Building Blocks

Building blocks approach to breaking down complex systems and concepts is one of the simplest yet powerful ways to navigate this complex world.

There are a few ways to think about blocks. Blocks can be a part of the system. The factor of split is that they form a component with a defined boundary. Another way to look at a block an abstract container for a feature. They may not have a specific physical significance. But they form an abstraction that is important in the context for the system.

Now moving onto connecting these blocks. A connection denotes a relationship. And relationships can have different meanings and also depends on which end of the relationship you are looking at. Hence a directional approach is required most times. Another way to connect blocks could be based on the temporal significance between the blocks. In other words, where blocks are arranged to form a sequence.

10 factors to judge the quality of a business

From an investing point of view, “high quality” is subjective. Subjective to your risk appetite, time horizon and your own biases. But it would be fair to say that, a company that can assure a certain amount of return over a period of time can be considered as high quality. The quality coming from the certainty to which we can look into the future.

That said, there are countless ways in which the future can unravel. Hence, we need to have a margin of safety in our thesis about a company and it’s future.

The analysis can be divided into a qualitative and quantitative parts.

The 5 main qualitative perspective are

  1. How does the business make money? What is it’s business model? What are the core features of the business that customers are paying continually paying for?
  2. Does it have a competitive advantage? Will that advantage strengthen or weaken as the business expands?
  3. Are they innovating with changing times? This shouldn’t be read as, are they jumping on the hype wagon every couple of years to prop up investor sentiment. Rather, is the business having a good balance of exploring new avenues and maintaining it’s core business.
  4. What are the major risks for the business? Are there any other businesses that can take its place easily?
  5. How are the people running the business? This is hard to judge without having any kind of contact with the management. Have they been on the news lately? And was it for a good or a bad reason?

The 5 main quantitative aspects to figure out are

  1. How has the returns been historically? What drove them over the years?
  2. What are the costs for running the business? Are the costs growing or dropping and why? How will the costs change as the business expands?
  3. How much debt does the company have? Is it good debt or bad debt? Will it be able to payoff most of it’s debt if an adversity occurs?
  4. What are the margins in the business? How much pricing power do they have?
  5. These metrics alone are not that helpful in itself. The key step here is to compare it with that of it’s competitors and against the backdrop of the industry the business is in.

Coffee-Can Investing

Coffee Can investing was first popularized by Robert G. Kirby in an article he published in the fall of 1984.

Coffee Can investing riffs off of an old-fashioned saving method where you physically earmark some money, put it in a coffee can, and basically forget about it. And only consider opening it either after a long time or when you desperately need the money.

Converting that concept into an investing strategy, this is how it would look like.

You would begin by allocating money to a number of high-quality companies and forget them for a period of 10 years. No buying or selling during this period. “Just” hold on to dear life.

Then you might ask, why not invest an index fund and hold that for 10 years. Well, for most people, the index fund is still a very good option. But the upside of how much an index can run in a span of 10 years is capped. This cap is typically due to the fact that the growth and return of an index fund in averaged among all of it’s constituents. Despite a few high performing companies, the index would still move slower.

However, the coffee can strategy does have an elegant logic behind it. Consider that you have $100 Million dollars to invest. If you split that into 50 investments in high quality companies worth $2 Million each. The maximum you could lose in one holding is only 2% of the total portfolio while the upside is uncapped. Chances are that at least a couple of the holdings turn out to be a multi-bagger and provide a net profit at the end of 10 years.

An advantage of this kind of investing is that the amount compounds over time and fetching every dividend along the way. Compounding works well when it is not disturbed.

A detriment to an investment strategy are it’s transaction costs. A great strategy with too many transactions would then begin to eat up the gains anyway. Coffee can investing solves that buy reducing transactions to the absolute minimum.

A downside is that it requires you to invest a lump sum amount up front. In addition to that it does take time and effort to figure out which companies are “high quality”. But it is doable.

Nootropics

Nootropics, aka, smart drugs, are supplements that enhance your cognitive functions like memory and creativity. Caffeine is one of the most common nootropic and it is found to increase alertness and attention. Another compound that is shown be psychoactive is L-Theanine. It is usually found in tea and has been shown to mitigate the negative effects of caffeine. L-Theanine seems to increase brain concentrations of serotonin and dopamine.

Unlike NZT from the movie Limitless, nootropics in real life have a much milder effect. And this comes with a catch. Most of these drugs have recorded side effect both short term and long term.

There are other drug-free options to achieve cognitive benefits. Exercising regularly, getting enough sleep, Blue light in the morning are some examples.

Content Delivery Across Platforms

Users are exposed to a number of platforms in the digital world. Each platform has it’s own quirks.

The typical strategy from a creator/publisher point of view is to create a core piece of content. Modify it for different platforms and publish them strategically. There are services that allow you to do this fairly simply.

Then there are open protocols in this space like RSS which enable sharing of text based content. Podcasts also follow a standard format allowing a creator to publish to different podcast players at the same time. Spotify announced an OpenAccess platform that will allow creators to publish their paid audio content on Spotify while still maintaining their direct relationship with their audience.

The need from the user point of view is quite clear here. We have preferences between different types of content. Some might like to read a full-fledged article or watch a Youtube video on the topic, or read a condensed twitter thread or, listen to it as a podcast form. While the underlying content is the same, the delivery channel is different.

The ways in which the user can interact with the content is also different in each case. In twitter they can retweet it or comment/like a twitter thread. While a blog post can be shared with others over email or any messaging social media app they use.

Monetization is different in these platforms as well. In Youtube the primary forms of monetization is either through the built-in AdSense or having In-Video sponsors. While the monetization for a blog/podcast could be a direct subscription model with individual users.

Prudential Algebra

Prudential Algebra is a decision making algebra first invented by Ben Franklin. To boil it down it is a balancing act between the pros and cons of all the options involved in the decision stretched in a time frame of a few days.

The method as written by Ben Franklin in a letter to his friend..

In the Affair of so much Importance to you, wherein you ask my Advice, I cannot for want of sufficient Premises, advise you what to determine, but if you please I will tell you how.
When these difficult Cases occur, they are difficult chiefly because while we have them under Consideration all the Reasons pro and con are not present to the Mind at the same time; but sometimes one Set present themselves, and at other times another, the first being out of Sight. Hence the various Purposes or Inclinations that alternately prevail, and the Uncertainty that perplexes us.
To get over this, my Way is, to divide half a Sheet of Paper by a Line into two Columns, writing over the one Pro, and over the other Con. Then during three or four Days Consideration I put down under the different Heads short Hints of the different Motives that at different Times occur to me for or against the Measure. When I have thus got them all together in one View, I endeavour to estimate their respective Weights; and where I find two, one on each side, that seem equal, I strike them both out: If I find a Reason pro equal to some two Reasons con, I strike out the three. If I judge some two Reasons con equal to some three Reasons pro, I strike out the five; and thus proceeding I find at length where the Balance lies; and if after a Day or two of farther Consideration nothing new that is of Importance occurs on either side, I come to a Determination accordingly.
And tho’ the Weight of Reasons cannot be taken with the Precision of Algebraic Quantities, yet when each is thus considered separately and comparatively, and the whole lies before me, I think I can judge better, and am less likely to take a rash Step; and in fact I have found great Advantage from this kind of Equation, in what may be called Moral or Prudential Algebra.

One aspect about this method is the time frame recommended between different steps. There is enough time for both our conscious mind to spit out everything we know about it and our unconscious mind to spell out what it picked up on the matter. This also spills into a decision journal. Over time, the record of each prudential decision made would be a great feedback loop to assess flaws in your decision making process.

Accumulating Thoughts

On average we have about 6000 thoughts everyday. What if we could record, track and classify all those thoughts. And feed it into a giant neural network to make a virtual version of yourself.

Writing, speaking, drawing, tweets, vlogs and all other forms of “content” we create are conscious to some extent. However our thoughts are a constant stream. Like a fire hose. Mixed with both conscious and serendipitous thoughts.

Could this virtual self be more objective and less susceptible to emotions. Or will it also have your biases built into it. Could you have this virtual self answer calls for you. Reply to messages?

Could we use this set of thoughts to spawn other forms of virtual interactions. Perhaps chatbots. Imagine a customer support chatbot modelled after Gordon Ramsay. Hilarious.

Lumber Crisis

2021, among other things like toilet paper, boba tea and pickle jars, saw a shortage in limber. Let’s try to understand what led to the shortage and the subsequent high prices.

After the financial crash of 2008, home building took a hit. Causing the lumber prices to fall. In addition to that, a lot of woodlands were lost to bark eating beetles. And this eventually led to the fall of prices in 2008.

Prior to the Covid crisis, in a similar fashion we lost about 6.2m acres of woodlands to wildfires in 2017-18. And when the pandemic came, investors expected history to repeat itself and they were short on the prices (expecting them to go down). Similarly, wood suppliers cut production in anticipation of low demand.

But what happened was that more people wanted to renovate their homes, and complete all the projects they always wanted to do. Now since, they have no other option but to do it. Combine a weening supply and a surging demand led to a 377% increase in the price of wood this year.

Reference

Why is lumber so expensive right now?

Greenfield vs. Brownfield

Greenfield and Brownfield investments are ways in which a company can expand into other countries. They are 2 different types of foreign direct investment.

Greenfield investment is when the company builds necessary resources from scratch in the new country. This could include building new plants, distribution centres etc. Greenfield option makes more sense if the business operations are unique and custom made for the company. It is more risky as it is the more expensive option of the two. If the operations are near one-of-a-kind, it would be cheaper to build it from scratch and operate it like existing parts of the business. A good example of this is the Gigafactory tesla is building in Germany.

Brownfield investment is when the company relies on acquiring existing companies and facilities. This makes sense when business operations are rather existing. In some cases, facilities are leased instead of purchasing. This could be an interim solution before companies can take the leap to build their own facilities in a new market.

This way of thinking can be applied to personal projects as well. Would it be easier to update your personal website by making tweaks or to rewrite it from scratch.

Excel

Excel is a remarkable piece of software. It is used by people from every walk of life. Whether you are developer, data scientist, statistician, analyst. You name it. You can have these wonderful tools that can spit out different kinds of data. Or have scripts to do complex calculations. But at the end of the day, you copy it to an excel workbook to send it off to someone or to do some simple tasks like extrapolation, sorting etc.

They even had to change a DNA naming convention due to a bug in Excel.

Excel is unbundling. SaaS like Airtable and Google sheets are the biggest of them. They connect a typical column-row sheet to the internet. Opening up lot more possibilities. And these services also connect to API services like Zapier. Making it possible to connect it to other applications to read, write or manipulate data.

Excel has a very peculiar architecture. Most pieces of software get more bloated with more features. However, the opposite is true for Excel. Over the years, the amount of features introduced strengthened and expanded it’s use-cases even more. That is a very hard thing to achieve in the software world.