have a seller account where your cash flows are volatile, where you’re not getting all your EBITDA and converting it into cash. Where you have a supply chain that is somewhat flimsy, and if you’re not big enough you don’t get a seller account manager, which is your account manager Amazon who can help you fix problems from time to time. If we had another hour I could keep going through list and lists of reasons that being a subscale small seller is really hard.

And so, it might make sense to sell. By the way, my last favorite reason is, if you talk to a lot of these Amazon sellers and you get to go on video call, there is usually some individual who hasn’t seen their family in four Christmases, because Christmas is their busiest time of year. They have bubble wrap and cardboard boxes behind them in the video screen. It is just a very hard business to run by yourself. So, people want to sell. Now, the buying market is odd. On one hand, it seems like there’s so many aggregators out there, there’s so much capital that’s gone in the space. It’s reported that five to $10 billion of capital’s gone in the space. That’s basically nothing. The funniest thing that we saw was Apollo gave money to Victory Park and they gave them $500 million as reported by Bloomberg. And everyone thought, oh my gosh, what a crowded space.

$500 million barely scratches the surface. It’s basically one or two loans to aggregators. If you think about that $60 billion of EBITDA today, we think the space could incur $240 billion of debt, not 500 million, or five billion or 10 billion. So, one reason the multiples are still so low is there’s just still not that much capital. The other reason, which is more structural, is debt service in the space is really expensive, and here’s why. All the normal providers of cheap debt like BDCs, or direct lenders, really struggle to invest in the space, largely because these types of deals don’t fit in their normal mental model. In normal, regular way, LBO Financing, a private equity firm runs around and tries to buy business. They might buy it eight, 10 times EBITDA, say it’s eight times. And basically any direct lender will go to any high quality equity sponsor and lever up their acquisition, call it 70, 60% LTV.

If you’re financing a deal at 70% loan of value, that was purchased at eight times, you’re at a 5.6 times debt to income, sort of wide. So, what you tell your LPs is, don’t worry about it. The LTV is what we really care about. And by the way, you want a low LTV for two reasons. The first is if you got the price wrong, you can still fire sell the asset without losing money. The second reason is you want the private equity fund to have put money in, to align your interest. If the private equity fund put no money in, they don’t care if the business goes out of business or not. In the Amazon third party seller aggregator space, it’s totally different. You finance these businesses at really high loan of values, 80, 90% type loan of values. But instead you’re relying on a low debt to income.

What you do is you basically say, hey. We’re going to finance this at 90% advance rate, which would be really aggressive, but you only bought the business for four times, that’s a 3.6 times debt to income. These direct lenders and BDCs can’t run around telling all their investors, hey. Remember how we told you LTV is the only thing that matters? Actually, it’s not the only thing that matters. Really there’s this whole other thing that matters. And by the way, so much of the direct lending world is so equity sponsor focused, that because these businesses and aggregators don’t have all the traditional equity sponsors everybody’s used to, it’s really hard for these cheap sources of capital to come into the space. So, instead what you have is hedge funds or credit funds or specialty lenders or esoteric credit funds, financing the ecosystem with very limited amounts of capital, which has caused interest to be higher than it would be in a normal ecosystem, where both your debt service and your limitation on debt to income, forces people to buy businesses at lower multiples than they would otherwise buy them.

And finally, even though capital’s been coming into the space, the rush of sellers who now want to sell, because they now know they can sell, is actually keeping pace. So, you might hear people talk about the fact that multiples have risen and gone up over time. We’re kind of seeing that, but not really. What we’re really seeing is the marketing line of what the multiple is go higher. More seller notes, earn outs, tricks and tips of how to juice the value of an asset. I think a lot of people don’t want to get into a debate about whether or not COVID created a bump in demand for certain products, so they solve that debate by just earn outs into the product. There’s a lot of these different reasons that these businesses continue to be attracted to buy.

5. Narrative Distillation – Kevin Kwok

Narrative distillation is a core part of company building

The largest trend in every function within companies is that they’re being pulled internal. Engineering was the first. The birth of modern software companies began when companies first understood that engineering wasn’t a back office job to outsource, but a core part of the primary job of a company. Core, not commodity.

Endogenous compounding is increasingly the foundation of all modern successful companies. In a world where it is hard to be successful and unknown, all external channels increasingly get arbitraged. Companies that discover some novel market or promising acquisition channel quickly find themselves joined by many competitors. And the outsized returns they briefly got fall back down to earth under the weight of competition. It is internally compounding advantages that fight the gravity of this reversion to the mean. This is why we talk so often about network effects & economies of scale. Because like any polynomial equation, as scale rises & approaches infinity, only the highest order bit matters. And it is the aspects of the company that are internal to its organization or ecosystem that can most compound unimpeded by the outside world.

While engineering was first, it is not unique. Every function whose returns on iteration are high and non-commodity will follow the same path.

The transition from marketing to growth was this exact same process. Traditionally marketing was something done after the work on the product was already complete. Companies would finish the product and throw it over the fence to the marketing team. The easiest way to know if a function is core or commodity is 1) whether the function is identical at other companies, or unique to the particulars of their company and 2) whether it has feedback loops in the company or purely uses external channels.

Modern growth teams are impossible to remove from the core flow of their companies. In fact, they are fused to core product and engineering. How can you do growth without it being inextricably tied to the core flows of the product?

Brand marketing is still important, but on a relative basis it is increasingly shrinking compared to paid acquisition and more importantly core product driven distribution. If you think about bottoms up, product driven SaaS companies or viral social networks, they are examples of how impossible it is for traditional marketing to compete with the product itself. The best companies understand that distribution is a first party concern when thinking about a product, not some checkbox to finish after.

In “Why Figma Wins” I wrote about how design is undergoing this exact same transition. Design at the best companies cannot be relegated to artists told what to make after all the decisions have been made. They must be part of the core decision making throughout the entire process and all its iterations. This doesn’t just fall on the companies. It also means designers must accept more responsibility. The best designers want to be at the table. And they understand that they must not just think at a creative level, but also in how their design process and output shapes the core business. The best designers not only do this, they relish it.

The same is happening to the narrative of companies. Increasingly, narrative isn’t primarily about external framing. It’s not something done after the work has been completed.

Adobe has continually shown over the last few decades how core managing the narrative is to getting the support and coordination of investors and employees as the company makes fundamental shifts to their business model. Whether that be in adding new products, transitioning to the faster internal cadence of a SaaS company, refactoring into a cloud-first infrastructure and pricing model, or the myriad other endeavors Adobe has undergone from building printing software to the full expanse it is now.

Those shaping the narrative must intimately understand how employees, investors, and customers think about the company. Refining and expanding the narrative is entwined with the company’s progress. Narrative is shaped by each iteration of a company’s processes and products. And in turn a company’s evolving narrative shapes how it focuses its processes and builds its products.

6. Betting on Unknown Unknowns – Alexandr Wang

The future is difficult to predict. As the pace of technology has accelerated, the rate of surprises has as well. It’s not hard to find examples of experts’ predictions which always end up being way off. It’s not because the experts are not knowledgeable—in fact it might be because they are too knowledgeable.

There’s a peculiar thing where oftentimes it’s the wildly optimistic predictions that end up being right. Such predictions seem entirely crazy at the time—it feels like betting on everything going absolutely perfectly. On the contrary, they are betting on “unknown unknowns” which will meaningfully change the game.

The maker of these optimistic predictions will never be able to chart the path in which their prediction will come true, or even if they tried, that path will be wrong. But, the prediction will end up being right because they are properly betting on unknown unknowns. These future moments of human invention will surprise us each time, but it should not be surprising that they will happen.

On the other hand, making long-term predictions about the future which are grounded in reality will often lead you to be wrong. The world is not an automaton which continues deterministically based on current realities. Betting against invention and innovation has, on the whole, turned out to be a bad bet over the course of human history.​

Accurately predicting the future relies on betting on unknown unknowns. It’s impossible to say what these breakthroughs will be, but it’s almost a certainty that they will happen…

…As a final caveat, you cannot always bet on unknown unknowns. Chances are that JC Penney is not going to magically become one of the most valuable stocks of the decade. If you had to bet on that one, the correct bet is probably that they will continue to be more and more irrelevant over time.

You can only bet on unknown unknowns near the frontiers of human tenacity and creativity. Towards the tail distributions on both traits, unexpected tail events start to happen that dominate everything else. The problem with JC Penney isn’t that the department store business is a bad business (you could argue that the online bookstore business for Amazon was also a bad business). The problem is that JC Penney doesn’t have a high density of people who are either deeply tenacious or deeply creative. The unknown unknowns at JC Penney are 1,000 times less likely than at Amazon, so you likely shouldn’t be betting on them.

When you have groups of people who are especially tenacious and especially creative, magic happens. Amazonians had to be far more tenacious than competitors, otherwise they would die. Amazon’s tenacity has perpetuated into Amazon being one perhaps the most innovative company in the world, continuing to invent and enter new markets at a breakneck pace. At its core, the reason to bet on Amazon is their corporate tenacity, and therefore inventiveness.

7. Terra: The Moon Also Rises – Mario Gabriele

Terra is building better money. Not only that, it is creating infrastructure for others to ceaselessly improve and remix it, giving it new abilities and uses. It is a blockchain and a bank and a payment processor, and a sort of technological nation-state. Terra’s contributors are just as likely to compare it to Y Combinator as they are to Singapore.

And yet, while Terra has the potential to revolutionize the financial industry and mainstream crypto adoption, some believe it is destined to fail, architected for collapse…

…In 2017, along with college friend Nicholas Platias, he began to actively study the space, watching as the ICO boom blazed to life. Many seemed to be building applications on top of existing “currency” projects like Bitcoin, even though Bitcoin itself hardly functioned as a reliable medium of exchange. Maybe there was space to create a project that worked as an actual currency?

Inspired by the sector’s potential and sensing a gap, Kwon and Platias started writing a whitepaper, spelling out some of the ideas they had. In particular, the pair were interested in the creation of a decentralized financial system that was actually usable by the average person — one in which a stable currency could be easily held and used as a form of payment both on and offline. In many respects, it was a return to the ideologies of Satoshi Nakamoto, at a time when Bitcoin’s stomach-churning volatility had revealed that it was far from an ideal “peer-to-peer version of electronic cash.”…

…Shin was a young man with money and time. For a few years, he advised and incubated internet businesses in Korea and Southeast Asia — but it was in meeting Kwon that he found a true second act.

Though separated by nearly a decade, Kwon and Shin got on quickly, finding overlapping interests and developing a rapport. Shin was interested in Kwon’s work — though he had yet to spend any meaningful time in the cryptocurrency sector, his experience building TMON had given him a front-row seat to online payments processing and its various quirks and failings.

In Kwon’s theories about a better, decentralized monetary system, he saw not only a provocative idea but a solution to a tangible problem. What if instead of using decrepit, rent-seeking payment processors to manage transactions, online retailers could leverage a well-engineered, decentralized solution?…

…The practical framing posed by Shin would come to shape Terra’s very identity. Gabe, a semi-pseudonymous “Lunatic” — the name given to Terra’s fans — explained:

The Terra blockchain developed based on the principle that the blockchain itself was a means to many ends, and for that means to succeed it had to be better compared to other options…[T]he founding team saw that there were several finance system pain points such as slow payment clearance and high payment fees. Following that, blockchain development happened to be the best available option to resolve those issues.

A partnership was born, and Shin set to work leveraging his contacts. As Kwon explained in our conversation, the TMON founder’s Rolodex allowed the budding blockchain project to condense a product-discovery journey that might have taken months or years into weeks. He also brought a different type of thinking to the project. While Kwon noted that he “used to be a very theoretical and abstract type of person,” Shin was “a more practical, numbers-driven executor.”

Along with Platias and other early contributors, Kwon and Shin started to more concretely scope out their solution, receiving feedback from Korea’s e-commerce players. They called it Terra.

Thanks to Shin’s profile, the Terra team was quick to attract financing. By late summer of 2018, it attracted a $32 million investment from leading cryptocurrency exchanges, including Binance, OKEx, and Huobi. Other backers included TechCrunch founder Michael Arrington, Polychain Capital, and Hashed.

In the fundraising announcement for that round, Shin outlined an audacious vision: to “build a platform that competes with Alipay on the blockchain.” The comparison to the Chinese super-app neatly encapsulated the team’s desire to build an intuitive, widely used financial product that served both consumers and merchants. It also expressed the desire for secondary apps to be built on top of Terra’s framework…

…There is only so far we can go without a better understanding of what Terra is and how it works. Yes, it is a cryptocurrency project. Yes, it improves payment processing for e-commerce companies. Yes, it is — in some sense — creating “better money.”

But what does any of that mean? Answering this question is not trivial. Terra’s complexity on the back-end allows it to be compelling and intuitive to the user. It is somehow elegantly convoluted but entirely logical — a kind of financial watch with hundreds of gears working together to keep time. …

…It’s hard enough to make money. But it’s much, much harder to create money from scratch. Terra’s whole system is founded on the latter — the fabrication of currency and a surrounding financial system.

Now, creating a cryptocurrency that functions as a medium of exchange has historically been rather difficult. Though the initial premise of Bitcoin was to create a true digital cash alternative, the asset’s volatility has made it an ineffective payment method. Who wants to buy something with a currency that might increase in value by 20% in 24 hours?

You can imagine a scenario in which you buy a TV for 0.01724 BTC when the asset’s price is $58,000 per token. That means you’ve paid about $1,000 for your next flatscreen. Ten minutes later, Bitcoin’s price hits $60,000, meaning you effectively paid $1,034 for it now. When Bitcoin hits $69,000 two days later, your TV spend hits $1,190.

This kind of turbulence is typical among crypto assets, which is why a set of projects have emerged that seek not to increase their value but remain as stable as possible. Rather than moving around minute-to-minute, these “stablecoins” trace the price of a fiat currency as closely as possible. Usually, they peg themselves to USD.

Stablecoins serve an extremely important purpose within the crypto ecosystem. Not only do they open up crypto as a medium of exchange, but they provide a place for investors to park assets during volatility without needing to move into fiat. For example, if you’re a long-time investor in Bitcoin but worry about short-term upheaval, you could choose to transfer some of those holdings into a stablecoin rather than selling and converting back into USD. While those holdings wouldn’t benefit from an upswing in Bitcoin’s price, they’re protected from a drop. (At least, in theory.)

The decentralized finance (DeFi) movement has also been a huge beneficiary of stablecoins. Without some stability in terms of value, many fewer would have been willing to stake their holdings in exchange for interest.

Clearly, stablecoins have value. But how exactly do they maintain their stability? How is it that a token can continually be worth $1?

The answer is, it depends.

---

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 Adobe and Amazon. 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 21 November 2021:

1. Experts From A World That No Longer Exists – Morgan Housel

Henry Ford was a tinkerer. He revolutionized the factory floor by letting his workers experiment, trying anything they could think of to make production more efficient.

There was just one rule, a quirk that seemed crazy but was vital to the company’s success: No one could keep a record of the factory experiments that were tried and failed.

Ford wrote in his book My Life and Work:

I am not particularly anxious for the men to remember what someone else has tried to do in the past, for then we might quickly accumulate far too many things that could not be done.

That is one of the troubles with extensive records. If you keep on recording all of your failures you will shortly have a list showing that there is nothing left for you to try – whereas it by no means follows because one man has failed in a certain method that another man will not succeed.

That was Ford’s experience. “We get some of our best results from letting fools rush in where angels fear to tread.” He wrote:

Hardly a week passes without some improvement being made somewhere in machine or process, and sometimes this is made in defiance of what is called “the best shop practice.”

They told us we could not cast gray iron by our endless chain method and I believe there is a record of failures. But we are doing it. The man who carried through our work either did not know or paid no attention to the previous figures … a record of failures – particularly if it is a dignified and well-authenticated record – deters a young man from trying … I cannot discover that any one knows enough about anything on this earth definitely to say what is and what is not possible.

The important thing is that when something that previously didn’t work suddenly does, it doesn’t necessarily mean the people who tried it first were wrong. It usually means other parts of the system have evolved in a way that allows what was once impossible to now become practical…

…“Don’t buy stocks when the P/E ratio is over 20” was a good lesson to learn from the 1970s when interest rates were 7%, the Fed hadn’t yet learned what it’s capable of, and most businesses were cyclical manufacturing companies vs. asset-light digital services. Is it relevant today? At a broad, philosophical level, yes. In practical terms, probably not. In the same sense, buying stocks at all seemed like nothing but speculation in the 1920s because corporate disclosures were so opaque. By the 1970s that had changed, and you could begin to make rational, calculated long-term decisions that put the odds in your favor.

What was foolish to one generation was smart to the next, but the older generation’s views lag. Every generation goes through this. Every generation fights it.

Same thing in the economy. Take this simple change in how the government views stimulus:

“Liquidate labor, liquidate stocks, liquidate real estate. Purge the rottenness out of the system.” – Treasury Secretary Andrew Mellon, 1930

“We have a lot of money. We need to get that money in Americans’ hands.” – Treasury Secretary Steve Mnuchin, 2020

That’s an enormous shift, an evolution in how policymakers handle recessions. Investor Conor Sen recently pointed out that high stock valuations and low interest rates used to mean future investment returns would be low. But now, he wrote:

What it’s actually indicating is that there exists a lot of fiscal capacity for higher levels of government spending, which can boost real GDP and earnings growth (probably some inflation too), an outcome better for financial markets than you’d get without that policy shift.

But for older investors whose careers have overlapped with high inflation and a policy environment dominated by monetary policy they’re not thinking about this — it’s the flaw in their framework.

Not a day goes by that I don’t become more confident that the secret to business and investing is identifying the few things that never change and hold onto them for dear life, and identifying what evolves and be ready to adapt those views quickly.

It’s just so hard to do the latter.

2. Eric Golden – Bored Ape Yacht Club – Patrick O’Shaughnessy and Eric Golden

[00:03:39] Patrick: And if you think about the collection, so there’s 10,000 of them. They’re NFTs. People collect one or more of them. What are the motivations for owning one that are distinct from let’s say a pure piece of art that you might show people but doesn’t have a membership criteria to it. Like how is this something more, something different?

[00:03:56] Eric: So if you zoom out, I think for me of how I got into this, this is not what I thought I would be owning. I got into crypto late. And by late, I mean everyone who was after 2013, that seems to be a big demarcation. And so I was into crypto in 2018, 2019, and I was buying it to coins. I really didn’t know much about it. But went on Twitter, most of the information was coming from Twitter and Discord. And on Twitter you would see these CryptoPunks, and I really wanted a CryptoPunk, and you would go in their Discord, and I was lusting after these things. I was looking at them and saying like, “I just want one.” But when I went into the Discord and I met these people, they’d been in Bitcoin since like 2010, they own Glitz. They just knew everything. And I felt like such an imposter. I was like, “I’m new to space. I’m just trying to get skin in the game to understand it.” And I really didn’t feel like I would belong.

And so when the Bored Ape project happened, it had come right after Top Shot. So Top Shot came out at the end of ’19. I got big into that in the beginning of 2020, and people were trading basketball cards, and it really was this first experience with NFTs and Roham Gharegozlou, the founder of Dapper Labs, gets a huge amount of credit of onboarding us into what is an NFT.

And so at that point, ironically in April, Larva Labs was about to issue their second project called Meebits, and I actually bought two of those. And I thought it was the most ridiculous thing I could ever do. I minted a human and a pig. A pig was very rare, and I showed my wife and I’m like, look, we just minted a digital cartoon and parents of a new pig. And I’m like, you can trade this thing for like $30,000. This whole thing crazy. And I put it up as my avatar, and I was trying to make this personality and just play around in the space. And the Apes were like taunting me. And they were this new project. They started off at $200. Meebits came out at like the equivalent of $8,000.

And so this was kind of a blue collar project that it had a vibe and a culture I wanted to be a part of. And so I ended up buying some Bored Apes and joining the group and joining the Discord and learning more about it. And I would say for a lot of people, especially I bought it in May, so it was a one month after launch. It was kind of this silly thing, which was like, we wanted to be punks, but we weren’t punks. And we bought this picture of an ape, and it was this fun lore of what would happen if everyone got rich from investing in crypto, what you end up doing, you would create this really cool bar and club to go hang out with your friends, which resonated with a lot of people. Like you’re working really hard. You want to make a lot of money, but what’s it all for? It’s just to go hang out with your friends.

And so this culture war started between Meebits and Apes, and we were joking about it, what group you were going to join. It was all very playful and fun. We were watching the price of their project, which is quoted in floors. So floor is the cheapest you can buy something at. There’s was two ETH, and ours was 0.3ETH, and we’re like, “Someday we’re going to cost more than Meebits.” And we would just joke about it in the Discord and talk about what this project could be. And so it really wasn’t on buying a piece of art. I think this is beautiful. I want to hang it on my wall, although I did really like it. It was more symbolic of joining a community and having a shared belief of the people who were on the frontier that are willing to fail unconventionally, but came into crypto around the same time.

We weren’t the CryptoPunks. We weren’t the first to get there, but we were totally okay with that. We were this new group that really wanted to have fun and teach each other. There’s another famous podcast that always asks what’s the kindest thing. And I really felt like the Bored Ape Yacht Club exemplified that. When you went into the Discord, you’re like, “I don’t know what DeFi is. What is Solana and why do all the VCs own it?” It was just this amazing sharing community where with my ape, I could speak in a way that immediately got me into a circle of people I wanted to associated with and I wanted to learn from. And it was really a club, not a piece of art where I was going to say, I own this rare thing. I’m going to hang on my wall…

…[00:11:29] Patrick: Let’s talk now about the value of holding these things beyond the purely digital. They release this thing called Roadmap 2.0, and again, I want to come back to, there’s a difference between owning a piece of art, say in the extreme you own the Mona Lisa, that’s incredibly valuable. Maybe it appreciates over time. It’s a piece of culture. There’s all sorts of interesting art specific angles that we’ll probably cover more in other episodes. But in this one I’m really interested in sort of the membership and community specific angle. So how is this organically, this roadmap managed, how does the community contribute to it? Are you excited about it? What do you think this might become if each of these 10,000 things is effectively like a membership card into a club?

[00:12:11] Eric: Roadmap 1.0 was a scavenger hunt where we were going to give away an ape and also a certain amount of ETH. So the first Roadmap was pretty basic, but the big finale was releasing of the mutant apes, which really was a way of extending the club. So if there was 10,000 people that were part of the original, they had always planned to make that number in total 30,000. But was we really fascinating was the way they went about distributing the second batch of the 20,000. And what was interesting about it is most of the wealth of the money paid for those mutants went to original owners, and some went to the Bored Ape Yacht Club founders themselves.

So there was this economic thing where they delivered to original holders Serum, and that Serum, if you combined it with your ape, would create a new mutant ape, and then you could sell that. But you got that for free. The value of that the day it was dropped in U.S. dollars was between 15 and $60,000. So everyone who owned an ape just got 15 to $60,000. And that came on the heels of us already getting a Bored Ape dog, which we could have sold for probably 15 to 20,000.

And so if you were in early, you’ve been paid back your investment already through the airdrop mechanisms, which we can talk about some more. What the Bored Ape Yacht Club itself raised, the actual founders raised something like $90 million in that second sale. Combine that with the fact that one of the interesting things about how NFTs sell is every time a transaction happens, the Bored Ape Yacht Club gets 2.5 per percent and a royalty. So if you have a million dollar sale, you have $25,000 going into the kitty. And so these numbers are wild, but since April, they’ve done over a billion dollars in sales and raised over a hundred million dollars in revenue for this organization to do what it will with.

And so you asked the question, there’s kind of two parts. One thing that made Bored Apes unique was they let the owners take the IP. So I own my ape. I can start a beer company, a coffee company. We can start the Bored Investor Yacht Club together. There’s all of these things that you can do because you own your own ape. Roadmap 2.0 right now is literally just a picture teasing out a lot of different things. And so the first thing that’s coming out is called Ape Fest in New York, which I’ll be attending, where we literally rented a yacht to go out on the Hudson River for a thousand of our friends to hang out. A lot of us have never met each other. We’re also throwing a huge party in Brooklyn, and there’s a bunch of other activities happening for this week. So that’s kind of the first meetup in real life.

And then there’s teasing at things that people are guessing about or speculating. You can pull the picture up. One is a game, which a lot of people are talking about, like a game that group could play and things that we own, we have some sort of part in that as assets. The other that I’m most excited about is it looks like there could be an actual bar in Miami. The funny thing is this meme becoming a reality. We were joking about what would happen if this all took off. Imagine we had our own Yacht Club where we would just hang out at a bar together. And in fact, that might actually happen, and we’re going to build one. And then the next one was DOW, which has really become, I think, going to be the big, next thing in crypto. It’s been around for a while. But I think that it’s gaining steam of, okay, if you bring all these people together, how do we think about governance? How do we think about what we do with the money?

And so if you become a member of the Bored Ape Yacht Club, your voice, you can go into the discord. You can say, “This is what I want to do.” People will work together to say, “I want to do this on my own, or try to make recommendations of what actually the Yacht Club should do.” So, yes, I’m extremely excited about Roadmap 2.0. I never really thought there would be anything past Roadmap 1.0, to be honest. I thought we would do this. We would trade it. It would be this iconic thing you own that, when you looked back at time, you’d say, “Okay, when NFTs became the mainstream onboarding to crypto,” which I really believe NFTs will do, “Bored Ape Yacht Club had a really strong place in how that all happened.

But the brand and the strength has gotten so powerful, they’ve actually been able to generate something I think far beyond anyone’s wildest streams, where now we’re comparing it to Ferrari and Rolex and Supreme and saying like, “This is going to be an international, global brand. And how do we handle this and what do we do with it?” Far more than I think what we could have imagined at the onset…

…[00:20:56] Patrick: So one of the things that I’m always curious about in anything is, what is the fundamental behind the asset? And beautiful thing about Bitcoin or gold is there is none, it’s a collective story or an agreement that grows or doesn’t or whatever. And so price is kind of untethered beyond just the imaginations of donors. Whereas something like Ethereum that gets used a lot or Solana that gets used a lot or, in this case, Bored Apes, relative to, say, CryptoPunks that seem to have much less going on in their ecosystem. You can map their value onto some underlying thing that’s not just price speculation and supply and demand.

So how do you think about that as an owner? Do you care? These things are worth a lot of money today. It would be unsurprising if they were worth 5% of that amount in two months or something for some reason, because there’s not a huge amount of underlying fundamentals. So as someone interested in NFTs, how do you think about that concept of earnings equivalent or cashflow equivalent or, I don’t know what the unit of fundamental is, but how do you begin to map old models onto this new world?

[00:21:56] Eric: I think it’s really hard and it’s a question I ask myself every day looking at the prices. When CryptoPunks was released, it was released with no roadmap. That’s been a big distinction of like, we’re just putting these out to the world very much like Bitcoin. When Bored Apes showed up, they said, “We’re going to do something.” And there was a question of, what are you actually going to do? And so I think that, when I look at valuation, I would caution people that this is still wild speculation, people playing with what’s possible. But Bored Apes is by far the group that has my attention of delivering and actually building a brand and has a lot more plans for the future. And where they’ve accumulated all this money, now it becomes an execution. So without any venture capital, they’ve generated over a hundred million dollars on their balance sheet to do a what they will.

And you have a very passionate, loyal community. I think of Chris Dixon’s 1,000 True Fans just hit me. I was like, “Oh, I totally get it.” Where you’ve got 15,000 people of which there’s definitely thousands of extremely loyal fans that want to see what’s possible. And so I don’t think people are doing discounted cashflow analysis on their ape. I think they’re comparing them to other assets, if anything, and doing relative value. That’s what I’m doing. And saying, “When I first came into this space, I wanted a punk that’s our gold or our treasury we’re basing stuff off of.” And how much should a Bored Ape be in relation to a punk? How should a Bored Ape be in relation to a piece of art like Dmitri’s Ringers? And so you’re comparing it to other assets.

The interesting thing is that they actually have, like with the airdrop mechanism, they actually did start to generate cash flow, but I’m not thinking that’s going to be a professional thing. I think that’s a one time thing, because then you get to how this suddenly does start to slip for people to feel like ponzis, where you’re like, “Oh, I’ve constantly got to issue a new thing, to issue a new thing.” And I can see why people are massively skeptical, which they should be. But I think that the brand is actually going to be able to build out IP that will be valuable. And I think that we’re getting into a space that’s fascinates me because at your conference where Mauboussin was talking about intangible value. And it’s so hard for a good analyst to put that on a balance sheet. As a former portfolio manager, you’re trying to value companies, and intangibles is where all of the value’s going, but we have no good accounting metrics. And what I’m telling you is I’m buying intangible value.

I don’t know how to measure this yet. And I don’t think we have the words or the measurement at mechanisms. We’re just not at a place where you can say like, “Oh, well that’s what it does.” NFTs are starting to get into DeFi, which everything just feels like you’re going towards this asset unlock using markets for price discovery. And you’re starting to see NFTs just into the DeFi space. So with that, I think you might be able to do a little bit more of a traditional, but I don’t think we’ve figured out yet what’s the best approach to value these things. And so if anyone asks, I usually don’t talk about this stuff, and here I am on your podcast because I don’t want people to think you just buy it for $200, it goes to 150,000. Eric just DMed me the next project where that’s going to happen. We could walk away. It’s still a very speculative asset class.

[00:24:58] Patrick: What do you mean by NFTs are going into DeFi? What does that mean?

[00:25:01] Eric: So what that means is, what I’m interested is a new NFT project comes on. I’m very interested in what new aspect is it adding? We’ve seen the social status showing people, hey, I was earlier, I owned this really value asset. Clearly this is entertaining. The question is utility. What type of utility can these things bring? And so utility, to me, is innovation on the prior projects. There was a project, I don’t know who the first one to do it was, but the one that’s by far the most popular or the most successful is called CyberKongz.

And what CyberKongz did was, when you bought one of their NFTs, you started earning tokens for every period of time you held it. So if you held it for a week, you got X amount of tokens. And then after you saved up enough tokens, you could then create the next tier of the membership. And so why that’s really interesting is it’s incentivizing people to hold for longer periods of time. And then you had this economic value. You knew that if I held it for X amount of weeks, I could collect enough tokens. With those tokens, I could create and NFT and sell it.

And so then with tokens, now you can start to create liquidity pools, you can get into staking. You can do all of the things that people are doing in the DeFi space, but connected to an NFT instead of connected to a token. Now, I say that with all of the caveats I can, that what’s been really interesting about this next step into DeFi is this question of, are these securities? Are you going to have regulation? What are you stumbling into from the silly art community, this is a fun project to, “Oh wow. I have a cashflow producing asset. Was that supposed to be registered with the SEC?”

3. ConstitutionDAO, The Need for Trust, Memes and Reality – Ben Thompson

From CNBC:

Sotheby’s is auctioning off an extremely rare and historic first-edition printing of the U.S. Constitution, and crypto investors are pooling millions of dollars worth of ether to buy it. An organization known as ConstitutionDAO is raising the money using a digital crypto wallet with the aim of crowdsourcing enough funds to make the winning bid when the document hits the auction block on Thursday night.

The foundational text is valued at $15 million to $20 million. Since launching five days ago, the group has thus far raised 967 ether, or $4.3 million. The exercise offers some of the first practical insight into how crypto infrastructure can be used to facilitate fractional ownership of a physical artifact.

ConstitutionDAO is a decentralized autonomous organization, or DAO, formed for the sole purpose of putting an original copy of the Constitution back in the hands of the people…If ConstitutionDAO secures the winning bid with this consortium of crypto bidders, each contributor will fractionally own part of the text.

It’s a lovely story that has taken the crypto world by storm, and is being hailed as a demonstration of the power of Decentralized Autonomous Organizations (DAOs) to bring together people who don’t know each other for a common purpose: chip in some ether, and if ConstitutionDAO wins the auction, you own (a fractional part of) an original copy of the U.S. Constitution; moreover, you get to vote based on your share of ConstitutionDAO tokens on what you want to do with said copy.

It’s a story, however, that isn’t exactly true.

The FAQ on the ConstitutionDAO website (the definitive FAQ is this Google Doc) states the following:

Am I receiving ownership of the Constitution in exchange for my donation?

No. You are receiving a governance token, not fractionalized ownership. Governance includes the ability to advise on (for illustrative purposes) where the Constitution should be displayed, how it should be exhibited, and the mission and values of ConstitutionDAO. ConstitutionDAO is taking donations and donors are receiving governance tokens with no expectation of profit. These donations are not tax deductible at this point in time.

The most obvious reason for this limitation is regulatory: issuing ownership tokens with the expectation of a return would make ConstitutionDAO a security; moreover, a DAO is digital, and the Constitution copy is physical, and it is not well established in most jurisdictions how or if a DAO can own physical property. Then there is the fact that Sotheby’s has to follow Know Your Customer (KYC) laws: if the DAO is simply a bunch of anonymous Ethereum addresses how can the auction house satisfy its legal requirements around limiting money laundering?

Instead, according to the project’s Purchase Process Details, it appears that the actual bidder for the Constitution will be a just-formed LLC with two members/beneficiaries who may sign a letter of intent to be bound by DAO decisions, but still TBD. It’s also not clear whether or not the founders of the project will take money off of the table; again from the FAQ:

Will the core team receive any of the raised funds for themselves or get compensated in any way from this?

The core team has not received or pre-minted any tokens. Following the purchase of the Constitution, we intend to submit a proposal to be voted on by the community. While this is unusual, we believe that it establishes a precedence of mutual trust between the core team and the backers of the ConstitutionDAO.

There’s a funny word in there: trust. It sure is striking that a memetic moment meant to demonstrate the power of trustless technologies is utterly and completely dependent on trust: trust that the LLC owners won’t take the funds and run — or the Constitution copy, for that matter; trust that the money will be refunded if the bid fails; and trust that the actual DAO, when it is finally formed, doesn’t enrich the core team along the way.

This isn’t a criticism of the entire project; as I noted, for both regulatory and time reasons it’s not clear how the core team could do better, and the existence of the Google Docs I drew my information from makes it clear that the team is trying to be transparent (and said transparency has increased over the last 24 hours, including revealing who controls the wallet that holds the funds). It is interesting, though.

4. A Look Under The Hood Of the Most Successful Streaming Service On The Planet – Catie Keck

When many of us fire up our favorite streaming services, we often bump into various fury-making problems: stuff freezes, controls don’t work, or the service crashes entirely. None of these are ideal, but all seem to have become a widely understood cost of cord-cutting. For example, Disney Plus crashed its very first day because its software couldn’t handle the demand (and then it buckled again under demand for WandaVision). HBO Max is so fundamentally broken that its own leadership has admitted that the app is a mess. Even Instagram, whose Stories feature makes it a kind of streaming service in its own right, crashes so frequently it’s started alerting its users when it’s borked. Streaming can be maddening!

A service’s guts, the engineering behind the app itself, are the foundation of any streamer’s success, and Netflix has spent the last 10 years building out an expansive server network called Open Connect in order to avoid many modern streaming headaches. It’s the thing that’s allowed Netflix to serve up a far more reliable experience than its competitors and not falter when some 111 million users tuned in to Squid Game during its earliest weeks on the service…

…Open Connect is Netflix’s in-house content distribution network specifically built to deliver its TV shows and movies. Started in 2012, the program involves Netflix giving internet service providers physical appliances that allow them to localize traffic. These appliances store copies of Netflix content to create less strain on networks by eliminating the number of channels that content has to pass through to reach the user trying to play it.

Most major streaming services rely on third-party content delivery networks (CDNs) to pass along their videos, which is why Netflix’s server network is so unique. Without a system like Open Connect or a third-party CDN in place, a request for content by an ISP has to “go through a peering point and maybe transit four or five other networks until it gets to the origin, or the place that holds the content,” Will Law, chief architect of media engineering at Akamai, a major content delivery network, tells The Verge. Not only does that slow down delivery, but it’s expensive since ISPs may have to pay to access that content.

To avoid the traffic and fees, Netflix ships copies of its content to its own servers ahead of time. That also helps to prevent Netflix traffic from choking network demand during peak hours of streaming.

“We, Open Connect, bring a copy of Bridgerton at the closest point to your internet service provider — in some cases, right inside your internet service provider’s network — and that basically avoids the burden of the internet service provider having to go get it and transfer it through all these servers on the internet over to you,” Haspilaire tells The Verge.

And they’re everywhere. At present, Netflix says it has 17,000 servers spread across 158 countries, and the company tells me it plans to continue expanding its content delivery network. Netflix prioritizes where it places these servers based on where it has the most members and relationships with ISPs, the company says.

“Anyone who wants to improve performance is going to try to put a server as close to the end user as possible,” Law explains. “And in putting it there and by serving the content from that last mile network, it stops the traffic having to transit all the rest of the internet and go back to an origin. So it’s taking a load off the internet, and it’s taking a load off the peering points.”

When Open Connect originally launched a decade ago, the service started working collaboratively with ISPs on deployment. Netflix provides ISPs with the servers for free, and Netflix has an internal reliability team that works with ISP resources to maintain the servers. The benefit to ISPs, according to both Netflix and Akamai, is fewer costs to ISPs by alleviating the need for them to have to fetch copies of content themselves.

“It’s not a huge burden, but it’s certainly a relief,” Law tells me. “It’s the same principle that Akamai is founded on and the same principle that every CDN works on. Netflix’s CDN is no different to other CDNs — except their CDN is dedicated to Netflix content.”

While most major third-party CDNs do multiple jobs and manage multiple requests from many companies — Akamai, for example, says it has thousands of customers — Netflix’s internal CDN does exactly one job: it distributes Netflix content. If a content distributor doesn’t have this kind of CDN partnership or server network in place, Law says, there’s a whole lot of stuff that needs to happen along the way for you to stream a movie or TV show.

5. He wanted make his revolutionary code free. But Ali Ghodsi is now a billionaire with a $28 billion startup – Kenrick Cai

Inside a 13th-floor boardroom in downtown San Francisco, the atmosphere was tense. It was November 2015, and Databricks, a two-year-old software company started by a group of seven Berkeley researchers, was long on buzz but short on revenue.

The directors awkwardly broached subjects that had been rehashed time and again. The startup had been trying to raise funds for five months, but venture capitalists (VC) were keeping it at arm’s length, wary of its paltry sales. Seeing no other option, NEA partner Pete Sonsini, an existing investor, raised his hand to save the company with an emergency $30 million injection. 

The next order of business: A new boss. Founding CEO Ion Stoica had agreed to step aside and return to his professorship at the University of California, Berkeley. The obvious move was to bring in a seasoned Silicon Valley executive, which is exactly what Databricks’ chief competitor, Snowflake, did twice on its way to a software record $33 billion IPO in September 2020. Instead, at the urging of Stoica and the other co-founders, they chose Ali Ghodsi, the co-founder who was then working as vice president of engineering.

“Some of the rest of the board was naturally like, ‘That doesn’t make any sense: Swap out one founder-professor for another?’” recalls Ben Horowitz, the company’s first VC backer and himself initially sceptical of entrusting the company to a career academic with no experience of running a business. A compromise was reached: Give Ghodsi a one-year trial run.

By Horowitz’s own admission, Ghodsi, 42, bald and clean-shaven, has become the best CEO in Andreessen Horowitz’s portfolio, which spans hundreds of companies. Databricks is already shaping up to be the firm’s best software success thanks to a recent valuation of $28 billion, 110 times larger than when Ghodsi took over. Databricks now boasts more than 5,000 customers, and Forbes estimates that it’s on track to book more than $500 million in revenue in 2021, up from about $275 million last year. It features on Forbes’s latest edition of the AI50, ranked fifth on last year’s Cloud 100 list and could soon be headed for an IPO that ranks among the most lucrative in the history of software. Already, Ghodsi’s magic act has minted at least three billionaire founders—himself, Stoica, 56, and chief technologist Matei Zaharia, 36—all of whom, by Forbes’s estimation, own stakes between 5 percent and 6 percent, worth $1.4 billion or more…

…Databricks’ cutting-edge software uses artificial intelligence (AI) to fuse costly data warehouses (structured data used for analytics) with data lakes (cheap, raw data repositories) to create what it has coined data “lakehouses” (no space between the words, in the finest geekspeak tradition). Users feed in their data and the AI makes predictions about the future. John Deere, for example, installs sensors in its farm equipment to measure things like engine temperature and hours of use. Databricks uses this raw data to predict when a tractor is likely to break down. Ecommerce companies use the software to suggest changes to their websites that boost sales. It’s used to detect malicious actors—both on stock exchanges and on social networks…

…In 2009, the 30-year-old Ghodsi came to the United States as a visiting scholar at UC Berkeley, where he got his first glimpse of Silicon Valley. Despite the collapse of the dotcom bubble nine years prior and the ongoing financial crisis, innovation was at a peak. Facebook was only five years old and not yet public. Airbnb and Uber were in their first year of existence. And a few upstart companies were just beginning to boast that their technology was able to beat humans at narrow tasks.

“It turns out that if you dust off the neural network algorithms from the ’70s, but you use way more data than ever before and modern hardware, the results start becoming superhuman,” Ghodsi says.

Unlike many foreign-born future entrepreneurs, Ghodsi was able to stay in America on a series of “extraordinary ability” visas. Once at Berkeley, he joined forces with Matei Zaharia, then a 24-year-old PhD student, on a project to build a software engine used for data processing that they dubbed Spark. The duo wanted to replicate what the big tech companies were doing with neural networks, without the complex interface.

“Our group was one of the first to look at how to make it easy to work with very large data sets for people whose main interest in life is not software engineering,” Zaharia says.

Spark turned out to be good—very good. It set a world record for speed of data sorting in 2014 and won Zaharia an award for the year’s best computer science dissertation. Eager for companies to use their tool, they released the code for free, but soon realised it wasn’t gaining any significant traction.

Over a series of meetings at cheap hole-in-the-wall Indian restaurants beginning in 2012, a core group of seven academics agreed to start Databricks. Entrepreneurial wisdom came from the Romania-born Zaharia’s thesis advisors, Scott Shenker and fellow Romanian Ion Stoica, two well-respected academics. Sto­ica was an exec at $300 million video streaming startup Conviva, while Shenker had been the first CEO of Nicira, a networking firm sold in 2012 to VMware for about $1.3 billion. Stoica would be CEO, and Zaharia the chief technologist. Shenker, who joined the board rather than working full-time for the company, arranged the initial meeting between Ben Horowitz, an early Nicira investor, and the researchers, who nearly balked at the idea.

“We thought to ourselves and said, ‘We don’t want to take his money because he’s not a researcher’,” Ghodsi says. “We’d wanted to get some seed funding, maybe raise a couple hundred thousand dollars and then just code away for a year and see what we could get.”

On a summer day at their new office space one block off Cal’s campus, the founders sat idly in their conference room, pondering how much money would be too much to turn down. An hour after their scheduled meeting time, Horowitz arrived. “Traffic is brutal to this Berkeley place,” he said, before cutting to the chase: “I’m not going to negotiate with you guys; I’m just going to give you an offer, so take it or leave it.” The offer: $14 million in capital at close to a $50 million valuation. It was too much to turn down.

“These kinds of ideas have a time limit on them,” Horowitz explains. “For most people, starting with seed money is the right thing to do, but not for these guys.”

6. Twitter thread on why Web 3.0 matters – Chris Dixon

Web 1 (roughly 1990-2005) was about open protocols that were decentralized and community-governed. Most of the value accrued to the edges of the network — users and builders.

Web 2 (roughly 2005-2020) was about siloed, centralized services run by corporations. Most of the value accrued to a handful of companies like Google, Apple, Amazon, and Facebook.

We are now at the beginning of the Web 3 era, which combines the decentralized, community-governed ethos of Web 1 with the advanced, modern functionality of Web 2.

Web 3 is the internet owned by the builders and users, orchestrated with tokens…

…Why does Web 3 matter?

First, let’s look at the problems with centralized platforms. (I wrote more about this back in 2018 here https://cdixon.org/2018/02/18/why-decentralization-matters/)

Centralized platforms follow a predictable life cycle. At first, they do everything they can to recruit users and 3rd-party complements like creators, developers, and businesses.

They do this to strengthen their network effect. As platforms move up the adoption S-curve, their power over users and 3rd parties steadily grows.

When they hit the top of the S-curve, their relationships with network participants change from positive-sum to zero-sum. To continue growing requires extracting data from users and competing with (former) partners.

Famous examples of this are Microsoft vs. Netscape, Google vs. Yelp, Facebook vs. Zynga,  Twitter vs. its 3rd-party clients, and Epic vs Apple.

For 3rd parties, the transition from cooperation to competition feels like a bait-and-switch. Over time, the best entrepreneurs, developers, and investors have learned to not build on top of centralized platforms. This has stifled innovation.

7. Roelof Botha – Sequoia’s Crucible Moment – Patrick O’Shaughnessy and Roelof Botha

[00:25:39] Patrick: If you think about today’s landscape, setting aside the cost of capital and the crazy funding environment, which, look, is great for the world I think. There’s a lot more businesses being built and talented people building them with more access to capital. I think that outcomes will be fantastic. How else do you see today’s landscape as different than the long past in which you’ve invested predominantly here in the US? What is most notably new or different about your interaction with founders or companies or opportunity sets? What are the winds of change, so to speak, today?

[00:26:11] Roelof: I’d say one of the biggest changes I’ve noticed over the last 15 years is the scale of ambition of founders. And maybe some of that deals with people seeing examples and role models that they can follow. It’s always been powerful for me. I think most people have this experience. When you’ve seen somebody else accomplish something, it’s sort of like an existence proof from science. It shows you it can be done and it gives you a template. Part of what we lamented 15 years ago was that founders didn’t have enough ambition. And sometimes we would sell too early when they were onto something great. And I was guilty of that myself. PayPal was a 1.5 billion acquisition, and today it’s a company worth over $300 billion. And Mike Moritz was on our board. And Mike, I think, saw the potential and pushed us and challenged us to think longer term.

And what did we know? What did I know? And I made the wrong decision, and didn’t quite fathom how much potential PayPal had as a business. That has changed. And I see founders today far more patient than they ever were, far more ambitious to build companies of consequence, and also far more mission-driven than they used to be. And not only is this in America, I’ve now started to see this in Europe. I think this was especially true of European founders maybe 10, 15 years ago, where they got to a certain scale and it seemed like that was good enough. That was a great accomplishment. And now the founders really have global aspirations.

[00:27:31] Patrick: How does this most change their behavior? You’ve mentioned longer time horizons and bigger ambitions, so maybe some of that just speaks for itself. But does this manifest in different ways of doing business? Or different ways that, as a board member, you guide companies in their early years? Like you have to act differently with that scope of ambition in mind in years one through three than you would if you were going for a smaller outcome?

[00:27:53] Roelof: I think it does lead to a different outcome, because the horizon is different. You don’t take shortcuts, you don’t use duct tape, you try to architect things properly. I think teams are more mindful of who they recruit. Look, and sometimes there are people that are wonderful to help you go from year one to year three, but maybe they’re not the people to get you from year three to year five. Or they can help you get you 100,000 in revenue, but they maybe can’t get you from there to a billion in revenue. And so I see founders being a lot more deliberate about thinking about the composition of their management teams, about their willingness to invest in the next generation of products that might yield benefits down the road.

Going back to Square as an example. Square Cash didn’t exist for the first four or five years of the company’s existence. And it’s a huge business today with 10 of millions of users. And Jack has this phrase about companies having multiple founding moments. And how do you encourage the team and provide that kind of platform for creativity to blossom within your organization? That’s the kind of thing that I’ve seen change, where people are just far more ambitious, they let more ideas blossom.

[00:28:56] Patrick: I love that we’re talking during a week when Zuckerberg changed the name of a trillion dollar business and is having one of those founding moments himself. Like you said, the examples that are out there now is almost like the classic four minute mile thing. Like once someone broke the four minute mile, then all these other people started doing it. Seems like there’s something similar going on here. When you first meet, because I know you invest all the way down at seed right at the beginning of a company, and series A and beyond, when you’re first meeting with a business, with a founder, or a founding team, what are your goals in the earliest meetings? Like what are you trying to learn? What are you trying to suss out? How do you go about doing that? Because I’m sure you’ve gotten as many reps as just about anybody. So what matters to you in those early meetings with very young companies?

[00:29:37] Roelof: Difficult question, but a fun question. Every meeting is both buying and selling, just like every good interview. If I walked into that meeting feeling as though my job is to find the flaws and to trip up the founder and to be the sole person who’s judging, if I turn around and I’m actually in interested in partnering with them, they may have been turned off so much by my behavior they wouldn’t choose me. So there’s this delicate balance of how do you ask questions in an engaging way so that you’re going to answer some of your diligence questions, but you also build trust. And candidly, I’ve actually found that that in of itself is valuable. And founders come back to us and say, “You ask the toughest questions, and that’s why I want to work with you, because you sharpened my thinking. You helped me think differently about my business. And that’s the kind of thinking that I want for the future. I don’t just want somebody who’s going to be a cheerleader, patting me on the back for everything.”

So it’s being engaged. It’s being prepared. I love to understand the eureka moment. What happened? How did lightning strike? How did you think of this problem? What did you encounter in the world? Because I encounter a lot of problems. It doesn’t motivate me to start a company. Sloth kicks in. So there’s something that happened where you were so frustrated as a founder with the state of the world that it motivated you to want to go and build a company. So one of the boards I’m on is a company called Natera. It’s a public company in the bioinformatics space. They have the leading technology in the world for doing non-invasive prenatal testing. The founder and I met in high school. And he eventually came to Stanford, he did a PhD in electrical engineering. And in 2002 his sister gave birth to a baby that died within a week from a genetic condition that was undetected during her pregnancy.

And Matt went back to Stanford to learn everything he could about biology and genetics, because he thought that people needed better care. In the 21st century he found it shocking that we didn’t have better technology to help families have healthy children. That was the motivation. Yes, he was a friend of mine, but you hear him talk about the motivation for starting a company like that. It’s emotional. And you understand that this person is mission driven, and then you understand all the things that they did to uncover the nuances of why this is a problem they’re going to dedicate maybe the rest of their life to. So I love understanding that eureka moment, that insight…

…[00:35:44] Patrick: What’s the most exciting about payments looking forward, thinking back here to the early PayPal days. You’ve been in and around this part of the world for a very long time. Seems like payments is just this thriving, fascinating area of technology and technology investing. What is interesting about today’s payments landscape and what might be interesting in the future?

[00:36:02] Roelof: The beauty of payments is it helps grease the wheels of commerce. I know that’s a very overused terminology. But there’s something really valuable in that insight where it makes commerce easy. It’s one of the things that we found after the eBay acquisition of PayPal, there was tighter integration between that payments product of PayPal and eBay. It accelerated commerce on eBay. Just think about that for a second. PayPal was pretty darn successful before the acquisition, but by making it slightly better, it just totally accelerated commerce. That’s the beauty of what payments in general can do for the economy, for GDP growth. It just makes commerce easier. And so when I look around, I still see many instances where payments are broken. International wire transfers. If I want to send a birthday gift to one of my family members in South Africa. That’s an arduous process.

I love the promise of smart contracts, where you can embed a cryptocurrency with a payments event to make things far more seamless. We made an investment in Filecoin, for example. So if you think about how storage works today, you consume storage on S3, they measure how much you use, and then you get an invoice and you pay it with a credit card bill and you pay 2%, whatever, transaction fees for that. It’s kind of cumbersome. And what you get with Filecoin instead is this ability for the use of storage to lead to the payment for it automatically. It’s fully integrated. There’s no need for subsequent invoicing and disputes. It’s just fully embedded in the experience. And so I think that the promise, in my mind, of some of the DeFi technology in enabling smart contracts and lowering transaction costs, to me, is absolutely fascinating…

…[00:44:08] Patrick: The reason I chose the last one, MongoDB, is hopefully for sort of a window into your thoughts on the world of developers today. The fact that all of this technology we’re investing in and talking about so much and spending our daily lives on is ultimately built mostly by software developers and that the tools available to them have proliferated. And there’s been incredible businesses built in this space, including MongoDB. You don’t necessarily have to talk just specifically about the company. I’m even more interested in sort of your thoughts on the world of developers, how much runway there is here, whether that’s something that you’re actively interested in and your thoughts on it today.

[00:44:42] Roelof: We had a strategic insight or sort of a theme that developed over a decade ago and we internally called it the rise of the developer. And that informed our investment in Unity, which also faces developers, GitHub, MongoDB, Confluent, many of these other businesses. It’s about the rise of the developer. And the reason is that there are about 25 million people on the planet who write software for a living. 25 million people. It is a staggeringly small number of people on whom we depend to build all these wonderful products that we use today. And so whenever you can deliver technology or products that help those developers become more productive, it has a massive force multiplier effect on the world.

[00:45:24] Patrick: I think that the story with Mongo specifically, especially at second act with Atlas, this product that they’ve grown and now is, I don’t know what percent of the business it is, but it’s kind of staggering.

[00:45:33] Roelof: It’s about half.

[00:45:34] Patrick: Yeah. I mean, it’s incredible in a short period of time. What have you learned there about just the team and how they’re able to manage that? And this is kind of a question about second acts. Like how do companies successfully pull this off? You’ve seen a lot of these second acts, these second founding moments, or maybe even third. Is there anything shared and common between those key moments that you could point to?

[00:45:53] Roelof: Firstly, the focus on the developer, making the developer’s life easier. The founders, Dwight and Eliot, were at DoubleClick before they started Mongo. And they experienced some of the challenges of database scalability and complexity with traditional relational databases. And that’s what inspired them to build a product for themselves as developers. They wanted a database with a schema that was different, a NoSQL schema, a document-based, that gave them more flexibility to build applications. The founding inspiration, back to the Eureka moment comment we talked about earlier. So that’s what inspired them. They were born in an era that sort of was right at the cusp of cloud computing. And so initially they used an open source approach and it was a product that people would download and build applications locally.

And then they faced what I call a crucible moment decision. Companies, in my mind, face one to two crucible moment decisions a year. And the challenge they have is identifying that it is actually a crucible moment. Because sometimes your head’s down, focused on all the execution issues in your business. And so you need a little bit of perspective and distance to see a crucible moment. And then you have to get the decision right.

So I remember that, as a board member, we were able to bring the learnings from what we were seeing in Silicon valley and what was happening with cloud computing to make sure that moving to the cloud was a conversation that really had the focus of management. And we ended up recruiting an outside board member who was a former AWS executive who could help the company unlock getting to the cloud. Because sometimes, even if you know it’s a crucible moment, even if you make the right decision, it’s hard to change your habits.

It’s almost like when you learn a new sport and you don’t quite get it right because your body’s got a habit from a different sport. You need to retrain your muscles for this new activity. And so the company went through this challenge of trying to figure out how to become a cloud business. And how do you compensate your salespeople? What exactly are the product features and how do you continue to invest in your legacy product versus the new product and deal with all those challenges? And Dave and the team have done a spectacular job. And as I mentioned earlier, it’s about 50% of the company’s revenue today.

And again, the focus was simplicity, because for the average developer, using Mongo on prem meant that you had to download it, you had to provision a server. It just requires a lot more work than consuming a database as a service, where we take care of figuring out how to scale it for you, how to shard it for you. It helps you focus on what you’re good at as a developer and you don’t have to do what is known as undifferentiated heavy lifting.

---

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), Amazon, Apple, Meta (formerly Facebook), Microsoft, MongoDB, Netflix, PayPal, and Square. Holdings are subject to change at any time.

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

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

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

Here are the articles for the week ending 14 November 2021:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I’d love to know what this is.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It wasn’t a competitive product.

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

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

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

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

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

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

Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Exactly!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10 to 20 stocks provides plenty of diversification.

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

What are the top mistakes you see investors make?

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

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

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

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

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

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

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

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

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

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

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

[00:07:36] Patrick: CDRW.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

---

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

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

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

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

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

1. DAOs: Absorbing the Internet – Mario Gabriele

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

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

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

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

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

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

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

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

What does that mean?

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

Simple enough, right?

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

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

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

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

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

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

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

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

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

David Gardner first touched on how he picks stocks.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4. Let the Market Worry For You – Michael Batnick

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Then Nov. 1 happened.

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

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

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

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

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

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

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

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

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

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

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

A few that stick out from economics:..

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

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

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

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

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

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

Edison’s answer was predictable:

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

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

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

“Greater. Much greater,” he replied.

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

“Along all lines.”

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

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

That was why Edison was so optimistic about innovation.

He explained:

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

He gave some examples:

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

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

This, of course, is exactly what happened.

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

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

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

---

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