Patient capital (E)

0:00Before Jeff Bezos was the richest man in the world, he worked for somebody who was one of the richest men in the world. somebody who used to be a professor at Columbia University. What exactly did D.E. Shaw do that made him a master of the universe? Hey, it's Arav, and this is a special archived episode of Akimbo.

0:34D.E. Shaw was one of the pioneers of program trading. of high-speed trading on Wall Street. High-speed trading is so focused on speed that an entire industry grew up around it based on the speed of light. It's called co-location. If you've got a computer program that can trade stocks faster and a little bit better than other people can, where you're making a tenth of a penny or a hundredth of a penny or a thousandth of a penny on every trade, then getting your computer program closer to the stock market itself, not giving up 100 feet or 10 feet or even a foot of 10 base T wire Ethernet between you and the trading floor matters.

1:29Because if you can get in a picosecond before your competition, you can grab that tiny little bit of equity faster than they can. And so the co-location industry is all about renting space in a building as close as possible to the central trading computer and keeping the wires as short as possible. Here's an industry that's based on the picosecond that didn't even exist 40 years ago. Why does it matter? It matters because people who play with money for a living are doing a simple bit of math. And the math is, what's the return on investment? Well, there are two ways to make the return on investment go up.

2:20One way is that you can get more money back for the money you invest. But the other way, the other half of the fraction is you can keep the money for less time. That if it takes you a year to get a 10 % return versus a 5 % return in a month, you're going to do way better if you can get what seems like half the return in one twelfth the time. Because the stock market trading, investing, capitalism has always been in a hurry. How fast can we get our money back? Sure, we want things to grow, but the capitalist says, if I have a choice between being a month trader and a day trader, and everything else is the same, I'll trade every day.

3:20And then, of course, the day trader is undermined by the hour trader, who's undermined by the minute trader and the second trader. And now you get the idea. The people who are doing this program trading, who make$400 million,$600 million in a year, that means they're making more than a million dollars in a day. Do the math. That's a very expensive podcast you just listened to, isn't it? These people don't spend any time whatsoever thinking about the repercussions of the trades that they are making. They aren't even aware of the companies in which they're making them. They don't look deeply into the fundamentals.

4:07What they're focusing on are little tiny glitches doing arbitrage between what something should be worth and what it is currently trading at. These little micro-trades filling in the gaps make the market, in their words, more efficient. The question is, more efficient at what? That doing it faster, without any guidance, without any oversight, simply running a program causes us to make up stories about what is actually happening. Consider these two lines from a Bitcoin analyst. Bitcoin price struggles to break above$12 ,000. After several fake-outs, the Bitcoin price is hovering below the psychologically important$12 ,000 mark as the bulls are struggling to make a decisive move.

5:04Well, actually, no, that's not what's happening. What's happening is a bunch of day traders and computers are looking at what happened a second ago and are going to decide what's going to happen a second from now, with many, many completely unrelated decisions made at as close to the speed of light as possible. Let's call this impatient capital. Someone who is investing impatient capital wants to know just one thing. how fast is this going to go up in value? That their goal is to buy low and sell high and then do it again tomorrow. But there is an alternative. And the alternative, as coined by Jacqueline Novogratz, is patient capital.

5:54And patient capital says, wait a minute. When Henry Ford figured out how to make the Model T so cheap He unleashed a 90-year cycle that ended up paving the earth and creating a big part of our climate change problem. Now, if that had been his goal and he had been patient, he would have succeeded. That it turns out when you show up in a community and turn on the lights, people do things with the light. It turns out that when we are able to make investments in a system, the system acts differently. And if we are patient, still using the mechanism of capitalism at our side, it is possible to change the world.

6:52that the folks at McDonald's have changed the way a billion people eat, which has changed the way countless farmers do their job, which has changed the way families interact with one another. Now, you might not be building that system on purpose, but it was capitalism that built that system and the people who invested in it early, maybe they sold their shares after they doubled or tripled or quadrupled in price. But the system continues to ratchet. So the question we need to ask as we look at the systems around us, are we responsible for what happens to the system we invest in? And if we are willing to be patient in how we are going to engage with that system, what change could we possibly make?

7:54Consider the case of Western Seed. Western Seed is a company in Kenya. It turns out that if you use kernels left over from last year's corn harvest, your yield will not be nearly as good as if you buy fresh seeds designed for this year's planting. I'm not talking about GMO. I'm talking about doing it the old-fashioned way, hand-hybridized seeds that are quite fertile that will grow in your plot far better than if you used farm-saved seeds from last year. The good news about farm-saved seeds is that they are free. The bad news is they don't work very well because the things that are left over after you grow wheat aren't necessarily the best seeds to grow wheat.

8:43That a natural hybrid bred the way that seeds have been bred for millennia that is designed for this year will dramatically outperform farm-safe seed. a$30 bag of seed will produce a$3 ,000 difference in the yield of your farm in just four months. So the question is, if we go to somebody and say, want to buy$3 ,000 worth of wheat for$30 in seed, you would expect that most rational actors would say yes. Except we're working in a low trust environment. We're working with technology because it's new. We're working with a matter of life and death. If you screw up, your family's not going to eat. If these are just magic beans and they're not going to grow right, you've made a huge error.

9:38So it doesn't take one year to persuade most of the farmers to adopt Western seed. It might take five years or 10 years. The day trader doesn't know what to do with that. So the day trader goes and buys some Bitcoin. So the day trader goes and buys a coal mine. But here, patient capital can start to change things. Because over time, the norm in this community will change. The norm will go from people like us use farm-saved seed to people like us use Western seed. And once they've made that commitment, Western seed is going to have a competitor, and that competitor may make an even higher-yielding seed.

10:24And once higher-yielding seeds are embraced, the people in the community will be able to go to private school. The people in the community will be able to buy books. The people in the community will find other things to do to create productivity. And 10 years or 20 years or 30 years from now, this little bag of seeds is going to transform the way the community lives and acts. it's still capitalism but it's patient capital it is keeping track on a different time frame and it's difficult for it to coexist with the time frame of how many basis points can I get regardless of the short term cost to me and the people around me consider the case of D-Light a D-Light solar lantern sits outdoors all day long, and then at night it glows for three or four or five hours, which means you can do your schoolwork, which means you can charge your phone.

11:29That if you live in a village off the grid with no electricity, instead of the entire world going pitch black at 6 p.m., you can get work done. It means that instead of spending 10, 20, 30 cents a day on kerosene, a dangerous way to light up the inside of your home, you can buy a solar lantern, which will pay for itself in 90 days. And once you have a solar lantern and your productivity increases because now you can work at night, you have enough money to buy a bigger solar lantern, one that can charge several devices, one that can bring other elements of powered devices into your life. And so the patient capital ratchet continues to turn because the culture in your community begins to change.

12:25Instead of everything extinguishing at 6 p.m., instead of people dying from lung disease or fire, the quality of life goes up. Now, the people who are selling D-Lite solar lanterns are not giving them away. They are making a profit. They are not making a profit that would make a day trader happy, but they are making a profit nonetheless. And over time, this patience begins to pay off. And what we end up with is productive groups of millions or even billions of people who, over the course of a decade or two, produce far more value than the venture capitalist who invested in a juicing machine that was supposed to double in price in a week.

13:20The late, great Zig Ziglar built his career on one profound sentence. You can get everything you want if you'll just help enough other people get what they want. Now, the robber barons in the masters of the universe have shortened this to, you can get anything you want. That without regard for how it will impact other people, folks who have plenty are tempted to say, I can have anything I want. And to pay for that, they focus on day trading. To pay for that, they focus on basis points. on what kind of return can I get from this interaction, from this email, from this investment. But what happens if we just take the second half of the sentence?

14:12What happens if we approach the problem of culture like this? If you just help enough other people get what they want, period. What would happen to our culture if our bias was if you just help enough other people get what they want. Because it's actually not a zero-sum game. It's only zero-sum if we're impatient. It's only zero-sum if we're buying and trading by the picosecond because for every winner there has to be a loser. That's how the market works. But if we bring patience to the equation, the rules are fundamentally different. It turns out that if I hold the door open, I can help the person behind me.

15:02And it turns out that if I create a culture where other people are holding the door open, where technology shows up not to belittle or enslave other people, but shows up simply to create more abundance and less scarcity, we play a different game. So, thanks to Zig for getting us started. but in fact, you can help enough other people get what they want. Thanks for listening. We'll see you next time.

15:55Roberta Perry. My question is... And that completes my question. I love to hear from you. If you've got a question, I hope you won't hesitate. We need more of your questions. Visit akimbo.link, that's A-K-I-M-B-O dot L-I-N-K, and click the appropriate button. While you're there, you can check out the show notes. We got this question last week. I think it will make you think. Hi, Seth. This is Oliver from Austria. I love the show on artificial intelligence. I just have one question. What do you think consciousness actually is? Where does it come from and why do we have it? And by consciousness, I mean the experience that it is like something to be me.

16:43So, for example, I feel like I am speaking into the microphone right now, as opposed to an algorithm which is just going through instructions and not aware of itself. Thank you. Love the show. Let's start with this. If there was someone on earth, a friend of yours, a colleague, perhaps your spouse, who didn't have that noise in their head, who didn't have the ongoing narrative all the time, if, in fact, there is not always, Sonder, the realization that other people have a noise in their head the way you have a noise in your head? What if there was someone who didn't? How could you tell? How could you tell the difference between someone who is a living, breathing, functioning human being who had all the internal doubts and repercussions and do-overs and someone who just acted like they did.

17:46And of course, you couldn't tell the difference. It's sort of a Turing test, but with real people. That there is no external evidence that someone has that buzzing going on. And it may be, as leaders in the area of philosophy of mind are now arguing, it may be this noise in our head is just a historical artifact. that dogs don't have it, that snails don't have it, that pigeons don't have it, and that maybe people have it differently from one another because we can't tell. And if we can't tell, then does it even matter? Here's the example I've given before that really resonated with me. Let's think about a football game.

18:31Let's think about the idea that there's instant replay, and there's play-by-play, and there's the color commentator. Now let's imagine that a play has just unfolded before our eyes. What happens is the quarterback drops back to pass. He fakes a handoff. He throws a long bomb. It's going, it's going. It's a touchdown. Now, you just heard what the play-by-play announcer was saying. Second and 13. Pickett under pressure. Puts it up deep. And oh, we'll grab by Brandon Lloyd. An incredible catch. A one-handed leaping catch by Brandon Lloyd. This is one of the best catches you'll ever see, ever. You heard it after you saw the play on the field.

19:17Of course you did, because the announcer also saw the play as you saw the play. And after the fact, the announcer made up all of this story about what you just saw. For a moment, imagine what it would be like if it was in the reverse order. Imagine what it would be like if when you were watching a football game, the announcer, sped up by 10 seconds on the track, said what was about to happen, and moments later, it did happen. How weird would that be? Well, we have come to be comfortable with the idea that we say stuff in our narrative brain, in our conscious brain, and then we do it. But it's probably true that the opposite is the case, that at a base chemical level, much quicker than we come up with the narrative, we've already decided to do something.

20:14We're already doing something. And then, only then, only after that fact do we come up with the narrative, that it's possible using functional MRI scanning and some thoughtful mind experiments to prove that this happens all the time. That really what we've got in our head is a play-by-play announcer. It's possible that this evolved over time, that human beings talked to themselves, and that that was the version we had first of what we now call consciousness. but then our brains evolved to the point where we could talk to ourselves without talking out loud. That language leads to this notion that we have a little man or a little woman in our head who's telling us what to do, but we don't.

21:08So that's my take on the philosophy of mind. I could go on about it all day long, but it's sort of mind-blowing because A, Sonder is really cool, that moment that you realize other people also have fears and dreams, and then B, realizing that maybe not everyone does, and that it is entirely possible that everyone but you is acting like they do. I think that's unrealistic, but we know that there are people in the world who do not report having the same sort of neurotic narration going on in our head that many of us do. I hope that resonates. Thanks for listening and thanks for your questions. We'll see you next time.