44: My Thoughts on Investment Style as Lifestyle Design, Constellation Software, Ant's IPO, AMD + Xilinx, TikTok + Shopify, U.S. Innovation, Solar, and S&P Global in China
‘It’s funny that we’re all standing on the side of a planet.’
One of the most serious problems with modern "management" is that the incentives are all wrong.
Imagine that I hire a programmer and pay him by the line of code. This idea has been so thoroughly debunked that it is nearly impossible to write out the consequences without sounding cliché.
Yet it happens all the time: Companies promote "Architects" who are evaluated by the weight of their "architecture." The result is stultifying and demoralizing. The architect does not work to facilitate the programmer's work, he works to produce evidence of his contribution in the form of frameworks, standards, and software process.
So, how are most managers evaluated? By the amount of "managing" they do, as measured by the amount of process they impose on their team.
Evaluating a manager by the amount of managing they do is exactly the same thing as evaluating a programmer by the amount of code they write. And it produces results like you describe, where the manager works to produce evidence of their management in the form of processes and decisions from the top down, rather than facilitating the work actually being done. —Raganwald
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Investing & Business
Investment Style and Stock Selection as Lifestyle Design
I’m not aiming for the highest return on my capital. It would sound good to say I was, but it wouldn’t be true.
Others have different constraints than I do, but I don’t have a real job, and I’m only investing my own money, so I have the luxury of taking into account things that may not make sense for a professional money management investing other people’s money.
Let’s paint a hypothetical picture: In this world, I figure that the best returns may come from investing in mining companies and oil companies. But I have no real interest in these things… If I invest in them, I’ll be spending a lot of my time reading about and thinking about things that are not interesting to me.
That doesn’t sound like something I want to do.
For me to want to invest in something, I have to want to spend lots of my time thinking about it, because the alternative is indexing and doing other things that are more fun.
I’m doubly lucky that most of the businesses that I find interesting happen to have attractive economics and that in recent times their industries have had strong tailwinds. I know it’s luck, but I’ll take it, because I have to accept the bad luck when it comes too.
I could improve my returns if I cut out all the “fluff” from my life and just focused on being the best investor that I can be. Spend all day reading filings and transcripts and reaching out to industry people and operators.
I could cut this newsletter, stop hanging out on social media, stop going down random rabbit holes about WWII history and cool science stuff… Just a monomaniacal investing machine, like a young Buffett, with few other interests or past-times.
I’d lose out on some investment ideas that I serendipitously find on these aimless expeditions, but I’m almost sure I’d still come out ahead if I increased the number of companies that I study in a year by 5x or 10x or whatever.
But I’m not looking for the best returns. I like doing these other things. What’s the point of having more money if you like your life less?
It’s cliché, but try not to do something you hate just for the money. Or at least, plan your exit strategy and don’t stay tied to the golden handcuffs forever.
‘The secret to the US economy's huge innovative success in one graph’
h/t @nosunkcosts (locked account)
S&P Global Goes to China
S&P Global (China) Ratings announced recently that it has completed its registration filing with the China Securities Regulatory Commission (CSRC). This marks the first time that a wholly foreign-owned Credit Rating Agency (CRA) is able to produce credit ratings in China's exchange bond market.
S&P Global (China) Ratings can rate those bonds and asset-backed securities registered with CSRC that are traded or listed for transfer on China's exchange bond market, as well as rating issuers, originators, companies and other items specified by CSRC, excluding government bonds. [...]
This registration means that S&P Global (China) Ratings, a subsidiary of S&P Global, has the broadest remit of any wholly foreign-owned CRA in China. In early 2019, the company received first-of-its-kind approval to publish ratings on the interbank bond market. The company published its first rating in July last year. (Source)
Speaking of S&P Global, their Q3 just came out. What a company:
Look at that Yellow Line (Solar Power)…
…and it doesn't have to stop there (down 90% in the past ˜10 years).
Wind power cost reduction 2009-2020 CAGR: -11%
Solar power cost reduction 2009-2020 CAGR: -19%
During the same period, coal is up 1%…
Natural gas is down, but that has a lot to do with fuel costs, not technological improvements. Fuel costs go up and down over time (carbon tax anyone?), but tech gains are forever.
As @LSValue pointed out, there’s a nice virtuous cycle between cheap solar and battery storage:
The second order effect is that batteries make even more sense with super cheap solar, as solar only collects power during the day, if you have cheap solar during the day then batteries are cheaper source at night.
The dynamics of solar + batteries are also different from what we're used to. Almost all the costs are upfront, and after that you have free sunlight and batteries that require basically no maintenance or replacement for many years. We're so used to think about "fuel" costs…
And “storage” doesn’t have to be literally batteries. Hydro can act as a gravity battery: When there’s plenty of solar and wind power, hydro generates less power and keeps the water in its reservoirs, and at night it opens back up to fill in the void. Places like Québec and Norway can act as giant "batteries" to neighbors if they are well interconnected with them.
Another possible storage tech that I’ve been keeping an eye on for years is grid-scale liquid-metal batteries that could store many megawatt-hours. If you’re curious, check out this video.
h/t O&G OG
Constellation Software: Volaris Creates Lumine Group for its Communications & Media Businesses
First Volaris created Modaxo (see edition #41) for their transportation assets, and now they’re creating a new identity for the comms & media stuff…
Is this just some Spring cleaning to refocus some sub-groups and give them more identity and culture and clear leadership, or is this setting things up for more spins and/or reorganization (could some of these become full groups, directly below the holding co level?).
“Lumine’s vision is to create a global ecosystem to help accelerate the growth and internationalization of communications and media software businesses,” says David Nyland, President of Lumine Group. “Businesses can leverage global resources including product innovation, customers and channels, support to enter new geographies, and a wealth of domain-specific best practices to scale efficiently.”
Since 2013, Lumine has built a global portfolio of complementary communications and media software businesses, completing 16 acquisitions with employees in over 30 countries. The portfolio encompasses a global network of customers, including tier-1 operators across the world.
“Lumine brings together a combination of innovative technology, great talent, and industry expertise under a single banner,” says Mark Miller, CEO of Volaris Group, and COO of Constellation Software. “The Lumine team will continue our legacy in this space, deploying Volaris best-practices and our winning buy-and-hold-forever formula.” (Source)
The Lumine site has a nice timeline showing all the acquisitions they’ve made over time (near the bottom of the page).
Patrick McKenzie on Founders & Availability Heuristic
A lot of founders choose markets based on the availability heuristic, which tends to overconcentrate brainsweat in predictable places. Some of them make for poor businesses specifically because they're interesting to young people without money.
There are plenty of hard problems with massive implications for society which are almost buried in money, and you will broadly be rewarded more for working on them than you will for doing incremental improvements on economically marginal entertainment activities or similar.
A surprisingly repeatable source of insight about the world: seek deep knowledge of a transaction that your peer set does not realize exists.
[someone else gave the example:] > Alice is a SW engineer at a social media company; she decides to learn a lot about global marine logistics (Source)
I definitely need to add “brainsweat” to my lexicon.
Ant’s Massive IPO
Ant’s IPO has been priced at a massive $34.5 billion, valuing the company at over $313 billion, the biggest IPO of all time. Byrne Hobart wrote about the company on August 31, 2020, if you’re looking for an overview (bolded parts are mine):
Ant’s main business, in terms of gross volume, is payments. In the last year, Ant handled RMB118tr of payments ($17tr USD). This is a bit under 3x the total spending handled by Visa and Mastercard. It’s an astoundingly large number, not just because it exceeds China’s $14tr GDP. (Peer-to-peer transfers, loan borrowings and payments, or transfers from a savings account to a money-market fund would not be accretive to GDP but would show up in Ant’s total payment value number.) [...]
Ant pays most of its payment revenue back to financial partners. After those fees, Ant’s share of payment volume is a bit over 0.01%.
Ant makes its real money from other financial services. In the last six months, payments were 36% of revenue, while expediting small business and consumer loans was 39%, investment products were 16%, and insurance was 8%.
In these businesses, as in payments, Ant mostly operates as an intermediary, connecting borrowers or investors to companies that can work with them.
AMD Acquires Xilinx for $34bn in Stock
Mule wrote about the acquisition here:
At the core of the deal is Xilinx and AMD together are going to be a much better go to market for Datacenter compute. This is important, as Nvidia so far has remained unchallenged in the datacenter. SmartNICs, FPGAs, GPUs, and CPUs together is one compelling platform. And if Lisa Su can bring together the software to support the platform, they may yet have the broadest platform of heterogeneous compute outside of Intel. [...]
Also, there are many new markets that AMD can start to bring their products to. Notably - the communications, automotive, and industrial segments of Xilinx’s portfolio are de-novo markets for AMD. Yet AMD’s general-purpose CPU is the biggest and best core on the planet, it’s likely AMD can leverage that to additional design wins.
You can read the whole thing here.
TikTok Partnering with Shopify
TikTok is further investing in social commerce with today’s announcement of a new global partnership with e-commerce platform Shopify. The deal aims to make it easier for Shopify’s over 1 million merchants to reach TikTok’s younger audience and drive sales. The partnership will eventually expand to include other in-app shopping features.
At launch, the agreement allows Shopify merchants to create, run and optimize their TikTok marketing campaigns directly from the Shopify dashboard by installing the new TikTok channel app from the Shopify App Store (Source)
Long Read: ‘The Consumerization of Investing’
Packy McCormick has an interesting read about the impact of the new wave of modern software platforms for investing (Robinhood, etc) and their impact on the markets, in part because retail investors are looking to get different things out of the experience of investing than the pros (the parallel with angel investing is astute). Check it out:
Interview: Twilio’s CEO Jeff Lawson
In edition #41 I wrote about an interview that Ben Thompson did with Twilio CEO Jeff Lawson. It’s behind a paywall, so I only put a short excerpt about “buying vs building” and the “three software eras”, but if you want more, I recommend this interview with Lawson that Patrick O’Shaughnessy did in early March 2020. It covers many of the same themes, and goes into more details about the benefits of being an API company vs a product/service/solution company.
Mastercard: Q3 Update on Cross-Border Volume
Science & Technology
‘Why China Spends on Applied But Not Basic Research’
Really interesting interview by Jordan Schneider of ChinaTalk with Emily de La Bruyere about China’s approach to science & tech research:
Jordan: The discourse in the U.S. revolves around pioneering basic research, but by contrast, China prioritizes applications. Beijing’s strategic discourse and resource allocations focus on deploying rather than developing cutting-edge capabilities.
Emily: […] we’re in this globalized environment where information is largely open and flows across borders, and because of that the advances in science and technology are easier than they have ever been for a country to claim or access internationally. That lowers both the cost and the time necessary to get what’s at the cutting edge. And the corollary here is that it is very expensive to invest in basic R&D, and is very risky because you don’t know what’s going to work. Whereas if you obtain something that’s already developed or really close to reaching maturity, it’s cheaper and low risk, but that there’s a lag. In a typical science and technology contest, that doesn’t let you win the race. It lets you get to the end more cheaply, but someone else is going to beat you. [...]
Jordan: This idea of “why buy when you can rent” makes a lot of sense. Is Chuck Schumer pouring a hundred billion dollars down the drain, trying to boost National Science Foundation funding to do this sort of basic research, only for it to show up in Chinese companies two to three years later?
Read the whole thing here. And if you want to better understand what is going on in China, based on what people who really know the country and what is being said in Chinese-language sources, definitely subscribe to ChinaTalk. There’s also a ChinaTalk podcast.
‘It’s funny that we’re all standing on the side of a planet.’
Massimo: With this image rotated to a landscape orientation, you can picture the orbital plane of the Solar System, called the ecliptic & Earth's place within it. Plus, you can see how our solar system is tipped about 60 degrees relative to the plane of our galaxy
Tim Urban: It’s funny that we’re all standing on the side of a planet.
‘Veterans with PTSD, anxiety, and other mental health challenges often find solace in gaming’
Interesting article written by a veteran about how gaming is helping many military service members better deal with various health challenges.
The pandemic has made things tougher for many vets, an additional unspoken cost to add to the bevy of military traumas. Alone, isolated, sick, and plagued by inner demons, I was rarely at peace. I didn’t want to put in the effort to eat, which left me too fatigued to get up to eat when I wanted to do so. I lost about 30 pounds in two weeks.
According to the RAND Organization, 18.5 percent of service members returning from conflicts in Iraq and Afghanistan meet the criteria for either depression or post-traumatic stress disorder (PTSD). Veterans were 1.5 times more likely to commit suicide than the general populationbefore the coronavirus pandemic even started [...]
Michelle Colder Carras sees games as a treatment, not just a respite. [...] Her 2018 study on how gaming can help veterans with mental health issues found that vets use games in a variety of ways to better their mental health, whether it’s through connecting with others, coping with symptoms of PTSD, suicidality, or substance cravings, or creating meaningful leadership roles or even jobs through games. Other researchers suggest that therapy through PE (prolonged exposure) and CPT (cognitive processing therapy) have proven immensely helpful to vets.
You can read the whole thing here. h/t Gavin Baker
Nerd Factor: Dopamine Pathway Rewarding Exploration
Scientific American on “The Science of Nerdiness”:
in recent years, other dopamine pathways in the brain have been proposed that are strongly linked to the reward value of information. People who score high in the general tendency toward exploration are not only driven to engage in behavioral forms of exploration, but also tend to get energized through the possibility of discovering new information and extracting meaning and growth from their experiences. These “cognitive needs,” as the humanistic psychologist Abraham Maslow referred to them, are just as important as other human needs for becoming a whole person.
How active is your nerdy dopamine pathway? If some or all of these statements describe you, dopamine might well be flowing strongly to your prefrontal cortex:
I love spending time reflecting on things.
I am full of ideas.
I have a vivid imagination.
I am interested in abstract ideas.
I am curious about many different things.
Well, if you’re reading my mishmash of random things here, you probably stand somewhere on the left side of that bell curve…
But the whole “nerdiness is a neurological thing” reminds me of these Fiona Apple lyrics:
He said "It's all in your head,"
And I said, "So's everything," but he didn't get it
‘Billy Wilder talks about the future of the movies, 1986’
34 years ago. Wow.
The Arts & History
From Shorting Lehman in 2008 to Sailing the World with Hobos & Crazy Czech Girls
I guess this fits here. I really enjoy this interview of Chris Sommers by Jim O’Shaughnessy (I’m getting good at typing that name, seems like I write about either the father or the son almost every week). You may know Chris as the CEO of Unhedged and as Inquisitive Investor on Twitter.
Chris is a finance guy and an entrepreneur, but the interview is mostly about his crazy adventures sailing the world for 4 years “without knowing how to sail”.
It's almost The Princess Bride... There's pirates, years at sea and almost dying, a love story. All that's missing is giants and revenge (where's that Czech girl?).
But they also cover Chris’ experience at Greenlight Capital and Shorting Lehman’s stock in 2008.
When Julius Caesar was Captured by Pirates
A recent twitter thread by Gareth Harney reminded me of this Caesar story I had heard years ago.
It’s pretty short and satisfying, so I won’t try to summarize it. You can check out the whole thing here if that sounds like an interesting premise.
Chernobyl: A Masterclass in Perspective
Good video on use of perspective in HBO’s Chernobyl.
Liberty, you may be interested in this:
Lithium Metal Polymer (LMP) battery commercialized NOW by the French Bollore Group for grid connected wind/solar, forklifts, car sharing, and most importantly a big battery contract on the Daimler eCitaro electric bus platform. Not good for lightly used automobiles, but good for anything used constantly. Very recyclable. Can't catch fire. No cobalt. Version3 is out and may just be taking off. Stock dirt cheap, and complicated, but owns 28% of Vivendi (music) and a very good freight forwarding business. Battery business currently loss making.
I like your views on investment. IMO the best way to reach FI is spending control & that is becoming easier with technology acting as a catalyst to drive your costs down. Once you can control your spending, it requires only a modest amount of incomes to reach FI. FI being a place where you decide what you want to do with your time. Investing once FI is reached can be a exploration exercise studying the firms you like on your timeline all the while enjoying the process along the way.