Lessons from Chamath Palihapitiya
This interview on CNBC was my first introduction to Chamath. It was from early last year when the airlines were looking for bailouts. Contrary to what everyone else on CNBC was saying, Chamath argued against bailouts. He made a great argument. Since then I’ve been sure to listen to his interviews and podcast appearances, including one that he now partially hosts. These are several lessons I’ve learned from him since then.
“The four things that matter to me are (1) Product market fit, (2) Integrity of management, (3) Headwinds or tailwinds, (4) Political infanticide. Those four things comprise success… I think it’s always the same four weights. It’s your judgement about what the weights are.”
There is no one right way to value a company. Most of us have no idea whether investing in an early stage company will lead to outsized returns. As a result, the best way forward is to maximize the odds of success as an investor. It’s not about guaranteeing success, it’s about guaranteeing the best odds of success. This formula is how Chamath goes about it.
I am a fan of this tweet in particular.
Second order thinking is an important concept. It’s something that I’ve written about before. Let’s say you’re bullish on the prospect of electric vehicles in the future. What are you going to do, invest in Tesla? Invest in a different EV company? I can guarantee you that there is already significant exuberance in those markets. That’s a first order effect. What has to happen, though, if electric vehicles do take off? That sentiment may be priced into Tesla’s stock already, but has it trickled down any further? A lot goes into making a car. Cars are a lot more complicated than pencils. While Chamath is long on the future of electric vehicles, he’s turned his attention to the component parts that will be required of all vehicles, specifically batteries. Second order thinking is where you can find opportunity.
“Technology is all about the compounding rate of its capability. Meaning how is Okta compounding its single sign-on platform? What does that even mean? It’s much easier to say Occidental Petroleum compounding its capital investment into the number of wells. That’s so much easier to answer.”
This reminds me of something Taleb wrote in The Black Swan:
“We see the obvious and visible consequences, not the invisible and less obvious ones. Yet those unseen consequences can be--nay, generally are--more meaningful.”
Our minds are made to understand linear relationships, not exponential ones. Everything going on with GameStop is a perfect example of exponential relationships. Taking a step back and trying to grasp the importance of compounding benefits due to technology would be a boon to understanding where companies are heading in the future.
“I think that there are 3 business lines that are pretty ready for prime time. One is around climate change, which I just think is crucial. There’s an enormous amount of work also to be done in education. I think that we’re gonna rip the bandaid off now and we’re gonna move to a much more ROI measurement oriented way of valuing education. So I think you’re going to overturn a trillion dollar economy. I also think that’s going to happen in health care.”
If you haven’t already, I highly recommend reading Marc Andreessen’s article It’s Time to Build. Chamath is in lockstep with Andreessen’s vision of the future.
“In FinTech, one of the most important things that we can do, one of the most important things that I can do, is make the knowledge I know about how to make money widely consumable. Train many other people in the lessons that I’ve learned so that they can make money for normal, ordinary folks.”
Chamath mentions something he learned from Warren Buffett, that the way you make money is not timing the market, it’s time in the market. Sharing lessons like this one on a large scale is difficult. You’re not going to see millions of people sign up for a reddit community sharing these ideas like people are with WallStreetBets.
“There’s a humanity and authenticity in just trying to do good by people.”
I am fascinated by how quickly the movement of Chamath for governor of California is coming together. His platform of ideas would be a huge change for the state. You can read more about it here. At the root of everything, I believe, is his genuine desire to do good by people.
“When I was closing Social Capital 1 I had a very important call with Peter Thiel… Peter said to me at one point, ‘Chamath, how much of the fund are you gonna do?’ This was a $285m or $275m fund. I said ‘$20m,’ and he said to me, which was incredible advice, ‘if you put in $60m I’ll put in $20m’ or something like that. So I said ok, I’m in for 60.”
Another great lesson I’ve learned from Nassim Taleb, having skin in the game.
“There’s a theme in psychology which is called repetitive compulsion. That psychological trait actually has incredible insights in business as well, particularly in investing. What it really means is that you have a tendency, you are compelled to repeat what you are most comfortable seeing and doing. So when you have a psychological blindspot, this idea of repetitive compulsion just reiterates those loops over and over. It really takes somebody who can dispassionately, but empathetically, point at those things and say ‘Hey, why are you doing that?’ or ‘why do you believe those things that you do?’ or ‘why did that happen the way that it did?’”
Soft skills are necessary for leadership positions. Technical skills get your foot in the door, but soft skills are what raises your ceiling. Recently I listened to a Jocko Podcast episode on leadership, and Jocko mentioned a similar situation. His co-host would sometimes click his pen while they were recording, and any podcaster knows that such noises need to be eliminated. Instead of telling him “stop clicking that pen,” he simply asked “do you think that pen clicking will be picked up by the microphone?”
“I wanted to build Berkshire 2.0, and that was always my ambition. The problem with wanting to build Berkshire 2.0 is that many people don’t respect capital allocation. They don’t think it’s a skill, and many people think it’s not doing anything. When Warren Buffett describes his job everyday as reading and thinking, I think a lot of people think ‘what a checked out dilettante. How dare he read and think all day, that’s not a job.’ I just think it’s so further from the truth, because in many ways what Buffett was able to do, and this is me imposing my own narrative now looking backwards, he was able to use capital to accelerate his worldview, and a lot of his worldview was around American exceptionalism and American GDP, and the belief in the American consumer and the American economy…. He’s done incredible things to move the American economic engine forward. He was voting with his dollars around businesses and ideas that were really critical parts of the American infrastructure for American middle class success. I would like to reimagine what that means for the next 50 years.”
This speaks for itself.
I also had all of the above written before listening to Chamath’s recent appearance on CNBC. It was even more enlightening than his appearance last year regarding airlines. You still won’t find the video online, CNBC is quick to remove any posts on YouTube, so I transcribed the best parts:
Scott: I mean you suggested that there’s a good amount of fundamental research going on underneath the $GME reddit situation. Do you truly believe that? That there’s actual fundamental research? Not to disparage in any way the people who are actually making these trades but this seems to be momentum rather than a deep fundamental analysis.
Chamath: Scott, there’s momentum in traditional hedge funds and how they move stocks as well. But it’s really disparaging if you, the starting position is these guys can’t do the same quality of research as an analyst in a fund. That’s just not true.
Chamath: There are fundamental momentum investors in the market that are organized capital i.e. hedge funds, and disorganized loosely affiliated capital i.e. r/WallStreetBets, and I think what you’re seeing is the push and pull of that and the realization should be that if every person was forced to publish their fundamental research, it would be hard to distinguish the best version of research from r/WallStreetBets and the best version of research from a hedge fund. They don’t have an edge, and this is what you’re exposing is that that edge is gone and now all of a sudden retail can be on the same footing and they don’t have to be the bag holder to Wall Street.
Chamath: When I went in there (r/WallStreetBets) and started to look around what I thought is, my god, here is a dynamic about trading, about momentum, about stocks, about short interest, about gamma squeezes. These are not things that I know a lot about, and so I put in a small position to learn, and what I learned is that people can do fundamental research, come to a point of view that’s diametrically opposed to organized capital, and they can be right.
Chamath: Here’s what will happen. If you basically follow your logic, then you’ll say “you know what, retail doesn’t know what they’re doing.” I think you’re wrong. Then the thing will be retail shouldn’t be allowed to participate in the stock market. I think you’re wrong. And then you know what will happen, Scott? The inequality gap will grow and grow because what are they supposed to do then? Buy an ETF, a passive fund? They can’t buy into hedge funds because the rules don’t allow them to. So now, systematically, what you’ve done is you entrench poverty.
Scott: They (GME) should be allowed to exist at whatever their stock should be valued at based on what their earnings are, and the stock was like 17, 18 not that long ago.
Chamath: Who says that? Who says that? Do you want to make the same argument against Tesla? It’s gone 10x in a few months. You don’t know what it’s worth. Let’s be honest, okay.
Chamath: So basically what you’re saying is, “Hey, if retail runs a momentum play to squeeze a short, that’s wrong. But hey if Renaissance Technologies and somebody else does it, that’s okay.” That’s what you’re saying. You may not know that’s what you’re saying, but that’s what you’re saying.
Chamath: The hazard (for retail) should be “Hey FYI.” For example, why isn’t there more transparency in the reporting that hedge funds have to make. Every long position, every short position and all the leverage they’re taking every day. Why don’t we do that? Then you would have a warning sign. You know why? Because people in retail would analyze that stuff so intricately and we would know where the tripwires were.
Truly amazing interview.
Further reading: