Myths of the energy transition—scarcity vs. overabundance 

One of the hallmarks of any industrial disruption is an early period of extreme denial—often from the incumbents who claim the new technology is not feasible for a certain reason. With the clean energy transition, one bearish argument that I’ve seen repeated over the years goes something like this: The rise of renewables will be constrained by raw material shortages (such as lithium or nickel), and any attempt to fully decarbonize the economy would result in a net decrease of available energy to society. This argument, to put it plainly, is wrong. It is far too short-sighted and fails to incorporate the second and third-order implications of  deflationary solar/wind/battery-dominated energy ecosystem. Nafeez Ahmed, a researcher at Tony Seba’s RethinkX, offers his thoughts in a deep-dive on the subject this week, titled “Why mineral shortages won’t derail clean energy.”  As Ahmed articulates so well in his piece, not only does the “resource scarcity” argument have little merit, but in reality, we can likely expect an overabundance of clean energy in the coming decades—one that will be massively stimulative to the global economy. 

“Conventional methodologies attempt to understand technologies and sectors in isolation, rather than recognizing how they work as interconnected systems. But the energy disruption is not happening in isolation. It is intimately connected to disruptions in the information, transport, materials and food sectors, and the dynamics of each of these disruptions cannot be fully understood without recognizing their cross-sector interconnections. Mainstream institutions largely fail to understand this crucial nexus between disruption, societal change, and system transformation.”

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“The line between visionary genius and batshit crazy is not always clear” 

I really loved the “Invest Like the Best” podcast conversation with Jay Hoag this week (transcript available here) . For the uninitiated, Jay is the co-founder of TCV, a growth equity firm that has made big and early bets on companies like Netflix, Spotify, Facebook and Peloton. Jay shares a ton of great insights, but I particularly enjoyed the segment where Jay discusses how the most “idiotic” ideas can often be contra-indicators for the best investments—and the most visionary leaders are often the craziest. (See Airbnb example in quote below). As Jay says, if the business idea is too logical, “that may not be the exceptional opportunity” worth pursuing as an investor.

“Almost to a person, the biggest technology successes were thought of as idiotic at the time, or going after small prizes. [With] Brian Chesky at Airbnb, [we said] ‘Wait a minute. So you have this idea where strangers are going to stay in strangers’ houses or on strangers’ couches or in a stranger’s bedroom while they’re still there?’ Yes, that was an incredible unique insight, but it was not viewed as logical at the time. Or in the case of Reed, I’m talking about the transition from DVDs to streaming, here we are having good success in DVDs and as a visionary, he’s able to see a future world where DVDs will start to taper off. That was in nobody’s consciousness… So as an investor, you hear all sorts of ideas that may seem crazy, if they’re too logical, that may not be the exceptional opportunity, but if there’s somewhat crazy and you can poke around a little bit to see if it makes sense… Then that’s proven to be where some of the greatest opportunities come from.”

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Aggregating marginal gains at scale  

This week, we published our Q3 letter in which we offer a peak behind our own investment process and our philosophy. In particular, we share a guiding principle of our own process, which is that the best organizations in the world tend to be on a constant search for marginal gains. Over time, these marginal gains can compound exponentially, creating natural moats and very happy, loyal customers. The idea applies to everything: it’s a great mental model for getting an edge in the market, but it’s also a tool that we use to look for companies that we’re researching and may eventually want to own. 

“Our view of investing edge is, in many ways, that it’s simply a continuous search for accumulating marginal gains to optimize our portfolio for the best possible outcome over a multi-year period. This idea doesn’t just apply to our own process. In practice, it’s a heuristic—a tool—we use to identify companies that we want to own. Our core portfolio as of this writing—TSLA, SPOT, SHOP, ABNB, and AMZN—are all premier examples of companies that use the concept of aggregation of marginal gains to continuously improve their value proposition for customers. After all, what is innovation if not just a continuous search for fractional advantages in business? Amazon, for instance, accumulates marginal gains by compressing their costs year after year for consumers, creating an infrastructure and logistics network unrivaled by its peers. In the short-term, the market can often misunderstand the intentions of the “marginal gain accumulators,” but over time, their value-creation becomes obvious in hindsight.”

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A few more links I enjoyed: 

Facebook Political Problems – via Ben Thompson / Stratechery
“I am, given my career, biased in this regard, but the rise of platforms like Shopify, Etsy, Substack, and the App Store are evidence that new careers can be built and untold niches filled when the entire world is your addressable market. The challenge in a worldwide market, though, is finding the customers who are [interested] in the niche being filled; this is where Facebook’s ad offering is very much a platform in its own right.”
The Ship That Became a Bomb – via The New Yorker
 “A fire or an explosion on the Safer could pollute the air for up to eight million Yemenis, and would complicate the delivery of foreign aid to the western coast. A spill would be even more calamitous. Yemen’s Red Sea fishing industry has already been ravaged by the war. An oil slick would knock it out entirely. A big spill would also block the port of Hodeidah, which is some thirty miles southeast of the tanker. Two-thirds of Yemen’s food arrives through the port. In every projection presented to the U.K. government, Hodeidah remained closed for weeks; in the worst case, it did not reopen for six months. The United Nations, whose mission to Yemen is overstretched and underfunded, has no contingency plan to accommodate a shutdown of the Hodeidah port.”
I Asked Experts Why Carmakers Can’t Just Transition To Newer Chips In Stock. Here’s What They Told Me – via Jalopnik
“The implication here is that the auto industry is far too reliant on archaic tech that isn’t applicable to other consumer tech fields. It’s now finally reckoning with its reluctance to change, and only a fool would invest in shops to pump out the outdated silicon cars require. But is that a fair assessment? As Fortune notes in its own piece, there are reasons why carmakers — some of the largest corporations in the world — choose the chips they do. The comparison to smartphones is moot. If your iPhone crashes, you press volume up, then volume down and hold the side button until the screen turns off and turns back on again and voila, you can lose yet more hours to Instagram like you never missed a beat. The potential ramifications of a glitch in a metal box traveling at many miles per hour are a little more severe. That’s especially true if you’re talking about modern vehicles with driver-assist functions.”

This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investments or strategies referenced were or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. This article contains links to 3rd party websites and is used for informational purposes only. This does not constitute as an endorsement of any kind. While Nightview uses sources it considers to be reliable, no guarantee is made regarding the accuracy of information or data provided by third-party sources. Nightview Capital Management, LLC (Nightview Capital) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Nightview Capital including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request.