What We’re Reading (Week Ending 20 June 2021) - 20 Jun 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 20 June 2021):
1. Blink – Michael Batnick
I can’t believe it’s been ten years since my mother passed away. The passage of time felt like the blink of an eye.
I was only 26 when my mother died. She only had 26 years with me. My fingers are shaking while I type because this is the most painful part. It’s not that I didn’t have enough time with her. It’s that she didn’t have enough time with me. She didn’t see me get married. She never got to meet her grandkids. She was robbed of some of the most joyful parts of life.
Even though my mother was the center of my universe, I don’t spend every second of every day thinking about her. It comes in waves. Tidal waves…
…I’m sad that my mother isn’t here, but I’m a better person for it. I would undo this in a second if I could, but losing her gave me a perspective on life that would have been impossible otherwise.
Ten years ago, I was a child in a man’s body. I had no prospects for a bright future. Death was staring me in the face, both metaphorically and literally. Now I’m a successful adult. I don’t mean that in the traditional sense of people equating success with money.
I’m successful because I don’t yearn for more. I have my wife and my boys and my freedom. I’m good. I have a unique appreciation of what I have because I already lost everything when my mother died. Now I have everything I need and everything I want.
Health is the only thing that matters. We all know this. But some people know it more than others. Losing my mother hurt like hell, but I’m grateful for what came of it. It taught me not to take anything in life for granted, especially life itself. Years aren’t promised, so I try to enjoy every day.
2. Technology Saves the World – Marc Andreessen
Only 15 months ago — March 13, 2020 — COVID-19 became a national emergency in the United States. My assumption at the time was that COVID lockdowns could extend as long as five years, the previous speed record for modern vaccine development, with many millions of deaths — a generational cataclysm.
While COVID certainly has been plenty devastating in the U.S. and around the world, with 600,000 Americans dead of and with COVID, and with shockingly broad destruction of American small businesses, it has not been nearly as destructive as it could have been. We are coming out of COVID years early, with many livelihoods and businesses preserved, compared to what we had any right to expect. And overwhelming credit goes to our spectacular technology industry.
The most amazing COVID technology story has to be the vaccines. Moderna, a product of the American venture capital system, created the first mRNA COVID vaccine within two days of receiving the genetic code for COVID by email. It’s hard to overstate the tremendous advance in both speed and effectiveness of this new technological platform — and now that we know how well mRNA vaccines work, we can look forward to decades of new vaccines both for potential COVID variants and for many other health threats. We now have the technological tools to quite literally code nature, and the payoff to human flourishing will be profound…
…Finally, possibly the most profound technology-driven change of all — geography, and its bearing on how we live and work. For thousands of years, until the time of COVID, the dominant fact of every productive economy has been that people need to live where we work. The best jobs have always been in the bigger cities, where quality of life is inevitably impaired by the practical constraints of colocation and density. This has also meant that governance of bigger cities can be truly terrible, since people have no choice but to live there if they want the good jobs.
What we have learned — what we were forced to learn — during the COVID lockdowns has permanently shattered these assumptions. It turns out many of the best jobs really can be performed from anywhere, through screens and the internet. It turns out people really can live in a smaller city or a small town or in rural nowhere and still be just as productive as if they lived in a tiny one-room walk-up in a big city. It turns out companies really are capable of organizing and sustaining remote work even — perhaps especially — in the most sophisticated and complex fields.
This is, I believe, a permanent civilizational shift. It is perhaps the most important thing that’s happened in my lifetime, a consequence of the internet that’s maybe even more important than the internet. Permanently divorcing physical location from economic opportunity gives us a real shot at radically expanding the number of good jobs in the world while also dramatically improving quality of life for millions, or billions, of people. We may, at long last, shatter the geographic lottery, opening up opportunity to countless people who weren’t lucky enough to be born in the right place. And people are leaping at the opportunities this shift is already creating, moving both homes and jobs at furious rates. It will take years to understand where this leads, but I am extremely optimistic.
3. Stripe: Thinking Like a Civilization – The Generalist (Mario)
The Roman poet Ovid coined that phrase, roughly translatable as “the end justifies the mean.” With that deft turn, Ovid summarized a school of moral philosophy referred to as consequentialism.
If Silicon Valley’s ethics can be distilled into a coherent ethics, this is it: do what is necessary to change the world, no matter how many toes are trampled, privacy rights violated, or human norms deranged. The method does not matter, consequentialism tells us, the result is what counts.
This is the ethos of Kalanick and Zuckerberg, and many tribute acts. It could not be further from the morality of the Collisons.
Though perhaps they would disagree, and could certainly put a finer point on their particular weltanschauung, Patrick and John seem to adhere to a deontological ethics. This school, best articulated by glorious weirdo Immanuel Kant, suggests that the morality of an action is determined independently of its outcome. Though much too simple, deontologists argue that things like intent matter.
All of which is to say that the Collisons seem to have forged an alternative for elite leadership that does not seek to excuse a noisome, polluting process with a favorable outcome. Just as Patrick notes that the “no jerks policy” companies sometimes apply to restrain themselves from hiring brilliant assholes is “too low a bar,” Stripe’s leadership seems to understand that success alone is not enough. You have to win with grace…
…Above all, Stripe is defined by its commitment (and espousal) of a multi-decade timeline. Leadership constantly reinforces the message that Stripe is in its early innings and that its most defining products are yet to come.
This is a useful message for nearly every company to advance, but it carries extra weight given Patrick’s intellectual influences and extracurriculars, particularly his service as a Board Member for The Long Now Foundation. The organization, “established in 01996” exists to encourage thinking about humanity over the next 10,000 years.
Stripe doesn’t have explicit plans for the next several millennia, but the company has succeeded in shifting employee mindset to think further ahead. In an interview with Ken Norton, Business Lead Michael Siliski articulated this trait:
“We talk a lot about building multi-decade abstractions. I personally like to think 10 to 30 years to get out of the three- to five-year mode, but generally here people do say “multi-decade” a lot. Patrick and John and the entire leadership team are clear that this is a long-term bet and that we’re still very early. That long time horizon comes from the top, and it’s in the culture. And my sense is it’s been like that at Stripe since day one.”
Others make the same note. From Patio11:
“[M]y career success metric is making a large improvement in the lives of a large number of software people. I encourage anyone who isn’t already planning on a 45 year time scale to try taking a stab at this and reviewing the plan every year; the weeks are long but the years fly by sometimes. At present I’m at Stripe because I think it is probably the best option available in working against those long-term goals. 15 years down; 30+ to go; still early innings.”
Even in the visionary world of technology, this extremity of foresight is unusual; it’s even more uncommon to have it effectively distributed through an organization.
This manifests in the company’s recruiting. Patrick notes that “the biggest thing we did differently…is just being ok to take a really long time to hire people.”
It took the company six months to hire its first two employees. Describing their “painfully persistent” process of recruiting in his conversation with Lilly, Patrick noted that he could think of five employees that Stripe had taken three or more years to recruit.
This approach makes sense when you think of it in a decades-long framework. As he notes in that discussion, employees — particularly managers — bring more employees with them over the years. Taking the time to find someone truly exceptional, though painful in the short term, compounds year after year.
4. Are Inflation Worries Over-Inflated? – Chuin Ting Weber
What happens to markets when inflation becomes a problem? For the US, historically, the worst inflationary period in recent memory was from 1973-1981. CPI started to print consistently in low single digits from 1982 onwards, with the exception of 6.0% in 1990. Many analysts point to OPEC and the oil crisis as the trigger for cost-push inflation starting in 1973. However, others have put the responsibility for the long drawn-out stagflation and economic slowdown on tightening by the Fed – the same concern being flagged by the worry camp today.
Let us take a look at the historical performance of the S&P500 during this time, for a one-time investment made at the start of each of these “bad” inflation years…
…For the two most unfortunate start points (1973 and 1974), it took 9-12 years for a lump sum investment to break even, net of inflation. This is consistent with MoneyOwl’s guidance for investors who wish to be in a 100% equities portfolio to have a time horizon of 10-15 years, based on the historical performance of markets. These are not magic numbers, but it gives the long-term investor some degree of comfort. In the example, we did not factor in dollar cost averaging, which is a more common way of investing and which could change the breakeven thresholds; nor adjustments to the investor’s personalised CPI or PCE based on his basket of goods.
However, what is counter-intuitive and remarkable, is that despite the inflationary environment, an investment took less than 5 years to break even on a real return basis in 7 out 9 years, or 78% of the time. In 6 out of 9 years, you break even within a year. More intriguing is that in as many as 4 years, investments started at the beginning of those years have not lost money since. This includes investments deployed at the beginning of the worst inflationary year of 1979.
Our little empirical study of US inflation vs. markets tells us that:
- There is no relationship between contemporaneous inflation and an investor’s long-term experience, or even in any single year. In fact, you can be handsomely rewarded by markets even during a period of very bad inflation.
- The odds of a positive return from being invested and staying invested are much higher than trying to time the market. Staying invested is valid even in inflationary and uncertain times.
- Having a line in the water to capture an outsized return if it comes along can cushion you against cumulative losses into the long term. We do not want to miss those years by timing the market, because it matters to our overall, cumulative return.
- There is a case for Dollar Cost Averaging during times of severe economic dislocation, because it means that your total return will not be the worst-case and you will also catch the good years. The regular saving plan (RSP) way of investing out of your monthly income, which is what we recommend for our mass market accumulation clients, has benefits beyond the formation of a good financial habit.
This walk down a “scary” memory lane supports what we already know about markets: that asset prices move quickly to incorporate all expectations and information about inflation and its potential impact on interest rates and equity prices. This is also indeed, a random walk. There is a randomness to year-on-year return and any investment approach built on trying to outguess markets repeatedly is quite futile.
5. He makes up to $3,900 a week racing cars on a blockchain game – Shihan Fang
If you haven’t heard of F1 Delta Time or its publisher, Hong Kong-based Animoca Brands, you’re not alone. It’s a game so new that it doesn’t even have its own Wikipedia page. F1 Delta Time is among a growing category of online games that are leading the “play-to-earn” movement. Built on blockchain technology, these games allow players to make money from in-game assets.
This offers gamers more opportunities to monetize their gaming efforts. Many games currently allow for virtual items to be traded for virtual currency. But unless they are built on blockchain technology, there’s no way to cash out either the virtual currency or items.
As such, gamers who want to turn their hobby into their line of work either have to climb their way up to a professional level or participate in peripheral activity like livestreaming or giving gaming tutorials. Another popular but tedious option is to build up an account and then sell it in an off-game transaction.
The play-to-earn movement has gained tremendous investor interest of late. Two unicorns were minted just last month, with Animoca Brands raising US$88.8 million and San Francisco-based Forte securing US$185 million at a valuation of $1 billion each. Neither of these companies are strictly in the gaming business; instead, they provide the blockchain platform to enable play-to-earn games…
…Besides Revv, F1 Delta Time issues digital assets tied to NFTs. It’s a process known as the “tokenization” of an asset and enables what Animoca calls “true digital ownership,” or having identifiable property rights to unique digital assets.
To race, each player needs a driver, a car, and a set of tires. These can be further customized by gear (suit, helmet, gloves, boots, trinket) and parts (front wing, rear wing, transmission, brakes, turbocharger, energy store, engine block, suspension) to create the best configuration for every race and type of weather.
Each of the aforementioned assets can be bought and sold on game-agnostic NFT marketplaces such as Opensea. Even the segments of each race track are tokenized, allowing owners to make money from entry fees.
Another novel application of NFTs is the in-game “staking” mechanism, a virtual event that allows players to temporarily lock up their cars in exchange for revv. According to its developers, “staking” was designed to increase the value and utility of in-game NFTs, and to allow owners to generate passive Revv income.
All tokenized items come in four levels of rarity: common, epic, legendary, and apex. The rarer the car, the lower the in-game supply, and the higher the earnings from staking.
NFT enthusiasts may want to note that a tokenized asset is made up of two parts: the NFT itself, which resides on blockchain, and the digital asset, which is stored off-chain, usually on a server run by Amazon Web Services. This means that the digital asset could potentially still be lost if its server is damaged or hacked, or if Amazon goes bust.
According to NFT insiders, this dependency is a weakness of the “centralized storage” model. While no one has the solution yet, there are some nascent efforts to create decentralized storage schemes for more “persistent” availability of assets.
“We have people in our team that are not good gamers at all. But they earn more because of other things like staking. If you’re purely investment and money-driven, there is money for you. If you are just a gamer, then there is something for you. If you like motorsports, there are collectibles. If you are across a few of those sectors, this is perfect,” says Brock.
6. Genetic Control of Aging and Life Span – Jill U. Adams, Ph.D
When studying life span, scientists tend to work with organisms that do not live very long; that way, they can observe the entire course of an organism’s existence and obtain relatively rapid experimental results. One organism that researchers frequently employ in their studies of life span is Caenorhabditis elegans, a microscopic roundworm that typically lives to a ripe old age of two to three weeks. Another advantage of using C. elegans is that these worms have a simple physiology and easily manipulated genes.
Over the last several decades, C. elegans has been the subject of many published studies, but perhaps the most famous of these appeared in 1993. In that paper, researcher Cynthia Kenyon and her associates showed that C. elegans with a specific single-gene mutation lived twice as long as members of the species that lacked this mutation (Kenyon et al., 1993). This finding was groundbreaking for a number of reasons. First, it challenged the prevailing concept that aging occurs as the body deteriorates over time. Second, it led to a shift in thinking, even among researchers who already believed that aging was subject to some sort of genetic control. Prior to this point, most such scientists figured that aging, age-related illnesses, and death were consequences of multiple cellular and physiological processes, and therefore under the regulation of a wide and diverse set of genes. Kenyon’s paper, however, suggested that a single gene could dramatically regulate how long an organism lived, thus opening the door to new hypotheses about modifying life span through genetic manipulation.
The responsible gene is called daf-2, and, in 1997, a research group led by Gary Ruvkun finally solved its DNA sequence (Kimura et al., 1997). Scientists were surprised to find that the protein coded for by this gene (designated DAF-2) looked much like the receptor protein within humans that responds to the hormone insulin. In other words, the worm protein is simply a primitive form of our own insulin receptors…
…So, how does a single gene cause such a dramatic effect? It turns out that daf-2 normally controls many other genes, which in turn regulate a variety of physiological processes at different stages in life. For example, in their studies of C. elegans, researchers have found a large set of genes that are either “turned on” or “turned off” in worms that carry two copies of the daf-2 mutation. The genes that show the most change fall into several different classes, some of which line up nicely with existing hypotheses about the mechanisms of aging in other organisms; this includes the belief that various genes encode for proteins that extend life by acting as antioxidants, regulating metabolism, and exerting an antibacterial effect.
One particular gene affected by daf-2 is daf-16; this gene encodes a transcription factor, or a protein that determines when and where hundreds of other genes are turned on. Normally, the DAF-2 protein (which is an insulin receptor) exerts a dampening effect on the DAF-16 protein through phosphorylation, or the addition of a phosphate group. In the mutant worms, however, DAF-16 is not phosphorylated, and it is thus active and present in cell nuclei. Experiments have determined that this activation of DAF-16 (caused by the absence of a phosphate group) is a necessary step toward life span extension (Figure 1).
7. Harder Than It Looks, Not As Fun as It Seems – Morgan Housel
Good advice that took me a while to learn is that everything is sales. Everything is sales. It’s usually framed as career advice – no matter what your role in a company is, your ultimate job is to help sales. But it applies to so many things.
Everything is sales also means that everyone is trying to craft an image of who they are. The image helps them sell themselves to others. Some are more aggressive than others, but everyone plays the image game, even if it’s subconscious. Since they’re crafting the image, it’s not a complete view. There’s a filter. Skills are advertised, flaws are hidden.
A friend recently complained about how inefficient his employer is. Processes are poor, communication is bad. He then said a competitor company had its act together. I asked him how he knew that – he’s never worked there and has never been inside the company. Fair, he said. It just seems that way from the outside.
But almost everything looks better from the outside. I guarantee workers at the competitor find flaws in the way their company operates, because they know about their company what my friend knows about his: how the sausage is made. All the messy personalities and difficult decisions that you only see when you’re inside, in the trenches. “All businesses are loosely functioning disasters” Brent Beshore says. But it’s like an iceberg, only a fraction is visible.
It’s the same for people. Instagram is full of beach vacation photos, not flight delay photos. Resumes highlight career wins but are silent on doubt and worry. Investing gurus are easy to elevate to mythical status because you don’t know them well enough to witness times when their decision-making process was ordinary, if not awful…
…When you are keenly aware of your own struggles but blind to others’, it’s easy to assume you’re missing some skill or secret that others have. The more we describe successful people as having guru-like powers, the more everyone else looks at them and says, “I could never do that.” Which is unfortunate, because more people would be willing to try if they knew that those they admire are probably normal people who played the odds right.
When someone is viewed as more extraordinary than they are, you’re more likely to overvalue their opinion on things they have no special talent in. Like a successful hedge fund manager’s political views, or a politician’s investment advice. Only when you get to know someone well do you realize the best you can do in life is to become an expert at some things while remaining inept at others – and that’s if you’re good. There’s an important difference between someone whose specific talent should be celebrated vs. someone whose ideas should never be questioned. Eat the orange, throw away the peel.
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 any of them. Holdings are subject to change at any time.
