217: Hyperscaler Infrastructure Layer, Scale Economics Shared, Reddit IPO, Ultrasonic Non-Invasive Brain Stimulation, Paxlovid, Power Grids, and Villeneuve's Rama
"Just for fun, I put the above section in GPT-3"
If it happens overnight it can unhappen overnight.
🎄 I don’t know yet what I’ll do during the couple weeks around the year-end holidays.
My kids will be home, so I’ll certainly be writing less, but I enjoy captaining this steamboat 👨✈️🚢, so I’m sure that I’ll spend some of my free time jotting down thoughts.
I’ll probably skip some editions, but not all of them. I can’t say in advance what the schedule will be, but hey, every day is a gift to begin with, so everything else is bonus 🎁
⚾️ Judge people against their own potential, not versus other people.
There’s so much variability when it comes to starting points. What matters is what you do with the hand you’ve been dealt, not what you do versus someone with pocket aces ♠️♥️♣️♦️.
I hear things like “oh, but Buffett’s father was a congressman“ or “this person‘s parents were rich”, as if this nullifies any accomplishments that they could have.
Think for a moment: how many CEO’s sons and daughters never really do anything… How many politicians’ kids never do anything… So it may be a better starting point than being born a quadriplegic lesbian in Afghanistan, but it certainly doesn’t mean that what you did wasn’t hard and valuable.
Heck, if you believe Josh Wolfe‘s (💚 🥃) theory that adversity gives you extra drive (“chip on shoulders..”), being born on third base may actually makes it harder to accomplish big things (yet we don’t hear “wow, Bill Gates did all this despite his parents being wealthy!”).
Born rich makes it easy to chill out on the beach — when you have many options other than hard work, it’s easy to be tempted...
People also tend to isolate variables way too much.
If you’re going to be jealous of someone, you have to look at the whole thing.
So yeah, maybe Elon Musk’s father had an emerald mine, but based on Musk's biography, he also sounds like a really really pretty terrible father. Are you really jealous of Musk’s childhood?
Maybe person X's family had a lot of money, but the parents were never there because they worked all the time.
There’s all kinds of pros and cons that can be mixed together and make the picture a lot more complex than it may seem at first glance or when you cherry-pick.
Jealousy is pointless — in fact, it’s kind of a like a bizarro hatred, because hatred makes you see only the negatives about someone, and jealously makes you see only the positives. Both are distortions, signs of bad calibration. Reality is always more nuanced… 🔎
🤖 Just for fun, I put the above in GPT-3 and it generated this:
It’s so easy to be jealous. It’s much harder to be grateful. If you’re jealous of someone, you’re not grateful for what you have. And since gratitude is the mother of all virtues, it’s a lot harder to be a good person if you’re jealous of other people. It makes you want to hurt them and make them feel bad. Jealousy is just poisonous. It’s not something that can be reasoned away, it’s an emotional state of mind. --- People who are doing better than you are not to be envied or resented, they are to be imitated. --- Confidence is the antidote to jealousy. When you have confidence, you have a sense of yourself, your abilities, and what you can do, which makes it more difficult to fall into jealousy. It’s very difficult to be confident if you’re jealous all the time. Confidence is like a muscle that you have to work to maintain. It’s not some inherent thing that people just have or don’t have, it’s something that you have to actively build and maintain. I’ve never felt jealousy and confidence at the same time.
Not bad wisdom for an autoregressive language model 🤔
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Investing & Business
Economics of Hyperscalers’ Infrastructure Layer
There’s a lot of napkin math here, but I think the way to think about it is on the right track:
Maybe owning the lowest layer isn't so bad?
Let's say a customer is spending $1M/year on Redshift. That nets AWS about6 $500-700k in gross profits, after paying for EC2 operational cost and depreciation. If that customer switches their $1M/year budget to Snowflake, then about $400k goes back to AWS, making AWS about $200k in gross profits.
That seems kind of bad for AWS? I don't know, we ignored a bunch of stuff here. Snowflake's projected 2022 research and development costs are 20% of revenue, and their sales and marketing costs are 48%! For a million bucks revenue, that's $700k. Translated back to AWS, maybe AWS would have spent $300-400k for the same thing? Seems reasonable.
Now the math suddenly adds up to me. AWS basically ends up with the same bottom line impact, but effectively “outsources” to Snowflake all the cost of building software and selling it. That seems like a good deal for them!
Of course, there’s operational leverage to these things and Snowflake’s % of SG&A won’t stay constant over time, etc, but it still shows that it’s not just about gross profits.
Source. h/t friend-of-the-show Brian Sholis
‘Take a Simple Idea and Take It Seriously’, Scale Economics Shared Edition
Friend-of-the-show Cedric Chin (🇸🇬) has a good piece that uses Nick Sleep and Qais Zakaria’s Nomad Investment partnership to illustrate the power of finding a very good idea and wringing all you can out of it — basically taking it more seriously and pushing it much further than almost anyone else would:
Over the next few years (and visibly, through the investment letters) Sleep and Zakaria began to realise that there was something truly special about Costco’s model. They started asking themselves what this special property was, how they might recognise it when present in other companies, and what the second and third order implications were. [...]
They asked: of all the possible business models in the world, what is the best possible business model? To paraphrase using the language of 7 Powers, of all the possible Powers, what, pray, is the best Power?
By 2010, eight years after first investing in Costco and six years after first writing about Amazon, it was clear from their letters that Sleep and Zakaria had settled on an answer. They believed that the best business model was one where the defensibility emerged from scale economies — but with a twist: if the cost savings from those same economies were shared with the end consumer, the odds of plateauing growth were considerably lower.
Why would that be superior to other kinds of business advantages and moats?
Sleep and Zakaria imply that not all moats are created equally. It’s tempting to think that if a moat produces overwhelming pricing power, this results in unparalleled profits and therefore acts as an unalloyed good. The Nomad letters hint that this isn’t necessarily the case. What matters is durability of compounding growth. So, for instance:
Strong network effects often leads to an overwhelming monopoly for the incumbent, and tends to provoke some form of regulatory crackdown or consumer backlash over the long term.
Strong brands give businesses pricing power, but do not prevent the entrance of new competitors with equivalently strong brands, nor protect the company from the disadvantages of scale (in fact I might go further and argue that scale sometimes works against the brand, depending on the brand narrative in question).
Switching costs creates disgruntled customers over the long term.
Counter-positioning is not a complete moat, as Helmer likes to point out.
And, finally, cornered resources and process power do not guarantee returns to scale.
In contrast, a business with scale economies shared passes on the benefits of its growth to its consumers. This aligns incentives rather wonderfully, and it turns out to be somewhat difficult for a regulator (or even a set of consumers) to crack down on a business that so consistently passes on its profits to its customers.
What’s interesting is that after 10x’ing their capital in a little over 10 years, the partners shut down the fund and moved on. Quit while you’re on top, I guess!
How do you even know how good you are? ¯\_(ツ)_/¯
A lot of people seem to think that it’s easy to know how good an investor you are.
I think it’s a lot harder than it may seem. There’s enough luck and uncertainty involved that it’s possible to do well despite flaws & mistakes, or to do badly despite a sound process & high level of skill.
So you may say that you can only know over the long-term, but how long is the long-term?
When do you give up, and how do you know that you’re not just giving up right before things were about to turn for you (Julian Robertson-style)? When do you celebrate, and how do you know that things won’t fall apart right after the party?
It’s a practice that is not only ongoing and with feedback loops of variable and unknown length, but your points of comparison can also be pretty slippery.
Sure the obvious bogey is index XYZ, but plenty of great investors have underperformed some index for a while, so it has to be long-term too, which brings us back to what is long-term, and when should you give up/celebrate? (never?)
It’s also tough to compare just by looking around, because like with looking at the night’s sky, there’s the “visible” universe, and the actual universe. What you see is what’s visible, but there’s plenty of dark matter out there (and dark matter matters, har har)...
You may think you compare favorably to what you see, but how do you know it’s representative?
Or maybe you’re intimidated and discouraged by what you see, but maybe you only hear about people’s successes and there’s a large submerged part to the iceberg that isn’t nearly as impressive (not to mention that once in a while hordes of day-traders come in the market and most proceed to lose everything over a period…).
I don’t know where I’m going with this. I just liked the idea of a system where it’s hard to know how well you’re doing, and hard to know who you’re really comparing against anyway. Welcome to uncertainty land!
I prefer to look at investing as a solo sport. Am I achieving my own goals? If so, I’m happy. I don’t need to compete with others.
‘In the past month, the Nasdaq 100 is -1.64% and the WCLD cloud index is -21.57%’
Reddit files to go public
Although Reddit was created in 2005, it has taken a unique road toward going public.
Conde Nast Publications acquired Reddit in 2006. The social media services remained a part of the publication company until it was made an independent subsidiary in 2011. Since then, it raised a series of funding rounds from venture capital firms.
Most recently, the company announced that it had raised a $700 million round in August 2021 at a valuation of more than $10 billion.
At the time of that funding round, the company said that it had reached $100 million in advertising revenue during the second quarter of 2021, up 192% from a year prior. (Source)
I tend to think that this can’t be good for Reddit as a community platform…
More stuff to *not* make part of your ego…
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Science & Technology
Dr. Andrew Huberman’s 24 Hours (Podcast)
Until recently, the only Huber-man I knew was John (💚 🥃), but I’ve been really impressed by this pod episode with Dr. Andrew Huberman, who’s a professor of neurobiology and ophthalmology at Stanford School of Medicine.
It’s a 2-hour overview (I listened at 2x and it was fine, he doesn’t speak very fast) of so many different practical things that you can do to try to better align your life with your biology to favor health and cognitive performance.
I’d be really surprised if you don’t find at least one thing in there to improve your life (and what’s that worth?).
I like the format too: He starts in the morning, and then goes through his normal 24-hour routine, and explains what he does and most importantly, why he does things.
What’s neat is that if any specific thing he mentions interests you, he cites a lot of the studies that you can dig deeper into, and he often mentions a whole podcast that he has with an expert on that topic.
I really recommend it:
I’ve already queued up a ton of his other episodes. It’s too early to judge, but I was really impressed — hopefully he’s a really good source of information and I can learn to trust his knowledge and BS detector over time, as I do with Peter Attia’s.
h/t - A reader sent this one to me, but I lost my note, and now I don’t know who it was. Sorry about that, you know who you are, thank you!
Interview: Jay Sanguinetti, Ultrasonic Non-Invasive Brain Stimulation & More
I enjoyed this interview by friend-of-the-show and supporter (💚 🥃) Jim O’Shaughnessy:
This one has a lot of really promising sci-fi tech (transcranial ultrasound brain stimulation to reduce anxiety and possibly depression?), and even touches on John Sarno and MAPS (psychedelics studies), as well as mindfulness. Cool stuff.
‘Electrical grids are some of the largest machines in existence… they stretch across continents… with absolutely zero slack’
Another amazing, badass thing that surrounds us, and we never think about it, like the *city of pipes* under our feet that bring us clean water and take away waste (which I wrote about in edition #163)…
Paxlovid: A Just-in-Time Breakthrough?
Paxlovid is a breakthrough, and I don’t use that term lightly. It not only provides a new layer of defense, but a unique one that is not dependent on our immune system and not affected by Omicron or other variants. It is the first drug specifically designed for SARS-CoV-2, not a repurposed molecule, and its efficacy supports that specific effort. Of course it would have been terrific to have it available from the earliest days of the pandemic, but the speed with which this molecule has been tested and validated is indeed impressive. We need it out there in large quantities ASAP. I cannot adequately emphasize its potential salutary impact.
He’s not kidding, check this out:
Where’s the operation warp-speed to hasten availability and ramp up production of this to the moon?
For the latest on Omicron, see:
Omicron Update: Dec 17 (by Dr. Katelyn Jetelina, masters in public health and PhD in epidemiology and biostatistics)
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The Arts & History
Evolution of the Alphabet
Certainly one of the highest-leverage art projects in humanity’s history!
The squiggles that changed the world!
Source: Matt Baker at Usefulcharts
Denis Villeneuve to direct Arthur C. Clarke’s Rendez-Vous With Rama
Alcon Entertainment, which previously partnered with Villeneuve on “Prisoners” and “Blade Runner 2049,” has acquired the film rights to Arthur C. Clarke’s classic sci-fi novel “Rendezvous With Rama” for their frequent collaborator to direct.
The novel had previously been controlled by Morgan Freeman and his partner Lori McCreery’s Revelations Entertainment, which will produce along with Alcon.
🤔 I can see it.
I read the book years ago, but from what I remember, it’s very ‘cinematic’, with a relatively simple plot that wouldn’t need to be too simplified to fit a 2h film, and very large-scale and atmospheric settings, which would be perfect for Denis’ strengths as a visual artist. 🛸
I hope it happens after Dune Part 2.
I guess Denis can now gets whatever big sci-fi script he wants… Too bad he doesn’t do TV, because he’d be perfect to do an Iain M. Banks ‘Culture’ mini-series.
h/t my friend JPV
Sleep and Zakaria closed down the Nomad Partnership in 2014 because the FCA (UK's financial regulator) increased the compliance requirements that was particularly onerous for such small partnerships. When they returned the money to their clients in 2014, they told them to buy only 3 stocks: Amazon, Costco and Berkshire!
And the Huberman Lab podcast is great. Great topics, it could be a bit more structured sometimes, but that is the only minor caveat that I have.