What Is The Basis Of Value?

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Monday, 8.53pm

Sheffield, U.K.

A billion here, a billion there, and pretty soon you’re talking about real money. – Everett Dirksen

I’ve been reading Terry Pratchett’s “Making Money” one more time. It’s about the introduction of paper money to the city of Ankh-Morpork and how everyone responds and it has lessons for us when we try to think about what value really is and how we can hold on to it.

Last week the Financial Times had a piece on NFTs – non-fungible tokens and whether they had a place in your investment portfolio. An NFT, as you’re probably aware, is a way to create a token that represents a piece of digital art, an image, a song, a tweet. These tokens are unique and can be used to prove ownership and they’ve recently been changing hands at astronomical valuations. The very first tweet, for example, was sold for nearly $3 million. In Ether.

Which brings us to Ethereum and the idea of cryptocurrencies. NFTs are typically paid for using new digital currencies. $3 million was, at the time of the trade, equivalent to around 1630 ETH. Ethereum has surged in value in the last month or so – my paltry holding that I picked up as an experiment is up around ten times. Perhaps I should have bought more. Then again – why would I, what is the basis of believing that this thing has any value?

The story of how value is created is the story of “Making Money”. It goes something like this. Once upon a time people believed in gold and they made money that was backed by gold. If you held a paper note that meant you had a claim on gold from the bank that issued the note. You weren’t ever expected to go into the bank and demand to get the amount of gold that the note backed but in theory, if you wanted to, you could. This meant that the amount of money in circulation was tied to the amount of gold you had and this was a little inconvenient.

What people realised was that the gold wasn’t the important bit. What was important was the reputation of the people who backed the gold. Did you believe in the country, the government that issued the paper money? The US dollar is backed by the US government as is the British Pound. As long as you believe in those governments you believe that their money has worth. And if you stop believing in a government the value of its currency crashes too – as we’ve seen happen several times.

When it comes to digital currencies you have no equivalent of a government backer. These are distributed currencies created using algorithms. Part of their appeal is getting away from the control of governments and their ability to create new money as it suits them. Bitcoin, for example, was created as a sort of digital gold. It needs to be mined, the total amount that can be mined is, in theory, fixed and you might think that it would have the stabilising properties of a monetary system anchored to gold as a store of value.

But these are early days so the main thing that holds up the value of digital currencies is the belief that they have value to someone else. So the price keeps rising because people buy it hoping that the price will rise.

So, we should probably go back to the basis of valuations – why does something have value?

The first way to think about value is as the net present value of future cashflows. Something is worth the money it will make for you now and in the future. If you buy a share of a business you will be rewarded with earnings. And the net present value of those future earnings is the value you’re willing to pay.

Of course, those earnings are in money and you have to believe in the value of the money you are getting. A company that earns in dollars is probably worth more than one that earns in a less tradeable currency. Would you be happy owning a company that derives the majority of its revenue in Bitcoin? You might if you’re Elon Musk – Tesla will accept payment in Bitcoin for its cars now.

The short-term view is that cryptocurrencies are dangerous because no one backs them – there is no government that you can turn to and demand they show value. The long-term view might be that cryptocurrencies are backed by all of us. We can all mine them, have digital wallets and inspect the ledgers. It means that distributed currencies are backed by all those who choose to engage with them.

What history teaches us is that things change. I’m sceptical about most things and the majority of my investments are in safe, traditional businesses. There is a small chance, however, that all the safe, traditional stuff will be wiped out by the new at some point. The only rational thing to do is have some of the new stuff in your portfolio as well as a hedge against the inevitable changes that the future will bring.

Now, how do I make an NFT from my picture and sell it?

Cheers,

Karthik Suresh

Why Do Big Ideas Rarely Work?

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Sunday, 8.12pm

Sheffield, U.K.

I never think of an entire book at once. I always just start with a very small idea. In ‘Holes,’ I just began with the setting; a juvenile correctional facility located in the Texas desert. Then I slowly make up the story, and rewrite it several times, and each time I rewrite it, I get new ideas, and change the old ideas around. – Louis Sachar

I’ve been looking at Ivan Brunetti’s books over the last few days – reminding myself of approach to drawing as I try and find a line that works for me and came across his An Anthology of Graphic Fiction, Cartoons, and True Stories which has an essay by Charles M. Schulz on developing a comic strip.

I have the odd conversation with friends that have to with starting something new – and they usually have a BIG IDEA. Something that they believe is going to change everything. And because big ideas have come along in the past and had an impact, they believe that their idea has as much of a chance of success as one by anyone else. Is that the case and is there any way of telling what might happen one way or the other?

Schulz talks about how people aren’t willing to put in “the great amount of work that others do in comparable fields.” He’s talking about cartooning but this is a good starting point for almost any idea that someone has. Have they put in the work that’s needed to be in a position where they know what they’re talking about? Do they have the experience that matters?

Experience is not the same as technique. You might be able to do something to a certain standard but that’s different from doing something many many times and figuring out what works and what does not. It might be worth asking yourself whether you’ve spent the five to ten years that are needed to develop the skills and capabilities you are going to use. And we mustn’t forget that there are a limited number of ten-year periods that we have. If you still have a few ahead of you, then you might be able to try out different things. If not, you might need to figure out what experience you already have and that you can build on.

What you can’t do is spend a little bit of time learning something new and then expect that whatever you create is going to make you millions. Behind every overnight success is often decades of preparatory work.

Now, assuming you have put in the time to know something about what you want to do – then how should you start with a project? Should you start at the top with a grand idea or should you start at the bottom and build from there?

You will find people that support either point of view. The writer John McPhee, for example, always starts with a structure, a graphic of some kind that captures the big idea. Then again, his process also involves transcribing all of his notes, coding them and taking a bottom up approach to organising his material before he starts writing.

In Zen and the art of motorcycle maintenance, Robert Pirsig describes a scene where a student is finding it hard to write about a town. Pirsig tries to narrow the focus of the topic again and again but the student is still struggling. Finally, in exasperation, he snaps, “Narrow it down to the front of one building on the main street of Bozeman. The Opera House. Start with the upper left-hand brick.”

The challenge with creating original work of any kind, according to Pirsig, is that all the stuff we already know comes in and gets in the way – we think we should do things in a certain way or that there is a particular approach that is best and we get blocked. We lose the ability to see what is actually there, instead getting lost in what we expect to see.

The way to unblock ourselves is to start seeing again. And we can’t do that with a big picture approach. We have to look closer and closer, smaller and smaller until we see what is actually there. And then that thing we see for the first time can form the kernel that we build around. If we do that we will end up creating something. And after a while we might create something that’s good.

The challenge is getting to the point where we can do original work. To get there, however, we have to practise and that means we have to imitate what others have done in order to learn. And eventually we’ll stop imitating and start to find our own style as long as we keep working at it.

Big ideas and models are banal – as my marketing lecturer said about one of my essays. Real value is in the specific, in the focused, in the unique.

That’s why we should start small, because it’s when you solve a particular problem, that applies in a particular situation for a particular group of people that you’re probably going to stumble across the next big idea.

Cheers,

Karthik Suresh

How Can You Tell When Your Product Is In Trouble?

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Friday, 8.04pm

Sheffield, U.K.

In technology, the low end always eats the high end. It’s easier to make an inexpensive product more powerful than to make a powerful product cheaper.[…] It’s very dangerous to let anyone fly under you. If you have the cheapest, easiest product, you’ll own the low end. And if you don’t, you’re in the crosshairs of whoever does. – Paul Graham

A lot of business is boring – for me anyway. I’m not very good at buying stuff in the first place so trying to figure out how to sell it is even less fun. But economics and value is mostly comes down to selling something to someone else. So it makes sense to try and get better at it – but where do you start?

At one end you have commodities. Things that are the same whoever you get them from. More and more things are commodities these days. Buying commodities comes down to getting them at the lowest price and that’s where markets come in. Traditionally, commodities used to be things like copper or coffee but these days they’ve started to include much of the stuff you buy on markets like Amazon or Ebay.

Let’s say you want to buy a webcam, for instance, there will be lots of options of things that seem mostly the same and it will come down to price. Sellers can improve their sales by optimising their listings, following the suggestions by the platform on best practice. Marketing these products comes down to making sure that information and images are clear enough so that a customer goes ahead with a transaction.

This “transactional” approach to buying a product is what marks it out as a commodity. Information and price are the two things that matter. Buyers use information to reassure themselves that they are getting what they need and use price to pick the particular item that they buy. And the better marketers get at pulling together the information that customers are looking for the more likely they are to make sales.

At the other end of the range you don’t really have products. You have customer needs, possibly ones that they don’t even understand themselves. People often think that the starting point is solving problems for customers. In fact, the starting point is more often problem finding – figuring out what the problem is in the first place.

This is the space for what Neal Rackham, one of the few researchers into sales, calls consultative selling. It’s working with users to figure out what the problems are in the first place and then working on solutions to them. The solutions we come up with these days are often a combination of process changes and software tools. At the same time many of these solutions don’t work – software solutions often run into trouble. For example, why do we see reports like this: “The key battleground will be the tech behind the passports. As the disastrous, and expensive, NHS Test and Trace app showed, the infrastructure is not easy to build.”

If you want to build something that works then you’re best off keeping it simple. This is hard to do because we’re trained to think that new is better, novel is good. And new and novel is good if you’re doing research and trying to push the boundaries of knowledge. But useful things are often simple and utilitarian – they get the job done with a minimum of fuss. And because they’re good you use them more and make them more powerful – eventually overtaking the more complex pieces of software that try and do everything.

This is one of the reasons why free software is so popular – the code often starts with someone writing something for themselves. The popular art program MyPaint started off because Martin Renold wanted a simple digital canvas with brushes. It’s simple but amazingly good for artists who just want to get on and make stuff. And there isn’t a commercial product out there that has the same feel and efficiency for the task that Martin and others need to do.

Paul Graham, the founder of YCombinator, knows a thing or two about startups, and what he has to say resonates with Neal Rackham’s research. It’s hard to go from big to small, from high end to low end, from complex to simple. It’s much easier to go the other way. So, if you’re not keeping things as simple and cheap as you can, there’s a good chance there’s someone else doing something that’s going to make your product and business irrelevant. After all, as Andy Grove, Intel’s CEO used to say, “Only the paranoid survive.”

Cheers,

Karthik Suresh

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