Chatting Tesla, Spotify, and disruption with the Good Soil guys

Last week, Emmet Peppers and Matt Smith of Good Soil invited me on their video podcast. I’m a big fan of Emmet and Matt’s investment style, so it was fun to talk shop. We covered a range of subjects, including our approach to concentration, our targeted holding periods, some projections on Tesla’s core business, our conviction in Spotify’s opportunity set, and much more. Note: This is the first part of a two-part episode, which should be published soon—and which I’ll link to in next week’s Nightcrawler. Stay tuned~

“We stay concentrated in large part to avoid risk—to avoid investing in companies with a lower probabilities of success. We also let winners run. Philosophically, a big part of the strategy that we employ is not artificially closing off a position when it’s fundamentally succeeding from a business perspective.”

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Free cash flow as the “hips” of finance

Michael Mauboussin, head of consilient research at Morgan Stanley, made a great point this week in his conversation with Barry Ritholtz: First-level thinkers tend to prioritize P/E ratios and earnings multiples when approaching valuation. But second-level thinkers tend to study free cash flow above all else. I 100% agree with this point, and I think the ability to properly analyze a company’s FCF is essential to the art of valuing growth companies in expansion-mode.  Mauboussin’s athletic framework for thinking about free cash flow was particularly memorable to me: “Remember your high school basketball coach would say keep your eyes on the hips, right?” Michael says. “Because everything follows the hips. That’s the hips of finance—which is, free cash flow—that’s the number you want to keep your eye on… Everything else are proxies.” He continues: 

“Free cash flow is the ultimate thing that we care about. All the other stuff—earnings, multiples, etc.—those are all proxies that try to get to the same thing. They’re shorthand… What’s good about shorthand, and what’s good about heuristics is that they save you time, and that’s why they’re useful…What’s limiting about heuristics though is that that they have biases. And so the key is not to never use them, the key is to understand where their limitations lie.”

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Don’t just ask what can go wrong; ask what can go right

All investing is calculated risk and weighting probabilities to make the best possible decisions day after day. Inherent in this process—and frankly something that I think is human nature—is to immediately ask yourself what can go wrong, i.e. What are the dangers of this investment? What can go wrong? What can go really wrong? And if so, what’s the worst downside? This is all pretty obvious stuff here, but I think what’s less obvious, to me at least, is how to invert the question to correctly weight your risk/return if things go well: Ask yourself, what can go right? And not just right, but what if we’re really right? And if we’re really right, what’s the upside potential? This sort of inversion is a helpful mental model that I like to apply to certain investment themes; probably the most obvious example is around AI and full-self-driving software, which is why we spend so much time studying this area. (The upside of these technologies are so enormous that it’s almost hard to fathom the step-change in value if/when the robotaxi fleet turns itself on.) With all that in mind, I enjoyed this profile of Tesla’s Elon Musk, an unrelenting and unapologetic techno-optimist, who says he is “99.9 per cent — round it up to 100 per cent” confident that Tesla’s full-self-driving program will pay off. To me, this is one of those generational, asymmetric opportunities—which is what makes the whole challenge so compelling and fun to participate in.

“The FT is naming Elon Musk its Person of the Year because he has triggered a historic shift in the world’s auto industry towards electric vehicles… On the challenge of autonomous driving, meanwhile, he gets close to conceding that some of his own earlier confidence was misplaced. ‘I didn’t think we would have to solve a significant part of artificial intelligence to make it work.’ But he adds that he is now ‘99.9 per cent — round it up to 100 per cent — confident full self driving will work, it’s just a question of when.'”

A few more links I enjoyed: 

How Coinbase thinks about the Metaverse – via Coinbase
“At the end of the day, this isn’t about expanding our business or making money. It’s about building a critical piece of the Metaverse ecosystem, and helping crypto grow in the right way. We know that the Metaverse will exist, and we know it will be a series of interconnected virtual worlds. Our goal is to make it easy for anyone to establish their identity and gain access to those worlds in a way that’s simple, trusted, and decentralized.”
A Dynamic of Deception – via Tolma
“As Bosch’s painting says; who controls people’s attention, controls their behaviour. And who is it that these days controls attention? Mass state-funded media and big-tech advertising. In no way different from Bosch’s Conjurer, these powers capture our attention. A capture made all the more easy by the addictive properties of the screens we watch them through. Mesmerized by whatever it is these powers hold forth, we lose attention from what really matters, and what is really going on. A shiny object is held in front of us, and as we go great lengths to take it, we don’t realize we are being robbed all the while.”
Learn Anything Faster By Using The Feynman Technique – via Sunny Labh
“The Feynman technique of Learning helps you learn and understand things by a different perspective. It can be used not just for academic purposes but also for building businesses, creating startups, mental models, and many more. The Feynman Technique is a great method to develop mastery over pretty much set of information.”

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