Podcast Blurbs [Getting wiped out, Crypto incentives, Safran pitch]

Adventures in Finance (Ep. 32; Kyle Bass)

Kyle Bass:

“…we had worked with a bunch of accountants and combed through as many balance sheets and income statements as we could and we found this company called Radisys.  Radisys was an embedded chip company at the time.  Back in 1996/1997, that’s when we had the 4 horsemen of the market, very similar to the FANG stocks today: Intel, Microsoft, Dell, Cisco.  We started looking at [Radisys’] deferred revenue, everything they were doing.  Their income statement didn’t added up and their Chief Operating Officer had just resigned for ‘personal reasons.’  And I made it my mission to track him down.  And I finally tracked him down at this lakehouse somewhere in the midwest…and he said ‘you know, I left that company because the CEO asked me to zero out some cost of goods sold line items so that we could stay within our debt covenants and I wasn’t willing to break that ethical and legal barrier.’  And I said ‘oh my goodness, here we’ve got ’em.’  […]

How do you think I executed this?  Well, I went into Radisys with a 100% short position and all the money I had saved up because I thought ‘I have this one locked down.’  So, we had fully positioned ourselves here, myself and all my customers and clients that I was advising, and a letter writer named Carlton Lutz, who wrote the technology market letter of the day, dubbed Radisys ‘The Son of Intel.”  The stock went promptly from about $16 to $40.  I got margin called out all the way up until I was completely wiped out.  I lost all of my money.  I was apoplectic.  I thought the world was going to end. […]

I remember that like it was yesterday and it was the greatest thing that ever happened to me…It couldn’t have happened at a better time in my life.  You want that to happen as early in your career as you can and you want it to be the most devastating blow that could ever hit you to teach you to bring humility into your investing and to teach you that you should never set yourself up for the knock-out punch.  You should never put 100% of your net worth in anything.  And so it teaches you a lot about sizing and risk management and life.  No matter how much you think you have your arms around a situation, you just never do.”

a16z (9/28/17; Why Crypto Matters)

Chris Dixon and Fred Ehrsam

“When you layer in these incentives – incentives not just for the developers building the project…but also the miners (who are the early service providers in the network) and then also users of the network – they can make these networks grow at a rate that we haven’t seen before.”

“You are now incentivizing all potential users of a potential protocol or application to join the thing early.  If you look at all the value that’s been accrued in the last 15 years, the vast majority of it has come from companies who have effectively built proprietary databases with strong network effects around them.  So we now live in this world where there’s massively consolidating power and one of the great promises of the token movement is that for the first time, you can overcome the chicken/egg problem as it relates to network effects.”

“One thing that cryptocurrency does is it’s like a universal problem to the bootstrap problem by incentivizing early users.  When there’s not enough network value, you give them financial value and then eventually, you give them less financial value because they get network value. […] if it works, it’s not just the employees who benefit from this appreciation, it’s the users.  And these people also play a role in the governance of the network.”

“You can view each token as basically creating it’s own little central bank, it’s own little government.  And there are already over 1,000 tokens.  So, in some ways what we’re doing is creating a giant experimenting ground for all sorts of different monetary policies and all sorts of governance schemes….Tezos is a new blockchain that looks somewhat similar to Ethereum in that it allows you to run a little bit of code on the blockchain referred to as smart contracts.  But the main new feature is this idea of a self-amending ledger, which is a fancy way of saying that the rules of Tezos can be modified.  The users and token holders of Tezos can vote to change Tezos itself as time goes on.  It provides this unique evolutionary mechanism, it can evolve and adapt over time.  Through this mechanism, you can imagine developers being able to contribute improvements to the Tezos protocol and getting paid quite substantially for it.

Ethereum is roughly a $25bn crypto.  If you were to come out and submit an improvement like sharding for example, it could easily raise the value of the network by 10%-20% ($2.5bn – $5bn).  That’s a really big potential bounty.  So then the question becomes, how do you match that potential value creation with the incentives to actually go and do the thing.  That’s where I think more innovation needs to happen.  What if you could offer even half of the perceived value of one of these improvements?  Everyone wins even though the size of the bounty seems enormous.  The interesting about Tezos is the way they propose doing this is through token inflation.  You submit a poll request to the Tezos code base with a bill attached to it and the way you get paid is some new tokens are created and sent to you.  It’s kind of like a new employee joining a company where everyone’s stock is diluted a little bit but it improves the overall value.”

“[with decentralization] a lot more people are more likely to be willing to use a decentralized protocol.  So in the same way that PayPal could never become the money of the internet but cryptos theoretically could or in the same way that developers are now quite scared of building on the Twitter or Facebook API but everyone uses SMTP or HTTP or TCP/IP as these common protocols.”

“Decentralized systems will start off on Day One having clunkier interfaces and slower performance but they have the benefit of having all these developers on top of them.  The same thing happened with the internet with AOL.  AOL had a much slicker interface, more performance, the internet was clunky and weird…You can build a business on email [decentralized] – compliance, anti-spam, email inboxes, server business.  You can argue that Gmail has gotten so big that they’ve actually re-centralized SMTP to some extent, maybe that’s a counterargument.  But generally, [with decentralized protocols] you can exit.  As a user, you can exit.  As a developer, you can exit.  And that keeps the platform in check.”

[on legitimate vs. illegitimate Initial Coin Offerings] “On the red flag side of [ICOs], a couple things come to mind.  One, tokens that we would refer to as rent-seeking, meaning they extract value from the transactions that occur through the network to the token holders or some third party.  A second is raising money for another investment vehicle which itself is centralized.  There’s no reason you need a token for that.  Other [red flags] are releasing a white paper that is actually just a marketing brochure, that has nothing to do with the technical specs of a protocol.”

“Matching the stage of the industry with the ambitions of the project.  At the moment, we’re largely at the infrastructure building stage.  If you look at what Ethereum is capable of in terms of throughput in the network, it can’t handle more than about 20-ish transactions per second, which means that you’re about 20,000x off being able to run Facebook on the chain.  As a result, it’s probably more relevant to build infrastructure components that let people build and scale that in the future rather than trying to build Facebook right now.  I would assign a higher likelihood of success to systems and infrastructure.”

“A mistake that’s often made in paradigm shifts is we try to shoehorn ideas from the existing world into the new paradigm because all we know is the existing world…one of the things I look for [in ICOs] is does this feel like a uniquely enabled behavior by the blockchain […] The top 50 sites on the internet today…guess how many of them were created by companies that existed before the internet was popularized.  It’s two.  MSN.com and Microsoft.com, both by Microsoft.  Every other site was made by a company that was native to the new paradigm, i.e. started after the internet was created.”

“I think subconsciously, most people think about the value of tokens like equity…but it turns out that tokens don’t really function like equity at all.  The key difference is that equity represents rights to a future cash flow in a company […] tokens more closely resemble currencies, where you look at some kind of monetary equation like MV = PQ and it turns out the important things to look at are not the rights to cash flows, rather it’s the money supply, it’s the velocity of money, it’s the average price and number of goods and services in the economy that are sold.  The money supply might be how much filecoin is outstanding, the velocity is every year how often does the whole money supply turn over, the price of goods and services in the economy could be how much does it cost to store 1 gig of data, and the last part of the equation is how many times are people are buying storage.”

Consuelo Mack / Wealthtrack (9/21/17; Where in the World Do you Find Compounding Growth at Value Prices?)

Davis Funds’ Danton Goei 

“If I had to choose one investment to put a large part of my net worth in where I could not trade it or even see how it’s been doing for 10 years, I would put it into Safran.  It’s a French jet engine manufacturer […] The aerospace industry is a great pond to fish in.  Why have we chosen the jet engine manufacturing space?  When you look at the players there, there are only 3 players that supply jet engines to all the commercial aircraft manufacturers – Safran (with their 50/50 JV partner GE), Pratt Whitney (which is owned by United Technologies), and Rolls Royce.  And if you look at the market where Safran plays, which is the narrowbody market, they have 75% of that space.  The narrowbody market is really the workhorse of fleets across the world – these are the Boeing 737s, the Airbus A320s – and is the fastest growing part of the market as well.  The median age of these planes is 25 years.  So, once you are the engine on these planes, you have 25 years of service and parts revenue.”