What We’re Reading (Week Ending 16 October 2022) - 16 Oct 2022
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 16 October 2022):
1. The World According to Xi Jinping – Kevin Rudd
Xi has brought that era of pragmatic, nonideological governance to a crashing halt. In its place, he has developed a new form of Marxist nationalism that now shapes the presentation and substance of China’s politics, economy, and foreign policy. In doing so, Xi is not constructing theoretical castles in the air to rationalize decisions that the CCP has made for other, more practical reasons. Under Xi, ideology drives policy more often than the other way around. Xi has pushed politics to the Leninist left, economics to the Marxist left, and foreign policy to the nationalist right. He has reasserted the influence and control the CCP exerts over all domains of public policy and private life, reinvigorated state-owned enterprises, and placed new restrictions on the private sector. Meanwhile, he has stoked nationalism by pursuing an increasingly assertive foreign policy, turbocharged by a Marxist-inspired belief that history is irreversibly on China’s side and that a world anchored in Chinese power would produce a more just international order. In short, Xi’s rise has meant nothing less than the return of Ideological Man.
These ideological trends are not simply a throwback to the Mao era. Xi’s worldview is more complex than Mao’s, blending ideological purity with technocratic pragmatism. Xi’s pronouncements about history, power, and justice might strike Western audiences as impenetrable or irrelevant. But the West ignores Xi’s ideological messaging at its own peril. No matter how abstract and unfamiliar his ideas might be, they are having profound effects on the real-world content of Chinese politics and foreign policy—and thus, as China’s rise continues, on the rest of the world…
…In 2013, barely five months after his appointment as party general secretary, Xi gave an address to the Central Conference on Ideology and Propaganda, a gathering of top party leaders in Beijing. The contents of the speech were not reported at the time but were leaked three months later and published by China Digital Times. The speech offers an unfiltered portrait of Xi’s deepest political convictions. In it, he dwells on the risks of the ideological decay that led to the collapse of Soviet communism, the West’s role in fomenting ideological division within China, and the need to crack down on all forms of dissent. “The disintegration of a regime often starts from the ideological area,” Xi said. “Political unrest and regime change may occur overnight, but ideological evolution is a long-term process,” he continued, warning that once “ideological defenses are breached, other defenses become very difficult to hold.” But the CCP “has justice on our side,” he assured his audience, encouraging them not to be “evasive, bashful, or mince our words” in dealing with Western countries, whose goal is “to vie with us for the battlefields of people’s hearts and for the masses, and in the end to overthrow the leadership of the CCP and China’s socialist system.”
This meant cracking down on anyone “harboring dissent and discord” and demanding that CCP members demonstrate loyalty not only to the party but also to Xi personally. What followed was an internal “cleansing” of the CCP, accomplished by purging any perceived political or institutional opposition, in large part through a decadelong anticorruption campaign that had begun even before the speech. A “rectification campaign” brought another round of purges to the party’s political and legal affairs apparatus. Xi also reasserted party control over the People’s Liberation Army and the People’s Armed Police and centralized China’s cybersecurity and surveillance systems. Finally, in 2019, Xi introduced a party-wide education campaign titled “Don’t Forget the Party’s Original Purpose, Keep the Mission in Mind.” According to an official document announcing the initiative, its goal was for party members “to gain theoretical learning and to be baptized in ideology and politics.” By around the end of his first term, it had become clear that Xi sought nothing less than to transform the CCP into the high church of a revitalized, secular faith…
…But as the party apparatus increasingly asserted control of the economic departments of the state, China’s policy debates on the relative roles of the state and the market became increasingly ideological. Xi also progressively lost confidence in market economics following the global financial crisis of 2008 and China’s homegrown financial crisis of 2015, which was sparked by the bursting of a stock market bubble and led to a nearly 50 percent collapse in the value of Chinese stocks before the markets finally settled in 2016.
China’s economic policy trajectory under Xi—from a consensus in support of market reforms to an embrace of increased party and state intervention—has therefore been uneven, contested, and at times contradictory. Indeed, in late 2013, less than six months after Xi’s revivalist sermon on ideology and propaganda, the Central Committee of the CCP (the top several hundred leaders of the party) adopted a remarkably reformist document on the economy, starkly titled “The Decision.” It outlined a series of policy measures that would allow the market to play “the decisive role” in the allocation of resources in the economy. But the rollout of these policies slowed to a standstill in 2015, while state-owned enterprises received trillions of dollars in investment from “industry guidance funds” between 2015 and 2021—a massive infusion of government support that brought the Chinese state roaring back to the center of economic policy…
…Xi’s ideological beliefs have committed China to the goal of building what Xi describes as a “fairer and more just” international system—one anchored in Chinese power rather than American power and one that reflects norms more consistent with Marxist-Leninist values. For that reason, China has pushed to strip UN resolutions of all references to universal human rights and has built a new set of China-centric international institutions, such as the Belt and Road Initiative, the Asian Infrastructure Investment Bank, and the Shanghai Cooperation Organization, to rival and eventually replace Western-dominated ones. A Marxist-Leninist quest for a “more just” world also shapes China’s promotion of its own national development model across the global South as an alternative to the “Washington consensus” of free markets and democratic governance. And Beijing has offered a ready supply of surveillance technologies, police training, and intelligence collaboration to countries around the world, such as Ecuador, Uzbekistan, and Zimbabwe, that have eschewed the classical Western liberal-democratic model.
These changes in Chinese foreign and security policy were signaled well in advance by earlier shifts in Xi’s ideological line. Using what Western audiences might see as obscure, theoretical mumbo jumbo, Xi has communicated to the party a crystal-clear message: China is much more powerful than it ever was, and he intends to use this power to change the course of history…
…But Xi is not completely secure. His Achilles’ heel is the economy. Xi’s Marxist vision of greater party control over the private sector, an expanding role for state-owned enterprises and industrial policy, and the quest for “common prosperity” through redistribution is likely to shrink economic growth over time. That is because declining business confidence will reduce private fixed capital investment in response to growing perceptions of political and regulatory risk; after all, what the state gives, the state can also take away. This applies in particular to the technology, finance, and property sectors, which have been China’s principal domestic growth engines for the last two decades. China’s attractiveness to foreign investors has also declined because of supply chain uncertainty and the impact of the new doctrines of national economic self-sufficiency. At home, China’s business elites have been spooked by the anticorruption campaign, the arbitrary nature of the party-controlled judicial system, and a growing number of high-profile tech titans falling out of political favor. And China has yet to figure out how to leave behind its “zero covid” strategy, which has compounded the country’s economic slowdown.
Adding to these weaknesses are a number of long-term structural trends: a rapidly aging population, a shrinking workforce, low productivity growth, and high levels of debt shared between state and private financial institutions. Whereas the CCP had once expected average annual growth to remain around six percent for the rest of the 2020s before slowing to around four percent for the 2030s, some analysts now worry that in the absence of a radical course correction, the economy will soon begin to stagnate, topping out at around three percent in the 2020s before falling to around two percent in the 2030s. As a result, China might enter the 2030s still locked in the so-called middle-income trap, with an economy smaller or only marginally larger than that of the United States. For China’s leadership, that outcome would have profound consequences. If employment and income growth falter, China’s budget would come under pressure, forcing the CCP to choose between providing health care, elder care, and pension entitlements on the one hand and pursuing national security goals, industrial policy, and the Belt and Road Initiative on the other. Meanwhile, China’s gravitational pull on the rest of the global economy would be called into question. The debate over whether the world has already witnessed “peak China” is only just beginning, and when it comes to China’s long-term growth, the jury is still out.
2. Discovering novel algorithms with AlphaTensor – Alhussein Fawzi, Matej Balog, Bernardino Romera-Paredes, Demis Hassabis, and Pushmeet Kohli
Algorithms have helped mathematicians perform fundamental operations for thousands of years. The ancient Egyptians created an algorithm to multiply two numbers without requiring a multiplication table, and Greek mathematician Euclid described an algorithm to compute the greatest common divisor, which is still in use today.
During the Islamic Golden Age, Persian mathematician Muhammad ibn Musa al-Khwarizmi designed new algorithms to solve linear and quadratic equations. In fact, al-Khwarizmi’s name, translated into Latin as Algoritmi, led to the term algorithm. But, despite the familiarity with algorithms today – used throughout society from classroom algebra to cutting edge scientific research – the process of discovering new algorithms is incredibly difficult, and an example of the amazing reasoning abilities of the human mind…
…For centuries, mathematicians believed that the standard matrix multiplication algorithm was the best one could achieve in terms of efficiency. But in 1969, German mathematician Volker Strassen shocked the mathematical community by showing that better algorithms do exist.
Through studying very small matrices (size 2×2), he discovered an ingenious way of combining the entries of the matrices to yield a faster algorithm. Despite decades of research following Strassen’s breakthrough, larger versions of this problem have remained unsolved – to the extent that it’s not known how efficiently it’s possible to multiply two matrices that are as small as 3×3.
In our paper, we explored how modern AI techniques could advance the automatic discovery of new matrix multiplication algorithms. Building on the progress of human intuition, AlphaTensor discovered algorithms that are more efficient than the state of the art for many matrix sizes. Our AI-designed algorithms outperform human-designed ones, which is a major step forward in the field of algorithmic discovery.
First, we converted the problem of finding efficient algorithms for matrix multiplication into a single-player game. In this game, the board is a three-dimensional tensor (array of numbers), capturing how far from correct the current algorithm is. Through a set of allowed moves, corresponding to algorithm instructions, the player attempts to modify the tensor and zero out its entries. When the player manages to do so, this results in a provably correct matrix multiplication algorithm for any pair of matrices, and its efficiency is captured by the number of steps taken to zero out the tensor.
This game is incredibly challenging – the number of possible algorithms to consider is much greater than the number of atoms in the universe, even for small cases of matrix multiplication. Compared to the game of Go, which remained a challenge for AI for decades, the number of possible moves at each step of our game is 30 orders of magnitude larger (above 1033 for one of the settings we consider).
Essentially, to play this game well, one needs to identify the tiniest of needles in a gigantic haystack of possibilities. To tackle the challenges of this domain, which significantly departs from traditional games, we developed multiple crucial components including a novel neural network architecture that incorporates problem-specific inductive biases, a procedure to generate useful synthetic data, and a recipe to leverage symmetries of the problem.
We then trained an AlphaTensor agent using reinforcement learning to play the game, starting without any knowledge about existing matrix multiplication algorithms. Through learning, AlphaTensor gradually improves over time, re-discovering historical fast matrix multiplication algorithms such as Strassen’s, eventually surpassing the realm of human intuition and discovering algorithms faster than previously known.
For example, if the traditional algorithm taught in school multiplies a 4×5 by 5×5 matrix using 100 multiplications, and this number was reduced to 80 with human ingenuity, AlphaTensor has found algorithms that do the same operation using just 76 multiplications…
…Because matrix multiplication is a core component in many computational tasks, spanning computer graphics, digital communications, neural network training, and scientific computing, AlphaTensor-discovered algorithms could make computations in these fields significantly more efficient. AlphaTensor’s flexibility to consider any kind of objective could also spur new applications for designing algorithms that optimise metrics such as energy usage and numerical stability, helping prevent small rounding errors from snowballing as an algorithm works.
3. This Is Life in the Metaverse – Kashmir Hill
Horizon is “Meta’s universe in the metaverse,” said Vishal Shah, the executive in charge of “the spatial co-present version of the internet” that the company formerly known as Facebook has staked its future on. Meta has an impressive track record, fundamentally changing the way its nearly three billion users socialize, share information and waste time…
…There is no shortage of skeptics mocking Meta’s plans, but how many of them have actually experienced the metaverse? I decided to try it out, defining, for my purposes, the metaverse as Horizon, Meta’s virtual platform for events, business meetings and user-constructed spaces.
My goal was to visit at every hour of the day and night, all 24 of them at least once, to learn the ebbs and flows of Horizon and to meet the metaverse’s earliest adopters. I gave up television, books and a lot of sleep over the past few months to spend dozens of hours as an animated, floating, legless version of myself.
I wanted to understand who was currently there and why, and whether the rest of us would ever want to join them…
…Sam Ferrer, 25, an illustrator based in the New York metropolitan area, wears golden, owl-like spectacles just like her avatar, Lil Nihilist. She told me that the metaverse had helped her through a difficult time in her life.
“If I never picked up a V.R. headset when I did, I might be dead now,” she said one night in the Plaza.
Ms. Ferrer graduated from college at the beginning of the pandemic and moved across the country to where she had no friends. In December 2020, isolated and lonely, she walked into an Amazon 4-Star store and spontaneously bought a Quest 2. She started social networking in virtual reality almost every night, first on the apps AltSpace and vTime before moving to Horizon.
“I like from 1 a.m. to 3 a.m.,” she said, of when the metaverse is at its peak. She lies under a weighted blanket in her bed, with a snack and a drink, spending hours chatting with friends in Horizon. She plugs her headset into a wall outlet so that the battery doesn’t run out, ending the session when she is too tired to continue.
This pattern is extremely common among the metaverse’s early adopters, who don’t want to be limited to the two hours allowed by the headset’s built-in battery. The World Health Organization says electromagnetic fields emitted by electronic devices such as smartphones do not pose a health risk. A Meta representative said the headset was safe to use while plugged in.
Though I am not a night owl, and had to significantly alter my sleep schedule to go to the metaverse in the wee hours, that is when I had the most interesting conversations, with artists and technologists from across a wide sweep of time zones. Many of them were there for long hours at a time. A beret-wearing avatar named I Love My Cat expressed concern about how long people wore their headsets. She was a “community guide,” one of the many moderators hired by Meta to hang out in the Plaza, answer questions and enforce the company’s code of conduct. She took a break every hour or so during her eight-hour shift.
“I was talking to someone once who had been on for more than 12 hours,” she told me. “I don’t know how they do it.”
It’s easy to lose track of time in Horizon. Like a casino, there are no clocks on the walls. Ms. Ferrer said it was what she did now instead of watching TV or scrolling TikTok.
Horizon’s cartoonish graphics have been widely mocked, but Ms. Ferrer likes the visual simplicity. Allowing users to shed the distractions of the physical world, Horizon offers a meeting of the minds, Ms. Ferrer said, and conversations get deep quickly.
“It’s extremely refreshing to be talked to and to be seen for who I am versus how I look,” she said. “I’m mentally cautious about not making my whole life about it. I still go out to bars or whatever and meet people, but I always have this to come back to.”
Horizon Worlds reminded me of the AOL chat rooms from my earliest days on the internet, in the 1990s — except here I was making eye contact with the people I’d met, seeing their movements and hearing their voices…
…Despite Meta’s warnings, every time I went into the metaverse, I inevitably ran into children. During one of my first visits to the Plaza, on a Monday afternoon in July, a guy in a gray blazer named Dustin excitedly told me that he had joined Horizon the day before and had spent eight straight hours there. He invited me to play a zombie-shooting game in a shopping mall. When tiny versions of the blocky, green zombies appeared, I exclaimed, “They’re little kids!”
“So am I,” he said, before adding, “Well, not that little.”
Dustin told me that he was 11, squarely in the camp of people whose brains were more threatened by the device than by the undead. As other journalists have discovered, there are tons of young people running around Horizon. On the upside for Meta, this means the company finally has a product that appeals to the generation that has largely rejected Instagram and Facebook. Though Horizon is an 18-and-over app, community guides told me that they kicked out only users younger than 13, and only if users explicitly revealed their age…
…Meta’s chief technology officer, Andrew Bosworth, has said the company wants “almost Disney levels of safety.” Horizon has user tools designed to deter virtual assaults and threatening behavior, including a personal boundary that keeps other avatars from getting too close; a “safe mode” that allows a user to escape into a solitary confinement cell; a mute function that can silence another avatar; and a polling function that can gauge whether a group feels a disruptive user should be kicked out.
Meta also asks Horizon users to consent to having their audio recorded. (If they refuse, they can’t talk in Horizon.) Audio is stored on a user’s headset, according to the company, and sent to Meta only if someone files a report, about harassment, for example. Users can be barred for a few hours or even for a month, based on those captured conversations…
…The Soapstone Comedy Club was created by Aaron Sorrels, who goes by the handle Unemployed Alcoholic. After quitting a marketing job to deal with his alcoholism, Mr. Sorrels became a comedian. When the pandemic hit, and he could no longer perform stand-up in his home state of Michigan, he was adrift until hearing that Mr. Zuckerberg was spending billions on the metaverse.
“This is going to be something, and now is the time to get involved,” Mr. Sorrels recalled thinking. He bought three Quest headsets with plans to beam in comedians, but he found more success building a world for amateurs to take the stage.
His club now gets up to 13,000 visitors weekly. He accepts donations from supporters, who get access to a private lounge, and he is among a small group of creators who Meta allows to monetize their worlds. Mr. Zuckerberg recently name-checked the Soapstone during an appearance on Joe Rogan’s podcast, which has millions more listeners than Horizon’s last confirmed tally of hundreds of thousands of users. Mr. Sorrels said running “a cartoon comedy club in a pretend land” was now his full-time job.
I started chatting with a man sitting next to me in the club named Malefic, who had a goatee and earrings, though his real-world self, Joe Cronin, had neither. Six hours earlier, Mr. Cronin, 30, a married programmer based in Pennsylvania with two small children, had been playing video games online with friends. When they went to sleep, he came to Horizon, his headset plugged into the wall, to decompress and socialize after an adrenaline-filled session. Horizon is where gamers go to chill out, like skiers at an après-ski bar.
“When you hear the birds chirping, you know you’re in trouble,” said Mr. Cronin, who liked the ability to “go out” via his Quest 2. “You don’t even have to get up and get dressed and get yourself all primped up. You just put on your headset. I’m legit in pajamas right now.”…
…Finding the time to go into the metaverse outside work hours was challenging. At one point, I wore my headset while exercising on a stationary bike. I managed it for 40 minutes, though my eye display fogged up, and I was breathing more heavily than I generally preferred to do when meeting new people. What I was not willing to do was to clock hours sleeping in the headset.
“Oh, that’s me. I sleep in my headset,” said Sam, a redhead in a blazer, one night in the Soapstone. “Imagine waking up in the most amazing place in the universe.”
I thought she was kidding, but she insisted that she was serious. “What does your bedroom look like? Is it where you want to live the rest of your life?” she asked.
I told her I liked my bedroom. She persisted: “That’s where you want to die?”
I said that I didn’t want to die anytime soon but that I did like my bedroom…
…One of my favorite experiences in Horizon was Surrounded, a comedy show produced by Just For Laughs and filmed at its Montreal festival in July. Seven professional comedians, including Pete Holmes and Nicole Byer, had performed in the center of a small, live audience — Horizon allowed me to join it. Attending real-world events in the metaverse could have wide appeal.
“I’ve never heard you laugh so hard,” my husband said, when I took off my headset.
But the companies pushing the metaverse have work to do to make it as “seamless” as their evangelists describe, including making the headset lighter. I tried to get colleagues, including my editor, to meet me in Horizon as I worked on this story, but I rarely succeeded. Zoom was just easier.
4. Your Life is Driven by Network Effects – James Currier
Adam Smith published The Wealth of Nations in 1776. In it, he envisioned markets with thousands of individuals pursuing their own independent self-interest as creating an “invisible hand” that unintentionally promoted the good of society. This “free-market model” allowed him to point out the math and mechanisms behind the emergence of large-scale social order.
Here we want to do the reverse — to use a “network model” to characterize the large scale human social orders and explain how they impact each of us with an often unseen hand.
In short, the networks of human connections in your life create a force that guides you down a path not always fully of your intention, through the mechanism of 100s of small interactions.
Further, this “network force” compounds over time. The longer your relationships, cliques, and communities persist, the more they shape your destiny.
Sociologists regard the evolution of our lives as resulting from a combination of our own choices and preference and the force of our surrounding social network structure.
Observing our own lives, and watching as 100s of founders move through their own journeys, we would go even further in the belief that it’s network forces that influence the majority of how our lives turn out. And 90% of those network forces are established in just 7 crossroads or pivotal life events.
Given the power of network forces on your life, they should be the primary consideration when making decisions at these crossroads. Although it may feel like a complex decision in the moment, they become simplified when seen primarily through the lens of joining and forming new networks and changing the network topology of your life.
The world seems chaotic. But it’s not. Underlying all this apparent complexity is some wonderfully simple math. Follow the math to your destination.
Understanding the primacy of networks will give you a superpower to see what others do not and navigate life’s big decisions more effectively…
…Did you know the frequency of the words you use are determined by an underlying mathematical pattern?
What’s stranger is that same mathematical pattern seems to determine the sizes of cities within a country, income distributions of people within an economy, income distribution among companies, how much traffic goes to different websites on the Internet, how often last names are used in a society, the number of phone calls people receive, the number of people who die in wars.
This mathematical pattern is a power law known as Zipf’s Law. It was first noticed as a principle of language. About 100 years ago, physicists and linguists discovered that the second most commonly used word in English is used one half as much as the most used word. The third most used word is used one third as much as the most used word, so forth down through all the words in a given language.
This law turns out to hold not just in languages, but in many other cases. The world looks complex or chaotic on the surface, particularly in social matters and perhaps your own life, but underlying what we see are simple rules of math.
The underlying mechanism for Zipf’s law is not yet agreed on but the main hypothesis is that it’s an outgrowth of the Principle of Least Effort. In short, systems that survive and operate at steady state optimize for efficiency. When they do, things tend to look like Zipf distributions.
Related to your life, an even stranger implication of Zipf’s Law is that unconscious network forces will act on anyone or any company that gets to be an outlier in one or more of these distributions. Bringing you back in line — or bringing another person or company back in line to make room for your new numbers — will happen without any conscious or intentional force at play.
This is a bit spooky. It means that the number of inhabitants of NYC constrains and influences the number of inhabitants of LA, Seattle, Chatanooga and all American cities in some unseen way because they are all part of the network of US cities. Even though we are each making what feel like independent decisions about where to live, it seems that we are part of this network unconsciously influencing people to keep American cities on the Zipf distribution line. I am one of those people being pushed around. And so are you.
That also implies that my income is somehow influenced by other incomes that surround me as my income fits into the Zipf Law curve. And my country’s GDP is influenced by other countries’ GDPs.
If math is underlying all this, what else in my life is being affected by the larger social order?
5. Little Rules About Big Things – Morgan Housel
There is rarely more or less economic uncertainty; just changes in how ignorant people are to potential risks.
You should obsess over risks that do permanent damage and care little about risks that do temporary harm, but the opposite is more common.
The only way to build wealth is to have a gap between your ego and your income…
…The inability to forecast the past has no impact on our desire to forecast the future. Certainty is so valuable that we’ll never give up the quest for it, and most people couldn’t get out of bed in the morning if they were honest about how uncertain the future is.
Having no FOMO might be the most important investing skill…
…People have vastly different desires, except for three things: Respect, feeling useful, and control over their time. Those are nearly universal.
The market is rational but investors play different games and those games look irrational to people playing a different game…
…A big takeaway from economic history is that the past wasn’t as good as you remember, the present isn’t as bad as you think, and the future will be better than you anticipate.
Most assholes are going through something terrible in their life. People hide their skeletons, which requires blind forgiveness of their quirks and moods because you’re unaware of what they’re dealing with.
History is driven by surprising events but forecasting is driven by obvious ones…
…Nothing too good or too bad stays that way forever, because great times plant the seeds of their own destruction through complacency and leverage, and bad times plant the seeds of their own turnaround through opportunity and panic-driven problem-solving…
…Napoleon’s definition of a military genius was “The man who can do the average thing when everyone else around him is losing his mind.” It’s the same in business and investing…
…Everyone is making a bet on an unknown future. It’s only called speculation when you disagree with someone else’s bet.
There are two types of information: stuff you’ll still care about in the future, and stuff that matters less and less over time. Long-term vs. expiring knowledge. It’s critical to identify which is which when you come across something new…
…Risk is what you can’t see, think only happens to other people, aren’t paying attention to, are willfully ignoring, and isn’t in the news. A little surprise usually does more damage than something big that’s been in the news for months…
…Once-in-a-century events happen all the time because lots of unrelated things can go wrong. If there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are … pretty good. It’s why Arnold Toynbee says history is “just one damn thing after another.”…
…More people wake up every morning wanting to solve problems than wake up looking to cause harm. But people who cause harm get the most attention. So slow progress amid a drumbeat of bad news is the normal state of affairs.
6. Vannevar Bush: Engineer of the American Century – David Senra
[00:10:06] So I just want to go through a couple of these things just on one page to just give you an idea. Because, guess, the important part here is like studying Edwin Land and studying Bush, one of the main themes is they both had a profound belief in the individual capacity for greatness. So the note I left myself on this page was, “This is more on Bush’s philosophy. A lot of this sounds like Edwin Land.” And so it says, “He was a contrarian, skeptical of easy solutions yet willing to tackle tough problems without a compass. He was a pragmatist who thought that knowledge arose from a physical encounter with a stubborn reality. He was suspicious of big institutions.” Every single thing I’m saying is what Bush believed, but also Edwin Land believed the exact same thing.
They objected to the pernicious effects of an increasingly bureaucratic society and the potential for mass mediocrity. And that’s not hyperbolic. Edwin Land is a two-time Harvard dropout. He winds up going and MIT asks him to give a speech. This, I think, happened in the 1950s. And Land was worried that our educational institutions at that time got so bureaucratic, he said that a student would get a message — he’s talking about MIT, for God’s sake. He said, “A student will get a message that a secret dream of greatness is a pipe dream.” And then he made the point that there’s little connection between the way they’re being taught and how the world actually works.
And he says, “He asked with passion.” This is Edwin Land speaking. “If this is preparation for life, where in the world will a person ever encounter this curious sequence of prepared talks and prepared questions, questions to which the answers are known?” And so Land’s point is, if they are able to survive this educational indoctrination, they may be good but they’ll never be great. And so you see in Bush’s — the way Bush would think about that is like we have — we’re essentially mass-producing mediocrity. And finally, I believe that they both share that’s related to what you and I are talking about right now. He believes that the individual was still of paramount importance…
…Why I think it’s important, because a lot — the reason I started studying him, and I told you this before on other podcast, is like if you study, there’s this gigantic economic explosion in American history that happens during and after World War II, right?
[00:14:03] And when you’re reading books about these founders, and I probably read, I don’t know, 30, 40, 50 of them, Bush is in every single one. His writings and his ideas were influential to generations of technology company founders. And then this book goes into more of how he viewed the world. “Bush saw the engineer as a pragmatic polymath.” And he’s going to describe here what that means. “The engineer, he once wrote, was not a physicist, a businessman, or an inventor, but someone who would acquire some of the skills and knowledge of each of these and be capable of successfully developing and applying new devices on the grand scale.” And that’s important to you and I because he saw entrepreneurs as the people to organize these inputs and to convert the inputs into an actual practical product that could be used by other people.
“This realization that the engineer was the engine of the 20th-century capitalism qualified Bush as the godfather of high technology and a leading proponent of industrial vitality through innovation. He co-founded one company and inspired many others that form the nucleus of the Route 128 high-tech cluster near Boston at the time in American history. Bush’s keen appreciation on the value of entrepreneurs made him a lonely advocate for economic dynamism when most economists welcome the concurrent rise of big business and big government.”
That’s an important point to pause on. He’s having these views. These views are completely — he’s having these views in 1950, it’s completely opposite to the world that he’s living in. And it’s why the author at the very beginning called him a contrarian. “He was among the few who realized the curative power of new ventures. The best way to limit monopoly economic power, he insisted, was through the advent of small, new industrial units,” what we call start-ups today, “for if these latter have half a chance, they can cut rings around the great stodgy businesses.” And so not only did he have opinions, but he forcefully argued those opinions in writing, in speeches, in actions…
…This part actually reminded me, all the way back on Founders #103, I read the biography of Hetty Green, who was the richest woman in America at the time. And she came from a family of whalers. She actually grew up in New Bedford, Massachusetts. And in that book, the author makes the argument that New Bedford, Massachusetts, was the richest city per capita in the world at the time, and that was a direct result of the fact that the whaling industry was so large at that time. So here, we see — this is absolutely incredible. When Bush is growing up in New England as well, he’s in Cape Cod, and for entertainment, as a boy, he would read old whaling logs over and over. And this is why. He said the logs taught him about leadership and group dynamics. “The relations between the captain and the mate during voyages that lasted for years strained human nature to the utmost,” he wrote. He learned that successful captains were autocratic.
Let me actually pause in the middle of this paragraph. So he says he learned the successful captains were autocratic. It doesn’t say how old Bush is when he’s doing this, but let’s say he’s maybe 10 or 15 years old. That would mean since he was born in 1890, he’s doing all this reading, let’s say, 1900, 1905, somewhere in there. About 110, 120 years later, I’m doing all this reading, too. Instead of reading old whaling logs over and over and reading biographies of entrepreneurs over and over, I have come across — like that’s the same conclusion that I’ve come to.
He learned that successful captains were autocratic. And so let’s define that word, a ruler who has absolute power. You and I have talked about that before, the best founders, they run their companies; they’re dictatorships, they’re not democracies. Hopefully, they’ve benevolent dictatorships…
…”He had barely enough money for 1 year of study, and he wished to avoid dragging his new wife into a life of penury.” So he didn’t have enough money. So he said, hey, why not work in 2 jobs to get by. One job, he’s on the faculty at Tufts, and then he’s also working at this company called AMRAD, which is American Radio and Research Corporation. And I mentioned this last week, but the reason that’s important is because this is — out of AMRAD comes the invention of these radio tubes. That’s the foundation for this gigantic company that’s going to make Bush wealthy called Raytheon. And this is an example of being at the right place at the right time with the right set of skills.
“They timed their move well. In 1924, the number of homes with radios tripled. Within 2 years, the first nationwide radio networks were in place. Raytheon’s radio tubes were destined for success. They brought down the price of home radios and made them easier to use. They took away the sense that mastering a radio required a zeal for gadgetry. The ability to plug a radio into a wall socket rather than rely on unwielding batteries domesticated the radio. It was now no more threatening than an electric lamp.” It will never cease to amaze me how all of these ideas fit together.
[00:23:53] So this jumped out at me. I had just recently reread Becoming Steve Jobs, which to me is the best single biography on the life of Steve Jobs that I’ve read so far. I read it for the second time, made another podcast on it. That’s episode 265. In that book, there is this like 200-word mini-speech that Steve gives off the cuff. I think he’s like 22 years old. The reporter writing this article finds him at a computer show. And he uses that exact terminology. So they say, hey, this is what Raytheon did. It gave — it brought down price of home radios, made it easier to use, took away the sense that mastering a radio required a zeal for gadgetry. Very similar to what Steve Jobs thought, like, hey, why are we building computers for hobbyists? For every 1 hobbyists, there’s 1,000 people that just want to buy a computer from a store, plug it in and use it. The ability to plug a radio into a wall socket. It’s the same idea. Rather than rely on unwielding batteries, domesticated the radio. It was now no more threatening than an electric lamp. This is incredible.
So let’s go — I’m going to read the whole 220 forewords because it was included in the book. Because it says, “It gives you an idea of Steve’s fully formed verbal mastery and the fact that he always had this verbal mastery and magnetic charisma even when he was young.” And so the magazine reporter comes to a young Steve Jobs at the computer fair at the Apple computer booth, right? And this is what Steve says, “I wish we had these personal machines when I was growing up,” Jobs tells him. That’s hilarious considering he’s still in the process of growing up when he’s talking about this, right? It’s just hilarious.
Jobs tells him before continuing on for a total of 224 words. “People have been hearing all sorts of things about computers during the past 10 years through the media. Supposedly computers have been controlling various aspects of their lives. Yet in spite of that, most adults have no idea what a computer really is, what it can or can’t do. Now for the first time, people can actually buy a computer for the price of a good stereo, interact with it and find out all about it. It’s analogist to the camera. There are thousands of people across the country taking photography courses. Didn’t have to be professional photographers. They just want to understand what the photographic process is all about.
Same with computers. We started a little personal computer manufacturing company in a garage in Los Altos in 1976. Now we’re the largest personal computer company in the world. We make what we think of as the Rolls-Royce of personal computers.” Here is the punchline, the reason I’m reading this to you, his next sentence. “It is a domesticated computer.”
[00:26:17] That is so wow to me. I love how these ideas all connect. And the crazy thing is this is what speaks to the importance of rereading books. I read this book for the first time, I don’t know, maybe a year ago, a year and a half, I can’t actually remember. Just like I read the Becoming Steve Jobs probably 2 or 3 years ago, the fact that then I pick up the book, the Becoming Steve Jobs book, years later or 2 or 3 years later, whatever it is, reread it, reminded of this fantastic excerpt that’s in that book of a 22- or 21-year-old Steve Jobs. Then a few weeks later or a month later or 2 months later, I don’t actually remember when it was, I picked this book up again, reread it, and like, “Oh, wow, where have I heard the word domesticated? It’s domesticated radio. What the hell? Why is my brain going crazy when I read that?” And I’m like, “I’m pretty sure somebody said that about they domesticated the computer. So who the hell said it?
Then I go to Readwise where I have 20,000 highlights from all these books and all my notes and this crazy database on the history of entrepreneurship that I’m not sure anybody else in the f**** world has. I type in the word domesticated computer and boom. I immediately see the ideas, the philosophy and the communication skills of one of history’s greatest entrepreneurs. That is wild. That is how you know it is a good idea. If you could take something complex and a little bit scary and domesticate it, make it easier for the customer to immediately get a benefit out of. When you do that, you explode the f**** market. The size of the radio market before this invention was tiny compared to what it is now. What is the size of the computer market in 1976, the personal computer market in 1976 compared to now? That is an incredibly powerful idea, domestication. And I would have never ever, ever, ever come up with that on my own. And these two separate experiences are separated by 50 years. This is happening in 1924 and that Steve Jobs quote is from 1977. That gets me fired up…
…So this is happening in 1938. The looming international crisis ended Bush’s days as a world-class inventor. And then he does something unbelievably intelligent here. He moves to DC — to Washington, D.C,, in anticipation before he’s asked to do this.
[00:42:02] And this is why. Bush could not tell if the U.S. would be drawn into the war, but he considered moving to the nation’s capital in case it was. “Washington is a central point,” he thought, and “I might be useful there in time of war.” And this is crazy. He didn’t want to do this. He just thought it was the right thing to do. He did not relish the prospect of living so far from his cherished New England. “Washington struck him as alien ground, and even visiting the city was an irritation to him.”
And then we see this repetition. He’s repeating this idea that’s throughout the entire book. It applies to war, education, company building. This is happening — this chapter is on 1939 and 1940, so I think this is when he said it. “It is being realized with a thought that the world is probably going to be ruled by those who know how in the fullest sense to apply science.” And so in the early days of World War 2 before America jumps in, Charles Lindbergh, the famous aviator, gives this speech — you probably know his name because he actually was the first one to make that first nonstop flight over the Atlantic. I think he flew from like New York to Paris.
But anyway, he gives a speech saying, “Hey, the German Air Force are just so much further ahead. There’s no way we can compete with them.” I’ve read it in a bunch of different books that people thought he was like a Nazi sympathizer. I have no idea. I haven’t looked into it. But the reason I’m bringing this to your attention is because I just love Van Bush’s response. His response to an enemy with superior technology, “All right, cool. We’re just going to have to get smarter.” I absolutely love this guy. Lindbergh left a mark on Bush who did not easily accept influences. Lindbergh showed such respect for German air power that he usually convinced listeners that the Nazi should be granted a wide berth. But Bush reacted differently to Lindbergh’s scare tactics. He was impelled to action by the very threat which Lindbergh so forcefully presented.
This is — I know I’ve repeated this over and over again, but this is a main trait of Bush that we have to get in. He likes to fight. Not one to retreat from a fight, Bush felt the country could keep its peace only by showing its strength. He wisely asserted that every innovation in war could be stymied by a counter-innovation. He glimpsed around the curve of knowledge exuding a poise and confidence that tomorrow’s inventions would erase the advantage of today’s dominant weapons. This is way before the invention of atomic bomb; how crazy is this? He was not unnerved by Germany’s lead in military hardware, neither did he accept American weakness.
7. How great value is being created in the stock market today – Chin Hui Leong
In my book, there are two main components that can cause the share price to increase or decrease: the free cash flow per share (FCF per share) and the price-to-FCF (P/FCF) ratio.
Multiply these two factors, and you get the share price. This simple equation implies that the movement of both the FCF per share or the P/FCF ratio will have a direct impact on a company’s share price…
…The equation above provides us with a framework to decipher what is happening to shares that we own. In the short term, share price movements are usually influenced by the P/FCF ratio.
Take Apple (NASDAQ: AAPL), the manufacturer of the popular iPhone. For the first nine months of its current fiscal year (9MFY22), the Cupertino company saw its FCF rise to US$90.6 billion, up by over 19 per cent from around US$76 billion a year ago. In terms of FCF per share, it has risen from US$4.53 per share in 9MFY21 to US$5.57 per share in 9MFY22.
Yet, despite the growth in FCF per share, Apple shares have fallen by 23 per cent this year. Clearly, the disparity between the iPhone maker’s business performance (represented by its FCF per share) and its share price performance is down to a shrinking P/FCF ratio.
There is a reason for this pessimism. To say today’s stock market sentiment is sour would be an understatement. Optimism arising from the economic bounce post-Covid has been overshadowed by pessimism over rising inflation and higher interest rates.
Should the market sentiment brighten, this ratio could head higher. Yet, as we said earlier, hoping for a higher P/FCF ratio is akin to hoping that investors’ mood changes for the better, which is an unreliable way to invest. We need something more reliable to drive stock price returns.
To be sure, we are not making light of the current economic situation. Apple is facing headwinds such as supply constraints; foreign currency translation losses due to a strong US dollar; and the impact on its business in Russia.
As investors, however, we have to separate between what’s temporary and what’s permanent. Should we take these current challenges as permanent? I don’t think so.
If history has taught us anything, it’s the business growth, represented by the FCF per share, that will be far more consequential compared to a change in market sentiment. Let me explain.
When I bought shares of Apple in June 2010 at a split adjusted US$8.75 per share, the business had generated US$0.47 per share in FCF over its trailing 12 months. The stock sported a P/FCF ratio of 18.7, as shown in the accompanying table…
…Fast forward to today, and shares have risen by 16 times to around US$140 per share. What’s interesting is the wide disparity between the key drivers behind the stock price increase.
Granted, my shares did benefit from an increase in the P/FCF ratio. However, the contribution of the ratio is a mere 13 per cent over the past 12 years. The clear driver is Apple’s FCF per share which has ballooned from US$0.47 when I bought the shares to over US$6.60 today.
Given the vast difference in contribution to Apple’s share price increase, what would you focus on? The answer is obvious: the business, represented by Apple FCF per share.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in Apple, Meta Platforms, and Zoom Video Communications. Holdings are subject to change at any time.
