Quote of the week: 

“Compound interest, described in a phrase of disputed origin, is ‘the eighth wonder of the world.’ Wonder or trick, it has built great fortunes, and you can use it to get richer.” Ed Thorp

Separating hype vs. reality in AI 

I believe the following three semi-contradictory facts are all reasonably true: (1) Artificial intelligence will create enormous technological and social changes that are difficult to fathom today; (2) Much of the public discourse around AI has been classically overhyped, bordering on absurdist hysteria (Exihibit A); (3) This persistent dynamic will create profound investment opportunities—and risks—for long-term investors. 

With that preamble, it was nice to see this measured (and relatively data-driven) Sequoia Capital report this week about how, exactly, AI and LLMs are being implemented within 33 of their portfolio companies. Their research is instructive because it provides some early (yet quantitative) evidence of how AI is actually being built into the tech stack at growing companies. “As many founders and builders are in the midst of figuring out their AI strategies themselves,” Sequoia investors Michelle Fradin and Lauren Reeder, wrote,  “we wanted to share our findings even as this space is rapidly evolving.” They continued: 

“It can sometimes feel like we have a tale of two stacks: the stack to leverage LLM APIs (more closed source, and geared towards developers) versus the stack to train custom language models (more open source, and historically geared towards more sophisticated machine learning teams). Some have wondered whether LLMs being readily available via API meant companies would do less of their own custom training. So far, we’re seeing the opposite. As interest in AI grows and open source development accelerates, many companies become increasingly interested in training and fine-tuning their own models. We think the LLM API and custom model stacks will increasingly converge over time. For example, a company might train its own language model from open source, but supplement with retrieval via a vector database to solve data freshness issues. Smart startups building tools for the custom model stack are also working on extending their products to become more relevant to the LLM API revolution.”

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Peter Lynch’s best call of his career

There are many reasons to admire Peter Lynch’s stock picking strategy: His “buy what you know” approach, his formidable work ethic, his mastery of market psychology, and much more. But an essay this week by Kevin Carpenter of Kingswell makes another smart observation: Lynch simply knew when to call it quits (i.e. a sort of “sell decision” for one’s own career). “Unlike so many others, he knew when it was time to walk away — and then did so in 1990, at the height of his fame, with no muss, fuss, or lingering looks back,” writes Kevin. He continues: 

“Those thirteen-plus years running the Magellan Fund had not been easy on either Lynch or his family. ‘I have a very small transmission,’ he once admitted. ‘My gear box has two speeds — off and overdrive.’ And, looking at Lynch’s prodigious workload, ‘overdrive’ might be an understatement. He visited hundreds of companies each year, conducting on-the-spot research of management and operating performance, all across the country. When not traveling, he was holed up in his office poring over annual reports and other filings — leaving no stone unturned in his quest to grow Magellan’s money. 80+ hour work weeks don’t leave much time for anything else and, eventually, something had to give. ‘You know you’re in trouble when you need a Cray computer (a super-computer of that era) to arrange your free time,’ he joked. And, to Lynch’s eternal credit, he ultimately chose his family over the allure of more and more money. ‘I remember standing in the rain [at my daughter’s soccer game],’ he said, ‘and thinking, ‘I want to see more of these.'”

A few more links I enjoyed:

Investing in An Age of Disruption – via Christopher Tsai
“Investing in an age of disruption means that, more than ever, we need to think forward as opposed to backwards and ask, “Where is the world ultimately heading?” We need to break free from a ‘this makes no sense’ snap judgement and approach valuation with new eyes, particularly as GAAP (Generally Accepted Accounting Principles) accounting often does a poor job of representing the underlying economic reality of rapidly growing businesses. Put differently, we need to do deep work and not dismiss a seemingly high valuation without understanding the economics of the business and the underlying system structure. To do anything less is arguably irresponsible.”
Ari Emanuel Is Never Indifferent – via Freakonomics
“Emanuel is a deal-making machine; that’s how Endeavor got to where it is today: 11,000 employees in 36 countries, with revenues of $5.3 billion last year, most of it from their sports properties, live events, and old-fashioned agenting. They represent a lot of big names: Oprah Winfrey, Dwayne the Rock Johnson, Ben Affleck, Larry David, Martin Scorsese, and as of very recently, Meghan Markle, the Duchess of Sussex. Emanuel’s first big deal was in 2009, when his relatively small Endeavor agency merged with the much larger and more historic William Morris Agency. Since then, he and his partners have bought all or part of the following: I.M.G., a sports, entertainment, fashion, and media agency; the Miss Universe franchise — bought from Donald Trump and since sold; a sports-betting tech firm called OpenBet; the Professional Bull Riders league; the Frieze Art Fair; and in 2016, the biggie, the Ultimate Fighting Championship, or U.F.C., the huge mixed-martial arts league. That cost $4.2 billion. This year, Endeavor went even bigger, spending $9.3 billion to acquire W.W.E., the pro wrestling league that’s part sport, part soap opera, mostly cash cow. Emanuel plans to turn this fighting empire into a new publicly traded company called T.K.O., which will be majority-owned and controlled by Endeavor.”

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