What We’re Reading (Week Ending 16 January 2022) - 16 Jan 2022
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 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: 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 Amazon and Facebook. Holdings are subject to change at any time.
