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ion drive
Hosted by Victor Gustaf Gao · EN
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ISSUE 13: The Depth of the Riches
Apr 10, 202100:12:46Tap to summarizeGood evening.My apologies for a few quiet weeks since the last update. A lot has been happening at work and in family life. Vaccination in the United States continues apace and work travel looks to resume, at least partially, as early as this month. As a result, for this spring and summer, I expect to publish once every three to four weeks. The new cadence is in part to ensure the quality of each update measures up to your expectations. Popular among many writers today is the importance of publishing frequently. I am not one to argue a general case against that, but do believe that, if a trade-off is inevitable, quality must precede quantity, as fewer issues at a consistent quality would be a better mark of respect for the reader’s time than more issues of varying constitution. On the other hand, a more measured cadence is only fair to my family, who have been cheering me on with nary a scratch on the chin since I embarked on this project at the beginning of the year.I look forward to filing dispatches from the road in the near future and introducing the voices of some of my friends to you in future issues.Now onto the update.1.If you wanted to look into the eyes of someone who takes immense pride in their professional expertise yet is hurt deeply by accusations of the contrary, you only need turn to the Netflix documentary Made You Look: A True Story About Fake Art. In it, Ann Freedman is the hapless director of an old and respected gallery in New York that was involved in one of the largest forgery scandals in recent history. From 1994 to 2009, eighty million dollars changed hands, endorsed and brokered by Freedman, before the purported works of American maestros such as Mark Rothko and Jackson Pollock were unmasked as scams. Though several art industry insiders and observers in the documentary accuse Freedman of deliberate and criminal fraud, the FBI notably did not pursue prosecution, citing lack of evidence to prove guilt beyond reasonable doubt.But perhaps the FBI also noticed a parallel between Freedman and another hapless expert, Abraham Bredius. Nicknamed “the pope” by his contemporaries, Bredius was the leading world expert on the works of the Dutch master Johannes Vemeer. A wealthy and venerable retiree in Monaco by 1937, Bredius disastrously misidentified a forgery as a newly discovered Vemeer when a well-meaning friend brought a painting to him in an effort to raise money for the anti-fascist Italian resistance. British economist Tim Harford gives a fascinating full account of the story in his book How to Make the World Add Up, but in brief, Bredius seemed to have harbored a personal pet theory that a period of Vemeer’s work was missing, and the forgery played into the unfounded theory perfectly. As Harford notes:When Bredius saw the picture, he didn’t just see a painting. He saw proof that he had been right all along.2.It’s tempting to sneer at the blunders of Freedman and Bredius. They certainly seem to be the mistakes of a self-important and self-assured elite on niche subjects entirely irrelevant to the well-being of society at large. But that would be wrong. In 2006, Professors Charles S. Taber and Milton Lodge of Stony Brook University published a study in the American Journal of Political Science entitled Motivated Skepticism in the Evaluation of Political Beliefs. In the study, the authors presented participants with both pro and con arguments on the topics of affirmative action and gun control. The authors then measured whether participants in the study were influenced by their prior beliefs. They were. Not only did the participants rate arguments that confirmed their prior beliefs more favorably, they also registered a level of animosity against conflicting arguments beyond what could be supported by logic. Deconfirmation bias and confirmation bias coexisted.More dispiritingly, even when given total choice over which arguments to consume, most participants willfully shunned information that contradicted their prior attitudes and beliefs. That choice, by the way, is called freedom of information in an open society. As Taber and Lodge lay out the implications in their paper:Our studies show that people are often unable to escape the pull of their prior attitudes and beliefs, which guide the processing of new information in predictable and sometimes insidious ways…Skepticism is valuable and attitudes should have inertia. But skepticism becomes bias when it becomes unreasonably resistant to change and especially when it leads one to avoid information as with the confirmation bias. And polarization seems to us difficult to square with a normatively acceptable model (especially since the supporters and opponents in the policy debate will diverge after processing exactly the same information). Moreover, up to some tipping point for persuasion, our model predicts polarization even from unbalanced and counterattitudinal streams of information.In other words, if you find our societies so irreconcilable even when people are presented with the same information, it’s because it is our nature to hang on to our pre-existing views, to willfully ignore conflicting arguments, and to engage in motivated skepticism. As proposed by Israeli psychologist Ziva Kundra: all reasoning is motivated reasoning.3.In the world of economics and finance, a cornerstone theory is the Efficient Market Hypothesis (EMH). The idea is that at any given point in time, the price of an asset reflects all there is to know about the asset. Consequently, it’s impossible for an investor to consistently generate alpha, or, excess return above the market.In an earlier era of modern finance, the prototypical protagonist, however tortured, was undoubtedly Gordon Gekko. A character in Oliver Stone’s 1987 film Wall Street, Gekko was sharp, ruthless, and amoral when it suited him. In popular imagination, Gekko epitomized the active investor with the uncanny ability to generate superior returns. Ironically, thirteen years before the film debuted, real-life economist and Nobel Prize laureate Paul Samuelson had published an essay, Challenge to Judgment, in which he argued that, over the long run, the active investor performed no better, if not worse, than the market. A year after Samuelson’s essay, entrepreneur John C. Bogle acted on the essay’s findings and created the world’s first index fund through his company the Vanguard Group. Though this first fund failed, Bogle kept the faith and his subsequent funds not only succeeded immensely but started a passive investment orthodoxy that persists even today.Yet not all is well in passive investment land. A recently published paper in the Quarterly Journal of Finance looked at fund performance data and whether the fund’s manager was exposed to EMH in school. It turns out that managers who attended schools that taught EMH were more likely to manage index funds. When they did manage active funds, they held portfolios with larger numbers of stocks and deviated less from their investment benchmarks, meaning these active funds in fact looked more like index funds. And how did these EMH managers do? The paper deploys five models in its answer.First, the net returns (first column in the table below) of exposed managers from the authors’ data set were higher, but the difference is statistically insignificant as shown by a p-value of 0.8510. Expense ratios (the last column) of exposed managers, however, are lower on a statistically significant level at a p-value of 0.0006. However, it is the middle two models that were the most damaging to EMH. In short, they show that on a risk-adjusted basis, managers exposed to EMH performed worse on a statistically significant level. Note that the paper’s conclusions may not contradict Samuelson and Bogle as strongly as the above analysis might imply. As the authors of the paper note:These [passive] managers do not generate superior performance, but the funds charge lower fees and generate higher fund flows.And in Samuelson’s original essay, his verbatim argument was not that passive managers would do better, but that active managers don’t, at least not over the long run: Perhaps there really are managers who can outperform the market consistently — logic would suggest that they exist. But they are remarkably well-hidden. However, what is most interesting and hopeful for me in this whole debate on active vs. passive investing styles is a growing awareness from both sides on the unintended consequences of passive investing. Namely, because a passive investing style tracks the market instead of attempting to beat it, on a market-wide basis there is a lower level of informed scrutiny to try to separate well-managed companies from the rest. From the perspective of the companies in the market, passive investors also means management no longer enjoys the level of reward for a job done better. Over the long run, it is not hard to see wealth creation suffer for society as a whole.Shortly before he passed on in 2019, Bogle himself called attention to the potential gravity of the matter: If historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large U.S. corporation. Public policy cannot ignore this growing dominance, and consider its impact on the fi...
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ISSUE 12: Among Whispering Pines
Mar 15, 202100:13:12Tap to summarizeGood evening.1.When I was 12, I got a job as student reporter for my school paper. To file my first report, one of my cousins, a civil engineer, took me to her work so I could observe engineers install a new railroad track that would pass not far from the school. On that sunny summer day in the back canyons of north San Diego County, I was mesmerized.The first step in laying down a track isn’t obvious. It happens below the surface. Like drainage systems on a farm, the ground is first graded then pipes laid in to ensure water never logs below the grade that could cause erosion or degradation. Next, a layer of coarse sand creates a slightly malleable but firm ballast to which crossties can be secured. Crossties can be of timber or concrete, and it’s important to align the center of the ties to the center of the tracks. If not, the ties will tilt.Now the rails are lowered and bolted onto the ties. More calibrations happen at this stage to ensure a precise alignment. It used to be that the rails were joined with fishplates, metal bars with tapered ends. Now it’s common to weld the rails, as technology improves to ensure ambient temperature fluctuations don’t expand or contract the rail.At this point another layer of ballast is applied, consisting of small, irregular rocks. Under gravity, they bunch up and tighten the hold of the track system as a whole. After some trains pass, a third layer of ballast can be applied as the weight and vibration of the trains shake up the rocks, helping them find odd, loose spaces to fill and making the base even stronger.While on break, one of the engineers asked me if I knew how wide the rails were spaced apart. I did not. Four feet and eight-and-a-half inches exactly. And how was this distance, also know as the standard gauge, determined?More popular than fact was a debunked myth that Colonial America engineers selected the gauge in honor of the Imperial Roman chariot, which just about accommodated two horses cantering forth side-by-side. While the measurements do roughly match, historical records show it was less the result of a singular, conscious, and affirmative decision than coincidences of history and a self-reinforcing socioeconomic phenomenon called path dependence.2.At the heart of physics is the study of a system’s behavior in terms of its motion as a function of time. Expressed in equations of motion, behaviors can be modeled mathematically, which could then be used for predictions.One such behavior is called holonomy. In a holonomic system, as long as we know the position of an object, we know its state. It doesn’t matter what path or how long the object takes to get to that position.A nonholonomic system, by logic, is then any system where the state of an object depends on the path it takes to get to its position. An example of a nonholonomic system is a model globe on a desk. Imagine the globe at rest and on the surface of the globe currently in contact with the desk is the country of Malaysia. Now roll the globe along any continuous path on the desk but return it to its original location without slipping, twisting, or picking it up. It’s unlikely the part touching the original spot on the desk is still Malaysia. The state of the globe depends on the path it takes.Path dependence, when extended into social sciences, partially explains why the standard gauge in the United States today approximates that of the Imperial Roman chariot. As painstakingly documented by economist Douglas Puffert in his book Tracks Across Continents, Paths Through History, the standard gauge was an early beneficiary of what we today call the network effect. When early vehicles were designed, tools were created to make and repair them. The more these tools were adopted, the more it made sense to keep making vehicles according to specifications these tools were designed to work with, even as new vehicle technologies emerged. But powerful they may be, network effects aren’t sufficient to explain entirely the survival of the gauge. Coincidences of history also played a role. Before the start of the American Civil War, for example, there were nine regional rail networks and each had to determine which gauge to adopt. Professor Puffert notes:[T]he process was path dependent, in that later outcomes depended on the specific course of preceding events rather than simply on such a priori factors as technology, tastes, or factor endowments.Further, engineers didn’t base their decision on the most widely used gauge in the nation as a whole, but whatever was adjacent to their region. This was borne out by data showing that, despite the supposedly standard gauge of four feet and eight-and-a-half inches representing 80% of all rails in the 1830s, it dropped to merely 55% by the 1860s. What reversed the decline was historical coincidence: Northern generals and military planners happened to recognize and take advantage of the superior logistics of railroads before their Southern counterparts. In the Atlanta campaign, for example, Major General William T. Sherman used rail to not only increase speed but also scale. According to military historian Christopher Gabel in his book Railroad Generalship: Foundations Of Civil War Strategy:In previous North American wars, armies of 30,000 taxed the limits of wagon-haul logistics and local requisition. But in 1864, Sherman waged an offensive campaign with an army of 100,000 men and 35,000 animals. His supply line consisted of a single-track railroad extending 473 miles from Atlanta to his main supply base at Louisville. Sherman estimated that this rail line did the work of 36,800 wagons and 220,800 mules!It shouldn’t be surprising that after the Union had won the war, the gauge used by the Union became the national standard, and that gauge was: four feet and eight-and-a-half inches. In other words, history matters. Had the Union lost the war, it’s far from clear what our railroad gauge would be today.3.While path dependence is an excellent descriptive framework to analyze nature and socioeconomic events, its utility as a normative framework for the entrepreneur is even greater. On the one hand, the network effect element of path dependence feeds much of the business literature today, as social media networks and gig economy marketplaces exploit the self-reinforcing forces of two-sided demand and supply.On the other hand, path dependence could also lull established players into complacency. With success, entrepreneurs begin to look for formulae to replicate. Instructive rules are articulated on analyst calls and in employee handbooks. Investors, pundits, and publishers propagate a sense of infallibility. Soon, board strategy meetings center around a schematic of the company’s flywheel. Investments are weighed based on their ability to take advantage of or strengthen the flywheel.I want to be clear. Learning from past actions and elevating the quality of thinking are absolutely critical to long-term entrepreneurial success. It’s that often the conventional tools of strategic analysis implicitly assume a static landscape in which past success can be replicated with the same actions that led to it. But as the late Professor Clayton Christensen of Harvard Business School explains in the innovator’s dilemma, established players fail not because they lose their edge in what they do well but because what they do well becomes less relevant in the face of a disruptor. Path dependence is fundamentally a mindset of conservatism, solving for the optimal equilibrium between innovation risk and short-term profit. Guide investments by the flywheel by all means, but the greater long-term threat to the entrepreneur isn’t investing outside the flywheel but that someone else develops a different flywheel with better product-market fit.As to commentators and analysts, the frame of path dependence offers a lesson for our craft as well. In 1927, Austrian journalist and biographer Stefan Zweig published a celebrated book, Sternstunden der Menschheit (Stellar Moments in Mankind), in which individual historical characters were given significant credit for particular courses of history. As is with pundits in general, Zweig excelled at gathering information, striking up useful friendships, and reconstructing a scene of significance. But in searching for a moment that was not only significant but also dramatic to retell, analysts fall victim to exaggerating its significance. And as Sternstunden der Menschheit gained widespread readership not only in Continental Europe but also the United States and Latin America, it became a mold plate of sorts for many subsequent historical analyses based on biographies.Ironically, Zweig gives a half-warning against this approach in his book: When it looks at great accomplishments, the world, bent on simplifying its images, likes best to look at the dramatic, picturesque moments experienced by its heroes.... But the no less creative years of preparation remain in the shadow.In physics, a system may be falsely identified as nonholonomic if adding a parameter, also known as raising the dimension of the space, allows the system to satisfy holonomic constraints. Using the mode...
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ISSUE 11: Wreckers of Outworn Empires
Mar 8, 202100:24:38Tap to summarizeGood evening.1.At the end of last week’s update I touched on legibility, the human inclination to simplify complex systems so as to impose control over them. Treated extensively in the 1990s by political scientist and anthropologist James C. Scott of Yale University in his book Seeing Like a State, legibility is an intellectual cousin to high modernism, which exudes unwavering confidence in the potential of science and technology to master nature, including human nature, to meet human needs. The Bauhaus movement is perhaps legibility’s most beloved transatlantic celebrity. On the hilly banks of the Roaring Fork River, where I’ve been bolted down for much of the pandemic, the vision of Austrian émigré and Bauhaus instructor Herbert Bayer has left its imprint all over the valley. Inside the ruminative Aspen Institute, expert curators staff a dedicated gallery.But elsewhere too has modernism exerted its hold. When an elite group of European planners met in Athens in 1933 to proclaim a new vision for cities, they called themselves modernists. The Athens Charter, as the vision came to be known, cherished legibility and advocated freestanding, monofunctional buildings laid out neatly on a grid but surrounded by vaguely-defined no man’s land, and it has proliferated on a global scale since.In 2019, architect and leading researcher at the Royal Danish Academy of Fine Arts Jan Gehl refuted in a new book foreword:All in all, these new [modernist] principles represented the most radical course change in the history of human settlement. And, by and large, there was never a proper assessment of whether these changes actually worked for mankind. They, in fact, did not…as exemplified by the widespread discontent...2.In 2010, the United States National Aeronautics and Space Administration (NASA) and the University of Alabama in Huntsville (UAH) co-founded a consortium to investigate systems engineering and to advance its discipline. It turns out one of the pre-dominant issues confronting large-scale systems engineering is that of system complexity. In the consortium’s seminal publication Engineering Elegant Systems: Theory of Systems Engineering, the co-authors explain:System complexity is defined as a measure of a system’s intricacy and comprehensibleness in interactions within itself and with its environment. This definition points to two factors in complexity: (1) Physical/logical intricacy and (2) human cognitive comprehension.Note that last bit on the human element. We’ll come back to it a few more times in this update. The consortium goes on to provide a granular table of properties of a complex system:What’s remarkable is that of the five properties, two, emergence and nonlinearity, aren’t even internal to the system but stem from the limitations of the human mind.In social sciences too have these properties amply manifested. Nineteenth-century French economist, journalist, and member of L'Assemblée nationale Frédéric Bastiat wrote in his 1850 pamphlet That Which is Seen, and That Which is Not Seen:In the sphere of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee.Across the English Channel in 1691, John Locke successfully argued that the government ought not to cap interest rates, because lenders would find ways to evade the law and pass the cost of evasion to “widows, orphans and all those who have their estates in money”. Those the government intended to protect would perversely end up with higher liability. The reasoning has withstood the test of time, as central bankers and economists even today acknowledge and try to mitigate the same concern in major interest rate and price control policies.3. At the moment, space is again in the headlines. Thanks to a handful of space cadet billionaires but also the current pandemic alerting us to the monstrously tragic consequences of tail risk, expansion of human presence into space has taken on greater moral meaning and urgency. This space expansionist view rests not only on a wealth of science fiction by generations of influential writers such as Jules Verne and H.G. Wells, but also substantial work produced by serious scientists, engineers, military planners, and an informed, diverse, global space intelligentsia. Indeed the name of this newsletter, the Ion Drive, takes inspiration from the eponymous electric propulsion system for spacefaring.In ISSUE 3: The Case for Space, I borrow the words of Mark Hopkins, an economist and board member of the National Space Society: The vast majority of resources in the solar system lies in space rather than on the Earth. This is true of both materials and energy… The sun produces ten trillion times more energy than what is currently used by the human race. If we could bring just a small percentage of that to Earth, we will have all the energy we need, and it’s a clean, inexhaustible resource. There is vast potential for increasing the size of the human economy by tapping into these resources... Space makes possible a prosperous and hopeful future for all of humanity.But in examining the folly of legibility in forestry last week, I couldn’t help asking whether full-throated space expansionism has also fallen prey to a failure to appreciate complexity. After all, despite widely different rationales and even heated disagreement among space advocates, all take for granted expansion to space is a Good Thing. Where is the debate on the unintended consequences? On Bastiat’s that which is not seen?It helps here to pinpoint an essential physical property of space little discussed in popular media. Although at first the void between stars and planets may seem like a wide open commons in which spacecraft can sail in any direction, the existence of gravitational wells makes specific lanes of travel more fuel-economical. Meanwhile, radiation belts and other natural phenomena lethal to machines and human life render certain zones highly undesirable. For example, the Earth’s massive gravity well means it takes more energy to travel from the Earth to the Moon than from the Moon to Mars. Linear distance matters less than fuel economy, and the void of space consists of unseen celestial, energetic mountains, valleys, deserts, and seas. Associate Professor Everett Dolman of the School of Advanced Airpower Studies at Maxwell Air Force Base, Alabama illustrates in his 2002 book Astropolitik, Classical Geopolitics in the Space Age:Perhaps the most intriguing point locations useful for strategic or commercial bases in Earth-Moon space are the gravitational anomalies known as Lagrange Libration Points, named for the eighteenth-century French mathematician… Lagrange calculated that there were five specific points in space where the gravitational effects of the Earth and Moon would cancel each other out… An object fixed at one of these points (or more accurately stated, in tight orbit around one of these points) would remain permanently stable, with no expenditure of fuel… The occupation and control of these points is of such vital importance that an advocacy group called the L-5 Society was formed to influence national policymakers. Dolman compares these advantageous points in space topology to choke points in conventional military planning. Their importance is that they dictate specific tactics and rationale for not only efficient exploitation but optimal control of space.So the uncomfortable truth, perhaps why it’s hardly spoken of by non-military space advocates, is that, much like conflicts on Earth, when we go to space we bring our problems with us, except with the practically infinite resource of the Solar System we can wreak destruction infinitely more terrible on each other.But even assuming we somehow overcome our Cainitic tendencies, the techno-geographic comparison of space to an open frontier seems inaccurate at best. Daniel Deudney, professor of political science and international relations at Johns Hopkins University elaborates in his 2020 book Dark Skies, Space Expansionism, Planetary Geopolitics, and the Ends of Humanity:The technologies of access to space may ...
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ISSUE 10: Places Where Ancient Groves Remain
Feb 27, 202100:14:53Tap to summarizeGood evening.Before we get into this week’s update, I wanted to thank readers who wrote in or spoke to me after last month’s Issue 2: Portugal is the New West Coast. While most were kind in agreement and glad to see more attention on Portugal, a few pointed out additional considerations on the ground.First, despite publicly stated intentions at the top for an entrepreneur-friendly environment, not everyone in the government seems to have gotten the memo. Bureaucracy doesn’t always match the rhetoric. A reader pointed me to this recent tweet by Cloudflare CEO Matthew Prince: Prince submits for evidence demand by Portuguese agencies that Cloudflare create more than a hundred high-paying engineering jobs in Portugal in 12 months from scratch in the middle of the pandemic. I’ve built many technical teams in my career, and this seems a frustratingly tall order indeed.Another reader pointed out that taxes were exorbitant regardless of a business’s profitability. And, the abstruseness of the tax code adds further burden to the entrepreneur. That said, somewhat unexpectedly, readers who were small business owners did not mind at all lobbying by large multinational companies. That’s because rather than individually negotiated concessions, the lobbying efforts have aimed at improving the rules to benefit everyone.Yet another reader, based in Berlin, summarized the dissenting sentiment best: Portugal’s brand for startups may have peaked. I appreciate the sentiment based on the level of concerns I’ve heard, but believe we are actually still on the front end of how Portugal will shape up itself. Taking European geography and demography into account, there isn’t much elsewhere in Western Europe to go where startups can still find high-quality, English-speaking talent and where the cost of living is significantly lower. That said, facts on the ground, as always, are more nuanced and Portuguese policy makers do seem to have much work cut out still. Here, the Singapore Economic Development Board, enthusiastically embraced and applauded by foreign investors in the city-state, may provide a helpful reference point for their Portuguese counterparts.Lastly, a reader based in Lisbon wanted it be known that in the midst of the pandemic, Portugal was kind and protective of its residents, regardless of their citizenship. Bureaucracy is painful here but if a real emergency happens it is nice to know that the government will try to help the people who are here.I cannot express enough how grateful I am for these reader comments, and I look forward to our future exchanges.Now, onto today’s update.1.For those that work with wood, especially by hand, the name George Nakashima (中島勝寿) evokes a special kind of reverence. Born in Spokane, Washington in 1905, Nakashima embodied rugged American ingenuity and master craftsmanship. He lived an understated yet illustrious life that started by the mountainous timberlines of the Pacific Northwest. His studies and apprenticeships took him to Paris, Tokyo, and Pondicherry. Later he planted roots in Pennsylvania and there built a home, studio, and workshop that would become a mecca of contemporary American design. As an Asian American, I see in Nakashima an earlier generation of elders who, embracing both their American identity and Old World heritage, were bound by neither and became something more. Nakashima’s Bucks County estate has been designated a National Historic Landmark and listed on the U.S. National Register of Historic Places. In 1983 he received the Order of the Sacred Treasure from the Emperor of Japan. Today Nakashima is widely considered a father of the American Craft movement and one of Twentieth Century’s most important furniture designers.But Nakashima also likely shared sidewalks and restaurants with his fellow Americans in post-World War I France such as F. Scott Fitzgerald, Ezra Pound, and Gertrude Stein. Arriving in Paris for his university studies in 1928, Nakashima’s best friend was a Russian composer and aristocrat, yet he admired the simplicity and sedulousness of the French workmen. As a French speaker, I was delighted that Nakashima was also and that he took quiet pride in his linguistic command to “almost joke like a native.” He was mesmerized when his menial theatre job brought him in close personal contact with grand European singers at the time such as Raquel Miller and Josephine Baker, who were the toast of Paris.Like many Japanese Americans of his generation, during World War II he was imprisoned, along with his wife and newborn daughter, in an Idaho concentration camp. A stoic patriot, Nakashima spent hardly half a page on his time in Idaho in his 1981 autobiography The Soul of a Tree, and even then, he focused on his work:[I]n Idaho I met a fine Japanese carpenter trained in Japan along traditional lines…We worked well together, scrounging in scrap woodpiles for bits of lumber. Sometimes we received permission to go out into the desert of central Idaho to find bits of bitterbrush, a brave shrub of great character which grows only a few feet in a hundred years. I learned a great deal from this man, through his hundreds of small acts of perfections. He helped me with many of the basic woodworking skills — for instance the correct sharpening of a chisel. We used a traditional Japanese waterstone, which if handled well can produce the finest of edges... He also taught me to sharpen a Japanese handsaw with its very deep gullet. The Japanese saw not only has saw teeth, but below each tooth, a further deep recess which takes away the sawdust without clogging.2.In this week’s Wall Street Journal, a headline caught my attention: Lumber Prices Are Soaring. Why Are Tree Growers Miserable? The context is the current remodeling and construction boom. More people are working and schooling children from home, and restaurants are building new outdoor spaces to adapt to the pandemic.But it turns out tree growers aren’t benefiting from this demand surge. That’s because before the trees can be used by construction workers, they first must be processed by sawmills, which are at full capacity. Doubling the woes is a poorly-timed oversupply of trees in the market. So even as builders pay top dollar for wood, sawmills are buying trees at historic low prices. The Wall Street Journal report estimates that log prices, after adjusting for inflation, are at their lowest in more than 50 years.For an investor, the first and most obvious lesson is the importance of industry-level value chain analysis. To the uninitiated analyst, it is all too easy to conclude that strong demand for “wood” would drive up prices, tempered by ample supply. This would have been a boring, and wrong, assessment of value creation in the forestry sector: a critical segment in the industry value chain, the preparation of log so it becomes lumber, is missing.But sharpen our chisel and we find hidden lessons to be joined. For example, how did the sawmills garner so much market power? The first-order answer is that a few sawmills have consolidated most of the capacity, but what made it economically attractive for them to do so in the first place?In Nakashima’s time, logging down a tree, examining it, and deciding its cut was a spiritual journey. In Nakashima’s words:There are so few who listen to the inner voice. In ages past, it would have been easy to join a crusade, to become a member of a community dedicated to building a great cathedral, to hew the great timbered doors, to carve a spirit in stone to grace the glorious façade.But one must work alone, building objects of wood. With a mendicant’s eye, a sadhu’s perception, a ragpicker’s sense, I poke my way through the valley of the fallen giants, finding here and there fragments which will be given a second life.While few commercial mills practiced Nakashima’s philosophy even during his time, the process to prep logs into commercial lumber was, for a long while, mostly the same regardless of the size of the tree. As such, older trees fetched top prices as their girth made possible wider panels that looked magnificent alone or joined by butterfly locks.But automation advanced, and fitting the machine to the most common girth not only brought down the unit cost but made older trees undesirable. From the Wall Street Journal article:When Interfor arrived, it studied the surrounding trees, noting ages and diameters, then calibrated mills to accommodate the most common-sized trunks..There aren’t enough of the oldest, thickest trees to justify scaling mills for them. Many of the biggest trees went from fetching top dollar to being mashed into paper and cardboard for much less money.Something else also happened:Because of trees bred to become planks and the computerization of mills, well-managed timberland produces about 50% more wood than it did a generation ago…In other words, through product standardization the mills commoditized logs even further. It mattered not where trees came from. No, these planks would never attain the exquisiteness of parcels expertly air-dried and handpicked by Nakashima and his compatriots, but mills competed even less than before on supply and instead on the buyer experience. For example, Canfor, one of the major mill operators mentioned in the Wall Street Journal, has invested heavily in digital ...
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ISSUE 9: No Man Clever Enough to Know All the Evil He Does
Feb 22, 202100:18:02Tap to summarizeGood evening.1.It used to be that when a person of influence passed on, eulogists and biographers would offer an assessment of the person’s life and its significance. More recently, it seems, the honor can be accorded in advance, when such person is alive and well and has simply alighted from their most visible perch.Not a day after Jeff Bezos announced his exit as Amazon CEO (though he remains Executive Chairman) did The Guardian dispatch a column entitled ‘A managerial Mephistopheles’: inside the mind of Jeff Bezos by journalist and essayist Mark O’Connell. I quite enjoyed O’Connell’s framing, and thought he commanded clarity despite the length of his case. O’Connell starts strong with a personal thought bubble:If a thing is available for purchase, and I want to buy it, I know for a near certainty that I will be able to get it on Amazon, and that I will in all likelihood be able to get it quicker and cheaper than I would elsewhere…I’d like to be able to tell you how much it would have cost me to get this book from another online seller, and how long it would have taken. But the truth is I don’t know, and I don’t know because it would have been a hassle to find out. A basically negligible hassle, maybe, but the point is that we live in a culture in which even negligible hassle amounts to a deal-breaker. It is a culture which Amazon helped to create and has come to exemplify, and of which I, as a consumer, am both beneficiary and product.He then sets up the Faustian question:But I am not merely a consumer…I am also a person with political beliefs, and moral principles. There is a distinction between having those beliefs and principles and acting in a way that is consistent with them – and this distinction is, I think, crucial to understanding the meaning of Amazon. What would it mean to resolve this contradiction – between my conception of myself as a person, and my Amazon purchase history?Next, O’Connell ups the stake:But the idea of “boycotting Amazon” arises out of a misreading of what Amazon actually is, and of its position in the contemporary marketplace. Amazon is not, and has not been for many years, merely a gigantic online shop that you can choose either to patronise or not. It is also, increasingly, the infrastructure undergirding the internet itself. Even if my task here was to convince you, the reader, that Amazon was bad and that you should boycott it – which we both know it is, and that you should – we would both of us still, in a strictly technical sense, be using Amazon. (Another, perhaps more accurate way of putting this would be to say that Amazon would still be using us.)Amazon Web Services (AWS), which launched in 2006 and is now the largest cloud computing platform in the world, provides hosting for the Guardian, and for tech mainstays such as Netflix and Twitter, as well as for industrial giants such as General Electric and Unilever. While researching this piece, I watched Amazon Empire: the Rise and Reign of Jeff Bezos, a highly informative – and highly critical – documentary, put out last year by the US non-profit public broadcaster PBS, which itself relies on Amazon’s cloud platform. In 2013, Amazon signed a $600m deal with the US government to host the top-secret workloads of its various intelligence agencies, including the CIA and NSA, via AWS’s Thomas Pynchon-ishly named Secret Region.Here, O’Connell’s case reaches a weak point, where he argues even space ambitions have been framed by Bezos primarily as a way to solve problems a dying planet could present to online shopping. But the column finishes on a clear note:And here we come to the core of the problem: Amazon works too well. Its success and ubiquity as a consumer phenomenon makes a mockery of my ethical objections to its existence…We live in a world where the satisfaction of quotidian desires is the work of mere moments. Whatever you want (and can afford) can be brought to you, cheaply and with vanishingly minimal effort on your part. We know that this form of satisfaction doesn’t make us any happier, and in fact only damages the world we live in, but even so we continue pursuing it – perhaps because it’s in our nature, or perhaps because almost every element of the culture we exist in is calibrated to make us do so.And so the problem, as such, is one of desire. It’s not that Amazon gives me what I want; it’s that it gives me what I don’t want to want. I want the convenience and speed and efficiency that Amazon offers, but I’d rather not want it if it entails all the bad things that go with it. 2.If Mark O’Connell and The Guardian exemplify a begrudging acknowledgment but ultimately critical view of Bezos’s societal impact, then Walter Isaacson is an unapologetic booster. In an introduction to a collection of Bezos’s writings entitled Invent & Wander, which was actually published 3 months before Bezos announced his retirement, Isaacson lavishes:I am often asked who, of the people living today, I would consider to be in the same league as those I have written about as a biographer: Leonardo da Vinci, Benjamin Franklin, Ada Lovelace, Steve Jobs, and Albert Einstein. All were very smart. But that’s not what made them special. Smart people are a dime a dozen and often don’t amount to much. What counts is being creative and imaginative. That’s what makes someone a true innovator. And that’s why my answer to the question is Jeff Bezos.Isaacson justifies his praise with what he considers to be four key ingredients:* To be passionately curious.* To love and to connect the arts and sciences…to be excited by all disciplines.* To have a reality-distortion field and to think different.* To retain a childlike sense of wonder.And yet Isaacson’s case falls flat almost immediately, as he cites non sequitur anecdotes either banal or so commonplace as to apply not only to Bezos but a whole demographic, such as love of Star Trek and having Thomas Edison and Walt Disney as childhood heroes. By the end of his introduction, Isaacson intones:But he still has many chapters to write in his story. He has always been public spirited, but I suspect in the coming years he will do more with philanthropy.Adoring this sentiment may sound, it unwittingly confesses the premature nature of any superlative assessment of the legacy of a person still living. And one is left with the sense that what is unsaid but ultimately a more credible, though crude, justification to compare Bezos to icons of the Renaissance and the American Revolution is simply that Bezos, at the time the book went to press, was the richest man in the world.3.At this point, it’s tempting to take the position that Bezos is a bit of both, a Mephistopheles and an uncrowned prince of modern-day renaissance. But that too should be embraced only as a tentative, transient view.Before I offer my alternative, it’s important we now hear from Bezos in his own words, rather than the words of others on his. In reading Invent & Wander, I thought the following excerpts stood out as not only genuine but also practical.On making decisions:Many of the important decisions we make at Amazon.com can be made with data. There is a right answer or a wrong answer, and math tells us which is which. These are our favorite kinds of decisions…As you would expect, however, not all of our important decisions can be made in this enviable, math-based way. Sometimes we have little or no historical data to guide us and proactive experimentation is impossible, impractical, or tantamount to a decision to proceed. Though data, analysis, and math play a role, the prime ingredient in these decisions is judgment…Math-based decisions command wide agreement, whereas judgment-based decisions are rightly debated and often controversial, at least until put into practice and demonstrated. Any institution unwilling to endure controversy must limit itself to decisions of the first type. In our view, doing so would not only limit controversy — it would also significantly limit innovation and long-term value creation.On investing: A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time — with the potential to endure for decades. When you find one of these, don’t just swipe right, get married.On forging culture:[A]re high standards intrinsic or teachable? If you take me on your basketball team, you can teach me many things, but you can’t teach me to be taller. Do we first and foremost need to select for “high standards” people? If so, this letter would need to be mostly about hiring practices, but I don’t think so. I believe high standards are teachable. In fact, people are pretty good at learning high standards simply through exposure. High standards are contagious. Bring a new person onto a high standards team, and they’ll quickly adapt. The opposite is also true.On managing oneself:I like to putter in the morning. I get up early. I go to bed early. I like to read the newspaper. I like to have coffee. I like to have breakfast with my kids before they go to school. So my puttering time is very important to me. That’s why I set my first meeting for ten o’clock. I like to do my high-IQ meetings before lunch… As a senior executive, what do you really get paid to do? You get paid to make a small number of high-quality decisions. Your job is not to make thousands of decisions every day… If I make, like, three...
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ISSUE 8: A Curious Case of Sinecdoche
Feb 14, 202100:05:47Tap to summarizeGood evening.In his 2004 annual shareholders letter, Jeff Bezos states his view on value creation:Our ultimate financial measure, and the one we most want to drive over the long-term, is free cash flow per share. Why not focus first and foremost, as many do, on earnings, earnings per share or earnings growth? The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings. Future earnings are a component — but not the only important component — of future cash flow per share. Working capital and capital expenditures are also important, as is future share dilution.This week luxury goods group LVMH and singer Rihanna announced they would suspend one of their collaborations, the Fenty Fashion House. Official response to the media from LVMH states: Following the completion of a fundraising round where L Catterton has taken a stake into Savage X Fenty, LVMH and Rihanna reaffirm their ambition to concentrate on the growth and the long-term development of Fenty ecosystem focusing on cosmetics, skincare and lingerie.In the meantime, Rihanna and LVMH have jointly made the decision to put on hold the RTW [ready-to-wear] activity, based in Europe, pending better conditions.While much of the fashion press highlighted the label’s out-of-range prices for Rihanna’s broad fan base and there’s certainly plenty new aperitif conversation material on whether it’s quixotic to build a new luxury brand at all, from an investor perspective it’s worth looking backstage at the financials for additional lessons to be learned.From the industry publication Business of Fashion:Smaller labels often suffer within big conglomerates like LVMH and Kering for a few reasons. For a start, they are slapped with financial reporting requirements that can stifle initiative, not to mention heavy corporate charges, without really benefiting from many of the synergies that can come from being part of a bigger group as their founders struggle to navigate internal politics and bureaucracy.And yet, not all startup labels within the larger maisons have been failures. In fact, LVMH itself provides two immediate counterexamples in its beauty label collaboration with Rihanna as well as another of its portfolio companies, Sephora. From the same Business of Fashion column:Start-up beauty labels are inherently easier to manage than young fashion brands. They typically have lower fixed costs than full-fledged maisons and they don’t need to prove themselves again each season. But beauty brands are also better suited to an incubator model because they can more easily plug into shared services and typically come with less ego at their creative helms.They are also easier to distribute, which brings us to Sephora, LVMH’s powerhouse multi-brand beauty retailer which, acting as a counterpart to Kendo [editor’s note: Kendo is an incubator unit within LVMH], provides the group’s start-up beauty labels with a potent built-in sales channel.And herein lies the seed of Fenty Fashion’s failure. Putting the above analysis in the free cash flow context at the beginning of this update, Fenty Fashion seemed to have suffered from weak earnings through mispricing and shared corporate cost overburdens, high capital expenditures due to fixed costs, and greater working capital requirements. In Bezos’s 2004 letter, he sought to impress the counterintuition that growing earnings without regard to capital expenditures and working capital could actually destroy value. But in the case of Fenty Fashion, no counterintuition is required. While the operating diagnosis rightfully consists of pricing, development, logistics, and distribution issues, financially they translate to a double whammy of poor earnings and poor free cash flow. Kudos to LVMH and Rihanna for seeing the structural issues with Fenty Fashion’s financials after just two years and, in Silicon Valley mode, failed fast so they could move on to better value creation activities. Which leads us to an article this weekend in the Financial Times on the online luxury marketplace Farfetch:[Founder José] Neves’s choice of a business model that differs from other online retailers such as Net-a-Porter or Matches Fashion has proven crucial: Farfetch would not buy any inventory and therefore took less risk on fleeting trends. Similar to Alibaba, which is a partner, by foregoing inventory Farfetch’s model has had the financial benefit of lowering working capital and avoiding warehouse investments beyond what are required for logistics to “dispatch a €4,600 Balenciaga velvet red coat from a store in France to the door of a consumer in Beijing in under four days.” No wonder investors have rewarded Farfetch with an all-time high close of $69.51 as of last Friday, six times from just a year ago at the beginning of the pandemic.In investing, it’s helpful to remember that reporting earnings are merely sinecdoches of cash, and an old aphorism holds after all: revenue is vanity; profit is sanity; but cash flow is reality.If you’ve been forwarded this update, please consider subscribing below. Thank you for your support.From Aspen, Colorado 🇺🇸Victor This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit iondrive.substack.com
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ISSUE 7: A Problem Well Put is a Problem Half Solved
Feb 8, 202100:07:31Tap to summarizeGood evening.As readers of this newsletter know, I am skeptical of crypto’s role as a currency, but remain curious as to its potential as an asset. In my January 10 update, I wrote:[A]pplying the innovator’s dilemma framework to our subject matter, if crypto is the disruptor, who are the incumbents? There would seem to be two. First, government-issued fiat currencies fulfill the role of money as we traditionally understand it. Second, there is gold, or rather, any alternative asset class that provides diversification.In the first instance, it’s not a fringe act today to note the problems of fiat currency. Monetary policy-induced overleveraging and rising geopolitical risks are just two examples most frequently mentioned in recent news. But these shortcomings just prove that, unlike the innovator’s dilemma, government fiat currencies are far from “over-serving” the market. On the other hand, crypto, atypical of a disruptive technology candidate, is not simpler nor more convenient to use. Perhaps no one makes this intuitive point more poignantly than the comedian John Oliver, when he called bitcoin “everything you don’t understand about money combined with everything you don’t understand about computers.”The second instance of crypto as an alternative asset class is more promising. With the stock market at all time highs yet still flush with cash, in recent weeks investors have directed significant sums into crypto…Coincidentally while crypto was breaking price records daily, we saw a cratering in the precious metals market last Friday…Relative to precious metals, which require familiarity with financial securities and fintech, crypto still may not be simpler, but it may not be much harder…The following week at the virtual World Economic Forum, Enass Abo-Hamed of the Royal Academy of Engineering, Imperial College of London and Daniel Evans of the Gibraltar Stock Exchange make a novel argument that cryptocurrency is a battery.The value proposition of crypto mining as storage of energy, or rather, of value, flips the carbon footprint argument of crypto on its head. It introduces an element I haven’t thought of previously, which is that excess renewable energy must be stored or used somewhere when the grid is overloaded. Rather than turning off a wind turbine or solar power field, the excess energy is converted via crypto mining into a storage of value that could be exchanged for services later: in other words, a currency. Is this enough to tilt the scale in crypto’s favor as a currency according to the innovator’s dilemma framework? Not for me, because to disrupt fiat currency, crypto still has to get much easier for the uninitiated user to learn. But does this reframe the case for crypto, especially as a counterpoint to critics who have argued crypto is bad for climate change? Absolutely.This brings me to a more general question. As our society pushes forward on new technologies, are we creating more sustainability problems than we are solving? Take for example artificial intelligence. Much has been covered in the expanding use cases of AI/ML, but what about the economics and environmental footprint?To unpack the problem, let’s look at what AI/ML entails. First, at the physical layer, more objects in our lives are embedded with sensors or are sensors. The aim and consequence are to record and quantify more of our physical world, creating vast data sets that make machine learning possible. Second, at the application layer, growing compute power and model sophistication such as dimensionality reduction and manifold learning have helped data scientists tackle messier technical problems than could be addressed even just a few years ago.Meanwhile, the pandemic has heightened the urgency and societal stakes to direct research insights toward practical problem-solving, broadly defined. In the words of famed Silicon Valley entrepreneur and investor Marc Andreessen, “It’s time to build.”And yet as practitioners know well, AI/ML faces particularly challenging economics because of data and model complexities.An underlying cause is entropy, the tendency of our natural world to become more chaotic over time. In my January 24 explainer of David Christian’s Big History theory, I wrote:Think of your desk. No matter how much you tidied it yesterday, unless you just cleaned up, it’s likely to now be a mess. The same applies to star systems and intergalactic space. This tendency towards chaos is also known as entropy.Human progress, then, could be understood as our activities to reduce entropy. We make progress when energy is more efficiently converted to work, and when the information we gather improves in quality. Another cause is the long tail: no matter how neatly a model accounts for a perceived cluster of data points, many still fall outside the explanatory power of the model, forcing the data scientist to search for yet more advanced modeling techniques. Financially, these technical challenges impose a high level of recurring expenditures for modeling and training data generation, meaning such costs must be classified as operating expenses rather than capital expenditures.This is no trivial matter.Expenses classification affects the shape of financial statements, which directly affects capital budgeting. Without a path toward a sustainable economic model, investments in AI/ML research would be supported by just a handful of the most well-resourced companies. Despite best intentions, management attention at any organization is by necessity constrained, limiting the span of subjects that can be researched, and even then, at potentially great computational, economic, and environmental cost.Back to the question at hand: what is the role of the tech sector in our effort to create a more sustainable economic growth model globally? There is evidence to support an optimistic view. According to GeSI, a global NGO focused on sustainability in the technology sector, for every ton of CO2 emitted by the technology sector, up to 10 ton could be saved in other sectors in the economy. Similarly, a Frost and Sullivan report showed that connected technologies can take 20 million cars off the road by 2025.As the World Wildlife Foundation reported recently:The biggest role that the digital sector can play is in contributing effective solutions to other sectors, influencing consumer and producer behaviour and leading the transformation of our energy systems.Still, while a lot of these arguments sound reasonable, without a global standard and systematic way of tracking and accounting, it would be too easy for them to remain in principle but not reality. That, perhaps is the greater call for action as we slowly wobble out of the pandemic and try to get in front of the next crisis.If you’ve been forwarded this update, please consider subscribing below. Thank you for your support.From Aspen, Colorado 🇺🇸Victor This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit iondrive.substack.com
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ISSUE 6: A Remembrance of Earth's Past
Jan 24, 202100:07:36Tap to summarizeGood evening.In my January 4 update I observed that a few philosophies seem to wield outsized influence in today’s innovation hubs such as Silicon Valley, Seattle, and Beijing. I named two philosophers in particular: René Girard and his mimesis theory, and David Christian, who coined the term Big History.Mimesis, in short, posits that the human proclivity to imitate others inevitably lead to destructive conflict, as illustrated in the Biblical story of brothers Cain and Abel. Peter Thiel, a prominent venture capitalist and former student of Girard’s at Stanford, extends the mimesis framework to ways to think about competition, value creation, and investing. In his book Zero to One, Thiel criticizes what he calls the ideology of competition:We preach competition, internalize its necessity, and enact its commandements; and as a result, we trap ourselves within it — even though the more we compete, the less we gain.Thiel further explains:For Hamlet, greatness means willingness to fight for reasons as thin as an eggshell: anyone would fight for things that matter; true heroes take their personal honor so seriously they will fight for things that don’t matter. This twisted logic is part of human nature, but it’s disastrous in business. If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most.I had planned on an explainer on mimesis, but my research led me to a long-form essay by David Perell, one of the most prolific writers online. Perell’s essay, aptly titled Peter Thiel’s Religion, not only provides background on Girard, but also sorts through his intellectual collaboration with Thiel. I may still decide to provide my own extended treatment of mimesis in a future update, but for now I would simply point the reader to a job well done by another. Instead, in today’s update, we explore Big History. As preamble, I am neither endorsing nor refuting the arguments advanced in Big History. Rather, my interest lies in unpacking what draws some of the most brilliant minds in business and technology to it. It is relevant because its followers deploy their wealth, influence, and resource according to its principles to shape our society.To start, Big History is a multidisciplinary field of study that deviates from conventional history in its cosmic time scale and contextualization of human activity in cosmology and natural history. The study of human existence and its relation with the cosmos harkens back to ancient sages such as Lao Tzu and Kapila and early modern science giants such as Nicolaus Copernicus. More recently, however, its most vocal exponent has been David Christian, Distinguished Professor of History at Macquarie University in Sydney and co-founder of the Big History Project with Bill Gates.In a 2018 introduction to Christian’s book, Origin Story, Gates writes:Big History tells the story of the universe from the big bang to the first signs of life to today’s complex societies. It shows how everything is connected to everything else, weaving together insights and evidence from across disciplines into a single, understandable narrative.According to Christian, to understand this narrative, rather than archeological samples of early farming or monastic archives of the deeds of kings, we are best off starting at the physical world and the biosphere. What is our natural world made of? What is its structure? What drives its change? The answer: energy and information. Christian argues that the combination of energy and information is definitionally human progress. Here the Second Law of Thermodynamics, the tendency towards disorder in a closed system, plays the central role. Think of your desk. No matter how much you tidied it yesterday, unless you just cleaned up, it’s likely to now be a mess. The same applies to star systems and intergalactic space. This tendency towards chaos is also known as entropy. Human progress, then, could be understood as our activities to reduce entropy. We make progress when energy is more efficiently converted to work, and when the information we gather improves in quality. If progress could be defined as the growth of human knowledge and wealth, and wealth broadly defined as the general ability to meet human needs and desires, then human history could be understood as a process of continual scientific exploration, technological development, and wealth creation.Let’s unpack these concepts.First, science is a tool of knowledge mining, a system of inquiry. At its core is a set of falsifiable hypothesis: statements we can prove or disprove after gathering evidence. Science primary explains natural phenomena.Second, technology is grounded in science, but is not science. Rather, it’s a system of human activities to change nature, based on what science has taught us. For a system to qualify as technology, it must be both programmable and executable. Programmability is about information. It encodes our knowledge of how nature can be changed. Executability is about energy. When energy passes through our code, nature is changed. Because technology revolves around human needs, technology and human needs cannot be viewed apart. To predict where technology is headed, we only have to look for where human needs are evolving.And this brings us to wealth creation. Technology and economic growth are well-correlated because both are products of the same evolving human need. From early tribal production to current-day market capitalism, science, technology, and the markets have worked synchronously in promoting human progress, bringing order to chaos.In Origin Story, Christian organizes 13.8 billion years of the universe according to key transition points defined by notable declines in entropy. He calls these thresholds:Threshold 1: The big bang. Beginning at the beginning. As far as we know.Threshold 2: Stars light up. Stars are born.Threshold 3: New chemical elements. Stars forge matter.Threshold 4: Earth and the solar system. Morsels of gas and rock form our home.Threshold 5: Life on Earth. Life evolves, adopts, and thrives.Threshold 6: Collective learning. Humans develop language.Threshold 7: Agriculture. Farming sows the seed of civilization.Threshold 8: The modern revolution. Change accelerates faster and faster.Between the 7th and 8th thresholds is where things get really exciting. Energy and information reach a critical level that gives rise to three successive economic ages: the agricultural, the industrial, and the informational.The agricultural age was based on solar power, which was a free resource that converts energy to matter via photosynthesis. The information density of the agricultural age was low, as farm products were not much more than photosynthesis enabled by human labor and some simple farming tools. That’s why no matter how smart a person was during this age, wealth creation was determined predominately via land ownership. The history of the agricultural age was a history of land control.The industrial age was marked by mass production and transportation. Its main energy source was fossil: first coal then oil and natural gas. These were converted to energy through mechanical, steam, and electric machines. The behemoths of the industrial age were energy companies and firms that owned capital equipment.The information density during the industrial age grew significantly, leading to a rise in demand of specialized skills. Institutions such as universities and trade schools emerged to meet this demand. The history of the industrial age was a history of machinery and fossil energy control.We live in the information age. Its beginning was the invention of generalized computers. These machines allowed us to gather information far exceeding the previous eras. We then applied vast computing power to design, model, predict, and automate whatever we can. The history of our age will be about control over data and algorithms.But beyond the relation between energy and information, we need to return to the dynamics between science, technology, and the economy to understand the immense interest of entrepreneurs and venture capitalists in Big History.In his 2021 new year’s address to startup founders, former Microsoft President and founder of Y Combinator China Dr. Qi Lu introduces a brief description of how technology is purposefully forged out of science, whose product is known as emergent systems.Dr. Lu explains (edit note: translation to English is mine): How did science emerge? It actually started in antiquity. In Greece there was Aristotle, Archimedes, and others. But it was not cultivated systematically. The first systematic development of science happened during the Renaissance. At the time, there was a societal demand, and the demand reached a critical mass to attract a group of people to conduct experiments, organize universities, and engineers as a profession emerged. Subsequently, the scientific method evolved. Foundational science, especially the foundation laid by scientists such as Sir Isaac Newton, precipitated the mass dissemination and usage of science and technology in the West.According to Dr. Lu, the third iteration of systematic development of technology was the modern research-driven university plus national labs. This development model was funded by the government, but driven by scientists. It started in post-WWII United States. At the time, there was actually quite a bit of c...
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ISSUE 5: Un Bon Croquis Vaut Mieux Qu'un Long Discours
Jan 17, 202100:03:30Tap to summarizeGood evening.Today’s update is a bit more meta. When I started this newsletter last month I wanted to focus on exploring the innovation stack that will power wealth creation and human prosperity in a post-COVID world. In my December 29 update, I wrote: Already in 2020 we’ve seen the distribution of healthcare, education, and work into private homes. Resilience and sustainability will take on new meaning and climb higher on the board room agenda. Here, brand-building, digital, and value investing each plays a key role in disruption and wealth creation.Further afield, the second decade of the 21st century may mark the beginning of sustained human presence in space, funded by a vibrant private sector that brings out the best of capitalist competition and the human spirit.For basic level-setting, over the last two weeks I’ve pored over surveys others have done, taking advantage of the Internet’s wonderful attribute of an infinite abundance of niches. While almost all of the reports were insightful, I found a particular style to be not only the most convincing but also motivating: effective data analysis combined with storytelling.The most public and longest-running report of this style is probably Mary Meeker’s Internet Trends Report. In this annual series, Meeker works data as a master quilter works her cloth and tells a spellbinding narrative of what’s happening in tech, why it’s important, and what opportunities may be discerned for the savvy investor, analyst, or entrepreneur.But I want to drive a finer point. What differentiates Mary Meeker’s report is not so much that there is an abundance of data, but the ratio of data over words is so high. While it’s standard practice for most reports to feature a thematic narrative with data as support, Meeker’s report drives the narrative predominately with data, and visualized data in particular, and sprinkles text only as absolutely necessary.The psychology of how all of this works has become better documented and publicized in recent times. Ironically, if we cast our glance at history, the power of visualized storytelling has long been understood and worked into our vernacular:* A good sketch is better than a long speech. (French: Un bon croquis vaut mieux qu'un long discours.) — Napoleon Bonaparte* A poet would be overcome by sleep and hunger before being able to describe with words what a painter is able to depict in an instant. — Leonardo da Vinci* To see once is better than to hear a hundred times. — Ban GuFor readers interested in more examples of this presentations style, I have included a few links below.* Europe, Unicorns, and Global Tech Diffusion by Benedict Evans* The State of the French Tech Ecosystem in 2020 by Alexandre Dewez* State of AI Report 2020 by Nathan Benaich and Ian HogarthWhich brings me back to why I believe this is a superpower in entrepreneurship, and that is an entrepreneur’s effectiveness at ethical persuasion. Remember, in business, a picture is visualized data analysis. Use it well, and use it often.Thank you for your support. If you’ve been forwarded this update, please consider subscribing below.From Aspen, Colorado 🇺🇸Victor This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit iondrive.substack.com
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ISSUE 4: Hamilton vs. Satoshi
Jan 11, 202100:13:36Tap to summarizeGood evening.Last week an old classmate from Teddy Hall said to me in a group chat:In ten years all remote workers will be paid in crypto.Unconvinced, I requested elaboration. Back came a passionate mix of how crypto might be used, why governments were inept, and a variant of “imagine living like a king” thanks to newfound wealth à la bitcoin. This exchange being on text, after a few unsuccessful volleys I opted to simply offer my gratitude for his willingness to engage, and wished him happy new year and fine fettle.Lest readers take me for a crypto luddite, though I am skeptical I’ve also long been curious. When I attended a blockchain program at the Saïd School in 2019 I had hoped to be put through the rigor of Hegelian dialectic: what are the case for crypto, the case against it, and a well-reasoned, if not definitive, resolution that improves the quality of one’s overall understanding. Alas such curiosity was unrequited, as the course mostly consisted of lessons on the mechanics of blockchain and a litany of aspirational use cases.In my subsequent search to understand crypto, I’ve found that since it’s a fintech innovation, a fine framework may as well be the innovator’s dilemma by the late Harvard Business School professor Clayton Christensen. For readers unfamiliar with the framework, let’s first set up two concepts: jobs to be done and disruptive innovation. The jobs to be done concept posits that innovation happens when the customer’s underlying need, “the job to be done,” is correctly identified and innovators create a better offer. In Christensen’s telling, he discovered this concept while consulting for a fast food company. Realizing that customers of the company’s milk shakes didn’t so much have a need for nutrition but distraction during long commutes, Christensen correctly advised his client to grow the milk shake business by offering more interesting milk shakes, such as those with a fruit chunk, rather than making the shakes more nutritious per se.Christensen’s second concept is disruptive innovation, in which he distinguishes sustaining and disruptive technologies. Christensen explains in his 1997 book:Most new technologies foster improved product performance. I call these sustaining technologies. Some sustaining technologies can be discontinuous or radical in character, while others are of an incremental nature. What all sustaining technologies have in common is that they improve the performance of established products… An important finding revealed in this book is that rarely have even the most radically difficult sustaining technologies precipitated the failure of leading firms.Occasionally, however, disruptive technologies emerge: innovations that result in worse product performance, at least in the near-term. Ironically, in each of the instances studied in this book, it was disruptive technology that preciptated the leading firms’ failure.Disruptive technologies bring to a market a very different value proposition than had been available previously… Products based on disruptive technologies are typically cheaper, simpler, smaller, and frequently, more convenient to use. Combining the concepts of jobs to be done and disruptive technology, the innovator’s dilemma is the paradoxical failure of a leading firm that provides the best product performance on the market but is overtaken by an ostensibly inferior, yet “good enough,” product. Over time, this inferior product evolves to be best in class and its maker the new leading firm.Now, applying the innovator’s dilemma framework to our subject matter, if crypto is the disruptor, what are the encumbents? There would seem to be two. First, government-issued fiat currencies fulfill the role of money as we traditionally understand it. Second, there is gold, or rather, any alternative asset class that provides diversification. In the first instance, it’s not a fringe act today to note the problems of fiat currency. Monetary policy-induced overleveraging and rising geopolitical risks are just two examples most frequently mentioned in recent news. But these shortcomings just prove that, unlike the innovator’s dilemma, government fiat currencies are far from “over-serving” the market. On the other hand, crypto, atypical of a disruptive technology candidate, is not simpler nor more convenient to use. Perhaps no one makes this intuitive point more poignantly than the comedian John Oliver, when he called bitcoin “everything you don’t understand about money combined with everything you don’t understand about computers.”The second instance of crypto as an alternative asset class is more promising. With the stock market at all time highs yet still flush with cash, in recent weeks investors have directed significant sums into crypto. To put this in perspective, as of last week the entire crypto market was about $850 billion, according to Binance, smaller than the latest round of U.S. stimulus package. But, it is growing fast and many institutional players such as Blackrock have moved in.Coincidentally while crypto was breaking price records daily, we saw a cratering in the precious metals market last Friday. From longtime gold trader and thought-leader Jonathan Mergott on January 9:Yesterday was bloody in precious metals. Silver tanked 10% at the worst point of the day and many miners were down 10% or more. Gold bulls on twitter suddenly got quite as virtually everyone was analyzing the market, their portfolio, and trying to see "what went wrong."While Mergott went on to chalk up the crash mostly to momentum-chasing algorithms and a temporary market confidence boost due to the economic relief package, when viewed in parallel, it’s hard not to wonder if the surge in crypto was at least partially funded by exits from the precious metals market, whose size is about $200 billion. Relative to precious metals, which require familiarity with financial securities and fintech, crypto still may not be simpler, but it may not be much harder.To sum it up, while it’s yet unclear if crypto is a disruptive technology to government fiat currencies, there may be something there for it to be a new alternative asset class. Nick Maggiuli of Ritholtz Wealth Management lays out a similar viewpoint as mine, but more eloquently with an additional thought on government intervention:The biggest risk I see to owning Bitcoin going forward isn’t a price crash (which is inevitable), but the possibility of a government ban on ownership. This might seem outlandish, but in April 1933 the U.S. government banned the ownership of gold bullion / coinage for all U.S. citizens. The reasons for that ban are very different from a Bitcoin ban that could happen today, but with the recent SEC complaint against Ripple (another cryptocurrency) I wouldn’t rule it out completely.So how else can we analyze crypto’s possible future?At this point, I would recommend a four-part series on emergent layers by Alex Danco of Shopify Money and one of the best public writers on money-as-a-technology. The core concept of emergent layers is that by abstracting a scarce resource (analogous to Christensen’s jobs to be done, but from the standpoint of the resource), humans have unlocked the key to make that resource abundant by understanding its essence rather than its particular vehicle, and subsequently created new value with the newfound abundance.In Danco’s own words:Going way back, we can see how humans have created new value through abstraction since the very beginning of time:-Basic safety and food requirements became abstracted into the communal tribe, allowing us to do more new things.-Communication with one another became abstracted into language, allowing us to do more new things.-Assisting and trading with one another became abstracted into currency, allowing us to do more new things.-Human and animal muscle became abstracted into steam, gas and electric power, allowing us to do more new things.-Our daily cognitive work (and much more) became abstracted into a network of intelligent machines, allowing us to do more new things.More recently, within the modern day technology stack:-Computing power became abstracted into the programmable chip, making it abundantly available (and Intel a lot of money)-PC hardware became abstracted into software, making it abundantly available (and Microsoft a lot of money)-Network participation became abstracted into all-purpose gear & protocols, making it abundantly available (and Cisco a lot of money)-Indexed comprehension of the contents of the internet was abstracted into PageRank, making it abundantly available (and Google a lot of money)-Humans connecting to one another was abstracted into the social graph, making it abundantly available (and Facebook a lot of money) Danco visualizes the above process in the following chart:He then cuts to the chase on what animates this theory: Why does this work? What makes column i and column j fit together to the extent that they do? The most important mental leap to make, I believe, is grasping the connection between scarcity and being overserved.Said another way, the key to grasping crypto’s future is understanding what...
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