After reviewing her book Broken Money, I was excited to chat with Lyn Alden. We talked about everything money and the financial system, including its history, taking engineer’s perspective, historical parallels (useful vs. misleading), the challenge of timing in the world of macro, and the confusion around inflation.

You can listen to our conversation on Spotify, Apple, and anchor (and via RSS).

Disclaimer: I write and podcast for entertainment purposes only. This is not investment advice.

A few of my favorite quotes:

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I recently had the pleasure of speaking with Jonny Miller, writer, podcaster, and breathwork facilitator. Jonny wrote some of my favorite recent pieces, including the amazing operating manual for the nervous system and How to Pay Off Your Emotional Debt. Jonny also puts together terrific small wikis like this one on emotional resilience, the ‘spiritual MBA’ and Somalist (‘a global directory of somatic practitioners + trauma-aware bodyworkers’).

We talked about breathwork and its benefits and risks (including Wim Hof), ‘state over story’ and the ability to change the state of your own nervous system, Jonny’s own journey, the $55,000 he spent exploring various modalities and experiences to find the most impactful ideas (including super interesting stuff like darkness meditation), emotional debt, repressed anger, and men’s work.

In the context of a breathwork journey, incomplete reflexes will rise to the surface and they will be felt. The body will move in a certain way, and then there'll be relaxation. It's almost like layers of an onion that keep on unpeeling. The more we become comfortable with feeling the full spectrum of emotions, the more that these deeper pieces start to arise.

We tend to focus on the outer journey, the how of success. How to spot opportunities, how to invest, how to build a business. Mastering the inner journey is equally important: both understanding your why and having the tools and practices to master the stress and setbacks along the way. That’s one of the lessons of the maze. Remember: great investors are survivors and experts at cultivating resilience.

We have what I think of as this Cartesian hangover, almost going back to Descartes, of this mind-body dualism. I think the rational brain, the intellect, the kind of left-hemispheric way of perceiving the world has been very prioritized and almost worshiped in our culture.

Controlling your mind, mastering your mind, mindfulness, all of these things have been really, really emphasized. I think what is starting to happen is the pendulum swinging back to, ‘oh no, there is no actual distinction between the brain and the nervous system.’

For this reason I recommend checking out Jonny’s work (among many other practitioners). If you’re interested in learning more about him, Jonny teaches an upcoming online course on nervous system mastery. He will also host a men’s retreat in Colorado in September 2023 (Deep Reset Retreat).

For those interested in exploring Breathwork further, Jonny recommended the app Othership (this is his link with an offer code with 3 months free). I will also soon be sharing some of my own experience on this topic.

Unfortunately, I ran into audio issues on my end during the recording (thank you, Zoom😢) and had to heavily edit my questions. There are still a few minor audio glitches, I hope it doesn’t affect the experience too much.

You can listen to our conversation on Spotify, Apple, anchor (and via RSS).

I had a chance to interview William Duggan, who teaches innovation at Columbia Business School and wrote Strategic Intuition. Much of the time we follow a process and execute on a plan, but every so often our success rests on having a strong creative insight — a novel idea or a variant perception of a massive misunderstood opportunity (in Edison’s words, ‘genius is one percent inspiration and ninety-nine percent perspiration’). A few of these insights can determine the arc of our career.

Since my post on Duggan’s Strategic Intuition, I’ve read his most recent book, The Seventh Sense, in which he applied the framework to everyday issues including finding the right career and creative networking. Duggan uses the terms ‘sixth’ and ‘seventh’ sense to distinguish between expert and creative intuition:

Professional athletes use their sixth sense during the game. Afterward, to prepare for the next game, they use their seventh sense: they study videos of their past games and games that others played against their next opponent, looking for ideas from both.

In the sixth sense you think fast, so all you have time to draw from is your own experience. In the seventh sense you think slow, so you have time to step back from your own experience and see your own examples from history as just one of many sources to draw from. — The Seventh Sense

Take Steve Jobs, a master of the seventh sense and serial combinatorial innovator:

He combined two examples from history to make his breakthrough Macintosh computer: the small, cheap, easy-to-use Apple II that his partner, Steve Wozniak, built, plus the graphical user interface and mouse that he saw on a big, expensive Xerox machine. Right afterward, he left Apple and spent ten years trying to build a perfect computer from scratch, which failed terribly.

He returned to Apple and went back to combining examples from history, and that’s when everything took off: under Jobs, Apple became the world’s most successful company by creative combination of breakthroughs that others made. — The Seventh Sense

In our conversation, Duggan explained how he found his big idea, the difference between creative/strategic intuition and expert intuition (with examples including Howard Schultz, Henry Ford, and Elizabeth Holmes), the role of memory, the influence of martial arts, meditation, passion, and the role of memory.

A few ideas that stuck with me:

• Passion follows a great idea. If you’re not yet feeling passionate about a new idea, say a business venture, the idea might not be strong enough. Elizabeth Holmes, Duggan pointed out, was passionate about the problem (minimum quantity blood tests) but she lacked a great idea. The technology required for her product didn’t exist yet. She tried to will it into existence out of passion. Duggan argues it should be the other way around: a great idea, based on elements that already work, ignites passion.

The best test of whether it's worthwhile to work on something is whether you find it interesting. That may sound like a dangerously subjective measure, but it's probably the most accurate one you're going to get. — Paul Graham

• Change your brainstorming process by spacing it out. Pose the question to the group, then allow for a period of collecting dots before looking for the answer.

If I ask you to brainstorm—that is, to toss out ideas from the top of your head, right now—that’s shallow creativity. Tossing out ideas in a room is a quick and efficient way to gather the sixth sense of everyone there. But for the most creative answers, use your seventh sense, not your sixth. That is, look outside the personal experience of whoever is in the room. By definition, brainstorming can’t do that.

In reverse brainstorming you don’t decide right away. If you can bring an idea on any topic at all, the rest of the group might not have thought about that topic before.

• Develop practices to clear your mind. Duggan pointed out three key obstacles: too much focus, multitasking (“in reality you cannot do many things at once … it’s rapid sequential focus”), and negative emotion.

Insight happens in a relaxed brain — otherwise known as presence of mind.

I hope you enjoy our conversation.

Frederik

You can listen to our conversation on Spotify, Apple, anchor (and via RSS).

Quotes that stuck with me:

There is no now. Everything is history. … There is no other guide to the future.

You don't have to have the passion before you have the idea. The idea gives you the passion. Oh great, this is what I'm gonna do.

How do you judge an idea when you have it? Is it based on real knowledge and experience? Real pieces of the puzzle. That's how you judge.

The moment you step into the battle, you forget everything. Meaning that you let your brain make the correct connections. That's the presence of mind, where your mind is clear. In martial arts, it's very fast, but it's really the same idea. It's to clear your mind and let your brain make its own connections, according to the situation and the circumstances.

A lot of people think Henry Ford invented the assembly line. He did not. The assembly line was invented a hundred years before, at the start of the Industrial Revolution. He invented a certain kind of assembly line, meaning he put together the old assembly line with something new.

I like to distinguish the natural flash of insight … Steve Jobs was good at it. He'd search and search and search and then something would strike him. I don't know if you know about the origin of Starbucks. Howard Schultz was working for a coffee company, high quality coffee, where you fill up your bag and take the coffee beans home. He goes to Milan for the first time in his life and he sees the coffee bar and he says, oh, okay, well we should clearly convert all our stores into that.

I always enjoy discovering people who are passionate about their work and are dedicated to a deep understanding of their domain. That’s definitely the case with Drew Cohen who writes Speedwell Research along with the prolific Kevin G (Drew used to work in research at Goldman and Capital Group.)

You can tell Drew is deeply curious about his work from the way he writes and digs into his companies. The business history section alone in his report on Meta is 44 pages long and basically a wildly detailed mini-biography (the entire report is a whopping 166 pages; you can find shorter examples of business history on their website, namely Constellation Software and Floor & Decor).

I was excited to record a conversation with him during which he commented:

I believe it's not worth writing anything that I don't believe is worth reading. The things I think are most interesting to read are the ones where the writer’s really excited about it. I spend the better part of a month on each report and it just would not be a great experience for me if I wasn't enjoying it. I think it would show up in the quality of work. It's very hard to be good at something when you don't enjoy it.

I couldn’t agree more. Drew recently outlined his research and writing philosophy on Speedwell’s substack:

How many sell-side reports that were published just a year ago would you want to read today? Not many, if any. The lack of shelf life is indicative of a lack of signal and insight.

Most companies change far less than you’d think by the publishing cadence of the sell-side. Costco’s value prop is essentially unchanged from several decades ago, the competitive advantage of Moody’s rating agency business still stands, and the virtues of BlackRock’s business model have endured quarter after quarter since their first index fund launched in 1999.

In line with that idea of increasing the resolution of a photo, our first aim is to understand what we are “looking at”. What is their operating model? How did they get here? We put these two questions together because a business’ operating model is typically born from a need, and their history gives us a better understanding of how they’ve iterated on their original value prop over time.

Floor & Decor was started after founder George Vincent West was fed up with the limited selection and prices of local alternatives. Sam Walton wanted to provide better value for money to his customers. Jeff Bezos wanted to create a service that could take advantage of the unlimited “storage” space the internet enabled. Starbucks’s Howard Shultz wanted to create a “3rd space” that wasn’t home or work. The original problems founders tried to solve and the ethos they imbue their companies with are usually still true decades later.

Another interesting essay explains his take on the Consumer's Hierarchy of Preferences (part I and part II) and how it affects strategy. From our conversation:

The idea is basically consumers value different things to different degrees. So you want to fill one desire and then a subsequent one, et cetera. So when you're shopping at Costco or you're shopping for flooring, you don't care about the decor of the place necessarily. If you had to drive a little bit further, that's okay with you in this circumstance.

And you're okay with the format being a warehouse because the things you value really are having a lot of selection and the fact that the stock is right in front of you. So that works for flooring. It wouldn't work for any model where someone wouldn't be willing to drive to an area where they couldn't build a big store. IKEA is another example.

What does this mean for building enduring businesses?

Companies that meet more conditions on a Consumer’s Hierarchy of Preferences, beyond the point that the consumer would have already satisfactorily purchased the item are effectively increasing the consumer surplus. Getting more higher-level items filled on The Consumer’s Hierarchy of Preferences is crucial to creating loyal customers with a unique value prop that cannot be easily mimicked by competitors. This is precisely why brands want to become “lifestyle” or “aspirational” brands—it is a more unique node on The Consumer’s Hierarchy of Preferences.

Nike’s competitors sell shoes; Nike sells athleticism and excellence. Dell sells computers; Apple sells perfectly crafted, consumer-friendly technology that “just works”. Just think—can you ever recall a Nike commercial talking about shoes, or an Apple advert talking about their computer specs?

Everything about how you structure your operation is a signal to consumers.

Having a product offering that creates consumer surplus tends to compound over time, as growth in the business allows a company to continue to work to improve their core value prop. In a sense, this consumer surplus is effectively compounded over time, and increases the intrinsic value of a company.

Drew and I talked about Meta, Constellation Software, Floor & Decor, Restoration Hardware, and his research and writing process. I hope you enjoy the conversation. You can also get in touch with Drew and Speedwell on Twitter.

I will share a few excerpts from their research reports below as well. Thank you for reading,

Frederik

You can listen to our conversation on Spotify, Apple, anchor, and via RSS.

DISCLAIMER. Drew writes about stocks and so it’s important to mention: none of this is investment advice! I write and podcast for entertainment purposes only and this conversation reflects just our personal opinions. This content should not be relied on to make investment decisions. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions. Speedwell’s reports were written in the past and their views are subject to change (and of course all of these stocks have since changed in price). Also see their disclaimer.

Business counterfactuals, failed businesses, and excerpts from Speedwell’s reports on Meta, Floor & Decor, and Constellation…

I write and podcast thanks to the support of my readers. To access the remainder of this post, please consider becoming a subscriber. Thank you.

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Video on Youtube: Learning for Analysts and Future Portfolio Managers.

Podcast feed: Spotify, Apple, at anchor, and via RSS.

You can find the presentation and transcript here.

I recently had the great pleasure of recording a talk with my friend Alix Pasquet III. Alix is the Managing Partner and portfolio manager at hedge fund Prime Macaya and has been a friend and teacher to me for years. He is one of my favorite sources of ideas and book recommendations.

In this presentation titled Learning for Analysts and Future Portfolio Managers Alix shared his framework for becoming a learning machine. Despite the title, many of the concepts apply to life and business more generally.

The talk contains three sections: problems, mindsets, and conditions, procedures, and action steps.

Problems deals with unique issues facing investment analysts.

Mindset tackles meta ideas about learning, including Alix’s emphasis that “learning is behavioral change.”

“If your behavior hasn't changed, you haven't learned. Learning is not sitting on a desk, and cramming your brain with knowledge that you're going to recite one day.”

Similar to the point I made in The Reading Obsession, he recommends balance between solitary learning (read a book, listen to a podcast etc.) and learning by engaging with the world and being social. This can be particularly important for people living in intellectual bubbles that easily turn into echo chambers (looking at you, New York and San Francisco…). As Alix likes to quote:

“A desk is a dangerous place from which to view the world.” John le Carré

This one was a little tangent but a mindset worth pointing out:

“The first mindset is don't do this job for the money. This is a very painful business. You're constantly faced with your mistakes. The sort of pain that you take on a daily, weekly, even yearly basis, you better love the business, if you're going to last at it. And if you're going to do this for the money, yeah, you might get lucky and start in 2011 and go through 2021 and you made a lot of money. But odds are the first time that the market teaches you a lesson, you're going to quit and not have the result.”

The last sections contains frameworks, ideas, mental models, and books that can make you a better investor.

Below are a few of my favorite quotes on mentors, studying great investors, culture at Tiger, failure point analysis, and the intriguing metaphor of futsal — accelerated learning due to a high number of reps over a short period of time. Something I want to look out for in the future. Enjoy!

Learning for Analysts and Future Portfolio Managers:

Podcast version: you can listen to the conversation on: Spotify, Apple, at anchor, and via RSS.

Mentors

“The first condition you want to create is having mentors. Stanley Druckenmiller says, if you're early in your career, and they give you a choice between a great mentor or higher pay, tick the mentor every time it's not even close. And don't even think about leaving that mentor until your learning curve peaks. Nothing to me is so invaluable as having great mentors. And a lot of kids are just too short sighted in terms of going for the short term money instead of preparing themselves for the longer term.

Two problems here. One, how do you find a mentor? I would start with people in your field that you have direct access to or somebody else can introduce you to and you want to approach them. And you approach them using a technique that I learned from a professor at Columbia University. He says you approach them with three prongs. First prong is ‘this is what I admire about you.’ The second prong is ‘this is what I can do for you.’ And the third prong is ‘this is what you can do for me.’ Always make what you can do for them greater than what they can do for you. And if they don't respond, persist. One thing to remember about highly successful people is they got to where they are through persistence. And what they really respect is people that show persistence.

The second problem you're going to encounter is how to be a good mentee. Part of the value they're going to add to you is not only teaching you things, but also introducing you to other people. And they're only going to do that if you're a good mentee. So follow their advice, show that you've put it into motion. If it worked, you tell them. Be grateful. If it hasn't worked, also tell them. They're going to want to give you even more advice. And when they see that you respond, and that you're somebody that is not wasting their time, then they'll introduce you to other people.

The third problem, I call it the upgrading your mentor problem. Once you've gotten to a certain level, you start realizing that you need another mentor to get you to the next level. And what a lot of people do in a way is totally ignore the guy that helped you to get to the previous level and the upgrade to the next guy. That's a big problem. Well, if you keep doing that, and succeeding, you won't have a problem. But the problem happens when you fail at one level. And the guide that you left at the previous level is not there to pick you up as you fall. So take your mentors along with you on your path to success.”

Futsal

“Futsal is soccer at the fraction of the size of a football team pitch. The number of players is smaller. You would think that it increases the number of strategic interactions by double but actually it increases the number of interactions by eight to sometimes 16 times. And what that does is you're learning at a very, very fast clip. And one of the patterns that we've seen is great investors often have gone through a futsal period in their careers. So Dan Loeb, for example, in the early 90s, he worked at Jeffries right at the moment when the Resolution Trust Corporation was selling off the problem assets of the savings and loan debacle at discounted prices in a two year period. He saw a deal every few days. And that increased the number of reps that he saw. But also, he had great customers, he had a young David Einhorn and a young David Tepper as customers. And the exposure and the reps were amazing.”

Failure points analysis

“This is the main tool I used before I started my fund. I made a list of the smartest analysts, PMs, allocators, brokers and set up meetings with them. I said, Hey, I'm about to start a hedge fund. How can I fail in starting a hedge fund? The initial things they said I wrote down and went through each category. How can I fail at idea generation? How can I fail at portfolio management? How can I fail at risk management? How can I fail at hiring? How can I fail at leading an investment team and so on. I learned from each individual conversation but the full leverage was how much I learned from the aggregate conversation, because I found patterns that even some of the people I spoke with did not know about. This is a process that I do every couple of years.”

Studying great investors

“You want to study great investors, CEOs and leaders, but again, be careful of hero worship. I think we often imagine these individuals have qualities or abilities that are better than anyone else’s. And some do. But mostly they're schmucks like us. They have the same weaknesses, patterns, they self sabotage. And don't think that they play perfectly. Very often, they also may have gotten lucky and have gone through a certain environment. Other times, they have support structures that we don't see. You have to remember that you're never going to be able to replicate what they've done. Mostly because we're not going to go through the same environment that they went through.

So how should you study a hero? You want to study their initial conditions. What was the early context, circumstance and environment that shaped them? One thing that is often ignored by Buffett and Munger, for example, is that they grew up in the aftermath of the Great Depression. That really impacted the way they saw things. No wonder they were infatuated with value investing early on. Who were their connectors, who were their filter aggregators. What hubs did they spend time at? Who was there? What books were they influenced by? For example, Elon Musk loves the books of Iain Bank, the science fiction writer? What was their secret advantage? Sometimes they have an advantage that they never talk about, and figuring out what that is can lead to insights.”

Teaching at Tiger

“I'm going through all of my anecdotes that I've picked up over the years. And there were two guys inside of Tiger in the 90s. One of them was Andreas Halvorsen. The second guy shall remain unnamed. If you were a young analyst, you went up to Andreas and said, Hey, I really like this idea. I want to pitch it to Julian. Andreas would say, let's work on it together. I'll help you shape the idea, point you in the right directions, the strengths and weaknesses of the idea, the process they should take, and so on. And then once you're ready, go and pitch it to Julian. And that analysts would go and pitch to Julian and Julian wouldn't even have a clue that Andreas had pushed this guy forward.

The other guy would take the idea and speak to Julian and say, you know, I spoke to so and so. He's got an idea. I think the idea is okay, but it's not really fine tuned yet. I'm going to help them fine tune it. And then they would go and do that. That young analyst never really got the full credit from Julian. Guess which guy is actually the wealthiest and most successful fund manager today? And by the way, the second guy is also very successful, doesn't matter. But it's Andreas, right? So you want to be that guy. You want to have a cultural impact on your business. Be the teacher.”

One of my favorite researchers and writers about this question is Kai Wu of Sparkline Capital. Kai spent five years at GMO and co-founded a hedge fund before devoting himself to tackling difficult questions, such quantitative value investing in the 21st century or discerning the value of a company’s culture, through unstructured data.

“Investors have not adapted their tools as the economy has evolved from industrial to intangible. Intangible assets are the primary drivers of corporate cash flow, yet are largely ignored in standard accounting and valuation practices.” Kai Wu, Searching for Superstars

After two years of research, Kai was finally confident that the value factor could be fixed by creating a composite measure for intangible value a derive a new estimate of intrinsic value.

The following is my take on his research around value and culture as well as a Q&A with Kai about his work.

Disclaimer: I write for entertainment purposes only. This is not investment advice. Seek your own financial, tax, and legal advice before making any investment decisions. Do your own work! I am are not your fiduciary or advisor.

💡You could be sponsoring posts like this one if you’re looking to reach 8,000+ thoughtful subscribers and many more readers on Twitter.😏

The quest for intangible value

Much of Kai’s work rests on the belief that too much capital has been chasing signals in structured data such as price and volume, financial statements, analyst estimates, and macroeconomic data. “Not surprisingly,” Kai writes, “we have witnessed standard quantitative factors, such as value and momentum, struggle in recent years.”

In addition, the rise of intangible assets seems to slowly devalue traditional financial information for an increasing number of companies:

“The constant rise in the importance of intangibles in companies’ performance and value creation, yet suppressed by accounting and reporting practices, renders financial information increasingly irrelevant.” Baruch Lev and Feng Gu, The End of Accounting

Instead, Kai focuses on unstructured data – everything from text in SEC filings, earnings calls, Twitter, LinkedIn, Glassdoor, even patents.  “Given that the quantitative community is still extremely focused on linear models,” he writes “there is a significant advantage to be gained by using machine learning models.”

“As investors, our goal is to explain the economy, but structured data provides only a very incomplete picture. Ultimately, we have no choice but to rely increasingly on machines to help us process the exponentially growing volume of data,” Kai writes in Investment Management in the Machine Learning Age, one of two foundational pieces on his research process.

In the other piece, Deep Learning in Investing: Opportunity in Unstructured Data, Kai lays out his process for using natural language processing to extract signals from text such as earnings transcripts. For example, machine learning models can be pre-trained on large language data sets, such as websites and user reviews, and allow the researcher to detect sentiment categories in earnings commentary.

“Given that these innovations are less than a few years old, we believe there is opportunity for entrepreneurial individuals and firms to profit from the impending transformation.”

Anyone familiar with the buzzword bingo that can appear in earnings releases and on calls knows that management teams are aware that their language is being parsed for keywords. Thus, for Kai this was merely the start of his learning journey.

One can trace the evolution of his work through his research papers, starting with an evaluation of how value investing has been structurally short disruption. Kai assigned companies “disruption scores” based on an assessment of SEC filings and patents. “Once we neutralize its anti-disruption bet,” he wrote “we find that value’s lost decade disappears.”

Kai then took deep dives into different forces shaping the economy today: from rising industry concentration (that piece is full of excellent industry consolidation charts) to the rise of the intangible economy and the emergence of platform companies with strong network effects. He even found a way to tackle human capital by assessing companies’ ability to attract graduates from top universities and searched for “hidden tech companies” by canvassing the workforce for PhDs and software developers. It’s that kind of quantitative yet investigative work on original questions that blew my mind.

Kai built a portfolio of factors surrounding intellectual property, human capital, brand equity, and network effects which he integrated into a new valuation framework with “a single cohesive measure of firm-level intangible value.”

If you read only one of his papers, Intangible Value is the one I’d recommend. It integrates his prior research and can spark new ideas and questions even if you have no further interest in quantitative investing.

He picked Buffett’s own evolution as an investor as an example of moving from tangible assets to brands and, finally, network effects:

The composition of his intrinsic value across sectors is intuitive and fascinating:

Kai launched an actively managed ETF based on his factors and metrics such as R&D spend, PhDs, patents, and the “disruptiveness” score (obviously not investment advice!).

Culture

Kai published another thought-provoking paper on a topic that is on my mind: culture, which he called the “ultimate intangible asset.” He created “company culture profiles” and used Glassdoor employee reviews to score companies on seven dimensions of culture (innovation, teamwork, results-orientation, integrity, customer-orientation, detail-orientation, and transparency).

“Nvidia focuses on innovation, Honeywell excels at details, and Starbucks cares about the customer. Given the nature of their respective businesses, this makes sense.”

Interestingly, he found that merely having a strong and distinctive culture seems to be valuable, musing that “perhaps cultural uniqueness is itself an intangible moat.” Unfortunately, it’s not that simple as the causality could be reversed if “only leaders who are already successful ‘earn the right’ to be culturally idiosyncratic.”

“In any case, investors should pay special attention to firms with strong cultures.”

Perhaps unsurprisingly, he found that companies scoring high on innovativeness outperformed generally, they won “not only in the technology sector, but in many other industries.” High employee satisfaction was also valuable whereas toxic culture detracted from performance. Other cultural factors seem to be more contextual. A culture of stability was valuable in “procedural” but not in “creative” industries.

I really recommend the paper because I used to think about culture as something that had to be evaluated bottom-up by the analyst (and firms like WCM made it integral to their investment philosophy). And yet it was never quite clear to me what the analyst should look for. There is no uniform “great culture” and what matters differs across industries. Even within an industry, successful cultures can look very different (I compared the collaborative culture of Atlassian to the performance culture of Snowflake). Perhaps the answer lies in a combination of quantitative and qualitative work. Research such as this paper can give the analyst pointers on what to look for during a deep dive.

Q&A with Kai Wu

Q: What drove you to set up your own firm and do this research on your own? What makes this so interesting or important to you?

The ability to conduct independent research is very important to me. While the investment industry attracts extremely smart and hard-working people, it is paradoxically not all that innovative. Unfortunately, large investment managers often face a classic innovator’s dilemma due to the myriad handcuffs of organizational constraints and institutional client demands.

While independence comes at a large cost, it ultimately frees one up to freely pursue new lines of inquiry with far fewer constraints. The greatest ideas often stem from meandering research that connects the dots across many disparate areas. This research is often “blue sky” or involves taking contrarian positions. We believe that being an independent boutique helps ensure we can take the intellectual risks required for innovation.

Q: What questions interest you most? How do you decide what to research next?

I focus on research topics that meet two criteria. First, they need to be big problems that many people care about. We have done a lot of work on how to modernize value investing, which is a strategy followed by trillions of dollars of capital. Similarly, our most recent paper provides a framework for investing in crypto. Given the great potential of Web3, this is a question on many investors' minds.

Second, I will only tackle problems if I think I can offer unique insights. My analysis tends to be extremely data-intensive and often relies on machine learning and natural language processing. Thus, I tend to stick to topics that lend themselves to this data-driven approach. Fortunately, with the exponential growth of data, an increasingly dominant share of questions are now addressable using these techniques.

Q: Why is unstructured data so important in your work and what are its limitations?

Structured data constitutes less than 20% of all outstanding data. Furthermore, in finance it mainly consists of traditional market and accounting data that has been picked over by academics and quants for many decades. If the important research questions could have been answered with this data, they would have been solved by now.

In contrast, unstructured data has really only become “unlocked” in the past several years. The data are large, high-dimensional, and messy. One cannot read a patent abstract with a linear regression. Fortunately, advances in natural language processing and computing allow us to tame this unstructured data. Unstructured data can be extremely valuable, giving us insight into firms’ human capital, culture, and brand perception (among other things).

We believe that unstructured data will see much greater adoption by the investment industry in the next decade. Its main current limitation is that it is much harder to work with. However, this bottleneck will be gradually resolved as more data scientists are trained and machine learning tools are made more accessible to the masses.

Q: How do you determine which data sources to use in your research?

As mentioned, data is huge and growing at a dizzying rate. Rather than randomly walk through this data, we start with a fundamental investment thesis – that intangible assets drive value creation but are underappreciated by the market. From first principles, we can derive the four pillars of intangible value: intellectual property, brand equity, human capital, and network effects.

From here, we search for data sources that might help us quantify each pillar. These data vary widely across pillars. For example, job postings help us measure human capital but patents are more useful for IP. The key is that we do not use the “brute force” approach employed by some quant investors. We have found that throwing massive datasets into a deep neutral net leads to extreme overfitting. We try to be quite thoughtful in first narrowing down our search space.

Q: There is evidence that traditional quantitative factors have decayed as more capital is deployed to exploit them. How do you think about the risk of competition catching up to the new factors you’re identifying and staying ahead on innovation as a small firm?

First of all, we agree with this point around alpha decay. The capital cycle operates across firms and industries, so why wouldn’t it also operate in investment strategies, styles and factors? Profitable strategies attract risk capital, which competes down returns. Investors would be wise to accept this inconvenient truth.

We do believe that we’ve found ways to quantify intangible value that are overlooked by the market. Furthermore, we believe there are structural barriers protecting this lead. Our lens straddles both the “value-growth” and “quant-fundamental” borders. We believe that institutional constraints (e.g., Morningstar “style boxes”) discourage researchers from venturing into these borderlands.

Of course, we do not expect our head start to last forever. This is why we place innovation at the center of our platform. Over the past year, we’ve added dozens of new facets to our models (e.g., culture, brand personality). We believe our independence and small size fosters a nimble and iterative approach, which has in turn enabled these results. In other words, our boutique size is not a bug but a feature. Most firms fail to innovate not because of limited resources but due to perverse incentives that stifle creativity.

Q: What is the destination for Sparkline? What would you like the firm to look like in 5-10 years?

Sparkline’s goal is to build a world-class investment firm. The base layer of this organization is our research platform. We’ve invested considerable resources in building the AI/ML tools required to extract insight from unstructured data and are continually reinvesting in this tech. These tools allow us to answer an ever-expanding set of questions. We have an ambitious research agenda and believe our “intangible value” framework provides a jumping off point for many exciting areas of exploration.

On top of this research platform, we are building a family of innovative investment products. Our goal is to provide clients with exposure to “intangible value” and other insights in an efficient and scalable way. We believe our unique philosophy will produce differentiated investment returns over the next decade.

Finally, we hope to improve the broader discourse of market participants. We are discouraged by the dogmatic squabbling of “value vs. growth” and “quant vs. fundamental.” We believe that the future of investing lies in bridging these warring factions. One reason we are so committed to sharing our investment research publicly is to show investors that there is a middle path.

Thank you so much, Kai!

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