The idea of dissipation of energy depends on the extent of our knowledge.
All posts filed under “Notes”
Seeing Through The Fog
I think seeing through the fog can be learned but it takes time and practice.
Some people are innately good at it and they seem to be able to do it naturally.
But I was not that person. It took me years to be able to do it well and I think there are a few things that helped me a lot.
1) Focusing on a sector and dedicating yourself to it helps a lot. I have been investing almost exclusively in Internet-based businesses since 1993 and that has helped me understand the dynamics, economics, and unique characteristics of doing business on the Internet. That framework helps me see through the fog.
2) Doing the upfront work to have a thesis before investing in a sector is important. My partner Brad taught me this trick back when we started USV in 2003. He insisted that we have a thesis before we raised our first fund and started investing. That thesis has evolved a lot over the years but we have always had one. When we wanted to start to invest in verticals, like financial services, healthcare, and education, almost ten years ago now, we took deep dives on those sectors and developed a thesis about how they would emerge, where the value was going to be, and where we wanted to focus before making a single investment in these verticals. That has served us incredibly well as we have built/are building fantastic portfolios in all three verticals.
3) Avoiding the noise is particularly important. This is hard to do unless you have a thesis. But even if you have a thesis, there is often a ton of noise around other things that you have to ignore. Otherwise, it will pull you in all sorts of directions, waste a ton of your time, and possibly lead to bad investments. I like to think of having blinders on when we are starting to invest in a new area. It is critically important to not let the hype and bluster and bullshit misdirect you.
4) Using the technology of the emerging sector really helps. That is often not easy. I remember when I first started playing around with Bitcoin in 2011, it wasn’t simple to get a wallet, mine some Bitcoin, use an exchange. But I did it because I wanted to use the technology and understand how it worked. Getting your hands dirty by using the technology as early as you can will you help to see through the fog. I strongly recommend it.
5) Reading everything that is written on an emerging sector is critical. I am not talking about books, they usually come too late. I am talking about academic/research/white papers and blog posts written (often poorly) by the leading technologists in the sector. There are sometimes early observers/pundits in these nascent sectors and some of them can be quite good. Find them and follow them.
6) Meeting with as many people working in the emerging sector as you can will help a lot. I don’t just mean entrepreneurs but you should meet as many of them as you can. I mean everyone and anyone who is working in the sector, investing in the sector, writing about the sector, and engaging in the sector. It’s a lot of work (and travel if you don’t live in a place people come to a lot), but it is invaluable.
Product Craftsmanship
The companies forget what it means to make great products. The product sensibility and the product genius that brought them to that monopolistic position gets rotted out by people running these companies who have no conception of a good product versus a bad product. They have no conception of the craftsmanship that’s required to take a good idea and turn it into a good product. And they really have no feeling in their hearts usually about wanting to really help the customers.
Compounding Knowledge
Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.
Indexing Inefficiency
One of the perverse effects of increased indexing and ETF activity is that it will tend to “lock in” today’s relative valuations between securities. When money flows into an index fund or index-related ETF, the manager generally buys into the securities in an index in proportion to their current market capitalization (often to the capitalization of only their public float, which interestingly adds a layer of distortion, disfavoring companies with large insider, strategic, or state ownership).
Thus today’s high-multiple companies are likely to also be tomorrow’s, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings. Conversely with money pouring into market indices, stocks outside the indices may be cast adrift, no longer attached to the valuation grid but increasingly off of it. This should give long-term value investors a distinct advantage. The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become.
Unrecognized Simplicities
Most geniuses—especially those who lead others—prosper not by deconstructing intricate complexities but by exploiting unrecognized simplicities.
Estimates Miss Earnings
Not Even Wrong
Many ideas that are “not even wrong”, in the sense of having no way to test them, can still be fruitful, for instance by opening up avenues of investigation that will lead to something conventionally testable. Most good ideas start off “not even wrong”, with their implications too poorly understood to know where they will lead.
Process and Product
The job of an Apple industrial designer is to imagine objects that don’t exist and to guide the process that brings them to life.