The Zen Innovation Investor Volume 4

The purpose of this weekly is to share thoughts about industries and companies that fit into powerful long-term investment themes. It is also a place to share insights into decision making, takeaways from the past week, and random thoughts that arise.

This week:

  • Lessons learned during the 1990s PC Era
  • Navigating Uncertainty in the Data and AI Era  Charlie Munger
  • A few random thoughts

Reflecting on the PC Era: Lessons for Today’s AI Revolution

This week, I’m taking a stroll down memory lane to the 1990s – a decade marked by extraordinary prosperity, especially for those at the forefront of the PC and software revolution. This era witnessed the transition from mainframes to personal computers, which set the stage for the Internet Era. As we stand on the cusp of the Generative AI revolution, I can’t help but see striking similarities with that transformative decade. In this volume, I’ll share some key lessons from the 90s that I believe are crucial for navigating today’s technological landscape, along with a personal story about handling uncertainty.

My Front-Row Seat in the PC Era

During the 1990s, I had the privilege of working closely with visionary PC Hardware and Software executives while at Cowen and Company and Merrill Lynch. Back then, I was still cutting my teeth in the industry, trying to distinguish the wheat from the chaff without much to go on except gut instinct. This experience taught me invaluable lessons, which I now apply to our current era:

1. StayAgile, Avoid BinaryThinking: Embracing flexibility and keeping an open mind are essential, especially when opportunities often lie in plain sight. During periods of transformative change, prior models or ways of doing things likely will no longer apply. Thinking flexibly allows for adaptation.

2. Embrace Change and Uncertainty: How we handle uncertainty significantly impacts our returns. Change is the only constant, and adapting to it is key.

3. PracticalApplicationinInvesting:

  • The best product doesn’t always win. Take Microsoft and Oracle, for example – not necessarily the best in their class, but incredibly well- managed.
  • Identifying overarching themes is crucial. The most successful companies and rewarding stock returns often emerge from clear, dominant trends.
  • Beware of fads or ideas that need tons of capital to scale. While they might seem appealing, they often represent lower probability plays (think or Webvan).
  • Portfolio sizing is as critical as ever. Diversification across a theme can yield market-beating returns without needing to pinpoint a single ‘winner.’
  • Developing a solid investment framework helps minimize errors. This approach was a hallmark of the most successful investors in the PC Era.
  • Listen to the leaders and visionaries! These are the people driving the future. They will see what can happen much better than we will, it is their passion and their job to do so

Navigating Uncertainty in the AI Era

The dawn of the Data/AI Era brings its share of uncertainties. It’s reminiscent of the early 1990s when I was a junior analyst at Merrill Lynch, covering the PC Hardware and Software industries. Many have a hard time believing that there was broad skepticism about companies like Microsoft and Dell at that time.

One story I like to recount is about calling on institutional investors in the early 1990s. At Merrill Lynch, we had a list of institutional investors that we needed to call to spread the word about how we saw the world. At that time, IBM was the big dog in computing. The world was changing, PCs were becoming more widely used. Bill Gates, who was CEO of Microsoft at the time, articulated his vision as

“a microcomputer on every desk and in every home running Microsoft software.” Back then, this vision of a microcomputer seemed bold, if not far-fetched.

We were recommending Microsoft, Compaq (PC manufacturer), and Dell. When I would make calls to the investors on my call sheet, almost every one of them would say “I’m not interested in Dell, Microsoft or Compaq. I’m looking to invest in companies that use the technology, like Walmart.” Now, Walmart was a good investment, but it is always difficult to see how big, bold predictions like Gates made will come to fruition. Microsoft and Walmart both benefitted from the PC revolution, yet their stock market returns were dramatically different. Over the last 30 years Microsoft’s market cap has increased from $11.8B to $2.8T (20%/annum) while Walmart’s market cap has grown from $37.8B to $441.7B or (8.5%/annum.). During the period from 1990-1999, Walmart was up 1,132% or 28.5% per annum, while Microsoft was up 9,562% or 58% per annum.

The key takeaway? Being on the right side of change, even if it doesn’t involve directly investing in cutting-edge technology, can be highly beneficial. The greatest mistake is to deny or dismiss the change altogether.

In Conclusion

As we journey through the AI revolution, remembering these lessons from the past can guide our decisions and strategies. It’s about staying informed, adaptable, and open to the endless possibilities that change brings.

As always, I’m here to share my journey, thoughts, and insights, hoping to provide a unique perspective on the ever-evolving landscape of innovation and investment.

Stay tuned for more reflections and insights in the upcoming volumes. Thank you for the support.

Charlie Munger

The investment world received some sad news this week, as Charlie Munger passed away at the age of 99. He was a true icon and mentor to many in our industry, even for those that never met him, me included.

Much will be written about him, so I will leave it to others to recount his life and his contributions. Personally, I am grateful to him for sharing as much as he did through the years, especially about human thinking, and human behavior. Many do not know that he dealt with a lot of adversity in his life in addition to all the

success that has been well documented. His productivity in society was felt until he passed away at 99. There is a lot to be inspired about as we mourn his death.

A few random thoughts: things I am pondering this week.

A wise friend of mine recently shared an interesting way to frame a problem. Instead of thinking or saying, “this happened to me,” replace it with “this happened.” Does that change your perspective? I am going to try it for sure.

Dear Humans,

No computer model is as interesting as drama between individuals in the board room or anywhere else.

Sincerely, Open AI (disclosure: I wrote this, not Chat GPT…)

An interaction with a friend of mine this past week made me feel really good. I asked him for help on a matter I must deal with. He is very skilled in his field, has achieved a lot of success, and is very humble. He embodies a great Charlie Munger quote: “the safest way to try and get what you want is to try and deserve what you want.” I am very happy for him; he deserves his success. I am also grateful for his generosity.

My story

I am an investor and entrepreneur, having started two investment companies. I am the Founder and CIO of Arrowside Capital, based in Boston. I have more than 30 years of experience in the investment business, investing in mostly small and mid- sized companies, all geared toward innovation and growth. The blog is named The Zen Innovation Investor because I believe it is so important to remain calm and focused during the rapid pace of change in the world today. I am keeping a view of the long term while also keeping abreast of developments in the world of innovative companies. I view this as a place to sharpen my thinking and provide some insights that are thought provoking.


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