What We’re Reading (Week Ending 20 September 2020) - 20 Sep 2020
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 September 2020):
1. The Metaverse: What It Is, Where to Find it, Who Will Build It, and Fortnite – Matthew Ball
The Metaverse, we think, will…
1. Be persistent – which is to say, it never “resets” or “pauses” or “ends”, it just continues indefinitely
2. Be synchronous and live – even though pre-scheduled and self-contained events will happen, just as they do in “real life”, the Metaverse will be a living experience that exists consistently for everyone and in real time
3. Have no real cap to concurrent participations with an individual sense of “presence” – everyone can be a part of the Metaverse and participate in a specific event/place/activity together, at the same time and with individual agency.
4. Be a fully functioning economy – individuals and businesses will be able to create, own, invest, sell, and be rewarded for an incredibly wide range of “work” that produces “value” that is recognized by others
5. Be an experience that spans both the digital and physical worlds, private and public networks/experiences, and open and closed platforms
6. Offer unprecedented interoperability of data, digital items/assets, content, and so on across each of these experiences – your “Counter-Strike” gun skin, for example, could also be used to decorate a gun in Fortnite, or be gifted to a friend on/through Facebook. Similarly, a car designed for Rocket League (or even for Porsche’s website) could be brought over to work in Roblox. Today, the digital world basically acts as though it were a mall where though every store used its own currency, required proprietary ID cards, had proprietary units of measurement for things like shoes or calories, and different dress codes, etc.
7. Be populated by “content” and “experiences” created and operated by an incredibly wide range of contributors, some of whom are independent individuals, while others might be informally organized groups or commercially-focused enterprises
2. Twitter thread from Okta CEO and co-founder Todd McKinnon on what it’s actually like to go through an initial public offering and be a public company – Todd McKinnon
How I benefited from @okta going public: – My control of the company increased significantly. – Preferred shares rights & preferences go away as everyone converts to common. – My shares along with VC converted to super-voting shares. As VCs sold their shares, my voting % went up.
How my job has changed: – More time in board meetings (committees, recruiting, communicating with, etc). – More time on IR & with investors (earnings reports, conferences, 1on1s – might sound repetitive, but you often learn interesting & unexpected things).
For years, we’d compensated employees with stock options & we HAD to give them liquidity. It was fun to celebrate with the team on the big day.
3. Memo on Shopify by venture capital firm Bessemer Venture Partners when it invested in the company – Alex Ferrara, Trevor Oelschig
Shopify was founded in 2007 by two Ruby on Rails core developers. One of the co-founders left soon after starting the business. The other, Tobi Lütke, stayed on and is serving as CEO. We have been impressed by Tobi. He is a young, first-time CEO who is thoughtful, has good product and management instincts. Shopify’s 24 employees are located in Ottawa, Canada. Based on Shopify’s reputation in Ottawa as a local internet startup success story, and based upon Tobi’s reputation among the developer community, the company has been able to recruit some of the best development and design talent in Ottawa at 60%-70% of the cost of similar talent in Silicon Valley or New York.
4. Tencent’s Dreams, Part II: Investing in the Metaverse – Packy McCormick
A strategic decision nine years ago accidentally set Tencent up to create more value from the Metaverse than it does from its entire core business by focusing on investment over organic growth.
After reading Part I, Rui Ma pointed me to the Tech Buzz China podcast in which she and Ying Lu discuss Pan Luan’s 2018 piece titled “Tencent Has No Dreams.” In it, he argues that a 2011 decision at a management team offsite caused Tencent to lose sight of its product-focused roots.
Back in 2011, Baidu passed Tencent as the most valuable tech company in China, and Pony Ma called a meeting of his top management to chart a new course for the company. In the meeting, dubbed “The Conference of the Gods,” he asked his 16 top executives to list out Tencent’s core competitive advantages. Two winners emerged: capital and traffic.
Led by President Martin Lau and his former Goldman colleague James Mitchell, who he brought on as Chief Strategy Officer, Tencent built its strategy on this flywheel of capital and traffic.
The strategy seems to be working. Since that 2011 meeting, Tencent’s stock has increased nearly 15x, from $44.5 billion to $660 billion. Attract companies to build on its platform with huge traffic, invest in the winners, give them more traffic, invest more or acquire the winners, generate more traffic, attract more companies, and so on. It runs essentially the same playbook with foreign companies who want access to China.
5. A $200 Billion Exotic Quant Trade Is Facing Existential Doubts – Justina Lee
ARP [alternative risk premia] products combine a diverse bunch of trades, often tried-and-tested ideas beloved by quants such as the tendency for cheap stocks to outperform in the long run or for short-term commodity futures to trade below long-term ones. The composition of funds and their returns vary vastly, but managers can point to a few unifying trends that have been a drag on performance in 2020.
The March turmoil upended the normal trading patterns these strategies rely on. Then the fast market recovery whipsawed trend-following systems and forced systematic models to dial back market exposures and miss out on gains.
At the same time, many popular factors used by these funds — such as value and foreign-exchange carry — failed to rebound along with stock benchmarks.
“The recovery depended on whether you were in those main long risk categories of liquid equities and fixed income,” said Anthony Lawler, head of GAM Systematic, which oversees about $3 billion. “ARP by and large are not in those things.”
Equity value has been a persistent drag on ARP portfolios
This year is adding to growing doubts over ARP, which has lagged stock indexes in recent years but has also posted a mixed performance as a portfolio diversifier. While defenders would argue that these products were never supposed to be a hedge against traditional assets, many investors likely got a different impression from their marketing, says MJ Hudson’s Suhonen.
6. Obvious Things That Are Easy To Ignore – Morgan Housel
A thing that’s obvious but easily overlooked is that feeling wealthy has little to do with what you have. It’s more about the gap between what you have and what you expect. And what you expect is driven by what other people around you have.
It’s been like that forever and for everyone. John D. Rockefeller never had penicillin, sunscreen, or Advil. But you can’t say a low-income American with Advil and sunscreen should feel better off than Rockefeller, because that’s not how people’s heads work. What would have seemed like magic to Rockefeller became our baseline expectation.
Incomes fall into the same trap. Median family income adjusted for inflation was $29,000 in 1955. In 1965 it was $42,000. Today it’s just over $62,000. We think of the 1950s and 1960s as the golden age of middle-class prosperity. But the median household today has roughly twice the income as the median family of 1955. Part of the disconnect can be explained by lots of people’s expectations being inflated by the lifestyles of a small share of people whose wealth grew exponentially over the last 40 years.
7. Upside-Down Markets: Profits, Inflation and Equity Valuation in Fiscal Policy Regimes – Jesse Livermore
If households and corporations were to deficit spend in the way that the government deficit spends, they would eventually run up against liquidity and solvency constraints. But a sovereign government is not subject to those constraints. Through its central bank, it decides the interest rate at which it borrows. And it doesn’t even need to borrow—it can finance spending by printing new money. As long as there are economic participants willing to withhold the new money, and as long as the economy has the productive capacity to fulfill any additional spending that the withholding process might give rise to, economic problems such as inflation need not emerge.This insight, most notably attributable to the British economist Abba Lerner, is a core component of Modern Monetary Theory (MMT). As the insight becomes better understood in
political circles, it will increasingly drive fiscal policies that seek to guarantee desired levels of income and spending growth in the economy, policies that have the potential to turn markets upside-down, for better or worse.
