What We’re Reading (Week Ending 30 October 2022) - 30 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 30 October 2022):
1. The state of the energy transition – Bill Gates
The world still needs to reduce annual greenhouse gas emissions from 51 billion tons to zero, but global emissions continue to increase every year. If you follow the annual IPCC reports, you’ve watched as the scenarios for limiting the global temperature rise to 1.5 or even 2 degrees Celsius become increasingly remote. And some of the clean technologies we need are still very far from becoming practical, cost-effective solutions we can deploy at scale.
In the past decade, we finally got going. Over the next three, we need to go much further, much faster. I still believe we can avoid a climate disaster—if we devote the next generation to mobilizing the largest crisis response in human history.
To understand what it will take to get to zero, we need to start by asking where the 51 billion tons of emissions come from. Unfortunately, the answer is everything and everywhere.
Everything: Virtually every human activity produces greenhouse gas emissions. People automatically think of electricity, where there’s a path to zero because wind and solar are now cheaper than fossil fuels. But electricity accounts for only 26 percent of global emissions. Similarly, lithium-ion batteries have made it possible to see a net-zero future for car travel. But cars account for less than half of the transportation sector’s 16 percent of emissions. Lithium-ion batteries don’t do much about the emissions from long-distance travel in airplanes, cargo ships, and heavy-duty trucks.
Agriculture and buildings account for 21 and 7 percent of emissions, respectively. The sector with the most emissions, 30 percent of the total, is manufacturing—making the things that modern life depends on, like cement, plastic, and steel. There are currently no cement plants in the world, and exactly one steel plant, that don’t produce CO2.
So, if you are reading this over lunch on a plastic device in your climate-controlled concrete-and-steel office building that you took a bus to get to, you begin to see how more or less every aspect of our lives contributes to the problem.
Everywhere: More than 70 countries have committed to reaching net zero, including big polluters like the United States and the European Union. Even if the US and Europe get there, however, we won’t have solved the problem. Three-quarters of the global population lives in emerging economies like Brazil, China, India, and South Africa, and although historically they played a very small role in causing climate change, they are now responsible for two-thirds of total greenhouse-gas emissions. China by itself emits more than one quarter. So solutions can’t be dependent on unique conditions in a single country or region. They have to work in all countries, or the temperature will continue to rise.
Thinking globally instead of nationally reveals why we can’t solve climate change simply by using less energy. Low- and middle-income countries are building aggressively to achieve the standard of living their people aspire to—and they should be. Many countries in Europe and North America filled the atmosphere with carbon to achieve prosperity, and it is both unrealistic and unfair to expect everyone else to forgo a more comfortable life because that carbon turned out to change the climate…
…Humanity has never had all these raw materials in front of us before: the investment, the policy, the pipeline of innovations, the overall public awareness that climate change is a priority. In recent polling, more people around the world see climate as a major threat than any other issue. And more individuals than ever are taking productive steps to reduce their own carbon footprints, which when viewed collectively sends a powerful signal to business and government leaders that more must be done. But even with all these tools and momentum, we still have to fashion them into a comprehensive solution.
That means three things: more research, development, and demonstration; developing a fair, workable process for scaling up; and helping people adapt to the climate change that is going to happen no matter what we do now.
Research, development, and demonstration: There are still many critical clean technologies that aren’t anywhere near cheap enough to compete. We need sustainable liquid fuels for long-haul transportation; affordable ways to capture CO2 directly from the atmosphere; additional sources of renewable energy to keep up with global demand that will double or triple as we electrify more and more processes. And to fill these gaps, we need to keep doing what we’ve done well since 2015: we need to ratchet up investment in clean-energy innovation even more.
Develop a fair, workable process for scaling up: We cannot pretend an energy transition won’t be disruptive. Although new industries and jobs will appear, some old ones will disappear. New infrastructure will affect the communities where it’s built. In the past, low-income communities and communities of color have suffered disproportionately from decisions about where big infrastructure projects should go, and we cannot let that happen this time. Public policies need to ensure a just transition so that we never pit a livable planet in opposition to people’s livelihoods. Those who could experience disruption need a voice in the process.
At the same time, there must be a transition. Last year, voters in Maine blocked the construction of transmission lines needed to bring low-carbon electricity to the Northeast. Some of those transmission lines were slated to cut through farms and forests, but nevertheless we need to be able to make responsible tradeoffs in fair and transparent ways so we can go faster. The unimaginable disruptions caused by a 4-degree rise in temperature will outweigh the downsides of most clean energy solutions—and a strong community engagement process will result in better design and siting of projects.
Help people adapt: The climate has already changed dramatically, and it will continue to do so. To minimize the damage these changes cause, we also need to invest in helping people adapt to a warmer climate, rising sea levels, and less predictable weather. That means investing in crop science so that farmers can plant seeds that are more tolerant of heat, an area our foundation has been working in for years. It also means figuring out technologies like desalination to guarantee that communities will have access to clean water, and upgrading port facilities around the world to make them resilient to floods and storms. The world must use the same strategies that have incentivized innovation in mitigation technologies to start getting serious about adaptation, too. We’re expanding our approach at Breakthrough Energy to reflect this perspective.
2. Cumulative vs. Cyclical Knowledge – Morgan Housel
In some fields our knowledge is seamlessly passed down across generations. In others, it’s fleeting. To paraphrase investor Jim Grant: Knowledge in some fields is cumulative. In other fields it’s cyclical (at best).
There are occasional periods when society learns that debt can be dangerous, greed backfires, and more money won’t solve all your problems. But it quickly forgets and moves on. Again and again. Generation after generation.
I think there are a few reasons this happens, and what it means we have to accept.
Some fields have quantifiable truths, while others are guided by vague beliefs and individual circumstances. Physicist Richard Feynman said, “Imagine how much harder physics would be if electrons had feelings.” Well, people do. So any topic guided by behavior – money, philosophy, relationships, etc. – can’t be solved with a formula like physics and math.
Neil deGrasse Tyson says, “The good thing about science is that it’s true whether or not you believe in it.” You can disagree and say science is the practice of continuous exploration and changing your mind, but in general he’s right. Germ theory is true and we know it’s true. But what about the proper level of savings and spending to live a good life? Or how much risk to take? Or the right investing strategy given today’s economy? Those kinds of questions do not lend themselves to scientific answers. They’re subjective, nuanced, and impacted by how the economy changes over time. So often there simply isn’t relevant information to pass down to the next generations. Even when firm financial rules exist, some truths have to be experienced firsthand to be understood.
Cyclical knowledge, and the inability to fully learn from others’ past experiences, means you have to accept a level of volatility and fragility not found in other fields. I can imagine a world in 50 years where things like cancer and heart disease are either non-existent or effectively controlled. I cannot ever imagine a world where economic volatility is tamed and people stop making financial decisions they eventually regret – no matter how much history of past mistakes we have to study.
3. Madhavan Ramanujam – How to Price Products – Patrick O’Shaughnessy and Madhavan Ramanujam
Patrick: [00:02:48] So Madhavan, I’ve loved reading your book years ago and then again in preparation for our conversation today for one major reason. And we’ll talk a lot about that reason in a few minutes here, and we’ll go over the place and all the things you’ve studied in business. But the one thing that you sort of blew my mind on with your book is the importance of pricing, which is something that so many entrepreneurs out their struggle with, and the order in which pricing should come in a product conversation. I think almost everyone puts that at the end. I have an idea, let’s talk to customers, let’s design something, let’s build something, and then let’s figure out what to charge for it. I’d love you to provide your alternative perspective on that order of operations and why you arrived at a radically different way of building products.
Madhavan: [00:03:32] I think probably framing the problem at hand for many years, I was working as a pricing consultant, especially in Silicon Valley. And I really witnessed how everyone was so obsessed on creating amazing new innovations but hardly paid attention to how to monetize successfully or to even have a willingness to pay in the market. We used to even get calls saying, “Hey, I built a new product. We’ve been working on it for the last 2 years, and we need a price. And by the way, we needed it last week.” And you couple all these reactions with the failure rate that you actually see in innovation, it’s remarkably high.
And when I took a step back and I kind of looked at it, I think the classic phrase that comes to mind is that these companies were, I would say, simply spraying and praying and hoping that they can monetize and they can build products that people will eventually buy. But the core issue here is they were hoping because they truly didn’t know. They built the products, slapped down a price and threw it in the market, and hoped for the best. I mean, this had to change. And this is why I wrote Monetizing Innovation. What we call a winning approach is to think pricing early and to really test for, whether there’s a product market pricing fit before you go too far in the journey.
And the reason for this is inverting that mindset is critical because when you’re building something as an entrepreneur, as a company, you actually don’t have a choice whether you’ll have a pricing conversation with a customer. The only thing in your control is when you will have it. And we are advocating having that much earlier so that you can design the product around what customers need, what they value, and what they’re willing to pay for, in a sense, know that you will monetize as opposed to hope that you would.
Patrick: [00:05:08] Maybe you can bring this to life and make it tangible for us with an example because it’s hard for me to imagine having a price conversation before I have a product to show somebody. It seems like the impulse is build something even if it’s like a vaporware, demo, or something, and be able to walk in the office and say, “This is what we do” and then maybe have a pricing conversation. But I think you think pricing conversation should be even before the design and building phase. So how does one of these conversations unfold if there’s nothing to show in the first place?
Madhavan: [00:05:35] Yes. Probably I’ll take an example of a story, and we talk about this in the first chapter of the book. It’s a story from Porsche. In their early ’90s, they were actually — they’re thinking of an innovative idea. They said, “Okay, should we build an SUV?” But an SUV for a Porsche, that just seemed off. What they did was interesting. They went to the market. There’s nothing drawn in terms of a blueprint, sketch, or even a product. But they just went in and tried to identify whether there is a need for a Porsche SUV. And more importantly, would someone pay for it, very high level. Pleasant surprise, they actually found that people said, “Yes, Porsche SUV could make sense, and I would pay for it.” I mean, people who had probably moved on from Porsche because they had a family, et cetera, but they wanted to come back to the Porsche umbrella. What happened next was super fascinating. What they did is they came up with blueprints, sketches and kept having this conversation with customers trying to identify what do they need, what do they value in an SUV, and are they willing to pay for it. They even did what we call as car clinics, where they would build a prototype, full-scale prototype, where they would actually bring in people and let them ride the car around. And not a single unit has been, let’s say, manufactured or productized yet, but it’s still a prototype.
And then after that experience, they would have this kind of willingness to pay conversations. Things like, for instance, a big cupholder, probably which goes against the grain of most engineers, doesn’t look very aesthetically appealing, is in the car because people said they need it, they value it, and they’re willing to pay for it. I mean, a 6-speed manual transmission, no one needed that in an SUV. That was out of the window. So everything that went into the car was actually battle-tested with customers to see if they need it, they value. And more importantly, are they willing to pay for it? This is a very different way of innovation as compared to like the age-old approach has been always build a product, perfect it, our customers don’t know what they want, let’s slap on a price and throw it in the market and hope for the best. Very different. But if you look at the output of this exercise, also couldn’t have been more different than traditional innovation processes. I mean, this SUV was launched with the name of Cayenne, which we all know today accounts for more than half of Porsche’s profit and is built in hundreds and thousands of units, one of the roaring successes in automotive history.
I think the key here is to have that conversation with your customers early. We are not saying you just have it once. It’s a bit of you have it over a period of time and sustaining. Like if you built a prototype and you pitch the value and you pitch the benefits, and if someone actually says they won’t pay for it, chances are they’re not going to pay for it when you build a nicer-looking version, and that’s the point. So having the testing and learning much earlier. And if someone says, no, they won’t pay for it, the most important question is to ask why. And you start hearing all of these things to design your products around what drives customers’ needs, what do they value and what are they ultimately willing to pay for. The folks at First Round wrote a blog article, in which they summarized the entire thesis of the book Monetizing Innovation in four succinct words. They said price before product, period.
Patrick: [00:08:36] What I like about that example is Porsche is not showing up saying, “We’ll build anything you want, what do you want?” They do have an SUV in mind. They’re willing to build single prototypes to test reaction. You’re not walking with a white sheet of paper, like there’s some opinion that they have. But they’re still testing that willingness to pay very, very early on. And I want to make sure we highlight what is distinct about willingness to pay versus just positive feedback because I think lots of things, features, and products or whatever, people might react positively to. But that’s not the same as their willingness to pay. So I want to make sure I understand the difference. And then I’ll ask what it looks like to have a great willingness to pay conversation, like how you actually structurally execute that strategy?
Madhavan: [00:09:18] Most of the companies, at least in the tech space, would tell you they try to achieve a product market fit. And while that is good, it is not sufficient. For instance, if someone comes and ask, do you like the headset that you’re wearing for this conversation? I like it. Do you like it at $200? The whole conversation is different. So if you didn’t put pricing as part of your product market fit validation, often you are hearing what you want to hear. The idea is to get to a product market pricing fit and try to truly understand if, at the end of the day, someone will pay for the innovation as in do they truly value it.
Because I think it also comes down to like how do we define price. When we talk price, most people think of a dollar figure. That’s just a price point. I think we need to educate people to think about price as a measure. For instance, liter is a measure of volume, price is a measure of value. And when you think of it this way, price really stands for do people want your product and how badly you want it. And in a way, the easiest way to remember this, in Latin, there’s only one word for price and value. It’s called pretium. And I think they figured this out long back. It’s reflections of the same coin.
4. Looking at Japan with FT Unhedged – Matthew C. Klein, Rob Armstrong, and Ethan Wu
Unhedged: As most of the world’s major economies have struggled with waves of pandemic-driven inflation and rapid policy tightening designed to address that inflation, Japan has stood apart. In August, Japanese consumer price inflation rose to 3% y/y. That’s a 30-year high, but officials in the U.S. or Europe can only dream of such a low figure. The Bank of Japan, correspondingly, swims against the global tide, keeping monetary policy loose. The result has been a dizzying fall in the yen:
It is the combination of an economic environment distinct from the rest of the world and a weak currency that drew Unhedged’s attention back to Japan. Surely relatively gentle policy, a currency supportive of exports, and some pent-up post-pandemic demand in Japan and Asia should create investment opportunities in a Japanese market that has been unpopular with global investors in recent years?
Matt Klein: The thing that really stands out to me is that the 1980s bubble and 1990s bust left a massive permanent mark on the Japanese economy. Corporations went from being massive borrowers that relied on external finance to cover their capital budgets (and some of their operating expenses) to being huge net lenders. Since 1995, debt repayments, cash accumulation, and purchases of other financial assets have added up to more than ¥600tn. The costs of this financial conservatism have been falling business investment and rising precarity for workers.
Shinzo Abe’s economic program was a response to this problem. The hope was that a mixture of carrots (a weaker yen, lower taxes on profitable companies, more pro-business regulations, infrastructure investment) and sticks (inflation, governance reforms, higher taxes on unprofitable companies) would get companies to start spending their cash piles. It didn’t really work, but the upshot is that Japanese companies have ended up with absurdly strong balance sheets…
…Unhedged: We have heard for a long time that strong Japanese balance sheets would be put to work creating shareholder value. Maybe now is the moment?
Matt: In theory, there is enormous potential for Japanese companies to boost shareholder returns by rejiggering their balance sheets. Dividend yields have ticked up since Abe began pushing for higher shareholder payouts a decade ago, but they are still low. Buybacks may be anathema to executives scarred by the 1990s, but there is no obvious reason why companies operating in a world of zero interest rates should be so conservative with their cash, which is worth about 13 times operating income.
Unhedged: Japanese companies’ balance sheet strength may make them look — in theory — like a haven in the rising-rate storm. So far, though, the Tokyo market remains unloved by international investors. That is understandable: a consequence of the weakening yen is that, measured in global currencies, the Tokyo stock index has performed terribly. From the start of the pandemic in February 2020, the Topix is up 20% in yen terms, but down 7% in dollars, badly trailing US and global indices…
…Matt Brett manages the Baillie Gifford Japan Trust, which has returned 300 per cent investing in Japanese equities (in pounds) over the past 10 years. He says that recently Japanese growth stocks, in which the Trust specialises, have followed US techs down, with the difference that “the Japanese growth stocks never went up”. Growth companies are trading at 1.3 times sales, he reckons, a “tiny premium” to the Topix at 1.1. Meanwhile, the yield on the stocks in the trust is 2.4 per cent. “As stock pickers, we are quite excited,” he says.
5. The end of Apple’s affair with China – The Economist
The mushrooming of factories in southern India marks a new chapter for the world’s biggest technology company. Apple’s extraordinarily successful past two decades—revenue up 70-fold, share price up 600-fold, a market value of $2.4trn—is partly the result of a big bet on China. Apple banked on China-based factories, which now churn out more than 90% of its products, and wooed Chinese consumers, who in some years contributed up to a quarter of its revenue. Yet economic and geopolitical shifts are forcing the company to begin a hurried decoupling. Its turn away from China marks a big shift for Apple, and is emblematic of an even bigger one for the world economy.
Apple’s packaging proclaims “Designed by Apple in California”, but its gadgets are assembled along a supply chain that stretches from Amazonas to Zhejiang. At the centre is China, where 150 of Apple’s biggest suppliers operate production facilities. Tim Cook, who was Apple’s head of operations before he became chief executive in 2011, pioneered the firm’s approach to contract manufacturing. A regular visitor to China, Mr Cook has maintained good relations with the Chinese government, obeying its requirements to remove apps and to hold Chinese users’ data locally, where it is available to the authorities.
Now a change is under way. Big tech is showing strains. On October 25th Alphabet and Microsoft presented disappointing quarterly results. Meta, which lost another fifth of its value after reporting the second straight quarter of declining sales, is a shadow of its former self. Apple’s latest earnings, due out after The Economist went to press on October 27th, may be dented by creaky Chinese supply chains and softening demand from Chinese consumers. So Mr Cook, who has not been seen in China since 2019, is wooing new partners. In May he entertained Vietnam’s prime minister, Pham Minh Chinh, at Apple’s futuristic headquarters. Next year Apple is expected to open its first physical store in India (whose prime minister, Narendra Modi, is a fan of gold iPhones).
The two countries are the main beneficiaries of Apple’s strategic shift. In 2017 Apple listed 18 large suppliers in India and Vietnam; last year it had 37. In September, to much local fanfare, Apple started making its new iPhone 14 in India, where it had previously made only older models. The previous month it was reported that Apple would soon start making its MacBook laptops in Vietnam. Some of Apple’s newer gadgets show the way things are going. Almost half its AirPod earphones are made in Vietnam and by 2025 two-thirds will be, forecasts JPMorgan Chase. The bank reckons that, whereas today less than 5% of Apple’s products are made outside China, by 2025 the figure will be 25% (see chart 1).
As Apple’s production system is shifting, its suppliers are diversifying away from China, too. One crude measure of this is the share of long-term assets that Taiwanese tech-hardware and electronics firms have located in China. In 2017 the average figure was 43%. Last year that had fallen to 31%, according to our estimates using company and Bloomberg data.
The most urgent reason for the scramble is the need to spread operational risk. Two decades ago the garment industry beefed up its operations outside China after the sars epidemic paralysed supply chains. “sars made it very clear to everyone operating in China that you needed a ‘China+1’ strategy,” observes Dominic Scriven of Dragon Capital, an investment firm in Vietnam. Covid taught tech firms the same lesson. Lockdowns in Shanghai in the spring temporarily shut a factory run by Quanta, a Taiwanese firm, believed to be making most of Apple’s MacBooks. Avoiding this kind of chaos is the “primary driving force” for Apple’s supply-chain moves, says Gokul Hariharan of JPMorgan Chase.
Another motive is containing costs. Average wages in China have doubled in the past decade. By 2020 a Chinese manufacturing worker typically earned $530 a month, about twice as much as one in India or Vietnam, according to a survey by jetro, a Japanese industry body. India’s ropey infrastructure, with bad roads and an unreliable electrical grid, held the country back. But it has improved, and the Indian government has sweetened the deal with subsidies. Vietnam offers tax rebates and holidays, too, as well as free-trade deals, including one recently signed with the eu. Bureaucracy around visas and customs remains a pain. But the work ethic is similar to that in China: “Confucius still gets them out of bed in the morning,” says one foreign executive in Vietnam.
6. Thinking About the Next Warren Buffett – Frederik Gieschen
Shareholder: “Do you ever get tired of being Warren Buffett? If you could come back again, would you want to be Warren Buffett?”
Buffett: “You see a lot of the publicity here for a couple of days around the time of the meeting. But life goes on in a very normal way. And I have fun every day of my life. Because, you know, I get to do what I want to do. And I get to do it with people I like and admire and trust. And it doesn’t get any better than that.”
The more I read about Buffett, the more overwhelmed I feel. The scale of his success and the sheer volume of material by and about him seems like too much to tackle. It creates a temptation to boil down the many layers and lessons into one convenient number: the track record.
Then I remind myself of this quote in which Buffett described the essence of his and Munger’s jobs:
“We have to identify and keep good managers interested after we’ve figured out who they are. The second thing we do is allocate capital. And aside from that, we play bridge.”
Notice the balance. Capital and people. Reading and relationships. Buffett is well aware that financial capital is not the only asset that compounds. His entire life he has been compounding social capital: relationships, trust, reputation.
You can’t tap dance to work if you don’t like who you’ll meet at the office. You can’t lead an enterprise with 372,000 employees based on “decentralization almost to the point of abdication” if you can’t completely trust your managers.
We have to resist the temptation to view him through just one lens. It creates a caricature. It’s not helpful. It’s worth asking: How many layers are there to Buffett’s success?
- Followed his passion.
- Great investor with an enviable long-term track record.
- Built a company in his image.
- Keeps painting his own canvas every day.
- Reached the top of the Forbes rich list and became an admired icon of the business world (rather than a reviled symbol of the system).
- Shareholders got wealthy alongside him.
- Created a unique and possibly lasting culture.
- Used his platform to educate generations of investors and business leaders.
- And then there’s the Giving Pledge. Buffett turned into more than a philanthropist: he became a catalyst for others to take action.
In The Big Short, Michael Lewis described how Michael Burry studied Buffett and found that the more he learned, “the less he thought Buffett could be copied.” Rather, the lesson from Buffett’s life was that “to succeed in a spectacular fashion you had to be spectacularly unusual.”
“If you are going to be a great investor, you have to fit the style to who you are. At one point I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules.” Michael Burry
Munger has said as much, explaining that Buffett, “the former protégé,” surpassing Ben Graham was “a natural outcome.”
“It’s what Newton said. He said, ‘If I’ve seen a little farther than other men, it’s by standing on the shoulder of giants.’”
Speaking of giants, during the 2019 annual meeting Munger was in a chattier mood. He shared one of my favorite little stories:
Munger: “Young lawyers frequently come to me and say, ‘How can I quit practicing law and become a billionaire instead?’ I say, well, it reminds me of a story they tell about Mozart.
A young man came to him, and he said, ‘I want to compose symphonies. I want to talk to you about that.’ Mozart said, ‘How old are you?’ ‘Twenty-two.’
And Mozart said, ‘You’re too young to do symphonies.’ And the guy says, ‘But you were writing symphonies when you were ten years old.’
He says, ‘Yes, but I wasn’t running around asking other people how to do it.’”
7. TIP485: Market Updates, Ray Dalio Retiring, Elon Buying Twitter and Elemental Power – Trey Lockerbie and Josh Wolfe
Trey Lockerbie (00:31:39):
I feel like people would have a hard time just wrapping their head around sitting across from Stan Druckenmiller who’s saying, “Hey, I want to give you money.” I would be like, “I want to give you money, Stan.” And I imagine that’s because you guys are doing such interesting cutting edge things and you’re fishing in all these areas that are maybe unexplored.
(00:31:55):
And one of them I’m really particularly interested in, which is chronobiology because I don’t know, you seem like the kind of guy who’s interested in longevity perhaps, or on the cutting edge and seeing all these things that might help in a lot of different ways. Maybe talk to us about what chronobiology is and maybe what is most exciting about it for you.
Josh Wolfe (00:32:14):
Maybe on the one hand I’m not old enough to be obsessed with the longevity thing. Maybe I still harness the illusion of the young that I’m going to live a very long time and I have some views about that, but I’m actually not focused on this in the context of longevity and trying to live forever. It’s more about understanding the biology of timing, the timing of mechanisms inside of ourselves and between ourselves and a truth that your Purkinje cells, which are in your brain are 25 years old and are not renewed. The cells inside of your cell or your gut are renewed in some cases every day or several days.
(00:32:45):
And so, if you were to say your gestational age versus your biological age, different parts of you are different ages. There isn’t a you, like this table that we’re sitting at is one age, but you and I, even though we might have been born at a certain year are made up of different parts and those different parts actually have different ages in the same way that you could look at a river or stream and say that, “Well, of course there’s a river or stream, but its individual components are constantly changing.” And it’s also why you might have cancer mutations in some parts of the body, because you have more rapid rejuvenation or reproduction of cells and in other cases you have very low rates of cancer, because you don’t have higher probability of mutations.
(00:33:18):
So I’m very interested in the cell signaling between organelles inside of a cell, between cells, within an organ, between organs themselves, between our bodies and circadian rhythms. If you take something like cholesterol medicine, they figured out that you want to take cholesterol medicine in a specific time of day, which tends to be night, because your liver shuts down the production of LDL and it’s a optimal time to take a cholesterol lowering medicine, so that’s something that’s not either obvious to many people or well known.
(00:33:46):
When you look at between humans, you see synchronicity between women who get their period that are clearly hormone signaling amongst each other at the same time they end up in the same cycle if they’re roommates in college and after. And so there’s just very interesting hidden biology in the timing mechanisms inside of cells, inside of our bodies, between our bodies and that means that there’s mysteries to unlock and ultimately drugs to produce.
(00:34:11):
And whether those drugs or mechanisms or technologies are for the specific time of day you should be taking specific drugs and your biology might actually be different than mine. There are people that we know are morning people and people that are more night owls. Some of that is genetic, some of that is biological and environmental or epigenetic, the way that the environment acts on the expression of your genes, but it’s an area that is just not well understood. And anytime there’s an area that’s not well understood, to me it’s a whistle to pay attention, because there’s an opportunity to discover something profound…
…Trey Lockerbie (00:37:38):
Elemental power. So, you’ve been outspoken about the need to rebrand nuclear energy to elemental power, but shifting towards a future heavily relying on it. Energy has been a major headline in 2022. Do you think the events that have unfolded this year have set the stage for a more elemental future?
Josh Wolfe (00:37:57):
On elemental energy, yes, I think that the events of the world have at least sparked people in a few ways, some of which are overt and observable and some of which are speculative. You’ve already seen in Germany, which unfortunately has made decisions, I would speculate, and this sounds conspiratorial and crazy, but the only thing that Putin had to do for the past decade was foment the Green party, foment them to rise up against Merkel and convince the populous that the important thing to do in the name of climate was to shut down nuclear power.
(00:38:26):
The effect of doing that was not to decrease our reliance on low carbon energy. I mean, nuclear produces zero carbon. It’s just the cleanest, largest, most reliable source of base load power for a population. Most of the people that are against nuclear, as I’ve rebranded it elemental, I’ll get to in a moment, they’re really against growth, they’re really against progress, they’re really against capitalism. They’re really against systems of power and in some cases democracy.
(00:38:50):
There really is an ideological wrapper around people that are against that. And the elements of the mantra for clean and green, if it’s not a de-growth position, are mostly focused on solar and wind and biofuels and things that feel like they’re natural. Now, solar, of course, is inorganic semiconductors, and they’re not necessarily super clean. Wind requires huge amounts of cement and technology and infrastructure, but there’s this poetic and romantic illusion about using these elements.
(00:39:16):
And so, that’s actually what inspired me to say, “Wait a second, people love solar. They love the sun. Sun makes us happy. It’s in children’s books and it’s on stickers at Greenpeace protests. People love the wind. There’s lots of that and that seems good and clean, and we want to keep our air fresh. People love water and hydro, that’s also good. I mean, it’s not great that we make dams and affect aquaculture, but people like the sun, they like the wind and they like water, they should like rocks. Rocks are great. Who doesn’t like rocks?
(00:39:41):
Well, hey, there’s this rock called uranium and you don’t really have to do all that much to it, but if you tweak it a little bit, just like you tweak the other stuff, you can get it to produce heat and that’s pretty cool. Okay, well, if you get heat coming out of this thing just like a geothermal, which people also love on the environmental end, that’s just literally heat from the earth that is able to boil water and produce steam and turn a turbine with that steam and produce electricity by spinning the magnets. Well, that’s really what nuclear power is.”
(00:40:05):
So, I realize that people are against nuclear because they conflate it, unfortunately, going back to the mid late 70s with nuclear war. Nobody wants nuclear war and nuclear war is terrible. So, now you’ve got this thing that’s associated, you don’t have hydro war, you don’t have solar war, you don’t have wind war, but you have nuclear war. Nuclear war is bad, so nuclear is bad.
(00:40:22):
And yeah, 1979, the China Syndrome movie where you had this environmental disaster and radiation leak from nuclear, you had also 1979 with Three Mile Island where there actually was a burst valve that wasn’t actually a radiation leak, nobody died, there were no injuries. It was actually proof positive of engineering systems that work. But then you had Chornobyl, which was a certifiable disaster. I would posit that there isn’t much Russian technology that is competitive on global stages that anybody would buy except for possibly an AK47 or a MiG fighter jet, because those actually have to compete on the global stage.
(00:40:54):
And then you had Fukushima where a company that we founded ended up playing a pivotal role in the cleanup, a company called Kurion named after Madame Curie who discovered radiation spelled with a K, that was developing technology, both material science that could grab radioactive elements like cesium and strontium and technetium and uranium and plutonium, and then robots that could actually enter a disaster site and remove that and they ended up being the only US company picked for that cleanup back in the Fukushima disaster, which happened because of an earthquake and a tsunami and then a radioactive meltdown. So, I was very proud of founding that company and capitalizing it and the work that they did, which was just quite miraculous.
(00:41:29):
So, I’ve always been interested in nuclear for about a decade, and I got interested really because of a book. I wish that there was something more sophisticated, but I read a book called Bottomless Well by two brilliant people, Mark Mills and Peter Huber. Peter since passed, but he was a polymath and brilliant legal mind, and Mark is a technology pundit and advisor to many and they wrote this great book. Bill Gates gave a testimonial blurb for it, and it was called The Bottomless Well and it was really about the availability of energy that’s all around us at a time when people were talking about peak oil and gas and so forth.
(00:41:56):
But the key thing was a paragraph in one of the chapters that caught me and the paragraph talked about our directional progress. And I always had this concept that I called the directional hour of progress, applying to all kinds of different technology industries, from lighting to automotive to semiconductors, where you can see where we start and how we progress and we’re never going back the other way. And so in this case, I’m listening to or reading this book, and I’m following the logic as they talk about going from carbohydrates, growing fields or trees and burning them as we did centuries ago, to hydrocarbons cracking the molecules of oil and natural gas and dead dinosaurs to release heat exothermically. And then the trend towards nuclear, which was uranium and the undeniable era of progress was more and more energy density per unit of raw material.
(00:42:38):
And so, that to me was a feeling of inevitability and so I got very interested in nuclear. I got very interested in every part of the fuel cycle from uranium miners who were mostly hucksters and fraudsters in New Mexico, Nevada. We said no to that. Modular reactors, small scale reactors that were too expensive and had too much regulatory risk. And I like to ask this two word question, which is what sucks in any industry and the thing that sucked was what do you do with the waste? And we went around and tried to find a company to invest in and we couldn’t and we ended up starting one from scratch.
(00:43:03):
So that was 10 years ago, we ended up selling that years later after success. We had about 160 million of revenue, 40 million of EBITDA. We sold for 10 times EBITDA with a mere, from us, million and a half invested in that company and returned about 105 million to our LPs and it was a great story. And as Bill Conway who put us in business from Carlyle said, “It’s got the benefit of being true.” So, nuclear did us well.
(00:43:24):
And it was interesting also, because we talked about being interested in defense and some of these sort of sectors that may benefit from a reality of the world, which is that there are these negative black swans that occur. And so, this was a company that benefited a positive black swan, a low probability, high magnitude event consequence from the Fukushima event, which for Japan was a negative black swan. And so, it’s just always interesting to think about how you can do something that not only makes investors a lot of money, but is morally good, because we helped to remove 99% of the radioactive material from that disaster site and feel really good about that. It’s made history.
(00:43:52):
I’ve been a proponent since then of nuclear, particularly as it has been noticeably, audibly, visibly absent from any of the proposals put forth by Al Gore, Greta, anybody that is saying we need to help the climate, we need to cut carbon. How can you not look at the abundance of the 440 plus global plants and their safety record and their low carbon footprint and say this is part of the answer. The amount of land that you need for wind or solar in contrast to one nuclear power plant, the density of the ability for a gigawatt power plant to provide for millions of people, it’s just incomparable.
(00:44:25):
And unfortunately, there was this zeitgeist that had captured people and it wasn’t part of the religious doctrine. It wasn’t at the podium when people were speaking. And so, I realized that the thing that this really needed was a rebrand and as I thought about wind and solar and hydro, I said, “Well, this is just a rock, so why don’t we call it elemental power?” And elemental power can’t include all these other things that the environmentalists love, but any true environmentalists should be pro-nuclear, but they just can’t bring themselves to say that word. It’s sacrilegious. And so, let’s give them a new word and the word is elemental power.
Trey Lockerbie (00:44:55):
There’s this new modular nuclear technology that’s coming up. Is that something that you are positioned in at all or you have interest in, or is it more about just raising awareness?
Josh Wolfe (00:45:05):
My rant here on elemental power has no economic interest. We made our money on cleaning up stuff and nuclear waste. It’s a hard industry. It’s not easy and I’d like to encourage a lot of people go into it. Eventually we’ll raise the talent base, we’ll lower the cost of capital, we’ll raise awareness and attention, and maybe we enter at some other point.
(00:45:21):
But as investors, I put it in the too hard category. Modular reactors are great, but it’s going to take a lot of money, a long time, and a lot of regulatory headache, so we’re not invested in modular reactors, we’re not invested in any of the large nuclear power players, we’re not invested in uranium players. There’s really no exposure today other than advocacy that I think it’s the morally right thing to do as a society…
…Trey Lockerbie (00:57:02):
All right, so before I let you go, there’s one more thing I want to talk about, because last time you and I got together, we discussed your aspiration to see human scent digitized. How have we been progressing on that front and what could a machine that could smell, maybe it’s the Tesla Optimus robot, let’s say, be of benefit.
Josh Wolfe (00:57:23):
Well, very skeptical of this Tesla Optimus robot. Obviously if you look at Boston Dynamics robots from five or 10 years ago, they were doing feats that just blow the mind. But yeah, so I don’t see that being really relevant technology and it felt like it was a gimmicky monorail man-like showcase from the Simpsons.
(00:57:39):
Yeah, digital smell. It’s something that one of the Nobel Prize winners that we backed Richard Axel in a company called Kallyope, which is focused on the gut brain access, a biotech company, maybe eight or 10 years ago said, “Forget about it. Don’t try. Like lots of people have tried, this is never going to work.”
(00:57:52):
And I’ve been looking for over a decade for both the hardware and the software and kissed a lot of frogs and we finally found someone. Beginning about six months ago, negotiated with a very large tech company where this technology’s being spun out of, it’ll be announced in about a month and we catalyzed the transaction and capitalized it with $60 million, some incredible co-investors, two giant tech companies, one giant global foundation, a few billionaire famous hedge fund folks that are coming as co-investors.
(00:58:19):
And notably, when I was negotiating this, I lost my sense of smell. I evaded Covid for two and a half years and I ended up getting it and my two symptoms were one, loss of smell and two was the anxiety about when my smell would come back, but that was about just under three weeks, so that was really poetic justice, I guess.
(00:58:34):
There’s three things that this company will do. One is, to me, the holy grail, and it’ll be the longest, but Shazam for smell, the ability to hold up your phone or some other small device to effectively capture in the same way you do today image, which is really two dimensional or three dimensional with RGB. And you can do time lapse and you can do slow mo and you can do 4K and you can put all kinds of filters and whatnot in that capture. The Sound, which is really two dimensional frequency, amplitude, wavelength and you can capture spatial or stereo or mono.
(00:59:02):
Smell is at least 40 dimensions and could be several hundred depending on what the molecules are. It’s complex. It’s not a single sound or a linear set of notes, it could be mixed in potpourri, so you have to be able to sort signal, but a smell is volatile organic compounds, they are quite literal chemicals that are floating in the air that bind to your old factory bulb. Ours is more sensitive than some, but less sensitive than others. We know that dogs can detect covid and cancer and Parkinson’s and early signals of epilepsy before someone has a seizure and machines will have the sense of smell.
Trey Lockerbie (00:59:34):
Now, is that the use case, what you just mentioned of for the medical device?
Josh Wolfe (00:59:39):
Yes, so one is Shazam for smell, for humans to be able to record smell, so your childhood bedroom, the nostalgia of a grandparent’s home, the smell of your loved one’s hair, the smell of a wine, a meal, a vacation, beach, forest, wooded path, your home, whatever it is. The second is detecting human health from breath, so that will be in fact why one of the large global foundations cares to be able to help diagnose people early.
(01:00:00):
And then the third is industrial and defense applications, so the ability to detect chemicals, and that could be industrial chemicals, it could be fire, it could be electrical fires inside of large server rooms. It could be taggants that are used on people of interest for defense applications. So yeah, it’s an exciting future and we relish the idea that we get to invest in people who are inventing the future.
Trey Lockerbie (01:00:22):
Now, can you foresee a world where the computer is recognizing the smell in those compounds, those volatile compounds, and then could recreate them in some physical space?
Josh Wolfe (01:00:33):
I can definitely foresee the world that it’ll take longer, but the first thing that Kodak did was figure out recording and then screen companies later on figured out playback, but recording will be first and we’ll be digitizing that with a signal and then playback will come after.
(01:00:45):
And I see no reason why it doesn’t obey the laws of physics to be able to do that. It just needs to reduce our human ignorance and come up with the knowledge and ultimately the technologies that embody that knowledge to be able to produce it, so we will have it. I couldn’t tell you when, but recording will come first.
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 Alphabet, Apple, Meta Platforms, and Microsoft. Holdings are subject to change at any time.
