What We’re Reading (Week Ending 23 May 2021)

What We’re Reading (Week Ending 23 May 2021) - 23 May 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 23 May 2021):

1. Letter #34: On wanting – Ali Montag

In 1972, banners covered the West Texas town of Odessa, black and white signs painted MOJO WINS. Neighbors held each other and cried. Fathers shook hands and slapped each other’s backs, grins spread wide. That year, their boys had done it: The Permian High School Panthers were state champions.

“We were hoarse from screaming and yelling. We didn’t want to leave the field,” quarterback Jerry Hix remembered years later, long after his high school football career had ended. “Nothing can compare. I miss it.”

It was a moment of indescribable pride for boys who spent the better part of their young lives cracking ribs, ripping tendons, and puking under the Texas sun, working toward a single goal: Excellence at the game of football. It was a moment of pride for the people of Odessa, the few thousand ranchers and oilmen and beauty clerks who scratched out lives in the arid desert, watching and praying over their team.

It was also a moment from which many of those boys would never recover.

“My life’s never been the same since,” said Joe Bob Bizzell, a player who flamed out of college football and retreated to the dirt roads of Odessa. A decade later, he found himself still there, repairing pump jacks on an Amoco oil field.

“You live in a fairy tale for that one year of your life,” said a different player’s wife. “You’re worshipped, and that year is over and you’re like anyone else. We all feel our husbands have been unhappier with everything they got out of it.”

Players fell into alcohol abuse and lackluster home lives. Permian High’s athletic trainer called winning a Texas high school football championship the “kiss of death” for teenage boys.

“They’re popular. They’re in very hot demand, like a hot rock group. No matter what they do, it’s a hit. Everything they do is right,” he said. “And they just can’t find that again. What other job can they find that has that glamour? What’s the substitute? Find the substitute for it. The only consequence of it is a mentally crippling disease for the rest of your life.”

Why am I recounting Pulitzer Prize winner H.G. Bissinger’s reporting in Friday Night Lights? First, because it is a wonderful book. Second, because as I’ve been re-reading it this week, the story feels uniquely relevant.

Bissinger’s nonfiction account of Odessa and its Permian Panthers isn’t just a book about winning football games. It’s a book about the lingering cost of life lived on a pedestal.

Flipping through Twitter last week, this video, “A day in the life of a New York fashion student,” popped into my feed. Watching, it wasn’t memories of NYC, or outfit envy, or nostalgia for my own youth that I first thought of (that came later)—but the boys of Permian High.

2. Daniel Kahneman: ‘Clearly AI is going to win. How people are going to adjust is a fascinating problem’ – Tim Adams

[Admas] One of the key problems seems to have been the widespread inability to grasp the basic idea of exponential growth. Does that surprise you?

[Kahneman] Exponential phenomena are almost impossible for us to grasp. We are very experienced in a more or less linear world. And if things are accelerating, they’re usually accelerating within reason. Exponential change [as with the spread of the virus] is really something else. We’re not equipped for it. It takes a long time to educate intuition…

…[Adams] Some of the examples you describe – the extraordinary variance seen in sentencing for the same crimes (even influenced by such external matters as the weather, or the weekend football results), say, or the massive discrepancies in insurance underwriting or medical diagnosis or job interviews based on the same baseline information – are shocking. The driver of that noise often seems to lie with the protected status of the “experts” doing the choosing. No judge, I imagine, wants to acknowledge that an algorithm would be fairer at delivering justice?

[Kahneman] The judicial system, I think, is special in a way, because it’s some “wise” person who is deciding. You have a lot of noise in medicine, but in medicine, there is an objective criterion of truth…

...[Adams] I was struck watching the American elections by just how often politicians of both sides appealed to God for guidance or help. You don’t talk about religion in the book, but does supernatural faith add to noise?

[Kahneman] I think there is less difference between religion and other belief systems than we think. We all like to believe we’re in direct contact with truth. I will say that in some respects my belief in science is not very different from the belief other people have in religion. I mean, I believe in climate change, but I have no idea about it really. What I believe in is the institutions and methods of people who tell me there is climate change. We shouldn’t think that because we are not religious, that makes us so much cleverer than religious people. The arrogance of scientists is something I think about a lot…

…[Adams] Do you feel that there are wider dangers in using data and AI to augment or replace human judgment?

[Kahneman] There are going to be massive consequences of that change that are already beginning to happen. Some medical specialties are clearly in danger of being replaced, certainly in terms of diagnosis. And there are rather frightening scenarios when you’re talking about leadership. Once it’s demonstrably true that you can have an AI that has far better business judgment, say, what will that do to human leadership?

3. A new book aims to blow up assumptions about the best founding teams – Connie Loizos

There’s a lot of how-to guidance out there when it comes to starting a company, and much of it has reinforced certain beliefs, including that solo founders don’t get very far on their own, that the most successful founders attend a small circle of top schools and that the best companies are created by people who launched them to solve a personal problem into which they had a particular insight.

Ali Tamaseb — who studied biomedical engineering at Imperial College London, attended business school at Stanford and founded a wearable tech startup before joining the venture firm DCVC as an investor in 2018 — says that lot of that guidance is, well, misguided. Tamaseb says he knows this because over the past four years, to improve his own decision-making, he amassed more than 30,000 data points about so-called “super founders,” from their age when their breakout company was founded to how many competitors they faced from the outset; in doing so, he says, he wound up discovering that much of what is espoused in startup circles is off the mark…

…TC: You also found that solo founders aren’t doomed to run smaller companies, despite some earlier thinking by Y Combinator’s Paul Graham that you need at least two co-founders to do something big.

AT: Right, 20% of the founders in both groups — the unicorn and non-unicorn group — were solo founders, so VCs are funding solo founders and they are building billion-dollar companies. Basically, one out of every five unicorn companies has a solo founder. So I think that’s another narrative that gets retold, including on Twitter, but that doesn’t match reality. Flexport, for example, has a solo founder [in Ryan Petersen]. So does CarGurus, which was founded by Langley Steinert, who, by the way, first co-founded TripAdvisor [and more recently founded ApartmentAdvisor].

TC: Your book also asserts that there are plenty of founders of billion-dollar companies that didn’t attend elite American universities.

AT: There are schools that founders attended more than others — Stanford, MIT, Wharton and Harvard — but as many of these founders attended schools that aren’t even at the top 100 [ranked U.S. schools] compared to those who went into the top 10. It’s a barbell distribution. Around 36% went to the top 10 schools, the same percentage went to schools not in the top 100, and there’s another 30% or so in the middle.

TC: Two other observations in the book that are interesting are that half the founding CEOs you researched were non-technical, and only 30% had domain expertise in the industry they were disrupting. The latter may surprise readers particularly.

AT: Yes, 30% of founders in consumer tech and 40% in enterprise tech did not come from the same domain [that their company now operates in]. And I see the same thing in startups that are just now getting funded. What it tells you is that domain expertise is not necessarily correlated to success. Take Nat Turner of Flatiron Health [a cancer-focused startup that sold to Roche Group in 2018]. These guys were serial entrepreneurs and they had a bunch of successes before, and they jumped from one industry to another, starting with a pizza delivery company they started in college, where they learned about the restaurant industry and deliveries and logistics. They also sold an ad tech company to Google. Then they go and start this company in the cancer oncology IP and data space, where they didn’t know anything, but they learned as much as anybody after spending two years going and talking with every oncologist they could find in New York to understand the space. So maybe founders apply their tech background to different industries or they apply soft skills like resources and connections to learn about a specific industry rather than coming from that industry.

4. The Unusual Signs of a Billion Dollar Company, with Elad Gil – James Currier

• It’s a really tough question early on because if something was very obvious that it’s going to be a massive business and market, everybody would already be doing it and there’d be no opportunity for a start-up.
• Definitionally, a start-up has to be doing something a little bit not obvious. It’s hard to estimate TAM. Often when people estimate it, they use a BS number where they say: “Commerce is $20 trillion, and if we capture just one sliver…”
• It’s really hard to actually know what the true size of a market is until you’re far enough along that you’re seeing customer adoption and you kind of extrapolate from there.
• You can also underestimate some of these things. So, for example, when I invested in Stripe, which was at the series A and I think they were only eight or ten people, I thought: “Oh my God, it’d be an amazing success if they were worth a few billion dollars.” Now I think it’s going to be a multi-hundred billion-dollar company over time. 
• I extrapolated the future growth of the internet, but not enough…
• …Most early-stage investors would say the thing that they care about most is the founders. And obviously, founders are incredibly important to a company. They really drive the success of it. I started two companies myself.
• But I think the market is even more important because I’ve seen great founders repeatedly get crushed by a terrible market. And I’ve actually seen some pretty mediocre people do incredibly well if there’s very strong product-market fit.
• Sometimes the company almost runs on its own, irrespective of what the founders do, as long as they have enough of an advantage or there’s a network effect that will sustain them.
• So ultimately my focus is on product market.
• Technology has become such a big force in society and all the biggest companies by market cap are now technology companies. If you look at every single metric, technology markets are at least 10X, if not many tens of times bigger than they were just 10 years ago. If you look at internet usage, time spent online, the number of people with access to the internet, the penetration of e-commerce, et cetera…
• …Companies that innovate early to get to a second product line, tend to do that often and build the muscle.
• Companies that innovate late actually never innovate again. If you take five, six, seven years to launch your second area, it usually means you’re not going to ever come up with anything else.
• Caution: Very innovative founders sometimes innovate in places where they really shouldn’t, because it’s both kind of a waste of time, but also, the things that work actually work pretty well. So, it’s this balance…

• …The place where people screw it up on the way to $B companies is a lot of founders, when they leave the company as CEO, they’ll promote the person who is the perfect complement to them to become the CEO.
• So, that’d be like Tim Cook at Apple. You really appreciate that operator skillset.
• In reality, maybe what the founders should be doing is hiring somebody more like them to become the next CEO.
• You kind of need that person who’s hungry and paranoid and scared, and willing to try new things and destroy their own business. That’s not the operator. The operator is the stabilizer, their whole career has been stabilizing.
• So, it’s really interesting to see this pattern where CEO transitions keep going bad because they keep hiring that non-entrepreneurial person or that very operation-centered person who’s the perfect compliment, but again, they need somebody who’s more like them, rather than somebody who’s different from them.
• Stabilizers often come in and they invoke conventional thinking, and often, these first-time founders are successful because they’ve broken with conventional thinking.

5. The hybrid work paradox – Satya Nadella

As I meet with leaders across industries, it’s clear there is no single standard or blueprint for hybrid work. Every organization’s approach will need to be different to meet the unique needs of their people. According to our research, the vast majority of employees say they want more flexible remote work options, but at the same time also say they want more in-person collaboration, post-pandemic. This is the hybrid work paradox.

We see the same anomalies when it comes to in-person attendance at our own worksites across the world as regions begin to recover from the pandemic. In China, for example, 81 percent of our employees are going back to the worksite three-plus days per week, compared with pre-pandemic attendance, while in Australia, in-person attendance is just 19 percent of what it was pre-pandemic.

Hybrid work represents the biggest shift to how we work in our generation. And it will require a new operating model, spanning people, places, and processes. Today, we published a playbook sharing some of what we’ve learned to date, including data, research, and best practices designed to help organizations navigate these evolving work norms…

…On social capital, every business must be world class at all forms of synchronous and asynchronous communications, to sustain culture across the organization. In fact, at Microsoft, meeting recordings are the fastest-growing content type. Employees now expect all meeting information — whether that’s recordings, transcripts, or highlights — to be available on demand, and on double speed, at a time that works for them.

We must also maintain everyday connections between employees, as well as between employees, their managers, and the company at large. It’s why with our employee experience cloud Microsoft Viva, for example, we’re bringing together one-to-one and one-to-many communications to keep everyone engaged and informed and maintain that connection between employees and the company and its mission…

…As we think about the design of places themselves, our aim is to maintain consistent person, reference, and task spaces for all employees, whether they are on-site or remote. No matter where people are working, they should have a common view of meeting participants and be able to connect with them. They should always have access to the same shared information. And they should be able to see what everyone in the meeting is collaborating on, whether that is a whiteboard or a document.

Creating equitable, inclusive experiences starts with designing for people not in the room. For example, in large meeting rooms in our campus, we are using Microsoft Teams Rooms with high-quality audio and video to ensure everyone can be seen, be heard, and participate as if they were there in person. We are even integrating social cues through emojis and reactions…

…Every business process will be impacted by the move to hybrid, and every business function will need to transform. From product development and manufacturing, to marketing, sales, customer service, and facilities, HR, and IT, every business process will need to be adjusted. One area that is of paramount importance is security.

The threat landscape has never been more complex or challenging, and security has never been more critical. We intercepted and thwarted a record 30 billion email threats last year and are currently tracking 40-plus active nation-state actors and over 140 threat groups.

As corporate networks are suddenly without firm borders, this is also changing our approach to security. We believe that a Zero Trust architecture is more important than ever as we shift to hybrid work.

6. Twitter thread on the importance of knowing when you’re a “pro” and when you’re an “amateur” – Brian Portnoy

I believe that Charley Ellis’ thesis in “Winning the Loser’s Game” is foundational for understanding investing and life generally: Win by not losing. However, there is an important piece to it that is mostly ignored. A thread… 1/x

If you’re reading this, you likely already know that Ellis uses a tennis analogy to make his point: pro athletes win by hitting harder shots while amateurs win by keeping the ball in play and allowing their opponent to err.  2/x

Same with investing: Most should just try to stay in the game than reach for the next overhead slam. Don’t search for the next Amazon, avoid the next Enron. 3/x..

…So what about the “ignored” part? I think it’s deciding whether to consider yourself a “pro” or an “amateur” (or somewhere along a spectrum) in a particular domain. 7/x

So how to self-assess? It’s really important (!) because much weight of the “less wrong” mental model actually rests on this necessarily prior decision. And has obvious connections to overconfidence, Dunning-Krueger, etc. 8/x

Maybe the easiest thing, sort of, is brute force humility — assume you know very little about everything. That wouldn’t be a bad tilt for some, but it is somewhat spirit-destroying and generally a terrible equilibrium for humanity, as it renders true expertise worthless. 9/x

Okay, so no forced humility. And believing you are a “pro” at many things also seems imprudent. Which leaves us, predictably and unsatisfyingly, somewhere in the middle, where we have to use different forms of judgment to asses pro vs. amateur status domain by domain. 10/x

7. How much Bitcoin comes from dirty coal? A flooded mine in China just spotlighted the issue – Shawn Tully

One of the great Bitcoin unknowns has long been the amounts being produced, or “mined,” in what’s believed to be the top locale for mining the signature cryptocurrency: China’s remote Xinjiang region. We got the answer when an immense coal mine in Xinjiang flooded and shut down over the weekend of April 17–18.

The blackout halted no less than one-third of all of Bitcoin’s global computing power. “We’d seen estimates that high, but this shutdown confirms them,” says Alex de Vries, an economist who runs the website Digiconomist, which tracks Bitcoin’s energy consumption. “We also learned that the area in Xinjiang where all that mining happens is much smaller than previously believed. It underscores China’s dominance in Bitcoin mining, and that dominance raises big security concerns.”

The Xinjiang accident highlights that Bitcoin is a creature of fossil fuels—principally coal, the dirtiest of them all…

…On April 11, the first news reports emerged that the Xinjiang mine had flooded, trapping 21 workers underground. The miners were rescued, but over the following weekend, authorities reportedly halted production while conducting a safety check, stopping shipments to power plants and causing a blackout. By de Vries’s estimates, the “hash rate,” the pace at which miners run algorithms to compete for fresh releases of Bitcoin, plummeted around 35%. Some in the Bitcoin community blamed the upheaval for hammering the price of the cryptocurrency by 14%, from a record $64,000 on Friday, April 16, to $55,000 on Sunday the 18th.

It’s by no means certain that reports of the accident pounded the wildly volatile coin. But the loss of computing power did trigger a sharp drop in the network’s capacity for handling transactions. Over the weekend, the cost of making a payment with the cryptocurrency or receiving a transfer of Bitcoin jumped from around $16 to $52, according to de Vries.

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Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in Amazon, Apple, and Microsoft. Holdings are subject to change at any time.