As we wind down 2021, I thought it’d be fun to do some non-stock related writing and reflect on some of the best books I read this year and some of my key learnings from them. I like to read across a range of subjects as I think having diverse knowledge not only makes you a better investor but gives you a more rounded understanding of the world. As such, the below list of ten books is a bit of a mashup across business, investing, technology, history, and even some epic science fiction (my guilty indulgence). Trying to distill the takeaways from some of these into a few sentences just doesn’t do them justice, so some may end up getting much longer blog posts in the future.
Meanwhile, keen to hear about any good books that people have read this year and any recommendations for 2022.
No Rules Rules: Netflix and the Culture of Reinvention
Reed Hastings, Erin Meyer
I have long been a fan of Netflix and their co-founder/CEO Reed Hastings, and this highly readable book provides some great insights into Reed’s management principles which have helped him grow and pivot Netflix into a media giant. Some of the key concepts that he delves into include radical honesty, releasing controls (the famous unlimited vacation policy), decentralised decision making, and cultural differences between different Netflix offices.
One of the more interesting learnings for me was that of talent density. Perhaps somewhat controversially, Netflix has a policy of “Adequate Performance Gets a Generous Severance Package”. Simply put, average employees will get the cut. While this may sound somewhat intense, various experiments and Netflix’s own results have shown that smaller teams of high caliber people are much more productive and have higher morale than having more people but of subpar or even average quality, as these people will influence the entire group in a negative way.
The book is written in an interesting style where author and professor Erin Meyer, known for her work on corporate culture, chimes in with an external perspective (sometimes rebuttals) of Reed’s assertions based on her observations and interviews with people in the company. This back and forth between Reed’s and Erin’s sections is entertaining and provides a more balanced view of the Netflix culture. Highly recommend this book for fans of the company or people interested in corporate management more generally.
The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics
For several years now I have been fascinated by the idea of complex adaptive systems - things like markets, economies, cities, nature - just about most systems which govern the world. This really insightful book by Santa Fe Institute Professor Eric Beinhocker goes deep into exploring why economies are not simple, predictable, mechanical machines, but are more like complex evolutionary ecosystems, like life itself.
The idea of complexity economics has been gathering significant momentum in the last few decades, in large part driven by the work of the Santa Fe Institute. Eric completely dismantles the ideas of traditional economics which are based on equilibrium-assuming physics models of the 17th/18th century, and asserts that economies are driven by an evolutionary algorithm which selects for the best ideas/business models/technologies in a fight for survival (creative destruction), which in turn spurs innovation and wealth creation. This idea completely resonates with me as it seems obvious that a highly dynamic, constantly evolving system like an economy or a stock market has emergent properties - i.e. millions of individual agents interacting together creating unpredictable, nonlinear effects that are greater than the sum of their parts - thus making them far too complex to predict with simple input-output models (look no further than the track record of economic forecasters and stock market predictions).
This is a dense book but full of great insights on ideas like emergent behaviour, cycles and oscillations, inequality, network theory and optionality. Will probably cover it in a more detailed standalone article in the future.
Complexity Investing whitepaper and other writings by NZS Capital. The guys at NZS truly grasp the ideas of complex adaptive systems, evolution, disruption and non-linearity, so much so that their whole investment approach is based around it
Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies
More Than You Know: Finding Financial Wisdom in Unconventional Places
I try to read everything that Michael Mauboussin writes. His multidisciplinary way of looking at the world and wide range of research interests I think makes him one of the most unique voices in the investment community. More Than You Know is a collection of some of his best writing from his days in Credit Suisse First Boston and covers a broad range of topics from investment philosophy, psychology, innovation, competitive strategy, science and complexity theory (notice a trend?).
All the essays are very focused and straight to the point, making the book easy and relatively quick to ready. I thought every piece had some great insights but what I enjoyed the most were his essays on complexity theory, drawing on lessons from biology, complex adaptive systems and his work at the Santa Fe Institute. One of my favourites is titled “Pruned for Performance”, which draws parallels between brain development and industry innovation:
“When the environment is uncertain, it helps to start with lots of alternatives (e.g. synaptic connections) and then select (via pruning) the ones that are best given the environment. The process is undoubtedly costly because lots of energy and resources necessarily go to waste, but it’s the best one going.”
It is a refreshing and very interesting take on investing that can be extended to numerous other fields. Highly recommend.
Acquired podcast episode - Michael Mauboussin Master Class — Moats, Skill, Luck, Decision Making and a Whole Lot More
Capitalism Without Capital: The Rise of the Intangible Economy
Jonathan Haskel, Stian Westlake
One of the most, if not the most, important dynamics in the global economy is the rise of intangible assets. Intangible assets exhibit very different characteristics to traditional tangible assets which has implications for how they are created, measured, financed, regulated and managed by companies, governments and societies at large. Capitalism Without Capital is written by two economists who explore all of these aspects of intangibles.
The crux of the book is their definition of intangible assets along four important economic characteristics: (1) they’re a sunk cost (if you go bankrupt you can’t sell them like you could with a physical asset); (2) they have spillovers (R&D, for example, benefits companies beyond the one that developed it); (3) they are scalable (effectively zero/low marginal cost); and (4) they have synergies (IP works best in conjunction with other IP). Together these characteristics play out in a variety of ways and contribute to understanding a number of major economic phenomenon including winner-take-most dynamics in business, increasing returns to scale, the rise of inequality, and what some perceive to be the increasing short-termism in financial markets.
Although I can’t say I enjoyed all the parts of the book (the first section around measurement of intangibles from a GDP perspective was not especially interesting for me), most of the discussion was compelling and very well argued.
Talks at Google, Jonathan Haskel and Stian Westlake on Capitalism Without Capital
Two papers on intangible assets by Michael Mauboussin:
Expectations and the Role of Intangible Investments
The Impact of Intangibles on Base Rates
The Innovator’s Solution
Clayton Christensen, Michael Raynor
Clayton Christensen’s theory of low-end disruption from his famous book The Innovator’s Dilemma has been hugely impactful on how I look at business models and innovation. This theory essentially states that certain segments of a market will eventually become overserved and somewhat ignored by a current technology or solution as it ‘overshoots’ in its performance. This creates an opportunity for a disrupter to come in and serve that low-end of the market in a more efficient manner along different parameters that are important to that segment. After getting a foothold in the market, the disrupter will then work their way upmarket through continuous improvement of the service / technology in a way that is eventually threatening to incumbents. Smartphones disrupting the PC industry as they became more powerful is a great example. Cloudflare is also a great embodiment of the low-end disruption strategy (the CEO Matthew Prince is a former student of Clayton Christensen).
The Innovator’s Solution expounds on this work in a number of ways. Probably the key new idea is that of modularity vs. integration – understanding when and why a company may integrate across parts of the value chain, vs. focusing on a specific part and hiving off/outsourcing the rest (modularizing). Integration is critical when there are parts of the value chain that have a significant impact on performance or user experience of the final product. This is why Apple controls all key elements of their phone design (OS, hardware, chips etc) to create a user experience that is superior to any of the Android phones, and e-commerce companies expand into logistics as it helps them better control a critical pain point for customers. Related to this is the physics-inspired Law of Conservation of Attractive Profits - profit-capture will shift around the value chain depending on who can integrate the most valuable parts of it.
There are tons of other powerful ideas in this book which will warrant a fuller article at some point. Ben Thompson of the fantastic Stratechery newsletter has written at length about Christensen’s work and disruption theory as well (links to some good articles below).
The Innovator’s Dilemma, Clayton Christensen
Cloudflare’s Disruption, Ben Thompson (Stratechery)
Beyond Disruption, Ben Thompson (Stratechery)
Netflix and the Conservation of Attractive Profits, Ben Thompson (Stratechery)
Bull! A History of the Boom and Bust, 1982-2004
With the general craziness that we’ve seen in the markets since March 2020, I became highly interested in the 1990s bull market which ultimately culminated in the 2000 dotcom crash. A knowledge of historical episodes can after all help investors sidestep disaster. This book is a wonderfully written piece of financial history which details different aspects of 1980-2000 bull market from the perspectives of all the major participants - retail investors, institutional investors, analysts, investment banks, media, politicians and regulators. It seems like almost everyone had an interest in keeping the frenzy going, and some of the similarities in attitudes to today are uncanny.
“It was coming to be believed, in the absence of evidence to the contrary, that almost any man under forty could intuitively understand and foresee the growth of young, fast-moving unconventional companies better than almost anyone over forty”
Probably the big takeaway for me was that while it is obviously easy to identify a bubble in hindsight, when you are living through it is extremely difficult to not get caught up in the euphoria. The contrarian value investors of the time had to endure years of underperformers and literally everyone around them telling them that they just don’t get it, to ultimately be proven correct, but only after years of excruciating pain and many throwing in the towel. Investing is a tough game.
Capital Account: A Money Manager’s Reports on a Turbulent Decade 1993-2002 Marathon Asset Management, Edward Chancellor
I went on a bit of a 90s bull market binge this year. Capital Account is the first of two books collating the writings of successful London-based value fund Marathon Asset Management (the second more recent book, Capital Returns, is much better known. Capital Account is much older and generally more difficult obtain). Capital Account covers the tech mania of the period from 1993-2002, and is a fascinating first hand perspective of how Marathon experienced and navigated their way through this frenzy period.
On top of insightful anecdotes and lessons on avoiding folly, what Marathon is famous for is their capital cycle approach to investing. Sectors experiencing an upswing and a period of high returns tend to attract attention, investment, new entrants and competition, which ultimately leads to oversupply of capital, reducing returns, and the inevitable bust, following which consolidation and outflows of capital inevitably occur. Exploring the capital cycle framework through the lens of the 90s internet and telecom mania was a perfect case study of how to implement this toolkit in practice. This is particularly useful given the parallels to many sectors/themes today which are seeing a goldrush (electric vehicles, renewables, SPACs during 2020/early 2021).
Despite the letters in this book being written over two decades ago, Marathon’s investment tenets and principles are timeless.
This Week In Intelligent Investing podcast episode - good discussion here on Marathon’s capital cycle approach to investing and what it means in the current market
Destined For War: Can America and China Escape Thucydides’s Trap?
We are living in challenging times geopolitically, and the tensions between China and the US seem to be on a one way path to escalation. In this book, Harvard professor Graham Allison, studies China’s emergence as a rival to the US through the lens of his Thucydides’s Trap idea. Thucydides was an ancient Greek historian who wrote The History of the Peloponnesian War, a historical account of the the multi-decade war between the two powerful Greek city-states Sparta and Athens. Allison popularised the term Thucydides’s Trap as the apparent tendency towards war when an emerging power (back then Athens) threatens to displace an existing great power (back then Sparta) as a regional or international hegemon. He studied many past episodes throughout history of where a rising power was coming up against a incumbent power, and unfortunately in just about all cases these situations have ended in conflict. The most notable example of where it didn’t was the relatively peaceful handover of power from Great Britain to the USA during the early 20th century, and that was only possible due to the shared similarities between the two in terms of values, beliefs and culture (USA was after all the child of Great Britain).
This is not the case between China and USA. In fact, Allison argues, the two are actually quite opposed in terms of their cultures, mindset, histories, views on government and foreign policy. While it is impossible to know what event could exactly trigger a conflict (an incident in the South China Sea or an incursion over Taiwan for example), the structural underpinnings for conflict have been well established.
While all of this may sound somewhat alarmist, it’s good to remember that the world is highly unpredictable, and unimaginable things happen far more frequently than one would expect (certainly the events of the last two years would have taught us that). Back at the turn of the 20th century in the 1910s, when the world was going through what seemed to be a golden era of peace and prosperity, who could have imagined that the next three decades would bring two catastrophic world wars, and a great depression in between. While since then we have had many decades of relative peace, to quote Ray Dalio, “history has shown that after extended periods of war most people become peacemakers. and after extended periods of peace most people become warmongers”. No state is permanent after all, and change is the only constant.
The Dark Forest
The second book of the Cixin Liu’s The Three Body Problem trilogy. This is probably one of the most mind-bending and imaginative sci fi series out there. After being translated into English from its original Chinese, this series quickly exploded in global popularity, winning the Hugo Award, receiving high-profile endorsements from the likes of Barack Obama to Mark Zuckerberg, as well as becoming quite popular in the investor community. Without giving too much away, the premise of the series is based on the virtually unsolvable three body problem in astronomy physics discovered by 19th century mathematician Henri Poincare. The three body problem relates to celestial systems where three stars are in an unstable orbit, such that it is impossible to predict their movements due to each exerting a gravitational pull on the other. Even small effects can have have severe unpredictable long-run consequences. A chaos system.
Cixin Liu took this interesting idea and turned it into an epic story that begins during The Cultural Revolution in China, and spans hundreds of years of human history and extraterrestrial contact. I thought this book was even better than the first, and his game theory inspired ‘Dark Forest’ theory for intelligent life in the universe was completely mind-blowing (and slightly terrifying). Don’t expect too much in the way of beautiful writing or thoughtful character development. These books are all about stunning sci fi concepts and philosophical exposition. Major media companies are also lining up to turn Three Body into a TV series, from Tencent, to Bilibili, to Netflix who’s recruited the high-profile Game of Thrones producers for their version. It’s a great time to be a science fiction fan.
The Three Body Problem, Cixin Liu.
Given the premise of the the series is based on unpredictability and chaos systems, investors have been quick to draw analogies between the idea of the Three Body Problem and the functioning of markets/economies. Ben Hunt of Epsilon Theory had a good essay on this and discussed it on various podcasts like here.
Stories of Your Life and Others
Ted Chiang has become one of the most influential science fiction writers, known for his short stories and novellas which are incredibly soulful, intelligent and have a real human element to them. Stories of Your Life and Others is his first collection of award-winning science fiction/fantasy short stories, the main title of which, Story of Your Life, was turned by Denis Villeneuve into the excellent sci fi film Arrival. What impressed me however, was the pure range and creativity of his stories.
One of my favourites was Tower of Babylon, which imagines a pre-scientific cosmology world where the building of the mythical Tower of Babylon that reached heaven was actually a reality. Another superb one was Seventy Two Letters, a steampunk inspired story in which the science and technology are based on the use of golems and mystical names embedded in them. In these and other stories he essentially imagines alternative versions of the world as if they were to exist based on scientific knowledge of the past.
Each story, despite being short, paints a very rich and memorable world with different sets of rules, knowledge and technology, which is a testament to how much complexity Ted Chiang can depict with limited words. Most of the stories left a very strong impression on my mind and a lot to think about after. Looking forward to reading the second of his collections, Exhalation, next year.
Other books read
The Misbehaviour of Markets - Rating 4/5
Expectations Investing - Rating 4/5
Financial Shenanigans - Rating 4/5
Competition Demystified - Rating 4/5
One Up: Creativity, Competition, and the Global Business of Video Games - Rating 4/5
Platform Revolution - Rating 4/5
Subscribed - Rating 3/5
How I Invest My Money - Rating 2/5
I was recently on the Compounding Curiosity podcast, hosted by Kalani Scarrott. He interviews investors and allocators across the Asia Pacific region, and I came on to discuss all things Sea Limited. He asked some great questions and we got into quite a bit of depth, covering amongst other things Free Fire longevity, Tencent agreement, competitive dynamics with Shopee and SeaMoney, and management. If you’re interested, have a listen below.
Links to listen on: Apple Podcasts, Spotify
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Love ya work mate! And appreciate you taking the time to come on 💪