What We’re Reading (Week Ending 10 April 2022)

What We’re Reading (Week Ending 10 April 2022) - 10 Apr 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 10 April 2022):

1. Antonio Gracias – Pro-Entropic Investing – Patrick O’Shaughnessy and Antonio Gracias

[00:02:52] Patrick: Antonio, I was trying to figure out where to begin this conversation. I always like to dive straight into the meat of some interesting idea, not do the childhood background stuff, we’ll get to that later. And because of our conversations over the last many months, I think this idea of pro-entropic companies is one of the most interesting ideas that I have personally encountered maybe ever in investing, and an ideal place to start. I would love you to walk us through this concept, because I think it really defines your style of investing and is quite a bit different of a lens than I’ve heard from other investors investing at a similar stage.

[00:03:25] Antonio: Sure, Patrick. Thank you. It’s a word we use here internally in our investment framework, and we think about – there are lots who use the word resilient. And to us, resilient things, resilient companies are things that recover quickly. So when you talk to neuroscientists about the word resilient, they define it as you come out of homeostasis, something happens to you, the adrenaline goes up, cortisol, whatever, and then you recover quickly, you go back to homeostasis and make a good decision. If you don’t recover quickly, then you can’t make a good decision.

Pro-entropic, as you think about a company, if a company’s resilient, it means that it recovers quickly when something happens. There’s a crisis, management’s good, they figure out a pivot, they figure out what to do. For us, pro-entropic, it really is a company that is good at chaos. So this kind of comes from our trying to understand and learn how to get better at not making mistakes and make great investments, right?

So, how do we figure out how to lower our errors and improve our successes? And we started to identify this idea that the world’s going to be more chaotic, a lot more chaotic – almost 10 years ago now. And the chaos was driven by the idea that de-globalization was changing the world, technological disruption was changing the world, climate change was changing the world, politics was changing the world, demographics are changing the world. So much was changing all at once. And if you think about the second law of thermodynamics, it tells us that everything tends towards entropy anyway, and entropy being chaos, it felt to us that the world was getting more chaotic. And we wanted to find things that were good that got better when chaos went up. And one of the reasons we invested so heavily in a company like SpaceX is because whatever we could imagine was happening in the world, this company just got better, and it was actually good for it.

And I think how we really think through it is thinking about all of the probabilistic outcomes of the world. We’re Bayesian thinkers here, we think a lot about Bayesian probability trees and Bayesian updating. And as you think about all the probabilities that might occur to a company – pandemic, wars, recession, whatever might happen, how will that company respond if nothing changes? So it’s strategy itself. That’s how we differentiate from resilient. If something’s resilient, resilience is great too, we invest in resilient companies as well. But every once in a while, we’ll find something that we think is really pro-entropic. And that for us is the holy grail of investing; a company that gets better no matter what, just by virtue of what it’s actually doing. It’s certainly true of SpaceX. We have a company called Gopuff in our portfolio, which also actually is, I think, heavily pro-entropic. And believe it or not, these guys are disrupting 7-Eleven, so it’s really convenience stores. Convenience stores do well in recessions. They do well in pandemics, they deliver convenience store stuff. It does well in almost any environment you can imagine, and it did extremely well through COVID. They’re still growing very quickly now. We think they’ll grow through a recession. Believe that’s the case, because usually convenience stores do. So it’s not just the super high tech stuff. It could also be things like Gopuff, where you’re providing a very valuable service to people no matter what, and they need it no matter what. That’s how we think about it.

And then when we find a company where the strategy is pro-entropic, we think about, are the managers pro-entropic? The people running this company, are they really good at understanding chaos in the world? And the way we think about this, and I’ll differentiate again for resilience, is that a great pro-entropic thinker is someone who is able to keep their probability state, their Bayesian probability state, open on options. So you’re running a company. You always want to have optionality in what’s going to happen and how you’re going to build the company. They will be able to keep that probability state open to the appropriate moment and then close it for execution, because great managers, great CEOs, great executives are great at strategy, and they’re great at keeping options open. But then when you watch what happens, moments will be like, “Nope, we’re going to close that probability set. We’re going to do that thing. We’re choosing one of those paths or maybe two of those paths. We can’t have 20 of them all the time.” If you have somebody who’s always open state, they don’t get anything done, and you’ve probably seen that too. We have too many ideas and we don’t go anywhere.

Executives that are really good at doing both of those things, opening the probability tree and then knowing when to close it and execute really hard and then reopen it; we define that as pro-entropic thinkers. And they rarely get knocked out of homeostasis. They’re resilient too. They’re usually really good at recovering, but they get knocked out of, I’d say their regular homeostasis by events less than someone who’s resilient because they’re already predicting it. They’ve got a probability tree they’re running already about what the world’s going to look like. And their inference is running against what the world’s going to look like. They’re making decisions about that, and they’re deciding when to toggle down and close off and when to reopen. It’s been really valuable to us…

...[00:15:08] Patrick: One term you used earlier that I want to make sure I understand as contrasted against resiliency and pro-entropic is durable. What do you mean by durable? And what is the full spectrum of companies? If we got pro-entropic at one end, what’s the other end of the spectrum, and where does durable fit in that?

[00:15:22] Antonio: Our framework is pro-entropic, resilient, durable, cyclical, and then fragile. And we do not do fragile. The word durable, think of durable as almost the little boat in the ocean and the ocean’s going up and down, a big storm comes, and it survives. It’s battered and beaten, but it came out the other end and it’s okay. And we have done some of that in the past. In the more traditional growth, the GARP kind of investing, I think that’s what you end up doing a lot of. These are companies that are probably growing nicely in good economic cycles, and they do okay. They survive bad cycles, and the timing of that investment matters a lot. Unless you really like to manage it a lot, probably don’t invest in those kinds of companies.

And a durable thinker is someone that is not resilient, and we use a neuroscience construct here. You have something happen to you that’s an event. Knocks you out of homeostasis, your limbic system fires off. It impacts your prefrontal cortex, your ability to make decisions. So we call that the limbic hijack. You can’t make a good decision because you’re in an emotional state. Recovering emotionally, recovering your physiological homeostasis quickly makes you resilient. There are lots of people in the world that don’t necessarily recover quickly, but they’re really good at just compartmentalizing it, sort of shove it down. And what happens when you do that? When you talk to neuroscientists about this, they call it allostatic load, which is the load of stress on your brain. Think about the number of windows open in the background of your brain. We think about your brain as a neural network. The number of windows just keeps going up. They’re open and open. Your processor’s spinning on this stuff in the background. Your decision quality goes down over time.

So it’s both true for companies that have a strategy where they’ll survive the crisis, they’ll come through it, they’ll still be there. But man, they’ll be a little battered, beaten. And then for decision makers who will survive the crisis, they’ll come through it, but they will probably be battered, beaten, and their coping strategy will not be to resolve and recover. It will be to compartmentalize and move on. And this idea of, the windows are still open and processing in the background means they probably won’t have as much processing power available for the next thing that happens, and the next thing that happens. And over time, that just adds up. And I don’t want to say that I’m a neuroscientist here, but I studied it very carefully, so maybe an amateur neuroscientist. I think about it as, as that stress builds up over time and what they call allostatic load is going up, eventually it can lead to PTSD. You get that from one event that’s super terrible or from lots of events that are bad that you don’t resolve…

...[00:22:05] Patrick: I want to come back to the transition into early Valor, but you mentioned the theory of constraints. And I want to talk about operations and the operations work that Valor does, I think completely uniquely, relative to peers, discuss that concept. what is the theory of constraints? Why is it so powerful? Do you think it’s universally applicable in business, or is it more applicable to certain kinds of businesses?

[00:22:25] Antonio: I think it’s universally applicable. I recommend to anyone listening to this podcast, “The Goal”. When I was trying to figure out how to run this factory, and I didn’t know what to do, I went to a friend of mine who was at business school and said, “What should I read?” And he told me to read this book called “The Goal”, which was great. And it really comes down to physics. So the laws we’re talking about, the second law of thermodynamics, the theory of constraints, these all are concepts that exist inside of physics. And it’s simply that a system operates at its slowest limiter. In the plating context, an example, we had big, long lines, hundred-foot long lines that had plating of nickel, gold, et cetera, going onto beryllium-copper substrates. And the slowest thing in that line to plate was nickel. And I asked the question one day of one of our platers, “Is there a way to make this thing go faster, please?”

He was a second shift guy. And he said, “Oh yeah, there’s a way to do it. The guy that ran the company before you, he had three nickel baths, and now we have one, and we go one third as fast.” So I went to go talk to the chemist and I asked him the question, “What’s going on?” And he’s describing Faraday’s law. If you have an aqueous solution and you put a current through it, basically the current dissipates in the center. So if you make the bath longer, you’ve got to slow the whole thing down to get the right amount of plating on the part. And we went, let’s take over three nickel baths. Well, it takes one extra chemist, it’s going to cost pretty much nothing. Okay, let’s do that. That’s an example. It’s a closed system and, in a closed system like this, the thing that limits its speed is the slowest element.

That was really how I started thinking about closed versus open systems theory. And first I started thinking about entropy, which is when you’re thinking about entropy, it’s actually an open system. If the world tends towards more entropy, it’s because the system is open. When you have these very closed systems, like in a manufacturing facility, you don’t have as much entropy inside, what you have is this idea of constraint-based thinking. In this case, it was driven by Faraday’s law, but it happens in pretty much any business I’ve seen.At our business here, we’re in the asset management investment business, we think about it this way. We know that our constraints should always be in our operations teams. We’re continuing to hire operations people. We could invest more capital, there’s more good opportunities, than we have operations people to help them. And so we think about this as our portfolio size, the amount of capital we’re managing, is driven by our ability to serve our companies. In our business here, we define our customer as the company we’re investing in. Our operations work, the lean stuff we do for them, is the valuable service we provide them. And so we know that that’s our primary constraint and everything else revolves around actually being able to make investments that are really, really good. But the thing that limits how many investments we’re making here, is can we serve them?

I have yet to run into a good business where, if we really thought through it with the executives, they weren’t constraint-based thinking. And it’s one of the things, by the way, I really enjoyed about working with Elon over the years, because he has a physics background, he 100% thinks this way. And most of the executives I’ve met, whether they know they’re doing it or not, actually think this way. What part of my business should I work on today to make the whole system go faster? And if things are high quality and high speed, typically the product is good. The customer’s happy. The velocity’s going up, and if you’re improving velocity quality, your business is getting better…

…[00:32:51] Patrick: It’s a great excuse, the concept of risk, to talk probably for a while about one of my favorite things that you and I have talked about, which is the evaluation of people. And this really gets into the world of psychology. You’ve mentioned your foray into neuroscience a couple of times already, but I think that the ability to understand people, their motivations, the type of person they are, the type of leader they’ll be, is incredibly important. Certainly in pro-entropic companies, it probably drives the outcomes. I would love you to take us down this road that you’ve been on for 15 years or so into the world of psychological research, the theories or ideas that you’ve found to actually be helpful in investing and why. I just think this is such a rich area of understanding. And I know it’s a passion area for you.

[00:33:31] Antonio: Part of this starts at the story of how I started thinking about this. In the same fund that we did Tesla and SpaceX, we had actually, what turned out to be a Medicaid fraud, and I was just tortured by this. These were things I did, okay, so I’m not blaming anybody but me, I made these decisions. How could it be that I could make some sets of decisions that are just great, and others that are just terrible? And in very close proximity in time. And so I actually went and found a psychologist and theologian named Galen Buckwalter, who thinks about some of these questions, and asked him to help me figure it out. We started thinking about, could we create a cultural test to help us understand people better? And one of the things he studies is people that have a brain anomaly that their amygdala doesn’t fire properly and clinically we call these people psychopaths.

The reality is that I want to be careful with that word, because it’s got a very negative connotation. But if you watch the movie Free Solo, you see Alex Honnold, he just doesn’t feel risk and anxiety the same way that people might. And some of these folks go on to do great things, some of them can be criminals. And one of the things he pointed out to me is, look, when you have someone who might commit a fraud, and they’re high performing, there’s no way to figure this out ex ante. You really have to have known them and watched them, because they’re really good at it. And if they’re clinical, they’re probably already in jail, but if they’re high IQ and subclinical, they’re probably in your office, and that’s the kind of people we try to sort out.

And so he took us through trying to learn how to think about this problem of sorting out people that really didn’t fit for us in terms of values, and sorting in people that were really good. And I think the key learning that I would share with you is this: he told us about 5% of the human population has this brain anomaly and they concentrate in areas like finance, law, entrepreneurship, politics, et cetera, all the power professions. And that we should think about it as probably 10% of the people we deal with are going to do things that we don’t like, other people might like them, we don’t like them. They don’t fit for our values just because of the nature of how they think and the way their brain operates, their actual, physical brain operates.

And so we changed our base rate forecast. We do base rate forecasting here on our investments all the time. What’s the probability of a 3x, what’s the probability of a 5x? We weren’t base rate forecasting people. Most people I talk to, if I said to them, “Hey, what percent of people do you think walk in your office, sit down for a meeting, just are not telling you the truth and think it’s okay? Not that they’re not telling the truth and think it’s not okay, but they’re not telling the truth and think it is okay?” Most people would say none. I would’ve said zero before I heard this. And so we raised our base rate forecast to 10% and it’s actually helped a lot, because you’d say, think about it as a base rate toward 10%. It should take you six or nine months to figure it out.

And so, one of the reasons that six month thing happened is, as we get to know people, and they get to know us, one of the questions we’re asking ourselves, “Are our values aligned?” That doesn’t mean someone’s bad or good. We have our set of values, other people their values. And if our values are very misaligned, we’ve found over the years that we’re just not going to enjoy the experience, which means you won’t be great partners, they won’t be good partners for us, and that’s not good for anyone. And our values, they’re here up on the wall in the conference room, humility, integrity, responsibility, and excellence. These are the things you believe in, we believe in it for ourselves; we hold ourselves accountable to it and we want to work with people that do the same thing.

It takes us about six to nine months to figure out whether or not we match up on that stuff, and that’s why this small check goes in first then we get to know each other, and once we match up, I think we’re great partners. We will go to bat for you, we will go to war for you. We will, 100%. But we’ve got to believe that the values matched up. And then it continued and we went deeper in the neuroscience, we brought in a woman, Laura Harrison, who’s been working on some of the stuff we’re talking about here. She’s got a PhD in the neuroscience of emotion from CalTech, and she’s brilliant. The things that I’m telling you about with decision-making have come from the work that we’ve had with this team of Galen and Laura and some of our folks internally, thinking about how we are understanding decision-making, and how we make better decisions, and how we analyze other people making decisions. And soon, how we can help train other people to make better decisions…

...[00:45:45] Patrick: This concept of identity that’s related to ego has always interested me. With a background in philosophy I always loved the Paul Graham essay, I think the title was Keep Your Identity Small. The idea that when you establish an identity, things you identify as or with, you’ll do irrational things to align with that view of your own identity. You’ll act to protect this identity you’ve built up for yourself, even though it’s BS typically. Identities are sort of illusory. What have you done personally, to not make those kinds of mistakes? To not make the affirmation ego related? Is it Atul Gawande checklist manifesto type stuff? What are the tools in that toolkit that are actually effective at improving this category of error?

[00:46:25] Antonio: I’ll start with internal things, then the external things. So internally a meditative practice I started several years ago as a young man, then dropped it for a while, then picked it back up again now a little over a decade ago. I started doing TM, transcendental meditation, which is a useful mantra. And I found that that gave me space between my limbic brain and my prefrontal cortex to make even a millisecond decision about how I’m going to respond, how I’m going to feel. And that was very useful to me. After practicing that for a long time, I was able to actually get myself to a place where I could use a mantra to replace the dialogue in your head that’s always going. And one thing that’s important about the dialogue, just to tell you, we tell people a lot, it’s not you thinking. It might be you but it’s often the source of emotional bias or cognitive bias. It’s important to know this, unless we direct it, it’s not really always thinking.

Thinking is occurring in the background and when you are asleep, and meditation, and TM in particular, opened a space between my limbic system and my prefrontal cortex so I could make a millisecond decision. That is a response that is correct, if it’s mediate to the environment, it makes sense or if it doesn’t, I should just do nothing and be calm. Over time, what happened to me, I got more deeply into it. I had done some Zen Buddhist meditation when I was in Japan when I was very young. I was able to return to a breathing practice, a meditative practice that is without a mantra, where I could reduce the voice. And this happened to me just a few years ago, I went to Japan with my family, and I went back to my very favorite place on earth, a temple called Ryoanji, outside Kyoto. It’s a beautiful zen temple.

And I was meditating there on New Year’s Day, and it was the first time in my life that I could take the voice down to zero, be in a state of awareness without hearing the voice and just be. This has allowed me to, I think, mediate between my sense of ego and what is really happening in the environment, because there’s a space there for me now. It’s been really very useful to me, just made my life more pleasant frankly.

The other thing I’ve done here is, I have some wonderful, wonderful partners I work with, very smart people and really great humans. And it’s part of our process. If you go look at our underwriting documents, it has bias, it’s got cognitive, behavioral and emotional bias in it. And we literally sit around and talk about it. And there’s a culture here where I want people to check me and I check them, why are we doing this? Does it really make sense? What are you feeling about it?

And having a conversation about feelings around an investment table, I know it sounds a little crazy, when it’s so data driven, but it’s important because we want our people to be passionate. We want to be passionate about what we’re doing, that’s the whole point, we like doing it. We want to make the world better, but at the same time we want to make sure it doesn’t override our cognitive systems. And so we have external checks as well, which is more of the checklist manifesto thing, where we’re actually just checking off and saying, yeah, we thought about it, we talked about it.

We don’t even say they don’t exist actually, we just identify them. And when we go back in time and look at our errors, cause we still make errors, we will look at the underwriting, look at the numbers, all the qualitative, quantitative stuff we do, we’ll look at the bias states; we’ll look and see if we made a mistake. If we miss a bias, did something happen there?

2. As Russia Plots Its Next Move, an AI Listens to the Chatter – Will Knight

A radio transmission between several Russian soldiers in Ukraine in early March, captured from an unencrypted channel, reveals panicked and confused comrades retreating after coming under artillery fire…

…As the soldiers spoke, an AI was listening. Their words were automatically captured, transcribed, translated, and analyzed using several artificial intelligence algorithms developed by Primer, a US company that provides AI services for intelligence analysts. While it isn’t clear whether Ukrainian troops also intercepted the communication, the use of AI systems to surveil Russia’s army at scale shows the growing importance of sophisticated open source intelligence in military conflicts.

A number of unsecured Russian transmissions have been posted online, translated, and analyzed on social media. Other sources of data, including smartphone video clips and social media posts, have similarly been scrutinized. But it’s the use of natural language processing technology to analyze Russian military communications that is especially novel. For the Ukrainian army, making sense of intercepted communications still typically involves human analysts working away in a room somewhere, translating messages and interpreting commands.

The tool developed by Primer also shows how valuable machine learning could become for parsing intelligence information. The past decade has seen significant advances in AI’s capabilities around image recognition, speech transcription, translation, and language processing thanks to large neural network algorithms that learn from vast tranches of training data. Off-the-shelf code and APIs that use AI can now transcribe speech, identify faces, and perform other tasks, often with high accuracy. In the face of Russia’s numerical and artillery advantages, intercepting communications may well be making a difference for Ukrainian troops on the ground.

Primer already sells AI algorithms trained to transcribe and translate phone calls, as well as ones that can pull out key terms or phrases. Sean Gourley, Primer’s CEO, says the company’s engineers modified these tools to carry out four new tasks: To gather audio captured from web feeds that broadcast communications captured using software that emulates radio receiver hardware; to remove noise, including background chatter and music; to transcribe and translate Russian speech; and to highlight key statements relevant to the battlefield situation. In some cases this involved retraining machine learning models to recognize colloquial terms for military vehicles or weapons.

The ability to train and retrain AI models on the fly will become a critical advantage in future wars, says Gourley. He says the company made the tool available to outside parties but refuses to say who. “We won’t say who’s using it or for what they’re using it for,” Gourley says. Several other American companies have made technologies, information, and expertise available to Ukraine as it fights against Russian invaders.

3. RWH003: How To Win The Investing Game w/Joel Greenblatt – William Green and Joel Greenblatt

William Green (00:07:38):

When you think of the biggest mistakes that you made, not just in those early years. I remember you saying to me that actually, you didn’t have that many disasters other than obviously, the wonderfully amusing story of Florida, Cypress Gardens. Well, you tell the story, what happened to Florida, Cypress Gardens?

Joel Greenblatt (00:07:53):

Well, the interesting thing, a Harcourt Brace Jovanovich, which was a publisher, but also owned amusement in parks in Florida, believe it or not, went to buy a very small company called Florida Cypress Gardens, which I remembered as a kid going to, and they had water skiing Santa Claus, during Christmas time, and all kinds of water shows and beautiful gardens. It was a very unique, interesting, and very memorable place to visit when you’re five or six years old.

Joel Greenblatt (00:08:18):

When I saw they were getting taken over, and this was literally in the first month I went into business for myself. I was pretty nervous. I was 27 and I had gotten money from a very famous guy and I want to do a good job. I saw this opportunity where Florida Cypress Gardens was being taken over, and there was a nice spread in that deal where I could make a lot of money if it went through. I thought the deal made a lot of sense at the time. I was able to have a big smile on my face and buy Florida Cypress Gardens as one of the first investments I made when I went out on my own.

Joel Greenblatt (00:08:48):

A few weeks before the deal was supposed to close, unfortunately, Florida Cypress Gardens fell into what’s called a sinkhole, meaning the main pavilions of Florida Cypress Gardens literally fell into a hole that appeared out of nowhere. Apparently that happens a lot in Florida, I wasn’t that familiar with it, and thank God I wasn’t at Florida Cypress Gardens when it happened, but the wall street journal wrote a real humorous story about it. I was like, “Why is this funny? I’m about to lose my business. I had taken a pretty decent sized bet in the a deal.”

Joel Greenblatt (00:09:15):

It just tells you, things can happen that you don’t anticipate, that it’s not really your fault. I’d never even heard of a sinkhole before I read about this happening, so it’s a risk that I… When you’re doing a merger deal, you’re not really saying risk of sinkhole is in your checklist of things to look for, so stuff happens, less kind words for that. It’s a good lesson to learn, especially out of the box. I was sweating pretty good. They ended up re-cutting the deal at a lower price and I lost money, but not that terrible. I got… Howard Marks, my favorite line from Howard Marks is always, “Experience is what you got when you didn’t get what you wanted.” I always loved that line and that’s what I got in Florida Cypress Gardens, some good experience…

…William Green (00:18:29):

Have you ever figured out ways to handle your emotions and to become more emotionally resilient? Because I think of someone like Howard Marks, who we talked about before. Howard, I think is… He says that he’s a worrier, but I think also he’s not super emotional. I always felt… When I was with him, it felt like being in the presence of a most superior machine, with about 50 more IQ point than I had. When I think of someone like Charlie Munger, who said to me at the bottom tick, in March 2009, when he was buying Wells Fargo, he didn’t feel any emotion, any fear. I was wondering if you were wired that way yourself, not to be too anxious, focused on odds, or if there were things that you had to do to get your emotions under control during these very rocky periods?

Joel Greenblatt (00:19:12):

Yeah. I think what you’re alluding to is, to be a really good investor and have a strong enough stomach, do you have to have a screw loose someplace to be able to handle it? I think the answer is, yes. You have to have a little bit of a screw loose to be able to take those risks. On the other hand, I do feel the kick in the stomach when I lose a lot of money, but I usually adjust to it in two or three days, try to get my wits about me to take advantage of the opportunity. I think I’m human, at least in that part, where the kick in the stomach, but you kind of get used to it. I think different parts of your career are different. When you’re young, you figure you have time to make it back. When you’re older, you maybe have the experience to know that it will come back. I’ve seen this before and I’ve seen it not only once but many times, so what do you do here?

Joel Greenblatt (00:19:57):

I’m not saying you can completely defeat the emotions that are involved and those emotions are very strong. But I do think, at least for me, being able to adjust and count your blessings fairly quickly and say, “Okay, can I live with where I am now? Yes, let’s move forward and try to do it the right way.” One of the best experiences I had, was when I had a summer job and a friend of mine was working for, actually, the head of risk arbitrage at [Drexel 00:20:26]. The guy running that department was about 72 at the time, which I thought was ancient, now I think he was a youngster.

Joel Greenblatt (00:20:32):

But I forgot why I had an opportunity to talk to him, but either way, we were taking a walk someplace or whatever and I was saying, I was so upset that I lost money in this thing and how unfair it was, and this thing came out of the blue. This gentleman turned to me and he says, “Well, have you ever made money where you were kind of lucky and it turned out better than you expected.” I said, “Yeah, that happens a lot.” He said, “Well, does it happen more than when the bad things happen?” I said, “Yeah.” And he said, “Well, stop complaining.” It’s a good way to contextualize, if you didn’t take risk, you couldn’t make extra money. You can put your money in the bank and only take inflation risk or whatever that might be, but at least you know what you have. But one of the reasons you’re able to make money is that the stock market gets very emotional sometimes, creates these opportunities, but it also comes along with pain. If it didn’t, everyone would do it and you wouldn’t have this opportunity.

Joel Greenblatt (00:21:27):

Of course, I’m saying something now, not in the heat of the moment, that sounds very logical, but eventually you get there. Eventually when bad things happen in a few days, if you can get your sea legs back and start thinking, “Okay, where are my opportunities? What can I do? Can I trade around in my portfolio? Is there a new opportunity that came up that’s maybe better than what I have?” That’s been the case. Good investors maybe still get kicked in the stomach, but then come back soon enough to take advantage of the opportunities that come there. I think big, big picture, you have to have a little bit of a screw loose to take the pain, especially with a very concentrated portfolio that a number of people I know, pursue.

Joel Greenblatt (00:22:06):

I did it for a number of reasons. When I’m looking for really, what I would call unfair bets, I don’t have 50 or a hundred unfair bets at a time to take, so by necessity, I have to, when I was running a very concentrated portfolio, take six or eight of them. Just have a very fine… I think you have to have a very high hurdle. Meaning, to get into the portfolio, it has to be really great. If you own six or eight great things, or at least great bets, that’s more comforting if you actually know what you own. If you don’t know what you own, if you don’t know how to value a business, you’re just going to react to the emotions, because you don’t actually understand what you own. But if you actually understand what you own, and the premise that you bought those things with is still intact, that’s actually the only way I think you can deal with the emotion, because you realize what you own is still good…

…William Green (01:08:00):

I wonder if I could talk to you a bit about Success Academy? Because obviously it’s an extraordinary thing. This network of, I think 46, 47 charter schools in New York City, that you helped to set up. That have had incredible results in turning around the lives of low income and minority kids in particular. This is a subject close to my heart, because my son Henry is an English teacher at Success Academy in New York City at the moment. Teaching 6th grade. So I get the inside dope on how well the system works. So I wondered [crosstalk 01:08:27]

Joel Greenblatt (01:08:26):

He’s really the one you should interview, by the way.

William Green (01:08:29):

Exactly.

Joel Greenblatt (01:08:29):

Because that’s a hard job. That’s a hard job.

William Green (01:08:31):

It’s a challenging job. This is something I never really included in the book, but it really struck me when I interviewed you about Success Academy. That your thought process in solving the problem of education was remarkably similar to your thought process in solving the problem of investing. That you went to about it in a similar way. I wondered if you could talk us through how you looked at the problem of, okay, here’s this existing school system that isn’t working. Let me figure out what might work well and solve this puzzle. How in a…

William Green (01:09:03):

It worked well and solve this puzzle. And how, in a sense, part of what you were doing was finding a simple idea that was very powerful, a simple strategy that was very powerful and replicable because that strikes me as in some ways, not dissimilar to your approach with something like the magic formula, where you said, okay, let me distill this very complex game of investing to it assets, of here’s, how you buy cheap and good stocks. And in some ways I see a real similarity in the way that you’ve tackled the education problem. Without you saying, this is the best way, you’re saying this is a really good solution.

Joel Greenblatt (01:09:32):

Well, I appreciate that. Together with my partner, John Petry, we really took a business approach to the way we wanted to tackle this. We’re not education experts, but to some extent we see what businesses work. And so first off, there are a lot of good one off schools. If you get the best teachers and you give them enough resources, you can have a really good school. But the real challenge is to scale a really good school and then also scale to kids who probably need more help than others, because they have less resources when they come in. And so what we knew from a business standpoint was that if you just rely on the top 1% of teachers, you’re going to run out of those. And so can you make an average teacher? Can you give them a model that works for them to be great and really teach those kids?

Joel Greenblatt (01:10:20):

In addition, you don’t want to scale a model that doesn’t work and you have to be willing to make errors. So you want to first come up with a prototype that works and then expand that, and it has to work because it’s replicable, whatever you do has to be replicable. And so if you start with that concept, what happened with successes? We had a school, we hired most brilliant women I’ve ever met named Eva Moskowitz to sort of follow with this strategy, try to design a school that was replicable. Of course we weren’t looking for bad teachers and we weren’t even looking for average teachers. So that’s part of it. But we were looking for a prescriptive model, which could help any teacher become much better and started with one school. And when it started to doing pretty well, a couple years later, we opened three more schools.

Joel Greenblatt (01:11:07):

And the only question I asked was not, are these schools great, but how much ahead are these three schools than the first school? How are the kids doing? And most of schooling is done with inputs, meaning, well, if we get this teacher and they have this much experience and we get whatever, but if you’re measuring outputs, which is, are the kids learning? It’s a very different, and we’re agnostic of how that happens. We want to figure out something where the kids are learning and that’s, it’s the output that matters to us, not the input. We have a theory of teachers have to do this, or the curriculum has to do this, but how do we get the outputs? Putting all those principles together actually lets you scale. And so each time we opened more schools and now there are, I think 47 schools and 23,000 kids, we make sure we’re making progress on all those elements.

Joel Greenblatt (01:11:54):

And there was a lot of trial and error what worked or what worked better and what’s the best way to recruit teachers and what’s the best way to train them and all those other things and all these things that I give total credit to Eva Moskowitz has been incredible. And I think she’s the only part that’s not replicable, but she has created a system that I think other people can take a lot from and copy. And so she’s done an amazing job and we really used our business sense as to get to a replicable model. And so I think a lot of that is based on not obviously being education experts, but being business experts and just saying, instead of profits, our profits are kids learning at a high rate and at a good level and measuring it that way. All those things together, we’re sort of the basis of how Success got started. And you know, I think part of why it’s been successful.

4. Nvidia: The GPU Company (1993-2006) – Benjamin Gilbert and David Rosenthal

David: Yup. NVIDIA at this point, they’re halfway down the road of developing the next chip that they think Sega is going to adopt for what ultimately would become the Dreamcast. NVIDIA was calling the NV2. When Sega comes back and says, we’re switching horses, we’re not going to do this, they’re screwed.

For so many reasons, everything we’ve discussed, there’s also in the interim year-and-a-half since NVIDIA started, the price of memory dropped because, thank you, Moore’s Law. NVIDIA’s chips were designed to be super, super tight on memory. The memory cost about $200 in component parts to go into their chips. Their competitors have more memory that’s costing them $50.

Ben: That was just in that one iteration. It’s interesting to note that NVIDIA, by being first and not projecting out the exponential change that would come from Moore’s Law, was actually at a disadvantage. Because they didn’t get a chance to watch and see where the standards were adopted, so they picked their own lane and went off in their own direction, which ended up not being what everyone else picked, which put them at a disadvantage. But second of all, everyone else’s cost structure was way lower or at least everyone else could see that the cost structure was getting way lower. NVIDIA designed for a constraint that was no longer true by the time everyone else came out with their stuff.

At this point, Jensen and his co-founders had to look at each other and say, okay, do we scrap everything we did? And if so, how do we not make this mistake again? How do we make sure that in future generations, we premeditate the exponential curve of Moore’s Law and prices coming down and design for things that are two, three, four generations beyond what we actually have available to hardware right now?

David: When all this goes down, the company has about nine months of runway left. Literally anybody else, you pull the plug. It’s over. Everything in the deck is stacked against you, like your F’d. I can’t imagine sitting there dreaming up a way out of this. But Jensen, God, he’s such a G. He’s like, no, we’re not going out like this.

When you hear Jensen talk today about NVIDIA’s culture, he says that intellectual honesty is the cornerstone of NVIDIA’s culture. This is what he’s freaking talking about. He sits down with Curtis and Chris. Remember, they’re engineers.

They’ve recruited NVIDIA a hundred-plus engineers into the company at this point and sold them on this technological vision of how we’re going to define the industry, we set the standards. We’re not going to use some off-the-shelf stuff. It’s all toast. Jensen’s like, guys, this is a pipe dream. We need to throw it all out if we’re going to survive.

The only thing we can do is standardize on the same Microsoft Direct3D as everyone else, same architecture, and our only shot is just to compete on performance and try to become the best chip out there in this now sea of commodity chips. His co-founders don’t want to do this. This is not an exciting vision for a Silicon Valley engineer.

Ben: When your CEO comes to you and says that, what they’re basically saying is, look, if my job was strategy and your job is execution, the strategy failed, so we just now need to literally out-engineer all of our competitors. We need to be smarter at engineering decisions, so we can be more performant at a lower price point using less energy than our competitors.

Microsoft being Microsoft had all the developer attention. And because Microsoft set a standard, NVIDIA realized, look, we have no ability to uniquely get our own developers, at least at that point in the company’s history. So we must just on our left, look and see all the developers are coming from Microsoft using this API, on our right is all the same consumers. We have to compete just head to head on raw engineering ability with everyone else.

David: You’re saying engineering ability. But remember, this is essentially a commodity at this point. Really, it’s not just engineering ability. It’s how fast you can ship. How fast can you design the next generation of chips? And can you ship it before everybody else? Because everybody knows what’s going to be on that ship.

Ben: And why is it? What fundamentally was it about graphics cards that made it a commodity?

David: At this point, all the other peripherals—and we’re going to get into this in a sec—there was nothing that special about it. They all did the same thing, which was take polygon-level, 3D graphics processing out of the CPU and onto this other chip on the motherboard. Just like sound cards were doing the same thing for sound, just like networking cards were doing the same thing for networking.

It was just like, what’s the price performance ratio of doing that? The interfaces and the programming language, that’s all standardized by Microsoft. You’re just a commodity hardware.

Ben: What GPUs actually do or did, at least in this point in time, say, okay, the system is going to feed me in basically point clouds, like vertices that make polygons that represent like a 3D world and my job as the GPU is to, as fast as I can, in the highest resolution that I can or I suppose a standard predetermined resolution, output a 2D thing that goes on the screen?

I turned 3D stuff into 2D stuff. I have to do that better than other things that I’m competing against, where basically all of us are. When you say commodity, you mean limited by Moore’s Law and doing right up to the edge of what integrated circuit manufacturing techniques enable us to do.

David: Yup. Everybody knows what this means. They got to ship faster than their competitors. They also got to ship faster than their competitors because they’re about to go bankrupt. They draw up this plan. They’re trying to thread the tightest needle possible here.

They have to lay off 70% of the company, which they do. They go down to about 35 people. Everybody who’s staying knows we now have to design from scratch and ship a new chip before our runway runs out, which is nine months. You can’t do that on a normal chip design cycle.

Ben: It takes two years, right?

David: Yeah. With these fabless chip companies, the way they would design chips is they would work on the design, they would send them over to the fabless company, the fabless company would produce some prototypes, they’d send them back, they test them, they go back and forth a few times.

Ben: You mean the foundry would produce some, like the TSMC, or the Samsung, or the GlobalFoundries.

David: Now importantly, NVIDIA is not using TSMC at this point because they can’t. TSMC only works with the best and NVIDIA is not the best. They’re using secondary foundries. That process takes a long time. Then at the end of it, when you’re sure you got the design right, then you do what’s called a tape-out of the chip.

Ben: I love this term, by the way.

David: It harkens back to literally when you used to tape masks to do the photolithography on the chip back in the day, but it just means finalizing the design.

Ben: But you actually do run it on some prototypes first. The foundry sends back some, hey, thanks for the designs, here’s the chip, run your tests on it, and make sure everything does what you think it does. That process takes two years to get a full iteration on.

David: Yup. They’re like, we can’t do this. Jensen’s like, here’s what we’re going to do. I’ve heard about these new technologies, some new machines out there that enable emulation of chips. In our case, we’re going to use it to emulate the graphics chip that we’re designing. It’s all in software and it works.

Ben: They’re startups, but they exist.

David: The problem is, when you emulate it in software, it’s really slow. When you play a game, when you’re looking at your computer monitor or whatever, it’s refreshing 30 to 60 times a second. If you’re a professional gamer, you probably have a go on it, like 120 times frames per second. This emulator runs at one frame every 30 seconds. They’re going to have to debug this thing in software to save this time going at one frame every 30 seconds.

Ben: It’s just insane.

David: That’s brutal.

Ben: They’re basically making this trade-off of, okay, if we want to ship something in nine months, we don’t have time to actually have it execute on the hardware. We are going to make the trade off of our testing being mind-numbing, like running whatever our graphics tests are, where we’re looking for this certain specified output. We need to plant someone in front of a screen to watch the new frame render once every 30 seconds and look again some tests to verify that the output is correct. If it is and this person does that mind numbing work, and sits there just observing, and observing, and observing, then we will go right to manufacturing without ever producing a physical prototype and ship that.

David: That is exactly what they did. They had spent a million dollars just to get the emulator hardware and software to do this.

Ben: I think they had generated some revenue, but it was still a third of the cash that they had in the entire bank account.

David: They go down to six months until they cash out in the company. They get it done in a few months and then they call up their foundry. I don’t know if they’re using United or one of the other foundries in Taiwan, not TSMC. They’re like, all right, we tape this thing out and send it to production. The foundries were like, you guys sure about that? They’re like, yup, we’re sure. Make 100,000 units.

Ben: If I’m remembering right, I think NVIDIA basically was the only customer of that emulation software. That was a startup that really wasn’t fully proven yet. NVIDIA was like, look, we literally have no options.

David: Yeah, they were the only customer and then that company went out of business after. The chip they designed is now the advantage. This is lunacy, what they’re doing. Obviously, they have to do it because their back is against the wall.

The advantage of this, though, is they are now designing this chip with the same set of assumptions about what technology is available as all their competitors, but their competitors are working on those designs. They’re not going to be able to get them out for 18 to 24 months. NVIDIA is going to get the same generation of design out in six months. This chip is called the RIVA 128. It’s what they call it. It is a freaking beast in every sense of the word.

Ben: It’s big.

David: It’s big. It’s extremely powerful relative to anything else on the market.

Ben: More powerful than any customers are telling them they want.

David: Yeah, way, way more powerful. But it comes with some downsides. With great power comes great responsibility. Because they built this thing in such a manner, it barely works. There are a lot of stuff wrong with it. I forget the exact number of this, but essentially, Direct3D at the time had something like 24 or 25 different ways and techniques.

Ben: These are the blend modes?

David: Yeah. I think that’s what it was, blend modes. The RIVA only works about two-thirds. One-third of it just freaking crashes. It doesn’t work.

Ben: I thought even worse than that. Basically, I think NVIDIA had to launch a campaign, going around to all the different developers and being like, come on, what do you really need more than these eight for? What are you really going to do where you need to use that fancy stuff? Do us a favor. For this generation of the chip, these eight work great. You’re going to love them. They’re so good. Just use those.

David: This is so, so great because people do it. They learn about the market. In the first iteration of NVIDIA, we’re going to build all this technology. We’re going to drive the market. They didn’t know anything about the market. They were just making all these assumptions about what people wanted.

But now, Jensen’s actually going into these developers trying to convince them to do this. They all do it. Why did they do it? Because the only thing that matters is performance. Consumers are going to buy hardware and games based on the quality of the graphics. This is being discovered for the first time. People are willing to make a lot of compromises in service of performance. NVIDIA’s the first one that figured this out because they have to go around and do this, and developers all get on board.

Ben: To be clear, it’s because the consumers are making the buying decision on what graphics card they buy.

David: It’s a completely interrelated system where the consumer is making all of the decisions. That’s where the demand is, the consumer is deciding what hardware to buy. That’s what NVIDIA’s business is.

Ben: Whether they’re buying it as a fully built computer from the OEM or whether they’re buying the card put in later themselves, they’re making a decision on what graphics card goes in the computer.

David: Exactly. The game developers are making decisions on what graphics cards to support and how to build their games with the assumption of what’s my target market of consumers? Who do I think will this game run on? You need to have at least an X-level performance rig in order to run my game in its fullest form.

Ben: The developers are premeditating what graphics cards are going to be out in the market when their games launch. They’re saying it’s going to be the most performant one at the right price point, so whatever the mass market is, we have to target that. If you’re telling us that we’re going to test it and it turns out that yours is the best performance per price, performance per watt, or whatever, if it’s the most efficient card, then people are going to buy that one, so we must target that card.

David: And they’re going to buy my game. I remember that this is a few years later. This is a trope that happened. There was a game called Crysis. Do you remember this?

Ben: Oh, yeah. What’s the relationship between Crysis and Far Cry?

David: Far Cry was the first game, the Crysis Engine, and then Crysis also. It was super convoluted. Basically, my perception of this thing was when Far Cry came out—this was mid-2000s—the graphics were unbelievable. If you had a rig powerful enough to run it, just unbelievable. The game itself was total crap. I don’t think I ever played more than 10 minutes of it.

Ben: I’m pretty sure if your computer didn’t support it, there were all these videos that people would record of building a tower of a thousand gasoline barrels and then shooting it. Because it was too complex for their graphics card to handle, their computer would just freeze. That was the failure mode of Far Cry with non-performant chips.

David: This is how the hardcore gaming industry evolves. Far Cry sold so much software and so much hardware just because people wanted to attempt to experience that level of graphics. That’s what the developers are starting to figure out. They’re like, all right, well, you can ship this thing. We’ll use only those eight blend modes whatever it takes because graphical performance is the most important thing.

It works. They sell one million units of the RIVA 128 within four months. I should have looked at what the MSRP was, but that is a lot of revenue.

5. An Interview with Dan Wang about COVID, Chinese Manufacturing, and China’s Response to Ukraine – Ben Thompson and Dan Wang

That’s good! I’m happy for you. What are you hearing, though, from people who are there? The views we have from the outside, whether that be news reports or what gets out under Western social media, it’s pretty scary. People struggling to get food, even water. Kids separated from their parents. What’s the view on the ground. Is it as bad as it seems from the outside?

DW: I think it might be quite a bit worse than what it seems than the outside. Now, Shanghai started to lock down about a month ago when it started posting a few cases, and at the time very few of us had been terribly concerned. What was surprising about this wave is that the bad news just kept piling on and on, such that we saw just a steady increase of new restrictions. At one point we woke up and figured out that all the schools had now been closed. Steadily the grocery delivery and eCommerce delivery platforms like Hema for groceries and JD.com for e-commerce had been slightly breaking down. So to have this series of steady escalation has been very surprising indeed.

Now for those of our listeners who don’t know, Shanghai has been doing very, very well in China, and has been known for having a light touch on COVID throughout the entire pandemic. Beijing, where I used to live, would lock down tight every single time, every other city would lock down for a few cases, Shanghai had a pretty light touch, it never really locked down. So we all feel that Shanghai is now guilty of quite a lot of hubris and is locking down in the most severe way; I think the really comparable event here is Wuhan in February 2020, or March 2020, when most people were confined to a space, and when Beijing deployed the People’s Liberation Army to really try to control the pandemic. So the situation is now pretty serious indeed.

I asked you this the last time you were on, but is zero-COVID sustainable? I know that was the message from Xi Jinping, so of course the Shanghai situation is going to be blamed on the local leaders, but is that messaging going to carry the day, that Shanghai should have done better? Or is there going to start to be some realization that this is impossible for the long run?

DW: We’re probably getting a little bit closer to the realization that zero-COVID is not possible, especially given the variant on top of Omicron which makes it far more transmissible. I think the way to think about this is that Beijing has deployed the People’s Liberation Army, again, for only the second time throughout this pandemic, and if you deploy the army to try to control this virus, well, then it becomes very slightly more complicated to say, “A lot of this is just local incompetence, the rules were not properly enforced,” because if the army is involved, then things are much more challenging to pass the buck.

It really is pretty surprising how poorly the Shanghai government has managed things. Shanghai is known throughout the rest of the country for being the most progressive, for having the greatest resources, for being the richest jurisdiction in the country, for doing a lot of the nicest things. I’ve written recently about how pleasant a city Shanghai really is. Every time we Shanghaiers would have to go to Beijing, we’re asking ourselves, “Why do we, who are living in mini New York, have to visit mini Pyongyang again?” So it’s been pretty shocking to see how poorly Shanghai’s government has bungled things.

In my view, the most stark issue here is that for a lot of people, Shanghai is out of food. So the grocery delivery platforms have been mostly shut down for the last few days, even over the last few weeks. It’s become quite a bit more difficult to buy groceries. Now that everyone is confined to home, the government is now sending rations of packs of vegetables to different people. Now, some of these rations are fairly generous. You have people getting some fish, you have people getting some shrimp and an assortment of things, but a lot of these ration packets are a head of cabbage, a few potatoes, carrots, and that is what you have to live on for the next while. This is the big surprise to all of us, that the government has looked fairly hesitant, uncertain, even incompetent in this case, and not correctly managing what should be a more straightforward affair with delivering food to most people.

I think you mentioned your annual letter in passing, referring to talking about Shanghai versus Beijing, and we’ll have a link to it, as it’s always an amazing read. But I think I would gauge that letter and our last interview as being pretty optimistic about China, I think particularly relative to maybe broader opinion. Over the last few months, though, you not only have this COVID situation coming back to the fore, but you also seem to have some backtracking around initiatives like reforming the real estate market or Common Prosperity. Are things looking a little bit stormier than they were even a few months ago?

DW: Things are absolutely more stormy over the last few months in China than even just three months ago when I published my letter. I think there are four big risks this year that’s going to make 2022 a very, very special year indeed. The first big risk, as you put it, is COVID. Right now the biggest economic city in the economic center in the country is under the most severe lockdown, demanding the army. That is a pretty big thing, and the danger here is that even if Shanghai is back to normal in something like two or three weeks, which I think is the most optimistic scenario, we don’t know if we have to do these rolling lockdowns throughout the rest of the country throughout the rest of the year. So that is the first big risk.

Second, if there are huge lockdowns of something like, let’s say, 10% of the country going dark for any given point, then the economy cannot do well. The National People’s Congress this year set a target of 5.5% GDP growth. It was ambitious in the best of times when there wasn’t quite a bit of COVID running around, but to have something like 5.5% growth while shutting down 10% in the country at any given point, that is looking far more difficult indeed.

The third big risk is this geopolitical uncertainty as it relates to Russia. It’s hard to figure out what exactly is going on here, but at least we can acknowledge that there are a lot of unknown unknowns.

And finally, the major event that will be the controlling force for this year is going to be the 20th party Congress held sometime in the fall, probably September or October of this year, when General Secretary Xi Jinping, is going to very likely almost certainly seek a third term as China’s top leader. And so, having this Party Congress in place, I think, is a very big reason that the country is pursuing zero-COVID, to make sure that COVID is not running rampant over what is the most important political event in China every five years, especially for Xi Jinping on a personal level; and then also, to set this fairly ambitious growth target so that people are feeling pretty good.

I think one of these things are going to have to give. Even in the other previous few party Congress years, we have a lot of politicians being purged for the sin of joining the wrong political faction, and when you add up all of these four factors together: COVID, the economy, geopolitics, as well as the Party Congress, this is going to be just a really weird brouhaha and I am not sure how things are going to shake out this year in China.

The level of uncertainty is really striking. You said that “almost certainly” Xi Jinping will be re-elected. Is there any thought or any discussion that that wouldn’t happen? From the outside, it’s certainly just been assumed that will be the case.

DW: The conventional wisdom in China is that Xi Jinping will have a third term, but what we don’t know is the shape of his responsibility. Now, there are a lot of tea leaf watchers in Beijing who are following these things much more closely than I am, but there is some speculation that he resurrects the title of Party Chairman, which previously only Mao Zedong held, and then appoints a new General Secretary, which would be his successor. Also, the other major uncertainty is the composition of the Politburo, and is there some sense that the Politburo will be stacked a little bit more evenly between different factions within the party? Or is he going to have a run of the table and have many of his own people in place at this most senior leadership positions?…

…One final question. How, if at all, has your view of the Taiwan risk changed? I have to ask you this because I was traveling over the last couple weeks, and as you can imagine, I got asked this constantly, so I will put it to you.

DW: Ben, I want to hear your answer first.

My answer is I think it has decreased the risk in the short-term, because I think that China is probably surprised by the unanimity and vigor of the Western response, and it’s probably a bit of a wake up call that the West still can get its crap together to a certain extent, but it’s probably increased the medium-term, in that China now knows what it has to do, what issues it has to overcome, what preparations it has to make. It, to your point, focuses minds on doing that. I do also think the clear trepidation in the West about Russia using nuclear weapons might also weigh into this, in that China may realize they have a bit of a trump card, which is, “Hey, if we do an embargo, and say we’re going to respond with nuclear, the West isn’t going to do anything.” That adds an additional layer of ambiguity into the question. Basically, short-term risk, I would say, is down a bit, but medium-to-long term risk is probably up a bit. I’m not sure what exactly the time periods are with that, but that’s my answer.

DW: Yeah, that’s exactly my view, that in the short-term at least, Beijing certainly knows that whatever lack of vigorous response it can hope for from the West, probably is now put to bed because of all of these different actions from the West. The major uncertainty that we have here, is that none of us can define a timeline. If we don’t know what the medium-term is, if we don’t know what the long-term is, then it becomes much more difficult to say when exactly these things will happen. My sense has always been that Beijing has never laid out a clear deadline of when it would really like to liberate Taiwan Island.

Just teasing you here, Ben.

6. Can Matt Mullenweg save the internet? – David Pierce

Most of Mullenweg’s time is spent as CEO of Automattic, one of the web’s largest platforms. It’s best known as the company that runs WordPress.com, the hosted version of the blogging platform that powers about 43% of the websites on the internet. Since WordPress is open-source software, no company technically owns it, but Automattic provides tools and services and oversees most of the WordPress-powered internet. It’s also the owner of the booming ecommerce platform WooCommerce, Day One, the analytics tool Parse.ly and the podcast app Pocket Casts. Oh, and Tumblr. And Simplenote. And many others. That makes Mullenweg one of the most powerful CEOs in tech, and one of the most important voices in the debate over the future of the internet…

…In every way that matters, Automattic is a reflection of Mullenweg (you could say he puts the “Matt” in Automattic). He started building web software because he wanted a place to store and share his photos; he’s a blogger to the core, and loves anything that aids in the free expression of ideas on the internet. He loves jazz, which is why WordPress releases are named for jazz musicians. He loves to read and write and work from anywhere, so he turned Automattic into a company that supports bloggers and promotes remote work. He buys companies that make products he likes, and companies that have missions he believes in. Most of all, he believes that open-source software is the future of everything. And he’s betting on it every way he can.

Eighteen years after he first started working on WordPress, Automattic is more powerful than ever. It’s a $7.5 billion company, one of the biggest private companies in the industry. And yet its founding idea — that software should be available to everyone and editable by anyone, that communities can build great things together, that walled gardens always eventually fall — seems more tenuous than ever. There’s another 17-year-old company named Facebook that flies in the face of everything Mullenweg believes in, and is threatening to own the future of the internet…

…The first time Mullenweg and I spoke for this story, I asked him what he thought about the state of the tech industry. It was early September, and conversations were raging about antitrust, misinformation, surveillance capitalism, Big Tech’s overreach, Facebook’s effect on democracy and in general the society wrought by the tech industry.

Before he answered, Mullenweg changed the frame of the question. This happened constantly in our conversations: I’d ask about Instagram or the iPhone, he’d respond with Plato or Camus. Once, when I asked him about Facebook, he responded with a story about the printing press. In this case, he simply urged me to think more broadly. “I don’t think you have to limit yourself to looking at technology,” he said. “Zoom out to human history, or look at the current state of the world, and look at the tension and the pendulum swing between freedom and authoritarianism.” That back and forth has always existed, he said, and to expect a bunch of companies to suddenly fix it is unrealistic.

The cycle plays out the same in tech, he said. Take the internet: built as an open platform, eventually colonized by a handful of dictatorial players. To them, Mullenweg says: Congratulations on all your accomplishments, but you’ll lose in the end. “You get folks who want to ride that openness, but then close people off,” he said. “Like Facebook using your contact books or your email to bootstrap its growth, but then not allowing anyone to do the same on Facebook.” That can work, Mullenweg acknowledges. Sometimes really, really well. “But it also contains the seeds of its own demise.” Users inevitably begin to feel hemmed in and controlled by the closed platforms, and yearn for open pastures. Then they go build something better. Something open. “People’s natural desire for freedom starts to get more and more of the best and brightest in the world working on open, distributed, decentralized systems.”

The seeds of this change are already everywhere, he said. Tesla has open-sourced its patents in an effort to speed up innovation in electric vehicles, because as Elon Musk said, the company’s goal is not just to sell cars but “to accelerate the advent of sustainable transport.” There’s also the whole decentralized, Web3, blockchain community, which excites Mullenweg every time it comes up. “There’s an inevitable gravitational pull towards open source affecting literally every field: finance, health, politics,” he said. “All the things that currently happen in closed ways, what if they were open? What if they were transparent? What if you could copy and paste it? Do your own version? Remix it?”

And then he offered the closest thing you’ll find to a Unified Theory of Matt Mullenweg. “As more and more of our lives start to be run and dictated by the technology we use, it’s a human right to be able to see how that technology works and modify it. It’s as key to freedom as freedom of speech or freedom of religion. So that is what I plan to spend the rest of my life fighting for.”…

…There’s just no hurrying Mullenweg, it seems. Even as the tech industry swirls around him, with regulatory fights and social media backlashes and the seemingly hourly shift in priorities, Mullenweg remains steadily on course. “We aspire to create the layer that every other application on the web can run on,” he said. “Hopefully one day, 85% or 90% of all websites have WordPress as their base layer.” Right now, the web operates largely on top of closed platforms owned by companies like Amazon and Facebook. “But to truly be a platform,” Mullenweg said, “it has to be open. Otherwise it’s more like a trap.”

He plans to spend the rest of his career building the web’s one true platform, the open system the internet deserves. What exactly does that look like? Who knows. Mullenweg is increasingly fascinated by all things Web3 and crypto, and sees in that space much of the collaboration and community he loves about WordPress and open source in general. He proudly reminded me that WordPress.com began accepting bitcoin in 2012, and that Vitalik Buterin, who eventually created Ethereum, wrote about Automattic for Bitcoin Magazine the same year.

“To me, what Web3 embodies is two essential ideas: decentralization and individual ownership,” Mullenweg said at his recent annual State of the Word speech, where he updates the WordPress community on the year that passed. He preceded that by saying he didn’t really know how to define Web3 at the moment — who does, really? — but supported the belief in an internet that anyone can help build, tweak to fit their own needs, and own themselves without paying rent to some large tech giant. He did issue a warning, though: “For every project which is asking for your money, dollars, for you to pay the cost of a house for a picture of an ape, you should ask: Does it apply the same freedoms which WordPress itself does? How closely does it apply to increasing your freedom and agency in the world?”

7. The Metaverse Has Bosses Too. Meet the ‘Managers’ of Axie Infinity – Edward Ongweso Jr

It’s only in the past year, however, that games have begun to not only shoehorn cryptocurrency into their rewards systems but also fully build themselves around crypto-tokens and digital assets like NFTs. What’s emerging is an ecosystem known as “play-to-earn,” where the players can generate revenue directly from playing video games, harvesting digital assets, and trading them…

…Axie Infinity is arguably the industry standard-bearer for play-to-earn games, and it’s a deceptively simple one at that. Axie, developed by Vietnam-based studio Sky Mavis, centers on NFTs of monsters called Axies that form a team whose battles earn players Smooth Love Potion (SLP) tokens. The game features its own blockchain, named Ronin, to facilitate faster and cheaper transactions for SLP, Axie’s governance token (AXS), and Ronin’s native token (RON). Battling is basic, akin to if your entire team of Pokémon battled at once. Axies, as well as other in-game items, are represented by NFTs which can be bought or sold on an in-game market. 

The rise of play-to-earn games, however, has not been as clear-cut as some suggest. The prices of Axie Infinity’s core tokens as well as trading of its Axie NFTs have consistently fallen since their peak last year. A recent hack threatens even greater downward pressure on prices. Questionable economics and labor dynamics have risen up from the froth: Play-to-earn is not just giving rise to a new class of digital workers who see a fraction of the total earnings from their efforts, but bosses, too. 

Getting started in Axie isn’t like other games, however. To play Axie at the highest level of the game—to be, effectively, a boss—you need start-up capital. 

To start playing Axie Infinity, you need to buy three Axie NFTs—an investment that, when crypto markets were stronger, cost well over a thousand U.S. dollars. Today, the cost hovers around $300. Axies can also be bred―for a fee that grows each time―using a basic tripartite genetics system allows for selection for different traits as well as random permutations. These newer and potentially stronger Axies NFTs can be minted for use in teams, or sold on marketplaces. 

Not everyone has enough money IRL to be their own boss in the metaverse, however. That’s why you can also loan your Axies to players unable to afford their own in exchange for a cut of any profits they generate, which can run from 20 to 50 percent. Manager cuts can go even higher, with “ranges from 30% – 75% cut per scholar based on their monthly rewards”  according to Axie Infinity’s co-founder and chief operating officer Aleksander Larsen (also known as “Psycheout” online). These players are known as “scholars,” and their benefactors—who may employ a few scholars or run massive operations with dozens or hundreds of scholars toiling away—widely refer to themselves as “managers.”…

…”I can’t specifically call it a boss/employee. It’s more of a partnership, or let’s call it a joint venture. One party puts up the capital and the other puts up the time,” Conor Kenny, an Axie Infinity manager and a YouTuber who documents crypto trades, told Motherboard. “The scholar grinds daily, you split the profits. Everybody wins!”

In his YouTube videos, however, Kenny strikes a different tone. “I employ them,” he enthusiastically says of his scholars in a September video agonizing over whether Axie Infinity was still a worthwhile investment for managers. “As we stand right now, Axie Infinity is a Ponzi scheme. It’s built on new players coming into the world,” Kenny added in the video…

…“Everything in life is a Ponzi,” said one Venezuelan manager who goes by Iguano and directs five scholars, reflecting the widespread idea that Axie Infinity’s buy-in requirement and diminishing returns as its token sinks in value make it similar to a Ponzi or pyramid scheme. “The first bunch of people who invested in the game have better profit than the people who invest at the end. The economy of Axie needs new people to join to provide gains to the people who were there before.”…

…Rafar’s scholarship program is a comprehensive one: It includes a one-month trial to maintain a competitive ranking, a daily quota of 75 SLP, an onboarding system complete with Google Doc guides, playtesting, live feedback, and a community Discord to ask questions and get further help.

“I also see Axie as a gateway for Filipinos to be educated about crypto which I believe will help advance them in the future,” he told Motherboard. “I’ve set up crash courses for them about the basics of crypto (how to create wallets, trade, and how to avoid scams)—basically making them literate in the crypto world.”

When someone is in desperate need of funds, Rafar said, he has in the past offered Axie scholarships as a way for them to solve their problems themselves. 

“For example I had one family member that is a scholar earning maybe $250 a month from their job,” Rafar told Motherboard. “They are having a kid and need money to pay the hospital bills, estimated to be about $500. I offered them an Axie account and held on to their SLP till the baby’s birth month. They are about to receive about $600 from earnings, which they wouldn’t have had otherwise.”…

…All this may be even further complicated by a recent major hack that rocked the Axie Infinity ecosystem: 173,600 ETH (about $588 million) and 25.5 million in a stablecoin called USDC was stolen from the Ronin Network on March 23, but was only noticed on March 29. Ronin is a so-called “sidechain” designed to allow people to use Axie Infinity without incurring expensive fees on Ethereum for every action. The hackers drained the liquidity from the Ronin “bridge,” which allowed for assets to be transferred between Ethereum to Ronin, leading to the bridge and its affiliated Katana decentralized exchange to both be deactivated. This means deposits and withdrawals are paused, including on Binance, stranding the funds of those who have wagered that this game will make them money, even as its core tokens have shed most of their value over the past year….

…Before the reforms announced in February, the most SLP an incredibly skilled player could expect daily was somewhere north of 324 tokens per day in Season 19 if they had 20 or more Axies, played at the highest levels of Adventure Mode, and got a 60 percent win rate while battling in higher ranks of PvP battling. At the current SLP price of $0.02 that’s a daily wage of $6.48, excluding the manager’s cut, which could be half of those earnings. In the Philippines, where nearly half of all players reside, the average minimum wage is about 366 pesos or $7.13. 

A research report from gaming research and consulting firm Naavik affirms as much: For low-level players or those just starting out, playing Axie Infinity each day earned less than a minimum wage job in the Philippines, the research concludes. That was in November, when the price oscillated between $0.06 and $0.08.

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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 Meta Platforms (parent of Facebook), Microsoft, and TSMC. Holdings are subject to change at any time. Holdings are subject to change at any time.