One Step Up #59
Portfolio Optimization, Semiconductors, Morgan Housel on How the World Works, Ignorance x Confidence + more
Dennis Rodman and the Art of Portfolio Optimization
Rodman was better at rebounding relative to his peers than any other player at any other skill, including points and assists. At 6’7’’ in an era of powerhouse 7’+ centers, he garnered a remarkable and statistically unmatched 30% of the defensive rebounds, and 17% of offensive rebounds, while simultaneously guarding anyone from Magic Johnson to Shaq. He led the league in rebounding a record seven consecutive years. At his peak, he was over six standard deviations better at rebounding than anyone else in the league. In one game Rodman single handedly outrebounded the opposing team. No other player has ever achieved this degree of statistical separation in any other skill, even his three-time teammate, Michael Jordan.
Rodman dominated the game without scoring by dramatically improving the statistical efficiency of his teammates via rebounding and defense. His rebounding prowess on both ends of the floor resulted in countless second chance scoring opportunities and higher per possession utility. How many Michael Jordan jump shots, Isaiah Thomas layups, or David Robinson dunks began from a Rodman rebound? Rodman had a measurable impact on the per-possession efficiency of his team when played. Counter-intuitively, his team’s shooting percentages improved dramatically when Rodman was on the floor despite the fact that he was a terrible shooter himself and rarely needed to be guarded!
Rodman tops the list of players with positive team margin of victory differential with him in the lineup vs. without him. Rodman could not shoot consistently outside of five feet, was incapable of carrying a team’s offense by himself, however when paired with efficient scorers he amplified team offensive efficiency to a higher level. Rodman dramatically improved the win-loss record of every team he joined (vice versa for those he left) including a record setting 72 win 1995-1996 Chicago Team. In total, he was a key member of five championship teams, two of which are widely considered among the best ever.
History and data shows that great defensive players like Rodman are the difference between mediocre and championship teams. A great defensive player can dramatically increase the per possession efficiency of a team’s offense, even if that player is subpar offensively. Volatility and convexity exposure acts the same way for the institutional portfolio, dramatically increasing the risk efficiency of composite returns, despite flat to negative carry during bull markets.
I Saw the Face of God in a Semiconductor Factory
But unlike copper and alfalfa, chips aren’t raw materials. Perhaps they’re currency, the coin of the global realm, denominated in units of processing power. Indeed, just as esoteric symbols transform banal cotton-linen patches into dollar bills, cryptic latticework layered onto morsels of common silicon—using printmaking techniques remarkably similar to the ones that mint paper money—turns nearly valueless material into the building blocks of value itself. This is what happens at TSMC.
The race in semiconductors is to the swift, and to the precise. Because velocity and precision are generally at odds in business—you move fast, you break things—TSMC’s workforce is legendary. If you see the manufacture of semiconductors as nothing but factory work, you might slag the project as monotonous or, more callously, “on the spectrum.” But the nanoscale work of chipmaking is monotone only if your ears aren’t sharp enough to hear the symphony.
Two qualities, Mark Liu tells me, set the TSMC scientists apart: curiosity and stamina. Religion, to my surprise, is also common. “Every scientist must believe in God,” Liu says.
Learning from Helzberg Diamond's Barnett Helzberg Jnr
Gem of an article - some of my favourites below:
Humility: “I love the thought that god gave us Mozart to keep us all humble. I’ve been blessed with many opportunities to remain humble and I do believe being the dumbest guy in the room can be the smartest thing you can do as a leader.”
Ideas: “A new idea is delicate. It can be killed by a sneer or a yawn; it can be stabbed to death by a quip and worried to death by a frown on the right man’s brow.”
Loyalty and complaning customers: “A recent Wall Street Journal explained the incredible value of making the angry customer happy compared with the value of the loyal customer. The FedEx concept of calculating the lifetime value of loyalty (that is, $20,000 per year X 20 years is a $400,000 customer) dramatically portrays this concept. Be proud of the fact that unhappy customers think enough of you to express their unhappiness. The biggest loss to your business are the customers who never come back to complain about a perceived problem. Instead, they tell all their friends that they’ll ‘never deal with that lousy company again.’ One study I read estimates that one unhappy customer tells 18 other people about a bad experience. What a huge missed opportunity. I much prefer that formerly unhappy customers tell their friends how we fixed their problems.”
Focus: “Among our happiest and best decisions were throwing out the dead merchandise horses and finding that the success of the company increased proportionately. We eliminated china, crystal, all flatware, luggage, radios, small appliances, and other non-jewellery items - ad infinitum and ad nauseum. The practice of optometry in a few stores ended. We found the less we sold, the better we sold what was left: fine jewelry. The time to give up on peripheral items had come; we were early in the game of giving them up. The company gained great focus and, doing fewer things, became far more successful.”
One Big Web: A Few Ways the World Works
It might sound crazy, but once you understand the basic principles of your profession, you might gain more expertise by reading around your field than within your field. Connecting dots between fields helps you uncover the most powerful forces that guide how the world works, which can be so much more important than a little new detail that’s specific to your profession.
Immunity: Derek Thompson of The Atlantic once told me: Money is more like a vaccine than a performance-enhancing drug. It can prevent a lot of misery, but it won’t necessarily make you happier.
Maximum scale (ecology, physics): Author Liz Marvin writes about giant sequoia trees:
This amazing tree can grow as tall as a skyscraper, but it still knows when to stop and take stock. Trees use a clever process of evaporation to pump water up to the canopies, where photosynthesis takes place. But the laws of physics dictate that this only works up to about 390 feet. The tallest tree on earth is a giant sequoia called Hyperion that stands at 379 feet. See?
This applies to businesses, products, marketing campaigns, and personal networks: There is a maximum scale – a natural ceiling – and if you try to push past it the system falls apart.
(the article is a deepdive on Rolex and why the autghor believes it is counterintuitively one of the best known brands in the world, and also one of the least known businesses)
The best brands in the world have a mindshare of distinctive positive associations that come from decades of cultivating their image. This stems from making high-quality products, clever marketing, and methodical merchandising. This moat is intangible, and although it’s impossible to measure exactly, it’s incredibly valuable: it’s the biggest competitive advantage that many brands possess. Warren Buffett understood this when he invested in Coke, Lou Simpson when he invested in Nike, and Bernard Arnault as he built his LVMH luxury empire.
Luxury brands are not like regular brands though. They possess a different set of qualities and follow different rules, almost opposite to traditional business.
Luxury is a spectrum. According to Brunello Cuccinelli, there are three types of luxury brands. If we imagine a pyramid, at the top is true or absolute luxury, in the middle is aspirational luxury, and the bottom accessible luxury. The top is where only the very best of breed sit and there are only a handful of them for any given category. Those that sit below can only dream of one day becoming part of that prestigious club. In the words of RH’s Gary Friedman, climbing the luxury mountain is incredibly hard, and has rarely been done. What separates the top from the bottom is having traced their own path for a very long period of time.
A true luxury brand has the following characteristics:
An obsession with high quality and craftmanship. It innovates and surprises, but always stays true to their core image.
It’s exclusive and scarce. Products are hard to get. Consumers make a deliberate effort to get their hands on them, not the other way around.
It evokes a certain status in the mind of consumers (both the buyer and the general public). This could be wealth, refined taste, appreciation of culture or history.
"Sheer ignorance - you know, there's no confidence to equal it.
From 5:24 onwards
Till next time.