What We’re Reading (Week Ending 31 May 2020) - 31 May 2020
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that ““I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” Jeremy and myself 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 31 May 2020):
1. We Need To Talk About Ergodicity – Joe Wiggins
A system is deemed ergodic if the expected value of an activity performed by a group is the same as for an individual carrying out the same action over time. Rolling a dice is an example of an ergodic system. If 500 people roll a fair six-sided dice once, the expected value is the same as if I alone roll a fair six-sided dice 500 times.
The Russian roulette example is a non-ergodic system. The expected value of the group differs sharply to the average of an individual carrying out the action through time. In the group situation the average outcome is to live and become wealthy. As an individual performing the activity through time – on average – I am dead. In a non-ergodic system the group expected value is deeply misleading as it pertains to individual experience.
Although these may seem like somewhat frivolous examples, the concept of ergodicity is incredibly important. Much of classical economics assumes about human behaviour is founded on the expected average outcome of the group (see Expected Utility Theory). This works under the assumption that most environments or situations are ergodic, when in fact this is not the case.
2. Not even wrong: ways to predict tech – Ben Evans
A lot of really important technologies started out looking like expensive, impractical toys. The engineering wasn’t finished, the building blocks didn’t fit together, the volumes were too low and the manufacturing process was new and imperfect. In parallel, many or even most important things propose some new way of doing things, or even an entirely new thing to do. So it doesn’t work, it’s expensive, and it’s silly. It’s a toy.
Some of the most important things of the last 100 years or so looked like this – aircraft, cars, telephones, mobile phones and personal computers were all dismissed.
But on the other hand, plenty of things that looked like useless toys never did become anything more.
This means that there is no predictive value in saying ‘that doesn’t work’ or ‘that looks like a toy’ – and that there is also no predictive value in saying ‘people always say that’. As Pauli put it, statements like this are ‘not even wrong’ – they give no insight into what will happen. You have to go one level further. You have to ask ‘do you have a theory for why this will get better, or why it won’t, and for why people will change their behaviour, or for why they won’t’?
3. My Son’s Entrepreneurship Journey – Investment Pilgrim
In Primary 4, he and his classmates started playing this traditional local game called “kuti kuti” where each player will control a small plastic animal. Each player is to maneuver his/her animal around the table with the aim of resting his/her animal over the other player’s animal. Once that is done, the game is won and the winner takes possession of the loser’s animal. This was very much like how I used to play the flag erasers with my friends when I was younger.
He started playing with large plastic animals. One weekend, he was out with his maternal grandfather when he saw a pack of the plastic animals selling for $2.50 for a pack of 10. He bought the pack, or his grandfather did anyway, and brought his new toys to school. He managed to sell each plastic animal for $1! In a few days, he sold all of them. Pretty good margin, lol.
He did not tell me any of this until it was over. When I found out about his transgressions away from school work, I did what any responsible parent would do. I laid down the law.
“Son, I need to tell you that your school work is the most important thing for you at this point.”
Pause.
“I’d also like you to think about growing this business.”
4. The Fourth Great Unlock – Scott Galloway
Jeff Bezos, at the outset of their earnings call, warned shareholders they “may want to take a seat.” He has done this several times. “This” is snatching profits from the jaws of shareholders to reinvest in the firm. With the exception of Netflix, no firm has been given this much runway. Bezos has used every foot of it to set aloft a vessel that nobody will likely catch. Imagine a Spruce Goose but at twice the speed of sound.
Bezos told investors that the $4 billion in profits they were expecting would be reinvested. The investment had a theme: Covid-19. Specifically, Bezos outlined a vision for at-home Covid tests, plasma donors, PPE equipment, distancing, additional compensation, and protocols to adapt to a new world. Jeff Bezos is developing the earth’s first “vaccinated” supply chain.
The genius here is breathtaking. Walmart can’t follow, as they don’t own their distribution for last-mile commerce. Outside of Walmart, few firms have the balance sheet to pull this off. Maybe FedEx, UPS, or Prologis? But it’s unlikely they could make this sort of investment, this fast — it would be perceived as reckless.
5. The Epic Games Primer: Parts I-VI Directory – Matthew Ball & Jacob Novak
Epic Games was founded by Tim Sweeney and Mark Rein in 1991. Sweeney is the CEO and majority/controlling shareholder, while Tencent owns roughly 40%. As a private company, Epic does not publicly disclose its financials. According to press reports, it was valued at roughly $15B in 2018 (when it last raised capital) and is currently raising more at a “significantly higher” price, per Bloomberg.
Compared to Facebook, Amazon, Apple, Microsoft and Google, which are worth $600B to $1.4T, Epic’s valuation is modest. However, Epic has the potential to become one of the largest, most influential tech companies in the world. This might seem hyperbolic to those who know Epic only as the marker of the hit video game Fortnite: Battle Royale. In fact, even long-time fans of Epic’s games might find such a pronouncement odd given Fortnite has generated more revenue in three years than the rest of Epic has in almost as many decades. But behind the scenes, it looks increasingly likely that Epic will be at the very center of society’s digital future.
6. Uncertainty II – Howard Marks
By definition, people who lack the expertise in a given field required for superior judgments also lack the expertise required to assess their level of expertise. As I mentioned, they qualify as John Kenneth Galbraith’s forecasters “who don’t know they don’t know.”
While re-reading my memo, I realized I had left out an important further ramification. Not only do most people fail to possess superior expertise – as well as the ability to know it – but they also lack the ability to figure out who does have it. That’s the catch: you may have to be an expert in a field in order to be able to figure out who the true experts are. That’s why research in most fields is subjected to “peer review,” meaning a review by experts, (not to be confused with “a jury of one’s peers,” meaning other lay citizens)…
… Nowadays, like everyone else, I’m bombarded with conflicting views regarding the wisdom of rapidly reopening the U.S. economy. Yet I recognize that not only is my opinion on that topic of little value, but I also don’t have the expertise required to know for sure whose opinion does count. What I do know is that the last thing I should do is choose an expert because his or her opinions agree with mine, and allow confirmation bias to affect my decision…
… So (a) true expertise is scarce and limited in scope, (b) expertise and predictive ability are two different things, and (c) we all should be careful about whom we listen to and how much weight we give to their pronouncements.
What we probably don’t realize is that walking can be a kind of a behavioral preventive against depression. It benefits us on many levels, physical and psychological. Walking helps to produce protein molecules in muscle and brain that help repair wear and tear. These muscle and brain molecules—myokines and neurotrophic factors, respectively—have been intensively studied in recent years for their health effects. We are discovering that they act almost as a kind of fertilizer that assists in the growth of cells and regulation of metabolism. They also reduce certain types of inflammation.
These essential molecules are produced by movement and the increased brain and body activity created by movement. If you’re not moving about, placing heart and muscle under a bit of positive stress and strain, these molecules aren’t produced in sufficient quantities to perform their roles.
7. If Robots Steal So Many Jobs, Why Aren’t They Saving Us Now? – Matt Simon
Modern Capitalism has never seen anything quite like the novel coronavirus SARS-CoV-2. In a matter of months, the deadly contagious bug has spread around the world, hobbling any economy in its path. In the United States, where consumer spending accounts for more than two-thirds of economic activity, commerce has come to a standstill as people stay home to slow the virus’ spread. Hotels and restaurants and airlines have taken massive hits; Delta has cut its flight capacity by 70 percent. One in five US households has already lost work. And that’s all because of the vulnerabilities of the human worker. When we get sick—or we have to shelter in place to avoid getting sick—the work that depends on people grinds to a stop.
Why haven’t the machines saved us yet?
This economic catastrophe is blowing up the myth of the worker robot and AI takeover. We’ve been led to believe that a new wave of automation is here, made possible by smarter AI and more sophisticated robots. San Francisco has even considered a tax on robots—replace a human with a machine, and pay a price. The problem will get so bad, argue folks like former presidential candidate Andrew Yang, we’ll need a universal basic income to support our displaced human workers. (UBI seems to have actually arrived, in a sense, with the Trump administration’s proposed payout to American households to weather the crisis: A $1,000 check for most, with an extra $500 for every child.)
