🔑 Key Takeaways
- Joao Menin's successful transformation of Banco Inter shows the power of innovation in banking. NZS Capital's use of Complexity Theory highlights the importance of strategic thinking, while SoftBank's investment in Banc Inter underscores the potential of super apps in Latin America.
- Long-term thinking and adaptability are essential for survival in a complex world. Drawing insights from biological systems can help optimize for longevity, and prioritizing long-term thinking can benefit both founders and CEOs. Investors should seek a better way of thinking rather than making predictions about the future.
- Companies that focus on compounding at a healthy rate for a long period and prioritize resilience, optionality, and durable growth are more desirable for long-term investors. The CEO's role should be as a capital allocator, not just an operator.
- Investing in companies that prioritize creating shared value for all constituents in their ecosystem, not just extracting profits, creates resilience and long-term value maximization.
- By balancing resilience and optionality, an investment portfolio can create a sturdy foundation while still providing the potential for high returns. The same strategy can also apply to running a business for sustainable growth.
- Gaussian risk models are flawed in power law distributed scenarios where a few winners exist. Adaptability and optionality are crucial to take advantage of this dynamic. Ole Peters' work on non-ergodic systems challenges traditional risk models and provides valuable insights for informed investment decisions.
- When building a portfolio, prioritize optionality and prepare for unexpected events. Focus on asymmetry and diversification, and avoid placing high conviction bets. Be flexible and unbiased, and aim for resilience with a portfolio of 30-40 optionality bets.
- Successful investing requires a team with open communication, a willingness to challenge biases, and a culture that rewards both risk-taking and admitting when you're wrong. Building optionality bets and regularly evaluating the portfolio can lead to more resilience and flexibility.
- In a market with high valuations and unprecedented factors, investing in top semiconductor companies and resilient platforms can bring portfolio strength. Avoid predictions and consider interest rates and stimulus effects.
- Investing in semiconductor companies like Texas Instruments provides stable investment options with long-lifetime and high margins, covering the whole value chain. Companies like Korea, providing Silicon Carbide, are a classic example of optionality.
- Investing in a company requires evaluating its management team and culture. Good leadership can turn a struggling company around, as seen with Cadence's CEO. Public information can aid investing, but it's not always vital.
- Beyond the public-facing material, insights into companies can be gleaned through in-depth executive presentations and historical research. Listening to podcasts or reading about the history of a company's development can provide fascinating insights into its origin and growth.
- Samsung dominates DRAM memory chips market, while TSMC specializes in making the hardest system-on-chips. TSMC's neutral business model avoids competition with its customers, whereas Samsung's vertically integrated model leads to competition and optionality.
- TSMC is a vital resource in the semiconductor ecosystem, and its success is dependent on a complex network of key players. Semiconductor sovereignty is crucial to secure future technology and innovation.
- To prepare for unforeseen challenges, consider investing in defense stocks or holding equipment for rebuilding fabs. Chip innovation now involves splitting up into multiple chips and using new transistor architecture for increased performance.
- The future of semiconductor industry relies on innovation and advancement in packaging, litho and IP blocks. With the active involvement of companies like ASML, TSMC, Lam Research, Applied Materials, and Tokyo Electron, the industry is healthy, high margin, and promising. TSMC's open innovation platform is essential in driving innovation, and off-the-shelf IP blocks are becoming a critical part of chip designing, thanks to companies like ARM, Cadence, and Synopsys.
- Collaboration is necessary for success in the semiconductor industry. Specialized companies, such as ASML, TRUMPF, and ZEISS, rely on forming alliances to develop necessary equipment. Innovation is needed to improve technology. Fundrise offers an approachable investment opportunity.
- Investment success requires collaboration, innovation, and a deep understanding of a company's unique underpinnings beyond traditional industry metrics. Leaving money on the table for partners and customers can also drive value creation.
- Companies that prioritize value creation over short-term hyper growth and consider growth governors can achieve sustained growth. Investors who research and understand a company's growth potential can underwrite its value and long-term success.
- Maximizing extra time to network, share knowledge, and focus on learning can lead to more valuable insights and ideas, as exemplified by the practices of Brinton and Jon and the exclusive content provided by the Acquired LP calls.
📝 Podcast Summary
The Transformation of Banco Inter and Investment Principles for the Latin American Startup Ecosystem
Joao Menin, CEO of Banco Inter, transformed a traditional, local, commercial bank into a publicly-traded digital bank and super app, providing free, full-service, digital checking accounts and adding non-banking products like investments, shopping, and travel in order to compete with Brazil's five big banks. NZS Capital investors Brinton Johns and Jon Bathgate talk about investing principles at their hedge fund, using Complexity Theory, and show frameworks that will change how you view the world. The SoftBank Latin America Fund, with over $8 billion, is investing in the Latin American startup ecosystem, and their portfolio company Banc Inter is one of Brazil and Latin America's leading super apps.
Understanding complexity theory and biological systems for better long-term thinking in business and investing.
Complex adaptive systems govern the world and create emergent behavior, making predicting the future useless. The Santa Fe Institute explores complexity theory and its application to biological systems. Resilience and adaptability are crucial for survival and longevity in the complex world. Companies optimized around productivity and short-term thinking can learn from the ant colony's optimization for longevity. Founders, who have a long-term stake in their companies, tend to think more long-term, but CEOs can also prioritize long-term thinking. Investors should seek a better way to think about things, rather than claiming to know the future. Understanding complexity theory and biological systems can provide useful insights for investing.
Prioritizing Long-term Steady Returns Over Short-term High Growth
Long-term steady returns and resilience are the goals for companies that take the marathon approach instead of short-term high growth. Companies that can compound at a healthy rate for a long period are more interesting than those aiming for quick returns. Resilience and optionality are crucial to portfolio selection, especially companies further along in their S Curve with mission criticality and switching costs, scale, or network effects-based competitive advantages. The focus is on companies that provide durable growth that can compound for decades. The CEO should be a capital allocator, not an operator. Companies that are hyper durable are desired and don't necessarily need all their employees driving high growth. Moats might not be the primary consideration for long-term compounding holds.
NZS Capital's approach to investing in value-creating companies with win-win outcomes.
NZS Capital looks for companies that don't just build a moat around their business and extract as much economics as possible, but create more value than they take. They aim for a win-win outcome for all constituencies across the value chain, including company employees, customers, and society while avoiding customer lock-in scenarios. Such companies are more resilient and have a long-term vision that's value-maximizing. Michael Porter also revised his thinking and wrote about the concept of shared value, emphasizing that caring about all constituencies, not just shareholders, is the long-term value-maximizing thing to do economically. Companies that embrace a totally different business model that enables a whole ecosystem are more likely to succeed than ones that take all the profits for themselves.
Creating a Resilient Investment Portfolio through Balancing Growth and Upside Potential
To create a resilient investment portfolio, it is important to balance between investing in companies that have the potential for steady growth and those that have the potential for high asymmetric upside returns. This can be achieved by concentrating on resilience, which constitutes around 50% of the portfolio, and distributing optionality, which represents just under half of the portfolio. To further mitigate risk, investment firms can opt for companies with both resilience and optionality. Such companies are referred to as route moats and can constitute up to 7-8% of the portfolio. This investing strategy is not only applicable to investing but also to running a business, as creating resilience in the core business while investing in future options is key to growth.
Understanding Power Law Dynamics in Modern Markets
The world is not normally distributed, and in certain scenarios, it's power law distributed. This means that risk models based on Gaussian distributions are flawed. Power law dynamics, where a few massive winners exist, are common in modern markets especially digital ones. It's important to focus on adaptability and optionality to take advantage of power law dynamics. In a non-ergodic system, time average doesn't equal ensemble average. Most people will lose in a power law distribution scenario while a few will win really big. It's crucial to understand power law distributions to make informed investment decisions. Ole Peters' work on non-ergodic systems is fascinating and changing the way we think about risk models.
The Importance of Optionality and Resilience in Portfolio Construction.
When constructing a portfolio, maximizing optionality and being prepared for outlier events is more important than having high conviction or batting average. Half the portfolio should focus on asymmetry and multi-baggers, while the other half should be diversified and optimized around outliers. Optionality positions should not be based on high conviction, but rather on the probability of getting lucky and generating outsized economic value over the long-term. Changing your mind when you're wrong and avoiding bias in the investment process is crucial. It's better to be approximately right than exactly wrong, and having 30-40 optionality bets in a portfolio is more resilient than having just 5 or 10.
Building a Strong Investment Team Culture to Prioritize Resilience and Flexibility
Investing is a team sport that requires open communication and willingness to call out biases in each other. It's okay to expect failure and build optionality bets into the portfolio, but it's important to document the reasons behind those bets and constantly check in on them. The team's culture rewards non-conviction and allows for taking risks, but also requires admitting when you're wrong and moving on quickly. While it may be tempting to ride winners for as long as possible, trimming positions when they no longer fit the portfolio's size or goals can be beneficial. Overall, the team prioritizes resilience and flexibility in their approach to investing.
Valuation and Resilience in Investing: Navigating the Information Age Market Environment
Valuation is a key piece in investing, especially in the current market environment with unprecedented high valuations. Predictions are necessary but expensive valuations force even more predictions, and the prediction becoming narrowing would warrant a bigger portfolio portion. Semiconductors are the new oxygen in this epic shift towards the information age, and the portfolio is brought more towards resilience by investing in top semiconductor companies like TSMC and TI. Companies that are more mature or becoming more of a platform may also belong in the resilient bucket of the portfolio. Optionality played out well for companies like Zoom, but returns pulled back. It is important to actively avoid trying to make predictions, especially in an environment with very little resilience, but interest rates and stimulus effects on all assets are unprecedented factors that must be taken into consideration.
Investing in Semiconductor Companies - The Classic Buffett Business
Semiconductor companies with a vast catalog of parts that have a long lifetime and high margins, such as Texas Instruments, are considered classic Buffett businesses for investment. The growth of such companies is good, and they create more value than they take. These companies are hard to replicate due to the wide range of parts that they offer, which would take decades to recreate. The portfolio of semiconductors covers the whole value chain, and the biggest investments are analog microcontroller companies and semiconductor capital equipment like TSMC, and optional positions like Cree. Silicon Carbide is an alternative technology to silicon, being used in electric vehicles and high-voltage applications. Companies like Korea have a two-thirds market for the substrate of Silicon Carbide, and they are a classic example of optionality for investors.
The Importance of Knowing a Company's Management Team and Culture in Investing
Investing in a company involves knowing its management team and its culture. Choosing between two highly competitive companies with a duopoly may come down to their management team. Cadence was viewed as a 'sleepy, crappy' company but their CEO, Lip-Bu Tan, turned the company around during the financial crisis and re-architected the product positioning and culture of the company, making it customer-centric. Tan's leadership qualities and the company's market share growth in digital markets convinced the investors to become its biggest shareholders. Management interfacing is an important aspect of investing but it has changed over the decade with the public availability of information. It may be helpful or harmful, but it's not always necessary.
How to Utilize Executives' Presentations and Historical Research for Effective Company Analysis
Executives' presentations at industry conferences provide a plethora of interesting and often overlooked insights about companies, which can be a great resource for research purposes. In-depth YouTube videos of executives and presentations by companies offer more detailed information than public-facing material often seen by investors. The hosts of the Acquired podcast rely heavily on these free resources to gather insights about companies they research, and it makes up a significant part of their process. Historical research on the development of semiconductors reveals insights into their origin and development, which make for fascinating listening or reading material. The history of semiconductors began with key insights into the doping of germanium, which is what enabled solid-state switching leading to the foundation for modern electronic devices.
Comparison between Samsung and TSMC in Semiconductor Industry
Samsung and TSMC are two major players in the semiconductor industry. Samsung excels in producing memory chips, with over half of the market share in DRAM, while also having a decent foundry business. On the other hand, TSMC specializes in making system-on-chips, which is the hardest stuff to make. Being vertically integrated in semiconductors like Intel, complicates their battle on multiple fronts, with a need of innovative technology. In contrast to Samsung, TSMC follows a very neutral business model and will never compete with their customers. Yet, it depends on the company's strategy, whether being more of a horizontal, pure play, or vertically integrated, playing at multiple spots in the value chain such that you compete with your customers and have optionality.
The Importance of TSMC in Securing Technological Progress.
TSMC is a critical player in the semiconductor ecosystem and a cornerstone of technological progress. The geopolitical risk associated with their location in Taiwan highlights the importance of protecting this vital resource, as the impact of losing TSMCs fabs could set back technology progress by up to a decade. While TSMCs success depends on a complex network of key players such as ASML, AMAT, and KLA, the company remains one of the most important technology platforms in the world. Vertical integration is necessary during times of rapid technological change, and the success of TSMC and companies like Tesla demonstrate the value of this approach. Semiconductor sovereignty is a vital consideration for the future of technology and innovation.
Diversification as a Hedge Against Black Swan Events for TSMC
In the event of a black swan event that challenges TSMC's sovereignty, investing in defense stocks or holding equipment for rebuilding fabs could be a hedge. Moores Law is still relevant in spirit, with potential for revisibility for the next 10-15 years, but the broader innovation is no longer just packing more transistors onto one gigantic chip, but splitting it up into multiple chips called chiplets or stitching together smaller GPUs. New transistor architecture, such as a gate all-around architecture, will also play a significant role in driving more performance.
The Thriving Semiconductor Industry.
The semiconductor ecosystem is healthy and has a lot of people capturing high margin, which is a sign of a robust and thriving industry. The future of Moores law requires advancements in packaging, litho, and other tools from companies like ASML, TSMC, Lam Research, Applied Materials, and Tokyo Electron. Off-the-shelf IP blocks are becoming a critical part of chip designing, and companies like ARM, Cadence, and Synopsys play a significant role in providing them. TSMC's open innovation platform is central to driving innovation, and it takes the whole industry's ecosystem to push things further down.
The Importance of Collaboration in the Semiconductor Industry
The semiconductor industry requires collaboration among different players to achieve success. Companies such as ASML, TRUMPF, and ZEISS play crucial roles in developing the necessary machines, lasers, lenses, and other equipment. Their specialized contributions rely heavily on an open approach of forming alliances with other industry players, while also embracing an ecosystem approach. ASML's partnership with ZEISS and its conference, SPIE, demonstrate the importance of collaborating with other ecosystem partners to receive necessary feedback and updates. Additionally, more innovation is needed in order to improve the manufacturing process of EUV systems and the technology as a whole. Fundrise offers an approachable opportunity for investing in real estate, allowing fine-grain control over the assets in which one is investing.
Investing in Real Estate through Fundrise and Collaborative Success Stories
Investors can take advantage of the benefits of real estate investing without the overhead and management fees of a REIT through Fundrise. ASML's success story shows the importance of collaboration and investment in innovative technologies by industry players to advance growth in the industry. TSMC's value creation for its partners, including Apple, through its manufacturing platform underscores the importance of leaving money on the table for customers and partners. Intelligent valuation of companies requires understanding the unique underpinnings of the company's success beyond brute force metrics like industry earnings multiple.
Understanding a Company's Strategic Trade-Offs for Sustainable Growth
Investors who understand a company's strategic trade-offs and the duration of its growth have a unique ability to underwrite its value. Companies that focus on creating more value than they take, and think about how to constantly create more value, create a feedback loop that leads to sustained growth. Flat growth over a long period of time is more valuable than short-term hyper growth, and negative feedback loops or growth governors can actually be a long-term good for the company. Researching companies has become easier than ever before, and companies that can double in five years and double again in five more years represent sustained growth of 50% over a decade, a difficult feat to achieve.
The Value of Structured Time and Knowledge Sharing
Creating opportunities for insights and aha moments by intentionally structuring time and being open to sharing knowledge can lead to more value creation than taking. The importance of maximizing extra time to connect dots and focus on learning is highlighted through the practices and resources shared by Brinton and Jon, such as writing and sharing their internal knowledge on the internet, reading newsletters, and being active on Twitter. The power of networking and learning from others is further emphasized through the LP calls by Acquired, which provide valuable exclusive content to members and can lead to real-world applications of complex ideas like those discussed in the Santa Fe Institute.