A year, it has been to Ruminated. A year of newsletters, a year of articles and so many of you joining me on this journey. Thank you. It means a lot to me.
Today we will talk about faith. Not religious faith, but the plain not-purely-logical belief that people have in ideas or the future of something. James Fowler, who studied human development and faith talked about a stage in life called Conjunctive Faith. it is the stage where people understand that logic has limitations and more often than not start giving more weightage to faith, beliefs and take down logic from the indisputable pedestal. The world would be a boring place if every decision made by every individual would be rational. It is the mix of rationality, belief and in some sense greed that brings the randomness of thermodynamics alive. Businesses as I often say are extensions of people and in being so are more and more affected by this faith based decision making. Look at every business you see and beyond data you would start seeing the impact of faith and beliefs. So today we talk about how everyday we see signs of this is business and economics. The no evidence bet, the belief based investments and obviously the Fear of Missing out.
So today we start off with the best selling story of this century. Cryptocurrency is a story more popular than Marvel and Game of Thrones combined. Coinbase is betting its future on the faith in cryptocurrency and the public markets are now open to it. We move on to the allure of South East Asia. Investors are betting on local players to unlock the value of the markets in the untapped geography. The funds have come in, returns will take time. We move on to a very interesting perspective that irrationality helps markets and new entrants. The other direction actually moves sectors towards monopoly. It is a read for the skeptic. Too much of logic can be bad practically and American markets are witnessing it. We end with the the cool new kid on the block : NFT. It probably is the fastest bubble in history. The question is whether it will survive.
1. There is an unknown tech prophet. He wrote some beautiful lines of code. And then he disappeared leaving his code open to the world. It is a beautiful story, but certainly a very expensive story. Bitcoin, says Robert Schiller, a Nobel Prize winning economist is a feat of storytelling. This week Coinbase, a company dependent on the faith of people on Bitcoin went, public. It’s fate in the next few years and beyond that will depend on the fate of Bitcoin. There is a beautiful story of how Gold went from being a banned and ridiculed currency to one that was widely accepted to today being a regular in many peoples financial portfolio. The world doesn’t change, we just tend to forget history. Coinbase and the Faith on the Bitcoin
2. In the last 5 years $26 Billion has been invested in South East Asian startup’s by the likes of Google, SoftBank and other VC firms. The big bet is that the untapped markets of South East Asia will give returns rare to be found elsewhere. As Western markets did boom towards the beginning of the previous decade and gave returns throughout, the idea is that SE Asia will do the same for this decade. Another interesting aspect of the region is that it is very culture heavy. So Grab knew that it had to give away free Durians (a local fruit) after every ride, while Uber stuck with the free ice cream model. Soon Grab had acquired Uber’s operations in the region. The region is rich but has its own ways. The result is local players being valued at very high prices. Whether the investors will get their returns or not, only time will tell. Currently it’s all faith in the power of local knowledge and scale. Results due to come out in a few years.
3. First a small introduction. There are two kinds of funds that invest money. The first has really smart people taking all sorts of decisions to increase the returns on the money invested, including fancy analysis and all their experience. The second is passive funds where no smart decisions are taken but money is invested basis certain rules such as what is the market share of the company in the category. No fancy calculations or smart decisions. The second type of fund is called Index Funds and they have regularly and significantly beaten the first kind of smart, managed Suave funds for decades. That’s counterintuitive, but index funds, which essentially are a bet on the market overall have always outperformed. In the past decade or two, people have realised this and majority of money has started flowing into index funds. That’s great again, people looking at data and making smart decisions with their money. But too much of something is always harmful and with much more money flowing into index funds, new kinds of complications have started coming in.And that is what the US economy is facing. When people make decisions, they make emotional decisions which are irrational and sometimes those decisions bring out winners. The economy diversifies and competition comes in. When you make decisions by rules, newer entrants find it more difficult, money gets concentrated in the hands of a few companies, the winners find it easier to win and so on. Do you sometimes feel that today all the companies you hear about are giants and growing and new companies are lesser. That’s partly because of Index funds. Faith is part irrationality and part instinct and instinct is strong. Don’t rule it out.
4. The new “cool” thing in the internet world is surely NFT’s. Incase you don’t know what NFT’s are, please read this beautiful initiation. Maybe you will realise that you have made some NFTs yourself. The amazing thing about NFTs is that I haven’t ever seen such a birth to bubble journey. The journey from the awareness of NFT to everyone selling NFT’s has been a speed of light journey. The problem with common resources is that they are often affected by the “Tragedy of the commons”. So if in a herding society there are grass fields, over grazing destroys the livelihood. The problem with NFT’s is the same. There is just too much of it. Everyone is trying to cash out right now before the fad ends. The idea is powerful, but powerful ideas always face a problem of everyone trying to get a piece of it. The lessons of NFT’s mirror many such ideas in the past, from fishing to comic book publication. Do you have faith in the growth of NFT’s ? Will they sustain the oversupply and become truly commonplace or will their fate be tied to the bitcoin? As usual we will wait for time to pass the judgement.