WTF – Tim O’Reilly – Lightbulbs On!

What's the Future - Tim O'Reilly

Best Read of the Year, not just for high technology, but for a reasoned meaning behind political events over the last two years, both in the UK and the USA. I can relate it straight back to some of the prescient statements made by Jeff Bezos about Amazon “Day 1” disciplines: the best defence against an organisations path to oblivion being:

  1. customer obsession
  2. a skeptical view of proxies
  3. the eager adoption of external trends, and
  4. high-velocity decision making

Things go off course when interests divide in a zero-sum way between different customer groups that you serve, and where proxies indicating “success” diverge from a clearly defined “desired outcome”.

The normal path is to start with your “customer” and give an analogue of what indicates “success” for them in what you do; a clear understanding of the desired outcome. Then the measures to track progress toward that goal, the path you follow to get there (adjusting as you go), and a frequent review that steps still serve the intended objective. 

Fake News on Social Media, Finance Industry Meltdowns, unfettered slavery to “the market” and to “shareholder value” have all been central to recent political events in both the UK and the USA. Politicians of all colours were complicit in letting proxies for “success” dissociate fair balance of both wealth and future prospects from a vast majority of the customers they were elected to serve. In the face of that, the electorate in the UK bit back – as they did for Trump in the US too.

Part 3 of the book, entitled “A World Ruled by Algorithms” – pages 153-252 – is brilliant writing on our current state and injustices. Part 4 (pages 255-350) entitled “It’s up to us” maps a path to brighter times for us and our descendants.

Tim says:

The barriers to fresh thinking are even higher in politics than in business. The Overton Window, a term introduced by Joseph P. Overton of the Mackinac Center for Public Policy,  says that an ideas political viability falls within a window framing a range of policies considered politically acceptable in the current climate of public opinion. There are ideas that a politician simply cannot recommend without being considered too extreme to gain or keep public office.

In the 2016 US presidential election, Donald Trump didn’t just  push the Overton Window far too to right, he shattered it, making statement after statement that would have been disqualifying for any previous candidate. Fortunately, once the window has come unstuck, it is possible to move it radically new directions.

He then says that when such things happen, as they did at the time of the Great Depression, the scene is set to do radical things to change course for the ultimate greater good. So, things may well get better the other side of Trumps outrageous pandering to the excesses of the right, and indeed after we see the result of our electorates division over BRexit played out in the next 18 months.

One final thing that struck me was how one political “hot potato” issue involving Uber in Taiwan got very divided and extreme opinions split 50/50 – but nevertheless got reconciled to everyone’s satisfaction in the end. This using a technique called Principal Component Analysis (PCA) and a piece of software called “Pol.is”. This allows folks to publish assertions, vote and see how the filter bubbles evolve through many iterations over a 4 week period. “I think Passenger Liability Insurance should be mandatory for riders on UberX private vehicles” (heavy split votes, 33% both ends of the spectrum) evolved to 95% agreeing with “The Government should leverage this opportunity to challenge the taxi industry to improve their management and quality control system, so that drivers and riders would enjoy the same quality service as Uber”. The licensing authority in Taipei duly followed up for the citizens and all sides of that industry. 

I wonder what the BRexit “demand on parliament” would have looked like if we’d followed that process, and if indeed any of our politicians could have encapsulated the benefits to us all on either side of that question. I suspect we’d have a much clearer picture than we do right now.

In summary, a superb book. Highly recommended.

Blockchain: the ultimate and positive chaotic disruption

Light Bulb Lit Up

The future is here. It’s just not evenly distributed yet“. Those were the words of Tim O’Reilly, owner of O’Reilly, producer of many of the definitive books on software systems and associated conferences. His company’s Radar blog is also noteworthy for it’s excellent peeks into the future of high technology related products and services. One subject seems to pass it by, and I can’t help think the implications are much more significant than people really comprehend yet; that of the technology that sits behind Bitcoin (Bitcoin itself is but a small part of it).

The mechanics of Bitcoin are described in the original Satoshi Nakamoto paper here. Alternatively, an earlier introductory blog post from me.

The main truly disruptive innovation with much wider utility is that of a Blockchain. A public record that is stored across many hundreds or thousands of machines, in hundreds of different legal jurisdictions, but together forming a definitive record of activity without any central control. A sort of ledger that lives in the worlds commons, and operable in a way that ensures a single digital object cannot be “double spent”; only transferred between entities.

Much of the economic activity in the world is currently served by institutions who possess “choke points” through which activity is carried and who charge (in some way) at the gate. If I want to send cash to someone, I typically pay commission or transaction charges to a number of institutions to do so. There are many areas that could be unleashed when transaction costs tend to zero and the record of some activity is stored in a publicly accessible entity without any central control:

  • Proof of Existence. One of the innovations of GIT (the Source Code Control System written by Linux author Linus Torvalds) is that every individual document/file is recorded in it’s database as a “hash”. When any piece of Digital material is passed through this piece of maths, the hash is a 8 byte “signature” that is effectively unique (the change of two random documents having the same hash is circa 1 in 83 million). So, you can immediately see, with very little comparison work, whether two documents are exactly the same or different. Manuel Araoz, a 25-year-old developer in Argentina, uses a blockchain to prove authoritatively that you had a specific document in your possession on a specific date, without having to publicly publish it’s content. The fact that electronic signatures can be part of the document being held (and hashed with the rest of its surrounding content) means that you have a distributed contract “system of record”.
  • Namecoin. The current Domain Name System (DNS) is effectively the web’s telephone directory that translates memorable names (like www.bbc.co.uk) into the Internet Protocol Address(es) at which that web site resides (in this instance, 173.194.115.96 and 10 others). However, the central repositories where this information is stored can be systemically blocked or willingly corrupted by owners of the various choke points, or the governments under whom they operate from a legal jurisdiction perspective. Namecoin is an attempt to mirror the DNS in a widely distributed blockchain, with domain names ending “.bit”, and hence operationally difficult to corrupt or censor. Although I have no useful application for it at this stage, I have already registered “ianwaring.bit” to reserve my presence there.
  • Music Distribution. Following a Kickstarter type model, would you like to buy shares in a specific musicians new song? That way, you’d see a return on your investment if it proved popular and you managed to help promote it widely to a bigger audience. Piracy in reverse! The Blockchain protocol does have the ability to run such Assurance Contracts (ie: this project is funded only if pledges of a specific value are achieved by a certain date, or annulled if the target is not met by then), so there are similar precedents for Venture Capital, or even what has to date been tax funded Government projects for the public good. I sometimes wonder how HS2 would do if the UK Government ran the whole thing as a Kickstarter project, and see if the beneficiaries were willing to put money where their political mouths are!
  • Voting. One of the ultimate choke points where MPs act as a proxy for the voters in a geographic area they represent for a multi-year term. The act of multi-year elections is probably an edge case; it’d be more radical if I could choose when I want my MP to act as my proxy and when I wish to register my share of the decision making process personally instead. I somewhat doubt that folks currently in Westminster would wish to put their constituents in control of their own interests, despite how refreshing and re-engaged we’d feel as a result.
  • Vendor Relationship Management. This is the ultimate result of Doc Searl’s work on VRM, where we ask commercial entities to bid for our business. Given the low or zero transaction cost, you could delegate a lot of the associated work to software agents if the product or service was a commodity. Like a Taxi or self-driving car, as given in this excellent 25 minute talk by Mike Hearn, an ex-Google employee (it is a great talk to listen to – not least the effect when some of the actors in transactions are machines themselves, complete with their own bank accounts and long term trade related decision making). Even Yelp, TripAdvisor or Social Media recommendations would be more plausible if subjected to the authoritative “someone I can trust” standards that the underlying technology can provide.

I’d thoroughly recommend this article on Business Insider, which does a great job of highlighting some of the possibilities.

There are many challenges ahead. Some regulatory (I hope Politicians and our Public Servants do act in our long term best interests, without being victim of the lobbying of interests rendered on the wrong side of , or distorted out of shape, by a drive for our mutual good). Some technology (things like Bitcoin will need improvements to bring down the current 10 minute delay to provide definitive authentication, and to handle an increase in Blockchain size to handle the transaction volumes currently seen by Mastercard and Visa networks). But the potential applications are dizzying both in number and of disruptive impact to everyone.

As Fred Wilson, notable VC, said recently: Let’s go back and revisit the big innovations on the commercial Internet over the past twenty years. TCP/IP, HTTP, The Browser, Search, Social, Mobile, Blockchains. Each one of those innovations drove an investment cycle. Our 2004 fund was built during social. Our 2008 fund was built during social and the emergence of mobile. Our 2012 fund was built during the mobile downturn. And our 2014 fund will be built during the blockchain cycle. I am looking forward to it.

Bitcoin (which I described in greater detail here) was only the start. The main challenge now is one of identity, and protecting it from interlopers. You have to keep your private key insanely private (even to the extent of keeping it off Internet connected machines), as that is your definitive personal identifier that someone else could use to masquerade as the real you everywhere online. At least until something can check your own physiology (it is really you), and your state of mind (you haven’t been sectioned, frail nor threatened), prior to any transaction being authenticated. Or is that what the Apple iWatch will be all about?

Apple, Sapphire, Liquid Metal & a relentlessly stationary Stock Price

Old Apple Rainbow Logo

I started running my own SIPP around one year ago, put 70% of the funds in an accumulating 100% Equity Index Tracker, and bet the rest of various US high technology stocks. So far, quite happy with overall progress. Just waiting for the recent split in Google shares to work through, but i’m beating 10% returns overall, which is tremendous.

The one bizarre one is Apple. I bought 30 shares at $523.47 (cost of around £9,593) and they are, after a year, sitting at a 1.43% loss – £137.09 overall – not big, but not showing signs of progressing either. That despite hoovering up over 70% of the mobile phone industry profits worldwide, and having an iPhone business that in itself is bigger than virtually every other company in the world. 2013 revenues of $170.91Bn.

The stock market seems to think Apple will no longer be able to continue it’s last 5 year bottom line compound annual growth rate of 39%, so are treating it as a slow and steady cash generative company, rather than one whose growth rate will continue undiminished. A Price/Earnings multiple of 13x, way lower than that of Google (30x) and that of Amazon (580x) – both of which have given me healthy returns.

Long Memory sometimes helps

My one respite has been in remembering, at the turn of the year, that Apple had signed a 2 year licensing agreement with a company called Liquid Metal (LQMT), nominally to reserve an exclusive option to use their impressive alloys – nearly 2 years ago. They’d also taken an equity investment in GT Advanced Technologies (GTAT), who were to use the investment to build a production facility in Arizona capable to manufacture phone-size displays made from Sapphire. Then a small smoke signal appeared in my Twitter feed, where someone said that Apple had filed a patent related to Liquid Metal at the US Patent Office in November 2013.

Hmmmm. I then started to get emails from the Motley Fool, saying that they knew of a recent patent filing, and that it was going to be a good opportunity to “get in early” on some secret stock they had the other side of a sales pitch for one of their investment programs. I’m already a subscriber to one of their other initiatives, so just sat that out, but tried to stay very tuned to LQMT (trading at 20c/share) and GTAT (who were around the $9 mark).

Buy buy buy

With a lack of signals arriving, I thought something would have to out ahead of the February end date of the Liquid Metal license, given that Apple had already put a patent in place using that technology. So, with around £4,700 cash in my SIPP, I elected to buy 22,000 shares of LQMT at $0.20 and 478 shares of GTAT at $9.22 on the 22nd January.

A couple of days later, news broke that employees of Apple had filed at least 7 more patents related to Liquid Metal alloys, and that GT Advanced Technology were putting pressure on US regulators to speed up the building of their new Arizona facility.

One blog I found along the way examined the Liquid Metal patents in great detail and were a fantastic, well researched read from a German expert. See: Philip Guehlke’s blog at http://www.techinsighter.com/

The Liquid Metal shares went off like a Roman Candle, zapping up from $0.20 to $0.39 in a week – and then meandered back down, sticking around the $0.29 mark. GT Advanced Technology were also climbing, but much less aggressively – though still over 20% in the first week.

I’m not used to holding shares that turn out to be quite that volatile, so I did an exit stage left on profits of 30.9% and 24.2% respectively – within 3 weeks of their original purchase. £1,450 profit. Well, that’s more than paid off the lack of Apple ROI ten times over. That said, LQMT shares are back at $0.22 now, and GTAT up at $16.00 or so, but overall happy with my lot.

Out of daily wild swings

I’m now back to my traditional position in long term buy and hold stocks only. That said, I do keep thinking about a few things as I see the buy side and sell side analysts batting Apple, Amazon and Google over tennis nets every day.

The way the market treat Apple is pretty unique. They’ve seen new product categories roll down the Apple conveyor belt to unprecedented worldwide success. iPod, iPhone, iPad… and they’re all staring down looking for evidence of yet another golden egg on its way. Contrast that to Amazon, who reinvest every penny of potential profit into building out their worldwide e-commerce infrastructure – to such an extent, the analysts think the first golden egg will arrive as soon as Jeff Bezos thinks it’s time to let it out.

New Product Categories

Apple management have indicated multiple new product categories will arrive in 2014. They have been going around the world trademarking the word “iWatch” and appear to have a wearable device in the works. Reputedly to have health monitoring related features. The main gotcha is that the market for watches worldwide at this stage is circa $1.2B/year, so it would be difficult to make any noticeable contribution to $170B/year Apple. More an accessory to the information hub that is the users iPhone.

They were reputed to be trying out a new set-top TV box that they were trialing with Time Warner Cable in the USA – at least until Comcast initiated their still ongoing attempt to buy that company. Comcast already have their own X1 box in several markets in the USA already. And again, the current Apple TV box – $99 each – and of which some 13 million had been sold to date – will again unlikely make a marked difference in Apple’s huge turnover. More as accessories to the main iPhone and iPad show.

All eyes on the next set of announcements

With that, it looks like iPhone, and to a lesser extend iPad, will continue to be their revenue and profit drivers, with new product categories likely to be ancillary accessories to support user engagement with those devices. Having seen the analyses of the Liquid Metal patents Apple have submitted, i’m fairly convinced the next models will be encased in Liquid Metal (instead of milled Aluminium for current high end models) and have scratch resistant Sapphire screens. That may also give them lower manufacturing costs to allow them to fill some of the other price bands that are growing most aggressively for their Android competitors. Or not!

Time will tell. The only thing i’m sure of is, that if they produce a health related iWatch, that my wife expect me to be first in the queue to buy one for her. And indeed a new handset if it’s an improvement to her much loved iPhone 5S. I certainly won’t let her down.

Shareholder Positions and Profits YTD

Pie Chart of Ian Waring Stock Profits YTD

At the start of last year, I started to run my pension funds personally. In line with normal advice, I put circa 70% of the available funds in Vantage LifeStrategy 100% Equity Accumulating Index Trackers, and the balance i’ve used to bet on a few companies I believe have a rosy long term future – while being fully aware of likely swings of the US Dollar vs GB pounds. I’ve lived long enough to see that cycle between $1.40 and $2.20 to the pound – currently nicely in the middle and with holdings I can leave in situ waiting for the right position to enact an exit – albeit that’s not for many years into the future.

At the moment, my total fund is up 9.05% in the year i’ve been running it. The shares portion of this has come in +17.68% year to date (touch wood – profit of £21,871.99). The sources that contributed to the increase in the fund are as above.

In the early days, I did bet on a few others but kept the shareholding small until I had visibility of what they were doing. When they weren’t giving meaningful return, or where I felt I didn’t understand the company direction (strategically) well enough – or learnt their susceptibility to unfounded competitor rumours – I unloaded them. That applied (for various reasons) to ARM, Baidu, Red Hat, Salesforce.com, Splunk and Netflix.

At this stage, i’ve retained positions in Google, Amazon, Tableau Software, Apple and… Facebook. I did buy some Facebook shares in the early days after it’s IPO, but unloaded them at a slight loss while they were in the $20’s. I’ve now bought back in at $69 – largely because Mark Zuckerberg’s purchase of WhatsApp, and the fact he’s put the WhatsApp CEO – who is vehemently against advertising – onto the Facebook Board. I thought this was brilliant, as advertising is the major current source of Facebook’s income, and there was a willingness to put someone up there that will push an alternative, subscription based model. A good sign that Facebook are willing to be radical with their business models, and not follow the normal high technology malaise of clinging to a failing business model into oblivion.

I always think that the Advertising Industry is naive to think their next frontier is the screen of people’s mobile phones; it’s a bit like having a kiddie jumping up and down in front of the TV when you’re trying to watch something. WhatsApp currently charge $1/year for the instant messaging service, and at that level, there is even scope for friends (or vendors) to offer to pay the subscriptions of large numbers of users.

Liquid Metal and GT Advanced Technologies were a small punt based on hearing about various Apple licensing agreements two years ago, and then seeing Apple employees start filing patents on the associated materials just ahead of contract renewal due dates. Liquid Metal is likely to be used for the carcass of new iPhones (without the need to mill aluminium as at present) and GT Advanced Technology supply very resilient Sapphire screens large enough for the display surface of same. Those shares turned out to be quite volatile, so I did an exit stage left on profits of 30.9% and 24.2% respectively – within 3 weeks of their original purchase.

Google shares will split in April, improving their liquidity. Amazon have had a recent fall, but i’m confident that they’ll recover 20-25% in the next 2-3 months. Tableau Software are just about to dilute things a bit with a new share offering, but my returns are still very good (not too far away from 100% returns for the 218 shares I still have). Apple are a blog post all by themselves, cursed by Analyst expectations of slowing growth (despite ratcheting up their market share relentlessly, plus earning 70% of the mobile industry profits) and discounting the likelihood of laying another category of Golden Egg, as they’ve done for iPod, iPhone and iPad already. Quite funny when Amazon trade at huge multiples on the suspicion that their conveyor belt will magic Golden Egg league profits as soon as Jeff Bezos decides that’s what he wants. And Facebook is a wait and see.

There are three potential IPOs i’m looking out for, but that apart, the strategy is “Long Term Buy and Hold”. Working well so far, touch wood.

Google Shares: Stick or Twist?

Danger - Will Robinson

A fairly quiet Sunday. Trip down to the gym for the last of my three weekly visits, finding that they were finishing their 24 hour Charity Spinathon, £20 duly donated. En route, listening to the last of a two hour John Gruber Podcast talking at length about Crypto currencies, which was fascinating. Then back home for a walk to the local shops with Jane to pick up some milk, then back to catching up on my various high technology news feeds.

I reflect on Robots getting more and more impressive. Saw a video of a guy in Germany debugging a table tennis playing robot, which is already showing promise (3 minute video here). Then saw that on Tuesday, there is a match planned between Timo Boll, the #1 German Professional Table Tennis Player (currently #8 in the world), playing against a KUKA industrial robot (preview here). Robots are one feature that keeps hitting news headlines concerning Google, who are making many related investments recently.

On a related thought, one thing that has started to bug me a bit is the so far excellent performance of my Self Invested Pension, which over the last 10 months has grown 10.68%. Given 64% of it is in an index tracker, the performance of various stocks i’ve traded (normally on a long term buy and hold basis) has been over 24% to date. The nagging feeling is always asking if i’m carrying too much of too few companies, albeit I tend to focus on ones that I feel have high market shares and future growth potential.

I’ve made good returns trading in then later out on Netflix, Splunk and Salesforce.com. I got slight losses from the early days in Red Hat, ARM, Baidu and Facebook, so reversed out with minimal damage. I made a returns of over 20% on GT Advanced Technologies (GTAT) and 49% on Liquid Metal (LQMT) in 3 weeks by joining the dots on some future Apple investments from patent filings. Those apart, I wound up investments in Google, Amazon, Apple and (having IPO’d) Tableau. I have more recently taken a position in Facebook (it was in the $20’s when I left it, and bought back in recently at $69).

One personal irritation about the Advertising Industry is its relentless pursuit to derive advertising revenue on mobile phones. This is a practice I hold akin to having a kiddie jumping up and down in front of the telly when you’re trying to watch something; something to be actively discouraged. The one concern I have is that Google are my biggest shareholding (at the time of writing, they represent just under 50% of my (non Index Tracker) stock investments), and derive almost all its revenue today from monetising purchase intentions – read: targeted advertising. Likewise Facebook.

Something that impressed me greatly with Facebook was CEO Mark Zuckerberg buying SMS app “WhatsApp”, which has over 400 million users (70% using the service daily) for a jaw dropping $19 billion. The ethos of WhatsApp is to never let advertising interfere with the user experience, instead relying on a nominal $1/year subscription to use their service. Despite that being the antithesis of Facebook’s current business model, they put the WhatsApp CEO straight onto the Facebook Board. While it may sound a very basic simplification, their willingness to do this sort of “eat our children” move gives me confidence that they are aiming for the long term – and not clamouring to keep hold of a business model that may go stale.

With that, I turn to Google. I put £40,834 in them and have so far seen that go up to £54,508 – an approx return of 35%. Around 98% of their current income is tied to advertising revenues. I have quite a wide view of the various initiatives they are undertaking, which while mind-blowing, don’t translate into a likely future revenue/profit stream for the next two years or so. Maybe Chrome Tablets will arrive. Maybe they’ll cotton on that it may be a good idea to sell their excellent ChromeCast outside the USA. One thing I don’t yet understand well is their fixation – and many investments – in both Deep Thinking technologies and in Robotics.

The fact they may pull a rabbit out of their hat on one of a wide range of initiatives means i’ll leave my shareholding in them where it is. Likewise the shareholdings held by my three grandchildren (Ellie age 12, Charlie age 9 and Ruby age 2 all have shares in Google, Amazon and Tableau alongside their index trackers). Google shares will split in April, so I think a likely increase as their Google shares get more liquid. After that, we’ll see if the value of those shares continue their relentless march northward.

I’m also confident Amazon will bounce back – I reckon up another 20% in the next quarter to recover from their recent downturn. Apple and Facebook will soldier on. Tableau Software will continue to impress (they are my highest returns to date – over 67% at the time of writing). Those apart, i’m keeping my eye out for signs of three potential IPOs that I think will become very valuable – when they’re ready. But that’s a story for another day.