#2: Corporate dystrophy; Subject-Object shift; Art of Execution; Open questions on DCA
May 8 - May 14
Corporate Dystrophy
Some orthogonal insights from Byrne Hobart’s profile on Stripe:
Every sufficiently successful company eventually reaches the point where it can only sustain growth by raising its rate of value capture rather than value creation. Some companies have a long runway for doing this, but for many it's surprisingly short; successor executives tend to operate more conventionally than founders, and it's conventional to let the quality of a business degrade a bit in order for a high growth rate not to degrade at all…it's a ubiquitous form of corporate entropy.
From the same article, quoting Richard Dawkins:
Staving off death is a thing that you have to work at. Left to itself – and that is what it is when it dies – the body tends to revert to a state of equilibrium with its environment.
If you measure some quantity such as the temperature, the acidity, the water content or the electrical potential in a living body, you will typically find that it is markedly different from the corresponding measure in the surroundings. Our bodies, for instance, are usually hotter than our surroundings, and in cold climates they have to work hard to maintain the differential. When we die the work stops, the temperature differential starts to disappear, and we end up the same temperature as our surroundings.
Fighting against dystrophy (erosion of entropy?) is the type of “cultural mojo” that defines great teams and companies. And it’s often quite visible in their execution speed and adaptability, or in the perception of both. Google had it for a long time, but seems to have lost it somewhat (at least in public perception) over the past few years. Facebook seems to be slowly losing it too, recently. At a certain amount of size and regulatory/anti-trust scrutiny, it’s probably very hard to maintain.
On the other hand, Microsoft seems to have rediscovered it under Nadella, and Intel’s new CEO is pitching a similar turnaround. And of course, the new darlings (Stripe, Cloudflare) have it in spades.
A driven leader (Bezos, Collison, Musk, Hastings, Zuckerberg) can be the root source source of this “culture to fight dystrophy”, but can this be made to last? Bezos’ services architecture seems to be a systematic attempt at doing so, and so is Hastings’ “no rules” approach - both use a combination of autonomy, accountability and APIs to achieve scale, while maintaining innovation.
The Subject-Object Shift
The “subject-object shift” holds that we are either subject to something or we hold it as subject. The difference between “I am sad” and “I feel sad” highlights the distinction. “I am sad” conveys that sadness is me. “I feel sad” reveals that sadness is a feeling: an object. This shift opens new possibilities. Suddenly, I can hold “sadness” apart from me, examine it, and even play with it.
This was from the “GALE Report 2021-05-14”, which also linked to the Adult Development Primer, which looks very promising.
From “The Hard Thing About Hard Things”, by Ben Horowitz:
Markets aren't efficient at finding the truth; they are efficient at converging to a conclusion; often, the wrong conclusion.
Warren Buffett’s dumbest trade
"The interesting thing about business, it's not like the Olympics. You don't get any extra points for the fact that something's very hard to do. So you might as well just step over one-foot bars, instead of trying to jump over seven-foot bars."
Basically, there’s no point doing complex SPAC warrant arbitrage trades 🤦🏽♂️
Lessons from “The Art of Execution”
Gavin Baker wrote a book review on Lee Freeman Shor’s “The Art of Execution” who analyzed a set of professional investors, and categorized their behaviors when their stocks go down (Assassins, Hunters and Rabbits), and when they go up (Connoisseurs and Raiders). The TLDR is:
Let your winners ride.
Always take some action when losing significant money on a position (either average down, or take the loss and exit).
Open questions on Dollar Cost Averaging (DCA)
When entering new positions:
Is it a good idea to do DCA vs buying all at once?
Is it any different when exiting?
Is it only a good idea if the positions are pre-decided, and we have the discipline to follow through irrespective of stock price movements (assuming no major change in fundamentals)?
Should the pre-decided positions be in unit quantities, or dollar amounts?
Dollar weighted vs time weighted returns
The WSJ reported that ARK generated 5.24% annual returns since inception weighted by dollars, underperforming the S&P. This is a repeated pattern across famous money managers, since a fund that performs well will raise more money, but often that will be at the peak of asset prices and its performance.
For personal portfolios, I would imagine this is a lesser problem in general, but it might still happen because we get over-confident right when our portfolio has performed well recently.
(Shower thought)
One of the saddest parts of growing older is seeing your former idols reveal themselves to be messy, flawed humans.
As I wrote the above, I recalled these haunting words by Venkatesh Rao (RibbonFarm):
Time, of course, is the merciless slaughterer of all these infinitely qualified anchors of the meaning of life. Wait long enough, and every truth will crumble. Wait long enough, and every value will dissolve into moral ambiguity. Wait long enough, and every habit will decay, first into ritual, then into farce. Wait long enough, and every slain demon will rise again.