What We’re Reading (Week Ending 03 December 2023) - 03 Dec 2023
Reading helps us learn about the world and it is a really important aspect of investing. The late Charlie Munger even went 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 03 December 2023):
1. Charlie Munger, Warren Buffett’s Partner and ‘Abominable No-Man,’ Dies at 99 – Jason Zweig and Justin Baer
No equal business partner has ever played second fiddle better than Charlie Munger.
Warren Buffett’s closest friend and consigliere for six decades, the billionaire vice chairman of Berkshire Hathaway died Tuesday at age 99 in a California hospital. A news release from Berkshire confirmed his death.
In public, especially in front of the tens of thousands of attendees at Berkshire’s annual meetings, Munger deferred to Buffett, letting the company’s chairman hog the microphone and the limelight. Munger routinely cracked up the crowd by croaking, “I have nothing to add.”
In private, Buffett, who is 93, often deferred to Munger. In 1971, Munger talked him into buying See’s Candy Shops for a price equivalent to three times the chocolate stores’ net worth—a “fancy price,” Buffett later recalled, far higher than he was accustomed to paying for businesses.
See’s would go on to generate some $2 billion in cumulative earnings for Berkshire over the coming decades…
…Buffett nicknamed Munger the “abominable no-man” for his ferocity in rejecting potential investments, including some that Buffett might otherwise have made. But Munger, who was fascinated by engineering and technology, also pushed the tech-phobic Buffett into big bets on BYD, a Chinese battery and electric vehicle maker, and Iscar, an Israeli machine-tool manufacturer.
Munger was a brilliant investor in his own right. He began managing investment partnerships in 1962. From then through 1969, the S&P 500 gained an average of 5.6% annually. Buffett’s partnerships returned an average of 24.3% annually. Munger’s did even better, averaging annualized gains of 24.4%.
In 1975, shortly before he joined Berkshire as vice chairman, Munger shut down his partnerships. Over their 14-year history, his portfolios gained an average of 19.8% annually; the S&P 500 grew at only a 5.2% rate…
…“I have been shaped tremendously by Charlie,” Buffett said in 1988. “Boy, if I had listened only to Ben [Graham], would I ever be a lot poorer.”
In 2015, Buffett wrote that Munger taught him: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”
Berkshire “has been built to Charlie’s blueprint,” Buffett added…
…Munger also confronted tragedy: In 1955, his son Teddy died of leukemia at age 9. Munger later recalled pacing the streets of Pasadena in tears at “losing a child inch by inch.” More than six decades later he would still choke up at the memory of his son’s suffering.
In 1978, a surgeon bungled a cataract surgery, leaving Munger blind in one eye, which later had to be surgically removed. The investor refused to blame the doctor, noting that complications occurred in 5% of such procedures. For him, as always, it was about the numbers.
Munger taught himself Braille, then realized he could still see well enough to read. He ended up driving his own car, often to the consternation of friends and family, until his early 90s…
…At Berkshire’s annual meeting in 2000, a shareholder asked how the speculation in Internet stocks would affect the economy. Buffett answered with nearly 550 words. Munger growled, “if you mix raisins with turds, they’re still turds.”
When a shareholder asked at the 2004 meeting how Berkshire sets pay for executives, Buffett spoke for more than five minutes. Munger drawled, “Well, I would rather throw a viper down my shirtfront than hire a compensation consultant.”…
…Munger never stopped preaching old-fashioned virtues. Two of his favorite words were assiduity and equanimity.
He liked the first, he said in a speech in 2007, because “it means sit down on your ass until you do it.” He often said that the key to investing success was doing nothing for years, even decades, waiting to buy with “aggression” when bargains finally materialized.
He liked the second because it reflected his philosophy of investing and of life. Every investor, Munger said frequently, should be able to react with equanimity to a 50% loss in the stock market every few decades.
Munger retained his sense of humor into his 90s, even though he was nearly blind, could barely walk, and his beloved wife, Nancy, had died years earlier. Around 2016, an acquaintance asked which person, in a long life, he felt most grateful to.
“My second wife’s first husband,” Munger said instantly. “I had the ungrudging love of this magnificent woman for 60 years simply by being a somewhat less awful husband than he was.”
2. How Geopolitical Risks Are Impacting Iranian Stocks – Tracy Alloway, Joe Weisenthal, Aashna Shah, and Maciej Wojtal
Maciej (04:03):
But what’s interesting and why we are doing this is that you mentioned that you were surprised how big Iran’s economy is and I would say that no, it’s actually very small compared to how big it could get because Iran, you know, it’s around 90 million people, the largest combined oil and gas reserves in the world, and a properly developed and diversified economy. Well, thanks to decades of sanctions, they didn’t have a choice. They had to develop all different parts of the economy.
And all this— in terms of GDP — is around, depending how you calculate it, but it’s around $200 billion. Now when you look at Turkey, which is a similar size country in terms of population and geographical size, but no natural resources, Turkey is around $800-$900 billion. If you look at Saudi Arabia, which has no other sectors except for oil and some petrochemicals, the GDP over there is around $1 trillion. So in some super optimistic, very positive scenario, if everything went well for Iran, Iran could become basically the combination of the two, which is anywhere between $1.8 to $2 trillion dollars.
So the upside for the economy is eight times from where it is right now. So this is the potential, this is the optionality that is in the market. On top of that, once the country starts to open up, obviously there is a long list of things that would have to come in place, then we expect to see a lot of capital flowing into the market and right now it’s only domestic capital and us, which means that because there is not enough capital the local assets are valued at very low levels.
So what we are seeing in the market is that we are buying stocks at four to five times forward net earnings and those earnings are growing, they are paying dividends. The average or the median dividend yield for the top 100 companies is probably close to 15%. So strong double digit dividend yields valuations at such levels that they cannot really fall further as long as those earnings are growing.
So investment risks are pretty small, pretty limited. You have different sorts of risks. You have geopolitics, exactly as you mentioned. I mean those equities basically are priced for war and obviously there is a reason, there might be a reason for that. It’s because it’s the Middle East and it’s amazing how the narrative, you know, the region reminded everyone that the situation and the perception of the region can make a u-turn overnight. Because a month ago, it was not only what you mentioned in the introduction that there was some sort of arrangement between Iran and the US which led to the prisoner exchange, which was very important because historically prisoner exchange was usually the first step to something bigger. Then on top of that, Iran is selling a lot of oil so obviously sanctions are probably not enforced very strictly and so on.
But the bigger story a month ago was in the whole Middle East where Iran basically signed what you can call a peace treaty with Saudi Arabia after many years of not having diplomatic relations. Then what followed were discussions and restoration of diplomatic ties with Iran and Egypt, Bahrain, all Saudi allies and so on…
…Maciej (12:22):
So on the seventh of October, I believe that it was the case for the whole region that the local currencies sold off and local stock markets went down. What happened was that initially everything went down. For the first three weeks, the local equity index measured in dollar terms was going down with the lowest point around 10% in terms of the correction.
Since then it started bouncing back. In local currency terms, the equity index is actually at the level from the seventh of October so it made up for all the losses. The currency is still down. So for a foreign investor who is measuring the P&L in dollar terms, you are still roughly 3% down. So it’s actually not that bad given the circumstances, given the risk for local markets and especially Iran which is involved in everything that is going on.
The worst case scenario is that potentially there is a military conflict war, and I don’t know, Iranian refineries or petrochemical plants are military targets and so on. And people were quite scared. We could see this. Some of the sectors went down in the meantime by about 20%, bounced back since then, but mainly that was happening due to very low liquidity.
So what was the biggest impact? Actually, we could see was on liquidity. Normal liquidity is around $150 million per day, and it went to as low as $30- 40 million. So what was going down the most was actually the most illiquid stocks or illiquid industries. So when I look at sectors that really were hit the most, it’s textile producers, confectionaries, so things that are not related to war or geopolitics at all, but they are basically illiquid.
And, oh. One thing important to remember, so the stock market is driven by retail investors. 90% of daily trading is done by retail. So, it’s very emotional, it’s very short term momentum, I would say. So they are selling or buying depending on the, you know, recent price action. So they were driving the share price direction basically…
…Maciej (15:36):
Yes, and the thing that is most volatile in Iran is the currency. So the stock market is much less volatile in the local currency than when measured in dollar terms. The local stock market is actually well hedged against currency depreciations because the majority of the biggest companies are actually exporters so they benefit from currency depreciation, but share prices react with a lag…
…Maciej (19:47):
There are two interesting facts about the performance of the market. So first of all, when I looked at the last 15 years and big geopolitical events for example, like previous conflicts with Hamas in Gaza, or there was a situation between Iran and the US where people were saying that this was close to a military conflict when Iranian general Soleimani was killed and then Iran retaliated by firing some missiles at an American base in Iraq. When I looked at the performance of the market, it never went down more than 10% in dollar terms, actually.
So what happened right now, I think the bottom was around almost 11% was pretty much in line with those historical geopolitical events that also presented a big risk for the local market. But another way of looking at the Iranian market is the historical performance. And this is very interesting because if you look at the performance of the benchmark equity index, it’s called TedPix Index, total return.
For the last 15 years, so since the inception in 2018, the annualized return in dollars is around 11%, which I think is quite amazing because it’s pretty much the same as for S&P 500, maybe 12% for S&P 500, so it’s in the same ballpark and the environment was completely different. I mean, couldn’t be more different because over the last 15 years in the US you had a technology revolution, those mega caps appearing on the market, interest rates initially going to zero, top of the cycle valuations and in Iran, you had two episodes of currency depreciation of more than 75%. You had some crazy presidents and you had US sanctions, UN sanctions and still, at the end of the day, when you compare performance over the last 15 years, it’s pretty much the same, obviously with much bigger volatility because in Iran, the volatility was probably around 40% or something.
But that shows you that when you’re buying assets at very, very low valuations, and I’m say talking about this four times net earnings, let’s say, and the economy and those companies are actually naturally hedged against the currency volatility or big depreciation, then even in those countries where things are going really bad you can still make money. But what is more important is that if in bad times you are still averaging 11% per year, just think what you can make, what you can expect, when things finally go the right way for Iran and the country opens up and so on? That’s the potential that we are obviously hoping for…
…Maciej (30:25):
There are several asset classes in Iran for retail investors. So real estate is the big one, the biggest one, but it’s a high ticket item so not everyone can trade in and out of apartments. It’s a well understood asset class as everywhere. That’s why it’s a bit less interesting for us. So if Iranians have any spare cash, they will buy real estate. From what I heard, 30% of apartments in Tehran are actually empty because they are basically used as a store of value just to park somewhere, assets, savings and they’re not even rented out, they’re just empty.
And also just bear in mind that in Tehran in the best places, the best neighborhoods of Tehran prices are quite expensive. So in the north of Tehran, if you want to buy an apartment, you have to pay around $10,000 per square meter. So a 100 square meter apartment, I don’t know three bedrooms will cost you a million dollars or something, in Iran, which is a poor country. So this is real estate. Real estate is the number one asset class.
Then a very important asset class are used cars. So people trade used cars because they are, again, a hedge against inflation against the currency depreciation, because car manufacturers will always adjust prices based on inflation. Some of the components have to be imported, which is not easy. They produce more than one million cars, or actually closer probably to 1.5 million cars per year, but this is not enough. So the demand is much higher.
So they’re trading used cars and there are platforms that help you trade used cars. It’s a proper asset class, and yes, every Iranian is actually a currency trader, because the currency has been so volatile historically. It’s very important that you know what’s happening to the dollar or the local currency against the dollar. So everyone is tracking the exchange rate and it’s not easy to buy and sell dollars. There are quotas for individual Iranians due to capital controls. So that’s why, instead of buying dollars or to get a bigger position, they go to those proxy asset classes, like used cars or real estate. Also interest rates so you can buy/sell Treasury bills, Treasury bills up to two years maturity. They pay around 25% yield to maturity, maybe a bit more right now so interest rates are high.
When you look at Iran, there is not enough capital there. There’s basically not enough money, credit doesn’t exist. I mean, you cannot get a mortgage at 25%, right? I mean, you cannot finance anything at 25%. And because of very volatile macro people also tend to postpone investment decisions, whether these are individuals or more importantly companies, right?
Everyone is looking like six months ahead, maybe 12 months ahead, right? And they are managing a crisis, because there is always some sort of a crisis, right? So when you think about it, for example, I don’t know, every company is running big inventories just in case, just so that they have enough material to manufacture their products. So they’re not optimized, organized in this very efficient, lean way. They are organized just to survive, basically, war conflict, currency depreciation, sanctions, trade disruptions, whatever…
…Maciej (35:41):
So when sanctions were reintroduced in 2018, they haven’t hurt manufacturing, they haven’t hurt exports, companies that much, to be honest. I mean, because people find a way. I mean, companies that export in the region, they’re not really affected by sanctions, big exporters that used to send products to Japan and so on, yes, they were affected, but they found other routes and manufacturers.
Sanctions caused one thing. I mean, sanctions caused currency volatility so the big depreciations of Rial and manufacturers who have costs in Rial, but they either sell in hard currency or at prices linked to some regional benchmarks that are in hard currency, their margins actually expanded.
Look, it’s an interesting thing that the highest earnings growth that we’ve seen over the last couple of years was one year after the 2018 sanctions. This is crazy because this is not intended, I would assume. And, who got hurt by sanctions? Well, households, because they are price takers. So when the inflation shut off because of the currency depreciation, their spending power went down massively, right? And they were able to survive and it was actually quite interesting that they were holding up quite well. And this is because of those savings, right?
Because of the savings that Iranian households had. I’m not sure what’s the situation right now, because they’ve been, I think, on a net basis, those savings have been decreasing over the last couple of years because they had just had to spend them. But yes, that’s what helped them survive the inflation basically.
3. Frugal vs. Independent – Morgan Housel
Frugal, by my definition, means depriving yourself of something you want and could afford.
Not wanting something to begin with because you get your pleasure and identity from sources that can’t be purchased is something entirely different. The best word for it is probably independent…
…The world tells you – even by a mere whisper – that everyone should want the same things: A big house, a nice car, advanced degrees, credentials, social clubs, etc.
I like most of those things. But you have to realize how much of their appeal is an attraction to status, which can be completely different from happiness.
There’s a recent example of someone understanding the difference in real time that I think is more fascinating than Holt or Read’s story.
Chuck Feeney, who founded Duty Free stores, died last month.
The well-known part of Feeney’s story is that he gave away 99.99% of his $8 billion fortune years ago, before he died. He and his wife kept $2 million, lived in a small apartment, flew coach, and gave the rest to charity.
The less well-known part of Feeney’s story is that he once gave the High Life an honest try. The Washington Post wrote of his life in 1980s, when he was newly rich:
He had luxury apartments in New York, London and Paris and posh getaways in Aspen and the French Riviera. He hobnobbed with the other mega-rich on yachts and private jets. If he wanted it, he could afford it.
He quickly realized it wasn’t for him. Society told him he should want those things. But it wasn’t what actually made him happy.
Giving money away was.
“I’m happy when what I’m doing is helping people and unhappy when what I’m doing isn’t helping people,” Feeney said…
…He didn’t follow a typical path of what other people told him to like or how to live.
He found what made him happy.
He may have looked frugal, but he was actually the freest, most independent person you’ll ever hear of.
4. Value Investing with Legends: Nicolai Tangen – Decision-Making and Intuition in Investing (transcript here) – Michael Mauboussin, Tano Santos, and Nicolai Tangen
Mauboussin: What motivated you to do that? And a slightly odd question. Do you see parallels between the investing and the art worlds at all?
Tangen: So I had been very well paid at Egerton and so could afford to take a break. I wanted to do something which was very different. And so I studied German Expressionist Woodcuts, pretty black and white. And it’s wonderful to study with people who think differently and who really want to dig down. And of course, you get your attention span back up from like 2 seconds to 2 hours when you have to write a dissertation and so on. So that was good.
Are there any similarities between art and investing? Well, I don’t think so. Some people claim there is. It’s not for me. I love art because it’s very different from what I do on a daily basis. But perhaps it’s good for creativity. It’s certainly good for the soul. It’s fun, it’s beautiful, interesting.
Santos: You know, when I was telling that we had this point of connection, it’s because I came very close to studying art history when I was a young man. I became completely obsessed with our history. And I spent every summer during my teenage years travelling around France and Italy, trying to absorb as much as I could, you know. And at some point I learned that I also like teaching, so that’s when I decided to go in a different direction. But you’re absolutely right, it’s something that sustains you throughout life.
Tangen: A big difference is you study art, it’s something dead, it’s on the wall. Finance, it’s alive, it’s incredible. I just think finance is just an amazing thing to study because it’s everything that you eat, wear, drive, consume, all these kind of things. It’s about the people, it’s about the psychology, it’s about corporate culture, it’s about – in the market, greed and fear, it’s related to macro. Security, wars, geopolitics and it changes all the time. All the time. And if you’re good at it, you make money. And so it is just the most interesting thing you can ever spend your time doing…
…Tangen: Now, we started off as a mid cap firm and then gradually went a bit larger cap because we thought we could add value also there. Also gradually we gravitated towards the higher quality spectrum of stocks and now that’s all I care about. It’s the high quality end. It’s companies which can grow earnings, high return on capital and solid moats. A lot of these things we look for. The rest of it is basically a waste of time. The fewer decisions you can make, the better they become. So if you can just sit there and compound, I just think it’s such a wonderful idea. Is it easy? No, it’s super tough. It’s super tough.
And why is that? Well, I kind of think, you come home from work, your husband or wife asks you, “What have you been doing today?” “Well, I’ve done nothing.” Next day, Tuesday, “What have you been doing today?” Nothing. Wednesday, nothing. Thursday nothing, Friday nothing. You just feel like a failure. So therefore you feel you have to trade a bit, but it’s mostly not very profitable…
…Mauboussin: Do you guys know this book came out this year called How Big Things Get Done? Do you know this, Nicolai? Bent Flyvbjerg and Dan Gardner?
Tangen: Yeah, I read it. It’s very good.
Mauboussin: But I think Chapter One is called Think Slow, Act Fast. And I really like that because the “think slow” part is, a lot of it is contemplation and from time to time you do have to act quickly. But for the most part it’s just sitting around and thinking and trying to line things up. You mentioned that finance is wondrous. I clearly agree with that. But I do want to come back to one of the educational items on your CV and that’s a Master’s in social psychology from the London School of Economics. And I believe you’ve suggested that social psychology is something that everyone should study. I think we spend a little bit of time on it in our finance curriculum, but probably not as much as we should. So tell us a little bit about your takeaways from studying behavior and how that applies to markets, both in good times and in challenging times.
Tangen: I think everybody should study it. And I saw that increasingly everything I read was within the social psychology area and I did it actually part time when I still ran AKO. I did my dissertation on looking at gut feel versus analysis and I interviewed the 15, who I thought were the best performing fund managers in Europe, and analyzed how were they actually going about making decisions. And it’s quite interesting because psychologists don’t typically have access to these well paid hedge fund managers and so on. So it was kind of gold dust kind of sample that I had there.
And what you see is that people, if you call it gut feel, nobody believes in it. If you call it pattern recognition, everybody believes in it, even though it’s the same thing. You don’t believe in anybody else’s gut feel, only your own. And you can mainly use it if you are quite senior in the firm, because you can’t come and say, listen, hey, I’m 22 years old, I really believe I have a gut feel that this and that. Now you’re 55, you’re the boss, everybody listens to you and you have more data points and more experience. So your gut feel is basically better or pattern recognition. That’s interesting. Then you use it when you have very little time, when things are urgent, and you use it when the problems are really complex and difficult to analyze.
My impression was that the best ones go from one to the other, so it depends on the situation. But that was really interesting…
…Tangen: I also spent time on people’s risk appetite. Now it’s very, very important when you run an asset management company, is to understand people’s risk appetite. Risk appetite is linked to different things, such as gender. So women take less risk than men. And you only look at the drowning statistics from Norway. Nine out of 10 people who drown are men, so they take more risks. You see it in traffic accidents and so on. Has to do with age, has to do with geographies, introvert, extrovert. So introverts take less risk. And you need to know that, because if an introvert woman aged 50 comes to you and want to take risk, that means something different from an extrovert guy, 22, from America. You need to dial it up and down. The noise level is really, really important.
The last thing I spent time on in social psychology was just to how to unbias your decisions. Extremely important that you’re able to question your own decision making and change your mind when the facts change. So really interesting, everybody, you just have to study it. It’s just the best thing to study.
Mauboussin: So, Nicolai, on that last one, are there a couple guides you would give to folks to debias as they go through their process, or there are tools that you would pull out?
Tangen: Well, the biggest bias people have is the fact that you don’t think you’re biased. Adam Grant’s book, Think Again, the whole mindset there of confident humility, that’s where you need to be as an investor. You need to be confident and you need to be really stubborn, because where you make money is, of course, where you do the opposite of everybody else. But when things change, you just need to change your mind. So that combination of being stubborn and agile is rare. But those are the guys who make the most money. I mean, look at Stan Druckenmiller, who is very confident about his decisions, but then, bang, something changes and he changes tact…
…Tangen: I sail. And at that stage, I sailed quite a bit of competition and I sailed with some spectacularly good sailors, some Olympic people. And I asked, why are you so good? And the whole debrief process was key. So two things which were key to their success. It was the bounce back ability – so how you get back on your horse after a loss, which you also, of course, need in investing. But then the debrief process was really important. And so we started to work with sports psychologists in terms how to improve these kind of things.
And one of the important thing when you look at high achievers in sport is that they focus in on the process rather than the results. And if your process is right, the results will come. And of course, in investing, this is more important than anywhere else, because in investing in the short term, there is just no correlation between process and outcome, whilst in the long term, that’s what it’s all about. And so you need to judge your process. And we kind of split the investment process into different categories and then we graded each analyst on each part of that process with regular intervals. And that’s a really good thing to do because if you go through a period of underperformance, as long as you see that your process is improving, you shouldn’t be too depressed about it…
…Tangen: I probably spend more time now on corporate culture than I did in the past. It’s so unbelievably important. And you have two companies which from the outside look exactly the same, right? They pretty much have the same product and so on. And then one of them is doing extremely well, and the other one is just not doing well. Gee, look at the banking. Look at the banking sector. On my podcast, I interviewed James Gorman, 14-year CEO of Morgan Stanley, and how Morgan Stanley has really done well compared to other banks. So it’s just intriguing how important corporate culture is. And that is also something that CEOs are very keen to talk about but the analysts generally are not so keen because the result of corporate culture work you see only in the long term, and most of the analysts are very short term.
And another interesting thing is that when you are young, you’re 25 years old, you are so in a hurry, despite having the whole life ahead of you. Now, when you are like 57, like me, and about to die, you suddenly get this long term time horizon. It makes no sense. But I think that’s just interesting. And I just met this 85 year old Spanish guy the other day and he was just planting some pistachio trees and he couldn’t wait. I can’t remember how long time it took for them to bear fruit, but it was certainly – I mean, he would probably not be alive then. He was really excited about it. I thought that was so cool…
…Tangen: Norway found oil in 69, on the very last attempt, on the very last well, they were drilling. If they hadn’t found oil on that last one, they would have just packed up the toys and gone home. So pretty amazing. Now, this was told to the Norwegian people on the day before Christmas Eve, 69, and wow, what a Christmas gift.
But the thing was that was it really? Because in a lot of other countries it had been a curse and it had led to corruption and crowding out effects and so on. And then some very clever politicians decided, you know what, let’s put the money into a fund. So they did, 27 years ago, started with a deposit of 2 billion Norwegian kroner, and that has now grown to more than 15,000 billion. So it’s been just an unbelievable success…
…Tangen: Now we are also generally pretty vocal on ESG because we think it’s very very important. We do think the link between climate and finance is strong and getting stronger. Climate is driving food inflation through bad harvests and food price increases. It’s also not driving it through productivity. So that link is strong and established…
…Mauboussin: So, Nicolai, when you end up hanging up your cleats, finally, how will you define success for the fund? I’m sure returns are obviously very important, but what other factors you think will be important to judge your success, as CEO of Norges?
Tangen: We have a clear goal in our strategy document. We want to be the best large investment fund in the world. How do you define that? Well, one thing is performance, but it has to do with process, reputation, risks. And also, I would judge it, just how happy are people working there? Are they using their full potential? Are they thriving? Do they have a good life? Very, very important. And are they having fun? Fun – completely underestimated. People who get fun, they’re more creative. It’s a great leveller. It’s kind of, in a way, the goal of everything we do. You want to have fun and you want to be fulfilled…
…Tangen: I do think a lot about productivity and the lack of productivity growth. And in particular, I’m thinking about Europe versus the US. Because in the US, there is more innovation, there is more speed, and Europe is pretty slow.
And what is it with Europe? Why don’t we have great technology companies? Why is growth pretty pedestrian? And it’s just a combination of so many things. It’s a mindset thing. In Europe, we think 2% growth is fine. Well, perhaps it should be five, perhaps it should be 10. We have very few kind of hairy goals. And you read the Elon Musk book and you understand what a hairy goal is. The speed, the speed by which you move. It just struck me here. I’m in New York now, and just the speed by which they pack a sandwich, right? It’s just like five times quicker than they do it in Europe. The depth of capital market, the lack of depth in the corporate bond market, you’ve got more risky capital here, or risk-seeking capital, you’ve got more venture capital. You can fail. And now in Europe, it’s not good to fail. Much bigger public sector, which probably slows down the thing. I really think union is a great thing, but it does something with structure of businesses. So you have a whole range of things which make Europe slower than America, then that worries me. But I’m doing more work here. This is my next thinking project. Really interesting.
5. Parallel Bets, Microsoft, and AI Strategies – Matthew Ball
Parallel bets strategies are best suited to (1) cash-rich companies . . . that are (2) pursuing “must-win” categories” . . . in which (3) their assets and strategies are a good fit . . . but (4) may not be configured correctly . . . and (5) there is a high rate of change . . . and (6) many uncertainties . . . and (7) many players . . . with (8) progress often occurring out of sight. Deployed correctly, a company can cover all of the bases while also neutralizing the existential threat of a new competitor. Parallel bets are therefore likely the right strategy generally for “Big Tech” and during this phase of AI, during which there are many unresolved and interconnected hypotheses.
- Will closed or open models be more capable? If closed models are technically superior, will open models nevertheless be considered “superior” on a cost-adjusted basis? What is the trade-off between the quality of a generative AI response and its cost? How does this vary by vertical?
- How many of the potential uses of generative AI will result in new companies/applications, rather than new or improved functionality in the products of existing market leaders? Put another way, is the technology or distribution more important? Is there a hybrid model in which users access existing applications, such as PhotoShop or Microsoft Office, but while logging into a third-party AI service, such as OpenAI?
- Which AI products or integrations will warrant additional revenue from the user, rather than just be baked into the core product as a new table-stakes feature?
- To what extent are the answers to these questions path-dependent, that is, subject to specific decisions by specific companies and the quality of their specific products—as was the case with Meta open-sourcing its Llama 2 LLM). And how, again, do the answers differ by vertical
Eventually, though, it will be necessary for parallel bets to be winnowed; all strategy is eventually about execution. Note how quickly Microsoft focused its OS strategy on Windows after the success of Windows 3.0 in 1990 (the company was later accused of following an “Embrace, Extend, Extinguish” model where one-time partners would be crushed once emerging markets stabilized). The questions here, of course, are “When,” “How Much,” and “How do you know?”
Microsoft never halted its investments in applications and productivity tools, nor Internet services, and is better off as a result. Sometimes parallel bets lead to growth in new adjacent markets, rather than displace a current one (to that end, Microsoft’s more direct OS-bets were eventually paired). It’s possible that Amazon’s Alexa device footprint will still yet enable the company to regain market leadership. Indeed, OpenAI’s CEO, Sam Altman has confirmed reports that it is considering its own foray into consumer hardware (led, according to rumours, by Apple’s long-time design chief, Jony Ive).
And sitting alongside all of the above considerations is the biggest question: how might the focus on current AI architectures and opportunities distract from the development of artificial general intelligence? John Carmack, who is considered the “father of 3D graphics” due his pioneering work at Id Software, which he co-founded in 1991, and joined Oculus VR as its first CTO in 2013, founded his own AI start-up in 2022, Keen Technologies, which is exclusively focused on developing artificial general intelligence. According to Carmack, the number of [contemporary] “billion-dollar off-ramps” for AI technologies has become a de facto obstacle to achieving true AGI. “There are extremely powerful things possible now in the narrow machine-learning stuff,” Carmack told Dallas Innovates in his first major interview after founding Keen, “[but] it’s not clear those are the necessary steps to get all the way to artificial general intelligence.”
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have a vested interest in Microsoft. Holdings are subject to change at any time.
