Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
Join Krzysztof and Luke as the two discuss the FTX saga, Coinbase as an investment, and all of the fun we are having with AI and chatGPT!
December 13, 2022 – By Samantha Bailey
In episode 6, Luke talks about self-experimentation and vows to take cold showers for two weeks to improve his mental acuity; we discuss the FTX saga and whether there’s psychopathy involved, or whether SBF was just a really good poker player; Coinbase as in investment: insane or visionary given the crypto detritus?
Krzysztof meanwhile displays his unapologetic nerd tendencies by talking way too much about thermodynamics, Einstein and his refrigerator, and whether we need to understand the core foundations of what we invest in, like transistors in the semiconductor industry—plus the complexities of Extreme Ultra Violet light, $ASML, Chinese & Taiwanese geopolitics, and all kinds of new fun we’re having with AI and chatGPT.
Meanwhile, Luke patiently refrains from giving Krzysztof a wedgie.
We also address a subscriber’s question about risk and risk management and whether it’s a good idea to discuss portfolios with one’s spouse.
[00:00:00] Luke: Hi and welcome to another episode of No Limit with Krzysztof and Luke.
Today is Monday. No, it’s Tuesday, isn’t it? We pushed it a day Tuesday, the 6th of December. And this will go out in about a week’s time. I think it is episode six. Maybe we are becoming old hands buddy.
[00:00:14] Krzysztof: and Indeed, indeed. How are you?
[00:00:19] Luke: I’m good. I’ve got a little bit of a cold apart from that. All good. I’m actually, I’m really getting into tennis at the moment. I joined a new gym and I’m try and play tennis every day and just to like literally to hit balls. I be going to cardio tennis as well as getting coaching.
Uh, like some match play stuff, like my game is appalling, uh, but you know, I can return a ball. Today. Very exciting. Uh, one of the ladies invited me to join her doubles game tomorrow, so I guess my game is not quite
[00:00:45] Krzysztof: Ooh,
[00:00:45] Luke: as I thought it was
[00:00:48] Krzysztof: Ooh. Right. Okay. Yeah. That’s awesome. It’s so odd to me. We are, it, we are doppelgangers in these strange ways, ways cuz I went through a very, passionate tennis phase myself.
[00:01:01] Luke: Great.
[00:01:02] Krzysztof: And not least of, because the, the author that I studied professionally was a huge tennis fan, David Foster Wallace, and wrote maybe some of the best essays ever written on tennis.
I dunno if you’ve read any.
[00:01:14] Luke: I told you I don’t do any reading, right? I just do
[00:01:17] Krzysztof: Oh, that’s right. You’re illiterate. Right? Okay. Well, uh, So there’s this magic thing that happens when these little squiggly shapes on a, on a piece of paper when you line them up, right? They like convey magic, like meaning. It’s, it’s wild. But, uh, check out if, when, if you ever have the time, check out the essay.
Roger Federer as Religious Experience.
[00:01:42] Luke: okay. That sounds interesting. But the titles got me
[00:01:45] Krzysztof: It’s, it’s fascinating. It’s a beautiful, beautiful essay about the genius of the body in a way. Like
[00:01:52] Luke: By the way, your, uh,
[00:01:54] Krzysztof: and he points
[00:01:55] Luke: your, your, uh, fed hiking Twitter post a couple of weeks ago with like a handsome looking Federer on like a Swiss mountain that definitely didn’t get enough love. You need to go, you need to go retweet that
[00:02:06] Krzysztof: I need to repost that right about fed hikes. Yeah, we need more fed hikes. Well, unfortunately, I’m doing much worse.
[00:02:14] Luke: What’s.
[00:02:14] Krzysztof: I tried to run every day pretty much, and this year I’ve had such a good go of it, like every single day. I retired from my competitive running days, but now I’m trying to get, sort of get more serious about it again, but in a different way, like maybe through consistency.
So I started running, you know, I got up to, uh, I ran 10 miles the morning of my wedding and things were going so great. So I figured I had a leg strengthening routine. So start going to the gym and then, and doing all of this right to avoid injury, which is the worst thing for me. Of all the things that happened like an injury.
And lo and behold, uh, I injured what felt like my hamstring. And it feels like a hamstring pull, right? Which is the worst. I’ve injured hamstrings before in so many ways. I self-diagnosed it as a sciatic nerve, but it turns out I went to a chiropractor. It’s not that, and it’s some sort of bursitis thing,
[00:03:12] Luke: Right,
[00:03:12] Krzysztof: Like we get bursitis in our shoulders, like an inflamed pocket of whatever, but there’s no cure. It turns out it’s like one of these things gets inflamed. There’s no cure and there’s not much blood going to it. So you kind of need to like do nothing. And I went on a small trot even, and you know, anything I do pretty much inflames it. So my quest for running every day of the year. So close, so close. And now I, I, and, and I can’t. So you know what I’m doing. I.
[00:03:42] Luke: are you doing?
[00:03:43] Krzysztof: without exercise and without running, I like start. I just fall apart. I just, you know, I feel miserable. So I start reading the Vim Hoff method,
the Iceman, where you come
across him. And, uh I force myself to, to take his advice that the first most important path to health via, via cold therapy or cold, is cold showers in the morning. And I’ve never done cold showers before because I’m too soft and I’m, I’m a creature of comfort and leisure and the finer things in life. And Luke man,
oh, man, let me tell you those first. 15 seconds whew. But I’m on like day day 12. I’ve stayed with it. Like I started 30 seconds a minute now, a minute and a half, and I feel so good afterwards. It’s, it’s like exactly as he says, it’s like this magical feeling afterwards where like tingly and I feel like all, and so it’s making up for the depression, I feel for, for the, from the injury.
What do you think of all this? Am I going
[00:04:50] Luke: I, I kind of experiment with myself from time to time. , did a couple of years of like intermittent fasting and actually it’s quite, uh, quite fun just to kind of go, you know, a day, two days without eating.
Quite interesting how you, the sort of mental acuity you have, I guess. Sure. You know, your caveman brain is suddenly switching on. You’re like, I need to get food. I played around with like, how long could I hold my breath? Um, and did some like 30 day hold your breath for five minutes program. That’s pretty exciting.
That’s a good one. But the, uh, the, the whim h stuff, the ice baths, that’s always been my list, but I’m too much of a pussy to do it. It’s so horrific.
[00:05:29] Krzysztof: The ice bath stuff. Yeah, no, that’s, that’s terrifying. The cold shower thing though. I, I, I’m gonna make this official, I challenge you in the next two weeks to, take five consecutive cold showers and all you need to do is 30 seconds.
[00:05:46] Luke: 30 seconds is a long time.
[00:05:48] Krzysztof: It’s only, but in the end it’s only the first 15 that are the real problem.
[00:05:52] Luke: All right. Okay. Uh, how many days?
[00:05:55] Krzysztof: Five we’ll see.
[00:05:56] Luke: right? Gimme two weeks. I am, uh, I’m, I’m coming out to your beautiful country, uh, fairly soon, so I’ll be in the snow for three months, uh, this winter. So there’s plenty of opportunities to be like icy cold when I’m jumping out at the hot tub. Um, so yeah.
Maybe I should, uh, maybe I should build up to that. Build up my cold tolerance. Okay.
[00:06:13] Krzysztof: Right on. Yeah. So cold showers, everyone I can’t believe I’m advocating for this, but it’s stunning. It’s stunning how what it does. Okay.
[00:06:23] Luke: talk about investing. This is an investing podcast. I’ve been rambling for 10 minutes already, but I, I’m very sorry to hear about your injury. I hope it gets better.
[00:06:29] Krzysztof: Thank
[00:06:30] Luke: Very good. Well, uh, where should we start? We had a little debate last week that, uh, I quite enjoyed if you didn’t catch episode five, we were debating whether there should be additional protections in place for investors. Essentially should you need to pass an exam to be an investor. And, uh, the small number of people that replied seem to agree with me that, uh, you know, we need to be egalitarian and, uh, remove the barriers
[00:06:55] Krzysztof: and I voted the other way.
[00:06:57] Luke: I think I brought you around,
[00:06:58] Krzysztof: Yep. In my own defense, I’m gonna say like, just take a look around, look at all the scams and frauds and, and things falling apart. So, go ahead. Don’t take any tests. I have the evidence I need, you know, like humans can’t control themselves.
[00:07:14] Luke: our, our emotions are, you know, our biggest challenge, I suppose, if trying to be a successful investor, the fear or greed.
[00:07:21] Krzysztof: in fact, Right. I wonder if even what I’m maybe advocating for is less like, okay, you have to know X, Y, and Z. Right? Which would be nice, I think, but maybe it’s more along the line of, okay, I took this test and I have this license, so I therefore need to uphold a way of being that justifies me having a license, right?
That would be a kind of loop like system of checks and balances, right? Like a pilot having gone through the series of trainings, has a license, therefore isn’t gonna attempt any funny business.
[00:07:58] Luke: Although Pilot, you know, you’ve got, uh, you know, hundreds of other people’s lives in your hands. Um, it’s a little bit different to managing your own investment portfolio, although you can blow up your life quite badly if you get it wrong. Yeah.
[00:08:10] Krzysztof: Yeah, we should, I, I don’t mean to divert us into the topic about ftx, but I wonder if he had a license.
[00:08:18] Luke: Yeah, exactly. Well, un unregulated industry crypto, right? So I, I guess not. Yeah.
[00:08:24] Krzysztof: It feels so odd just to be totally upfront with you. Feels so odd for me. Advocating for a position that’s sort of on the bureaucratic side. my own personal errors are always on the side of, uh, rebellion and kind of pushing the, the limits of, you know, and advocating for anarchy and, you know, the what, the chaotic forces, the Dian sort of thing.
So it’s odd. It’s odd, but I just wanna say . Who am I?
[00:08:52] Luke: You’re a married man now it’s this new responsibility. Yeah.
[00:08:55] Krzysztof: is this what happens?
[00:08:56] Luke: You suddenly get all nurturing. You wanna protect people.
So one thing I was thinking actually, I did quite enjoy our debate, so we should try and do that a bit more often. I think I’d like us to be more controversial on this podcast.
I’m definitely up for that. Um, albeit there are probably some lines we should never cross, so yeah, you know, let’s try and find some points of difference and we’ll, uh, we’ll debate them on future podcasts. And if you’re listening and you’ve, uh, you’ve got a suggestion, then go tweet us.
Let us know what we should go to battle.
[00:09:22] Krzysztof: We’re looking for genuine debate. We’re not looking to to just be nice and, and play long, because that’s pretty bland and boring, I think. I guess so. Maybe. Maybe it’s useful. What All I’ll say is that what’s so fascinating to me about the FTX sagas that it unfolds is the, is the kind of, from my understanding, psychological, the plane, the level of his think.
On which he has to exist, where he’s fooling everyone around him, including incredibly smart people with like huge amounts of invested capital. And somehow, somewhere in this, no one double checks anything
[00:10:04] Luke: You, you’re talking there just for, anyway, doesn’t know anything about what’s going on. Sam Bankman Fried, the founder, CEO of ftx, one of the, what were previously one of the biggest crypto platforms in the world. Um, and how his house of cards has come tumbling down. And I guess the question is, it seems to be, um, did he kind of blunder into this, with poor governance?
Uh, or did he, did he sort of design this initially as this crazy house of cards? Was this kind of malicious intent to defraud the world or, um, did he just kind of screw.
[00:10:38] Krzysztof: Did you hear the apology tour? I mean the, the long conversations,
[00:10:44] Luke: Read about it,
[00:10:45] Krzysztof: the deal, book
summit and the, okay. So what was stunning to me as a listener is that during those interviews he feels believable. Like he feels kind of like a, almost like a confused teenager, almost like soft spoken and, and shaky.
and yet when I listen to some analysis the level of sophistication that he was working at, and creating a, a crypto exchange platform you cannot do that without a, a profound level of understanding and math and sophistication.
Maybe this takes us a little bit to, to poker, right? Poker at its at, in its most extreme forms or maybe highest levels, right? You have so much pressure, there’s so much fear involved, right? And yet you are being forced to sometimes lie, right? It for the sake of, of the hand.
And in order to do that skillfully, you kind of have to disassociate from your body or fear or all of the other stuff that’s going on. I mean, that’s in the art, right? In that context, it’s kind of performative art. But to do it in this global way, I guess all I’m saying is, it was shocking to me to see that I started believing his apology tour and then only then I was reminded, wait a second, that doesn’t add up.
None of it adds up.
[00:12:11] Luke: You know, if you’re bluffing in poker, if you can convince yourself, you know, that you have the hand you are representing, you’re gonna put on a, a much stronger show. And, and what’s that term? Cognitive dissonance. You know, maybe this SBF guy, you know, he, maybe he, in his mind, he genuinely.
You know, the hero, and it just kind of, you know, it got away from him and he was unlucky, and it could have played out very differently, and he could have, you know, pivoted all these, you know, decker billion dollars into effective altruism and saved the world. Maybe in his mind, you know, that’s, that’s kind of how he sees himself as opposed to being, the kind of arch villain, uh, in this, massive global fraud on cryptocurrency enthusiasts.
[00:12:53] Krzysztof: It’s so tragic how many people continue to have lost so much because of the bad actors in this space, which is a fascinating thing. I’m, I’m really thinking about Coinbase now, for example. A company that is highly regulated and they’re, you know, the silver lining is, they’re saying everything in our business model is in the open.
We’re, we’re not in The Bahamas and here are all our, here’s all the paperwork. Right. Is that enough now at this point?
[00:13:23] Luke: right. And if the, you know, even if they are, uh, running Coinbase, uh, following the regulations that don’t quite exist yet, you know, at least they’re doing what they say they’re doing. , if the whole of the cryptocurrency world implodes on the back of this FTX thing and you know, it’s nowhere near over, there are many other big firms yet to go down.
Like if the whole space collapses, Coinbase probably collapse along with them. Even if they are well run, they’re just in a broken in.
[00:13:48] Krzysztof: Yeah. And it would remain to be seen whether anything rises from the ashes.
Okay. I have, uh, you wanna, would you like me to tell you about my latest ventures in reading?
[00:14:01] Luke: yeah, let’s hear.
[00:14:02] Krzysztof: Maybe preamble this by saying
I try, I, I, I try to learn the deepest roots of the whole first principal’s idea. Right. To really become knowledgeable. You can’t skip. All the foundational steps. So in, in my attempt to learn about the semiconductor industry, turns out I, I, you have to understand physics
[00:14:28] Luke: Sure.
[00:14:29] Krzysztof: on that first principal’s level, and I’ve been dabbling with physics for many years, but on the quantum side, and that’s, I mean, it is useful for transistors.
It’s what makes it possible. But the weird stuff, right, is, is not really what , what’s needed.
And so I came across, or this book which I finished, uh, last week called Einstein’s Fridge,
how the difference between Hot and Cold explains the universe. And my goodness, there’s so many ways that this book helped me tie a bunch of loose ends together in terms of how do these things actually work, like the, the underlying principles. And I came across some really fascinating little gems of, trivial ish things, but I was like, oh my God.
Like in this perspective, that’s so mind blowing. And yes, I think this book helped me understand the other book I finished, which is Chip War, which I’d like to talk a little bit about too. But it all goes together, Luke, all of the, all of the pieces
[00:15:34] Luke: So you now, uh, you now understand the physics of semiconductors and this makes you a better investor. How?
[00:15:40] Krzysztof: I would say maybe if there’s a golden rule in investing, for me, it goes back to you have to understand the company that you’re investing in because there’s too much noise, right? Everywhere else, there’s gonna be all the game theory stuff and all the, all the deliberate misinformation and all of that.
But if you truly, fundamentally understand the business you, you own, it’ll be easier to avoid all the other behavioral stuff and it seems to me that when. Consider investing in a semiconductor company. And somebody tells me like something like, believe me, these things are magic, or these things are important, and then I go to bed like, cool.
Like, but how, like, what makes them magic? Like what, what do you, you know, like they’re a chip. Like what? I, I personally can’t feel confident, right? Like of maybe what I would call the, what’s the moat here? Or like, what, what is the magic juice? But to understand that you really have to keep, like pulling back the layers until you get to this crazy thing I’ll share with you, you know, like, oh yeah, that’s, that’s insane.
Like I get why this is a hundred million dollar machine. I get now on the fundamental level, what problem this is solving.
[00:16:58] Luke: I kind of hear where you’re coming from. It’s, and it’s, I guess it’s reassuring if you feel you understand the business at a relatively low level, like the actual thing it’s selling, that’s quite important. But can you do that for everything in your portfolio? Like there are some things in my portfolio where.
I do have to just, I don’t have the bandwidth. I have to shrug and go like, clearly this works because there is a customer base paying actual money and, you know, paying increasing amounts of money year after year. So clearly there is something, it’s not just complete fiction. Um, and I think you just have to sort of trust that’s the case sometimes.
But if it’s, if it’s to satisfy your own intellectual curiosity, like go for it.
[00:17:35] Krzysztof: Yeah, I, I agree. We can’t know everything. In this particular case with semiconductors, I thought I, I want to do a deep dive because one, I think it’s the future and it rolls obviously into AI stuff and. It’s a big industry. It’s not just say, one company. Right. And so now it turns out , there’s a level of like, almost like I now have a, not just an understanding, but appreciation of this whole industry and so many of its players.
And now I think on an intuitive level, I, I kind of say, I really do understand why a company like Nvidia is special, like from the atoms to the, the transistors to all of it.
[00:18:20] Luke: for those of us who don’t have the time to read Einstein’s fridge, okay. Fancy. Trying to, you know, give me the TLDR.
[00:18:27] Krzysztof: Hmm.
So there’s this guy named Einstein, right?
[00:18:31] Luke: No, I did a little bit of reading, so I gather he did actually invent a fridge. An actual fridge, yeah.
[00:18:36] Krzysztof: Yeah.
[00:18:37] Luke: But that’s not what you’re
[00:18:37] Krzysztof: Yeah, isn’t that wild? Instead, I’m not gonna, it’s too complicated because the whole book is an explanation of the laws of thermodynamics and why their uh, why their laws. But the way that these particular laws affect everything, including there’s a clear relationship between the laws of thermodynamics and information theory.
It turns out this question of what is information and basically how heat and cold work that they kind of align at the similar, at a similar formula. An information theory is where bits come from, and bits are the things that create the digital world, right? And the digital world is manipulated by these little inventions called transistors and transistors.
Figuring out how to make more of them is the semiconductor industry. So it all really, like, it’s of, it’s, this is the stuff, here are the fun things. Oh, I don’t wanna bore any listeners that are still awake at this point. . I don’t wanna lose them, but I came up with a, a couple of like, fun little tidbits to share.
[00:19:49] Luke: Please do entertain me.
[00:19:50] Krzysztof: Actually let me, let me pop quiz pop quiz for you. When you have a, when you have a say hot cup of tea and you put in a nice cube, There you go. Does the ice cube make the tea holder or does the tea make the ice cube warmer?
[00:20:10] Luke: Do they, do they not just act on each other and they converge on some central temperature based on mass and, okay. No. Okay. Okay, so wait. Okay, let just take another shot of that then if that’s incorrect. I guess. Well, everything is radiating heat, so everything in the universe is getting colder and, uh, I’d know where I’m going with this. Gone. What, what’s the answer?
[00:20:37] Krzysztof: Well, no. No. At least take a bet. At least. At least. So you got a 50 50 shot
[00:20:43] Luke: the ice. The ice is making the tea cooler. Was that one of the options?
[00:20:47] Krzysztof: That is one of
[00:20:48] Luke: I’ll go with that one.
[00:20:49] Krzysztof: and. That’s
[00:20:49] Luke: Okay.
[00:20:50] Krzysztof: one,
[00:20:55] Luke: What’s happening, Chris, off
[00:20:56] Krzysztof: Well, it’s, it’s, uh, the tea is making the ice warmer
[00:21:01] Luke: because,
[00:21:02] Krzysztof: and that is the, uh, because
he heat, because, uh, ice is in a more stable configuration. So the number of ways that ICE can exist are, is fewer, the molecules are call it more rigid and going at a slower temperature and they’re all kind of grouped in the particular
[00:21:22] Luke: Ah, okay. So like the tea, the hot tea molecules are like smashing into the ice, like the crystalline ice molecules and then busting them up, and therefore like energizing them. And so they’re melting and becoming hotter.
[00:21:34] Krzysztof: Kind of, but it’s, it’s, it’s more wild than that. It’s because the probability of ice is less than heat and eventually the two fun e equilibrium. So that it’s, it’s where time comes from, but that’s a whole nother emergence of time comes from this very thing.
But that’s for, for another conversation.
[00:21:56] Luke: Douglas Adams like had this, had this, the, like the whole universe was in a cup of tea. I’m sure that was one of the hitchhiker books.
[00:22:03] Krzysztof: I’m, I’m sure, right, because time is actually not a, um, property of physics. It’s an emergent quality and emerges. heat equalizing, cold
because that’s where the balance ends up. , probabilistically, a cup of tea that has, that has melted the ice is the most likely, most highly probable state for the universe to be
Okay, but sorry for torturing you about that, and I, that, that explanation probably seems so Jed and Mangled, but I’m obviously not a professional physicist .
You know, I finally finished Chip War
[00:22:42] Luke: All done.
[00:22:43] Krzysztof: and I can’t, I really can’t say enough good things about that. I think Simon and I will be talking about it and making a podcast about the book specifically in the near future.
But when I got to the chapter about EUV, which is extreme ultraviolet light, my mind was blown. Like, it’s just so astounding what we’re doing. And I wonder. And this is maybe that that nerd in me coming out where I think if you begin to appreciate what is involved in making semiconductors as an investor, you’re gonna end up having, I, I don’t know if it’s just more appreciation, but maybe more faith in your investment, given what’s being accomplished.
So I’m happy to nerd out a little longer and, and kind of share with you from this short chapter about extreme ultraviolet light. What actually goes into these things. The whole problem in the sense is size. We’re trying to fit more and more transistors into a small acreage. We’re talking about centimeters and millimeters, right? So how do you continue reducing size?
When the actual physical wavelength of visible light is, uh, I believe something like 248 nanometers or whatever, that’s tiny, tiny, tiny, right? But at some point we hit a limit. So there’s this thing called extreme ultraviolet light, which is, uh, something like 13.5 nanometers. But what’s the problem? The problem is you can’t go out and buy an EUV light bulb
You actually have to make this thing. Okay, cool. Let’s make a, a, a thing that emits these tiny, tiny wavelengths, right? What goes into that? That’s the shocking part. The way an e u v, , light is made. It requires get this pulverizing, a small ball of tin with a laser. Okay, so I’m going to turn to the book and read a couple of these sentences just so you get how insane this is.
The best approach is to shoot a tiny ball of tin measuring 30000000th of a meter wide, moving through a vacuum at a speed of around 200 miles per hour. The tin is then struck twice with a laser, the first pulse to warm it up, the second to blast it into a plasma with a temperature around half a million degrees, many times hotter than the surface of the sun.
The process of blasting 10 is then repeated 50,000 times per. to produce e u light in the quantities necessary to fabricate chips.
The upshot here Luke, is that these machines that make these E U V light bulbs, let’s call them , contain 457,329 parts, and they cost each cost over $100 million. and are the most expensive mass produced machine tools in the history of man.
[00:25:59] Luke: If we bring it back to investing a little bit like this is asml, right? They’re the guys that make these machine.
[00:26:04] Krzysztof: Yeah, exactly. Our world, our modern world now runs entirely on semiconductors. Everything, all of it. Like, if you don’t think it runs on semiconductors, it does somehow, some way, somewhere down the chain.
And that this is the new oil, right? This is the the new essential thing you need to have, right? So what’s crazy? , I think, well, crazy maybe is the wrong word. What’s hard to wrap your mind around is that the bleeding edge of this industry, meaning, everything having to do with AI cannot be made without this e u v light.
And that is only made by one company, ASML, uh, company in the Netherlands. And there’s another company that kind of fits in this bucket, TSM, if that company goes down, 37% of the world’s chip capacity basically goes offline and the world goes back to the dark ages to some non-trivial extent. Point being that it’s kind of astounding to think that there’s a company in the Netherlands and a company in Taiwan that should anything happen to them, our way of life gets confounded to a degree we would find unrecognizable.
[00:27:18] Luke: and let me just kind of summarize back kind of who these players are and what they do. So, ASML make these hundred million dollar machines that with their lasers and their tin and, uh, their extreme ultraviolet light, um, they manufacture those machines.
They sell those machines to Taiwan Semiconductor, TSMC and TSMC have most of those machines currently in Taiwan, , which is, potentially massive geopolitical risk. Um, TSMC are using ASML’s machines to manufacture semiconductors for companies like Nvidia, AMD, Samsung, Intel, others. And ultimately, as you’re quite right to say all of society basically runs on this stuff.
So if we lose ASML or then it won’t be very long before our ability to continue to be productive as society kind of fizzles out or at least slows down substantially what we kind of ramp up a domestic capability in the US and in other countries. Did I get that right?
[00:28:24] Krzysztof: Y Yeah, you got that absolutely right. And just maybe to make it even more pointed or more real, during the lockdown phase of Covid, there were massive shortages. And when you have a chip shortage, we know a car, for example, can’t ship,
modern cars now have chips, right? And so all of a sudden people have no cars. All of a sudden some people couldn’t drive to work. Now imagine all of that with no, no phones, no computers, everything that our modern world runs on all of a sudden can’t be made, which is insane to think about.
[00:28:59] Luke: And governments are trying to do something about this, but it’s, you know, a multi-year effort and requiring significant investment to try and recreate the capability that’s currently sitting in that tiny little island in Southeast Asia.
[00:29:11] Krzysztof: yeah. And, um, and the, I’ll say one more thing. What I truly loved about this book is that the way he wrote it was, uh, was in the style of a political thriller. I mean, so skillfully. I can’t praise, uh, Chris Miller enough, and I hope to have a conversation with him, but, but it reads like a tense political.
And the sort of, I’m not gonna, I’m not ruining anything for anyone . This is in fact the real world. But the, but you know, the question we’re left with is given the importance of tsm, which lives on the small island of Taiwan, we know China wants that island,
[00:29:51] Luke: Yeah.
[00:29:52] Krzysztof: and we know that in order to get that island, there’s a huge risk to tsm.
We also know China has been practicing all kinds of military strategies and creating amphibious tanks. I mean, they’re doing everything they can to rattle their sabers to say, no, we’re serious. We’re coming to get it. But the flip side,
TSM is so important to everyone, including China. So if it ever goes down, China itself would be devastated.
[00:30:25] Luke: And, and just to sort of broaden the complexity a little bit, like this is not made any better by , recent embargoes where the Biden administration, the US have effectively said, Like to the companies at the end of this, like Nvidia and AMD guys, you can’t ship the stuff you’ve produced with all these crazy technologies, if it’s above a certain threshold of capability, you can’t ship it to China because you know, people are taking hardware that maybe is intended for like someone’s gaming pc and it’s being repurposed into like missile guidance systems and serious defense capabilities.
So, um, I suppose the US of right to, to embargo that in that way. But that’s ratcheting up the tension and making it much more likely that if China can’t get its own domestic capability of and running, then they’re more likely to, uh, well fill the pressure to go and, take over Taiwan.
[00:31:18] Krzysztof: It’s wild out there. Luke, . It’s truly wild out there.
[00:31:21] Luke: All eyes are on Ukraine, but um, you know, this is potentially a much bigger threat in the, in the Wings. Who knows what 2023 will have in store for us. All
[00:31:30] Krzysztof: Right. we are right. The roaring twenties. Continue. It’s been a great, it’s been a great time so far, right? , get your party hat folks.
[00:31:42] Luke: Should we, uh, should we talk about something a bit more optimistic and sunny perhaps?
[00:31:46] Krzysztof: Yeah, maybe our Spotify,
[00:31:48] Luke: Yeah, so actually that’s just true. Let’s do a little seven investing advert. Good show. So we, um, we got our Spotify stats. Let me dig some of these open actually. Uh, so, um, so we are in No Limit podcast. We’re in new addition to the Seven Investing podcast, which I’ve been running for about two years.
The podcast is now in the top 5% most shared globally. That’s great. And, uh, we’re the top 5% most followed podcasts. That’s really good. Although I think you’ve gotta look at this with a bit of a pinch of salt because there are a shit ton of podcasts out there that never make it past episode one.
So there’s probably a good 50% out there that don’t even factor, but still we’re doing great. And a start, I did enjoy 69% of our listeners discovered us in 2022. So, uh, it’s gathering steam. So if you’re listening to this podcast and, uh, you’re getting value out of it, maybe an opportunity and ask, Go tell a friend, uh, go send a link to a friend, see if we can double our audience. And our director of marketing, Sam Bailey, shared some other stats. I was quite intrigued. Did you look at the, top five countries where we are popular? So it’s all the ones that you’d expect, like, uh, the us, the uk, Australia, Canada, but in fifth place was Singapore.
So, hi to our Singaporean listeners.
[00:33:09] Krzysztof: Hey,
[00:33:12] Luke: I hope we haven’t terrified you with, uh, too much Taiwan
[00:33:15] Krzysztof: I hear great things about Singapore. Can’t
[00:33:17] Luke: yeah. I’ve never been, I’d
[00:33:19] Krzysztof: never been to Asia. Yeah. And in fact, I’d like to, uh, make a request of our audience, if possible. We usually tweet an episode on the Twitter. And so if there’s something that resonated with you, or you have a question or a comment or a difference that you hold, or you wanna set Luke’s take straight and, you know, wise him up a bit, please feel free.
We want to encourage the, the banter in the direct. Interaction with our
[00:33:47] Luke: For sure.
[00:33:48] Krzysztof: So speak
[00:33:49] Luke: Yeah. Maybe tweet Krzysztof and tell him how his understanding of physics is completely back to front
[00:33:54] Krzysztof: All right. Luke, you wanna tell us about the Lovelace Test
[00:33:57] Luke: Yes, I do. This is really interesting stuff. Now, have you been checking out, uh, any of these fantastic AI tools like, uh, chatGPT, MidJourney Dall-e 2 is only creating with any of those.
[00:34:12] Krzysztof: Yeah. Oh my God. I mean, that’s, I’m sure we’re gonna talk about that next episode, but dear Lord
[00:34:18] Luke: It’s, it’s incredible stuff.
[00:34:19] Krzysztof: it’s here, right? It’s here. It’s here, right? That’s the thing, right? It’s
[00:34:23] Luke: Ai, AI is here, albeit, uh, A large language model, but it’s, um, it’s kind of, it’s good enough for me. It’s, it’s all intense and purposes. Um, well, so I, I did run into something quite interesting, um, called the Lovelace Test 2.0, in fact. So, um, we might all be familiar with the Turing test, from, way back in the forties, fifties, proposed by Alan Turing, and uh, so I think he called it the Imitation Game.
So essentially could a, could a computer fool, uh, a third party into believing that it was a human. Um, and so, and I don’t think Alan chewing ever intended that test to really be conducted. It was more like something he discussed in the margins of some other paper, I think. but some chaps have recently proposed the Lovelace Test two, which is essentially, , can an AI demonstrate creativity to the level that, uh, it can convince a human that it’s truly creative.
And I think we are there, I would say, um, I’ve seen some just incredible works of art. The one that really caught my eye though, and it’s been going viral on Twitter, you’ve probably seen it. the Avengers 1980 directed by Wes Anderson.
Wow. So, uh, someone’s taken mid journey, which is one of these, image creation tools, and just by using the prompt, the Avengers 1980, directed by Wes Anderson, he’s produced this set of incredible visuals of, you know, this is what the Avengers would look like. And everyone’s looking for any kind of su and Bill Murray esque in their kind of fifties suits. Uh, and he is followed up with Star Wars, directed by Wes Anderson.
So I, you know, the, the sort of creativity. Or at least, you know, the seemingly creative nature of some of these tools. Um, you know, who knows what, what utility we’ll find for them. I’m using chatGPT almost every day at the moment. I’ve actually just taken the opportunity to put it on my home screen and I’m kind of opening it with just random questions every day and having a conversation with Sing it’s, it’s remarkable.
But, um, I dunno if anyone’s officially declared that the Lovelace two test has been passed, but, um, tall, intense and purposes, this thing for my money at least, is creative.
[00:36:42] Krzysztof: It’s so stunning to me, Luke to reflect on this moment of history sometimes, you know, it just takes time to understand the significance of something. I mean, the way history works, right? You just need space and you need a little bit of perspective, right? But correct me if I’m wrong, it almost feels like this thing drops and almost immediately people who’ve played with it or experiencing it are saying, okay, we’re in a new world almost overnight, and yet it’s just the beginning,
[00:37:12] Luke: people are using a combination of these tools to create beautiful imagery, write scripts. Probably the tools are here today and I think now the discovery is kind of how it’s, you know, we’re now only limited by our imagination how we can use these things.
Um, For entertainment, but also for utility to, you know, it’s really, gonna be an accelerant to really anybody almost in any job.
[00:37:38] Krzysztof: You know, you know what this makes me think of a little bit is the question of vinyl. I like, we went from, music on a, you know, on vinyl, and then we had the cassette, and then we had the CD and the cassette and the CD both were phased out and the mp3, right? But then human longing brought back , vinyl because there’s something, beautiful or satisfying about a physical circle that spins and the attention and care you need to run it, as opposed to the ease and quickness of, say, a cd. Right? I wonder if humans in the age of AI, if we’re gonna go through a similar sort of curve where it’s like, okay, AI then starts taking over everything, and will we begin to feel a nostalgia for say something written merely by a human?
And then we’ll have two categories like are, you know, you know what I’m
[00:38:32] Luke: Yeah, absolutely. Yeah, Well, um, well, somebody controversially recently used one of these image creation tools and entered the result in an art contest somewhere in the States and won the contest, right? So, um, you know, kind of, sort of comical thing to have happened, but inevitable and, you know, one day an AI written novel will win, you know, the Booker Prize and AI created movies will be winning.
Oscars. I guess we’re just gonna need like a whole new category of a way of judging the world. Is, is something less worthwhile? Cause it wasn’t created by humans? I don’t think so.
[00:39:07] Krzysztof: No, it’s a great philosophical question and maybe to land this back to, to our investing theme, I think it’s worth pointing out that the one company on the planet that makes the most advanced chips for the purpose of AI is Nvidia. You could use that bit of data for your own , investing explorations.
[00:39:28] Luke: So before we, uh, we wrap up today, I thought I’d pick up a question that came from our Discord. Um, we were chatting with some members and, BabboVicenza on the 7investing Discord. Put a question to us and I thought maybe the podcast would be a good place to, uh, to debate this one.
So he asked, how do the different lead advisors think about risks and what are useful and less useful ways to frame risk? What are the mental traps you could fall into? And also, you know, do we discuss risk of our investing with our co-investors, like our spouses? So I wonder if I could pitch that one over to you.
How do you think about risk?
[00:40:06] Krzysztof: I’ll take this on the, I guess the highest of levels. First is, I’d say there is no such thing as no risk, like life by definition is risky. So let me just , lay that out there, and if you wish to convince yourself otherwise, then it seems like you’re going to fall into some trap or other, because whether it’s getting out of bed and crossing traffic or obviously investing, everything has risk,
[00:40:31] Luke: a cold shower day today,
[00:40:35] Krzysztof: right. There’s a risk that I’m going mad. Uh, by doing this to myself voluntarily,
maybe the first intuitive response I have, Luke is it’s a, it’s in a sense essential to define the context with which you’re trying to answer that question. So by that, I’ll give an easy example. There is no such thing as like an absolute amount or level of risk because it’s all contextual.
So if you’re, say, 25 years old, the amount of risk you theoretically should be taking is higher than, say if you’re 80 years old and retired. And that doesn’t make risk itself as a quantity, better or worse. It’s just it’s a variable. But the mistake for younger person would be to avoid risk, meaning have loss aversion, whereas somebody who’s retired, their mistake would be taking on too much. So it’s kind of the know yourself, know what you’re trying to accomplish, and then assess carefully it’s too little, too much or some balance.
[00:41:44] Luke: The key thing there is just not being blind to it. Like as you say, there’s risk in everything. I think part of the art as an investor is to just ensure you understand and quantify the risks and to sort of structure your portfolio in such a way. That there’s no one, you know, event that could completely wipe you out.
Do you consider yourself a risk taking investor at your, what You, your right old age of 42?
[00:42:12] Krzysztof: For, unfortunately, I know I look young in, in, in dashing, but I’m 43, so there’s more, there’s more mileage on this horse Luke than meets the eye. I think I fall in the risk tolerant group I have. Appetite for life , which, which means that when I err, I err on the side of too much risk.
And that’s something that’s essential for me to know and, future wisdom will be for me to moderate that risk as I get older. And now that I have a partner with whom I share responsibility to go back to the question, knowing my inherent attraction to, I call it the higher risk, higher reward portion of the map.
Ethically, I know
that I, I just can’t take on as much risk as I, as I would like to or feel drawn or compelled to
[00:43:08] Luke: I, I think I’m similar. I’ve got a number of things in my portfolio that are more overwhelmingly likely to go to zero. Like they, they’re just gonna get wiped out, but in the small chance that they do succeed, the return is gonna be enormous. So I’m quite comfortable with that. Um, ideally I’d like to have many more of those bets.
You know, in poker parlance it’s like equity. If there’s a, one in 10 chance of getting like 50 times return, but nine out of 10 times you can end up with nothing, but it still makes sense to make that bet. But ideally you wanna make that bet like a thousand times because then the math’s on your side.
But it’s hard to ferret out those companies, um, because you, if you don’t really understand the risks inherent, some of them you could find you’ve got something that, like 10 out of 10 times it’s gonna go to zero.
[00:43:54] Krzysztof: I’m glad you brought it back to poker. In the easy example of this, is if you’re sitting at the poker table and you need, let’s say an inside straight, meaning you need the one card to connect the five, right? Uh, there’s, you know, the odds, right?
You could calculate the odds of you getting the card. You. But most people, or at least most people that don’t play poker on any serious level, they ignore all other factors and just basically let their curiosity, like, I only need one card, so let me put in the money to get the card and find out.
Right? But that’s leaving it up to call it luck or chance. The correct thing to do is to calculate how much you could win versus how much it’s going to cost you. Right. And compare those, that ratio odds to the odds of getting the card. And that’s what I would call like risk, proper risk, um, management or analysis, risk analysis would be better.
Right. That’s not in a empty field. I’m curious For sure. I want, I want the next card I wanna see and I wanna hope I get that missing card. But oftentimes it is incorrect. And so the play is to lay your hand down and doing that right repeatedly trains you, trains you to think in these kinds of
[00:45:13] Luke: Yeah. You know, the thing that always sort of makes me, makes me have a rise, smile. So in a poker game, you can do something called rabbit hunting. So if you’ve folded, but if you’re really curious, you know, you can ask the dino if it’s a friendly game to show you what the card would’ve been. And, uh, you know, I, I kind of have a little smile at my friends when they kick themselves.
The card they wanted did come in and they folded, but up until the point that card’s turned over, it is every card. Right. It’s this Eigenspace of possibilities. And it’s like, you know, Schrodinger’s cat in the box, it’s every single card in the deck until you turn it over.
So, um, the rabbit hunting is kind of irrelevant really.
[00:45:51] Krzysztof: Mm. Right. I actually, I, I train myself to never do
[00:45:54] Luke: Right. And you can’t do that in real life. Right. You know, you make an investment or you make a decision, you decide to propose and get married. Right. Unless you are doctor strange, you can’t look down, you know, the multiverse of possibilities and see which is the optimal decision. You just gotta make the best decision you can and, uh, live with it, I suppose.
[00:46:12] Krzysztof: Right? Yeah. That seems to me the ditch of like, of inviting regret when you don’t need to,
[00:46:18] Luke: Yeah.
[00:46:18] Krzysztof: right? Why, why? Look back, and that kind of fits in a little bit with your worry portfolio that we were talking about, right? Like the difficulty of, of truly selling a position so that you don’t torture yourself with what could have been.
You make the choice and then you move on.
[00:46:34] Luke: Agree. Yeah. Like I said, for me that works for me and, you know, you have your own method, but bringing it back again, we don’t wanna repeat what we said last week, but the core is, or the key is know thyself and, uh, you know, do things that just make, make it easier for you to manage your own emotions, whatever that means for you. Should we just touch on , the, co-investor point? So, um, uh, you know, our colleague Baba Vizo was asking, you know, do we discuss. Risk and our investments with our spouses. Bit tongue in cheek, I was going to ask you, is your significant other a risk taker?
You know, clearly she is because, uh, she’s agreed to marry you. Um, but do you, do you discuss your portfolio with her?
[00:47:14] Krzysztof: No. No, I don’t. This is one of those odd things where, because I’m in this world so much and spent so much time doing this, I almost, most of the. It’s the last thing I wanna do on our dog walks for that reason alone, my own sanity. Sometimes, sometimes if some exciting stuff is happening, I’ll talk her ear off about, you know, I remember the GameStop saga and I, I couldn’t stop thinking about what, what in goodness sakes is going on here, but other, other than maybe larger things, I don’t, don’t do
[00:47:47] Luke: Uh, I don’t, I don’t know. I don’t for, for other reasons as well. Um, like Katrina has her own, um, index investments to certain she’s not permitted because of her job to invest in like, individual companies. And to follow the guidelines of her employer. It’s better if I just don’t discuss what’s in my portfolio with her.
Um, although she’s, she is aware that we are significantly poorer than we were a year ago. .
[00:48:15] Krzysztof: She
has an inkling. Huh? Yeah. Are we having fun with this investing thing yet, or what?
[00:48:22] Luke: We’re, uh, well, I feel like I’m learning a lot, uh, from the experience of 2022 that’s gonna make me a better investor for the rest of my life. So, um, so yeah. Yeah.
[00:48:32] Krzysztof: Oh yeah. Right.
[00:48:33] Luke: Yeah.
[00:48:33] Krzysztof: That’s such a good perspective. Thank you for mentioning that Luke. For everyone that’s in it with us. Right. It really is this feeling of it’s never gonna end. I’ve lost, I’m wounded and I’m, it’s better just to die. Don’t die. Do not, do not leave. It always, always clears up and gets better, and it might not be today, might not be tomorrow, but it always does change, and the lessons you learn here will stay with you for the rest of your investing life, which hopefully is very, very long.
Especially if you take cold showers in the morning. So
[00:49:07] Luke: Very good. Well, okay, should we, uh, should we round it out with a three conversations game? You ready for this?
[00:49:13] Krzysztof: let’s do it. I’m
[00:49:14] Luke: now I, I, we’ve actually, uh, we’ve now gotten my conversations already cuz I had a question about ftx, but I think we’ve covered that earlier in the episode. So I’m gonna have to ad hoc a third question, but let’s, uh, let’s see how we go.
So I’ve got a, I’ve got a fun one for you to start off with. So, um, you might recall a couple of weeks ago, uh, our CEO Simon had a power outage and he had to run to his sister’s house to rejoin our team call. So, if I gave you 24 hours notice to prepare, how long could you and your wife last confined to your home, including the roof in the Guardant with no utilities, no contact with the outside world? Okay. Um,
[00:49:57] Krzysztof: Wow,
[00:49:58] Luke: A bit more of an investing in one. Number two, cuz I’m, I’ve been a big believer in work from home, um, and I’m, the question in my head, I’m wondering if this thesis is right or not. So I’ll be intrigued as your view, what is the real future of flexible working work from home? Cuz I’m gonna use your insights to inform my own investing strategy.
And, um, let me come up with a question on the, on the hoof, okay? What is the greatest meal you could prepare for $1? And I say $1 because right now you can buy a seven investing subscription for $1 for a, as a, as I said, a
[00:50:39] Krzysztof: that dollar can go a long way, right?
[00:50:41] Luke: So you get to, you get to nix one of those three, and then I’ll pick one of the other
[00:50:45] Krzysztof: Yes. Yes. Oh, wow. Such a good questions. Luke.Mm. I’ll mix the best meal for a
[00:50:51] Luke: Okay. All right. Um, got this round out with some fun cuz it’s uh, it’s, it’s a wordier question. I’ve intrigued by the answer. So you are, um, you’re confined to the home. I’m cutting off all the power. Uh, you gotta do your prepar. You’ve got 24 hours this time tomorrow. How long could you last?
[00:51:09] Krzysztof: So of no getting, obviously no getting grocery.
[00:51:12] Luke: You could, you can, uh, you can stock up in advance, but come that 24 hour point. We’re cutting you off from the outside.
[00:51:17] Krzysztof: Oh, so we, so right. To be clear, I have 24 hours to,
I feel like I could, we, we would last till we
[00:51:26] Luke: Wow. Nice. Okay, let’s
hear it. Excellent. Well, okay. Clearly, clearly that’s true, but were you implying like a death of old age, not a death of starvation in a few weeks?
[00:51:36] Krzysztof: Right, right, right, right, right.
[00:51:38] Luke: I’ll shut up. Come push you answer.
[00:51:39] Krzysztof: The theory I think I was going on is that, is that doesn’t seem impossible given the little land we have and, and enough grains and things to plant that we would
die of anything physical. And in terms of say, my own daily life, all I’d do is read anyway. So I’d be ha, nothing would change. I’d just sit in my chair and do exactly what I’d do anyway. , uh, and we, and, yeah. So I’d say, I’d say, without answering your question exactly what, whether I could solve the water problem is, would depend on.
That’s, that’s what the answer depends on. Would I be able to make a rain catcher thing that would provide enough water?
But enough rain barrels, I mean, I don’t know, like 10 of them. We could stack them in the back. There’s the water. There’s the,
[00:52:27] Luke: I like it. Impressive answer. Uh, I, I believe you, I believe you could last forever and you’ve got such an impressive live behind you that by the time you’ve read the last book, I’m sure you’ve forgotten the first one. You can go round around forever. Yeah.
[00:52:39] Krzysztof: I just go. Just go back. Awesome. It was so good talking to you. Luke.
Any last words
[00:52:45] Luke: Uh, well I’m working on the tennis game. Hopefully you do get back to the running. I, uh, challenge accepted, although I’m not gonna enjoy it on the cold showers.
Um, but I’ll give you an update this time next week, uh, how that’s going.
[00:52:57] Krzysztof: Awesome. All right. Thanks for listening to everyone.
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