6: The Chips Monopoly, The Science of Missing, Ergodicity, Envy is the Cancer of the Soul, Never Trust a Miller
"Tous les jours et tout le jour, tout le jour et tous les jours" - Jean Giono
Thumbnail: Photo by BP Miller on Unsplash
Investing & Business
A primer on Semiconductors
Watching time: 16 minutes
A nice video that gives you a quick rundown on the semiconductors industry.
Hundred tons machines are shooting lasers into tiny drops of liquid tin mid-air to turn it into plasma just to make your phone run faster
My selected highlights:
Semiconductors is a VERY specialized sector, in which the main actors have mostly come to focus on one of 5 layers
Instruction Set Architecture set the standard on how a processor is supposed to handle information. The strength of an ISA comes from becoming an industry-standard.
It is a quasi-monopoly as Intel and AMD own most of the IP related to the x86 ISA for instance, the most popular one that allows Windows, Linux and MacOS to run on a huge array of processors. That’s why you are able to build your own PC without to have to think too much about interoperability.
The big trend in Chip Design and Manufacturing has been the advent of so-called “fabless” designers
Most big names in the tech industry (e.g. GAFAM, AMD, Nvidia, Qualcomm…) have separated the design and production layers, relying on third-party manufacturers using state-of-the art (and unbelievably expensive machines) to handle the manufacturing part.
Recently, though, there have been a few examples of vertical integration making a comeback (Apple, Samsung)
The fabrication process for processors is unbelievably complex and as a result has huge barriers to entry due to the need for huge volumes to achieve economies of scale
As a result, this is another VERY concentrated industry, with the Taiwanese leader TSMC owning >50% of the market consistently:
The presenter interestingly notes that TSMC is worth more than the whole Samsung empire!
The manufacturing of high-end eUV (Extreme Ultra-Violet) litography machines used in chip design is basically the feat of a SINGLE company
ASML is the sole manufacturer of Extreme Ultra Violet machines used in the manufacturing of high-end chips.
They only manufacture about ~25 of them a year, and they come at a price tag of $130m, with >50% of them being bought by TSMC.
Science of Missing
Reading time: ~10 minutes
In this article on The Science of Hitting Substack, Alex Morris comes back to reflect on some of his worst investment failures over the past decade, by taking the example of JCPenney ($JCP) IBM ($IBM) and Kraft Heinz ($KHC):
If a company is losing relevance with customers, that’s a major red flag. As a corollary to that idea, if a company is unable to generate organic revenue growth, outsized returns for shareholders is an unlikely outcome over the course of the next 5-10 years.
Overall, his personal conclusion is that given the high level of uncertainty about the future that you have to work with, the best way to cover your bets is to go with the best quality you can find while putting valuation in the passenger’s seat:
In the choice between a good business at a fair price and a (seemingly) fair business at a (seemingly) good price, I mistakenly chose the latter.
The takeaway, in my mind, is a slight tweak of my earlier conclusion: while a reasonable valuation is important to long-term investment success, it should be of secondary consideration in the research process. The first filter must be business quality. Unless it’s a high-quality business, it doesn’t matter if the stock trades at a discount to book value or a double digit FCF yield - for me, it’s a pass.
Thought-provoking stuff…
Ergodicity - Over a long time horizon, 94% of us will be broke
Reading time: ~10 minutes
What is this bárbaros?
In mathematics, ergodicity expresses the idea that a point of a moving system, either a dynamical system or a stochastic process, will eventually visit all parts of the space that the system moves in, in a uniform and random sense. This implies that the average behavior of the system can be deduced from the trajectory of a "typical" point.
Alright, I’m not sure I understand better now…
But it’s our lucky day, because this post from Avoid Boring people wonderfully put the concept in layman’s terms by capitalizing on this video by ErgodicityTV (might be the nerdiest YT channel I’ve stumbled across in a long time).
How we define expected value can give us dramatically different results, changing our mindset on the attractiveness of bets and how much to bet.
Ergodicity means that the ensemble average is the same as the time average. Something being non-ergodic means the opposite, that the ensemble average is not the time average.
What this does mean is that the average over time for a person will be in line with the average at a point in time for a group. It means that the process is not "path-dependent", i.e. that past results do not predict your future success.
The author put together a simple test with a coin tossing game, by observing the wealth outcome for series of 100 coins toss for 100 people.
Something strange is happening. We see one lucky outlier who got to $1k in wealth, and also see that the average wealth (dashed red line) is continuously increasing. However, notice that the majority of these people lost money! In this simulation, 94 out of the 100 people who played ended up with less than the $1 they started with.
[…]
The average of the entire "system" increases, but that doesn't mean that the average of a single unit is increasing. Large outliers skew the average, but the majority of people are losing.
This bears repeating. Even when the expected value of such a bet was positive, 94 out of 100 people who played in such a game lose most of their money. Those outcomes happen within the same system, but give you the opposite takeaway on whether you'd want to play.
Wealth in this scenario is non-ergodic, since the wealth in the future depends on the wealth of the past (path dependence). The ensemble average does not equal the time average.
It is possible to make a parallel to investing or even life decisions in general :
Be careful about how you're applying expected values, since you want to know if that's the average of the entire system, or what an individual like you should expect on average. If you have probabilities in mind, model them out and see what that implies
What can seem attractive at first is often terrible, as a small number of outlier values skew the average upwards
I really found this article to be mind-blowing. I had heard about ergodicity before, but I lacked an illustration to really grasp the concept and understand its importance. Taking a simple game as an illustration made the concept much clearer to me, and now I kind of want to read about path dependence in other fields!
Envy is the Cancer of the Soul
Reading time: ~15 minutes
I’m a great fan of Lawrence Yeo’s content, and I enjoy reading it in between finance, history and economics-related pieces. He manages to put together interesting and actionable advice, while keeping an amusing tone throughout the text and illustrations.
In this piece, Lawrence tackles the subject of envy:
Envy is one of the great struggles plaguing humanity today, and it’s only getting worse. The conditions that allow envy to thrive are being accentuated by technological progress, yet our norms have not updated to accommodate this reality.
[…]
This is my attempt to dissect the shit out of envy, and to go deep into the problem without any preconceived notions. How exactly does envy arise, and what about today’s world makes this especially problematic? How do we manage its presence, and diminish it as much as possible?
Alright, now I’m pumped up.
According to Lawrence’s definition, envy is the little, annoying sister of inspiration:
You will be envious of those that have reached your desired state, but are not too far removed from it. Those that are too far out will be sources of inspiration, not envy.
Envy seems to follow a pattern that replicates ad nauseam:
(1) You once had a shared history with the rival, but now the rival seems to be way ahead of you.
(2) A rival’s path to success appears easily replicable.
(3) The rival seems very relatable to you. You have similar interests, similar outlooks, but the outcomes appear to be wildly different.
Also, social media only made the whole situation worse (but I guess you’d know that):
Communication is asynchronous, meaning that conversations are not happening in real-time. People can take time crafting what they want to say, which means that they are editing themselves before any conversation has begun. And whenever someone is given the capacity to edit, they are given the opportunity to pick and choose how they want to present themselves.
This leads to everyone showing the polished versions of their lives, or what I call the avatars of their refined selves. Every thought is sculpted to be presentable, and every utterance has the purpose of attracting attention.
In the end, Lawrence identifies 3 main levers to get rid of envy in your life:
(1) Question the desired good.
(2) Reframe the (imagined) dynamic you have with your rival.
(3) Take time to block all incoming noise from potential rivals. Focus on your own life.
The world is connected in a manner that has no precedent, and perhaps it’s time we stop pretending that we’re equipped to handle that reality. In order to accept what we are up against, we must first admit the limits of our capabilities, because then we know what we need to bridge the gap. […] By arming ourselves with the capacity to talk about it freely, we finally have what it takes to fight the long battle against envy: the age-old cancer of the soul.
I encourage you to read the whole post below (even just to see Lawrence’s beautiful illustrations!):
Arts & History
Nutrition in France from 1870 to 1990
Reading time: ~60 minutes
One of my favorite findings recently, this is a course taught by Pr. Dominique Lejeune on the history of nutritional habits in France from 1870 to the end of the 20th century.
I found it has several qualities: it is well documented, concise (about 30 pages) and full of interesting and vivid anecdotes. Because this is a rather obscure subject (unless you studied history and/or nutrition in college?), I learned a lot from it already even though I have not digested it fully (no pun intended).
A few selected highlights:
At the end of the 19th century, the consumption of liquor was at elevated levels, reaching as much as 4.5L per habitant per year!
The French society was very festive in the countryside, and rythmed by numerous celebrations (for religious motives, to celebrate the end of the harvesting period, or for other life events):
Every encounter, every transaction (the French word “pot-de-vin'“ taken at face value)involves the consumption of alcohol. Everywhere on the territory, socializing involves drinking.
There is also a very interesting portrait of sevral archetypal characters, such as the miller or the poacher:
The miller is a very important character, cf. Eugène Le Roy (1836-1907), the famous author of Jacquou le Croquant (1897). His first work is Le Moulin du Frau (1890), whose main character is the miller Hélie Nogaret.
There is a whole imagery with the mill, its owner, the miller, his job, his assistants... It is an envied profession, which makes a good living, even those who are not tenants of their mill.
The miller is a character who distinguishes himself from the other peasants by his costume (all white, all clean), a character whom the peasants distrust (reputation of knavery: at a time when bread still constitutes the essential part of the peasant's food, one suspects particularly the miller of changing the good wheat against the mediocre one, of keeping in his millstones a part of the grains, of attributing to himself finally the best flour!)
Treat for the Ears
Quarteto em Cy (a play on words of the Portuguese for Quartet in B by poet and lyricist Vinicius de Moraes) is a Brazilian girl group originally composed of four sisters hailing from Ibirataia, a town located in the Brazilian state of Bahia: Cybele, Cylene, Cynara and Cyva – their real first names
The Quarteto em Cy, noted for the extraordinary precision of the vocalists' intonation and delivery, performed and recorded with almost every single major Brazilian artist of the '60s and '70s; their popularity exceeded and still exceeds the borders of their native country. They met with great success in America in the mid-sixties, and have a considerable following in Japan, where they still tour regularly.