Weekly Digest #6 [ Bitcoin, Uber, Investing Principles, Moats & Leadership]
A snapshot of article summaries that we enjoyed reading ( Dec 10— Dec 15)
“Education without values, as useful as it is, seems rather to make man a more clever devil.”
— C.S. Lewis
Bitcoin & Its Future: Any asset has cash flows whose value is driven by investor expectations of those cash flows. Bitcoin has no cash flows as its value is derived to some extent by its desirability and potential uses just like gold but mostly by its cost of mining. Gold however due to historical reasons has been universal accepted storage of value, Bitcoin is a digital commodity with no such universal acceptance as a storage of value. The cost of mining Bitcoin is close to $5000 per coin. Hence, the price is close to fully loaded cost of mining the Bitcoin. One would expect the price of Bitcoin to fluctuate somewhere around that price. The recent investors are driven by the greed of guaranteed arbitrage profits in the futures markets. An arbitrage opportunity exists when its price was well above the cost of mining. The cost of mining is not a fixed dollar amount. There exists a feedback mechanism: As the price of Bitcoin increases, new miners enter the market increasing the effort to mine the bitcoin. The efforts increase as the reward is shared with many people. Similarly, as price falls and miners exit, cost reduces, however, the number of miners can’t go beyond threshold level as without miners providing the computing power to maintain the ledger, Bitcoin won’t be viable. Mining at a cost higher than the cost at which you sell in the futures market destroys value. A rational investor has no incentive to mine if the cost of mining is higher than the future price and is better off buying in the futures market. Mining at a cost higher than the cost at which you sell in the futures market destroys value. A rational investor has no incentive to mine if the cost of mining is higher than the future price and is better off buying in the futures market. However, the author is optimistic about Blockchain economy and says that a new cryptocurrency might emerge and governments might start issuing cryptocurrency. Ultimately, a set of numbers without any value or entitlement is worthless.
Uber’s crash: A loss of over 4.5 bn USD raises questions about Uber’s hype. No successful major tech company has been as unprofitable for anywhere remotely as long as Uber has been. Uber has never presented why it will be profitable and neither has it earned adequate returns on capital. The notion that Uber is the highest valued private company relies on massive subsidies of services, minimal and inconsistent financial disclosures and an effective PR campaign that depicts Uber as the digital startup whose initial losses transform into profits. Investors have pinned their hopes on a successful IPO for recovering their losses which means finding greater fools in sufficient numbers. Primarily, Uber is a taxi company with an app and does not create any technological barrier to entry like other tech companies. Neither does it demonstrate network effects — having more users doesn’t improve the service nor does adding more drivers. Uber claims that it creates economies of scale for drivers but the benefits are not visible. More drivers mean more jobs and less utilization per driver. There is a tradeoff between capacity and utilization which is an unlikely trait of a digital company. Uber does not benefit from scale as economics of service delivery hasn’t improved as margins have fallen as operations increased and it has also reduced flexibility. Uber does not have a cost advantage rather it is a high-cost provider. Traditional transportation companies maintain central control of both vehicles and labor along with capacity. Uber cannot schedule or control capacity. Local transport services have backhaul problems like waiting hours, rush in a direction during peak commute hours, etc. Surge pricing hasn’t led to low-cost times which could have led to better utilization. Uber also has huge overhead costs like highly paid employees operating in prime office space, driver recruitment costs, PR costs, litigation costs, and a global operating expense. The reduction in gross margins of Uber has been derived from squeezing driver compensation costs. These pay cuts have led to turnover resulting in higher managerial costs and degrading service quality. Driverless cars would mean Uber owning them leading to a huge cost overload. Neither have their other ventures in other sectors like Uber Eats have been profitable. All signs point towards one direction that not local cab companies but investors would be Uber’s biggest roadkill.
Principles of Investing: Having an investment plan that will stick through all markets ahead of time will help in taking emotions out of the equation. An investment plan will help in eliminating short-term thinking. We overthink things in life but simple is always better in the long term. Don’t speculate, invest. As Ben Graham said “ an investment operation is one in which upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative”. Dollar cost average — Investing on a periodic basis either monthly or biweekly. When markets are high, you buy a low amount of shares and when markets are low, you buy more thus keeping you honest from making short-term emotional decisions. Don’t try to time the market as it requires being right twice — when you enter and when you get out. You need to get both time and direction right which is difficult. Stay away from individual stocks if you don’t have the time to do research and track them consistently. Use index funds or ETFs. Index products have lower fees, fewer transaction costs as they trade less and you get a market return at a lesser fee. Have goals in mind when it comes to your investments. This will help to check if you are on the right track in hitting those goals. Diversification by asset class and within markets is an easy way to spread out your bets and lower your risks of major losses. Diversification across markets gives you the advantage of having investments that zig when others zag. Within your investment plan, you should have an asset allocation plan by dividing your investment funds and asset class into certain target weights. Rebalance these weights in order to stick to your plan. Ignore short-term market movements. Save at least enough for the company match to your retirement if you don’t know how much to save for your retirement. Review your investments on a periodic basis. It helps to look at your balance and performance on a quarterly or semi-annually basis to check with your goal. Don’t ever buy a product that makes a promise for an exact return number per year. Use technology and automation for the savings and investment decisions to focus on more important things in life. Using common sense and keeping it simple always works in markets. Don’t ever buy a product that makes a promise for an exact return number per year. Use technology and automation for the savings and investment decisions to focus on more important things in life. Using common sense and keeping it simple always works in markets.
Blockchain Moats: Economic moats mean the ability to maintain a competitive advantage over competitors and build long-term defensibility. Internet companies built moats around centralization and leveraged fees on centralized data. Blockchain infuses decentralization and a shared data layer. The biggest leverage for decentralized projects is to align incentives across all stakeholders. For blockchain projects to build strong moats, the author believes in five key factors: network effects, ecosystem, compliance, brand and governance. Network effects mean that the network becomes more valuable as more people use it. For crypto networks, there are many variants of network effects involving protocols, tokens, money, and security. These network effects create a monopolistic winner takes all dynamic. Ecosystem means network effect of products and services that a company offers that create synergies which allow them to dominate the market and move into other adjacent markets. It’s vital to build a strong culture around the community which is transparent. Governance is a system to manage and implement changes in the protocols. Communities and protocols evolve under collaboration consensus and coordination. Governance is key to keeping a community intact and providing the token with the value to ensure trust and cooperation. The most compliant blockchain in the eyes of the regulators is Coinbase which fosters trust, creates an advantage as its a huge barrier to entry and helps in building a strong brand. It is very difficult and time-consuming to be compliant with all regulations. Brand invokes trust recognition and leadership in a category. A trusted brand is hard to build and difficult to displace and a strong brand can accelerate network effects by bringing more participants in the ecosystem. The moat created is as big as the reach in terms of people. Once it reaches critical mass, it is easier to recruit developers partners and investors. However, it’s a combination of moats that helps in building long-term defensibility. An end to end solution will make it difficult for competitors to replicate these pieces. Teams and organizations that embrace this will build long-lasting organizations networks and communities to propel the space.
Leadership Style: In an age where even Silicon Valley disruptors struggle to keep up, it is more critical than ever for leaders to know themselves. Exceptional leaders need to have a thorough understanding of the world, their industry, their company and — crucially — themselves. Based on decades of research on leadership effectiveness and close observation of leadership in practice, the team at Insead have designed a development and feedback tool called the x360 to facilitate this self-discovery. The tool has three core dimensions which have been proven to be equally valid across cultures and types of organizations. The three dimensions are — Adaptability, 5 Caps, and Effectiveness. In this piece, we will describe the dimension of adaptability, i.e. the “Who you are” component of the x360. Adaptability Index captures decades of research on what differentiates those who can deal with stress and lead through it and those who cannot. This aspect of leadership considers facets of the self that are relatively stable and hard to change. This contains 5 subsets. First is Resilience-In an environment that requires constant experimentation, setbacks are inevitable. Resilience refers to the ability to bounce back from such setbacks and function well in the face of adversity. Those with resilience have strong coping mechanisms and are less prone to anxiety and depression. The second aspect is Emotional intelligence-When the going gets tough, it is easy to get overcome by negative emotions, to lose one’s temper or to feel overwhelmed. Leaders need to understand when they (or their team members) are incapacitated by anger or fear and need some extra time before making decisions. The third parameter Paradoxical Thinking — the ability to embrace contradictions and to be energized rather than overwhelmed by them. Leaders who perceive tensions as opportunities are better able to devise fully integrated solutions. The fourth aspect is having a Learning Orientation — that reflects a tendency to seek new knowledge, to keep up with novel ideas and to constantly upgrade one’s skills. In an exponentially changing environment, a learning orientation is critical for breakthrough performance. The fifth aspect is that of Leadership Confidence-referring to the belief in one’s ability to mobilize others and take on the next leadership challenge. Leadership in this fast-paced world is not for the faint-of-heart as courage and a can-do attitude is required. Crafting your own leadership signature is an ongoing process that begins by creating a clear, unvarnished picture of who you are. It is about eliminating your blind spots. Self-awareness is empowering: It will allow you to figure out which skills you will need going forward to become the best leader you can be.
Capabilities of Effective Leadership: Researchers have uncovered the five key capabilities of effective leaders. Forming the second dimension of the x360, they are as follows: sense making, relating, visioning, inventing, building credibility. These capabilities span the wide-ranging set of skills — from the intellectual and interpersonal to the conceptual and creative — required in today’s business environment. However, it is important to dispel the common myth, which has crushed the soul of many an executive that leaders should possess all of these skills. No matter how exceptional, it is truly rare to see a leader exhibit more than two or three. Sense-Making — Effective leaders are keenly aware of what is going on in this chaotic world. They know how to keep their finger on the pulse of the external world. They realize that new, better methods may come from outsiders. In a way, this is the opposite of tunnel vision. The second capability is that of Relating — This can be thought of as the glue that brings people together. Ever since the birth of matrix organizations, leaders at all levels have had to fine-tune their persuasion skills. This starts with a strong ability to listen to others and understand what makes them tick. Only then can these leaders rally support for their own ideas. The next capability is Visioning — Effective leaders often use images, metaphors, and stories to win people over. They are also able to link their vision to an organization’s core values and mission, imparting optimism in the process. They may not be able to fully describe how the vision can be achieved, but by creating a sense of urgency, they can inspire others to think up ways to effect change. The next capability is about Inventing — devising ways to bring a vision to life, either through structures or processes. Inventing allows abstract ideas to materialize. Leaders with strong inventing skills are experts at reorganizing the way work is done, identifying key performance indicators and measuring progress. They cultivate a culture of innovation and excellence. The last capability which the model talks about is Building Credibility — this is most important as it is both the condition and result of the other four. It is about gaining respect from others by keeping commitments & operating with a strong sense of purpose. Credible leaders walk the talk; their actions match their words. These five capabilities are instrumental in making leaders effective. Effective leaders know what is their strong suit and do not fall for the myth of the omniscient leader. They do not delude themselves into thinking that the success of the whole organization solely rests on their shoulders. Organizational success resides in distributed leadership or the fine art of finding and working with people who can compensate for one’s weaknesses. While these capabilities are essential, these are not checklist items and one cannot have them all but can surely strive towards them.
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