Brinton Johns & Jon Bathgate (NZS Capital) - acquired - 'expensive valuations force predictions'

These guys are exceptional thinkers – their paper on ‘complexity investing’ – is a great piece.

Power law systems: The most used word in the book … Moby Dick … is … ‘the’ … it is used 15T v the next closest which is used 7T … then there is a long tail … that is how a lot of markets work … a few big winners and a lot of small losers


Complexity investing & Semiconductors with NZS Capital: Link to podcast

Complex adaptive systems: Once you accept the fact that all of life is governed by complex adaptive systems, and the markets are also governed by complex adaptive systems, which means emergent behavior, you can't predict the future, you focus on adaptability … those complex adaptive systems tend to be governed by power laws. It's sort of a natural follow on

Resilience stocks: Stable, long-term compounders that offer –

  1. Mission-critical high switching costs

  2. Scale – where a company can take 95% of the profits – big profits begets bigger reinvestment – begets better customer experience

  3. Network effects – where one or two players take 80%-95% of the profits

Win/win businesses: Don’t like excessive price hikes – business model has to be a win-win for all stakeholders

Long-term thinking: If a management team is really thinking long term – I don’t know why they wouldn’t give some of their economics away each year

Conviction: Conviction is stupid. Conviction is saying, I think my view of the future is going to be right. Really, what you want is optionality, and you need people to have conviction because otherwise there would be no entrepreneurs … Example on Tesla, I don't think that we have super high conviction that Tesla's going to power-law the EUV market, but is there some probability where they do that and it's worth multiples of what it is today? Sure. That's the way that we think about conviction.

Optionality: There are other predictions like we think EUVs are going to dominate the world and Tesla is going to be the power-law winner inside of EVs. That may only happen in 2 out of 10 copies of the multiverse, certainly not 10 out of 10. These predictions are much narrower and the range of outcomes is much broader

Investing is a team sport: We think investing is inherently a team sport. It's a terrible solo sport for the most part. The way we view team is our role is calling out bias in each other

Great book from Bell Labs – ‘The idea factory’

Primary research: One of the things that are chronically undervalued by investors is Youtube presentations by executives at industry conferences

Santa Fe Institute & Moby Dick: Did Santa Fe Institute short course on complex systems - Power laws are everywhere e.g. the most used word in Moby Dick … ‘the’ … is used 15T v the next closest which is used 7T … then there is a long tail

Power laws: Constantly looking for these companies that can ‘power law’ – ‘does the embedded optionality have a winner take most payoff’

Conviction is overconfidence: ‘done more work than someone else and therefore can see the future better’ – have ~50 names where they concentrate on ‘resilience’ – stable compounding machines – which is around half of the portfolio and then distribute optionality around 40 names – which is the other half … In VC part of the portfolio – trying to maximise the probability that you get lucky

Sizing optionality positions – need to watch evolve – Zoom e.g. was a ‘feature, then COVID came and an ecosystem was built around it and it became a full-blown platform’ … as a result … the range of outcomes would narrow and the predication would get safer .. thus warranting a bigger position … but need to consider what the market is pricing … is valuation forcing us to believe a lot more than what is actually occurring?

Valuation: Expensive valuations force predictions … you have to believe a lot more at 10x sales then 10x EBIT

Current cycle: We are in an epic shift. We're still early days from the industrial age, the information age, and semiconductors are the new oxygen in this environment … There are 10 out of 10 copies of the multiverse in the future going forward where railroads are important. They are probably also 10 out of 10 copies of the multiverse where semiconductors are important

Investing in Candence: He told us what we wanted to hear, but in terms of turning around the culture, really taking a company that was in a very difficult position in the financial crisis, and really re-architecting the product positioning of the company, he's so customer-centric. That was how we first got involved with Cadence.