Foxes and Hedgehogs; $CRM; Verbal Inflation; Compounding Machines #106
Reflecting on a few interesting reads over the past week
I'm going to try and take a slightly different format this week by highlighting five reads/listens vs. going deep on a few.
Foxes and Hedgehogs
This is a great post by Altos VC on the idea of foxes vs. hedgehogs and how to identify and ultimately associate yourself with as many hedgehogs as possible. Here are some quotes that really stood out to me:
“the fox is a cunning creature, able to devise a myriad of strategies for sneak attacks upon the hedgehog…Fast, sleek, beautiful, fleet of foot, and crafty – the fox looks like the sure winner. The hedgehog on the other hand, is a dowdier creature…He waddles along, going about his simple day, searching for lunch and taking care of his home…(but) despite the greater cunning of the fox, the hedgehog always wins.”
Foxes tend to be serial entrepreneurs. Hedgehogs tend to stay at one company forever. (Some people must think that Hedgehogs are related to dinosaurs).
The thing with Hedgehogs is that they never give up. They keep at it – and they don’t ever get bored because they just love what they do – and they have a lot of fun along the way. They can even be downright silly at times.
“The essence of commitment is making a decision. The Latin root for decision is to ‘cut away from,’ as in an incision. When you commit to something, you are cutting away all your other possibilities, all your other options.”
Ho Nam, a Managing Partner at Altos, also talks about this concept here in the podcast below.
Investing in $CRM (Salesforce)
There is a lot that you can learn from reading investor letters, especially long-term investors who have built their positions over time. This letter from RV Capital goes through a number of interesting topics (e.g. investing in China, thesis on Alibaba) as well as the merits of investing in Salesforce.
Now, on the surface, Salesforce can be defined as a fairly broad/horizontal platform. However, it's important to recognize how they have built stickiness by making strategic acquisitions (e.g. Mulesoft, Slack, Tableau) and building a robust partner ecosystem.
As someone who is beginning to study larger corporates and conglomerates, it's quite interesting to see the differences between corporates who make investments in unrelated and often lower-quality assets vs. corporates who make strategic acquisitions to ultimately grow their share of the value stack. The moment the parent company begins to struggle (e g. poor results, changes in management), poor acquisitions tend to bubble up and get isolated fairly quickly.
This is an interesting read on the idea that we are seeing verbal inflation just as much as monetary inflation.
"New dollars and false ideas don't add value to the system, they increase entropy, but they accrue value to those who spend them first. In both cases, the dilution of value across the system as a whole is only noticeable after many transactions. Thus, there are strong short-term reasons to embrace both processes, but only if you are close to the printers.
If you're sociologically close to the printers of official knowledge, little white lies are profitable. But if you're a normal person trying to figure out how the world works, you're screwed. By the time normal people hear that the discovery was false, they've been living for years according to a false mental model. Maybe society fully updates and the false idea is washed away forever, just as the effect of money printing eventually washes out with a rise in prices and wages across the board, but individuals close to the printers profited in the short term, and most people paid a cost."
Investing in Compounding Machines
"Cash + Optionality + Astute Capital Allocation = Compounding Machine
Good businesses generate lots of cash. Great businesses generate tonnes of cash, have lots of capital deployment options, and, more often than not, choose the right ones. This leads to higher future cash flows which can be reinvested, creating a virtuous circle."
This post breaks down how/why you should invest in compounding machines. As long as the equation above doesn't change, investing can be fairly easy and more importantly, headache-free.
Why Money Managers Fail
This is an interesting view into why money managers fail. While over-diversification and/or an inability to change is the most commonly stated reason, this study points out other factors including institutional bureaucracy, cynical factions, ulterior motives, and an inability to create a second generation.
This last issue is one that I believe will come up more often as investment funds start to experience succession. The incentive for top talent to leave and start their own fund or perhaps have a more meaningful role at a smaller fund is quite high.