What We’re Reading (Week Ending 11 July 2021) - 11 Jul 2021
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 11 July 2021):
1. The Beginning of Infinity – Naval Ravikant and Brett Hall
Brett Hall: Hello Naval, it’s great to be here. You’ve raised so many interesting aspects of The Beginning of Infinity, which has become a real passion of mine. Like a lot of people who enter science, when I was at school I thought, “Well, I want to be an astronomer, so I’ll go to a university and do a physics degree, then do an astronomy degree, and then become a professional astronomer.”
One day I picked up David Deutsch’s The Fabric of Reality in a bookstore and started reading it. The first chapter described what I was trying to achieve in my life. It was putting into words what I felt my university studies and my general outlook on life was about.
Deutsch says that the ancient philosophers thought they could get an understanding of the entire world. As time passed, though, modern science made it seem as though this was an impossible project. There’s no way you could understand everything about reality. There’s too much to know.
How could you possibly know everything?
At the beginning of The Fabric of Reality, David Deutsch presents this idea that you don’t need to know every single fact to fundamentally understand everything that can be understood.
He presents this vision that there are four fundamental theories from science and outside science: quantum theory, the theory of computation, evolution by natural selection, and epistemology—which is the theory of knowledge. Together they form the worldview, or lens, through which you can understand anything that can be understood…
…Brett: Deutsch’s worldview is that reality is comprehensible. Problems are solvable, or “soluble,” as he writes. It’s a deeply rationally optimistic worldview that believes in good scientific explanations and progress.
Progress is inevitable as long as we have these good explanations. Good explanations have tremendous reach. They are acts of creativity.
Humans are problem solvers and can solve all problems. All sins and evil are due to a lack of knowledge. One can be optimistic about constant progress. That’s what the title refers to: We’re at the beginning of an infinite series of progress.
It’s a very optimistic take. It states that we are at home in the universe and the universe is ours as a resource to learn about and exploit; that material wealth is a set of physical transformations that we can affect; that everything that is not forbidden by the laws of physics is eventually possible through knowledge and knowledge creation.
He also writes about how humans are universal explainers, that anything that can be known and understood can be known and understood by human beings in the computation power of a human system.
Everything is knowable by humans. We’re at the beginning of an infinity of knowledge.
We understand things using good explanations and constantly replace old theories with better ones. There’s no endpoint in sight. There’s no perfection. Every theory can be falsified eventually and improved.
We are on our way to being able to do everything that is not forbidden by the laws of physics…
…Naval: Does probability actually exist in the physical universe, or is it a function of our ignorance? If I’m rolling a die, I don’t know which way it’s going to land; so therefore I put in a probability. But does that mean there’s an actual probabilistic unknowable thing in the universe? Is the universe rolling a die somewhere, or is it always deterministic?
Brett: All probability is actually subjective. Uncertainty and randomness are subjective. You don’t know what the outcome’s going to be, so you roll a die. That’s because you individually do not know; it’s not because there is uncertainty there deeply in the universe. What we know about quantum theory is that all physically possible things occur.
This leads to the concept of the multiverse. Rather than refute all of the failed ways of trying to understand quantum theory, we’re going to take seriously what the equations of quantum theory say. What we’re compelled to think about quantum theory, given the experiments, is that every single possible thing that can happen does happen. This means that there is no inherent uncertainty in the universe because everything that can happen actually will happen. It’s not like some things will happen and some things won’t happen. Everything happens.
You occupy a single universe, and in that universe, when you roll the die, it comes up a two. Somewhere else in physical reality, it comes up a one, somewhere else a three, a four, a five, and a six.
Naval: If I’m rolling two dice, then the universes in which they sum up to two is less than the number of universes in which we roll a seven, because that can be a three and a four, a five and a two, and so on. So the number of universes still does correspond to what we calculate as the probability.
2. A Framework for The Metaverse – Matthew Ball
The Metaverse is often mis-described as virtual reality. This is like saying the mobile internet is the iPhone. The iPhone isn’t the mobile internet; it’s the consumer hardware and app platform most frequently used to access the mobile internet.
Sometimes the Metaverse is described as a virtual user-generated content (UGC) platform. This is like saying the internet is Yahoo!, Facebook, or World of Warcraft. Yahoo! is an internet portal/index, Facebook is a UGC-focused social network, World of Warcraft is an MMO. Other times we receive a more sophisticated explanation, such as ‘the Metaverse is a persistent virtual space enabling continuity of identity and assets’. This is much closer to the truth, but it too is insufficient. It’s a bit like saying the internet is Verizon, or Safari, or HTML. Those are a broadband provider that connects you to the entire web, a web browser that can access/render all of the internet’s webpages from a single screen and IP identifier, and a markup language that enables the creation and display of the web. And certainly, the Metaverse doesn’t mean a game or virtual space where you can hang out (similarly, the Metaverse isn’t now ‘here’ just because more of us now are hanging out virtually and/or more often).
Instead, we need to think of the Metaverse as a sort of successor state to the mobile internet. And while consumers will have core devices and platforms through which they interact with the Metaverse, the Metaverse depends on so much more. There’s a reason we don’t say Facebook or Google is an internet. They are destinations and ecosystems on or in the internet, each accessible via a browser or smartphone that can also access the vast rest of the internet. Similarly, Fortnite and Roblox feel like the Metaverse because they embody so many technologies and trends into a single experience that, like the iPhone, is tangible and feels different from everything that came before. But they do not constitute the Metaverse.
3. Twitter thread on how Facebook uses user-data – Jesse Pujji
Is Facebook listening to your conversations? No, they are not. They are doing something MUCH more effective! Here’s how it works
The two most valuable pieces of software on earth are: 1) the $FB pixel and 2) the $FB newsfeed. When you wonder, how come FB is worth $1T and Twitter is only $55BN, those two pieces of software are your answer.
The FB pixel is a tiny piece of code that nearly every website on the planet has embedded. It feeds data back to FB (in aggregate, anonymized) for the list of websites visited, how much time was spent, did you buy or not, etc.
The newsfeed algo looks at that as a signal as well as hundreds of other things (your age, who your friends are, what ads you screenshot) to determine which ad to place in front of you. Again, all of this is done in groupings. Not personal.
When they get it right: right message in front of right person at right time….everyone wins. A brand finds a new customer. You find a product you want. FB makes $.
And this is a good thing. You get value from this all the time. You’re shopping for a mattress. You go to Casper’s website. Then back to FB/IG. You start getting ads for other mattress companies and even a mattress comparison site. You find the right choice, you buy!
4. Money Rules – Morgan Housel
The formula for how to do well with money is simple. The behaviors you battle while implementing that formula are hard.
“Save more money and be more patient” is too simple for most people to take seriously, but it’s the best solution to most financial problems.
Expectations move slower than reality on the ground, so it’s easy to become frustrated when clinging to the economic trends of a previous era.
Everything is relative. John D. Rockefeller was asked how much money was enough and said, “Just a little bit more.” Everyone, at every income, tends to feel the same.
5. Doing Nothing is Hard Work – Ben Carlson
If you watch all 10 penalty kicks you begin to notice a theme in the strategy by the goalies — they like to dive. In fact, each goalie dove on every penalty kick attempt. And as luck would have it, this strategy worked on the very last kick.
I’m not exactly a soccer expert, but there are a few obvious reasons the goalies dive like this.
The striker has the advantage since the goal is so large and they get to kick from a relatively short distance. And since they can kick the ball with such force the goalie has to make a split-second decision.
But it also looks really cool.
Saving a ball that’s kicked right at you is boring. A diving save, on the other hand, makes you look like a hero. And so it was in yesterday’s match.
It’s hard to argue with this strategy considering it won Switzerland the game.
There is an alternative to the horizontal diving save, though. The goalie could simply stay put in the middle.
Researchers in Israel studied nearly 300 penalty kicks from various leagues and championship matches over the years to gain a general sense of the strategy for both goalies and strikers.
They found the goalkeeper dove left or right nearly 94% of the time, meaning the other 6% of the time they basically just stayed in the middle hoping the kick would come right down the pipe…
…Strikers were five times more likely to kick it down the middle than goalies were to stay in the middle waiting for a direct kick.
We humans simply have a bias towards action over inaction.
Goalies admitted they felt worse about themselves if they stayed put in the middle and there was a goal kicked to the right or left. It’s easier to stomach a ball kicked right down the middle if they dove left or right because it showed their effort.
We want to have our hands on the steering wheel to give us a sense of control, even when that control is an illusion.
The illusion of control applies to investing as well.
Successful investing tends to be boring and long-term in nature but it’s hard to look cool with a boring, long-term strategy. Where’s the fun in that?
In many areas of life, the harder you work, the more you are rewarded for your efforts. This rule of thumb does not apply to the markets. Much of the time the more you press the worse your results when it comes to the markets.
A bias towards action at all times when investing opens you up to all sorts of mistakes, many of which are of the avoidable or unnecessary variety.
6. David Velez – Building The Branchless Bank – Patrick O’Shaughnessy and David Velez
Patrick: [00:04:26] What do you think are the most important differentiators between what we’ll call the incumbent banks that maybe Berkshire invested in more traditionally, versus Nubank? What are the largest important differences for those out there, listening to understand?
David: [00:04:40] I think the first one is, the consumer obsession and a culture that is based on consumer obsession. I don’t think this is necessarily specific to financial services. I think one common denominator of incumbent industries, either financial services, or if you look at insurance or even in media or transportation, is that after let’s say six, seven decades of traditional capitalism, you ended up with a number of players, oligopolies, where four or five companies effectively own the market. Whenever you see another golf police structure, you find that there are abnormal returns and you also find a lot of complacency among incumbents. That complacency, ultimately ends up translating into taking customers for granted when it should be the actually opposite. Ultimately, you win because customers choose you. What you find in Latin America and a lot of emerging markets and a little bit of the US, is that there are five banks that have won, let’s say banking 1.0, and they will become complacent and they forgot about customers.
There are a number of different things that we’re doing differently. But I would say the number one is having a culture that is obsessed about customers and doing the right thing for the customers, from doing the right decisions, to giving the right customer service, to building products that are really actually good for them. I would say that’s number one. Then there is all the tactical advantages that being a technology company at heart provides. Obviously from being a fully digital company and not needing to have a full offline distribution, very expensive backend branches, that allows us to have about 50X more customers per human, than traditional banks. Just being in total detail, we have one building here in Sao Paulo and have 40 million customers different 5,570 Brazilian cities in the Amazons, in the south, we have customers in Mexico city, obviously, and Columbia. That gives us a huge operational efficiency.
Ultimately, that translates into significant cost efficiency, that we can pass to the end consumer via lower fees. We don’t need to charge so many fees. We don’t charge any fees. Then there’s all the other advantages of being a tech company from a data first, analytics infrastructure, to be able to use a lot of data to make a lot of different decisions. All of these different advantages, add up to building a type of offering that is very hard for the traditional incumbents to match.
Patrick: [00:07:11] Maybe you could just level set for us, today in the markets where you operate, if I was about to become a new Nubank customer, what does that traditionally feel like? What is the model customer doing with you and how do they sort of get on board to begin?
David: [00:07:24] 90% of our customers come through word of mouth, completely referred by other friends. We’ve been really growing fully by word of mouth, no customer acquisition costs since 2014, when we launched. And our latest cohort last month, is exactly the same as our first cohort in 2013. It’s been viral, which is unexpected for a financial services product. You don’t see a credit card has no virality characteristics. There’s no real network effects when you think about it. It’s not Facebook. It’s not Instagram, where if all your friends are there, you want to be there. Here, you will have a loan product that doesn’t necessarily make it better for your friends. I’ll provide a little bit more nuance then later on because in effect that’s one of the things that we’ve done differently. But in general, most people will hear from us through a friend, will download the app or will be invited by a friend. The friend will send you an invitation via WhatsApp or email or Facebook or any type of channel. You accept the invitation. You download the app. And in a few seconds or a few minutes, you have a bank account open. You have a credit card, a virtual credit card working. We’ll send you a physical credit card to your house in one or two days it’s there.
Then you get access to a number of different products that we have. You can get an insurance product, you kind of start investing your money in a number of your funds, and also equities through Easynvest, a company we bought last year. If you have any questions, you can ask any questions via the chat that we have in our app. And all your interaction is fully digital through the app. The last thing I’ll add is, one of the big pains in this market is, over 40% of the population are blacklisted in the consumer bureaus. They are outside of the credit system. If you want to credit, you do not pay the average 500% APR. You pay 1000% APR. Because there are a couple of institutions that will lend you money at that rate. Most traditional institution will not lend you if you are black listed in one of the bureaus. Just because there was no FICO score. There was no positive credit information, only negative.
I’ll give you an example. In my case, I moved apartments and the cable company still send me a bill for $10 and I never got that bill. So I became a delinquent for them. They sent me to one of these credit bureaus. If I needed a loan from one of the big banks, I would have had been rejected. A lot of the opportunity here was for us to build new credit methodologies, build our own FICO, proprietary. Allow us to underwrite most of the population, both the banked and the better. One of the big variables in our model is, who invites you? Since 90% of our customers come through referrals, we use the credit information of their referral as an input into our credit model. It turns out, it is very predictive and it has allowed us to underwrite two people on lower costs that never had access to any type of credit product.
7. The Elon Musk Productivity Email – Elon Musk
– Excessive meetings are the blight of big companies and almost always get worse over time. Please get of all large meetings, unless you’re certain they are providing value to the whole audience, in which case keep them very short.
– Also get rid of frequent meetings, unless you are dealing with an extremely urgent matter. Meeting frequency should drop rapidly once the urgent matter is resolved.
– Walk out of a meeting or drop off a call as soon as it is obvious you aren’t adding value. It is not rude to leave, it is rude to make someone stay and waste their time.
– Don’t use acronyms or nonsense words for objects, software or processes at Tesla. In general, anything that requires an explanation inhibits communication. We don’t want people to have to memorize a glossary just to function at Tesla.
– Communication should travel via the shortest path necessary to get the job done, not through the “chain of command”. Any manager who attempts to enforce chain of command communication will soon find themselves working elsewhere.
– A major source of issues is poor communication between depts. The way to solve this is allow free flow of information between all levels. If, in order to get something done between depts, an individual contributor has to talk to their manager, who talks to a director, who talks to a VP, who talks to another VP, who talks to a director, who talks to a manager, who talks to someone doing the actual work, then super dumb things will happen. It must be ok for people to talk directly and just make the right thing happen.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in Alphabet (parent of Google), Facebook, and Tesla. Holdings are subject to change at any time.
