What We’re Reading (Week Ending 15 August 2021) - 15 Aug 2021
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 15 August 2021):
1. Hanging By A Thread – Morgan Housel
Robert E. Lee had one last shot to escape Ulysses Grant’s troops and regroup to gain the upper hand in the Civil War. His plan was bold but totally plausible. All he needed was food for his hungry troops.
An order was put in to have rations delivered to a Virginia supply depot for Lee’s men.
But there was a communication error in Richmond, and the wagons delivered boxes of ammunition but not a morsel of food.
Lee said the mishap “was fatal, and could not be retrieved.” His troops were starving. The Civil War ended two days later.
History hangs by a thread…
…Finance professor Ellroy Dimson says, “risk means more things can happen than will happen.” An important point here is that if none of these big events occurred, something else just as wild and unpredictable could have taken their place. Even when some part of the outcome is the same, the context and little bits of trivia are different in a way that can totally change the final story. America may have joined World War I without the Lusitania’s sinking, but its participation could have been less, or later, or not as popular. That could have shifted how the interwar period in the 1920s and 1930s played out, which would have impacted how World War II occurred, which would have altered the course of the most promising inventions of the 20th century … on and on, endlessly.
I try to keep two things in mind in a world that’s this fragile to chance.
One is to base your predictions on how people behave vs. specific events. Predicting what the world will look like in, say, 2050, is just impossible. But predicting that people will still respond to greed, fear, opportunity, exploitation, risk, uncertainty, tribal affiliations and social persuasion in the same way is a bet I’d take.
Another – made so starkly in the last year and a half – is that no matter what the world looks like today, and what seems obvious today, everything can change tomorrow because of some tiny accident no one’s thinking about. Events, like money, compound. And the central feature of compounding is that it’s never intuitive how big something can grow from a small beginning.
2. How Millennial Investors Lost Millions on Bill Ackman’s SPAC – Michelle Celarier
Last fall, he started hearing about the boom in SPACs, and Ackman’s Tontine stuck out: It was the largest, with more than $4 billion to shop for a company. Ackman, a legendary hedge-fund manager who’d just made $2.6 billion on a timely Covid short bet, was behind the SPAC, and he claimed it was the most investor-friendly one ever.
In November, when Ackman told investors in his hedge fund that he expected to be able to announce a deal with a target company by the end of the first quarter, the psychiatrist jumped in.
The SPAC market was red hot, with SPACs sponsored by venture-capital guru Chamath Palihapitiya and former Citigroup investment banker Michael Klein also soaring. In early February, Ackman tweeted a rap video about SPACs minting money, and Redditors went crazy. “That video literally single-handedly caused the stock to rise 10 percent,” recalls the psychiatrist.
The sense of urgency was palpable. “It was like, okay, this is coming very soon. If you don’t get in now, you’re going to miss it,” he says. “There’s just that frenzy of wanting to get in on the ground floor. It’s like getting in an IPO at the ground level” — something that is unavailable to retail investors and a key reason why they buy shares of SPACs before deals are announced.
By March, the psychiatrist was plunking all of his capital into call options on Tontine, which goes by the stock symbol PSTH. “Whatever money I had, I pretty much was putting it all into buying more of it,” he says.
At one point, his stake in Tontine was worth over $1 million on paper. He lost it all when his June 18 calls — with a strike price of $25 — expired worthless; the stock was around $23 at the time.
The Reddit gang had convinced themselves that Ackman’s Tontine was going to merge with a unicorn like Stripe, the online payments processor, or Elon Musk’s Starlink — largely because Ackman himself had joked about “marrying a unicorn” when he launched his SPAC last July. The media was also obsessed with the unicorn theme. But most everyone seemed to ignore the fact that Tontine’s prospectus listed unicorns as just one type of company that Ackman was chasing.
And when a deal was finally disclosed on June 4, Tontine’s partner wasn’t a unicorn, the moniker for a private startup valued at more than $1 billion. Moreover, there would be no merger. In a highly unusual move, Tontine had agreed to take a 10 percent stake in the upcoming spinoff of Universal Music Group from French conglomerate Vivendi. There would be money left over for another deal and a chance to get in on the ground floor of a third vehicle.
The structure was too complicated for both investors and their brokerages to quickly unpack, and the stock, along with the warrants and options attached to it, tanked. Within weeks, the Securities and Exchange Commission stunned Ackman, essentially killing the deal by telling his lawyers that it did not meet the New York Stock Exchange’s requirements for a SPAC — even though Ackman said on CNBC that the NYSE had given him the go-ahead months earlier.
By the time the deal fell apart, the psychiatrist’s savings had already evaporated. He is now scrambling to make quarterly tax payments to the IRS, while owing $350,000 in student loans.
“I considered this a safe, calculated bet,” he says. So did a lot of people, including 16 others II interviewed by phone, Zoom, direct message, or in person. But as they all learned, there is little safety in SPACs — especially in the call options on those that haven’t found a partner.
3. Magic beans – Josh Brown
Imagine the chutzpah it takes to say to yourself that you know definitively what the global economy is going to look like in six months. Now imagine thinking you could take this certainty about the future and use it to predict exactly which investment markets would rise and fall as a result – so not only can you see the economy’s future, but you can predict how all of the other investors will react to it!
Now imagine saying you could do this sort of thing consistently, out loud in front of other people.
Now imagine charging them money for it.
At this point, you’re selling magic beans. A talking dog. A singing frog. A goose that lays golden eggs. You’re a medicine show.
When I explain like this, the whole notion sounds crazy. Crazy sells.
The internet is filled with people who will believe nearly anything they read, if presented in the right circumstances. In part, it’s because they don’t spend a lot of time considering how unlikely it is that someone is willing to sell you the future for twenty dollars a month. In part, it’s because they do know better, but deep down they still want to believe. So if you speak with enough conviction, and don’t get asked too many questions about whether or not you’ve been right about these predictions historically, you can make a lot of money. The outcome doesn’t matter, you’re filling a void of rampant doubt with the opiate of your professed certainty and confidence.
So what’s the right answer? For me, it’s always been accepting the limitations inherent in trying to understand the future and arranging your bets in such a way that you can succeed despite a multitude of potential outcomes. Building durable portfolios, expecting risk to eventually be rewarded and accepting the fact that there will be good times and bad.
4. Sebastian Mejia – Mastering On-Demand Convenience – Patrick O’Shaughnessy and Sebastian Mejia
Patrick: [00:08:43] Can you talk about the early network dynamics where you had to go get couriers, convince them to log into the app and you had to go get demand? What was that like? What literally was the first city or first few order? This free text thing sounds extremely unique and different than the structured inventory that you saw from basically every other app. How did that work? How did you figure out how much you needed to pay the couriers? All the basics of like the unit economics must’ve been fascinating to figure out on the fly, how did you do that? What was it like?
Sebastian: [00:09:12] Previously, we had experience building companies, but it was more enterprise. And we were basically selling software to supermarket. So we got some sort of idea of how the industry worked, but we wanted to do something completely different, focused on the customer. So we basically started building and initially, that convenience product had a very limited assortment. I’m talking about 1,000, 2,000 SKUs. And basically said, “Well, we already have this consumer-facing app, it’s going to be very easy to build all of the logistics behind it.” And of course, that’s not the case. When we initially launched, we had no traction whatsoever. So it was literally us trying to understand what was going on with the customers, why they were not engaging with the product. So Rappi from the beginning, had this DNA of being very hyper-local and very guerrilla. And that meant that we literally went out to get customers onboarded and talking to customers. And we were basically offering donuts in exchange of downloads.
And that was our customer acquisition costs. And we also had to do the same thing on the courier front. And what are they interesting insights is that although eCommerce is still very small and it was way smaller back then, you had a culture of delivery. You had a culture of calling the restaurant, calling the store, and there were couriers already working. There were just completely disconnected. There was no network bringing them together, making them productive, making them more efficient in the way they routed. So we didn’t have to go against, let’s say culture. We didn’t have to go and educate couriers and even go ahead and educate deeply the customers, because they already understood that delivery was this thing that existed. We just applied technology to organize all of these agents and these add on let’s say, in the physical world to make them function more efficient.
I remember us doing the deliveries early on. I remember I was being scooters, making drops, testing the courier app. And from there, we started to evolve the product and we started to also engage couriers to make it better. For us, part of the mission was super critical on how are we going to make these guys not only more efficient, but we’re going to make sure that they are paid very well, and that they’re making significant more than their minimum wage. And I’m only talking about two sides of the marketplace, right? If you introduced the merchant side of the marketplace, it adds another layer of complexity. And at the beginning, when we launched, we really didn’t understand how to integrate with catalog of a supermarket. How do you actually integrate with a 30,000 SKU store? How do you make sure that you have relevant inventory on real time? How did you integrate with a restaurant?
Rappi, when we launched, we didn’t even have tablets. We didn’t have integrations with POS systems. So it was literally us going placing the order as if it was a random customer. A lot of the things were built as we learn. And many of the things had to be built from first principles very early on, because it’s not that you have a lot of tech stack or logistics stacks that you can just jump on and use to launch. It’s one of the challenges of building in the emerging market. But I also think it’s an advantage because you get to build these very core competencies that tomorrow are going to be very valuable business, right? I see ourselves doing all sorts of services on top of these piece of the stack, whether it’s logistics, whether it’s customer service, marketing tools, etc.
Patrick: [00:12:37] When I talked to the founders of Loft, they had an interesting, similar experience where there’s no MLS system. So there was no proper database of apartments or homes or something they could tap into. They basically had to build it themselves. I’ve got this obsession with companies that make previously non legible data legible to some system tend to do really, really well. And so I’m really interested how you solve that problem in these specific cases. So that 30,000 SKU supermarket, or if there’s a restaurant with 200 menu items, literally, what was the process of getting that legible to your software in your platform? How did you do?
Sebastian: [00:13:11] The supermarket and the restaurant business is quite different. I think in the restaurant, you basically have two options to actually integrate with what happens inside the business. You can use a tablet or you can use an integration with the POS. So you’re basically getting as close as possible to the kitchen that gives the restaurant owner the ability to actually update the menu, the ability to pick the cooking time and selected depending on the dish that you’re cooking. So you’ve got to go really deep in the operations of the restaurant. Then when you’re going through the supermarket space or the retailers, we’re dealing with inventory per store, you’re dealing also with inventory levels. So you need to make sure that you have the assortment, but you also need to have some sort of measurement or way of identifying where certain products are being stocked out. And that’s a big, big challenge that has a lot of different angles that you can tackle it from machine learning to project; what are going to be the products that are stocked out with more probability, to just better integrations with the supermarkets.
Not all of these companies have a proper API where you can actually connect with and understand what is the assortment that they have in the store. So you basically end up using flat files, and you need to have data that is coming in. You have to clean that data in so it connects actually with your core catalog, which is the nervous system of any type of eCommerce business. So that represents a lot of different challenges. Today Rappi is operating with more than 200,000 points of sale from restaurants to retailers of all sorts. So that data challenge, I think, is very, very intriguing. It’s something that we are investing a lot of energy and time. And I wouldn’t say we are fully on that plays where we can say, “Look, this is something that we mastered,” because there’s a lot of complexity. Bt I also think it’s one of the most interesting aspects of this business because local means that you’re integrating such a deep way with the local economy that you’re creating all of these modes and all of these integrations that are just very hard to replicate.
Patrick: [00:15:21] Is there a good example of that? I want to understand what you mean by local. Is it measured in blocks? Is it measured in the equivalent of a zip code? What is local and how different might one unit be from a neighboring unit and in what ways?
Sebastian: [00:15:34] We could be talking about two kilometer radius for a specific zone. And then it’s not only how you actually draw the zone in a city. You also have Latin America with a lot of income disparity. So it’s like your perfect Manhattan. It’s much more mixed, and you can have a very wealthy neighborhood next to a neighborhood that is not wealthy at all. So you have to navigate all of that hyper locality aspect. And then once you set those polygons, you’re basically delivering inside those zones. And then what I mean by local is that you also have to integrate with the stores inside that specific zone. You have to position the couriers inside that specific zone.
But once you do that, the marketplace starts to thrive because the customer experience is amazing. 10, 30 minute delivery. The courier experience is amazing because they’re super productive. You don’t have to do a lot of long distance. Structurally, that also means that you can deliver in a very affordable way. As a customer, you’re paying $1 to $1,50, then you’re still allowing the couriers to make two times the minimum wage. So the model works really, really well. And then you have to have all of the dimension of catalog really, really tied into what you do. And by that, I mean all of those integrations with inventories, with catalogs as real time as possible. So that, in my view, is a very, very hard thing to replicate. That’s why I have this idea that if you look at all of the eCommerce companies in the world, the majority of them that deal with, let’s say, infrastructure or the ones that really thrive in their specific markets tend to be local with very few exceptions. And the exceptions are much more the companies that do drop shipping or that are exporting from China into the world.
But if you really understand that you gotta deliver fast, the companies need to build a local presence, and it’s hard for a foreign company to actually replicate this because of the level of depth at which you need to operate.
5. Eternal Change for No Energy: A Time Crystal Finally Made Real – Natalie Wolchover
A novel phase of matter that physicists have strived to realize for many years, a time crystal is an object whose parts move in a regular, repeating cycle, sustaining this constant change without burning any energy.
“The consequence is amazing: You evade the second law of thermodynamics,” said Roderich Moessner, director of the Max Planck Institute for the Physics of Complex Systems in Dresden, Germany, and a co-author on the Google paper. That’s the law that says disorder always increases.
Time crystals are also the first objects to spontaneously break “time-translation symmetry,” the usual rule that a stable object will remain the same throughout time. A time crystal is both stable and ever-changing, with special moments that come at periodic intervals in time.
The time crystal is a new category of phases of matter, expanding the definition of what a phase is. All other known phases, like water or ice, are in thermal equilibrium: Their constituent atoms have settled into the state with the lowest energy permitted by the ambient temperature, and their properties don’t change with time. The time crystal is the first “out-of-equilibrium” phase: It has order and perfect stability despite being in an excited and evolving state.
6. What’s an API? – Justin Gage
An API is a group of logic that takes a specific input and gives you a specific output. A few examples:
- If you give the Google Maps API an address as an input, it gives you back that address’s lat / long coordinates as an output
- If you give the Javascript Array.Sort API a group of numbers as an input, it sorts those numbers as an output
- If you give the Lyft Driver API a start and finish address as an input, it finds the best driver as an output (I’m guessing)
When engineers build modules of code to do specific things, they clearly define what inputs those modules take and what outputs they produce: that’s all an API really is. When you give an API a bunch of inputs to get the outputs you want, it’s called calling the API. Like calling your grandma.
Inputs
An API will usually tell you exactly what kind of input it takes. If you tried putting your name into the Google Maps API as an input, that wouldn’t work very well; it’s designed to do a very specific task (translate address to coordinates) and henceforth it only works with very specific types of data. Some APIs will get really into the weeds on inputs, and might ask you to format that address in a specific way.
Outputs
Just like with inputs, APIs give you really specific outputs. Assuming you give the Google Maps API the right input (an address), it will always give you back coordinates in the exact same format. There’s also very specific error handling: if the API can’t find coordinates for the address you put it, it will tell you exactly why.
7. Jim Ling – Chris Tucker
Through the Sixties and early Seventies, conglomerate-in Texas and throughout the country -meant Jim Ling, creator of the huge Dallas-based Ling-Temco-Vought (LTV). How big was LTV? Massive.
At its peak in 1969, Ling’s company controlled Wilson, the nation’s largest producer of sporting goods and its third-largest meatpacker; Jones and Laughlin, America’s sixth-largest steel company; Braniff, the eighth-largest airline; and Vought, the eighth-largest defense contractor. Toss in a string of other companies with their innumerable subsidiaries and you have Ling-Temco-Vought, at the time the 14th-largest company in America.
How big was LTV? So big, some say, that only the U.S. government was big enough to stop it. Calling LTV “a force destructive of competition,” the Justice Department filed an antitrust suit to force LTV to give up Jones and Laughlin. Ling, not his lawyers, devised a settlement to placate the feds.
How big was LTV? So vast, according to some observers, that not even the man who created it really understood its inner workings. And Ling, an idiosyncratic genius, was finally caught up in a swirl of circumstances-market reversals, government harassment, personal conflicts with associates-that led to the famed Palace Revolt of 1970, when Ling was booted out of the company he built.
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 no vested interest in them. Holdings are subject to change at any time.
