Review of The Difference Between God and Larry Ellison by Mike Wilson

If the title of your biography is "The Difference Between God and [You]" (Larry Ellison in this case), then obviously you are a jerk.

Larry Ellison says that Steve Jobs was his best friend (they may have been each other's only real friends), which is perfect because they were both jerks.

That's the thing about these winner take all business competitions. They select for jerks who don't spend time with their families, who sell vaporware which hurts honest competitors, who trick investors with bad accounting to get a lower cost of capital.

IBM came up with the first relational database system, called System R. Ellison and his partners read IBM's papers on it and created Oracle. Why didn't IBM do what Oracle did? Apparently, a bit of innovator's dilemma:

"A lot of people-executives, programmers, salespeople, technical support people-had built their careers on IMS. Indeed the engineers at [IBM] were still making improvements in IMS when their colleagues in San Jose published the first of the System R papers. According to longtime industry consultant Jeffrey Tash, the IMS loyalists 'fought like crazy' to keep the relational product from going to market. They did not want IBM to sell anything that might replace the product they had built.

At first IBM tried to resolve the conflict between IMS and System R by creating a database that was somehow both relational and hierarchical."

It's not clear that RDMS started out inferior to the IMS system, as true disruptive innovation theory requires, but the point about internal politics preventing a new opportunity is there. As I said in my review of Innovator's Dilemma:

"managers bury their heads in the sand because it's the shareholders' money anyway. They are focused on maximizing the present value of their salaries, which means making sure Bob's division doesn't try to get you fired."

How was Ellison able to start Oracle? He and the two other Oracle co-founders worked for a company called Precision Instrument. The company was outsourcing some software development work, and these three decided that they would form a company to bid on the job:

"Ellison, the mastermind, remained an employee of Precision Instrument, with responsibility for overseeing the contract. But he made it clear to is employers that he would soon resign to join the new venture."

Not many people would be aggressive enough to use their executive position at company A to launch their own company B with a built-in customer.

3/5

"Soon every company will be a software company."

Essay:

"Why are software-based companies taking over the world? The answer is simply that powering companies by software allows them to be responsive and data-driven and, hence, able to react to changes quickly."

Software = nimble. But there are other ways to be nimble, like being small.

A correspondent writes, "Yet there are calls to end 'software patents.' I wonder if in the late 1800s and early 1900s there were calls to end 'gear and sprocket' patents."

"Amish Hackers"

"Amish lives are anything but anti-technological. In fact on my several visits with them, I have found them to be ingenious hackers and tinkers, the ultimate makers and do-it-yourselfers and surprisingly pro technology."

The Toyota Way

Great story about Toyota:

"[T]oyota was similarly extreme in how it exercised kaizen and things like root cause analysis. If an oil puddle is found on the factory floor, most companies would quickly get someone to clean it up before it causes an accident. At Toyota, they would quickly get someone to place warning cones and tape around the puddle, and then they would figure out where the puddle came from. Was a leaky forklift parked here? Does one of the pipes overhead have a leak? Is a nearby robot flinging a few drops of oil from it's joints every minute? The oil puddle is a sign of a problem somewhere else, possibly a more important one, and you don't clean it up until you've figured out where it came from and fixed the cause."

Owners With No Skin in the Game - Accounting Conservatism, Innovation, Shareholder Elections, and Passive Management

This study on the effects of accounting conservatism is worth thinking about:

"tracked more than 70,000 publicly traded U.S. companies from 1976 to 2006 and found that the more conservative a company was with its accounting procedures, the greater the impact it had on its ability to innovate.

Businesses with the most conservative accounting approach filed about 10 percent fewer patents and had fewer patent citations. They invested less in R&D, and, the study found, the cash flows generated by the fruits of this R&D tended to have shorter horizons. 'For the very conservative firms, cash flows from patents are realized 1-2 years out. For the more liberal firms, the cash flow from patents is realized 5-6 years out,' Hilary adds. 'It means you have safer companies, but fewer blockbuster innovations.'"

Yet another reason why you would expect private companies (Mittelstand) and "owner-operators" of public companies to outperform. Permanent capital always allows for longer time preference. Shortest time preference is a non-owner CEO with levered options exposure, close to retirement, who guts the company to boost the stock price.

The real problem is the boards that are hiring these CEOs with no skin in the game. So shouldn't boards be figuring this out and hiring better managements? How could they keep doing such a bad job?

The answer is illustrated perfectly in this recent NYT article, "Bad Directors and Why They Aren’t Thrown Out", about the retention of the HP directors in the wake of the Autonomy acquisition. Shareholders get to "vote", but the outcomes are the same as a North Korean election,

"shareholder efforts to remove directors in uncontested elections rarely succeed or come close, even in egregious circumstances. Last year, there were elections for 17,081 director nominees at United States corporations, according to the service. Only 61 of those nominees, or 0.36 percent, failed to get majority support. More than 86 percent of directors received 90 percent or more of the votes. Of the 61 directors who failed to get majority approval, only six actually stepped down or were asked to resign. Fifty-one are still in place, as of the most recent proxy filings."

There are two reasons the elections don't work. First, they are rigged: company boards of directors decide the number of nominees and they nominate only as many as there are open seats, so that all nominees are elected because they only need a single yes vote.

Second, and ultimately more importantly, the biggest shareholders are beholden to the companies! The largest owners of big cap companies are the big mutual fund and asset management companies, which have a conflict of interest because they either manage company retirement plans or are hoping to win the business. Either way, it must help to have the reputation as a "team player" when it comes to voting their clients' interests.

These big mutual fund companies are seeming more and more like big marketing machines that don't put much effort into security selection or governance of the companies that they nominally own.

A great look into the security selection aspect is this presentation on "active share" -  a measure of the degree to which a fund's holdings vary from the benchmark (e.g. S&P 500). Passive management has become more and more popular over the past decade. Look at the chart on page 15. Once a large cap fund rises about $10 billion AUM, active management falls off a cliff.

I'd guess there are two big drivers of passivity at big fund managers. First the less money you spend on security selection and governance, the more of the fees flow to the bottom line. (And you don't get paid for performance, so a dollar spent on analysts only makes sense if it yields more AUM than a dollar spent buying TV ads on weekend golf games.)

Second, if you can get people to believe in buy-and-hold/indexing/EMH, it absolves you of responsibility for losing money in recessions. No tough decisions about how to handle adverse demographic and political trends have to be made.

Lessons From the Largest Computer Ever Built

Locklin:

"The third and final lesson I’ll take from the development of SAGE: break down the problem into manageable pieces, and solve them. They used the technology on hand in the 50s; vacuum tubes, telephone lines and CRTs. They didn’t postulate any significant breakthroughs in order to get ‘er done. They made do with what they knew was possible As such, the path to success was obvious. Engineering genius came along the way. If you don’t have manageable pieces, you don’t have a real project: you have a wish. What are the manageable pieces needed to make “nanotech” or controlled nuclear fusion a reality? What are the manageable pieces needed to make quantum computing or deriving all electrical power from the sun a reality? I don’t know, and I don’t know of anybody else who does: therefore, such things do not count as legitimate long term projects."

"How the Mid-Victorians Worked, Ate and Died"

Paper

Analysis of the mid-Victorian period in the U.K. reveals that life expectancy at age 5 was as good or better than exists today, and the incidence of degenerative disease was 10% of ours. Their levels of physical activity and hence calorific intakes were approximately twice ours. They had relatively little access to alcohol and tobacco; and due to their correspondingly high intake of fruits, whole grains, oily fish and vegetables, they consumed levels of micro- and phytonutrients at approximately ten times the levels considered normal today.

Within two generations, however, male health nationally had deteriorated to such an extent that in 1900, five out of 10 young men volunteering for the second Boer War had to be rejected because they were so undernourished. They were not starved, but had been consuming the wrong foods

The fall in nutritional standards between 1880 and 1900 was so marked that the generations were visibly and progressively shrinking. In 1883 the infantry were forced to lower the minimum height for recruits from 5ft 6 inches to 5ft 3 inches. This was because most new recruits were now coming from an urban background instead of the traditional rural background (the 1881 census showed that over three-quarters of the population now lived in towns and cities).

Video: "Time-lapse: Space shuttle Endeavour's trek across L.A."

Video: "Herstellung einer Generatorwelle"

Happy Friday!

WSJ: "Paving the Way for Driverless Cars"

One technological development I'm watching for is the driverless car. This great WSJ article summarizes the possibilities that they offer:

On local streets, signal timing contributes to hundreds of millions of vehicle hours of annual delay because it is based on out-of-date historical data that inaccurately measure relative traffic volumes at intersections. Without signals based on real-time traffic flows, driverless vehicles may not be able to accurately align their speeds with them.
[...]
The driverless car represents one of the most amazing breakthroughs in safety and quality of life in recent history. Instead of focusing on enormously expensive high-speed rail as our transportation future, the government would do well to stop hindering driverless cars by its obsolete thinking about our nation's roads.

Of course, coordination between driverless cars could allow much more efficient traffic management and use of the road network. Another bullish take,

"the driverless car [is] as important as anything developed between 1930 and 1970. It will do the work that currently occupies something like 3% of our workforce full time AND save driving time for the rest of us AND reduce transport costs by eliminating the need for individual cars AND reduce need for parking lots. And it won’t take many of Google’s billions to develop."

The driverless car invention will be absolutely amazing and substantially increase productivity. If combined with two additional inventions it would be extraordinary: thorium power and electric vehicles. That would mean that transportation could be basically free.

Right now transportation is pretty expensive. What would change if the marginal cost fell drastically, an order of magnitude or more? The best way to think about this (h/t to a correspondent) is Gilder's Law - "the best business models waste the era's cheapest resources in order to conserve the era's most expensive resources."

What if, in addition to computing power, transportation over land was nearly free? Right now an expensive resource is real estate. Coveted urban real estate (~1% of land) is 3,4,5 orders of magnitude more expensive than the median. So warehouse your goods someplace cheap and truck them to the consumer instead of having a big box store (this trend is already in place).  

What else might change? How much easier would it be to borrow something if it could be brought to you with no human intervention? So, why own goods that are rarely used - rent them. Again, something that is already happening with power tools, for example.

Why don't we just eat mongongo nuts?

This is from Jared Diamond's essay about the idea that agriculture was a mistake. But this quote is hilarious:

"[T]he average time devoted each week to obtaining food is only 12 to 19 hours for one group of Bushmen, 14 hours or less for the Hadza nomads of Tanzania. One Bushman, when asked why he hadn't emulated neighboring tribes by adopting agriculture, replied, 'Why should we, when there are so many mongongo nuts in the world?'"

Apparently, the mongongo nuts are 57% fat and 24% protein by weight. Very paleo!

Also, rather than laboriously harvest them yourself, you can find them all in one place (with the nut meat intact!) in piles of elephant dung. Mmm... hunter-gathering.

"New Technology May Spell the End for NYC’s Bottom-Rung Lawyers"

"[N]ew technology is threatening to put New York's growing subclass of mercenary drudge work lawyers out to pasture. The Southern District of New York recently became the nation's first federal court to explicitly approve the use of predictive coding, a computer-assisted document review that turns much of the legal grunt work currently done by underemployed attorneys over to the machines."

Atlantic Article on Dairy Advances

This is an interesting article. Big data!

In 1942, when my father was born, the average dairy cow produced less than 5,000 pounds of milk in its lifetime. Now, the average cow produces over 21,000 pounds of milk. At the same time, the number of dairy cows has decreased from a high of 25 million around the end of World War II to fewer than nine million today. This is an indisputable environmental win as fewer cows create less methane, a potent greenhouse gas, and require less land.
[...]
That meant that some bulls became incredibly sought after. The number two bull of the last century, Pawnee Farm Arlinda Chief, had more than 16,000 daughters, 500,000 granddaughers, and 2 million great granddaughters. He's responsible for about 14 percent of all the genetic material in all Holsteins, USDA scientists estimate.

Bearish for milk prices, too. Real milk prices have fallen at least 60 percent over the past century. It is generally a bad idea to bet on commodity prices. The only exception is commodities selling for less than marginal cost of production, like our friend natural gas. It is good to buy free natural gas reserves, as well.