What We’re Reading (Week Ending 18 July 2021) - 18 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 18 July 2021):
1. Think different: 10 unconventional lessons from owning Apple shares for 10 years – Chin Hui Leong
3. Unconventional wisdom
The world plunged into a financial crisis in 2008. When it comes to recessions, conventional wisdom suggests that you should rotate out of discretionary into non-discretionary stocks.
Yet, Apple’s strong business performance during this period puts a dent in this belief. Sales of its devices, which are often deemed to be discretionary in nature, propelled the firm’s revenue up by over 52 per cent between 2007 and 2009.
In contrast, non-discretionary stocks such as Proctor and Gamble (NYSE: PG) only managed a tepid 5.6 per cent revenue growth in that period.
Conventional wisdom does not always hold up. Look for real-life evidence.
4. Unimaginable growth
When I bought Apple shares in 2010, the company generated a little under US$43 billion in revenue for fiscal year 2009. By 2012, its topline had exceeded US$156 billion. In just three years, sales more than tripled, a phenomenal feat by any measure.
As investors, we should recognise that we can only project what we can imagine. When it comes to great companies such as Apple, you are better off leaving plenty of leeway to be surprised on the upside. From my experience, they often do.
5. Internet-scale businesses
In 2010, there were no trillion-dollar companies; today, there are five such companies. A big reason is smartphones, which have helped to increase the global population with Internet from 1.8 billion in 2010 to over five billion today.
Connectivity has made it possible to reach billions of customers today, a scale that did not exist a decade ago.
As investors, we should expect to see more trillion dollar, Internet-scale companies in the future.
6. A different future
If you plan to buy an innovative company, be ready for the business to look different a decade from today.
Case in point: At the end of fiscal year 2009, Apple was a product-focused company. Sales of iPhones, iPods and Macs made up well over 80 per cent of its revenue. Software and services accounted for less than 6 per cent.
By fiscal 2020, services had grown to almost a fifth of all its revenue and over a third of its gross profits. For a sense of scale, Apple’s services revenue alone is more than twice what Netflix (NASDAQ: NFLX) makes in a year.
7. Value you can’t see
Apple has introduced new products over the past decade. The Apple Watch was introduced in 2014, followed by the debut of Airpods two years later . In 2017, HomePod was launched.
Thing is, much of its roadmap was not visible in 2010.
Therefore, if you valued Apple’s business a decade ago, you would not have known the future value these products would create.
Again, innovative companies tend to surprise on the upside.
2. What Is CRISPR? – CB Insights
CRISPR is a defining feature of the bacterial genetic code and its immune system, functioning as a defense system that bacteria use to protect themselves against attacks from viruses. It’s also used by organisms in the Archaea kingdom (single-celled microorganisms).
The acronym “CRISPR” stands for Clustered Regularly Interspaced Short Palindromic Repeats. Essentially, it is a series of short repeating DNA sequences with “spacers” sitting in between them.
Bacteria use these genetic sequences to “remember” each specific virus that attacks them.
They do this by incorporating the virus’ DNA into their own bacterial genome. This viral DNA ends up as the spacers in the CRISPR sequence. This method then gives the bacteria protection or immunity when a specific virus tries to attack again.
Accompanying CRISPR are genes that are always located nearby, called Cas (CRISPR-associated) genes.
Once activated, these genes make special proteins known as enzymes that seem to have co-evolved with CRISPR. The significance of these Cas enzymes is their ability to act as “molecular scissors” that can cut into DNA.
To recap: in nature, when a virus invades bacteria, its unique DNA is integrated into a CRISPR sequence in the bacterial genome. This means that the next time the virus attacks, the bacteria will remember it and send RNA and Cas to locate and destroy the virus.
While there are other Cas enzymes derived from bacteria that cut out viruses when they attack bacteria, Cas9 is the best enzyme at doing this in animals. The widely-known term CRISPR-Cas9 refers to a Cas variety being used to cut animal (and human) DNA.
In harnessing this technology, researchers have added a new step: after DNA is cut by CRISPR-Cas9, a new DNA sequence carrying a “fixed” version of a gene can nestle into the new space. Alternatively, the cut can altogether “knock out” of a particular unwanted gene — for example, a gene that causes diseases.
One way to think about CRISPR-Cas9 is to compare it to the Find & Replace function in Word: it finds the genetic data (or “word”) you want to correct and replaces it with new material. Or, as CRISPR pioneer Jennifer Doudna puts it in her book A Crack In Creation: Gene Editing and the Unthinkable Power to Control Evolution, CRISPR is like a Swiss army knife, with different functions depending on how we want to use it.
CRISPR research has moved so fast that it’s already gone beyond basic DNA editing. In December 2017, the Salk Institute designed a “handicapped” version of the CRISPR-Cas9 system, capable of turning a targeted gene on or off without editing the genome at all. Going forward, this kind of process could ease the concerns surrounding the permanent nature of gene editing.
3. Let the bullets fly for a while – Lillian Li
There’s a symbiotic relationship between old public institutions and rising new digital institutions in China. Didi cleaned up the grey market for black cabs, Meituan and Ele.ma act as de facto restaurant inspectors. Every content platform carries out content moderation on behalf of the party. The government is pragmatic. In the fragmented authoritarian governance structure of China, the agents that can introduce and maintain legibility stay.
With these hybrid governance structures experiencing hypergrowth, it is not obvious what should be regulated and how. Despite the absence of a blueprint, there is a regulator cadence that I term “let the bullets fly for a while”…
…To fully grok China, one needs to watch the brilliantly dark film called Let the Bullets Fly. Since its release in 2010, the tale about a robber-turned-pretend governor in the feudalist Goosetown has become a Chinese cyberspace meme staple. Ladened with things said and unsaid about the rules and boundaries of power, money and lawfulness in China, it is a cultural touchstone.
In the midst of pivotal scenes —bewildering battles where nothing is clear — subordinates ask the robber-governor what to do. Inevitably, he responds with the infamous line “Let the bullets fly for a while.” Meaning, let the chaos run; who knows what issues resolve themselves without intervention, or when the tide will turn. Inaction is an asset during uncertainty. Calling things too soon shuts down possibilities.
My love of Chinese Internet memes aside, this turn of phrase has resonance amongst regulators and economists. It’s been a favourite catchphrase in conversations when they are asked to describe the Chinese regulatory approach. This is also borne out by macroeconomic theory3, when markets experience high future uncertainty (as is the case in new emerging markets) where regulators have inadequate regulatory tools, bias towards inaction is a dominant strategy.
Deng’s slogan of “crossing the river by feeling the stones” captures the subtle pragmatism needed to navigate brave new worlds. Partly due to imperfect information and partly due to the lack of consensus on the regulatory approaches to take, Chinese regulators have historically taken an-observe-then-act approach.
4. Scale: Rational in the Fullness of Time – Packy McCormick
When Wang and co-founder Lucy Guo founded Scale out of Y Combinator in 2016, the company was called Scale API and its value prop was essentially that it was a more reliable Mechanical Turk with an API. They started with the least sexy-sounding piece of an incredibly sexy-sounding industry: human-powered data labeling.
Customers sent Scale data, and Scale worked with teams of contractors around the world to label it. Customers send Scale pictures, videos, and Lidar point clouds, and Scale’s software-human teams would send back files saying “that’s a tree, that’s a person, that’s a stop light, that’s a pothole.”
By using ML to identify the easy stuff first and routing more difficult requests to the right contractors, Scale could provide more accurate data more cheaply than competitors. Useful, certainly, but it’s hard to see how a business like that … scales. (I’m sorry, but I also can’t promise that will be the last scale pun).
Scale’s ambitions are obfuscated by its starting point: using humans to build a seemingly commodity product. A bet on Scale is a bet that data labeling is the right starting point to deliver the entire suite of AI infrastructure products.
If Wang is right, if data is the new code, the biggest bottleneck for AI/ML development, and the right insertion point into the ML lifecycle, then the brilliance of the strategy will unfold, slowly at first then quickly, over the coming years. It will all look rational in the fullness of time.
Scale has a high ceiling. It has the potential to be one of the largest technology companies of this generation, and to usher in an era of technology development so rapid that it’s hard to comprehend from our current vantage point. But it hasn’t been all clear skies to date, and the future won’t be easy either. It will face competition from the richest companies and smartest people in the world. It still has a lot to prove.
In either case, Scale is a company you need to know. It’s also an excellent excuse to dive into the AI and ML landscape and separate fact from science fiction. It’s looking increasingly likely that AI will find itself in the technology impact pantheon alongside the computer, the internet, and potentially web3.
5. Lessons in Low Ego Leadership with DocuSign CEO Dan Springer – Mathilde Collin and Dan Springer
Mathilde Collin: Great. I’ve heard from many people that you’re a great leader and I think you’ve already spent twenty five years in leadership positions. And I’m curious if you have any philosophy on leadership that you’d like to share with our audience.
Dan Springer: Yeah, I mean there’s a slightly geeky term that I like to use to sort of simplify how I evaluate leaders in the company or when I’m interviewing people about potentially bringing in a company which is sort of combining three different factors that I think are really critical.
The first one is whether people have the right sort of skills and smarts to be effective in their job. The second one is, are they able to manage their ego and so that they’re able to be manager, you go well, folks on the teams results as opposed to their individual results and credit analysis is simply how hard they work and how much they apply themselves.
And the formula that I like to use with those three things is I take the S or the smarts and skills divide that by the ego. Did you want to do a better job minimizing that and then raise that quotient to the power of how hard you work and you can play around with numbers like one to five and do your own assessment. And so to see this sort of interesting things, you do play around with the math. But the key thing for me is to realize that to some extent you can get smarter and you can develop more skills. But we’re all sort of given some certain level of capabilities that we have and some better for some jobs. Once you have that, the parts you can really control with how you manage your ego and how you really apply yourself and how hard you work. And so I try to encourage people to say that’s where you should put your focus and developing yourself as an individual contributor, but particularly as a manager is are you going to be successful by those two variables you can control?
Mathilde Collin: And I’m curious, how do you teach people or help people work on their ego?
Dan Springer: So that’s the part that’s interesting because sometimes it’s easy for people, some people naturally have high cues. Their personality is to be supportive of other people. They get their joy out of watching people develop. So it’s easy for them to do it. And some people, it’s really, really difficult. And the thing I would tell you is that we’re all on a journey. And when I try to talk to people about ego management, if you will, I try to go back and say, hey, let me tell you, I think today I’ve gotten to a point on a one to five scale, which is I’ve gotten to about four. I think I do a pretty good job of putting the organization first. Customers first. The other employees first over myself.
But when I was twenty three, a young person I go, I probably was a one or two on ego. I you know, I was very focused on my own career. I was competitive, I was ambitious. And, you know, I was not great at that. I had some early management jobs where it wasn’t, I don’t think, very good as a manager and very sensitive. I was managing people much older than I was, and I just didn’t have an awareness of how to do that.
Well, so you sort of start off and say, I’ve been there is someone struggling, I’ve been where you are. It takes some work. But what it mostly takes is awareness and focus. And so that’s what I try to tell them stories about. Here’s places that I wasn’t aware of. So not just me, so I could be other stories of other people. And here’s what they did to be more successful, because that’s one. And the second big thing is giving people feedback. And I would say feedback is a gift and you need to be able to explain to people why you see them underperforming on the ego dimension and say, this is how I saw you interact with your teammates. And this is what other people say when they come out of interactions with you and why they maybe feel bruised or not supported whatever it might be, and giving people that direct, you know, and really critical feedback on how they’re showing up is, I think the only way you can really help if it’s not about book learning. I mean, you can read stories, but it really is about that intensely personal development.
6. Commentary: Chinese fashion giant Shein has taken over the world. It has just met its match – Patrick Reinmoeller, Mark Greeven, and Yunfei Feng
With fast fashion firms under pressure to stay ahead of fashion cycles and entertain customer desire for the newest styles, there’s a growing countertrend that questions its breakneck speed.
The global fashion industry generates about 4 to 10 per cent of total greenhouse gas emissions, more than all international flights and maritime shipping combined.
According to the World Bank, the fashion industry uses 93 billion cubic metres of water every year, an amount that 5 million people could use for consumption instead.
The industry also produces about 20 per cent of wastewater worldwide through dyeing and treating fabrics. It dumps microfibers that amount to about 50 billion plastic bottles into the ocean and disposes 87 per cent of total fibre input annually.
These negative effects of fashion are predicted to increase by 50 per cent by 2030, as more buy into the ethos of fast fashion: Buy fast, buy new, and dispose prematurely. According to the Ellen MacArthur Foundation, the average person today buys and discards about 60 per cent more clothing compared to 2000.
Fast fashion leaders have launched initiatives that boost their sustainability record, though they’ve been met with scepticism. Although H&M has started already in 2010 with its Conscious Collection emphasising organic and sustainable fabrics, the Norwegian Consumer Authority said information provided about the clothing, such as the amount of recycled material in each item, is insufficient.
A rejection of overconsumption in favour of essentials and basics, espoused by brands like Patagonia, fares better with those concerned about fashion’s environmental impact.
New models are emerging fast. Business models of vintage, recycled clothes are quickly losing their stigma in the West.
7. Too Smart – Morgan Housel
What’s boring is often important and the smartest people are the least interested in what’s boring.
Ninety percent of personal finance is just spend less than you make, diversify, and be patient.
But if you’re very intelligent that bores you to tears and feels like a waste of your potential. You want to spend your time on the 10% that’s mentally stimulating.
Which isn’t necessarily bad. But if your focus on the exciting part of finance comes at the expense of attention to the 90% of the field that’s boring, it’s disastrous. Hedge funds blow up and Wall Street executives go bankrupt doing things a less intelligent person would never consider. A similar thing happens in medicine, a field that attracts brilliant people who may be more interested in exciting disease treatments than boring disease prevention.
There’s a sweet spot where you grasp the important stuff but you’re not smart enough to be bored with it.
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 Apple, DocuSign, Meituan, and Netflix. Holdings are subject to change at any time.
