Building Blocks Of Innovation; Investing In A Dynamic WorldJohn Huber
I recently talked with Matt Samuels who has a podcast called Deep Dives. His podcast is not an investing podcast, but rather an eclectic mix of the arts, politics, and business, all of which are interests of mine. Investing is much like my view of life: it’s a multidisciplinary endeavor with lots of moving parts from many different subjects involving all kinds of people from different backgrounds, geographies, and cultures. And to make it fun, all of these components are constantly coming and going, and evolving in real time. Investing is a dynamic game with no clear rules, ever changing variables, and no ending. One person’s decision can have an indirect but profound impact on someone else’s outcome, even when those two people don’t know each other and are separated by industry, occupation, location, or even by time itself.
Q1 2021 hedge fund letters, conferences and more
On a morning run this week I was thinking about the origins of a couple new companies I’ve been studying for a while (Snowflake and Databricks, which is on my private company watchlist). Both companies, like so many countless others, likely wouldn’t exist if not for the creation of Amazon Web Services.
The value AWS has created for others is incredible. Nearly every new company I study owes its origin to Amazon's idea of creating building blocks to run an internet operating system. Apple cites the value the App Store facilitates; I'd love to see the value AWS is responsible for
— John Huber (@JohnHuber72) June 7, 2021
This is a pretty obvious concept, but it got me thinking about innovation in general, and I spent the run imagining a business family tree of sorts that went back a couple centuries.
I recently read a book that touched on the Battle of Monongahela in the French and Indian War, where a 23-year old George Washington escaped death by inches when a bullet entered and exited his coat but missed his body by a fraction of an inch. It got me wondering: What would our world look like today if that musket ball had been three inches to his right? It’s possible that the American colonies would not have succeeded in their attempt to break away from Great Britain, at least not by 1781. Liberty was too strong of a human desire to be held back permanently, but it’s possible that modern democracy and capitalism could have been postponed by decades. Democracy is an old idea that originated in Athens, but it took a couple millenniums for it to take the form that so much of the free world enjoys today.
Technology and science are fields where breakthroughs occur because of the building blocks completed by others that precede each new innovator. If Washington was killed in the forest that July day in 1755, Robert Fulton — himself a man interested in the arts, technology and business — might not have had achieved commercial steam travel in 1807. The steam engine’s practical impact on society might have been delayed. It’s possible the industrial revolution, one of the most important events in human history, could have taken a different turn. This could have postponed for many years the development of machines, the locomotive, the American railroad network, the ability to refine petroleum, the invention of automobiles, airplanes, electronics, computers, and the internet. Imagine if our 2021 society was living with the technology of say 1971 simply because American capitalism got a late start. It seems impossible given the reality we’re used to, but if the duration of human history is the length of a beach, 50 years is just a handful of sand. It is a big deal in the context of a human lifespan, but much less significant when judged over the course of history. I can easily imagine a scenario where an event here or there went differently and we’d all be happily living in a different world, not imagining what we’re missing (of course, the opposite could be true as well — there could be an alternative world out there where our 2021 selves are blissfully ignorant of the future innovations that got delayed).
All of these industries would have eventually taken shape in some similar form eventually, but the famous contributors would have been completely different. What’s interesting about history is that each great entrepreneur owes their success to the lucky timing of their birth. Had the industrial revolution been postponed by 25 years, Andrew Carnegie and John D. Rockefeller could have been merely footnotes in history. They would have missed the sweet spot of their respective industry’s emergence by a generation and would have chosen some alternative path. Bill Gates attended one of the only high schools in the country that had a computer in the 1970’s. Imagine if the computer revolution was postponed because transistors weren’t yet invented. We never would have heard of Bill Gates because his work required Gordon Moore, whose work needed Claude Shannon’s contributions, whose work needed Thomas Edison, among countless others. The world would have developed at a different pace and in different key locations, and it’s likely we never would have heard of any of those individuals, but instead from other people who are completely unknown. All of those major players owe their spot in history to their lucky timing and serendipitous decisions of those who lived decades before them as much as they do to their own incredible brilliance (which obviously was the other key ingredient — and one I’m not trying to downplay).
It’s just fun to imagine these alternative worlds for a minute because it shows how dynamic the world is, how pulling on one seemingly meaningless thread can impact everything else for generations, and maybe most interestingly, how we are all connected as humans. I’m obviously viewing these events from a business perspective, but the same hypothetical scenarios could be imagined for society as a whole. The advancement of suffrage rights, labor laws, civil liberties, human rights, freedom of religion, all of the famous leaders in all of those categories, and so many other important things in the world are all dependent on so many variables that it’s humbling to consider. Whenever I start to feel a bit too responsible for any experiences I’ve had in my life or in business, I start to think about that musket ball, and how I probably wouldn’t even exist had that day had ended differently for George Washington.
Let’s shift back to the real world (your sighs of relief are palpable) and apply this to investing. My first thought was how human capital is the driving factor of value creation, especially today. Intangible assets like product research, customer relationships, intellectual property, and technical skillsets make up most of the S&P 500’s value today. The ideas people have and the coordinated effort to put those ideas into practical applications are the true differentiation — and the key ingredients to building a moat in today’s world.
Facebook is a long-time Saber investment, and in my view is the poster child for how much value can be created from incredible engineering talent, adaptable and forward-thinking management, and human network effects. Facebook is also a case study in how people often put things into black and white boxes, and dig their heels in rather than remain open-minded to different perspectives. This describes the behavior among some users on Facebook but the same closed-mindedness applies to some journalists, politicians and others who form opinions on the company’s practices. Emotions tend to lead to misjudgment and mischaracterization, and often simplifies complicated subjects down to inaccurate headlines and soundbites: Facebook is evil, Jeff Bezos doesn’t pay taxes, big tech is spying on you, etc… People often box themselves into arguments that they defend with greater and greater vigor, which leads to tribalism behavior at the expense of rational debate, progress and solutions. Facebook is one such issue where the reality isn’t either/or but much more nuanced. My view from talking with many people at the company is the opposite of the one so often heard from the loudest corners of the internet. I think the company is filled with genuine people who actually want to create great products and do what’s best for users. On the podcast, I talk more specifically about the economics of the business on the podcast and why I think the stock is mispriced.
We also talk about Etsy, which also benefits from similar moat-building ingredients, and is executing incredibly well in an industry with huge tailwinds. I also talked about Saber’s Etsy investment with Columbia’s Graham & Doddsville newsletter earlier this year.
Hopefully some of these “unstructured” notes are interesting to readers. I may try to share more journal notes, including less day dreaming and more company specific thinking (although I find day dreaming to be a surprisingly productive source of new ideas!)
Thanks for reading!
Article by John Huber, Saber Capital Management