What We’re Reading (Week Ending 27 June 2021) - 27 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 27 June 2021):
1. Little Stories – Morgan Housel
After years of tests, Lockheed engineers finally built a stealth plane. They could fly their prototype without radar picking it up. It was a miracle.
Then one day, it just stopped working.
“You lit up the radar like a goddamn Christmas tree” an engineer tells a test pilot in the book Skunkworks. “They saw him coming from 50 miles away.”
No one could figure it out. They hadn’t made any changes to the plane’s design.
The cause, they eventually discovered, highlighted the complexity of their work.
A screw hadn’t been secured tightly enough during maintenance, its head extending a few millimeters above the plane’s surface. That was maybe half a drill spin less than ideal. It was more than tight enough for the plane to operate. But on radar, it “appeared as big as a barn door.”
There’s a lot of hidden leverage in the world – tiny things that seem inconsequential but operate in a tightly wound system where one flaw can bring everything down.
It also makes me wonder: How much incredible technology has been abandoned in frustration when we were half a drill spin away from success?…
…Skateboarder Tony Hawk landed a 900 – two and a half spins – at the 1999 X Games. It was the biggest achievement the sport had ever seen, the equivalent of the four-minute mile.
It catapulted Hawk into legend status. His video game came out a year later and sold 30 million copies. Six Flags named a rollercoaster after him.
But here’s the craziest part of this story: fifteen years later, an eight-year-old landed a 900.
Hawk was also the first person to land a 720 (two spins) – a feat later accomplished by a second-grader.
A lot of sports work like that. One person raises the bar over what previously seemed impossible, and that becomes the baseline for a new generation to build upon.
Just qualifying for the Boston Marathon requires a time that, 100 years ago, would put you within nine minutes of a world record.
A gold-medal gymnast 70 years ago would not make the cut in a local competition today.
Same with technology, business, and investment knowledge. One generation builds on the impossible feats of the previous one. It’s like compound interest.
A fifth-grader recently landed a 1080 – three spins, unthinkable in Hawk’s day. Asked what he thought of the achievement, Hawk replied: “It represents everything I love about skateboarding: constant evolution.”
Which is a statement you can apply to just about any field.
2. Tech Companies Discover Hidden Costs of Remote Work – Sarah Krouse
As companies prepare to implement new remote-work policies, they are finding those policies come with a host of unexpected costs. What’s racking up the bills: new time off and financial benefits to boost morale and help with challenges like child care, immigration fees and paperwork for workers who hold visas, and reimbursing employees for home office equipment. Plus there are potential tax costs associated with employees moving to a state where the company doesn’t already have a presence and business registration.
Intuit’s consumer finance app, Credit Karma, incurred an additional 8% to 10% of expenses for new benefits to support remote workers during the pandemic, said Colleen McCreary, the division’s chief people officer. The company added additional mental health benefits such as remote therapy and agreed to cover remote doctor visits that were outside its health plan’s coverage last year—perks that will remain in place as the company reopens its office. It plans to do so fully by September and expects workers to report in person some of the time, but it will not dictate how often or when they must do so.
To limit costs last year, Credit Karma told its 1,300-employee workforce they could only work remotely from certain states like California and North Carolina where the company already has business operations, she said.
A year ago, CEOs or chief financial officers believed their overall costs could fall dramatically if they relied less on real estate and went remote, said John Bremen, a managing director at Willis Towers Watson who advises companies on their work arrangements. But many corporate leaders have come around to a hybrid approach that allows employees to work part time in the office and part time remotely. That means companies aren’t giving up all of their office space as expected…
…More than a year into the pandemic, some tech companies say remote work has improved productivity and morale, in addition to allowing them to hire talent regardless of where workers live. Those benefits, remote work advocates say, surpass any additional financial costs associated with remote and hybrid work.
3. Howard Marks – Embracing the Psychology of Investing – Patrick O’Shaughnessy and Howard Marks
Patrick: [00:09:11] Living through 2020 and now into 2021 has surely been one of the most interesting markets that anyone’s ever seen. You’ve seen a lot of fascinating markets in your career. And I think your memo output in 2020 was prolific. You wrote a lot about the market. How does this 18-month period stack up to your own experience with market history in terms of its uniqueness and the fact that we had a vicious bear market very quickly and then a pretty similarly vicious bull market? It just strikes me as unusual relative to history, and I’m curious your read on it.
Howard: [00:09:43] Mark Twain said, “History does not repeat, but it does rhyme.” And if you look at the cycle of 2020, it doesn’t rhyme with very much. The main reason is because in every other crisis that I lived through, the upcycle, down cycle, let’s say, the cause was endemic. The cause came from within. And most cycles, I think, occur because people become over optimistic and everything departs from the secular trend line in the direction of excess. And as I mentioned, people become excited and enthusiastic and eventually their excitement and enthusiasm take things to an excess. And in the long run, that access is not sustainable. And so you get a correction back toward the trend line. You get a downward correction. But, of course, it goes through the trend line to an excess on the downside, which ultimately turns out to be unsustainable. So you get a correction back up toward the trend line. So I think cycles are best understood not as ups and downs, which sounds kind of random, but as excesses and corrections.
The point is that what happened in 2020 was obviously not the result of excess optimism. It happened because, for an exogenous reason, that is we were hit by a meteor from outer space in the form of a pandemic. That’s what caused the downturn, along with the fact that in order to fight the pandemic the authorities closed business to keep people from infecting each other. So you had, I would say, a manmade recession prompted by an exogenous event. And then you had an upturn which was engineered by the Fed and the Treasury, not because the upturn did not occur because things got so bad that they were unsustainable and there was a natural regression back toward the trend line of the economy. The recovery occurred because the Fed and Treasury did things that caused it. There’s no similarity to past cycles in terms of cause, speed, amplitude, and impact. You had to learn a whole new game plan.
Patrick: [00:11:59] Do you think that that entire new game plan affects all investors going forward? Because you’ve written a lot in the past about the role of liquidity in markets, famously in the Great Depression monetary supply contracted. The toolkit seems to be fight every battle by flooding liquidity into the system, and so how do we adjust our model of the world going forward?
Howard: [00:12:21] I think that there’s every possibility that people will look at the last two experiences, which are 2020 and 2008, the global financial crisis, and say, the Fed obviously has the firepower to prevent every downturn in the economy and they should do so when people think that way. I’m not confident on this subject because I’m not a professional economist or Fed watcher. And you know, you should beware of analogies. But in the forestry business, if there’s a small fire they let it occur and sometimes they even cause some small fires to burn up the fuel that lies on the forest floor. And if you don’t permit any small forest fires, when you finally have one that you can’t put out right away, you’re going to have a doozy because of all the accumulated fuel on the forest floor. I believe that if they prevent every recession, that will give rise to such excesses on the high side, it will be, as I say, unsustainable and will cause a recession and that’s going to be a doozy.
So it just seems to me that if I were running Fed, which I’m absolutely unqualified to do, I would opt for leaving it alone most of the time, the economy, and having it do what it does naturally. All of us in the investment business, I don’t think there are any socialists in the investment business. We’re all in the investment business because we believe in the efficacy of the free market as an allocator of resources. So if you do, then shouldn’t you leave the economy and the capital market alone as much as you can so that it can freely allocate resources? So I guess I would not be an activist.
Now having said that, what they did in 2020 they had to do. And if they hadn’t done it, we’d have a worldwide depression now. And I made the point in one of my memos that just because something has negative possible ramifications doesn’t mean you shouldn’t do it. But in this case, they had to do it. But it did have, in my opinion, negative possible ramifications, so they should try to avoid doing it again anytime soon. And I’m a visual person, so I come up with visual images. And my visual image for the economy is its kind of like a ball at the top of a water spout. And as long as the water spout is strong, the ball stays up in the air, it stays out of the water. So the Fed levitates the economy through the water stock, which consists of liquidity. But it only stays up as long as the Fed is injecting liquidity. And is it appropriate for the Fed to inject incremental liquidity on a permanent basis?
4. What Makes Quantum Computing So Hard to Explain? – Scott Aaronson
The trouble is that quantum computers will not revolutionize everything.
Yes, they might someday solve a few specific problems in minutes that (we think) would take longer than the age of the universe on classical computers. But there are many other important problems for which most experts think quantum computers will help only modestly, if at all. Also, while Google and others recently made credible claims that they had achieved contrived quantum speedups, this was only for specific, esoteric benchmarks (ones that I helped develop). A quantum computer that’s big and reliable enough to outperform classical computers at practical applications like breaking cryptographic codes and simulating chemistry is likely still a long way off.
But how could a programmable computer be faster for only some problems? Do we know which ones? And what does a “big and reliable” quantum computer even mean in this context? To answer these questions we have to get into the deep stuff.
Let’s start with quantum mechanics. (What could be deeper?) The concept of superposition is infamously hard to render in everyday words. So, not surprisingly, many writers opt for an easy way out: They say that superposition means “both at once,” so that a quantum bit, or qubit, is just a bit that can be “both 0 and 1 at the same time,” while a classical bit can be only one or the other. They go on to say that a quantum computer would achieve its speed by using qubits to try all possible solutions in superposition — that is, at the same time, or in parallel.
This is what I’ve come to think of as the fundamental misstep of quantum computing popularization, the one that leads to all the rest. From here it’s just a short hop to quantum computers quickly solving something like the traveling salesperson problem by trying all possible answers at once — something almost all experts believe they won’t be able to do.
The thing is, for a computer to be useful, at some point you need to look at it and read an output. But if you look at an equal superposition of all possible answers, the rules of quantum mechanics say you’ll just see and read a random answer. And if that’s all you wanted, you could’ve picked one yourself.
What superposition really means is “complex linear combination.” Here, we mean “complex” not in the sense of “complicated” but in the sense of a real plus an imaginary number, while “linear combination” means we add together different multiples of states. So a qubit is a bit that has a complex number called an amplitude attached to the possibility that it’s 0, and a different amplitude attached to the possibility that it’s 1. These amplitudes are closely related to probabilities, in that the further some outcome’s amplitude is from zero, the larger the chance of seeing that outcome; more precisely, the probability equals the distance squared.
But amplitudes are not probabilities. They follow different rules. For example, if some contributions to an amplitude are positive and others are negative, then the contributions can interfere destructively and cancel each other out, so that the amplitude is zero and the corresponding outcome is never observed; likewise, they can interfere constructively and increase the likelihood of a given outcome. The goal in devising an algorithm for a quantum computer is to choreograph a pattern of constructive and destructive interference so that for each wrong answer the contributions to its amplitude cancel each other out, whereas for the right answer the contributions reinforce each other. If, and only if, you can arrange that, you’ll see the right answer with a large probability when you look. The tricky part is to do this without knowing the answer in advance, and faster than you could do it with a classical computer.
Twenty-seven years ago, Shor showed how to do all this for the problem of factoring integers, which breaks the widely used cryptographic codes underlying much of online commerce. We now know how to do it for some other problems, too, but only by exploiting the special mathematical structures in those problems. It’s not just a matter of trying all possible answers at once.
5. Twitter thread on the “fighter mentality” of Mark Zuckerberg – Dan Rose
In my experience the best founders develop a fighter mentality. Mark Zuckerberg was a fighter, and without that mentality Facebook would never have achieved its full potential. Here’s what I saw over 13 years working for Zuck:
One of Mark’s first big fights was with his own board + exec team. They tried to convince him to sell the company to Yahoo for $1B in ’06. At the time FB had 5M users (all college) and was 2 yrs old. At the age of 22, Mark stood to gain $300M personally. How could he say no?
Everyone told Mark to sell. Friends said he’d be crazy to pass up $1B. His management team wanted an exit. His board put pressure on him. But Mark knew something they didn’t – FB was on the cusp of launching new products that would completely change the trajectory of the company.
I joined FB in mid-2006, right after Mark made the decision not to sell (I’m glad he did!). He had the courage to go against everyone around him, and he was promptly vindicated the following year when we raised our Series C from Microsoft at $15B.
Within a couple of years after the Yahoo near miss, Mark replaced his entire management team and reconstituted the board. He needed people around him who believed in his vision, people he could trust to fight alongside him. I was one of them…
…The Social Network came out in 2010. Mark had been warned it would portray him in a negative light, and he was appropriately concerned about its impact on team morale, FB’s brand and his personal reputation. His advisors told him to ignore it, keep his head down, stay focused.
In one of the greatest jiu jitsu moves of all time, Mark rented out the Shoreline cinema complex and bussed in the entire company to see the premier of the movie. His first (and probably only) viewing of The Social Network was in a giant cinema with the rest of his employees.
Adding to the surrealness of this scene, Mark’s admin asked me to sit next to him – she thought my positivity would be a calming influence. When the character portraying him was being seduced by a girl, he leaned over and whispered “now this is awkward.” We both laughed out loud!
6. How Software Is Eating the Car – Robert N. Charette
“Once, software was a part of the car. Now, software determines the value of a car,” notes Manfred Broy, emeritus professor of informatics at Technical University, Munich and a leading expert on software in automobiles. “The success of a car depends on its software much more than the mechanical side.” Nearly all vehicle innovations by auto manufacturers, or original equipment manufacturers (OEMs) as they are called by industry insiders, are now tied to software, he says.
Ten years ago, only premium cars contained 100 microprocessor-based electronic control units (ECUs) networked throughout the body of a car, executing 100 million lines of code or more. Today, high-end cars like the BMW 7-series with advanced technology like advanced driver-assist systems (ADAS) may contain 150 ECUs or more, while pick-up trucks like Ford’s F-150 top 150 million lines of code. Even low-end vehicles are quickly approaching 100 ECUs and 100 million of lines of code as more features that were once considered luxury options, such as adaptive cruise control and automatic emergency braking, are becoming standard.
Additional safety features that have been mandated since 2010 like electronic stability control, backup cameras, and automatic emergency calling (eCall) in the EU, as well as more stringent emission standards that ICE vehicles can only meet using yet more innovative electronics and software, have further driven ECU and software proliferation.
Consulting firm Deloitte Touche Tohmatsu Limited estimates that as of 2017, some 40% of the cost of a new car can be attributed to semiconductor-based electronic systems, a cost doubling since 2007. It estimates this total will approach 50% by 2030. The company further predicts that each new car today has about $600 worth of semiconductors packed into it, consisting of up to 3,000 chips of all types…
…How little software is developed by car makers is illustrated by comments made in 2020 by Herbert Diess, then CEO Volkswagen Group and now its Chairman, when he admitted that “hardly a line of software code comes from us.” VW estimates that only 10% of the software in its vehicles is developed in-house. The other 90% is contributed by tens of suppliers, and at some OEMs, this number reportedly reaches more than 50.
So many software suppliers, each with their own development approach, using their own operating systems and languages obviously adds another level of complication, especially in performing verification and validation. This is highlighted by a recent Strategy Analytics and Aurora Labs survey of software developers across the automotive supply chain asking how difficult it was to know when a code change in one ECU affects another. Some 37% of those surveyed indicated it was difficult, 31% indicated it was very difficult, 7% indicated that it was pretty darn close to impossible, while 16% indicated that it was not possible.
Car companies and their suppliers are realizing that they must collaborate more to keep tighter control of data configuration management to keep unintended consequences from occurring due to unanticipated ECU code changes. But both admit that there is still a way to go.
7. Twitter thread on the rise of intangibles and what it means for investors – Eugene Ng
Sharing my key takeaways from @mjmauboussin’s latest piece on “The Impact of Intangibles on Base Rates” and how it should affect us as investors. A must read! https://www.morganstanley.com/im/publication/insights/articles/article_theimpactofintangiblesonbaserates.pdf?1624494283562
1️⃣ Thinking Casually White heavy check mark: Taking the inside view, gathering lots of information of what is of interest, combining with your own input & experience & project into the future and coming up with a narrative trumps…
2️⃣ Thinking statistically Cross mark: Taking the outside view, relying on the past & base rates. Not relying of own experience, but others experience. Outcomes tend to be average, outliers rare, best for bell-shaped distributions, not in stocks where power laws and tails exist.
3️⃣ Intangibles & Growth. Two key characteristics: (1) Grow Faster Chart with upwards trend: Enjoy strong economies of growth, cheap to reproduce and share Rightwards arrow companies can grow much faster & more persistent; (2) Decline Faster Chart with downwards trend: Obsolescence and sunkeness Rightwards arrow companies can decline much faster
4️⃣ Intangibles & Access: The distinction between tangible is access. Only one can use a tangible asset at one time, whereas many can use an intangible asset at the same time. Marginal cost of sharing can be very low. E.g. Software.
5️⃣ Intangibles & Scalability: Because intangibles are much more scalable, companies that rely on intangibles can grow much faster than those built on tangibles. Chart with upwards trendRocket
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 Facebook and Microsoft. Holdings are subject to change at any time.
